STOCKTON-EAST WATER DISTRICT DIRECTORS

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3 STOCKTON-EAST WATER DISTRICT DIRECTORS Andrew Watkins, President Thomas McGurk, Vice President Alfred Bonner Paul Sanguinetti Westford Ray Latimer Paul Polk Melvin Panizza STAFF Kevin Kauffman, General Manager Jeanette R. Thomas, Assistant General Manager Jun Jamosmos, Accountant COUNSEL TO THE DISTRICT Herum Crabtree Brown Stockton, California SPECIAL COUNSEL Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California TRUSTEE U.S. Bank, N.A. Los Angeles, California VERIFICATION AGENT The Arbitrage Group Tuscaloosa, Alabama

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5 Table of Contents Page SUMMARY STATEMENT...i INTRODUCTION...1 Update of Certain Information Since the Date of the Preliminary Official Statement...3 THE CERTIFICATES...3 General Provisions...3 Transfers and Exchanges...4 Book-Entry System...4 Provisions Upon Termination of Book-Entry Only System...5 Optional Prepayment...5 Extraordinary Prepayment...5 Mandatory Prepayment...5 Notice of Prepayment...5 DEBT SERVICE SCHEDULE...6 SECURITY FOR THE CERTIFICATES...6 Installment Purchase Agreement 1990 Project...7 Installment Purchase Agreement 1975 Project...10 Debt Service Reserve Fund...14 Debt Service Reserve Fund Policy...14 CERTIFICATE INSURANCE...16 ESTIMATED SOURCES AND USE OF FUNDS...17 REFUNDING PLAN...17 THE 1975 PROJECT AND THE 1990 PROJECT...18 THE WATER SYSTEM...19 General...19 District Powers...20 Water Supply...20 The Second Amended Contract...21 Addendum to the Second Amended Contract...22 Water System Rates and Charges...22 Historic Water Deliveries...22 Projected Water Deliveries...24 Bay-Delta Hearings...25 Factors Affecting Agriculture...25 District Historic Operating Results...27 District Projected Operating Results Project Historic Operating Results Project Projected Operating Results Project Operating Results...30 i

6 Table of Contents (continued) Page CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES...34 Article XIIIB...34 Proposition Future Initiatives...37 THE CORPORATION...37 APPROVAL OF LEGAL PROCEEDINGS...37 LITIGATION...37 TAX MATTERS...37 CONTINUING DISCLOSURE...39 RATING...39 UNDERWRITING...40 VERIFICATION...40 MISCELLANEOUS...40 APPENDIX A APPENDIX B APPENDIX C FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDING MARCH 31, A-1 CERTAIN INFORMATION WITH RESPECT TO STOCKTON-EAST WATER DISTRICT...B-1 CERTAIN INFORMATION WITH RESPECT TO URBAN CONTRACTORS...C-1 APPENDIX D CERTAIN PROVISIONS OF THE SECOND AMENDED CONTRACT... D-1 APPENDIX E SUMMARY OF PRINCIPAL LEGAL DOCUMENTS...E-1 APPENDIX F FORM OF SPECIAL COUNSEL OPINION... F-1 APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE... G-1 APPENDIX H DTC AND BOOK-ENTRY ONLY SYSTEM... H-1 APPENDIX I FORM OF MUNICIPAL BOND INSURANCE POLICY... I-1 ii

7 No dealer, broker, salesperson or other person has been authorized by the District, the Corporation or the Underwriters to give any information or to make any representations, other than those contained in this Official Statement, and if given or made, such information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Certificates by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Certificates shall under any circumstances create any implication that there has been no change in the affairs of the District, the Corporation or other matters described herein 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, its 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. This Official Statement and the information contained herein are subject to completion or amendment without notice. These securities may not be sold nor may an offer to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE CERTIFICATES TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, project, budget or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under THE WATER SYSTEM. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH 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 THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT.

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9 SUMMARY STATEMENT This summary is subject to in all respect to the more complete information contained in this Official Statement and the offering of the Certificates to potential investors is made only by means of the entire Official statement. Purpose The Certificates are being sold to refinance a portion of certain water system improvements and related facilities of Stockton-East Water District, to purchase a reserve surety policy for deposit in the Debt Service Reserve Fund and to pay costs of issuance. A portion of the Certificates comprising the 1975 Project Refunding Certificates will be purchased by the Underwriters pursuant to a Purchase Contract. The balance of the Certificates comprising the 1990 Project Refunding Certificates were purchased by the Underwriters pursuant to a separate Purchase Contract dated February 7, The execution and delivery of either portion of the Certificates is contingent on the execution and delivery of the other portion of the Certificates. Security for the Certificates Each Certificate represents an undivided interest of the Owner thereof in Installment Payments to be made by the District in connection with the refinancing of a portion of the 1990 Project pursuant to the Installment Purchase Agreement 1990 Project and by the District in connection with the refinancing of a portion of the 1975 Project pursuant to the Installment Purchase Agreement 1975 Project. The Installment Payments are scheduled to be sufficient to pay the principal and interest due with respect to the Certificates. THE OBLIGATION OF THE DISTRICT TO PAY INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE DISTRICT TO PAY INSTALLMENT PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Security for the Installment Purchase Agreement 1990 Project General. The obligation of the District to make the 1990 Project Installment Payments is a special obligation of the District payable solely from Net Revenues of the 1990 Project (including certain payments received by the District from the City of Stockton, California Water Service Company, and certain other entities pursuant to the Second Amended Contract), agricultural service revenues, Wheeling Revenues and, under certain circumstances described herein, from certain other funds and other District moneys legally available for payment thereof. Rate Covenant for the 1990 Project. The District has covenanted in the 1990 Project Installment Purchase Agreement, to the fullest extent permitted by law, to fix, prescribe and collect as a base monthly payment to be paid by the City of Stockton, California Water Service Company, and other entities under and pursuant to the Second Amended Contract an amount, which, together with Wheeling Revenues, will be equal to 1990 Project Installment Payments not allocable to i

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11 Series A Reserve Fund A Reserve Fund Surety Bond will be deposited in the Series A Reserve Fund established under the Trust Agreement (the Series A Certificate Payment Fund ) as security for the Certificates in an amount equal to the Series A Reserve Fund Requirement. The Reserve Fund Surety Bond provides that upon notice from the Trustee to the Insurer to the effect that insufficient amounts are on deposit in the Series A Certificate Payment Fund to pay the principal of (at maturity or pursuant to mandatory prepayment requirements) and interest with respect to the Certificates, the Insurer will promptly deposit with the Trustee an amount sufficient to pay the principal of and interest with respect to the Certificates or the available amount of the Reserve Fund Surety Bond, whichever is less. Prepayment The Certificates shall be subject to prepayment in whole or in part on any date in the order of maturity as directed by the District and by lot within each maturity from funds received by the District due to a casualty loss or governmental taking of the 1975 Project or the 1990 Project, as more fully described herein, at the principal amount thereof plus interest accrued to the date fixed for prepayment, without premium. The 1975 Project Refunding Certificates are not subject to optional or mandatory prepayment. Stockton-East Water District Stockton-East Water District, organized in 1948, encompasses approximately 116,300 acres situated in eastern San Joaquin County, California, including all of the City of Stockton. The District provides treated municipal and industrial water to the City of Stockton, California Water Service Company and certain other entities which in turn serve approximately 305,905 urban and 23,300 rural residents. The District also serves irrigation water to approximately 70,000 acres of agricultural land. The District receives water from New Hogan Reservoir on the Calaveras River under the terms of an agreement with the Bureau of Reclamation, Calaveras County Water District and the District. The District also receives water from Stanislaus River under the terms of an agreement with the Bureau, and under the terms of a Transfer Agreement by and among the District, the Urban Contractors, South San Joaquin Irrigation District and Oakdale Irrigation District. iii

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13 $3,505,000 STOCKTON-EAST WATER DISTRICT REFUNDING REVENUE CERTIFICATES OF PARTICIPATION (1975 PROJECT AND 1990 PROJECT), SERIES 2002A INTRODUCTION This Official Statement, including the cover page and all appendices hereto, provides certain information concerning the sale and delivery of a portion of the Stockton-East Water District Refunding Revenue Certificates of Participation (1975 Project and 1990 Project), Series 2002A in the aggregate principal amount of $3,505,000 (the 1975 Project Refunding Certificates ). The balance of the Certificates in the aggregate principal amount of $21,635,000 (the 1990 Project Refunding Certificates ) will be delivered simultaneous with the 1975 Project Refunding Certificates. The 1975 Project Refunding Certificates and the 1990 Project Refunding Certificates will be sold to the Underwriters pursuant to separate purchase contracts and the delivery of either portion of the Certificates will be contingent on the delivery of the other portion of the Certificates, as described under the caption UNDERWRITING. Descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each document. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in Appendix E hereto entitled SUMMARY OF PRINCIPAL LEGAL DOCUMENTS. The Certificates represent the undivided interests of the registered owners thereof (the Owners ) in (i) payments to be made by Stockton-East Water District (the District ), in connection with the refinancing of a portion of certain water system improvements and related facilities (as more fully described herein, the 1990 Project ), pursuant to an Installment Purchase Agreement 1990 Project, dated as of January 1, 2002 (the Installment Purchase Agreement 1990 Project ), between the District, as purchaser, and Local Agency Installment Purchase Corporation, a California nonprofit public benefit corporation (the Corporation ), as seller, and (ii) payments to be made by the District in connection with the refinancing of certain water system improvements and related facilities (as more fully described herein, the 1975 Project ), pursuant to an Installment Purchase Agreement 1975 Project, dated as of January 1, 2002, between the District and the Corporation (the Installment Purchase Agreement 1975 Project and together with the Installment Purchase Agreement 1990 Project, the Installment Purchase Agreements ). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of January 1, 2002 (the Trust Agreement ), by and among the District, the Corporation and U.S. Bank, N.A., as trustee (the Trustee ). Pursuant to the Trust Agreement, the Corporation has assigned to the Trustee for the benefit of the Owners of the Certificates substantially all its rights under the Installment Purchase Agreements, including the right to receive installment payments under the Installment Purchase Agreement 1990 Project (the 1990 Project Installment Payments ) and under the Installment Purchase Agreement 1975 Project (the 1975 Project Installment Payments and together with the 1990 Project Installment Payments, the Installment Payments ) payable by the District under the Installment Purchase Agreements and the right to enforce amounts payable when due in the event of a default by the District. The District s obligation to make the 1990 Project Installment Payments is a special obligation of the District payable solely from Net Revenues of the 1990 Project, consisting of

14 Revenues (as described below) remaining after payment of Operation and Maintenance Costs (as defined below) of the 1990 Project, including (a) payments received by the District from the City of Stockton (the City ), California Water Service Company ( California Water ), Lincoln Village Maintenance District and Colonial Heights Maintenance District (all of the foregoing collectively, the Urban Contractors ), under a water contract dated September 25, 1987 (as supplemented by the Addendum described under the caption Addendum to the Second Amended Contract the Second Amended Contract ), (b) revenue collected by the District for agricultural water sales ( Agriculture Service ) and (c) in certain cases, from other moneys legally available for payment thereof including amounts transferred to the Revenue Fund established by the District (the Revenue Fund ) from certain funds and accounts securing the Installment Purchase Agreement 1975 Project. Under no circumstances shall the District be required to advance any moneys derived from any source of income other than the Net Revenues of the 1990 Project and, under the circumstances hereinafter described, certain other moneys, all as further described herein; nor shall any other funds or property of the District be liable for the payment of the 1990 Project Installment Payments. See the caption SECURITY FOR THE CERTIFICATES Installment Purchase Agreement 1990 Project for a more complete description of the security for the Installment Payments. The obligation of the District to make the 1990 Project Installment Payments from the sources described above is absolute and unconditional; and until such time as the 1990 Project Installment Payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement 1990 Project), the District will not discontinue or suspend any 1990 Project Installment Payments required to be made by it when due, whether or not the Water System (as defined in Appendix E hereto) or any part thereof is operating or operable, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part and whether or not the 1990 Project has been completed; and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any part of any agreement for any cause whatsoever. The obligation of the District to make the 1990 Project Installment Payment is payable from Net Revenues of the 1990 Project on a parity with its obligation to make payments (the 1990 Installment Payments ) with respect to an Installment Purchase Agreement, dated as of April 1, 1990, by and between the District and California Public Agency Leasing Corporation (the 1990 Installment Purchase Agreement ) and payments (the 1992 Installment Payments ) with respect to an Installment Purchase Agreement, dated as of October 1, 1992, by and between the District and the Corporation (the 1992 Installment Purchase Agreement ) and payments (the 1997 Installment Payments ) with respect to an Installment Purchase Agreement dated as of December 1, 1997, by and between the District, and the Local Agency Installment Purchase Corporation (the 1997 Installment Purchase Agreement, and together with the 1992 Installment Purchase Agreement and the 1990 Installment Purchase Agreement, the Parity Installment Purchase Agreements ). The obligation of the District to make the 1975 Project Installment Payments is a special obligation of the District payable solely from Revenues of the 1975 Project, including portions of payments received by the District from the City, California Water, Lincoln Village Maintenance District and Colonial Heights Maintenance District. See SECURITY FOR THE CERTIFICATES Installment Purchase Agreement 1975 Project. Under no circumstances shall the District be required to advance any moneys derived from any source of income other than the Revenues of the 1975 Project, nor shall any other funds or property of the District be liable for the payment of the 1975 Project Installment Payments. See SECURITY FOR THE CERTIFICATES. 2

15 The obligation of the District to make the 1975 Project Installment Payments from the sources described above is absolute and unconditional; and until such time as the 1975 Project Installment Payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement 1975 Project), the District will not discontinue or suspend any 1975 Project Installment Payments required to be made by it when due, whether or not the 1975 Project or any part thereof is operating or operable or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part; and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. Simultaneously with the delivery of the Certificates, a municipal bond insurance policy (the Municipal Bond Insurance Policy ) will be issued by Financial Guaranty Insurance Company, doing business in California as FGIC Insurance Company (the Insurer ) which provides for the payment of the principal of and interest with respect to the Certificates when due. See the caption CERTIFICATE INSURANCE. The District regularly prepares a variety of reports, including audits, budgets and related documents. Any Certificate owner may obtain a copy of publicly available information by contacting Jeanette R. Thomas, Assistant General Manager, Stockton-East Water District, 6767 East Main Street, Stockton, California , telephone (209) Update of Certain Information Since the Date of the Preliminary Official Statement This Official Statement includes certain changes since the date of the Preliminary Official Statement in Appendix E under the caption SUMMARY OF CERTAIN PROVISIONS OF THE INSTALLMENT PURCHASE AGREEMENT 1975 PROJECT COVENANTS OF THE DISTRICT Tax Covenants and the caption SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT COVENANTS OF THE DISTRICT Tax Covenants. Such changes reflect a modification of the tax covenants of the District contained in the Installment Purchase Agreement 1975 Project and the Trust Agreement. General Provisions THE CERTIFICATES The Certificates will be executed and delivered in fully registered form in denominations of $5,000 or any integral multiple thereof. The Certificates will be dated February 1, The Certificates shall become payable in the years and amounts and with interest components based on the respective rates set forth on the cover page hereof, which interest shall be payable on April 1 and October 1 of each year commencing October 1, 2002 (each, a Payment Date ). Interest with respect to the Certificates shall be payable from the Payment Date preceding the date of execution thereof, unless such date of execution is after the fifteenth day of the month next preceding a Payment Date (the Record Date ) and on or before the succeeding Payment Date, in which case interest with respect thereto shall be payable from such Payment Date, or unless such date of execution is on or before the first Record Date, in which event interest with respect thereto shall be payable from February 1, Regularly scheduled payment of interest shall be made by check mailed by first class mail on the Payment Dates to the person whose name appears on the Certificate registration books 3

16 maintained by the Trustee as the Owner thereof as of the close of business on the applicable Record Date at the address then shown on said registration books or, upon written request filed with the Trustee prior to the applicable Record Date by an Owner of at least $1,000,000 in aggregate principal amount of Certificates by wire transfer in immediately available funds to a bank account number in the United States designated by the Owner in such written request. Principal or Prepayment Price and interest with respect to Certificates will be payable only upon surrender thereof at the principal corporate trust office of U.S. Bank, N.A. in Los Angeles, California, on behalf of the Trustee. Transfers and Exchanges Any Certificate may, in accordance with its terms, be transferred on the Certificate registration books by the person in whose name it is registered, in person or by such person s duly authorized attorney, upon surrender of such Certificate at the principal corporate trust office of U.S. Bank, N.A. in Los Angeles, California, on behalf of the Trustee, accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. Upon the surrender of a Certificate for transfer the Trustee is to execute and deliver a new Certificate or Certificates of the same maturity in authorized denominations. The Trustee may charge a sum for each new Certificate executed and delivered upon any transfer and may require the payment by any Certificate Owner requesting any such transfer of any tax or other governmental charge required to be paid with respect to such transfer. Certificates may be exchanged at the principal corporate trust office of U.S. Bank, N.A. in Los Angeles, California, on behalf of the Trustee, for a like aggregate principal amount of Certificates of other authorized denominations of the same maturity. The Trustee may charge a sum for each new Certificate executed and delivered upon any exchange and may require the payment by any Certificate Owner requesting any such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The Trustee shall not be required to register the transfer or exchange of any Certificate (i) within fifteen days preceding selection of Certificates for prepayment or (ii) selected for prepayment. Book-Entry System The information in this section concerning The Depository Trust Company ( DTC ) and DTC s book-entry system has been obtained from DTC, and the District, the Corporation and the Trustee take no responsibility for the accuracy thereof. See the caption Appendix H DTC AND BOOK-ENTRY ONLY SYSTEM for a further description of DTC and its book-entry system. Capitalized terms used under this caption and not otherwise defined shall have the respective meanings given to such terms in Appendix H. DTC will act as securities depository for the Certificates. The Certificates will be executed and delivered as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee). One fully-registered Certificate will be executed and delivered for each year in which the Certificates mature in a denomination equal to the aggregate principal amount of the Certificates maturing in that year, and will be deposited with DTC. So long as Cede & Co. is the registered owner of the Certificates, as nominee of DTC, references herein to the owners or holders of the Certificates or Certificate Owners shall mean Cede & Co. and shall not mean the actual purchasers of the Certificates (the Beneficial Owners ). 4

17 The District and the Trustee cannot and do not give any assurances that DTC Direct Participants or DTC Indirect Participants will distribute to the Beneficial Owners (i) payments of interest with respect to and principal of the Certificates, (ii) certificates representing an ownership interest in or other confirmation of ownership interests in the Certificates, or (iii) redemption or other notices sent to DTC or Cede & Co., its nominee, as registered owner of the Certificates, or that they will do so on a timely basis or that DTC, or the Participants will service and act in the manner described in the Official Statement. Provisions Upon Termination of Book-Entry Only System In the event the book-entry system described above is abandoned, Certificates will be printed and delivered. Thereafter, any Certificate may, in accordance with its terms, be transferred, and exchanged as described above. Optional Prepayment The 1975 Project Refunding Certificates are not subject to optional prepayment prior to their respective stated maturities. Extraordinary Prepayment The Certificates are subject to prepayment prior to their respective stated maturities, as a whole on any date or in part on any Payment Date in the order of maturity as directed by the District and by lot within each maturity in integral multiples of $5,000 from funds received by the District due to a casualty loss or governmental taking of the 1975 Project or the 1990 Project, upon the conditions and terms prescribed in the Trust Agreement and in the Installment Purchase Agreements, at a Prepayment Price equal to the principal amount thereof and accrued interest thereon to the date fixed for prepayment, without premium. Mandatory Prepayment The 1975 Project Refunding Certificates are not subject to mandatory prepayment. Notice of Prepayment Notice of prepayment shall be mailed, first-class postage prepaid, to the Owners of any Certificates designated for prepayment at their respective addresses appearing on the certificate registration books and to the Information Services, and by registered or certified or overnight mail to the Securities Depositories (as such terms are described in the Trust Agreement) at least 30 days but not more than 60 days prior to the prepayment date. Any defect in such notice or the mailing thereof shall not affect the validity of the proceedings for the prepayment of any Certificate. Notice of prepayment shall specify (a) the date of notice, (b) the prepayment date, (c) the prepayment place or places, (d) the Prepayment Price, (e) the maturities, (f) CUSIP numbers, if any, and, if less than all of any such maturity is to be prepaid, the serial numbers of the Certificates of such maturity to be prepaid by giving the individual number of each Certificate or by stating that all Certificates between two stated numbers, both inclusive, have been called for prepayment, (f) in the case of any Certificate called for prepayment in part only, the portion of the principal amount thereof to be prepaid. Each such notice shall also state that on said date there will become due and payable on each of said Certificates the Prepayment Price thereof or of said specified portion of the principal 5

18 represented thereby in the case of a Certificate to be prepaid in part only, together with interest accrued with respect thereto to the prepayment date, and that (provided that sufficient moneys for such prepayment shall have been deposited with the Trustee) from and after such prepayment date interest evidenced and represented by the Certificates shall cease to accrue and will require that such Certificates be then surrendered. DEBT SERVICE SCHEDULE Set forth below is a schedule of principal and interest with respect to the Certificates, in each of the years indicated. STOCKTON-EAST WATER DISTRICT DEBT SERVICE SCHEDULE Year Ending 1975 Project Refunding Certificates 1990 Project Refunding Certificates April 1 Principal Interest Principal Interest Total 2003 $ 1,130, $ 122, $ -- $1,110, $2,362, ,170, , , ,192, ,205, , , ,192, , , ,871, , , ,869, , , ,868, ,010, , ,870, ,045, , ,868, ,090, , ,871, ,130, , ,868, ,180, , ,872, ,230, , ,872, ,285, , ,873, ,335, , ,866, ,400, , ,871, ,470, , ,875, ,535, , ,870, ,615, , ,873, ,690, , ,867, ,780, , ,873, SECURITY FOR THE CERTIFICATES Each Certificate represents an undivided interest in Installment Payments to be made by the District under the Installment Purchase Agreements. The Corporation will assign substantially all its right, title and interest in the Installment Purchase Agreements to the Trustee, pursuant to the Trust Agreement, for the benefit of the Owners of the Certificates, including its right to receive Installment Payments and insurance and condemnation proceeds thereunder and its rights to exercise all the rights and remedies conferred on the Corporation under the Installment Purchase Agreements. 6

19 The Installment Payments payable to the Trustee, consisting of a principal component and an interest component, are calculated to be sufficient to pay, when due, the principal and interest, with respect to the Certificates. Installment Purchase Agreement 1990 Project Revenues of the 1990 Project. All Revenues of the 1990 Project and all amounts on deposit in the Revenue Fund for the 1990 Project are irrevocably pledged to the payment of the 1990 Project Installment Payments as provided in the Installment Purchase Agreement 1990 Project; and the Revenues of the 1990 Project shall not be used for any other purpose while any of the 1990 Project Installment Payments remains unpaid; provided, however, that there may be apportioned out of the Revenues of the 1990 Project such sums for such purposes as are expressly permitted in the Installment Purchase Agreement 1990 Project (including, but not limited to, the payment of Operation and Maintenance Costs of the 1990 Project). Such pledge, together with the pledges created by the Parity Installment Purchase Agreements, constitutes a first lien on Revenues of the 1990 Project and, subject to the application of amounts on deposit therein as permitted in the Installment Purchase Agreement 1990 Project, the Revenue Fund for the 1990 Project and the other funds and accounts created pursuant to the Installment Purchase Agreement 1990 Project for the payment of the Installment Purchase Agreement 1990 Project and all other Contracts and Bonds in accordance with the terms of the Installment Purchase Agreement 1990 Project and of the Trust Agreement. The term Revenues is defined in the Installment Purchase Agreement 1990 Project to mean all income, rents, rates, fees, charges and other moneys derived from the ownership or operation of the 1990 Project, including, without limiting the generality of the foregoing, (1) all amounts received by the District under the Second Amended Contract with respect to the 1990 Project, (2) the earnings on and income derived from the investment of such income, rents, rates, fees, charges, or other moneys, (3) all income, rents, rates, fees, charges and other moneys for Agricultural Service received by the District with respect to the 1990 Project, and (4) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the 1990 Project. Revenues does not include Development Fees and Wheeling Revenues (as such terms are defined in Appendix E hereto) although both Wheeling Revenues and Development Fees, if received, will be credited towards the District s obligations to make Parity Installment Payments as described under the captions THE WATER SYSTEM The Second Amended Contract and 1990 Project Operating Results. Revenues do not include payments received by the District from the Urban Contractors under the Second Amended Contract with respect to the Installment Purchase Agreement 1975 Project. Revenues do include, however, amounts transferred to the Revenue Fund for the 1990 Project from the funds and accounts created with respect to the Installment Purchase Agreement 1975 Project, if any. Funds and Accounts Under the Installment Purchase Agreement 1990 Project. The District has covenanted in the Installment Purchase Agreement 1990 Project that, subject to the Installment Purchase Agreement 1975 Project, the District will withdraw on March 31 of each year from amounts on deposit in the Surplus Account created pursuant to the 1975 Bond Resolution (as defined in Appendix E) and continued pursuant to the Installment Purchase Agreement 1975 Project (the Surplus Account ) the amounts, if any, determined by the District to be necessary to make the 1990 Project Installment Payments on such March 31 or the succeeding September 30 and to deposit such 7

20 amounts into the Series A Certificate Payment Fund. On April 10, 2001, the District and the Urban Contractors entered into a settlement agreement with respect to the application of moneys in the Surplus Account by the District. See the caption THE WATER SYSTEM 1990 Project Operating Results herein. Other District Funds. The District has covenanted in the Installment Purchase Agreement 1990 Project that if and to the extent Net Revenues of the 1990 Project derived from Agricultural Service are insufficient together with scheduled payments under the Second Amended Contract and Wheeling Revenues to make 1990 Project Installment Payments, the District will pay the amount of such insufficiency from any other legally available funds of the District, but not including any payment received by the District pursuant to the Second Amended Contract unless consented to by the parties thereto. See the caption THE WATER SYSTEM District Projected Operating Results. There can be no assurance, however, that the District will have other legally available funds with which to pay the amount in question if the need should arise. See the caption THE WATER SYSTEM Historic Water Deliveries for a discussion of recent shortfalls in Agricultural Service Revenues. By a resolution adopted on March 6, 1990 (the Policy Resolution ) the District has established a policy of maintaining operating reserves of at least $1,500,000. Such reserves, if any, as may be maintained by the District pursuant to the Policy Resolution may be used for any lawful purpose deemed appropriate by the District including payment of the 1990 Project Installment Payments. The Policy Resolution does not constitute a covenant of the District to maintain any particular level of reserves; and the District is free to modify or repeal it if it chooses to do so. At March 31, 2001, the District had operating reserves in excess of $6,000,000. Limited Liability. THE OBLIGATION OF THE DISTRICT TO PAY 1990 PROJECT INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE DISTRICT TO PAY 1990 PROJECT INSTALLMENT PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. The obligation of the District to make the 1990 Project Installment Payments from the sources described above is absolute and unconditional; and until such time as the 1990 Project Installment Payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement 1990 Project), the District will not discontinue or suspend any 1990 Project Installment Payments required to be made by it when due, whether or not the Water System or any part thereof is operating or operable, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part and whether or not the 1990 Project has been completed; and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. The 1990 Project Installment Payments are not secured by, and the Certificate Owners have no security interest in or mortgage on, the 1990 Project, the Water System, or other assets of the District or any other real property of the District. Default by the District will not result in loss of the 1990 Project, the Water System, or other assets of the District or any other real property of the 8

21 District. Should the District default, the Trustee, as assignee of the Corporation, may declare all of the unpaid 1990 Project Installment Payments to be immediately due and payable, whereupon the same shall become due and payable; and the Trustee may take whatever action at law or in equity may appear necessary or desirable to accelerate the remaining 1990 Project Installment Payments, or enforce performance and observance of any obligation, agreement or covenant of the District under the Installment Purchase Agreement 1990 Project. See the caption Appendix E SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Events of Default and Remedies of the Corporation. Rate Covenant. The District has covenanted in the Installment Purchase Agreement 1990 Project, to the fullest extent permitted by law, to fix, prescribe and collect as a base monthly payment pursuant to the Second Amended Contract an amount which, together with Wheeling Revenues, will be equal to 1990 Project Installment Payments not allocable to Agricultural Service. The District has further covenanted, to the fullest extent permitted by law, to fix, prescribe and collect rates and charges for Agricultural Service which, together with payments scheduled to be received pursuant to the Second Amended Contract and Wheeling Revenues, will be at least sufficient to yield during each Fiscal Year Net Revenues equal to 1990 Project Debt Service for such Fiscal Year. See the caption THE WATER SYSTEM Historic Water Deliveries for a discussion of recent shortfalls in Agricultural Service Revenues. Limitations on Indebtedness. The District has covenanted in the Installment Purchase Agreement 1990 Project that it will not issue any evidence of indebtedness or incur any obligations payable from Revenues of the 1990 Project or moneys on deposit in the Revenue Fund superior to the 1990 Project Installment Payments. The District may at any time execute any Contract or issue any Bonds (as such terms are defined in the Installment Purchase Agreement 1990 Project), as the case may be, payable on a parity with the 1990 Project Installment Payments, provided: (a) The Net Revenues of the 1990 Project together with Wheeling Revenues and Development Fees for the most recent audited Fiscal Year preceding the date of adoption by the Board of Directors of the District of the resolution authorizing the execution of such Contract or the issuance of such Bonds, as the case may be, as evidenced by both a calculation prepared by the District and special report prepared by an Independent Certified Public Accountant on such calculation on file with the District, shall have produced a sum equal to Debt Service for the 1990 Project for such Fiscal Year; and (b) The estimated Net Revenues of the 1990 Project together with estimated Wheeling Revenues and estimated Development Fees for the then current Fiscal Year and for each Fiscal Year thereafter to and including the first complete Fiscal Year after the latest Date of Operation of any uncompleted Project, as evidenced by a certificate of the Manager on file with the District, plus (after giving effect to the completion of all uncompleted Projects) an allowance for estimated Net Revenues of the 1990 Project for each of such Fiscal Years arising from any increase in the rates and charges which are economically feasible and reasonably considered necessary based on projected operations for such period, as evidenced by a certificate of the Manager on file with the District, shall produce a sum equal to the estimated Debt Service for the 1990 Project for each of such Fiscal Years, after giving effect to the execution of all Contracts and the issuance of all Bonds estimated to be required to be executed or issued to pay the costs of completing all uncompleted Projects; and 9

22 (c) The Project to be acquired and constructed with the proceeds of such Contract or such Bond is technically feasible and the estimated cost of the acquisition and construction thereof is reasonable, as evidenced by a certificate (prepared at the time of the execution of the initial Contract or the issuance of the initial Bonds, as the case may be, for the purpose of acquiring and constructing such Project) of the Manager on file with the District. The District may at any time issue evidences of indebtedness or incur other obligations for any lawful purpose provided such indebtedness or obligations are subordinate in all respects to the pledge of and lien of the 1990 Project Installment Payments. Installment Purchase Agreement 1975 Project Revenues of the 1975 Project. Revenues of the 1975 Project include all income, rents, rates, fees, charges and other moneys derived from the ownership or operation of the 1975 Project, including, (1) all amounts received by the District under the Second Amended Contract with respect to the 1975 Project, (2) the earnings on and income derived from the investment of such income, rents, rates, fees, charges, or other moneys, and (3) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the 1975 Project, but excluding in all cases any and all amounts pledged to pay any bonds, contracts or obligations, other than the Installment Purchase Agreement Project, any Bonds or any Contracts, and also excluding any and all amounts pledged to pay the 1990 Installment Purchase Agreement 1990 Project. Revenues of the 1975 Project, when and as received, will be received and held by the District in trust and will be deposited by the District in the Water Fund and will be accounted for through the Water Fund. All such Revenues of the 1975 Project, whether held by the District as trustee or deposited with the Trustee, all as described below will be disbursed, allocated and applied solely to the uses and purposes described below, and will be accounted for separately and apart from all other moneys, funds, accounts or other resources of the District. All Revenues of the 1975 Project at any time paid into the Water Fund will be held in trust for the benefit of the Owners from time to time of the Certificates, and the District will have no beneficial right or interest in any of such moneys except only as provided in the Installment Purchase Agreement 1975 Project and the Trust Agreement. Pursuant to the Installment Purchase Agreement Project, all Revenues of the 1975 Project, including Contractor Payments, received by the District will be deposited in the Water Fund. All moneys in the Water Fund shall be set aside or transferred to the Trustee by the District at the following times, in the following respective special accounts, and in the following order of priority: (1) Interest Account, (2) Principal Account, (3) Series A Reserve Fund, (4) Maintenance and Operation Account, (5) Repair and Replacement Reserve Account, and (6) Surplus Account. 10

23 Each of said accounts was established by the resolution (the 1975 Bond Resolution ) authorizing the issuance of the District s 1975 Water Revenue Bonds (the 1975 Bonds ), and each of them is continued by the Installment Purchase Agreement 1975 Project. All Revenues of the 1975 Project will be held in trust by the Trustee or the District, as applicable, and will be applied, used and withdrawn only for the purposes authorized in the Installment Purchase Agreement 1975 Project and in the Trust Agreement, as set forth below. (1) Interest Account. On or before the fifth day of each month, the Treasurer will transfer from the Water Fund to the Trustee for deposit in the Interest Account an amount of Revenues of the 1975 Project equal to one-fifth (1/5) of the portion of the next succeeding 1975 Project Installment Payment designated as interest becoming due and payable on the next succeeding 1975 Project Installment Payment Date. No deposit need be made into the Interest Account if the amount contained therein is at least equal to the interest portion of the next succeeding 1975 Project Installment Payment to become due on the next succeeding 1975 Project Installment Payment Date. The Treasurer shall also transfer from the Water Fund to the applicable trustee for deposit in the respective interest account, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, the interest due with respect to any other Debt Service for the 1975 Project in accordance with the provisions of the Contract, resolution or indenture relating thereto. All moneys in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest with respect to the Certificates as it shall become due and payable (including accrued interest on any Certificates prepaid prior to maturity). (2) Principal Account. On or before the fifth day of each month, beginning in April, 1993, the Treasurer will transfer from the Water Fund to the Trustee for deposit in the Principal Account an amount of Revenues of the 1975 Project equal to one-tenth (1/10) of the portion of the next succeeding 1975 Project Installment Payment designed as principal becoming due and payable on the next applicable 1975 Project Installment Payment Date. No deposit need be made into the Principal Account so long as there shall be in such account moneys sufficient to pay the principal portion of the next succeeding 1975 Project Installment Payment due on the next applicable 1975 Project Installment Payment Date. The Treasurer shall also transfer from the Water Fund to the applicable trustee for deposit in the respective principal account, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, the principal due with respect to any other Debt Service for the 1975 Project in accordance with the provisions of the Contract, resolution or indenture relating thereto. All moneys in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of the Certificates as they shall become due and payable. (3) Series A Reserve Fund. On or before the fifth day of each month, the Treasurer shall transfer from the Water Fund to the Trustee for deposit in the Series A Reserve Fund such amount of Revenues as shall be required to restore or maintain the Series A Reserve Fund in the full amount of the Series A Reserve Fund Requirement (but only to the extent a deficiency in the Series A Reserve Fund is allocable to nonpayment of Installment Payments under the Installment Purchase Agreement 1975 Project); provided, however, that the District may provide for the Series A Reserve Fund by a policy of insurance issued by a municipal bond insurance company, whose insurance obligations have ratings by Standard & Poor s Corporation ( S&P ) which are the highest ratings then issued by S&P. The Treasurer shall also from the remaining moneys in the Water Fund, thereafter, transfer to the applicable trustee for deposit in the respective bond reserve account for any Contracts or Bonds without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference an amount equal to the amount required to be transferred thereto in 11

24 accordance with the provisions of the Contract, resolution or indenture relating thereto. In the event of any such insufficiency the District shall collect from each party to the Water Contract as debt service surcharge such party s pro-rata share of such deficiency regardless of the reason for such a deficiency. No deposit need be made into the Series A Reserve Fund so long as there shall be on deposit in the Series A Reserve Fund a sum equal to at least the Series A Reserve Fund Requirement. All moneys in the Series A Reserve Fund shall be used and withdrawn by the Trustee solely for the purpose of replenishing the Interest Account or the Principal Account in the event of any deficiency in either of said accounts, or for the purpose of paying the principal of and interest with respect to the Certificates in the event that no other moneys of the District are available therefor. (4) Maintenance and Operation Account. On or before the fifth day of each month, the Treasurer will set aside out of the Water Fund and deposit in the Maintenance and Operation Account a sum at least equal to the budgeted amount required by the District for the payment of Operation and Maintenance Costs of the Water System during such month. Moneys in the Maintenance and Operation Account shall be used only to pay the budgeted Operation and Maintenance Costs of the Water System as they become due and payable. (5) Repair and Replacement Reserve Account. On or before the fifth day of each month, the Treasurer will transfer from the Water Fund to the Trustee for deposit in the Repair and Replacement Reserve Account the sum of $2,916.67; provided, however, that said required monthly deposit may be reduced below $2, per month if the District shall obtain an opinion of a qualified independent engineer as to the appropriate monthly deposit to be made, and said required monthly deposit is thereafter not reduced below the figure specified in said opinion. If said required monthly deposit is reduced as above provided it may in like fashion at any time thereafter be increased up to and including the sum of $2, per month. (6) Surplus Account. All moneys remaining in the Water Fund on March 31 of each year, after setting aside and depositing all of the sums required to be set aside or deposited therefrom by the Treasurer by the provisions set forth above, will be held by the Treasurer and deposited in the Surplus Account. All moneys in the Surplus Account will be withdrawn by the Treasurer and used to establish and maintain any reserve accounts required by the terms of any water service contracts of the District and to meet any allocations and payments to the District required by the terms of any water service contracts of the District, all in accordance with the terms of any such contracts. All remaining moneys in the Surplus Account not needed for the foregoing purposes may be expended for any lawful purpose of the District, including any transfers for the payment of installment payments in accordance with the Installment Purchase Agreement 1990 Project. Limited Liability. THE OBLIGATION OF THE DISTRICT TO PAY 1975 PROJECT INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE DISTRICT TO PAY 1975 PROJECT INSTALLMENT PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. The obligation of the District to make the 1975 Project Installment Payments from the sources described above is absolute and unconditional; and until such time as the 1975 Project Installment Payments shall have been paid in full (or provision for the payment thereof shall have 12

25 been made pursuant to the Installment Purchase Agreement 1975 Project), the District will not discontinue or suspend any 1975 Project Installment Payments required to be made by it when due, whether or not the Water System or any part thereof is operating or operable, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part; and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. The 1975 Project Installment Payments are not secured by, and the Certificate Owners have no security interest in or mortgage on, the 1975 Project, the Water System, any other real property of the District or other assets of the District. Default by the District will not result in loss of the 1975 Project, the Water System, any other real property of the District or other assets of the District. Should the District default, the Trustee, as assignee of the Corporation, may declare all of the unpaid 1975 Project Installment Payments to be immediately due and payable, whereupon the same shall become due and payable; and the Trustee may take whatever action at law or in equity may appear necessary or desirable to accelerate the remaining 1975 Project Installment Payments, or enforce performance and observance of any obligation, agreement or covenant of the District under the Installment Purchase Agreement 1975 Project. See Appendix E SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Installment Purchase Agreement 1975 Project Events of Default and Remedies of the Corporation. Rate Covenant. The District has covenanted in the Installment Purchase Agreement 1975 Project to fix, prescribe and collect as a portion of the base monthly payment pursuant to Paragraph 6 of the Second Amended Water Contract an amount which will be equal to Debt Service for the 1975 Project for such Fiscal Year. Limitations on Indebtedness. The District has covenanted in the Installment Purchase Agreement 1975 Project that it will not issue any evidence of indebtedness or incur any obligations payable from Revenues of the 1975 Project or moneys on deposit in the Water Fund superior to the 1975 Project Installment Payments. The District may at any time execute any Contract or issue an Bonds, as the case may be, payable on a parity with the 1975 Project Installment Payments and which are secured by a pledge of and lien on Revenues of the 1975 Project, provided: (a) The Net Revenues of the 1975 Project for the most recent audited Fiscal Year preceding the date of adoption by the Board of Directors of the District of the resolution authorizing the execution of such Contract or the issuance of such Bonds, as the case may be, as evidenced by both a calculation prepared by the District and a special report prepared by an Independent Certified Public Accountant on such calculation on file with the District, shall have produced a sum equal to Debt Service (including amounts owing to the Insurer with respect to draws on the Surety Bond) for the 1975 Project for such Fiscal Year; and (b) The estimated Net Revenues of the 1975 Project for the then current Fiscal Year and for each Fiscal Year thereafter to and including the first complete Fiscal Year after the latest Date of Operation of any uncompleted Project, as evidenced by a certificate of the Manager on file with the District, plus (after giving effect to the completion of all uncompleted Projects) an allowance for estimated Net Revenues of the 1975 Project for each of such Fiscal Years arising from any increase in the rates and charges which are economically feasible and reasonably considered necessary based on projected operations for 13

26 such period, as evidenced by a certificate of the Manager on file with the District, shall produce a sum equal to the estimated Debt Service (including amounts owing to the Insurer with respect to draws on the Surety Bond) for each of such Fiscal Years, after giving effect to the execution of all Contracts and the issuance of all Bonds estimated to be required to be executed or issued to pay the costs of completing all uncompleted Projects; and (c) The Project to be acquired and constructed with the proceeds of such Contract or such Bond is technically feasible and the estimated cost of the acquisition and construction thereof is reasonable, as evidenced by a certificate (prepared at the time of the execution of the initial Contract or the issuance of the initial Bonds, as the case may be, for the purpose of acquiring and constructing such Project) of the Manager on file with the District. The District may at any time issue evidences of indebtedness or incur other obligations for any lawful purpose which are payable from Revenues of the 1975 Project, or moneys on deposit in the Water Fund subordinate to the lien of the 1975 Project Installment Payments. Debt Service Reserve Fund The Trust Agreement requires the establishment of a Series A Reserve Fund (the Series A Reserve Fund ) in an amount equal to the Series A Reserve Fund Requirement. The Installment Purchase Agreements authorize the District to obtain a Surety Bond in place of fully funding the Series A Reserve Fund. Accordingly, the District will obtain a Surety Bond from the Insurer for the purpose of funding the Series A Reserve Fund. See SECURITY FOR THE CERTIFICATES Debt Service Reserve Fund Policy below. If on the day prior to any Payment Date the money in the Series A Certificate Payment Fund is insufficient to make the payments required by the Trust Agreement with respect to Certificates on such Payment Date, the Trustee shall transfer from the Series A Reserve Fund to the Series A Certificate Payment Fund the amount of such insufficiency. In the event that the Trustee has transferred money from the Series A Reserve Fund to the Series A Certificate Payment Fund in accordance with the Trust Agreement, upon receipt of the amounts from the District required by the Installment Purchase Agreements to increase the balance in the Series A Reserve Fund to the Series A Reserve Fund Requirement, the Trustee shall deposit such amounts in the Series A Reserve Fund. If the amount available and contained in the Series A Reserve Fund exceeds an amount equal to the Series A Reserve Fund Requirement and if the District is not then in default under the Installment Purchase Agreements or the Trust Agreement, the Trustee shall semiannually on or before April 1 and October 1 withdraw the amount of such excess from the Series A Reserve Fund and shall deposit such amount in the Series A Certificate Payment Fund. Except for such withdrawals, all moneys in the Series A Reserve Fund shall be used and withdrawn by the Trustee solely for the purpose of paying principal and interest with respect to the Certificates in the event that Installment Payments and other amounts required to be paid by the District pursuant to the Installment Purchase Agreements are insufficient therefor. Debt Service Reserve Fund Policy Concurrently with the execution and delivery of the Certificates, the Insurer will issue a Municipal Bond Debt Service Reserve Fund Policy (the Reserve Policy ). The Reserve Policy 14

27 unconditionally guarantees the payment of that portion of the principal and interest with respect to the Certificates which has become due for payment, but shall be unpaid by reason of nonpayment by the District, provided that the aggregate amount paid under the Reserve Policy may not exceed the maximum amount set forth in the Reserve Policy. The Insurer will make such payments to the trustee (the Trustee ) for the Certificates on the later of the date with respect to which such principal and interest is due or on the business day next following the day on which the Insurer shall have received telephonic or telegraphic notice subsequently confirmed in writing or written notice by registered or certified mail from the Trustee of the nonpayment of such amount by the District. The term nonpayment with respect to a Certificate includes any payment of principal or interest (as applicable) made to an owner of a Certificate which has been recovered from such owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final nonappealable order of a court having competent jurisdiction. The Reserve Policy is non-cancellable and the premium will be fully paid at the time of execution and delivery of the Certificates. The Reserve Policy covers failure to pay principal with respect to the Certificates on their respective stated maturity dates, or dates on which the same shall have been called for mandatory prepayment, and not on any other date with respect to which the Certificates may have been accelerated, and covers the failure to pay an installment of interest with respect to the stated date for such payment. The Reserve Policy shall terminate on the earlier of the scheduled final maturity date with respect to the Certificates or the date on which no Certificates are outstanding under the authorizing document. Generally, in connection with its issuance of a Reserve Policy, the Insurer requires, among other things, (i) that, so long as the Insurer has not failed to comply with the Insurer s payment obligations under the Reserve Policy, the Insurer be granted the power to exercise any remedies available at law or under the authorizing document other than (A) acceleration with respect to the Certificates or (B) remedies which would adversely affect holders in the event that the District fails to reimburse the Insurer for any draws on the Reserve Policy; and (ii) that any amendment or supplement to or other modification of the principal legal documents be subject to the Insurer s consent. The specific rights, if any, granted to the Insurer in connection with the issuance of the Reserve Policy are set forth in the description of the principal legal documents appearing elsewhere in this Official Statement. Reference should be made as well to such description for a discussion of the circumstances, if any, under which the District is required to provide additional or substitute credit enhancement, and related matters. The Reserve Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Insurer is a wholly-owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC Corporation is a subsidiary of General Electric Capital Corporation ( GE Capital ). Neither FGIC Corporation nor GE Capital is obligated to pay the debts of or the claims against the Insurer. The Insurer is a monoline financial guaranty insurer domiciled in the State of New York and subject to regulation by the State of New York Insurance Department. As of September 30, 2001, the total capital and surplus of the Insurer was approximately $1.033 billion. The Insurer prepares financial statements on the basis of both statutory accounting principles and generally accepted accounting principles. Copies of such financial statements may be obtained by writing to the Insurer at 125 Park Avenue, New York, New York 10017, Attention: Communications Department (telephone number: ) or to the New York State Insurance Department at 25 Beaver 15

28 Street, New York, New York , Attention: Financial Condition Property/Casualty Bureau (telephone number: ). CERTIFICATE INSURANCE Concurrently with the execution and delivery of the Certificates, the Insurer will issue its Municipal Bond New Issue Insurance Policy with respect to the Certificates (the Policy ). The Policy unconditionally guarantees the payment of that portion of the principal and interest with respect to the Certificates which has become due for payment, but shall be unpaid by reason of nonpayment by the District. The Insurer will make such payments to State Street Bank and Trust Company, N.A., or its successor as its agent (the Fiscal Agent ), on the later of the date on which such principal or interest (as applicable) is due or on the business day next following the day on which the Insurer shall have received telephonic or telegraphic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from an owner of Certificates or the Trustee of the nonpayment of such amount by the District. The Fiscal Agent will disburse such amount due with respect to any Certificates to its owner upon receipt by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the owner s right to receive payment of the principal or interest (as applicable) due for payment and evidence, including any appropriate instruments of assignment, that all of such owner s rights to payment of such principal or interest (as applicable) shall be vested in the Insurer. The term nonpayment with respect to a Certificate includes any payment of principal or interest (as applicable) made to an owner of a Certificate which has been recovered from such owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. The Policy is non-cancellable and the premium will be fully paid at the time of execution and delivery of the Certificates. The Policy covers failure to pay principal with respect to the Certificates on their respective stated maturity dates or dates on which the same shall have been duly called for mandatory prepayment, and not on any other date on which the Certificates may have been otherwise called for prepayment, accelerated or advanced in maturity, and covers the failure to pay an installment of interest on the stated date for its payment. Generally, in connection with the Insurer insuring an issue of municipal securities, the Insurer requires, among other things, (i) that it be granted the power to exercise any rights granted to the holders of such securities upon the occurrence of an event of default, without the consent of such holders, and that such holders may not exercise such rights without the Insurer s consent, in each case so long as the Insurer has not failed to comply with the payment obligations of the Insurer under its insurance policy; and (ii) that any amendment or supplement to or other modification of the principal legal documents be subject to the Insurer s consent. The specific rights, if any, granted to the Insurer in connection with its insurance of the Certificates are set forth in the description of the principal legal documents appearing elsewhere in this Official Statement. Reference should be made as well to such description for a discussion of the circumstances, if any, under which the Issuer is required to provide additional or substitute credit enhancement, and related matters. This Official Statement contains a section regarding the ratings assigned to the Certificates and reference should be made to such section for a discussion of such ratings and the basis for their assignment to the Certificates. Reference should be made to the description of the District for a discussion of the ratings, if any, assigned to the District s outstanding parity debt that is not secured by credit enhancement. 16

29 The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. ESTIMATED SOURCES AND USE OF FUNDS The following table sets forth the estimated sources and uses of funds (exclusive of $7, accrued interest) with respect to the Certificates. Sources Uses Certificate Proceeds... $ 3,505, Original Issue Premium... 54, Moneys from 1993 Certificates funds and accounts , Total... $ 4,484, Escrow Fund for 1993 Certificates... $ 4,275, Costs of Issuance (1) , Total Sources... $ 4,484, (1) Estimate includes legal and financing costs, printing costs, fees of rating agency, underwriters discount, premium for Municipal Bond Insurance Policy and the Reserve Fund Surety Bond, initial fees of the Trustee, and Special Counsel fees. REFUNDING PLAN 1992 Certificates. A portion of the proceeds from the sale of the Certificates, together certain amounts from the funds and accounts created with respect to the 1992 Certificates, with interest to be earned thereon, will be used and has been determined by the District to be sufficient to currently refund $22,515,000 of the outstanding principal balance of the Stockton-East Water District Certificates of Participation (1990 Project) Series 1992A (the 1992 Certificates ). The portion of the 1992 Certificates refunded by the Certificates (the Refunded 1992 Certificates ) were originally executed and delivered to provide funds for the construction of a portion of the 1990 Project. Under the refunding plan to be accomplished by the execution and delivery of the Certificates and the use of a portion the proceeds provided thereby, the District shall cause to be deposited in an escrow fund (the 1990 Project Escrow Fund ) to be held by U.S. Bank, N.A., acting as escrow agent (the Escrow Agent ) under an Escrow Agreement 1990 Project, dated as of January 1, 2002 (the 1990 Project Escrow Agreement ), by and between the District and the Escrow Agent, funds from the net proceeds of the sale of the Certificates which together with certain amount from the funds and accounts created with respect to the 1992 Certificates will enable the Escrow Agent to purchase investment securities, the interest on and principal of which when due will provide moneys which, together with the cash to be concurrently deposited in such fund, will be sufficient to pay the principal of and interest and prepayment premium, if any, with respect to the Refunded 1992 Certificates on April 1, See the caption VERIFICATION herein. Upon the deposit of such proceeds and other moneys into the 1990 Project Escrow Fund, the Refunded 1992 Certificates will no longer be deemed outstanding. 17

30 The types of securities which may be purchased for the 1990 Project Escrow Fund by the Escrow Agent are direct obligations of the United States or obligations fully guaranteed by the United States, including United States Treasury Certificates of Indebtedness, Notes and Bonds, State and Local Government Series (collectively, the Government Obligations ). Such Government Obligations will be irrevocably pledged under the Escrow Agreement Project to the payment of the principal of and interest with respect to the Refunded 1992 Certificates and will not be available to pay principal of and interest with respect to the Certificates Certificates. A portion of the proceeds from the sale of the Certificates, together certain amounts from the funds and accounts created with respect to the 1993 Certificates, with interest to be earned thereon, will be used and has been determined by the District to be sufficient to currently refund the $5,400,000 outstanding principal balance of the Stockton-East Water District Certificates of Participation (1990 Project) Series 1993 (the 1993 Certificates ). The 1993 Certificates were originally executed and delivered to refinance certain water system improvements and related facilities originally financed from the District s 1975 Water Revenue Bonds. Under the refunding plan to be accomplished by the execution and delivery of the Certificates and the use of a portion the proceeds provided thereby, the District shall cause to be deposited in an escrow fund (the 1975 Project Escrow Fund ) to be held by the Escrow Agent under an Escrow Agreement 1975 Project, dated as of January 1, 2002 (the Escrow Agreement Project ) by and between the Escrow Agent and the District, funds from the net proceeds of the sale of the Certificates will enable the Escrow Agent to purchase investment securities, the interest on and principal of which when due will provide moneys which, together with the cash to be concurrently deposited in such fund, will be sufficient to pay the principal of and interest and prepayment premium, if any, with respect to the 1993 Certificates on April 1, See the caption VERIFICATION herein. Upon the deposit of such proceeds and other moneys into the Escrow Fund, the 1993 Certificates will no longer be deemed outstanding. The types of securities which may be purchased for the 1975 Project Escrow Fund by the Escrow Agent are direct obligations of the United States or obligations fully guaranteed by the United States, including United States Treasury Certificates of Indebtedness, Notes and Bonds, State and Local Government Series (collectively, the Government Obligations ). Such Government Obligations will be irrevocably pledged under the Escrow Agreement Project to the payment of the principal of and interest with respect to the 1993 Certificates and will not be available to pay principal of and interest with respect to the Certificates. THE 1975 PROJECT AND THE 1990 PROJECT The 1975 Project. Prior to 1977, the Stockton metropolitan area depended on local wells for its municipal and industrial water supply. At that time, annual pumping of groundwater was over 45,000 acre-feet, which exceeded annual recharge. As a result, a cone of depression of the underground water developed under the City, inducing a flow from the west of deep saline water with consequent deterioration of the quality of the water from wells on the western side of the cone. In order to restore and preserve the underground basin and improve the quality of water being served in the Stockton metropolitan area, the District secured voter approval for the issuance of the 1975 Bonds and used the proceeds from the sale thereof to finance the 1975 Project, including construction of a 35 million gallon per day water treatment plant and a 13.3 mile gravity pipeline to transport water to said plant from New Hogan on the Calaveras River. The 1975 Project was completed in 1977 and has been operated by the District continuously since that time. 18

31 The 1990 Project. The proceeds of the 1992 Certificates were used to complete the 1990 Project, which transports water from the Stanislaus River below New Melones Reservoir ( New Melones ), diverts Stanislaus water at the existing Goodwin Dam to the District s conveyance system and conveys Stanislaus River water to the District s existing water treatment plant through a system of canals and pipelines. The 1990 Project was intended to supplement the District s surface supply from New Hogan with an additional surface water supply. See the caption THE WATER SYSTEM Water Supply herein. The 1990 Project consists of the purchase of an undivided one-third interest in Goodwin Dam, a diversion structure on the Stanislaus River previously owned solely by the South San Joaquin Irrigation District ( SSJID ) and Oakdale Irrigation District ( OID ), and the construction of the Goodwin Tunnel, the Upper Farmington Canal, improvements to Shirley, Hoods and Rock Creeks for conveyance, the Lower Farmington Canal, and improvements to the existing District water treatment plant. Although the 1990 Project was substantially completed in 1994 and is currently in operation, certain creek improvements remain to be completed. The 1990 Project contains both single-use facilities, used exclusively by the District, and joint use facilities which are used by the District to wheel Stanislaus River water to CSJWCD, a neighboring agricultural water district. Joint use facilities consist of the diversion structure at Goodwin Dam, Goodwin Tunnel, the Upper Farmington Canal, and Shirley/Hoods/ Rock Creeks. All other 1990 Project components are single-use facilities. General THE WATER SYSTEM The District was formed in 1948 under the Water Conservation District Act of 1931 of the State of California for the purposes of acquiring a supplemental water supply and improvement of the ground water basin. The District was reauthorized in 1971 pursuant to a special act of the California Legislature. The District currently includes 116,300 acres of land bounded roughly by Eight Mile Road on the north and French Camp Road on the south, the Delta on the west and the San Joaquin County line on the east. The entire Stockton metropolitan area lies within the District as do the communities of French Camp and Linden. The District includes approximately 305,905 urban residents and 23,300 rural residents. There are approximately 70,000 acres of irrigated agricultural land in the District planted in orchard, row and field crops. In 1971 a Master Water Plan for the District and adjacent areas was developed in cooperation with the County, the City and California Water which recommended the construction of a water treatment plant to serve the metropolitan Stockton area. That same year the District boundaries were expanded to include the entire metropolitan Stockton area. In 1975 voters approved bonds, the proceeds of which were used to construct the 1975 Project to convey Calaveras River water from New Hogan Reservoir to the treatment plant. The treatment plant and pipeline were completed in In connection with the issuance of such bonds, the District entered into an agreement with the City, the County and California Water pursuant to which the District was assured, subject to the terms and limitations therein, of a source of payment of the Existing Bonds. See Appendix D hereto for a summary of certain provisions of the Second Amended Contract. 19

32 District Powers Under the Water Conservation District Act and a special act of the State Legislature (Chapter 819, California Statutes of 1971) (the Special Act ), the District has broad general powers over the use of water within its boundaries, including the right of eminent domain, authority to acquire, control, distribute, store, spread, sink, treat, purify, reclaim, process and salvage any water for beneficial use, to sell treated or untreated water, to contract with the United States, other political subdivisions, public utilities, or other persons, and to levy taxes on lands, power to levy ground water assessments for the production of water from ground water supplies within the District, with limitations on agricultural assessments, and to fix charges for stream delivered water. Water Supply Calaveras River Water Supply. Water which is treated and delivered through the 1975 Project is obtained from New Hogan Reservoir ( New Hogan ) on the Calaveras River pursuant to two contracts entered into as of August 25, 1970, one among the United States of America, the District and the Calaveras County Water District (the U.S. New Hogan Contract ), and the other between the District and the Calaveras County Water District (collectively, the New Hogan Contracts ). The term of the New Hogan Contracts runs through September 1, Pursuant to the U.S. New Hogan Contract, the supply of water to the District is subordinate only to the storage and use of water for flood control, the maintenance of a storage basin at 15,000 acre feet, and the release of a portion of unregulated runoff in the Calaveras River which is passed through New Hogan in recognition of prior downstream water rights entitlements. The United States may, under the U.S. New Hogan Contract, temporarily reduce or discontinue delivery of water under certain circumstances. After meeting prior downstream water rights entitlements, the District shall be entitled to water from New Hogan in accordance with the terms of the U.S. New Hogan Contract, which does not specify minimum or maximum entitlement amounts. Stanislaus River Water Supply. Pursuant to a contract between the District and the United States Bureau of Reclamation (the Bureau ) dated December 19, 1983 (the New Melones Contract ), the District receives water from the New Melones Reservoir on the Stanislaus River. Subject to the terms of the New Melones Contract, certain minimum amounts of water are to be delivered for both agricultural and municipal and industrial use. The water to be delivered to the District is interim water, as opposed to firm water, and the New Melones Contract provides that under certain circumstances both the minimum and maximum contract amounts of water delivered may be reduced or suspended. Further, the maximum amount of water delivered may be increased under certain circumstances set forth in the New Melones Contract. On October 30, 1992, the Central Valley Project Improvement Act, Public Law , Title 34 ( CVPIA ) was signed into law. CVPIA significantly changes existing Central Valley Project priorities and management and alters the allocation of water resources. Although the primary purpose of these changes was to protect, restore and enhance fish and wildlife, CVPIA includes provisions stating that such purpose is of equal priority with irrigation and municipal and industrial uses. Despite such language, the effect of CVPIA has been that no water was delivered by the Bureau to the District under the New Melones Contract during the fiscal year ending March 31, Beginning in 1995, the New Melones Contract allocated water for use at the water treatment plant and for agricultural service. The District s 1995 allocation was deferred for use in the 1996 fiscal year. The Bureau has allocated New Melones water deliveries to the District each year 20

33 thereafter. The annual allocation amount of the New Melones Contract has ranged from a minimum of 34,000 acre-feet in fiscal year 2001 to a maximum of 90,000 acre-feet in previous years. The Bureau currently operates the project pursuant to an interim operations plan, which provides allocations of water pursuant to a schedule based upon carry-over storage and anticipated inflow. The parties are involved in a New Melones Long Term Operating Plan negotiations which are intended to develop long term operating guidelines for New Melones which will provide more certainty as to the amount of water to be received by the District from New Melones in the future. The District has entered into an agreement with SSJID and OID (the Transfer Agreement ) to purchase Stanislaus River water over a ten year period, commencing upon the first date water is delivered. The amount of water which can be purchased by the District under the Transfer Agreement ranges from 8,000 acre-feet per year to 30,000 acre-feet per year depending upon certain hydrological forecasts. The price paid by the District for water purchased under the Transfer Agreement includes a $55 per acre foot charge payable based on the amount of water delivered; provided, however, that in certain hydrological years the charge is $90 per acre foot for up to 8,000 acre-feet. These charges are indexed to the Consumer Price Index. The obligation of SSJID and OID to deliver water under the Transfer Agreement is subject to a variety of conditions and limitations, including but not limited to receipt of all necessary environmental and other approvals, including compliance with the California Environmental Quality Act, as provided in the Transfer Agreement. Environmental Documentation was completed in August 1999, and water has been transferred to the District pursuant to the Transfer Agreement since the fall of The environmental document was challenged in San Joaquin County Superior Court, and the case was dismissed in favor of defendants. The dismissal was reversed in favor of the plaintiffs by the Appellate Court. The District is not restricted from continuing to accept water from SSJID and OID while the plaintiffs challenge is being considered. The Second Amended Contract The District and the Urban Contractors have entered into the Second Amended Contract, pursuant to which the Urban Contractors have agreed to purchase treated water from the District. Pursuant to the Second Amended Contract each Urban Contractor will purchase a share of treated water available from the District each year, such share to be recomputed each year based on the total amount of water supplied to each Urban Contractor from all sources the previous year. The Second Amended Contract calls for annual payments to be made to the District by the Urban Contractors, including amounts equal to the Parity Installment Payments, even if the District fails to deliver New Melones Water and regardless of the amount of water actually delivered to the Urban Contractors, except that the Urban Contractors are not required to make payments pursuant to the Second Amended Contract if, for any period of eighteen months the District fails to make available to the Urban Contractors at least 7,500 acre feet of treated water from any source. The Urban Contractors are required to resume payments pursuant to the Second Amended Contract upon the resumption by the District of the provision of normal water service contemplated by the Second Amended Contract. The District has made available to the Urban Contractors at least 7,500 acre feet of treated water during each eighteen month period since the effectiveness of the Second Amended Contract. See Appendix D hereto for a summary of certain provisions of the Second Amended Contract. 21

34 Addendum to the Second Amended Contract An Addendum to the Second Amended Contract (the Addendum ) was approved and executed by the parties to the Second Amended Contract and the County as of March 23, Pursuant to the provisions of the Addendum, the County is considered a party to the Second Amended Contract as and for those unincorporated areas of the County s territory which are included within the boundaries of the District and CSJWCD. In addition, the Addendum provides that amounts contributed by the parties through the establishment and levying of developer fees for the 1990 Project shall be jointly pooled and credited toward the total cost of financing the portion of the 1990 Project attributed to new development. Pursuant to the 1990 Trust Agreement and the 1992 Trust Agreement, Development Fees, if any, received by the Trustee are deposited in the 1990 Series B Certificate Payment Fund and the 1992 Series B Certificate Payment Fund. Although Development Fees are not available to pay principal of or interest with respect to the Installment Purchase Agreements or the Certificates, receipt of Developments Fees reduces the amount of Parity Installment Payments required to be paid by the District and reduces amounts payable by the Urban Contractors under the Second Amended Contract. See the caption THE WATER SYSTEM 1990 Project Operating Results. Water System Rates and Charges The District annually adopts rates and charges for water service in the District by action of its Board of Directors, and the approval of the voters or any other governmental agency or body is not required; however, such rates are subject to referendum in accordance with the Special Act. For information concerning Proposition 218, which may affect the District s ability to increase certain rates and charges, see the caption CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES Proposition 218. The schedule of certain rates effective through March 31, 2002 is as follows: STOCKTON-EAST WATER DISTRICT WATER SERVICE RATES AND CHARGES Type of Service Treated Municipal & Industrial Surface Water (based on 40,000 acre feet delivery) Base Monthly Payments by Urban Contractors Rate Equalization M&I Groundwater Assessment Agricultural Surface Water Agricultural Well Water Assessment Municipal & Industrial Well Water Assessment Domestic and Municipal & Industrial Flat Rate Well Water Assessment Rate $ per acre foot per acre foot per acre foot per acre foot 3.60 per acre foot per acre foot per unit Source: District. Historic Water Deliveries The District records the volume of treated water delivered to the Urban Contractors. The following table summarizes treated water deliveries for the most recent ten Fiscal Years. 22

35 STOCKTON-EAST WATER DISTRICT HISTORIC TREATED WATER DELIVERIES Fiscal Year Treated Water Deliveries Percent Increase (ending March 31) (AF/year) (1) (mgd) (2) (Decrease) , (0.1%) , (1.6) , , (3.0) , , , (3.6) , , (2.1) , (1) Acre feet per year. (2) Million gallons per day. Source: District. The District currently delivers approximately 48.5% of its treated water to the City, 47.3% of its treated water to California Water and 4.7% of its treated water to San Joaquin County. The percentage of District treated water sold to the City has continued to increase slightly over time with a resulting decrease in the percentage of District treated water sold to California Water. These changes reflect the more rapid increase in water connections to the City s water system as compared to the California Water system, a trend which the District expects to continue in the future. Agricultural surface water sales, together with groundwater and domestic assessments, which are included in Agricultural Service Revenues which are pledged to the payment of the 1990 Project Installment Payments, for the most recent ten Fiscal Years are as follows: (1) Fiscal Year (ending March 31) STOCKTON-EAST WATER DISTRICT HISTORIC AGRICULTURAL WATER DELIVERIES Water Sales (Acre Feet) Agricultural Service Revenues (1) Percent Increase (Decrease) ,047 $806, % , , , ,089 (3.4) , ,452 (0.2) , , , , , , , , , , ,351 N/A Revenues include surface water sales, groundwater assessments and domestic assessments. Source: District. 23

36 Agricultural Service Revenues have been insufficient to pay the portion of the Parity Installment Payments allocable to Agricultural Service under the Parity Installment Purchase Agreements. As a result, such payments have either been advanced by the District from amounts on deposit in the funds and accounts created under the 1993 Installment Purchase Agreement, or have been included in the base monthly payments made by the Urban Contractors. Historically, the District characterized such payments in the District s financial records as loans from the Water Fund to the agricultural division, such characterization has been an area of litigation between the District and the Urban Contractors. See the caption THE WATER SYSTEM 1990 Project Operating Results. Projected Water Deliveries The District projects the volume of treated water delivered to the Urban Contractors in the current and next four fiscal years (assuming normal supply and demand levels and water availability) will be as follows: (1) (2) STOCKTON-EAST WATER DISTRICT PROJECTED TREATED WATER DELIVERIES Fiscal Year Treated Water Deliveries Percent Increase (ending March 31) (AF/year) (1) (mgd) (2) (Decrease) , % , , , , Acre feet per year. Million gallons per day on average. Source: District. Treated water deliveries are dependent in large part on availability of water from New Hogan and from New Melones. The District projects that the City s share of treated water sales will increase to 56% during the term of the Certificates and that California Water s share of treated water sales will decrease to 40% during the term of the Certificates. 24

37 The District projects agricultural surface water sales for the current and next four fiscal years (assuming normal supply and demand levels and water availability) are as follows: Source: District. STOCKTON-EAST WATER DISTRICT PROJECTED AGRICULTURAL WATER DELIVERIES Fiscal Year (ending March 31) Water Sales (Acre Feet) Percent Increase (Decrease) , % , , , , The District projects agricultural water sales to increase as a result of a District program to facilitate the conversion by District water users from groundwater use to surface water use. See the caption THE WATER SYSTEM Factors Affecting Agriculture for certain information with respect to factors which now affect agricultural and water use by agricultural users. Bay-Delta Hearings On May 22, 1995 the State Water Resources Control Board ( SWRCB ) adopted a Water Quality Control Plan for the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (the Plan ). The Plan established water quality control measures consisting of: (i) beneficial uses to be protected; (ii) water quality objectives for the reasonable protection of beneficial uses; and (iii) a program of implementation for achieving the water quality objectives. On December 29, 1999 the SWRCB adopted Water Right Decision 1641 (as amended March 15, 2000 in accordance with Order WR ), which decision imposed terms and conditions upon the water rights held by various parties in order to meet most of the requirements of the Plan for the San Joaquin River watershed. A portion of the water rights on which the District relies for its surface water supplies (from New Melones Reservoir) have been were included by the SWRCB in the decision, and permit conditions were imposed upon those rights to meet the requirements of the Plan. Because the New Melones Project was already being operated in accordance with the Interim Operations Plan, the decisions should not reduce the overall amount of water available to the District. The SWRCB was scheduled to continue with hearings to implement that portion of the Plan relating to the Sacramento River watershed (including eastside tributaries such as the Calaveras River). However, this portion of the hearings (Phase 8) was stayed pending settlement of these matters. Settlement discussions are ongoing. Factors Affecting Agriculture The District s ability to make the 1990 Project Installment Payments is dependent in part on the collection of rates and charges for Agricultural Service. A number of factors, including but not limited to weather conditions, crop prices, disease and crop predation, federal and state agricultural 25

38 and environmental policies, national and international trade policies, soil quality, drainage and other soil conditions may effect agriculture generally and the use of water by agricultural water users within the District. Operational conditions and general economic conditions may adversely affect the quantity of agricultural water used and/or the ability of farmers within the District to pay rates and charges for Agricultural Service. If any of these factors does in fact have such an adverse affect, the District expects that its revenues from Agricultural Service would decline. However, the District does not believe that such a decline would adversely affect its ability to make 1990 Project Installment Payments as long as the Urban Contractors continued to honor their obligations under the Second Amended Contract because of (i) the availability of the Debt Service Reserve Fund and (ii) the District s ability to collect from each of the Urban Contractors such Urban Contractor s pro rata share of any Debt Service Reserve Fund deficiency which might result from transfers from the Debt Service Reserve Fund to cover such a decline. See the caption THE WATER SYSTEM Historic Water Deliveries for a discussion of shortfalls in Agricultural Services Revenues in recent years. 26

39 District Historic Operating Results A copy of the most recent audited financial statements of the District is included as Appendix A hereto. The following table is a summary of operating results of the District as a whole for Fiscal Years 1997 through These results have been derived from the District s Financial Statements but exclude certain non-cash items and include certain other adjustments. The table has not been audited by the District s auditor. STOCKTON-EAST WATER DISTRICT HISTORIC OPERATING RESULTS FISCAL YEAR ENDED MARCH Revenues: Surface Water Sales and Groundwater Assessments (1) $ 905,912 $ 867,282 $ 770,923 $ 815,789 $ 802,594 Municipal and Industrial Water Contractor Payments 8,937,682 7,739,211 8,324,251 7,919,376 7,052,730 Property Taxes 257, , , , ,338 Interest and Penalties (2) 1,407,585 1,075,073 1,218,442 1,219,026 1,102,473 Other 410, , , ,089 86,330 Total Revenues $11,919,870 $10,204,796 $10,753,266 $10,400,877 $ 9,283,465 Expenses: Source of Supply $ 2,072,787 $ 1,997,250 $ 924,444 $ 1,199,015 $ 612,976 Transmission and Distribution 252, , , , ,470 Water Treatment 3,058,578 3,041,358 2,980,184 2,931,505 2,832,572 General and Administrative 1,397, ,433 1,149, , ,235 Other 2,132 32,142 17,127 3,935 4,749 Total Expenses $ 6,783,139 $ 6,387,895 $ 5,320,312 $ 5,342,493 $ 4,667,002 Net Revenues $ 5,136,731 $ 3,816,901 $ 5,432,954 $ 5,058,384 $ 4,616,463 Total Installment Payments (3) $ 3,586,028 $ 3,583,028 $ 3,586,850 $ 3,896,333 $ 3,611,333 (1) (2) (3) Coverage Includes wheeling revenues. Excludes interest income related to investments made pursuant to the Parity Installment Purchase Agreements. Includes 1992 Installment Payments allocable to the Stockton-East Water District Certificates of Participation (1990 Project) Series 1992A Installment Payments, 1993 Installment Payments, and 1997 Installment Payments. Excludes 1990 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1990B and the 1992 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1992B which are anticipated to be paid from development fees. See THE WATER SYSTEM 1990 Project Operating Results. Source: District. District Projected Operating Results The projected operating results of the District as a whole for Fiscal Years 2002 through 2006 are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast represents the District s estimate of projected financial results based upon the District s judgment of the most probable occurrence of certain important future 27

40 events. The assumptions set forth in the footnotes to the chart set forth below are material in the development of the District s financial projections, and variations in the assumptions may project substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. STOCKTON-EAST WATER DISTRICT PROJECTED OPERATING RESULTS FISCAL YEAR ENDING MARCH Revenues: Surface Water Sales and Groundwater Assessments (1) $ 969,304 $ 978,304 $ 1,007,653 $ 1,037,883 $ 1,063,830 Municipal and Industrial Water Contractor Payments (2) 10,867,998 11,278,182 11,289,460 10,800,750 11,124,772 Property Taxes (3) 255, , , , ,905 Interest and Penalties (4) 1,200,000 1,230,000 1,260,750 1,292,269 1,324,575 Other 282, , , , ,394 Total Revenues $ 13,574,768 $ 14,045,075 $ 14,131,727 $ 13,720,461 $ 14,117,476 Expenses: Source of Supply (5) $ 2,899,000 $ 2,971,475 $ 3,045,762 $ 3,121,906 $ 3,199,954 Transmission and Distribution (5) 384, , , , ,886 Water Treatment (6) 4,214,844 4,320,215 4,428,220 4,538,926 4,652,399 General and Administrative (5) 2,415,116 2,547,500 2,611,188 2,676,467 2,743,379 Other 11,000 13,000 15,000 17,000 19,000 Total Expenses $ 9,924,437 $ 10,298,740 $ 10,557,884 $ 10,823,456 $ 11,095,617 Net Revenues $ 3,650,331 $ 3,746,335 $ 3,573,884 $ 2,897,005 $ 3,021,859 Total Installment Payments (7) $ 2,961,410 $ 2,788,103 $ 2,789,643 $ 2,469,838 $ 2,793,838 Coverage (1) Includes projected assessments on municipal groundwater pumping at current rates. Projected 3% increase per annum starting in fiscal year (2) Includes wheeling revenues; reflects projected increase in treated water sales described under the caption THE WATER SYSTEM Projected Water Deliveries. (3) Projected 3% increase per annum. (4) Projected to increase 2.5% per annum. (5) Projected to increase approximately 5% per annum. (6) Reflects projected increase in treated water sales described under the caption THE WATER SYSTEM Projected Water Deliveries. (7) Includes 1997 Installment Payments and the Installment Payments. Excludes 1990 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1990B and the 1992 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1992B which are anticipated to be paid from development fees. See THE WATER SYSTEM 1990 Project Operating Results. Source: District. 28

41 1975 Project Historic Operating Results The following table is a summary of operating results of the 1975 Project for Fiscal Year 1997 through These results have been derived from the District s Financial Statements but exclude certain non-cash items and include certain other adjustments. The table has not been audited by the District s auditor. STOCKTON-EAST WATER DISTRICT 1975 PROJECT HISTORIC OPERATING RESULTS FISCAL YEAR ENDING MARCH Revenues City of Stockton (1)(2) $ 1,172,731 $ 1,023,966 $ 1,188,744 $ 888,987 $ 1,297,010 California Water Service Company (1)(2) 1,232,758 1,070,388 1,280, ,575 1,289,347 Colonial Heights (1) 23,328 22,869 26,548 19,004 27,442 Lincoln Village (1) 77,507 63,876 80,489 56,888 80,298 Non-Contractor Revenues (3) 1,585,058 1,316,139 1,457,522 1,609,630 1,076,299 $ 4,091,382 $ 3,497,238 $ 4,033,978 $ 3,508,083 $ 3,770,395 Expenses: Treatment Plant O&M $ 2,415,278 $ 1,854,296 $ 2,263,042 $ 1,698,242 $ 2,161,370 Net Revenues $ 1,676,104 $ 1,642,942 $ 1,770,936 $ 1,809,841 $ 1,609,025 Total Installment Payments (4) $ 1,548,510 $ 1,548,450 $ 1,548,838 $ 1,550,093 $ 1,552,133 Coverage Surplus Account Deposit $ 127,594 $ 94,492 $ 222,098 $ 222,098 $ 56,892 (1) (2) (3) (4) Payments under the Second Amended Water Contract. The decrease in California Water Service Company s payments and the increase in Stockton s payments resulted from a change in the percentage of water delivered to each Contractor required by the Second Amended Water Contract. In addition, the Second Amended Water Contract implemented rate equalization. Payments by non-contractor municipal groundwater users as a result of rate equalization. Includes 1993 Installment Payments. 29

42 1975 Project Projected Operating Results The following projected 1975 Project operating results for Fiscal Years 2002 through 2006 with respect are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast represents the District s estimate of projected 1975 Project operating results based upon the District s judgment of the most probable occurrence of certain important future events. The assumptions set forth in the footnotes to the chart set forth below are material in the development of the District s 1975 Project operating projections, and variations in the assumptions may project substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. STOCKTON-EAST WATER DISTRICT PROJECTED 1975 PROJECT OPERATING RESULTS FISCAL YEAR ENDING MARCH Revenues City of Stockton (1) $ 1,190,681 $ 1,503,444 $ 1,415,532 $ 552,944 $ 400,428 California Water Service Company (1) 1,498,197 1,219,277 1,147, , ,743 Colonial Heights (1) 32,679 45,705 43,033 16,810 12,173 Lincoln Village (1) 71,502 70,403 66,286 25,893 18,751 Non-Contractor Revenues (2) 2,121,251 2,247,218 2,269,690 2,292,387 2,315,311 $ 4,914,310 $ 5,086,048 $ 4,942,523 $ 3,336,466 $ 3,071,407 Expenses Treatment Plant O&M $ 2,960,435 $ 3,310,493 $ 3,221,357 $ 3,126,024 $ 3,024,187 Net Revenues $ 1,953,875 $ 1,775,556 $ 1,721,166 $ 210,442 $ 47,220 Total Installment Payments (3) $ 1,252,675 $ 1,241,250 $ 1,241, Coverage Surplus Account Deposit $ 701,200 $ 534,306 $ 480,016 $ 210,442 $ 47,220 (1) (2) (3) Payments projected under the Second Amended Water Contract. Projected assessments on municipal groundwater pumping at a current charge of $75 per acre foot. Includes 1975 Project Installment Payments. Source: District Project Operating Results General. In addition to amounts received by the District from the Urban Contractors under the Second Amended Contract and Agricultural Service Revenues described above under the caption SECURITY FOR THE CERTIFICATES, the obligation of the Urban Contractors to make payments under the Second Amended Contract with respect to the Parity Installment Payments are reduced to the extent Development Fees and Wheeling Revenues are received by the Trustee. Set forth below is historic and projected information with respect to receipt of Development Fees and Wheeling Revenues. 30

43 Development Fees. The following table shows historic Development Fee deposited with the Trustee by the City and the County: Source: District. Fiscal Year STOCKTON-EAST WATER DISTRICT HISTORICAL DEVELOPMENT FEES FISCAL YEAR ENDING MARCH 31 Development Fees Cumulative Development Fees 2001 $4,567,814 $31,549, ,055,875 26,981, ,414,888 23,925, ,792,384 21,510, ,719,878 19,718, ,642,953 17,998, ,471,826 16,355,484 All Development Fees are invested in U.S. Treasury Securities with a maturity on or prior to April 1, Such investments currently have a value at maturity of $57,874,087 as compared to a total amount due on the 1990 Series B Certificates on April 1, 2005 of $85,603,112. While Development Fees received to date have exceeded the projections made by the Urban Contractors in 1992, as a result of lower than expected interest rates in recent years, the District currently projects that amounts on deposit for the payment of the 1990 Series B Certificates may be insufficient. The District and the Urban Contractors are currently reviewing various options with respect to the projected shortfall of amounts to be on deposit to pay the 1990 Series B Certificates including but limited to refinancing a portion of the 1990 Series B Certificates. Pursuant to the Second Amended Contract and the Parity Installment Purchase Agreements, the District is obligated to collect such insufficiency from the Urban Contractors under the Water Contract. Wheeling Revenues. Pursuant to a contract between the District and Central San Joaquin Water Conservation District ( CSJWCD ) dated January 31, 1990 (the Wheeling Agreement ), CSJWCD is obligated to pay certain amounts to the District to wheel water through the 1990 Project. In accordance with the terms of the Wheeling Agreement, CSJWCD is obligated to pay the District for wheeling CSJWCD s water through a portion of the 1990 Project. The first payment from CSJWCD pursuant to the Wheeling Agreement was due in To date, CSJWCD has not paid the District the full amounts owed by CSJWCD under the terms of the Wheeling Agreement, and the Urban Contractors have had to pay the Debt Service for the 1990 Project without full contribution from CSJWCD. In 1997, the City of Stockton, California Water Service Company, San Joaquin County, the District and CSJWCD entered into an agreement (the CSJWCD Agreement ), whereby CSJWCD agreed to make certain minimal payments to the District as Wheeling Fees, as defined therein. CSJWCD made such payments, and the CSJWCD Agreement expired on January 31, The Fiscal Year 2002 budget adopted by the District includes the full cost of the Wheeling Fees within the base monthly payment. Any payments made by CSJWCD would be credited to the base monthly payment by the Urban Contractors. 31

44 The District is unable to predict if Wheeling Revenues will be received from CSJWCD in any future fiscal year. In the event Wheeling Revenues are not received from CSJWCD in the amounts required under the Wheeling Agreement or the CSJWCD Agreement as scheduled, the District will charge the Urban Contractors for the shortfall, all in accordance with the Second Amended Contract Project Historic Operating Results. The following table shows historic operating results with respect to the 1990 Project for the last five Fiscal Years. These results have been derived from the District s Financial Statements but exclude certain non-cash items and include certain other adjustments. The table has not been audited by the District s auditor. STOCKTON-EAST WATER DISTRICT 1990 PROJECT HISTORIC OPERATING RESULTS FISCAL YEARS ENDING MARCH Revenues: Contractor Payments (1) $ 4,696,300 $ 4,091,973 $ 4,162,273 $ 4,311,293 $ 3,282,335 Agricultural Service Revenue Wheeling Revenues 150, , , , Surplus Account Transfer Total Revenues $ 4,846,300 $ 4,241,973 $ 4,290,273 $ 4,411,293 $ 3,282,335 (1) (2) (3) Expenses: Treatment Plant $ 963,329 $ 694,700 $ 734,920 $ 710,680 $ 340,000 Purchased Water 1,400,216 1,204,544 1,095, , ,047 Conveyance System O&M (2) 445, , , , ,088 Total Expenses $ 2,808,782 $ 2,206,690 $ 2,252,260 $ 2,065,052 $ 1,223,135 Net Revenues $ 2,037,518 $ 2,035,283 $ 2,038,013 $ 2,346,241 $ 2,059,200 Total Installment Payments (3) $ 2,037,518 $ 2,035,283 $ 2,038,013 $ 2,346,241 $ 2,059,200 Coverage Pursuant to Second Amended Contract. Includes Conveyance System O&M allocated to, but not paid by, CSJWCD. Includes 1992 Installment Payments allocable to the Stockton-East Water District Certificates of Participation (1990 Project) Series 1992A and 1997 Installment Payments. Excludes 1990 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1990B and the 1992 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1992B which are anticipated to be paid from development fees. See 1990 Project Operating Results Development Fees. Source: District. 32

45 1990 Project Projected Operating Results. The following projected 1990 Project operating results for the Fiscal Years 2002 through 2006 with respect are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast represents the District s estimate of projected 1990 Project operating results based upon the District s judgment of the most probable occurrence of certain important future events. The assumptions set forth in the footnotes to the chart set forth below are material in the development of the District s 1990 Project operating projections, and variations in the assumptions may project substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. STOCKTON-EAST WATER DISTRICT 1990 PROJECT PROJECTED OPERATING RESULTS FISCAL YEARS ENDING MARCH Revenues: Contractor Payments (1) $ 5,953,688 $ 6,192,134 $ 6,346,937 $ 7,464,284 $ 8,053,365 Agricultural Service Revenue (2) Wheeling Revenues (3) Surplus Account Transfer (4) 133, , Total Revenues $ 6,087,220 $ 6,434,700 $ 6,346,937 $ 7,464,284 $ 8,053,365 (1) (2) Expenses: Treatment Plant (5) $ 1,922,240 $ 2,148,000 $ 2,201,700 $ 2,256,743 $ 2,313,161 Purchased Water (6) 1,732,500 1,750,500 1,838,025 1,929,926 2,026,423 Conveyance System O&M 393, , , , ,813 Total Expenses $ 4,047,740 $ 4,398,500 $ 4,564,725 $ 4,737,919 $ 4,918,396 Net Revenues $ 2,039,480 $ 2,036,200 $ 1,782,212 $ 2,726,365 $ 3,134,969 Total Installment Payments (7) $ 1,708,735 $ 1,546,853 $ 1,548,493 $ 2,469,838 $ 2,793,278 Coverage Pursuant to Second Amended Contract. Due to uncertainty over agricultural use of 1990 Project water, for planning purpose the District has not projected Agricultural Service Revenue attributable to the 1990 Project. Any Agricultural Service Revenues received by the District will be credited against Contractor Payments. (3) No Wheeling Revenues are projected. Any Wheeling Revenues received by the District will be credited against Contractor Payments. (4) See table under the caption 1975 Project Historic Operating Results for amounts in the funds and accounts under the Installment Purchase Agreement 1975 Project which are projected to be available for transfer. No transfer is projected after Fiscal Year (5) Reflects projected increase in treated water sales described under the caption THE WATER SYSTEM Projected Water Deliveries. (6) Increase reflects higher levels of Stanislaus River water projected to be available under the Bureau Contract and the Transfer Agreement. (7) Includes 1997 Installment Payments and the 1990 Project Installment Payments. Excludes 1990 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1990B and the 1992 Installment Payments allocable to the Certificates of Participation (1990 Project), Series 1992B which are anticipated to be paid from development fees. See 1990 Project Operating Results Development Fees. Source: District. Effect of the Settlement Agreement. On April 10, 2001 the District, the City of Stockton and California Water entered into a Settlement Agreement (the Settlement Agreement ) addressing these outstanding loans and other amounts owed to the Municipal Division from the Agricultural Division. The Settlement Agreement provides that these amounts, up to a total amount of $2,013,202 through April 1, 2003, will be forgiven if the District Board, by April 1, 2003, is successful in 33

46 obtaining legislation amending the Special Act, or is successful through other means, in providing the Agricultural Division with revenue sufficient to meet all of the costs of the Agricultural Division budget including the portion of the Parity Installment Payments allocable to Agricultural Service. The parties agreed that if the Agricultural Division is not successful by April 1, 2003 in obtaining legislation or other means that provide the Agricultural Division with revenue sufficient to meet all of the costs of the Agricultural Division s budget, including the portion of the Parity Installment Payments allocable to Agricultural Service, the parties shall be bound, until January 1, 2004, to negotiate in good faith concerning the terms of reimbursement or other arrangements regarding loans or transfers of Municipal Division funds. The parties to the Settlement Agreement acknowledged that should the District be unsuccessful in obtaining authorization to provide the Agricultural Division with revenue sufficient to meet all of the costs of the Agricultural Division s budget, including the portion of the Parity Installment Payments allocable to Agricultural Service, the District will continue to make payment of the Parity Installment Purchase Agreements after the fiscal year using legally available funds as defined in the Parity Installment Purchase Agreements. The parties currently dispute whether or not Municipal Division funds used for that purpose must be repaid pursuant to the Special Act. In addition, for purpose of settlement, the parties agreed on the amount of reimbursements owed from the Agricultural Division to the Municipal Division resulting from expenditures from the Surplus Fund, agreed that the District will include such amount in the Agricultural Division s budget over ten years and will use reasonable efforts to attempt to repay these amounts to the Municipal Division once the District is successful in obtaining legislation amending the Special Act so as to provide the Agricultural Division with revenue sufficient to meet all of the costs of the Agricultural Division s budget. Article XIIIB CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES Article XIIIB of the California State Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The base year for establishing such appropriation limit is the 1978/79 fiscal year and the limit is to be adjusted annually to reflect changes in population and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or (iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years. Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity s revenues in any year exceed the 34

47 amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Certain expenditures are excluded from the appropriations limit including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly. The District is of the opinion that its water charges do not exceed the costs the District reasonably bears in providing such services and therefore are not subject to the limits of Article XIIIB. The District will covenant in the Installment Purchase Agreement that, to the fullest extent permitted by law, it will prescribe rates and charges sufficient to provide for payment of Installment Payments in each year. Proposition 218 General. An initiative measure entitled the Right to Vote on Taxes Act (the Initiative ) was approved by the voters of the State of California at the November 5, 1996 general election. The Initiative added Article XIIIC and Article XIIID to the California Constitution. According to the Title and Summary of the Initiative prepared by the California Attorney General, the Initiative limits the authority of local governments to impose taxes and property-related assessments, fees and charges. Article XIIID. Article XIIID defines the terms fee and charge to mean any levy other than an ad valorem tax, a special tax or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property-related service. A property-related service is defined as a public service having a direct relationship to property ownership. Article XIIID further provides that reliance by an agency on any parcel map (including an assessor s parcel map) may be considered a significant factor in determining whether a fee or charge is imposed as an incident of property ownership. Article XIIID requires that any agency imposing or increasing any property-related fee or charge must provide written notice thereof to the record owner of each identified parcel upon which such fee or charge is to be imposed and must conduct a public hearing with respect thereto. The proposed fee or charge may not be imposed or increased if a majority of owners of the identified parcels file written protests against it. As a result, if and to the extent that a fee or charge imposed by a local government for water service is ultimately determined to be a fee or charge as defined in Article XIIID, the local government s ability to increase such fee or charge may be limited by a majority protest. In addition, Article XIIID includes a number of limitations applicable to existing fees and charges including provisions to the effect that (i) revenues derived from the fee or charge shall not exceed the funds required to provide the property-related service, (ii) such revenues shall not be used for any purpose other than that for which the fee or charge was imposed, (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel and (iv) no such fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Property-related fees or charges based on potential or future use of a 35

48 service are not permitted. If and to the extent that a fee or charge for wholesale water sales to the Urban Contractors or retail sales for agricultural service is determined to be a fee or charge as defined in Article XIIID and is further determined not to comply with the foregoing limitations, the District would have been required to so comply by July 1, The District believes that the above described provision of Article XIIID does not apply to Wheeling Revenues charged by the District to CSJWCD, to the Agricultural Revenues charged by the District or to amounts charged to the Urban Contractors under the Second Amended Contract. As a result, the District does not intend to implement such procedures or substantive provisions of Article XIIID unless and until the courts make a contrary determination. The City and the County do not currently project raising water rates and charges in the next twelve month period and, therefore, have not made a determination as to whether Article XIIID applies to such water rates and charges. In the event that the City or the County determined that Article XIIID does apply to such rates and charges, the City and County expect to comply with Article XIIID. The effect of such compliance by the City and the County on their ability to make payments to the District under the Second Amended Contract is unknown. Article XIIID does not apply to California Water. Article XIIIC. Article XIIIC provides that the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge and that the power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. Article XIIIC does not define the terms local tax, assessment, fee or charge, so it is unclear that the definitions set forth in Article XIIID referred to above will be applicable to Article XIIIC. Moreover, the provisions of Article XIIIC are not expressly limited to local taxes, assessments, fees and charges imposed after November 6, Therefore, in the absence of other limitations, provisions of Article XIIIC could be applicable to the wholesale water rates charged by the District. The District and its counsel do not believe that Article XIIIC grants to the voters within the District the power to repeal or reduce rates and charges in a manner which would be inconsistent with the District s contractual obligation, including but not limited to, the Installment Purchase Agreement. There can be no assurance of the availability of particular remedies adequate to protect the interests of Certificate Owners. Remedies available to Certificate Owners in the event of a default by the District are dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time-consuming to obtain. The City, County and their respective counsel do not believe that Article XIIIC grants to voters in their respective jurisdiction the power to repeal or reduce rates and charges in a manner which would be inconsistent with their contractual obligations to pay their share of the Parity Installment Payments under the Second Amended Contract. Availability of Revenues. In addition to the specific limitations on remedies contained in the applicable documents themselves, the rights and obligations with respect to the Certificates, the Trust Agreement and the Installment Purchase Agreement are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors rights, to the application of equitable principles if equitable remedies are sought, and to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California. The various opinions of counsel to be delivered with respect to such documents, including the opinion of Special Counsel (the form of which is attached as Appendix F), will be similarly qualified. 36

49 Future Initiatives Articles XIIIB, XIIIC and XIIID were adopted as a measure that qualified for the ballot pursuant to California s initiative process. From time to time other initiatives could be proposed and adopted affecting the District s revenues or ability to increase revenues. THE CORPORATION The Local Agency Installment Purchase Corporation is a California public benefit corporation organized to help public agencies in financing public projects. The Corporation was established in 1990, and the members of its Board of Directors are also the principals of the Underwriters. APPROVAL OF LEGAL PROCEEDINGS The legality and enforceability of the Installment Purchase Agreements is subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, acting as Special Counsel. The form of such legal opinion is attached hereto as Exhibit F and such legal opinion will be printed on each Certificate. Certain legal matters will be passed upon for the Underwriters by their counsel, Ballard Spahr Andrews & Ingersoll, LLP, Salt Lake City, Utah, for the District by Herum Crabtree Brown, Stockton, California, for the Trustee and Escrow Agent by its counsel, and for the Insurer by its counsel. LITIGATION At the time of delivery of and payment for the Certificates, the District will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the knowledge of the District, threatened against the District affecting the existence of the District or the titles of its directors or officers to their respective offices or seeking to restrain or to enjoin the sale or delivery of the Certificates, the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the validity or enforceability of the Certificates, the Trust Agreement or the Installment Purchase Agreements or any action of the District contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the District or its authority with respect to the Certificates or any action of the District contemplated by any of said documents, nor to the knowledge of the District, is there any basis therefor. TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, the portion of each Installment Payment constituting interest is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, the portion of each Installment Payment constituting interest is exempt from State of California personal income tax. Special Counsel notes that, with respect to corporations, the portion of each Installment Payment constituting interest may be included as an 37

50 adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of the same series and maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to the owner of the Certificate before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by the owner of a Certificate will increase the owner s basis in the Certificate. In the opinion of Special Counsel original issue discount that accrues to the owner of a Certificate is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Special Counsel s opinion as to the exclusion from gross income of the portion of each Installment Payment constituting interest (and original issue discount) is based upon certain representations of fact and certifications made by the District and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the execution and delivery of the Certificates to assure that the portion of each Installment Payment constituting interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause the portion of each Installment Payment constituting interest (and original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Certificates. The District has covenanted to comply with all such requirements. The amount by which a Certificate Owner s original basis for determining loss on sale or exchange in the applicable Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Certificate premium, which must be amortized under Section 171 of the Code; such amortizable Certificate premium reduces the Certificate Owner s basis in the applicable Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Certificate premium may result in a Certificate Owner realizing a taxable gain when a Certificate is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the Owner. Purchasers of the Certificates should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Certificate premium. The Internal Revenue Service (the IRS ) has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Certificates will be selected for audit by the IRS. It is also possible that the market value of the Certificates might be affected as a result of such an audit of the Certificates (or by an audit of similar bonds). Special Counsel s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Special Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate permit certain actions to be taken or to be omitted if a favorable opinion of 38

51 Special Counsel is provided with respect thereto. Special Counsel expresses no opinion as to the exclusion from gross income of interest (and original issue discount) for federal income tax purposes with respect to any Certificate if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth. Although Special Counsel has rendered an opinion that the portion of the Installment Payments constituting interest (and original issue discount) is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the ownership of the Certificates and the accrual or receipt of interest (and original issue discount) with respect to the Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences with respect to the Certificates. CONTINUING DISCLOSURE The District has covenanted in a Continuing Disclosure Certificate for the benefit of the holders and beneficial owners of the Certificates to provide certain financial information and operating data relating to the District by not later than 210 days following the end of the District s Fiscal year (currently its Fiscal Year ends on March 31) (the Annual Report ), commencing with the report for Fiscal Year ending March 31, 2002, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report and the notices of material events will be filed by the District with each Nationally Recognized Municipal Securities Information Repository. The specific nature of the information to be contained in the Annual Report and the notice of material events is set forth in Appendix G FORM OF CONTINUING DISCLOSURE CERTIFICATE hereto. These covenants have been made in order to assist the Underwriters in complying with rule 15c2-12(b)(5) promulgated under the Securities Exchange Act of The District is not currently in default on any continuing disclosure undertaking. Pursuant to the District s continuing disclosure obligation with respect to the District s Refunding Revenue Certificates of Participation (1990 Project) Series 1997A, the District was required to file an Annual Report for the fiscal year ending June 30, 2000 on October 26, The District filed such Annual Report on November 18, All other Annual Reports have been filed in accordance with such continuing disclosure obligation. RATING Upon issuance of the Municipal Bond Insurance Policy, S&P will assign the Certificates a rating of AAA. This rating is based upon the Municipal Bond Insurance Policy insuring the payment when due of the principal of and interest with respect to the Certificates. The District has furnished S&P information and material which have not been included in this Official Statement. Generally, rating agencies base their ratings on information and material so furnished and on investigations, studies and assumptions made by the rating agencies. The rating reflects only the view of such organization and an explanation of the significance of such rating may be obtained from Standard & Poor s Corporation, 55 Water Street, New York, New York 10041, (212) There is no assurance that the rating will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Certificates. 39

52 UNDERWRITING The 1975 Project Refunding Certificates will be purchased by Salomon Smith Barney Inc. and IBIS Securities, as underwriters (the Underwriters ), under a Purchase Contract, dated February 22, 2002 (the 1975 Project Purchase Contract ), pursuant to which the Underwriters agree to purchase all of the 1975 Project Refunding Certificates for an aggregate purchase price of $3,541, which represents the principal amount thereof, plus original issue premium of $54,407.75, and less Underwriters discount of $18,330.65) plus accrued interest with respect to the 1975 Project Refunding Certificates from February 1, 2002 to the delivery date thereof. The 1990 Project Refunding Certificates will be purchased by the Underwriters under a separate Purchase Contract (the 1990 Project Purchase Contract, and together with the 1975 Project Purchase Contract, the Purchase Contracts ). Pursuant to the Purchase Contracts, the delivery of each portion of the Certificates will be contingent on the delivery of the other portion of the Certificates. The initial public offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriters. The Underwriters may offer and sell the Certificates to certain dealers (including dealers depositing Certificates into investment trusts), dealer banks, banks acting as agent and others at prices lower than said public offering prices. VERIFICATION The Arbitrage Group, Tuscaloosa, Alabama, independent certified public accountants, will verify certain mathematical computations as to the sufficiency of the investments deposited into the Escrow Fund to pay, when due and on the date designated for prior prepayment, the principal of, interest with respect to and premiums in connection with the Refunded 1992 Certificates and the 1993 Certificates and as to the yield on the Certificates and on the Government Obligations purchased with proceeds of the Certificates and deposited into the Escrow Funds. MISCELLANEOUS Insofar as any statements made in this Official Statement involve matters of opinion or of estimates, whether or not expressly stated, they are set forth as such and not as representations of fact. No representation is made that any of such statements made will be realized. Neither this Official Statement nor any statement which may have been made verbally or in writing is to be construed as a contract with the Owners of the Certificates. The execution and delivery of this Official Statement have been duly authorized by the District. STOCKTON-EAST WATER DISTRICT By: /s/ Andrew Watkins President 40

53 APPENDIX A FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR ENDING MARCH 31, 2001 A-1

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