$5,290,000 KERN DELTA WATER DISTRICT

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1 NEW ISSUE - FULL BOOK ENTRY ONLY INSURED RATING: S&P: AA (stable outlook) UNDERLYING RATING: S&P: A+ (See RATINGS herein) In the opinion of Nossaman LLP, Irvine, California, Bond Counsel, based on existing statutes, regulations, rulings and court decisions and assuming, among other matters, compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxable income, although Bond Counsel observes that it is included in adjusted current earnings in calculating corporate alternative minimum taxable income. In the further opinion of Bond Counsel, interest on the Bonds is, under existing law, exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding other federal or State tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. The District has designated the Bonds as qualified tax-exempt obligations for purposes of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended. See TAX MATTERS herein. $5,290,000 KERN DELTA WATER DISTRICT Water Revenue Refunding Bonds Series 2015A (BANK QUALIFIED) Dated: Date of Delivery Due: December 1, as shown on inside cover The Bonds are being issued pursuant to an Indenture of Trust, dated as of April 1, 2015 (the Indenture ) between the Kern Delta Water District (the District ) and Wells Fargo Bank, National Association, Los Angeles, California (the Trustee ) and will be secured as described herein. The Bonds are being issued (i) to provide funds to refinance certain obligations of the District, (ii) to purchase a reserve fund insurance policy to be deposited in the Reserve Fund for the Bonds and (ii) to pay certain costs of issuing the Bonds. Definitions of certain capitalized terms herein are contained in Appendix A hereto, and are incorporated herein by reference. The Bonds will be issued in book-entry form, initially registered in the name of Cede & Co., New York, New York, as nominee of The Depository Trust Company ( DTC ), New York, New York. Interest on the Bonds will be payable on June 1 and December 1 of each year, commencing June 1, 2015, and principal of the Bonds will be paid on the dates set forth in the Maturity Schedule on inside cover hereof. Purchasers will not receive certificates representing their interest in the Bonds. Individual purchases will be in principal amounts of $5,000 or in any integral multiples of $5,000. Payments of principal and interest will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Bonds. Payment of principal of and interest on the Bonds (the Debt Service Payments ) are payable from Net Revenues (as defined herein) of the District s water system (the System ). The Debt Service Payments are a special limited obligation of the District, payable from and secured by a pledge of and first lien on all Net Revenues, subject to the parity lien, if any, of any Parity Obligations as provided for in the Indenture (as described herein). The Bonds are subject to redemption prior to maturity as set forth herein. See THE BONDS -- Redemption of the Bonds herein. The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by Assured Guaranty Municipal Corp. See BOND INSURANCE and APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY. THE BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT PAYABLE SOLELY FROM AND SECURED SOLELY BY THE NET REVENUES PLEDGED THEREFOR IN THE INDENTURE AND ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF, OR CHARGE OR LIEN UPON ANY PROPERTY OF THE DISTRICT, OR ANY OF THE DISTRICT S INCOME OR RECEIPTS, EXCEPT THE NET REVENUES. THE BONDS ARE NOT A DEBT OF THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE DISTRICT, AND NEITHER THE FAITH AND CREDIT OF THE DISTRICT, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS ARE PLEDGED TO THE PAYMENT OF THE BONDS, AND THE DISTRICT IS NOT OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION THEREFOR. NEITHER THE BONDS NOR THE OBLIGATION TO MAKE DEBT SERVICE PAYMENTS CONSTITUTES AN INDEBTEDNESS OF THE DISTRICT, THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. This cover page contains information for general reference only. It is not a summary of the security or terms of this issue. Investors must read the entire Official Statement, including the section entitled RISK FACTORS, for a discussion of special factors which should be considered, in addition to the other matters set forth herein, in considering the investment quality of the Bonds. Capitalized terms used on this cover page and not otherwise defined shall have the meanings set forth herein. The Bonds are offered when, as and if sold and issued, subject to the approval as to their legality by Nossaman LLP, Irvine, California, Bond Counsel. Certain legal matters will be passed upon for the District by McMurtrey, Hartsock & Worth, Bakersfield, California, its general counsel, and by Nossaman LLP, Irvine, California, Disclosure Counsel. Certain legal matters will be passed upon for the Underwriter by its counsel, Stradling Yocca Carlson & Rauth, A Professional Corporation, Sacramento, California and for AGM by its counsel. It is anticipated that the Bonds in book-entry form, will be available for delivery through the facilities of DTC on or about April 15, WELLS FARGO SECURITIES Date: March 26, 2015

2 Maturity Date (December 1) Principal Amount MATURITY SCHEDULE $3,930,000 Serial Bonds Interest Rate Yield CUSIP (Base: 49228W) 2015 $270, % 0.32% AA , AB , AC , AD , AE , AF , AG , AH , AJ , AK , C AL , C AM , C AN , AP , AQ , AR3 C Yield to first optional redemption date of December 1, $1,360, % Term Bonds Due December 1, 2034, Price: % (CUSIP : 49228WAS1) Copyright 2015, American Bankers Association. CUSIP data in this Official Statement are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are provided for convenience of reference only. The District and the Underwriter do not assume any responsibility for the accuracy of CUSIP data.

3 KERN DELTA WATER DISTRICT BOARD OF DIRECTORS Rodney Palla, President David Kaiser, Vice President David C. Cosyns, Secretary Kevin Antongiovanni, Treasurer, Assessor and Tax Collector Richard Tillema, Director Howard R. Frick, Director Fred Garone, Director Phillip J. Cerro II, Director Donald Collins, Director ADMINISTRATIVE STAFF L. Mark Mulkay, General Manager, Assistant Treasurer & Assistant Secretary Gene R. McMurtrey and Robert W. Hartsock, Assistant Secretaries SPECIAL SERVICES District Counsel McMurtrey, Hartsock & Worth Bakersfield, California Trustee Wells Fargo Bank, National Association Los Angeles, California Bond/Disclosure Counsel Nossaman LLP Irvine, California

4 No dealer, broker, salesperson or other person has been authorized by the Kern Delta Water District (the District ) or the Underwriter to give any information or to make any representations other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the District or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been obtained from the District and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriter. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities under federal securities laws, as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there have not been any changes in the affairs of the District since the date hereof. All summaries of the documents are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE BONDS 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. THE PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Official Statement for purposes of, and as that term is defined in, Securities Exchange Commission Rule 15c2-12. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, AGM has not independently verified, and makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the caption BOND INSURANCE and APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY.

5 TABLE OF CONTENTS INTRODUCTION...1 General...1 The District...1 Purpose...1 Security for the Bonds...2 Risk Factors...2 Limited Obligations...2 Municipal Bond Insurance...3 Forward-Looking Statements...3 Summaries Not Definitive...3 THE REFUNDING PLAN...3 CONTINUING DISCLOSURE...4 THE BONDS...4 Description of the Bonds...4 Redemption of the Bonds...5 Issuance of Parity Obligations...7 Book-Entry Only System...8 ESTIMATED SOURCES AND USES OF FUNDS...9 DEBT SERVICE...9 SECURITY FOR THE BONDS...10 General...10 Pledge of Net Revenues...10 Debt Service Payments...11 Rate Covenant...12 Reserve Fund...13 Application of Revenues...13 No Amendments to Indenture...14 BOND INSURANCE...14 Bond Insurance Policy...15 Assured Guaranty Municipal Corp RISK FACTORS...17 System Demand and Growth...17 System Expenses Drought Executive Order...17 Parity Obligations...18 Proposition Constitutional Limit on Appropriations, Fees and Charges...18 Limited Recourse on Default...19 Limitations on Remedies Available; Bankruptcy...19 No Obligation to Tax...20 Change in Law...20 Geologic, Topographic and Climatic Conditions...20 Environmental Considerations...21 Impact of State Budget...23 Loss of Tax Exemption...24 IRS Audit of Tax-Exempt Issues...24 Secondary Market for Bonds...24 i

6 Insurer Default...25 THE DISTRICT...26 History...26 Governance...26 Management...26 Employees...27 Defined Contribution Plan...27 THE WATER SYSTEM...27 Existing Facilities...27 Service Areas...27 Water Supply...30 Kern River Supply...30 Groundwater...31 Imported State Project Water...31 Water Treatment...34 Storage Capacity...34 Water Connections...34 Capital Improvement Program...35 Water Banking Program...35 Water Rates...36 Largest Customers...37 Unencumbered Reserves...38 Assessments...38 Outstanding Water System Indebtedness...39 Insurance...39 Assessed Valuation Within the District...39 Tax Levies and Delinquencies...40 Largest Taxpayers...42 District Financial Information...42 Projected Operating Results and Debt Service Coverage...45 Present and Ongoing Development Activity...47 Litigation...47 TAX MATTERS...49 General...49 Changes in Federal and State Tax Law...51 Form of Opinion...51 BANK QUALIFIED...51 NO LITIGATION...51 RATINGS...52 PROFESSIONAL FEES...52 CERTAIN LEGAL MATTERS...52 UNDERWRITING...52 ADDITIONAL INFORMATION...53 APPENDIX A -- SUMMARY OF THE INDENTURE... A-1 APPENDIX B -- AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR 2012/13... B-1 APPENDIX C -- FORM OF FINAL OPINION OF BOND COUNSEL...C-1 APPENDIX D -- FORM OF CONTINUING DISCLOSURE AGREEMENT...D-1 APPENDIX E -- BOOK ENTRY PROVISIONS... E-1 APPENDIX F SPECIMEN MUNICIPAL BOND INSURANCE POLICY..F-1 ii

7 OFFICIAL STATEMENT $5,290,000 KERN DELTAWATER DISTRICT WATER REVENUE REFUNDING BONDS SERIES 2015A (BANK QUALIFIED) INTRODUCTION General The purpose of this Official Statement of the Kern Delta Water District (the District ) is to furnish information regarding the issuance and sale of $5,290,000 principal amount of Kern Delta Water District Water Revenue Refunding Bonds, Series 2015A (the Bonds ) pursuant to the provisions of an Indenture of Trust, dated as of April 1, 2015(the Indenture ) between the District and Wells Fargo Bank, National Association (the Trustee ). The Bonds will be issued pursuant to the provisions of Articles 10 and 11, Chapter 3, Part 1, Division 2, Title 5 (commencing with Section 53570) of the California Government Code, as amended (the Bond Law ). The Bonds are subject to redemption prior to maturity as described herein. See THE BONDS herein. The District The District was formed December 29, 1965, pursuant to Division 13 of the Water Code of the State of California. Its purpose was, and is, to obtain and provide a supply of water for lands located within the boundaries of the District. The District contains approximately 128,958 gross acres of suburban and agricultural land in the Kern River Delta and Kern Lake Bed areas lying southerly of the City of Bakersfield in the central part of the Kern County portion of the San Joaquin Valley. The District extends roughly 17 miles north-south and 22 miles east-west. U.S. Highway 99 bisects the District, and Interstate Highway 5 runs through the western part of the District. The District is governed by a nine member Board of Directors, and currently employs 32 full-time employees. For other information concerning the District, see THE DISTRICT and THE WATER SYSTEM herein. For other selected demographic and economic information, see APPENDIX B - GENERAL DEMOGRAPHIC INFORMATION hereto. A copy of the audited financial statements of the District for the year ended December 30, 2013 is attached hereto as APPENDIX C. Purpose The Bonds are being issued by the District to (i) together with other available funds of the District, prepay the District s obligations under an Installment Purchase Contract, dated as of November 1, 2005 (the Installment Purchase Contract ) with the CSDA Finance Corporation (the Corporation ), which obligations secure the District s Certificates of Participation (Water Bank Project) Series 2005, executed and delivered in the original principal amount of $6,915,000 of which $5,755,000 is currently outstanding (the Refunded 2005 Certificates ), (ii) purchase a reserve fund insurance policy for deposit in the Reserve Fund for the Bonds and (iii) 1

8 pay certain costs of issuance of the Bonds (including expenses incurred in connection with the prepayment of the Refunded 2005 Certificates). See THE REFUNDING PLAN and ESTIMATED SOURCES AND USES OF FUNDS herein. The 2005 Certificates were issued to finance certain improvements to the water system (the System ) of the District. See THE DISTRICT and THE WATER SYSTEM herein for a description of the District s water system. Security for the Bonds The Bonds are payable from, and secured by a lien on, the Net Revenues (as described in SECURITY FOR THE BONDS - General herein), and from certain interest and other income derived from certain funds and accounts held under the Indenture. Under the Indenture, the District has irrevocably pledged all Net Revenues to the payment of the Debt Service Payments, subject to the terms and conditions of the Indenture. Revenues (as described in SECURITY FOR THE BONDS ) are held in the Revenue Fund of the District, and Net Revenues required to pay Debt Service Payments on the Bonds and Parity Obligations are held in the Debt Service Fund of the District, as provide for in the Indenture. See SECURITY FOR THE BONDS herein. The District is authorized to issue additional Parity Obligations secured by the Net Revenues with a lien on a parity basis with the lien of the Bonds. See THE BONDS Issuance of Parity Obligations herein. Upon issuance of the Bonds, no other Parity Obligations will be outstanding. Pursuant to the Indenture, the District has covenanted to fix, prescribe and collect certain rates and charges for service provided by the System. See SECURITY FOR THE BONDS - Rate Covenant herein. Risk Factors There can be no assurance that the local demand for the services provided by the System will be maintained at levels described in this Official Statement, that the District s expenses for operating and maintaining the System will be consistent with the levels described in this Official Statement or that water will be available to District for resale as projected in this Official Statement. Changes in technology, decreased demand, new regulatory requirements, increases in the cost of energy or other expenses would reduce Net Revenues, and could require substantial increases in rates or charges in order to comply with the rate covenant. Such reduced availability of water or such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. See RISK FACTORS herein for a discussion of special factors which should be considered, in addition to the other matters set forth herein, in considering the investment quality of the Bonds, including a discussion of the impact of Proposition 218, Constitutional limits on fees and charges, seismic considerations, limitation on remedies and changes in law. Limited Obligations THE OBLIGATION OF THE DISTRICT TO MAKE PAYMENTS OF PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE SOLELY FROM NET REVENUES AND OTHER FUNDS PROVIDED FOR IN THE INDENTURE, AND DOES NOT CONSTITUTE A DEBT OF THE DISTRICT OR THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN 2

9 THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL DEBT LIMITATION OR RESTRICTION, OR AN OBLIGATION FOR WHICH THE DISTRICT OR THE STATE OF CALIFORNIA IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE DISTRICT OR THE STATE OF CALIFORNIA HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. Municipal Bond Insurance The scheduled payment of principal of an interest on the Bonds when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by Assured Guaranty Municipal Corp. Forward-Looking Statements This Official Statement contains forward-looking statements, including (i) statements containing projections of Net Revenues and other financial items, (ii) statements of future economic performance of the System, and (iii) statements of the assumptions underlying or relating to statements described in (i) and (ii) above, (collectively, the Forward-Looking Statements ). All statements other than statements of historical facts included in this Official Statement, including without limitation statements under THE WATER SYSTEM and SECURITY FOR THE BONDS regarding the financial position, capital resources and status of the District and the System are Forward-Looking Statements. Although the District believes that the expectations reflected in such Forward-Looking Statements are reasonable, no assurance can be given that such expectations will prove to be correct. Important factors which could cause actual results to differ materially from expectations of the District (collectively, the Cautionary Statements ) are disclosed in this Official Statement. All Forward-Looking Statements attributable to the District are expressly qualified in their entirety by the Cautionary Statements. Summaries Not Definitive Definitions of certain capitalized terms herein are contained in APPENDIX A hereto, and are incorporated herein by reference. Definitions of certain terms used in this Official Statement, and the summaries of and references contained herein to the Indenture, the Bonds, the Continuing Disclosure Agreement, statutes and other documents do not purport to be comprehensive or definitive and are qualified by reference to each such document, instrument or statute. Copies of the documents described herein will be available at the office of the District, General Manager, 501 Taft Highway, Bakersfield, CA THE REFUNDING PLAN The District is selling the Bonds to provide a portion of the moneys necessary to refund all of its obligations under the Installment Sale Contract and to prepay the Refunded 2005 Certificates. A portion of the proceeds of the Bonds will be used on the Closing Date to establish an escrow fund (the Escrow Fund ) for the Refunded 2005 Certificates, to be held in trust by Wells Fargo Bank, National Association, acting as escrow agent for the Refunded 2005 Certificates (the Escrow Agent ) under Escrow Instructions from the District to the Escrow Agent, dated as of April 1, 2015 (the Escrow Agreement ). Proceeds deposited into the Escrow Fund will be held uninvested and will be used by the Escrow Agent to prepay the 3

10 outstanding Refunded 2005 Certificates at a redemption price equal to 100% of the principal amount thereof as specified in the Escrow Agreement. See ESTIMATED SOURCES AND USES OF FUNDS herein. Upon deposit of such proceeds and other moneys into the Escrow Fund, the Refunded 2005 Certificates will no longer be deemed outstanding. The moneys held by the Escrow Agent are pledged to the payment of the Refunded 2005 Certificates. Moneys deposited in the Escrow Fund are not available to pay principal of or interest on the Bonds. CONTINUING DISCLOSURE The District has covenanted, pursuant to a Continuing Disclosure Agreement, dated as of April 1, 2015, for the benefit of holders and beneficial owners of the Bonds to provide, or cause to be provided, certain financial information and operating data relating to the District by not later than October 1 in each year following the end of the District s Fiscal Year (which currently would be December 31), commencing with the report for the Fiscal Year ended December 31, 2015 (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. The Annual Report and notices of material events will be filed by the District with the Municipal Securities Rulemaking Board (the MSRB ). The specific nature of the information to be contained in the Annual Report or the notices of material events is summarized below in APPENDIX D. These covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). With respect to its prior undertakings under the Rule within the past five years, the District failed to file its annual reports and certain notices of events with respect to rating changes in connection with its 1999 general obligation bonds. As of the date of this Official Statement, the District has made corrective filings as a best effort to come into compliance with the Rule. Description of the Bonds THE BONDS The Bonds shall be delivered in the form of fully registered Bonds, without coupons, in denominations of $5,000 or any integral multiple thereof, and shall be dated the date of initial delivery thereof. The Bonds will mature on the dates and in the amounts set forth on the front cover of this Official Statement. The Bonds, when issued, will be registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York ( DTC ). So long as DTC, or Cede & Co. as its nominee, is the registered owner of all Bonds, all payments on the Bonds will be made directly to DTC, and disbursement of such payments to the DTC Participants (defined below) will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners (defined below) will be the responsibility of the DTC Participants, as more fully described hereinafter. See Book-Entry Only System below. Interest on the Bonds shall be payable on June 1 and December 1 of each year, commencing June 1, 2015, and continuing to and including the date of maturity or prior redemption, whichever is earlier. Principal of the Bonds shall become payable on December 1 in each of the years and in the amounts set forth on the inside cover page of this Official Statement. Principal and premium, if any, of the Bonds shall be payable upon presentation and surrender thereof at the corporate trust office of the Trustee in Los Angeles, California. Interest 4

11 on the Bonds shall be based on a 360-day year composed of twelve 30-day months and shall be payable by check from the Trustee mailed on each Interest Payment Date by first class mail to the registered Owners as of the close of business on the 15th day of the calendar month (whether or not such day is a Business Day) preceding an Interest Payment Date (the Record Date ) at their addresses shown on the registration books maintained by the Trustee. Upon the written request from any Owner of Bonds aggregating at least $1,000,000 in principal amount, received on or prior to the fifteenth day of the month preceding an applicable Interest Payment Date, by wire in Federal Reserve funds to an account within the United States on the Interest Payment Date, with regard to which such payment is made. See Book-Entry Only System below for a description of how interest and principal will be paid while the Book-Entry System is in effect. Redemption of the Bonds Optional Redemption. The Bonds maturing on or before December 1, 2024 shall not be subject to optional redemption prior to their respective stated maturities. The Bonds maturing on or after December 1, 2025 shall be subject to optional redemption from any source of available funds, prior to maturity in whole, or in part among maturities as shall be specified in a Certificate of the District filed with the Trustee and randomly by lot within a maturity, on any date on or after December 1, 2024, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. Sinking Fund Redemption of Bonds. The Bonds maturing December 1, 2034 shall be subject to mandatory sinking fund redemption in part, by lot, commencing on December 1, 2031, from mandatory sinking fund payments, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest to the date fixed for redemption, without premium, in the aggregate respective principal amounts and on the dates set forth below: Sinking Fund Redemption Date (December 1) Principal Amount To Be Redeemed 2031 $ 320, , , (maturity) 360,000 If some but not all of such Bonds have been redeemed pursuant to optional redemption, the total amount of all future sinking fund payments shall be reduced by the aggregate principal amount of such Bonds so redeemed, to be allocated among such sinking fund payments on a pro rata basis as determined by the District. Purchase in Lieu of Redemption. In lieu, or partially in lieu, of such call and redemption, moneys of the District may be used to purchase Outstanding Bonds prior to the selection of Bonds for redemption by the Trustee, at public or private sale as and when and at such prices as the District may in its discretion determine but only at prices (including brokerage or other expenses) of not more than par plus applicable accrued interest and redemption premiums, and any accrued interest payable upon the purchase of Bonds may be paid from the amount in the Payment Fund for payment of interest on the following Interest Payment Date. If 5

12 any Bond so purchased is not canceled upon purchase, the purchase of such Bond is subject to the prior written consent of the Insurer. Selection of Bonds for Redemption. In the event that part, but not all, of the Bonds are to be redeemed, the Bonds to be redeemed shall be selected by the Trustee among maturities as designated in writing by the District and by lot within a maturity; provided, however, that, as shall be set forth in a Certificate of the District, the Bonds may be redeemed by any maturity or maturities selected by the District, and by lot within a maturity. For the purpose of the selection described in this Section, all Bonds registered in the name of the same Owner shall be aggregated and treated as a single Bond held by such Owner. Notwithstanding any of the foregoing, in any such partial redemption the Trustee shall call the Bonds in integral multiples of $5,000. In the event of a redemption for which the Trustee does not have monies available to redeem the entire amount scheduled for redemption, the Trustee shall redeem Bonds of the applicable maturity or maturities by lot up to a principal amount equal to the available monies. Notice of Redemption; Rescission. The Trustee shall give notice (the Redemption Notice ), at the expense of the District, of the redemption of the Bonds. Such Redemption Notice shall specify: (a) the Bonds or designated portions thereof (in the case of redemption of the Bonds in part but not in whole) which are to be redeemed, (b) the date of redemption, (c) the place or places where the redemption will be made, including the name and address of any paying agent, (d) the redemption price, (e) the CUSIP numbers (if any) assigned to the Bonds to be redeemed, (f) if less than all the Bonds of a maturity are to be redeemed, the certificate numbers of the Bonds to be redeemed and, in the case of any Bond to be redeemed in part only, the amount of such Bond to be redeemed, and (g) the original issue date, interest rate and stated maturity date of each Bond to be redeemed in whole or in part. Such Redemption Notice shall further state that on the specified date there shall become due and payable upon each Bond or portion thereof being redeemed the redemption price, together with interest accrued to the redemption date, and that from and after such date interest with respect thereto shall cease to accrue and be payable. At least thirty (30) but not more than forty-five (45) days prior to the redemption date, the Trustee shall cause Redemption Notices to be given to the respective Owners of Bonds designated for redemption by first class mail, postage prepaid, at their addresses appearing on the Bond Register maintained by the Trustee. Neither failure to receive any Redemption Notice nor any defect in such Redemption Notice so given shall affect the sufficiency of the proceedings for the redemption of such Bonds. The District shall have the right to rescind any optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any such notice of optional redemption shall be canceled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. The District and the Trustee shall have no liability to the Owners or any other party related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent. Effect of Redemption. If, on said redemption date, moneys sufficient for the redemption of all the Bonds to be redeemed, together with interest to said redemption date shall be held by the Trustee so as to be available therefor on such redemption date, and, if notice of redemption thereof shall have been given as aforesaid, then, from and after said 6

13 redemption date, interest with respect to the portion of Bonds to be redeemed shall cease to accrue and become payable. If said moneys shall not be so available on said redemption date, interest with respect to such portion of Bonds shall continue to be payable until paid at the same rates as they would have been payable had they not been called for redemption. Issuance of Parity Obligations The District has covenanted in the Indenture that no additional indebtedness payable out of its Revenues shall be issued having any priority in payment of principal and accreted values, premium (if any), or interest over any Outstanding Parity Obligations, including the Bonds. The District has covenanted in the Indenture that, except for refunding Parity Obligations to the extent incurred to pay or discharge Outstanding Parity Obligations and which do not result in an increase in the average annual debt service on all Parity Obligations to be Outstanding after the issuance or incurrence of such refunding Parity Obligations, no additional Parity Obligations shall be created or incurred unless: (1) The District is not in default under the terms of the Indenture; (2) The Net Revenues, calculated in accordance with Generally Accepted Accounting Principles, either (i) as shown by the books of the District for the latest Fiscal Year, as verified by a certificate of a Finance Officer, or (ii) as shown by the books of the District for any more recent twelve (12) month period selected by the District, as verified by a certificate or opinion of an Independent Certified Public Accountant employed by the District, plus in either case (at the option of the District) the Additional Revenues, shall be at least equal to one hundred and twenty-five percent (125%) of the amount of Maximum Annual Debt Service; and (3) Except with respect to Governmental Loans, there shall be established from the proceeds of such Parity Obligations a reserve fund for the security of such Parity Obligations, in an amount equal to the lesser of (i) the maximum amount of debt service required to be paid by the District with respect to such Parity Obligations during any Fiscal Year, or (ii) the maximum amount then permitted under the Code, in either event as certified in writing by the District. With respect to Governmental Loans, the District may, in its sole discretion, establish a reserve fund in an amount not to exceed the limits set forth herein. Additional Revenues means, with respect to the issuance of any Parity Obligations, an allowance for Net Revenues (i) arising from any increase in the charges made for service from the System adopted prior to the incurring of such Parity Obligations and effective within eighteen (18) months following the date of incurring such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the District, and (ii) arising from any increase in service connections to the System prior to the incurring of such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such connections had been in existence during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the District, all as shown by the certificate or opinion of an Independent Financial Consultant. The provisions of subsection (2) above shall not apply to any Parity Obligations if (i) all of the proceeds of which (other than proceeds applied to pay costs of issuing such Parity Obligations and to make the reserve fund deposit required pursuant to subsection (3) above) shall be deposited in an irrevocable escrow held in cash or invested in Federal Securities for the 7

14 purpose of paying the principal of and interest and premium (if any) on any Outstanding Bonds or on any outstanding Parity Obligations, (ii) at the time of the incurring of such Parity Obligations, the District certifies in writing that maximum annual debt service on the refunding Parity Obligations will not exceed Maximum Annual Debt Service on the Outstanding Bonds being refunded, and (iii) the final maturity of the refunding Parity Obligations is not later than the final maturity of the refunded Bonds. In order to maintain the parity relationship of the Debt Service Payments to all Parity Obligations, the District has covenanted that all payments in the nature of principal and interest with respect to any Parity Obligations, except with respect to Governmental Loans, will be structured to occur semi-annually on the Due Dates and in each year as such payments are due with respect to the Debt Service Payments, and reserve account replenishment with respect to any Parity Obligations, except with respect to Governmental Loans, will be structured to occur monthly, and to otherwise structure the terms of such Parity Obligations to ensure that they are in all respects payable on a parity with the Debt Service Payments and not prior thereto; provided that the District shall not make a payment on such Governmental Loan to the extent it would have the effect of causing the District to fail to pay Debt Service Payments on a timely basis. In such event, the District shall make Debt Service Payments and payments on such Governmental Loan on a pro rata basis. Subordinate Obligations. Notwithstanding the foregoing, nothing in the Indenture will be construed as prohibiting the issuance by the District of subordinated debt secured by Net Revenues. Book-Entry Only System DTC will act as securities depository for the Bonds. The Bonds will be issued as fullyregistered bonds registered in the name of Cede & Co. (DTC s partnership nominee). One fully-registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX F - BOOK ENTRY PROVISIONS herein. Neither the District nor the Trustee can and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal, interest or premium with respect to the Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither the District nor the Trustee are responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto. 8

15 ESTIMATED SOURCES AND USES OF FUNDS The proceeds received from the sale of the Bonds and other available funds are to be applied as follows: Sources of Funds Principal Amount of Bonds $ 5,290, Net Original Issue Premium 252, Amount Relating to Refunded 2005 Certificates 427, TOTAL SOURCES $ 5,970, Uses of Funds: Transfer to Escrow Agent (1) $ 5,761, Costs of Issuance (2) 208, TOTAL USES $ 5,970, (1) See THE REFUNDING PLAN above. (2) Includes fees of Bond Counsel, Disclosure Counsel and Trustee, Underwriter s discount, premiums for the Policy and Reserve Fund Insurance Policy and other costs of issuing the Bonds. DEBT SERVICE The following table illustrates the annual debt service for the Bonds as of December 1 of each year. Period Ending (December 1) Principal Interest Total Debt Service 2015 $ 270,000 $ 120,784 $ 390, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 97, , ,000 87, , ,000 75, , ,000 67, , ,000 57, , ,000 47, , ,000 36, , ,000 24, , ,000 12, ,600 TOTALS $ 5,290,000 $2,116,884 $ 7,406,884 9

16 SECURITY FOR THE BONDS General THE BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT PAYABLE SOLELY FROM AND SECURED SOLELY BY THE NET REVENUES PLEDGED THEREFOR IN THE INDENTURE AND ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF, OR CHARGE OR LIEN UPON ANY PROPERTY OF THE DISTRICT, OR ANY OF THE DISTRICT S INCOME OR RECEIPTS, EXCEPT THE NET REVENUES. THE BONDS ARE NOT A DEBT OF THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE DISTRICT, AND NEITHER THE FAITH AND CREDIT OF THE DISTRICT, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS ARE PLEDGED TO THE PAYMENT OF THE BONDS, AND THE DISTRICT IS NOT OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION THEREFOR. NEITHER THE BONDS NOR THE OBLIGATION TO MAKE DEBT SERVICE PAYMENTS CONSTITUTES AN INDEBTEDNESS OF THE DISTRICT, THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Pledge of Net Revenues The Bonds are secured by a pledge of the Net Revenues received by the District from the operation of the System, as those terms are defined below and upon all money and securities on deposit in certain accounts under the Indenture. The obligation of the District to make Debt Service Payments from Net Revenues is absolute and unconditional, and until such time as all Debt Service Payments shall have been fully paid and the Bonds are no longer Outstanding (or provision for the payment thereof shall have been made), the District will not, under any circumstances, discontinue, abate or suspend any payment due under the Indenture when due, whether or not the System is operating or operable or has been completed, or whether or not the System is condemned, damaged, destroyed or seized 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, counterclaim, defense, recoupment, abatement, suspension, deferment or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement or covenant contained in the Indenture for any cause whatsoever. All Net Revenues are irrevocably pledged by the District to the payment of debt service on the Bonds as provided in the Indenture, and the Net Revenues shall not be used for any other purpose while any of the Bonds remain Outstanding; provided, however, that out of the Net Revenues, there may be apportioned such sums for such purposes as are expressly permitted by the Indenture, including payment of debt service on any Parity Obligations. This pledge shall constitute a first lien on the Net Revenues for the payment of the Debt Service Payments and debt service on any Parity Obligations in accordance with the Indenture. The Bonds are not secured by a lien on the System or any other property of the District. In the Indenture, the District covenants that, so long as any Bonds are outstanding, the District will not issue or incur any obligations payable from Net Revenues superior to the payment of the Debt Service Payments. The District is authorized to issue additional Parity Obligations secured by Net Revenues with a lien on a parity basis with the lien of the Bonds, provided it complies with certain provisions in the Indenture. See THE BONDS Issuance of 10

17 Parity Obligations herein. by Net Revenues. The District is also authorized to issue subordinate debt secured Net Revenues are Revenues less the Operation and Maintenance Expenses, as such terms are defined below. The System means the District s water system, including all facilities, works, properties and structures of the District for the treatment, transmission and distribution of water, including all contractual rights to water supplies, transmission capacity supply, easements, rights-of-way and other works, property or structures necessary or convenient for such facilities, together with all additions, betterments, extension and improvements to such facilities or any part thereof hereafter acquired or constructed. See THE DISTRICT and THE WATER SYSTEM herein for a description of the System. Revenues means all gross income and revenue received or receivable by the District from the ownership and operation of the System, calculated in accordance with Generally Accepted Accounting Principles, including all rates, fees and charges (including connection fees) received by the District for Water Service and all other income and revenue howsoever derived by the District from the System or arising from the System; provided, however, that (i) any specific charges levied for the express purpose of reimbursing others for all or a portion of the cost of the acquisition or construction of specific facilities, or (ii) customers deposits or any other deposits subject to refund until such deposits have become the property of the District, are not Revenues. Operation and Maintenance Expenses means the reasonable and necessary costs and expenses paid by the District for maintaining and operating the System, as determined in accordance with Generally Accepted Accounting Principles, including but not limited to (a) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the System in good repair and working order, and (b) administrative costs of the District attributable to the System and the financing thereof; but excluding (x) depreciation, replacement and obsolescence charges or reserves therefor, (y) in any Fiscal Year prior to setting aside an amount equal to the Debt Service Payments for such Fiscal Year, capital expenditures other than as set forth in subsection (a) above, and (z) amortization of intangibles or other bookkeeping entries or a similar nature. The District has covenanted to fix, prescribe and collect rates and charges for the System sufficient to annually provide Net Revenues equal to 125% of the Debt Service Payments and the payment of debt service on any Parity Obligations, plus certain reserves. See Rate Covenant below. Debt Service Payments The Indenture requires the District to pay all Debt Service Payments directly to the Trustee on the applicable Due Date. The District is required to pay Debt Service Payments without offset or deduction of any kind. Due Date means the fifteenth (15) day of the month prior to an Interest Payment Date. See APPENDIX A hereto. See also Pledge of Net Revenues above. The District s obligation to make Debt Service Payments is a special obligation of the District payable solely from the Net Revenues and other funds provided for in the Indenture. Neither the Bonds nor the obligation of the District to make Debt Service Payments constitutes a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limit or restriction or an obligation for which 11

18 the District or the State of California is obligated to levy or pledge any form of taxation or for which the District or the State of California has levied or pledged any form of taxation. Rate Covenant The District has covenanted that the District shall fix, prescribe, revise and collect rates, fees and charges for the service and facilities furnished by the System during each Fiscal Year, which are at least sufficient, after making allowances for contingencies and error in the estimates, to yield Revenues sufficient to pay the following amounts in the following order of priority: (a) The District will, at all times while any of the Bonds remain Outstanding, fix, prescribe and collect rates, fees and charges in connection with the System so as to yield Revenues at least sufficient, after making reasonable allowances for contingencies and errors in the estimates, to pay the following amounts in the order below set forth: (1) All Operation and Maintenance Expenses of the System; (2) The Debt Service Payments and interest thereon and all payments (including payments of interest and under reimbursement agreements) with respect to related Parity Obligations issued or incurred as they become due and payable; (3) Amounts necessary to bring the amount of funds in the Reserve Fund up to the Reserve Requirement within one year of a draw thereon and amounts necessary to bring the amount of funds in any reserve account up to the Reserve Requirement within one year of a draw thereon for any Parity Obligations; and (4) All other payments required to meet any other obligations of the District which are charges, liens, encumbrances upon the Revenues or the Net Revenues during such Fiscal Year. (b) Furthermore, the District shall fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the System during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to one hundred and twenty-five percent (125%) of the aggregate amount of the Debt Service Payments, and principal of and interest on any Parity Obligations issued or incurred after the date hereof payable from Net Revenues coming due and payable during such Fiscal Year. The District may make adjustments, from time to time, in its rates, fees and charges as it deems necessary, but shall not reduce its rates, fees and charges below those in effect unless the Net Revenues resulting from such reduced rates, fees and charges shall at all times be sufficient to meet the requirements set forth in this paragraph. (c) If the District violates the covenants set forth above, such violation shall not, in and of itself, be a default under the Indenture and shall not give rise to a declaration of an Event of Default if the coverage calculated hereunder does not decrease below 1.00 times annual Debt Service Payments, payments on Parity Obligations, amounts sufficient to maintain the Reserve Fund at the Reserve Requirement, and Operation and Maintenance Expenses of the System and, within 120 days after the date such violation is discovered, the District hires an Independent Financial Consultant or an Independent Engineer to review the 12

19 revenues and expenses of the System and abides by such consultant s recommendations to revise the schedule of rates, fees and charges and to revise any Operation and Maintenance Expenses of the System insofar as practicable and to take such other actions as are necessary so as to produce Net Revenues to cure such violation for future compliance; provided, however, that if the District does not cure such violation within twelve (12) months succeeding the date such violation is discovered, an Event of Default shall be deemed to have occurred. Reserve Fund Under the Indenture, a Reserve Fund is established for the Bonds (the Reserve Fund ), and will be held in trust by the Trustee. On the Closing Date, a reserve fund insurance policy from AGM (the Reserve Fund Policy ) will be deposited into the Reserve Fund in the amount of $390, The premium on the Reserve Fund Policy will be fully paid at or prior to the issuance of the Bonds. The Reserve Fund Policy will provide that, upon the later of (i) the Business Day next following the Business day of receipt by AGM of a Notice of Nonpayment presented by the Trustee to AGM; or (ii) the payment date of the Bonds as specified in the Notice of Nonpayment, AGM will make a deposit of funds with the Trustee, or its successor, in an amount sufficient to pay principal and interest on the Bonds, to the extent of amounts available under the Reserve Fund Policy up to the Policy Limit. See APPENDIX A SUMMARY OF THE INDENTURE under the caption Bond Reserve Policy Provisions for further information with respect to the Reserve Fund Policy. Application of Revenues Payments from Revenue Fund. The District has covenanted that all Revenues, when and as received, will be received and held by the District in trust for the benefit of Bondholders and payments with respect to any Parity Obligations, and will be deposited by the District immediately upon receipt in the Revenue Fund, which the District has covenanted in the Indenture to establish and maintain throughout the term of the Bonds. All Revenues shall be disbursed, allocated and applied solely to the uses and purposes set forth in the Indenture, and shall be accounted for separately and apart from all other money, funds, accounts or other resources of the District. All Revenues in the Revenue Fund shall be set aside by the District and applied in the following order of priority: (1) Operation and Maintenance Expenses. The District agrees and covenants to pay all Operation and Maintenance Expenses (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Expenses, the payment of which is not then immediately required) from the Revenue Fund as they become due and payable. (2) Debt Service Payments. Debt Service Payments payable pursuant to the Indenture and all other payments relating to principal and interest on or with respect to Parity Obligations, shall be paid in accordance with the terms hereof and of such Parity Obligations, without preference or priority, and in the event of any insufficiency of such moneys, ratably without any discrimination or preference. 13

20 (3) Reserve Funds. Payments required pursuant to the Indenture, or with respect to Parity Obligations, to replenish debt service reserve funds established for Parity Obligations shall be made in accordance with the terms of the Indenture and such Parity Obligations, without preference or priority, and in the event of any insufficiency of such moneys, ratably without any discrimination or preference. (4) General Expenditures. All Revenues not required to be withdrawn pursuant to the provisions of (1) through (3) above will be used for expenditure for any lawful purpose of the District, including payment of Operation and Maintenance Expenses or payment of any rebate requirement or of any obligation subordinate to the payment of all amounts due under the Indenture or under Parity Obligations. Payment of Debt Service Payments. On or before each Due Date, the District shall withdraw from the Debt Service Fund established under the Indenture an amount sufficient to the aggregate amount of the Debt Service Payments coming due on the next succeeding Interest Payment Date, and transfer the same to the Trustee for deposit into the Payment Fund on the following dates and in the following amounts: (1) Interest Component. On or before the fifteenth day of each May and November, an amount which is equal to the amount to become due on such Bonds on the next succeeding Interest Payment Date; provided, however, that the District may be entitled to certain credits on such payments to the extent funds for such purpose are on deposit in the Payment Fund. (2) Principal Component. On or before the fifteenth day of November of each year, an amount which, together with any moneys already on deposit with the Trustee and available to make such payment, is not less than the entire amount of the next succeeding maturing principal or mandatory sinking account payment coming due on the Bonds after such date; provided, however, that the District may be entitled to certain credits on such payments to the extent funds for such purpose are on deposit in the Payment Fund. No Amendments to Indenture So long as the Bonds are Outstanding, the District has covenanted to not amend or supplement the Indenture, except as provided for in the Indenture. See APPENDIX A hereto. BOND INSURANCE There follows under this caption certain information concerning the terms of the Policy and the Insurer that has been supplied by the Insurer for inclusion in this Official Statement. No representation is made by the District or the Underwriter as to the accuracy, completeness or adequacy of such information, nor as to the absence of material adverse changes in such information subsequent to the date of this Official Statement. Neither the District nor the Underwriter have made any independent investigation of the Insurer or the Policy, and reference is made to the information set forth below and in APPENDIX F hereto for a description thereof. The following information and the specimen of the Policy attached as APPENDIX F hereto have been furnished by the Insurer for use in this Official Statement. 14

21 Bond Insurance Policy Concurrently with the issuance of the Bonds, Assured Guaranty Municipal Corp. ("AGM" or the Insurer ) will issue its Municipal Bond Insurance Policy for the Bonds (the "Policy"). The Policy guarantees the scheduled payment of principal of and interest on the Bonds when due as set forth in the form of the Policy included as an exhibit to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Assured Guaranty Municipal Corp. AGM is a New York domiciled financial guaranty insurance company and an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. Neither AGL nor any of its shareholders or affiliates, other than AGM, is obligated to pay any debts of AGM or any claims under any insurance policy issued by AGM. AGM s financial strength is rated AA (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ), AA+ (stable outlook) by Kroll Bond Rating Agency, Inc. ( KBRA ) and A2 (stable outlook) by Moody s Investors Service, Inc. ( Moody s ). Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings. On November 13, 2014, KBRA assigned an insurance financial strength rating of AA+ (stable outlook) to AGM. AGM can give no assurance as to any further ratings action that KBRA may take. On July 2, 2014, S&P issued a credit rating report in which it affirmed AGM s financial strength rating of AA (stable outlook). AGM can give no assurance as to any further ratings action that S&P may take. On July 2, 2014, Moody s issued a rating action report stating that it had affirmed AGM s insurance financial strength rating of A2 (stable outlook). In February 2015, Moody s published a credit opinion under its new financial guarantor ratings methodology maintaining its 15

22 existing rating and outlook on AGM. action that Moody s may take. AGM can give no assurance as to any further ratings For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, Capitalization of AGM. At December 31, 2014, AGM s policyholders surplus and contingency reserve were approximately $3,763 million and its net unearned premium reserve was approximately $1,769 million. Such amounts represent the combined surplus, contingency reserve and net unearned premium reserve of AGM, AGM s wholly owned subsidiary Assured Guaranty (Europe) Ltd. and 60.7% of AGM s indirect subsidiary Municipal Assurance Corp.; each amount of surplus, contingency reserve and net unearned premium reserve for each company was determined in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference. Portions of the following document filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (filed by AGL with the SEC on February 26, 2015). All consolidated financial statements of AGM and all other information relating to AGM included in, or as exhibits to, documents filed by AGL with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, excluding Current Reports or portions thereof furnished under Item 2.02 or Item 7.01 of Form 8-K, after the filing of the last document referred to above and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52 nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Except for the information referred to above, no information available on or through AGL s website shall be deemed to be part of or incorporated in this Official Statement. Any information regarding AGM included herein under the caption BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters. AGM or one of its affiliates may purchase a portion of the Bonds offered under this Official Statement and such purchases may constitute a significant proportion of the Bonds offered. AGM or such affiliate may hold such Bonds for investment or may sell or otherwise dispose of such Bonds at any time or from time to time. AGM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than 16

23 with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE. RISK FACTORS The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating the risks in the purchase of the Bonds. System Demand and Growth There can be no assurance that the local demand for the services provided by the System will be maintained at levels described in this Official Statement under the heading THE DISTRICT and THE WATER SYSTEM. Reduction in the level of demand could require an increase in rates or charges in order to produce Net Revenues sufficient to comply with the District s rate covenant in the Indenture. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. There can be no assurance that any other entity with regulatory authority over the System will not adopt further restrictions on operation of the System. System Expenses There can be no assurance that the District s expenses for the System will be consistent with the levels described in this Official Statement. Changes in technology, new regulatory requirements, increases in the cost of energy or other expenses would reduce Net Revenues, and could require substantial increases in rates or charges in order to comply with the rate covenant. Such rate increases could increase the likelihood of nonpayment, and could also decrease demand Drought Executive Order On April 1, 2015 the Governor of California issued an executive order (the 2015 Executive Order ) mandating, among other provisions, a 25% reduction in potable urban water usage in California (as compared to potable water usage in 2013) through February 28, The State Water Resources Control Board (the SWRCB ) is expected to issue rules implementing such mandatory reductions sometime in April. The 2015 Executive Order provides that the actual mandatory reduction required of each water supplier by the SWRCB will vary based on per capita water usage, with those areas with higher per capita water use being required to achieve proportionately higher reductions than those areas with lower per capita water usage. Until the SWRCB issues such rules, the District cannot predict what effect the 2015 Executive Order will have on the operations or finances of the District. The District does not currently believe that the reductions required by the 2015 Executive Order will have a material adverse effect on the District s ability to pay Debt Service on the Bonds. The District is obligated under the Indenture to set rates and charges sufficient to provide Net Revenues equal to 125% of Debt Service due in each Fiscal Year as more particularly described under the caption SECURITY FOR THE BONDS Rate Covenant. 17

24 Parity Obligations Although the District has covenanted not to issue additional obligations payable from Net Revenues senior to the Debt Service Payments, the Indenture permits the issuance by the District of certain indebtedness which may have a lien upon the Net Revenues which is on a parity basis to the lien which secures the Debt Service Payments, if certain coverage and other tests are met (see THE BONDS Issuance of Parity Obligations herein). These coverage tests involve, to some extent, projections of Net Revenues. If such indebtedness is issued or incurred, the debt service coverage for the Debt Service Payments securing the Bonds may be diluted below what it otherwise would be subject to under the coverage tests. Moreover, there is no assurance that the assumptions which form the basis of such projections, if any, will be actually realized subsequent to the date of such projections. If such assumptions are not realized, the amount of future Net Revenues may be less than projected, and the actual amount of Net Revenues may be insufficient to provide for the payment of the Debt Service Payments and such additional indebtedness. Proposition 218 On November 5, 1996, the voters of the State approved Proposition 218, the Right to Vote on Taxes Act. Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of the District to levy and collect both existing and future taxes, assessments, fees and charges. Proposition 218 also extends the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes, assessments, fees and charges imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees or charges, except those which are pledged to the repayment of certain debt. If such a repeal or reduction in District fees or charges were to occur, and it was held that any such taxes, assessments, fees or charges were not pledged to any debt repayment, the District s ability to make Debt Service Payments could be adversely affected. In addition, while the matter is not free from doubt, Proposition 218 imposed restrictions on the levy of charges for property-related services. In July 2006 the California Supreme Court confirmed that a public agency s charges for ongoing water delivery are fees and charges within the meaning of Proposition 218. As a result, voters within the boundaries of the District could adopt an initiative measure that reduced or repealed water rates and charges levied by the District, although it is not clear (and has not been determined by State courts) whether such action would be enforceable where such fees and charges are pledged as coverage to the repayment of indebtedness such as the Bonds. The District believes that its fees for water service will not be adversely affected by the application of the substantive or procedural requirements of Proposition 218, and that Proposition 218 would not have any immediate adverse effect on its ability to operate its System. However, there can be no assurance of the availability of remedies to protect fully the interest of the holders of the Bonds. In addition, Proposition 218 affects the levy of rates and charges of certain public agency customers of the District. Constitutional Limit on Appropriations, Fees and Charges If a portion of the System rates or connection charges were determined by a court to exceed the reasonable costs of providing service, any fee which the District charges may be 18

25 considered to be a special tax, which under Articles XIIIA or XIIID of the California Constitution must be authorized by a two-thirds vote of the affected electorate. This requirement is applicable to the District s rates for service provided by the System. The reasonable cost of service provided by the System has been determined by the State Controller to include depreciation and allowance for the cost of capital improvements. In addition, the State courts have determined that fees such as connection fees (capacity charges) will not be special taxes if they approximate the reasonable cost of constructing System improvements contemplated by the local agency imposing the fee. Such court determinations have been codified in the Government Code of the State of California (Section et seq.). Under Article XIIIB of the California Constitution, state and local government entities have an annual appropriations limit which limits their ability to spend certain moneys called appropriations subject to limitation, which consists of tax revenues, certain state subventions and certain other moneys, including user charges to the extent they exceed the costs reasonably borne by the entity in providing the service for which it is levying the charge. In general terms, the appropriations limit is to be based on certain Fiscal Year 1978/79 expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population and services provided by these entities. Among other provisions of Article XIIIB, if an entity s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. The District is of the opinion that the rates and use charges imposed by the District in connection with the System do not exceed the costs it reasonably bears in providing such services. Limited Recourse on Default If the District defaults on its obligation to make Debt Service Payments, the Trustee has the right to accelerate the total unpaid principal amounts of the Debt Service Payments. However, in the event of a default and such acceleration there can be no assurance that the District will have sufficient Net Revenues to pay the accelerated Debt Service Payments and payments with respect to Parity Obligations. Limitations on Remedies Available; Bankruptcy The enforceability of the rights and remedies of the Owners and the obligations of the District may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors rights generally, now or hereafter in effect; equitable principles which may limit the specific enforcement under State law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police power inherent in the sovereignty of the State and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercising of powers by the federal or State government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights. 19

26 No Obligation to Tax The obligation of the District to pay the Debt Service 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 Debt Service Payments does not constitute a debt or indebtedness of any District, the State or any of its political subdivisions, in contravention of any constitutional or statutory debt limitation or restriction. Change in Law In addition to the other limitations described herein, the State electorate or Legislature could adopt a constitutional or legislative property tax decrease or an initiative with the effect of reducing revenues payable to or collected by the District. There is no assurance that the State electorate or Legislature will not at some future time approve additional limitations that could have the effect of reducing the Net Revenues and adversely affecting the security of the Bonds. Geologic, Topographic and Climatic Conditions The value of the System, and the ability to generate Revenues, is contingent upon the ability of the District to deliver water to its customers. The financial stability of the District can be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions (such as earthquakes), topographic conditions (such as earth movements and floods) and climatic conditions (such as droughts and tornadoes). The District is in an active geological area. Engineering standards require that some of these factors be taken into account, to a limited extent, in the design of improvements, including the System. Some of these factors may also be taken into account, to a limited extent, in the design of other infrastructure and public improvements neither designed nor subject to design approval by the District. Design criteria in any of these circumstances are established upon the basis of a variety of considerations and may change, leaving previously-designed improvements unaffected by more stringent subsequently established criteria. In general, design criteria reflect a balance at the time of protection and the future costs of lack of protection, based in part upon a present perception of the probability that the condition will occur and the seriousness of the condition should it occur. Conditions may occur which may result in damage to improvements in varying degrees, and such damage may entail significant repair or replacement costs, and there can be no assurance that such repair or replacement will occur. Under any of these circumstances, the public and private improvements within the District in general may well depreciate or disappear, notwithstanding the establishment of design criteria for any such condition. Major portions of the California State Water Project (the State Water Project ) delivery system are located parallel to and near the San Andreas Fault and other faults. The State Water Project facilities are designed to withstand earthquakes without major damage. Inspections following the June 1992 Landers earthquake, a magnitude 6.5 earthquake on the same day near Big Bear City, and the October 17, 1987 magnitude 7.1 Loma Prieta earthquake in northern California did not reveal any damage to State Water Project facilities. The January 17, 1994 magnitude 6.7 earthquake centered in Northridge created slight damage to State Water Project facilities. Occurrence of other earthquakes could cause an interruption 20

27 of deliveries of water to and from the District until repairs could be effected, thus possibly diminishing the value of the System and the amount of Revenues. However, the District s North Las Posas Basin Aquifer Storage Project, which is functioning but not yet completed, was designed to provide for additional supply storage in the event of an earthquake or other supply related emergency. See THE DISTRICT Emergency Supplies herein for a discussion of water supply sources available to the District in an emergency. The State of California has experienced severe droughts in the current and recent years, which caused a significant reduction in, and, in some cases, elimination of, the amount of water available from the State Water Project. Operational mandates for environmental protection of the Sacramento-San Joaquin River Delta (the source of water for the State Water Project) as imposed by federal and state regulatory agencies also impinge on the amount of water available for delivery to contractors. In the State Water Project Draft Delivery Reliability Report 2013, the State Department of Water Resources forecasts that, based on historical precipitation patterns, current level of demand, and operating under these environmental mandates, on average 60% of contractor requests will be met through The State Water Project is a source of less than 10% of the water delivered by the District. See THE DISTRICT Water Supply herein. Interruption of delivery of water for any reason will not alter the legal obligation of the District to pay Debt Service Payments. However, a reduction in the availability of water could materially adversely affect the Revenues. See THE DISTRICT Emergency Supplies herein. Environmental Considerations Bay-Delta. Most of California s developed water supply flows into or is exported from the Sacramento-San Joaquin River Delta/San Francisco Bay Estuary (Delta). Human activity and changing environmental conditions coupled with a complex framework of federal and state laws administered by numerous agencies have made management of the Delta challenging. Recent State Water Legislation. In November 2009, the State enacted the Delta Reform Act, which created the Delta Stewardship Council (the DSC ), to assume Bay-Delta management responsibilities in lieu of the California Bay-Delta Authority. Under the legislation, the DSC must work to achieve the coequal goals of providing a more reliable water supply for California and protecting, restoring, and enhancing the Delta ecosystem. The legislation also mandates that the coequal goals be achieved in a manner that protects and enhances the unique cultural, recreational, natural resource, and agricultural values of the Delta. The legislation required the DSC to adopt a comprehensive Delta Plan, which the DSC did in May Seven separate lawsuits were filed challenging the legality of the plan, and those remain pending as of this time. The Delta Reform Act also reshaped the existing Delta Protection Commission (the DPC ) into a 15-member body primarily comprising local representatives from Bay-Delta communities. The legislation required the DPC to adopt a Bay-Delta economic sustainability plan, which the DPC completed on January The legislation also created a new Sacramento-San Joaquin Delta Conservancy (the Conservancy ) to engage in ecosystem restoration projects within the Bay-Delta and Suisun Marsh. The Conservancy is authorized to acquire conservation easements and to support efforts that advance the economic well-being of Bay-Delta residents. Finally, the legislation mandated that the State Water Resources Control Board ( SWRCB ) conduct informational hearings and issue a report regarding criteria for Bay-Delta 21

28 outflows that would, in the SWRCB s opinion, protect and preserve public trust resources. In a report that was unanimously adopted in August 2010, the SWRCB concluded that substantially increased flows from rivers flowing into the Bay-Delta would be needed in the Delta ecosystem if fishery protection was the sole purpose for which its waters were put to beneficial use. Bay Delta Conservation Plan. TheBayDeltaConservationPlan(the BDCP )isa long-term conservation strategy designed to improve the status of species and natural communities covered by the plan, and provide the basis for long-term permits under the federal Endangered Species Act and California Natural Community Conservation Planning Act for operation of the SWP and the federal Central Valley Project ( CVP ) (collectively, the Water Projects ). The goal of the plan is to improve the reliability of Delta water supply, while also restoring aquatic habitat and fish populations. The BDCP is guided by a steering committee of local water agencies, environmental and conservation organizations, state and federal agencies, and other interest groups. The State released a public draft of the BDCP in November 2013, and an accompanying Draft Environmental Impact Report/Environmental Impact Statement (the BDCP EIR/EIS ). The BDCP EIR/EIS was prepared to fulfill the requirements of the California Environmental Quality Act (CEQA) and the National Environmental Policy Act (NEPA). The draft BDCP EIR/EIS considers numerous alternatives and one no action alternative. The no action alternative describes future circumstances without implementation of the proposed BDCP actions, and represents continuation of the existing plans, policies, operations, and conditions that represent continuation of trends in nature. The other alternatives include various combinations of water conveyance configurations, capacities, operations, and habitat restoration, and their effects on biological resources, hydrology, and the human environment. Under CEQA, the Preferred Alternative designated by DWR includes two 40-foot inside diameter tunnels to carry water 35 miles to the existing pumping plants in the south Delta. From there, water would be moved into existing aqueducts that supply much of the State. However, this alternative is subject to change as DWR receives and considers public and agency input on the environmental analysis. The District is unable to predict what the final Preferred Alternative will be, or the financial or operational impact of such Preferred Alternative. Stakeholders with diverse interests have expressed varying degrees of dissatisfaction with the BDCP. ESA Litigation. The listing of a number of fish species as threatened or endangered under the federal and/or California Endangered Species Acts (respectively, the Federal ESA and the California ESA and, collectively, the ESAs ) have affected operations of the Water Projects by reducing the amount of water pumped by the Water Projects and by limiting the flexibility of both Water Projects. Currently, six species, the Sacramento River winter-run and Central Valley spring-run Chinook salmon, delta smelt, a distinct population segment of the North American green sturgeon, Central Valley steelhead, and Southern Resident killer whales ( Southern Resident ) are listed under the Federal ESA and are the subject of two biological opinions involving the operation of the Water Projects. The Federal ESA requires that before any federal agency authorizes, funds, or carries out an action, it must consult with the appropriate federal wildlife agency to determine whether the action is likely to jeopardize the continued existence of any threatened or endangered species, or adversely modify the species critical habitat. The result of the consultation is known as a biological opinion. In the biological opinion, the federal wildlife agency determines whether the action is likely to cause jeopardy to the species or destruction or adverse 22

29 modification of its critical habitat, and recommends a reasonable and prudent alternative ( RPA ) (in the event an affirmative finding of jeopardy or adverse modification is made) or reasonable and prudent measures (in the event a finding is made that the action is not likely to result in jeopardy or adverse modification) that would allow the action to proceed without causing jeopardy or adverse modification. Typically, an incidental take statement (or ITS ) accompanies the biological opinion. The ITS allows the action to proceed even though it may result in some level of take, including harming or killing some members of the species, incidental to the agency action, provided that the agency action does not jeopardize the continued existence of any threatened or endangered species and complies with mitigation and minimization measures recommended by the federal wildlife agency. On December 15, 2008, the United States Fish and Wildlife Service (the Service ) issued a biological opinion and ITS that govern operations of the Water Projects with respect to the delta smelt and its critical habitat. The Service concluded that the continued long-term operation of the Water Projects and cumulative effects are likely to jeopardize the continued existence of the delta smelt. Because the delta smelt is listed under state law, as well as federal law, the Department of Water Resources sought and obtained a consistency determination under the California ESA based, in part, on the 2008 Biological Opinion. The Service has twice reinitiated consultation in order to amend the ITS. This has had no effect on the consistency determination issued under state law. On June 4, 2009, the National Marine Fisheries Service ( NMFS ) issued a biological opinion and ITS on the proposed operations of the Water Projects with respect to the Sacramento River winter-run Chinook salmon, Central Valley spring-run Chinook salmon, Central Valley steelhead, Central California Coast steelhead, Southern Distinct Population Segment of North American green sturgeon ( Green Sturgeon ), and the Southern Resident. NMFS concluded that the long-term operations of the Water Projects and cumulative effects are likely to jeopardize the continued existence of the winter-run and spring-run Chinook salmon, the Central Valley steelhead, the Green Sturgeon, and the Southern Resident. NMFS further concluded that the long-term operations would destroy or adversely modify the designated critical habitat of the winter-run and spring-run Chinook salmon, the Central Valley steelhead, and the proposed critical habitat of the Green Sturgeon. NMFS concluded that the proposed operations are not likely to jeopardize the continued existence of the Central California Coast steelhead. The Department of Water Resources has altered the operations of the SWP to accommodate the listed species. This change in operations has influenced the manner in which water is diverted from the Bay-Delta and SWP deliveries. The District cannot predict whether ongoing activities will result in future reinitiation of consultation triggering changes to one or both of the biological opinions described above, which could result in any materially positive or adverse impact on the operation of the District s System. Impact of State Budget The State has experienced serious budgetary shortfalls in recent years, although the state is currently projected to end the current fiscal year with a significant surplus. The District cannot predict what actions will be taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures. It is therefore anticipated that there could be additional legislation in the future which addresses a shortfall. The District cannot 23

30 predict what measures may be proposed or implemented for the current Fiscal Year or in the future. Given the magnitude of the State s historical budgetary deficits, it is possible that future legislation will impact revenues of local agencies. These developments at the State level will most likely adversely affect local governments. Proposition 1A, passed by the voters in 2004 ( Proposition 1A ), amended the California Constitution to, among other things, prohibit the shift of property tax revenues from cities, counties and special districts, except to address a severe state financial hardship (and only then if (x) such amounts were agreed to be repaid with interest within three years, (y) the State had repaid any other borrowed amounts, and (z) such borrowing could not occur more often than twice in ten years). In 2009 the State Legislature exercised its authority and suspended the protection of Proposition 1A for Fiscal Year 2009/10, and authorized approximately $1.9 billion to be borrowed from local governments through the suspension of Proposition 1A, all of which was subsequently repaid. The District participated in the Proposition 1A financing. The District currently does not anticipate that the State budget problems will materially adversely impact the operation of its water operations or its ability to pay Debt Service Payments or any of its other obligations as when due. Loss of Tax Exemption As discussed in this Official Statement under the caption TAX MATTERS, interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date the Bonds were issued, as a result of future acts or omissions of the District in violation of its covenants in the Indenture. Should such an event of taxability occur, the Bonds are not subject to a special redemption and will remain outstanding until maturity or until prepaid under one of the other redemption provisions contained in the Indenture. In addition, legislation affecting the tax exemption of interest on the Bonds may be considered by the United States Congress and the State legislature. Federal and state court proceedings and the outcome of such proceedings could also affect the tax exemption of interest on the Bonds. No assurance can be given that legislation enacted or proposed, or actions by a court, after the date of delivery of the Bonds will not have an adverse effect on the tax exemption of interest on the Bonds or the market value of the Bonds. IRS Audit of Tax-Exempt Issues The IRS has initiated an expanded program for the auditing of tax-exempt issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar obligations). Secondary Market for Bonds There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that any Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then-prevailing circumstances. Such prices could be substantially different from the original purchase price. 24

31 Insurer Default The Insurer. In the event that the District fails to provide funds to make payment of the principal of and interest on the Bonds when the same shall become due, any owner of such Bonds shall have a claim on the Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory redemption resulting from default or otherwise, the payments guaranteed under the Policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration. The Policy does not insure the payment of any premium payable upon the redemption of the Bonds. Purchasers of the Bonds should also note that, while the Policy will insure payment of the principal amount (but not any premium) paid to any owner of the Bonds in connection with the mandatory or optional redemption of any Bond which is recovered from such owner as a voidable preference under applicable bankruptcy law, such amounts will be repaid by the Insurer to the Owner only at the times and in the amounts as would have been due absent such redemption unless the Insurer chooses to pay such amount at an earlier date or dates. So long as the Insurer performs its obligations under the Policy, the Insurer shall be deemed to be the sole holder of the Bonds insured by it for the purpose of exercising any voting right or privilege or giving any consent of direction or taking any other action that the Owners of such Bonds are entitled to take pursuant to the Indenture pertaining to defaults and remedies, and the duties and obligations of the Trustee. In the event that the Insurer is unable to make payments of principal of and interest on the Bonds as such payments become due, the Bonds are payable solely from moneys received by the Trustee pursuant to the Indenture. In the event that the Insurer is required to pay principal of or interest on the Bonds, no representation or assurance is given or can be made that such event will not adversely affect the market price for or marketability of the Bonds. The long-term insured ratings on the Bonds are dependent, in part, on the claims paying ability or financial strength ratings, as applicable, of the Insurer. The Insurer s current claims paying ability or financial strength ratings are predicated upon a number of factors which could change over time and could result in downgrading of the insured ratings on the Bonds. Such a downgrade could adversely affect the market price for, and marketability of, the Bonds. The Insurer is not contractually bound to maintain its present claims paying ability or financial strength ratings in the future. See RATINGS herein. Creditworthiness of the Insurer. The Insurer s obligation under the Policy is a general obligation of the Insurer. Default by the Insurer may result in insufficient funds being available to pay the principal of and interest on the Bonds. In such event, the remedies available to the applicable Trustee may be limited by, among other things, certain risks related to bankruptcy proceedings, and may also have been altered prior to a default by the Insurer, which has the right, acting with the Trustee, without Owner consent, to amend the applicable provisions of the Indenture governing defaults and remedies and to direct the Trustee to direct remedies with respect to such obligation. The Policy does not insure the payment of redemption premiums. 25

32 Developments over the past few years which have been the subject of substantial discussion in the financial press and which affect the bond insurance business, including that of the Insurer, have had a serious adverse effect on the financial condition of a number of bond insurers, weakening their credit status as reflected in their credit ratings. Therefore, when making an investment decision on the Bonds a prospective Owner should look to the ability of the District to pay the Debt Service Payments which secure the Bonds and not solely to the Insurer s ability to pay claims under the Policy. No review of the business or affairs of the Insurer has been conducted by the District or the Underwriter in connection with the offering of the Bonds. No assurance can be given by the District or the Underwriter as to the Insurer s ability to pay claims under the Policy. See BOND INSURANCE herein and APPENDIX F hereto for further information concerning the Insurer and the Policy, including instructions for obtaining certain financial information concerning the Insurer. THE DISTRICT The following material is descriptive of the District. It has been prepared by or excerpted from sources as noted herein and has not been verified by Bond Counsel, Disclosure Counsel, the Underwriter or Underwriter s Counsel. History The District, comprising approximately 128,958 acres of suburban and agricultural land of which 116,711 acres are assessed, was formed December 29, 1965, pursuant to Division 13 of the Water Code of the State of California. Its purpose was, and is, to obtain and provide a supply of water for lands located within the boundaries of the District. Governance The District is governed by a Board of Directors consisting of nine (9) members elected to four-year alternating terms at elections held every two years. The names of the current members of the Board of Directors of the District, together with their titles and year in which current terms expire are set forth in the following table: Management Name and Title Term Expires Rodney Palla, President November, 2015 David Kaiser, Vice President November, 2017 David C. Cosyns, Secretary November, 2017 Kevin Antongiovanni, Treasurer, November, 2017 Assessor and Tax Collector Richard Tillema, Director November, 2015 Howard R. Frick, Director November, 2017 Fred Garone, Director November, 2015 Phillip J. Cerro II, Director November, 2015 Donald Collins, Director November, 2015 The General Manager of the District is responsible for carrying out the day-to-day affairs of the District. L. Mark Mulkay, the General Manager, has been with the District for 23 years, 26

33 22 of which he has served as General Manager. Mr. Mulkay has a total of 32 years experience in water management. He is a registered Civil Engineer in California. Mr. Mulkay graduated in 1984 with a Master s degree in Agriculture and Irrigation Engineering from Utah State University, and graduated in 1983 with a B.A. degree in Civil Engineering from Brigham Young University. Employees As of January 1, 2015, the District employed 32 full-time employees, consisting of three managerial staff, three supervisors, five clerical and 21 Maintenance and Operation personnel. None of the District s employees are covered by collective bargaining agreements, and the District has never experienced a labor-related work-stoppage. Defined Contribution Plan The District sponsors a defined contribution pension plan covering all employees satisfying a minimum hours of employment and years of service. The District contributes 6% of all eligible employees gross wages. Additionally, beginning in Fiscal Year 2014, the District matches all eligible employee contributions up to an additional 3% of such employee s gross wages. The District s contribution and expense for the year ended December 31, 2013 was $89,825 and $79,773 for the year ended December 31, See Appendix B for additional information about the defined contribution pension plan. The District does not provide other post retirement employment benefits to its employees. Existing Facilities THE WATER SYSTEM District facilities consist of 151 miles of canals, 194 weirs (control structure for the canals), 482 irrigation turnouts and 19 groundwater wells. Service Areas The District contains approximately 128,958 gross acres of suburban and agricultural land in the Kern River Delta and Kern Lake Bed areas lying southerly of the City of Bakersfield in the central part of the Kern County portion of the San Joaquin Valley. The District extends roughly 17 miles north-south and 22 miles east-west. U.S. Highway 99 bisects the District, and Interstate Highway 5 runs through the western part of the District. The Eastside Canal forms the eastern boundary of the District and the New Rim Ditch much of the southern boundary. The District provides water to all lands within its boundaries, through either surface water deliveries or through groundwater replenishment. With respect to surface deliveries, the District maintains five separate surface water service areas (the Service Areas ). The lands within these areas are eligible to purchase water delivered by the District. To encourage utilization, the water is priced generally at or below the cost of providing alternative supplies, such as through groundwater pumping. With respect to groundwater replenishment, the District owns and operates approximately 151 miles of predominately unlined canals and owns various spreading facilities, all of which are used to recharge water into the groundwater basin. This water is then extracted by landowners lying within the boundaries of the District. These landowners pay for the groundwater recharge program through zone of benefit assessments. 27

34 The District is divided into six major Service Areas (west to east): Buena Vista, Stine, Farmers, Kern Island, Non-Service, and Eastside. The Buena Vista Service Area ( BV Service Area ) runs generally north to south along the western boundary of the District and consists of approximately 12,900 acres of served lands. The BV Service Area extends approximately nine miles north-south and three miles east-west. The Buena Vista Canal runs through the middle of the BV Service Area, and Interstate Highway 5 runs through the bottom third. The Stine Service Area ( Stine Service Area ) is located east of the BV Service Area, with the Stine Canal bisecting the area and includes nearly 11,300 acres of served lands. The Stine Service Area is pear-shaped and is approximately nine miles north-south and two miles wide on the north and seven miles wide on the south. The Farmers Canal runs through the south east portion of the Stine Service Area, and Interstate 5 runs along its south western border. The Famers Service Area ( Farmers Service Area ) is nestled in between the Stine Service Area and Kern Island Service Area (described below). It is a fairly small Service Area of approximately 6,560 acres, and resembles a patchwork quilt generally running north to south. The Kern Island Service Area ( Kern Island Service Area ) is the largest Service Area, comprising approximately 36,500 acres of served lands, and is shaped like a J running through the middle of the District. The upper Kern Island Service Area extends 10 miles northsouth and is approximately five miles wide. The lower Kern Island Service Area extends fifteen miles east-west and is five wide on the east, narrowing to two miles wide on the west. Highway 99 runs through the middle of the upper Kern Island Service Area and Interstate 5 nearly bisects the lower Kern Island Service Area in half. The Eastside Utility Service Area ( Eastside Service Area ) is the smallest Service Area at approximately 4,300 acres, and runs along the eastern boundary of the District. The Non-Service Area consists of the remainder of lands within the District and includes over 48,000 acres. Most of these lands fall between the Kern Island Service Area and Eastside Service Area, but some of the lands are scattered within the other Service Areas. The largest block includes 35,320 acres of agricultural lands between the Kern Island Service Area and the Eastside Service Area. There are two sewer plants, located on approximately 3,336 acres, owned by the City of Bakersfield in this area. Additionally, approximately 10,000 acres of commercial and residential lands are located in the Non-Service Area. The Service Areas are set forth on the following map. 28

35 Kern Delta Water District Service Area Map River Canal Eastside Stine Eastbranch GOSFORD RD 15 Ditch Canfield TAFT HWY Buena Vista BUENA VISTA RD Branch 2 Stillson Branch 1 Central PANAMA RD Buena Vista East HOUGHTON RD 5 HWY OLD RIVER RD 14 Ditch Farmers Smith & Judd 20 Ft. Canal Randal 13 Dtich Kern Island 18 N & S 99 HWY Drain DI GIORGIO RD ADOBE RD S FAIRFAX RD E BEAR MOUNTAIN BLVD S VINELAND RD S EDISON RD TEALE RD Rim ± Legend District Boundry KDWD Canals ROADS Kern Island Service Area East Side Service Aera Buena Vista Service Area Stine Service Area Farmers Service Area Prepared By: Kern Delta Water District Prepared On: February 9, ,000 14,000 28,000 42,000 56,000 Feet 29

36 Water Supply The District water supply is primarily obtained from three sources: (1) surface deliveries by canal service areas (Eastside, Kern Island, Farmers, Stine and Buena Vista Service Areas) with high priority Kern River water rights; (2) pumping from the groundwater basin; and (3) water from the California State Water Project ( SWP ) that is typically delivered to Buena Vista Water Storage District ( BVWSD ) in exchange for an equal amount of Kern River Water. Kern River Supply Each of the five canals described above divert water from the Kern River on the basis of priority. The District owns the canals and the attached priority water rights. The highest priority is attached to the Kern Island Canal, which is entitled to take the first 300 cubic feet per second (cfs) of natural Kern River flow at the first point of measurement (located about five miles upstream of Bakersfield). The quantities of flow in excess of 300 cfs are allocated according to priorities of the other canals as shown in the following table. Combined entitlements accruing under these water rights have averaged approximately 250,000 acre-feet for the more than one hundred year period from 1896 to However, as a result of litigation initiated against the District, it was determined that certain limited water rights had been forfeited. Excluding forfeiture, the Courts have determined that the District has a preserved entitlement of approximately 202,000 acre-feet per year on average. Canal TABLE 1 KERN DELTA WATER DISTRICT DIVERSION RIGHTS OF CANALS (Cubic Feet Per Second) (1) Natural Flow At First Point (cfs) (2) Maximum Diversion Rights (cfs) Kern Island Old South Fork (4) (3) Buena Vista (3) Stine (3) Farmers (3) Buena Vista (2 nd ) 2, (3) Kern Island (2 nd ) 3, (3) Source: Kern Delta Water District. (1) 1 cfs over a 24 hour period is equal to 1.98 acre-feet of water. (2) River flow required to achieve full right. (3) At such time that there are Second Point entitlements, usually March through August, the allocation is reduced proportionally for river losses between First Point and Second Point. (4) The Old South Fork entitlement is owned by the City of Bakersfield and diverted by the District and used by the Old South Fork lands within the District. The Old South Fork entitlement is not included in the District s 202,000 acre-feet per year of preserved entitlement. 30

37 Groundwater Irrigation wells range within the District in depth from 50 to 1,500 feet with an average of about 600 feet. The District s canals are unlined, and it is estimated that between 25-30% of the water diverted to the System from the Kern River is recharged to the aquifer. Groundwater levels in the District tend to go down in dry years and rebound in wet years. The present average pumping depth is estimated to be 180 feet in the western portion of the District, and between 300 and 330 feet in the eastern portion. District studies have indicated a long term overdraft in the past in varying amounts. However, this overdraft condition has been or will likely be eliminated through importation of SWP water and increased diversions of Kern River water. Imported State Project Water The District obtains water from the SWP pursuant to a contract with the Kern County Water Agency that acquires the water through a contract with the California Department of Water Resources ( DWR ), dated October 22, 1972 (the State Water Supply Contract ). Pursuant to the State Water Supply Contract, the District has an annual entitlement of 25,500 acre feet of water from the SWP. The State Water Supply Contract also provides for delivery, upon request by the District, of so-called Article 21 water (surplus water) on an as-available basis, normally during the four winter and spring months. Delivery of all or a portion of that entitlement is dependent upon a balancing of the requests made by all participants in the SWP. In years of low water supply, the District s request for delivery of water from DWR is subject to deficiency clauses contained in the State Water Supply Contract, which could result in less than the full entitlement being delivered. See RISK FACTORS herein for information regarding possible interruption of deliveries of water from the SWP. The District received 5% of its SWP entitlement in 2014, and DWR has informed the District that it may only receive approximately 15% of its entitlement in The District typically provides 100% of each year s available entitlement to its landowners. Generally, 42% of the SWP water is allocated to the eastern portion of the District, and 58% to the western portion. The eastern 42% is allocated first to the Eastside Service Area (0.5 acrefeet per acre) and the remainder is allocated pro-rata to the remaining lands served by the Eastside Canal. The western 58% is allocated among all Buena Vista, Stine, Farmers, and Kern Island Service Area lands in an attempt to equalize the total water allocation to all water users in those Service Areas. The State Water Supply Contract extends through the year 2035, or until all State bonds for the SWP are retired, if later. However, negotiations have begun regarding an extension of the contract term. Under the State Water Supply Contract, the District makes annual fixed and variable payments to the State. The charges consist of the Delta Water Charge, which includes a capital cost component and a minimum operation, maintenance, power and replacement ( OMP&R ) component related to the conveyance facilities, and a transportation charge, which also includes capital cost and minimum and variable OMP&R components related to the transportation facilities. About July 1 of each year, DWR provides to the District a Statement of Charges detailing the charges payable by the District to DWR in the following calendar year. The charges comprise several components, reflecting the cost of supplying water to the District. These DWR costs are passed through to the customers through the District s fees and assessment. 31

38 The District executed water exchange agreements on October 27, 1972 and March 16, 1975 (the Exchange Agreement ), with BVWSD, which provides for the exchange of the District s SWP water for an equal amount of Kern River water owned by BVWSD. Under the Exchange Agreement, the District delivers its annual allocation of SWP water to BVWSD and receives a like amount of Kern River water from BVWSD s Kern River supply. The District pays the costs associated with transporting the SWP water, which are minimal due to BVWSD s location, plus an exchange fee of $5 per acre-foot to BVWSD. The Exchange Agreement provides an inexpensive method of delivering SWP into the District using existing facilities, allowing the District to save approximately $20-30 per acre-foot on transportation costs. The following table summarizes the water supply and water delivery operations of the System for the past ten Fiscal Years. The information for the 2014 Fiscal Year is estimated. Typically, the difference between Surface Water Supply and Operations is the production of District provided groundwater. 32

39 TABLE 2 KERN DELTA WATER DISTRICT SUMMARY OF SURFACE WATER SUPPLY AND OPERATIONS (Acre-feet) Kern River Diversions: $ 110,667 $ 115,348 $ 140,607 $ 201,810 $ 197,662 $ 154,609 $ 182,344 $ 132,364 $ 208,135 $ 213,202 State Water Diversions: 1,535 3,097 20,602 21,227 7,122 9,501 9,054 11,798 19,832 6,016 Exchange Water Diversions: ,364 50,559 35, ,360 15,574 Other Surface Water Diversions: 2,321 9,457 4,637 6,637 3,744 5,606 4,612 2,179 5,182 4,293 Well Production: 10,529 12,185 18,316 30,086 13,962 1,164 8, ,685 9,855 Total Water Production: 125, , , , , , , , , ,940 Total Water Sold: 102, , , , , , , , , ,234 Operational Recharge: 22,112 30,838 41,742 99,613 64,030 22,811 43,002 25,310 68,474 81,706 Source: Kern Delta Water District. 33

40 Water Treatment Since the District supplies agricultural water, which does not require treatment, it does not treat any water. Although authorized by Division 13 of the California Water Code, at the present time the District does not directly supply water for urban or manufacturing and industrial uses. By contract, the District is a wholesale supplier of water to various urban purveyors within the District s boundaries, such as the City of Bakersfield, California Water Service Company, and others. The source of supply for wholesale water sales, to date, has been a portion of the District s groundwater replenishment water delivered into the groundwater basin via operational seepage losses in the District s unlined canals. Storage Capacity Shortly after the District purchased the water rights and facilities now controlled by the District from the City of Bakersfield (the City ), a storage agreement was signed between the City and the District. The storage agreement allows the District to store up to 40,000 acre-feet of Kern River water in Lake Isabella. The agreement also includes a rule curve, which allows the District to increase storage from February through June (when the peak storage of 40,000 acre-feet is reached), and then decrease the amount down to 7,000 acre-feet by November, which may be carried over into the next spring. Water Connections The District serves approximately 2,900 individual parcels, constituting approximately 1,800 individual landowners and approximately 250 water customers, through 482 turnouts. In addition, the District provides wholesale water to the City of Bakersfield and California Water Service Company, a regulated public utility ( Cal Water ) through a canal recharge program. Almost all of the lands that can be physically served by the District are already connected. The turnouts per service area are shown below: TABLE 3 KERN DELTA WATER DISTRICT SUMMARY OF WATER CONNECTIONS (As of December, 2014) Service Area Number of Turnouts Eastside 54 Kern Island 260 Farmers 52 Stine 36 Buena Vista 80 Total 482 Source: Kern Delta Water District. 34

41 Capital Improvement Program The District continues a small capital improvement program of approximately $100,000 per year. The District facilities were originally constructed in the late 1800 s, and as components wear out the District replaces such facilities. The District has historically financed this replacement program on a pay-as-you-go basis, and anticipates continuing this program in this manner. As part of the District s purchase agreement from the City of Bakersfield, the District receives a portion of the storm water runoff produced within the City limits (the City has a permit for storm water discharges through the California Regional Water Quality Control Board, NPDES Permit No. CA ). As the City has continued to grow, the District has found it more difficult to manage the increasing storm water problem with existing facilities. Expansion of existing facilities and construction of new facilities are planned. Management of these facilities will be by the District. Construction costs and Operation and Maintenance Expenses are expected to be funded by developer fees imposed and collected through City ordinance or District contract with the City. Water Banking Program The District has and continues developing a water banking program (the Banking Program ) on lands within the District. This Banking Program provides for the District s import of supplies from the SWP and/or other sources when available and (a) storage of these supplies in the District s groundwater basin via direct groundwater recharge, and/or (b) delivery of these supplies to growers for use in lieu of their extraction of groundwater. In-lieu programs enhance groundwater storage without requiring local recharge facilities by reducing extraction of indigenous groundwater supplies, which are recharged naturally. The District has utilized the groundwater storage capacity of the Banking Program to provide storage for supplies delivered to the District from its water banking partners: The Metropolitan Water District of Southern California ( MWD ) and San Bernardino Valley Municipal Water District ( SBJMWD ). These banked supplies will be returned to the banking partners when needed. The facilities required for the water banking project include: Conveyance facilities, consisting of canals, pipelines, and pumping stations and connections to existing District facilities from the California Aqueduct and the Arvin-Edison Intake Canal; Groundwater recharge basins (814 acres of spreading basins) throughout the District; and Extraction wells to recover stored groundwater and convey supplies back to the California Aqueduct. These facilities have been integrated into the District s existing water management system and into regional conveyance systems that include the Cross Valley Canal. During years when surface supplies are inadequate, stored groundwater has been supplied to the District s customers in-lieu of their normal surface water supplies. Surface water supplies are also used to effect a delivery to the District s water banking partners directly or by exchange, while growers utilize banked groundwater. Supplies provided to the banking partners under this 35

42 program are allocated from a mix of the District s surface water supplies and stored groundwater. The District is also discussing this banking program with other water agencies. Although MWD provide funding for a major portion of the Banking Program, there still remains additional groundwater storage capacity in the District s basin for other agencies and for the District s water supplies. Water Rates The Board of Directors determines water rates, administrative fee and zone of benefit charges annually. Each service area has the same rate for Kern River water (Utility Water), and there are four different rates for SWP water. The SWP water rate varies based on an assumed depth to groundwater in each service area; the deeper the groundwater, the higher the rate. The District s connection fee, or turnout fee, allows a water user to request a turnout at no cost to the user if the turnout will serve 40 acres or more. In that case the District will, at no charge to the landowner, construct the turnout. If the turnout will serve less than 40 acres the cost of the turnout, which on the average costs approximately $10,000, is paid by the water user based on an inverse proration of the cost. For example, if the turnout will serve 30 acres, the landowner pays $2,500 and the District covers the remaining $7,500. The landowner typically pays the costs associated with any land acquisition that may be necessary for the connection. At the first of every month, the District bills all water users for the amount of water used the previous month. Payments are due by the end of the month in which bills are sent, but do not become delinquent until the first of the next month. For example, water used in June is billed the first of July, the payment is due by the end of July, and becomes delinquent the first of August is not paid. A delinquent water user will not receive additional water unless the delinquent amount has been paid. The District also has the ability to file a lien on the delinquent water user s land, as well as a lien on the property on which the water was used, for the unpaid amount. TABLE 4 KERN DELTA WATER DISTRICT SUMMARY OF WATER RATES (As of January 2015) Canal Utility Water (1) SWP Water (1) Rates (2) Assessment Eastside $ $ $ 7.31 Kern Island Farmers Stine Buena Vista Source: Kern Delta Water District. (1) In dollars per acre foot. (2) In dollars per acre. 36

43 Largest Customers The following is a list of the District s ten largest customers, and their prior year s consumption. This list will vary from year to year based on the type of water year, how much water is available in the Kern River, types of crops planted by the landowners and many other factors. Customer TABLE 5 KERN DELTA WATER DISTRICT SUMMARY OF TEN LARGEST CUSTOMERS (Fiscal Year 2014) Volume (1) Volume (1) Revenue Percent of Total (2) Kern Lake Ranch 33,484 29,880 $ 689, % Bidart Farms 14,012 15, , Angone Family Trust 7,937 7, , McKittrick Ranch Partnership 5,793 6, , Richard Tillema 7,289 6,879 88, Donald & Margaret Schulte 4,233 4,201 71, Michael & Elizabeth Antongiovann 1,056 1,041 54, Doug & Mary Kaiser Living Trust 2,328 1,715 48, Meadow Creek Ranch 1,472 1,221 34, Stenderup Ag Partners 2,252 1,555 34, TOTALS 79,856 76,132 $1,613, % Source: Kern Delta Water District. (1) Acre feet. (2) Based on total 2014 water sale revenues of $2,625,

44 Unencumbered Reserves The following chart illustrates the unencumbered reserves of the District for Fiscal Years 2009 through 2014: Assessments TABLE 6 KERN DELTA WATER DISTRICT UNENCUMBERED RESERVES (As of December 31) Fiscal Year Unencumbered Reserves 2009 $ 17,393, ,329, ,932, ,368, ,219, ,095,249 Source: Kern Delta Water District. Additionally, the District levies an annual assessment to cover a general and administrative fee and zone of benefit charge based upon acreage. The Board of Directors annually determines the level of assessments. Property assessments are levied in December, are due December 31 and become delinquent if not paid by June 30. The following table illustrates historical administrative assessment for the current and past eight Fiscal Years: Year Ended (Dec 31) TABLE 7 KERN DELTA WATER DISTRICT HISTORICAL ANNUAL ASSESSMENT (Fiscal Years 2007 through 2014) Annual Assessment Delinquent Amount (1) Percent Delinquent (2) 2007 $ 1,031,260 $ 47, % ,027,587 52, ,022,486 64, ,019,520 75, ,020,950 51, ,015,095 55, ,011,369 66, ,022,155 50, ,021,358 Source: Kern Delta Water District. (1) 2015 Assessments are due January 1, 2015 but not delinquent until July 1, (2) Represents initial delinquencies. 38

45 The following is a list of the largest assessments levied by the District. User Name TABLE 8 KERN DELTA WATER DISTRICT SUMMARY OF LARGEST ASSESSMENTS (Fiscal Years 2013 and 2014) 2013 Assessment Percent of Total (1) 2014 Assessment Percent of Total (2) Boston Ranch Co $ 97, % $ 97, % George Borba & Sons 45, , Fry Family Trust 29, , City of Bakersfield 22, , Bidart Family Partnership 27, , Kootstra Living Trust 23, , Tillema Family Trust 23, , San Joaquin Farms 22, , BOS Family Trust 12, , PallaRosaDairy3 Properties 20, , TOTAL $ 323, % $ 339, % Source: Kern Delta Water District (1) Based on total 2013 assessments of $1,025,835. (2) Based on total 2014 assessments of $1,030,995. Outstanding Water System Indebtedness As of the date of issuance of the Bonds, there will be no indebtedness of the District secured by Net Revenues. The District s 1999 G.O. Bond currently outstanding the principal amount of $920, are secured by the levy of the 1% ad valorem property tax. Insurance The District is a member of the Association of California Water Agencies Joint Powers Insurance Authority ( JPIA ). The JPIA's members have pooled funds to be self-insured for liability, property, and workers' compensation insurance. The District participates in the liability and property programs. The liability policy also covers public official errors and omissions. The general liability, automobile and public officials policy provides for no deductible with a $500,000 JPIA self-insurance limit and $49,500,000 excess coverage. The property insurance has $1,000 deductible with a $50,000 JPIA self-insurance limit and $50,000,000 excess coverage. There is no earthquake coverage. Assessed Valuation Within the District The County Assessor assesses all real and personal property in the District for tax purposes except public utility property which is assessed county-wide by the State Board of Equalization. The Board of Equalization s Utility Roll is comprised of State assessed properties of regulated public utilities and companies such as telephone and gas companies. Basically, 39

46 there are three classes of utility property: unitary, operating non-unitary and non-operating nonunitary. California law exempts from taxation $7,000 of the assessed valuation of an owner occupied dwelling. Effective with the 1980/81 Fiscal Year, State law has also exempted 100 percent of the value of business inventories from taxation, rather than 50 percent as in prior years. The law provides for reimbursements to local agencies based on their share of the revenues derived from the application of the maximum tax rate applied to business inventories in the 1979/80 Fiscal Year, with adjustments to reflect increases in population and the consumer price index. Revenue estimated to be lost to local taxing agencies due to such exemptions is reimbursed from State sources. Such reimbursements are based upon total taxes due upon such exempt values and are not reduced by any amount for estimated delinquencies. The summary below shows a ten-year summary from Fiscal Years 2005/06 through 2014/15 of total assessed valuations (land only), prior to any redevelopment increment. TABLE 9 KERN DELTA WATER DISTRICT ASSESSED VALUATIONS (Fiscal Years 2005/06 through ) Local Secured Utility Unsecured Total (1) $ 820,243,754 $ 640,613 $ 908,936 $ 821,793, ,242,859, , ,114 1,244,444, ,642,783, ,598 2,499,000 1,645,874, ,710,041, ,069 2,548,980 1,713,176, ,430,123, ,113 2,599,959 1,433,303, ,271,966, ,117 2,593,797 1,275,162, ,253,007, ,680 2,613,328 1,255,965, ,316,380, ,137 1,953,608 1,318,679, ,370,232, ,321 1,961,178 1,372,537, ,504,760, ,655 1,961,331 1,507,063,420 Source: California Municipal Statistics Inc. (1) Before redevelopment increment. Tax Levies and Delinquencies Kern County collects an ad valorem property tax. The District receives a portion of this ad valorem tax (the 1% ad valorem property tax ). Ad Valorem property taxes are collected by the County Tax Collector. Taxes and assessments on the secured roll are payable in two installments on November 1 and February 1 of each Fiscal Year, and become delinquent on December 10 and April 10, respectively. Taxes on unsecured property are assessed and payable on April 1 and become delinquent the following August 31. Since June 1982, a ten percent (10%) penalty has been added to delinquent taxes which have been levied on property on the secured roll. Property with delinquent taxes may be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption 40

47 penalty of one percent (1%) per month applied to taxes which become delinquent prior to the tax year. If taxes are unpaid for a period of five years or more, the property is deeded to the State and is subject to sale by the County Tax Collector. The following tabulation shows a ten-year history of the 1% ad valorem property tax, the tax amount delinquent and percentage of taxes delinquent each year as of June 30, for the District. TABLE 10 KERN DELTA WATER DISTRICT SECURED TAX LEVIES AND DELINQUENCIES (Fiscal Years 2004/05 through 2013/14) Secured Tax Charge (1) Delinquent Amount (2) Percent Delinquent (2) $ 1,356, $ 20, % ,725, , ,405, , ,175, , ,148, , ,788, , ,769, , ,705, , ,757, , ,871, , Source: California Municipal Statistics, Inc. and Kern County. (1) 1%GeneralFundLevy. (2) As of June

48 Largest Taxpayers The following table lists the twenty largest taxpayers in the District based upon their 2013/14 secured assessed property valuations: Property Owner TABLE 11 KERN DELTA WATER DISTRICT LARGEST TAXPAYERS (Fiscal Year 2013/14) Primary Land Use Assessed Valuation %of Total (1) George Borba & Son Dairy Agricultural $ 20,014, % Kaiser Foundation Hospitals Commercial Land 19,728, Standard Pacific Corp. Residential Development 17,912, Boston Ranch Co. Agricultural 17,770, Lennar Fresno Inc. Residential Development 14,979, Bolthouse Properties LLC Agricultural 13,868, Black Ops Real Estate LLC Undeveloped 9,179, MKA Real Estate Qualified Fund I LLC Undeveloped 8,314, Panama & Gorsford Retail LLC Agricultural 7,615, Loyola Prop I LP Agricultural 6,600, C&C Commercial CA Inc. Commercial 5,955, Old River Dairy LLC Agricultural 5,896, T&R Fry Family Trust Agricultural 5,484, A&C Beech Prop LLC Undeveloped 5,478, Trilogy Dairy Properties LLC Agricultural 5,381, Costco Wholesale Corp. Commercial 5,135, Bidart Family Partnership Agricultural 4,952, Carmax Auto Superstores Cal LLC Commercial 4,794, Winco Foods LLC Commercial 4,656, Wal Mart Real Estate Business Trust Commercial 4,349, $ 188,067, % Source: California Municipal Statistics, Inc. (1) The District s 2013/14 land only local secured assessed valuation (land only) is $1,370,232,488. District Financial Information Income is generated by the District from the sale of irrigation water to agricultural users within the District, the limited sale of certain canal seepage replenishment to various urban purveyors, and the levy of a general administrative fee and zone of benefit charge based upon acreage. See APPENDIX B for the audited financial statement for the Fiscal Year ended December 31, 2013 prepared by Dale Piner, certified public accountant (the Auditor ). The Auditor has not reviewed such statements in connection with their inclusion in this Official Statement, nor has the District requested such a review. The District has not requested consent from the Auditor to include the audited financial statements for the Fiscal Year ended December 31, 2013 for inclusion in this Official Statement since the District does not believe such consent is required. The District anticipates audited financial statements for the Fiscal 42

49 Year ending December 31, 2014 will be available by June 30, The District does not anticipate that such audited financial statements will reflect any material deterioration of the financial position of the District. Copies of the audited financial statements for the District s other Fiscal Years can be obtained at the office of the General Manager. 43

50 TABLE 12 KERN DELTA WATER DISTRICT SUMMARY OF REVENUES AND EXPENSES AND DEBT SERVICE (Fiscal Year Ended December 31) REVENUE Water Sales District $ 4,235,081 $ 3,734,467 $ 3,532,845 $ 2,960,294 $ 2,179,413 Well Water Sales Water Banking 280, ,621 1,045, ,931 Water Banking Capital Water Banking 4,120,424 4,829,601 Take Payment Revenues Water Banking 588, ,868 1,200,000 OM&R and Pass Through Revenues Water Banking 3,189, ,228 3,185,014 1,750,000 1,968,603 Total Revenue $ 12,133,439 $ 9,171,700 $ 8,366,480 $ 5,755,464 $ 4,924,947 OPERATING EXPENSES Source of Supply: Source of Supply District 1,889,068 1,857,976 2,157,855 1,822,931 1,879,943 Exchange Fees Water Banking 730, , ,360 Power and O&M Costs Water Banking 1,385, ,442 2,031,990 1,806,046 Total Source of Supply 1,889,068 3,974,166 3,731,769 3,854,921 4,406,349 Transmission and Distribution District 1,322,295 1,439,687 1,820,344 1,774,272 2,133,322 Administration and General District 1,784,334 1,751,507 1,884,443 1,979,465 1,833,379 Taxes District 5,715 5,422 11,802 5,570 Total Operating Expenses $ 5,001,412 $ 7,170,782 $ 7,436,556 $ 7,620,460 $ 8,378,620 Operating Income (Loss) 7,132,027 2,000, ,924 (1,864,996) (3,453,673) NONOPERATING REVENUES (EXPENSES) Interest Revenue District $ 246,633 $ 125,231 $ 86,298 $ 48,339 $ 24,991 Interest Revenue Water Banking 71,289 73,896 54,194 54,338 21,338 Property Taxes District 3,011,153 2,933,885 3,016,696 2,981,007 3,130,491 Property Assessments District 830, , , , ,435 Gain on Sale of Property District 14,520 14,000 4,500 8,240 1,397 Other Nonoperating Revenues District 37,937 35, , , ,078 Other Nonoperating Expenses Combined (62,104) (223) (219,129) Total Nonoperating Revenues $ 4,212,446 $ 4,011,983 $ 4,046,358 $ 4,119,671 $ 4,039,601 Net Income (Loss) 11,344,473 6,012,901 4,976,282 2,254, ,928 11,344,473 6,012,901 4,976,282 2,254, ,928 Debt Service Series 2005 COPs 424, , , , ,076 Total Debt Service $ 424,564 $ 424,501 $ 424,776 $ 424,701 $ 424,076 Debt Service Coverage Source: District Audited Financial Statements. 44

51 Projected Operating Results and Debt Service Coverage The District s estimated projected operating results for the Water System for the Fiscal Years ending December 31, 2014 through December 31, 2018 are set forth below, excluding depreciation and revenues and expenses associated with the District s outstanding general obligation bonds. 45

52 TABLE 13 KERN DELTA WATER DISTRICT PROJECTED OPERATING RESULTS (Fiscal Year Ending December 31) Operating Revenues Water Sales District (1) $ 1,680,932 $ 3,847,193 $ 3,962,609 $ 4,081,487 $ 4,203,932 $ 4,330,050 Well Water Sales Water Banking 944, , ,177 1,016,792 1,047,296 1,078,715 Take Payment Revenues Water Banking (2) 1,304, , , , , ,264 Pass Through Revenues Water Banking (3) 2,609,609 1,666,880 1,666,880 1,666,880 1,666,880 1,666,880 Total Operating Revenues $ 6,539,493 $ 7,117,761 $ 7,261,930 $ 7,410,423 $ 7,563,371 $ 7,720,908 Operating Expenses Source of Supply: Source of Supply District (4) $ 2,014,857 $ 2,480,541 $ 2,604,568 $ 2,734,796 $ 2,871,536 $ 3,015,113 Exchange Fees Water Banking (3) 541, , , , , ,153 Power and O&M Costs Water Banking (3) 2,251,454 1,125,727 1,125,727 1,125,727 1,125,727 1,125,727 Total Source of Supply $ 4,807,464 $ 4,147,421 $ 4,271,448 $ 4,401,676 $ 4,538,416 $ 4,681,993 Transmission and Distribution District (1) 2,097,036 2,121,149 2,184,783 2,250,327 2,317,837 2,387,372 Administration and General District (5) 1,641,900 2,504,250 2,579,378 2,656,759 2,736,462 2,818,555 Total Operating Expenses $ 8,546,400 $ 8,772,820 $ 9,035,609 $ 9,308,762 $ 9,592,715 $ 9,887,920 Operating Income (Loss) (2,006,907) (1,655,059) (1,773,680) (1,898,339) (2,029,343) (2,167,012) Nonoperating Revenues Interest Revenue District $ 39,756 $ 24,000 $ 24,240 $ 24,482 $ 24,727 $ 24,974 Interest Revenue Water Banking 33,459 30,000 30,300 30,603 30,909 31,218 Property Tax District 3,377,958 2,981,007 2,981,007 2,981,007 2,981,007 2,981,007 Assessments District 821, , , , , ,064 Other District (5) 232, , , , , ,336 Total Nonoperating Revenues $ 4,505,326 $ 4,019,931 $ 4,028,221 $ 4,032,069 $ 4,041,541 $ 4,046,600 Net Revenue $ 2,498,419 $ 2,364,872 $ 2,254,541 $ 2,133,730 $ 2,012,198 $ 1,879,588 Debt Service: Series 2005 COPs 422, Bonds , , , , ,950 Total Debt Service $ 422,876 $ 390,784 $ 369,300 $ 373,750 $ 370,950 $ 372,950 Debt Service Coverage Remaining Revenues $ 2,075,543 $ 1,974,088 $ 1,885,241 $ 1,759,980 $ 1,641,248 $ 1,506,638 Source: The District. (1) 2014 is unaudited actual revenue in a very dry year and thereafter assume revenues in a median water year. 3% per year inflation beginning in 2016 assumes the Board will be of a mind to offset rising operating costs with incremental rate increases. (2) See note (1) relative to and thereafter conservatively assume Take Payments would be reduced by 50% in a median water year. (3) See note (1) relative to and thereafter assumes less revenue from banking partners would be required to cover less cost in a median water year. Note that the 2015 and thereafter revenues offset "Exchange Fees - Water Banking" and "Power and O&M Costs - Water Banking" combined beginning in (4) Assumes 5% inflation beginning in (5) Assumes 3% inflation beginning in

53 Present and Ongoing Development Activity The District does not anticipate a sudden growth in land served. Therefore, operations should not change materially. No large capital improvement projects are expected other than the project described under Water Banking Program herein. Areas on the north end of the District are gradually but steadily being developed from agricultural uses to urban uses. The District s purchase agreement with the City of Bakersfield allows the City to purchase water from the District for use on the land historically served by the District with Kern River water, if needed. The District s sale of canal seepage replenishment to the City of Bakersfield and others supports such development. Litigation The following is a summary of certain ongoing litigation instituted by North Kern Water Storage District in November, This case is entitled North Kern Water Storage District v. Kern Delta Water District, et al., Tulare County Superior Court Case No In 1976 the District became the owner of certain Kern River water rights which are collectively referred to as the Kern Island Water Rights. The Kern Island Water Rights, if exercised to the fullest extent of which they are capable, would produce a long-term average yield of 250,000 acre feet per year. At the time of acquisition, and for many years prior thereto, the predecessors-in-interest of the District had exercised the Kern Island Water Rights to a yield of approximately 160,000 acre feet per year. After the acquisition, the District exercised said rights to a yield of approximately 182,000 acre feet per year. That portion of the Kern Island Water Rights which was not taken and used by the predecessors-in-interest of the District is sometimes referred to as release water. The release water had historically been utilized, in large part, by North Kern Water Storage District. Some of the release water had also been utilized by the predecessors-in-interest of the City of Bakersfield. The increase in utilization of Kern Island Water Rights by the District resulted in a decrease of release water available to North Kern Water Storage District and the City of Bakersfield. North Kern Water Storage District filed its lawsuit to prevent the District from exercising the Kern Island Water Rights in excess of 160,000 acre feet per year. To put it another way, North Kern Water Storage District wants to force a continuation of release water from the Kern Island Water Rights to others. The case went to trial in 1997 and resulted in a judgment generally more favorable to North Kern than the District. This decision was appealed by both parties and the judgment was reversed with instructions to retry the case according to certain principles laid down by the appellate court. The retrial occurred in 2004 and resulted in a judgment generally more favorable to the District than North Kern. The 2004 trial court judgment found, among other things, (1) that although non-use of Kern River water by the District s predecessors results in a forfeiture of some portion of the District s historic Kern River water right, the District is entitled to claim preserved entitlements far in excess of North Kern s contentions, i.e., based on historic hydrology, the preserved entitlements will yield a long-term average Kern River water supply to the District of approximately 211,000 acre-feet per year; (2) that increased use of Kern River water by the District from 1976 through 2004 did not result in an injury to North Kern or the City, for which reason neither were entitled to damages from the District; and (3) that all parties would bear their own litigation expenses since there was no prevailing party in the case. 47

54 The 2004 trial court judgment was appealed by North Kern (North Kern Water Storage District v. Delta Water District, 5 th Civil No. F047706). The final judgment ultimately determined (i) partial forfeiture through non-use of Kern Delta s historic water rights but (ii) with preserved entitlements in amounts exceeding Kern Delta s long-term average use, averaging approximately 202,000 acre-feet per year. Thus, the judgment does not impose restrictions on Kern Delta which will materially adversely affect the District s ability to meet projected long-term demands of its lands and landowners. As a result of the final judgment rendered in this case, some of the parties to the litigation (not including Kern Delta) have requested the State Water Resources Control Board determine certain rights relative to the forfeited Kern River entitlement. Kern Delta will monitor such proceedings to ensure that its preserved Kern River rights are not diminished. The District is operating within the parameters specified by the trial court and is attempting to fully utilize all Kern River water available to it on an annual basis. Since this means that the District has more water Kern River water available to it than its historic, longterm water user demands, the District is attempting to expand usage. As part of the proposed increase in usage, the District prepared an environmental analysis under the California Environmental Quality Act (CEQA) which resulted in both North Kern and the City of Bakersfield initiating litigation, respectively, North Kern, et al v. Kern Delta (Ventura County Superior Court Case No. CIV ; and City of Bakersfield v. Kern Delta (Ventura County Superior Court Case No. CIV ). North Kern and the City of Bakersfield sued the District to set aside certain CEQA determinations made by it with respect to utilization of its preserved entitlements. These actions were heard and an order was entered by the court requiring Kern Delta to vacate its CEQA determinations and, pending additional compliance with CEQA, not implement certain measures intended to increase utilization of Kern River water supplies. The District suffered no loss of water or water rights. Thereafter, the District, in a continuing effort to fully utilize its preserved Kern River entitlement and in an attempt to act in accordance with the prior judgment requiring additional compliance with the California Environmental Quality Act (CEQA) developed the Kern River Water Allocation Plan (Plan) and certified an Environmental Impact Report (EIR) regarding such Plan. North Kern again filed suit, (North Kern Water Storage District, et al. v. Kern Delta Water District (Ventura County Superior Court Case No CU-WM-VTA), as did the City of Bakersfield (City of Bakersfield v. Kern Delta Water District (Kern County Superior Court Case No. S-1500-CV KCT and Ventura County Superior Court Case No CU-WM-VTA.) The plaintiffs in these actions (filed in October 2012) generally claimed the EIR was insufficient under CEQA and requested the court to require the District to rescind the EIR certification and to enjoin the District from implementing the Plan. Both cases have been fully consolidated. On June 5, 2014, the court entered an Order on Petition for Writ of Mandate ordering the District to set aside the certification of its EIR, and to redraft and recirculate a supplemental focused EIR with respect to certain matters. Kern Delta will comply with the court s order. Attorney s fees have been requested by the Plaintiffs, which together total approximately $500, The District maintains a Water Rights Protection and Litigation Reserve account which had a balance slightly over $3,750, as of December 2014 and therefore any attorneys fees that might become payable will not substantially impact the District. In another Kern River related matter, the City of Bakersfield (City), in an effort to expand its use of Kern River waters, developed a proposed program which it entitled the Kern River Flow and Municipal Water Program (KRFMWP). As part of its analysis of the KRFMWP under 48

55 the California Environmental Quality Act (CEQA), the City certified an Environmental Impact Report (EIR). The District, in an action entitled Kern Delta Water District v. City of Bakersfield (Kern County Superior Court No CV KCT), which was filed on October 26, 2012, generally claims the EIR is insufficient under CEQA and requests the court to require the City to rescind the EIR certification and to enjoin the City from implementing the KRFMWP. Venue for this case was transferred to the County of Tulare and the case was consolidated with other similar lawsuits filed by others against the City based upon its KRFMWP EIR. If the case results in an unfavorable decision to the District, the District does not expect this to have a material adverse impact on its ability to pay debt service on the Bonds. In an unrelated matter, litigation was commenced in May, 2010 by Rosedale-Rio Bravo Water Storage District (RRB) for the purpose of challenging groundwater extractions from the commonly referred to Pioneer Project, a water storage and recovery project in the general Bakersfield area. RRB is participating in the litigation with various landowners who claim to have been injured as a result of Pioneer Project operations. During the course of the litigation, the District was required to be joined as a party. The District elected to participate in the proceeding as a plaintiff, the costs of which are all being borne by RRB (including attorneys fees and related litigation expenses). There does not appear to be any risk of financial loss resulting from the litigation. The case is entitled Rosedale-Rio Bravo Water Storage District, et al. v. Kern County Water Agency, et al. (Ventura County Superior Court Case No CU-WM-VTA): Various claims for personal injuries and/or property damage have been filed against the District from time to time. All such claims have been referred to the District s insurance provider (the Joint Powers Insurance Authority), and are being handled by such insurance provider (without a reservation of rights), and it would appear that the District will not suffer any direct financial loss or defense burden by virtue of said claims. General TAX MATTERS In the opinion of Bond Counsel, under existing laws, regulations, rulings and judicial decisions, interest on the Bonds is excluded from gross income for federal income tax purposes. Bond Counsel is further of the opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that it is included in adjusted current earnings for purposes of the federal alternative minimum tax imposed on individuals and corporations. The opinions described in the preceding sentences assume the accuracy of certain representations and compliance by the District with covenants designed to satisfy the requirements of the Code that must be met subsequent to the issuance of the Bonds. Failure to comply with such requirements could cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District will covenant to comply with such requirements. Bond Counsel has expressed no opinion regarding other federal tax consequences arising with respect to the Bonds. Bond Counsel is of the opinion that under existing laws, regulations, rulings and judicial decisions, interest on the Bonds is exempt from State of California personal income taxes. The accrual or receipt of interest on the Bonds may otherwise affect the federal income tax liability of the owners of the Bonds. The extent of these other tax consequences will depend 49

56 upon such owners particular tax status and other items of income or deduction. Bond Counsel has expressed no opinion regarding any such consequences. Purchasers of the Bonds, particularly purchasers that are corporations (including S corporations and foreign corporations operating branches in the United States), property or casualty insurance companies, banks, thrifts or other financial institutions, certain recipients of social security or railroad retirement benefits, taxpayers otherwise entitled to claim the earned income credit, or taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, should consult their tax advisors as to the tax consequences of purchasing or owning the Bonds. Backup Withholding. As a result of the enactment of the Tax Increase Prevention and Reconciliation Act of 2005, interest on tax-exempt obligations such as the Bonds is subject to information reporting in a manner similar to interest paid on taxable obligations. Backup withholding may be imposed on payments made after March 31, 2007 to any bondholder who fails to provide certain required information including an accurate taxpayer identification number to any person required to collect such information pursuant to Section 6049 of the Code. The new reporting requirement does not in and of itself affect or alter the excludability of interest on the Bonds from gross income for federal income tax purposes or any other federal tax consequence of purchasing, holding or selling tax-exempt obligations. Tax Treatment of Original Issue Discount and Premium. If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes original issue discount for purposes of federal income taxes and State of California personal income taxes. If the initial offering price to the public (excluding bond houses and brokers) at which a Bond is sold is greater than the amount payable at maturity thereof, then the excess of the tax basis of a purchaser of such Bond (other than a purchaser who holds such Bond as inventory, stock in trade or for sale to customers in the ordinary course of business) over the principal amount of such Bond constitutes original issue premium for purposes of federal income taxes and State of California personal income taxes. Under the Code, original issue discount is excludable from gross income for federal income tax purposes to the same extent as interest on the Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each such Bond and the basis of such Bond acquired at such initial offering price by an initial purchaser of each such Bond will be increased by the amount of such accrued discount. The Code contains certain provisions relating to the accrual of original issue discount in the case of purchasers of the Bonds who purchase such Bonds after the initial offering of a substantial amount thereof. Owners who do not purchase such Bonds in the initial offering at the initial offering prices should consult their own tax advisors with respect to the tax consequences of ownership of such Bonds. All holders of such Bonds should consult their own tax advisors with respect to the allowance of a deduction for any loss on a sale or other disposition to the extent that calculation of such loss is based on accrued original issue discount. Under the Code, original issue premium is amortized for federal income tax purposes over the term of such a Bond based on the purchaser s yield to maturity in such Bonds, except thatinthecaseofsuchabondcallablepriortoitsstatedmaturity,theamortizationperiodand the yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such Bond. A purchaser of such a Bond is required to decrease his or her adjusted basis in such Bond by the amount of bond premium attributable to each taxable year in which such purchaser holds such Bond. The amount of bond premium attributable to a 50

57 taxable year is not deductible for federal income tax purposes. Purchasers of such Bonds should consult their tax advisors with respect to the precise determination for federal income tax purposes of the amount of bond premium attributable to each taxable year and the effect of bond premium on the sale or other disposition of such a Bond, and with respect to the state and local tax consequences of owning and disposing of such a Bond. Changes in Federal and State Tax Law From time to time, there are legislative proposals in the Congress and in the various state legislatures that, if enacted, could alter or amend federal and state tax matters referred to above or adversely affect the market value of the Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether if enacted it would apply to bonds issued prior to enactment. In addition, regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value of the Bonds. It cannot be predicted whether any such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Bonds or the market value thereof would be impacted thereby. Purchasers of the Bonds should consult their tax advisors regarding any pending or proposed legislation, regulatory initiatives or litigation. The opinions expressed by Bond Counsel are based upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of issuance and delivery of the Bonds and Bond Counsel has expressed no opinion as of any date subsequent thereto or with respect to any pending legislation, regulatory initiatives or litigation. Form of Opinion The form of Bond Counsel s anticipated opinion is included as APPENDIX C. The statutes, regulations, rulings, and court decisions on which such opinion will be based are subject to change. BANK QUALIFIED The District has designated the Bonds qualified tax-exempt obligations within the meaning of Section 265(b)(3) of the Code, and, in the case of certain financial institutions (within the meaning of Section 265(b)(3) of the Code), a deduction is allowed for 80% of that portion of such financial institutions interest expense allocable to interest on the Bonds. NO LITIGATION There is no action, suit or proceeding known to be pending or threatened, restraining or enjoining the issuance or delivery of the Bonds or the Indenture or in any way contesting or affecting the validity of the foregoing or any proceedings of the District taken with respect to any of the foregoing. The District is not aware of any litigation pending or threatened questioning the existence or powers of the District or the ability of the District to pay principal or interest on the Bonds. Although the District is subject to a number of lawsuits in the ordinary conduct of its affairs, there are no claims or actions, threatened or pending, which, if determined against the District, either individually or in the aggregate, would have a material adverse effect on the financial condition of the District, Net Revenues or the Revenue Fund. See THE WATER SYSTEM Litigation. 51

58 RATINGS Standard & Poor s Ratings Service, a Standard and Poor s LLC business ( S&P ) is expected to assign the Bonds a rating of AA (stable outlook) with the understanding that, upon delivery of the Bonds, the Policy will be issued by AGM. See BOND INSURANCE herein. In addition, S&P has assigned its underlying municipal bond rating of A+ to the Bonds. Such ratings reflect only the views of such organization and an explanation of the significance of the ratings may be obtained from S&P. There is no assurance that any rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. The District undertakes no responsibility to oppose any downward revision or withdrawal of any rating obtained. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Bonds. PROFESSIONAL FEES In connection with the issuance of the Bonds, fees payable to Nossaman LLP as Bond Counsel and Disclosure Counsel, and Wells Fargo Bank, National Association, as Trustee, are contingent upon the issuance of the Bonds. Although it is serving as Bond Counsel and Disclosure Counsel to the District in connection with the issuance of the Bonds, Bond Counsel represents the Underwriter in connection with other financings and matters unrelated to the Bonds. CERTAIN LEGAL MATTERS Upon the delivery of the Bonds, Nossaman LLP, Irvine, California, Bond Counsel, will issue its opinion approving the validity of the Bonds, the form of which opinion is set forth in APPENDIX C hereto. Certain legal matters will be passed upon for the District by McMurtrey, Hartsock & Worth, its general counsel, and by Nossaman LLP, as Disclosure Counsel. Certain legal matters will be passed upon for the Underwriter by Stradling Yocca Carlson & Rauth, A Professional Corporation, Sacramento, California and for AGM by its counsel. UNDERWRITING The District has agreed to sell the Bonds to Wells Fargo Bank, National Association, as underwriter (the Underwriter ), and the Underwriter has agreed, subject to certain conditions, to purchase the Bonds at a purchase price of $5,460, (principal amount of the Bonds of $5,290,000, less an underwriter s discount of $82,224.35, and plus net original issue premium of $252,811.20). The obligations of the Underwriter are subject to certain conditions precedent, and it will be obligated to purchase all such Bonds if any such Bonds are purchased. The Underwriter intends to offer the Bonds to the public initially at the prices and/or yield set forth on the cover page of this Official Statement, which prices or yields may subsequently change without any requirement of prior notice. The Underwriter reserves the right to join with dealers and other underwriters in offering the Bonds to the public. The Underwriter may offer and sell Bonds to certain dealers (including dealers depositing Bonds into investment trusts) at prices lower than the public offering prices, and such dealers may reallow any such discounts on sales to other dealers. In reoffering Bonds to the public, the Underwriter may overallocate or effect transactions which stabilize or maintain the market prices for Bonds at levels above those which might otherwise prevail. Such stabilization, if commenced, may be discontinued at any time. 52

59 Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association. Wells Fargo Bank, National Association ( WFBNA ), the sole underwriter of the Bonds, has entered into an agreement (the Distribution Agreement ) with its affiliate, Wells Fargo Advisors, LLC ( WFA ), for the distribution of certain municipal securities offerings, including the Bonds. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting or remarketing agent compensation, as applicable, with respect to the Bonds with WFA. WFBNA also utilizes the distribution capabilities of its affiliates, Wells Fargo Securities, LLC ( WFSLLC ) and Wells Fargo Institutional Securities, LLC ( WFIS ), for the distribution of municipal securities offerings, including the Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC s expenses based on its municipal securities transactions. WFBNA, WFSLLC, WFIS, and WFA are each whollyowned subsidiaries of Wells Fargo & Company. Wells Fargo Bank, National Association is serving as underwriter, Escrow Agent, and Trustee for the Bonds. ADDITIONAL INFORMATION Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Bonds. The execution and delivery of this Official Statement have been authorized by the members of the District. KERN DELTA WATER DISTRICT By: /s/ L. Mark Mulkay General Manager 53

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61 APPENDIX A SUMMARY OF THE INDENTURE Definitions Additional Revenues means, with respect to the issuance of any Parity Obligations, an allowance for Net Revenues (i) arising from any increase in the charges made for service from the System adopted prior to the incurring of such Parity Obligations and effective within eighteen (18) months following the date of incurring such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such increase in charges had been in effect during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the District, and (ii) arising from any increase in service connections to the System prior to the incurring of such Parity Obligations, in an amount equal to the total amount by which the Net Revenues would have been increased if such connections had been in existence during the whole of the most recent completed Fiscal Year or during any more recent twelve (12) month period selected by the District, all as shown by the certificate or opinion of an Independent Financial Consultant. Authorized Officer means, with respect to the District, its President, General Manager, Secretary or any other person designated as an Authorized Representative of the District by a Certificate of the District signed by its President, General Manager or Secretary and filed with the Trustee. Bond Counsel means any other attorney or firm of attorneys appointed by and acceptable to the District, of nationally-recognized experience in the execution and delivery of obligations the interest in which is excludable from gross income for federal income tax purposes under the Code. Bond Year means the period from the Closing Date through December 1, 2015, and thereafter the twelve-month period commencing on December 2 of each year through and including December 1 of the following year. Business Day means any day other than a Saturday, Sunday or legal holiday or a day on which banks are authorized to be closed for business in California or on which the Principal Office is authorized to be closed. Certificate of the District means an instrument in writing signed by an Authorized Officer. Code means the Internal Revenue Code of 1986, as amended. Each reference to a section of the Code in the Indenture shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations relating to such section which are applicable to the Certificates or the use of the proceeds thereof. Debt Service means, during any period of computation, the amount obtained for such period by totaling the following amount-- (a) The principal amount of all Outstanding serial Bonds and Parity Obligations coming due and payable by their terms in such period (except to the extent that A-1

62 such principal has been defeased and is held uninvested in cash or invested in Federal Securities which mature at times and in such amounts as are necessary to pay the principal to which such amounts are pledged); (b) The minimum principal amount of all Outstanding term Bonds and Parity Obligations scheduled to be redeemed by operation of mandatory sinking fund deposits in such period, together with any premium thereon (except to the extent that such principal has been defeased and is held uninvested in cash or invested in Federal Securities which mature at times and in such amounts as are necessary to pay the principal to which such amounts are pledged); and (c) The interest which would be due during such period on the aggregate principal amount of Bonds and Parity Obligations which would be Outstanding in such period if the Bonds or Parity Obligations are retired as scheduled (except to the extent that such interest has been fully capitalized and is invested in Federal Securities which mature at times and in such amounts as are necessary to pay the interest to which such amounts are pledged), but deducting and excluding from such aggregate amount the amount of Bonds and Parity Obligations no longer Outstanding; provided that, whenever interest as described in the Indenture accrues at other than a fixed rate, such interest shall be assumed to be a rate equal to the greater of (i) the actual rate on the date of calculation, or if the Parity Obligation is not yet outstanding, the initial rate (if established and binding), (ii) if the Parity Obligation has been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, and (iii) (x) if interest on the Parity Obligation is excludable from gross income under the applicable provisions of the Internal Revenue Code, the most recently published The Bond Buyer Bond Revenue Index (or comparable index if no longer published) plus fifty (50) basis points, or (y) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities, plus fifty (50) basis points. Debt Service Payments mean the payments of Debt Service on the Bonds due under the Indenture. Event of Default means an event of default described in the Indenture. Federal Securities mean (a) direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America, (b) obligations fully and unconditionally guaranteed as to timely payment of the interest and principal by the United States of America, (c) obligations of any agency or instrumentality of the United States of America as to which the timely payment of the interest on and the principal of such obligations is backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. Fiscal Year means the twelve calendar month period terminating on December 31 of each year, or any other annual accounting period hereafter selected and designated by the District as its Fiscal Year in accordance with applicable law. Generally Accepted Accounting Principles mean the uniform accounting and reporting procedures prescribed by the California State Controller or his successor for California water A-2

63 districts in the State of California, or failing the prescription of such procedures means generally accepted accounting principles as presented and recommended by the American Institute of Certified Public Accountants or its successor, or by the National Council on Governmental Accounting or its successor, or by any other generally accepted authority on such principles. Governmental Loan means a loan from the State or the United States of America, acting through any of its agencies, to finance improvements to the System, and the obligation of the District to make payments to the State or the United States of America under the loan agreement memorializing said loan on a parity basis with the payment of Debt Service Payments. Independent Certified Public Accountant means any certified public accountant or firm of certified public accountants duly licensed and entitled to practice, and practicing as such, under the laws of the State of California, appointed and paid by the District, and each of whom-- 1. is in fact independent and not under the domination of the District; 2. does not have a substantial financial interest, direct or indirect, in the operations of the District; and 3. is not connected with the District as a board member, officer or employee of the District or the Authority, but may be regularly retained to audit the accounting records of and make reports thereon to the District. Independent Financial Consultant means any financial consultant or firm of such consultants of national reputation generally recognized to be well qualified in financial matters relating to systems similar to the System, appointed and paid by the District, and who, or each of whom-- 1. is in fact independent and not under the control of the District; District; and 2. does not have a substantial financial interest, direct or indirect, in the 3. is not connected with the District as a council member, officer or employee of the District, but may be regularly retained to make reports to the District Interest Payment Date means each June 1 and December 1, commencing on June 1, Investment Manager means Wells Capital Management and its successors and assigns, to the extent appointed by the District to act as investment manager, or any other corporation or association which may at any time be substituted in its place. Law means Division 13 of the Water Code of the State of California, as amended. Maximum Annual Debt Service means, as of the date of any calculation, the maximum sum obtained for the current or any future Bond Year so long as any of the Bonds remain Outstanding by totaling the following amounts for such Bond Year: A-3

64 (a) the principal amount of the Bonds and Parity Obligations coming due and payable by their terms in such Bond Year, including the principal amount of any term Bonds and term Parity Obligations which are subject to mandatory sinking fund redemption in such Bond Year; and (b) the amount of interest which would be due during such Bond Year on the aggregate principal amount of the Bonds and Parity Obligations which would be Outstanding in such Bond Year if such Bonds and Parity Obligations are retired as scheduled Moody s means Moody s Investors Service, Inc., its successors and assigns. Net Proceeds means, when used with respect to any insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all reasonable expenses (including attorneys fees) incurred in the collection of such proceeds. Outstanding when used as of any particular time with reference to Bonds, means all Bonds except: (1) Bonds canceled by the Trustee; (2) Bondspaidordeemedtohavebeenpaid;and (3) BondsinlieuoforinsubstitutionforwhichreplacementBondsshallhave been executed and delivered under the Indenture. Owner or Bondowner means the registered owner of any Outstanding Bond. Parity Obligations means all bonds, notes, loan agreements, installment sale agreements, leases or other obligations of the District, payable from and secured by a pledge of and lien upon any of the Net Revenues incurred on a parity with the Bonds. Permitted Investments mean any of the following which at the time of investment are legal investments under the laws of the State of California for the moneys proposed to be invested therein (the Trustee is entitled to conclusively rely upon any direction of the District as a certification that such investment constitutes a Permitted Investment): 1. Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, but excluding CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. 2. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): Farmers Home Administration (FmHA) Certificates of beneficial ownership Federal Housing Administration Debentures (FHA) A-4

65 General Services Administration Participation certificates Government National Mortgage Association (GNMA or Ginnie Mae ) GNMA guaranteed mortgage-backed bonds GNMA guaranteed pass-through obligations (participation certificates) (not acceptable for certain cash-flow sensitive issues.) U.S. Maritime Administration Guaranteed Title XI financing U.S. Department of Housing and Urban Development (HUD) Project Notes Local District Bonds New Communities Debentures U.S. Government guaranteed debentures U.S. Public Housing Notes and Bonds U.S. Government guaranteed public housing notes and bonds 3. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): Federal Home Loan Bank System Senior debt obligations Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac ) Participation certificates Senior debt obligations Federal National Mortgage Association (FNMA or Fannie Mae ) Mortgage-backed securities and senior debt obligations Resolution Funding Corp. (REFCORP) obligations Farm Credit System Consolidated system-wide bonds and notes Federal Agriculture Mortgage Association Tennessee Valley District 4. Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G, AAA-m, or AA-m and if rated by Moody s rated Aaa, Aa1 or Aa2, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee provide investment advisory or other management services. A-5

66 5. Certificates of deposit secured at all times by collateral described in 1 and/or 2 above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks including the Trustee and its affiliates. The collateral must be held by a third party and the Owners must have a perfected first security interest in the collateral. 6. Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF. 7. Investment agreements, including GIC s, forward purchase agreements and reserve fund put agreements. 8. Commercial paper rated, at the time of purchase, Prime -1 by Moody s and A- 1 or better by S&P. 9. Bonds or notes issued by any state or municipality which are rated by Moody s and S&P in one of the two highest rating categories assigned by such agencies. 10. Bank deposits, accounts, federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime -1 or A2 or better by Moody s and A-1 or A or better by S&P. 11. Repurchase agreements for 30 days or less must follow the following criteria: (i) Repurchase agreements that provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trustee (buyer/lender), and the transfer of cash from the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trustee in exchange for the securities at a specified date. 12. Asset-backed Securities: As authorized in Government Code Section 53601(n), investment in any equipment lease-backed certificate, consumer receivable pass-through certificate or consumer receivable-backed bond with a maximum remaining final maturity of five years. Purchaseswillberestrictedtosecuritieswithanexpectedweightedaveragelifenotto exceed three years. Securities eligible for investment under this subdivision shall be rated AAA by a nationally recognized rating service. 13. Mortgage-backed Securities: As authorized in Government Code Section 53601(n), investment in any mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, with a maximum remaining final maturity of five years. Purchases will be restricted to securities with an expected weighted average life not to exceed three years. Securities eligible for investment under this subdivision shall be rated AAA by a nationally recognized rating service. Purchases of asset-backed and mortgage-backed securities may not exceed 20% of the District s portfolio in total. 14. Medium-term Notes: Corporate notes issued by corporations organized and operating within the United States with a rating of A or higher at the time of purchase by a nationally recognized rating service and with a maximum remaining maturity of no more than three (3) years after the date of purchase. A-6

67 15. The Local Agency Investment Fund created pursuant to Section of the California Government Code, to the extent the Trustee is authorized to register such investment in its name. 16. Shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 of the Government Code of the State of California which invests exclusively in investments permitted by Section of Title 5, Division 2, Chapter 4 of the Government Code of California, as it may be amended. 17. The Ventura County Pooled Treasury Portfolio. Principal Office means the corporate trust office of the Trustee currently located in Los Angeles, California, or such other office designated by the Trustee from time to time. Prior Obligations means the District s obligations under the Installment Purchase Contract dated as of November 1, 2005, between the District and the Corporation, as evidenced by the Kern Delta Water District Certificates of Participation (Water Bank Project) Series Record Date means the fifteenth day of the calendar month prior to an Interest Payment Date. Responsible Officer means any officer of the Trustee assigned by the Trustee to administer the trusts established under the Indenture. Revenue Fund means the fund of the District into which it deposits Operating Revenues. S&P means Standard & Poor s Ratings Group, a division of McGraw Hill Incorporated, its successors and assigns. State means the State of California. Transfer and Exchange of Bonds Subject to the Indenture, each Bond shall be transferable only upon a register of the names of each Owner (the Bond Register ), which shall be kept for that purpose at the Principal Office, by the Owner thereof in person or by his or her attorney duly authorized in writing, upon surrender thereof together with a written instrument of transfer satisfactory to the Trustee duly executed by the Owner or his or her duly authorized attorney. Upon the transfer of any such Bond, the Trustee shall provide in the name of the transferee, a new Bond or Bonds, of the same aggregate principal amount, interest rate and maturity as the surrendered Bonds (unless there has occurred a partial redemption of such Bond, in which case the principal amount of the new Bond shall be equal to the unredeemed principal amount of the Bond submitted for transfer). Bonds Mutilated, Destroyed, Lost or Stolen If any Bond shall become mutilated, the Trustee, at the expense of the Owner of said Bond, shall authenticate and deliver a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. If any A-7

68 Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft shall be submitted to the Trustee, and, if such evidence is satisfactory to the Trustee and if an indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Owner, shall authenticate and deliver a new Bond of like tenor and numbered as the Trustee shall determine in lieu of and in substitution for the Bond so lost, destroyed or stolen. PaymentofDebtService All of the Net Revenues have been pledged for the payment of Parity Obligations, including the Bonds, and all moneys on deposit in the Payment Fund established under the Indenture are irrevocably pledged, charged and assigned to the punctual payment of the Bonds, and except as otherwise provided in the Indenture, the Net Revenues and such other funds shall not be used for any other purpose so long as any of the Bonds remain Outstanding. Such pledge, charge and assignment shall constitute a first lien on the Net Revenues and such other moneys for the payment of the Debt Service Payments, the Bonds and any Parity Obligations. The District s obligation to pay the Debt Service Payments and any other amounts coming due and payable shall be a special obligation of the District limited solely to the Net Revenues. Under no circumstances shall the District be required to advance moneys derived from any source of income other than the Net Revenues and other sources specifically identified in the Indenture for the payment of the Debt Service Payments and the Bonds, nor shall any other funds or property of the District be liable for the payment of the Debt Service Payments, the Bonds or any other amounts coming due and payable. The obligations of the District to make the Debt Service Payments from the Net Revenues and to perform and observe the other agreements shall be absolute and unconditional and shall not be subject to any defense or any right of setoff, counterclaim or recoupment arising out of any breach of the District or the Trustee of any obligation to the District or otherwise with respect to the System, or out of indebtedness or liability at any time owing to the District by the Trustee. Until such time as all of the Debt Service Payments and all other amounts coming due and payable shall have been fully paid or prepaid, the District (a) will not suspend or discontinue payment of any Debt Service Payments or such other amounts with respect to the Bonds, (b) will perform and observe all other agreements contained in the Indenture, and (c) will not terminate the Indenture for any cause, including, without limiting the generality of the foregoing, the occurrence of any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, destruction of or damage to the System, sale of the System, the taking by eminent domain of title to or temporary use of any component of the System, commercial frustration of purpose, any change in the tax or other laws of the United States of America or the State or any political subdivision of either thereof or any failure of the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Indenture. DepositofDebtServicePayments All Debt Service Payments with respect to the Bonds shall be paid directly by the District to the Trustee on the applicable Due Date. Such payments received by the Trustee shall be held in trust by the Trustee under the terms of the Indenture and shall be deposited by it as and when received in the Debt Service Account of the Payment Fund, which fund the Trustee by the Indenture agrees to establish and maintain so long as any Bonds are Outstanding. The Net Revenues of the System shall be received and deposited by the District in the Debt Service Fund which is held by the District. On or before each Record Date, the District shall withdraw from the Debt Service Fund an amount, together with the balance then on deposit in the A-8

69 Payment Fund, if any (other than amounts held for the defeasance of Bonds and any amounts required for payment of principal of or interest on any Bonds which have matured or been called for redemption but which have not yet been presented for payment), equal to the aggregate amount of the Debt Service Payments coming due on the next succeeding Interest Payment Date, and transfer the same to the Trustee for deposit into the Payment Fund on the following dates and in the following amounts: (1) Interest Component. On or before the fifteenth day of each May and November, an amount which is equal to the amount to become due on such Bonds on the next succeeding Interest Payment Date; provided, however, that the District may be entitled to certain credits on such payments as set forth above. (2) Principal Component. On or before the fifteenth day of November of each year, an amount which, together with any moneys already on deposit with the Trustee and available to make such payment, is not less than the entire amount of the next succeeding maturing principal or mandatory sinking account payment coming due on the Bonds after such date; provided, however, that the District may be entitled to certain credits on such payments as set forth above. Liability of District Limited Notwithstanding anything contained in the Indenture, the District shall not be required to advance any moneys derived from any source of income other than Net Revenues legally available therefor in the Revenue Fund and the other funds provided in the Indenture for the payment of the Debt Service Payments or for the performance of any agreements or covenants contained in the Indenture required to be performed by it. The District may, however, but shall not be required to, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose. The obligation of the District to make the Debt Service Payments and the other amounts due under the Indenture is a special obligation of the District payable solely from the moneys legally available therefor under the Indenture, and does not constitute a debt of the District or of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. Compliance with Indenture The District will not suffer or permit any material default by it to occur under the Indenture, but will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms of the Indenture required to be complied with, kept, observed and performed by it. Observance of Laws and Regulations The District will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States of America or of the State of California, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by it, including their right to exist and carry on their respective businesses, to the end that such franchises, rights and privileges shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired. A-9

70 Prosecution and Defense of Suits The District will promptly, upon request of the Trustee or any Owner, take such action from time to time as may be necessary or proper to remedy or cure any cloud upon or defect in the title to the System or any part thereof, whether now existing or hereafter developing, will prosecute all actions, suits or other proceedings as may be appropriate for such purpose and will indemnify and save the Trustee and every Owner harmless from all cost, damage, expense or loss, including reasonable attorneys fees, which they or any of them may incur by reason of any such cloud, defect, action, suit or other proceeding. Accounting Records and Statements The Trustee will keep proper accounting records in which accurate entries shall be made of all transactions made by the Trustee relating to the receipt, deposit and disbursement of the Debt Service Payments, and such accounting records shall be available for inspection by the District or any Owner or his or her agent duly authorized in writing on any Business Day upon reasonable notice at reasonable hours and under reasonable conditions prescribed by the Trustee. Further Assurances Whenever and so often as requested to do so by the Trustee or any Owner, the District will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee and the Owners all advantages, benefits, interests, powers, privileges and rights conferred or intended to be conferred upon them by the Indenture. Against Encumbrances The District covenants that, as of the Closing Date, there is no pledge of or lien on Revenues or a pledge of or lien on Net Revenues senior to or on a parity with the pledge and lien of Revenues or Net Revenues securing the Bonds. The District will not make any pledge of or place any lien on the Revenues or the Net Revenues, provided that the District may at any time, or from time to time, pledge or encumber the Net Revenues in connection with the issuance or execution of Parity Obligations, or subordinate to the pledge of Net Revenues in the Indenture. Against Sale or Other Disposition of Property Except as provided in the Indenture, the District covenants that the System shall not be encumbered, sold, leased, pledged, any charge placed thereon, or otherwise disposed of, as a whole or substantially as a whole. Neither the Net Revenues nor any other funds pledged or otherwise made available to secure payment of the Debt Service Payments shall be mortgaged, encumbered, sold, leased, pledged, any charge placed thereon, or disposed or used except as authorized by the terms of the Indenture. The District shall not enter into any agreement which impairs the operation of the System or any part of it necessary to secure adequate Net Revenues to pay the Debt Service Payments, or which otherwise would materially impair the rights of the Owners and the owners of any Parity Obligations with respect to the Net Revenues. If any substantial part of the System shall be sold, the payment therefor shall either (a) be used for the acquisition or construction of improvements, extensions or replacements of A-10

71 facilities constituting part of the System, or (b) to the extent not so used, be paid to the Trustee to be applied to pay or redeem the Bonds or any Parity Obligations, in accordance with written instructions of the District filed with the Trustee. Against Competitive Facilities Except for any utility system existing as of the date of the Indenture, the District will not, to the extent permitted by law, acquire, maintain or operate and will not, to the extent permitted by law and within the scope of its powers, permit any other public or private agency, authority, city or political subdivision or any person whomsoever to acquire, maintain or operate within the District any utility system competitive with the System; provided, however, that the District may assign all or a portion of the System to another entity upon delivery to the Trustee of an opinion of nationally recognized bond counsel that such assignment will not adversely affect the taxexempt status of the Bonds, and provided such entity assumes the obligations of the District under the Indenture. Tax Covenants Notwithstanding any other provision of the Indenture, absent an opinion of Bond Counsel that the exclusion from gross income of interest on the Bonds will not be adversely affected for federal income tax purposes, the District covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows: (i) The District covenants that it shall not make or permit any use of the proceeds of the Bonds that may cause the Bonds to be arbitrage bonds within the meaning of the Code. (ii) The District covenants that the proceeds of the Bonds will not be used as to cause the proceeds on the Bonds to satisfy the private business tests of Section 141(b) of the Code or the private loan financing test of Section 141(c) of the Code. (iii) The District covenants not to take any action or permit or suffer any action to be taken if the result of the same would be to cause the Bonds to be federally guaranteed within the meaning of Section 149(b) of the Code. Operation of the System The District covenants and agrees to operate the System in an efficient and economical manner and to operate, maintain and preserve the System in good repair and working order. PaymentofClaims The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the Net Revenues or any part thereof or on any funds in the control of the District or the Trustee prior or superior to the lien of the Bonds or which might impair the security of the Bonds; provided the District shall not be obligated to make such payment so long as the District contracts such payment in good faith. A-11

72 Compliance with Contracts The District will comply with, keep, observe and perform all agreements, conditions, covenants and terms, expressed or implied, required to be performed by it contained in all contracts for the use of the System and all other contracts affecting or involving the System to the extent that the District is a party thereto. Insurance So long as the Bonds are Outstanding, the District shall maintain or cause to be maintained, but only if and to the extent available at reasonable cost from reputable insurers, a standard comprehensive general insurance policy or policies in protection of the District and its members, officers, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the System. Said policy or policies shall provide coverage with such liability limits and shall be subject to such deductibles as shall be customary with respect to works and property of a like character. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the District, and may be maintained in whole or in part in the form of self-insurance by the District, subject to the provisions of the Indenture, or in the form of the participation by the District in a joint powers agency or other program providing pooled insurance. The proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which such proceeds shall have been paid. So long as the Bonds are Outstanding, the District shall procure and maintain, or cause to be procured and maintained, but only in the event and to the extent available from reputable insurers at reasonable cost, casualty insurance against loss or damage to any improvements constituting any part of the System, covering such hazards as are customarily covered with respect to works and property of like character. Such insurance may be subject to deductible clauses which are customary for works and property of a like character. Such insurance may be maintained as part of or in conjunction with any other casualty insurance carried by the District and may be maintained in whole or in part in the form of self-insurance by the District, subject to the provisions of the Indenture, or in the form of the participation by the District in a joint powers agency or other program providing pooled insurance. All amounts collected from insurance against accident to or destruction of any portion of the System shall be used to repair, rebuild or replace such damaged or destroyed portion of the System, and to the extent not so applied, shall be paid to the Trustee to be applied to redeem the Bonds or any Parity Obligations, in accordance with written instructions of the District filed with the Trustee. Books and Accounts; Financial Statements The District shall keep proper books of record and accounts of the System, separate from all other records and accounts, in which complete and correct entries shall be made of all transactions relating to the System. Said books shall, upon prior request, be subject to the reasonable inspection by the Owners of not less than ten percent (10%) in aggregate principal amount of the Outstanding Bonds, or their representatives authorized in writing. The District shall cause the books and accounts of the System to be audited annually by an Independent Accountant, not more than one hundred eighty (180) days after the close of each Fiscal Year, and shall make a copy of such report available for inspection by the Owners at the office of the District. A-12

73 Payment of Taxes and Compliance with Governmental Regulations The District will pay and discharge all taxes, assessments and other governmental charges, if any, which may hereafter be lawfully imposed upon the System or any part thereof or upon the Net Revenues when the same shall become due. The District will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the System or any part thereof, but the District shall not be required to make such payments, or to comply with any regulations or requirements, so long as the payment or validity or application thereof shall be contested in good faith. Collection of Rates and Charges (a) The District covenants that it shall fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the System during each Fiscal Year, which are at least sufficient, after making allowances for contingencies and error in the estimates, to yield Revenues sufficient to pay the following amounts in the following order of priority: (i) All Operation and Maintenance Expenses of the System; (ii) All Debt Service Payments and all payments of principal of and interest on Bonds and any Parity Obligations as they become due and payable; (iii) Amounts necessary to bring the amount of funds in the Reserve Fund up to the Reserve Requirement within one year of a draw thereon for the Bonds and amounts necessary to bring the amount of funds in any reserve account up to the Reserve Requirement within one year of a draw thereon for any Parity Obligations; and (iv) All other payments required to meet any other obligations of the District which are charges, liens, encumbrances upon the Revenues or the Net Revenues during such Fiscal Year. (b) Furthermore, the District shall fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the System during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to one hundred twentyfive percent (125%) of the aggregate amount of the Debt Service Payments, and principal of and interest on any Parity Obligations issued or incurred after the date of the Indenture payable from Net Revenues coming due and payable during such Fiscal Year. The District may make adjustments, from time to time, in its rates, fees and charges as it deems necessary, but shall not reduce its rates, fees and charges below those in effect unless the Net Revenues resulting from such reduced rates, fees and charges shall at all times be sufficient to meet the requirements set forth in this paragraph.. (c) If the District violates the covenants set forth in the Indenture, such violation shall not, in and of itself, be a default under the Indenture and shall not give rise to a declaration of an Event of Default if the coverage calculated under the Indenture does not decrease below 1.00 times annual Debt Service Payments, payments on Parity Obligations, amounts sufficient to maintain the Reserve Fund at the Reserve Requirement, and Operation and Maintenance Expenses of the System and, within 120 days after the date such violation is discovered, the District hires an Independent Financial Consultant to review the revenues and expenses of the System and abides by such consultant s recommendations to revise the schedule of rates, fees A-13

74 and charges and to revise any Operation and Maintenance Expenses of the System insofar as practicable and to take such other actions as are necessary so as to produce Net Revenues to cure such violation for future compliance; provided, however, that if the District does not cure such violation within twelve (12) months succeeding the date such violation is discovered, an Event of Default shall be deemed to have occurred in the Indenture. (d) The District shall furnish to the Trustee within 270 days following the close of each of its Fiscal Years, an audit report of an Independent Certified Public Accountant with respect to the Fiscal Year, together with a certificate of the District certifying that the District has complied with its rate covenant contained in subsections (a) and (b) above for the Fiscal Year. Eminent Domain Proceeds Any amounts received as awards as a result of the taking of all or any part of the System by the lawful exercise of eminent domain, at the election of the District (evidenced by a Certificate of the District filed with the Trustee) shall either (a) be used for the acquisition or construction of improvements and extension of the System, or (b) be paid to the Trustee to be applied to redeem the Bonds or any Parity Obligations, in accordance with written instructions of the District filed with the Trustee. Rebate of Excess Investment Earnings to United States The District shall calculate or cause to be calculated, and shall provide, or cause to be provided, written notice to the Trustee of the excess investment earnings (as defined in the Code, Excess Investment Earnings ) at such times and in such manner as may be required pursuant to the Code. The District shall inform the Trustee how frequently calculations are to be made, and shall ensure that a copy of all such calculations is given promptly to the Trustee. The District agrees to deposit with the Trustee, promptly upon the receipt of any such calculations, the amount of Excess Investment Earnings so calculated. The Trustee shall deposit all amounts paid to it for such purpose by the District in the Rebate Fund, and shall pay to the United States of America from the amounts on deposit in the Rebate Fund such amounts as shall be identified pursuant to written notice filed with the Trustee by the District for such purpose from time to time. Events of Default and Events of Mandatory Acceleration; Acceleration of Maturities If one or more of the following Events of Default shall happen: (a) default shall be made in the due and punctual payment by the District of any Debt Service Payment when and as the same shall become due and payable; (b) default shall be made by the District in the performance of any of the agreements or covenants contained in the Indenture required to be performed by it, and such default shall have continued for a period of thirty (30) days after the District shall have been given notice in writing of such default by the Trustee; (c) the District shall file a petition seeking arrangement or reorganization under federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the A-14

75 provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the District or of the whole or any substantial part of its property; or (d) an event of default shall have occurred with respect to any Parity Obligations; If an Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, subject to the provisions of the Indenture, exercise any remedies available to the Trustee and the Bondowners in law or at equity. Upon the occurrence of an Event of Default under the Indenture, the Trustee may declare the principal and interest with respect to all such Bonds immediately due and payable and such principal and interest shall thereupon be due and payable immediately. The Trustee shall apply amounts on deposit in the funds and accounts in accordance with the Indenture. This provision, however, is subject to the condition that, except with respect to an Event of Default under subsection (c) above, if at any time after such Outstanding principal amount of the Bonds and the accrued interest thereon shall have been so declared due and payable and before the acceleration date or the date of any judgment or decree for the payment of the money due shall have been obtained or entered, the District shall deposit with the Trustee a sum sufficient to pay such amount due prior to such date and the accrued interest thereon, with interest on such overdue payments at the rate on such Bonds, and the reasonable fees and expenses of the Trustee, including those of its attorneys, and any and all other defaults known to the District (other than in the payment of such principal amount of the Bonds and the accrued interest thereon due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then and in every such case the Trustee, by written notice to the District, may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. Other Remedies of the Trustee The Trustee may (subject to the receipt of indemnity as provided in the Indenture): (a) by mandamus or other action or proceeding or suit at law or in equity enforce its rights against the District, or any board member, officer or employee thereof, and compel the District or any such board member, officer or employee to perform and carry out its or his or her duties under applicable law and the agreements and covenants contained in the Indenture required to be performed by it or him; (b) by suit in equity enjoin any acts or things which are unlawful or violate the rights of the Trustee or the Bondowners under the Indenture; (c) intervene in judicial proceedings that affect the Bonds or the security therefor or under the Indenture; or (d) by suit in equity upon the happening of an Event of Default require the District and its officers and employees to account as the trustee of an express trust. A-15

76 Non-Waiver A waiver of any default or breach of duty or contract by the Trustee or the Owners shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee or the Owners to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee or the Owners may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or the Owners, the Trustee, the Owners and the District shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Remedies Not Exclusive No remedy in the Indenture conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any other law. No Liability by the Trustee to the Owners Except for the duty of the Trustee to make payments of principal, redemption premiums and interest with respect to the Bonds from moneys received from the District, the Trustee will not have any obligation or liability to the Owners with respect to the payment when due of the Debt Service Payments by the District, or with respect to the performance by the District of the other agreements and covenants required to be performed by it contained in the Indenture. Limitation on Owners Right to Bring Suit No Owner of any Bond shall have any right to institute any proceeding, judicial or otherwise, under or with respect to the Indenture, or for the appointment of a receiver or trustee or for any other remedy under the Indenture, at law or in equity, unless: (1) such Owner has previously given written notice to the Trustee of a continuing Event of Default; (2) the owners of not less than a majority in principal amount of the Bonds Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee under the Indenture; (3) such Owner or Owners have offered to the Trustee reasonable indemnity, satisfactory to the Trustee, against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding. A-16

77 It being understood and intended that no one or more Owners shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the lien of the Indenture or the rights of any other Owners or to obtain or to seek to obtain priority or preference over any other Owners or to enforce any right under the Indenture, except in the manner in the Indenture provided and for the equal and ratable benefit of all Bonds and Parity Obligations. Notwithstanding the foregoing, the Owner of any Bond shall have the right which is absolute and unconditional to receive payment of interest on such Bond when due in accordance with the terms thereof and of the Indenture and the principal of such Bond at the stated maturity thereof and to institute suit for the enforcement of any such payment in accordance with the provisions of the Indenture and such rights shall not be impaired without the consent of such Owner. Application of Funds Upon Default All monies received by the Trustee or by any receiver pursuant to any right given or action taken shall, after payment of the reasonable costs and fees of, and the reasonable fees, expenses, liabilities and advances incurred or made by the Trustee, be deposited in the Debt Service Account and all moneys so deposited during the continuance of an Event of Default (other than moneys for the payment of Bonds which have previously matured or otherwise become payable prior to such Event of Default or for the payment of interest due prior to such Event of Default), together with all moneys in the funds and accounts maintained by the Trustee under the Indenture, shall be applied as follows: (a) Unless the principal of all Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied: First: To the payment to the persons entitled thereto of all installments of interest then due on the Bonds and any Parity Obligations, with interest on overdue installments, if lawful, at the rate per annum borne by the Bonds, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably according to the amounts due on such installment, to the persons entitled thereto without any discrimination or privilege; and Second: To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds and any Parity Obligations which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Indenture), with interest on such Bonds at their rate from the respective dates upon which they became due, in the order of their due dates, and, if the amount available shall not be sufficient to pay in full Bonds and any Parity Obligations due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal and interest due on such date, to the persons entitled thereto without any discrimination or privilege. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds and any Parity Obligations, with interest on overdue interest and principal, as aforesaid, without preference or priority over interest or of interest over principal or of any installment of interest over any other installment of interest, or of any Bonds over any other Bonds or any Parity A-17

78 Obligations, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege. Rights of the Owners of Parity Obligations Notwithstanding anything to the contrary, it is acknowledged and agreed that the rights of the Trustee and the Owners under the Indenture in and to the Net Revenues and the System shall be exercised on a parity and proportionate basis with the rights of the owners of any Parity Obligations and any fiduciary acting for the benefit of such owners. The Trustee The District, in its sole discretion, or the Owners of a majority in aggregate principal amount of all Bonds Outstanding may, by thirty (30) days prior written request, remove the Trustee initially a party hereto, and any successor thereto, and in such event, or in the event the Trustee resigns, the District shall appoint a successor Trustee, but any such successor shall be a bank, national banking association or trust company in good standing doing business and having an office in Los Angeles or San Francisco, California, having (or if such bank, national banking association or trust company is a member of a bank holding company system, its bank holding company shall have) a combined capital (exclusive of borrowed capital) and surplus of at least Fifty Million Dollars ($50,000,000) and subject to supervision or examination by federal or state authority; provided, however, that the District shall not remove the Trustee if the District is in default under the Indenture. The Trustee may at any time resign by giving written notice to the District and by giving to the Bond Owners notice by mailing a notice of such resignation to their addresses appearing in the Bond Register. Upon receiving any such notice of resignation, the District shall promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event that the District does not appoint a successor Trustee within thirty (30) days following receipt of such notice of resignation, the resigning Trustee may petition at the expense of the District an appropriate court having jurisdiction to appoint a successor Trusteeortoresign. Whenever in the administration of its duties under the Indenture, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter (unless other evidence in respect thereof be specifically prescribed in the Indenture) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by the certificate of an Authorized Officer of the District and such certificate shall be full warranty to the Trustee for any action taken or suffered under the provisions of the Indenture upon the faith thereof, but in its discretion the Trustee may, in lieu thereof (but shall not be obligated to), accept other evidence of such matter. The Trustee may in good faith buy, sell, own, hold and deal in any of the Bonds issued pursuant to the Indenture, and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party to the Indenture. The Trustee and its affiliates, either as sponsor, advisor, principal or agent, may also engage in or be interested in any financial or other transaction with the District, and may act as depository, trustee, or agent for any committee or body of Owners of Bonds or other obligations of the District as freely as if it were not Trustee under the Indenture. The Trustee may execute any of the trusts or powers of the Indenture and perform the duties required of it under the Indenture by or through attorneys, agents, or receivers, and shall A-18

79 be entitled to advice of counsel concerning all matters of trust and its duty under the Indenture. The Trustee shall be fully reimbursed by the District for reasonable expenses incurred in connection with the performance of its obligations under the Indenture. Upon any default by, or misconduct of, any agent, attorney or receiver appointed by the Trustee, the Trustee shall fully pursue all remedies available to it against such attorney, agent or receiver, and the proceeds of the exercise of such remedies shall be used to reimburse the District for any loss it may have suffered as a result of the default or misconduct of such agent, attorney or receiver. Before taking any remedial action under the Indenture the Trustee may require that a satisfactory indemnity bond or other indemnity satisfactory to the Trustee be furnished for the reimbursement of all reasonable expenses to which it may be put and to protect it against all liability which may be incurred in connection with the taking of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct; provided, however, the Trustee shall not seek such indemnity prior to making payments on the Bonds. The Trustee, prior to the occurrence of an Event of Default, and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform only such duties as are specifically set forth in the Indenture. The Trustee shall, during the existence of any Event of Default (which has not been cured or waived), exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a reasonable person would exercise or use in the conduct of such person s own affairs. The Trustee shall not be deemed to have knowledge of an Event of Default (except in connection with a failure of the District to make Debt Service Payments when due) until a Responsible Officer has actual knowledge thereof, or until notified in writing of such Event of Default. No provision of the Indenture or any other document related hereto shall require the Trustee to risk or advance its own funds or otherwise incur any financial liability in the performance of its duties or the exercise of its rights under the Indenture. The Trustee shall not be liable for any action taken or not taken by it in accordance with the direction of a majority (or other percentage provided for in the Indenture) in aggregate principal amount of Bonds outstanding relating to the exercise of any right, power or remedy available to the Trustee. The Trustee shall not be liable to the parties or deemed in breach or default under the Indenture if and to the extent its performance under the Indenture is prevented by reason of force majeure. The term force majeure means an occurrence that is beyond the control of the Trustee and could not have been avoided by exercising due care. Force majeure shall include but not be limited to acts of God, terrorism, war, riots, strikes, fire, floods, earthquakes, epidemics or other similar occurrences. The Trustee shall not be liable in connection with the performance of its duties under the Indenture, except for its own negligence or willful misconduct. Amendment or Supplement by Consent of Owners The Indenture may be amended in writing by agreement between the District and the Trustee, but no such amendment or supplement shall (i) reduce the rate of interest evidenced by the Bonds or extend the time of payment of such interest or reduce the amount of principal thereof or extend the Maturity Date thereof without the prior written consent of the Owner thereof, or (ii) reduce the percentage of Owners of Bonds whose consent is required for the execution of any amendment of or supplement to the Indenture, or (iii) modify any rights or obligations of the Trustee without its prior written consent thereto. A-19

80 The Indenture and the rights and obligations of the District, of the Trustee and the Owners of the Bonds may also be modified or amended from time to time and at any time by a Supplemental Indenture which the District and the Trustee may enter into, but without the consent of any Bond Owners, if the Trustee determines that the provisions of such Supplemental Indenture shall not materially adversely affect the interests of the Owners of the Bonds, including, without limitation, for any one or more of the following purposes: (a) to add to the covenants and agreements of the District other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power in the Indenture reserved to or conferred upon the District; (b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the District or the Trustee may deem necessary or desirable; (c) to modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; (d) to make such additions, as may be necessary or desirable to assure exemption from federal income taxation of interest on the Bonds; or (e) to authorize the issuance of Parity Obligations. Defeasance ways: Any Outstanding Bonds shall be paid and discharged in any one or more of the following (a) by paying or causing to be paid the principal of and interest on such Bonds Outstanding, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, before maturity, money which, together with the amounts which are then on deposit in the Payment Fund and available therefor, is fully sufficient to pay such Bonds, including all principal and interest; or (c) by depositing with the Trustee, (or such other fiduciary as determined by the District) under an escrow agreement or escrow instructions, cash, non-callable Federal Securities or, subject to the prior written consent of the Bond Insurer, pre-refunded non-callable municipal obligations rated AAA and Aaa by S&P and Moody s, respectively (or any combination thereof) (the Defeasance Obligations ) in such amount as an Independent Certified Public Accountant shall determine will, together with the interest to accrue thereon and moneys then on deposit (or a pro rata share thereof) in the Payment Fund available therefor, together with the interest to accrue thereon, be fully sufficient to pay and discharge such Bonds (including all principal and interest) at or before their respective maturity dates. Notwithstanding that some Bonds may not have been surrendered for payment, all obligations of the District and the Trustee under the Indenture with respect to such defeased A-20

81 Bonds shall cease and terminate, except only the obligation of the Trustee to pay or cause to be paid to the Owners of such Bonds all sums due thereon. Unclaimed Moneys Anything contained in the Indenture to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of the interest or principal of the Bonds which remains unclaimed for the lesser of the period ending one day prior to the date such money would escheat to the State or two (2) years after the date when the payments evidenced and represented by such Bonds have become payable, if such money was held by the Trustee at such date, or for the lesser of the period ending one day prior to the date such money would escheat to the State or two (2) years after the date of deposit of such money if deposited with the Trustee after the date when the interest and principal evidenced and represented by such Bonds have become payable, the Trustee shall pay such amounts to the District as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the District for interest and principal represented by such Bonds. Bonds Insurance Policy Provisions (a) So long as no Bond Insurer Default shall have occurred and be continuing, the Bond Insurer shall at all times be deemed the sole Owner of the outstanding Bonds for the purposes of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Owners of the Bonds are entitled to take pursuant to the Indenture. In furtherance thereof and as a term of the Indenture and each Bond, the Trustee and each Bondholder appoint the Bond Insurer as their agent and attorney-in-fact and agree that the Bond Insurer may at any time during the continuation of any proceeding by or against the District under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an "Insolvency Proceeding") direct all matters relating to such Insolvency Proceeding, including without limitation, (A) all matters relating to any claim or enforcement proceeding in connection with an Insolvency Proceeding (a "Claim"), (B) the direction of any appeal of any order relating to any Claim, (C) the posting of any surety, supersedes or performance bond pending any such appeal, and (D) the right to vote to accept or reject any plan of adjustment. In addition, the Trustee and each Bondholder delegate and assign to the Insurer, to the fullest extent permitted by law, the rights of the Trustee and each Bondholder in the conduct of any Insolvency Proceeding, including, without limitation, all rights of any party to an adversary proceeding or action with respect to any court order issued in connection with any such Insolvency Proceeding. (b) No grace period for a covenant default under the Indenture affecting the Bonds shall exceed 30 days or be extended for more than 60 days without the prior written consent of the Bond Insurer. No grace period shall be permitted for payment defaults on the Bonds. (c) The maturity of the Bonds shall not be accelerated without the consent of the Bond Insurer and in the event the maturity of the Bonds is accelerated, the Bond Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued, on such principal to the date of acceleration (to the extent unpaid by the District) and the Trustee shall be required to accept such amounts. Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Bond Insurer s obligations under the Bond Insurance Policy with respect to such Bonds shall be fully discharged. A-21

82 (d) Any amendment or waiver of, or supplement or modification to, any provision of the Indenture that requires the consent of Owners of the Bonds or adversely affects the rights and interests of the Bond Insurer shall be subject to the prior written consent of the Bond Insurer. (e) The rights granted to the Bond Insurer under the Indenture to request, consent to or direct any action are rights granted to the Bond Insurer in consideration of its issuance of the Bond Insurance Policy. Any exercise by the Bond Insurer of such rights is merely an exercise of the Bond Insurer s contractual rights and shall not be construed or deemed to be taken for the benefit of or on behalf of the Owners of the Bonds, nor does such action evidence any position of the Bond Insurer, affirmative or negative, as to whether the consent of the Owners of the Bonds or any other person is required in addition to consent of the Bond Insurer. (f) To accomplish a defeasance of Bonds under the Indenture, the District shall cause to be delivered to the Bond Insurer (i) a report of an independent firm of nationally recognized certified public accountants or such other accountant as shall be acceptable to the Bond Insurer verifying the sufficiency of the escrow established to pay the Bonds in full on the maturity or redemption date (a Verification ), (ii) an Escrow Deposit Agreement (which shall be acceptable in form and substance to the Bond Insurer), and (iii) an opinion of nationally recognized bond counsel to the effect that the Bonds are no longer Outstanding under the Indenture; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the District, the Trustee and Bond Insurer. The Bond Insurer shall be provided with final drafts of the above-referenced documentation not less than five business days prior to the funding of the escrow. Bonds shall be deemed Outstanding under the Indenture unless and until they are in fact paid and retired or the criteria in this subsection are met. (g) Amounts paid by the Bond Insurer under the Bond Insurance Policy shall not be deemed to have been paid for purposes of the Indenture and shall remain outstanding and continue to be due and owing until paid by the District in accordance with the Indenture. The Indenture shall not be discharged unless all amounts due or to become due to the Bond Insurer have been paid in full or duly provided for. (h) Each of the District and the Trustee covenant and agree to take such action as is necessary from time to time to preserve the priority of the pledge of the Net Revenues under applicable law. (i) If, on the third Business Day prior to the related Interest Payment Date, there is not on deposit in the Debt Service Account, after making all transfers and deposits required under the Indenture, moneys sufficient to pay the principal of and interest on the Bonds due on such Interest Payment Date, the Trustee shall give notice to the Bond Insurer and to the Bond Insurer s Fiscal Agent (if any) by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to such Interest Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Bonds due on such Interest Payment Date, the Trustee shall make a claim under the Bond Insurance Policy and give notice to the Bond Insurer and the Bond Insurer s Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Bonds and the amount required to pay principal of the Bonds, confirmed in writing to the Bond Insurer and the Bond Insurer s Fiscal Agent (if any) by 12:00 noon, New York City time, on such Business Day by filling in the form of Notice of Claim and Certificate delivered with the Bond Insurance Policy. A-22

83 (j) The Trustee shall designate any portion of payment of principal of Bonds paid by the Bond Insurer, whether by virtue of mandatory sinking fund redemption or maturity, on its books as a reduction in the principal amount of Bonds registered to the then current Owners, whether DTC or its nominee or otherwise, and shall issue a replacement Bond to the Bond Insurer, registered in the name of Assured Guaranty Municipal Corp., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided, however, that the Trustee s failure to so designate any payment or issue any replacement Bond shall have no effect on the amount of principal of or interest on Bonds payable by the District or on the subrogation rights of the Bond Insurer. (k) Upon payment of a claim under the Bond Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of the Owners of the Bonds designated the Policy Payments Account, over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under the Bond Insurance Policy in trust on behalf of Owners of the Bonds and shall deposit such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to Owners of the Bonds in the same manner as principal and interest payments are to be made with respect to the Bonds under the provisions of the Indenture regarding payment of Bonds. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything to the contrary otherwise set forth in the Indenture, and to the extent permitted by law, in the event amounts paid under the Bond Insurance Policy are applied to claims for payment of principal of, or interest on, the Bonds, and interest on all amounts paid by the Bond Insurer under the Bond Insurance Policy shall accrue and be payable from the date of such payment at the Bond Insurer Rate. The District hereby covenants and agrees that the amounts to be reimbursed to the Bond Insurer under the Indenture are secured by a lien on and pledge of the Net Revenues and payable from such Net Revenues on a parity with debt service due on the Bonds. (l) The Trustee shall keep a complete and accurate record of all funds deposited by the Bond Insurer into the Policy Payments Account and the allocation of such funds to payment of principal of and interest on any Bond. The Bond Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. Funds held in the Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. Any funds remaining in the Policy Payments Account following the Interest Payment Date on which amounts therein have been disbursed shall be remitted to the Bond Insurer. (m) To the extent that the Bond Insurer makes any payment of principal of or interest on the Bonds, the Bond Insurer shall, in accordance with the terms of the Bond Insurance Policy, become subrogated to the rights of the Owner of such Bonds receiving such payment (which subrogation rights shall also include the rights of any such recipients in connection with any Insolvency Proceedings). Each obligation of the District to the Bond Insurer under the Indenture shall survive the discharge or termination of the Indenture. (n) The District shall pay or reimburse the Bond Insurer any and all charges, fees, costs and expenses that the Bond Insurer may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security of the Bond Insurer under the Indenture, (ii) the pursuit of any remedies under the Indenture or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related A-23

84 to, the Indenture, whether or not executed or completed, or (iv) any litigation or other dispute in connection with the Indenture or the transactions contemplated hereby, other than the costs resulting from a Bond Insurer Default. The Bond Insurer reserves the right the charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Indenture. (o) After the payment of the reasonable expenses of the Trustee, the application of funds realized upon an event of default under the Indenture shall be applied to payment of expenses of the District or rebate only after the payment of past due and current debt service on the Bonds and amounts required to restore the Reserve Fund to the Reserve Requirement. (p) The Bond Insurer shall be entitled to pay principal of or interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer (as such terms are defined in the Bond Insurance Policy) and any amounts due on the Bonds as a result of acceleration of the maturity thereof in accordance with the Indenture, whether or not the Bond Insurer has received a Notice of Nonpayment (as such term is defined in the Bond Insurance Policy) or a claim upon the Bond Insurance Policy. (q) The notice address of the Bond Insurer with respect to the Bond Insurance Policy is: Assured Guaranty Municipal Corp., 31 West 52nd Street, New York, New York 10019, Attention: Managing Director Surveillance, Re: Policy No., Telephone: (212) ; Telecopier: (212) In each case in which notice or other communication refers to an event of default under the Indenture, then a copy of such notice or other communication shall also be sent to the attention of the General Counsel and shall be marked to indicate URGENT MATERIAL ENCLOSED. (r) The Bond Insurer shall be provided with the following information by the District or Trustee, as the case may be: (i) Annual audited financial statements within 180 days after the end of the District s Fiscal Year (together with a certification of the District that it is not aware of any default or event of default under the Indenture), and the District s annual budget within 30 days after the approval thereof together with such other information, data or reports as the Bond Insurer shall reasonably request from time to time; (ii) Notice of any draw upon the Reserve Fund within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the Reserve Requirement and (ii) withdrawals in connection with a refunding of the Bonds; (iii) Notice of any default known to the Trustee or District within five Business Days after knowledge thereof; (iv) Prior notice of the advance refunding or redemption of any of the Bonds, including the principal amount, maturities and CUSIP numbers thereof; (v) Notice of the resignation or removal of the Trustee and the appointment of, and acceptance of duties by, any successor thereto; (vi) Notice of the commencement of any proceeding by or against the District commenced under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an Insolvency Proceeding ); A-24

85 (vii) Notice of the making of any claim in connection with any Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on, the Bonds; (viii) A full original transcript of all proceedings relating to the execution of any amendment or waiver of, or supplement or modification to, the Indenture; and (ix) All reports, notices and correspondence to be delivered to Owners of Bonds under the terms of the Indenture. In addition, all information furnished pursuant to the Continuing Disclosure Agreement shall also be provided to the Bond Insurer, simultaneously with the furnishing of such information pursuant thereto. The Bond Insurer shall have the right to receive such additional information as it may reasonably request. (s) The District shall permit the Bond Insurer to discuss the affairs, finances and accounts of the District or any information the Bond Insurer may reasonably request regarding the security for the Bonds with appropriate officers of the District and will use commercially reasonable efforts to enable the Bond Insurer to have access to the facilities, books and records of the District on any Business Day upon reasonable prior notice. (t) The District shall notify the Bond Insurer of the failure of the District to provide notices, certificates and other information under the Indenture. (u) Notwithstanding satisfaction of the other conditions to the issuance of additional Parity Obligations set forth in the Indenture, no such issuance may occur (A) if an Event of Default under the Indenture (or any event which, once all notice or grace periods have passed, would constitute such an event of default) exists unless such default shall be cured upon such issuance, and (B) unless the Reserve Fund is fully funded at the Reserve Requirement (including the proposed issue) upon the issuance of such additional Parity Obligations, in either case unless otherwise permitted by the Bond Insurer. (v) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the Indenture would adversely affect the security for the Bonds or the rights of the Owners thereof, the Trustee shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Bond Insurance Policy. (w) No contract shall be entered into or any action taken by which the rights of the Bond Insurer or security for or sources of payment of the Bonds may be impaired or prejudiced in any material respect except upon obtaining the prior written consent of the Bond Insurer. (x) The District shall not enter into an interest rate exchange product secured by and payable from Net Revenues without the prior written consent of the Bond Insurer. Bond Reserve Policy Provisions. (a) Upon any payment by the Bond Insurer under the Bond Reserve Policy, the Bond Insurer shall furnish to the District written instructions as to the manner in which payment of amounts owed to the Bond Insurer as a result of such payment under the Bond Reserve Policy shall be made. Amounts drawn under the Bond Reserve Policy shall be used solely to pay scheduled payments of principal and interest due on the Bonds. A-25

86 (b) The District shall pay the Bond Insurer, from amounts deposited in the Reserve Fund in accordance with the Indenture, the principal amount of any draws under the Bond Reserve Policy and pay all related reasonable expenses incurred by the Bond Insurer and shall pay interest thereon from the date of payment by the Bond Insurer at the Bond Insurer Rate (collectively, Policy Costs ). If the interest provisions of this subsection shall result in an effective rate of interest which, for any period, exceeds the limit of the usury or any other laws applicable to the indebtedness created in the Indenture, then all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice between or by any party hereto, be applied as additional interest for any later periods of time when amounts are outstanding under this subsection to the extent that interest otherwise due under the Indenture for such periods plus such additional interest would not exceed the limit of the usury or such other laws, and any excess shall be applied upon principal immediately upon receipt of such moneys by the Bond Insurer, with the same force and effect as if the District had specifically designated such extra sums to be so applied and the Bond Insurer had agreed to accept such extra payment(s) as additional interest for such later periods. In no event shall any agreed-to or actual exaction as consideration for the indebtedness created in the Indenture exceed the limits imposed or provided by the law applicable to this transaction for the use or detention of money or for forbearance in seeking its collection. Repayment of Policy Costs shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of PolicyCotsrelatedtosuchdraw. (c) Amounts in respect of Policy Costs paid to the Bond Insurer shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to the Bond Insurer on account of principal due, the coverage under the Bond Reserve Policy will be increased by a like amount, subject to the terms of the Bond ReservePolicy.TheobligationtopayPolicyCostsshallbesecuredbyavalidlienonNet Revenues (subject only to the priority of payment provisions set forth in the Indenture). (d) All cash and investments in the Reserve Fund shall be transferred to the Debt Service Account for payment of debt service on the Bonds before any drawing may be made on the Bond Reserve Policy or on any alternative credit instrument on deposit therein. Payment of any Policy Costs shall be made prior to replenishment of any such cash amounts in the Reserve Fund. Draws on all alternative credit instruments on deposit therein (including the Bond Reserve Policy) on which there is available coverage shall be made on a pro rata basis (calculated by reference to available coverage under each such alternative credit instrument) after applying available cash and investments in the Reserve Fund. Payment of Policy Costs and reimbursement of amounts with respect to such alternative credit instruments shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Fund. For the avoidance of doubt, available coverage means the coverage then available for disbursement pursuant to the terms of the applicable alternative credit instrument without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provider to honor any such claim or draw. (e) If the District shall fail to pay any Policy Costs in accordance with the requirements of the Indenture, the Bond Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Indenture, other than (i) acceleration of the maturity of the Bonds or (ii) remedies which would adversely affect owners of the Bonds. A-26

87 (f) The Indenture shall not be discharged until all Policy Costs owing to the Bond Insurer shall have been paid in full. The District s obligation to pay such amounts, as provided in the Indenture, shall expressly survive payment in full of the Bonds. (g) Policy Costs due and owing shall be included in debt service requirements for purposes of the rate covenant set forth in the Indenture and the calculation of the additional Parity Obligations set forth in the Indenture. (h) The Trustee shall ascertain the necessity for a claim upon the Bond Reserve Policy in accordance with the provisions of the Indenture and shall provide notice to the Bond Insurer in accordance with the terms of the Bond Reserve Policy at least five Business Days prior to each date upon which interest or principal is due on the Bonds. (i) The District shall, pay or reimburse the Bond Insurer any and all charges, fees, costs, losses, liabilities and expenses which the Bond Insurer may pay or incur, including, but not limited to, fees and expenses of attorneys, accountants, consultants and auditors and reasonable costs of investigations, in connection with (i) any accounts established to facilitate payments under the Bond Reserve Policy, (ii) the administration, enforcement, defense or preservation of any rights in respect of the Indenture, including defending, monitoring or participating in any litigation or proceeding (including any bankruptcy proceeding in respect of the District) relating to the Indenture, any party to the Indenture or the transactions contemplated hereby, (iii) the foreclosure against, sale or other disposition of any collateral securing any obligations under the Indenture, if any, or the pursuit of any remedies under the Indenture, to the extent such costs and expenses are not recovered from such foreclosure, sale or other disposition, (iv) any amendment, waiver or other action with respect to, or related to the Indenture or the Bond Reserve Policy, or (v) any action taken by the Bond Insurer to cure a default or termination or similar event (or to mitigate the effect thereof) under the Indenture; costs and expenses shall include a reasonable allocation of compensation and overhead attributable to time of employees of the Bond Insurer spent in connection with the actions described in the preceding clauses (ii) through (v). The Bond Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Indenture. Amounts payable by the District under the Indenture shall bear interest at the Bond Insurer Rate from the date such amount is paid or incurred by the Bond Insurer until the date the Bond Insurer is paid in full. (j) The obligation of the District to pay all amounts due, as and to the extent provided in the Indenture, shall be an absolute and unconditional obligation of the District and will be paid or performed strictly in accordance with the Indenture, irrespective of (i) any lack of validity or enforceability of or any amendment or other modifications of, or waiver with respect to the Bonds or the Indenture, (ii) any amendment or other modification of, or waiver with respect to the Bond Reserve Policy, (iii) any exchange, release or non-perfection of any security interest in property securing the Bonds or the Indenture, (iv) whether or not such Bonds are contingent or matured, disputed or undisputed, liquidated or unliquidated, (v) any amendment, modification or waiver of or any consent to departure from the Indenture or the Bond Reserve Policy, (vi) the existence of any claim, setoff, defense (other than the defense of payment in full), reduction, abatement or other right which the District may have at any time against the Trustee or any other person or entity other than the Bond Insurer, whether in connection with the Indenture or the transactions contemplated hereby or any unrelated transactions, (vii) any statement or any other document presented under or in connection with the Bond Reserve Policy relied upon in good faith by the Bond Insurer proving in any and all respects invalid, inaccurate, insufficient, fraudulent or forged or any statement therein being A-27

88 untrue or inaccurate in any respect, or (viii) any payment in good faith by the Bond Insurer under the Bond Reserve Policy against presentation of a certificate or other document which does not strictly comply with the terms of the Bond Reserve Policy. Benefits of Indenture Limited to Parties Nothing contained in the Indenture, expressed or implied, is intended to give to any person other than the District, the Trustee and the Owners any claim, remedy or right under or pursuant hereto, and any agreement, condition, covenant or term contained in the Indenture required to be observed or performed by or on behalf of the District shall be for the sole and exclusive benefit of the Trustee and the Owners. Waiver of Personal Liability No board member, officer or employee of the District shall be individually or personally liable for the payment of the interest or principal the Bonds, but nothing contained in the Indenture shall relieve any board member, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or by the Indenture. Investments Amounts on deposit in any fund or account created pursuant to the Indenture shall be invested in Permitted Investments which will, as nearly as practicable, mature on or before the dates when such money is anticipated to be needed for disbursement under the Indenture, in accordance with such written directions as the District may from time to time provide to the Trustee. The Trustee and any affiliates may act as sponsor, advisor, principal or agent in the acquisition or disposition of any such investment. The Trustee shall not be liable or responsible for any loss suffered in connection with any such investment made by it under. Interest or profit received on such investments shall be deposited to the Debt Service Account. In computing the amount in any fund or account, Permitted Investments shall be valued at market value, exclusive of accrued interest. Except for investment agreements and repurchase agreements, if at any time after investment therein a Permitted Investment ceases to meet the criteria set forth in the definition of Permitted Investments and such obligation, aggregated with other nonconforming investments, exceeds ten percent (10%) of invested funds, such Permitted Investment shall be sold or liquidated. California Law The Indenture shall be construed and governed in accordance with the laws of the State of California. Payments Due on Days that are not Business Days In any case where the date fixed for payment of principal or interest on the Bonds or the date fixed for redemption of Bonds shall not be a Business Day, then payment of such principal or interest or redemption price shall be made on the next succeeding Business Day, with the same force and effect as if made on such non-business Day and no interest shall accrue on such amounts from and after such non-business Day. A-28

89 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE DISTRICT FOR FISCAL YEAR 2013

90 [THIS PAGE INTENTIONALLY LEFT BLANK]

91 KERN DELTA WATER DISTRICT Financial Statements Years Ended December 31, 2013 and 2012

92 KERN DELTA WATER DISTRICT INDEX TO REPORT December Independent Auditor's Report 1-2 Management's Discussion and Analysis 3-7 Financial Statements Comparative Statements of Net Position Comparative Statements of revenues, expenses, and changes in Net Position Comparative Statements of Cash Flows Notes to the Financial Statements

93 dp DALE PINER CEUIFIED PUBliC ACCOUNTANT INDEPENDENT AUDITOR'S REPORT The Board of Directors KERN DELTA WATER DISTRlcr Bakersfield, California Report on the Financial Statements I have audited the accompanying financial statements of Kern Delta Water District as of and for the years ended December 31, 2013 and 2012, and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error. Auditor's Responsibility My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, I express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Opinion In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kern Delta Water District as of December 31, 2013 and 2012, and the changes in 200 New Stine Road' Suite 133 Bakersfield, CA 93309' (661) ' FAX (661) dpiner@dalepinercpa.com 1

94 financial position and cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America. Emphasis of Matter As discussed in Note 1, the District has changed its method for accounting and reporting certain items previously reported as assets or liabilities during 2013 due to the adoption of Government Accounting Standards Board's Statement No. 65, ''[tems Previously Reported as Assets and Liabilities': The adoption of this standard required retrospective application resulting in a $174,447 and $190,723 reduction of previously reported net position at December 31, 2012 and December 31, 2011, respectively. My opinion is not modified with respect to this matter. Other Matters Accounting principles generally accepted in the Unites States of America require that the management's discussion and analysis be presented to supplement the basic financial statements. Such information, although not a part of the financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. I have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquires of management about the methods of preparing the information and comparing the information for consistency with management's responses to my inquires, the financial statements, and other knowledge I obtained during the audit of the financial statements. I do not express an opinion or provide any assurance on the information because the limited procedures do not provide me with sufficient evidence to express an opinion or provide any assurance. Dale Piner August 6, 2014 Bakersfield, California 2

95 Kern Delta Water District Management's Discussion and Analysis The following discussion and analysis of the financial performance of Kem Delta Water District (the District) is intended as an overview of the financial activities for the fiscal years ended December 31,2013 and This information is presented in conjunction with the basic audited financial statements and accompanying notes which follow this section. Financial Highlights For the second consecutive year the District experienced a very challenging water year in Continuing drought conditions resulted in water available from traditional sources being limited to approximately 20% of normal, compounding an already difficult situation resulting from the 35% of normal conditions of the prior year. The prevailing dry weather conditions resulted in the sale of only 115,000 acre feet of water, 32% less than 2012 and 17% less than budget. The change in net position for the District in 2013 was an unfavorable ($697,000) and the challenges consequential to the dry water year contributed significantly to the unfavorable financial results. The following comments should be reviewed in the context of the challenges mentioned: The District's current assets decreased by $1.6 million in Cash decreased by $3.1 million as the District continued to invest in Capital Assets, reduce Debt, and pay for the costs related to normal operations of the District which exceeded cash received from normal operations of the District. The decrease in Cash was offset by the prepa~/ment of the first installment of 2014 State Water costs in the amount of $1.4 million.. The District continued to invest in Capital Assets during 2013 spending nearly $2.0 million for spreading projects ($1.0 million), facility improvements ($0.6 million), and equipment ($0.3 million). The District's Change in Net Position for 2013 was unfavorable at ($697,000) and represents an unfavorable year to year downturn compared to 2012 of ($1.7 million). The District's total operating revenue in 2013 was $830,000 less than 2012 due primarily to the decrease in water sales revenue consequential to the ongoing drought. Operating expenses increased compared to the previous year by $852,000 driven largely by the increased cost of State water of $551,000. Overview of the Financial Statements T~is annual report includes the management's discussion and analysis report, the independent auditor's report, the basic financial statements of the District and select additional information. T!'e financial statements also include notes that explain in more detail some of the information included in the financial statements. Required Financial Statements The financial statements of the District report information of the District using accounting methods similar to those used by private sector companies. The financial statements cc nform to accounting principles generally accepted in the United States of America and utilize the accrual basis of accounting. The Comparative Statements of Net Position include all of the District's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors (liabilities), with the difference between the two reported 3

96 Kern Delta Water District Management's Discussion and Analysis as net position. These statements indicate which assets are restricted due to contractual obligations. Board action or other commitments. These statements also provide the basis of assessing the liquidity. capital structure and financial flexibility of the District. Revenue and expenses for each of the last two fiscal years are accounted for in the Comparative Statements of Revenues, Expenses and Changes in Net Position. These statements measure the success of the District's operations and can be used to determine profitability. credit worthiness and whether the District has successfully recovered all of its costs through user fees and other charges. The Comparative Statements of Cash Flows report cash receipts. cash payments. and net changes in cash resulting from operations. investing. and financial activities. These statements provide information related to sources and uses of cash and the comparative change in cash balances for each of the years ended December and December Fi'lancial Analysis of the District The required financial statements. discussed above. are intended to assist the reader in assessing the financial health of the District. The reader of these financial statements should also consider non-financial factors such as changes in economic condition. population grow1h. and new or changed governmental legislation when reviewing and analyzing the financial condition of the District. Presented below are condensed versions of the financial statements. Table A Condensed Statements of Net Position December and 2012 Variance Fav/(Unfav) Current Assets $ ,441 $ 21, $ ( ) Capital Assets , Other Assets ( ) Total Assets $ 88,965,278 $ $ (863,655) Deferred outflows of resources $ $ (5,944) Current Liabilities $ $ 2,484,452 $ ( ) Lcng Term Debt 6, Total Liabilities $ $ $ In!Jested in Capital Assets. Net of Related Debt $ $ $ Restricted for MetropOlitan Water District Program Restricted for Debt Service Unrestricted ( ) Total Net Position $ $ 80, $ (696,844) 4

97 Kern Delta Water District Management's Discussion and Analysis Total assets decreased $864,000 to $88.97 million at December 31,2013 compared to $89.8 million reported at December 31, This decrease is attributable primarily to a reduction in Cash of $3.1 million offset by using Cash to increase Prepaids by $1.4 million and to invest in Capital Assets in the amount of $831,000 net of accumulated depreciation. The Prepaid balance at the end of 2013 was the result of paying the first installment of 2014 State water costs in December of Total liabilities decreased $173,000 to $9.0 million at December 31, 2013 from $9.2 million at December 31,2012. Principal payments on the Districts long term debt in the amount of $310,000 were offset by an increase in short term accounts payable at the end of 2013 of $137,000. Table B Condensed Statements of Revenues, Expenses and Changes in Net Position December 31,2013 and 2012 Variance Fav/(Unfav) Operati ng Revenues $ 4,924,947 $ 5,755,464 $ (830,517) Non-operating Revenues 4,470,129 4,332, ,385 Total Revenues $ 9,395,076 $ 10,088,208 $ (693,132) Operating Expenses $ 9,530,484 $ 8,677,667 $ (852,817) Non-operati ng Expenses 561, ,665 (205,771) Total Expenses $ 10,091,920 $ 9,033,332 $ (1,058,588) Change in Net Position $ (696,844) $ 1,054,876 $ (1,751,720) W'1ile the Statements of Net Position show the District's change in financial position, the Statements of Revenues, Expenses and Changes in Net Position provide answers as to the nature and sources of these changes. Total revenues decreased $693,000 to $9.4 million in 2013 from $10.1 million in Reduced water sales consequential to the prevailing drought conditions previously explflined contributed significantly to the downturn in revenue as total water sold in 2013 was 32% less than However, a Significant portion of the water sold in 2013 was water extracted from the District's groundwater storage facilities at a price to the user that included the cost of extraction. Consequently, the price increase for well water resulted in an overall decrease in operating revenue of only 14% or $831,000 compared to Increased non-operating revenues from sales of seepage losses and other miscellaneous sources in 2013 offset the downturn in operating revenue by $ Total expenses increased by more than $1.0 million to $10.1 million during 2013 from $9.0 million in Power costs to pump the well water sold during 2013 accounted for nearly $800,000 of the increase in expenses. The District's financial participation in two Joint Powers Authority groups, both of which were new to the District at the end of 2012, cost the District over $200,000 in

98 Kern Delta Water District Management's Discussion and Analysis Capital Assets As of December 31, 2013, the District had invested $30.3 million in net capital assets as shown below: Table C Capital Assets December 31,2013 and Variance Land Transm iss ion & Distribution \/"ater Banking Facilities (,s>neral Plant & Equipment Total Gross Capital Assets $ 2,369,825 16,833,714 16,004,247 2,584,618 $ 37,792,404 $ 2,359,075 16,606,778 14,653,215 2,200,538 $ 35,819,606 $ 10, ,936 1,351, ,080 $1,972,79(1 Less: Accumulated Depreciation (7,476,013) (6,334,425) (1, 141,58E Total Net Capital Assets $ 30,316,391 $ 29,485,181 $ 831,210 Restricted Assets: MWD program facilities Total Capital Assets 38,760,517 $ ,908 38,760,517 $ 68,245,698 $ 831,210 Total Capital Assets increased by nearly $2.0 million in The increase is attributable to continuing investment in facilities and construction to improve the District's ability to store and deliver water to customers. The District spent nearly $2.0 million on additional capital offset by $1.1 million in depreciation during the year. Included in these investments are 1) Water Banking facility improvements and spreading basin construction projects at a cost of $1.4 million, 2) additional equipment in the amount of $384,000, and 3) improvements to existing canal structures and facilities at a cost of $227,000. Table D Debt December 31,2013 and Variance Bonds $6,741,249 $ 7,041,301 $300,052 Bonds decreased $300,000 during the fiscal year ended December 31, 2013 as a consequence of principal payments made during the year. 6

99 Kern Delta Water District Management's Discussion and Analysis Contacting the District's Management This financial report is designed to provide our customers and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the District at 501 Taft Highway, Bakersfield, CA

100 KERN DELTA WATER DISTRICT COMPARATIVE STATEMENTS OF NET POSITION December and 2012 ASSETS CURRENT ASSETS Unrestricted assets Cash and cash equivalents Receivables (net of allowance for uncollectibles) Waters sales & banking activities Taxes and assessments Interest Prepaid expenses TOTAL CURRENT ASSETS (unrestricted) Restricted assets for debt service Certificates of Participation-cash and cash equivalents TOTAL CURRENT ASSETS (restricted) TJTAL CURRENT ASSETS Capital assets, at cost (partially pledged) Less accumulated depreciation $ 14,792,162 $ 17,940,590 2,130,099 1,909,328 1,077,890 1,071,007 14,100 22,501 1,478, ,689 19,492,817 21,065, , , , ,624 19,920,441 21,492,739 37,792,404 35,819,606 7,476,013 6,334,425 30,316,391 29,485,181 Investment in Joint Powers Authority Restricted assets Metropolitan Water District program facilities TOTAL ASSETS DEFERRED OUTFLOWS OF RESOURCES Deferred refunding costs (32,071) 90,496 38,760,517 38,760,517 88,965,278 89,828,933 18,362 24,306 See independent auditor's report and notes to the financial statements. 8

101 KERN DELTA WATER DISTRICT COMPARATIVE STATEMENTS OF NET POSITION December and 2012 LIABILITIES CURRENT LIABILITIES Accounts payable I nterest payable Future assessment revenue Current portion of long-term debt TOTAL CURRENT LIABILITIES LONG-TERM DEBT General obligation bonds Certificates of participation, less discount of$153,751, 2013, and $163,699, 2012 TOTAL LONG-TERM DEBT $ ,253,556 $ 1,138,029 26,038 25,054 1,022,155 1,011, , ,000 2,621,749 2,484, ,000 1,080,000 5,501,249 5,651,301 6,421,249 6,731,301 TOTAL LIABILITIES 9,042,998 9,215,753 NET POSITION Net irvestment in capital assets Restr;:cted for Metropolitan Water District program Restricted for debt service Unrestricted TOTAL NET POSITION $ 23,575,142 22,280,181 38,760,517 38,760, , ,624 17,177,359 19,169,164 79,940,642 $ 80,637,486 See independent auditor's report and notes to the financial statements. 9

102 KERN DELTA WATER DISTRICT COMPARATIVE STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Years ~nded December 31,2013 and 2012 OPERATING REVENUE: Water sales, water banking fees and exchange fees $ ,924,947 $ ,755,464 OPERATING EXPENSES: Source of supply Transmission and distribution Administration and general Depreciation Taxes 4,406,349 2,133,322 1,833,379 1,151,864 5,570 3,854,921 1,774,272 1,979,465 1,057,207 11,802 TOTAL OPERATING EXPENSES 9,530,484 8,677,667 Operating income (loss) (4,605,537) (2,922,203) NONO~ERATING REVENUES (EXPENSES): Interest revenue Property taxes Property assessments Gain (loss) on disposition of property Other nonoperating revenues Other nonoperating expenses Share of Joint Power Authority income (expenses) Interest expense 46,329 3,130,491 1,025,834 1, ,078 (219,129) (342,307) 102,677 2,981,007 1,038,082 8, ,738 (223) (355,442) Nonoperating revenues, net 3,908,693 3,977,079 Change in net position (696,844) 1,054,876 NET POSITION-JANUARY 1 80,637,486 79,582,610 NET POSITION-DECEMBER 31 $ 79,940,642 $ 80,637,486 See independent auditor's report and notes to the financial statements. 10

103 KERN DELTA WATER DISTRICT COMPARATIVE STATEMENTS OF CASH FLOWS Years Ended December 31, 2013 and CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 4,604,176 $ 8,693,271 Cash payments to employees (1,536,512) (1,443,619) Cash payments to suppliers for operations (6,150,079) (7,394,243) Cash payments for general and administrative expenses (1,833,379) (1,417,325) Net cash provided (used) by operating activities (4,915,794) (1,561,916) CASH FLOWS FROM INVESTING ACTIVITIES: Interest received 54, ,835 Contributions to Joint Powers Authority (96,563) (90,496) Net cash provided (used) by investing activities (41,833) 26,339 CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: Disposal (acquisition) of capital assets (1,981,676) (3,129,797) Property rentals & Developer fees 266, ,515 Principal payments on long-term debt (310,000) (300,000) I nterest paid net of bond amortizations (325,431) (337,506) Net cash provided (used) by capital financing activities (2,351,029) (3,564,788) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Property taxes collected 3,130,491 2,981,007 Assessments collected 1,029,737 1,036,063 Net cash provided (used) by noncapital financing activities 4,160,228 4,017,070 Net increase (decrease) in cash (3,148,428) (1,083,295) Cash beginning of year 18,368,214 19,451,509 Cash end of year $ 15,219,786 $ 18,368,214 Reconciliation of cash: Cash $ 14,792,162 $ 17,940,590 Restricted cash - Certificate of Participation reserve fund 427, ,624 $ 15,219,786 $ 18,368,214 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating income (loss) $ (4,605,537) $ (2,922,203) Adjustments to reconcile operating income (loss) to net :ash provided (used) by operating activities: Depreciation 1,151,864 1,057,207 C',anges in working capital components: (Increase) decrease in: Accounts receivables (220,771) 2,937,807 Prepaid expenses (1,356,877) (91,796) Increase (decrease) in: Accounts payable 115,527 (2,542,931) $ (4,915,794) $ (1,561,916) See independent auditor's report and notes to the financial statements. 11

104 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and District Activities Kern Delta Water District, comprising approximately 128,958 acres of land of which 116,997 acres are assessed, was formed December 29, 1965 pursuant to division 13 of the Water Code of the State of California. The District is governed by a nine member Board of Directors who are elected by geographic divisions. Its purpose was, and is, to obtain a supply of water for irrigation of farmlands located within the boundaries of the District. The accounting and reporting policies of the District conform in all material respects to generally accepted accounting principles in the United States of America applicable to governmental enterprise funds. Reporting Entity The District has no oversight responsibility for any other governmental entity nor is the District's operation a component unit of any other governmental entity. Therefore, the reporting entity consists only of District operations. Basis of Presentation The District reports its activities as an enterprise fund. An enterprise type fund is a Proprietary type fund used to account for operations that are financed in a manner similar to private business enterprises: (a) where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the gener:1i public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenue earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. Measurement Focus and Basis of Accounting Measurement focus is a term used to describe "Which" transactions are recorded within the various financial statements. Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. The accompanying financial statements are prepared using the economic resource measurement focus and the accrual basis of accounting. Under the economic measurement focus all assets, deferred outflows of resources, liabilities, and deferred inflows of resources (whether current or noncurrent) associated with these activities are included on the Statement of Net Position. The Statement of Revenues, Expenses, and Changes in Net Position presents increases 12 See independent auditor's report.

105 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (revenue) and decreases (expenses) in total net position. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. The District distinguishes operating revenue and expenses from nonoperating items. Operating revenues and expenses generally result from delivery of water and associated costs to obtain and deliver water. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the District's policy to use restricted resources first, then unrestricted resources as they are needed. New Accounting Pronouncements In 2013, the District implemented GASB Statement No. 65, "Items Previously :~eported as Assets and Liabilities". This statement established accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflow!; of resources, certain items that were previously reported as assets and liabilities Due to the implementation of this statement, the calculation of deferred amount on refunding was revised to eliminate the inclusion of costs that should be recognized as an expense in the period incurred and eliminated debt issuance costs which should be recognized as an expense in the period incurred. Accounting changes adopted to conform to the provisions of this statement should be applied retroactively. The result of the implementation of this standard was to decrease the net position at December 31, 2012 and December 31,2011 by $174,447 and $190,723, respectively. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element deferred outflows of resources, represents a consumption of net position that applies t( a future period(s) and so will not be recognized as an outflow of resources (expense/e<penditure) until then. The District has only one item that qualifies for reporting in this catf'!gory. This item is deferred loss on refunding which resulted from the difference in the ca~rying value of refunded debt and its reacquisition price. This amount is shown as deferren and amortized over the shorter of the life of the refunded or refunding debt.. In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement el~ment, deferred inflows of resources, represents an acquisition of net position that applies to a 13 See independent auditor's report.

106 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES future period(s) and will not be recognized as an inflow of resources (revenue) until that time. The District has no deferred inflows of resources. Operating Revenues and Expenses Operating revenues, such as charges for services (water sales and service fees or exchange fees) result from exchange transactions associated with the principal activity of the District. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as sale of assets and investment income, result from nonexchange transactions or ancillary activities in which the District gives (receives) value without directly receiving (giving) equal value in exchan;je. Operating expenses include the cost of sales and service, administrative expenses and depreciation on capital assets. All expenses not meeting this definition are reported as nonoperating expenses. Establishment of Revenue Income is generated from the sale of irrigation water to users within the District and the levy of a general and administrative fee and a Zone of Benefit charge based li;:>on acreage. Property assessments are levied annually in December and are due on December 31. Assessments become delinquent if not paid by June 30 of the::ollowing year. The Board of Directors determines water rates, administrative fees, and Zone of Benefit charges annually. Budget Although a budget is adopted annually, it is used primarily as a guideline for the Board in regulation of expenditures. The budget is prepared on a modified cash basis. There is no legal compulsion to stay within the adopted budget in the payment or classification of expenditures. Cash and Cash Equivalents Cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Short-term investments include the pooled cash with the Kern CO'Jnty Treasury. 14 See independent auditor's report.

107 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Capital Assets Premises and equipment are stated at cost less accumulated depreciation. The depreciation charged is on the straight-line method over the estimated useful lives as follows: Transmission Facilities Gates, Weirs, etc... General Plant 60 Years 25 Years 4 to 10 Years Repairs and maintenance are recorded as an expense. Renewals and better'11ents are capitalized. Gains and losses on dispositions are included in income in the year of disposition. Investments All investments are stated at fair value, except for money market investments which have a remaining maturity of less than one year when purchased, which are stated at amortized cost. Money market investments are short-term, highly liquid debt instruments including commercial paper, bankers' acceptance, and U.S. Treasury and Agency obligations. Fair value is the value at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Reclassifications Certain reclassifications have been made in the 2012 financial statements to conform to the 2013 financial statement presentation. GASB No. 63 has been implemented; therefore, certain items for 2012 have been reclassified to reflect the new reporting standards required by GASB No. 63. Concentration of Credit Risk Credit has and will be extended, in the form of accounts receivable, to land OIrners and water purchasers who are located primarily in the District's service area. 15 See independent auditor's report.

108 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property Taxes County property taxes attach as an enforceable lien on property as of March 1. Taxes are levied on July 1 and are due and payable in two installments on November 15 and March 15. Unsecured property taxes are payable in one installment on or before August 31. The County of Kern bills and collects the taxes as a part of the 1 % countywide property tax levy and subsequently distributes a portion of the levy to the District. Property taxes are recognized as revenue when they are appropriated to the District by Kern County. Proper allowances are made for estimated uncollectible accounts. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America include amounts that are based on management's best estimates and judgments. Accordingly, actual results could differ from the estimates. Compensated Absences Vested or accumulated vacation leave and benefits are recorded as an exper3eand a liability as the benefits accrue to employees. Vacation pay accruals generally do not exceed the amount earned for one year; however, an employee may accumul3te vacation time earned, but not more than 240 hours. Net Position In the statement of net position, net position is classified in the following categories: Net investment in capital assets - This amount consists of capital assets net of accumulated depreciation and reduced by outstanding debt that is attributed to the acquisition, construction, or improvement of the assets. Restricted Net Position - These amounts are restricted by external creditors, nrantors, laws, or regulations of other governments. Unrestricted Net Position - This amount is all items that do not meet the definition of "net investment in capital assets" or "restricted assets". 16 See independent auditor's report.

109 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Bond Discounts Discounts on bonded debt issues are amortized to interest expense over the respective lives of the bonded debt. When debt has been refunded in a transaction accounted for as an in-substance defeasance, the deferred amount on refunding is recorded as an offset against the bond liability and is amortized to interest expense over the life of the defeased debt. Subsequent Event In preparing these financial statements, the District has evaluated events and transactions for potential recognition or disclosure through August 6,2014, the date the financial statements were available to be issue. 17 See independent auditor's report.

110 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 2 CASH AND INVESTMENTS The District has the following cash and investments at December 31: Deposits: Demand deposits Investments: U,S, government securities Kern County Investment Fund Total investments Total 2013 $ 786, ,624 14,005, $15,219, $ 1,075, ,624 16,864,991 17,292,615 $18,2'38,214 Cash and investments are presented on the Statements of Net Position as follows at December 31: :>12 Cash and Cash Equivalents: Demand deposits $ 786,347 $ 1,075,599 Kern County Investment Fund Total cash and cash equivalents Restricted Cash, Cash Equivalents and Investments for Certificates of Participation: Mutual funds Total restricted cash, cash Equivalents and investments Total 14,005,815 14,792, , ,624 $15,219,786 16,864,991 17,940, , ,624 $18,368,214 Cash Deposits: The carrying amounts of the District's cash deposits were $786,347 and $1,075,599 at December 31, 2013 and 2012, respectively, Bank balances at December 31, 2013 and 2012 were $786,345 and $1,225,120, respectively, which were fully insured a"d/or collateralized with securities held by the pledging financial institutions in the D'strict's name as discussed below, The State of California Government Code and the District's investment policy authorize investments in obligations of the U,S, Treasury, its agencies and instrumentalities, commercial paper, bankers' acceptances, repurchase agreements and the Sbte of California Local Agency Investment Fund, Under the California Government Code, a financial institution is required to secure 18 See independent auditor's report,

111 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 2 CASH AND INVESTMENTS I deposits in excess of $100,000 made by state or local government units by pledging securities held in the form of an undivided collateral pool. The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by public agencies. Cash funds deposited with banks and credit unions are insured by Federal depository insurance. Any excess deposits are collateralized 110% with securities held by the bank or credit union in the District's name. This Code states the collateral pledged in this manner shall have the effect of perfecting a security interest in such collateral superior to those of a general creditor. Thus, the collateral for cash deposits is considered to be held in the District's name. Investments: Under the provisions of the District's investment policy and in accordance with Section of the California Government Code, the following investments are authorized: Securities of the U.S. Government, or its agencies Time Deposits Bankers Acceptances Repurchase Agreements Commercial Paper Local Agency Investment Fund At December 31, 2013, the District had $14,111,013 invested with the Kern County Investment Fund. The Kern County Investment Fund fair value factor of was used to calculate the fair value of the investments. As of December 31,2012, the District had $16,952,466 invested with the Kern County Investment Fund. The Kern County Investment fund fair value factor of was used to calculate the fair value of the investments. Risk Disclosure: Interest Rate Risk: As a mean of limiting its exposure to fair value losses arising from rising interest rates the District's investment policy limits investments to a maximum of five years. At December 31,2013 and 2012, the District had the following investment maturities: Kern County Investment Fund, $14,005,815 and $16,864,990, 2013 and 2012, respectively. The maturity date of the Kern County Investment Fund is less than one year. 19 See independent auditor's report.

112 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 2 CASH AND INVESTMENTS Credit Risk: State law limits investments in commercial paper and corporate bonds to the top two ratings issued by the nationally recognized statistical rating organizations (NRSROs). At December 31, 2013 and 2012 the District's credit risks, were as follows: Wells Fargo Advantage Government Money Market, AAA rating by Moody's Credit and S&P Credit. Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in possession of an outside party. Of the District's investments, $427,624; 2013, and $427,624; 2012, of the securities were held by an investments counterparty, not in the name of the District. Maturity: Cash and investments totaling $15,219,786; 2013, and $18,368,214; 2012, stated atfair value, all have a maturity date of less than one year. NOTE 3 CAPITAL ASSETS Land, structures and improvements, and machinery and equipment are stated at cost. Balance TRANSFERS Balance 12/31/12 ADDITIONS DELETIONS 12/31/13 Transmission & Distribution $16,606,778 $ 226,936 $ $16,~:33,714 General Assets 2,200, ,747 21,667 2,f84,618 Water banking facilities 14,653,215 1,351,032 16,(04,247 Land 2,359,075 10,750 2,:;69,825 ~35,819,606 ~1,994,465 ~ 21,667 ~37,792,4Q4 20 See independent auditor's report.

113 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 4 RESTRICTED ASSETS Certificates of Participations: Cash and cash equivalents - As part of the Certificates of Participations agreement, the District has agreed to establish and maintain for the duration of any outstanding certificates, a reserve fund held by the Trustee in the amount of; the lesser of (i) 10% of the original principal amount of certificates, (ii) an amount equal to the maximum annual installment payment due and payable in a Certificate Year, or (iii) 125% of the average annual installment payment. Metropolitan Water District Program: Per the amended agreement dated December 21, 2004, the District is required to hold in trust the following items: Metropolitan Water District-Transportation Facilities Trust Property $38.760,517 $38,760,517 NOTE 5 LONG-TERM DEBT 1999 General Obligation Refunding Bonds - Original Issue $2,870,000: Issue Date February 1999 Effective Interest Rate 4.45% Interest is payable semi-annually on June 1 and December 1, beginning June 1, 1999, The bonds will fully mature on December 1,2019, Interest rates range from 3,7% to 4,7%, Outstanding Dec. 31,2012 Bonds Issued Redeemed Current Year Outstanding Dec. 31,2013 $1, $ Certificates of Participation - Series 2005 $ 155,000 $ On December 1, 2005 the District issued $6,915,000 of Certificates of Participations. The purpose of the Certificates was to finance the purchase of certain real propertll in connection with development of a water banking program as part of the District's water system, fund a Reserve Fund for the certificates and to pay certain costs of issuing the Certificates, The District has irrevocably pledged all net revenue of the water system to the payment of the installment obligation, The Certificates of Participation have the option to be prepaid, at the District's discretion, Any prepayment will be paid at the 21 See independent auditor's report,

114 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 5 LONG-TERM DEBT certificates face value, without premium, plus any accrued interest payable, Beginning December 1, 2022 the District is required to create and fund a sinking fund account. The District is obligated to fund the sinking fund for the years 2022 through The total amount of the sinking fund will be $1,235,000. Interest is payable semi-annually on June 1 and December 1. The Certificate of Participation will fully mature on December 1, Interest rates range from 3.5% to 4.625%. The effective interest rate of the Certificates is 4.80%. Outstanding Dec. 31, 2012 Certificates Issued Redeemed Current Year Outstanding Dec. 31,201~ $ $ $ $5, The District has covenanted that the District shall fix, prescribe, revise and collect rates, fees and charges for the service and facilities furnished by the water system during each fiscal year, which are at least sufficient, after making allowances for contingencies and error in the estimates, to yield revenue sufficient to pay; (a) maintenance and operations of the water system, (b) installment payments of this obligation, (c) maintain the funded reserve required by this obligation, and (4) any other obligations of the District. The annual requirements to amortize principal and interest on long-term debt are as follows: Year Total Debt Ending Principal Interest Service 2014 $ 320,000 $ 312,456 $ 632, , , , , , , , , , , , , ,285,000 1,049,445 2,334, ,355, ,364 2,125, ,700, ,656 2,126, ,000 55, ,500 ~61895,QQQ ~3,719,371 ~1Q,6j4 371 For the years ended December 31,2013 and 2012, the District expended cash of $325,476 and $337,505 for interest expense, respectively. The District did not capitalize any interest expense during 2013 and See independent auditor's report.

115 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 6 DEFINED CONTRIBUTION PLAN The District sponsors a defined contribution pension plan covering all employees satisfying a minimum hours of employment and years of service. The District contributes 6% of all eligible employees' gross wages. The District's contribution and expense for the year ended December 31, 2013 was $89,825 and $79,773 for NOTE 7 RELATED PARTY TRANSACTIONS The District sells water to members of the Board of Directors and to businesses that they control or are employed by. Total water sales to these related parties amounted to 39% and 35% for years ended December 31,2013 and 2012, respectively. NOTE 8 RISK MANAGEMENT The District is a member of the Association of California Water Agencies/Joint Powers Insurance Authority (JPIA). The JPIA's members have pooled funds to be sel'-insured for liability, property, and workers' compensation insurance. The District particip('tes in the liability and property programs. The liability policy also covers public official e"rors and omissions. The District is billed a deposit premium each year by JPIA. The deposit premium is placed in a reserve fund to cover the self-insurance portion of any claims. If actual claims and expected settlements exceed the reserve fund at the year-end; an additional premium may be billed to the member Districts. When all claims relating to a specific year are settled, any remaining amounts in the reserve are refunded to the District. The District recognizes its premiums as an expense when incurred. Net premium expense for the year ended December 31, 2013 was $60,840 and $66,514 for The general liability, automobile and public official's policy provides for a $1,000 deductible with a $1,000,000 JPIA self-insurance limit and $59,000,000 excess coverage. The property insurance has $1,000 deductible with a $50,000 JPIA self-insurance limit and $100,000,000 excess coverage. The property policy includes fidelity coverage with a limit of $100,000. NOTE 9 COMMITMENTS AND CONTINGENCIES Water Rights: North Kern Water Storage District and the City of Bakersfield have filed litigativn with respect to the District's utilization of Kern River water beyond amounts which North Kern Water Storage District and the City of Bakersfield claim the District has historically utilized. That lawsuit has resulted in a judgment rendered by the Tulare County Superior Court. Said judgment has found the following; The District is entitled to a "preserved entitlement" 23 See independent auditor's report.

116 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 9 COMMITMENTS AND CONTINGENCIES of Kern River Water in the approximate amount of 200,000 acre feet per annum (on average), The City of Bakersfield and North Kern were not entitled to recover ':Iamages against the District, and approximately 40,000 acre feet, per annum, of Kern R.iver water originally accruing to entitlements exercised by the District is forfeited water, and available for redistribution by the State Water Resources Control Board upon appropriate application, Numerous entities have made application with the State Water Resources Control Board for the forfeited water. The District has not made application for the forfeited water. The District will monitor such proceedings to ensure that its preserved Kern River rights are not diminished. At the present time the prospects are excellent that the District will suffer no diminution in its historic level of diversions as a result of this lawsuit. Water Utilization: North Kern Water Storage District and the City of Bakersfield filed numerous claims against the District seeking to set aside certain CEQA determinations made by the District with respect to utilization of its preserved entitlements. The court ordered the District to vacate its CEQA determinations and, pending compliance with CEQA, not implement certain measures intended to increase utilization of Kern River water supplies. The District suffered no loss of water or water rights. The District intends to continue its efforts to fully utilize its preserved entitlements to Kern River water and to satisfy all CEQA r~quirements. Water Banking: The District has joined in an action with three water entities against a water banking authority. The District's are seeking the court's determination as to the exact nature of the District's right to use the water banking facilities for storage and extraction. Use of the water banking facilities will enhance the water storage abilities of each district. Insurance Claim: Various claims for personal injuries, and property damage have been filed against the District from time to time. All claims have been referred to the District's insura'lce carrier and it would appear that the District will not suffer any direct financial loss or defense costs. The District's insurance carrier is the Joint Powers Insurance Authority of the Association of California Water Agencies, a cooperative insurance agency. What effects, if any, these claims will have on the District's premiums for insurance coverage are not known. 24 See independent auditor's report.

117 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December and 2012 NOTE 9 COMMITMENTS AND CONTINGENCIES Water Exchange Agreement: During the water year, the District consummated a Water Exchange Agreement with Buena Vista Water Storage District for the exchange of California Aqueduct water for Kern River water. The District agreed to pay Buena Vista an exchange fee of $75,000 for the water year ending March 16, 1976 and each year thereafter. During the water year a second agreement was established whereby the District, beginning with the water year ending March 16, 1976 agreed to pay Buena Vista for an additional 15,000 acre feet per year or a total of 30,000 acre feet per year. The total fee for the two exchange agreements is $150,000 or $5 per acre foot. The District is required to pay the exchange fee only if water is exchanged. During 2013, the District exchanged 8,925 acre feet of water. During 2012, the District exchanged 16,632 acre feet of water. Exchange fees of $44,625 and $83,160 have been included in accrued expenses for 2013 and 2012, respectively. Kern County Water Agency: The District contracts for state project water through the Kern County Water Agency. The payments for delivery of the water are due on January 1 and July 1 of each year. The District's financial commitment for the semi-annual payments are required even if the District receives no deliveries from the state project. The agreement specifies 25,500 acre feet of "firm" water and 4,500 acre feet of "surplus" water. The District was allocated 8,925 and 16,632 acre feet of water for 2013 and 2012, respectively. The District recorded expenditures for its annual obligation (net of adjustments) totaled $1,666,780 for 2013 and $1,429,973 for Since the Agency's total costs for the future years is not known, the District's share of those costs cannot be determined and are not disclosed. Water Supply: The major source of operating revenue to the District is the sale of Kern River water. The annual water supply is determined by the rain and snowfall within the Kern Riler drainage system. Therefore, the District's ability to generate revenues is dependent up.')n the natural flow of the Kern River which cannot be predicted or guaranteed. NOTE 10 WATER IN STORAGE The District is a participant in the Pioneer Project, which was established to store water in the underground aquifer and to replenish the water table under the south valley. As of December 31, 2013, the District has percolated 39,990 acre feet of water into their overdraft account. Additionally the District has stored in their banking account 18,784 acre feet of water. The 25 See independent auditor's report.

118 KERN DELTA WATER DISTRICT Notes to the Financial Statements For the years ended December 31,2013 and 2012 NOTE 10 WATER IN STORAGE water in the banking account may be withdrawn at the District's discretion. Additionally the District has stored 27,560 acre feet of water in another water district's banking facilities. NOTE 11 KERN DELTA WATER DISTRICT/METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA WATER MANAGEMENT PROGRAM Metropolitan Water District (MWD) and the District have executed a water management program agreement dated December 24, In essence the agreement is for the District to receive, from MWD, and store up to 250,000 acre feet of water. The agreement has a term of 31 years ending November 4, At the termination of the agreement all capital and facilities will be the sole property of the District. MWD committed $38,760,517 to build the program facilities. Annually MWD is obligated to pay for operation and maintenance costs associated with the program facilities and for any operatiolal costs associated with the delivery and/or return of any water with MWD. During 2013 the District returned 10,000 acre feet of water to MWD. During 2012 MWD delivered 50,000 acre feet of water and the District returned no water. At December 31,2013 MWD has 167,895 acre feet of water, after 11 % losses, stored in the District. Through December 31,2013 MWD has delivered 233,365 acre feet of water to the District. NOTE 12 KERN DELTA WATER DISTRICT AND ARVIN-EDISON WATER STORAGE DISTRICT WATER SUPPLY AND MANAGEMENT FACILITIES Effective January 1, 2009 the District and Arvin-Edison Water Storage District (AE) entered into an agreement for the construction and operation of groundwater recovery wells. The District constructed and operates groundwater wells within the AE right of way contiguous to the AE Intake Canal. These groundwater wells will provide both entities with additional water management capabilities. The agreement provides for various priorities and fees for use of facilities. The agreement expires on November 4, NOTE 13 KERN DELTA WATER DISTRICT AND SAN BERNARDINO VALLEY MUNICIPAL WATER DISTRICT WATER MANAGEMENT PROGRAM Effective October 26,2011 the District entered into a water banking agreemert with San Bernardino Valley Municipal Water District (Valley). The agreement is effective from October 26,2011 until December 31,2025. Valley provided 30,000 acre feet of water ';0 the District for storage in the District's water management program facilities. The District is obligated to return 26,700 acre feet of water. The program provides for 11 % losses which accrue to the District. Valley paid the District a participation fee, various additional charges and reimbursed the District for any costs associated with the transportation of the water to themanagement 26 See independent auditor's report.