$5,870,000 SAN DIEGUITO WATER DISTRICT (San Diego County, California) Water Revenue Refunding Bonds, Series 2014 (BANK QUALIFIED)

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1 NEW ISSUE FULL BOOK-ENTRY RATING S&P: AA+ In the opinion of Best Best & Krieger LLP, Riverside, California, Bond Counsel, subject to certain qualifications described herein, under existing statutes, regulations, rules and court decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, the interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings and the Bonds are qualified tax-exempt obligations within the meaning of Section 265(b)(3) of the Internal Revenue Code. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See TAX MATTERS herein. $5,870,000 SAN DIEGUITO WATER DISTRICT (San Diego County, California) Water Revenue Refunding Bonds, Series 2014 (BANK QUALIFIED) Dated: Date of Delivery Due: October 1, as shown on inside cover Authority for Issuance. The bonds captioned above (the Bonds ) are being issued by the San Dieguito Water District (the District ) an irrigation district governed by a board of directors composed of the City Council of the City of Encinitas under an Indenture of Trust, dated as of September 1, 2014 (the Indenture ) by and between the District and MUFG Union Bank, N.A., as trustee for the Bonds (the Trustee ). Use of Proceeds. The Bonds are being issued to provide funds to (i) defease and refund on a current basis the District s outstanding Water Revenue Refunding Bonds, Series 2004 (the 2004 Bonds ), currently outstanding in the amount of $8,110,000, and (ii) pay the costs of issuing the Bonds. See FINANCING PLAN. Security for the Bonds. The Bonds are payable from and secured by the District s pledge of Net Revenues under the Indenture, defined generally as gross revenues received from the District s water transportation, treatment and distribution system (the Water System ), less maintenance and operation costs of the Water System. See SECURITY FOR THE BONDS. Outstanding Parity Debt. The District has entered into a 2007 Installment Purchase Agreement, as amended by a First Supplement to Installment Purchase Agreement, under which $5,535,000 remains outstanding (together, the 2007 Installment Purchase Agreement ) and is payable on a parity basis with debt service on the Bonds. See OUTSTANDING PARITY DEBT. Bond Terms; Book-Entry Only. The Bonds will bear interest at the rates shown below, payable semiannually on April 1 and October 1 of each year, commencing on April 1, 2015, and will be issued in fully registered form without coupons in the denomination of $5,000 or any integral multiple of $5,000. The Bonds will be issued in book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers of the Bonds will not receive certificates representing their interests in the Bonds. Payments of the principal of, premium, if any, and interest on the Bonds will be made to DTC, which is obligated in turn to remit such principal, premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the Bonds. See THE BONDS General Provisions. Redemption. The Bonds are not subject to optional or mandatory redemption prior to maturity. Neither the Bonds nor the obligation OF THE DISTRICT to pay principal of or interest thereon constitute a debt or a liability of THE DISTRICT, THE CITY OF ENCINITAS, the State of California or any of its political subdivisions within the meaning of any Constitutional limitation on indebtedness, or a pledge of the full faith and credit of the DISTRICT OR THE CITY OF ENCINITAS. THE BONDS are secured solely by the pledge of NET Revenues and certain funds held under the INDENTURE. The Bonds are not secured by a pledge of the taxing power of the DISTRICT. MATURITY SCHEDULE (On Inside of Cover Hereof) THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE OF BONDS. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION WITH RESPECT TO THE PURCHASE OF THE BONDS. The Bonds are offered when, as and if issued and received by the Underwriter and subject to the approval as to their legality by Best Best & Krieger, LLP, Riverside California, Bond Counsel. Certain legal matters will also be passed upon for the District by Best Best & Krieger LLP, Riverside, California, as Disclosure Counsel. Certain legal matters will be passed upon for the District by its general counsel. It is anticipated that the Bonds will be delivered in definitive form through DTC on or about September 30, The date of this Official Statement is: September 18, 2014.

2 $5,870,000 MATURITY SCHEDULE Maturity Date (October 1) Principal Amount Interest Rate Price or Yield Price CUSIP (1) 2015 $570, % 0.120% AU , AV , AW , AX , AY , AZ , BA , BB , BC6 (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of American Bankers Association by S&P Capital IQ. Copyright 2014 CUSIP Global Services. All rights reserved. This data is not intended to create a database and does not serve in any way a substitute for the CUSIP Service Bureau. CUSIP numbers are provided for convenience of reference only. Neither the San Dieguito Water District nor the Underwriter takes any responsibility for the accuracy of the CUSIP numbers.

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5 SAN DIEGUITO WATER DISTRICT BOARD OF DIRECTORS Tony Kranz, President Lisa Shaffer, Vice President Teresa Arballo Barth, Member Kristin Gaspar, Member Mark Muir, Member EXECUTIVE STAFF Gus Vina, Board Secretary Glenn Pruim, General Manager Bill O Donnell, Assistant General Manager Jeffrey Umbrasas, Administrative Services Manager Kathy Hollywood, Board Clerk CITY OF ENCINITAS SUPPORT STAFF Tim Nash, Finance Director Jay Lembach, Finance Manager Glenn Sabine, City Attorney/District General Counsel PROFESSIONAL SERVICES BOND COUNSEL & DISCLOSURE COUNSEL Best Best & Krieger LLP Riverside, California FINANCIAL ADVISOR Fieldman, Rolapp & Associates, Inc. Irvine, California TRUSTEE MUFG Union Bank, N.A. Los Angeles, California ESCROW BANK MUFG Union Bank, N.A. Los Angeles, California

6 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds other than as contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person, in any jurisdiction where such offer, solicitation or sale would be unlawful. The information set forth herein has been obtained from sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation, by the District. Neither the delivery of this Official Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. The information and expressions of opinion stated herein are subject to change without notice. Certain statements included or incorporated by reference in this Official Statement constitute forwardlooking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the words expects, forecasts, projects, intends, anticipates, estimates, assumes and analogous expressions. The achievement of certain results or other expectations contained in such forward-looking statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those that have been projected. No assurance is given that actual results will meet the forecasts of the District in any way, regardless of the optimism communicated in the information, and such statements speak only as of the date of this Official Statement. The District disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any changes in the expectations of the District with regard thereto or any change in events, conditions or circumstances on which any such statement is based. All summaries of the Indenture (as defined herein), and of statutes and other documents referred to herein do not purport to be comprehensive or definitive and are qualified in their entireties by reference to each such statute and document. This Official Statement, including any amendment or supplement hereto, is intended to be deposited with one or more depositories. This Official Statement does not constitute a contract between any Owner of a Bond and the District. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The issuance and sale of the Bonds have not been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, in reliance upon exemptions provided thereunder by Sections 3(a)(2) and 3(a)(12), respectively, for the issuance and sale of municipal securities.

7 TABLE OF CONTENTS INTRODUCTION... 1 FINANCING PLAN... 3 The Refunding Plan... 3 Estimated Sources and Uses of Funds... 3 Outstanding Parity Debt... 3 DEBT SERVICE SCHEDULE... 4 THE BONDS... 5 Authority for Issuance... 5 General Provisions... 5 Redemption... 5 Book-Entry Only System... 5 SECURITY FOR THE BONDS... 6 Pledge of Net Revenues... 6 Revenue Fund... 7 Debt Service Fund... 7 Rate Covenants... 7 Parity Obligations... 8 Subordinate Obligations... 9 Variable Rate Indebtedness Eminent Domain Proceeds Casualty Insurance Proceeds THE WATER SYSTEM General Service Area Management and Personnel Investment Policy Audited Financial Statements Joint Facilities and Local Water Rights Water Quality Compliance Water Sources and Supply District Facilities Service Area Rates and Charges Collection Procedure Future Water System Improvements Outstanding Water System Indebtedness Risk Management and Insurance Programs Retirement System Commitment Water Sources and Supply; Water Purchases Water Demand Service Connections Largest Customers Projected Water Deliveries Historic Water Sales Revenue Projected Potable Water Sales Revenues Historic Operating Results Historic Debt Service Coverage Projected Operating Results and Debt Service Coverage BOND OWNERS RISKS Water System Demand and Growth Net Revenues; Rate Covenants District Expenses Future Land Use Regulations Proposition Constitutional Limit on Appropriations, Fees and Charges Limitations on Remedies Available to Bondowners Seismic Considerations Environmental Regulation No Obligation to Tax Change in Law Geologic and Topographic Risks Associated with SDCWA and MWD Secondary Market for Bonds Federal Tax-Exempt Status of the Bonds IRS Audit of Tax-Exempt Issues Parity Obligations TAX MATTERS CERTAIN LEGAL MATTERS FINANCIAL ADVISOR LITIGATION RATINGS CONTINUING DISCLOSURE UNDERWRITING EXECUTION APPENDIX A - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE... A-1 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR THE FISCAL YEAR ENDED JUNE 30, B-1 APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE... C-1 APPENDIX D FORM OF OPINION OF BOND COUNSEL... D-1 APPENDIX E DTC AND THE BOOK- ENTRY ONLY SYSTEM... E-1 i

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9 OFFICIAL STATEMENT $5,870,000 SAN DIEGUITO WATER DISTRICT (San Diego County, California) Water Revenue Refunding Bonds, Series 2014 (BANK QUALIFIED) INTRODUCTION This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement. Authority for Issuance. The Bonds are authorized pursuant to the provisions of Sections 3570 et seq. and et seq. of the California Government Code, a resolution adopted by the Board of Directors of the District on August 20, 2014 (the District Resolution ), and an Indenture of Trust (the Indenture ), dated as of September 1, 2014, between the District and MUFG Union Bank, N.A., as trustee (the Trustee ). Form of Bonds. The Bonds will be dated their date of delivery and will be issued in fully registered form, without coupons, in the minimum denominations of $5,000 or any integral multiple thereof. See THE BONDS General Provisions. When delivered, the Bonds will be registered in the name of The Depository Trust Company, New York, New York ( DTC ), or its nominee. DTC will act as securities depository for the Bonds. Individual purchases of Bonds will be made in book-entry form only in the principal amount of $5,000 each or any integral multiple thereof. Purchasers of the Bonds will not receive certificates representing the Bonds purchased. See THE BONDS - Book-Entry Only System and APPENDIX E DTC AND THE BOOK-ENTRY ONLY SYSTEM. Purpose of the Bonds. The Bonds are being issued to provide funds to (i) defease and refund on a current basis the District's outstanding Water Revenue Refunding Bonds, Series 2004 (the 2004 Bonds ), currently outstanding in the amount of $8,110,000, and (ii) pay the costs of issuing the Bonds. See FINANCING PLAN. Pledge of Water System Revenues. The Bonds are payable from and secured by a first pledge of and lien on Net Revenues received from the operation of the District's existing water system, comprising all facilities for the transportation, treatment and distribution of water for the residents, commercial and industrial consumers of water in the District (the Water System ). Net Revenues, are generally defined as Gross Revenues received from the Water System, less the amount of maintenance and operation costs of the Water System becoming payable in such period. See SECURITY FOR THE BONDS Pledge of Net Revenues and FINANCING PLAN Outstanding Parity Debt. Rate Covenants. The District will make the following covenants in the Indenture with respect to charges for the Water System during each Fiscal Year, as follows: (a) The District shall fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year that are at least sufficient, after making allowances for contingencies and error in the estimates, to pay the following amounts in the following order:

10 (i) all Maintenance and Operation Costs of the Water System estimated by the District to become due and payable in that Fiscal Year; (ii) the Debt Service on the Bonds; (iii) all other payments required for compliance with the Indenture and the Parity Bond Instruments pursuant to any Parity Bonds relating to the Water System; and; (iv) all payments required to meet any other obligations of the District (including any State Loans) which are charges, liens, encumbrances upon or payable from the Gross Revenues of the Water System or the Net Revenues of the Water System. (b) The District shall fix, prescribe, revise and collect Charges for the Water System (exclusive of connection fees and transfers to the Revenue Fund from a rate stabilization fund) during each Fiscal Year which are sufficient to yield Net Revenues of the Water System at least equal to 100% of the amounts payable as described in clause (a) above in that Fiscal Year for Bonds which have a lien on Net Revenues. (c) The District shall fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year that are sufficient to yield Net Revenues of the Water System at least equal to 115% of the amounts payable as described in clause (a) above in that Fiscal Year for all Bonds which have a lien on Net Revenues. See SECURITY FOR THE BONDS - Rate Covenants. Outstanding Parity Debt. Debt Service on the Bonds will be payable on a parity with the payment of debt service on an Installment Purchase Agreement entered into as of November 1, 2007, by and between the District and the R.E. Badger Water Facilities Financing Authority, as amended by a First Supplement to Installment Purchase Agreement (together, the 2007 Installment Purchase Agreement ) which is currently outstanding in the principal amount of $5,920,000. See FINANCING PLAN - Outstanding Parity Debt. Issuance of Additional Parity Obligations. The District may issue or incur additional obligations and bonds on a parity with or subordinate to the Bonds, provided that the conditions set forth in the Indenture are met. See SECURITY FOR THE BONDS - Issuance of Parity Obligations, -State Loans and Issuance of Subordinate Obligations. Payment. Principal of the Bonds will be payable in each of the years and in the amounts set forth on the cover page hereof at the office of the Trustee. Interest on the Bonds will be paid by check or draft of the Trustee mailed by first class mail to the person entitled thereto. See THE BONDS General Provisions. Initially, interest on and principal and premium, if any, of the Bonds will be payable when due by wire of the Trustee to the Depository DTC which will in turn remit such interest, principal and premium, if any, to DTC Participants (as defined herein), which will in turn remit such interest, principal and premium, if any, to Beneficial Owners (as defined herein) of the Bonds. See THE BONDS - Book-Entry Only System and APPENDIX E DTC AND THE BOOK-ENTRY ONLY SYSTEM. Redemption. The Bonds are not subject to optional and mandatory redemption prior to their stated maturity dates. Risks of Investment. The Bonds are repayable only from certain money available to the District from its Water System. For a discussion of some of the risks associated with the purchase of the Bonds, see BONDOWNERS RISKS. Neither the Bonds nor the obligation of the District to pay principal of or interest thereon constitutes a debt of the District, the City of Encinitas, the State of California or any of its political subdivisions within the meaning of any constitutional limitation on indebtedness, or a pledge of the full faith and credit of the District or the City of Encinitas. The Bonds are secured solely by the pledge of Net Revenues of the District and certain funds held under the Indenture. 2

11 FINANCING PLAN The Refunding Plan In 2004, the District issued the 2004 Bonds in the aggregate original principal amount of $13,845,000 for the purpose of refunding its 1993 Refunding Revenue Bonds and a 1993 Installment Sale Agreement entered into to finance a water filtration plant. A portion of the proceeds of the Bonds will be used to prepay and defease the outstanding 2004 Bonds to be defeased and redeemed. Proceeds of the Bonds, together with certain funds made available through the defeasance of the 2004 Bonds, will be deposited into an escrow account with the Escrow Bank and used for the purposes of defeasing the 2004 Bonds. Amounts so deposited, which will be held uninvested, will be sufficient to pay the redemption price of the 2004 Bonds upon their optional redemption on October 1, Assuming the accuracy of the computations, as a result of the deposit and application of funds as provided in the escrow account, the 2004 Bonds will be defeased and all obligations thereunder discharged. Estimated Sources and Uses of Funds The estimated sources and uses of funds relating to the Bonds are as follows: Sources: Principal Amount of Bonds $5,870, Plus Net Original Issue Premium 684, Plus Funds Relating to the 2004 Bonds 1,888, TOTAL SOURCES $8,442, Uses: Deposit to Escrow Fund $8,293, Deposit to Costs of Issuance Fund (1) 148, TOTAL USES $8,442, (1) Costs of Issuance include legal fees, underwriter s discount, printing costs, rating agency fees and other miscellaneous expenses. Outstanding Parity Debt In November, 2007, the District participated in a financing with the R.E. Badger Water Facilities Financing Authority which upgraded jointly owned water facilities of the District and the Santa Fe Irrigation District. For this financing, the District entered into the 2007 Installment Purchase Agreement, of which $5,535,000 of principal remains outstanding. 3

12 Bond Year Ending October 1 DEBT SERVICE SCHEDULE Annual debt service on the Bonds and the 2007 Installment Purchase Agreement are presented below Bonds Annual Debt Service 2007 Installment Purchase Agreement Total Annual Debt Service 2014 Bonds Principal 2014 Bonds Interest 2015 $ 570,000 $ 211, $ 781, $ 637, $ 1,418, , , , , ,418, , , , , ,418, , , , , ,419, , , , , ,419, , , , , ,425, ,000 87, , , ,427, ,000 60, , , ,432, ,000 30, , , ,434, , , Total: $5,870,000 $1,169, $7,039, $6,423, $13,984,

13 THE BONDS Authority for Issuance The Bonds are authorized pursuant to the provisions of Sections et seq. and et seq. of the California Government Code, a resolution adopted by the Board of Directors of the District on August 20, 2014, and the Indenture. General Provisions Bond Terms. The Bonds will be dated their date of delivery and issued in fully registered form without coupons in denominations of $5,000 or any integral multiple of $5,000, so long as no Bond has more than one maturity date. The Bonds will mature in the amounts and on the dates, and bear interest at the rates per annum, set forth on the inside cover page of this Official Statement. Payments of Principal and Interest. Interest on the Bonds will be payable on April 1 and October 1 in each year, beginning April 1, 2015 (each an Interest Payment Date ) to the person whose name appears on the Bond Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date. While the Bonds are subject to the book-entry system, the principal, interest and any prepayment premium with respect to a Bond will be paid by the Trustee to DTC for subsequent disbursement to beneficial owners of the Bonds. If there exists a default in payment of interest due on any Interest Payment Date, interest will be payable on a payment date established by the Trustee to the persons in whose names the Bonds are registered at the close of business on a special record date for the payment of such defaulted interest established by notice mailed by the Trustee to the registered Owners of the Bonds not less than 15 days preceding such special record date. Principal of and premium (if any) on any Bond will be paid upon presentation and surrender thereof at the Principal Corporate Trust Office of the Trustee. Both the principal of and interest and premium (if any) on the Bonds will be payable in lawful money of the United States of America. Calculation of Interest. The Bonds will bear interest based on a 360-day year comprised of twelve 30- day months from the Interest Payment Date next preceding the date of authentication thereof, unless said date of authentication is an Interest Payment Date, in which event such interest is payable from such date of authentication, and unless said date of authentication is prior to April 1, 2015, in which event such interest is payable from the date of delivery of the Bonds; provided, however, that if, as of the date of authentication of any Bond, interest thereon is in default, such Bond will bear interest from the date to which interest has previously been paid or made available for payment thereon in full. Redemption The Bonds are not subject to optional redemption or mandatory sinking fund payments prior to maturity. Book-Entry Only System The Bonds will be issued as fully registered bonds in book-entry only form, registered in the name of Cede & Co. as nominee of DTC, and will be available to ultimate purchasers in the denomination of $5,000 or any integral multiple of $5,000, under the book-entry system maintained by DTC. While the Bonds are subject to the book-entry system, the principal, interest and any prepayment premium with respect to a Bond will be paid by the Trustee to DTC, which in turn is obligated to remit such payment to its DTC Participants for subsequent disbursement to Beneficial Owners of the Bonds. Purchasers of the Bonds will not receive certificates representing their interests therein, which will be held at DTC. See APPENDIX E DTC AND THE BOOK-ENTRY ONLY SYSTEM for further information regarding DTC and the book-entry system. 5

14 SECURITY FOR THE BONDS The general funds of the District and the City are not liable and neither the credit nor the taxing power of the District or the District are pledged for the payment of the principal of and interest on the Bonds. The Owner of the Bonds may not compel the exercise of the taxing power by the District or the forfeiture of its property. The principal of and interest on the Bonds are not a debt of the District or the City, nor a legal or equitable pledge, charge, lien or encumbrance, upon any of its property, or upon any of the District s income, receipts, or revenues except the Net Revenues of the Water System. Pledge of Net Revenues First and Exclusive Lien on Net Revenues. Under the Indenture, the District transfers, places a charge upon, assigns and sets over to the Trustee, for the benefit of the Owners, that portion of the Net Revenues which is necessary to pay the principal of and interest on the Bonds in any Fiscal Year, together with all moneys on deposit in the Debt Service Fund, and such portion of the Net Revenues is irrevocably pledged to the punctual payment of the principal or Redemption Price of and interest on the Bonds. The Net Revenues may not be used for any other purpose while any of the Bonds remain Outstanding, except that out of Net Revenues there may be apportioned and paid such sums for such purposes, as are expressly permitted by the Indenture, including Parity Bonds. (See SECURITY FOR THE BONDS Parity Obligations and FINANCING PLAN - Outstanding Parity Debt. ) This pledge constitutes a first, direct and exclusive charge and lien on the Net Revenues for the payment of the principal of and interest on the Bonds in accordance with the terms thereof. Net Revenues. The Indenture defines Net Revenues as the amount of the Gross Revenues received from the Water System during such period, less the amount of Maintenance and Operation Costs of the Water System becoming payable during such period. Gross Revenues are defined in the Indenture as, for any period of computation, all gross charges received for, and all other gross income and revenues derived by the District from, the ownership or operation of the Water System or otherwise arising from the Water System during such period, including but not limited to (a) all Charges received by the District for use of the Water System, (b) all receipts derived from the investment of funds held by the District or the Trustee under the Indenture, (c) transfers from (but exclusive of any transfers to) any rate stabilization reserve accounts, and (d) all moneys received by the District from other public entities whose inhabitants are served pursuant to contracts with the District. Maintenance and Operation Costs are defined in the Indenture as the reasonable and necessary costs spent or incurred by the District for maintaining and operating the Water System, calculated in accordance with sound accounting principles, and all reasonable and necessary expenses of management and repair and other expenses to maintain and preserve the Water System in good repair and working order, and including all reasonable and necessary administrative costs of the District attributable to the Water System and the Bonds, such as salaries and wages and the necessary contribution to retirement of employees, overhead, insurance, taxes (if any), expenses, compensation and indemnification of the Trustee, and fees of auditors, accountants, attorneys or engineers, and including all other reasonable and necessary costs of the District or charges required to be paid by it to comply with the terms of the Bonds or the Indenture, but excluding depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature. 6

15 Revenue Fund In order to carry out and effectuate the pledge and lien of Net Revenues to payment of debt service on the Bonds, the District will covenant and agree in the Indenture that all Gross Revenues, when and as received, will be held by the District in trust and will be deposited by the District in its Revenue Fund (the Revenue Fund ) and will be accounted for through and held in trust in the Revenue Fund, and the District will only have such beneficial right or interest in any of such money as provided in the Indenture. All Gross Revenues will be accounted for separately and apart from all other money, funds, accounts or other resources of the District. All Gross Revenues will be transferred, disbursed, allocated and applied solely to the uses and purposes set forth below: (1) Operating Costs. The District will first pay from the moneys in the Revenue Fund the Maintenance and Operation Costs as such costs become due and payable. (2) Debt Service Fund. On or before the second Business Day prior to each Interest Payment Date, beginning the second Business Day prior to April 1, 2015, the District will transfer from the Revenue Fund to the Trustee for deposit in the Debt Service Fund, which the Trustee will establish and maintain, the following amounts: (i) an amount equal to the aggregate amount of interest to become due and payable on all Outstanding Bonds on the next succeeding Interest Payment Date, plus (ii) beginning October 1, 2015, an amount equal to the aggregate amount of Principal Installments (including any Sinking Fund Installments) becoming due and payable on all Outstanding Bonds on the next succeeding Principal Installment Date. All interest earnings and profits or losses on the investment of amounts in the Debt Service Fund (described below) shall be deposited in or charged to the Debt Service Fund and applied to the purposes thereof. No transfer and deposit need be made into the Debt Service Fund if the amount contained therein, taking into account investment earnings and profits, is at least equal to the Interest Requirement or Principal Installments to become due on the next Interest Payment Date or Principal Installment Date upon all Outstanding Bonds. (3) Surplus. As long as all of the foregoing payments, allocations and transfers are made at the times and in the manner described above in subsections (1) and (2), any moneys remaining in the Revenue Fund may at any time be treated as surplus and applied for any lawful purpose. Debt Service Fund The Indenture provides that the Trustee will establish and maintain a Debt Service Fund. Prior to each Interest Payment Date, the Trustee will withdraw from the Debt Service Fund an amount equal to the Interest Requirement payable on such Interest Payment Date, and will cause this amount to be applied to the payment of interest when due. Prior to each Principal Installment Date, the Trustee will withdraw from the Debt Service Fund an amount equal to the principal amount of the Outstanding Serial Bonds, if any, maturing on that Principal Installment Date, and will cause the same to be applied to the payment of the principal of Bonds when due. Rate Covenants The District will make the following covenants in the Indenture with respect to Charges for the Water System: 7

16 (a) The District shall fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year which are at least sufficient, after making allowances for contingencies and error in the estimates, to pay the following amounts in the following order: (i) all Maintenance and Operation Costs of the Water System estimated by the District to become due and payable in that Fiscal Year; (ii) the Debt Service on the Bonds and Parity Bonds; (iii) all other payments required for compliance with the Indenture and the Parity Bonds Instruments pursuant to which any Parity Bonds relating to the Water System are issued; and (iv) all payments required to meet any other obligations of the District (including any State Loans)which are charges, liens, encumbrances upon or payable from the Gross Revenues of the Water System or the Net Revenues of the Water System. (b) The District shall fix, prescribe, revise and collect Charges for the Water System (exclusive of connection fees and transfers to the Revenue Fund from a rate stabilization fund) during each Fiscal Year which are sufficient to yield Net Revenues of the Water System at least equal to 100% of the amounts payable as described in clause (a) above in that Fiscal Year for Bonds which have a lien on Net Revenues. (c) The District shall fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year that are sufficient to yield Net Revenues of the Water System at least equal to 115% of the amounts payable as described in clause (a) above in that Fiscal Year for Bonds which have a lien on Net Revenues. Parity Obligations Under the Indenture the District may issue Parity Bonds (defined as the 2007 Installment Purchase Agreement and any bonds, notes or other obligations (including without limitation long-term contracts, loans, sub-leases or other legal financing arrangements) of the District payable from and secured by a pledge of and lien upon any of the Net Revenues) only in compliance with the following conditions. Parity Bonds and Indebtedness. In addition to the Bonds, the District may, by a Parity Bonds Instrument (as defined in Appendix A), issue or incur other loans, advances or indebtedness payable from Net Revenues to be derived from the Water System, to provide financing for the Water System, in such principal amount as may be determined by the District. The District may issue or incur any such Parity Bonds subject to the following specific conditions: (a) The District shall be in compliance with all covenants set forth in the Indenture. (b) The Net Revenues of the Water System, calculated on sound accounting principles, as shown by the books of the District for the latest Fiscal Year or any more recent 12 month period selected by the District ending not more than 60 days prior to the adoption of the Parity Bonds Instrument, as shown by the books of the District, plus, at the option of the District, any or all of the items listed in subsections (i) and (ii) below, must at least equal 115% of Maximum Annual Debt Service and debt service on any State Loans, with Maximum Annual Debt Service calculated on all Bonds to be Outstanding immediately subsequent to the issuance of such Parity Bonds which have a lien on Net Revenues of the Water System. The items that may be added to Net Revenues for the purpose of issuing or incurring Parity Bonds are the following: (i) an allowance for Net Revenues from any additions to or improvements or extensions of the Water System to be made with the proceeds of such Parity Bonds, and an allowance for Net Revenues from any such additions, improvements or extensions that have been made from moneys from any source but in any case which, during all or any part of such Fiscal Year or such 12 month period, were not in service, all in an amount equal to 90% of the 8

17 estimated additional average annual Net Revenues to be derived from such additions, improvements and extensions for the first 36 month period in which each addition, improvement or extension is respectively to be in operation; and (ii) an allowance for earnings arising from any increase in the Charges which have become effective prior to the incurring of such additional indebtedness but which, during all or any part of such Fiscal Year or such 12 month period, was not in effect, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in Charges had been in effect during the whole of such Fiscal Year or such 12 month period. (c) provide that: The Parity Bonds Instrument providing for the issuance of such Parity Bonds must (i) the proceeds of such Parity Bonds will be applied to the acquisition, construction, improvement, financing or refinancing of additional facilities, improvements or extensions of existing facilities within the Water System, or otherwise for facilities, improvements or property which the District determines are of benefit to the Water System, or for the purpose of refunding any Bonds in whole or in part, including all costs (including costs of issuing such Parity Bonds and including capitalized interest on such Parity Bonds during any period which the District deems necessary or advisable) relating thereto; (ii) interest on such Parity Bonds must be payable on an Interest Payment Date; (iii) the principal of such Parity Bonds must be payable on October 1 in any year in which principal is payable; and (iv) money, or a surety bond or parity debt instrument may be deposited in a reserve account for such Parity Bonds from the proceeds of the sale of such Parity Bonds in such amount as may be determined by the District. State Loans. The District may borrow money from the State to finance improvements to the Water System by complying with all of the provisions listed above for issuing parity obligations except those listed under subsections (c)(ii), (iii) and (iv), and the obligation of the District to make payments to the State under the loan agreement memorializing the loan (the State Loan ) may be treated as Parity Bonds for purposes of the Indenture; provided that the District may not make a payment on any State Loan to the extent it would have the effect of causing the District to fail to make a timely payment on the Bonds. Subordinate Obligations Nothing in the Indenture prohibits or impairs the authority of the District to issue bonds or other obligations secured by a lien on Gross Revenues or Net Revenues which is subordinate to the lien established under the Indenture securing the Bonds or Parity Bonds upon such terms and in such principal amounts as the District may determine; provided, that the District may issue or incur any such Subordinate Bonds subject to the following specific conditions: (a) The District must be in compliance with all covenants set forth in the Indenture. (b) The Net Revenues of the Water System, calculated on sound accounting principles, as shown by the books of the District for the latest Fiscal Year or any more recent 12 month period selected by the District ending not more than 60 days prior to the adoption of the Subordinate Bonds Instrument pursuant to which such Subordinate Bonds are issued, as shown by the books of the District, plus, at the option of the District, any or all of the items designated as (i) and (ii) below, must at least equal 100% of Maximum Annual Debt Service, with Maximum Annual Debt Service calculated on all Bonds or Parity Bonds to be Outstanding immediately subsequent to the issuance of such Subordinate 9

18 Bonds which have a lien on Net Revenues of the Water System. The items that may be added to such Net Revenues for the purpose of issuing or incurring Subordinate Bonds are the following: (i) An allowance for Net Revenues from any additions to or improvements or extensions of the System to be made with the proceeds of such Subordinate Bonds, and also for Net Revenues from any such additions, improvements or extensions which have been made from moneys from any source but in any case which, during all or any part of such Fiscal Year or such 12 month period, were not in service, all in an amount equal to 90% of the estimated additional average annual Net Revenues to be derived from such additions, improvements and extensions for the first 36 month period in which each addition, improvement or extension is respectively to be in operation; and (ii) An allowance for earnings arising from any increase in the Charges which has become effective prior to the incurring of such additional indebtedness but which, during all or any part of such Fiscal Year or such 12 month period, was not in effect, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in Charges had been in effect during the whole of such Fiscal Year or such 12 month period. (c) The Subordinate Bonds Instrument providing for the issuance of Subordinate Bonds must provide that: (i) The proceeds of such Subordinate Bonds must be applied to the acquisition, construction, improvement, financing or refinancing of additional facilities, improvements or extensions of existing facilities within the Water System, or otherwise for facilities, improvements or property which the District determines are of benefit to the Water System, or for the purpose of refunding any Bonds and Parity Bonds in whole or in part, including all costs (including costs of issuing such Subordinate Bonds and including capitalized interest on such Subordinate Bonds during any period which the District deems necessary or advisable) relating thereto; and (ii) Interest on such Subordinate Bonds must be payable on an Interest Payment Date; Variable Rate Indebtedness (iii) The principal of such Subordinate Bonds must be payable on October 1 in any year in which principal is payable. Parity Bonds or Subordinate Bonds may be issued as variable rate indebtedness, and shall be assumed to bear interest at the highest of: (i) the actual rate on the date of calculation, or if the Parity Bonds or Subordinate Bonds are not yet outstanding, the initial rate (if established and binding), (ii) if the Parity Bonds or Subordinate Bonds have been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, or if no Parity Bonds or Subordinate Bonds are outstanding for the twelve prior months under the Parity Bonds Instrument or Subordinate Bonds Instrument, the average rate borne by reference to an index comparable to that to be utilized in determining the interest rate for the Parity Bonds or Subordinate Bonds to be issued; and (iii) (a) if interest on the Parity Bonds or Subordinate Bonds is excludable from gross income under the applicable provisions of the Tax Code, the most recently published Bond Buyer Revenue Bond Index (or comparable index if no longer published), or (b) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities provided, however, that for purpose of any rate covenant measuring actual debt service coverage during a test period, variable rate Parity Bonds or Subordinate Bonds shall be deemed to bear interest at the actual rate per annum applicable during the test period. 10

19 Eminent Domain Proceeds The Indenture provides that if all or any part of the Water System is taken by eminent domain proceedings, the District will deposit all Net Proceeds with the Trustee in a special fund in trust and apply those funds to the cost of acquiring or constructing or financing Improvements to the Water System if the following conditions are met: (a) the District first secures and files with the Trustee a Certificate of the District showing (i) the estimated loss in annual Net Revenues, if any, suffered, or to be suffered, by the District by reason of such eminent domain proceedings, (ii) a general description of the Improvements to the Water System then proposed to be acquired or constructed by the District from such Net Proceeds, and (iii) an estimate of the additional Net Revenues to be derived from such Improvements; and (b) the Trustee, on the basis of such Certificate of the District, determines that such additional Net Revenues will sufficiently offset the loss of Net Revenues, resulting from such eminent domain proceedings so that the ability of the District to meet its obligations under the Indenture will not be substantially impaired, which determination will be final and conclusive. If these conditions are met, the District will then promptly proceed with the acquisition or construction or financing of such Improvements substantially in accordance with such Certificate of the District and payments therefor will be made by the Trustee from such Net Proceeds and from other moneys of the District lawfully available therefor, and any balance of such Net Proceeds not required by the District for these purposes will be deposited in the Revenue Fund. If these conditions are not met, then such Net Proceeds will be held in trust by the Trustee and applied to the payment of the Bonds of such Series as they become due by their terms, and, pending such application, such remaining moneys may be invested by the Trustee in the manner provided in the Indenture. Casualty Insurance Proceeds The District will covenant in the Indenture that it will at all times maintain such insurance on the Water System as is customarily maintained with respect to works and properties of like character against accident to, loss of or damage to such works or properties. If any useful part of the Water System is damaged or destroyed, such part will be restored to use. The Net Proceeds of insurance against accident to or destruction of the physical Water System will be used for repairing or rebuilding the damaged or destroyed portions of the Water System (to the extent that such repair or rebuilding is determined by the District to be useful or of continuing value to the Water System), and to the extent not so applied, will be held in trust by the Trustee and applied to the payment of the Bonds of such Series as they become due by their terms, and, pending such application, such remaining moneys may be invested by the Trustee in the manner provided in the Indenture Any such insurance must be in the form of policies or contracts for insurance with insurers of good standing and will be payable to the District, or may be in the form of self-insurance by the District. The District will establish such fund or funds or reserves as it determines, in its sole judgment, are necessary to provide for its share of any such self-insurance. 11

20 THE WATER SYSTEM The following material is descriptive of the District. It has been prepared by or excerpted from sources as noted herein and has not been verified by Bond Counsel, Disclosure Counsel, the District's Financial Advisor or the Underwriter. For further information, see THE WATER SYSTEM herein. General The District is located in the northern portion of San Diego County, California approximately twentyfive miles north of the City of San Diego, and slightly more than one hundred miles south of downtown Los Angeles. The District was formed in 1922, under the provisions of the Irrigation District Law, as amended (Division 11 of the Water Code of the estate of California) (the Irrigation District Law ). In 1986, the District became a subsidiary district of the City of Encinitas (the City ) pursuant to an incorporation election. Subsequently, the District has remained a separate and distinct entity from the City, although its five-person governing board is the elected City Council of the City. The District General Manager is the Public Works Director of the City. Since June of 1995, the City has had the ability to abolish the District as a separate entity and merge it with the City, but has elected not to do so in order to preserve certain options with its relationship with the San Diego County Water Authority. If the City ever determined that it was necessary to dissolve the District, then the City would be required under California law to assume the obligations and liabilities of the District including the 2007 Installment Purchase Agreement and the Bonds. The City currently has no intention to exercise this option in the foreseeable future. The District's headquarters are located at 160 Calle Magdalena and consist of 16,927 square feet of building facilities which are used as the City s corporation yard and the operational center of the District. Service Area The District currently serves an area of approximately 8.9 square miles, and provides potable water to the coastal portions of the City of Encinitas, encompassing approximately 5,652 acres. Topographically, the District is characterized by rolling hills and mesas gently sloping toward the coastal plain to the west bordering for about five miles along the Pacific Ocean. Elevations vary from 410 feet to sea level. Mild ocean breezes maintain year-round average temperatures in the area encompassing the District of 65 to 75 degrees in the daytime and 47 to 65 degrees at night. Rainfall averages 12 inches per year, mostly in the winter months. The District was originally established to provide irrigation water to surrounding farms, ranches and fruit groves, however, suburban residential communities have become the dominant features within the District. Population in the District is estimated to be 36,750 residents in calendar year Based on 2010 U.S. Census data and the recent San Diego Association of Governments (SANDAG) Series 8 Regional Growth Forecast, the District's population is projected to increase to approximately 38,200 in The District currently contains, and is planned for, a mixture of commercial and residential development, as well as agricultural usage of land. The District was originally formed for the purpose of developing an adequate water supply for the landowners and residents of the area. On November 15, 1948, and December 13, 1948, respectively, the residents of the District voted to become a member of the San Diego County Water Authority ( SDCWA ), the regional water supplier, and the Metropolitan Water District of Southern California ( MWD ), thus becoming eligible to purchase water transported into San Diego County via the aqueducts of these two agencies. Management and Personnel The District's five-person governing board is the elected City Council of the City. The District has a staff of 24 full-time employees. There are also several City employees which support the District's operations, 12