CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore)

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1 NEW ISSUE BOOK-ENTRY ONLY RATINGS: Senior Subordinate Series 2013 Water Bonds: Moody s: Aa2 Aa3 S&P: AA AA- Series 2013 Wastewater Bonds: Moody s: Aa2 Aa3 S&P: AA AA- (See RATINGS herein) In the opinion of Bond Counsel, under current law and assuming the compliance with certain covenants by the City and the accuracy of certain representations and certifications made by certain City officials and other persons and entities described in certifications made by certain City officials and other persons and entities described in TAX MATTERS herein, interest on the Series 2013 Bonds is (i) excludable from the gross income of the owners of the Series 2013 Bonds for purposes of federal income taxation under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), and (ii) not a specific item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. However, interest on the Series 2013 Bonds must be included in adjusted current earnings for purposes of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes) under Section 56 of the Code. It is also the opinion of Bond Counsel that, under current law of the State, the Series 2013 Bonds, their transfer, and the principal and interest payable thereon (including any profit made in the sale thereof) shall be and remain exempt from any and all State, county, and municipal taxation in the State; however, the law of the State does not expressly refer to, and no opinion is expressed concerning, estate or inheritance taxes, or any other taxes not levied directly on the Series 2013 Bonds, their transfer or the interest thereon. $130,110,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Project Revenue Bonds (Water Projects) Series 2013A $123,750,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Project Revenue Bonds (Wastewater Projects) Series 2013C Dated: Date of Delivery $155,990,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Refunding Revenue Bonds (Water Projects) Series 2013B $100,860,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Refunding Revenue Bonds (Wastewater Projects) Series 2013D $31,740,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Subordinate Refunding Revenue Bonds (Water Projects) Series 2013C $26,405,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Subordinate Refunding Revenue Bonds (Wastewater Projects) Series 2013E Due: July 1, as shown on the inside cover Mayor and City Council of Baltimore (the City ) is issuing its Project Revenue Bonds (Water Projects), Series 2013A (the Series 2013A Water Bonds ), its Refunding Revenue Bonds (Water Projects), Series 2013B (the Series 2013B Water Bonds ), its Subordinate Refunding Revenue Bonds (Water Projects), Series 2013C (the Series 2013C Water Bonds and together with the Series 2013A Water Bonds and the Series 2013B Water Bonds, the Series 2013 Water Bonds ), its Project Revenue Bonds (Wastewater Projects), Series 2013C (the Series 2013C Wastewater Bonds ), its Refunding Revenue Bonds (Wastewater Projects), Series 2013D (the Series 2013D Wastewater Bonds ), and its Subordinate Refunding Revenue Bonds (Wastewater Projects), Series 2013E (the Series 2013E Wastewater Bonds and together with the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds, the Series 2013 Wastewater Bonds ). The Series 2013 Water Bonds and the Series 2013 Wastewater Bonds are referred to herein as the Series 2013 Bonds. The proceeds of the Series 2013A Water Bonds will be used to (i) finance the cost of facilities pursuant to the City s Water Capital Improvement Program, (ii) provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations under the Water Resolution of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013A Water Bonds, and (iii) pay issuance costs related to the Series 2013A Water Bonds. The proceeds of the Series 2013B Water Bonds, together with other available funds of the City, will be used to (i) refund certain maturities of the City s outstanding water revenue bonds described herein (the Refunded Water Bonds ), (ii) to refund certain maturities of the City s outstanding senior lien water revenue bonds issued as auction rate securities described herein (the Refunded Senior Water Auction Rate Bonds ), and (iii) pay issuance costs related to the Series 2013B Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Water Auction Rate Bonds. The proceeds of the Series 2013C Water Bonds will be used, together with other available funds of the City, to (i) refund certain maturities of the City s outstanding subordinate lien water revenue bonds issued as auction rate securities described herein (the Refunded Subordinate Water Auction Rate Bonds, and together with the Refunded Senior Water Auction Rate Bonds, the Refunded Water Auction Rate Bonds ) and (ii) pay issuance costs related to the Series 2013C Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Water Auction Rate Bonds. The proceeds of the Series 2013C Wastewater Bonds will be used to (i) finance the cost of facilities pursuant to the City s Wastewater Capital Improvement Program, (ii) provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations under the Wastewater Resolution of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013C Wastewater Bonds, and (iii) pay issuance costs related to the Series 2013C Wastewater Bonds. The proceeds of the Series 2013D Wastewater Bonds, together with other available funds of the City, will be used to (i) refund certain maturities of the City s outstanding wastewater revenue bonds described herein (the Refunded Wastewater Bonds ), (ii) refund certain maturities of the City s outstanding senior lien wastewater revenue bonds issued as auction rate securities described herein (the Refunded Senior Wastewater Auction Rate Bonds ), and (iii) pay issuance costs related to the Series 2013D Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Wastewater Auction Rate Bonds. The proceeds of the Series 2013E Wastewater Bonds will be used, together with other available funds of the City, to (i) refund certain maturities of the City s outstanding subordinate lien wastewater revenue bonds issued as auction rate securities described herein (the Refunded Subordinate Wastewater Auction Rate Bonds, and together with the Refunded Senior Wastewater Auction Rate Bonds, the Refunded Wastewater Auction Rate Bonds ) and (ii) pay issuance costs related to the Series 2013E Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Wastewater Auction Rate Bonds. The Series 2013 Bonds are issuable only as fully registered bonds in denominations of $5,000 and any integral multiple thereof, and interest on the Series 2013 Bonds from the date of delivery is payable semiannually on each January 1 and July 1 beginning July 1, The Series 2013 Bonds will initially be maintained in book-entry form only and registered in the name of a nominee of The Depository Trust Company, New York, New York ( DTC ). Individual purchasers of the Series 2013 Bonds ( Beneficial Owners ) will not receive physical delivery of bond certificates. So long as DTC or its nominee is the registered owner of the Series 2013 Bonds, the Trustee will make payments of the principal or Redemption Price of and interest on the Series 2013 Water Bonds and the Series 2013 Wastewater Bonds to DTC in accordance with the Water Resolution and the Wastewater Resolution, respectively, and the Trustee will have no obligation to make payments to any Beneficial Owners. See Series 2013 Bonds Book-Entry System. The Series 2013 Bonds are subject to mandatory sinking fund and optional redemption prior to maturity as described herein. THE SERIES 2013A WATER BONDS AND THE SERIES 2013B WATER BONDS CONSTITUTE SENIOR REVENUE OBLIGATIONS UNDER THE WATER RESOLUTION. THE SERIES 2013C WASTEWATER BONDS AND THE SERIES 2013D WASTEWATER BONDS CONSTITUTE SENIOR REVENUE OBLIGATIONS UNDER THE WASTEWATER RESOLUTION. THE SERIES 2013C WATER BONDS CONSTITUTE SUBORDINATE REVENUE OBLIGATIONS UNDER THE WATER RESOLUTION. THE SERIES 2013C WATER BONDS ARE NOT SECURED BY A DEBT SERVICE RESERVE FUND. THE SERIES 2013E WASTEWATER BONDS CONSTITUTE SUBORDINATE REVENUE OBLIGATIONS UNDER THE WASTEWATER RESOLUTION. THE SERIES 2013E WASTEWATER BONDS ARE NOT SECURED BY A DEBT SERVICE RESERVE FUND. THE SERIES 2013 WATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY MANUFACTURERS AND TRADERS TRUST COMPANY, AS TRUSTEE (THE TRUSTEE ). THE SERIES 2013 WASTEWATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WASTEWATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY THE TRUSTEE. OPERATING REVENUES OF THE WASTEWATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WATER BONDS, AND OPERATING REVENUES OF THE WATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WASTEWATER BONDS. THE SERIES 2013 BONDS ARE SPECIAL OBLIGATIONS OF THE CITY, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY OR OF THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2013 BONDS. MATURITY SCHEDULE (See Inside Cover and Following Pages) The Series 2013 Bonds are offered, subject to prior sale, when, as and if issued by the City and accepted by the Underwriters subject to the approval of McGuireWoods LLP, Baltimore, Maryland, Bond Counsel to the City. Certain legal matters will also be passed upon by Ballard Spahr LLP, Baltimore, Maryland, Counsel to the Underwriters. It is expected that the Series 2013 Bonds will be available for delivery on or about December 3, Dated: November 15, BofA Merrill Lynch M&T Securities, Inc. Siebert Brandford Shank & Co., L.L.C. Wells Fargo Securities

2 SERIES 2013A WATER BONDS $64,370,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $1,185, % 0.27% 05922KTR $3,210, % 3.10%* 05922KUH ,090, KUB ,370, * 05922KTT ,170, KUC ,535, * 05922KTU ,280, KUM ,715, * 05922KTV ,395, KUD ,900, * 05922KTW ,515, KUE ,095, * 05922KUJ ,640, KUF ,300, * 05922KTX ,770, KUN ,515, * 05922KTY ,910, KTS ,740, * 05922KTZ ,055, KUG ,980, * 05922KUK3 $28,880, % Term Bond due July 1, 2038; Yield 4.45%* CUSIP: 05922KUL1 $36,860, % Term Bond due July 1, 2043; Yield 4.54%* CUSIP: 05922KUA5 SERIES 2013B WATER BONDS $91,270,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $ 85, % 0.27% TR $3,360, % 2.88% TX ,195, UL , UV , UM ,900, * TY ,130, TS ,265, * TZ ,985, UN ,575, * UA ,085, UP ,985, * UB , TT ,515, * UC , UQ ,085, * UW ,545, TU ,230, * UD , UR ,530, * UE ,990, TV ,865, * UF ,100, US ,205, * UG ,420, TW , UX ,690, UT ,690, * UH , UU2 $26,705, % Term Bond due July 1, 2038; Yield 4.45%* CUSIP: UJ7 $1,115, % Term Bond due July 1, 2038; Yield 4.48%* CUSIP: UY4 $36,900, % Term Bond due July 1, 2042; Yield 4.53%* CUSIP: UK4 * Priced to the first optional redemption date of January 1, 2024.

3 SERIES 2013C WATER BONDS $31,740,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $ 10, % 0.35% UZ $ 100, % 3.68%* VM ,105, VA ,830, * VW ,205, VB , VN ,210, VC ,015, * VX ,320, VD ,165, * VP ,335, VE ,000, VQ ,445, VF ,285, * VY ,555, VG , VR ,570, VH ,100, * VZ ,685, VJ , VS , * VK ,970, * WA ,700, * VU , VT , * VL ,090, * WB ,715, * VV9 * Priced to the first optional redemption date of January 1, 2024.

4 SERIES 2013C WASTEWATER BONDS $61,330,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $1,160, % 0.27% 05922KUP $3,045, % 3.10%* 05922KUZ ,040, KUQ ,200, * 05922KVA ,125, KUR ,360, * 05922KVB ,205, KUS ,525, * 05922KVC ,295, KUT ,705, * 05922KVD ,385, KUU ,890, * 05922KVE ,505, KUV ,085, * 05922KVF ,630, KUW ,285, * 05922KVG ,765, KUX ,500, * 05922KVH ,900, KUY ,725, * 05922KVJ5 $27,420, % Term Bond due July 1, 2038; Yield 4.45%* CUSIP: 05922KVK2 $35,000, % Term Bond due July 1, 2043; Yield 4.54%* CUSIP: 05922KVL0 SERIES 2013D WASTEWATER BONDS $70,180,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $ 45, % 0.27% WC $5,490, % 3.10%* WN ,110, WD ,660, * WP ,100, WE ,850, * WQ ,065, WF ,275, * WR ,780, WG ,760, * WS ,450, WH ,840, * WT ,405, WJ ,030, * WU ,825, WK ,130, * WV ,980, WL ,325, * WW ,420, WM ,640, * WX4 $14,835, % Term Bond due July 1, 2038; Yield 4.45%* CUSIP: WY2 $15,845, % Term Bond due July 1, 2042; Yield 4.53%* CUSIP: WZ9 SERIES 2013E WASTEWATER BONDS $26,405,000 Serial Bonds Due July 1 Amount Interest Rate Price/ Yield CUSIP Due July 1 Amount Interest Rate Price/ Yield CUSIP 2014 $ 20, % 0.35% XA $2,340, % 2.51% XH ,485, XB ,455, XJ ,580, XC ,570, XK ,690, XD ,690, * XL ,700, XE ,810, * XM ,810, XF ,030, * XN ,225, XG0 * Priced to the first optional redemption date of January 1, 2024.

5 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2013 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT PRIOR NOTICE. No dealer, broker, salesman or other person has been authorized by the City or the Underwriters to give any information or to make any representation other than as contained in this Official Statement, and if given or made, such other information or representation 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 Series 2013 Bonds by any person in any jurisdiction in which it is not lawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the City and other sources which are deemed to be reliable but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriters or, as to information from sources other than the City, by the City. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibility to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. All quotations from and summaries and explanations of laws and documents herein do not purport to be complete, and reference is made to such laws and documents for a full and complete statement of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. This Official Statement speaks only as of its date. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Series 2013 Bonds shall under any circumstances create any implication that there has been no change in the affairs of the City or in the Utilities (as defined herein) or in the matters described herein since the date hereof. This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or holders of any of the Series 2013 Bonds. The Trustee has neither reviewed nor participated in the preparation of this Official Statement. No registration statement relating to the Series 2013 Bonds has been filed with the United States Securities and Exchange Commission or with any state security agency. The Series 2013 Bonds have not been approved or disapproved by the Securities and Exchange Commission or any state securities agency nor has the Securities and Exchange Commission or any state securities agency passed upon the accuracy or adequacy of this Official Statement. Any representation to the contrary may be a criminal offense.

6 CUSIP numbers on the inside cover and following pages of this Official Statement are copyright 2013 by the American Bankers Association. CUSIP data herein is provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. and the City takes no responsibility for the accuracy thereof. These data are not intended to create a database and do not serve in any way as a substitute for the CUSIP Service Bureau. Certain statements contained in this Official Statement do not reflect historical facts, but rather are forecasts and forward-looking statements. No assurance can be given that the future results discussed herein will be achieved, and actual results may differ materially from the forecasts described herein. In this respect, the words estimate, forecast, project, anticipate, expect, intend, believe and other similar expressions are intended to identify forward-looking statements. The forward-looking statements in this Official Statement are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. All estimates, projections, forecasts, assumptions and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Official Statement. The City specifically disclaims any obligation to update any forward-looking statements to reflect actual occurrences or unanticipated events or circumstances after the date of this Official Statement, except as otherwise expressly provided in CONTINUING DISCLOSURE herein. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE CITY, THE WATER UTILITY, THE WASTEWATER UTILITY, AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SERIES 2013 BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. THE SERIES 2013 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE WATER RESOLUTION NOR THE WASTEWATER RESOLUTION BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

7 TABLE OF CONTENTS SUMMARY STATEMENT... i MAYOR AND CITY COUNCIL OF BALTIMORE ELECTED AND CERTAIN APPOINTED OFFICIALS... viii INTRODUCTION...1 PLAN OF FINANCE THE SERIES 2013 WATER BONDS...4 PLAN OF FINANCE THE SERIES 2013 WASTEWATER BONDS...5 ESTIMATED SOURCES AND USES OF SERIES 2013 WATER BONDS...8 ESTIMATED SOURCES AND USES OF SERIES 2013 WASTEWATER BONDS...9 DEPOSITS TO ESCROW DEPOSIT FUND...9 THE SERIES 2013 BONDS...10 REDEMPTION...13 SECURITY FOR THE SERIES 2013 WATER BONDS...17 SECURITY FOR THE SERIES 2013 WASTEWATER BONDS...25 EXISTING DEBT SERVICE REQUIREMENTS OF THE WATER UTILITY...35 EXISTING DEBT SERVICE REQUIREMENTS OF THE WASTEWATER UTILITY...36 ORGANIZATION AND STAFF OF THE UTILITIES...37 THE WATER SYSTEM...47 FINANCIAL OPERATIONS OF THE WATER UTILITY...51 WATER UTILITY CAPITAL IMPROVEMENT PROGRAM...59 UNACCOUNTED FOR WATER...62 THE WASTEWATER SYSTEM...62 FINANCIAL OPERATIONS OF THE WASTEWATER UTILITY...69 WASTEWATER UTILITY CAPITAL IMPROVEMENT PROGRAM...75 ENVIRONMENTAL COMPLIANCE...78 EMERGENCY PREPAREDNESS AND SECURITY MEASURES...81 AUDIT REGARDING WATER AND WASTEWATER BILLING PROCEDURES...82 LITIGATION...83 UNDERWRITING...83 RELATIONSHIPS...84 CONTINUING DISCLOSURE...84 TAX MATTERS...86 RATINGS...90 LEGAL MATTERS...90 FINANCIAL ADVISOR...90 VERIFICATION OF MATHEMATICAL COMPUTATIONS...90 AVAILABILITY OF FINANCIAL INFORMATION...91 Appendix A Definitions of Certain Terms and Summaries of the Water Resolution and the Wastewater Resolution Appendix B Audited Water Utility Fund Financial Statements for Fiscal Years Ended June 30, 2011 and June 30, 2012 Appendix C Audited Wastewater Utility Fund Financial Statements for Fiscal Years Ended June 30, 2011 and June 30, 2012 Appendix D Certain Information Regarding Baltimore City and Baltimore County Appendix E Proposed Forms of Opinions of Bond Counsel Appendix F Proposed Form of Continuing Disclosure Certificate Page

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9 SUMMARY STATEMENT (Subject in all respects to more complete information in this Official Statement and Appendices hereto) The Utilities. The City s Water Utility and Wastewater Utility (collectively, the Utilities ) are separate utilities within the Bureau of Water and Wastewater (the Bureau ), one of the three bureaus in the City s Department of Public Works. Article VI, Section 18 of the Charter of Baltimore City (1996 Edition) established the Utilities in 1979 as separate enterprises to be self-sustaining and operated without profit or loss to the other funds or programs of the City. The Water System. The Water Utility s service area is approximately 220 square miles and includes Baltimore City and parts of Baltimore, Anne Arundel, Carroll, Howard and Harford Counties. The Water Utility services over 1,800,000 people, by supplying approximately 93 billion gallons of water annually. Water Utility customers in Baltimore County are served through individual meters but are billed by the City at rates set by Baltimore County with the concurrence of the City. Fewer than 20 Water Utility customers in Anne Arundel County are served through individual meters but are billed by the City at rates set by the City following a public hearing. Wholesale service is provided to parts of Howard, Anne Arundel, Carroll and Harford Counties. The water distribution system s 30 storage facilities have a usable storage capacity of 420 million gallons and the system s 20 pumping stations have a safe pumping capacity of 618 million gallons per day. Approximately 56% of the Water Utility s water sales are delivered by gravity. The distribution system has approximately 4,500 miles of mains ranging in size from 4 inches to 144 inches in diameter. Authorization of the Series 2013 Water Bonds. The Series 2013 Water Bonds are issued pursuant to Ordinance No. 495 of the City, adopted by the City Council of Baltimore (the City Council ) on May 21, 1990, and approved by the Mayor of the City of Baltimore (the Mayor ) on May 24, 1990, as amended by Ordinance No. 39 of the City, adopted by the City Council on June 8, 1992, and approved by the Mayor on June 8, 1992, by Ordinance No. 609 of the City, adopted by the City Council on June 15, 1995, and approved by the Mayor on June 29, 1995, by Ordinance No. 275 of the City, adopted by the City Council on May 18, 1998, and approved by the Mayor on May 21, 1998, and by Ordinance No of the City, adopted by the City Council on May 15, 2000, and approved by the Mayor on May 18, 2000, as amended and restated by Ordinance No of the City, adopted by the City Council on April 15, 2002, and approved by the Mayor on April 16, 2002, and as amended by Ordinance No of the City, adopted by the City Council on May 24, 2004, and approved by the Mayor on May 25, 2004, by Ordinance No of the City, adopted by the City Council on April 30, 2007, and approved by the Mayor on May 1, 2007, and by Ordinance No of the City, adopted by the City Council on March 21, 2011, and approved by the Mayor on March 25, 2011 (collectively, the Authorizing Water Ordinance ). The Series 2013 Water Bonds are also issued pursuant to the City s Amended and Restated Water Projects Bond Resolution adopted by the Board of Finance of the City (the Board of Finance ) on April 15, 2002 and effective on May 7, 2002, as amended and supplemented by the Water Projects First Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2003, the Water Projects Second Supplemental Bond Resolution adopted - i -

10 by the Board of Finance on June 23, 2003, the Water Projects Third Supplemental Bond Resolution adopted by the Board of Finance on November 24, 2003, the Water Projects Fourth Supplemental Bond Resolution adopted by the Board of Finance on May 24, 2004, the Water Projects Fifth Supplemental Bond Resolution adopted by the Board of Finance of the City on April 25, 2005, the Water Projects Sixth Supplemental Bond Resolution adopted by the Board of Finance on April 24, 2006, the Water Projects Seventh Supplemental Bond Resolution adopted by the Board of Finance on December 18, 2006, the Water Projects Eighth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Water Projects Ninth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Water Projects Tenth Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2008, the Water Projects Eleventh Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Water Projects Twelfth Supplemental Bond Resolution adopted by the Board of Finance on November 23, 2009, the Water Projects Thirteenth Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2011, the Water Projects Fourteenth Supplemental Bond Resolution adopted by the Board of Finance on June 27, 2011, and the Water Projects Fifteenth Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013 (collectively, the Water Resolution ). The terms, provisions and details of the Series 2013 Water Bonds described herein, including the security therefor, are as prescribed in the Water Resolution. Purpose of the Series 2013 Water Bonds. The City s Series 2013A Water Bonds are being issued to finance the cost of facilities pursuant to the City s Water Capital Improvement Program (as defined herein), to provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations (as defined in the Water Resolution) under the Water Resolution of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013A Water Bonds, and to pay issuance costs related to the Series 2013A Water Bonds. The City s Series 2013B Water Bonds, together with other available funds of the City, are being issued to refund certain maturities of the City s outstanding water revenue bonds described herein (the Refunded Water Bonds ), to refund certain maturities of the City s outstanding senior lien water revenue bonds issued as auction rate securities described herein (the Refunded Senior Water Auction Rate Bonds ), and to pay issuance costs related to the Series 2013B Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Water Auction Rate Bonds. The proceeds of the Series 2013C Water Bonds will be used, together with other available funds of the City, to refund certain maturities of the City s outstanding subordinate lien water revenue bonds issued as auction rate securities described herein (the Refunded Subordinate Water Auction Rate Bonds, and together with the Refunded Senior Water Auction Rate Bonds, the Refunded Water Auction Rate Bonds ) and to pay issuance costs related to the Series 2013C Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Water Auction Rate Bonds. See PLAN OF FINANCE THE SERIES 2013 WATER BONDS. Security for the Series 2013 Water Bonds. The Series 2013 Water Bonds are payable solely from and secured solely by the Pledged Amounts of the Water Utility. Pledged Amounts are defined in the Water Resolution as (i) the Operating Revenues, (ii) amounts - ii -

11 (including investment earnings thereon) in any fund or account established pursuant to the Water Resolution for the payment of any Revenue Obligations (as defined in the Water Resolution), (iii) unexpended proceeds of Revenue Obligations, including investment earnings on such proceeds, (iv) amounts due and payable to the City under or pursuant to any Hedge Agreement (as defined in the Water Resolution), and (v) other amounts legally available for the payment of the principal of, and premium, if any, and interest on Revenue Obligations. The Series 2013A Water Bonds and the Series 2013B Water Bonds are Senior Revenue Obligations. The Series 2013A Water Bonds and the Series 2013B Water Bonds are secured by Pledged Amounts of the Water Utility on a parity basis with other Senior Revenue Obligations of the City as described herein. The Series 2013C Water Bonds are Subordinate Revenue Obligations (as defined in the Water Resolution). The Series 2013C Water Bonds are secured by Pledged Amounts of the Water Utility on a subordinate basis, junior and subordinate to the pledge of the Pledged Amounts to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the outstanding Senior Revenue Obligations. The Bondholders security interest in certain of the Pledged Amounts, including the Operating Revenues, under the Water Resolution (constituting those portions which are not in the possession of the Trustee and in which it is not possible to perfect a security interest by the filing of financing statements) will remain unperfected. The Series 2013C Water Bonds are not secured by a debt service reserve fund. Payments of principal, interest and Sinking Fund Installments on the Series 2013C Water Bonds shall not be made by the Trustee to the holders thereof if an Event of Default under the Water Resolution of which the Trustee has notice has occurred and is continuing. So long as any Senior Revenue Obligations are Outstanding (i) the failure to pay the principal of or interest on any Subordinate Revenue Obligation, including the Series 2013C Water Bonds, shall not constitute an Event of Default, and (ii) the Trustee may not declare the aggregate principal amount of the Subordinate Revenue Obligations, including the Series 2013C Water Bonds, to be due and payable upon the occurrence of any Event of Default under the Water Resolution. The Wastewater System. The City, through the Wastewater Utility s system of sanitary sewers, interceptors, pumping stations and wastewater treatment facilities, provides for the treatment and disposal of sanitary sewage flow of approximately two-thirds of the population of the Baltimore metropolitan area. The Wastewater Utility maintains approximately 1,340 miles of sanitary interceptors and main line sewers, which convey wastewater to the Wastewater Utility s two treatment plants. Most of the wastewater is conveyed by gravity to the treatment plants, but the Wastewater Utility operates eight major pumping stations and several smaller stations, with a total pumping capacity of approximately 220 million gallons per day. Authorization of the Series 2013 Wastewater Bonds. The Series 2013 Wastewater Bonds are issued pursuant to Ordinance No. 496 of the City, adopted by the City Council on May 21, 1990, and approved by the Mayor on May 24, 1990, as amended by Ordinance No. 40 of the City, adopted by the City Council on June 8, 1992, and approved by the Mayor on June 8, 1992, by Ordinance No. 610 of the City, adopted by the City Council on June 15, 1995, and approved by the Mayor on June 29, 1995, and by Ordinance No of the City, adopted by the City Council on May 15, 2000, and approved by the Mayor on May 18, 2000, as amended and restated by Ordinance No of the City, adopted by the City Council on April 15, 2002, and approved by the Mayor on April 16, 2002, as amended by Ordinance No of - iii -

12 the City, adopted by the City Council on April 30, 2007, and approved by the Mayor on May 1, 2007, and by Ordinance No of the City, adopted by the City Council on March 21, 2011, and approved by the Mayor on March 25, 2011 (collectively, the Authorizing Wastewater Ordinance ). The Series 2013 Wastewater Bonds are also issued pursuant to the City s Amended and Restated Wastewater Projects Bond Resolution adopted by the Board of Finance on April 15, 2002 and effective on May 7, 2002, as amended and supplemented by the Wastewater Projects First Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2003, the Wastewater Projects Second Supplemental Bond Resolution adopted by the Board of Finance on June 23, 2003, the Wastewater Projects Third Supplemental Bond Resolution adopted by the Board of Finance on May 24, 2004, the Wastewater Projects Fourth Supplemental Bond Resolution adopted by the Board of Finance on April 26, 2004, the Wastewater Projects Fifth Supplemental Bond Resolution adopted by the Board of Finance on August 30, 2004, the Wastewater Projects Sixth Supplemental Bond Resolution adopted by the Board of Finance on February 28, 2005, the Wastewater Projects Seventh Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2005, the Wastewater Projects Eighth Supplemental Bond Resolution adopted by the Board of Finance on September 26, 2005, the Wastewater Projects Ninth Supplemental Bond Resolution adopted by the Board of Finance on October 24, 2005, the Wastewater Projects Tenth Supplemental Bond Resolution adopted by the Board of Finance on April 24, 2006, the Wastewater Projects Eleventh Supplemental Bond Resolution adopted by the Board of Finance on December 18, 2006, the Wastewater Projects Twelfth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Wastewater Projects Thirteenth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Wastewater Projects Fourteenth Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2008, the Wastewater Projects Fifteenth Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Wastewater Projects Sixteenth Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Wastewater Projects Seventeenth Supplemental Bond Resolution adopted by the Board of Finance on November 23, 2009, the Wastewater Projects Eighteenth Supplemental Bond Resolution adopted by the Board of Finance on March 22, 2010, the Wastewater Projects Nineteenth Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2011, the Wastewater Projects Twentieth Supplemental Bond Resolution adopted by the Board of Finance on June 27, 2011, the Wastewater Projects Twenty-First Supplemental Bond Resolution adopted by the Board of Finance on April 23, 2013, and the Wastewater Projects Twenty-Second Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013 (collectively, the Wastewater Resolution ). The terms, provisions and details of the Series 2013 Wastewater Bonds described herein, including the security therefor, are as prescribed in the Wastewater Resolution. Purpose of the Series 2013 Wastewater Bonds. The City s Series 2013C Wastewater Bonds are being issued to finance the cost of facilities pursuant to the City s Wastewater Capital Improvement Program (as defined herein), to provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations (as defined in the Wastewater Resolution) under the Wastewater Resolution of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013C Wastewater Bonds, and to pay issuance costs related to the Series 2013C Wastewater Bonds. The City s Series 2013D - iv -

13 Wastewater Bonds, together with other available funds of the City, are being issued to refund certain maturities of the City s outstanding wastewater revenue bonds described herein (the Refunded Wastewater Bonds ), to refund certain maturities of the City s outstanding senior lien wastewater revenue bonds issued as auction rate securities described herein (the Refunded Senior Wastewater Auction Rate Bonds ), and to pay issuance costs related to the Series 2013D Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Wastewater Auction Rate Bonds. The proceeds of the Series 2013E Wastewater Bonds will be used, together with other available funds of the City, to refund certain maturities of the City s outstanding subordinate lien wastewater revenue bonds issued as auction rate securities described herein (the Refunded Subordinate Wastewater Auction Rate Bonds, and together with the Refunded Senior Wastewater Auction Rate Bonds, the Refunded Wastewater Auction Rate Bonds ) and to pay issuance costs related to the Series 2013E Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Wastewater Auction Rate Bonds. See PLAN OF FINANCE THE SERIES 2013 WASTEWATER BONDS. Security for the Series 2013 Wastewater Bonds. The Series 2013 Wastewater Bonds are payable solely from and secured solely by the Pledged Amounts of the Wastewater Utility. Pledged Amounts are defined in the Wastewater Resolution as (i) the Operating Revenues, (ii) amounts (including investment earnings thereon) in any fund or account established pursuant to the Wastewater Resolution for the payment of any Revenue Obligations (as defined in the Wastewater Resolution), (iii) unexpended proceeds of Revenue Obligations, including investment earnings on such proceeds, (iv) amounts due and payable to the City under or pursuant to any Hedge Agreement (as defined in the Wastewater Resolution), and (v) other amounts legally available for the payment of the principal of, and premium, if any, and interest on Revenue Obligations. The Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds are Senior Revenue Obligations. The Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds are secured by Pledged Amounts of the Wastewater Utility on a parity basis with other Senior Revenue Obligations of the City as described herein. The Series 2013E Wastewater Bonds are Subordinate Revenue Obligations (as defined in the Wastewater Resolution). The Series 2013E Wastewater Bonds are secured by Pledged Amounts of the Wastewater Utility on a subordinate basis, junior and subordinate to the pledge of the Pledged Amounts to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the outstanding Senior Revenue Obligations. The Bondholders security interest in certain of the Pledged Amounts, including the Operating Revenues, under the Wastewater Resolution (constituting those portions which are not in the possession of the Trustee and in which it is not possible to perfect a security interest by the filing of financing statements) will remain unperfected. The Series 2013E Wastewater Bonds are not secured by a debt service reserve fund. Payments of principal, interest and Sinking Fund Installments on the Series 2013E Wastewater Bonds shall not be made by the Trustee to the holders thereof if an Event of Default under the Wastewater Resolution of which the Trustee has notice has occurred and is continuing. So long as any Senior Revenue Obligations are Outstanding (i) the failure to pay the principal of or interest on any Subordinate Revenue Obligation, including the Series 2013E Wastewater - v -

14 Bonds, shall not constitute an Event of Default, and (ii) the Trustee may not declare the aggregate principal amount of the Subordinate Revenue Obligations, including the Series 2013E Wastewater Bonds, to be due and payable upon the occurrence of any Event of Default under the Wastewater Resolution. Limited Obligations. The Series 2013 Bonds are special obligations of the City and neither the faith and credit nor the taxing power of the City or of the State of Maryland or of any other political subdivision thereof is pledged to the payment of the principal and Redemption Price of and interest on the Series 2013 Bonds. Operating Revenues of the Wastewater Utility are not pledged to the repayment of the Series 2013 Water Bonds, and Operating Revenues of the Water Utility are not pledged to the repayment of the Series 2013 Wastewater Bonds. The Series 2013 Water Bonds are issued pursuant to the Water Resolution and the Series 2013 Wastewater Bonds are issued pursuant to the Wastewater Resolution. Rate Covenants. In the Water Resolution and the Wastewater Resolution, the City covenants that it will take or cause to be taken all actions to ensure that Rates and Charges of the Utilities are assessed, established and collected so that, for each Fiscal Year, (i) Net Revenues of each of the Water Utility and the Wastewater Utility will be at all times equal to at least 1.15 times the Debt Service Requirements on Senior Revenue Obligations of each Utility for such Fiscal Year, and (ii) Net Revenues after payment of debt service on the Senior Revenue Obligations will be at all times equal to at least 1.10 times the Debt Service Requirements on outstanding Subordinate Revenue Obligations for such Fiscal Year (to be calculated to exclude therefrom principal payments with respect to Revenue Notes in such Fiscal Year); provided that the Net Revenues of each Utility will be at all times at least equal to 100% of the sum of (1) the Debt Service Requirements of such Utility for such Fiscal Year (including Debt Service Requirements with respect to Subordinate Revenue Obligations); (2) amounts required to be deposited into the Debt Service Reserve Fund during such Fiscal Year; and (3) the principal or redemption price of and interest on general obligation bonds issued with respect to such Utility payable during such Fiscal Year. Redemption of Series 2013 Water Bonds. The Series 2013 Water Bonds maturing on or after July 1, 2024, are subject to redemption, at the option of the City, prior to maturity beginning on and after January 1, 2024, at the times and redemption prices expressed herein. See REDEMPTION Optional Redemption. The Series 2013 Water Bonds maturing on July 1, 2038, July 1, 2042 and July 1, 2043, are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013 Water Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013 Water Bonds on July 1 of the years and in the amounts as set forth in REDEMPTION Mandatory Sinking Fund Redemption below. Redemption of Series 2013 Wastewater Bonds. The Series 2013 Wastewater Bonds maturing on or after July 1, 2024, are subject to redemption, at the option of the City, prior to maturity beginning on and after January 1, 2024, at the times and redemption prices expressed - vi -

15 herein. See REDEMPTION Optional Redemption. The Series 2013 Wastewater Bonds maturing on July 1, 2038, July 1, 2042 and July 1, 2043, are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013 Wastewater Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013 Wastewater Bonds on July 1 of the years and in the amounts as set forth in REDEMPTION Mandatory Sinking Fund Redemption below. - vii -

16 MAYOR AND CITY COUNCIL OF BALTIMORE ELECTED AND CERTAIN APPOINTED OFFICIALS MAYOR Stephanie Rawlings-Blake CITY COUNCIL President (elected City-Wide) Bernard C. Jack Young First District Councilperson: James B. Kraft Second District Councilperson: Brandon M. Scott Third District Councilperson: Robert Curran Fourth District Councilperson: William B. Henry Fifth District Councilperson: Rochelle Rikki Spector Sixth District Councilperson: Sharon Green Middleton Seventh District Councilperson: Nick Mosby Eighth District Councilperson: Helen Holton Ninth District Councilperson: William Pete Welch Tenth District Councilperson: Edward L. Reisinger Eleventh District Councilperson: William H. Cole IV Twelfth District Councilperson: Carl Stokes Thirteenth District Councilperson: Warren Branch Fourteenth District Councilperson: Mary Pat Clarke BOARD OF ESTIMATES Bernard C. Jack Young Stephanie Rawlings-Blake Joan M. Pratt Alfred H. Foxx, Jr. George A. Nilson President Mayor Comptroller and Secretary Director of Public Works City Solicitor BOARD OF FINANCE Stephanie Rawlings-Blake Joan M. Pratt Larry I. Silverstein (Vice President) Frederick W. Meier, Jr. Dana C. Moulden Mayor Comptroller Member Member Member - viii -

17 $130,110,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Project Revenue Bonds (Water Projects) Series 2013A $123,750,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Project Revenue Bonds (Wastewater Projects) Series 2013C OFFICIAL STATEMENT Relating to $155,990,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Refunding Revenue Bonds (Water Projects) Series 2013B $100,860,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Refunding Revenue Bonds (Wastewater Projects) Series 2013D $31,740,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Subordinate Refunding Revenue Bonds (Water Projects) Series 2013C $26,405,000 CITY OF BALTIMORE, MARYLAND (Mayor and City Council of Baltimore) Subordinate Refunding Revenue Bonds (Wastewater Projects) Series 2013E INTRODUCTION This Official Statement sets forth certain information with respect to the issuance by Mayor and City Council of Baltimore (the official name of the City of Baltimore, Maryland, hereinafter referred to as the City ) of its $130,110,000 Project Revenue Bonds (Water Projects), Series 2013A (the Series 2013A Water Bonds ), its $155,990,000 Refunding Revenue Bonds (Water Projects), Series 2013B (the Series 2013B Water Bonds ), its $31,740,000 Subordinate Refunding Revenue Bonds (Water Projects), Series 2013C (the Series 2013C Water Bonds and, together with the Series 2013A Water Bonds and the Series 2013B Water Bonds, the Series 2013 Water Bonds ), its $123,750,000 Project Revenue Bonds (Wastewater Projects), Series 2013C (the Series 2013C Wastewater Bonds ), its $100,860,000 Refunding Revenue Bonds (Wastewater Projects), Series 2013D (the Series 2013D Wastewater Bonds ), and its $26,405,000 Subordinate Refunding Revenue Bonds (Wastewater Projects), Series 2013E (the Series 2013E Wastewater Bonds and together with the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds, the Series 2013 Wastewater Bonds ). The Series 2013 Water Bonds and the Series 2013 Wastewater Bonds, collectively, are referred to herein as the Series 2013 Bonds. The Series 2013 Water Bonds are issued pursuant to Ordinance No. 495 of the City, adopted by the City Council of Baltimore (the City Council ) on May 21, 1990, and approved by the Mayor of the City of Baltimore (the Mayor ) on May 24, 1990, as amended by Ordinance No. 39 of the City, adopted by the City Council on June 8, 1992, and approved by the Mayor on June 8, 1992, by Ordinance No. 609 of the City, adopted by the City Council on June 15, 1995, and approved by the Mayor on June 29, 1995, by Ordinance No. 275 of the City, adopted by the City Council on May 18, 1998, and approved by the Mayor on May 21, 1998, and by Ordinance No of the City, adopted by the City Council on May 15, 2000, and approved by the Mayor on May 18, 2000, as amended and restated by Ordinance No of the City, adopted by the City Council on April 15, 2002, and approved by the Mayor on April 16, 2002, and as amended by Ordinance No of the City, adopted by the City Council on May 24, 2004, and approved by the Mayor on May 25, 2004, by Ordinance No of the City, adopted by the City Council on April 30, 2007, and approved by the Mayor on May 1, 2007, and by Ordinance No of the City, adopted by the City Council on March 21, 2011, and approved by the Mayor on March 25, 2011 (collectively, the Authorizing Water Ordinance )

18 The Series 2013 Water Bonds are also issued pursuant to the City s Amended and Restated Water Projects Bond Resolution adopted by the Board of Finance of the City (the Board of Finance ) on April 15, 2002 and effective on May 7, 2002, as amended and supplemented by the Water Projects First Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2003, the Water Projects Second Supplemental Bond Resolution adopted by the Board of Finance on June 23, 2003, the Water Projects Third Supplemental Bond Resolution adopted by the Board of Finance on November 24, 2003, the Water Projects Fourth Supplemental Bond Resolution adopted by the Board of Finance on May 24, 2004, the Water Projects Fifth Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2005, the Water Projects Sixth Supplemental Bond Resolution adopted by the Board of Finance on April 24, 2006, the Water Projects Seventh Supplemental Bond Resolution adopted by the Board of Finance on December 18, 2006, the Water Projects Eighth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Water Projects Ninth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Water Projects Tenth Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2008, the Water Projects Eleventh Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Water Projects Twelfth Supplemental Bond Resolution adopted by the Board of Finance on November 23, 2009, the Water Projects Thirteenth Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2011, the Water Projects Fourteenth Supplemental Bond Resolution adopted by the Board of Finance on June 27, 2011, and the Water Projects Fifteenth Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013 (collectively, the Water Resolution ). The terms, provisions and details of the Series 2013 Water Bonds described herein, including the security therefor, are as prescribed in the Water Resolution. The Series 2013 Wastewater Bonds are issued pursuant to Ordinance No. 496 of the City, adopted by the City Council on May 21, 1990, and approved by the Mayor on May 24, 1990, as amended by Ordinance No. 40 of the City, adopted by the City Council on June 8, 1992, and approved by the Mayor on June 8, 1992, by Ordinance No. 610 of the City, adopted by the City Council on June 15, 1995, and approved by the Mayor on June 29, 1995, and by Ordinance No of the City, adopted by the City Council on May 15, 2000, and approved by the Mayor on May 18, 2000, as amended and restated by Ordinance No of the City, adopted by the City Council on April 15, 2002, and approved by the Mayor on April 16, 2002, as amended by Ordinance No of the City, adopted by the City Council on April 30, 2007, and approved by the Mayor on May 1, 2007, and by Ordinance No of the City, adopted by the City Council on March 21, 2011, and approved by the Mayor on March 25, 2011 (collectively, the Authorizing Wastewater Ordinance ). The Series 2013 Wastewater Bonds are also issued pursuant to the City s Amended and Restated Wastewater Projects Bond Resolution adopted by the Board of Finance on April 15, 2002 and effective on May 7, 2002, as amended and supplemented by the Wastewater Projects First Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2003, the Wastewater Projects Second Supplemental Bond Resolution adopted by the Board of Finance on June 23, 2003, the Wastewater Projects Third Supplemental Bond Resolution adopted by the Board of Finance on May 24, 2004, the Wastewater Projects Fourth Supplemental Bond Resolution adopted by the Board of Finance on April 26, 2004, the Wastewater Projects Fifth Supplemental Bond Resolution adopted by the Board of Finance on August 30, 2004, the - 2 -

19 Wastewater Projects Sixth Supplemental Bond Resolution adopted by the Board of Finance on February 28, 2005, the Wastewater Projects Seventh Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2005, the Wastewater Projects Eighth Supplemental Bond Resolution adopted by the Board of Finance on September 26, 2005, the Wastewater Projects Ninth Supplemental Bond Resolution adopted by the Board of Finance on October 24, 2005, the Wastewater Projects Tenth Supplemental Bond Resolution adopted by the Board of Finance on April 24, 2006, the Wastewater Projects Eleventh Supplemental Bond Resolution adopted by the Board of Finance on December 18, 2006, the Wastewater Projects Twelfth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Wastewater Projects Thirteenth Supplemental Bond Resolution adopted by the Board of Finance on April 16, 2007, the Wastewater Projects Fourteenth Supplemental Bond Resolution adopted by the Board of Finance on April 28, 2008, the Wastewater Projects Fifteenth Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Wastewater Projects Sixteenth Supplemental Bond Resolution adopted by the Board of Finance on April 27, 2009, the Wastewater Projects Seventeenth Supplemental Bond Resolution adopted by the Board of Finance on November 23, 2009, the Wastewater Projects Eighteenth Supplemental Bond Resolution adopted by the Board of Finance on March 22, 2010, the Wastewater Projects Nineteenth Supplemental Bond Resolution adopted by the Board of Finance on April 25, 2011, the Wastewater Projects Twentieth Supplemental Bond Resolution adopted by the Board of Finance on June 27, 2011, the Wastewater Projects Twenty-First Supplemental Bond Resolution adopted by the Board of Finance on April 23, 2013, and the Wastewater Projects Twenty-Second Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013 (collectively, the Wastewater Resolution ). The terms, provisions and details of the Series 2013 Wastewater Bonds described herein, including the security therefor, are as prescribed in the Wastewater Resolution. Pursuant to the Water Resolution and the Wastewater Resolution, Manufacturers and Traders Trust Company has been appointed trustee (the Trustee ) for the Series 2013 Bonds. The City is empowered to issue the Series 2013 Bonds by Section 50 of Article II (the Enabling Act ) of the Charter of Baltimore City, 1996 Edition, as amended (the City Charter ), which authorizes the City to borrow money to finance undertakings for the accomplishment of any of the purposes, objects and powers of the City and in connection therewith to issue obligations (including refunding obligations) payable as to both principal and interest solely from and secured solely by a pledge of the revenues from or arising in connection with the property, facilities, developments and improvements whose financing is undertaken by the issuance of such obligations. For the definitions of certain words and terms used in this Official Statement and a summary of certain provisions of the Water Resolution and the Wastewater Resolution, see Appendix A Definitions of Certain Terms and Summaries of the Water Resolution and the Wastewater Resolution. The City s Water Utility and Wastewater Utility (collectively, the Utilities ) are separate utilities within the Bureau of Water and Wastewater (the Bureau ), one of three separate bureaus in the City s Department of Public Works. Article VI, Section 18 of the Charter of Baltimore City (1996 Edition) established the Utilities in 1979 as separate enterprises to be self

20 sustaining and operated without profit or loss to the other funds or programs of the City. Section 21A of Article 29 of the Baltimore City Code (1976 Edition) (the City Code ), provides the Board of Estimates of the City, on the recommendation of the Director of Finance and the Director of Public Works, the power to assess, establish and change rates and charges for the supply and use of the Utilities water and wastewater services. This Official Statement and the Appendices contain brief descriptions of the water and wastewater system, the organization and staff of the Water Utility and the Wastewater Utility, their financial operations and capital improvement programs, together with other information, including summaries of the terms of the Series 2013 Bonds, the Authorizing Water Ordinance, the Authorizing Wastewater Ordinance, the Water Resolution, the Wastewater Resolution, certain provisions of the City Charter and certain data about the City and Baltimore County, Maryland ( Baltimore County ). The attached Appendices are integral parts of this Official Statement and should be read in their entirety. The descriptions and summaries contained in this Official Statement do not purport to be comprehensive or definitive, and references to each law or document, including the definitive forms of the Series 2013 Bonds and information with respect thereto contained in the Water Resolution and the Wastewater Resolution, are qualified in their entirety by reference to each such document. For complete details of all terms and conditions, copies of all such materials are available from the City by contacting the Chief, Bureau of Treasury Management, Abel Wolman Municipal Building, 200 North Holliday Street, Room 7, Baltimore, Maryland 21202, (410) PLAN OF FINANCE THE SERIES 2013 WATER BONDS As set forth in ESTIMATED SOURCES AND USES OF SERIES 2013 WATER BONDS, the proceeds of the Series 2013A Water Bonds will be used to (i) finance (including by reimbursing prior project expenditures) the cost of facilities pursuant to the City s Water Utility Capital Improvement Program (as defined herein), (ii) provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations under the Water Resolution, of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013A Water Bonds, and (iii) pay administrative, legal, financing and other costs of issuance of the Series 2013A Water Bonds. As set forth in ESTIMATED SOURCES AND USES OF SERIES 2013 WATER BONDS, the proceeds of the Series 2013B Water Bonds, together with other available funds of the City, will be used to (i) refund all or a portion of the maturities of the City s outstanding water revenue bonds described below (the Refunded Water Bonds ), (ii) refund all or a portion of the maturities of the City s outstanding senior lien water revenue bonds issued as auction rate securities described below (the Refunded Senior Water Auction Rate Bonds ), and (iii) pay issuance costs related to the Series 2013B Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Water Auction Rate Bonds. As set forth in ESTIMATED SOURCES AND USES OF THE SERIES 2013 WATER BONDS, the proceeds of the Series 2013C Water Bonds, together with other available funds of the City, will be used to (i) refund all or a portion of the maturities of the City s outstanding subordinate lien water revenue bonds issued as auction rate securities described below (the - 4 -

21 Refunded Subordinate Water Auction Rate Bonds, and together with the Refunded Senior Water Auction Rate Bonds, the Refunded Water Auction Rate Bonds ) and (ii) pay issuance costs related to the Series 2013C Water Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Water Auction Rate Bonds. Refunded Water Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2002A $103,305, , 2018, 2019, January 2, , 2021, 2023, 2027, 2032, A 12,835, January 2, Refunded Senior Water Auction Rate Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2004B 44,000, December 20, Refunded Subordinate Water Auction Rate Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2002C $28,100,000 * 2037 December 18, The Refunded Water Bonds that may be redeemed on January 2, 2014, and the Refunded Water Auction Rate Bonds, are collectively referred to as the Current Refunded Water Bonds. PLAN OF FINANCE THE SERIES 2013 WASTEWATER BONDS As set forth in ESTIMATED SOURCES AND USES OF SERIES 2013 WASTEWATER BONDS, the proceeds of the Series 2013C Wastewater Bonds will be used to (i) finance (including by reimbursing prior project expenditures) the cost of facilities pursuant to the City s Wastewater Utility Capital Improvement Program (as defined herein); (ii) provide for a deposit to the Debt Service Reserve Fund securing Senior Revenue Obligations under the * Represents a portion of the Refunded Subordinate Water Auction Rate Bonds of such series maturing in such year. On the date of delivery of the Series 2013 Bonds, the Trustee for such series of Refunded Subordinate Water Auction Rate Bonds will select the Refunded Subordinate Water Auction Rate Bonds, or portions thereof, from such maturity and series to be refunded and send a notice to the holders of the Refunded Subordinate Water Auction Rate Bonds so selected

22 Wastewater Resolution of an amount reflecting the increase in the Debt Service Reserve Fund Requirement as a result of the issuance of the Series 2013C Wastewater Bonds; and (iii) pay administrative, legal, financing and other costs of issuance of the Series 2013C Wastewater Bonds. As set forth in ESTIMATED SOURCES AND USES OF SERIES 2013 WASTEWATER BONDS, the proceeds of the Series 2013D Wastewater Bonds, together with other available funds of the City, will be used to (i) refund all or a portion of the maturities of the City s outstanding wastewater revenue bonds described below (the Refunded Wastewater Bonds ), (ii) refund all or a portion of the maturities of the City s outstanding senior lien wastewater revenue bonds issued as auction rate securities described below (the Refunded Senior Wastewater Auction Rate Bonds ), and (iii) pay issuance costs related to the Series 2013D Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Senior Wastewater Auction Rate Bonds. As set forth in ESTIMATED SOURCES AND USES OF THE SERIES 2013 WASTEWATER BONDS, the proceeds of the Series 2013E Wastewater Bonds, together with other available funds of the City, will be used to (i) refund all or a portion of the maturities of the City s outstanding subordinate lien wastewater revenue bonds issued as auction rate securities described below (the Refunded Subordinate Wastewater Auction Rate Bonds, and together with the Refunded Senior Wastewater Auction Rate Bonds, the Refunded Wastewater Auction Rate Bonds ) and (ii) pay issuance costs related to the Series 2013E Wastewater Bonds and certain other administrative, legal, financing and other costs, including fees associated with terminating (in whole or in part) any or all of the interest rate swap agreements related to the Refunded Subordinate Wastewater Auction Rate Bonds

23 Refunded Wastewater Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2002A $54,860, , 2018, 2019, January 2, , 2021, 2023, 2027, 2032, A 6,035,000 * 2023, 2024, 2025 January 2, B 6,800, , 2017, 2018, July 1, , 2020, C 2,985, , 2020 July 1, Refunded Senior Wastewater Auction Rate Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2002B $15,700,000* 2032 December 20, A $17,100, December 18, Refunded Subordinate Wastewater Auction Rate Bonds Series Principal Amount Being Refunded Maturities (due July 1) Optional Redemption Date Optional Redemption Price 2002C $25,300,000* 2032 December 23, The Refunded Wastewater Bonds that may be redeemed on July 1, 2015 and July 1, 2016 are hereinafter referred to as the Advance Refunded Wastewater Bonds. The Refunded Wastewater Bonds that may be redeemed on January 2, 2014, and the Refunded Wastewater Auction Rate Bonds, are collectively referred to as the Current Refunded Wastewater Bonds. * Represents a portion of the Refunded Wastewater Bonds and the Refunded Wastewater Auction Rate Bonds of such series maturing in such year. On the date of delivery of the Series 2013 Bonds, the Trustee for such series of Refunded Wastewater Bonds and Refunded Wastewater Auction Rate Bonds will select the Refunded Wastewater Bonds and Refunded Wastewater Auction Rate Bonds, or portions thereof, from such maturity and series to be refunded and send a notice to the holders of the Refunded Wastewater Bonds and Refunded Wastewater Auction Rate Bonds so selected

24 ESTIMATED SOURCES AND USES OF SERIES 2013 WATER BONDS Sources of funds: Series 2013A Water Bonds $130,110, Series 2013B Water Bonds 155,990, Series 2013C Water Bonds 31,740, Net Original Issue Premium 26,556, Available Funds of the City (1) 6,974, Total Sources of Funds $351,371, Uses of funds: Deposit to Construction Fund $130,154, Deposit to Debt Service Reserve Fund (2) 9,716, Refunding Deposit (3) 191,753, Estimated financing expenses (4) Underwriters Discount 686, Administrative, legal, financing and miscellaneous expenses 387, Swap termination expenses (5) 18,672, Total estimated financing expenses 19,746, Total Uses of Funds $351,371, (1) (2) (3) (4) (5) Includes available Debt Service Fund and Debt Service Reserve Fund monies allocable to the Refunded Water Bonds. Amount required to make the amount on deposit in the Debt Service Reserve Fund securing the Senior Revenue Obligations under the Water Resolution upon the issuance of the Series 2013A Water Bonds and the Series 2013B Water Bonds equal to the Debt Service Reserve Fund Requirement. Amount required to pay the principal or redemption price of and interest on the Current Refunded Water Bonds. See VERIFICATION OF MATHEMATICAL COMPUTATIONS. Includes Underwriters discount as well as certain fees and expenses of the financial advisor to the City, Bond Counsel to the City, counsel to the Underwriters and certain accounting fees, as well as rating agency fees, printing costs, fees and expenses of the Trustee and other miscellaneous expenses. Amount required to pay the fees associated with the termination (in whole or in part) of any or all of the interest rate swap agreements entered into in connection with the Refunded Water Auction Rate Bonds

25 ESTIMATED SOURCES AND USES OF SERIES 2013 WASTEWATER BONDS Sources of funds: Series 2013C Wastewater Bonds $123,750, Series 2013D Wastewater Bonds 100,860, Series 2013E Wastewater Bonds 26,405, Net Original Issue Premium 24,000, Available Funds of the City (1) 3,535, Total Sources of Funds $278,551, Uses of funds: Deposit to Construction Fund $124,983, Deposit to Debt Service Reserve Fund (2) 7,784, Refunding Deposit (3) 131,759, Estimated financing expenses (4) Underwriters Discount 508, Administrative, legal, financing and miscellaneous expenses 387, Swap termination expenses (5) 13,128, Total estimated financing expenses 14,023, Total Uses of Funds $278,551, (1) (2) (3) (4) (5) Includes available Debt Service Fund and Debt Service Reserve Fund monies allocable to the Refunded Wastewater Bonds. Amount required to make the amount on deposit in the Debt Service Reserve Fund securing the Senior Revenue Obligations under the Wastewater Resolution upon the issuance of the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds equal to the Debt Service Reserve Fund Requirement. Amount required to (i) pay the principal or redemption price of and interest on the Current Refunded Wastewater Bonds, and/or (ii) purchase federal securities payable as to principal and interest in such amounts and on such dates as will be sufficient to pay when due the principal or Redemption Price of and interest on the Advance Refunded Wastewater Bonds. See VERIFICATION OF MATHEMATICAL COMPUTATIONS. Includes Underwriters discount as well as certain fees and expenses of the financial advisor to the City, Bond Counsel to the City, counsel to the Underwriters and certain accounting fees, as well as rating agency fees, printing costs, fees and expenses of the Trustee and other miscellaneous expenses. Amount required to pay the fees associated with the termination (in whole or in part) of any or all of the interest rate swap agreements entered into in connection with the Refunded Wastewater Auction Rate Bonds. DEPOSITS TO ESCROW DEPOSIT FUND On the date of issuance and delivery of the Series 2013B Water Bonds, Series 2013C Water Bonds, Series 2013D Wastewater Bonds and Series 2013E Wastewater Bonds, (i) portions of the proceeds of the Series 2013B Water Bonds and Series 2013C Water Bonds will be deposited by the Director of Finance with the Trustee to pay the redemption price of the Current Refunded Water Bonds on the first optional redemption date, (ii) portions of proceeds of the Series 2013D Wastewater Bonds will be deposited by the Director of Finance with Manufacturers and Traders Trust Company (the Escrow Deposit Agent ) in a trust fund (the Escrow Deposit Fund ) to be established under an Escrow Deposit Agreement entered into between the City and the Escrow Deposit Agent (the Escrow Deposit Agreement ), and (iii) portions of the proceeds of the Series 2013D Wastewater Bonds and Series 2013E Wastewater Bonds will be deposited by the Director of Finance with the Trustee to pay the redemption price of the Current Refunded Wastewater Bonds on the first optional redemption date. The Escrow Deposit Agent will apply all or part of the funds so deposited in the Escrow Deposit Fund to - 9 -

26 purchase direct obligations of, or obligations the timely payment of the principal of and interest on which is unconditionally guaranteed by, the United States of America (the Government Obligations ). The Government Obligations on deposit in the Escrow Deposit Fund will mature in stated fixed amounts as to principal and interest at such times as will, together with the funds deposited with the Trustee and other cash on hand, be sufficient, without reinvestment, (a) to pay the interest on the Advance Refunded Wastewater Bonds until the specified maturity or optional redemption dates and (b) to pay at maturity or redeem the Advance Refunded Wastewater Bonds on their respective maturity or optional redemption dates in the principal amounts or at the redemption prices set forth in the table captioned Refunded Wastewater Bonds herein. See VERIFICATION OF MATHEMATICAL COMPUTATIONS herein. The Government Obligations and cash, if any, on deposit in the Escrow Deposit Fund, and the funds deposited with the Trustee will be used for the payment of the principal of and redemption premium (if any) and interest on the specified Advance Refunded Wastewater Bonds being refinanced, and are not available for the payment of principal of, redemption premium, if any, or interest on any other obligations of the City, including, without limitation, the Series 2013 Bonds. General THE SERIES 2013 BONDS The Series 2013 Water Bonds and the Series 2013 Wastewater Bonds will bear interest from the date of delivery, at the rates set forth on the inside cover of this Official Statement, initially payable semiannually on each January 1 and July 1 beginning July 1, The Series 2013 Bonds will be issued in fully registered form without coupons in denominations of $5,000 and any integral multiple thereof. Book-Entry Only System The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Series 2013 Bonds. The Series 2013 Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee). One fully registered Series 2013 Bond certificate will be issued for each stated maturity of the Series 2013 Bonds 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 1934, as amended. 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 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,

27 banks, trust companies, clearing corporations, and certain other organizations. DTC is a whollyowned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for the 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 is rated AA+ by Standard & Poor s. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of the Series 2013 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2013 Bonds on DTC s records. The ownership interest of each actual purchaser of each Series 2013 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 Series 2013 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 Series 2013 Bonds, except in the event that use of the book-entry system for the Series 2013 Bonds is discontinued. So long as Cede & Co., as nominee of DTC, is the Registered Owner of the Series 2013 Bonds, references herein to the Holders or Owners of the Series 2013 Bonds shall mean Cede & Co. and not the Beneficial Owners of the Series 2013 Bonds. To facilitate subsequent transfers, all Series 2013 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 the Series 2013 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 Series 2013 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts the Series 2013 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. Conveyances 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. So long as the Series 2013 Bonds are held by DTC under a book-entry only system, redemption notices shall be sent only to DTC. If less than all of the Series 2013 Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed

28 Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2013 Bonds unless authorized by DTC 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 the Series 2013 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). So long as the Series 2013 Bonds are held by DTC under a book-entry system, payments of the principal or the Redemption Price of and the interest on the Series 2013 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 Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participants and not of DTC, the Trustee or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of the principal or Redemption Price of and interest on the Series 2013 Bonds 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 Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Series 2013 Bonds at any time by giving reasonable notice to the Trustee and the City. Under such circumstances, in the event a successor depository is not obtained, bond certificates are required to be printed and delivered. In addition, the City may discontinue use of DTC (or any substitute depository or its successor) with respect to the Series 2013 Bonds at any time. If the book-entry only system is discontinued, the Trustee will deliver fully registered definitive Series 2013 Bond Certificates to each holder in accordance with the Water Resolution or Wastewater Resolution (as the case may be). Certain information included under this caption has been provided by DTC. No representation is made by the City as to the accuracy or adequacy of such information provided by DTC or as to the absence of material adverse changes in such information subsequent to the date hereof. THE CITY AND THE TRUSTEE WILL NOT HAVE ANY RESPONSIBILITY OR OBLIGATION TO THE DIRECT PARTICIPANTS, TO THE INDIRECT PARTICIPANTS OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT; (ii) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2013 BONDS; (iii) ANY NOTICE WHICH IS PERMITTED OR REQUIRED TO BE GIVEN TO BONDHOLDERS BY DTC UNDER THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION; (iv) THE SELECTION BY DTC OR ANY DIRECT OR INDIRECT PARTICIPANT OF ANY PERSON

29 TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE SERIES 2013 BONDS; (v) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS BONDOWNER; OR (vi) DTC S SERVING OR ACTING IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. Optional Redemption REDEMPTION The Series 2013 Water Bonds maturing on or after July 1, 2024 are subject to redemption prior to maturity at par plus accrued interest thereon to the date set for redemption, at the option of the City, beginning on and after January 1, 2024 as a whole or in part on any Business Day, in any order of maturity selected by the City and by lot within any maturity unless the Trustee selects an alternate method it deems proper (provided that so long as DTC is the holder of the Series 2013 Water Bonds it shall select the particular accounts of Participants from which Series 2013 Water Bonds will be redeemed and to which the Redemption Price will be credited). The Series 2013 Wastewater Bonds maturing on or after July 1, 2024 are subject to redemption prior to maturity at par plus accrued interest thereon to the date set for redemption, at the option of the City, beginning on and after January 1, 2024 as a whole or in part on any Business Day, in any order of maturity selected by the City and by lot within any maturity unless the Trustee selects an alternate method it deems proper (provided that so long as DTC is the holder of the Series 2013 Wastewater Bonds it shall select the particular accounts of Participants from which Series 2013 Wastewater Bonds will be redeemed and to which the Redemption Price will be credited). Mandatory Sinking Fund Redemption The Series 2013A Water Bonds maturing on July 1, 2038, and 2043 are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013A Water Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013A Water Bonds on July 1 of the following years in the following amounts:

30 ** Final maturity Series 2013A Water Bonds $28,880,000 Term Bonds Due July 1, 2038 Year Sinking Fund Installment Year Sinking Fund Installment 2034 $5,225, $6,050, ,490, ** 6,355, ,760,000 Series 2013A Water Bonds $36,860,000 Term Bonds Due July 1, 2043 Year Sinking Fund Installment Year Sinking Fund Installment 2039 $6,670, $7,720, ,005, ** 8,110, ,355,000 The Series 2013B Water Bonds maturing on July 1, 2038, and 2042 are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013B Water Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013B Water Bonds on July 1 of the following years in the following amounts: Series 2013B Water Bonds $1,115,000 Term Bonds Due July 1, 2038 Year Sinking Fund Installment Year Sinking Fund Installment 2034 $220, $225, , ** 225, ,000 Series 2013B Water Bonds $26,705,000 Term Bonds Due July 1, 2038 Year Sinking Fund Installment Year Sinking Fund Installment 2034 $6,970, $4,145, ,745, ** 7,905, ,940,000 ** Final maturity Series 2013B Water Bonds $36,900,000 Term Bonds Due July 1, 2042 Year Sinking Fund Installment Year Sinking Fund Installment 2039 $8,540, $9,410, ,965, ** 9,985,

31 The Series 2013C Wastewater Bonds maturing on July 1, 2038, and 2043 are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013C Wastewater Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013C Wastewater Bonds on July 1 of the following years in the following amounts: ** Final maturity Series 2013C Wastewater Bonds $27,420,000 Term Bonds Due July 1, 2038 Year Sinking Fund Installment Year Sinking Fund Installment 2034 $4,965, $5,745, ,210, ** 6,030, ,470,000 Series 2013C Wastewater Bonds $35,000,000 Term Bonds Due July 1, 2043 Year Sinking Fund Installment Year Sinking Fund Installment 2039 $6,335, $7,330, ,650, ** 7,700, ,985,000 The Series 2013D Wastewater Bonds maturing on July 1, 2038, and 2042 are subject to redemption prior to maturity at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption from the Sinking Fund Installments for such Series 2013D Wastewater Bonds paid from the Sinking Fund Account in the Debt Service Fund established for the Series 2013D Wastewater Bonds on July 1 of the following years in the following amounts: ** Final maturity Series 2013D Wastewater Bonds $14,835,000 Term Bonds Due July 1, 2038 Year Sinking Fund Installment Year Sinking Fund Installment 2034 $3,750, $2,835, ,570, ** 2,980, ,700,

32 Series 2013D Wastewater Bonds $15,845,000 Term Bonds Due July 1, 2042 Year Sinking Fund Installment Year Sinking Fund Installment 2039 $3,125, $3,445, ,280, ** 5,995,000 Notice of Redemption So long as any of the Series 2013 Bonds are maintained in book-entry form, notice of redemption of such Series 2013 Bonds will be given only to DTC or a successor Securities Depository in accordance with the Water Resolution or the Wastewater Resolution (as the case may be) and the Series 2013 Bonds as described above under THE SERIES 2013 BONDS Book-Entry Only System. At any other time, notice of redemption will be mailed at least thirty days before the redemption date to the Holders of the Series 2013 Bonds to be redeemed at their addresses as they appear on the registration books maintained by the Bond Registrar, provided, however, that such mailing will not be a condition precedent to such redemption, and failure to mail any such notice, or any defect therein or in the mailing thereof, to any such Holder will not affect the validity of the proceedings for redemption of the Series 2013 Bonds. The Series 2013 Bonds so called for redemption will cease to bear interest on the specified redemption date and will no longer be secured under the Water Resolution or the Wastewater Resolution (as the case may be) provided that funds for such redemption are on deposit at that time with the Trustee. Any notice of redemption of the Series 2013 Bonds delivered in accordance with the Water Resolution or the Wastewater Resolution may be conditional, and if any condition stated in the notice of redemption shall not have been satisfied on or prior to the redemption date, said notice shall be of no force and effect and the City shall not be required to redeem such Series 2013 Bonds thereby called for redemption, such Series 2013 Bonds shall not become due and payable, the redemption shall be cancelled, and the Trustee shall within a reasonable time thereafter give notice, to the persons and in the manner in which the notice of redemption was given, that such condition or conditions were not met and that the redemption was cancelled. In addition, the City may, at its option, on or prior to the date fixed for optional redemption, rescind and cancel such notice of redemption by written request of the City to the Trustee, and any optional redemption of such Series 2013 Bonds, and notice thereof, shall be rescinded and cancelled and the Trustee shall mail notice of such cancellation to the recipients of the notice of redemption being cancelled pursuant to the provisions of the Water Resolution and the Wastewater Resolution. Any optional redemption of Series 2013 Bonds, and notice thereof, shall be rescinded and cancelled if for any reason on the date fixed for optional redemption moneys are not available in the Redemption Fund or otherwise held in trust for such purpose in an amount sufficient to pay in full on said date the principal of, interest, and any premium due on such Series 2013 Bonds called for optional redemption and such failure to optionally redeem such Series 2013 Bonds called for redemption shall not be a default under the Water Resolution or the Wastewater Resolution

33 Registration and Exchange of the Series 2013 Bonds So long as the Series 2013 Bonds are maintained in book-entry form, the Beneficial Owners thereof will have no right to receive physical possession of the Series 2013 Bonds, and transfer of ownership interests in the Series 2013 Bonds will be made through book entries by DTC, Participants and Indirect Participants. See SERIES 2013 BONDS Book-Entry Only System above. If the book-entry only system is discontinued, any Series 2013 Water Bond or Series 2013 Wastewater Bond may be exchanged for an equal aggregate principal amount of Series 2013 Water Bonds or Series 2013 Wastewater Bonds, respectively, of the same series and maturity and bearing interest at the same rate of other authorized denominations, and the transfer of any Series 2013 Bond may be registered, upon presentation and surrender of such Bond at the designated corporate trust office of the Trustee, together with an assignment duly executed by the Holder or his attorney or legal representative. In such event, the City and the Trustee may require the person requesting any such exchange or transfer to reimburse them for any tax or other governmental charge payable in connection therewith. Neither the City nor the Trustee will be required to register the transfer of any Series 2013 Bond or make any such exchange of any Series 2013 Bond after such Series 2013 Bond or any portion thereof has been selected for redemption. Pledged Amounts SECURITY FOR THE SERIES 2013 WATER BONDS * The Series 2013 Water Bonds are special obligations of the City, payable solely from and secured solely by the Pledged Amounts of the Water Utility. Pledged Amounts are defined in the Water Resolution as (i) the Water Utility s Operating Revenues, (ii) amounts (including investment earnings thereon) in any fund or account established pursuant to the Water Resolution for the payment of any Revenue Obligations, (iii) unexpended proceeds of Revenue Obligations, including investment earnings on such proceeds, (iv) amounts due and payable to the City under or pursuant to any Hedge Agreement, and (v) other amounts legally available for the payment of the principal of, premium, if any, and interest on Revenue Obligations. The Series 2013A Water Bonds and the Series 2013B Water Bonds are secured by Pledged Amounts of the Water Utility on a parity basis with other outstanding Senior Revenue Obligations of the City as described herein. The Series 2013C Water Bonds are secured by a pledge of Operating Revenues of the Water Utility on a parity basis with other outstanding Subordinate Revenue Obligations of the City, which pledge is junior and subordinate to the pledge of Operating Revenues to the payment of the principal and Redemption Price of and interest on Senior Revenue Obligations. Moneys held in the Rebate Fund are not pledged to the payment of any Revenue Obligations. The Bondholders security interest in certain of the Pledged Amounts, including the Operating Revenues, under the Water Resolution (constituting those portions which are not in the possession of the Trustee and in which it is not possible to perfect a security * Capitalized terms used in this Section shall have the meanings set forth in the Water Resolution unless otherwise indicated

34 interest by the filing of financing statements) will remain unperfected. The Series 2013C Water Bonds are not secured by a debt service reserve fund. Payments of principal, interest and Sinking Fund Installments on the Series 2013C Water Bonds shall not be made by the Trustee to the holders thereof if an Event of Default under the Water Resolution of which the Trustee has notice has occurred and is continuing. So long as any Senior Revenue Obligations are Outstanding (i) the failure to pay the principal of or interest on any Subordinate Revenue Obligation, including the Series 2013C Water Bonds, shall not constitute an Event of Default, and (ii) the Trustee may not declare the aggregate principal amount of the Subordinate Revenue Obligations, including the Series 2013C Water Bonds, to be due and payable upon the occurrence of any Event of Default under the Water Resolution. In addition, to the extent provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations secured by a Credit Facility, such pledge will also secure the reimbursement of amounts paid by any Credit Facility Provider. However, the pledge of the Operating Revenues to secure the payment of the principal, Redemption Price and purchase price of and interest on any Subordinate Revenue Obligations and each Series of Additional Subordinate Revenue Obligations (including Revenue Notes), and the reimbursement of any Credit Facility Provider paying such amounts, will be junior and subordinate to the pledge of the Operating Revenues to secure the payment of the principal, Redemption Price and purchase price of and interest on Senior Revenue Obligations, and the reimbursement of any Credit Facility Provider securing such Senior Revenue Obligations. See SECURITY FOR THE SERIES 2013 WATER BONDS Additional Revenue Obligations below. THE SERIES 2013 WATER BONDS ARE SPECIAL OBLIGATIONS OF THE CITY AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY OR OF THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2013 WATER BONDS. THE ISSUANCE OF THE SERIES 2013 WATER BONDS IS NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY AN OBLIGATION, MORAL OR OTHERWISE, OF THE CITY OR OF THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION WHATEVER THEREFOR. OPERATING REVENUES OF THE WASTEWATER UTILITY (AS SUCH TERMS ARE DEFINED IN THE WASTEWATER RESOLUTION) ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WATER BONDS, AND OPERATING REVENUES OF THE WATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WASTEWATER BONDS. Pledged Funds The Water Resolution provides for the creation of the following funds and separate accounts for the Series 2013A Water Bonds: a Debt Service Fund (the Series 2013A Water Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Construction Fund and a Rebate Fund. As security for the Series 2013A Water Bonds, the City has pledged and assigned to the Trustee any and all

35 amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013A Water Bonds. Amounts on deposit in the Series 2013A Water Debt Service Fund, the Construction Fund and the Redemption Fund secure only the Series 2013A Water Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. Each fund or account created for Subordinate Revenue Obligations shall be separately created for each Series of Additional Subordinate Revenue Obligations, designated by reference to such Series, except as otherwise provided in the Supplemental Resolution authorizing such Additional Subordinate Revenue Obligations. The Water Resolution provides for the creation of the following funds and separate accounts for the Series 2013B Water Bonds: a Debt Service Fund (the Series 2013B Water Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Refunding Fund, a Costs of Issuance Fund and a Rebate Fund. As security for the Series 2013B Water Bonds, the City has pledged and assigned to the Trustee any and all amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013B Water Bonds. Amounts on deposit in the Series 2013B Water Debt Service Fund and the Redemption Fund secure only the Series 2013B Water Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. The Water Resolution provides for the creation of the following funds and separate accounts for the Series 2013C Water Bonds: a Debt Service Fund (the Series 2013C Water Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Refunding Fund, a Costs of Issuance Fund and a Rebate Fund. As security for the Series 2013C Water Bonds, the City has pledged and assigned to the Trustee any and all amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013C Water Bonds. Amounts on deposit in the Series 2013C Water Debt Service Fund and the Redemption Fund secure only the Series 2013C Water Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. The Water Resolution provides for the creation of a Debt Service Reserve Fund to be held by the Trustee and pledged as security for the Series 2013A Water Bonds, the Series 2013B Water Bonds and any other Senior Revenue Obligations, including certain Existing Senior Revenue Obligations (as defined in Appendix A hereto), but excluding the Series 1993-A Water Bonds and the Series 1994-A Water Bonds. The Series 2013C Water Bonds are not secured by a debt service reserve fund. In addition, the Water Resolution provides for the Water Operating Fund, the Water Capital Fund, the Operating Reserve Fund, the Rate Stabilization Fund and the Residual Fund to be held by or for the account of the City for the ongoing operation and maintenance of the Water Utility. Of these funds, only the Water Operating Fund is pledged to the payment of Revenue Obligations

36 Funds and accounts equivalent to many of those created for the Series 2013 Water Bonds were established for the Existing Revenue Obligations (as defined in Appendix A hereto). Pursuant to the Water Resolution, the funds and accounts established for the Existing Revenue Obligations secure only those Existing Revenue Obligations for which they were created. Notwithstanding the foregoing, a Debt Service Reserve Fund secures the Series 2013A Water Bonds, the Series 2013B Water Bonds and all Existing Senior Revenue Obligations (as defined in Appendix A hereto) other than the Series 1993-A Water Bonds and the Series 1994-A Water Bonds. As Additional Revenue Obligations are issued, funds and accounts similar to those created for the Existing Revenue Obligations and the Series 2013 Water Bonds may be created with respect to such Additional Revenue Obligations. Additional funds and accounts may also be created by a Supplemental Resolution in order to effectuate the issuance of Additional Revenue Obligations so long as the creation of any such funds and accounts does not adversely affect the equal and ratable pledge of the Operating Revenues to the payment of Senior Revenue Obligations. The City has covenanted in the Water Resolution that it will pay from Operating Revenues, on or before the first business day of each month, to the extent available, and in the following order of priority: (i) the Operating Expenses of the Water Utility; (ii) (a) to the Trustee, the amount, if any, necessary to make the amount on deposit in the Interest Account maintained for each Series of Senior Revenue Obligations equal to the amount of accrued and unpaid interest on the Senior Revenue Obligations of such Series as of the first Business Day of the immediately succeeding month, (b) to the Trustee, commencing on the twelfth month prior to such principal becoming due, one-twelfth of the amount of any principal of the Outstanding Senior Revenue Obligations of each Series becoming due on the next principal payment date for such Senior Revenue Obligations, (c) amounts due and payable under any Hedge Agreement which are payable on a parity basis with the Senior Revenue Obligations, and (d) amounts owing to the provider of a Credit Facility which are payable on a parity basis with the Senior Revenue Obligations; (iii) the amount, if any, required to be deposited in the Debt Service Reserve Funds under the Water Resolution to the extent required to cure any deficiency therein; (iv) to the Trustee, (a) the amount, if any, necessary to make the amount on deposit in the Interest Account maintained for the Subordinate Revenue Obligations of each subordinate Series equal to the amount of accrued and unpaid interest on the Outstanding Subordinate Revenue Obligations of such subordinate Series as of the first Business Day of the immediately succeeding month, (b) commencing on the twelfth month prior to such principal becoming due, one-twelfth of the amount necessary to make the amount on deposit in the Principal Account and the Sinking Fund Account, respectively, maintained for the Subordinate Revenue Obligations of each subordinate Series equal to the amount of principal and Sinking Fund Installments becoming due on the next principal payment date for such Subordinate Revenue Obligations, (c) the payment of amounts due and payable under any Hedge Agreement which are subordinate to the Senior Revenue Obligations and on a parity basis with the Subordinate Revenue

37 Obligations, and (d) the payment of amounts owing to the provider of a Credit Facility which are subordinate to the Senior Revenue Obligations; (v) the amount required to maintain the Operating Reserve of the Water Utility (defined below); and (vi) transfers to the Rate Stabilization Fund in the amounts determined by the City. Pursuant to the Water Resolution, the City shall maintain operating reserves (the Operating Reserve of the Water Utility ) in an amount determined by the City to be adequate Operating Reserves for the Water Utility, but in any event no less than eight percent of the Operating Expenses of the Water Utility (the Water Utility Operating Reserve Requirement ). As of the end of each Fiscal Year, Operating Reserves for the Water Utility shall be no less than the Water Utility Operating Reserve Requirement. Moneys on deposit in the Operating Reserve Fund may be used for any lawful purpose and may be counted toward the Water Utility Operating Reserve Requirement. Pursuant to the Water Resolution, moneys on deposit in the Rate Stabilization Fund may be used by the City (i) to pay Operating Expenses; (ii) to fund transfers to any fund or account established under the Water Resolution; (iii) to make payments required under any Hedge Agreement; (iv) for the payment of principal, redemption premium, if any, and interest on any revenue bonds or notes the proceeds of which were applied with respect to the Water Utility issued under the City Charter but not under the Water Resolution; (v) for the payment of principal of, redemption premium, if any, and interest on general obligation bonds issued with respect to the Water Utility; and (vi) for the payment of principal, redemption premium, if any, and interest on any other general obligation debt issued with respect to the Water Utility. Pursuant to the Water Resolution, Net Revenues remaining as of June 30 of any Fiscal Year may be deposited in the Residual Fund in an amount determined by the City. Moneys on deposit in the Residual Fund may be used by the City in the following order of priority: (i) to pay all amounts necessary to fund Ordinary Capital Requirements for the Water Utility and (ii) for any other lawful purpose, including (without limitation) for the purpose of funding Extraordinary Capital Requirements for the Water Utility, temporary loans to the Wastewater Utility and the payment of amounts due and payable under any Hedge Agreement which are subordinate to Subordinate Revenue Obligations. Any transfer from the Residual Fund to the Wastewater Utility shall constitute a loan to the Wastewater Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). If at any time sufficient moneys are not available to pay Operating Requirements of the Water Utility, the City may borrow from the Wastewater Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). Loans to the Water Utility from the Wastewater Utility may be

38 evidenced and secured by Subordinate Revenue Obligations issued pursuant to the Water Resolution. The Operating Reserve of the Water Utility, the Rate Stabilization Fund and the Residual Fund shall be maintained in the custody or for the benefit of the City separate and distinct from all other funds of the City. Unless the City fails to make a required monthly payment to the Debt Service Fund maintained for any series of Revenue Obligations (and such failure is not cured within 30 days or by the principal or interest payment date, whichever occurs first), thereby creating an Event of Default, and appropriate remedies therefor are invoked, there is no requirement that Pledged Amounts be otherwise segregated from other Operating Revenues of the Water Utility, thus possibly limiting the availability of Pledged Amounts already collected but not yet transferred to the Debt Service Fund. Debt Service Reserve Fund The amount of the Debt Service Reserve Fund Requirement for the Series 2013A Water Bonds, the Series 2013B Water Bonds and all other Senior Revenue Obligations (other than the Series 1993-A Water Bonds and the Series 1994-A Water Bonds) is an amount equal to the lesser of (i) the Maximum Annual Debt Service on such Senior Revenue Obligations in the current or any future Fiscal Year, (ii) 10% of the proceeds of such Senior Revenue Obligations, or (iii) 125% of the average annual Debt Service Requirements on such Senior Revenue Obligations. The Debt Service Reserve Fund maintained for the Series 2013A Water Bonds, the Series 2013B Water Bonds and any other Senior Revenue Obligations (other than the Series 1993-A Water Bonds and the Series 1994-A Water Bonds) is available to cure any deficiency in the Debt Service Fund maintained for the Series 2013A Water Bonds, the Series 2013B Water Bonds or such other Senior Revenue Obligations secured by the Debt Service Reserve Fund for the payment when due of principal of and interest on such Senior Revenue Obligations. The Series 2013C Water Bonds are not secured by a debt service reserve fund. Rate Covenant In the Water Resolution, the City covenants to take or cause to be taken all actions necessary to ensure that Rates and Charges of the Water Utility are assessed, established and collected so that, for each Fiscal Year, (i) Net Revenues will be at all times equal to at least 1.15 times the Debt Service Requirements on Senior Revenue Obligations of the Water Utility for such Fiscal Year, and (ii) Net Revenues after payment of debt service on the Senior Revenue Obligations will be at all times equal to at least 1.10 times the Debt Service Requirements on outstanding Subordinate Revenue Obligations for such Fiscal Year (to be calculated to exclude therefrom principal payments with respect to Revenue Notes in such Fiscal Year); provided that Net Revenues of the Water Utility will be at all times at least equal to 100% of the sum of (1) the Debt Service Requirements of the Water Utility for such Fiscal Year (including Debt Service Requirements with respect to Subordinate Revenue Obligations); (2) amounts required to be deposited into the Debt Service Reserve Fund during such Fiscal Year; and (3) the principal or redemption price of and interest on general obligation bonds issued with respect to the Water

39 Utility payable during such Fiscal Year. These requirements are referred to herein as the Rate Requirements. The City also covenants in the Water Resolution that it will cause to be taken (i) all the specific steps necessary under current City procedures to assess, establish and collect Rates and Charges so as to meet the Rate Requirements, including the implementation of necessary increases in Rates and Charges at any time that the Rate Requirements are not being met; and (ii) all actions necessary so that amounts at least equal to the Rate Requirements for each Fiscal Year are included in the City s Ordinance of Estimates for each Fiscal Year (and thus are appropriated for expenditure by the Water Utility in such Fiscal Year) and are collected when due (or as soon thereafter as possible in accordance with applicable law) or are otherwise made available in a timely manner. This covenant is expressly deemed to obligate the pertinent City officials and the Board of Estimates and City Council to take the specific steps necessary under current City procedures to ensure that such amounts are in fact appropriated. The Water Resolution also contains the City s covenant that it will not amend, seek to amend or have amended any existing law, the City Charter or current City procedures so as to cause the City s covenants in the Water Resolution to be abrogated or breached, and the City s acknowledgment that such covenants are binding on it notwithstanding any change in applicable law, the City Charter or current City procedures. For further details of the City s covenants as to Rates and Charges, see Appendix A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION Summary of Certain Provisions of the Resolutions Rate Requirements. Additional Revenue Obligations The Water Resolution provides for the issuance of Additional Revenue Obligations, including both Additional Senior Revenue Obligations and Additional Subordinate Revenue Obligations, pursuant to Supplemental Resolutions of the City adopted by the Board of Finance. Such Supplemental Resolutions shall specify whether such Additional Revenue Obligations constitute Senior Revenue Obligations or Subordinate Revenue Obligations. Such Additional Revenue Obligations may be issued only: (i) to refund or advance refund any series of Outstanding Revenue Obligations or other Indebtedness; (ii) to obtain funds to acquire, design, construct, reconstruct, equip, improve, finance or refinance Water Facilities (including reimbursing the City for funds expended for such purposes); or (iii) to make deposits into any reserve related to the Operating Requirements of the Water Utility, as may be established pursuant to a Supplemental Resolution. This authority to issue Additional Revenue Obligations for such purposes shall include the authority to issue Additional Revenue Obligations in order to obtain funds to pay the costs to be incurred in connection with the issuance and sale of such Additional Revenue Obligations, to establish necessary reserves related to such Additional Revenue Obligations and to pay interest prior to and during construction and for a limited period after the completion of the Financed Facilities. The issuance of Additional Revenue Obligations is subject to certain conditions specified in the Water Resolution, including (among others): (a) for the issuance of Additional Senior

40 Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Senior Revenue Obligations, Net Revenues would have been equal to at least 1.15 times the Maximum Annual Debt Service on outstanding Senior Revenue Obligations, assuming the issuance of the Additional Senior Revenue Obligations and taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Senior Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; (b) for the issuance of Additional Subordinate Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Subordinate Revenue Obligations, Net Revenues after payment of debt service on the Senior Revenue Obligations would have been equal to at least 1.10 times the Maximum Annual Debt Service on outstanding Subordinate Revenue Obligations (to be calculated to exclude therefrom principal payments with respect to Revenue Notes), assuming the issuance of the Additional Subordinate Revenue Obligations and after taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Subordinate Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; and (c) a certificate of the Trustee stating that upon the issuance of such Additional Revenue Obligations the Trustee does not have notice that an Event of Default has occurred and is continuing. Payment of the principal or Redemption Price of and interest on, and the purchase price of, any Additional Revenue Obligations issued as Subordinate Revenue Obligations, including the Series 2013C Water Bonds, under the Water Resolution will be junior and subordinate to the pledge of the Pledged Amounts to the Series 2013A Water Bonds, the Series 2013B Water Bonds and any other Senior Revenue Obligations. Other Indebtedness Except as provided in the Authorizing Water Ordinance and in the Water Resolution, the City may not issue any Indebtedness secured by a ratable or parity pledge of or other lien on the Pledged Amounts and may not otherwise create or cause to be created any lien or charge on the Pledged Amounts. So long as all necessary requirements of the City Charter, the City Code and other applicable law are complied with, the City may issue or assume any Indebtedness other than Revenue Obligations or enter into any leases, financing leases, sale-leasebacks and similar transactions ( Leases ) for any valid public purpose related to the Water Utility, which Indebtedness or Leases, if so determined by the Board of Finance, may be secured by a pledge of the Pledged Amounts, provided that such pledge in all respects is junior and subordinate to the pledge of the Pledged Amounts created by the Water Resolution to secure the payment of the principal or Redemption Price of and interest on, and the purchase price of, Outstanding Water Bonds and the interest on Outstanding Revenue Notes, and the reimbursement of any Credit Facility Provider securing the payment of such amounts. The Water Resolution provides that such debt service payments with respect to such Indebtedness and Leases may be made by the City, so long as (i) no Event of Default shall have occurred and be continuing, (ii) the amount on deposit in the Debt Service Reserve Fund, if any, maintained for certain series of Revenue Obligations is not less than the Debt Service Reserve Fund Requirement for such Revenue

41 Obligations, and (iii) no payment required to be made by the City to the Debt Service Fund or the Debt Service Reserve Fund for any series of Revenue Obligations, as set forth in the Water Resolution, remains unpaid. See Appendix A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION Summary of Certain Provisions of the Resolutions Permitted Transactions and Deposit of Operating Revenues. Notwithstanding anything in the Authorizing Water Ordinance or the Water Resolution to the contrary, the City may issue Indebtedness and enter into Leases secured solely by revenues, receipts or other moneys derived by the City from the lease, license, operation, sale or other disposition of any facility or equipment of the Water Utility constructed or acquired by or on behalf of the City with the proceeds of such Indebtedness or in connection with such Leases. Such revenues, receipts and other moneys will not be considered Operating Revenues of the Water Utility or Rates and Charges under the Water Resolution, provided that certain requirements specified in the Water Resolution are met. Certain Outstanding Indebtedness The City has issued certain Variable Rate Indebtedness for the Water Utility, all of which is currently in an Auction Rate Mode and consists of the Water Auction Rate Bonds. As of November 1, 2013, there was $108,725,000 of Variable Rate Indebtedness outstanding for the Water Utility. All of this outstanding Variable Rate Indebtedness is currently swapped to a fixed rate under various Hedge Agreements. In connection with recent market events affecting the trading levels for certain variable rate demand obligations and auction rate securities, the City is monitoring such developments closely and evaluating options to address potential ongoing market dislocation for its outstanding Variable Rate Indebtedness and related Hedge Agreements. As described in PLAN OF FINANCE THE SERIES 2013 WATER BONDS above, the City is refunding the Refunded Water Auction Rate Bonds with proceeds of the Series 2013B Water Bonds and Series 2013C Water Bonds. Enforceability The enforceability of the Series 2013 Water Bonds, the Authorizing Water Ordinance and the Water Resolution may be limited by the exercise of judicial discretion in accordance with general equitable principles and by bankruptcy, insolvency, moratorium and other laws affecting creditors rights generally heretofore or hereafter enacted to the extent constitutionally enforceable. Pledged Amounts SECURITY FOR THE SERIES 2013 WASTEWATER BONDS * The Series 2013 Wastewater Bonds are special obligations of the City, payable solely from and secured solely by the Pledged Amounts of the Wastewater Utility. Pledged Amounts are defined in the Wastewater Resolution as (i) the Wastewater Utility s Operating Revenues, (ii) amounts (including investment earnings thereon) in any fund or account established pursuant * Capitalized terms used in this Section shall have the meanings set forth in the Wastewater Resolution unless otherwise indicated

42 to the Wastewater Resolution for the payment of any Revenue Obligations, (iii) unexpended proceeds of Revenue Obligations, including investment earnings on such proceeds, (iv) amounts due and payable to the City under or pursuant to any Hedge Agreement, and (v) other amounts legally available for the payment of the principal of, premium, if any, and interest on Revenue Obligations. The Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds are secured by Pledged Amounts of the Wastewater Utility on a parity basis with other outstanding Senior Revenue Obligations of the City as described herein. The Series 2013E Wastewater Bonds are secured by a pledge of Operating Revenues of the Wastewater Utility on a parity basis with other outstanding Subordinate Revenue Obligations of the City, which pledge is junior and subordinate to the pledge of Operating Revenues to the payment of the principal and Redemption Price of and interest on Senior Revenue Obligations. Moneys held in the Rebate Fund are not pledged to the payment of any Revenue Obligations. The Bondholders security interest in certain of the Pledged Amounts, including the Operating Revenues, under the Wastewater Resolution (constituting those portions which are not in the possession of the Trustee and in which it is not possible to perfect a security interest by the filing of financing statements) will remain unperfected. The Series 2013E Wastewater Bonds are not secured by a debt service reserve fund. Payments of principal, interest and Sinking Fund Installments on the Series 2013E Wastewater Bonds shall not be made by the Trustee to the holders thereof if an Event of Default under the Wastewater Resolution of which the Trustee has notice has occurred and is continuing. So long as any Senior Revenue Obligations are Outstanding (i) the failure to pay the principal of or interest on any Subordinate Revenue Obligation, including the Series 2013E Wastewater Bonds, shall not constitute an Event of Default, and (ii) the Trustee may not declare the aggregate principal amount of the Subordinate Revenue Obligations, including the Series 2013E Wastewater Bonds, to be due and payable upon the occurrence of any Event of Default under the Wastewater Resolution. In addition, to the extent provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations secured by a Credit Facility, such pledge will also secure the reimbursement of amounts paid by any Credit Facility Provider. However, the pledge of the Operating Revenues to secure the payment of the principal, Redemption Price and purchase price of and interest on any Subordinate Revenue Obligations and each Series of Additional Subordinate Revenue Obligations (including Revenue Notes), and the reimbursement of any Credit Facility Provider paying such amounts, will be junior and subordinate to the pledge of the Operating Revenues to secure the payment of the principal, Redemption Price and purchase price of and interest on Senior Revenue Obligations, and the reimbursement of any Credit Facility Provider securing such Senior Revenue Obligations. See SECURITY FOR THE SERIES 2013 WASTEWATER BONDS Additional Revenue Obligations below. THE SERIES 2013 WASTEWATER BONDS ARE SPECIAL OBLIGATIONS OF THE CITY AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY OR OF THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2013 WASTEWATER BONDS. THE ISSUANCE OF THE SERIES 2013 WASTEWATER BONDS IS NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY AN OBLIGATION, MORAL OR OTHERWISE, OF THE CITY OR OF

43 THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION WHATEVER THEREFOR. OPERATING REVENUES OF THE WATER UTILITY (AS SUCH TERMS ARE DEFINED IN THE WATER RESOLUTION) ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WASTEWATER BONDS, AND OPERATING REVENUES OF THE WASTEWATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WATER BONDS. Pledged Funds The Wastewater Resolution provides for the creation of the following funds and separate accounts for the Series 2013C Wastewater Bonds: a Debt Service Fund (the Series 2013C Wastewater Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Construction Fund and a Rebate Fund. As security for the Series 2013C Wastewater Bonds, the City has pledged and assigned to the Trustee any and all amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013C Wastewater Bonds. Amounts on deposit in the Series 2013C Wastewater Debt Service Fund, the Construction Fund and the Redemption Fund secure only the Series 2013C Wastewater Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. Each fund or account created for Subordinate Revenue Obligations shall be separately created for each Series of Additional Subordinate Revenue Obligations, designated by reference to such Series, except as otherwise provided in the Supplemental Resolution authorizing such Additional Subordinate Revenue Obligations. The Wastewater Resolution provides for the creation of the following funds and separate accounts for the Series 2013D Wastewater Bonds: a Debt Service Fund (the Series 2013D Wastewater Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Refunding Fund, a Costs of Issuance Fund and a Rebate Fund. As security for the Series 2013D Wastewater Bonds, the City has pledged and assigned to the Trustee any and all amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013D Wastewater Bonds. Amounts on deposit in the Series 2013D Wastewater Debt Service Fund and the Redemption Fund secure only the Series 2013D Wastewater Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. The Wastewater Resolution provides for the creation of the following funds and separate accounts for the Series 2013E Wastewater Bonds: a Debt Service Fund (the Series 2013E Wastewater Debt Service Fund ) (within which is an Interest Account, a Principal Account and a Sinking Fund Account), a Redemption Fund, a Refunding Fund, a Costs of Issuance Fund and a Rebate Fund. As security for the Series 2013E Wastewater Bonds, the City has pledged and assigned to the Trustee any and all amounts on deposit in such funds with the exception of the Rebate Fund, which is not pledged to the payment of the Series 2013E Wastewater Bonds

44 Amounts on deposit in the Series 2013E Wastewater Debt Service Fund and the Redemption Fund secure only the Series 2013E Wastewater Bonds and are not available to satisfy the claims of holders of the other Outstanding Bonds or any other Additional Revenue Obligations or to reimburse any Credit Facility Provider. The Wastewater Resolution provides for the creation of a Debt Service Reserve Fund to be held by the Trustee and pledged as security for the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds and any other Senior Revenue Obligations, including certain Existing Senior Revenue Obligations (as defined in Appendix A hereto), but excluding the Series 1993-A Wastewater Bonds, the Series 1994-A Wastewater Bonds and the Water Quality Bonds. The Series 2013E Wastewater Bonds are not secured by a debt service reserve fund. In addition, the Wastewater Resolution provides for the Wastewater Operating Fund, the Wastewater Capital Fund, the Operating Reserve Fund, the Rate Stabilization Fund and the Residual Fund to be held by or for the account of the City for the ongoing operation and maintenance of the Wastewater Utility. Of these funds, only the Wastewater Operating Fund is pledged to the payment of Revenue Obligations. Funds and accounts equivalent to many of those created for the Series 2013 Wastewater Bonds were established for the Existing Revenue Obligations (as defined in Appendix A hereto). Pursuant to the Wastewater Resolution, the funds and accounts established for the Existing Revenue Obligations secure only those Existing Revenue Obligations for which they were created. Notwithstanding the foregoing, the Debt Service Reserve Fund secures the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds and all Existing Senior Revenue Obligations (as defined in Appendix A hereto) other than the Series 1993-A Wastewater Bonds, the Series 1994-A Wastewater Bonds and the Water Quality Bonds. As Additional Revenue Obligations are issued, funds and accounts similar to those created for the Existing Revenue Obligations and the Series 2013 Wastewater Bonds may be created with respect to such Additional Revenue Obligations. Additional funds and accounts may also be created by Supplemental Resolution in order to effectuate the issuance of Additional Revenue Obligations so long as the creation of any such funds and accounts does not adversely affect the equal and ratable pledge of the Operating Revenues to the payment of Senior Revenue Obligations. The City has covenanted in the Wastewater Resolution that it will pay from Operating Revenues, on or before the first business day of each month, to the extent available, and in the following order of priority: (i) the Operating Expenses of the Wastewater Utility; (ii) (a) to the Trustee, the amount, if any, necessary to make the amount on deposit in the Interest Account maintained for each Series of Senior Revenue Obligations equal to the amount of accrued and unpaid interest on the Senior Revenue Obligations of such Series as of the first Business Day of the immediately succeeding month, (b) to the Trustee, commencing on the twelfth month prior to such principal becoming due, one-twelfth of the amount of any principal of the Outstanding Senior Revenue Obligations of each Series becoming due on the next principal payment date for such Senior Revenue Obligations, (c) amounts due and payable under any Hedge Agreement which are payable on a parity basis with the Senior Revenue

45 Obligations, and (d) amounts owing to the provider of a Credit Facility which are payable on a parity basis with the Senior Revenue Obligations; (iii) the amount, if any, required to be deposited in the Debt Service Reserve Funds under the Wastewater Resolution to the extent required to cure any deficiency therein; (iv) to the Trustee, (a) the amount, if any, necessary to make the amount on deposit in the Interest Account maintained for the Subordinate Revenue Obligations of each subordinate Series equal to the amount of accrued and unpaid interest on the Outstanding Subordinate Revenue Obligations of such subordinate Series as of the first Business Day of the immediately succeeding month, (b) commencing on the twelfth month prior to such principal becoming due, one-twelfth of the amount necessary to make the amount on deposit in the Principal Account and the Sinking Fund Account, respectively, maintained for the Subordinate Revenue Obligations of each subordinate Series equal to the amount of principal and Sinking Fund Installments becoming due on the next principal payment date for such Subordinate Revenue Obligations, (c) the payment of amounts due and payable under any Hedge Agreement which are subordinate to the Senior Revenue Obligations and on a parity basis with the Subordinate Revenue Obligations, and (d) the payment of amounts owing to the provider of a Credit Facility which are subordinate to the Senior Revenue Obligations; (v) the amount required to maintain the Operating Reserve of the Wastewater Utility (defined below); and (vi) transfers to the Rate Stabilization Fund in the amounts determined by the City. Pursuant to the Wastewater Resolution, the City shall maintain operating reserves (the Operating Reserve of the Wastewater Utility ) in an amount determined by the City to be adequate Operating Reserves for the Wastewater Utility, but in any event no less than eight percent of the Operating Expenses of the Wastewater Utility (the Wastewater Operating Reserve Requirement ). As of the end of each Fiscal Year, Operating Reserves for the Wastewater Utility shall be no less than the Wastewater Operating Reserve Requirement. Moneys on deposit in the Operating Reserve Fund may be used for any lawful purpose and may be counted toward the Wastewater Operating Reserve Requirement. Pursuant to the Wastewater Resolution, moneys on deposit in the Rate Stabilization Fund may be used by the City (i) to pay Operating Expenses; (ii) to fund transfers to any fund or account established under the Wastewater Resolution; (iii) to make payments required under any Hedge Agreement; (iv) for the payment of principal, redemption premium, if any, and interest on any revenue bonds or notes the proceeds of which were applied with respect to the Wastewater Utility issued under the City Charter but not under the Wastewater Resolution; (v) for the payment of principal, redemption premium, if any, and interest on general obligation bonds issued with respect to the Wastewater Utility; and (vi) for the payment of principal, redemption premium, if any, and interest on any other general obligation debt issued with respect to the Wastewater Utility. Pursuant to the Wastewater Resolution, Net Revenues remaining as of June 30 of any Fiscal Year may be deposited in the Residual Fund in an amount determined by the City

46 Moneys on deposit in the Residual Fund may be used by the City in the following order of priority: (i) to pay all amounts necessary to fund Ordinary Capital Requirements for the Wastewater Utility and (ii) for any other lawful purpose, including (without limitation) for the purpose of funding Extraordinary Capital Requirements for the Wastewater Utility, temporary loans to the Water Utility and the payment of amounts due and payable under any Hedge Agreement which are subordinate to Subordinate Revenue Obligations. Any transfer from the Residual Fund to the Water Utility shall constitute a loan to the Water Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). If at any time sufficient moneys are not available to pay Operating Requirements of the Wastewater Utility, the City may borrow from the Water Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). Loans to the Wastewater Utility from the Water Utility may be evidenced and secured by Subordinate Revenue Obligations issued pursuant to the Wastewater Resolution. The Operating Reserve of the Wastewater Utility, the Rate Stabilization Fund and the Residual Fund shall be maintained in the custody or for the benefit of the City separate and distinct from all other funds of the City. Unless the City fails to make a required monthly payment to the Debt Service Fund maintained for any series of Revenue Obligations (and such failure is not cured within 30 days or by the principal or interest payment date, whichever occurs first), thereby creating an Event of Default, and appropriate remedies therefor are invoked, there is no requirement that Pledged Amounts be otherwise segregated from other Operating Revenues of the Wastewater Utility, thus possibly limiting the availability of Pledged Amounts already collected but not yet transferred to the Debt Service Fund. Debt Service Reserve Fund The amount of the Debt Service Reserve Fund Requirement for the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds and all other Senior Revenue Obligations (other than the Series 1993-A Wastewater Bonds, the Series 1994-A Wastewater Bonds and the Water Quality Bonds) is an amount equal to the lesser of (i) the Maximum Annual Debt Service on such Senior Revenue Obligations in the current or any future Fiscal Year, (ii) 10% of the proceeds of such Senior Revenue Obligations, or (iii) 125% of the average annual Debt Service Requirements on such Senior Revenue Obligations. The Debt Service Reserve Fund maintained for the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds and any other Senior Revenue Obligations (other than the Series 1993-A Wastewater Bonds, the Series 1994-A Wastewater Bonds and the Water Quality Bonds) is available to cure any deficiency in the Debt Service Fund maintained for the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds or such other Senior Revenue Obligations secured by the Debt

47 Service Reserve Fund for the payment when due of principal of and interest on such Senior Revenue Obligations. The Series 2013E Wastewater Bonds are not secured by a debt service reserve fund. Rate Covenant In the Wastewater Resolution, the City covenants to take or cause to be taken all actions necessary to ensure that Rates and Charges of the Wastewater Utility are assessed, established and collected so that, for each Fiscal Year, (i) Net Revenues will be at all times equal to at least 1.15 times the Debt Service Requirements on Senior Revenue Obligations of the Wastewater Utility for such Fiscal Year, and (ii) Net Revenues after payment of debt service on the Senior Revenue Obligations will be at all times equal to at least 1.10 times the Debt Service Requirements on outstanding Subordinate Revenue Obligations for such Fiscal Year (to be calculated to exclude therefrom principal payments with respect to Revenue Notes in such Fiscal Year); provided that the Net Revenues of the Wastewater Utility will be at all times at least equal to 100% of the sum of (1) the Debt Service Requirements of the Wastewater Utility for such Fiscal Year (including Debt Service Requirements with respect to Subordinate Revenue Obligations); (2) amounts required to be deposited into the Debt Service Reserve Fund during such Fiscal Year; and (3) the principal or redemption price of and interest on general obligation bonds issued with respect to the Wastewater Utility payable during such Fiscal Year. These requirements are referred to herein as the Rate Requirements. The City also covenants in the Wastewater Resolution that it will cause to be taken (i) all the specific steps necessary under current City procedures to assess, establish and collect Rates and Charges so as to meet the Rate Requirements, including the implementation of necessary increases in Rates and Charges at any time that the Rate Requirements are not being met; and (ii) all actions necessary so that amounts at least equal to the Rate Requirements for each Fiscal Year are included in the City s Ordinance of Estimates for each Fiscal Year (and thus are appropriated for expenditure by the Wastewater Utility in such Fiscal Year) and are collected when due (or as soon thereafter as possible in accordance with applicable law) or are otherwise made available in a timely manner. This covenant is expressly deemed to obligate the pertinent City officials and the Board of Estimates and City Council to take the specific steps necessary under current City procedures to ensure that such amounts are in fact appropriated. The Wastewater Resolution also contains the City s covenant that it will not amend, seek to amend or have amended any existing law, the City Charter or current City procedures so as to cause the City s covenants in the Wastewater Resolution to be abrogated or breached, and the City s acknowledgment that such covenants are binding on it notwithstanding any change in applicable law, the City Charter or current City procedures. For further details of the City s covenants as to Rates and Charges, see Appendix A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION Summary of Certain Provisions of the Resolutions Rate Requirements

48 Additional Revenue Obligations The Wastewater Resolution provides for the issuance of Additional Revenue Obligations, including both Additional Senior Revenue Obligations and Additional Subordinate Revenue Obligations, pursuant to Supplemental Resolutions of the City adopted by the Board of Finance. Such Supplemental Resolutions shall specify whether such Additional Revenue Obligations constitute Senior Revenue Obligations or Subordinate Revenue Obligations. Such Additional Revenue Obligations may be issued only: (i) to refund or advance refund any series of Outstanding Revenue Obligations or other Indebtedness; (ii) to obtain funds to acquire, design, construct, reconstruct, equip, improve, finance or refinance Wastewater Facilities (including reimbursing the City for funds expended for such purposes); or (iii) to make deposits into any reserve related to the Operating Requirements of the Wastewater Utility, as may be established pursuant to a Supplemental Resolution. This authority to issue Additional Revenue Obligations for such purposes shall include the authority to issue Additional Revenue Obligations in order to obtain funds to pay the costs to be incurred in connection with the issuance and sale of such Additional Revenue Obligations, to establish necessary reserves related to such Additional Revenue Obligations and to pay interest prior to and during construction and for a limited period after the completion of the Financed Facilities. The issuance of Additional Revenue Obligations is subject to certain conditions specified in the Wastewater Resolution, including (among others): (a) for the issuance of Additional Senior Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Senior Revenue Obligations, Net Revenues would have been equal to at least 1.15 times the Maximum Annual Debt Service on outstanding Senior Revenue Obligations, assuming the issuance of the Additional Senior Revenue Obligations and taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Senior Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; (b) for the issuance of Additional Subordinate Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Subordinate Revenue Obligations, Net Revenues after payment of debt service on the Senior Revenue Obligations would have been equal to at least 1.10 times the Maximum Annual Debt Service on outstanding Subordinate Revenue Obligations (to be calculated to exclude therefrom principal payments with respect to Revenue Notes), assuming the issuance of the Additional Subordinate Revenue Obligations and after taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Subordinate Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; and (c) a certificate of the Trustee stating that upon the issuance of such Additional Revenue Obligations, the Trustee does not have notice that an Event of Default has occurred and is continuing. Payment of the principal or Redemption Price of and interest on, and the purchase price of, any Additional Revenue Obligations issued as Subordinate Revenue Obligations, including the Series 2013E Wastewater Bonds, under the Wastewater Resolution will be junior and

49 subordinate to the pledge of the Pledged Amounts to the Series 2013C Wastewater Bonds, the Series 2013D Wastewater Bonds and any other Senior Revenue Obligations. Other Indebtedness Except as provided in the Authorizing Wastewater Ordinance and in the Wastewater Resolution, the City may not issue any Indebtedness secured by a ratable or parity pledge of or other lien on the Pledged Amounts and may not otherwise create or cause to be created any lien or charge on the Pledged Amounts. So long as all necessary requirements of the City Charter, the City Code and other applicable law are complied with, the City may issue or assume any Indebtedness other than Revenue Obligations or enter into any Leases for any valid public purpose related to the Wastewater Utility, which Indebtedness or Leases, if so determined by the Board of Finance, may be secured by a pledge of the Pledged Amounts, provided that such pledge in all respects is junior and subordinate to the pledge of the Pledged Amounts created by the Wastewater Resolution to secure the payment of the principal or Redemption Price of and interest on, and the purchase price of, Outstanding Wastewater Bonds and the interest on Outstanding Revenue Notes, and the reimbursement of any Credit Facility Provider securing the payment of such amounts. The Wastewater Resolution provides that such debt service payments with respect to such Indebtedness and Leases may be made by the City, so long as (i) no Event of Default shall have occurred and be continuing, (ii) the amount on deposit in the Debt Service Reserve Fund, if any, maintained for certain series of Revenue Obligations is not less than the Debt Service Reserve Fund Requirement for such Revenue Obligations, and (iii) no payment required to be made by the City to the Debt Service Fund or the Debt Service Reserve Fund for any series of Revenue Obligations, as set forth in the Wastewater Resolution, remains unpaid. See Appendix A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION Summary of Certain Provisions of the Resolutions Permitted Transactions and Deposit of Operating Revenues. Notwithstanding anything in the Authorizing Wastewater Ordinance or the Wastewater Resolution to the contrary, the City may issue Indebtedness and enter into Leases secured solely by revenues, receipts or other moneys derived by the City from the lease, license, operation, sale or other disposition of any facility or equipment of the Wastewater Utility constructed or acquired by or on behalf of the City with the proceeds of such Indebtedness or in connection with such Leases. Such revenues, receipts and other moneys will not be considered Operating Revenues of the Wastewater Utility or Rates and Charges under the Wastewater Resolution, provided that certain requirements specified in the Wastewater Resolution are met. Certain Outstanding Indebtedness The City has issued certain Variable Rate Indebtedness for the Wastewater Utility, all of which is currently in an Auction Rate Mode and consists of the Wastewater Auction Rate Bonds. As of November 1, 2013, there was $91,660,000 of Variable Rate Indebtedness outstanding for the Wastewater Utility. All of this outstanding Variable Rate Indebtedness is currently swapped to a fixed rate under various Hedge Agreements. In connection with recent market events affecting the trading levels for certain variable rate demand obligations and auction rate securities, the City is monitoring such developments closely and evaluating options to address potential ongoing market dislocation for its outstanding Variable Rate Indebtedness and related Hedge Agreements. As described in PLAN OF FINANCE THE SERIES

50 WASTEWATER BONDS above, the City is refunding the Refunded Wastewater Auction Rate Bonds with proceeds of the Series 2013D Wastewater Bonds and Series 2013E Wastewater Bonds. Enforceability The enforceability of the Series 2013 Wastewater Bonds, the Authorizing Wastewater Ordinance and the Wastewater Resolution may be limited by the exercise of judicial discretion in accordance with general equitable principles and by bankruptcy, insolvency, moratorium and other laws affecting creditors rights generally heretofore or hereafter enacted to the extent constitutionally enforceable. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

51 EXISTING DEBT SERVICE REQUIREMENTS OF THE WATER UTILITY (1)(2) The following table sets forth for each Fiscal Year ending June 30 the: (i) existing debt service requirements of the Outstanding Senior Revenue Obligations (other than the Series 2013A Water Bonds and the Series 2013B Water Bonds); (ii) principal due on the Series 2013 Senior Water Bonds (whether at maturity or by mandatory sinking fund redemption) on the July 1 immediately succeeding such Fiscal Year; (iii) sum of all interest due on the Series 2013 Senior Water Bonds during such Fiscal Year; (iv) total debt service requirements of the Series 2013 Senior Water Bonds; (v) projected total debt service on Senior Revenue Obligations under the Water Resolution, assuming the issuance of no additional indebtedness; (vi) existing debt service requirements of the Outstanding Subordinate Revenue Obligations (other than the Series 2013C Water Bonds); (vii) principal due on the Series 2013C Water Bonds (whether at maturity or by mandatory sinking fund redemption) on the July 1 immediately succeeding such Fiscal Year; (viii) sum of all interest due on the Series 2013C Water Bonds during such Fiscal Year; (ix) total debt service requirements of the Series 2013C Water Bonds; and (x) the combined total debt service under the Water Resolution, assuming the issuance of no additional indebtedness. Existing Debt Total Debt Existing Debt Fiscal Year Service on Service on Service on Combined Ending Senior Lien Series 2013 Senior Water Bonds Senior Lien Subordinate Lien Series 2013C Water Bonds Total Debt June 30 Water Bonds (1) Principal Interest Total Water Bonds (1) Water Bonds (1) Principal Interest Total Debt Service 2014 $18,201,113 $1,270,000 $8,148,017 $9,418,017 $27,619,130 $5,398,295 $10,000 $897,325 $907,325 $33,924, ,045,761 3,285,000 14,064,238 17,349,238 35,394,998 5,392,255 1,105,000 1,552,763 2,657,763 43,445, ,062,181 3,425,000 13,956,738 17,381,738 35,443,918 5,392,455 1,205,000 1,508,563 2,713,563 43,549, ,314,857 5,265,000 13,787,988 19,052,988 35,367,845 5,399,580 1,210,000 1,448,313 2,658,313 43,425, ,329,507 5,425,000 13,554,588 18,979,588 35,309,095 5,395,311 1,320,000 1,387,813 2,707,813 43,412, ,319,737 5,675,000 13,325,038 19,000,038 35,319,775 5,395,599 1,335,000 1,321,813 2,656,813 43,372, ,305,027 5,975,000 13,047,438 19,022,438 35,327,464 5,396,176 1,445,000 1,255,063 2,700,063 43,423, ,583,027 6,290,000 12,752,138 19,042,138 34,625,165 5,395,545 1,555,000 1,182,813 2,737,813 42,758, ,501,377 6,600,000 12,448,638 19,048,638 34,550,015 5,399,351 1,570,000 1,105,063 2,675,063 42,624, ,048,377 6,935,000 12,118,638 19,053,638 33,102,015 5,392,571 1,685,000 1,026,563 2,711,563 41,206, ,034,652 7,275,000 11,777,088 19,052,088 33,086,740 5,398,076 1,800, ,313 2,742,313 41,227, ,046,902 7,635,000 11,416,638 19,051,638 33,098,540 5,393,164 1,815, ,313 2,668,313 41,160, ,983,252 12,110,000 11,034,888 23,144,888 33,128,140 5,397,205 1,930, ,563 2,693,563 41,218, ,979,527 12,700,000 10,429,388 23,129,388 33,108,915 5,395,018 2,045, ,063 2,713,063 41,216, ,987,227 13,415,000 9,794,388 23,209,388 33,196,615 5,395,671 2,165, ,188 2,731,188 41,323, ,554,127 9,410,000 9,123,638 18,533,638 33,087,765 5,394,234 2,285, ,938 2,742,938 41,224, ,559,102 9,830,000 8,663,988 18,493,988 33,053,090 5,395,096 2,300, ,688 2,653,688 41,101, ,522,166 10,380,000 8,172,488 18,552,488 33,074,654 5,391,953 2,420, ,688 2,660,688 41,127, ,152,482 10,945,000 7,653,488 18,598,488 35,750,969 5,396,534 2,540, ,625 2,663,625 43,811, ,938,285 11,795,000 7,106,238 18,901,238 35,839,522 7,698, ,537, ,317,045 12,415,000 6,517,425 18,932,425 30,249,470 7,691, ,941, ,208,272 9,455,000 5,897,775 15,352,775 26,561,047 7,677, ,238, ,363,925 9,925,000 5,426,125 15,351,125 25,715,050 7,771, ,486, ,315,035 10,420,000 4,931,000 15,351,000 25,666,035 6,044, ,710, ,072,415 14,485,000 4,411,125 18,896,125 22,968,540 3,121, ,090, ,076,165 15,210,000 3,688,000 18,898,000 22,974,165 1,443, ,417, ,072,915 15,970,000 2,927,500 18,897,500 22,970, ,970, ,072,665 16,765,000 2,129,000 18,894,000 22,966, ,966, ,915 17,705,000 1,290,750 18,995,750 19,755, ,755, ,915 8,110, ,500 8,515,500 9,275, ,275,415 TOTAL $361,486,956 $286,100,000 $259,999,880 $546,099,880 $907,586,836 $143,963,381 $31,740,000 $17,655,463 $49,395,463 $1,100,945,679 (1) With respect to the Revenue Obligations bearing interest at a variable rate, for all of which the City has entered into interest rate swap agreements, the rate or rates of interest paid under such interest rate swap agreements are reflected in this table. (2) Totals may not add due to rounding

52 EXISTING DEBT SERVICE REQUIREMENTS OF THE WASTEWATER UTILITY (1)(2) The following table sets forth for each Fiscal Year ending June 30 the: (i) existing debt service requirements of the Outstanding Senior Revenue Obligations (other than the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds); (ii) principal due on the Series 2013 Senior Wastewater Bonds (whether at maturity or by mandatory sinking fund redemption) on the July 1 immediately succeeding such Fiscal Year; (iii) sum of all interest due on the Series 2013 Senior Wastewater Bonds during such Fiscal Year; (iv) total debt service requirements of the Series 2013 Senior Wastewater Bonds; (v) projected total debt service on Senior Revenue Obligations under the Wastewater Resolution, assuming the issuance of no additional indebtedness; (vi) existing debt service requirements of the Outstanding Subordinate Revenue Obligations (other than the Series 2013E Wastewater Bonds); (vii) principal due on the Series 2013E Wastewater Bonds (whether at maturity or by mandatory sinking fund redemption) on the July 1 immediately succeeding such Fiscal Year; (viii) sum of all interest due on the Series 2013E Wastewater Bonds during such Fiscal Year; (ix) total debt service requirements of the Series 2013E Wastewater Bonds; and (x) the combined total debt service under the Wastewater Resolution, assuming the issuance of no additional indebtedness. Existing Debt Service Total Debt Service Existing Debt Fiscal Year on Senior Lien On Senior Lien Service on Combined Ending Wastewater Series 2013 Senior Wastewater Bonds Wastewater Subordinate Lien Series 2013E Wastewater Bonds Total June 30 Bonds (1) Principal Interest Total Bonds (1) Wastewater Bonds (1) Principal Interest Total Debt Service 2014 $37,275,564 $1,205,000 $6,406,198 $7,611,198 $44,886,762 $8,051,400 $20,000 $754,000 $774,000 $53,712, ,475,202 3,150,000 11,051,500 14,201,500 50,676,702 8,051,400 1,485,000 1,304,400 2,789,400 61,517, ,883,062 4,225,000 10,925,500 15,150,500 51,033,562 8,051,400 1,580,000 1,245,000 2,825,000 61,909, ,541,715 5,270,000 10,756,500 16,026,500 50,568,215 8,051,400 1,690,000 1,166,000 2,856,000 61,475, ,891,746 7,075,000 10,515,050 17,590,050 50,481,796 8,051,400 1,700,000 1,081,500 2,781,500 61,314, ,158,941 5,835,000 10,184,250 16,019,250 50,178,191 8,051,399 1,810, ,500 2,806,500 61,036, ,188,056 7,910,000 9,892,500 17,802,500 49,990,556 8,051,400 2,225, ,000 3,131,000 61,172, ,069,491 5,455,000 9,497,000 14,952,000 47,021,491 8,051,399 2,340, ,750 3,134,750 58,207, ,792,507 5,745,000 9,224,250 14,969,250 46,761,757 7,622,594 2,455, ,750 3,132,750 57,517, ,513,297 9,320,000 8,937,000 18,257,000 46,770,297 7,073,309 2,570, ,000 3,125,000 56,968, ,649,375 8,535,000 8,471,000 17,006,000 46,655,375 6,071,180 2,690, ,500 3,116,500 55,843, ,648,850 8,860,000 8,044,250 16,904,250 46,553,100 3,995,855 2,810, ,000 3,102,000 53,650, ,661,396 7,210,000 7,601,250 14,811,250 46,472,646 3,019,772 3,030, ,500 3,181,500 52,673, ,467,149 7,800,000 7,240,750 15,040,750 46,507,899 4,208, ,716, ,104,594 6,465,000 6,850,750 13,315,750 46,420,344 4,176, ,596, ,026,139 6,730,000 6,527,500 13,257,500 46,283,639 4,140, ,423, ,932,336 7,115,000 6,191,000 13,306,000 46,238,336 3,772, ,011, ,937,807 7,415,000 5,835,250 13,250,250 46,188,057 3,822, ,010, ,336,682 7,825,000 5,464,500 13,289,500 45,626,182 3,763, ,389, ,993,436 8,365,000 5,073,250 13,438,250 43,431, ,431, ,654,421 8,715,000 4,655,000 13,370,000 40,024, ,024, ,832,963 7,780,000 4,219,250 11,999,250 36,832, ,832, ,395,844 8,170,000 3,830,250 12,000,250 34,396, ,396, ,738,594 8,580,000 3,421,750 12,001,750 31,740, ,740, ,333,500 9,010,000 2,992,750 12,002,750 24,336, ,336, ,739,313 9,460,000 2,542,250 12,002,250 20,741, ,741, ,741,750 9,930,000 2,069,250 11,999,250 18,741, ,741, ,741,000 10,430,000 1,572,750 12,002,750 18,743, ,743, ,325,000 1,051,250 14,376,250 14,376, ,376, ,700, ,000 8,085,000 8,085, ,085,000 TOTAL $780,724,728 $224,610,000 $191,428,748 $416,038,748 $1,196,763,476 $116,078,396 $26,405,000 $10,350,900 $36,755,900 $1,349,597,771 (1) With respect to the Revenue Obligations bearing interest at a variable rate, for all of which the City has entered into interest rate swap agreements, the rate or rates of interest paid under such interest rate swap agreements are reflected in this table. (2) Totals may not add due to rounding

53 Organization ORGANIZATION AND STAFF OF THE UTILITIES The Utilities are separate utilities within the Bureau of Water and Wastewater, one of the three separate bureaus of the Department of Public Works. The Bureau is administered by a Bureau Head, who is appointed by the Mayor and is responsible to the Director of Public Works. As of July 1, 2013, the Water Utility had 932 budgeted positions and the Wastewater Utility had 911 budgeted positions. These positions are staffed with employees with professional qualifications in the fields of engineering, finance, accounting and public management as well as skilled technical water and wastewater operation and maintenance personnel. The Bureau consists of eight divisions which perform services with respect to the Utilities: Water and Wastewater Engineering, Asset Management, Customer Services and Support, Water and Wastewater Maintenance, Construction Management, Environmental Services, Surface Water and Wastewater Facilities. Internal administrative and financial functions are provided within the Office of the Bureau Head. Described below are functional responsibilities of each division and the Office of the Bureau Head with respect to the Utilities. Office of the Bureau Head, Bureau of Water and Wastewater The Office of the Head of the Bureau of Water and Wastewater provides direct guidance of the Utilities and the implementation of policy and establishment of procedures for the Utilities. In addition, it coordinates all City policies and procedures affecting the Utilities. The Office of the Bureau Head also recommends rates and the annual budget for the Utilities to the Director of Public Works. See FINANCIAL OPERATIONS OF THE WATER UTILITY Rates and FINANCIAL OPERATIONS OF THE WASTEWATER UTILITY Rates below. Division of Water and Wastewater Engineering The Division of Water and Wastewater Engineering is responsible for the administration, capital improvement planning, and engineering design for contracts to construct and maintain water and wastewater treatment plants, pumping stations, and the collection and conveyance system. The Division recommends and monitors the Capital Improvement Programs for the Water Utility and the Wastewater Utility, reviews development plans and construction drawings, coordinates design and construction of the water and wastewater treatment plants, and provides technical assistance to the Division of Water and Wastewater Maintenance. Additionally, the Division is responsible for administration of Federal and State grants and loans. Division of Asset Management The Division of Asset Management is responsible for optimizing the service life of the sewer, water, and stormwater infrastructures through the development and implementation of proactive inspections and preventative maintenance programs. The Division implements a strategic approach to managing these assets at a sustainable cost and an acceptable level of risk

54 Division of Customer Services and Support The Division of Customer Services and Support is responsible for providing quarterly meter reading and billing of approximately 411,000 water accounts. The five components are Utility Billing, Meter Reading Operations, Meter Shop Operations, Control One Abatement Center and the Correspondence Unit. The core activities include the installation and maintenance of water meters, meter reading, delinquent turn offs, account billing, billing audits and adjustments, informal hearings, and service discount programs. The Customer Care section of Utility Billing manages water service inquiries and escalated billing complaints through the call center and one stop shop. Division of Water and Wastewater Maintenance The Division of Water and Wastewater Maintenance is responsible for maintenance of water, wastewater and storm water systems. With respect to the Water Utility, the Division maintains approximately 3,400 miles of main in the water distribution system in Baltimore City and Baltimore County. In regard to the Wastewater Utility, the Division maintains over 1,340 miles of sanitary interceptors and main line sewers, over 35,400 individual sanitary manholes, and over 210,000 sanitary house connections in Baltimore City. Division of Construction Management The Division of Construction Management is responsible for planning and directing the construction, contract administration, and inspection of infrastructure, dams, bridges, and water and wastewater treatment facilities. The Division reviews construction to assure adherence to codes, costs, progress and quality. Division of Environmental Services The Division of Environmental Services is responsible for the storage, treatment, and pumping of drinking water to the Baltimore metropolitan area. The Division also contains the laboratories that serve the water treatment plants, the wastewater treatment plants, and the industrial pretreatment program. Additional responsibilities include reservoir water quality management, urban water quality management, and industrial pollution control. Division of Surface Water The Surface Water Management Division (SWMD) provides for protection, enhancement and restoration of watersheds within the City of Baltimore and the Chesapeake Bay tributaries through water quality management and rigorous compliance measures mandated by the Environmental Protection Agency through the Clean Water Act. The Division includes two engineering sections for the administration, capital improvement planning, and engineering design of stormwater infrastructure rehabilitation and NPDES permit compliance. Additional responsibilities include development plans review, regulatory inspections, and monitoring and pollution source tracking as it applies to stormwater management and soil erosion and sediment control. Additionally, the Division is responsible for administration of Federal and State grants and loans which pertain to stormwater

55 Division of Wastewater Facilities The Division of Wastewater Facilities is responsible for the operation and maintenance of the wastewater treatment plants and pumping stations. Support Services Provided by the City The City provides several support services to the Utilities. The Utilities each pay the City 6% of budgeted expenses, exclusive of debt service, as reimbursement for services provided. Among the services provided to the Utilities by the City are (i) hiring and personnel policy, (ii) legal, (iii) purchasing, and (iv) cash and debt management. Management Personnel ALFRED H. FOXX, Director of Public Works Alfred Foxx was appointed Acting Director of the Baltimore City Department of Public Works (DPW) in July 2010 by Mayor Stephanie Rawlings-Blake and subsequently confirmed as Director by the Baltimore City Council on September 10, He oversees an agency which has 2,720 positions, an operating budget of approximately $450 million and a capital budget of approximately $500 million. DPW provides trash, recycling, bulk pick-up, street-sweeping and rat eradication services in Baltimore City. DPW also provides drinking water to 1.8 million people in the Metropolitan Area, wastewater collection and treatment for 1.6 million people and surface water management for Baltimore City. Mr. Foxx is a graduate of the University of Florida and the United States Army s Command and General Staff College. He reached the rank of Colonel in the United States Army and served as Executive Director of Civil Works with the Army s Corps of Engineers, a $4.5 billion dollar a year, 26,000 person engineering, construction, facilities operation and maintenance agency. He served as the Director of Public Works for military installations in Europe and numerous projects in Europe, Asia and the United States. Before coming to DPW, Mr. Foxx served as the Director of Baltimore City s Department of Transportation beginning in In that capacity, he was responsible for highway, road and bridge design, construction and maintenance; impound operations; parking enforcement; traffic engineering; and special events. RUDOLPH S. CHOW, P.E., Deputy Director of Public Works; Bureau Head, Bureau of Water and Wastewater Mr. Chow was hired as the Acting Head, Bureau of Water and Wastewater in February 2011 and was subsequently nominated by the Mayor and in May was confirmed by the Baltimore City Council as Bureau Head. In October 2013, Mr. Chow was designated as the Deputy Director of Public Works. Prior to this position, he served as Team Chief of the Washington Suburban Sanitary Commission s ( WSSC ) Customer Care Team, which is the largest section in WSSC and was responsible for maintaining WSSC s infrastructures including water and sewer lines, valves, fire hydrants, manholes and water meters and vaults. Additionally, he was also in charge of the WSSC s billing, emergency and non-emergency call centers, claims, and SSO Consent Decree. Among other key positions held in the WSSC, Mr. Chow also served as the Interim Deputy General Manager for 18 months where he was responsible for all of the WSSC s day to day operation units. Governor William D. Schaefer

56 recognized Mr. Chow for bringing the first Denitrification Wastewater Treatment Plant online at WSSC. In 1996, he was a member of the WSSC s Competitive Action Program Steering Team responsible for reorganizing and streamlining WSSC operations. Mr. Chow holds a Bachelor of Science degree from George Washington University and a Master of Science Degree from the University of Maryland. He is a registered Professional Engineer in Maryland and Delaware. Mr. Chow holds several other professional licenses including operator s licenses to Wastewater Treatment Plant, Water Distribution, Wastewater Collection System and Superintendent. His professional affiliations include the American Society of Civil Engineers, the American Water Works Association, and Water Environment Federation. KIMBERLY MORTON, Esq. Chief of Staff, Department of Public Works Ms. Morton was hired as the Chief of Staff for DPW in September of She oversees the Administrative Bureau of DPW and provides direct support to the Bureau of Water and Wastewater through Contract Administration, Communications, Security, Information Technology, and Human Resource functions. She holds a Bachelor s degree from Morgan State University and a Law Degree from University of Maryland School of Law. Her professional affiliations include the American Public Works Association and the American Water Works Association. SHAARON PHILLIPS, Chief Administrative Officer, Bureau of Water and Wastewater Ms. Phillips was hired as the Executive Staff Officer, Bureau of Water and Wastewater in July of In September of 2013, her position was reclassified into the role of the Chief Administrative Officer. She provides direct support to the Bureau Head of the Bureau of Water and Wastewater, and she previously served as the Acting Chief of the Customer Service and Support Division. She holds a Bachelor s degree in Communications from Howard University in Washington, D.C., and a Masters in Business Administration from University of Phoenix. Her professional affiliations include the American Public Works Association and the American Water Works Association. BLAKE A. BORNKESSEL, Chief, Utility Finances Mr. Bornkessel was named Chief of Utility Finances in February He previously held a position in a national management and financial consulting firm. Mr. Bornkessel earned a Bachelor of Science degree in Finance/Accounting and a Bachelor of Science in Business Administration degree in Management Information Systems from Rockhurst University in Kansas City, Missouri. His professional affiliations include the American Water Works Association and the Water Environment Federation and serves on the Money Matters Task Force of the National Association of Clean Water Agencies. ART J. SHAPIRO, PE, PMP, Chief, Water and Wastewater Engineering Division Mr. Shapiro was named Chief of Utilities Maintenance Division in February He has over 35 years experience in the responsible management of large capital projects including environmental infrastructure and process equipment. He previously held the position of Project Manager II with the Shaw Environmental and Infrastructure Group and was appointed start up manager to the Newtown Creek Water Pollution Control Plant Expansion Project in Brooklyn,

57 New York for the New York City Department of Environmental Protection. He has also previously held the position of Capital Project Manager with the Department of General Services, State of Maryland. Mr. Shapiro has received his Bachelor of Science degree in Mechanical Engineering from Drexel University and a Master of Science degree in Technical Management from the Johns Hopkins University. Mr. Shapiro has achieved certification as a Project Management Professional and is licensed as a professional engineer in Maryland and Florida. He is an active member of the National Society of Professional Engineers, American Water Works Association, the Water Environment Federation, and the American Society of Mechanical Engineers. Mr. Shapiro has also been awarded several United States Patents related to the water treatment field. CARLOS ESPINOSA, Acting Chief, Asset Management Division Mr. Espinosa was named Acting Chief of the Asset Management Division in February He is a contracted employee affiliated with MWH Global. He has 33 years of experience in the design, operation, maintenance, and evaluation of utility infrastructures. This experience includes eight years working for the Anne Arundel County, Maryland Department of Public Works as Utility Operations Engineer and Water Operations Superintendent, and three years for the Harford County, Maryland DPW Water and Sewer Division as Chief of Engineering and Planning, responsible for the execution of the capital projects, master plan updates, developer services, and water and sewer petitions. Mr. Espinosa holds engineering degrees from the United States Naval Academy and the Johns Hopkins University. He is a licensed professional engineer in Maryland, Virginia, and Delaware. His professional affiliations include the American Water Works Association and the Water Environment Federation. ANTHONY GALLOWAY, Acting Chief, Utilities Maintenance Division Mr. Galloway was named Acting Chief of the Utilities Maintenance Division in May of He previously held the position of General Superintendent and has been employed with the City of Baltimore since He has over 25 years experience in the repair and construction of water, sewer and storm drain lines. His responsibility across the Bureau of Water and Wastewater has also included creating standard operating procedures and processing complaints. He holds a Certification in Construction Management from Baltimore County Community College. SAMUEL ATOLAIYE, CCM, PMP, Chief, Construction Management Division Mr. Atolaiye was appointed Chief of Construction Management Division in November He has over 30 years of experience in the engineering and construction industry. Mr. Atolaiye graduated with a Bachelor s degree in Civil Engineering from Kaduna Polytechnic, Nigeria and a Masters in Civil (Structural) Engineering from Norwich University, Vermont. He is a professional engineer licensed in Virginia, a Certified Construction Manager and a Project Management Professional. His professional affiliations include the American Society of Civil Engineers, Project Management Institute, Construction Management Association of America, the Water Environment Federation and the American Public Works Association

58 JAMES PRICE, Chief, Environmental Services Division Mr. Price was named Chief of the Environmental Services Division in May He has over 30 years of experience in the water treatment field. He previously held the position of Chief of Plant Operations for the Washington Suburban Sanitary Commission. Mr. Price earned an Associate s degree in Microcomputer Applications from Howard Community College, a Bachelor of Science degree in Business Administration from Columbia Union College, and a Master of Public Policy degree from the University of Maryland, College Park. Mr. Price is a licensed Superintendent and Operator by the State of Maryland. He is an active member of the American Water Works Association, and currently holds the position of trustee for the Chesapeake Section American Water Works Association, Inc. MICHAEL F. GALLAGHER, Chief, Wastewater Facilities Division Mr. Gallagher was named Chief of Wastewater Facilities Division in May He has been employed by the City of Baltimore and the Department of Public Works since He previously held the position of Engineer Supervisor where he oversaw the Capital Improvement Program and Engineering Section for the Division. He earned an Associates of Applied Science degree in Electro-Mechanical Engineering from Alfred State University and a Bachelor of Technology degree in Industrial Engineering from the State University of New York, College of Technology, Utica, New York. Mr. Gallagher serves on the Board of Directors for the Maryland Association of Wastewater Generating Agencies. He is also a member of the Wastewater Operators Association of Maryland. KIM BURGESS, P.E., Chief, Surface Water Division Ms. Burgess was named Chief of Surface Water Management Division in December She previously held a management position in a national environmental engineering consulting firm which has provided services to the City of Baltimore for over the past ten years. Ms. Burgess earned a Bachelor s of Science degree in Civil Engineering from Florida Institute of Technology in Melbourne, Florida. She is licensed as a professional civil engineer in Maryland, Georgia and Florida. She is also a member of the Stormwater Resources Committee Environmental Water Resources Institute (EWRI) of the Maryland Section of the American Society of Civil Engineers (ASCE), the Baltimore Ecosystem Study program, the Chesapeake Water Environment Association (CWEA) Stormwater Committee, and the Urban Waters Federal Partnership

59 YVONNE MOORE-JACKSON, Chief, Customer Support and Services Division Ms. Moore-Jackson was named Chief of Customer Support and Services Division in September Prior to this position, she served in several managerial roles with the City of Baltimore Department of Housing and Community Development since March Ms. Moore- Jackson earned a Bachelor s of Arts degree in Business from Notre Dame of Maryland University. Billings and Collections The Customer Service and Support Division reads meters on a quarterly basis for all metered customers located in the City, portions of Anne Arundel County, and Baltimore County. A bill for both water and wastewater service is rendered within one week of the meter reading. The City collects all bills, including those of customers located in the Counties. All customer service inquiries are handled by the Customer Service and Support Division and all costs of billing and collection are borne by the Water Utility. In order to facilitate the collection of bills rendered, the Customer Service and Support Division implemented (i) a delinquency charge of five percent, compounded each quarter on all bills over 30 days old (which is retained in full by the Water Utility), and (ii) a termination procedure for delinquent balances over $250. In addition, for utility customers located within the City, every unpaid water and wastewater bill constitutes a lien on the property served. Such properties may be sold by the City at tax sale as a collection method of last resort. As of June 30, 2013, the Utilities delinquent accounts over 260 days old totaled $29,285, for water and wastewater services, which are billed together and cannot be separated. The City s billing and collections procedures were the subject of a recent review conducted by the Baltimore City Department of Audits in connection with allegations of inaccurate billing procedures for certain metered water accounts. See AUDIT REGARDING WATER AND WASTEWATER BILLING PROCEDURES herein. Employee Relations Union Affiliations City employees within the Utilities are represented by three labor organizations: American Federation of State, County and Municipal Employees ( AFSCME ) AFL-CIO, Council No. 67, and Local 44 (trades and labor); City Union of Baltimore, Local 800 AFT, AFL- CIO (clerical and administrative personnel); and Managerial and Professional Society of Baltimore, Inc. (managerial and professional employees). Each of these three organizations also represents employees in other City agencies, in addition to those in the Utilities. Collective bargaining for municipal employees was established by ordinance in In accordance with the terms of this ordinance, the managerial and professional employees may only meet and confer on terms and conditions of employment. Each of the unions with bargaining rights negotiates independently with the City on all matters relating to wages, hours and working conditions. To conform to local legislation, any agreement reached between the parties becomes a Memorandum of Understanding requiring

60 approval by the Board of Estimates. The Board of Estimates examines the Memorandum of Understanding ( MOU ) for its impact on the City s operating budget and its funding requirements. Approvals of such agreements are subject to the appropriation of funds by the City. If agreement cannot be reached, the disputed issues are submitted to a three-member impasse panel. The City and the respective union each designate one member of the panel and mutually agree on the third. The role of the panel is one of mediation, fact-finding and recommendation, not binding arbitration. The AFSCME Locals, which include Locals 44, 558 and 2202, and City Union of Baltimore ( CUB ), have begun negotiation sessions for a successor MOU for fiscal years 2014 and Changes as detailed in Change to Grow: A Ten Year Financial Plan for Baltimore, a financial plan issued by the City of Baltimore in February 2013 covering fiscal years , are currently being negotiated. There will be a two (2) percent wage increase for the three AFSCME Locals and CUB Units for fiscal year The Managerial and Professional Society of Baltimore, Inc. ( MAPS ) has come to an agreement for fiscal years 2014 and 2015 and MAPs members will also receive a two (2) percent wage increase for fiscal years 2014 and Retirement System Employees of the Bureau are covered by the Employees Retirement System (the ERS ), one of three actuarially funded retirement systems provided by the City for its employees. The ERS was established with prior service provisions on January 1, 1926 to cover all individuals employed in the general administration of the City except for uniformed officers of the Fire and Police Departments and professional employees of the board of education and elected officials of the City. These individuals are covered under other City and State retirement plans. The ERS plan provisions have been amended from time to time and new classes of membership (optional to prior members) have been incorporated. On July 1, 1979, a noncontributory class of membership was established for all employees hired on or after that date. Membership in the noncontributory class is automatic after one year of employment. Contributory employees hired prior to July 1, 1979 could elect to transfer to the noncontributory class and receive a distribution of their employee contributions with interest or remain in their existing class. As of June 30, 2012, 99% of the ERS membership was noncontributory. The remaining 1% are A members who contribute to the plan. The ERS is administered by a seven-member Board of Trustees composed of the Comptroller, two appointees of the Mayor, three employees elected by the active members and one retiree elected by the retired members. The Executive Director and staff of the system are civil service employees. Assets of the system are held under a custodial agreement with BNY Mellon Bank Asset Servicing. The ERS contracts with various investment management firms which make investment decisions within guidelines established by the Board of Trustees. The assets are diversified across several different securities classifications to minimize risk and enhance returns over the long term. Monitoring of investment activity is conducted with the assistance of a professional investment advisor under contract with the Boards of Trustees of the retirement systems

61 The City contributes to the ERS annually pursuant to an actuarial valuation which uses the projected unit credit cost method. Using this method, the actuary is required by ordinance to determine the contributions necessary to fund: (a) the normal cost contribution which equals the amount of annual contributions necessary to provide each member s benefit had such contributions been made annually from the member s date of enrollment to the member s date of retirement, and (b) a prior service cost contribution which is the amount sufficient to meet regular interest on the unfunded accrued liability and to amortize the principal of the unfunded accrued liability. The unfunded accrued liability is open-ended and is amortized over 20 years. As of June 30, 2012, the date of the last actuarial valuation, the ERS funded ratio was 67% on an actuarial value of assets basis and 57.6% on a market value of assets basis. As of June 30, 2011, the ERS funded ratio was 72.7% on an actuarial value of assets basis and 64.0% on a market value of assets basis. The latest study of the assumed interest rate of return, mortality rate, service retirement and compensation was performed for the four-year period ended June 30, As a result of the study, the assumed rate of return decreased from 8.0% to 7.750% for pre-retirement and 6.55% for post-retirement. Other recommendations were made, including changes to mortality rates, withdrawal rates, disability rates, retirement rates and a change in the salary scale, to more closely represent experience. The Board of Trustees of the ERS adopted the recommendations that were included in the actuarial valuation. Post-retirement benefit increases are provided for all participants in pay status for more than 18 months. Increases are guaranteed at 1.5% for retirees under the age of 65 and 2% for retirees age 65 and older. Additional increases may be provided when investment performance exceeds 6.55%. The actuarially determined increase is payable as equal percentage increases commencing the January 1 following the June 30 investment performance determination date. The City s annual contributions to the ERS consist of a normal cost contribution and an accrued liability contribution to fully fund the system. The City s total annual contribution to the ERS is allocated to its several departments, programs, and funds on a percentage-of-payroll basis. Such total City contributions and the portions allocated to the Water Operating Fund and the Wastewater Operating Fund have been as follows: Fiscal Year Ended June 30 Water Utility and Wastewater Utility Pension Contribution Water Total City Utility Share Contribution of Total to ERS Contribution Wastewater Utility Share of Total Contribution 2007 $31,361,000 $2,971,000 $3,687, ,614,000 3,172,000 4,073, ,146,931 3,224,000 4,057, ,004,852 3,056,000 3,980, ,545,513 2,815,000 3,455, ,995,000 5,402,000 6,330,

62 The latest available ERS Component Unit Financial Report indicates that the City s unfunded accrued liabilities were as follows: Fiscal Year Ended June 30 Unfunded Accrued Liabilities 2007 $151,485, ,544, ,728, ,709, ,236, ,612,088 Source: Statement of Unfunded (Excess) Accrued Liabilities is from Schedule of Funding Progress, Comprehensive Annual Financial Report for the Year Ending June 30, 2012, Employees Retirement System City of Baltimore, Maryland. General. Certain financial information relating to the pension plans is also contained in the notes to the City s Consolidated Annual Financial Report. Interested parties are encouraged to view additional information or request a copy of the pension fund financial statements at the following addresses: Employees Retirement System/Elected Officials Retirement System 7 East Redwood Street 13th Floor Baltimore, MD Other Post-Employment Benefits The City provides post-employment health benefits to its employees and to retirees of the Baltimore City Public School System. The City complies with Governmental Accounting Standards Board Statement Number 45 ( GASB 45 ) with respect to reporting the annual cost of the post-employment benefits and the unfunded actuarial accrued liabilities for the cost of postemployment benefits. The City has established a trust fund (the Trust Fund ), gained approval from the IRS for tax exempt status for the income of the Trust Fund, and has made contributions to the Trust Fund, outside of the cost to pay current benefits, with an audited net asset value at June 30, 2012 of $262.4 million. In addition to budgeted contributions, the City has dedicated the revenue stream from the Medicare Part D employer subsidy to the Trust Fund. The $262.4 million net asset value as of June 30, 2012 consists of contributions from prior year General Fund budget surpluses, revenue from the employer subsidy, interest income, and budgeted contributions. As of June 30, 2012, the OPEB Unfunded Actuarial Accrued Liability for the City is calculated to be $1.493 billion. The Annual Required Contribution ( ARC ) as determined by the actuary for fiscal year 2012 was $117.9 million (using a discount rate of 5.95%). During fiscal year 2012, the City funded $157.1 million of the ARC, with $120.8 million in paygo costs for current benefits and $36.3 million in contribution above paygo toward the ARC. In fiscal

63 year 2013, the City expects to contribute at least an additional $9.5 million in budgeted contributions. The City is taking additional steps to help manage the OPEB liability. In July 2008, the City implemented a new graduated scale for retiree health care premium contributions. Under the new schedule, retirees with fewer than 15 years of service will pay more than the 50% premium contribution that retirees with 15 or more years of service contribute. Effective April 1, 2010, the City migrated its Medicare eligible retirees and dependents to an Employer Group Waiver Plan (EGWP), which is a Medicare PDP Plan that will be administered by the city s Pharmacy Benefit Manager. The City is implementing the PDP to help manage its cost for retiree drugs. The City anticipates approximately $1.5 million annually in incremental savings over Retiree Drug Subsidy payments. Water System Service Area THE WATER SYSTEM The Water Utility supplies water to the City, as well as portions of Baltimore, Anne Arundel, Carroll, Harford and Howard Counties. The total water service area is approximately 220 square miles, 80 square miles of which are in Baltimore City. The Water Utility serves over 1,800,000 people by supplying approximately 93 billion gallons of water annually. Approximately 51% of the Water Utility s customers and 42% of water usage are currently located within the City; the remaining 49% of customers and 58% of water usage are in the surrounding County service areas. Water service is provided to customers in part of Baltimore County, and to fewer than 20 customers in Anne Arundel County, on a retail basis. Wholesale service is provided to parts of Howard, Anne Arundel, Harford and Carroll Counties. The City provides untreated water to Carroll and Harford Counties. The operation and maintenance of the supply, treatment, transmission and most of the distribution facilities in the system are the responsibility of the Water Utility. The total amount of finished water produced has declined every year since fiscal year 2005, ranging from 0.15% to 5.16% per year. Fiscal year 2013 marked the greatest reduction over that time span. Factors influencing total finished water demand include conservation measures and fluctuation of relatively wet and dry years, as well as economic conditions. Total finished water demand over the last 10 years has decreased. Based on current conditions, water demand is expected to remain steady; however, based on long-term population projections, overall water demand is expected to increase over the next 10 years. Water Supply Sources The water system receives its untreated water from the following three sources: Loch Raven and Prettyboy Reservoirs on the Gunpowder River and Liberty Reservoir on the Patapsco River. The City has an agreement to withdraw up to 250 million gallons per day ( mgd ) from the Susquehanna River; however, the City s right to withdraw is subject to regulation by the Susquehanna River Basin Commission. The Susquehanna River supply has been used in the past only during periods of drought, and on several other occasions for testing purposes. Groundwater is not utilized as a source of supply

64 Loch Raven and Prettyboy Reservoirs are located in a 303 square mile watershed and have a combined available capacity of 39 billion gallons. Land use in the watershed is principally agricultural, which generally results in excellent water quality for municipal purposes. Liberty Reservoir has a watershed of 164 square miles and an available storage capacity of 43 billion gallons. The water quality of Liberty Reservoir is also considered excellent for municipal water supply. The Loch Raven and Prettyboy Dams, constructed in the 1920 s and 1930 s, respectively, have been the subject of inspections throughout the years. A construction project to address rehabilitation and upgrades at the Liberty Dam was completed in To comply with a U.S. Army Corps of Engineers recommendation, the Water Utility retained an independent consulting firm to study the Prettyboy and Loch Raven Dams to determine the improvements necessary to comply with federal standards relating to the probable maximum flood ( PMF ). The consultant s investigations at the Prettyboy Dam concluded that a significant amount of seepage was occurring through the construction joints in the concrete, that the spillway is capable of passing the PMF, that the dam has significant flood control impact, that stability of the dam is satisfactory and that the rehabilitation of ancillary mechanical systems is warranted. A portion of the rehabilitation of the Prettyboy Dam was completed in Construction on the remaining rehabilitation began in 2008 and is now complete. The consultant s investigation found that Loch Raven Dam was incapable of withstanding PMF conditions and additionally had some marginal safety problems in respect to stability of the dam. A study to identify alternative corrective measures for the Loch Raven Dam was conducted and construction and rehabilitation to address these concerns were completed at the end of 2005 at an approximate total construction cost of $35 million. Water from the Loch Raven/Prettyboy system is conveyed for treatment to the Montebello Filtration Plants via a seven-mile, concrete-lined tunnel, 12 feet in diameter. Normally, flow is by gravity, although water can be pumped by a station located at the Montebello Plants should the water levels fall low enough to preclude gravity flow. The station contains three 120 mgd pumps. Water is conveyed by gravity from Liberty Reservoir to the Ashburton Water Filtration Plant (the Ashburton Plant ) via a 12½ mile, concrete-lined tunnel, 10 feet in diameter. However, as with the Loch Raven/Prettyboy system pumping facilities, pumps are available at the Ashburton Plant should the water levels fall low enough to preclude gravity flow. The City entered into an agreement with the Philadelphia Electric Company in 1925 to use the Company s Conowingo Lake as an additional water supply source. The lake is located on the Susquehanna River in Harford County. The Susquehanna water supply system (Conowingo Lake) includes the Conowingo Intake, the Deer Creek Pumping Station, and connecting pipelines and tunnels. The City s agreement with the Philadelphia Electric Company was modified in 1984 with the approval of the Federal Energy Regulatory Commission ( FERC ) to allow up to 250 mgd of water to be taken from the Susquehanna River. The

65 Conowingo Intake has an installed intake capacity of 500 mgd. The pumping station and pipeline have a capacity of 250 mgd. The station has three 50 mgd pumps with provisions for two more identical units. All water is pumped by the Deer Creek Pumping Station approximately 36 miles to the Montebello Filtration Plants. In 1998, the City filed a federal action against the Susquehanna River Basin Commission (the SRBC ), which administers a multi-state compact created by federal law to regulate the users of the Susquehanna River. The City sought to nullify the SRBC s determination that it could restrict the City s withdrawal of water from the Susquehanna River. The trial court held ineffective the State of Maryland s attempt to preserve the City s right to withdraw unlimited water when the State joined the compact in In September 2001, the City approved a settlement agreement for an appeal that was pending in the U.S. Court of Appeals for the Fourth Circuit filed by the City against the SRBC. The key feature of the agreement is the City s unfettered right to withdraw water from the Susquehanna River, at no cost, up to 250 mgd during normal flow conditions and up to 64 mgd as a monthly average, or 107 mgd as a daily peak, during droughts. The City s consultants reasonably project that the agreement, coupled with water conservation and other measures, will guarantee sufficient water for the entire region for the next 20 years, even based on maximum water usage projections. A recent study determined that the 2050 demand of raw water would necessitate securing 60 mgd of additional safe yield in order to position the utility to withstand an intense drought such as the droughts experienced in the 1930 s and 1960 s. On July 28, 2010, Baltimore delivered applications to the Susquehanna River Basin Commission (SRBC) to increase the limitations to 124 mgd (30-day average) and 186 mgd (peak day). On May 6, 2011 the City modified its application to seek review and approval of the July 28, 2010 request under a phased approach. Phase 1, which was approved by the SRBC on September 15, 2011, identified an increase from 64 mgd to 84 mgd (30-day average) and 107 mgd to 142 mgd (peak day) during Trigger Low Flow Events. Phase 2 would address the balance of the City s request to increase those limits to 124 mgd (30-day average) and 186 mgd (peak day) during such flow events. The City intends to apply for the Phase 2 increment as demand increases in coming years. No significant problems have been experienced with any of the water tunnels or pumping facilities and all of these facilities are in good condition. Treatment Water from Liberty Reservoir is treated at the Ashburton Plant which is located on the City s west side. All other water is treated at the two Montebello Filtration Plants on the east side of the City. Treatment consists of disinfection, coagulation, sedimentation, filtration, fluoridation, and corrosion control. Total design capacity of the three plants is 360 mgd of finished water. The Montebello filtration facilities consist of Plants No. 1 and No. 2 built in 1915 and 1928, respectively. Plant No. 1 has a design capacity of 128 mgd, and Plant No. 2 has a design capacity of 112 mgd. The Ashburton Plant went on line in 1956 with a design capacity of 120 mgd

66 Future Demand and Safe Yield Current projections indicate that the water system may require certain expansions to meet the projected supply demands of the Water Utility s service area in the year One of the major challenges confronting the system is the transfer of good quality water from the sources east of the system to the increased demand anticipated in the west, especially from areas outside the City in the various County jurisdictions. Since 1960, demand in the City, although increasing slightly, has become a smaller percentage of the total demand placed on the system. In fiscal year 2012, the City s average filtered water demand was mgd, which constituted 43.86% of the total system demand. The present supply sources of the water system are rated by their safe yield. Safe yield is defined as the sum of usable water reservoir storage divided by the length of drought (assumed, based on certain criteria), plus the drought stream flow. The computed safe yield of the Loch Raven/Prettyboy system is 148 mgd, while the Liberty Reservoir has a safe yield of 93 mgd. Carroll County was previously allowed to take 3 mgd from the Liberty Reservoir; however, a revised agreement was approved in February 2005 that allows the County to withdraw up to 6 mgd as a 30-day average. This lowers the safe yield for the Water Utility to 87 mgd. The present combined safe yield of the reservoir system is thus 235 mgd. The 2012 average raw water demand is 209 mgd, while the average across 2008 through 2012 is approximately 218 mgd. The average demand is expected to be mgd by 2025, or 64.6 mgd in excess of the present reservoir system s safe yield. In order to provide additional system reliability and capacity, the City is studying several long-range planning options that may include construction of an additional filtration plant at Fullerton, in Baltimore County, or expansion of other City facilities. Distribution The distribution system s piping varies in size from 4 to 144 inches in diameter. The majority of the pipe is cast iron, although sizes 16 inches in diameter and greater may be steel or reinforced concrete. There are approximately 4,500 miles of main in the system, of which approximately 1,550 miles are in Baltimore City. The distribution system has 420 million gallons of usable storage capacity contained in 30 elevated and ground storage facilities. There are 20 pumping stations in active use with a safe capacity of 618 mgd. However, about 56% of the system s overall consumption is delivered by gravity. The Water Utility s storage capacity is sufficient to meet system demands. In September 2003, at the request of Anne Arundel County, the City transferred the portion of City-owned mains located in Anne Arundel County to the County by a Deed of Transfer. The original system was built by Anne Arundel County and required rehabilitation, which would have cost approximately $8,000,000. By transferring this portion of the system to Anne Arundel County, the City saved these improvement costs and future operation and maintenance costs associated with the portion of the mains transferred to the County. The City continues to provide water to this portion of the system in Anne Arundel County via wholesale service through master meters

67 System Operation and Maintenance The City has a preventive maintenance program for all components of the system and a portion of the comprehensive water quality plan is focused on improving the treatment facilities training program. In addition, the Water Utility s Capital Improvement Program contemplates ongoing water main cleaning and cement lining programs. See WATER UTILITY CAPITAL IMPROVEMENT PROGRAM. System Metering As of September 16, 2013, the Baltimore Metropolitan Water Distribution System was 100% metered, with 411,665 active metered accounts. The breakdown of active metered accounts by political subdivision is shown in the table below. Metered Political Subdivision Accounts Baltimore City 206,199 Baltimore County 205,445 Anne Arundel County 13 Howard County 4 Carroll and Harford Counties 1 Total 411,665 In an effort to improve customer service, the City is in the processes of implementing Advanced Meter Infrastructure (AMI) and Automated Meter Replacement (AMR) across all meters in the Baltimore City and Baltimore County political subdivisions. Installation of the meters in Baltimore City is scheduled to complete installation in April The service area attributed to Baltimore County is schedule for completion in April Concurrently, the City has also begun the process to replace the water and sewer billing system. The new billing system is expected to be in operation by April Rates FINANCIAL OPERATIONS OF THE WATER UTILITY In November 1978, the voters of the City approved the Charter Amendment establishing the Water Utility as a separate enterprise and requiring that the Water Utility be financially selfsustaining and operated without profit or loss to the other funds or programs of the City. In addition, the Charter Amendment requires the City to approve a separate budget for the Water Utility. As required by the Charter Amendment, in December 1978, the City Council adopted Ordinance 941 establishing, among other things, a mechanism for the determination of rates and charges. Ordinance 941 requires that the Board of Estimates, upon the recommendation of the Director of Finance and the Director of Public Works, establish rates and charges sufficient to make the Water Utility self-supporting at all times and that it adjust the rates if the projected statement of revenues, expenses and changes in equity for the current fiscal year anticipates a loss and the actual results for the immediate prior year resulted in a loss or deficit. In addition,

68 Ordinance 941 requires that the rates so established shall be at a level sufficient to recover any accumulated deficit from prior years. On July , the Board of Estimates approved increasing water and sewer rates by an additional 15.0% effective July 3, 2013, 11% effective July 1, 2014, and 11% effective July 1, Retail and wholesale water rate increases over the past 32 years and the next two years are as follows: Current Rate Structure Retail and Wholesale Water Rate Increases Date % Increase Date % Increase January April April April April April April May April June June June May May April June April July April July * July * * Approved by the Board of Estimates in 2013, but not yet effective. The revenues of the Water Utility are primarily derived from water sales, with a minor amount of revenues generated by charges for other services and rental income, penalty charges for late payment and interest earnings on investments. Water Utility customers in Baltimore City and the small number of retail customers in Anne Arundel County are billed quarterly on the basis of a minimum quarterly charge and consumption charges per one hundred cubic feet (Ccf). The existing schedule of retail water rates for customers in Baltimore City is shown in the table below. Meter Size (inches) Minimum Quarterly Charges for Metered Water Service Consumption Allowed (Ccf) Meter Size (inches) Consumption Allowed (Ccf) Rate Rate $ $ , T* , , , , , , T* , , * T denotes Townhouse. Modified March 15, One-inch metered townhouses built after July 1, 1992, requiring sprinklers (1 dwelling unit). Two-inch metered townhouses built after July 1, 1992 requiring sprinklers (maximum 2 dwelling units)

69 Low Income Assistance Programs Consumption Charges Quarterly Use Block (Ccf) Rate ($ per Ccf) First Next Over The Bureau of Water and Wastewater initiated a Low Income Assistance Program in April This crisis intervention program was initiated to prevent water service cut-off due to delinquency and allow for the establishment of a payment plan with the Bureau of Revenue Collections to satisfy outstanding water account balances. In April 2008, the program was modified by increasing the annual amount of the grant from $100 to $125, extending the program to eligible tenants, and making the grant available to eligible customers at the point of delinquent notice rather than waiting until the point of turn-off. In July 2013, the program was modified by increasing the annual amount of the grant from $125 to $145. In May 2008, the Bureau of Water and Wastewater implemented a Water and Sewer Low Income Senior Citizens Discount Program which is designed to assist low income senior citizens who are often on fixed incomes. The program was modified in July of 2013 to increase the discount from 30% to 35% on water/sewer rates for eligible senior citizens age 65 or older who are City residents and whose household income does not exceed $25,000. County Water Services Howard County and Anne Arundel County are charged a wholesale rate for treated water established by the City. Carroll County is charged a wholesale rate for untreated water that is also established by the City. Under a 1992 Agreement, the City supplies Harford County with untreated water at cost. Under provisions of Chapter 539 of the Laws of Maryland of 1924, the City is obligated to supply water to Baltimore County at cost. The current method of determining the cost to serve Baltimore County is set out in a City-County Water Agreement dated September 20, 1972, as amended (the City-County Water Agreement ). In general, Baltimore County is required to pay a share of the Water Utility s operations and maintenance expense related to jointly used facilities in proportion to its water usage and all costs for facilities serving only Baltimore County. Baltimore County also pays its share of capital costs on jointly used facilities financed entirely by the City. See FINANCIAL OPERATIONS OF THE WATER UTILITY City-County Water Agreement. Below is a table showing water sales revenues from the various subdivisions served by the Water Utility as projected in the fiscal year 2014 budget:

70 Subdivision Revenues ($000 s) % of Total Baltimore City $84, % Baltimore County 58, % Howard County 15, % Anne Arundel County 1, % Carroll and Harford Counties % Total $160, % Major Users The Water Utility s accounts both retail and wholesale, are subject to Rates and Charges established by the City except for those accounts in Baltimore County, which are governed by the terms of the City-County Water Agreement described below. The following lists of the Water Utility s ten largest users in the City and Baltimore County are drawn from the City s records of its metered accounts with one-inch or larger meters (except that all metered accounts of the City government and the Housing Authority of Baltimore City are included). The users on this list may be responsible for other smaller accounts that are not reflected below. Billings in City Customers Fiscal Year 2013 Mayor and City Council $3,782,805 Housing Authority of Baltimore City 1,715,335 W.R. Grace 1,492,913 Johns Hopkins Hospital 998,538 Johns Hopkins University 502,715 University of Maryland 396,808 Domino Sugar 369,387 State of Maryland (Prison System) 261,450 Baltimore Resco 249,780 Fleischmann's Vinegar Co. 238,426 Total $10,008,157 Billings in County Customers Fiscal Year 2013 Severstal Sparrows Pt, LLC $539,090 Baltimore County Government 315,783 Imerys 196,035 University of Md. County 175,013 Constellation Power Source 112,107 Southern Management 109,225 Oak Campus Partners, LLC 108,649 Greater Baltimore Medical Center 102,093 Westminster Mgmt, LLC 99,993 Board of Trustees-Dundalk 97,012 Total $1,855,000 Severstal Sparrows Point, LLC, the largest customer in Baltimore County ceased operation in December of The City is experiencing no collection difficulties with any of the foregoing major users; however, the City is in negotiations with a former major user, Mittal

71 Steel USA Sparrows Point Division (predecessor to Severstal Sparrows Point LLC) over a historical water billing dispute in the approximate amount of $1,800,000. City-County Water Agreement Under Chapter 539 of the Laws of Maryland of 1924 (the Metropolitan District Act ), the City is obligated to provide water to Baltimore County at cost. The City-County Water Agreement, among other things, established the methods by which the County s share of the Water Utility s costs was to be determined. Among the costs to be apportioned are the costs of operation, maintenance and administration, major repairs and capital projects during construction. Customers in the County are served through individual meters but are billed by the City at rates set by the County rather than on the basis of Rates and Charges established by the City. Following the end of each fiscal year, when the information as to the Water Utility s actual costs for that period and the County s share of usage is available, City and County officials meet to reach agreement on costs to be paid by the County. If the revenues from billings to County customers exceed the agreed costs, the City remits the excess to the County within 60 days; if there is a shortfall, the County must pay the difference to the City within 60 days. In March 2007, the City and the County settled a disagreement over the proper method of determining the cost of treating the sewer discharge from the Ashburton Water Treatment Plant (the Ashburton Plant ). The City s Wastewater Utility treats the sewage that is discharged from the Ashburton Plant. A board of arbitration was convened under the terms of the City-County Water Agreement to resolve the matter by way of binding arbitration. Baltimore City and Baltimore County, desirous of settling and terminating all existing claims and disputes relating to this matter, reached a settlement agreement. Highlights of the settlement agreement include the City and the County recognizing the County s volumetric share of the Ashburton Plant discharge as sewage flow contributed by the County under the terms of the City-County Sewerage Agreement described below, the County agreeing to pay a portion of the City s collection system maintenance costs because the Ashburton Plant is located in the City, and agreement that the Ashburton Plant sewer discharges will not be used to determine the County s proportionate share of capital improvement project costs. Summary of Historical Operating Results and Coverage The Water Utility has operated as a separate enterprise of the City on a self-sustaining basis since July 1, The following table contains, for the Water Utility s fiscal years , summary operating and an analysis of coverage requirements

72 Summary of Historical Operating Results ($000 s) Total Revenues $132,340 $129,292 $130,666 $119,624 Transfer (to) from Rate Stabilization Fund 4,000 2,000 (1,000) 6,000 Total Operating Expenses (95,386) (90,586) (88,394) (94,547) Net Revenues $40,954 $40,706 $41,272 $31,077 Debt Service Senior Lien Revenue Obligations $23,917 $23,342 $23,342 $21,980 Subordinate Lien Revenue Obligations 6,676 3,963 3,963 4,972 Total Debt Service $27,306 $27,306 $27,306 $26,952 Senior Lien Debt Service Coverage 1.71x 1.74x 1.76x 1.41x Senior and Subordinate Lien Debt Service Coverage 1.49x 1.49x 1.51x 1.15x Summary of Projected Operating Results and Coverage The table below sets forth the Water Utility s projection of its operating results and coverage requirements for the fiscal years 2013 through These projections are based on the Water Utility s projected rate increases, the Water Utility s forecasted revenues and operating and maintenance expenses, the estimated debt service requirements on revenue obligations and the terms and conditions contained in the Water Resolution. The forecasts in the following table are not guarantees of future performance. Actual results may vary materially from those forecasts as a result of various risks and uncertainties that include, among others, unanticipated declines in levels of water consumption, increases in Water Utility personnel costs and other operating costs, additional regulatory requirements and adverse developments in general economic conditions. With respect to the Revenue Obligations bearing interest at a variable rate, all of which is currently in an Auction Rate Mode, and for all of which the City has entered into Hedge Agreements, the rate or rates of interest paid under such Hedge Agreements are reflected in the table below. However, on occasion, the City has experienced an increase in its debt service costs associated with its Variable Rate Indebtedness in excess of the amounts payable to the City pursuant to the Hedge Agreements. See SECURITY FOR THE SERIES 2013 WATER BONDS - Certain Outstanding Indebtedness. With respect to the Series 2002-B Bonds and the Series 2002-C Bonds, the Maximum Dutch Auction Rate is the product of the Auction Index multiplied by the Auction Multiple, but in no event in excess of 14%. The Auction Index is the Seven-Day AA Non-Financial Composite Commercial Paper Rate on such date. The Auction Multiple is a percentage of the Auction Index, based on the then prevailing rating of the Series 2002-B Bonds and the Series 2002-C Bonds by S&P and Moody s (based on the Insurer, Financial Guaranty Insurance Company). For so long as the prevailing rating is below BBB/Baa, the Auction Multiple is 225%. With respect to the Series 2004B Water Bonds, the Maximum Dutch Auction Rate is the product of the Auction Index multiplied by the Auction Multiple, but in no event in excess of 15%. The Auction Index is the Seven-Day AA Non-Financial Composite Commercial Paper Rate on such date. The Auction Multiple is a percentage of the

73 Auction Index, based on the then prevailing rating of the Series 2004B Water Bonds by S&P and Moody s (based on the Insurer, XLCA). For so long as the prevailing rating is A-/A3, the Auction Multiple is 200%; in the event the prevailing rating drops to BBB/Baa, the Auction Multiple will be 250%; in the event the prevailing rating drops below BBB/Baa, the Auction Multiple will be 275%. As described in PLAN OF FINANCE THE SERIES 2013 WATER BONDS above, the City is refunding the Refunded Water Auction Rate Bonds with proceeds of the Series 2013B Water Bonds and Series 2013C Water Bonds. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

74 Summary of Projected Operating Results* ($000 s) Fiscal Year Ending June ** Revenues: Baltimore City $71,985 $71,985 $82,298 $90,709 $99,960 $114,176 Baltimore County (a) 54,562 58,562 60,607 62,525 64,469 66,534 Revenue from Other Counties (b) 15,930 15,930 18,083 19,899 21,915 24,965 Transfer (to) from Rate Stabilization Fund - (7,500) (5,000) (1,000) (4,000) (4,000) Other Revenue 12,148 12,305 12,418 12,543 12,687 12,809 Interest Revenue (c) ,021 Revenue from Increased Charges (d) 12,466 10,227 11,266 17,266 14,167 Total Revenues $154,625 $163,905 $178,954 $196,287 $212,654 $229,672 Operating Expenses: Operating and Maintenance Expenses (e) $111,778 $120,817 $125,206 $129,355 $133,671 $138,163 Less: Additional Expenses (f) Net Revenues Available for Debt Service (g) $42,447 $42,688 $53,348 $66,532 $78,583 $91,109 Debt Service: Senior Lien Revenue Obligations (h) $27,082 $27,026 $31,501 $39,913 $50,570 $61,934 Subordinate Lien Revenue Obligations (h) 6,655 11,570 15,165 16,135 16,189 16,144 Total Debt Service $33,738 $38,596 $46,666 $56,048 $66,759 $78,078 Revenues Available After Debt Service $8,709 $4,092 $6,683 $10,484 $11,824 $13,031 Projected Debt Service Coverage (f) Senior Lien Debt Service Coverage 1.57x 1.58x 1.69x 1.67x 1.55x 1.47x Senior Lien & Subordinate Lien DS Coverage 1.26x 1.11x 1.14x 1.19x 1.18x 1.17x * Totals may not add due to rounding. ** Fiscal Year 2013 results are projected because the Water Utility s audited financial statements for such fiscal year are not yet complete. (a) Projection is based on anticipated cost to provide service under City-County Water Agreement. Assumes Baltimore County cash is received in the fiscal year that the revenue is accrued. However, the County settlement does not occur until the subsequent fiscal year, resulting in some portion of revenues remaining uncollected until the subsequent fiscal year. (b) For Anne Arundel, Howard and Carroll Counties, projection based on historical usage plus anticipated rate increases. For Harford County, projection based on anticipated cost to provide service under the City s agreement with Harford County. (c) Includes interest on Debt Service Reserve Fund, Operating Reserve Fund and Residual Reserve Fund. Assumed interest rate of 0.50% in Fiscal Year 2013, 0.70% in Fiscal Years , and 2.00% in Fiscal Year 2017 and (d) Increased charges are assumed to be adopted each year in April/May/June (effective the following fiscal year) prior to the issuance of additional indebtedness. (e) Estimated based on line item forecasts. (f) Per Water Resolution, certain additional expenses paid before debt service. (g) (h) Excludes transfers to/from the Residual Fund. Senior and subordinate lien debt assumed to be issued at end of each fiscal year to fund projects in the following fiscal year. Senior lien debt (other than MDE loans) and subordinate lien debt issued after the Series 2013 Water Bonds assumed to have interest rates ranging from 4.75% to 5.5% and 30-year term. Future MDE loans are assumed to be issued on a senior lien basis with a 1% interest rate and a 30-year term. Adjusted for capitalized interest (net debt service)

75 WATER UTILITY CAPITAL IMPROVEMENT PROGRAM The Water Utility Capital Improvement Program is part of the City s general development plan and consists of a one-year capital budget and a recommended capital program for the succeeding five-year period. The Water Utility s recommendations as to capital improvements are transmitted through the Director of Public Works to the City s Department of Planning. After holding formal hearings, the City s Planning Commission sends its recommended Capital Improvement Program to the Board of Estimates. Before any action is taken by the Board of Estimates, the plan is reviewed by the Department of Finance. After considering the recommendations of the Planning Commission and the Department of Finance and testimony of the originating agencies, the Board of Estimates approves a Capital Budget for the ensuing fiscal year and a recommended Capital Improvement Program for the succeeding five-year period. The Board of Estimates then transmits the Capital Budget and six-year Capital Improvement Program to the City Council; the Capital Budget is subject to final approval by the City Council as part of the annual Ordinance of Estimates. The City Council can approve the Capital Budget as presented or can make reductions in the Board of Estimates recommendations, but it cannot increase the amounts fixed by the Board or add any amount for any new purpose. Capital Needs The Water Utility Capital Improvement Program addresses three major areas of need: supply improvements, treatment improvements and other programs in addition to normal annual improvements and expansion of plant services. A summary of projected funding sources for fiscal years 2014 through 2019 is set forth in the following table. Following the table are narrative descriptions of the Water Utility s specific areas of capital needs and the particular projects currently scheduled to be financed under the Capital Improvement Program to meet those needs. The Capital Improvement Program allows for sufficient funds to provide for the necessary expansion, make the required major repairs and provide for the proper level of normal annual additions for the Water Utility. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

76 Projects TREATMENT PLANTS Water Utility Capital Improvement Program Projected Sources of Funds ($000 s) Revenue State County Utility Bonds Funds Funds Funds Total Fullerton Water Filtration Plant $195,750 - $467,750 - $663,500 Montebello Water Recycle Program 41,721 29,959 71,680 Montebello WFP Filter Renovations 66,556 44, ,904 Montebello WFP Laboratory Facilities 9,860 6,572 16,432 Chlorine Handling Safety Improvements 40,952 33,399 74,351 Montebello Washwater Lake Dredging 2,558 1,917 4,475 Ashburton Chemical Laboratory TOTAL TREATMENT PLANTS $357,831 $0 $584,380 $0 $942,211 DISTRIBUTION SYSTEM Monitoring Water Transmission Mains 1,835 13,751 11,916 27,502 Guilford Finished Water Reservoir Improvements 25,013 40,810-65,823 Ashburton Finished Water Reservoir Improvements 114,860 76, ,300 Druid Lake Finished Water Reservoir Improvements 110,203 76, ,555 Water Supply Tunnels Inspection & Rehabilitation 3,277 5,125-8,402 Water Infrastructure Rehabilitation 670,468 26,610 2, ,528 Valve and Hydrant Replacement Annual 8,535 30,503 29,314 68,352 Susquehanna Transmission Main Valve Replacement 5,562 4,325-9,887 Water Meter Replacement Program 123,463 98,532 9, ,870 Citywide Fire Hydrant Replacement 8,250 8,250 16,500 Water Audit 11,773 8, ,600 TOTAL DISTRIBUTION SYSTEM $1,074,989 $0 $389,625 $62,705 $1,527,319 OTHER Water Facilities - Annual Improvements 35,140 26,125 4,800 66,065 Urgent Needs Water Engineering Services 27,437 7,593 75, ,450 Maintenance Building at Loch Raven Dams 10,349 6,932-17,281 Maintenance Building at Liberty Dam 21,326 14,226-35,552 Guilford Water Pumping Station Improvements 12,210 17,703-29,913 Vernon Water Pumping Station Improvements 16,498 10,659-27,157 Cromwell Water Pumping Station Improvements 10,215 15,979-26,194 Pikesville Water Pumping Station Improvements 12,750-12,750 Towson Water Pumping Station Improvements ,870-13,000 Ashburton Water Pumping Station Improvements 25,267 22,407-47,674 Reservoir Area Roads & Culvert Repair & Rehab 42,358 28,442-70,800 Administration Building 7,780 7,780-15,560 Watershed Bridge Maintenance 51,646 34,786-86,432 Earthen Dam Improvement Program 6,611 3,668-10,279 TOTAL OTHER $266,967 $0 $221,920 $80,220 $569,107 TOTAL CAPITAL IMPROVEMENT PROGRAM $1,699,787 $0 $1,195,925 $142,925 $3,038,

77 Supply Improvements The Water Utility owns approximately 17,000 acres of watershed area in Baltimore and Carroll Counties. Maintenance and improvements to the watershed area involve rehabilitation to bridges and dams, and repairs to reservoirs to improve water circulation. The six-year Capital Improvement Program includes $243,664,000 for improvements to watershed bridges, roads and infrastructure. Treatment Plant Improvements The Capital Improvement Program includes $663,500,000 for the construction of a new Water Filtration Plant in the Fullerton area of Baltimore County. The facility is needed to meet the projected demands of the Water Utility service area and to provide additional filtered water to zones of Baltimore City during drought periods. The Plant will treat water from the Susquehanna River and will have an initial capacity of approximately 120 mgd. The six-year capital improvements for the Montebello Treatment Plant total $203,491,000. Planned projects include several new facilities and improvements to existing facilities. $869,000 is included for a new chemical laboratory at the Ashburton Treatment Plant. $176,515,000 is included for various improvements to the treatment plants and for urgent needs water engineering services. $74,351,000 is included for improvements in safety of handling chlorine. Distribution System Annual Improvements The six-year Capital Improvement Program includes $1,527,319,000 for distribution system improvements. Projects are funded on an as-needed basis and for ongoing programs such as cleaning and lining, water main installations, water meter replacement, and valve and hydrant replacement. Capital Improvements Benefiting the Counties Under the terms of the City-County Water Agreement (see FINANCIAL OPERATIONS OF THE WATER UTILITY City-County Water Agreement ), the City and Baltimore County agree to be responsible for their respective proportionate shares of capital projects that are mutually beneficial to them. In addition, Baltimore County must approve the project and certify that funds are available to pay its proportionate share of the local costs. The City bills Baltimore County for its share monthly based on costs incurred during construction. Baltimore County is responsible for the entire cost of capital improvements which will benefit it alone. The current six-year Water Utility Capital Improvement Program includes $3,038,637,000 of improvements, of which $1,195,925,000 is attributable to Baltimore County. Howard and Anne Arundel County customers pay for their share of rehabilitation capital projects of the Water Utility that benefit them through the rates for service established, billed and collected by the City

78 The American Recovery and Reinvestment Act of 2009 The American Recovery and Reinvestment Act of 2009 was passed into law in February 2009 to provide new funds available for water and wastewater infrastructure projects in Maryland. These funds were allocated to the U.S. Environmental Protection Agency, to be administered by the Maryland Department of the Environment through the Drinking Water Revolving Fund Program. The City identified projects that met the criteria for participation in the stimulus funding and submitted the requisite applications for each project. The City was awarded $17,000,000 from the Drinking Water Revolving Loan Fund with an interest rate of 0.0% as well as a grant of $1,500,000. Homeland Security Grant Program A Buffer zone protection grant in the amount of $263,250 was awarded from the Department of Homeland Security through Baltimore County Police Department. The grant will fund security enhancements at the City s wastewater treatment plant and the watershed area. UNACCOUNTED FOR WATER The unaccounted for water percentage for the fiscal year ended June 30, 2012 was 15.89%. The percent of water unaccounted for in Baltimore s distribution system has remained stable over the past 10 years, fluctuating between 15.8% and 23.2%. While the level of unaccounted for water is influenced by external factors such as weather, consumption, and breaks on large transmission mains, the City is making a significant effort to reduce system losses through a comprehensive program of water main rehabilitation, system audits, and valve exercising. The City is rehabilitating approximately three to five percent of the distribution system annually through its capital improvement program. Since 2002, the City has maintained a contract to undertake Water System audits for the purpose of reducing unaccounted for water. The City has secured fire hydrants, in areas where they are frequently opened by unauthorized individuals, to prevent this unauthorized access. This reduces the unaccounted for water. In addition, the City continues systematic leak detection efforts to reduce unaccounted for water and to identify small leaks before they develop into major leaks resulting in significant water losses. Wastewater System Service Area THE WASTEWATER SYSTEM The Wastewater Utility, through its system of sanitary sewers, interceptors, pumping stations and wastewater treatment facilities, provides for the treatment and disposal of sanitary sewage flow of approximately two-thirds of the population of the Baltimore metropolitan area. The wastewater system presently receives wastewater directly from portions of Anne Arundel and Baltimore Counties, as well as the City. In addition, portions of Anne Arundel and Howard Counties discharge wastewater into the system through Baltimore County, and Baltimore County recovers the costs attributable to the treatment of such wastewater from those Counties. Total annual flows treated by the City have shown no significant growth over the last ten years The

79 Back River Treatment Plant influent flow averaged mgd for fiscal year The Patapsco Treatment Plant influent flow averaged 62.0 mgd for fiscal year Therefore the system total influent flow for fiscal year 2013 was mgd. Based on overall projected increases in service area population, system-wide demand is expected to modestly increase during the next ten years. Collection System The Wastewater Utility s service area contains two major drainage areas, separately served by the Wastewater Utility s two treatment plants (see Treatment Plants below). The City owns and operates the wastewater collection system within its corporate limits, and the Counties own and operate the collection systems within their respective limits. The Wastewater Utility s collection system consists of approximately 1,340 miles of sanitary interceptors and main line sewers, some in operation since As of 2005, the sewage collection system is separate from the storm water system. Various materials have been used to construct the collection system, including ductile iron, cast iron, vitrified clay, reinforced concrete, and plastic pipes. Most of the collection system was installed prior to the requirement that pipe joints be of the compression type designed to limit groundwater infiltration and wastewater exfiltration. The wastewater collection system is in good condition, but, as with any system with approximately 100 years of service, an intensive schedule of inspection followed by rehabilitation is in progress to ensure continued operation without disruption of service. In addition, portions of the wastewater collection system will have to be rehabilitated in light of the Consent Decree described in the Environmental Compliance section hereof. Pumping Stations The majority of the wastewater in the Baltimore collection system flows to the City s two wastewater treatment plants by gravity; however, approximately 50 mgd are pumped from the various low points in the system, representing approximately 26% of the combined flow to both plants. The Pumping Stations Section of the Wastewater Facilities Division currently consists of nine major pumping stations and numerous smaller facilities, with a total capacity of approximately 304 mgd. Most of the larger facilities have bar screen units to remove some of the larger solids such as debris and tree limbs before the water flows to one of the treatment plants. The latest improvements include renovation to the Eastern Avenue Pumping Station, including the installation of backup electrical generators, which was completed in April 2010, and the construction of the new 20 mgd Stony Run Wastewater Pumping Station, which, was required for Consent Decree-related improvements and completed in May Systems Control and Data Acquisition Upgrades The pumping stations and sewage metering stations have a Systems Control and Data Acquisition (SCADA) that provides equipment status, alarms, and for the metering stations, sewage flows, to a central location. The upgrade project consisted of hardware and software upgrades and enhancements to provide improved operations and station status data to the City s central monitoring location and cellular technologies to eliminate land lines. These upgrades are

80 scheduled to be completed in On the metering station side, the SCADA system is also being upgraded to improve reliability. Treatment Plants Treatment of wastewater is provided by the Back River Wastewater Treatment Plant (the Back River Plant ) and the Patapsco Wastewater Treatment Plant (the Patapsco Plant ). The major treatment processes employed by the plants include primary treatment for the removal of material suspended in the wastewater ( suspended solids ); secondary treatment for biological reduction of pollutants which adversely affect the oxygen content in the receiving waters ( biochemical oxygen demand ); tertiary treatment for nutrient removal; disinfection to kill harmful bacteria; and solids handling for management and recycling of solid material ( biosolids ), a by-product of wastewater treatment. Back River Wastewater Treatment Plant Preliminary Treatment. Preliminary treatment consists of screening through fine screens and grit removal. A study is currently underway to make improvements to the headworks and to evaluate the need for wastewater storage at the plant due to collection system improvements under the Consent Decree. Primary Treatment. Primary treatment at Back River Plant consists of clarification in a battery of eleven primary settling tanks. Construction to renovate Primary Clarifiers No. 3 through No. 7 are underway and are scheduled for completion in the Spring Secondary Treatment. Secondary treatment at the Back River Plant consists of three parallel, activated sludge facilities with design flows of 30, 75 and 98 mgd, respectively. Activated I was built in the 1950 s and 1960 s as a constant flow facility with an expansion taking place in This facility was renovated and converted to Biological Nutrient Removal (BNR) in Activated II was built in 1988 as a conventional activated sludge facility and was renovated and retrofitted for BNR in May Activated III was designed and constructed as a BNR facility and placed in service in August Activated II and III are both in service and are performing as designed. Renovation of the 12 secondary clarifiers of Activated II (SC- 802) was completed in January Advanced Waste Treatment. In addition to the BNR upgrades noted above, the National Pollutant Discharge Elimination System (NPDES) permit for the Back River Plant requires the removal of phosphorus. To accomplish this, a chemical containing iron (ferrous chloride) is added that reacts with phosphorus forming a precipitate that can be removed in clarifiers or in sand filters. Ferrous chloride is stored at the chemical storage and pumping facility, which along with the sand filters were placed in service in Both of these facilities are in service and performing as designed. Disinfection. The disinfection facilities of the Back River Plant consist of chlorine contact tanks, a re-aeration cascade and the outfall structure. Bacterial kill is accomplished through the use of sodium hypochlorite (bleach); dechlorination is by sodium bisulfate addition, while adequate dissolved oxygen is provided through post aeration. Discharge to Back River is via the outfall structure. These facilities were placed in operation in 1989 and have met effluent

81 limitations. A second outfall delivers treated wastewater to the former steel facility located at Sparrows Point, where historically it had been reused for cooling and other industrial purposes. This water is subsequently discharged to the Patapsco River under the steel facility s permit. Because the steel facility is no longer in operation, the current owner of the facility has sought to terminate the City s ability to discharge effluent through the facility s pipelines. The City has contested the facility owner s right to such termination, and the dispute is currently in litigation. At the same time, the City is exploring several possible solutions to meet its permitted discharge requirements, including a negotiated resolution with the owner of the former steel facility, construction of additional pipelines, and development of a new discharge location. Solids Handling and Treatment. Solids at the Back River Plant resulting from primary, secondary and tertiary treatment are processed by degritting, thickening, anaerobic digestion and dewatering. As part of preliminary treatment, the wastewater passes through grit tanks; however, some grit remains in the primary sludge and this is removed in cyclone degritters. Primary sludge is thickened in six gravity sludge thickeners. Thickening of secondary sludge is accomplished by two dissolved air flotation thickeners and five gravity belt thickeners. An additional three gravity belt thickeners will be installed under Contract SC-8526, which is under construction with a scheduled completion date of July Stabilization of sludge is provided by anaerobic digesters in which microorganisms, capable of living in the absence of oxygen, produce a combustible gas (methane) as a byproduct. In December 1992, the digestion system was expanded with the addition of two eggshaped digesters with a capacity of three million gallons each. These are in addition to the six conventional digesters with capacity of 1.3 million gallons each for a total capacity of 13.8 million gallons. Digestion facilities improvements will be made under SC Improvements will include one new Acid Phase Reactor that is expected to increase volatile solids destruction, subsequently reducing the amount of solids to be processed. This will result in reduced cost of solids disposal. In addition, this project includes the renovation and expansion of the Gravity Belt Thickening Facility and the renovation of the existing in-ground anaerobic digesters. The scheduled completion date of this contract is July Sludge dewatering is accomplished in a centrifuge dewatering facility placed in service in January In Fiscal Year 2013, 25% of the total solids production at the Back River Plant was processed through the dewatering system. The remainder of the sludge is pumped directly to the heat drying facility. Solids Disposal. Solids disposal at the Back River Plant is accomplished under private contracts utilizing composting and heat drying. The current composting agreement commenced in March 2008 and allows for a guaranteed monthly tonnage of 2,167 wet tons of sludge (approximately 700 dry tons of sludge per month) to be processed at the composting facility. This privatized contract had a second five (5) year extension approved June 1, An additional 55 dry tons of sludge per day is processed at the privatized heat drying facility, located at the Back River Plant. This facility commenced commercial operation in January 1995 under a contract that extends to the year Liquid digested sludge is pumped to the heat drying facility where it is dewatered, dried, converted to pellet form and marketed as a fertilizer amendment

82 Additional Requirements. The Wastewater Utility has aggressively addressed plant odor problems by installing chemical scrubbers at seven major odor generation sites around the plant. This effort has successfully reduced the number of odor complaints from 1989 s high of 392 complaints per year to four complaints during the period July 1, 2012 through June 30, Additional chemical scrubbers have been installed for the control of odors coming from the primary clarifiers. Patapsco Wastewater Treatment Plant Preliminary/Primary Treatment. Preliminary and primary treatment at the Patapsco Plant consists of grit removal, screening, and clarification. Hydraulic capacity of the primary facility is 105 mgd, providing sufficient capacity to handle most peak flows experienced at the Patapsco Plant. Renovations of the gravity sludge thickeners began in November 2008 and were completed in December New chemical storage and feeding facilities and renovations of the fine screen facility are under construction under Contract SC-855. Renovations to the primary clarifiers are also included in SC-855, which is scheduled for completion in December Secondary Treatment. The Patapsco Plant currently provides secondary treatment utilizing pure oxygen activated sludge process. A new Reactor Control Building and miscellaneous improvements to the mechanical and electrical systems have been completed and have been performing satisfactorily for several years. The original activated sludge system, placed in service in 1980, has a design capacity of 87.5 mgd and includes special covered reactors, clarifiers, a return sludge pumping station and a pure oxygen generation system. This system was modified in 1987 to provide biological phosphorus removal using a patented Anaerobic/Oxic (A/O) process. The Patapsco Plant also uses ferric chloride to assist in meeting the effluent limits for total phosphorus. The secondary treatment system was expanded to a hydraulic capacity of 105 mgd with the addition of two reactors, four clarifiers, and a sludge pumping station. These facilities were placed in service in 1993 and are sized to handle the additional capacity necessary for projected Baltimore County population growth. These facilities also include additional ferric chloride storage for chemical phosphorus reduction. In order to increase operational efficiency, construction to improve Return Sludge Pump Stations and to consolidate the chemical feed system was completed in January In January 2008, work began on major upgrades to the Process Control Instrumentation for the Liquid Oxygen Plant and was completed in March Contract SC-868 completed design in December 2012 to install above ground oxygen piping and atmospheric vaporizer at the Liquid Oxygen Plant and is scheduled to complete construction in December of Disinfection. Disinfection at the Patapsco Plant is accomplished by chlorination prior to discharge to the Patapsco River. These chlorination facilities, last expanded in 1991, allow the plant to meet residual chlorine limits. New disinfection facilities utilizing bleach and sodium bisulfite rather than chlorine and sulfur dioxide gas are under design, to be bid in the last quarter In the interim, the Plant is using bleach on a full time basis, using the temporary bleach system provided under construction contract SC-852R. This temporary bleach system was

83 installed so the contractor could relocate the existing chlorine lines and utilities to allow piles to be driven in this area as part of the ENR construction under SC-852R. Solids Handling and Disposal. Processes for handling sludge at the Patapsco Plant include degritting and gravity thickening. Because of EPA regulations (40 CFR Part 503), the Wastewater Utility decided to treat and dispose of the sludge from the Patapsco Plant via a privatized heat drying and pelletization process which provides environmentally beneficial reuse of the material. All current sludge production is heat dried, pelletized and marketed as a fertilizer amendment. The Number 2 dryer was rehabilitated due to an April 2010 fire and was placed in service in March Additional Requirements. At the Patapsco Plant there are deposits of chromecontaminated soil, some of which are being stored in a State-approved containment area on-site. If this area is needed for future development, this soil will have to be moved off site and decontaminated or moved to an approved facility. The design for the upgrade of the Patapsco Plant with state-of-the-art facilities for the removal of nitrogen indicates that the required new facilities can be constructed on the site without impacting this containment area. Patapsco and Back River Wastewater Treatment Plants ENR Upgrades The new NPDES permit for the Patapsco Plant (10-DP580) was issued on October 1, The new permit contains effluent criteria limits for biological oxygen demand, suspended solids, phosphorus, nitrogen, enterococcus, residual chlorine, dissolved oxygen and ph. In addition, the City is supporting the implementation strategy of the Chesapeake Bay Agreement updated in 2000 to improve the water quality in the Chesapeake Bay. MDE has adopted draft effluent criteria for wastewater treatment facilities known as Enhanced Nutrient Reduction ( ENR ) limits to address the Chesapeake Bay Agreement goals. In 2006, the City and MDE signed an Agreement instituting ENR at the Patapsco Plant limiting nitrogen discharges to 3 milligrams per liter of effluent ( mg/l ) and phosphorus discharges to 0.3 mg/l. To meet the agreed nitrogen and phosphorus limits, the City created three ENR contracts (SC-852R, SC-855 and SC-845R). Construction commenced in December 2009 for site excavation, driving of 1,652 piles, relocation of plant utilities and the construction of 34 De- Nitrification Filters (SC-852R). The construction contract for plant-wide modifications to support the ENR process (SC-855) is anticipated to be completed in December The installation of 22 Biological Aerated Flooded Filters (BAFF), pumping station and other related work (SC-845R) is anticipated to be completed in March The City is also anticipating changes to limits in the Back River Plant NPDES permit requiring further reductions to the current nitrogen limits at this 180 million gallon per day (design flow) facility. The City began operating a Biological Nutrient Reduction (BNR) facility at Back River over 15 years ago in an effort to improve the water quality in the Bay and reduce nitrogen and other pollutants noted above. In 2006, the City and MDE signed an Agreement instituting ENR at the Back River Plant limiting nitrogen discharges to 3 milligrams per liter of effluent (mg/l) and phosphorus discharges to 0.3 mg/l. As a result, the City has retained consultants to design facilities for enhanced nitrogen removal at the plant. These upgrades will be completed in two phases and will be on line by December The City was issued the new

84 Back River NPDES permit renewal (DP-0581) by MDE on May 1, The City owns and operates the two largest wastewater treatment plants in the State of Maryland. The projected capital investment required for the ENR upgrades at the Back River and Patapsco Plants is approximately $950,000,000. Bay Restoration Fund The State of Maryland passed legislation in May 2004 establishing a Bay Restoration Fund (the BR Fund ) to finance the upgrade of wastewater treatment plants in the State of Maryland to achieve state-of-the-art ENR. During the 2012 State of Maryland Legislative Session, HB 0446 was passed which doubled the flat rates applied to residential customers effective July 1, The revised rates are outlined below. An environmental surcharge has been set at $5.00 per month per household; a surcharge on businesses is based on the wastewater they generate. Since the City bills customers quarterly, residential customers are charged a flat rate of $15.00 on each quarterly billing. The City began billing the fee to property owners for accounts located within Baltimore City in January of Collected fees are remitted to the Comptroller of the State of Maryland. In April 2005, as allowed by State law, the City implemented, with the consent of MDE, a Bay Restoration Fee Financial Hardship Exemption Program for low- and fixed-income residential customers. Customers who meet the eligibility criteria will be exempt from this fee for one calendar year. Exemptions cannot be made retroactively and must be re-established each year. The BR Fund is administered by MDE. The BR Fund will reimburse up to 100% of eligible costs for planning, design, and construction of upgrades to achieve ENR. It is expected that MDE will prioritize plants to be upgraded based on their ability to achieve the largest nutrient reduction needed for Maryland to meet its commitments under the 2000 Bay Agreement. Since the Back River and Patapsco Plants are regional facilities that treat large volumes of wastewater, they are among the largest point source contributors of nutrients into the Chesapeake Bay. The City has received approval from the State for up to 71.5% grant funding for the Patapsco ENR project. The City is waiting to finalize the exact grant funding percentage determination for the Back River ENR projects and has received funding of 93.44% of the first project SC 877. System Operation and Maintenance The Wastewater Utility s current operation and maintenance procedures and staffing levels are sufficient to ensure continuation of wastewater services. The computerized Maintenance Management System, placed in service in 1993, was upgraded in 2004 with a new processor and the latest version of the software. This system enhances the preventive maintenance capability of the Wastewater Utility and streamlines the inventory and ordering of parts and supplies. The Wastewater Facilities Division will advertise a Request for Proposal (RFP) for a new upgraded maintenance management system The Wastewater Utility s fleet of vehicles is currently in good repair. A vehicle replacement program is maintained on a continual yearly basis. This replacement and

85 maintenance program requires continued attention as the Wastewater Utility contemplates increased vehicle utilization and a replacement schedule based on the physical condition of the vehicles. Rates FINANCIAL OPERATIONS OF THE WASTEWATER UTILITY In November 1978, the voters of the City approved the Charter Amendment establishing the Wastewater Utility as a separate enterprise and requiring that the Wastewater Utility be financially self-sustaining and operated without profit or loss to the other funds or programs of the City. In addition, the Charter Amendment requires the City to approve a separate budget for the Wastewater Utility. As required by the Charter Amendment, in December 1978, the City Council adopted Ordinance 941 establishing, among other things, a mechanism for the determination of rates and charges. Ordinance 941 requires that the Board of Estimates, upon the recommendation of the Director of Finance and the Director of Public Works, establish rates and charges sufficient to make the Wastewater Utility self-supporting at all times and that it adjust the rates if the projected statement of revenues, expenses and changes in equity for the current fiscal year anticipates a loss and the actual results for the immediate prior year resulted in a loss or deficit. In addition, Ordinance 941 requires that the rates so established shall be at a level sufficient to recover any accumulated deficit from prior years. On July 3, 2013, the Board of Estimates approved increasing the water and sewer rates by an additional 15.0% effective July 3, 2013, 11% effective July 1, 2014, and 11% effective July 1, Retail wastewater rate increases over the past 31 years and the next two years are as follows: Wastewater Utility Rate Increases Date % Increase Date % Increase April April July 1982 (2.7) April April April April 1992* 18.0 May April 1992** 46.0 June April June June May May June April July April July *** April July *** * Residential ** Commercial/Industrial *** Approved by the Board of Estimates in 2013, but not yet effective

86 Current Rate Structure The revenues of the Wastewater Utility are primarily derived from wastewater service charges, with a minor amount of revenues generated by charges for other services and interest earnings on investments. Wastewater service is billed quarterly to customers in the City on the basis of a minimum quarterly charge and flow charges per one hundred cubic feet (Ccf) of metered water consumption up to a predetermined unit volume per meter size. The current rate for all consumers is $4.944 per one hundred cubic feet of metered water consumption. The existing schedule of wastewater rates is as follows: Minimum Quarterly Charges for Metered Wastewater Service Meter Size (inches) Rate Consumption Allowed (Ccf) Meter Size (inches) Rate Consumption Allowed (Ccf) $ $1, , T* , , , , , , T* , , * T denotes Townhouse. Modified March 15, One-inch metered townhouses built after July 1, 1992, requiring sprinklers (1 dwelling unit). Two-inch metered townhouses built after July 1, 1992 requiring sprinklers (maximum 2 dwelling units). Customers with higher than normal concentrations of pollutants in their wastewater are assessed a surcharge designed to recover the costs of treating such higher-strength wastes. The City is obligated by statute to provide wastewater treatment and disposal services to Baltimore County at cost. The current method of determining the cost to serve Baltimore County is set out in a City-County Sewerage Agreement dated March 6, 1974 (the City-County Sewerage Agreement ). In general, Baltimore County is required to pay a share of the Wastewater Utility s operation and maintenance expense related to jointly used facilities in proportion to its wastewater usage. A similar agreement with Anne Arundel County is in effect with respect to a portion of that County s wastewater. See FINANCIAL OPERATIONS OF THE WASTEWATER UTILITY City-County Sewerage Agreement. Below is a table showing wastewater revenues from the various subdivisions served by the Wastewater Utility as projected in the fiscal year 2014 budget: Subdivisions Revenues ($000s) % of Total Baltimore City $ 141, % Counties 72, % Total $ 217, %

87 Major Users The Wastewater Utility s individual accounts, which are located in Baltimore City, are subject to Rates and Charges established by the City. The following list of the Wastewater Utility s ten largest users is drawn from the City s records of its metered water accounts with one-inch or larger meters (except that all metered accounts of the City government and the Housing Authority of Baltimore City are included regardless of the size of the account). The users on this list may be responsible for other smaller accounts that are not reflected below. Billing in Calendar City Customers Year 2011 Mayor and City Council $6,987,143 Housing Authority of Baltimore City 3,198,403 Johns Hopkins Hospital 2,308,717 John Hopkins University 1,157,937 University of Maryland System 805,783 State of Maryland (Prison System) 781,306 Domino 532,118 Baltimore Zoo 374,286 VCK Realty, LLC 331,388 Md. Port Administration 283,970 Total $16,761,051 The City is experiencing no collection difficulties with any of the foregoing major users. City-County Sewerage Agreement The City provides wastewater services to parts of Baltimore County at cost. The City s supply of such services to the County is presently governed by the City-County Sewerage Agreement, which among other things establishes the methods by which the County s share of the Wastewater Utility s costs is to be determined. Among the costs to be apportioned are the costs of operation, maintenance and administration, major repairs and capital projects during construction. During the course of each fiscal year, the County pays quarterly installments to the City based on the costs determined for the last year as to which a settlement was made. Within 60 days of the date settlement is reached for that year, the County is required to pay, or the City is required to remit, as the case may be, the difference between the amount determined in the settlement and the amount the County paid during the year. Thus, in a year during which costs attributable to the County have increased significantly over the previous year, the Wastewater Utility will experience a shortfall in County revenues which will be made up sometime after the end of the year. The City has a similar agreement with Anne Arundel County under which the Wastewater Utility receives and treats a portion of that County s wastewater. Because the

88 revenues received from Anne Arundel County are relatively small, the timing of their receipt has no significant impact on the Wastewater Utility. Summary of Historical Operating Results and Coverage The Wastewater Utility has operated as a separate enterprise of the City on a selfsustaining basis since July 1, The following table contains, for the Wastewater Utility s fiscal years 2009 to 2013, summary operating results including debt service coverage requirements. Summary of Historical Operating Results ($000 s) Total Revenues $179,873 $160,076 $166,072 $158,305 Transfer (to) from Rate Stabilization Fund - - 3,000 1,200 Total Operating Expenses (119,356) (110,131) (115,762) (121,123) Net Revenues $60,517 $49,945 $53,310 $38,382 Debt Service Senior Lien Revenue Obligations $35,177 $35,156 $35,643 $25,585 Subordinate Lien Revenue Obligations 9,790 9,818 6,805 8,725 Total Debt Service $44,967 $44,974 $42,448 $34,310 Senior Lien Debt Service Coverage 1.72x 1.42x 1.49x 1.50x Total Debt Service Coverage 1.34x 1.11x 1.25x 1.11x *Estimated and unaudited. Summary of Projected Operating Results and Coverage The following table sets forth the Wastewater Utility s projection of its operating results and coverage requirements for the fiscal years 2013 through These projections are based on the Wastewater Utility s projected rate increases, the Wastewater Utility s forecasted revenues and operating and maintenance expenses, the estimated debt service requirements on revenue obligations and the terms and conditions contained in the Wastewater Resolution. The forecasts in the following table are not guarantees of future performance. Actual results may vary materially from those forecasts as a result of various risks and uncertainties that include, among others, increases in personnel costs and other operating costs, additional regulatory requirements and adverse developments in general economic conditions. With respect to the Revenue Obligations bearing interest at a variable rate, all of which is currently in an Auction Rate Mode, and for all of which the City has entered into Hedge Agreements, the rate or rates of interest paid under such Hedge Agreements are reflected in the table below. However, on occasion, the City has experienced an increase in its debt service costs associated with its Variable Rate Indebtedness in excess of the amounts payable to the City pursuant to the Hedge Agreements. See SECURITY FOR THE SERIES 2013 WASTEWATER BONDS - Certain Outstanding Indebtedness. With respect to the Series

89 2002-B Bonds and the Series 2002-C Bonds, the Maximum Dutch Auction Rate is the product of the Auction Index multiplied by the Auction Multiple, but in no event in excess of 14%. The Auction Index is the Seven-Day AA Non-Financial Composite Commercial Paper Rate on such date. The Auction Multiple is a percentage of the Auction Index, based on the then prevailing rating of the Series 2002-B Bonds and the Series 2002-C Bonds by S&P and Moody s (based on the Insurer, Financial Guaranty Insurance Company). For so long as the prevailing rating is below BBB/Baa, the Auction Multiple is 225%. With respect to the Series 2004A Wastewater Bonds, the Maximum Dutch Auction Rate is the product of the Auction Index multiplied by the Auction Multiple, but in no event in excess of 15%. The Auction Index is the Seven-Day AA Non-Financial Composite Commercial Paper Rate on such date. The Auction Multiple is a percentage of the Auction Index, based on the then prevailing rating of the Series 2004A Wastewater Bonds by S&P and Moody s (based on the Insurer, XLCA). For so long as the prevailing rating is A-/A3, the Auction Multiple is 200%; in the event the prevailing rating drops to BBB/Baa, the Auction Multiple will be 250%; in the event the prevailing rating drops below BBB/Baa, the Auction Multiple will be 275%. As described in PLAN OF FINANCE THE SERIES 2013 WASTEWATER BONDS above, the City is refunding the Refunded Wastewater Auction Rate Bonds with proceeds of the Series 2013B Wastewater Bonds and Series 2013C Wastewater Bonds. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

90 Summary of Projected Operating Results* ($000 s) Fiscal Year Ending June ** Revenues: Baltimore City $118,383 $118,383 $135,056 $148,611 $163,507 $186,430 Baltimore County (a) 63,111 69,950 75,355 77,056 81,018 83,541 Transfer (to) from Rate Stabilization Fund 4,750 2,000 5,500 5,000 (2,000) (9,500) Other Revenue 6,460 7,006 7,619 8,297 8,297 8,297 Interest Revenue (b) Revenue from Increased Charges (c) - 16,673 13,555 14,896 22,923 14,905 Total Revenues $192,704 $214,390 $237,453 $254,204 $274,059 $284,581 Operating Expenses: Operating and Maintenance Expenses (d) $133,945 $146,409 $157,350 $161,466 $169,146 $174,355 Less: Additional Expenses (e) Net Revenues Available for Debt Service (f) $58,159 $67,380 $80,001 $92,138 $104,313 $109,626 Debt Service: Senior Lien Revenue Obligations (g) $41,674 $42,813 $47,876 $59,633 $68,920 $75,669 Subordinate Lien Revenue Obligations (g) 9,843 14,528 17,949 18,699 18,732 18,765 Total Debt Service $51,517 $57,340 $65,825 $78,332 $87,651 $94,433 Revenues Available After Debt Service $6,642 $10,040 $14,177 $13,806 $16,662 $15,192 Projected Debt Service Coverage Senior Lien Debt Service Coverage 1.40x 1.57x 1.67x 1.55x 1.51x 1.45x Senior & Subordinate Lien DS Coverage 1.13x 1.18x 1.22x 1.18x 1.19x 1.16x * Totals may not add due to rounding. ** Fiscal Year 2013 results are projected because the Wastewater Utility s audited financial statements for such fiscal year are not yet complete. (a) Projection is based on anticipated cost to provide service under City-County Sewerage Agreement. Assumes Baltimore County cash is received in the fiscal year that the revenue is accrued. However, the County settlement does not occur until the subsequent fiscal year, resulting in some portion of revenues remaining uncollected until the subsequent fiscal year. (b) Includes interest on Debt Service Reserve Fund, Operating Reserve Fund and Residual Fund. Assumes interest rate of 0.50% in Fiscal Year 2013, 0.70% in Fiscal Years , and 2.00% in Fiscal Year 2017 and (c) Increased charges are assumed to be adopted each year in April/May/June (effective the following fiscal year) prior to the issuance of additional indebtedness. (d) Estimated based on line item forecasts, with the exception of an additional $3 million in FY 2015 and an additional $3 million in FY 2017 for increased costs related to ENR implementation at the Back River and Patapsco Treatment Plants. (e) Per Wastewater Resolution, certain additional expenses paid before debt service. (f) Excludes transfers to/from the Residual Fund. (g) Senior and subordinate lien debt assumed to be issued at end of each fiscal year to fund projects in the following fiscal year. Senior lien debt (other than MDE loans) and subordinate lien debt issued after the Series 2013 Wastewater Bonds assumed to have interest rates ranging from 4.75% to 5.5% and 30-year term. Future MDE loans are assumed to be issued on a senior and subordinate lien basis with a 1% interest rate and a 20-year term

91 WASTEWATER UTILITY CAPITAL IMPROVEMENT PROGRAM The Wastewater Utility Capital Improvement Program is part of the City s general development plan and consists of a one-year capital budget and a recommended capital program for the succeeding five-year period. The Wastewater Utility s recommendations as to capital improvements are transmitted through the Director of Public Works to the City s Department of Planning. After holding formal hearings, the City s Planning Commission sends its recommended Capital Improvement Program to the Board of Estimates. Before any action is taken by the Board of Estimates, the plan is reviewed by the Department of Finance. After considering the recommendations of the Planning Commission and the Department of Finance and testimony of the originating agencies, the Board of Estimates approves a Capital Budget for the ensuing fiscal year and a recommended Capital Improvement Program for the succeeding five-year period. The Board of Estimates then transmits the Capital Budget and six-year Capital Improvement Program to the City Council; the Capital Budget is subject to final approval by the City Council as part of the annual Ordinance of Estimates. The City Council can approve the Capital Budget as presented or can make reductions in the Board of Estimates recommendations, but it cannot increase the amounts fixed by the Board or add any amount for any new purpose. In June 2012, the United States Environmental Protection Agency ( EPA ) issued a new framework to help local governments meet their Clean Water Act obligations. The Integrated Municipal Stormwater and Wastewater Planning Approach Framework assists states and local governments in developing voluntary storm and wastewater management plans that will offer the greatest opportunity for cost-effective and protective solutions and implementing the most important projects first. The City is currently developing an integrated plan in consultation with EPA and the Maryland Department of the Environment ( MDE ) with the goal of identifying efficiencies in implementing sometimes overlapping and competing requirements that arise from the City s wastewater program and the consent decree entered into in 2002 with the EPA, including how best to make capital investments and meet operation and maintenance requirements. See ENVIRONMENTAL COMPLIANCE 2002 Consent Decree. Once adopted, the City s integrated plan will assist the Wastewater Utility in prioritizing the most environmentally beneficial projects and in the appropriate sequencing and scheduling of work. Capital Needs The Wastewater Utility Capital Improvement Program addresses three major areas of need: the Back River Plant, the Patapsco Plant and the Conveyance System in addition to normal annual improvements. The improvements to the Plants are based on detailed facilities plans which provide for meeting the requirements of future regional growth and maintaining stringent environmental standards. The projects will expand the capacity of the sanitary sewer system and help reduce pollution in the Chesapeake Bay and its tributaries. Back River Wastewater Treatment Plant Improvements to the Back River Plant comprise $1,145,934,000 of the total $3,003,534,000 six-year Wastewater Utility Capital Improvement Program. These projects

92 include plant-wide odor control, enhanced nutrient removal, and primary tank renovations. Improvements to the Patapsco Plant comprise $28,451,000 of the total $3,003,534,000 six-year Wastewater Utility Capital Improvement Program. These projects include a Centrate treatment facility, miscellaneous rehabilitation measures, and conversion of the chlorine disinfection system to sodium hypochlorite. Additional capital improvements may be required following the resolution of the City s dispute with the owner of the former Sparrows Point steel mill relating to the discharge of effluent through the steel facility s pipelines described above under THE WASTEWATER SYSTEM Back River Wastewater Treatment Plant Disinfection. Electrical Systems Upgrade One project totaling $137,816,000 is included to provide for an upgrade of the electrical system safety and reliability at the Back River and Patapsco Wastewater Treatment Plants as well as all wastewater pumping stations. Collection and Conveyance The Capital Improvement Program addresses the need to upgrade, renovate and rehabilitate the sewage collection and conveyance system. The total estimated cost of these improvements over the period covered by the Capital Improvement Program is $1,518,133,000. Normal Annual Improvements The Capital Improvement Program includes funds totaling $99,328,000 for ongoing programs such as improvements of security at wastewater facilities and providing Architectural/Engineering services to quickly address urgent needs throughout the sanitary system. A summary of projected funding sources for the Capital Improvement Program for fiscal years 2014 through 2019 is shown in the following table. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

93 WASTEWATER UTILITY CAPITAL IMPROVEMENT PROGRAM Projected Sources of Funds (000 s) Revenue State County Utility Bonds Funds Funds Funds Total TREATMENT PLANTS Annual Facilities Improvements $23,710 $47,680 $16,938 $88,328 WW Facilities Security Improvements 5,500 5,500 11,000 Electrical Systems Upgrade 68,908 68, ,816 Comprehensive Biosolids Management Plan 12,450 12,450 24,900 Back River Sparrows Point Outfall 16,706 16,706 33,412 Administration Building 7,780 7,780 15,560 PATAPSCO WWTP: Centrate Treatment Facility 3,571 1,824 5,395 Miscellaneous Rehabilitation 7,385 7,385 14,770 Chlorine Conversion 2,652 5,634 8,286 BACK RIVER WWTP: Primary & Influent Facilities Rehabilitation 139, , ,940 Plant-Wide odor Control 11,538 11,538 23,076 Enhanced Nutrient Removal (ENR) 169, , , ,918 TOTAL TREATMENT PLANTS $469,523 $504,212 $494,728 $16,938 $1,485,401 COLLECTION & CONVEYANCE Sewer System Rehabilitation Program - Gwynn s Falls Sewershed 94, , ,430 Sewershed System Rehabilitation Program Herring Run Sewershed 219,053 66, ,871 Sewershed System Rehabilitation Program - Low Level Sewershed 134,099 1, ,463 Sewer System Rehabilitation Program - High Level Sewershed 77,472 77,472 Sewershed System Rehabilitation Program - Patapsco Sewershed 31,065 7,886 38,951 Sewer System Rehabilitations Program - Main Outfall Sewershed 167, , ,217 Sewer System Rehabilitation Program - Dundalk Sewershed 13,073 9,469 22,542 House Lateral Connection Upgrade Program 57,200 57,200 Sanitary sewer Inspection Services 34,320 8,580 42,900 Sewer Overflow Elimination 59,896 24,648 84,544 Clinton Street Pump Station Force Main Improvements 3,330 3,330 Urgent Need Sanitary Services 114,101 13,000 77, ,463 GIS/Mapping Program 6,750 6,750 TOTAL COLLECTION & CONVEYANCE $1,006,164 $0 $427,857 $ 84,112 $1,518,133 TOTAL CAPITAL IMPROVEMENT PROGRAM $1,475,687 $504,212 $922,585 $101,050 $3,003,534 77

94 Capital Improvements Benefiting the Counties Under the terms of the City s agreements with Baltimore and Anne Arundel Counties, those jurisdictions agree to be responsible for their respective proportionate shares of capital projects that are mutually beneficial to them. Before the City commences work on such a project, the County involved must approve the project and certify that funds are available to pay its proportionate share of the local costs. The City bills the County for its share monthly based on costs incurred during construction. The six-year current Capital Improvement Program projects contributions totaling $922,585,000 from Baltimore County. The American Recovery and Reinvestment Act of 2009 The American Recovery and Reinvestment Act of 2009 (ARRA) was passed into law in February New funds made available included $92,800,000 for wastewater and stormwater infrastructure projects in Maryland. These funds were allocated to the U.S. Environmental Protection Agency, to be administered by the Maryland Department of the Environment through the established Water Quality Revolving Loan Fund. The City identified projects that met the criteria for participation in this stimulus funding and submitted the requisite applications for each project. As a result, Contract SC-852R, Patapsco Wastewater Treatment Plant Enhanced Nutrient Removal Denitrification, was selected to receive $6,000,000 in ARRA funding in the form of a principle forgiveness loan. The entire amount of this funding will be applied directly to the SC-852R construction contract. The City was also awarded a wastewater loan under the Water Quality Revolving Fund in the amount of $3,000,000 with an interest rate of 0.0%. Water Utility ENVIRONMENTAL COMPLIANCE The Water Utility is currently taking the necessary steps to meet the requirements of the Long Term 2 Enhanced Surface Water Treatment Rule (LT2ESWTR) and the Stage 2 Disinfectants and Disinfection Byproducts Rule (STAGE2 DBPR). Under the Stage2 DBPR the City must monitor additional sites in the distribution system for disinfection by products which include total Trihalomethanes and Haloacetic Acid compounds formed by chlorinating drinking water during the disinfection process. Under the rule the City must monitor multiple sites in the distribution system and determine the average annual concentration of disinfection byproducts at each monitoring site. Areas of the distribution system not meeting federal regulations will prompt corrective action by the Water Utility. This may lead to future requirements to alter the disinfection processes; however, the Water Utility does not expect this rule to produce a major impact. The LT2ESWTR primarily focuses on protecting the municipal water supply from microbial pathogens, specifically Cryptosporidium. Long term monitoring of Baltimore s raw water sources indicate Cryptosporidium and other microbial pathogens are only occasionally detected (two times in five years), and they have not been found at levels of concern. Other than required monitoring this portion of the LT2ESWTR is not an issue for future compliance; however, this rule also requires the covering or replacement of all open finished water reservoirs to guard against the reintroduction of microbial contaminants. Because Baltimore s distribution 78

95 system utilizes several open finished water reservoirs this portion of the rule poses a significant financial obligation. Historically, the distribution system utilized seven open finished water reservoirs. Currently three (Pikesville, Fullerton and Towson) have been covered and the remaining four are: under construction (Montebello); near completion of design (Guilford); and near completion of study (Druid Lake and Ashburton Lake). Under LT2ESWTR open finished water reservoirs must be covered or replaced under an EPA-approved compliance schedule: Reservoir Contract Design Complete Construction Start Scheduled Completion Montebello 2 WC-1160R 10/13/ /21/2009 6/30/2014 Guilford WC /30/2013 2/19/2014 2/16/2016 Druid Lake WC /28/2014 7/1/2014 6/25/2018 Ashburton Lake WC /29/ /31/ /31/2018 Wastewater Utility The objective of the federal Clean Water Act is to restore and maintain the chemical, physical, and biological integrity of the nation s waters. To achieve this objective, wastewater discharges are controlled by the National Pollutant Discharge Elimination System (the NPDES ) administered by the EPA. The EPA has delegated administration of the program for Maryland to MDE s Water Management Administration. Under this program, the City s larger wastewater plant, the Back River Plant, has two permitted outfalls and the Patapsco Plant has one permitted outfall. The new Patapsco Wastewater Treatment Plant discharge permit (10-DP580) became effective October 1, 2010 and will expire in five years. The City Back River WWTP NPDES permit renewal (DP-0581) became effective on May The Patapsco Plant had no excursions to report in fiscal year The Back River Plant was in total compliance during fiscal year 2013 except for July 17 and 19, 2012; when there were ph and dissolved oxygen excursions due to lack of power resulting from an electrical transformer fire. During the period of July 1, 2012 through June 30, 2013 sewage or sludge spills occurred as follows: On January 11, 2013 approximately 75,000 gallons of anaerobically digested sludge was spilled on the ground when the #2 Digester overflowed. The spill occurred because the digester was being taken out of service and the influent and effluent valves were closed. Apparently the influent valve was not closed completely and the digester was overfilled, causing the spill. The valve was secured and the area cleaned up and no sludge entered the storm drain. 79

96 On January 31, 2013 there was a 3,500 gallon and 185,000 gallon overflow. The 3,500 gallon overflow resulted from a surge of flow from the Baltimore County Patapsco Pumping Station which breached the Patapsco WWTP combined influent channel. The 185,000 gallon overflow was the result of a valve failure on the #3 secondary clarifier which was under construction. The contractor had stop logs in the tank and the Plant used the tank to peak shave flow due to heavy rains. Once the tank was filled, operations could not close the valve. The contractor had to remove the stop log to stop the overflow. On June 10, 2013 approximately 50,000 gallons of wastewater overflowed onto the ground when the screen building overflowed during a high flow storm event when the flow reached 365 mgd. The operator could not act fast enough to raise the screens to prevent the overflow. Once the screens were raised the overflow ceased. The majority of the flow did not enter the storm drains and the area was cleaned up and limed. During the period of July 1, 2012 through June 30, 2013 there were 321 known incidents of sanitary sewer overflows (SSO) ranging in estimated volume from 15 gallons to 4.4 million gallons from the sewer collection system. The City included these overflows as part of the Quarterly Reports provided to the EPA, the Department of Justice and MDE pursuant to the Consent Decree. During this same period, there were no known incidents of combined sewer overflows (CSO). Modifications required by the Consent Decree to separate the wastewater and stormwater collection systems were completed in The Patapsco Wastewater Treatment Plant NPDES operating permit, issued September 21, 2010, contains a provision that the Enhanced Nutrient Removal upgrade will have construction completed by June 20, Based on the current construction schedule, this project will not be complete by that date. DPW informed the MDE Wastewater Permits Program of this fact on May 2, On June 24, 2013, MDE Wastewater Permits Program staff replied that the matter was being referred to the MDE Compliance Program and that issues of this type are handled through consent agreements rather than permit modifications. DPW and MDE have not yet begun negotiating the consent agreement. It is likely that the consent agreement will contain a modified schedule as well as stipulated penalties, but it is premature at this time to speculate on the specifics of the schedule or the amount of the penalties Consent Decree In 2002, the City completed negotiations with the U.S. Department of Justice, the EPA, and MDE to address past and periodic discharges and wet weather overflows from the City s wastewater collection system. As is the case in many major cities, a portion of the City s sewer infrastructure is aging, and there are also decades-old designed overflow points that periodically discharge sewage during heavy rainfall events. The negotiations were incorporated into a Consent Decree which was subsequently signed by the Mayor, approved by the City s Board of Estimates and executed by the U.S. Department of Justice, the EPA and MDE. As part of its national efforts to eliminate Combined Sewer Overflows ( CSOs ) and Sanitary Sewer Overflows ( SSOs ), the EPA had threatened the City with litigation. The federal and state environmental enforcement agencies alleged that the overflows from the City s 80

97 collection system violated the federal Clean Water Act, the City s treatment plants NPDES permits, and the Environment Article of the Annotated Code of Maryland. In an effort to avoid litigation and cooperate with federal and state authorities, the City entered into the Consent Decree similar to those entered into by other major cities such as Miami, New Orleans, Atlanta, Birmingham and Cincinnati. Based upon the Consent Decree, the City commenced a capital improvement program estimated to cost approximately $330,000,000, involving approximately 39 construction projects that will eliminate all of the City s remaining engineer-designed SSO structures. At an anticipated estimated cost of an additional $350,000,000 to $650,000,000, the City will also conduct a comprehensive study, inspection and rehabilitation of the entire collection system over a period spanning 14 years. The City currently estimates that the total cost of all capital improvements, maintenance, repairs and other enhancements necessary to bring the City s collection system into compliance with the federal Clean Water Act will be approximately $1 billion. Consistent with negotiated collection system consent decrees involving other cities, the EPA insisted upon a cash penalty for past overflows and stipulated penalties if the City fails to meet milestone dates for completion of construction, inspection and rehabilitation of its collection system. The City expects to finance these costs through a combination of water and wastewater revenue bonds, user rate increases, state low-interest loans, and any available state or federal grants. The City believes adequate financial resources are or will be available to pay for the capital improvement program. The City prepares and submits a Quarterly Report to the EPA, the Department of Justice and MDE detailing the progress and status of the Consent Decree projects. The City is currently engaged in an ongoing dialogue with EPA and MDE regarding deadlines in the Consent Decree and the extent of capital improvements required. As described above in WASTEWATER UTILITY CAPITAL IMPROVEMENT PROGRAM, the City is currently working with EPA and MDE to develop and implement an integrated plan to help identify efficiencies in implementing sometimes overlapping and competing requirements that arise from the City s wastewater program and the consent decree, including how best to make capital investments and meet operation and maintenance requirements. EMERGENCY PREPAREDNESS AND SECURITY MEASURES The City has taken aggressive steps to improve its emergency preparedness and security measures at all of its water and wastewater facilities. The use of chlorine gas to disinfect drinking water prior to distribution to the public and to disinfect wastewater prior to discharge into the environment is being discontinued at the Ashburton and Montebello Water Treatment Plants and the Back River Wastewater Treatment Plant for public safety reasons. Alternative measures of disinfection will be incorporated into these facilities. The Back River plant has completed conversion to disinfection using bleach while at the Patapsco plant conversion to bleach is at 100% design and will be completed prior to the completion of the ENR Facility Upgrade. The facilities of the Utilities are being modified to significantly improve security and monitoring capabilities. This work includes the installation of secure card access facilities at the main gates and building entrances, motion detection equipment, remote digital cameras, and central monitoring stations. Drinking water quality monitoring has been increased. Baltimore 81

98 City completed a Water Facilities Vulnerability Study in compliance with EPA requirements. The recommendations are under evaluation. AUDIT REGARDING WATER AND WASTEWATER BILLING PROCEDURES During 2011 and 2012, the City s Department of Audits initiated a review of the Department of Public Works, Bureau of Water and Wastewater s billing and meter operations in connection with allegations received regarding inaccurate water billings. These allegations included over, under, mismanaged and missed billings. The review conducted by the audit team identified a focused sample of 70,000 accounts from a billing population across a three year period of July 2008 through June The sample focused upon all households with the criteria of estimated meter readings and subsequent actual readings with no subsequent adjustment in the billing system. In February 2012, the Department of Audits issued a report titled, Review of Allegations Regarding Water and Wastewater Billing Procedures to Determine the Validity of Those Allegations and Identify Opportunities for Improvement. A copy of the report may be found on the website of the Baltimore City Comptroller s Office. In the report, the Department of Audits offered recommendations to improve weaknesses of the billing procedures across the Bureau. Following the recommendations received from the Department of Audits included in the report, the Bureau of Water and Wastewater revised internal procedures and archival methods of the Customer Service and Support Division for capturing historical billing records. In addition, the Department of Audits reviewed 14,000 accounts that had received multiple estimated bills due to non-functioning meter equipment that had reached the end of its useful life. The Bureau of Water and Wastewater subsequently identified this equipment for immediate replacement and completed installation within fiscal year The Bureau also increased personnel levels within the meter reading operation to augment operations and create an additional section tasked with the responsibility of quality control. The total increase in positions amounted to thirty-two personnel. Because the new positions were reclassified from funded vacant positions within the Water Utility, this increase in employees does not materially impact the cost structure of the Water Utility or the pension obligations of the City. As a result of the review, the Department of Public Works determined that adjustments were required to approximately 20,000 of the 70,000 accounts reviewed and issued approximately $4.2 million in refunds. Following this effort, as a result of further review by an independent consultant retained by the Bureau of Water and Wastewater, the City recognized a $9.2 million gross adjustment to the audited financial statements for the Water Utility and the Wastewater Utility, allocated to Fiscal Years 2010 and 2011, which amount was considered a conservative estimate of the highest cost to the City for additional future refunds (including the $4.2 million already issued). The audited financial statements for the Water Utility and the Wastewater Utility for fiscal years 2010 and 2011 were restated in April 2013 to reflect these adjustments. The cost of such refunds was allocated 57% to the Wastewater Utility Fund and 43% to the Water Utility Fund. In addition to the corrective actions taken following the Audit findings, the independent consultant has undertaken a review of all allegations contained in the audit report to ensure accounts have been adjusted appropriately, and to confirm that the corrective actions have been implemented and adequately address all allegations. This independent review is expected to be 82

99 completed in November There is currently no material litigation pending or threatened against the City regarding the substance of the billing errors described above, and the City does not expect any material litigation related thereto. The City does not expect the amount of any future refunds, together with refunds already paid, to increase beyond $9.2 million. As a result, the City s obligation to pay any such refunds will not have a material adverse impact on the financial position of the Water Utility or the Wastewater Utility or the ability of the City to meet its obligations under the Water Resolution or the Wastewater Resolution. LITIGATION There are various lawsuits pending against the City relating to the Utilities. The City believes that, individually and in the aggregate, these actions will have no material adverse effect on the financial position of the City or the future operations of the Utilities. UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Representative of the Underwriters, has agreed, subject to certain conditions set forth in the purchase contracts with the City, to purchase the Series 2013 Water Bonds at an aggregate purchase price of $343,709, (which represents the par amount of Series 2013 Water Bonds plus a net original issue premium of $26,556, and less an Underwriters discount of $686,856.90) and the Series 2013 Wastewater Bonds at an aggregate purchase price of $274,507, (which represents the par amount of Series 2013 Wastewater Bonds plus a net original issue premium of $24,000, and less an Underwriters discount of $508,245.52). The Underwriters may offer and sell the Series 2013 Bonds to certain dealers (including dealers depositing Series 2013 Bonds into investment trusts, certain of which may be sponsored by one or more of the Underwriters) and others at prices lower than the public offering prices stated on the cover page hereof. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association. Wells Fargo Bank, National Association ( WFBNA ), one of the underwriters of the Series 2013 Bonds, has entered into an agreement (the "Distribution Agreement") with its affiliate, Wells Fargo Advisors, LLC ( WFA ), for the distribution of certain municipal securities offerings, including the Series 2013 Bonds. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting or remarketing agent compensation, as applicable, with respect to the Series 2013 Bonds with WFA. WFBNA also utilizes the distribution capabilities of its affiliates, Wells Fargo Securities, LLC ( WFSLLC ) and Wells Fargo Institutional Securities, LLC ( WFIS ), for the distribution of municipal securities offerings, including the Series 2013 Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC s expenses based on its municipal securities transactions. WFBNA, WFSLLC, WFIS, and WFA are each whollyowned subsidiaries of Wells Fargo & Company. The public offering prices set forth on the inside cover page hereof may be changed after the initial offering by the Underwriters. The purchase contract for the Series 2013 Water Bonds 83

100 provides that the Underwriters obligation to purchase the Series 2013 Water Bonds is subject to certain conditions and that the Underwriters are obligated to purchase all of the Series 2013 Water Bonds if any Series 2013 Water Bonds are purchased. The purchase contract for the Series 2013 Wastewater Bonds provides that the Underwriters obligation to purchase the Series 2013 Wastewater Bonds is subject to certain conditions and that the Underwriters are obligated to purchase all of the Series 2013 Wastewater Bonds if any Series 2013 Wastewater Bonds are purchased. The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage services. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the City, for which they received or will receive customary fees and expenses. The City intends to use a portion of the proceeds from this offering to redeem the Refunded Water Bonds, the Refunded Wastewater Bonds, the Refunded Water Auction Rate Bonds and the Refunded Wastewater Auction Rate Bonds (collectively, the Refunded Bonds ). To the extent an Underwriter or an affiliate thereof is an owner of Refunded Bonds, such Underwriter or its affiliate, as applicable, would receive a portion of the proceeds from the issuance of the Series 2013 Bonds contemplated herein in connection with such Refunded Bonds being redeemed by the City. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities, which may include credit default swaps) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City. The Underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments. RELATIONSHIPS M&T Securities, Inc., an Underwriter of the Series 2013 Bonds, is a subsidiary of Manufacturers and Traders Trust Company, the Trustee for the Series 2013 Bonds. CONTINUING DISCLOSURE In connection with Securities Exchange Commission Rule 15c2-12 (17 C.F.R. Part 240, c2-12) (the Rule ), the City has entered into an undertaking (the Undertaking ) for the benefit of the holders of the Series 2013 Bonds to provide (i) not later than 275 days after the end of the City s fiscal year, certain financial information and operating data annually, including the 84

101 audited financial statements of the Water Utility and the Wastewater Utility for the preceding fiscal year (the Annual Report ) to the Municipal Securities Rule Making Board (the MSRB ) via the MSRB s Electronic Municipal Market Access System ( EMMA ) and (ii) in a timely manner, but not in excess of 10 business days after the occurrence of such event, notice of various events described in the Rule to the MSRB via EMMA. A proposed form of the City s Continuing Disclosure Certificate containing the Undertaking and describing the specific nature of the information to be contained in the Annual Report and the notices of significant events is included as Appendix F hereto. A failure by the City to comply with the Undertaking will not constitute a default or an Event of Default under the Water Resolution or the Wastewater Resolution (as the case may be) or the Series 2013 Water Bonds or the Series 2013 Wastewater Bonds (as the case may be) (although Bondholders and beneficial owners will have any available remedy in equity to compel such compliance). Nevertheless, such failure must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2013 Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the Series 2013 Bonds and their market price. The City failed to comply with some of its obligations under certain of its continuing disclosure undertakings within the last five years. In particular, the City s Comprehensive Annual Financial Reports ( CAFRs ) for the fiscal years ended June 30, 2010 and June 30, 2011, which were required by the City s continuing disclosure undertakings to have been filed with EMMA on or before March 1, 2011 and March 2, 2012, respectively, were not filed with EMMA until December 7, 2012 due to delays in the completion of the CAFRs, and were not indexed properly with EMMA to be associated with many of the City s water and wastewater bond issues until January 22, Similarly, the City s CAFR for the fiscal year ended June 30, 2012, which was required to be filed with EMMA on or before March 2, 2013, was not filed with EMMA until August 20, 2013 due to delays in the completion of the CAFR. Also, the City s CAFRs for the fiscal years ended June 30, 2008 and June 30, 2009 were filed with EMMA within one month after the respective dates on which they were due under the City s applicable continuing disclosure undertakings. In addition, the City s annual financial and operating data filings for the fiscal years ended June 30, 2008, June 30, 2009 and June 30, 2010 were filed within six months after the respective dates on which they were due with respect to certain of the City s water and wastewater bond issues. Similar delays in filing, and occasionally incomplete filings, also occurred with respect to certain continuing disclosure undertakings relating to City s general obligation bonds, parking system facilities bonds, convention center revenue bonds and certificates of participation. The City also failed to index properly certain filings with EMMA to become associated with all of the required bond issues, and in some instances failed to provide timely notice that the required filings would be delayed, in accordance with relevant continuing disclosure undertakings. The City has made supplemental filings with EMMA to address these issues and is currently in material compliance with its continuing disclosure obligations. The City is committed to complying with all of its past and future continuing disclosure obligations. In furtherance of this commitment, the proposed form of the City s Continuing Disclosure Certificate included as Appendix F hereto provides that the date by which the Annual Report must be provided to the MSRB is not later than 275 days after the end of the City s fiscal year, compared to 245 days that is typically required by the City s existing continuing disclosure 85

102 undertakings. The City expects this change will facilitate timely filings with respect to the Series 2013 Bonds. Opinion of Bond Counsel TAX MATTERS Bond Counsel s opinion will state that, under current law and assuming the compliance with the Covenants (as defined below) by the City and the accuracy of certain representations and certifications, interest on the Series 2013 Bonds (including any accrued original issue discount properly allocable to the owners of the Series 2013 Bonds), is (a) excludable from the gross income of the owners of the Series 2013 Bonds for purposes of federal income taxation under Section 103 of the Code, and (b) not a specific item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. However, interest on the Series 2013 Bonds must be included in adjusted current earnings for purposes of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes) under Section 56 of the Code. See Appendix E hereto for the forms of the opinions of Bond Counsel. Bond Counsel will express no opinion regarding other federal tax consequences arising with respect to the Series 2013 Bonds. Bond Counsel s opinion speaks as of its date, is based on current legal authority and precedent, covers certain matters not directly addressed by such authority and precedent, and represents Bond Counsel s judgment as to the proper treatment of interest on the Series 2013 Bonds for federal income tax purposes. Bond Counsel s opinion does not contain or provide any opinion or assurance regarding the future activities of the City or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the Internal Revenue Service (the IRS ). The City has covenanted, however, to comply with the requirements of the Code. Reliance and Assumptions; Effect of Certain Changes In delivering its opinion regarding the Series 2013 Bonds, Bond Counsel is relying upon and assuming the accuracy of representations and certifications of representatives of the City, the underwriters of the Series 2013 Bonds and other public officials as to facts material to the opinion, which Bond Counsel has not independently verified. In addition, Bond Counsel is assuming continuing compliance with the Covenants by the City. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied after the issuance of the Series 2013 Bonds in order for interest on the Series 2013 Bonds to be and remain excludable from gross income for purposes of federal income taxation. These requirements include, by way of example and not limitation, restrictions on the use, expenditure and investment of the proceeds of the Series 2013 Bonds and the use of the property financed or refinanced by the Series 2013 Bonds, limitations on the source of the payment of and the security for the Series 2013 Bonds, and the obligation to rebate certain excess earnings on the gross proceeds of the Series 2013 Bonds to the United States Department of the Treasury ( Treasury ). The tax certificate for the Series 2013 Bonds (the Tax 86

103 Certificate ) contains covenants (collectively, the Covenants ) under which the City has agreed to comply with such requirements. Failure by the City to comply with the Covenants could cause interest on the Series 2013 Bonds to become includable in gross income for federal income tax purposes retroactively to their date of issue. In the event of noncompliance with the Covenants, the available enforcement remedies may be limited by applicable provisions of law and, therefore, may not be adequate to prevent interest on the Series 2013 Bonds from becoming includable in gross income for federal income tax purposes. Bond Counsel has no responsibility to monitor compliance with the Covenants after the date of issue of the Series 2013 Bonds. Certain requirements and procedures contained, incorporated or referred to in the Tax Certificate, including the Covenants, may be changed and certain actions may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such document. Bond Counsel expresses no opinion concerning any effect on excludability of interest on the Series 2013 Bonds from gross income for federal income tax purposes of any such subsequent change or action that may be made, taken or omitted upon the advice or approval of counsel other than Bond Counsel. Certain Collateral Federal Tax Consequences The following is a brief discussion of certain collateral federal income tax matters with respect to the Series 2013 Bonds. It does not purport to address all aspects of federal taxation that may be relevant to a particular owner thereof. Prospective purchasers of such Series 2013 Bonds, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the federal tax consequences of owning or disposing of the Series 2013 Bonds. Prospective purchasers of the Series 2013 Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers including, without limitation, financial institutions, certain insurance companies, certain corporations (including S corporations and foreign corporations), certain foreign corporations subject to the branch profits tax, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and taxpayers attempting to qualify for the earned income tax credit. In addition, prospective purchasers should be aware that the interest paid on, and the proceeds of the sale of, tax-exempt obligations, including the Series 2013 Bonds, are in many cases required to be reported to the IRS in a manner similar to interest paid on taxable obligations. Additionally, backup withholding may apply to any Series 2013 Bond owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Series 2013 Bond owner who is notified by the IRS of a failure to report all interest and dividends required to be shown on federal income tax returns. The reporting and withholding requirements do not in and of themselves affect the excludability of such interest from gross income for federal tax purposes or any other federal tax consequence of purchasing, holding or selling tax-exempt obligations. 87

104 Original Issue Discount The original issue discount ( OID ) on any Series 2013 Bond is the excess of such bond s stated redemption price at maturity (excluding certain qualified stated interest that is unconditionally payable at least annually at prescribed rates) over the issue price of such bond. The issue price of a bond is the initial offering price to the public at which price a substantial amount of such bonds of the same maturity was sold. The public does not include bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. The issue price for each maturity of the Series 2013 Bonds is expected to be the initial public offering price set forth on the inside front cover page of this Official Statement but is subject to change based on actual sales. OID on the Series 2013 Bonds with OID (the OID Bonds ) represents interest that is excludable from gross income for purposes of federal income taxation. However, the portion of the OID that is deemed to have accrued to the owner of an OID Bond in each year may be included in determining the alternative minimum tax with respect to the Series 2013 Bonds and the distribution requirements of certain investment companies and may result in some of the collateral federal income tax consequences mentioned in the preceding subsection. Therefore, owners of OID Bonds should be aware that the accrual of OID in each year may result in alternative minimum tax liability, additional distribution requirements or other collateral federal income tax consequences although the owner may not have received cash in such year. Interest in the form of OID is treated under Section 1288 of the Code as accruing under a constant yield method that takes into account compounding on a semiannual or more frequent basis. If an OID Bond is sold or otherwise disposed of between semiannual compounding dates, then the OID which would have accrued for that semiannual compounding period for federal income tax purposes is to be apportioned in equal amounts among the days in such compounding period. In the case of an original owner of an OID Bond, the amount of OID that is treated as having accrued on such OID Bond is added to the owner s cost basis in determining, for federal income tax purposes, gain or loss upon its disposition (including its sale, redemption or payment at maturity). The amounts received upon such disposition that are attributable to accrued OID will be excluded from the gross income of the recipients for federal income tax purposes. The accrual of OID and its effect on the redemption, sale or other disposition of OID Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. Prospective purchasers of OID Bonds should consult their own tax advisors with respect to the precise determination for federal income tax purposes of interest accrued upon sale or redemption of such OID Bonds and with respect to state and local tax consequences of owning OID Bonds. Bond Premium In general, if an owner acquires a bond for a purchase price (excluding accrued interest) or otherwise at a tax basis that reflects a premium over the sum of all amounts payable on the bond after the acquisition date (excluding certain qualified stated interest that is 88

105 unconditionally payable at least annually at prescribed rates), that premium constitutes bond premium on that bond (a Premium Bond ). In general, under Section 171 of the Code, an owner of a Premium Bond must amortize the bond premium over the remaining term of the Premium Bond, based on the owner s yield over the remaining term of the Premium Bond, determined based on constant yield principles. An owner of a Premium Bond must amortize the bond premium by offsetting the qualified stated interest allocable to each interest accrual period under the owner s regular method of accounting against the bond premium allocable to that period. In the case of a tax-exempt Premium Bond, if the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to that accrual period, the excess is a nondeductible loss. Under certain circumstances, the owner of a Premium Bond may realize a taxable gain upon disposition of the Premium Bond even though it is sold or redeemed for an amount less than or equal to the owner s original acquisition cost. Prospective purchasers of any Premium Bonds should consult their own tax advisors regarding the treatment of bond premium for federal income tax purposes, including various special rules relating thereto, and state and local tax consequences, in connection with the acquisition, ownership, amortization of bond premium on, sale, exchange, or other disposition of Premium Bonds. Effects of Future Enforcement, Regulatory and Legislative Actions The IRS has established a program to audit tax-exempt obligations to determine whether the interest thereon is includable in gross income for federal income tax purposes. If the IRS does audit the Series 2013 Bonds, the IRS will, under its current procedures, treat the City as the taxpayer. As such, the beneficial owners of the Series 2013 Bonds will have only limited rights, if any, to participate in the audit or any administrative or judicial review or appeal thereof. Any action of the IRS, including but not limited to the selection of the Series 2013 Bonds for audit, or the course or result of such audit, or an audit of other obligations presenting similar tax issues, may affect the marketability or market value of the Series 2013 Bonds. Legislation affecting tax-exempt obligations is regularly considered by the United States Congress and various State legislatures. Such legislation may effect changes in federal or State income tax rates and the application of federal or State income tax laws (including the substitution of another type of tax), or may repeal or reduce the benefit of the excludability of interest on the tax-exempt obligations from gross income for federal or State income tax purposes. The U.S. Department of the Treasury and the IRS are continuously drafting regulations to interpret and apply the provisions of the Code and court proceedings may be filed the outcome of which could modify the federal or State tax treatment of tax-exempt obligations. There can be no assurance that legislation proposed or enacted after the date of issue of the Series 2013 Bonds, regulatory interpretation of the Code or actions by a court involving either the Series 2013 Bonds or other tax-exempt obligations will not have an adverse effect on the federal or State tax status of the Series 2013 Bonds, marketability or market price or on the economic value of the taxexempt status of the interest on the Series 2013 Bonds. Prospective purchasers of the Series 2013 Bonds should consult their own tax advisors regarding the potential consequences of any such pending or proposed federal or State tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. 89

106 State Tax Matters Bond Counsel s opinion will also state that, under current law of the State, the Series 2013 Bonds, their transfer, and the principal and interest payable thereon (including any profit made in the sale thereof) shall be and remain exempt from any and all State, county, and municipal taxation in the State; however, the law of the State does not expressly refer to, and no opinion is expressed concerning, estate or inheritance taxes, or any other taxes not levied directly on the Series 2013 Bonds, their transfer or the interest thereon. Interest on the Series 2013 Bonds may be subject to state or local income taxes in jurisdictions other than the State under applicable state or local tax laws. Such holders or prospective purchasers of the Series 2013 Bonds should consult their own tax advisors with respect to the tax status of the Series 2013 Bonds in jurisdictions other than the State. RATINGS Moody s Investors Service, Inc. ( Moody s ) and Standard & Poor s Ratings Services ( S&P ) have given the Series 2013A Water Bonds, the Series 2013B Water Bonds, the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds ratings of Aa2 and AA, and the Series 2013C Water Bonds and the Series 2013E Wastewater Bonds ratings of Aa3 and AA-. An explanation of the significance of any such ratings may be obtained from the rating agency furnishing it. The City furnished to such rating agencies the information contained in a preliminary form of this Official Statement and other information. Generally, rating agencies base their ratings on such materials and information, as well as their own investigations, studies and assumptions. It should be noted that such ratings may be changed at any time and that no assurance can be given that they will not be revised downward or withdrawn by any of such rating agencies, if, in the judgment of any of them, circumstances should warrant such actions. The City undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of any of such ratings could have an adverse effect on market prices for the Series 2013 Bonds. LEGAL MATTERS Certain legal matters incident to the authorization, issuance and sale of the Series 2013 Bonds are subject to the receipt of opinions as to legality and with respect to the excludability of the interest on the Series 2013 Bonds from gross income for purposes of federal income taxation on such Series 2013 Bonds from McGuireWoods LLP, Baltimore, Maryland, Bond Counsel to the City. Certain legal matters will also be passed upon for the City by the City s Department of Law and for the Underwriters by their Counsel, Ballard Spahr LLP. FINANCIAL ADVISOR Public Financial Management, Philadelphia, Pennsylvania, has been engaged by the City to provide financial advisory services for the development and implementation of the financial plan leading to the issuance of the Series 2013 Bonds. VERIFICATION OF MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by Maher Duessel (the Verification Agent ) on behalf of the City relating to (a) computation of the 90

107 forecasted receipts of principal and interest on the Government Obligations and cash held uninvested in the Escrow Deposit Fund and by the Trustee and the forecasted payments of principal, redemption premium (if any) and interest on the Refunded Bonds, and (b) computation of the yields on the applicable Series 2013 Bonds and such Government Obligations was examined by the Verification Agent. Such computations were base solely upon assumptions and information supplied by the Verification Agent on behalf of the City. The Verification Agent has restricted its procedures to examining the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information upon which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. AVAILABILITY OF FINANCIAL INFORMATION Copies of the Water Utility s and the Wastewater Utility s audited financial statements for the Fiscal Years ended June 30, 2011 and June 30, 2012, together with the report of KPMG LLP, independent certified public accountants, are included in Appendices B and C and are also available from the City upon request. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 91

108 The execution and delivery of this Official Statement by the undersigned officials has been duly authorized by the City. MAYOR AND CITY COUNCIL OF BALTIMORE /s/ Stephanie Rawlings-Blake Stephanie Rawlings-Blake Mayor /s/ Harry E. Black Harry E. Black Director of Finance /s/ Stephen M. Kraus Stephen M. Kraus Chief, Bureau of Treasury Management 92

109 APPENDIX A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION

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111 APPENDIX A DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE WATER RESOLUTION AND THE WASTEWATER RESOLUTION THE SERIES 2013A WATER BONDS AND SERIES 2013B WATER BONDS CONSTITUTE SENIOR REVENUE OBLIGATIONS UNDER THE 2002 WATER RESOLUTION. THE SERIES 2013A WASTEWATER BONDS AND SERIES 2013B WASTEWATER BONDS CONSTITUTE SENIOR REVENUE OBLIGATIONS UNDER THE 2002 WASTEWATER RESOLUTION. THE SERIES 2013C WATER BONDS CONSTITUTE SUBORDINATE REVENUE OBLIGATIONS UNDER THE 2002 WATER RESOLUTION. THE SERIES 2013C WASTEWATER BONDS CONSTITUTE SUBORDINATE REVENUE OBLIGATIONS UNDER THE 2002 WASTEWATER RESOLUTION. THE SERIES 2013 WATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY THE TRUSTEE. THE SERIES 2013 WASTEWATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WASTEWATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY THE TRUSTEE. OPERATING REVENUES OF THE WASTEWATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WATER BONDS AND OPERATING REVENUES OF THE WATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WASTEWATER BONDS. THE SERIES 2013 BONDS ARE SPECIAL OBLIGATIONS OF THE CITY, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY OR OF THE STATE OF MARYLAND OR OF ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2013 BONDS. Definitions As used in this Appendix A, the term Resolution means, as the context requires, (i) with respect to the Series 2013 Water Bonds, the Mayor and City Council of Baltimore Amended and Restated Water Projects Bond Resolution adopted by the Board of Finance on April 15, 2002 (the 2002 Water Resolution ), as such Resolution may be amended, modified or supplemented by Supplemental Resolutions (including the Water Projects Fifteenth Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013) in accordance with the provisions thereof (collectively, the Water Resolution ), or (ii) with respect to the Series 2013 Wastewater Bonds, the Mayor and City Council of Baltimore Amended and Restated Wastewater Projects Bond Resolution adopted by the Board of Finance on April 15, 2002 (the 2002 Wastewater Resolution ), as such Resolution may from time to time be amended, modified or supplemented by Supplemental Resolutions (including the Wastewater Projects Twenty-Second Supplemental Bond Resolution adopted by the Board of Finance on October 28, 2013) in accordance with the provisions thereof (collectively, the Wastewater Resolution ). In addition to terms defined elsewhere in this Official Statement, the following are definitions of certain terms used in this Official Statement and in this Appendix A. Terms used but not defined herein shall have the meanings assigned to such terms in the Resolution. A-1

112 Additional Revenue Bonds means Bonds of the City permitted to be issued in accordance with the Resolution. Additional Revenue Obligations means the Additional Revenue Bonds and the Revenue Notes. Additional Senior Revenue Obligations means Additional Revenue Bonds, the payment of the principal or Redemption Price of and the interest on, and the purchase price of, which shall be secured equally and ratably with the Existing Bonds and Additional Senior Revenue Obligations by the pledge of Operating Revenues, and designated as Senior Revenue Obligations in the Supplemental Resolutions authorizing such Additional Senior Revenue Obligations. Additional Subordinate Revenue Obligations means the Revenue Notes and Additional Revenue Bonds the payment of the principal or Redemption Price of and the interest on, and the purchase price of, which shall be secured by the pledge of Operating Revenues subordinate to the Senior Revenue Obligations as provided in the Resolution, and designated as Subordinate Revenue Obligations in the Supplemental Resolutions authorizing such Additional Subordinate Revenue Obligations. Applicable Law means any law, regulation, requirement or order of any federal, state or local agency, court or other governmental body, applicable from time to time to the acquisition, design, construction, equipping, financing, ownership or operation of the Water Facilities or the Wastewater Facilities, as applicable, or the performance of any obligations under any agreement entered into in connection therewith. Authorized Baltimore Newspaper means a daily newspaper printed in the English language and having a general circulation in the City of Baltimore, Maryland. Authorized New York Newspaper means a daily newspaper printed in the English language and having a general circulation in the Borough of Manhattan, City and State of New York, or a financial journal printed in the English language and circulated in the Borough of Manhattan, City and State of New York. Authorized Officer means (i) in the case of the City, the Mayor, the Acting Mayor or the Director of Finance, and when used with reference to any act or document also means any other person authorized by resolution of the Board of Finance to perform such act or execute such document; and (ii) in the case of the Trustee, the President, any Vice-President, any Assistant Vice-President, any Corporate Trust Officer, or any Assistant Corporate Trust Officer of the Trustee, and when used with reference to any act or document also means any other person authorized to perform such act or execute such document by or pursuant to a resolution of the Board of Directors of the Trustee. Balloon Indebtedness means Indebtedness 25% or more of the principal amount of which matures in the same 12-month period, which portion of such principal amount is not required by the documents governing such Indebtedness to be amortized by redemption prior to such period. Optional Tender Indebtedness shall not be deemed to constitute Balloon Indebtedness solely by reason of the option of the holder thereof to require the redemption or purchase thereof or any required purchase or redemption thereof in connection with any termination of any Credit Facility securing such Optional Tender Indebtedness prior to the stated maturity thereof. Bond or Bonds means (A) under the Water Resolution, the Existing Water Bonds and the Series 2013 Water Bonds, together with any Additional Revenue Bonds issued under the 2002 Water Resolution, and (B) under the Wastewater Resolution, the Existing Wastewater Bonds and the Series A-2

113 2013 Wastewater Bonds, together with any Additional Revenue Bonds issued under the 2002 Wastewater Resolution. Bondholder means, when used with reference to a Revenue Obligation, the registered owner of such Revenue Obligation. Bond Insurance Policy means any insurance policy issued with respect to the Existing Bonds, as described in each Resolution. Bond Year means, with respect to any Series of Bonds, a period beginning on the date of issuance of such Series of Bonds and ending on the immediately succeeding June 30, and each period of 12 consecutive months beginning on July 1 and ending on June 30 thereafter. Business Day means a day other than a Saturday, Sunday or legal holiday in the State of Maryland observed as such by the City or the Trustee, or both. Capital Receipts of the Utility means (A) with respect to the Water Utility, all receipts deposited in the Water Capital Fund of the Water Utility or any fund for capital projects created pursuant to the Resolution, including, without limitation, revenues, receipts from federal grants, State grants, county grants (including contributions for service), private grants, State loans, City general obligation loan funds, proceeds of the Revenue Obligations and all other receipts dedicated to particular capital projects of the Water Utility, and (B) with respect to the Wastewater Utility, all receipts deposited in the Wastewater Capital Fund of the Wastewater Utility or any fund for capital projects created pursuant to the Resolution, including, without limitation, revenues, receipts from federal grants, State grants, county grants (including contributions for service), private grants, State loans, City general obligation loan funds, proceeds of the Revenue Obligations and all other receipts dedicated to particular capital projects of the Wastewater Utility. Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor federal income tax statute or code, and the applicable regulations thereunder. Consulting Engineer means an independent consulting engineer having a favorable national reputation for skill and experience with respect to the design, construction and operation of water facilities or wastewater utilities, as applicable, and the determination of the economic feasibility of such facilities. Costs of Issuance means the costs of issuing any Series of Revenue Obligations, including, without limitation, costs of engraving, printing, advertising, attorneys fees, underwriting discount, placement fees, consultants fees, bond insurance fees, rating agency fees, initial fees for letters of credit or lines of credit, initial fees of the Trustee and all other incidental expenses connected therewith. Credit Facility means any Liquidity Facility, letter of credit, bond insurance policy, bond purchase agreement, guaranty, line of credit, surety bond or similar credit or liquidity facility securing any Revenue Obligation or other Indebtedness of the City. Credit Facility Agreement means the agreement pursuant to which any Credit Facility is issued. Credit Facility Provider means the issuer of any Credit Facility then in effect. Debt Service Requirements means, when used with respect to any Indebtedness for any Fiscal Year or Bond Year (as the case may be), as of any particular date of calculation, the amount required to A-3

114 pay the sum of (a) the interest on such Indebtedness payable during the period from the second day of such Fiscal Year or Bond Year (as the case may be) through the first day of the immediately succeeding Fiscal Year or Bond Year (as the case may be), and (b) the principal of, the Sinking Fund Installment for and any other amount required to effect any mandatory redemption of such Indebtedness, if any, during the period from the second day of such Fiscal Year or Bond Year (as the case may be) through the first day of the immediately succeeding Fiscal Year or Bond Year (as the case may be), less any amount of such interest or principal for the payment of which moneys or Permitted Investments, the principal of and interest on which when due will provide for such payment, are irrevocably held in trust, including (without limitation) any accrued interest and capitalized interest on deposit in the Interest Account. For the purpose of calculating the Debt Service Requirements: (i) with respect to any Variable Rate Indebtedness: (A) for the purpose of calculating the Debt Service Reserve Fund Requirement for any Revenue Obligations or any other debt service reserve fund requirement for any Indebtedness other than Revenue Obligations and the principal amount of Balloon Indebtedness constituting Variable Rate Indebtedness payable in any Fiscal Year or Bond Year described, in clause (ii)(d) below, such Indebtedness shall be deemed to bear interest at the fixed rate that it would have borne had it been issued at a fixed rate for the term thereof, as evidenced by a certificate of an Authorized Officer of the City and a certificate of an investment banking firm or financial advisor knowledgeable in financial matters relating to the City who may be, without limitation, the financial advisor to the City, confirming such interest rate assumption as reasonable; and (B) for all other purposes of the Resolution, such Variable Rate Indebtedness shall be deemed to bear interest at an annual rate equal to (1) in the case of any period during which such Indebtedness shall have been outstanding, 110% of the weighted average interest rate per annum borne by such Indebtedness during such period and (2) in any other case, the Revenue Bond Index of 30 year revenue bonds published in the Bond Buyer on the most recent date prior to the date of calculation (or, if such index is no longer published, such other index of revenue bonds as shall be set forth in a certificate of an Authorized Officer of the City); provided, however, that for Variable Rate Indebtedness with respect to which the City has entered into a Hedge Agreement, such Variable Rate Indebtedness shall be deemed to bear interest, during the term of the Hedge Agreement applicable thereto, at an annual rate of interest equal to the fixed rate of interest payable by the City under such Hedge Agreement; and (ii) with respect to any Balloon Indebtedness: (A) unless such Indebtedness meets the requirements of clause (ii)(b), (ii)(c), (ii)(d) or (v) below, the principal amount of such Indebtedness shall be deemed to be payable during the Fiscal Year or Bond Year in which such principal amount becomes due, except as provided in clause (ii)(e) below; (B) if a Liquidity Facility is then in effect with respect to such Indebtedness, at the election of the City, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year as of any date of calculation may be deemed to be the amount that would be payable during such Fiscal Year or Bond Year (as the case may be) pursuant to the Credit Facility Agreement under which such Liquidity Facility was issued (including any term loan provisions thereunder) if such Liquidity Facility were used or drawn upon to purchase or retire such Indebtedness on the stated maturity date thereof or on any date established for the mandatory redemption thereof, less the aggregate amount required to be on deposit in any irrevocable A-4

115 sinking fund established to provide for the payment of such Indebtedness in accordance with clause (ii)(c) below during such Fiscal Year or Bond Year (as the case may be), except as provided in clause (ii)(e) below; (C) if (1) pursuant to a resolution of the City, an irrevocable sinking fund shall have been established to provide for the payment of such Indebtedness when due, (2) deposits to such sinking fund are current and timely and (3) verification of such timely deposits is contained in the most recent audited financial statements of the City or a letter to the City from an Independent Public Accountant, then the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year (as the case may be) shall be deemed to be the amount required to be deposited in such sinking fund for such Fiscal Year or Bond Year (as the case may be), except as provided in clause (ii) (E) below; (D) except as provided in clause (ii)(c) above and clauses (ii)(e) or (v) below, in the case of any Balloon Indebtedness in an aggregate principal amount that, together with the aggregate principal amount of outstanding Optional Tender Indebtedness described in clause (iii)(c) below, does not exceed 20% of the Operating Revenues for the most recent Fiscal Year for which audited financial statements of the City are available, at the election of the City, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year (as the case may be) may be deemed to be the amount that would be payable during such Fiscal Year or Bond Year (as the case may be) if such Indebtedness were required to be amortized in full from the date of its issuance or, in the case of any such Indebtedness issued to finance or refinance any Financed Facilities, at the option of the City, a date on or before the completion of such Financed Facilities, in substantially equal annual installments of principal (such principal to be rounded to the nearest $5,000) and interest over a term equal to the shorter of (1) 30 years and (2) 120% of the weighted average economic life of the Financed Facilities, as evidenced by a certificate of an Independent Public Accountant; provided, however, that if any principal amount of such Indebtedness is stated to mature or is unconditionally subject to mandatory redemption within the 12-month period immediately succeeding the date of calculation, then such principal amount shall be deemed to be payable on the stated maturity date thereof or on the date established for the mandatory redemption thereof; and (E) for purposes of calculating the Debt Service Reserve Fund Requirement for any Revenue Obligations or any other debt service reserve fund requirement for any Indebtedness other than Revenue Obligations, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year shall be determined in accordance with clause (ii)(d) above without regard to the aggregate principal amount of such Indebtedness outstanding from time to time; (iii) with respect to any Optional Tender Indebtedness: (A) unless such Indebtedness meets the requirements of clause (iii)(b), clause (iii)(c), or clause (v) below, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year as of any date of calculation shall be deemed to be the principal amount of such Indebtedness that could be payable by the City during such Fiscal Year or Bond Year (as the case may be) in connection with any demand for the purchase or redemption of such Indebtedness by any holder thereof or any termination of any Credit Facility securing such Indebtedness, except as provided in clause (iii)(d) below; (B) if a Liquidity Facility is then in effect with respect to such Indebtedness, at the election of the City, the principal amount of such Indebtedness payable in each Fiscal Year A-5

116 or Bond Year as of any date of calculation may be deemed to be the amount that would be payable during such Fiscal Year or Bond Year (as the case may be) pursuant to the Credit Facility Agreement under which such Liquidity Facility was issued (including any term loan provisions thereunder) if such Liquidity Facility were used or drawn upon to purchase or retire such Indebtedness on the earliest date on which such Indebtedness may be required to be purchased or redeemed at the option of the holder thereof or in connection with any expiration of any Credit Facility securing such Indebtedness, except as provided in clause (iii)(d) below; (C) except as provided in clause (iii)(d) below, in the case of any Optional Tender Indebtedness in an aggregate principal amount that, together with the aggregate principal amount of Outstanding Balloon Indebtedness described in clause (ii)(d) above, does not exceed 20% of the Operating Revenues of the City for the most recent Fiscal Year for which audited financial statements of the City are available, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year (as the case may be) may be determined in accordance with clause (ii)(d) above as if such Optional Tender Indebtedness were Balloon Indebtedness; and (D) for purposes of calculating the Debt Service Reserve Fund Requirement for any Revenue Obligations, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year (as the case may be) shall be determined in accordance with clause (iii)(c) above without regard to the aggregate principal amount of such Indebtedness outstanding from time to time; (iv) with respect to any Credit Facility Agreement, except as provided in clause (ii)(b) and clause (iii)(b) above, so long as no demand for payment under the Credit Facility issued under such Credit Facility Agreement shall have been made, the debt service requirements of such Credit Facility Agreement shall be excluded from such calculation; and (v) with respect to any (i) Revenue Notes the initial stated maturity of which is equal to or less than 36 months from the date of issuance (and one or more series of Revenue Notes issued in order to refund any such Revenue Notes), or (ii) Indebtedness other than Revenue Obligations, the principal amount of such Indebtedness payable in each Fiscal Year or Bond Year (as the case may be) shall be deemed to be the amount that would have been payable during such Fiscal Year or Bond Year (as the case may be) if such Indebtedness were required to be amortized in full from the date of its issuance or, in the case of any such Indebtedness issued to finance or refinance any Financed Facilities, at the option of the City, a date on or before the completion of such Financed Facilities, in substantially equal annual installments of principal (such principal to be rounded to the nearest $5,000) and interest over a term equal to the shorter of (1) thirty years and (2) 120% of the weighted average economic life of the Financed Facilities, as evidenced by a certificate of an Independent Public Accountant. Debt Service Reserve Fund Credit Facility means any Credit Facility held to the credit of any Debt Service Reserve Fund. Debt Service Reserve Fund Requirement means, as of any particular date of computation, (A) under the Water Resolution, with respect to all Senior Revenue Obligations other than the Series 1993-A Bonds and the Series 1994-A Bonds, an amount equal to the lesser of (i) the Maximum Annual Debt Service on the Senior Revenue Obligations other than the Series 1993-A Bonds and the Series 1994-A Bonds in the current or any future Fiscal Year, (ii) 10% of the proceeds of such Senior Revenue Obligations, or (iii) 125% of the average annual Debt Service Requirements on such Senior Revenue Obligations; provided, however, that the Debt Service Reserve Fund Requirement for any Series of Additional Revenue Obligations may be less than the amount specified above if such lesser amount is set forth in the Supplemental Resolution authorizing the issuance of such Series of Additional Revenue A-6

117 Obligations and such Supplemental Resolution establishes separate accounts in the Debt Service Fund and, if necessary, in the Debt Service Reserve Fund for such Series of Additional Revenue Obligations and provides that only such separate accounts within the Debt Service Fund and the Debt Service Reserve Fund are pledged to the payment of such Series of Additional Revenue Obligations, or (B) under the Wastewater Resolution, with respect to all Senior Revenue Obligations other than the Series 1993-A Bonds and the Series 1994-A Bonds and the Water Quality Bonds, an amount equal to the lesser of (i) the Maximum Annual Debt Service on the Senior Revenue Obligations other than the Series 1993-A Bonds and the Series 1994-A Bonds and the Water Quality Bonds in the current or any future Fiscal Year, (ii) 10% of the proceeds of such Senior Revenue Obligations, or (iii) 125% of the average annual Debt Service Requirements on such Senior Revenue Obligations; provided, however, that the Debt Service Reserve Fund Requirement for any Series of Additional Revenue Obligations may be less than the amount specified above if such lesser amount is set forth in the Supplemental Resolution authorizing the issuance of such Series of Additional Revenue Obligations and such Supplemental Resolution establishes separate accounts in the Debt Service Fund and, if necessary, in the Debt Service Reserve Fund for such Series of Additional Revenue Obligations and provides that only such separate accounts within the Debt Service Fund and the Debt Service Reserve Fund are pledged to the payment of such Series of Additional Revenue Obligations. With respect to any Series of Tax-Exempt Revenue Obligations, the Debt Service Reserve Fund Requirement may be increased by the City to the extent that there is delivered to the Trustee an opinion of Bond Counsel to the effect that such increase will not adversely affect the exclusion of interest on the Tax-Exempt Revenue Obligations from gross income for purposes of federal income taxation. Defeasance Obligations means: (A) (B) (C) (D) Cash; U.S. Dollar-denominated senior debt securities of the United States of America issued by the U.S. Department of the Treasury (including obligations issued or held in book entry form on the books of the Department of the Treasury) and backed by the full faith and credit of the United States of America; Direct obligations of any state, political subdivision or governmental authority or agency within the territorial United States of America which have been deemed paid and discharged as a result of the irrevocable escrow of sufficient securities of the type described in (A) or (B) above; Collateralized investment agreements meeting the requirements of the Resolution. See under the heading Defeasance below. Defeased Bonds means the portion of the Refunded Bonds that are subject to the Escrow Deposit Agreement. Director of Finance means the Director of Finance of the City established as the head of the Department of Finance pursuant to Article VII, Section 4, of the City Charter, or a properly appointed designee of the Director of Finance. Enabling Laws means Section 50 of Article II of the City Charter, as amended, and all future acts supplemental thereto or amendatory thereof; Section et seq. of the Local Government Article of the Annotated Code of Maryland (2013 Replacement Volume), as amended, and all future acts supplemental thereto or amendatory thereof; and the Ordinance. Reference to the Enabling Laws in the Resolution or any Supplemental Resolution may refer to one or more of such Enabling Laws and shall not A-7

118 be deemed to be exclusive of any public general law, any public local law or charter provisions enacted from time to time. Escrow Deposit Agent means Manufacturers and Traders Trust Company, in its capacity as Escrow Deposit Agent under the Escrow Deposit Agreement, and its successors and assigns. Escrow Deposit Agreement means the Escrow Deposit Agreement dated as of [December] 1, 2013, by and between the City and the Escrow Deposit Agent, relating to the defeasance of the Defeased Bonds. Bonds. Existing Bonds means, collectively, the Existing Wastewater Bonds and the Existing Water Existing Revenue Obligations means the Existing Bonds. Existing Senior Revenue Obligations means all of the Existing Bonds except for the Series 2002C Bonds, the Series 2004B Wastewater Bonds, the Series 2004C Wastewater Bonds, the Series 2005A Wastewater Bonds, the Series 2006A Wastewater Bonds, the Series 2006A Water Bonds, the Series 2007A Wastewater Bonds, the Series 2008A Water Bonds, the Series 2009A Wastewater Bonds, the Series 2009A Water Bonds, and the Series 2009B Water Bonds. Existing Wastewater Bonds means the Series 1993-A Bonds, the Series 1994-A Bonds, the Series 1994-B Bonds, the Series 1994-C Bonds, the Series 1994-D Bonds, the Series 1996-B Bonds, the Series 1998-A Bonds, the Series 1999-A Bonds, the Series 1999-B Bonds, the Series 2001-A Bonds, the Series 2002A Bonds, the Series 2002B Bonds, the Series 2002C Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Wastewater Bonds, the Series 2004B Wastewater Bonds, the Series 2004C Wastewater Bonds, the Series 2005A Wastewater Bonds, the Series 2005B Wastewater Bonds, the Series 2006A Wastewater Bonds, the Series 2006B Wastewater Bonds, the Series 2006C Wastewater Bonds, the Series 2007A Wastewater Bonds, the Series 2007B Wastewater Bonds, the Series 2007C Wastewater Bonds, the Series 2007D Wastewater Bonds, the Series 2008A Wastewater Bonds, the Series 2009A Wastewater Bonds, the Series 2009B Wastewater Bonds, the Series 2009C Wastewater Bonds, the Series 2009E Wastewater Bonds, the Series 2011A Wastewater Bonds, the Series 2011B Wastewater Bonds, the Series 2011C Wastewater Bonds, the Series 2013A Wastewater Bonds and the Series 2013B Wastewater Bonds Outstanding under the Wastewater Resolution. Existing Water Bonds means the Series 1993-A Bonds, the Series 1994-A Bonds, the Series 2002A Bonds, the Series 2002B Bonds, the Series 2002C Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Water Bonds, the Series 2004B Water Bonds, the Series 2005A Water Bonds, the Series 2006A Water Bonds, the Series 2007A Water Bonds, the Series 2007B Water Bonds, the Series 2007C Water Bonds, the Series 2008A Water Bonds, the Series 2009A Water Bonds, the Series 2009B Water Bonds, the 2011A Water Bonds, the Series 2011B Water Bonds, and the Series 2011C Water Bonds Outstanding under the Water Resolution. Extraordinary Capital Requirement means for any Fiscal Year, (A) with respect to the Water Utility, the amount of appropriation authority in the Water Utility capital budget portion of the Ordinance of Estimates for such Fiscal Year necessary for non-recurring, unanticipated, major capital expenditures related to the maintenance or repair of the Water Facilities during such Fiscal Year and not otherwise provided for in the Water Utility operating or capital budget portion of the Ordinance of Estimates, and (B) with respect to the Wastewater Utility, the amount of appropriation authority in the Wastewater Utility capital budget portion of the Ordinance of Estimates for such Fiscal Year necessary for nonrecurring, unanticipated, major capital expenditures related to the maintenance or repair of the A-8

119 Wastewater Facilities during such Fiscal Year and not otherwise provided for in the Wastewater Utility operating or capital budget portion of the Ordinance of Estimates. Financed Facilities means, as applicable, (A) Water Utility capital projects (a) that are either (i) appropriated in any past or the current Ordinance of Estimates (as of the date of issuance of any Series of Revenue Obligations), (ii) included, from time to time, in the City s six-year capital program (or comparable document, from time to time), (iii) contained in any supplemental appropriation to the Ordinance of Estimates approved from time to time by the City Council, or (iv) which are the subject of transfers from existing appropriations in the Ordinance of Estimates, as approved, from time to time, by the Board of Estimates and (b) that are financed with proceeds of Revenue Obligations; or (B) Wastewater Utility capital projects (a) that are either (i) appropriated in any past or the current Ordinance of Estimates (as of the date of issuance of any Series of Revenue Obligations), (ii) included, from time to time, in the City s six-year capital program (or comparable document, from time to time), (iii) contained in any supplemental appropriation to the Ordinance of Estimates approved from time to time by the City Council, or (iv) which are the subject of transfers from existing appropriations in the Ordinance of Estimates, as approved, from time to time, by the Board of Estimates and (b) that are financed with proceeds of Revenue Obligations. Fiscal Year means the 12-month period commencing on July 1 of any calendar year and ending on June 30 of the succeeding calendar year, unless the City shall notify the Trustee of a change in its fiscal year for accounting purposes, in which case the Fiscal Year shall be the 12-month period set forth in such notice. Government Obligations means direct obligations of, or obligations for the timely payment of the principal of and the interest on which are unconditionally guaranteed by, the United States of America, including (without limitation) any certificate evidencing an ownership interest therein. Hedge Agreement means a contract or agreement, payable from Operating Revenues, intended to place Revenue Obligations on the interest rate, currency, cash flow or other basis desired by the City, including, without limitation, any interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract, any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, any contract to exchange cash flows or a series of payments, or any contract, including, without limitation, an interest rate floor or cap, or an option, put or call, to hedge payment, currency, rate, spread or similar exposure, between the City and a counterparty (a Hedge Provider ); provided that not less than 30 days prior to the City s execution of such contract or agreement, each Rating Agency which maintains a rating with respect to any Revenue Obligations receives notice in writing of the City s pending execution thereof; and provided further that at the time of origination each Rating Agency which maintains a rating with respect to any Indebtedness confirms in writing to the City that the City s execution and delivery of such contract will not result in a downgrading, withdrawal or suspension of such rating. Hedge Provider is defined above in the definition of Hedge Agreement. Holder or holder or any similar term means, when used with reference to a Revenue Obligation, the registered owner of such Revenue Obligation. Indebtedness means any indebtedness or liability for borrowed money, any installment sale obligation or any obligation under any Lease that is capitalized under generally accepted accounting principles, in each case which the City may by law or contract be obligated to pay from the Water Operating Fund or the Wastewater Operating Fund, as applicable. A-9

120 Independent Counsel means any attorney or attorneys duly admitted to practice law before the highest court of any state who have regularly engaged in the practice of law as their primary occupation for not less than five years and who are not officers or full-time employees of the City. Bond Counsel to the City may be deemed Independent Counsel. Independent Public Accountant means an individual, partnership or corporation engaged in the accounting profession, either entitled to practice, or having members or officers entitled to practice, as a certified public accountant under the laws of the State of Maryland or any other State in the United States of America and in fact independent, appointed by the City and qualified to pass upon those matters required by the Resolution to be passed upon by an Independent Public Accountant. Insurance Default has the meaning, with respect to the Existing Bonds, as defined and described in each Resolution. Insurer means, with respect to the Existing Bonds, the Insurers as described in each Resolution. Interest Payment Date means, unless otherwise provided in the Existing Bonds or by Supplemental Resolution with respect to any Series of Additional Revenue Obligations, January 1 and July 1. Investment Direction means a written direction given to the Trustee by the City from time to time with respect to the investment of moneys on deposit in the funds and accounts established in the Resolution in one or more Permitted Investments. Each Investment Direction shall be signed by an Authorized Officer of the City. An Investment Direction may specify the Permitted Investments to be acquired or describe, in detail satisfactory to the Trustee, categories of Permitted Investments to be acquired. below. Leases shall have the meaning given to such term under the heading Permitted Transactions Liquidity Facility means a written commitment to provide money to purchase or retire any Indebtedness if (i) on the date of delivery of such Liquidity Facility, the unsecured indebtedness of the provider of such Liquidity Facility is rated by any two Rating Agencies in one of the two highest Rating Categories and (ii) as of any particular date of determination, not more than 10% of any amount realized under such Liquidity Facility for the payment of the principal or the purchase or redemption price of such Indebtedness (exclusive of amounts realized for the payment of accrued interest on such Indebtedness) shall be required to be repaid by the City within the succeeding 12-month period. Maximum Annual Debt Service means, when used with reference to any Revenue Obligations for any Bond Year or Fiscal Year, as of any particular date of computation, the greatest amount required in the then current or any future Bond Year or Fiscal Year, respectively, to pay the Debt Service Requirements of such Revenue Obligations. Mayor or Acting Mayor means the Mayor of the City elected from time to time in accordance with the City Charter, or in his absence, the President of the City Council, or other designee, appointed in accordance with the City Charter. Moody s means Moody s Investors Service, Inc., a Delaware corporation, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the City. A-10

121 Net Revenues means, as the context requires, (A) under the 2002 Water Resolution, Operating Revenues, minus Operating Expenses, plus the amounts, if any, transferred from the Rate Stabilization Fund to the Water Operating Fund, plus investment earnings on all Trusteed Funds, other than the Construction Funds, and Non-Trusteed Funds, minus the amounts, if any, transferred from the Water Operating Fund to the Rate Stabilization Fund, or (B) under the 2002 Wastewater Resolution, Operating Revenues, minus Operating Expenses, plus the amounts, if any, transferred from the Rate Stabilization Fund to the Wastewater Operating Fund, plus investment earnings on all Trusteed Funds, other than the Construction Funds, and Non-Trusteed Funds, minus the amounts, if any, transferred from the Wastewater Operating Fund to the Rate Stabilization Fund. Non-Trusteed Funds means, as the context requires, (A) under the 2002 Water Resolution, funds other than the Trusteed Funds held by the City and credited to the Water Utility, or (B) under the 2002 Wastewater Resolution, funds other than the Trusteed Funds held by the City and credited to the Wastewater Utility. Operating Expenses mean all expenses which may reasonably be determined by the City in its annual budget to be directly or indirectly attributable to the ownership or operation of the Water Utility or the Wastewater Utility, as applicable, and payable as operating expenses without regard to the treatment of such expenses under generally accepted accounting principles, including, without limitation, reasonable and usual expenses of administration, operation, maintenance and repair, which may include expenses not annually recurring, costs of billing and collecting the rates, fees and charges for the use of or the services furnished by the Water Utility or the Wastewater Utility, as applicable, insurance and surety bond premiums and reserves, other charges and fees necessary for the maintenance of adequate insurance coverage for the City and the Water Utility or the Wastewater Utility, as applicable, fees and payments for any Credit Facility, legal, engineering and auditing expenses, expenses and compensation of the Trustee, reimbursement to the City s general fund for the cost of services rendered with respect to the Water Utility or the Wastewater Utility, as applicable, and other expenses of the City required to be paid by law or under the Resolution or any Supplemental Resolution, but will not include (i) any allowance for amortization or depreciation, (ii) deposits or transfers to the Debt Service Fund, the Debt Service Reserve Fund, the Subordinate Debt Service Fund, the Rate Stabilization Fund or the Residual Fund, (iii) payments for existing Debt Service and (iv) expenditures which the City makes an election to capitalize. Operating Requirements of the Wastewater Utility means, for any period, the amount of money necessary to meet (i) all operating expenses of the Wastewater Utility, exclusive of depreciation; (ii) the Debt Service Requirements with respect to Indebtedness in respect of the Wastewater Utility; (iii) all amounts necessary to maintain the Operating Reserve of the Wastewater Utility; (iv) all amounts payable to any reserve funds established under the Wastewater Resolution for the payment of Indebtedness in respect of the Wastewater Utility; (v) all amounts necessary to maintain the Ordinary Capital Requirement; (vi) all amounts necessary to fund appropriations for specific capital projects to the extent that such projects are expected to be paid from Operating Revenues of the Wastewater Utility; (vii) all amounts necessary to compensate the Wastewater Utility for any operating deficit from the previous Fiscal Year or Years; (viii) all payments of principal, premium, if any, and interest on the City s general obligation bonds issued to provide the Wastewater Facilities; and (ix) all other amounts which the City may by law or contract be obligated to pay from the Wastewater Operating Fund with respect to the Wastewater Utility. Operating Requirements of the Water Utility means, for any period, the amount of money necessary to meet (i) all operating expenses of the Water Utility, exclusive of depreciation; (ii) the Debt Service Requirements with respect to Indebtedness in respect of the Water Utility; (iii) all amounts necessary to maintain the Operating Reserve of the Water Utility; (iv) all amounts payable to any reserve A-11

122 funds established under the Water Resolution for the payment of Indebtedness in respect of the Water Utility; (v) all amounts necessary to maintain the Ordinary Capital Requirement; (vi) all amounts necessary to fund appropriations for specific capital projects to the extent that such projects are expected to be paid from Operating Revenues of the Water Utility; (vii) all amounts necessary to compensate the Water Utility for any operating deficit from the previous Fiscal Year or Years; (viii) all payments of principal, premium, if any, and interest on the City s general obligation bonds issued to provide the Water Facilities; and (ix) all other amounts which the City may by law or contract be obligated to pay from the Water Operating Fund with respect to the Water Utility. Operating Reserve Fund means the Operating Reserve Fund established by the City under the 2002 Water Resolution or the 2002 Wastewater Resolution, as applicable, as a Non-Trusteed Fund. Operating Reserve of the Wastewater Utility means operating reserves in an amount determined by the City to be adequate operating reserves for the Wastewater Utility, but in any event no less than eight percent of the operating expenses of the Wastewater Utility shown on the budget of the Wastewater Utility for the period of calculation, exclusive of depreciation. Operating Reserve of the Water Utility means operating reserves in an amount determined by the City to be adequate operating reserves for the Water Utility, but in any event no less than eight percent of the operating expenses of the Water Utility shown on the budget of the Water Utility for the period of calculation, exclusive of depreciation. Operating Revenues means (A) under the 2002 Water Resolution, all income, revenue, receipts and other moneys of the Water Utility, including, without limitation, revenues of the Water Utility arising from Rates and Charges established by the City and the collection of such Rates and Charges and all amounts derived by the City from the ownership and operation of the Water Utility and all accounts, general intangibles and contract or other rights to receive the same, and the proceeds thereof, but exclusive of Capital Receipts of the Water Utility, and (B) under the 2002 Wastewater Resolution, all income, revenue, receipts and other moneys of the Wastewater Utility, including, without limitation, revenues of the Wastewater Utility arising from Rates and Charges established by the City and the collection of such Rates and Charges and all amounts derived by the City from the ownership and operation of the Wastewater Utility and all accounts, general intangibles and contract or other rights to receive the same, and the proceeds thereof, but exclusive of Capital Receipts of the Wastewater Utility. Operating Revenues does not include revenues arising in connection with Permitted Transactions as described below under the heading Permitted Transactions. Optional Tender Indebtedness means any Indebtedness that is subject to optional or mandatory tender by the holder thereof (including, without limitation, any mandatory tender in connection with the expiration of any Credit Facility securing such Indebtedness) for purchase or redemption prior to the stated maturity date thereof if the purchase or redemption price of such Indebtedness is under any circumstances payable from the Water Operating Fund (with respect to the Water Utility) or from the Wastewater Operating Fund (with respect to the Wastewater Utility), as applicable. Ordinary Capital Requirement means, for any period, (A) with respect to the Water Utility, the amount of appropriation authority included in the Water Utility capital budget portion of the Ordinance of Estimates as deemed necessary for the payment of normal recurring capital costs related to the renewing, improving, rebuilding or extending of the Water Facilities during such period and expected to be provided from current Operating Revenues of the Water Utility; provided, however, that if as of June 30 of any Fiscal Year there shall be an amount credited to any capital reserve account within the Water Utility which shall not have been allocated, for payment of the cost of a specific capital project of the Water Utility, then as of such date the Ordinary Capital Requirement shall be reduced for such Fiscal Year by A-12

123 such amount, and (B) with respect to the Wastewater Utility, the amount of appropriation authority included in the Wastewater Utility capital budget portion of the Ordinance of Estimates as deemed necessary for the payment of normal recurring capital costs related to the renewing, improving, rebuilding or extending of the Wastewater Facilities during such period and expected to be provided from current Operating Revenues of the Wastewater Utility; provided, however, that if as of June 30 of any Fiscal Year there shall be an amount credited to any capital reserve account within the Wastewater Utility which shall not have been allocated, for payment of the cost of a specific capital project of the Wastewater Utility, then as of such date the Ordinary Capital Requirement shall be reduced for such Fiscal Year by such amount. Outstanding or outstanding means, as of any particular date, (a) when used with reference to Revenue Obligations, all Revenue Obligations authenticated and delivered under the Resolution except (i) any Revenue Obligation cancelled by the Trustee or the Registrar (or delivered to the Trustee or the Registrar for cancellation) at or before such date, (ii) any Revenue Obligation for the payment of the principal or Redemption Price of and interest on which provision shall have been made as provided in the Resolution, (iii) any Revenue Obligation in lieu of or in substitution for which a new Revenue Obligation shall have been authenticated and delivered pursuant to the Resolution and (iv) so long as any Senior Revenue Obligations are Outstanding, the Subordinate Revenue Obligations; and (b) when used with reference to any other Indebtedness, except as otherwise provided in any resolution of the City authorizing the issuance of any such Indebtedness, all Indebtedness theretofore issued or incurred other than any such Indebtedness that is deemed to have been paid and discharged under generally accepted accounting principles and that is not secured by any Operating Revenues. Participant, when used with respect to any Securities Depository, means any participant of such Securities Depository. Permitted Investments means, to the extent permitted by applicable law: (A) (B) (C) (D) Cash; U.S. Dollar-denominated senior debt sec urities of the United States of America issued by the U.S. Department of the Treasury (including obligations issued or held in book entry form on the books of the Department of the Treasury) and backed by the full faith and credit of the United States of America; Collateralized investment agreements provided by a financial institution whose long term unsecured debt is rated by any two Rating Agencies in one of the three highest Rating Categories; U.S. Dollar-denominated obligations, debentures, notes or other evidence of indebtedness issued or guaranteed, directly or indirectly, by any of the following federally sponsored agencies or instrumentalities, which obligations are backed by the full faith and credit of the United States of America: Commodity Credit Corporation Export-Import Bank of the United States Farm Credit System Financial Assistance Corporation Federal Financing Bank Federal Housing Administration General Services Administration Government National Mortgage Association (GNMA) A-13

124 Housing and Urban Development Maritime Administration Rural Housing Services (formerly, Farmers Home Administration) Rural Electrification Administration Rural Telephone Bank Small Business Administration Washington Metropolitan Area Transit Authority such other federally sponsored agencies or instrumentalities which may hereafter be created or otherwise approved by the Insurer of the affected series of Bonds; (E) U.S. Dollar-denominated obligations, debentures, notes or other evidence of indebtedness issued or guaranteed, directly or indirectly, by any of the following federally sponsored agencies or instrumentalities, which obligations are not backed by the full faith and credit of the United States of America: Federal Farm Credit Banks Funding Corporation Federal Home Loan Banks (including their Consolidated Obligations issued through the Office of Finance of the Federal Home Loan Bank System) Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) Financing Corporation (FICO) Private Export Funding Corporation Resolution Funding Corporation (REFCORP) Student Loan Marketing Association (SALLIE MAE) Tennessee Valley Authority such other federally sponsored agencies or instrumentalities which may hereafter be approved by the Insurer of the affected series of Bonds; (F) (G) (H) U.S. Dollar-denominated obligations issued by public agencies, instrumentalities or municipalities and fully secured as to the payment of both principal and interest by a pledge of annual contributions under an annual contributions contract or contracts with the United States of America; or temporary notes, preliminary loan notes or project notes issued by public agencies, instrumentalities or municipalities, in each case fully secured as to payment of both principal and interest by a requisition or payment agreement with the United States of America; U.S. Dollar-denominated demand deposits, interest-bearing time deposits, certificates of deposit, federal funds, bankers acceptances or other similar banking arrangements, in each case issued by a domestic commercial bank (including the branch office located in the United States of a foreign bank) whose short term certificates of deposit are rated, on the date of purchase, in the highest ratings category (disregarding any gradations within such category) for comparable types of obligations by a nationally recognized securities rating organization ( NRSRO ), and which mature no more than 360 days after the date of purchase; and deposits which are fully insured by the Federal Deposit Insurance Corporation (FDIC ) in banks that have capital and surplus of at least $50,000,000; Repurchase agreements with (i) registered broker-dealers or (ii) domestic commercial banks that are members of the FDIC or any members of the Corporation of Primary Dealers in United States Government Securities (or any successor thereof), in each case the underlying securities of which are of the type described in (A)-(G) above; provided A-14

125 that, in the case of (ii) above, the long term senior unsecured debt obligations of the issuer (or of any unconditional guarantor) are rated, at the time of purchase, A2 or better by Moody s or A or better by S&P; (I) (J) (K) (L) (M) (N) Direct obligations of any state, political subdivision or governmental authority or agency within the territorial United States of America whose debt obligations are rated, at the time of purchase, Aa2 or better by Moody s or AA or better by S&P, or any general obligation fully and unconditionally guaranteed as to principal and interest by any state, political subdivision or governmental authority or agency within the territorial United States of America whose debt obligations are rated, at the time of purchase, A2 or better by Moody s or A or better by S&P; Commercial paper with an original maturity at issuance of not more than 270 days, which is rated, at the time of purchase, in the highest ratings category (disregarding any gradations within such category) for comparable types of obligations by a NRSRO; other corporate debt instruments or any obligations which are rated, at the time of purchase, in one of the 2 highest ratings categories (disregarding any gradations within such categories) for comparable types of obligations by Moody s or S&P; Money market funds rated Aaa by Moody s or Aam (or Aam-G) or better by S&P, including any such fund maintained by the Trustee (including any proprietary mutual fund of the Trustee or any affiliate of the Trustee for which the Trustee or an affiliate of the Trustee serves as investment advisor or provides other services to such mutual fund and receives reasonable compensation therefor); Municipal obligations, the payment of principal, interest and redemption premium, if any, of which are irrevocably secured by obligations of the type described in (A)-(E) above, and which have been deposited in an escrow arrangement that is irrevocably pledged to the payment of such obligations; Investment agreements, including forward purchase agreements to purchase any of the investments described above, or guaranteed investment contracts with any company or financial institution; provided, that such agreements or contracts, or the senior unsecured long term debt obligations of the issuer (or of any unconditional guarantor) are rated, at the time such agreements or contracts are entered into, in one of the 2 highest ratings categories (disregarding any gradations within such categories) for comparable types of obligations by a NRSRO; and Other forms of investment approved in writing by the Insurer of the affected series of Bonds. Pledged Amounts means (i) the Operating Revenues, (ii) amounts (including investment earnings thereon) in any fund or account established pursuant to the Resolution for the payment of any Revenue Obligations, (iii) unexpended proceeds of Revenue Obligations, including investment earnings on such proceeds, (iv) amounts due and payable to the City under or pursuant to any Hedge Agreement, and (v) other amounts legally available for the payment of the principal of, and premium, if any, and interest on Revenue Obligations. Rates and Charges means, as the context requires, (A) under the 2002 Water Resolution, the rates and charges assessed or established by the Board of Estimates in accordance with Article 24, Section 3-1 of the City Code, as amended from time to time, for the supply and use of water for any purpose and A-15

126 at any point in or outside Baltimore City, either by meter, fixed charge or otherwise, or (B) under the 2002 Wastewater Resolution, the rates and charges assessed or established by the Board of Estimates in accordance with Article 24, Section 3-1 of the City Code, as amended from time to time, for wastewater for any purpose and at any point in or outside Baltimore City, either by meter, fixed charge or otherwise. Rating Agency means, under a Resolution, any nationally recognized securities rating agency that, at the request of the City, shall have assigned a rating that is then in effect with respect to any Revenue Obligations issued under such Resolution, and their successors and assigns, and Rating Agencies means each such Rating Agency, collectively, or if there is no rating agency then assigning a rating on any of the Revenue Obligations issued under such Resolution, any nationally recognized securities rating agency. Rating Category means one of the general rating categories of a Rating Agency, without regard, in the case of long-term rating categories, to any refinement or gradation of such rating category by numerical modifier or otherwise. Redemption Instruction means a written direction to the Trustee with respect to the purchase or redemption of Revenue Obligations in accordance with the Resolution specifying the Revenue Obligations to be purchased or redeemed (as the case may be), and the provisions of the Resolution authorizing such redemption. Redemption Instructions shall be signed by an Authorized Officer of the City. Redemption Price means, when used with respect to Revenue Obligations or any portion thereof, the principal amount of such Revenue Obligations or such portion thereof plus the applicable premium, if any, payable upon redemption thereof pursuant to the Resolution. Replacement Bonds means the Series 2013 Bonds that are issued upon the discontinuance of the maintenance of the Series 2013 Bonds in book-entry form or the appointment of a replacement Securities Depository in accordance with the Resolution. Requisition means a written request for the payment of moneys from any Construction Fund in accordance with the Resolution, signed by the Director of Finance. Residual Fund means the Residual Fund established by the City, in its discretion, as a Non- Trusteed Fund, for deposits as contemplated by the Resolution. Revenue Notes means any notes of the City issued in accordance with the Resolution, the payment of the principal of and interest on which is subordinate to the payment of the principal of and interest on the Senior Revenue Obligations. Bonds. Revenue Obligations means the Bonds and Revenue Notes, collectively, including the Existing Securities Depository means The Depository Trust Company, a corporation organized and existing under the laws of the State of New York, and any other securities depository for the Series 2013 Bonds, and its successors. Senior Revenue Obligations means Revenue Obligations other than Subordinate Revenue Obligations. A-16

127 Serial Revenue Obligations means the Revenue Obligations of any Series that are stated to mature in consecutive annual installments. Series 1993-A Bonds means, as the context requires, (A) under the Water Resolution, $58,850,000 Refunding Revenue Bonds (Water Projects) Series 1993-A, of which $23,900,000 remains Outstanding, or (B) under the Wastewater Resolution, $34,450,000 Refunding Revenue Bonds (Wastewater Projects) Series 1993-A, of which $14,000,000 remains Outstanding. Series 1994-A Bonds means, as the context requires, (A) under the Water Resolution, $46,095,000 Project and Refunding Revenue Bonds (Water Projects) Series 1994-A, of which $12,610,000 remains Outstanding, and (B) under the Wastewater Resolution, $18,125,000 Project and Refunding Revenue Bonds (Wastewater Projects) Series 1994-A, of which $8,730,000 remains Outstanding. Series 1994-B Bonds means, under the Wastewater Resolution, $6,619,646 Revenue Bonds (Wastewater Projects) Series 1994-B, of which $802,163 remains Outstanding. Series 1994-C Bonds means, under the Wastewater Resolution, $6,181,014 Revenue Bonds (Wastewater Projects) Series 1994-C, of which $764,704 remains Outstanding. Series 1994-D Bonds means, under the Wastewater Resolution, $4,312,538 Revenue Bonds (Wastewater Projects) Series 1994-D, of which $580,803 remains Outstanding. Series 1996-B Bonds means, under the Wastewater Resolution, $3,067,253 Project Revenue Bonds (Wastewater Projects) Series 1996-B, of which $795,308 remains Outstanding. Series 1998-A Bonds means, under the Wastewater Resolution, $6,420,000 Project Revenue Bonds (Wastewater Projects) Series 1998-A, of which $2,118,330 remains Outstanding. Series 1999-A Bonds means, under the Wastewater Resolution, $2,574,042 Project Revenue Bonds (Wastewater Projects) Series 1999-A, of which $908,678 remains Outstanding. Series 1999-B Bonds means, under the Wastewater Resolution, $10,324,370 Project Revenue Bonds (Wastewater Projects) Series 1999-B, of which $4,215,421 remains Outstanding. Series 2001-A Bonds means, under the Wastewater Resolution, $12,774,339 Project Revenue Bonds (Wastewater Projects) Series 2001-A, of which $6,552,054 remains Outstanding. Series 2002A Bonds means, as the context requires, (A) under the Water Resolution, $118,920,000 Project and Refunding Revenue Bonds (Water Projects) Series 2002A, of which $108,930,000 remains Outstanding, or (B) under the Wastewater Resolution, $68,575,000 Project and Refunding Revenue Bonds (Wastewater Projects) Series 2002A, of which $59,420,000 remains Outstanding. Series 2002B Bonds means, as the context requires, (A) under the Water Resolution, $18,300,000 Refunding Revenue Bonds (Water Projects) Auction Rate Notes, Series 2002B, of which $18,300,000 remains Outstanding, or (B) under the Wastewater Resolution, $25,300,000 Refunding Revenue Bonds (Wastewater Projects) Auction Rate Notes, Series 2002B, of which $25,300,000 remains Outstanding. A-17

128 Series 2002C Bonds means, as the context requires, (A) under the Water Resolution, $40,800,000 Refunding Revenue Bonds (Water Projects) Subordinate Lien Auction Rate Notes, Series 2002C, of which $40,800,000 remains Outstanding, or (B) under the Wastewater Resolution, $48,300,000 Project and Refunding Revenue Bonds (Wastewater Projects) Subordinate Lien Auction Rate Notes, Series 2002C, of which $44,700,000 remains Outstanding. Series 2003A Bonds means, as the context requires, (A) under the Water Resolution, $49,665,000 Project Revenue Bonds (Water Projects) Series 2003A, of which $12,835,000 remains Outstanding, or (B) under the Wastewater Resolution, $26,860,000 Project Revenue Bonds (Wastewater Projects) Series 2003A, of which $6,035,000 remains Outstanding. Series 2003B Bonds means, as the context requires, (A) under the Water Resolution, $2,030,810 Project Revenue Bonds (Water Projects) Series 2003B, of which $1,242,410 remains Outstanding, or (B) under the Wastewater Resolution, $6,041,587 Project Revenue Bonds (Wastewater Projects) Series 2003B, of which $3,194,170 remains Outstanding. Series 2004A Wastewater Bonds means, under the Wastewater Resolution, the $17,500,000 Project Revenue Bonds (Wastewater Projects) Auction Rate Notes, Series 2004A, of which $17,100,000 remains Outstanding. Series 2004A Water Bonds means, under the Water Resolution, the $6,237,353 Project Revenue Bonds (Water Projects) Series 2004A, of which $3,982,584 remains Outstanding. Series 2004B Wastewater Bonds means, under the Wastewater Resolution, the $18,036,481 Subordinate Project Revenue Bonds (Wastewater Projects), Series 2004B, of which $8,215,638 remains Outstanding. Series 2004B Water Bonds means, under the Water Resolution, the $47,500,000 Project Revenue Bonds (Water Projects) Auction Rate Notes, Series 2004B, of which $44,000,000 remains Outstanding. Series 2004C Wastewater Bonds means, under the Wastewater Resolution, the $16,638,681 Subordinate Project Revenue Bonds (Wastewater Projects), Series 2004C, of which $9,785,827 remains Outstanding. Series 2005A Wastewater Bonds means, under the Wastewater Resolution, the $21,396,098 Subordinate Project Revenue Bonds (Wastewater Projects) Series 2005A, of which $10,929,090 remains Outstanding. Series 2005A Water Bonds means, under the Water Resolution, the $16,330,000 Project Revenue Bonds (Water Projects), Series 2005A, of which $1,670,000 remains Outstanding. Series 2005B Wastewater Bonds means, under the Wastewater Resolution, the $39,295,000 Project Revenue Bonds (Wastewater Projects), Series 2005B, of which $11,620,000 remains Outstanding. Series 2006A Wastewater Bonds means, under the Wastewater Resolution, the $29,994,730 Subordinate Project Revenue Bonds (Wastewater Projects), Series 2006A, of which $17,191,609 remains Outstanding. Series 2006A Water Bonds means, under the Water Resolution, the $26,675,000 Subordinate Project Revenue Bonds (Water Projects), Series 2006A, of which $23,890,000 remains Outstanding. A-18

129 Series 2006B Wastewater Bonds means, under the Wastewater Resolution, the $6,640,260 Project Revenue Bonds (Wastewater Projects), Series 2006B, of which $4,419,647 remains Outstanding. Series 2006C Wastewater Bonds means, under the Wastewater Resolution, the $50,355,000 Project Revenue Bonds (Wastewater Projects), Series 2006C, of which $27,655,000 remains Outstanding. Series 2007A Wastewater Bonds means, under the Wastewater Resolution, the $39,835,833 Subordinate Project Revenue Bonds (Wastewater Projects), Series 2007A, of which $27,239,274 remains Outstanding. Series 2007A Water Bonds means, under the Water Resolution, the $2,245,508 Project Revenue Bonds (Water Projects), Series 2007A, of which $1,592,487 remains Outstanding. Series 2007B Water Bonds means, under the Water Resolution, the $50,740,000 Refunding Revenue Bonds (Water Projects), Series 2007B, of which $50,585,000 remains Outstanding. Series 2007B Wastewater Bonds means, under the Wastewater Resolution, the $3,089,895 Project Revenue Bonds (Wastewater Projects), Series 2007B, of which $2,199,755 remains Outstanding. Series 2007C Wastewater Bonds means, under the Wastewater Resolution, the $60,140,000 Refunding Revenue Bonds (Wastewater Projects), Series 2007C, of which $59,915,000 remains Outstanding. Series 2007C Water Bonds means, under the Water Resolution, the $40,275,000 Revenue Bonds (Water Projects), Series 2007C, of which $37,135,000 remains Outstanding. Series 2007D Wastewater Bonds means, under the Wastewater Resolution, the $110,310,000 Revenue Bonds (Wastewater Projects), Series 2007D, of which $102,165,000 remains Outstanding. Series 2008A Wastewater Bonds means, under the Wastewater Resolution, the $56,615,000 Project Revenue Bonds (Wastewater Projects), Series 2008A, of which $51,410,000 remains Outstanding. Series 2008A Water Bonds means, under the Water Resolution, the $27,175,000 Subordinate Project Revenue Bonds (Water Projects), Series 2008A, of which $24,510,000 remains Outstanding. Series 2009A Wastewater Bonds means, under the Wastewater Resolution, the $8,098,240 Subordinate Project Revenue Bonds (Wastewater Projects), Series 2009A, of which $6,818,675 remains Outstanding. Series 2009A Water Bonds means, under the Water Resolution, the $21,635,000 Subordinate Project Revenue Bonds (Water Projects), Series 2009A, of which $20,050,000 remains Outstanding. Series 2009B Wastewater Bonds means, under the Wastewater Resolution, the $2,000,000 Project Revenue Bonds (Wastewater Projects), Series 2009B, of which $1,466,339 remains Outstanding. Series 2009B Water Bonds means, under the Water Resolution, the $17,000,000 Subordinate Project Revenue Bonds (Water Projects), Series 2009B, of which $17,000,000 remains Outstanding. Series 2009C Wastewater Bonds means, under the Wastewater Resolution, the $29,300,000 Project Revenue Bonds (Wastewater Projects), Series 2009C, of which $28,140,000 remains Outstanding. A-19

130 Series 2009E Wastewater Bonds means, under the Wastewater Resolution, the $3,000,000 Project Revenue Bonds (Wastewater Projects), Series 2009E, of which $2,999,000 remains Outstanding. Series 2011A Wastewater Bonds means, under the Wastewater Resolution, the $103,865,000 Project Revenue Bonds (Wastewater Projects), Series 2011A, of which $100,665,000 remains Outstanding. Series 2011A Water Bonds means, under the Water Resolution, the $53,060,000 Project Revenue Bonds (Water Projects), Series 2011A, of which $51,150,000 remains Outstanding. Series 2011B Wastewater Bonds means, under the Wastewater Resolution, the $3,706,500 Project Revenue Bonds (Wastewater Projects), Series 2011B, of which $3,706,500 remains Outstanding. Series 2011B Water Bonds means, under the Water Resolution, the $4,356,000 Project Revenue Bonds (Water Projects), Series 2011B, of which $4,356,000 remains Outstanding. Series 2011C Wastewater Bonds means, under the Wastewater Resolution, the $1,235,500 Project Revenue Bonds (Wastewater Projects), Series 2011C, of which $1,235,000 remains Outstanding. Series 2011C Water Bonds means, under the Water Resolution, the $1,452,000 Project Revenue Bonds (Water Projects), Series 2011C, of which $1,452,000 remains Outstanding. Series 2013A Wastewater Bonds means, under the Wastewater Resolution, the $31,844,000 Project Revenue Bonds (Wastewater Projects), Series 2013A, of which $31,844,000 remains Outstanding. Series 2013B Wastewater Bonds means, under the Wastewater Resolution, the $3,000,000 Project Revenue Bonds (Wastewater Projects), Series 2013B, of which $3,000,000 remains Outstanding. Sinking Fund Installment means the amount provided in the Resolution and in each Supplemental Resolution authorizing the issuance of Term Revenue Obligations to redeem or pay at maturity Term Revenue Obligations of each Series as provided in the Resolution or such Supplemental Resolution; less the amount of any credit arising from the purchase, redemption or delivery for cancellation of Term Revenue Obligations of such Series as provided in the Resolution. S&P means Standard & Poor s Ratings Service, a division of The McGraw-Hill Companies and its successors and assigns, and, if such division shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the City. Subordinate Revenue Obligations means (A) under the 2002 Water Resolution, Revenue Notes, the Series 2002C Water Bonds and any Additional Revenue Bonds issued as Subordinate Revenue Obligations pursuant to the 2002 Water Resolution, including the Series 2006A Water Bonds, the Series 2008A Water Bonds, the Series 2009A Water Bonds, the Series 2009B Water Bonds, and the Series 2013C Water Bonds, and (B) under the 2002 Wastewater Resolution, Revenue Notes, the Series 2002C Wastewater Bonds and any Additional Revenue Bonds issued as Subordinate Revenue Obligations pursuant to the 2002 Wastewater Resolution, including the Series 2004B Wastewater Bonds, the Series 2004C Wastewater Bonds, the Series 2005A Wastewater Bonds, the Series 2006A Wastewater Bonds, the Series 2007A Wastewater Bonds, the Series 2009A Wastewater Bonds, and the Series 2013E Wastewater Bonds. A-20

131 Supplemental Resolution means any resolution of the City amending, modifying or supplementing the Resolution or any Supplemental Resolution adopted and becoming effective in accordance with the terms of the Resolution. Tax-Exempt Revenue Obligations means the Existing Bonds and any other Revenue Obligations with respect to which there shall have been delivered to the City an opinion of Bond Counsel to the effect that the interest on such Revenue Obligations is excludable from gross income for federal income tax purposes. Term Revenue Obligations means the Revenue Obligations of any Series, other than Serial Revenue Obligations, payable prior to or at their stated maturity from Sinking Fund Installments deposited in the Sinking Fund Account maintained for such Term Revenue Obligations. Transfer Direction means a written direction given to the Trustee from time to time with respect to the transfer in accordance with the Resolution of moneys on deposit in one fund or account established under the Resolution to another fund or account established under the Resolution, signed by an Authorized Officer of the City. Trusteed Funds means those funds established as such pursuant to the Resolution and held by the Trustee. Variable Rate Indebtedness means, as of any particular date, Indebtedness the interest rate on which is not established at a fixed rate or rates for the remaining term thereof, including notes in the nature of commercial paper. Wastewater Capital Fund means the fund of the City to which Capital Receipts of the Wastewater Utility are credited. Water Capital Fund means the fund of the City to which Capital Receipts of the Water Utility are credited. Wastewater Facilities means all wastewater facilities of the City, including the Financed Facilities. Water Facilities means all water facilities of the City, including the Financed Facilities. Wastewater Operating Fund means the fund of the City to which Operating Revenues of the Wastewater Utility are credited. Water Operating Fund means the fund of the City to which Operating Revenues of the Water Utility are credited. Water Quality Bonds means the Series 1994-B Bonds, the Series 1994-C Bonds, the Series 1994-D Bonds, the Series 1996-B Bonds, the Series 1998-A Bonds, the Series 1999-A Bonds, the Series 1999-B Bonds and the Series 2001-A Bonds identified under the 2002 Wastewater Resolution. Wastewater Utility means the wastewater utility conducted as a separate enterprise pursuant to Article VI, Section 18 of the City Charter. Water Utility means the water utility conducted as a separate enterprise pursuant to Article VI, Section 18 of the City Charter. A-21

132 Summary of Certain Provisions of the Resolutions The following is a summary of certain provisions of the Resolutions. This is not a complete recital of the terms and provisions of either Resolution, and reference should be made to each Resolution for a complete statement of its terms and provisions. Rules of Construction. Any reference to a particular percentage or proportion of the holders of Revenue Obligations shall mean the holders at the particular time of the specified percentage or proportion in aggregate principal amount of all Revenue Obligations then Outstanding under the Resolution, except (i) Revenue Obligations held by or for the account of the City, whether or not pledged to or by the City to secure any indebtedness; provided, however, that Revenue Obligations so pledged may be regarded as Outstanding for the purposes of this heading if the pledgee shall establish to the satisfaction of the Trustee the pledgee s right to vote such Revenue Obligations; and (ii) for so long as any Senior Revenue Obligations are Outstanding, the Subordinate Revenue Obligations. For the purposes of this heading, Revenue Obligations held by any Credit Facility Provider shall not be deemed to be held by or for the account of the City. Any reference in the Resolution to Revenue Obligations the consent or direction of a specified proportion of the holders of which is required or permitted prior to the taking of any action thereunder shall mean the holders of such proportion of Outstanding Revenue Obligations as shall be affected thereby. Resolution, Pledge of Pledged Amounts and Revenue Obligations Constitute a Contract. With respect to Existing Bonds and in consideration of the purchase and acceptance of any or all Additional Revenue Obligations authorized or permitted to be issued under the Resolution by those who shall hold the same from time to time: (a) the Resolution shall be deemed to be and shall constitute a contract between the City, the Trustee and the holders from time to time of Revenue Obligations; (b) except as otherwise expressly provided in the Resolution, the pledge made in the Resolution and the covenants and agreements set forth to be performed by or on behalf of the City shall be for the equal and ratable benefit, protection and security of (i) the holders of any and all Outstanding Revenue Obligations, (ii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the provider of any Credit Facility securing such Additional Revenue Obligations, and (iii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations and the Hedge Agreement entered into with respect to such Additional Revenue Obligations, the Hedge Provider; (c) the City pledges and assigns to the Trustee any and all interest of the City in and to the Operating Revenues as security for (i) the payment of the principal or Redemption Price of and interest on, and the purchase price of, all Outstanding Revenue Obligations, (ii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the payment of amounts owing to the provider of any Credit Facility securing such Revenue Obligations, (iii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations and the Hedge Agreement entered into with respect to such Additional Revenue Obligations, the payment of amounts due and payable by the City under or pursuant to such Hedge Agreement, and (iv) the performance of any other obligation of the City under the Resolution, all in accordance with the provisions thereof; (d) the City pledges and assigns to the Trustee any and all interest of the City in and to the Trusteed Funds (other than the Rebate Funds) as security for (i) the payment of the principal or Redemption Price of and interest on, and the purchase price of, all Outstanding Revenue Obligations, A-22

133 (ii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the payment of amounts owing to the provider of any Credit Facility securing such Revenue Obligations, (iii) to the extent provided in the Resolution and in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations and the Hedge Agreement entered into with respect to such Additional Revenue Obligations, the payment of amounts due and payable by the City under or pursuant to such Hedge Agreement, and (iv) the performance of any other obligation of the City under the Resolution, all in accordance with the provisions thereof; (e) the Revenue Obligations, the City s reimbursement obligations to the provider of any Credit Facility, and any other contractual obligation of the City under or with respect to any Credit Facility or under or with respect to any Hedge Agreement shall not be general obligations of the City, but shall be special obligations only, secured by and payable only from Pledged Amounts as provided in the Resolution, and the full faith and credit of the City is not pledged to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the Revenue Obligations, amounts owing to the provider of any Credit Facility or (f) amounts due and payable by the City under or pursuant to any Hedge Agreement; and (g) the covenants, agreements, and provisions of the Resolution, the Revenue Obligations, any Credit Facilities securing such Revenue Obligations, and any Hedge Agreements entered into in connection with such Revenue Obligations shall not impose any pecuniary obligation on the City except to the extent that Pledged Amounts or other amounts made available to the City for such purpose are available to the City to satisfy such obligation; provided, however, that the pledge of the Operating Revenues to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the Subordinate Revenue Obligations shall be junior and subordinate to the pledge of the Operating Revenues to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the Senior Revenue Obligations. Refunding Revenue Obligations. The City may issue refunding obligations which may be Bonds or Revenue Notes issued under the Resolution to refund any Series (or portion thereof) of Outstanding Revenue Obligations. Additional Revenue Obligations. In addition to the Existing Bonds, the City may issue from time to time Additional Revenue Obligations to be secured by the Resolution. Additional Revenue Bonds may be issued as Senior Revenue Obligations or Subordinate Revenue Obligations. The Series 1993-A Bonds, the Series 1994-A Bonds, the Series 2002A Bonds, the Series 2002B Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Water Bonds, the Series 2004B Water Bonds, the Series 2005A Water Bonds, the Series 2007A Water Bonds, the Series 2007B Water Bonds, the Series 2007C Water Bonds, the Series 2011A Water Bonds, the Series 2011B Water Bonds, the Series 2011C Water Bonds, the Series 2013A Water Bonds, and the Series 2013B Water Bonds constitute Senior Revenue Obligations under the 2002 Water Resolution. The Series 2002C Bonds, the Series 2006A Water Bonds, the Series 2008A Water Bonds, the Series 2009A Water Bonds, the Series 2009B Water Bonds, and the Series 2013C Water Bonds constitute Subordinate Revenue Obligations under the 2002 Water Resolution. The Series 1993-A Bonds, the Series 1994-A Bonds, the Series 1994-B Bonds, the Series 1994-C Bonds, the Series 1994-D Bonds, the Series 1996-B Bonds, the Series 1998-A Bonds, the Series 1999-A Bonds, the Series 1999-B Bonds, the Series 2001-A Bonds, the Series 2002A Bonds, the Series 2002B Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Wastewater Bonds, the Series A-23

134 2005B Wastewater Bonds, the Series 2006B Wastewater Bonds, the Series 2006C Wastewater Bonds, the Series 2007B Wastewater Bonds, the Series 2007C Wastewater Bonds, the Series 2007D Wastewater Bonds, the Series 2008A Wastewater Bonds, the Series 2009B Wastewater Bonds, the Series 2009C Wastewater Bonds, the Series 2009E Wastewater Bonds, the Series 2011A Wastewater Bonds, the Series 2011B Wastewater Bonds, the Series 2011C Wastewater Bonds, the Series 2013A Wastewater Bonds, the Series 2013B Wastewater Bonds, the Series 2013C Wastewater Bonds and the Series 2013D Wastewater Bonds constitute Senior Revenue Obligations under the 2002 Wastewater Resolution. The Series 2002C Bonds, the Series 2004B Wastewater Bonds, the Series 2004C Wastewater Bonds, the Series 2005A Wastewater Bonds, the Series 2006A Wastewater Bonds, the Series 2007A Wastewater Bonds, the Series 2009A Wastewater Bonds, and the Series 2013E Wastewater Bonds constitute Subordinate Revenue Obligations under the 2002 Wastewater Resolution. The issuance of Additional Revenue Obligations shall be authorized by a Supplemental Resolution of the City. The Supplemental Resolution authorizing the issuance of any Series of Additional Revenue Obligations shall specify (i) whether such Additional Revenue Obligations constitute Senior Revenue Obligations or Subordinate Revenue Obligations, and (ii) the maturities and redemption provisions of such Additional Revenue Obligations, the form, denominations, registration provisions and provisions for the exchange of such Additional Revenue Obligations and other details of such Additional Revenue Obligations. Payment of the principal or Redemption Price of and interest on, and the purchase price of, each Series of Additional Senior Revenue Obligations shall be secured equally and ratably on a parity with the Existing Bonds and Additional Senior Revenue Obligations by the pledge of the Operating Revenues. The pledge of the Operating Revenues to the payment of the principal or Redemption Price of and interest on, and the purchase price of, Subordinate Revenue Obligations and each Series of Additional Subordinate Revenue Obligations (including Revenue Notes) shall be junior and subordinate to the pledge of the Operating Revenues to the payment of the principal or Redemption Price of and interest on, and the purchase price of, Senior Revenue Obligations. Additional Revenue Obligations may be issued only for any one or more of the following purposes: (i) refunding or advance refunding of any Series of Outstanding Revenue Obligations or any other Indebtedness ( Refunding Purposes ); (ii) obtaining funds to acquire, design, construct, reconstruct, equip, improve, finance or refinance Water Facilities or Wastewater Facilities, as applicable, including reimbursement to the City of amounts spent to finance the costs of the Financed Facilities; or (iii) the making of deposits into any reserve related to the Operating Requirements of the Water Utility or Operating Requirements of the Wastewater Utility, as applicable, as may be established in a Supplemental Resolution. So long as all requirements of the City Charter, the City Code and Applicable Laws are complied with, the City may enter into Hedge Agreements with respect to any Revenue Obligations, payable from Operating Revenues on a parity with, or subordinate to, any Revenue Obligations; provided, however, that the City s obligations under such Hedge Agreements shall not constitute Indebtedness, shall be deemed Outstanding under the Resolution only for the purpose of receiving payments thereunder as provided therein, and shall not be entitled to any other rights thereunder. A-24

135 The Supplemental Resolution authorizing the issuance of any Series of Additional Revenue Obligations may provide that proceeds realized under any Credit Facility securing the payment of such Additional Revenue Obligations shall not be available to pay the principal or Redemption Price of or interest on, or the purchase price of, any other Revenue Obligations. In order to issue Additional Revenue Obligations, there must be delivered to the Trustee: (a) a copy of the applicable Supplemental Resolution authorizing the issuance of such Additional Revenue Obligations, certified by an Authorized Officer of the City; (b) the amount, if any, necessary for deposit in the Debt Service Reserve Fund to make the amount therein equal to the Debt Service Reserve Fund Requirement, as certified by an Authorized Officer of the City; (c) an opinion of Bond Counsel to the effect that: (i) Additional Revenue Obligations executed, authenticated and delivered as provided in the Resolution have been duly and validly authorized and issued in accordance with law, the Resolution and the applicable Supplemental Resolution of the City authorizing such Additional Revenue Obligations and constitute valid and binding special obligations of the City; and (ii) the issuance of such Additional Revenue Obligations will not adversely affect the excludability from gross income, for federal income tax purposes, of interest paid on any Tax-Exempt Revenue Obligations theretofore issued; (d) a certificate of an Authorized Officer of the City stating that (i) the Additional Revenue Obligations to be authenticated have not been theretofore issued on the basis of the applicable Supplemental Resolution of the City authorizing such Additional Revenue Obligations; and (ii) upon the authentication and delivery of such Additional Revenue Obligations no Event of Default exists under the Resolution or any applicable Supplemental Resolution of the City authorizing Revenue Obligations; (e) a written order of the City for the authentication and delivery of such Additional Revenue Obligations and directing the disbursement of the proceeds by the Trustee in accordance with the Supplemental Resolution authorizing the issuance of such Additional Revenue Obligations; (f) a certificate of an Authorized Officer of the City stating that the proceeds of the Additional Revenue Obligations to be issued and other available funds specified by the City available for such purpose will be sufficient to provide for the payment of the estimated costs with respect to the acquisition, design, construction, reconstruction, improvement, equipping and financing of the Financed Facilities intended to be funded in whole or in part by such Additional Revenue Obligations; (g) for the issuance of Additional Senior Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Senior Revenue Obligations, Net Revenues would have been at least equal to 1.15 times the Maximum Annual Debt Service on outstanding Senior Revenue Obligations, assuming the issuance of the Additional Senior Revenue Obligations and taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Senior Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; (h) for the issuance of Additional Subordinate Revenue Obligations, a certificate of an Authorized Officer of the City stating that for at least 12 consecutive months during the 18 months immediately preceding the authorization of the issuance of such Additional Subordinate Revenue Obligations, Net Revenues after payment of debt service on the Senior Revenue Obligations would have A-25

136 been at least equal to 1.10 times the Maximum Annual Debt Service on outstanding Subordinate Revenue Obligations (to be calculated to exclude therefrom principal payments in respect of Revenue Notes), assuming the issuance of the Additional Subordinate Revenue Obligations, after taking into account (i) any Rates and Charges that have been adopted but may not yet be in effect and (ii) if such Additional Subordinate Revenue Obligations are issued to finance the acquisition of existing facilities, the revenues and expenses of such existing facilities being acquired during such period; (i) a certificate of the Trustee stating that upon the issuance of such Additional Revenue Obligations the Trustee does not have notice that an Event of Default has occurred and is continuing; (j) for the issuance of the Series 2013 Bonds, an opinion of Bond Counsel to the effect that the Defeased Bonds have been defeased and are no longer Outstanding; (k) Agreement; for the issuance of the Series 2013 Bonds, executed counterparts of the Escrow Deposit (l) for the issuance of the Series 2013 Bonds, a verification report of Independent Public Accountants (or other verification agents having a national reputation in the field of verifying defeasance escrows), to the effect that provision shall have been made by the City for the payment to the Holders of the Refunded Bonds of the full amount to which such Holders would be entitled by way of principal or Redemption Price thereof and interest thereon to the date of maturity or redemption of the Refunded Bonds by deposit with the Trustee (or other method satisfactory to the Trustee) of callable or noncallable Defeasance Obligations, the principal of and the interest on which when due will provide such full amount. provided, however, that the certificates required by clauses (f), (g) and (h) above shall not be required if the Additional Revenue Obligations are issued for Refunding Purposes. Creation of Funds and Accounts to Be Held by the Trustee. There have been created under the Resolution the following separate funds and accounts for the Existing Bonds and for each Series of Additional Senior Revenue Obligations, designated by reference to such Series, except as otherwise provided in the Supplemental Resolution authorizing such Additional Senior Revenue Obligations: Debt Service Fund Redemption Fund Construction Fund Purchase Fund (as to the Series 2002B Bonds and the Series 2002C Bonds) Rebate Fund In addition, there is created (i) for the Series 2002A Bonds, the Series 2002B Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Water Bonds, the Series 2004B Water Bonds, the Series 2005A Water Bonds, the Series 2007A Water Bonds, the Series 2007B Water Bonds, the Series 2007C Water Bonds, the Series 2011A Water Bonds, the Series 2011B Water Bonds, the Series 2011C Water Bonds, the Series 2013A Water Bonds, the Series 2013B Water Bonds, and all Additional Senior Revenue Obligations issued under the 2002 Water Resolution, a Debt Service Reserve Fund under the 2002 Water Resolution, and (ii) for the Series 2002A Bonds, the Series 2002B Bonds, the Series 2003A Bonds, the Series 2003B Bonds, the Series 2004A Wastewater Bonds, the Series 2005B Wastewater Bonds, the Series 2006B Wastewater Bonds, the Series 2006C Wastewater Bonds, the Series 2007B Wastewater Bonds, the Series 2007C Wastewater Bonds, the Series 2007D Wastewater Bonds, the Series 2008A Wastewater Bonds, the Series 2009B Wastewater Bonds, the Series 2009C Wastewater Bonds, the Series 2009E Wastewater Bonds, the Series 2011A Wastewater Bonds, the Series 2011B Wastewater A-26

137 Bonds, the Series 2011C Wastewater Bonds, the Series 2013A Wastewater Bonds, the Series 2013B Wastewater Bonds, the 2013C Wastewater Bonds, the 2013D Wastewater Bonds and all Additional Senior Revenue Obligations issued under the 2002 Wastewater Resolution a Debt Service Reserve Fund under the 2002 Wastewater Resolution. Separate Debt Service Reserve Funds have been established under each Resolution for certain of the Existing Bonds that constitute Existing Senior Revenue Obligations. Each Debt Service Fund, Purchase Fund, Redemption Fund, Construction Fund, Rebate Fund, and each account therein, created for Subordinate Revenue Obligations shall be separately created for each Series of Additional Subordinate Revenue Obligations, designated by reference to such Series, except as otherwise provided in the Supplemental Resolution authorizing such Additional Subordinate Revenue Obligations. Additional funds and accounts are also authorized to be created by Supplemental Resolution in order to effectuate the issuance of Additional Revenue Obligations, including (without limitation) Variable Rate Indebtedness and Optional Tender Indebtedness, so long as the creation of any such funds and accounts does not adversely affect the equal and ratable pledge of the Operating Revenues to the payment of Senior Revenue Obligations as provided in the Resolution and in any Supplemental Resolution authorizing the issuance of Additional Revenue Obligations. When any provision of the Resolution requires that any amount be deposited in a fund or account maintained for any Revenue Obligations, such amount shall be deposited in the fund or account for such Revenue Obligations. Amounts from time to time on deposit in the funds and accounts maintained for the Revenue Obligations of any Series shall secure only the outstanding Revenue Obligations of such Series and amounts payable to the provider of any Credit Facility securing Revenue Obligations of such Series and shall not be available to satisfy the claims of the holders of any other Revenue Obligations or to reimburse any other Credit Facility Provider for amounts payable in connection with any other Credit Facility. Construction Fund: Application of Moneys. Except as otherwise provided in the Resolution, any moneys deposited in the Construction Fund maintained for any Revenue Obligations shall be used only to finance Costs of Issuance relating to such Revenue Obligations and to finance or refinance Financed Facilities including reimbursement to the City of amounts spent to finance the costs of the Financed Facilities. Payments from the Construction Fund maintained for any Revenue Obligations shall be made in accordance with Requisitions meeting the requirements of the Resolution. Although it is anticipated that the amounts on deposit in each Construction Fund will be used to pay costs of Financed Facilities, if for any reason costs of Financed Facilities are less than such amounts, upon receipt of Transfer Directions, the Trustee shall transfer any moneys on deposit in the Construction Fund maintained for any Revenue Obligations that are not required for the payment of unpaid costs of Financed Facilities (i) to the Redemption Fund maintained for such Revenue Obligations, or (ii) otherwise as directed by the City, in its Transfer Directions, provided that the City first obtains and delivers to the Trustee an opinion of Bond Counsel that a transfer pursuant to such Transfer Direction will not adversely affect the excludability from gross income for federal income tax purposes of interest on any Tax-Exempt Revenue Obligations. Deposit of Operating Revenues. On or before the first Business Day of each month in each Bond Year, the City shall pay or cause to be paid to the Trustee from the Operating Revenues an amount sufficient to make the deposits described below. Except as otherwise provided by Supplemental Resolution, the Trustee shall notify the City within 15 days of an Interest Payment Date or a principal payment date, if A-27

138 there are insufficient funds on deposit in any Debt Service Fund to make a principal or interest payment due on such date. The City and the Trustee also shall cause to be deposited into the Debt Service Fund such portion of proceeds of Bonds as designated by Supplemental Resolution and any other funds directed to be deposited into any Debt Service Fund by the City. Under each Resolution, the Trustee shall deposit the amounts received from or on behalf of the City in each month, pursuant to such Resolution, upon receipt, in the following manner and in the following order of priority: FIRST: Interest on Senior Revenue Obligations: to the Interest Account maintained for each Series of Senior Revenue Obligations, the amount, if any, necessary to make the amount on deposit therein equal to the amount of accrued and unpaid interest on the Senior Revenue Obligations of such Series as of the first Business Day of the immediately succeeding month (in the case of any Outstanding Senior Revenue Obligations that constitute Variable Rate Indebtedness, calculated on the basis of the actual interest rates borne by such Senior Revenue Obligations through the date of such deposit and assuming such Senior Revenue Obligations bear interest during any period after the date of such deposit at an annual rate equal to 110% of the interest rate borne by such Senior Revenue Obligations on the date of such deposit), after taking into account any moneys on deposit in the Capitalized Interest Account that are available for such purpose; SECOND: Principal on Senior Revenue Obligations: (i) to the Principal Account maintained for the Senior Revenue Obligations of each Series, commencing on the twelfth (12 th ) month prior to such principal becoming due, one-twelfth (1/12) of the amount of any principal of the Outstanding Senior Revenue Obligations of such Series becoming due on the next principal payment date for such Senior Revenue Obligations; provided that deposits with respect to the principal of Senior Revenue Obligations the first principal installment of which matures less than one year from the date of initial authentication and delivery of such Senior Revenue Obligations shall commence in the first month after the delivery of such Senior Revenue Obligations and, prior to the immediately succeeding July 1, the amount provided in this clause with respect to such Senior Revenue Obligations shall be equal to the quotient obtained by dividing the principal amount of such Senior Revenue Obligations becoming due on or prior to the immediately succeeding July 1 by the number of monthly payment dates between the date of authentication and delivery of such Senior Revenue Obligations and the immediately succeeding July 1; and (ii) to the Sinking Fund Account maintained for the Senior Revenue Obligations of each Series, commencing on the twelfth (12 th ) month prior to such Sinking Fund Installment becoming due, onetwelfth (1/12) of the total amount of any Sinking Fund Installments for the Outstanding Senior Revenue Obligations of such Series becoming due on the next principal payment date for such Senior Revenue Obligations; provided that deposits with respect to Senior Revenue Obligations the first payment of a Sinking Fund Installment for which is due less than one year from the date of initial authentication and delivery of such Senior Revenue Obligations shall commence in the first month after the delivery of such Senior Revenue Obligations and, prior to the immediately succeeding July 1, the amount provided in this clause with respect to such Senior Revenue Obligations shall be equal to the quotient obtained by dividing the total amount of the Sinking Fund Installments for such Senior Revenue Obligations becoming due on or prior to the immediately succeeding July 1 by the number of monthly payment dates between the date of authentication and delivery of such Senior Revenue Obligations and the immediately succeeding July 1; A-28

139 THIRD: Debt Service Reserve Funds: to any Debt Service Reserve Fund, beginning in the month immediately succeeding any month in which the City receives notice of any deficiency in such Debt Service Reserve Fund, one-twelfth (1/12) of the amount of such deficiency until the amount credited to such Debt Service Reserve Fund equals the Debt Service Reserve Fund Requirement; provided, however, that in the case of the Debt Service Reserve Funds established for the Existing Bonds, such deposit shall be calculated as provided in the Resolution; FOURTH: Interest on Subordinate Revenue Obligations: to the Interest Account maintained for the Subordinate Revenue Obligations of each Subordinate Series, the amount, if any, necessary to make the amount on deposit therein equal to the amount of accrued and unpaid interest on the Outstanding Subordinate Revenue Obligations of such Subordinate Series as of the first Business Day of the immediately succeeding month (in the case of any Outstanding Subordinate Revenue Obligations that constitute Variable Rate Indebtedness, calculated on the basis of the actual interest rates borne by such Subordinate Revenue Obligations through the date of such deposit and assuming such Subordinate Revenue Obligations bear interest during any period after the date of such deposit at an annual rate equal to 110% of the interest rate borne by such Subordinate Revenue Obligations on the date of such deposit); and FIFTH: Principal on Subordinate Revenue Obligations: (i) to the Principal Account maintained for the Subordinate Revenue Obligations of each Series, commencing on the twelfth (12 th ) month prior to such principal becoming due, one-twelfth (1/12) of the amount of any principal of the Outstanding Subordinate Revenue Obligations of such Series becoming due on the next principal payment date for such Subordinate Revenue Obligations; provided that deposits with respect to the principal of Subordinate Revenue Obligations the first principal installment of which matures less than one year from the date of initial authentication and delivery of such Subordinate Revenue Obligations shall commence in the first month after the delivery of such Subordinate Revenue Obligations and, prior to the immediately succeeding July 1, the amount provided in this clause with respect to such Subordinate Revenue Obligations shall be equal to the quotient obtained by dividing the principal amount of such Subordinate Revenue Obligations becoming due on or prior to the immediately succeeding July 1 by the number of monthly payment dates between the date of authentication and delivery of such Subordinate Revenue Obligations and the immediately succeeding July 1; and (ii) to the Sinking Fund Account maintained for the Subordinate Revenue Obligations of each Series, commencing on the twelfth (12 th ) month prior to such Sinking Fund Installment becoming due, one-twelfth (1/12) of the total amount of any Sinking Fund Installments for the Outstanding Subordinate Revenue Obligations of such Series becoming due on the next principal payment date for such Subordinate Revenue Obligations; provided that deposits with respect to Subordinate Revenue Obligations the first payment of a Sinking Fund Installment for which is due less than one year from the date of initial authentication and delivery of such Subordinate Revenue Obligations shall commence in the first month after the delivery of such Subordinate Revenue Obligations and, prior to the immediately succeeding July 1, the amount provided in this clause with respect to such Subordinate Revenue Obligations shall be equal to the quotient obtained by dividing the total amount of the Sinking Fund Installments for such Subordinate Revenue Obligations becoming due on or prior to the immediately succeeding July 1 by the number of monthly payment dates between the date of authentication and delivery of such Subordinate Revenue Obligations and the immediately succeeding July 1. If the amounts paid to the Trustee by the City in any month are not sufficient to provide for all of the deposits required by clause FIRST, SECOND or THIRD above, then the amount to be deposited to the fund or account maintained for each Series of Senior Revenue Obligations as required by such clauses shall be equal to the amount determined by multiplying (1) the amount available to the Trustee for such A-29

140 deposit (which amount shall include all Operating Revenues delivered to the Trustee, including amounts intended for deposit pursuant to clauses FOURTH and FIFTH above) by (2) a fraction, the numerator of which is the amount required to be deposited in the fund or account maintained for such Series of Senior Revenue Obligations in accordance with such clause and the denominator of which is the total of the amounts required to be deposited in all such funds or accounts in accordance with such clauses FIRST, SECOND and THIRD. If, after payment in full of all amounts required by clauses FIRST, SECOND or THIRD, the amounts paid to the Trustee by the City in any month are not sufficient to provide for all of the deposits required by clause FOURTH or FIFTH above, then the amount to be deposited to the fund or account maintained for each Series of Subordinate Revenue Obligations as required by such clauses shall be equal to the amount determined by multiplying (1) the amount available to the Trustee for such deposit by (2) a fraction, the numerator of which is the amount required to be deposited in the fund or account maintained for such Series of Subordinate Revenue Obligations in accordance with such clause and the denominator of which is the total of the amounts required to be deposited in all such funds or accounts in accordance with such clauses FOURTH and FIFTH. In addition to the payments described above, the City shall pay or cause to be paid to the Trustee from the Operating Revenues (i) on each Interest Payment Date for any Revenue Obligations, any amount necessary to pay the interest due on such Revenue Obligations on such date in excess of the amount on deposit in the Interest Account maintained for such Revenue Obligations available therefor and (ii) on each date on which the principal of or any Sinking Fund Installment for any Revenue Obligations becomes due, any amount necessary to pay the principal or Sinking Fund Installment due on such Revenue Obligations on such date in excess of the amount on deposit in the Principal Account or the Sinking Fund Account, respectively, maintained for such Revenue Obligations. The Trustee shall deposit the amounts received by or on behalf of the City pursuant to this paragraph, upon receipt, in the appropriate account of the Debt Service Fund maintained for such Revenue Obligations. On or before the Redemption Date of any Bonds, the City shall pay or cause to be paid to the Trustee from the Operating Revenues any amount necessary to pay the Redemption Price of such Bonds on such date in excess of the amount on deposit in the Redemption Fund maintained for such Bonds available therefor. The Trustee shall deposit the amounts received by or on behalf of the City pursuant to this paragraph, upon receipt, in the Redemption Fund maintained for such Bonds. THE SERIES 2013 WATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY THE TRUSTEE UNDER THE WATER RESOLUTION. THE SERIES 2013 WASTEWATER BONDS ARE PAYABLE SOLELY FROM AND SECURED BY PLEDGED AMOUNTS OF THE CITY S WASTEWATER UTILITY INCLUDING OPERATING REVENUES AND AMOUNTS IN THE FUNDS AND ACCOUNTS PLEDGED THEREFOR HELD BY THE TRUSTEE UNDER THE WASTEWATER RESOLUTION. OPERATING REVENUES OF THE WASTEWATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WATER BONDS AND OPERATING REVENUES OF THE WATER UTILITY ARE NOT PLEDGED TO THE REPAYMENT OF THE SERIES 2013 WASTEWATER BONDS. Debt Service Fund: Application of Moneys. The Trustee shall, on each Interest Payment Date with respect to outstanding Revenue Obligations of any Series, pay or cause to be paid out of FIRST, the Capitalized Interest Account maintained for such Revenue Obligations and SECOND, the Interest Account maintained for such Revenue Obligations, the interest due on such Revenue Obligations. The Trustee shall pay out of such Interest Account or amounts paid to the Trustee for such purpose any amounts required for the payment of accrued interest upon any purchase or redemption of such Revenue Obligations. Notwithstanding the foregoing, payments of interest on the Subordinate Revenue A-30

141 Obligations shall not be made by the Trustee to the holders of Subordinate Revenue Obligations if an Event of Default of which the Trustee has notice has occurred and is continuing (except from the Capitalized Interest Account maintained for such Subordinate Revenue Obligations or from a Credit Facility securing such Subordinate Revenue Obligations). If moneys on deposit in the Interest Account maintained for any Senior Revenue Obligations, after taking into account any moneys available for such payment in the Capitalized Interest Account maintained for such Senior Revenue Obligations, are not sufficient to pay the interest due on such Senior Revenue Obligations on any date, the Trustee shall, prior to any transfer from any Debt Service Reserve Fund maintained for such Senior Revenue Obligations on such date, transfer an amount equal to the deficiency therein first from the Principal Account and second from the Sinking Fund Account maintained for such Senior Revenue Obligations. The Trustee shall promptly notify the City that such a deficiency existed and the City shall promptly deposit Operating Revenues with the Trustee equal to the amount of such deficiency. Upon receipt of such money, the Trustee shall deposit the same in the funds or accounts in which a deficiency then exists. If moneys on deposit in the Interest Account maintained for any Subordinate Revenue Obligations, after taking into account any moneys available for such payment in the Capitalized Interest Account maintained for such Subordinate Revenue Obligations, are not sufficient to pay the interest due on such Subordinate Revenue Obligations on any date, the Trustee shall transfer an amount equal to the deficiency therein from the Principal Account or the Sinking Fund Account maintained for such Subordinate Revenue Obligations. The Trustee shall promptly notify the City that such a deficiency existed and the City shall promptly deposit Operating Revenues with the Trustee equal to the amount of such deficiency. Upon receipt of such money, the Trustee shall deposit the same in such Principal Account or the Sinking Fund Account, maintained for such Subordinate Revenue Obligations, as the case may be. The Trustee shall on each date on which the principal of any Revenue Obligations becomes due, pay or cause to be paid the principal of such Revenue Obligations out of the Principal Account maintained for such Revenue Obligations upon presentation and surrender of the requisite Revenue Obligations. Notwithstanding the foregoing, payments of principal on the Subordinate Revenue Obligations shall not be made by the Trustee to the holders of Subordinate Revenue Obligations if an Event of Default of which the Trustee has notice has occurred and is continuing. The Trustee shall take all action required by the Resolution to effect the timely redemption of Revenue Obligations in accordance with the Sinking Fund Installment schedule for such Revenue Obligations. Notwithstanding the foregoing, payments of Sinking Fund Installments on the Subordinate Revenue Obligations shall not be made by the Trustee to holders of Subordinate Revenue Obligations if any Event of Default of which the Trustee has notice (determined in accordance with the Resolution) has occurred and is continuing (except from a Credit Facility securing such Subordinate Revenue Obligations). Moneys in the Sinking Fund Account maintained for the Revenue Obligations of each Series shall be applied to the purchase or redemption of Revenue Obligations of such Series, as follows: Subject to the provisions of the Resolution, the Trustee shall, before each date in each Bond Year on which a Sinking Fund Installment for Revenue Obligations of any Series becomes due, call for redemption on such date from moneys held or to be deposited in the Sinking Fund Account maintained for such Revenue Obligations such principal amount of Revenue Obligations of such Series subject to redemption from the Sinking Fund Installment due on such date as, at a price of the principal amount thereof (accrued interest on such Revenue Obligations being payable first, from the Capitalized Interest A-31

142 Account and second, from the Interest Account maintained for such Series of Revenue Obligations), is equal to the Sinking Fund Installment due on such date as set forth in the Existing Bonds, with respect to the Existing Bonds, and in any Supplemental Resolution, with respect to any Additional Revenue Obligations, taking into account the amount credited against and applied to reduce such Sinking Fund Installment in accordance with the Resolution. The Trustee shall endeavor to purchase Revenue Obligations of any Series subject to redemption from the Sinking Fund Installment due on any date with amounts on deposit in the Sinking Fund Account maintained for such Revenue Obligations for the payment of such Sinking Fund Installment in accordance with Redemption Instructions given to the Trustee. The Trustee shall pay the interest accrued on such Revenue Obligations first, from the Capitalized Interest Account and second, from the Interest Account maintained for such Revenue Obligations or amounts paid by the City with respect thereto and the purchase price from the Sinking Fund Account maintained for such Revenue Obligations, but no such purchase shall be made by the Trustee (i) within a period of 45 days immediately preceding any date on which such Revenue Obligations are subject to redemption from such Sinking Fund Installment, or (ii) at a price, including any brokerage and other charges, greater than the principal amount thereof and accrued interest thereon. The aggregate purchase prices of the Revenue Obligations of each Series so purchased in any Bond Year shall not exceed the amount deposited in the Sinking Fund Account maintained for such Revenue Obligations on account of the Sinking Fund Installment for such Revenue Obligations becoming due during the period from the second day of such Bond Year through the first day of the immediately succeeding Bond Year; provided, however, that if in any Bond Year the amount credited against the Sinking Fund Installment for Revenue Obligations of any Series as described above equals or exceeds the Sinking Fund Installment for such Revenue Obligations due during the period from the second day of such Bond Year through the first day of the immediately succeeding Bond Year, any excess amount on deposit in the Sinking Fund Account maintained for such Revenue Obligations shall be applied by the Trustee to the purchase of any Revenue Obligations of such Series subject to redemption from such Sinking Fund Installment then Outstanding as shall be directed by the City in Redemption Instructions. If (i) by the application of moneys in the Sinking Fund Account maintained for Revenue Obligations of any Series as described above the Trustee shall purchase Revenue Obligations of such Series in any Bond Year, (ii) the City delivers to the Trustee for cancellation, on or before the 45th day next preceding any date on which a Sinking Fund Installment is due, Revenue Obligations subject to redemption from such Sinking Fund Installment or (iii) Revenue Obligations subject to redemption from the Sinking Fund Installment due during the period from the second day of any Bond Year through the first day of the immediately succeeding Bond Year are otherwise redeemed during such period, then an amount equal to 100% of the aggregate principal amount of any such Revenue Obligations so purchased and delivered to the Trustee for cancellation or redeemed shall be credited against such Sinking Fund Installment. If the aggregate principal amount of Revenue Obligations of any Series purchased or redeemed during the period from the second day of any Bond Year through the first day of the immediately succeeding Bond Year is in excess of the Sinking Fund Installment due on such Revenue Obligations during such period, the Trustee shall file with the City not later than the 20th day succeeding the end of such period a statement identifying the Revenue Obligations purchased or redeemed during such period. Upon the receipt of Redemption Instructions stating with respect to the amount of such excess the subsequent Sinking Fund Installment or Sinking Fund Installments with respect to such Revenue Obligations that are to be reduced and the amount by which such Sinking Fund Installment or Sinking Fund Installments are to be reduced, the Trustee shall recompute the Sinking Fund Installments with respect to such Revenue Obligations in accordance with such Redemption Instructions. A-32

143 If the City shall determine to provide for the payment of any Revenue Obligations as provided in the Resolution (under the heading Defeasance ), on the date on which such Revenue Obligations are deemed to be paid in accordance with the Resolution, amounts on deposit in the Debt Service Fund maintained for such Revenue Obligations for the payment of the principal or Redemption Price of or interest on such Revenue Obligations shall, upon the written direction of an Authorized Officer of the City, be paid either (i) to the City for deposit in the Water Operating Fund or the Wastewater Operating Fund, as applicable, or (ii) to the escrow deposit agent for such Revenue Obligations. Except as otherwise provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, any amount on deposit in the Debt Service Fund maintained for any Revenue Obligations on July 1 of any Bond Year in excess of the amount required to be on deposit therein in accordance with the Resolution on such date shall be paid first, to the Debt Service Reserve Fund established for such Revenue Obligations to the extent of any deficiency therein on such date and then either (i) to the City, for deposit in the Water Operating Fund or the Wastewater Operating Fund, as applicable, or (ii) in accordance with Transfer Directions, to any Trusteed Fund. Debt Service Reserve Fund: Application of Moneys. If (a) on any Interest Payment Date the amount in the Interest Account maintained for any Series of Senior Revenue Obligations shall be less than the amount of interest then due on the Senior Revenue Obligations of such Series after taking into account (i) any moneys available for such payment in the Capitalized Interest Account established for such Series, and (ii) the transfer, if any, required by the Resolution, or (b) on any date on which the principal of or any Sinking Fund Installment for any Senior Revenue Obligations becomes due the amount in the Principal Account and the Sinking Fund Account maintained for such Senior Revenue Obligations shall be less than the amount of the principal and the Sinking Fund Installment (either or both, as the case may be) then due on the Senior Revenue Obligations of such Series, the Trustee forthwith shall transfer moneys from the Debt Service Reserve Fund established for such Senior Revenue Obligations, first, to the Interest Account maintained for such Senior Revenue Obligations, and second, to the Principal Account and Sinking Fund Account maintained for such Senior Revenue Obligations, to the extent necessary to make good any deficiency; provided that (i) under each Resolution, amounts on deposit in the Debt Service Reserve Fund established for the Series 1993-A Bonds may only be used to make good any deficiency in funds or accounts established for the Series 1993-A Bonds, (ii) under each Resolution, amounts on deposit in the Debt Service Reserve Fund established for the Series 1994-A Bonds may only be used to make good any deficiency in funds or accounts established for the Series 1994-A Bonds, (iii) under the 2002 Wastewater Resolution, amounts on deposit in the Debt Service Reserve Fund established for the Water Quality Bonds may be used only to make good any deficiency on funds or amounts established for the Water Quality Bonds secured by such Debt Service Reserve Funds, and (iv) under each Resolution, amounts on deposit in the Debt Service Reserve Fund established for the Senior Revenue Obligations other than those specified in clauses (i)-(iii) may be used only to make good any deficiencies in funds or accounts established for such Senior Revenue Obligations issued thereunder, and if such amounts are not sufficient to make good any deficiencies in the funds and accounts established for the such Senior Revenue Obligations, then the moneys transferred from the Debt Service Reserve Fund established for such Senior Revenue Obligations shall be deposited in each fund and account in which a deficiency exists in an amount equal to the amount determined by multiplying (1) the amount available to the Trustee from the Debt Service Reserve Fund established for the such Senior Revenue Obligations by (2) a fraction, the numerator of which is the amount required to be deposited in such fund or account and the denominator of which is the amount required to be deposited in all of the funds or accounts established for the such Senior Revenue Obligations in which a deficiency exists. Any amounts to the credit of any Debt Service Reserve Fund maintained for the Revenue Obligations of any Series in excess of the Debt Service Reserve Fund Requirement for such Series shall on July 1 of each Bond Year and on any other date specified by an Authorized Officer of the City either A-33

144 (i) be paid to the City for deposit to the Water Operating Fund or the Wastewater Operating Fund, as applicable, or (ii) in accordance with Transfer Directions, be deposited in any Trusteed Fund. Redemption Fund: Application of Moneys. Moneys in the Redemption Fund maintained for the Revenue Obligations of any Series shall be applied by the Trustee to the redemption of Revenue Obligations of such Series in accordance with Redemption Instructions given to the Trustee in accordance with the Resolution or to the purchase of Revenue Obligations in lieu of redemption as directed in writing by the City. No purchase of any Revenue Obligations shall be made (i) within 45 days immediately preceding any date on which such Revenue Obligations are subject to call for redemption under the provisions of the Resolution except from moneys other than the moneys set aside or deposited for the redemption of such Revenue Obligations or (ii) at a price, including any brokerage or other charges, greater than the Redemption Price applicable on the next date on which such Revenue Obligations are redeemable, plus accrued interest due. Moneys in the Redemption Fund maintained for Senior Revenue Obligations of any Series which are not set aside for the redemption of Senior Revenue Obligations of such Series or required to pay the purchase price of Senior Revenue Obligations of such Series theretofore contracted to be purchased shall be transferred by the Trustee in accordance with Transfer Directions delivered to the Trustee to the Debt Service Reserve Fund, the Principal Account or the Sinking Fund Account maintained for such Senior Revenue Obligations. Moneys in the Redemption Fund maintained for Subordinate Revenue Obligations of any Series which are not set aside for the redemption of Subordinate Revenue Obligations of such Series or required to pay the purchase price of Subordinate Revenue Obligations of such Series theretofore contracted to be purchased shall be transferred by the Trustee in accordance with Transfer Directions delivered to the Trustee to the Principal Account or the Sinking Fund Account maintained for such Subordinate Revenue Obligations. Subordinate Revenue Obligations. The Trustee shall apply amounts on deposit in the Subordinate Debt Service Fund maintained for the Subordinate Revenue Obligations of each Series to the payment of the principal of, redemption premium, if any, and interest on such Series of Subordinated Revenue Obligations in accordance with the provisions of the Supplemental Resolution pursuant to which such Subordinated Revenue Obligations of such Series are issued. Investment of Moneys. Moneys in the Trusteed Funds may be invested. Subject to Applicable Law, any moneys held by the Trustee in any of such funds or accounts shall be invested by the Trustee in accordance with Investment Directions, but only as follows: (a) Moneys in each Debt Service Fund maintained for each Series of Existing Bonds and the Series 2013 Bonds and except as otherwise provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the Debt Service Fund maintained for such Revenue Obligations, shall be invested in Permitted Investments maturing or redeemable at the option of the holder in such amounts and on such dates as may be necessary to provide moneys to meet the payments from such funds and accounts; (b) Moneys in the Debt Service Reserve Funds shall be invested only in Permitted Investments, except as otherwise provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations; and (c) Moneys in the Redemption Funds and moneys in the Construction Funds maintained for the Existing Bonds and, except as otherwise provided in any Supplemental Resolution authorizing the A-34

145 issuance of any Additional Revenue Obligations, the Redemption Funds and the Construction Funds maintained for such Revenue Obligations, shall be invested in Permitted Investments maturing or redeemable at the option of the holder in such amounts and on such dates as may be necessary to provide moneys to meet the payments from such funds. (d) Moneys in the Credit Facility Accounts, the Credit Facility Proceeds Accounts and the Purchase Funds shall not be invested. Interest earned, profits realized and losses suffered by reason of any investment of the Trusteed Funds shall be credited or charged, as the case may be, to the fund or account for which such investment shall have been made. Interest earned and profits realized on the investment of the Trusteed Funds shall be paid to the City for deposit in the Water Operating Fund or the Wastewater Operating Fund (as applicable), at the time or times provided in the Resolution; provided, however, that interest earned and profits realized on the investment of (i) the Construction Funds maintained for the Existing Bonds and, except as otherwise provided in the Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the Construction Fund maintained for such Additional Revenue Obligations, shall be retained in such fund, (ii) the Capitalized Interest Accounts maintained for the Existing Bonds and, except as otherwise provided in the Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, the Capitalized Interest Account maintained for such Additional Revenue Obligations, shall be retained in such fund, and (iii) the Debt Service Reserve Funds shall be retained in such fund to the extent of any deficiency therein. In computing the value of the assets of the Trusteed Funds, investments and accrued interest thereon shall be deemed a part thereof. Investments credited to the Trusteed Funds shall be valued for all purposes under the Resolution at market bid price. A Debt Service Reserve Fund Credit Facility issued with respect to any Series of the Bonds shall be subject to the provisions of the applicable Resolution, including any Insurer requirements as set forth in the 2002 Water Resolution or the 2002 Wastewater Resolution, as applicable, or any applicable Supplemental Resolution. In addition, in determining the value of the assets of the Debt Service Reserve Fund, except (i) as otherwise provided in any Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations and the creation of a Debt Service Reserve Fund in connection therewith, or (ii) as otherwise provided in the 2002 Water Resolution or the 2002 Wastewater Resolution, as applicable, there shall be credited to the Debt Service Reserve Fund maintained for the Series 2002A Bonds, the Series 2002B Bonds and Additional Senior Revenue Obligations the amount that can be realized by the Trustee under any Debt Service Reserve Fund Credit Facility securing such Revenue Obligations if each of the following conditions is met: (i) on the date of delivery of such Debt Service Reserve Fund Credit Facility to the Trustee and on the date of such determination, the unsecured indebtedness or claims-paying ability of the issuer of such Debt Service Reserve Fund Credit Facility or its parent holding company or other controlling entity is rated in one of the two highest Rating Categories by each Rating Agency then providing a rating for the Bonds; (ii) to the Trustee s knowledge, such Debt Service Reserve Fund Credit Facility is free and clear of all liens and encumbrances superior to the lien of the Resolution; (iii) such Debt Service Reserve Fund Credit Facility permits the Trustee to realize amounts thereunder at such times as the Trustee is required to transfer any amount (other than any surplus) from such Debt Service Reserve Fund in accordance with the Resolution; and (iv) the expiration date of such Debt Service Reserve Fund Credit Facility is not before the earlier of (A) the date that is within six months after the date of calculation and (B) the earliest maturity date of the Revenue Obligations secured thereby. At least 30 days before the amount that can be realized under such Debt Service Reserve Fund Credit Facility is credited to the Debt Service Reserve Fund (or such fewer number of days as shall be acceptable to the Rating Agencies), the City shall give each of the Rating Agencies notice of its intention to provide for the delivery of such Debt Service Reserve Fund Credit Facility for A-35

146 the credit of the Debt Service Reserve Fund. The City agrees to simultaneously deliver a copy of any such notice to the Trustee. Neither the Trustee nor the City shall be liable for any loss arising from, or any depreciation in the value of, any obligations in which moneys of the funds or accounts shall be invested in accordance with the Resolution. The Trustee shall not be responsible for determining whether any investments under the Resolution are permitted by Applicable Law. The Trustee may sell or redeem any obligations in which moneys shall have been invested to the extent necessary to provide cash in the respective funds or accounts, to make any payments required to be made therefrom, or to facilitate the transfers of moneys between various funds and accounts as may be required from time to time pursuant to the provisions of the Resolution, provided that the Trustee shall consult with the City prior to taking any such action which is not in accordance with an Investment Direction, Redemption Instruction or Transfer Direction. As soon as practicable after any such sale or redemption, the Trustee shall give notice thereof to the City. Rate Requirements. In the 2002 Water Resolution, the City covenants that it will take or cause to be taken all actions necessary to ensure that Rates and Charges of the Water Utility are assessed, established and collected so that, for each Fiscal Year, (i) Net Revenues of the Water Utility will be at all times equal to at least 1.15 times the Debt Service Requirements on Senior Revenue Obligations issued under the 2002 Water Resolution for such Fiscal Year and (ii) Net Revenues of the Water Utility after payment of debt service on the Senior Revenue Obligations will be at all times equal to at least 1.10 times the Debt Service Requirements on outstanding Subordinate Revenue Obligations issued under the 2002 Water Resolution for such Fiscal Year (to be calculated to exclude therefrom principal payments in respect of Revenue Notes issued under the 2002 Water Resolution in such Fiscal Year); provided that Net Revenues will be at all times at least equal to 1.00 times (1) the Debt Service Requirements for such Fiscal Year (including Debt Service Requirements in respect of Subordinate Revenue Obligations); (2) amounts required to be deposited into the Debt Service Reserve Fund during such Fiscal Year; and (3) the principal or redemption price of and interest on general obligation bonds issued in respect of the Water Utility payable during such Fiscal Year. In the 2002 Wastewater Resolution, the City covenants that it will take or cause to be taken all actions necessary to ensure that Rates and Charges of the Wastewater Utility are assessed, established and collected so that, for each Fiscal Year, (i) Net Revenues of the Wastewater Utility will be at all times equal to at least 1.15 times the Debt Service Requirements on Senior Revenue Obligations issued under the 2002 Wastewater Resolution for such Fiscal Year and (ii) Net Revenues of the Wastewater Utility after payment of debt service on the Senior Revenue Obligations will be at all times equal to at least 1.10 times the Debt Service Requirements on outstanding Subordinate Revenue Obligations issued under the 2002 Wastewater Resolution for such Fiscal Year (to be calculated to exclude therefrom principal payments in respect of Revenue Notes issued under the 2002 Wastewater Resolution in such Fiscal Year); provided that Net Revenues will be at all times at least equal to 1.00 times (1) the Debt Service Requirements for such Fiscal Year (including Debt Service Requirements in respect of Subordinate Revenue Obligations); (2) amounts required to be deposited into the Debt Service Reserve Fund during such Fiscal Year; and (3) the principal or redemption price of and interest on general obligation bonds issued in respect of the Wastewater Utility payable during such Fiscal Year. Within 180 days after the close of each Fiscal Year, the City shall deliver to the Trustee a certificate of an Authorized Officer of the City setting forth whether the City met the Rate Requirements as of the end of the immediately preceding Fiscal Year. A-36

147 The City further covenants that in the event of a failure to meet the Rate Requirements as of the end of any Fiscal Year, the City shall notify the Trustee and shall promptly employ a Consulting Engineer to prepare and submit a written report and recommendations with respect to the rates and charges of the Water Utility or the Wastewater Utility (as applicable) and with respect to improvements or changes in the operations of the Water Utility or the Wastewater Utility (as applicable), stating also the extent to which prior recommendations of consultants or engineers may not have been complied with by the City. The City shall revise its Rates and Charges accordingly, within 90 days after receipt of such report; failure to do so will constitute an Event of Default. So long as the City employs a Consulting Engineer and follows the recommendations of such Consulting Engineer to the extent permitted by law, failure to meet the Rate Requirements in any Fiscal Year shall not constitute an Event of Default. Neither the Board of Estimates nor the Director of Public Works shall provide for abatement and reduction of the Rates and Charges which would cause the Rates and Charges as assessed and established to equal less than the amounts necessary to satisfy the Rate Requirements. Except as otherwise provided in the Ordinance or in the Resolution, so long as any Revenue Obligations are outstanding, the City shall not, in the normal course and without taking corrective steps to remedy the reasons therefor, furnish or supply any facilities, services or commodities afforded by it in connection with the Water Utility or the Wastewater Utility (as applicable) free of charge, except for water provided through hydrants in connection with the provision of fire and other public safety services of the City. The City will promptly enforce in the manner and to the extent provided by law the payment of any and all delinquent accounts except when the City determines that such enforcement is no longer practicable or economically justified. The Ordinance provides that the City may borrow money pursuant to Applicable Law in order to make a loan to the Water Utility or the Wastewater Utility to meet any temporary cash operating deficit. In accordance with the Ordinance, if the City borrows pursuant to such authority, the proceeds of such borrowing or loan to the Water Utility or the Wastewater Utility shall not constitute amounts available for satisfaction of the Rate Requirements under the applicable Resolution. Ordinance of Estimates. The City covenants that it will take or cause to be taken all actions necessary so that amounts at least equal to the Rate Requirements for each Fiscal Year (i) are included in the Ordinance of Estimates for each Fiscal Year and (ii) are collected when due (or as soon thereafter as possible in accordance with Applicable Law) or are otherwise made available in a timely manner. Additional Appropriations and the Rate Requirements. Under the 2002 Water Resolution, the City covenants that if additional appropriations for expenditures for the Water Utility are approved to be made from Operating Revenues of the Water Utility received or expected to be received in any Fiscal Year by the Water Utility in excess of those relied upon by the Board of Estimates in determining the Ordinance of Estimates for such Fiscal Year, the City will take or cause to be taken in timely fashion all actions necessary to comply with the Rate Requirements. Under the 2002 Wastewater Resolution, the City covenants that if additional appropriations for expenditures for the Wastewater Utility are approved to be made from Operating Revenues of the Wastewater Utility received or expected to be received in any Fiscal Year by the Wastewater Utility in excess of those relied upon by the Board of Estimates in determining the Ordinance of Estimates for such Fiscal Year, the City will take or cause to be taken in timely fashion all actions necessary to comply with the Rate Requirements. Budget Increases and the Rate Requirements. Under the 2002 Water Resolution, the City covenants that if, upon the application of the Director of Public Works, the amount for a particular program, purpose, activity or project budgeted for the Water Utility in the Ordinance of Estimates for any Fiscal Year is increased or the amount for a new program, purpose, activity or project for the Water Utility is introduced A-37

148 by transferring amounts already appropriated to the Water Utility in the Ordinance of Estimates for any Fiscal Year, the City will take or cause to be taken all actions necessary to comply with the Rate Requirements. Under the 2002 Wastewater Resolution, the City covenants that if, upon the application of the Director of Public Works, the amount for a particular program, purpose, activity or project budgeted for the Wastewater Utility in the Ordinance of Estimates for any Fiscal Year is increased or the amount for a new program, purpose, activity or project for the Wastewater Utility is introduced by transferring amounts already appropriated to the Wastewater Utility in the Ordinance of Estimates for any Fiscal Year, the City will take or cause to be taken all actions necessary to comply with the Rate Requirements. Retaining Appropriations and Water Utility Balances. Under the 2002 Water Resolution, the City covenants to take or cause to be taken all actions necessary to assure that (i) upon the recommendation of the Director of Finance and the Director of Public Works, appropriations for any program, purpose, activity or project included in the Ordinance of Estimates for any Fiscal Year for the Water Utility will be carried over to Fiscal Years subsequent to the one for which any appropriation was initially made for the accomplishment of such program, purpose, activity or project, and (ii) any balance remaining to the credit of the Water Utility at the end of any Fiscal Year shall remain to the credit of the Water Utility and an estimate of such balance shall be included in the Water Utility s budget for the next ensuing Fiscal Year as an estimated receipt to be utilized with respect to the Water Utility, i.e. an amount to be available for appropriation in the Water Utility budget in the next ensuing Fiscal Year. Under the 2002 Wastewater Resolution, the City covenants to take or cause to be taken all actions necessary to assure that (i) upon the recommendation of the Director of Finance and the Director of Public Works, appropriations for any program, purpose, activity or project included in the Ordinance of Estimates for any Fiscal Year for the Wastewater Utility will be carried over to Fiscal Years subsequent to the one for which any appropriation was initially made for the accomplishment of such program, purpose, activity or project, and (ii) any balance remaining to the credit of the Wastewater Utility at the end of any Fiscal Year shall remain to the credit of the Wastewater Utility and an estimate of such balance shall be included in the Wastewater Utility s budget for the next ensuing Fiscal Year as an estimated receipt to be utilized with respect to the Wastewater Utility, i.e. an amount to be available for appropriation in the Wastewater Utility budget in the next ensuing Fiscal Year. Limitation on Amendment of Applicable Laws. The City covenants that it will not amend, seek to amend or have amended any existing law, the City Charter or current City procedures in any manner which would cause the covenants of the City contained in the Resolution to be abrogated or breached. The City recognizes and acknowledges that its covenants with the holders of any Revenue Obligations are binding upon the City notwithstanding any change in Applicable Law, the City Charter or City procedures in effect at the time of adoption of the Resolution. Accounting. Under the respective Resolutions, the City covenants that (i) the accounting system utilized for the Water Utility and the Wastewater Utility, as applicable, will conform to generally accepted principles of utility accounting and will be kept on the accrual basis and in the manner prescribed in Article VII, Section 8 of the City Charter, as amended from time to time; (ii) the Financial Report will be submitted as a separate section of the statements prescribed under Article VII, Section 8 of the City Charter, as amended from time to time; (iii) the Financial Report will contain at least all of the financial statements required under Article 24, Section 3-3 of the City Code, as amended from time to time, and will be filed within 180 days of the close of each Fiscal Year; and (iv) the Financial Report shall be audited by an Independent Public Accountant. Permitted Transactions. The City hereby covenants and agrees under each Resolution as follows: A-38

149 Except as provided in the Ordinance and in such Resolution, the City shall not issue any Indebtedness secured by a pledge of or other lien on the Pledged Amounts, and shall not otherwise create or cause to be created any lien or charge on the Pledged Amounts. So long as all necessary requirements of the City Charter, the City Code and other Applicable Law are complied with, nothing in such Resolution shall be construed to prohibit the City from issuing or assuming any Indebtedness other than Revenue Obligations or entering into any leases, financing leases, sale-leasebacks and similar transactions ( Leases ) for any valid public purpose related to the Water Utility or the Wastewater Utility, as applicable, which Indebtedness or Leases, if so determined by the Board of Finance, may be secured by a pledge of the Pledged Amounts, provided that such pledge shall in all respects be junior and subordinate to the pledge of the Pledged Amounts to secure the payment of the principal or Redemption Price of and interest on, and the purchase price of, outstanding Bonds and the interest on outstanding Revenue Notes and the reimbursement of the provider of any Credit Facility securing the payment of such amounts. Notwithstanding anything in the Ordinance or such Resolution to the contrary, the City may issue Indebtedness and enter into Leases secured solely by the revenues, receipts or other moneys derived by the City from the lease, license, operation, sale or other disposition of any facility or equipment of the Water Utility or the Wastewater Utility, as applicable, constructed or acquired by or on behalf of the City with the proceeds of such Indebtedness or in connection with such Leases. Such revenues, receipts and other moneys shall not be considered Operating Revenues of the Water Utility or Operating Revenues of the Wastewater Utility or Rates and Charges of either utility, provided that: A. neither the debt service on such Indebtedness, the amounts payable in connection with such Leases, any cost of the acquisition, construction, leasing, operation, maintenance or repair of any such facility or equipment nor provision for reserves for any of the foregoing shall be paid from the proceeds of Revenue Obligations or from Operating Revenues of the Water Utility or Operating Revenues of the Wastewater Utility or shall be included in operating expenses of the Water Utility or the Wastewater Utility, respectively, B. any such revenues, receipts and moneys in excess of such debt service, amounts payable in connection with such Leases, costs of acquisition, construction, leasing, operation, maintenance and repair and reserves shall be deposited to the credit of the Water Utility (and upon such deposit shall be deemed Operating Revenues of the Water Utility) or the Wastewater Utility (and upon such deposit shall be deemed to be Operating Revenues of the Wastewater Utility), as applicable, and C. prior to issuing or assuming such Indebtedness or entering into such Lease, the City shall deliver to the Trustee a certificate of an Authorized Officer of the City stating that the lease, license, operation, sale or other disposition of such facility or equipment and the application of the revenues, receipts and other moneys derived therefrom to the leasing, operation, maintenance and repair thereof and the payment of the debt service on such Indebtedness issued therefor or the amounts payable in connection with the Leases entered into therefor, and the provision of reserves for the foregoing, will not result in any material decrease in the Operating Revenues. So long as all requirements of the City Charter, the Code and Applicable Law are complied with, the City may borrow from the Wastewater Utility or the Water Utility. So long as (i) no Event of Default shall have occurred and be continuing, (ii) the amount on deposit in the Debt Service Reserve Fund, if any, maintained for each Series of Revenue Obligations is not less than the Debt Service Reserve Fund Requirement for such Revenue Obligations, and (iii) no payment required to be made by the City pursuant to clauses FIRST through THIRD above (under the A-39

150 heading Deposit of Operating Revenues ) remains unpaid, the City may pay or prepay the principal or the purchase price of, or interest on, any Subordinate Revenue Obligation, may pay or prepay the principal of and interest on, or the purchase price of, any other Indebtedness other than Revenue Obligations, and may pay or prepay any amounts payable in connection with any Leases permitted to be incurred, assumed or entered into by the City under this provision, and may reimburse the provider of any Credit Facility securing the payment of such amounts, and no recourse shall be had by the holder of any Revenue Obligation against the person to whom any such payment shall have been made unless such person shall have had, at the time of receipt of such payment, actual knowledge of the occurrence of an Event of Default. During (i) the continuance of any Event of Default, (ii) any period in which any deficiency exists in any Debt Service Reserve Fund or (iii) any period in which any payment required by clauses FIRST through THIRD above (under the heading Deposit of Operating Revenues ) remains unpaid, no payments shall be made with respect to the Subordinate Revenue Obligations of any Series (except from amounts theretofore set aside in the Capitalized Interest Account maintained for Subordinate Revenue Obligations of such Series) or the principal of or interest on, or the purchase price of, any Indebtedness or the amounts payable in connection with any Leases incurred, assumed or entered into by the City under this provision, or with respect to the reimbursement of the provider of any Credit Facility securing the payment of such amounts. The Resolutions provide, respectively, that the Water Facilities and the Wastewater Facilities may be sold, mortgaged, leased or otherwise disposed of or encumbered so long as such actions are consistent with Applicable Law, the Ordinance and the covenants contained in the Resolution. In order to implement the obligations historically exercised by the City with respect to the Water Utility and to implement the City Charter provisions with respect to the Water Utility, under the 2002 Water Resolution, the City covenants to operate, or cause to be operated, the Water Utility properly and in a sound, efficient and economical manner and shall maintain, preserve, and keep the same or cause the same to be maintained, preserved, and kept in good repair, working order and condition, and shall from time to time make, or cause to be made, all necessary and proper repairs, replacements and renewals so that the operation of the Water Utility may be properly and advantageously conducted, and, if any useful part of the Water Utility is damaged or destroyed or taken through the exercise of eminent domain, the City shall, as expeditiously as practicable, commence and diligently prosecute the replacement or reconstruction of such damaged or destroyed part so as to restore the same to use and the replacement of such part so taken; provided, however, that nothing in the Ordinance or the Resolution shall require the City to operate, maintain, preserve, repair, replace, renew or reconstruct any part of the Water Utility if abandonment of operation of such part is economically justified, is not prejudicial to the interests of the holders of the Revenue Obligations and will not impair the ability of the City to satisfy the Rate Requirements. In order to implement the obligations historically exercised by the City with respect to the Wastewater Utility and to implement the City Charter provisions with respect to the Wastewater Utility, under the 2002 Wastewater Resolution, the City covenants to operate, or cause to be operated, the Wastewater Utility properly and in a sound, efficient and economical manner and shall maintain, preserve, and keep the same or cause the same to be maintained, preserved, and kept in good repair, working order and condition, and shall from time to time make, or cause to be made, all necessary and proper repairs, replacements and renewals so that the operation of the Wastewater Utility may be properly and advantageously conducted, and, if any useful part of the Wastewater Utility is damaged or destroyed or taken through the exercise of eminent domain, the City shall, as expeditiously as practicable, commence and diligently prosecute the replacement or reconstruction of such damaged or destroyed part so as to restore the same to use and the replacement of such part so taken; provided, however, that nothing in the Ordinance or the Resolution shall require the City to operate, maintain, preserve, repair, replace, renew or reconstruct any part of the Wastewater Utility if abandonment of operation of such part is A-40

151 economically justified, is not prejudicial to the interests of the holders of the Revenue Obligations and will not impair the ability of the City to satisfy the Rate Requirements. Operating Revenues; Operating Reserve; Rate Stabilization Fund; Residual Fund; Operating Reserve Fund. Under each Resolution, the City covenants to apply Operating Revenues of the Water Utility or the Wastewater Utility, respectively (as applicable), to the extent available, in the following order of priority: (i) FIRST, to the payment of Operating Expenses of such Utility; (ii) SECOND, to the payment to the Trustee of the amounts required to be deposited pursuant to clauses FIRST and SECOND above, under the heading Deposit of Operating Revenues, the payment of amounts due and payable under any Hedge Agreement which are payable on a parity with the Senior Revenue Obligations, and the payment of amounts owing to the provider of a Credit Facility which are payable on a parity with the Senior Revenue Obligations; (iii) THIRD, to the payment to the Trustee of the amounts, if any, required to be deposited in the Debt Service Reserve Funds to the extent required to cure any deficiency therein as provided by clause THIRD above, under the heading Deposit of Operating Revenues ; (iv) FOURTH, to the payment to the Trustee of the amounts required to be deposited pursuant to clauses FOURTH and FIFTH above, under the heading Deposit of Operating Revenues, the payment of amounts due and payable under any Hedge Agreement which are subordinate to the Senior Revenue Obligations and on parity with the Subordinate Revenue Obligations, and the payment of amounts owing to the provider of a Credit Facility which are subordinate to the Senior Revenue Obligations; (v) FIFTH, to the maintenance of the Operating Reserve of the Water Utility or the maintenance of the Operating Reserve of the Wastewater Utility, as applicable; and (vi) SIXTH, to transfers to the Rate Stabilization Fund in the amounts determined by the City. Under the 2002 Water Resolution, the City covenants to maintain operating reserves (the Operating Reserve of the Water Utility ) in an amount determined by the City to be adequate operating reserves for the Water Utility, but in any event no less than eight percent of the operating expenses of the Water Utility shown on the budget of the Water Utility for the period of calculation, exclusive of depreciation (the Water Operating Reserve Requirement ). As of the end of each Fiscal Year, operating reserves for the Water Utility shall be equal to no less than the Water Operating Reserve Requirement. The City has established an Operating Reserve Fund in which an initial sum of money has been deposited. Moneys on deposit in the Operating Reserve Fund may be used for any lawful purpose and may be counted toward the Water Operating Reserve Requirement. This Operating Reserve Fund is not a Trusteed Fund. Under the 2002 Wastewater Resolution, the City covenants to maintain operating reserves (the Operating Reserve of the Wastewater Utility ) in an amount determined by the City to be adequate operating reserves for the Wastewater Utility, but in any event no less than eight percent of the operating expenses of the Wastewater Utility shown on the budget of the Wastewater Utility for the period of calculation, exclusive of depreciation (the Wastewater Operating Reserve Requirement ). As of the end of each Fiscal Year, operating reserves for the Wastewater Utility shall be equal to no less than the Wastewater Operating Reserve Requirement. The City has established an Operating Reserve Fund in which an initial sum of money has been deposited. Moneys on deposit in the Operating Reserve Fund may be used for any lawful purpose and may be counted toward the Wastewater Operating Reserve Requirement. This Operating Reserve Fund is not a Trusteed Fund. A-41

152 Moneys on deposit in the Rate Stabilization Fund may be used by the City in accordance with the Resolution pursuant to which such Rate Stabilization Fund is established (1) to pay Operating Expenses of the Water Utility or the Wastewater Utility, as applicable; (2) to fund transfers to any Fund or Account established under such Resolution; (3) to make payments required under any Hedge Agreement; (4) for the payment of principal, redemption premium, if any, and interest on any revenue bonds or notes the proceeds of which were applied in respect of the Water Utility or the Wastewater Utility, as applicable, issued under the City Charter but not under the Resolution; (5) for the payment of principal, redemption premium, if any, and interest on general obligation bonds issued in respect of the Water Utility or the Wastewater Utility, as applicable; and (6) for the payment of principal, redemption premium, if any, and interest on any other general obligation debt issued in respect of the Water Utility or the Wastewater Utility, as applicable. Under the 2002 Water Resolution, Net Revenues of the Water Utility remaining as of June 30 of any Fiscal Year may be deposited in the Residual Fund established thereunder in an amount determined by the City as described in the 2002 Water Resolution. Moneys on deposit in the Residual Fund established under the 2002 Water Resolution may be used by the City FIRST, to pay all amounts necessary to fund Ordinary Capital Requirements, and SECOND for any other lawful purpose, including (without limitation) for the purpose of funding Extraordinary Capital Requirements, temporary loans to the Wastewater Utility and the payment of amounts due and payable under any Hedge Agreement which are subordinate to Subordinate Revenue Obligations. Any transfer from the Residual Fund to the Wastewater Utility shall constitute a loan to the Wastewater Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). Under the 2002 Wastewater Resolution, Net Revenues of the Wastewater Utility remaining as of June 30 of any Fiscal Year may be deposited in the Residual Fund established thereunder in an amount determined by the City as described in the 2002 Wastewater Resolution. Moneys on deposit in the Residual Fund established under the 2002 Wastewater Resolution may be used by the City FIRST, to pay all amounts necessary to fund Ordinary Capital Requirements, and SECOND for any other lawful purpose, including (without limitation) for the purpose of funding Extraordinary Capital Requirements, temporary loans to the Water Utility and the payment of amounts due and payable under any Hedge Agreement which are subordinate to Subordinate Revenue Obligations. Any transfer from the Residual Fund to the Water Utility shall constitute a loan to the Water Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). The 2002 Water Resolution provides that if at any time sufficient monies are not available to pay Operating Requirements of the Water Utility, the City may borrow from the Wastewater Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any successor provision thereto). Loans to the Water Utility from the Wastewater Utility may be evidenced and secured by Subordinate Revenue Obligations issued pursuant to the Resolution. The 2002 Wastewater Resolution provides that if at any time sufficient monies are not available to pay Operating Requirements of the Wastewater Utility, the City may borrow from the Water Utility upon such terms and conditions, and evidenced by such documentation, as the City shall deem necessary or appropriate, as a borrowing to meet temporary cash requirements or to prevent borrowings from the General Fund or any other fund of the City pursuant to Article VI, Section 18 of the City Charter (or any A-42

153 successor provision thereto). Loans to the Wastewater Utility from the Water Utility may be evidenced and secured by Subordinate Revenue Obligations issued pursuant to the Resolution. The Operating Reserve of the Water Utility, the Operating Reserve of the Wastewater Utility, each Rate Stabilization Fund, each Residual Fund and each Operating Reserve Fund shall be maintained in the custody or for the benefit of the City separate and distinct from all other funds of the City. Removal of Trustee. The Trustee may be removed under either Resolution at any time by (i) the Holders of 25% of the Revenue Obligations under such Resolution by an instrument in writing signed and acknowledged by such Holders or by their attorneys-in-fact, duly authorized, or (ii) the City, so long as no Event of Default or event which, but for the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, for such cause as shall be determined by the City in the exercise of reasonable business judgment by filing with the Trustee an instrument signed by an Authorized Officer of the City. Facsimile copies of each such instrument providing for any such removal shall be delivered by the City to the Trustee and any successor thereof. The Trustee may also be removed at any time for any breach of trust or for acting or proceeding in violation of, or for failing to act or proceed in accordance with, any provision of the Resolution with respect to the duties and obligations of the Trustee by any court of competent jurisdiction upon the application of the City pursuant to a resolution of the City, or of the Holders of not less than 10% of the Revenue Obligations. Events of Default. Each of the following events is declared to constitute an event of default under the Resolution (each, an Event of Default ). AN EVENT OF DEFAULT UNDER THE WATER RESOLUTION DOES NOT CONSTITUTE AN EVENT OF DEFAULT UNDER THE WASTEWATER RESOLUTION AND AN EVENT OF DEFAULT UNDER THE WASTEWATER RESOLUTION DOES NOT CONSTITUTE AN EVENT OF DEFAULT UNDER THE WATER RESOLUTION. (a) Payment of the principal or Redemption Price of or interest on any Revenue Obligations shall not be made when the same shall have become due and payable, either at maturity or by proceedings for redemption or otherwise, or payment of the purchase price of any Revenue Obligation required by its terms to be purchased from the Holder thereof by the City on any date prior to its stated maturity shall not be made in accordance with the terms thereof on such date; or in the case of Auction Rate Securities, payment of any interest on any Auction Rate Security is not made, (i) if such Auction Rate Security bears interest at a Commercial Paper Rate, Dutch Auction Rate, Daily Rate, Weekly Rate or Semi-Annual Rate, when due, and (ii) if such Auction Rate Security bears interest in any other Interest Rate Mode, then within one Business Day of when it becomes due and payable; or payment of the purchase price of any Auction Rate Security required to be purchased pursuant to the applicable Resolution is not made when such payment has become due and payable; (b) The City shall default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Revenue Obligations or in the Resolution on the part of the City to be performed, and such default shall continue for 30 days after written notice specifying such default and requiring the same to be remedied shall have been given to the City by the Trustee; provided however, that if the City shall proceed to take any curative action which, if begun and prosecuted with due diligence, cannot be completed within a period of 30 days, then such period shall be increased to such extent as shall be necessary to enable the City to complete such curative action through the exercise of due diligence; (c) Under the 2002 Water Resolution, if an order, judgment or decree is entered by a court of competent jurisdiction (i) appointing a receiver, trustee, or liquidator for the City or the whole or any A-43

154 substantial part of the Water Utility; (ii) granting relief in involuntary proceedings with respect to the City under the federal bankruptcy act, or (iii) assuming custody or control of the City or of the whole or any substantial part of the Water Utility under the provision of any law for the relief of debtors, and the order, judgment or decree is not set aside or stayed within 60 days from the date of entry of the order, judgment or decree; and under the 2002 Wastewater Resolution, if an order, judgment or decree is entered by a court of competent jurisdiction (i) appointing a receiver, trustee, or liquidator for the City or the whole or any substantial part of the Wastewater Utility; (ii) granting relief in involuntary proceedings with respect to the City under the federal bankruptcy act, or (iii) assuming custody or control of the City or of the whole or any substantial part of the Wastewater Utility under the provision of any law for the relief of debtors, and the order, judgment or decree is not set aside or stayed within 60 days from the date of entry of the order, judgment or decree; (d) Under the 2002 Water Resolution, if the City (i) admits in writing its inability to pay its debts generally as they become due, (ii) commences voluntary proceedings in bankruptcy or seeking a composition of indebtedness, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a receiver of the whole or any substantial part of the Water Utility, or (v) consents to the assumption by any court of competent jurisdiction under any law for the relief of debtors of custody or control of the City or of the whole or any substantial part of the Water Utility; and under the 2002 Wastewater Resolution, if the City (i) admits in writing its inability to pay its debts generally as they become due, (ii) commences voluntary proceedings in bankruptcy or seeking a composition of indebtedness, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a receiver of the whole or any substantial part of the Water Utility, or (v) consents to the assumption by any court of competent jurisdiction under any law for the relief of debtors of custody or control of the City or of the whole or any substantial part of the Water Utility; (e) If a Credit Facility is then held by the Trustee with respect to any series of Bonds, receipt by the Trustee, on or before the close of business on the day of a drawing under such Credit Facility to pay interest on such series of Bonds on an Interest Payment Date, of written notice from the Credit Facility Provider that the interest component of the Credit Facility will not be reinstated as of the date of such notice to the amount required to be maintained pursuant to the Resolution; or (f) If the Bonds have been purchased at the direction of the Credit Facility Provider and thereafter all of the Auction Rate Securities, other than Auction Rate Securities registered in the name of the City, are held as Pledged Bonds, then upon written notice from the Credit Facility Provider to the Trustee that an event of default has occurred and is continuing under the Credit Facility Agreement and the written direction of the Credit Facility Provider to the Trustee to accelerate the payment of the principal of and interest due on the Bonds. A default under any other resolution adopted by the City or in respect of any other obligation of the City, other than a default with respect to a Revenue Obligation or under any resolution relating to a Revenue Obligation, shall not be or constitute a default under the Resolution in respect of the Revenue Obligations. Upon the occurrence of any Event of Default under clauses (a) or (f) above, the Trustee shall promptly give Electronic Notice (as defined in the Resolution) of that Event of Default to the City, the Paying Agent, the Tender Agent, each Credit Facility Provider, each Insurer and each Remarketing Agent. If an Event of Default occurs under clause (e), the Trustee shall give Electronic Notice to the City, the Paying Agent, the Tender Agent, each Auction Agent, each Remarketing Agent, each Insurer and each Credit Facility Provider. A-44

155 Acceleration of Maturity. Upon the happening and continuance of any Event of Default, then and in every such case the Trustee may, and upon the written request of the Holders of not less than 25% of the Senior Revenue Obligations (or if no Senior Revenue Obligations are Outstanding, 25% of the Subordinate Revenue Obligations) shall, by a notice in writing to the City, declare the principal of all of the Outstanding Revenue Obligations to be due and payable. Notwithstanding the foregoing, the Trustee may not declare the principal of any Series of Revenue Obligations to be due and payable without the prior written consent of any person whose consent shall be required for such declaration under the terms of the Supplemental Resolution authorizing the issuance of such Revenue Obligations and shall not declare the Existing Bonds to be due and payable without the prior written consent of the applicable Insurer. Upon the giving of notice of such declaration, such principal shall become and be immediately due and payable, anything in the Revenue Obligations or in the Resolution to the contrary notwithstanding. At any time after the principal of the Revenue Obligations shall have been so declared to be due and payable, and before the entry of 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 Resolution, the Trustee may (in the event such declaration has been made upon the written request of the Holders of not less than 25% of the Senior Revenue Obligations, only with the written consent of the Holders of not less than 25% of the Senior Revenue Obligations and not then due by their terms), by written notice to the City, annul such declaration and its consequences but only if: (i) moneys shall have accumulated in the Debt Service Fund maintained for each Series of Senior Revenue Obligations sufficient to pay all arrears of interest, if any, upon all of the Outstanding Senior Revenue Obligations of such Series (except the interest accrued on such Senior Revenue Obligations since the last Interest Payment Date) and the principal of all matured Senior Revenue Obligations of such Series (except the principal of any Senior Revenue Obligations which has become due and payable solely as a result of such declaration by the Trustee); (ii) moneys shall have accumulated and be available sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee and the Registrar; and (iii) every other Event of Default known to the Trustee shall have been remedied to the satisfaction of the Trustee. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. Nothing in the Resolution shall be construed to prohibit the City from taking any action, to the extent permitted by Applicable Law, to remedy the Event of Default giving rise to such declaration, and in the event that the City shall remedy such Event of Default to the satisfaction of the Trustee and the conditions in the preceding clauses (i), (ii), and (iii) shall have been satisfied, the Trustee shall annul any declaration (in the event such declaration was made upon the written request of the Holders of not less than 25% of the Senior Revenue Obligations, only with the written consent of Holders of not less than 25% of the Senior Revenue Obligations not then due by its terms) the effect of which was to cause the principal of the Outstanding Senior Revenue Obligations to be immediately due and payable. So long as any Senior Revenue Obligations are Outstanding (i) the failure to pay the principal of or interest on any Subordinate Revenue Obligation shall not constitute an Event of Default, and (ii) the Trustee may not declare the aggregate principal amount of the Subordinate Revenue Obligations to be due and payable upon the occurrence of any Event of Default under the Resolution. So long as no Insurance Default shall have occurred and be continuing, the Trustee may not declare the aggregate principal amount of the Series 1993-A Bonds, the Series 1994-A Bonds, Series 2002A Bonds, the Series 2002B Bonds or the Series 2002C Bonds to be due and payable upon the occurrence of any Event of Default under the Resolution unless there is on deposit with the Trustee or the Insurance Trustee an amount sufficient to pay all amounts due on the Series 2002A Bonds. A-45

156 Enforcement. Upon the happening and continuance of any Event of Default, then and in every such case, the Trustee may proceed, and upon the written request of the Holders of not less than 25% of the Senior Revenue Obligations (or if no Senior Revenue Obligations are Outstanding, 25% of the Subordinate Revenue Obligations) shall proceed (subject to the provisions of Section 6.02 of the Resolution), to protect and enforce its rights and the rights of the Holders of the Revenue Obligations under the laws of the State of Maryland or under the Resolution and any Credit Facility (including any Debt Service Reserve Fund Credit Facility) by such suits, actions or special proceedings in equity or at law, either for the specific performance of any covenant contained in the Resolution or in aid or execution of any power therein granted, or for an accounting against the City as if the City were the trustee of an express trust, or for the enforcement of any proper legal or equitable remedy as the Trustee shall deem most effectual to protect and enforce such rights. In the enforcement of any remedy under the Resolution, the Trustee shall be entitled to sue for, enforce payment of, and receive, any and all amounts then or during any default becoming, and at any time remaining, due from the City for principal of or interest on the Revenue Obligations or otherwise under any of the provisions of the Resolution or of the Revenue Obligations, with interest on overdue payments at the rate or rates of interest specified in such Revenue Obligations, together with any and all costs and expenses of collection and of all proceedings under the Resolution and under such Revenue Obligations, without prejudice to any other right or remedy of the Trustee or of the Holders of such Revenue Obligations, and to recover and enforce judgment or decree against the City but solely as provided in the Resolution and in such Revenue Obligations and from the sources and moneys provided therein and in such Revenue Obligations for any portion of such amounts remaining unpaid, with interest, costs and expenses, and to collect in any manner provided by law the moneys adjudged or decreed to be payable. Priority of Payments following Default. If an Event of Default shall have occurred and be continuing and the moneys held by and available to the Trustee under the Resolution for the payment of the principal of or Sinking Fund Installment (as the case may be), and interest on, any Senior Revenue Obligations shall not be sufficient to pay such principal or Sinking Fund Installment (as the case may be) and interest as the same become due and payable (either by their terms or by acceleration of maturity), such moneys, together with any moneys then available or thereafter becoming available for such purpose, whether through exercise of the remedies provided for in the Resolution or otherwise, shall be applied (after payment of all amounts owing to the Trustee under the Resolution and notwithstanding any other provision of the Resolution) as provided in the following paragraphs (a) and (b): (a) Unless the principal of all the Senior Revenue Obligations shall be due and payable, all such moneys shall be applied: FIRST: To the payment to the persons entitled thereto of all installments of interest then due on the Senior Revenue Obligations, in the order in which such installments became due and payable, and, if the amount available shall not be sufficient to pay in full all such installments, then to the payment, ratably, according to the amounts due on all such installments of such interest, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in the Senior Revenue Obligations; SECOND: To the payment to the persons entitled thereto of the unpaid principal of any of the Outstanding Senior Revenue Obligations which shall have become due and payable, in the order of their due dates, with interest upon the principal amount of the Senior Revenue Obligations from the respective dates upon which they shall have become due and payable, and, if the amount available shall not be sufficient to pay in full the principal of the Outstanding Senior Revenue Obligations due and payable on any particular due date, together with such interest, then to the payment first of such interest, ratably, A-46

157 according to the amount of interest due on such date, and then to the payment of such principal, ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in the Senior Revenue Obligations; and THIRD: To the payment of the interest on and the principal of the Senior Revenue Obligations as the same become due and payable. (b) If the principal of all the Senior Revenue Obligations shall have become due and payable, either by their terms or by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Senior Revenue Obligations, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in the Senior Revenue Obligations. Notwithstanding any other provision of the Resolution, amounts on deposit in the Construction Fund, the Debt Service Fund, the Debt Service Reserve Fund and the Redemption Fund maintained for any Revenue Obligations shall be applied solely to the payment of amounts due on such Revenue Obligations or, to the extent provided in the Supplemental Resolution authorizing the issuance of any Additional Revenue Obligations, to the reimbursement of the provider of any Credit Facility securing such Revenue Obligations. Whenever moneys are to be applied by the Trustee as described above, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. The setting aside of such moneys in trust for the benefit of the Holders of Outstanding Senior Revenue Obligations as provided in the Resolution shall constitute proper application by the Trustee, and the Trustee shall incur no liability whatsoever to the City, to any Holder of Revenue Obligations or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due regard to the circumstances, and ultimately applies the same in accordance with such provisions of the Resolution as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys, it shall fix the date (which shall be an Interest Payment Date for Revenue Obligations unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal of any Revenue Obligations to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. The Trustee shall not be required to make payment to the Holder of any unpaid Revenue Obligations unless such Revenue Obligations shall be presented to the Trustee for appropriate endorsement. After the occurrence of an Event of Default, no payment shall be made on or with respect to the Subordinate Revenue Obligations under a Resolution until the principal of and interest on the Senior Revenue Obligations have been paid in full under such Resolution. Upon payment in full of the Senior Revenue Obligations, if an Event of Default shall have occurred and be continuing and the moneys held by and available to the Trustee under the Resolution for the payment of the principal of or Sinking Fund Installment (as the case may be), and interest on, the Subordinate Revenue Obligations shall not be sufficient to pay such principal or Sinking Fund Installment (as the case may be) and interest as the same become due and payable (either by their terms or by acceleration of maturity under the provisions of the Resolution), such moneys, together with any moneys then available or thereafter becoming available for such purpose, whether through exercise of the remedies provided for in Article VII of the Resolution or A-47

158 otherwise, shall be applied (after payment of all amounts owing to the Trustee under the Resolution and notwithstanding any other provision of the Resolution) as provided in the following paragraphs (a) and (b): (a) Unless the principal of all the Subordinate Revenue Obligations shall be due and payable, all such moneys shall be applied: FIRST: To the payment to the persons entitled thereto of all installments of interest then due on the Subordinate Revenue Obligations, in the order in which such installments became due and payable, and, if the amount available shall not be sufficient to pay in full all such installments, then to the payment, ratably, according to the amounts due on all such installments of such interest, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in the Subordinate Revenue Obligations; SECOND: To the payment to the persons entitled thereto of the unpaid principal of any of the Outstanding Subordinate Revenue Obligations which shall have become due and payable, in the order of their due dates, with interest upon the principal amount of the Subordinate Revenue Obligations from the respective dates upon which they shall have become due and payable, and, if the amount available shall not be sufficient to pay in full the principal of the Outstanding Subordinate Revenue Obligations due and payable on any particular due date, together with such interest, then to the payment first of such interest, ratably, according to the amount of interest due on such date, and then to the payment of such principal, ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in the Subordinate Revenue Obligations; and THIRD: To the payment of the interest on and the principal of the Subordinate Revenue Obligations as the same become due and payable. (b) If the principal of all the Subordinate Revenue Obligations shall have become due and payable, either by their terms or by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Subordinate Revenue Obligations, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in the Subordinate Revenue Obligations. Notwithstanding any other provision of the Resolution, amounts on deposit in the Construction Fund, the Debt Service Fund and the Redemption Fund maintained for any Subordinate Revenue Obligations shall be applied solely to the payment of amounts due on such Subordinate Revenue Obligations or, to the extent provided in the Supplemental Resolution authorizing the issuance of any Additional Subordinate Revenue Obligations, to the reimbursement of the provider of any Credit Facility securing such Subordinate Revenue Obligations. Whenever moneys are to be applied by the Trustee as described above, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. The setting aside of such moneys in trust for the benefit of the Holders of Outstanding Subordinate Revenue Obligations as provided in the Resolution shall constitute proper application by the Trustee, and the Trustee shall incur no liability whatsoever to the City, to any Holder of Revenue Obligations or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due A-48

159 regard to the circumstances, and ultimately applies the same in accordance with such provisions of the Resolution as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys, it shall fix the date (which shall be an Interest Payment Date for Revenue Obligations unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal of any Revenue Obligations to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. The Trustee shall not be required to make payment to the Holder of any unpaid Revenue Obligations unless such Revenue Obligations shall be presented to the Trustee for appropriate endorsement. Majority of Holders of Revenue Obligations May Control Proceedings. Anything in the Resolution to the contrary notwithstanding, the Holders of a majority of the Revenue Obligations shall have the right (subject to the provisions of such Resolution), by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee under the Resolution, provided that such direction shall not be otherwise than in accordance with law or the provisions of the Resolution, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Holders of Revenue Obligations not parties to such direction. Notwithstanding the foregoing, so long as any Senior Revenue Obligations are Outstanding, no Holder of Subordinate Revenue Obligations shall have any rights as described under this heading. Restrictions upon Action by Individual Holders of Revenue Obligations. No Holder of any of the Revenue Obligations shall have any right to institute any suit, action or proceeding in equity or at law on any Revenue Obligations for the execution of any trust under the Resolution or for any other remedy thereunder unless (i) such Holder previously shall have given to the Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, and (ii) the Holders of not less than 25% of the Revenue Obligations shall have made written request to the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Resolution or to institute such suit, action or proceeding in its or their name, and further, unless there shall have been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall have refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of the Resolution or to any other remedy under the Resolution; provided, however, that notwithstanding the foregoing provisions of this provision and without complying therewith, the Holders of not less than 25% of the Revenue Obligations may institute any such suit, action or proceeding in their own names for the benefit of all Holders of Outstanding Revenue Obligations. It is understood and intended that, except as otherwise provided above, no one or more Holders of the Revenue Obligations shall have any right in any manner whatsoever by his or their action to affect, disturb or prejudice the security of the Resolution or to enforce any right thereunder except in the manner provided in the Resolution, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner provided in the Resolution and for the benefit of all holders of the Outstanding Revenue Obligations, and that any individual right of action or other right given by law to one or more of such Holders of the Outstanding Revenue Obligations is restricted by the Resolution to the rights and remedies in the Resolution; provided, however, that nothing in the Resolution shall affect or impair the right of any Holder of any Revenue Obligation to enforce payment of the principal of, premium, if any, or interest on such Revenue Obligation at and after the maturity thereof, or the obligation of the City to pay such principal, premium, if any, and interest to the Holder thereof at the time and place, from the source and in the manner expressed in the Resolution and in the Revenue Obligations. A-49

160 Notwithstanding the foregoing, so long as any Senior Revenue Obligations are Outstanding, no Holder of Subordinate Revenue Obligations shall have any rights described under this heading. Modification or Amendment without Consent. Without notice to or the consent of the Holders of Revenue Obligations, the City may adopt at any time or from time to time a Supplemental Resolution, supplementing or amending the Resolution or any Supplemental Resolution (which Supplemental Resolutions shall thereafter form a part of the Resolution). Each Supplemental Resolution may be for one or more of the following purposes and shall become fully effective in accordance with its terms upon the filing with the Trustee of a copy of such Supplemental Resolution certified by an Authorized Officer of the City: (a) to grant to or confer upon the Trustee for the benefit of the Holders of the Revenue Obligations any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Trustee for the benefit of the Holders of the Revenue Obligations; (b) to add to the covenants and agreements of the City contained in the Resolution other covenants and agreements thereafter to be observed relative to the acquisition, construction, equipping, operation, maintenance, development or administration of the Water Facilities or the Wastewater Facilities, as applicable, or relative to the application, custody, use or disposition of the proceeds of Revenue Obligations; (c) Resolution; to surrender any right, power or privilege reserved to or conferred upon the City by the (d) to confirm, as further assurance, any pledge under, and the subjection to any lien on, or claim or pledge of (whether created or to be created by the Resolution), the Pledged Amounts; (e) to authorize the issuance of any Additional Revenue Obligations in accordance with the Resolution, including (without limitation) any modifications or amendments required (i) to effectuate the issuance of any capital appreciation bonds, Variable Rate Indebtedness, Balloon Indebtedness, Optional Tender Indebtedness or similar obligations, (ii) to grant to or otherwise secure the payment of the principal of and interest on, and the purchase price of, any Additional Revenue Obligations, and amounts payable under any Credit Facility Agreement pursuant to which any Credit Facility securing such payments shall have been issued, on a parity with the Existing Bonds in accordance with the Resolution, or (iii) to provide for the issuance or the assumption of any Indebtedness in accordance with the Resolution, provided that the pledge of the Operating Revenues made by the Resolution to the payment of the principal or Redemption Price of, and the purchase price of, each Series of Subordinate Revenue Obligations (including Revenue Notes) shall be junior and subordinate to the pledge of the Operating Revenues to the payment of the principal or Redemption Price of and interest on, and the purchase price of, outstanding Senior Revenue Obligations in accordance with the terms of the Resolution; (f) to cure any ambiguity or to cure or correct any defect or inconsistent provisions contained in the Resolution or to make such provisions in regard to matters or questions arising under the Resolution as may be necessary or desirable and not contrary to or inconsistent with the Resolution; (g) to permit the qualification of the Resolution or any Supplemental Resolution under any federal statute now or hereafter in effect or under any state blue sky law and, in connection therewith, to add to the Resolution or any Supplemental Resolution such other terms, conditions and provisions as may be permitted or required by such federal statute or state blue sky law; (h) to obtain or to maintain any ratings on Bonds from any Rating Agency; A-50

161 (i) to provide for the issuance of any Revenue Obligations in coupon form or in book-entry form (or, with respect to any Revenue Obligations then maintained in book-entry form with a Securities Depository, to provide for the continued maintenance of such Revenue Obligations in book-entry form with such Securities Depository or any replacement Securities Depository or to provide for the discontinuance of the maintenance of such Revenue Obligations in book-entry form); provided, however, that prior to the effective date of any such amendment providing for the issuance of any Revenue Obligations in coupon form or in book-entry form, there shall be delivered to the City and the Trustee an opinion of Bond Counsel to the effect that the issuance of any such Revenue Obligations in coupon or book-entry form (as the case may be) will not adversely affect the excludability from gross income for federal income tax purposes of the interest paid on any Tax-Exempt Revenue Obligations theretofore issued; (j) to make any other change in the Resolution which the Trustee determines shall not prejudice in any material respect the rights of the holders of the Revenue Obligations at the date as of which such change shall become effective; or (k) to preserve the excludability from gross income for federal income tax purposes of the interest paid on any Tax-Exempt Revenue Obligations theretofore issued. Supplemental Resolutions Requiring Consent of Holders of Revenue Obligations. In addition to Supplemental Resolutions permitted as described above, subject to the prior written consent of the Holders of a majority of the Senior Revenue Obligations (or if no Senior Revenue Obligations are Outstanding, the Holders of a majority of the Subordinate Revenue Obligations), the City may adopt at any time and from time to time Supplemental Resolutions amending or supplementing the Resolution, any Supplemental Resolution or any Revenue Obligations or releasing the City from any of the obligations, covenants, agreements, limitations, conditions or restrictions therein contained; provided, however, that nothing contained in the Resolution shall permit (i) a change in any terms of redemption or purchase of any Revenue Obligations, the due date for the payment of principal, redemption or purchase price of or interest on any Revenue Obligations or any reduction in principal or Redemption Price of or interest on, or the purchase price of, any Revenue Obligations without the consent of the affected Holders of such Revenue Obligations, or (ii) any reduction in the percentage of the aggregate principal amount of Revenue Obligations the consent of the Holders of which is required for any modification of the Resolution or any diminishment of the pledge of Pledged Amounts securing the Revenue Obligations without the unanimous written consent of the holders of Outstanding Revenue Obligation. Defeasance. If the City shall pay or cause to be paid the principal or Redemption Price of and interest on all Revenue Obligations under a Resolution at the times and in the manner stipulated therein and in such Resolution, then the pledge of any Pledged Amounts or other moneys and securities and funds hereby pledged to the payment of the principal or Redemption Price of and interest on, and the purchase price of, the Revenue Obligations and all other rights granted to the Trustee or the Holders of Revenue Obligations under such Resolution shall be discharged and satisfied. In such event, the Trustee shall, upon the request of the City, execute and deliver to the City all such instruments as may be desirable to evidence such discharge and satisfaction, and the Trustee shall pay or deliver to the City all moneys, securities and funds held by it pursuant to such Resolution (other than any moneys and securities required for the payment or redemption of Revenue Obligations not theretofore surrendered for such payment or redemption). A Bond shall be deemed to have been paid within the meaning of and with the effect expressed in a Resolution if (i) money for the payment or redemption of such Bond shall then be held by the Trustee (through deposit by the City of moneys for such payment or redemption or otherwise, regardless of the source of such moneys), whether at or prior to the maturity or the redemption date of such Bond, or (ii) if the maturity or redemption date of such Bond shall not then have arrived, provision shall have been made A-51

162 by the City for the payment to the holder of such Bond of the full amount to which such holder would be entitled by way of principal or Redemption Price thereof and interest thereon to the date of maturity or redemption of such Bond by deposit with the Trustee (or other method satisfactory to the Trustee) of callable or noncallable Defeasance Obligations, the principal of and the interest on which when due will provide such full amount, based upon a verification report of Independent Public Accountants (or other verification agents having a national reputation in the field of verifying defeasance escrows), and the City shall have made provision, satisfactory to the Trustee, for one publication in an Authorized Baltimore Newspaper and in an Authorized New York Newspaper of a notice that such moneys are so available for such payment; provided, however, that if such Bond is to be redeemed prior to the maturity thereof, the City shall have taken all action necessary to redeem such Bond and notice of such redemption shall have been duly given or provisions satisfactory to the Trustee shall have been made for the giving of such notice; and provided, further, that if callable Defeasance Obligations are deposited with the Trustee under this paragraph (b), the principal of and the interest on such Defeasance Obligations shall be calculated to the earliest date on which such Defeasance Obligations may be called under the terms thereof for purposes of determining whether any Bond shall be deemed to have been paid under the Resolution. Notwithstanding, any moneys held by the Trustee for the payment and discharge of any of the Revenue Obligations which remain unclaimed for six years after the later of (i) the date at which such Revenue Obligations have become due and payable either at their stated maturity dates or by call for earlier redemption, and (ii) the date of deposit of such moneys shall, at the written request of the City, be repaid by the Trustee to the City as its absolute property and free from trust, and the Trustee shall thereupon be released and discharged; provided, however, that, before being required to make any such payment to the City, the Trustee may, at the expense of the City, cause to be published in an Authorized Baltimore Newspaper and in an Authorized New York Newspaper a notice that such moneys remain unclaimed and that, after a date named in such notice, which date shall be not less than 40 nor more than 90 days after the date of publication of such notice, the balance of such moneys then unclaimed shall be returned to the City. This provision shall survive the defeasance or termination of the Resolution. An Additional Revenue Obligation shall be deemed to have been paid within the meaning of and with the effect expressed in a Resolution if it is deemed to be paid in accordance with the provisions of the Supplemental Resolution authorizing the issuance thereof. If the City shall determine to provide for the payment of all of the Revenue Obligations of any Series in accordance with the Resolution, upon the direction of the City, the Trustee shall set aside all amounts on deposit in the funds and accounts maintained solely for the Revenue Obligations of such Series (other than amounts set aside for the payment of particular Revenue Obligations of such Series in accordance with the Resolution) for the payment of the principal or Redemption Price of and interest on, and the purchase price of, such Revenue Obligations on the due dates for such payments in accordance with the Resolution. If all of the Revenue Obligations of any Series shall have been paid in accordance with the Resolution, amounts on deposit in the funds and accounts maintained solely for such Revenue Obligations (other than amounts set aside for the payment of particular Revenue Obligations of such Series in accordance with the Resolution) shall be paid to the City for deposit in the Water Operating Fund or the Wastewater Operating Fund, as applicable. The provisions of this paragraph shall be subject in all respects to the provisions of any Supplemental Resolution authorizing the issuance of Additional Revenue Obligations. Notwithstanding the foregoing provisions, in the event that any principal of, Sinking Fund Installment for or interest on any Insured Bond shall be paid by the Insurer pursuant to the terms of the Bond Insurance Policy, such Insured Bond shall not be deemed to be paid within the meaning of and with the effect expressed in the applicable Resolution and shall continue to be Outstanding thereunder and the Insurer shall be fully subrogated to all of the rights of the Holder thereof. In such event, the pledge of the A-52

163 Operating Revenues and all covenants, agreements and other obligations of the City under the Resolution shall continue in full force and effect and the lien of the Resolution shall not be deemed to have been discharged until the Insurer shall be repaid in full. Under each Resolution, Defeasance Obligations may include or consist of collateralized investment agreements, so long as such agreements meet the following requirements: (i) The provider shall be a domestic or foreign bank or financial institution, a domestic or Canadian life insurance company, a wholly-owned and guaranteed financial institution subsidiary of: (1) one of the above-mentioned institutions, or (2) an insurance holding company, a domestic financial guaranty insurance company or an affiliate thereof, whose obligations are fully guaranteed by an affiliate or the parent company (an Eligible Provider ), in each instance having a rating of AAA or Aaa by S&P and Moody s, respectively. (ii) The agreement shall provide to the Trustee or its agent holding such collateral a perfected security interest in (1) securities issued or guaranteed by the United States of America, the Government National Mortgage Association, Freddie Mac or Fannie Mae or (2) municipal, corporate, asset-backed and mortgage-backed obligations rated AAA or Aaa by S&P and Moody s, respectively, and the proceeds thereof, to secure the provider s obligation under the agreement. Any collateral delivered pursuant to the agreement must be delivered free and clear of claims of any third parties and must be registered in the name of the Trustee or its agent. (iii) The agreement shall require the Trustee or its agent to value the collateral weekly. The value of the collateral must be equal to at least 105% of the amount of cash transferred to the provider pursuant to the agreement for investment, plus accrued interest. If the value of the securities held as collateral falls below 105%, additional collateral meeting the requirements of this provision shall be transferred to the Trustee or its agent. (iv) The agreement shall provide that if the financial strength rating of the provider falls below AAA or Aaa by S&P or Moody s, respectively, at any time during the term of the agreement, the provider will, within 10 days thereafter, at the direction of the Insurer, either: (1) deliver a portfolio of Defeasance Obligations to the Trustee, or (2) pledge additional collateral such that the market value of the collateral is maintained at levels and upon such conditions as would be acceptable to the rating agencies to maintain the ratings on the Bonds, or (3) terminate the agreement, in which event the provider shall pay to the Trustee the present value of the difference between the earnings that would have accrued under the agreement and the interest earnings that will accrue at the rate borne by any new investment agreement or alternative investment plus the cost of a verification report prepared by an acceptable verification agent in connection with the replacement of such agreement. City Protected in Acting in Good Faith. In the exercise of the powers of the City and its officers, employees and agents under the Resolution, including (without limitation) the application of moneys, the investment of funds and the operation and modification of the Water Utility or the Wastewater Utility, as applicable, the City shall not be accountable to the Trustee or any Holder of Revenue Obligations for any action taken or omitted by it or its officers, employees and agents in good faith and reasonably believed in good faith by it or them to be authorized or within the discretion or rights or powers conferred. The City and its officers, employees and agents shall be protected in its or their acting upon any paper or document reasonably believed in good faith by it or them to be genuine, and it or they may conclusively rely upon the advice of counsel as to matters of law and may (but need not) require further evidence of any fact or matter before taking any action. No recourse shall be had by the Trustee or any Holder of Revenue Obligations for any claims based on the Resolutions against any officer, employee or agent of the City A-53

164 alleging personal liability on the part of such person unless such claims are based upon the bad faith, fraud or deceit of such person. A-54

165 APPENDIX B AUDITED WATER UTILITY FUND FINANCIAL STATEMENTS FOR FISCAL YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2012

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167 CITY OF BALTIMORE WATER UTILITY FUND FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2012 and 2011 (WITH REPORT OF INDEPENDENT AUDITORS THEREON) B-1

168 CITY OF BALTIMORE WATER UTILITY FUND FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2012 and 2011 TABLE OF CONTENTS Page Report of Independent Auditors Management s Discussion and Analysis Statements of Fund Net Assets... 8 Statements of Revenues, Expenses, and Changes in Fund Net Assets... 9 Statements of Cash Flows Notes to the Financial Statements

169 KPMG LLP Suite K Street, NW Washington, DC Independent Auditors Report The Mayor, City Council, Comptroller and Board of Estimates City of Baltimore, Maryland: We have jointly audited the statement of net assets of the Water Utility Fund of the City of Baltimore, Maryland (the City), as of June 30, 2012 and 2011 and the related statements of revenues, expenses, and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the City s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the financial statements present only the Water Utility Fund and do not purport to, and do not, present fairly the financial position of the City of Baltimore, Maryland, as of June 30, 2012 and 2011, its changes in financial position or its cash flows for the years 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 financial position of the Water Utility Fund as of June 30, 2012 and 2011, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 7 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 accordance with auditing standards generally accepted in the United States of America, which consisted principally of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s 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. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

170 In accordance with Government Auditing Standards, we have also issued our report dated August 19, 2013 on our consideration of the City s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters, which include the Water Utility Fund. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Robert L. McCarty Jr., CPA City Auditor Department of Audits Independent Auditors August 19,

171 City of Baltimore Water Utility Fund Management s Discussion and Analysis This section of the City of Baltimore, Maryland s Water Utility Fund (Water Utility) financial statements presents our discussion and analysis of the Water Utility s financial performance during the years ended June 30, 2012 and Background The Water Utility supplies water to the City, as well as to portions of Baltimore, Anne Arundel, Carroll, Harford, and Howard Counties. The Water Utility serves over 1,800,000 people by supplying approximately 93 billion gallons of water annually. Approximately 51% of the Water Utility s customers and 42% of water usage are currently within the City, with the remaining 49% of customers and 58% of water usage being in the surrounding Maryland counties. Highlights For fiscal year 2012, total operating revenues were $132.3 million, which represents a increase of 2.3% from fiscal year 2011 revenues. For fiscal year 2011, total operating revenues were $129.3 million, which represented a decrease of 1.1% below fiscal year 2010 revenues. Total operating expenses for fiscal year 2012 were $114.9 million, an increase of $7.6 million over fiscal year 2011 operating expenses of $107.3 million. Total operating expenses for fiscal year 2011 were $107.3 million, an increase of $4.3 million over fiscal year 2010 operating expenses of $103.0 million. Net assets increased in fiscal years 2012 and 2011, by $31.8 million and $34.3 million, respectively. Overview of the Financial Statements This report consists of three parts: 1) management s discussion and analysis (this section), 2) financial statements, and 3) notes to the financial statements. The financial statements provide both long-term and short-term information about the Water Utility s overall financial status. The notes to the financial statements explain some of the financial information in the financial statements and provide more detailed information. The Water Utility s financial statements are prepared in conformity with accounting principles generally accepted in the United States as applied to governmental units on an 3

172 accrual basis. Under this basis, revenues are recognized in the period in which they are earned, expenses are recognized in the period in which they are incurred, and depreciation of assets is recognized in the statement of revenues, expenses, and changes in fund net assets. All assets and liabilities associated with the operation of the Water Utility are included in the statement of net assets. Financial Analysis of the Water Utility Net Assets Water Utility Fund (Expressed in Thousands) Change Change Current and other assets $236,657 $250,706 $236,074 $(14,049) $14,632 Capital assets , , ,423 61,843 54,447 Total assets.... 1,193,370 1,145,576 1,076,497 47,794 69,079 Current liabilities.. 39,134 34,755 38,726 4,379 (3,971) Noncurrent liabilities , , ,163 11,619 38,729 Total liabilities.. 600, , ,889 15,998 34,758 Net assets: Invested in capital assets, net of related debt , , ,242 66,065 15,179 Restricted ,321 49,431 40,520 2,890 8,911 Unrestricted 40,918 78,077 67,846 (37,159) 10,231 Total net assets.. $592,725 $560,929 $526,608 $31,796 $34,321 Analysis of Net Assets Net assets may serve as a useful indicator of the Water Utility s financial position. For the Water Utility, assets exceeded liabilities by $592.7 million, $560.9 million, and $526.6 million in fiscal years 2012, 2011, and 2010, respectively. The Water Utility s net assets include its investment of $499.5 million, $433.4 million and $418.2 million in capital assets (e.g., land, buildings, and equipment); less any related outstanding debt used to acquire those assets, at the end of fiscal years 2012, 2011, and 2010, respectively. The Water Utility uses these capital assets to provide water services to citizens; consequently, these assets are not available for future spending. Although the Water Utility s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from customers of the Water Utility through rates and charges, since the capital assets themselves cannot be liquidated for these liabilities. An additional portion of the Water Utility s restricted net assets, $52.3 million, represents restricted resources that are legally obligated for revenue bond repayment requirements. The Water Utility had unrestricted net assets of $40.9 4

173 million, $78.1 million, and $67.8 million as of June 30, 2012, 2011, and 2010, respectively. During fiscal years 2012, 2011, and 2010, the Water Utility expended $91.1 million, $72.4 million, and $69.9 million for capital assets, respectively. These assets primarily represent facility enhancements to comply with environmental regulations. The assets were funded primarily through new issues of revenue bonds of $4.4 million, $53.1 million, and $17.0 million in fiscal years 2012, 2011, and 2010, respectively. Fitch Ratings, Moody s Investor Services, Inc., and Standard & Poor s Rating Services gave the Series 2009 Bonds insured ratings of AAA, Aaa, and AAA, respectively. Revenues, Expenses, and Changes in Fund Net Assets Water Utility Fund (Expressed in Thousands) Years Ended June 30, 2012 Change Change Operating revenues.. $ 132,340 $ 129,292 $ 130,666 $3,048 $(1,374) Operating expenses: Salaries and wages. 36,099 34,792 35,548 1,307 (756) Other personnel costs. 14,777 11,964 11,813 2, Contractual services... 35,305 34,325 30, ,848 Material and supplies ,591 9,189 10,288 (598) (1,099) Minor Equipment Depreciation... 19,551 16,728 14,568 2,823 2,160 Total operating expenses. 114, , ,962 7,623 4,352 Operating income ,403 21,978 27,704 (4,575) (5,726) Non-operating expense, net.. (12,465) (9,422) (5,520) (3,043) (3,902) Income before capital contributions ,938 12,556 22,184 (7,618) (9,628) Capital contributions. 26,858 21,765 13,798 5,093 7,967 Change in net assets.. 31,796 34,321 35,982 $ (2,525) $ (1,661) Beginning net assets.. 560, , ,626 Ending net assets. $ 592,725 $ 560,929 $ 526,608 5

174 Analysis of Revenues, Expenses, and Changes in Fund Net Assets The overall increase in the Water Utility s net assets amounted to $31.8 million and $34.3 million for fiscal years 2012, and 2011, respectively, due to the implementation of a 9% water rate increased in fiscal years 2012 and 2011, to customers located in Baltimore City, Anne Arundel, Howard, and Carroll Counties, successfully minimizing increases in operating expenses, and capital contributions, primarily from Baltimore County, corresponding to increases in the cost of the Capital Improvement Program. Capital Assets The Water Utility s capital assets as of June 30, 2012, 2011, and 2010 amounted to $956.7 million, $894.9 million, and $840.4 million (net of accumulated depreciation), respectively. Capital assets include land, equipment, buildings, improvements and construction in progress. Total increases in the Water Utility s net capital assets for fiscal years 2012 and, 2011 were $72.4 million and $54.4 million, respectively. These increases were funded primarily by issuance of revenue bonds. The following schedule presents the capital asset activities for fiscal years 2012, 2011, and 2010 (amounts expressed in thousands): Balance Net Balance Net Balance June 30, 2012 Change June 30, 2011 Change June 30, 2010 Land. $ 12,540 $ 12,540 $ 12,540 Buildings and improvements.. 654,809 $ (16,744) 671,553 $ 251, ,332 Equipment.. 11,022 1,109 9,913 (1,658) 11,571 Construction in progress.. 216,052 15, ,864 (195,116) 395,980 Infrastructure.. 62,290 62,290 Total capital assets, net.. $ 956,713 $ 61,843 $ 894,870 $ 54,447 $ 840,423 As of June 30, 2012, the Water Utility had commitments of $80.8 million for the acquisition and construction of capital assets. See Note 5 for further information. Debt Administration For fiscal years 2012, 2011, and 2010, the Water Utility had long-term obligations of $512.6 million, $517.1 million, and $472.0 million, respectively. These long-term obligations consisted primarily of revenue bonds, which are secured by revenue from the sale of water. The Water Utility issued $4.4 million in revenue bonds during fiscal year 2012 to fund the cost of acquisition and construction of various capital projects, all of which remained outstanding at June 30, During fiscal years 2012, 2011, and 2010, the Water Utility s debt decreased by $ 4.5 million, and increased by $45 million, and $10.8 million, respectively. See Note 6 for further information. 6

175 Economic Condition of the Water Utility The Water Utility is a large regional utility system that provides service to the diverse Baltimore metropolitan area, which includes Baltimore City as well as portions of Baltimore, Anne Arundel, Howard, Carroll, and Harford counties. Modest growth is expected in the future. The Water Utility s long-term water supply is good, with water primarily coming from the Loch Raven, Prettyboy, and Liberty Reservoirs. Additional water can be drawn from the Susquehanna River, providing the Water Utility with additional capacity. Although the Water Utility is expected to make substantial investments in capital improvements to meet the Safe Drinking Water Act requirements and to rehabilitate aging infrastructure, management expects continued good financial performance, including adequate debt service coverage and liquidity. 7

176 CITY OF BALTIMORE Water Utility Fund Statements of Fund Net Assets For the Years Ended June 30, 2012 and 2011 (Expressed in Thousands). Assets: Current assets:. Cash and cash equivalents.... $ 18,834 $ 50,736 Accounts receivable, net:. Service billings. 47,424 42,772 Other Due from other governments. 1,582 8,301 Inventories. 6,398 4,903 Total current assets , ,958 Noncurrent assets:. Restricted assets:. Cash and cash equivalents , ,154 Accounts receivable ,198 8,452 Capital assets not being depreciated , ,404 Capital assets, net of accumulated depreciation , ,466 Unamortized bond issuance costs ,159 1,444 Deferred outflow of resources - interest rate swaps 46,843 28,698 Total noncurrent assets.. 1,118,754 1,038,618 Total assets... 1,193,370 1,145,576. Liabilities:. Current liabilities:. Accounts payable and accrued liabilities ,504 3,256 Accrued interest payable.. 9,299 8,432 Deposit subject to refund Due to other governments.... 7,639 7,090 Other liabilities.. 2,228 2,155 Revenue bonds payable. 10,343 8,936 Accounts payable from restricted assets.. 6,106 4,871 Total current liabilities. 39,134 34,755 Noncurrent liabilities:. Revenue bonds payable, net. 502, ,197 Other liabilities.... 3,486 3,575 Derivative instrument liability. 55,788 38,120 Total noncurrent liabilities. 561, ,892 Total liabilities , ,647 Net assets:. Invested in capital assets, net of related debt. 499, ,421 Restricted for:. Debt service. 52,321 49,431 Unrestricted.. 40,918 78,077 Total net assets. $ 592,725 $ 560,929 The notes to the financial statements are an integral part of this statement. 8

177 CITY OF BALTIMORE Water Utility Fund Statements of Revenues, Expenses, and Changes in Fund Net Assets For the Years Ended June 30, 2012 and 2011 (Expressed in Thousands) Operating revenues:.. Water service. $ 127,544 $ 129,292 Other income.. 4,796 - Total operating income , ,292. Operating expenses:. Salaries and wages. 36,099 34,792 Other personnel costs.. 14,777 11,964 Contractual services.. 35,305 34,325 Materials and supplies... 8,591 9,189 Minor equipment Depreciation ,551 16,728 Total operating expenses , ,314. Operating income... 17,403 21,978. Nonoperating revenues (expenses):. Loss on sale of investments.... (120) (115) Interest income 1,960 4,435 Interest expense... (14,305) (13,742) Total nonoperating expenses, net.. (12,465) (9,422) Income before capital contributions.. 4,938 12,556 Capital contributions ,858 21,765 Changes in net assets.. 31,796 34,321 Total net assets - beginning , ,608 Total net assets - ending.. $ 592,725 $ 560,929 The notes to the financial statements are an integral part of this statement

178 . CITY OF BALTIMORE Water Utility Fund Statements of Cash Flows For the Years Ended June 30, 2012 and 2011 (Expressed in Thousands) Cash flows from operating activities: Receipts from customers... $ 128,530 $ 137,438 Payments to employees. (50,876) (46,756) Payments to suppliers... (32,517) (47,666) Net cash provided by operating activities ,137 43,016 Cash flows from capital and related financing activities:. Proceeds from revenue bonds... (4,553) 53,060 Interest income (expense) net... (13,809) (9,026) Principal paid on revenue bonds (8,036) Acquisition and construction of capital assets..... (91,133) (72,439) Capital contributions. 26,858 21,765 Net cash used by capital and related financing activities. (82,352) (14,676) Net increase (decrease) in cash and cash equivalents. (37,215) 28,340 Cash and cash equivalents, beginning of year , ,550 Cash and cash equivalents, end of year. $ 118,675 $ 155,890. Reconciliation of operating income to net cash provided by operating activities:. Operating income. $ 17,403 $ 21,978 Adjustments to reconcile operating income to net cash provided by operating. activities:. Depreciation expense.. 19,551 16,728 Changes in assets and liabilities:. Accounts receivables.. (4,651) 10,196 Accounts receivables-other.. (132) - Due from other governments ,719 - Accounts receivables-restricted... (5,746) - Inventories. (1,495) (420) Accounts payable and accrued liabilities... 10,855 (4,295) Accrued interest payable Other liabilities... (17) (3,087) Restricted accounts payable ,234 (2,050) Due to/from other governments ,966 Total adjustments.. 27,734 21,038 Net cash provided by operating activities. $ 45,137 $ 43,016. The notes to the financial statements are an integral part of this statement. 10

179 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and Description of the Water Utility The Water Utility is a separate utility in the Bureau of Water and Waste Water, one of the three bureaus in the City of Baltimore, Maryland s Department of Public Works. In November 1978, the voters approved a Charter Amendment establishing the Water Utility as a separate enterprise and requiring it to be financially self-sustaining and operated without profit or loss to the other funds or programs of Baltimore City (City). These financial statements are only of the Water Utility s operations and are not intended to present the financial position, changes in financial position, or, where applicable, cash flows of the City. 2. Summary of Significant Accounting Policies The accounting and financial reporting policies of the Water Utility conform to accounting principles generally accepted in the United States and reporting standards as promulgated by the Governmental Accounting Standards Board for enterprise funds. The Water Utility has elected not to follow Financial Accounting Standards Board pronouncements issued after November 30, Basis of Accounting The financial statements have been prepared on the accrual basis of accounting whereby revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Operating revenues result from the services provided by the Water Utility, and all other revenue is considered nonoperating. Cash and Cash Equivalents Cash and cash equivalents include demand deposits, as well as short-term investments with a maturity date within three months of the date acquired by the Water Utility. Investments Investments are reported at fair value on the date of the Statement of Net Assets, based on market prices. Investments with maturities of less than one year from purchase date are reported at cost, which approximates fair value. Securities traded on national exchanges are valued at the last reported sales price. Swaps Interest Rate Swaps are entered into to take advantage of lower cost interest rates, through conversion of variable rate to fixed rates and fixed rate to variable rates. It is the policy of the Water Utility to not record the fair value of the swap arrangements. Swap related transactions are recorded as payments are received and made. Note 9 provides more information on the various rewards and risks typical to these types of financing arrangements. 11

180 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Inventories Inventories are stated at cost, using the moving average cost method. Unbilled Water Utility User Charges Unbilled water user charges are estimated and accrued at year-end. Restricted Assets The proceeds of the Water Utility revenue bonds, Federal and State grants, and restricted accounts receivable are restricted for the purpose of the construction of water facilities and revenue bond repayment requirements. Use of Restricted Net Assets When an expense is incurred for which restricted and unrestricted resources are available to pay the expense, it is the Water Utility s policy to apply the expense first to restricted resources, then to unrestricted resources. Capital Assets Purchased or constructed capital assets are reported at historical cost. Capitalization thresholds are $50,000 for buildings and improvements; and $5,000 for equipment. Capital assets are depreciated using the straight-line method over the estimated useful lives, as follows: Buildings... Improvements Equipment. Mobile Equipment. 50 years years 2 25 years 5 10 years Gains and Losses on Early Extinguishment of Debt from Refundings Gains and losses on the early extinguishment of debt are amortized over the shorter of the life of the new or old debt. Sick, Vacation, and Personal Leave Employees earn one day of sick leave for each completed month of service; there is no limitation on the number of sick leave days that may be accumulated. A portion of unused sick leave earned annually during each twelve-month period may be converted to cash for a maximum of three days, computed on an attendance formula. 12

181 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Upon retirement with pension benefits, or termination of employment after completion of twenty or more years of service without pension benefits, employees receive one day s pay for every four sick leave days accumulated and unused at the date of separation; under any other conditions of separation, unused sick leave is forfeited. At June 30, 2012, it is estimated that accumulated non-vested sick leave for the Water Utility approximated $5,156,000. Sick leave benefit expenses are recorded as a percent of conversion value based on years of service, with a maximum of 100% for employees with twenty years or more of service. Employees can accumulate a maximum of 224 vacation and personal leave days depending upon length of service, which either may be taken through time off or carried until paid upon termination or retirement. Accumulated vacation and personal leave expenses are recorded when leave is earned. The total vacation, personal leave, and conversion value of unused sick leave recorded as a liability for compensated absences at June 30, 2012 and 2011 is $5,756,000 and $5,731,000, respectively. 3. Deposits and Investments The Water Utility participates in the City s pooled cash account. At June 30, 2012 and 2011, the Water Utility s share of the City s pooled cash account, including both restricted and unrestricted cash, was $26,664,000 and $62,209,000, respectively. All of the City s pooled cash deposits are either insured through the Federal Depository Insurance Corporation or collateralized by securities held in the name of the City by the City s agent. For other than pension funds, the City is authorized by state law to invest in direct or indirect obligations of the United States Government, repurchase agreements that are secured by direct or indirect obligations of the United States Government, certificates of deposit, commercial paper with highest letter and numerical rating, and mutual funds registered with the Securities and Exchange Commission. The City s investment policy limits the percentage of certain types of securities, with the exception of obligations for which the United States Government has pledged its full faith and credit. For investments held by the City in trust and/or to secure certain debt obligations, the City complies with the terms of the trust agreements. The City s Board of Finance has formally adopted the above policies and reviews and approves all security transactions. 13

182 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 The Water Utility s investments at June 30, 2012 and 2011 are presented in the following table. All investments are presented by investment type, and debt securities are presented by maturity (amounts expressed in thousands): June 30, 2012 Fair Investment Maturities (In Months) Investment Type Value Less than 6 6 to 12 Greater than 12 Debt Securities: U.S. Agencies $21,725 $21,725 Money market mutual funds.. 41,265 41,265 Commercial paper. 6,563 6,563 69,553 $69,553 Less: Cash equivalents.. 69,553 Total investments June 30, 2011 Fair Investment Maturities (In Months) Investment Type Value Less than 6 6 to 12 Greater than 12 Debt Securities: U.S. Agencies $21,856 $21,856 Money market mutual funds.. 65,773 65,773 Commercial paper. 6,052 6,052 93,681 $93,681 Less: Cash equivalents.. 93,681 Total investments Interest rate risk Interest rate risk is the risk that changes in interest rates of debt investments will adversely affect the fair value of investments. The City limits its interest rate risk in accordance with the City s Board of Finance policy by maintaining a minimum of 20 percent of the City s investment in funds in liquid investments to include United States Government securities, overnight repurchase agreements, and by limiting the par value of the portfolio invested for a period greater than one year at or below $100 million. The Water Utility is in compliance with this policy. Credit risk of debt securities Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. As discussed above, the City s Board of Finance limits City investments to only the highest rated investments in the categories discussed above. The Water Utility s portions of the City s rated debt investments as of June 30, 2012 and 2011 were rated by a nationally recognized statistical rating agency, and are presented below using the Standard and Poor s rating scale (amounts expressed in thousands): 14

183 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 June 30,2012 Quality Ratings Investment Type Fair AAA A1 P1 Value U.S. Agencies: Federal Home Loan Mortgage Corp. Securities $21,725 $21,725 Money market mutual funds: Wilmington Bank US Government Money Market Fund... 41,265 41,265 Commercial paper.. 6,563 $6,563 Total rated debt investments.. $69,553 $62,990 $6,563 June 30, 2011 Quality Ratings Investment Type Fair AAA A1 P1 Value U.S. Agencies: Federal Home Loan Mortgage Corp. Securities $136 $136 Federal Home Loan Mortgage Corp. Discounts 21,720 21,720 Money market mutual funds: M&T Bank US Government Money Market Fund... 65,773 65,773 Commercial paper.. 6,052 $6,052 Total rated debt investments.. $93,681 $87,629 $6,052 Concentration of credit risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The City has not adopted a formal policy on the concentration of credit risk. The Water Utility had the following debt security investments at June 30, 2012 and 2011, which were more than five percent of total investments (amounts expressed in thousands): June 30, 2012 Fair Percentage of Investment Value Portfolio Commercial paper Silver Tower... $6, % June 30, 2011 Percentage of Investment Fair Portfolio Value Commercial paper Silver Tower... $6, % 15

184 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and Allowance for Doubtful Accounts Accounts receivable as of June 30, 2012 and 2011 are shown net of allowances of $9,534,000 and $6,655,000, respectively. 5. Capital Assets Capital assets activity for the years ended June 30, 2012 and 2011 was as follows (expressed in thousands): Balance Balance June 30, 2011 Increases Decreases June 30, 2012 Capital assets, not being depreciated: Land... $12,540 $12,540 Construction in progress ,864 $81,171 $65, ,052 Total capital assets, not being depreciated ,404 81,171 65, ,592 Capital assets, being depreciated: Buildings and improvements. 1,011, ,011,487 Equipment.. 60,551 3,124 63,675 Infrastructure.. 62,919 62,919 Total capital assets, being depreciated.. 1,071,874 66,207 1,138,081 Less: accumulated depreciation for: Buildings and improvements.. 339,770 16, ,678 Equipment.. 50,638 2,015 52,653 Infrastructure Total accumulated depreciation. 390,408 19, ,960 Total capital assets, being depreciated, net ,466 46, ,121 Total capital assets, net $894,870 $127,826 $65,983 $956,713 Capital assets, not being depreciated: Balance Balance June 30, 2010 Increases Decreases June 30, 2011 Land $12,540 $12,540 Construction in progress. 395,980 $70,820 $265, ,864 Total capital assets, not being depreciated. 408,520 70, , ,404 Capital assets, being depreciated: Buildings and improvements. 745, ,938 1,011,323 Equipment.. 60, ,551 Total capital assets, being depreciated.. 805, ,291 1,071,874 Less: accumulated depreciation for: Buildings and improvements.. 325,053 14, ,770 Equipment.. 48,627 2,011 50,638 Total accumulated depreciation. 373,680 16, ,408 Total capital assets, being depreciated, net , , ,466 Total capital assets, net $840,423 $320,383 $265,938 $894,870 16

185 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Interest is capitalized on capital assets acquired with tax-exempt debt. The amount of interest to be capitalized is calculated by offsetting interest cost incurred from the date of the borrowing until completion of the project, with interest earned on invested proceeds over the period. During fiscal years 2012 and 2011, interest cost of $9,697,000 and $9,688,000, respectively (net of interest earned of $1,287,000 and $2,061,000, respectively), was capitalized. At June 30, 2012, the Water Utility had outstanding commitments for construction of $80,838, Long-term Obligations The Constitution of Maryland requires a three-step procedure for the creation of debt by the City of Baltimore: - Act of the General Assembly of Maryland or resolution of the majority of Baltimore City delegates - Ordinance of the Mayor and City Council of Baltimore - Ratification by the voters of the City of Baltimore Changes in long-term debt obligations for the years ended June 30, 2012 and 2011 are as follows (amounts expressed in thousands): Amounts Due Balance Balance Within June 30, 2011 Additions Reductions June 30, 2012 One Year Revenue bonds.. $524,179 $4,356 $9,168 $519,367 Less: unamortized charges.. 7, ,787 Total Revenue bonds payable.. $ 517,133 $4,356 $8,909 $512,580 $10,343 Compensated absences $ 5,731 $25 $5,756 $2,228 Amounts Due Balance Balance Within June 30, 2010 Additions Reductions June 30, 2011 One Year General obligation bonds payable $ 118 $ 2 $ 120 Revenue bonds.. 479,155 53,060 8, ,179 Less: unamortized charges.. 7,305 $259 $7,046 Total Revenue bonds payable.. $ 471,850 $ 53,060 $ 7,777 $ 517,133 $ 8,936 Compensated absences $ 5,448 $ 83 $ 5,731 $ 2,003 17

186 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 The City has issued revenue bonds, the proceeds of which were used to provide funds for capital improvements to water facilities. Certain assets and revenues of the Water Utility are pledged as collateral for the bonds and notes. Bonds and notes outstanding as of June 30 consist of (amounts expressed in thousands): Term bonds series 1993-A with interest at 5.60%, payable semiannually, due July 1, $5,300 $7,700 Term bonds series 1993-A with interest at 5.65%, payable semiannually, due July 1, ,900 23,900 Term bonds series 1994-A with interest at 6.00%, payable semiannually, due July 1, ,405 5,355 Term bonds series 1994-A with interest at 5.00%, payable semiannually, due July 1, ,280 10,280 Term bonds series 2002-A with interest at 5.00%, payable semiannually, due July 1, ,250 4,250 Term bonds series 2002-A with interest at 5.00%, payable semiannually, due July 1, ,845 9,845 Term bonds series 2002-A with interest at 5.125%, payable semiannually, due July 1, ,385 15,385 Term bonds series 2002-A with interest at 5.125%, payable semiannually, due July 1, ,840 64,840 Term bonds series 2003-A with interest at 4.20%, payable semiannually, due July 1, ,835 12,835 Term bonds series 2006-A with interest at 4.625%, payable semiannually, due July 1, ,930 5,930 Term bonds series 2006-A with interest at 4.625%, payable semiannually, due July 1, ,435 7,435 Term bonds series 2007-B with interest at 4.50%, payable semiannually, due July 1, ,995 22,995 Term bonds series 2007-B with interest at 4.50%, payable semiannually, due July 1, ,910 7,910 18

187 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and Term bonds series 2007-C with interest at 5.00%, payable semiannually, due July 1, ,115 9,115 Term bonds series 2007-C with interest at 5.00%, payable semiannually, due July 1, ,630 11,630 Term bonds series 2008-A with interest at 4.625%, payable semiannually, due July 1, ,740 5,740 Term bonds series 2008-A with interest at 4.73%, payable semiannually, due July 1, ,115 1,115 Term bonds series 2008-A with interest at 5.00%, payable semiannually, due July 1, ,150 6,150 Term bonds series 2009-A with interest at 5.00%, payable semiannually, due July 1, ,220 1,220 Term bonds series 2009-A with interest at 5.125%, payable semiannually, due July 1, ,630 3,630 Term bonds series 2009-A with interest at 5.375%, payable semiannually, due July 1, ,680 4,680 Term bonds series 2009-A with interest at 5.75%, payable semiannually, due July 1, ,120 6,120 Serial bonds series 2002-A maturing in annual installments from $1,855,000 to $1,975,000 from July 1, 2012 through July 1, 2021, with variable interest through July 1, 2016 and a fixed rate of 4.85% to 5.0% thereafter payable semiannually 18,890 20,845 Serial bonds series 2003-B maturing in annual installments from $66,000 to $984,000 through February 1, 2024, with interest rate at 0.40%, payable semiannually... 1,311 1,379 Serial bonds series 2005-A maturing in annual installments from $580,000 to $3,500,000 from July 1, 2021 through July 1, 2025, with interest rate of 4.00% to 5.00%, payable semiannually. 1,670 1,670 Serial bonds series 2006-A maturing in annual installments from $515,000 to $1,035,000 from July 1, 2012 through July 1, 2026, with interest rate of 4.00% to 4.50%, payable semiannually. 11,705 12,260 Serial bonds series 2007-A maturing in annual installments from $64,000 to $80,000 through February 1, 2037, with interest rate at 0.40%, payable semiannually 1,665 1,967 Serial bonds series 2008-A maturing in annual installments from $475,000 to $1,005,000 from July 1, 2012 through July 1, 2028, with interest rates of 2.00% to 4.50%, payable semiannually... 12,630 13,170 19

188 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Serial bonds series 2007-C maturing in annual installments from $740,000 to $1,570,000 from July 1, 2012 through July 1, 2027, with interest rates of 3.75% to 5.00%, payable semiannually... Serial bonds series 2009-A maturing in annual installments from $475,000 to $1,005,000 from July 1, 2012 through July 1, 2021, with interest rates of 2.00% to 4.50%, payable semiannually ,020 18,790 5,220 5,615 Serial bonds series 2009-B maturing in annual installments of $586,172 from February 1, 2015 through February 1, 2042, with an interest rates of 0.00%... 17,000 17,000 Auction rate notes series 2002-B, payable monthly, due July 1, ,300 18,300 Auction rate notes series 2004-B, payable monthly, due July 1, ,100 47,100 Auction rate notes series 2002-C, payable monthly, due July 1, ,800 40,800 Serial bonds series 2004-A maturing in annual installments from $197,000 to $984,000 through February 1, 2024, with interest rate at 0.45%, payable semiannually 4,185 4,388 Serial bonds series 2007-B maturing in annual installments from $30,000 to $3,860,000 from July 1, 2012 through July 1, 2027, with interest rate of 3.60% to 4.50%, payable semiannually... 19,745 19,775 Serial bonds series, 2011-A maturing in annual installments of $915,000 to $2,000,000 from July 1, 2012 through February 1, 2031, with interest rates from 2.00% to 5.00%... 27,315 27,315 Serial bonds series, 2011-B maturing in annual installments of $130,193 to $172,023 from February 1, 2015 through February 1, 2043, with interest rates of 1.00% 4,356 Term bond series 2011-A with interest at 4.57%, payable semiannually, due July 1, ,400 11,400 Term bond series 2011-A with interest at 5.00%, payable semiannually, due July 1, ,345 14, , ,179 Less: Unamortized Charges 6,787 7,046 $512,580 $517,133 20

189 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 At June 30, 2012 and 2011, the Water Utility fund had $105,200,000 and $106,200,000 of auction rate notes outstanding, respectively. Interest rates for these notes are determined every 7 to 35 days depending on the date of issue. In the event of a failed auction, the auction agent assesses the failed auction rate to the issuers of the notes. Interest paid under these conditions is currently limited to 150% to 175% of the non-financial commercial paper rate depending on the rating of the insurance provider on each note issue. The failed auction rate on these notes is in the 1% range or less. Principal maturities and interest on revenue bonds are as follows (amounts expressed in thousands): Interest Fiscal Year Principal Interest Rate Swap Net (a) 2013 $10,343 $18,553 $ (5) ,830 18, ,169 17, ,740 17, ,403 16, ,081 76, ,572 62,259 (6) ,200 46,485 (91) ,959 27,620 (106) ,292 10,650 (83) , (9) $519,367 $311,758 $(263) (a) Interest Rate Swap Net payments represent estimated payments for additional interest resulting from swap agreements to counterparties. The additional payments were computed using rates as of June 30, 2012, assuming current interest rates remain the same for the entire term of the bonds. As rates vary, variable rate bond interest payments and net swap payments will vary. The Water Utility has various revenue bond covenants that generally require the Utility to maintain rates sufficient to meet the operating requirements of the Utility and an operating reserve as defined in the revenue bond indentures. As of June 30, 2012, the rate requirements were met, and management believes the Water Utility is in compliance with all significant requirements of the indentures. 7. Pledged Revenue The Water Utility Fund has pledged future customer revenues to repay $519,367,000 and $524,179,000 of revenue bond debt, at June 30, 2012 and 2011, respectively. Proceeds from these revenue bonds were used to build and improve various aspects of the City s Water Utility system. The bonds are payable solely from the revenues of the Water 21

190 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Utility Fund and are payable through Annual principal and interest payments on these revenue bonds are expected to require 23% of pledged revenues. Total principal and interest remaining to be paid on the revenue bonds for the Water Utility Fund is $830,864,000 and $933,290,000 at June 30, 2012 and 2011, respectively. Principal and interest paid for the current year and current pledged revenue for the Water Utility Fund was $31,405,000 and $132,340,000 respectively. While principal and interest and pledged revenue for 2012 and 2011 were $30,543,000 and $129,292,000, respectively. 8. Prior-Year Defeasance of Debt In prior years, the Water Utility defeased certain revenue bonds by placing the proceeds of new debt issues in an irrevocable trust to provide for all future debt service payments on the old debt. Accordingly, the trust account assets and the liability for the defeased debt are not included in the Water Utility s financial statements. At June 30, 2012 and 2011, $122,030,000 and $124,020,000 of debt outstanding is considered defeased, respectively. 9. Interest Rate Swaps Objectives of the swaps - The City has entered into swaps for three reasons: First, the majority of its swaps have been used to create synthetic fixed rate financings (by issuing floating-rate bonds and swapping them to fixed) as a way to provide lower-cost fixed rate financing to meet the City s capital needs. Second, the City has used swaps from fixed to floating to help the City manage its balance sheet for an appropriate mix of fixed and floating rate exposure. And, third, the City has used basis swaps to amend the floating rate on certain of its existing synthetic fixed rate swaps in order to provide a better hedge on the underlying floating rate bonds. Terms, fair value, and credit risk - The terms, fair values and credit risk ratings of the outstanding swaps, as of June 30, 2012, were as follows. The notional amounts of the swaps generally match the principal amount of the associated debt. The City s swap agreements contain scheduled reductions to outstanding notional amounts that are intended to track the scheduled or anticipated reductions in the associated bonds payable category. Hedged Derivative Instruments: At June 30, 2012 and 2011, the Water Utility Fund had deferred liabilities for various hedged derivative instruments with total fair values of these instruments in the amount of ($46,843,000) and ($28,698,000), respectively. The notional amounts for these hedged derivative instruments at June 30, 2012 and 2011 were $115,105,000 and $118,060,000, respectively. During fiscal year 2012 and 2011, the fair values of these instruments decreased by $18,145,000 and increased $3,867,000, respectively. All hedges are cash flow hedges. The following schedule provides a detailed analysis of derivative instruments held at June 30, 2012: 22

191 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 June 30, 2012 Outstanding Effective Termination Interest Rate Interest Rate Bonds Date Date Paid by City Received Notional Amount Fair Value Counterparty Credit Rating Floating to Fixed Swaps: 2002 Revenue Bonds 5/7/2002 7/1/ % 67% LIBOR $ 59,100,000 $(27,589,725) A-/Baa Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,110,000 4,209 A-/Baa Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,170,000 (34,580) A-/Baa Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,325,000 (62,880) A-/Baa Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 1,615,000 (56,522) A-/Baa Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 1,685,000 (67,430) A-/Baa Revenue Bonds 6/1/2004 7/1/ % SIFMA 46,100,000 (19,036,508) A-/Baa1 Total Swaps Outstanding $115,105,000 $(46,843,436) Outstanding Bonds Effective Date Termination Date Interest Rate Paid by City June 30, 2011 Interest Rate Received Notional Amount Fair Value Counterparty Credit Rating Floating to Fixed Swaps 2002 Revenue Bonds 5/7/2002 7/1/ % 67% LIBOR $ 59,100,000 $ (16,322,187) A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 1,955,000 28,289 A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,110,000 7,844 A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,170,000 (5,735) A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 2,325,000 (16,694) A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 1,615,000 (15,713) A/A Revenue Bonds 5/7/2002 7/1/ % Bond Rate/CPI 1,685,000 (17,846) A/A Revenue Bonds 6/1/2004 7/1/ % SIFMA 47,100,000 (12,356,376) A/A2 Total Swaps Outstanding $ 118,060,00 $ (28,698,418) Credit risk As of June 30, 2012, the Water Utility Fund is not exposed to credit risk on all but one of the outstanding swaps because the swaps have negative fair values. All fair values were calculated using the mark-to-market or par value method. However, should interest rates change and the fair values of the swaps become positive, the Fund would be exposed to credit risk in the amount of the derivatives fair value 1. Should the counterparties to these transactions fail to perform according to the terms of the swap contracts, the Fund faces a maximum loss equivalent to the swap s $4,209 fair value. However, because the swaps counterparties are also party to other swaps, the Fund could use netting provisions to offset the potential loss. The swap agreements contain varying collateral agreements with counterparties. In general, these agreements require full collateralization of the fair value of the swap should the counterparty s credit rating fall below Baa as issued by Moody s or BBB as issued by Standard and Poor s. Collateral on all swaps is to be in the form of United States Government securities held by the City. As of June 30, 2012, none of the City s swap agreements met this requirement. Although the City executes transactions with various counterparties, the 9 Water Utility Fund swaps are held with one counterparties. That counterparty is rated A-/Baa1. 1 For the one swap agreement that has positive fair value, the City has credit exposure to the counterpart as of June 30,

192 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Basis risk The City s variable rate bonds are of three types: remarketed variable rate demand bonds ( VRDBs ), auction rate bonds ( ARBs ), and CPI index bonds. For those swaps associated with the VRDBs and ARBs, the City receives a floating rate based on either the SIFMA Index or the one-month LIBOR. For the SIFMA based swaps, the City is exposed to basis risk should the spread between the SIFMA and the VRDBs or ARBs rate change. If a change occurs that results in the spread widening, the expected cost savings may not be realized. As of June 30, 2012, the SIFMA rate for the 52-week period ranged from 0.07% to 0.26%, whereas the City tax-exempt market rate ranged from 0.06% to 0.46%. For one of the swaps, the City will receive 67% percent of LIBOR, a rate chosen to closely approximate the City s tax-exempt variable rate bond payments. Because this swap is LIBOR-based, there is an additional degree of basis risk. As of June 30, 2012, 67% of LIBOR for the 52-week period ranged from 0.13% to 0.26%. For those swaps associated with CPI index bonds, there is no basis risk, because the floating rate on the swaps is identical to the floating rate on the bonds. Interest rate risk For those swaps for which the City pays a floating rate and receives fixed rate payments, the City is exposed to interest rate risk. As floating rates increase, the City s expected savings could decrease. The City would, however, benefit from offsetting increases in its earnings on short-term investments, whose return would be expected to go up in a higher interest rate environment. Termination risk The City or the counterparty may terminate a swap if the other party fails to perform under the terms of the contract. If at the time of termination the swap contract has a negative fair value, the City would be liable to the counterparty for that payment. Investment derivative instruments: The fair value balance and notional amounts of derivative instruments outstanding at June 30, 2012 and 2011, classified by type and the changes in fair value of such derivative instruments for the year ended June 30, 2012 and 2011 are as follows: June 30, 2012 Investment Derivative Instruments Changes in Fair Value Fair Value at June 30, 2012 Classification Amount Classification Amount Notional Fixed to Floating Investment Revenue $ (139,430) Debt $ (208,443) $ (13,220,453) Floating to Fixed Investment Revenue (337,944) Debt (8,736,069) (71,455,000) $ (477,374) $(8,944,512) $ (84,675,453) June 30, 2011 Investment Derivative Instruments Changes in Fair Value Fair Value at June 30, 2011 Classification Amount Classification Amount Notional Fixed to Floating Investment Revenue $ (124,748) Debt $ (347,873) $ (13,220,453) Floating to Floating Investment Revenue 2,175,175 Debt (9,074,013) (71,455,000) $ 2,050,427 $(9,421,886) $ (84,675,453) 24

193 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 Credit Risk At June 30, 2012 and 2011, the government is not exposed to credit risk on the interest rate swaps, because they are in a negative fair value or liability position. However, if interest rates change and the fair values become positive, the Water Utility Fund would have exposure to credit risk. The counterparty s credit rating at June 30, 2012, was AA/Aa2 for derivative instruments held by the Water Utility Fund. Interest rate risk For those swaps for which the Water Utility Fund pays a floating rate and receives fixed rate payments, the fund is exposed to interest rate risk. As floating rates increase, the Water Utility Fund s expected savings could decrease. The fund would, however, benefit from offsetting increases in its earnings on short term investments, whose return would be expected to go up in a higher interest environment. 10. Pension Plan Classified employees of the Water Utility are required to join the City of Baltimore s Employees Retirement System (ERS). The ERS is a cost-sharing multiple-employer defined benefit pension plan which provides retirement, disability and death benefits to plan members and beneficiaries. The plan is managed by a Board of Trustees in accordance with Article 22 of the Baltimore City Code. Plan provisions may be amended only by the City Council. The Water Utility s share of contributions to the plan was $5,402,000 in 2012, $2,815,000 in 2011 and $3,056,000 in The Water Utility contributed 100% of the required contribution each of the three years. ERS issues a publicly available financial report that may be obtained by writing to the Baltimore City Retirement Systems, 7 East Redwood Street, 12 th Floor, Baltimore, MD Other Postemployment Benefits Baltimore City administrative policy provides that other postemployment benefits, other than pension benefits, be provided to all employees of the City. These benefits include certain healthcare and life insurance benefits. All employees who retire are eligible to receive these benefits. The City of Baltimore provides other postemployment benefits (OPEB) to all qualified City employees. The OPEB Plan (Plan) is a contributory, single employer defined benefit plan. The benefit and contribution provisions of the Plan are established and may be amended by the City. The Plan provides postemployment healthcare, prescription and life insurance benefits to retirees and their beneficiaries. In order to effectively manage the Plan, the City established an OPEB Trust Fund. All retiree and City contributions are deposited into the Trust Fund and all retiree related health and life insurance benefits are paid from the Trust Fund. The City also contracted with the Board of Trustees of the Employees Retirement System to act as investment manager for the Trust Fund. BNY Mellon Bank Asset Servicing is the Trust Fund s asset custodian. The Plan does not issue stand-alone financial statements: however, the OPEB Trust Fund is included in the City s financial statements as a Trust and Agency Fund. At June 30, 2012, the city policy is to fund benefits on a pay as you go basis plus make additional contributions comprising the federal retiree drug subsidy payments and additional annual appropriations. Retirees are required to contribute at various rates 25

194 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 ranging from approximately $58 to $1,331 on a monthly basis, depending on the health plan and level of coverage elected and whether Medicare supplemental coverage is present. As of June 30, 2012 there were 10,477 City retirees eligible for these benefits. For fiscal year 2012 and 2011, the City s total contributions to the Plan were $142.4 and $142.8 million, respectively, from its General Fund. 12. Risk Management The Water Utility participates in the City s risk management program. The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. During fiscal year 1987, the City established the Risk Management Fund (an internal service fund) to account for and finance its uninsured risks. The City s risk financing techniques include a combination of risk retention through self-insurance and risk transfer through the purchase of commercial insurance. The Risk Management Fund services all claims for risk of loss, including general liability, property and casualty, workers compensation, unemployment compensation, automobile physical damage and bodily injury, and sundry other risks. Commercial insurance coverage is provided for each property damage claim in excess of $500,000 with a cap of $500,000,000. Settled claims have not exceeded this commercial coverage in any of the past three years. The City also provides medical insurance coverage for all employees and retirees. Employees are required to pay a percentage of the annual cost of the medical plans, and the remaining costs are paid by the City s internal service fund. All funds of the City participate and make payments to the Risk Management Fund based on actuarial estimates and historical cost information of the amounts needed to pay prior and current year claims. During fiscal years 2012 and 2011, the Water Utility s share of the City s cost was $1,792,000 and $1,795,000, respectively. 13. Commitments and Contingencies The Water Utility has received Federal and State grants. Entitlement to grant resources is generally conditioned upon compliance with terms and conditions of the grant agreements and applicable Federal and State regulations, including the expenditure of the resources for eligible purposes. Substantially all grants are subject to financial and compliance audits in accordance with grantors requirements. Any disallowances as a result of these audits become a liability of the Water Utility. As of June 30, 2012, the Water Utility estimates that no material liabilities will result from such audits. The City has voluntarily entered into a Consent Decree to rehabilitate its aging sewer infrastructure and correct historical overflow mechanisms. The Consent Decree is one of many that the United States Department of Justice has currently negotiated with major east coast cities with aged sewer and storm water infrastructures. The City is proactively negotiating to increase its remedial efforts to address discharge and overflow concerns of the State and Federal regulatory agencies. These efforts are ambitious, and the costs of 26

195 CITY OF BALTIMORE Water Utility Fund Notes to the Financial Statements June 30, 2012 and 2011 the construction and maintenance are estimated to range between $500 to $700 million dollars over the next decade and beyond. The City has committed to financing these remedial efforts through a combination of water and waste water revenue bonds in conjunction with all available State and Federal assistance. 27

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197 APPENDIX C AUDITED WASTEWATER UTILITY FUND FINANCIAL STATEMENTS FOR FISCAL YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2012

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199 CITY OF BALTIMORE WASTE WATER UTILITY FUND FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2012 and 2011 (WITH REPORT OF INDEPENDENT AUDITORS THEREON) C-1

200 CITY OF BALTIMORE WASTE WATER UTILITY FUND FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2012 and 2011 TABLE OF CONTENTS Page Report of Independent Auditors Management s Discussion and Analysis Statements of Fund Net Assets... 8 Statements of Revenues, Expenses, and Changes in Fund Net Assets... 9 Statements of Cash Flows Notes to the Financial Statements

201 KPMG LLP Suite K Street, NW Washington, DC Independent Auditors Report The Mayor, City Council, Comptroller and Board of Estimates City of Baltimore, Maryland: We have jointly audited the statement of net assets of the Waste Water Utility Fund of the City of Baltimore, Maryland (the City), as of June 30, 2012 and 2011 and the related statements of revenues, expenses, and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the City s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the financial statements present only the Waste Water Utility Fund and do not purport to, and do not, present fairly the financial position of the City of Baltimore, Maryland, as of June 30, 2012 and 2011, its changes in financial position or its cash flows for the years 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 financial position of the Waste Water Utility Fund as of June 30, 2012 and 2011, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 through 7 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 accordance with auditing standards generally accepted in the United States of America, which consisted principally of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s 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. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.