$111,900,000 Subordinated Electric Revenue Refunding Bonds

Transcription

1 NEW ISSUE FULL BOOK-ENTRY In the opinion of Orrick, Herrington & Sutcliffe LLP and Lofton & Jennings, Co-Bond Counsel, based on an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, compliance with certain covenants, interest on the 2003 Subordinated Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the opinion of Co-Bond Counsel, interest on the 2003 Subordinated Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Co-Bond Counsel observe that such interest is included in adjusted current earnings in calculating federal corporate alternative minimum taxable income. Co-Bond Counsel express no opinion regarding any other tax consequences caused by the ownership or disposition of, or the accrual or receipt of interest on, the 2003 Subordinated Bonds. See "TAX MATTERS" herein. $111,900,000 Subordinated Electric Revenue Refunding Bonds Dated: Date of Delivery Due: August 15, 2028 The Subordinated Electric Revenue Refunding Bonds will be issued in two separate Series (Series 2003H and Series 2003I) (collectively, the "2003 Subordinated Bonds") pursuant to the provisions of Resolution No of the Sacramento Municipal Utility District (the "District"), as amended and supplemented, and will be payable from the Net Subordinated Revenues of the Electric System of the District, as described herein. Each Series of 2003 Subordinated Bonds will mature in the years and amounts as shown on the inside cover. Initially, each Series of 2003 Subordinated Bonds will be delivered in denominations of $25,000 or any integral multiple thereof. The 2003 Subordinated Bonds will initially be issued as auction rate securities bearing interest at ARS Rates. The 2003 Subordinated Bonds will accrue interest from the date of delivery of the 2003 Subordinated Bonds for the Initial Periods described on the inside cover at the rates established by the Underwriter for each Series prior to the delivery of the 2003 Subordinated Bonds. After the Initial Periods, each Series of 2003 Subordinated Bonds will accrue interest for subsequent Auction Periods described on the inside cover at the ARS Rate for such Auction Period determined in accordance with the Auction Procedures described in Appendix D hereto. Prospective purchasers of the 2003 Subordinated Bonds should review the Auction Procedures and should note that such procedures provide that (i) a Bid or Sell Order constitutes a commitment to purchase or sell 2003 Subordinated Bonds based on the results of an Auction; (ii) Auctions will be conducted through telephone communication and (iii) settlement for purchases and sales will be on the Business Day following an Auction. Beneficial interest in 2003 Subordinated Bonds may be transferred only though a Broker-Dealer for the applicable Series of 2003 Subordinated Bonds or pursuant to a Bid or Sell Order placed in an Auction. Under certain circumstances and upon notice to Owners as described herein, the interest rate Mode applicable to a Series of 2003 Subordinated Bonds may be converted from ARS Rates to another interest rate Mode, and in such event such Series of 2003 Subordinated Bonds must be tendered for purchase on the conversion date at par. See "THE 2003 SUBORDINATED BONDS Conversion Between Modes" and "- Purchase of 2003 Subordinated Bonds" herein. In the event of such a conversion, the method and frequency of interest rate adjustments, the interest payment dates, the authorized denominations and other terms of such Series may be changed, as described herein. This Official Statement provides information as of its date concerning the 2003 Subordinated Bonds while bearing interest at ARS Rates. Owners and prospective purchasers of the 2003 Subordinated Bonds should not rely on this Official Statement for information concerning the 2003 Subordinated Bonds in connection with any conversion of the 2003 Subordinated Bonds to a Mode other than the ARS Mode, but should look solely to the offering document to be used in connection with any such conversion. The 2003 Subordinated Bonds are also subject to optional and mandatory sinking fund redemption prior to maturity as set forth herein. See "THE 2003 SUBORDINATED BONDS Redemption" herein. The 2003 Subordinated Bonds of each Series are being issued as fully registered bonds and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the 2003 Subordinated Bonds, and individual purchases of the 2003 Subordinated Bonds will be made in book-entry form only. Principal or purchase price of, premium, if any, and interest on the 2003 Subordinated Bonds will be payable by the Trustee to DTC, which is obligated in turn to remit such principal or purchase price, premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2003 Subordinated Bonds, as described herein. The scheduled payment when due of the principal of and interest on the 2003 Subordinated Bonds will be insured by a financial guaranty insurance policy to be issued by XL Capital Assurance Inc. simultaneously with the issuance of the 2003 Subordinated Bonds. The principal of and interest on the 2003 Subordinated Bonds, together with the debt service on other Subordinated Bonds and Parity Subordinated Debt (as defined herein), are payable exclusively from and secured by a pledge of the Net Subordinated Revenues of the Electric System of the District. Neither the credit nor the taxing power of the District or the State of California is pledged to the payment of the 2003 Subordinated Bonds. Payment of the principal of and interest on the Subordinated Bonds, including the 2003 Subordinated Bonds, is subordinated to the payment of principal and interest on the District's Electric Revenue Bonds and other Parity Bonds (as defined herein). The information presented on this cover page is for quick reference only and is qualified in its entirety by reference to the entire Official Statement and the documents summarized and described herein. The 2003 Subordinated Bonds are offered when, as and if issued and received by the Underwriters, subject to the approval of validity by Orrick, Herrington & Sutcliffe LLP, Sacramento, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel to the District. Certain legal matters will be passed on for the Underwriters by their counsel, Nixon Peabody LLP, San Francisco, California. It is expected that the 2003 Subordinated Bonds will be available for delivery to DTC on July 15, Morgan Stanley (As Underwriter and Broker- Dealer for the Series 2003H Subordinated Bonds) July 7, 2003 Goldman, Sachs & Co. (As Underwriter and Broker- Dealer for the Series 2003I Subordinated Bonds)

2 SACRAMENTO MUNICIPAL UTILITY DISTRICT Sacramento, California 2003 SUBORDINATED BONDS $55,950,000 Subordinated Electric Revenue Refunding Bonds, Series 2003H CUSIP No JL3 Final Last Day of Initial Auction First Auction First Interest Maturity Initial Period Period Date Payment Date August 15, 2028 July 21, 2003 Seven-Day July 21, 2003 July 22, 2003 Monday Auctions $55,950,000 Subordinated Electric Revenue Refunding Bonds, Series 2003I CUSIP No JM1 Final Last Day of Initial Auction First Auction First Interest Maturity Initial Period Period Date Payment Date August 15, 2028 July 20, 2003 Seven-Day July 18, 2003 July 21, 2003 Friday Auctions

3 SACRAMENTO MUNICIPAL UTILITY DISTRICT Sacramento, California BOARD OF DIRECTORS Larry Carr Linda Davis Peter Keat, Vice President Susan Patterson, President Howard Posner Genevieve Shiroma Bill Slaton OFFICERS AND EXECUTIVES Jan Schori General Manager and Chief Executive Officer John Distasio Assistant General Manager, Customer Services Arlen Orchard General Counsel Noreen Roche-Carter Treasurer James Shetler Assistant General Manager, Energy Supply Linda Hensley Director and Chief, Business Technology and Change Management SPECIAL SERVICES Gail Hullibarger Assistant General Manager, Administrative Services, and Chief Financial Officer James Tracy Chief Risk Officer and Director, Business Planning and Budget Cary Nethaway Controller ORRICK, HERRINGTON & SUTCLIFFE LLP, Sacramento LOFTON & JENNINGS, San Francisco Co-Bond Counsel U.S. BANK NATIONAL ASSOCIATION, San Francisco Trustee and Paying Agent DEUTSCHE BANK TRUST COMPANY AMERICAS, New York Auction Agent PRICEWATERHOUSECOOPERS LLP, Sacramento Independent Accountants PUBLIC FINANCIAL MANAGEMENT, INC., Sacramento Financial Advisor Main Office of the District: 6201 S Street, Sacramento, California Mailing Address: P.O. Box 15830, Sacramento, California Telephone: (916)

4 No dealer, broker, salesperson or other person has been authorized by the District or the Underwriters to give any information or to make any representations with respect to the 2003 Subordinated Bonds other than those contained in this Official Statement and, if given or made, such 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 nor the solicitation of an offer to buy, nor shall there be any sale of the 2003 Subordinated Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the District and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation of, the Underwriters. The information and expressions of opinion stated herein are subject to change without notice. The delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibilities to investors under the 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. The CUSIP numbers included in this Official Statement are for the convenience of the Holders and potential Holders of the 2003 Subordinated Bonds. No assurance can be given that the CUSIP numbers for a particular maturity of 2003 Subordinated Bonds will remain the same after the date of issuance and delivery of the 2003 Subordinated Bonds. IN CONNECTION WITH THE OFFERING OF THE 2003 SUBORDINATED BONDS THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF SUCH BONDS AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL ON THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements generally are identifiable by the terminology used, such as plan, expect, estimate, budget or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the captions INTRODUCTION, PLAN OF FINANCE, DISTRICT STRATEGY, POWER PURCHASE AGREEMENTS, FUEL SUPPLY, PROJECTED RESOURCES, DEMAND SIDE MANAGEMENT PROGRAMS, TRANSMISSION, POWER POOL AND OTHER AGREEMENTS, DISTRICT S RATES AND CUSTOMER BASE, SELECTED FINANCIAL DATA, RANCHO SECO DECOMMISSIONING, CAPITAL REQUIREMENTS AND OUTSTANDING INDEBTEDNESS and LEGAL PROCEEDINGS in this Official Statement. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The District does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

5 TABLE OF CONTENTS INTRODUCTION...1 PLAN OF FINANCE...3 Refunding of Bonds...3 Project Costs...3 Interest Rate Swap Agreement Series S Senior Bonds...3 ESTIMATED SOURCES AND USES OF FUNDS...4 THE 2003 SUBORDINATED BONDS...4 General...4 Interest Provisions...5 Determination of ARS Rate...6 Conversion Between Modes...9 Purchase of 2003 Subordinated Bonds...11 Redemption...12 Selection of 2003 Subordinated Bonds for Redemption...13 Notice of Redemption...13 SECURITY FOR THE SUBORDINATED BONDS...14 Limited Obligations; Pledge of Revenues...14 Subordinate Pledge...14 No Reserve Fund...15 Rates and Charges...15 Limitations on Additional Obligations Payable from Net Subordinated Revenues...15 BOND INSURANCE...17 General...17 Reinsurance...17 Financial Strength and Financial Enhancement Ratings of XLCA...18 Capitalization of the 2003 Bond Insurer...18 Regulation of the 2003 Bond Insurer...19 Form of Financial Guaranty Insurance Policy...19 THE DISTRICT...19 Organization and Powers...19 Management...20 Employee Relations...22 DISTRICT STRATEGY...22 Recent Developments in the California Electric Markets...22 The District s Competitive Business Strategy...23 THE SERVICE AREA AND ELECTRIC SYSTEM...25 The Service Area...25 The Electric System...25 Power Generation Facilities...27 POWER PURCHASE AGREEMENTS...30 FUEL SUPPLY...32 General...32 Supply...32 Transmission...33 Gas Storage...34 PROJECTED RESOURCES...34 DEMAND SIDE MANAGEMENT PROGRAMS...36 TRANSMISSION, POWER POOL AND OTHER AGREEMENTS...37 California-Oregon Transmission Project...37 TANC Tesla-Midway Transmission Service...37 Intertie Contract...38 Power Pool Agreements...38 Other Agreements with PG&E...38 DISTRICT S RATES AND CUSTOMER BASE...39 General...39 Customer Base; Largest Customers...40 SELECTED OPERATING DATA...41 SELECTED FINANCIAL DATA...42 Management s Discussion of Unconsolidated Operating Results...43 Regulatory Assets...45 Consolidated Financial Information...46 RANCHO SECO DECOMMISSIONING...46 Overview...46 Financial Assurance Plan...47 CAPITAL REQUIREMENTS AND OUTSTANDING INDEBTEDNESS...48 Estimated Capital Requirements...48 Outstanding Indebtedness...48 INSURANCE...51 LEGAL PROCEEDINGS...51 Environmental Litigation...51 FERC Administrative Proceedings...52 Other Litigation...54 Potential Litigation...57 ABSENCE OF LITIGATION REGARDING THE 2003 SUBORDINATED BONDS...57 UNDERWRITING...57 FINANCIAL ADVISOR...58 VERIFICATION...58 APPROVAL OF LEGAL PROCEEDINGS...58 TAX MATTERS...58 CONTINUING DISCLOSURE UNDERTAKING...59 EXPECTED RATINGS...60 MISCELLANEOUS...60 APPENDIX A 2002 AND 2001 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS...A-1 APPENDIX B FACTORS AFFECTING THE CALIFORNIA ELECTRIC UTILITY INDUSTRY. B-1 APPENDIX C BOOK-ENTRY SYSTEM... C-1 APPENDIX D AUCTION PROCEDURES...D-1 APPENDIX E SUMMARY OF CERTAIN PROVISIONS OF THE SUBORDINATE MASTER RESOLUTION... E-1 APPENDIX F SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR BOND RESOLUTION...F-1 APPENDIX G PROPOSED FORM OF LEGAL OPINIONS FOR 2003 SUBORDINATED BONDS.G-1 APPENDIX H FORM OF CONTINUING DISCLOSURE AGREEMENT...H-1 APPENDIX I FORM OF FINANCIAL GUARANTY INSURANCE POLICY... I-1 -i-

6 [THIS PAGE INTENTIONALLY LEFT BLANK]

7 OFFICIAL STATEMENT Relating to SACRAMENTO MUNICIPAL UTILITY DISTRICT $111,900,000 Subordinated Electric Revenue Refunding Bonds Series 2003H and Series 2003I INTRODUCTION This Official Statement, including the cover page and Appendices attached hereto, describes the Sacramento Municipal Utility District (the District ), a political subdivision of the State of California, its $55,950,000 Subordinated Electric Revenue Refunding Bonds, Series 2003H (the Series 2003H Subordinated Bonds ) and $55,950,000 Subordinated Electric Revenue Refunding Bonds, Series 2003I (the Series 2003I Subordinated Bonds, and, together with the Series 2003H Subordinated Bonds, the 2003 Subordinated Bonds ), in connection with the sale by the District of the 2003 Subordinated Bonds. The 2003 Subordinated Bonds are being issued (i) to refund certain of the District s Electric Revenue Bonds, (ii) to finance certain capital expenditures, and (iii) to pay costs of issuance. See PLAN OF FINANCE. The 2003 Subordinated Bonds are being issued pursuant to Resolution No of the District, adopted November 7, 1985, as amended and restated pursuant to Resolution No (the Subordinate Master Resolution ), as supplemented, and pursuant to applicable California law, including the Municipal Utility District Act (Public Utilities Code Sections to 12860) (the Act ), the Revenue Bond Law of 1941 (Government Code Section et seq.) and Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (Government Code Section et seq.) (the Refunding Law ). The issuance of the 2003 Subordinated Bonds was authorized on July 3, 2003, by resolution of the Board of Directors of the District (the 2003 Supplemental Resolution ). The Subordinate Master Resolution and all supplemental resolutions, including the 2003 Supplemental Resolution, are collectively referred to herein as the Subordinate Resolution. See APPENDIX E - SUMMARY OF CERTAIN PROVISIONS OF THE SUBORDINATE MASTER RESOLUTION. U.S. Bank National Association serves as trustee and paying agent under the Subordinate Resolution (the Trustee ). The 2003 Subordinated Bonds and other bonds issued on a parity therewith pursuant to the Subordinate Master Resolution are collectively referred to herein as the Subordinated Bonds. The District has outstanding $24,575,000 principal amount of its Subordinated Electric Revenue Refunding Bonds, 1985 Refunding Series (the 1985 Subordinated Bonds ), $82,075,000 aggregate principal amount of its Subordinated Electric Revenue Refunding Bonds, Series 2001A and Series 2001B (the 2001 Subordinated Bonds ), and $269,100,000 aggregate principal amount of its Subordinated Electric Revenue Refunding Bonds, Series 2002C, Series 2002D, Series 2002E, Series 2002F and Series 2002G. After the issuance of the 2003 Subordinated Bonds, $487,650,000 aggregate principal amount of the Subordinated Bonds will be outstanding. The payment of the principal of and interest on the Subordinated Bonds, including the 2003 Subordinated Bonds, is subordinate to the payment of the principal of and interest on the District s Electric Revenue Bonds (the Senior Bonds ). Upon issuance of the 2003 Subordinated Bonds and the simultaneous refunding of the Refunded Bonds, and after the expected issuance by the District of its Electric Revenue Refunding Bonds, 2003 Series S (the 2003 Series S Senior Bonds ) on August 19, 1

8 2003 and the simultaneous refunding of certain other Senior Bonds, $1,689,280,000 of Senior Bonds will remain Outstanding. The Senior Bonds are issued pursuant to Resolution No (the Senior Bond Resolution ) adopted in 1971, as amended and supplemented. See APPENDIX F SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR BOND RESOLUTION. The District has outstanding $166,300,000 principal amount of commercial paper notes (the Notes ). Notes in the aggregate principal amount of $115,300,000 will be paid on August 29, 2003 with a portion of the proceeds of the District s Electric Revenue Bonds, 2003 Series R, issued on June 4, 2003 (the 2003 Series R Senior Bonds ). The Notes are secured by a letter of credit issued by Bayerische Landesbank, JPMorgan Chase Bank, and Westdeutsche Landesbank Girozentrale. The Notes (and the District s obligations to the letter of credit banks) are payable solely from Available Revenues of the Electric System and are subordinate in right of payment to the payment of principal of and interest on the Senior Bonds and the Subordinated Bonds (including the 2003 Subordinated Bonds). The District is responsible for the acquisition, generation, transmission and distribution of electric power to its service area, which includes most of Sacramento County and a small adjoining portion of Placer County. The estimated population of the service territory was approximately 1,280,000 as of December 31, For the year ended December 31, 2002, the District served 541,296 customers and had total electricity sales of approximately 9.5 million kilowatt hours (kwh) and a record peak demand of 2,779 megawatts (MW). The District owns and operates an electric system which includes generating facilities with an aggregate generating capacity of approximately 763 MW and transmission and distribution facilities. See THE SERVICE AREA AND ELECTRIC SYSTEM - The Electric System. The District s power requirements exceed its generating capacity and thus the District has agreements with others (including the Local Cogeneration Projects as hereinafter defined) for the purchase of a portion of its power requirements. See POWER PURCHASE AGREEMENTS. Pursuant to a Continuing Disclosure Agreement, dated the date of issuance of the 2003 Subordinated Bonds (the Continuing Disclosure Agreement ) between the District and the Trustee, the District will covenant for the benefit of the holders of the 2003 Subordinated Bonds and owners of beneficial interest in the 2003 Subordinated Bonds to provide certain financial information and operating data and to provide certain notices. See CONTINUING DISCLOSURE UNDERTAKING and Appendix H - FORM OF CONTINUING DISCLOSURE AGREEMENT. The information presented in this Introduction is qualified in its entirety by reference to this entire Official Statement and the documents summarized or described herein. This Official Statement, including the Appendices, describes certain terms of the 2003 Subordinated Bonds, the Subordinate Resolution and certain agreements, contracts and other arrangements, some of which currently exist and others of which may exist in the future. The descriptions of and references to all documents, statutes, regulations and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each such document, statute, regulation or instrument. Capitalized terms not otherwise defined in this Official Statement shall have the meanings ascribed thereto in Appendix D AUCTION PROCEDURES, Appendix E - SUMMARY OF CERTAIN PROVISIONS OF THE SUBORDINATE MASTER RESOLUTION - Definitions or in the Subordinate Resolution. 2

9 PLAN OF FINANCE Refunding of Bonds The District is issuing the 2003 Subordinated Bonds for the purpose of refunding the Senior Bonds listed in the following table (the Refunded Bonds ). Refunded Bonds Series Stated Maturity Principal Amount Redemption Date 1996 Series J 8/15/16 $ 4,160,000 8/15/ Series J 8/15/21 24,525,000 8/15/ Series J 8/15/24 18,215,000 8/15/ Series M 7/01/28 59,155,000 7/01/04 $106,055,000 The District will deposit a portion of the proceeds of the 2003 Subordinated Bonds and other available funds in trust in an escrow fund (the Escrow Fund ) established under an escrow agreement between the District and the Trustee. The moneys so deposited will be invested in direct obligations of the United States of America (the Federal Securities ), the interest on and principal of which will be sufficient to pay the interest on and principal of the Refunded Bonds to their respective redemption dates and to redeem the Refunded Bonds on such redemption dates. Upon deposit, all liability of the District with respect to the Refunded Bonds (except for the obligation of the District to pay the interest on and principal of the Refunded Bonds from moneys on deposit in the Escrow Fund) will cease. The holders of the Refunded Bonds will be entitled to payment from the District solely from moneys or Federal Securities on deposit in the Escrow Fund, and the Refunded Bonds will no longer be outstanding under the Resolution. The Federal Securities and moneys in the Escrow Fund will not secure the 2003 Subordinated Bonds and will not be available to pay the principal of or interest or premium on the 2003 Subordinated Bonds. Project Costs The District is also issuing the 2003 Subordinated Bonds to finance capital expenditures in the approximate amount of $390,000. Interest Rate Swap Agreement On June 20, 2003, the District entered into a variable-to-fixed interest rate swap agreement with a notional amount of $111,900,000 for the purpose of converting the interest obligation of the 2003 Subordinated Bonds to a primarily fixed rate. Payments under the swap agreement begin on August 15, 2003, and will continue until August 15, 2028 (unless earlier terminated by the District). The District will pay a fixed rate of 2.894% under the swap agreement and will receive a variable rate equal to 63% of the one-month LIBOR. The obligations of the District under the swap agreement are not secured by a pledge of Revenues or any other property of the District. See CAPITAL REQUIREMENTS AND OUTSTANDING INDEBTEDNESS - Outstanding Indebtedness - Interest Rate Swap Agreements Series S Senior Bonds On June 4, 2003, the District entered into a forward delivery purchase agreement with Morgan Stanley & Co. Incorporated for the purchase of its 2003 Series S Senior Bonds in the aggregate principal amount of $331,170,000 for the purpose of refunding certain outstanding Senior Bonds. Under the purchase agreement, the 2003 Series S Senior Bonds are to be issued and delivered on August 19, 2003, 3

10 subject to certain conditions contained therein. The issuance of the 2003 Series S Senior Bonds is not a condition to the issuance of the 2003 Subordinated Bonds. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds with respect to the 2003 Subordinated Bonds are as follows: Sources of Funds: Par amount of 2003 Subordinated Bonds... $111,900, Senior Bond Reserve Fund Release... 5,707, Funds Available From District... 1,300, Total Sources of Funds... $118,908, Uses of Funds: Refunding of Refunded Bonds... $116,571, Project Costs , Costs of Issuance (including Underwriting Discount and Bond Insurance Premium)... 1,944, Total Uses of Funds... $118,908, THE 2003 SUBORDINATED BONDS The following is a summary of certain provisions of the 2003 Subordinated Bonds. Reference is made to the 2003 Subordinated Bonds for the complete text thereof and to the Resolution for a more detailed description of such provisions. The discussion herein is qualified by such reference. This Official Statement provides information as of its date with respect to 2003 Subordinated Bonds bearing interest at ARS Rates. Owners and prospective purchasers of the 2003 Subordinated Bonds should not rely on this Official Statement for information concerning the 2003 Subordinated Bonds in connection with any conversion of the 2003 Subordinated Bonds to a Mode other than the ARS Mode, but should look solely to the offering document to be used in connection with any such conversion. General The 2003 Subordinated Bonds will be issued in two Series in the aggregate principal amount of $111,900,000. Each Series of 2003 Subordinated Bonds will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the 2003 Subordinated Bonds. Principal or purchase price of, premium, if any, and interest on the 2003 Subordinated Bonds are payable by the Trustee to DTC, which is obligated in turn to remit such principal or purchase price, premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2003 Subordinated Bonds. See Appendix C BOOK- ENTRY SYSTEM herein. The 2003 Subordinated Bonds in the ARS Mode will be issued as fully registered bonds without coupons, initially in denominations of $25,000 or any integral multiple thereof. The 2003 Subordinated Bonds initially will be delivered bearing interest in the ARS Mode, but may be converted at the option of the District, subject to certain restrictions, to bear interest at interest rates set or adjusted according to different methodologies, including Daily Mode, Weekly Mode, Flexible Mode, Term Rate Mode and Fixed Rate Mode. The 2003 Subordinated Bonds will be dated as of the date of their initial delivery and will mature on the respective dates shown on the inside cover of this Official Statement. The 2003 Subordinated Bonds will bear interest from the most recent date to which interest has been paid or, if no 4

11 interest has been paid, from the date of delivery of the 2003 Subordinated Bonds (the Closing Date ). Initially, interest on each Series of 2003 Subordinated Bonds is payable on the initial Interest Payment Dates shown on the inside cover and thereafter on each Interest Payment Date, as described in the following section. While the 2003 Subordinated Bonds bear interest at ARS Rates, there will be no Liquidity Facility supporting a mandatory tender for purchase of 2003 Subordinated Bonds. The 2003 Subordinated Bonds in the ARS Mode are not subject to optional tender for purchase. Interest Provisions Pursuant to the Resolution, the 2003 Subordinated Bonds may bear interest in one of several different interest rate Modes: Flexible Mode, Daily Mode, Weekly Mode (each a Short-Term Mode ), Term Rate Mode or Fixed Rate Mode (each a Long-Term Mode ), or an ARS Mode (collectively with the Short-Term Modes or Long-Term Modes, the Modes ). All of the 2003 Subordinated Bonds of a particular Series must be in the same Mode at the same time; however, the District may elect to convert the Mode on a Series of 2003 Subordinated Bonds to another Mode from time to time as described under Conversion Between Modes. Subsequent to such change in Mode (other than a change to a Fixed Rate Mode), a Series of 2003 Subordinated Bonds may again be changed to a different Mode at the times and in the manner provided in the Resolution. A Fixed Rate Mode shall be in effect until the Maturity Date, and may not be changed to any other Mode. Each Series of 2003 Subordinated Bonds will be issued in an ARS Mode. Each Series of 2003 Subordinated Bonds will be dated the date of delivery, and will bear interest from their date of delivery through and including the Last Day of Initial Period, as set forth on the inside front cover of this Official Statement at the rates established by the applicable Underwriter, and thereafter at the applicable ARS Rate determined pursuant to the Auction Procedures (as hereinafter defined). Following the Initial Period, each Series of 2003 Subordinated Bonds will initially bear interest for the applicable Initial Auction Period set forth on the inside front cover of the Official Statement but can be converted to a daily, seven-day, 28-day, 35-day, three-month, six-month or a Special Auction Period. The Special Auction Period is any period of not less than seven days nor more than 1,092 days which is not another Auction Period. Interest Payment Date with respect to 2003 Subordinated Bonds in the ARS Mode shall mean each date on which interest is to be paid and is the First Interest Payment Date set forth on the inside front cover of this Official Statement, and thereafter: (a) when used with respect to any Auction Period other than a daily Auction Period or a Special Auction Period, the Business Day immediately following such Auction Period, (b) when used with respect to a daily Auction Period, the first Business Day of the month immediately succeeding such Auction Period, (c) when used with respect to a Special Auction Period of (I) seven or more but fewer than 92 days, the Business Day immediately following such Special Auction Period, or (II) 92 or more days, each thirteenth Tuesday with respect to the Series 2003H Subordinated Bonds and each thirteenth Monday with respect to the Series 2003I Subordinated Bonds after the first day of such Special Auction Period or the next Business Day if such Tuesday or Monday (as appropriate) is not a Business Day and on the Business Day immediately following such Special Auction Period, (d) each redemption date, (e) each Mandatory Tender Date, and (f) the Maturity Date. The Interest Accrual Period means the period during which a 2003 Subordinated Bond accrues interest payable on the next Interest Payment Date applicable thereto. Each Interest Accrual Period commences on (and includes) the last Interest Payment Date to which interest has been paid (or, if no interest has been paid in such Mode, from the date of original authentication and delivery of the 2003 Subordinated Bonds, or the Mode Change Date, as the case may be) and shall extend to, but not include, the Interest Payment Date on which interest is to be paid. 5

12 While 2003 Subordinated Bonds bear interest in the ARS Mode, interest thereon shall be calculated on the basis of a 360-day year for the actual number of days elapsed with respect to Auction Periods of 180 days or less, and on the basis of a 360-day year comprised of twelve 30-day months with respect to Auction Periods greater than 180 days. In an ARS Mode, the applicable ARS Rate will be determined pursuant to the Auction Procedures hereinafter described. The interest rate is effective for the entire Interest Period. No Bonds in the ARS Mode may bear interest at an interest rate higher than 12% per annum (the Maximum Rate ). Determination of ARS Rate In the ARS Mode, the 2003 Subordinated Bonds will bear interest at an ARS Rate for the applicable Auction Period. ARS Rate means, for each Series of 2003 Subordinated Bonds in an ARS Mode, the rate set by the applicable Broker-Dealer for the Initial Auction Period set forth on the inside front cover of this Official Statement, and thereafter, the Auction Rate for each Auction Period; provided, however, that, if the Auction Agent fails to calculate or, for any reason, fails to provide the Auction Rate for any Auction Period, (i) if the preceding Auction Period was a period of 35 days or less, the new Auction Period will be the same as the preceding Auction Period and the ARS Rate for the new Auction Period will be the same as the ARS Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than 35 days, the preceding Auction Period will be extended to the next Monday in the case of the Series 2003H Subordinated Bonds and the next Sunday in the case of the Series 2003I Subordinated Bonds (or if such Monday or Sunday is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the ARS Rate in effect for the preceding Auction Period will continue in effect for the Auction Period as so extended, and, in the event Auction Period is extended as set forth in clause (ii) an Auction will be held on the last Business Day of the Auction Period as so extended to take effect for an Auction Period beginning on the Business Day immediately following the last day of the Auction Period as extended which Auction Period will end on the date it would otherwise have ended on had the prior Auction Period not been extended; provided, further, that if the Auction Procedures are suspended due to the failure to pay principal of, premium or interest on, any 2003 Subordinated Bond in an ARS Mode, the ARS Rate for the next succeeding Auction Period will be the Default Rate; provided, further, that in no event the ARS Rate exceed the Maximum ARS Rate; and; provided, further, in the event of a failed conversion from an ARS Rate to another interest rate Mode or the failed conversion from one Auction Period to another Auction Period, the affected 2003 Subordinated Bonds will continue as 2003 Subordinated Bonds with a seven-day Auction Period and bear interest at the Maximum Interest Rate for the next Auction Period. Auction Date means with respect to each Series of 2003 Subordinated Bonds, during any period in which the Auction Procedures are not suspended in accordance with the provisions of the 2003 Subordinated Bonds, (i) if such Series of 2003 Subordinated Bonds are in a daily Auction Period, each Business Day, (ii) if such Series of 2003 Subordinated Bonds are in a Special Auction Period, the last Business Day of the Special Auction Period, and (iii) if such Series of 2003 Subordinated Bonds are in any other Auction Period, the Business Day next preceding each Interest Payment Date for such Series of 2003 Subordinated Bonds (whether or not an Auction shall be conducted on such date); provided, however, that the last Auction Date with respect to a Series of 2003 Subordinated Bonds in an Auction Period other than the daily Auction Period or Special Auction Period shall be the earlier of (a) the Business Day next preceding the Interest Payment Date next preceding the conversion date for such Series of 2003 Subordinated Bonds and (b) the Business Day next preceding the Interest Payment Date next preceding the final maturity date for such Series of 2003 Subordinated Bonds; and provided, further, that if such Series of 2003 Subordinated Bonds are in a daily Auction Period, the last Auction Date shall be the earlier of (x) the Business Day next preceding the conversion date for such Series of 2003 Subordinated Bonds and (y) the Business Day next preceding the final maturity date for such Series Bonds. The last Business Day of a Special Auction Period shall be the Auction Date for the Auction 6

13 Period which begins on the next succeeding Business Day, if any. On the Business Day preceding the conversion from a daily Auction Period to another Auction Period, there will be two Auctions, one for the last daily Auction Period and one for the first Auction Period following the conversion. Auction Period means: (i) a Special Auction Period; (ii) with respect to the 2003 Subordinated Bonds in a daily Auction Period, a period beginning on each Business Day and extending to but not including the next succeeding Business Day; (iii) with respect to the Series 2003H Subordinated Bonds in a seven-day Auction Period, a period of generally seven days beginning on a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (iv) with respect to the Series 2003I Subordinated Bonds in a seven-day Auction Period, a period of generally seven days beginning on a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on the Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (v) with respect to the Series 2003H Subordinated Bonds in a 28-day Auction Period, a period of generally 28 days beginning on a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the fourth Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (vi) with respect to the Series 2003I Subordinated Bonds in a 28- day Auction Period, a period of generally 28 days beginning on a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on the fourth Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (vii) with respect to the Series 2003H Subordinated Bonds in a 35-day Auction Period, a period of generally 35 days beginning on a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the fifth Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (viii) with respect to the Series 2003I Subordinated Bonds in a 35-day Auction Period, a period of generally 35 days beginning on a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on the fifth Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on the next succeeding day which is followed by a Business Day); (ix) with respect to the 2003 Subordinated Bonds in a three-month Auction Period, a period of generally three months (or shorter period upon a conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the first day of the month that is the third calendar month following the beginning date of such Auction Period; and (x) with respect to the 2003 Subordinated Bonds in a six-month Auction Period, a period of generally six months (or shorter period upon a conversion from another Auction Period) beginning on the day following the last day of the prior Auction Period and ending on the next succeeding Interest Payment Date or Interest Payment Date; provided, however, that (a) if there is a conversion of a Series of 2003 Subordinated Bonds (i) from a daily Auction Period to a seven-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on the next succeeding Monday (for the Series 2003H Subordinated Bonds) or Sunday (for the Series 2003I Subordinated Bonds) (unless such day is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on the Monday (for the Series 2003H Subordinated Bonds) or Sunday (for the Series 2003I Subordinated Bonds) (unless such day is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 21 days but not more than 28 days from such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next Auction Period shall begin on the date of the conversion (i.e. the Interest Payment Date for the prior Auction Period) and shall end on the Monday (for 7

14 the Series 2003H Subordinated Bonds) or Sunday (for the Series 2003I Subordinated Bonds) (unless such day is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day) which is more than 28 days but no more than 35 days from such date of conversion. The definitions of other capitalized terms used in this section, the procedure for submitting orders prior to the Submission Deadline on each Auction Date, and the particulars with regard to the determination of the Auction Rate and the allocation of the 2003 Subordinated Bonds bearing interest at ARS Rates (collectively, the Auction Procedures ) are described in Appendix D -- AUCTION PROCEDURES. The provisions of the Resolution concerning the Auction Procedures including without limitation the definitions of Minimum ARS Rate, Maximum ARS Rate, Maximum Interest Rate, ARS Index, Interest Payment Date, ARS Rate, may be amended by obtaining the consent of the XL Capital Assurance Inc. (the 2003 Bond Insurer ) and the owners of all ARS of a Series of 2003 Subordinated Bonds affected by the amendment. All owners will be deemed to have consented if on the first Auction Date occurring at least 20 days after the Auction Agent mailed notice to such owners the ARS Rate determined for such date is the Winning Bid Rate. Changes to the Auction Periods and Auction Dates do not require the amendment of the Auction Procedures or any consents. The Trustee will enter into the Auction Agreement initially with Deutsche Bank Trust Company Americas, pursuant to which, Deutsche Bank Trust Company Americas, as Agent for the Trustee, shall perform the duties of Auction Agent. The Auction Agreement will provide, among other things, that the Auction Agent will determine the Auction Rate for each Auction in accordance with the Auction Procedures. The Resolution and the Auction Agreement provide that the Auction Agent may resign from its duties as Auction Agent by giving at least 90 days notice or 30 days notice, if it has not been paid, to the District and the Trustee and does not require, as a condition to the effectiveness of such resignation, that a replacement Auction Agent be in place if its fee has not been paid. Each Broker-Dealer Agreement provides that the Broker-Dealer thereunder may resign upon five business days notice or immediately, in certain circumstances, and does not require, as a condition to the effectiveness of such resignation, that a replacement Broker-Dealer be in place. For any Auction Period during which there is no duly appointed Auction Agent, or during which there is no duly appointed Broker-Dealer, it will not be possible to hold Auctions, with the result that the interest rate on the 2003 Subordinated Bonds in an ARS Mode will be (i) if the preceding Auction Period was a period of 35 days or less, the new Auction Period shall be the same as the preceding Auction Period and the ARS Rate for the new Auction Period shall be the same as the ARS Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than 35 days, the preceding Auction Period shall be extended to the next Monday in the case of the Series 2003H Subordinated Bonds and the next Sunday in the case of Series 2003I Subordinated Bonds (or if such Monday or Sunday is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the ARS Rate in effect for the preceding Auction Period will continue in effect for the Auction Period as so extended. In the event Auction Period is extended as set forth in clause (ii) of the preceding sentence, an Auction shall be held on the last Business Day of the Auction Period as so extended to take effect for an Auction Period beginning on the Business Day immediately following the last day of the Auction Period as extended which Auction Period will end on the date it would otherwise have ended on had the prior Auction Period not been extended; provided, however, that if the Auction Procedures are suspended due to the failure to pay principal of, premium or interest on, any 2003 Subordinated Bond, the ARS Rate for the next succeeding Auction Period shall be the Default Rate. Each Broker-Dealer Agreement will provide that the applicable Broker-Dealer may submit an Order in Auctions for its own account. If a Broker-Dealer submits an Order for its own account in any 8

15 Auction, it might have an advantage over other Bidders in that it would have knowledge of orders placed through it in that Auction; such Broker-Dealer, however, would not have knowledge of Orders submitted by other Broker-Dealers (if any) in that Auction. In the Broker-Dealer Agreement, Broker-Dealers will agree to handle customer orders in accordance with their respective duties under applicable securities laws and rules. During an ARS Mode, a beneficial owner of a 2003 Subordinated Bond may sell, transfer or dispose of such Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures (see Appendix D AUCTION PROCEDURES ) or through a Broker-Dealer. The ability to sell a 2003 Subordinated Bond in an Auction may be adversely affected if there are not sufficient buyers willing to purchase all the 2003 Subordinated Bonds at a rate equal to or less than the Maximum Interest Rate. The Broker-Dealers have advised the District that it intends to make a market in the 2003 Subordinated Bonds between Auctions; however, such Broker-Dealers are not obligated to make such markets, and no assurance can be given that secondary markets therefor will develop. Conversion Between Modes The District may elect to change the Mode on the 2003 Subordinated Bonds on a Mode Change Date in the manner described below. Mode Change Date means the day on which another Mode on the 2003 Subordinated Bonds begins. Conversion from ARS Mode to a Mode Other than Fixed Rate Mode. At the option of the District, any Series of the 2003 Subordinated Bonds may be converted from the ARS Mode to any Mode other than the Fixed Rate Mode. Any such conversion shall be made as follows: Period. (i) The Mode Change Date shall be the Interest Payment Date following the final Auction (ii) The District shall give written notice of any such conversion to the Notice Parties, the Auction Agent and the Broker-Dealer no less than seven (7) Business Days prior to the date on which the Trustee is required to notify the Owners of the conversion pursuant to clause (iii) below. Such notice shall specify the Mode Change Date, the Mode and the Interest Period to which the conversion will be made. Together with such notice, the District shall file with the Trustee an Opinion of Bond Counsel to the effect that the conversion of the 2003 Subordinated Bonds to be converted to such Mode will not adversely affect the validity of the 2003 Subordinated Bonds or any exclusion from gross income for federal income tax purposes to which interest on the 2003 Subordinated Bonds would otherwise be entitled. No change to such Mode shall become effective unless the District shall also file with the Trustee an Opinion of Bond Counsel to the same effect dated the Mode Change Date. (iii) Not less than twenty (20) days prior to the Mode Change Date, the Trustee shall mail a written notice of the conversion to the Owners of all 2003 Subordinated Bonds to be converted, specifying the Mode Change Date. (iv) At any time prior to 10:00 a.m. on the Business Date immediately preceding the Mode Change Date, the District may withdraw its notice of conversion and the Auction for such 2003 Subordinated Bonds will be held on such Auction Date as if no conversion notice had ever been given. If on a Mode Change Date from an ARS Mode, any condition precedent to such conversion is not satisfied, the Trustee will give written notice by first class mail postage prepaid as soon as practicable and in any event not later than the next succeeding Business Day to the Owners that such conversion has not occurred, that the 2003 Subordinated Bonds will not be purchased on the failed Mode Change Date, that the Auction Agent will continue to implement the Auction Procedures on the Auction Dates with respect to the 2003 Subordinated Bonds which otherwise would have been converted excluding, however, the 9