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Resolution No. 8151
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. 8151 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF VERNON APPROVING THE FORM OF AN INTEREST RATE SWAP AGREEMENT AND AUTHORIZING THE ENTRY INTO :ONE OR MORE INTEREST RATE SWAP TRANSACTIONS AND CERTAIN ACTIONS RELATING THERETO WHEREAS, the City of Vernon (the "City") is a municipal corporation and a chartered city of the State of California organized and existing under its Charter and the Constitution of the State of lCalifornia; and WHEREAS, the City is authorized pursuant to the provisions of its Charter and the City of Vernon Municipal Facilities Revenue Bond Law, constituting Chapter 2, Article XI, of the Vernon City Code, to issue bonds, notes and other obligations payable from the Net Revenues of the Electric System (capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Indenture mentioned below) to finance the Costs of improvements and additions to the Electric System and to refund such bonds, notes and other obligations; and WHEREAS, this City Council has adopted a resolution (the "Bond Resolution") authorizing the execution and delivery, in the name of and on behalf of the City, of an Indenture of Trust (the "Master Indenture"), to be dated as of March 1, 2003, and to be entered into by the City and BNY Western Trust Company, as trustee (the "Trustee"), providing the terms of City of Vernon Electric System Revenue Bonds to finance the Costs of improvements and additions to the Electric System or to refund any Outstanding Bond or Bonds; and WHEREAS, pursuant to the Bond Resolution, this City Council 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1W 19 20 21 22 23 24 25 26 27 28 has authorized the issuance of City of Vernon Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series C (the "2003 Series C Bonds") to, among other things, finance a portion of the Costs of the Malburg Generating Station; and WHEREAS, the 2003 Series C Bonds are to be issued under and pursuant to the Master Indenture as supplemented by the Third Supplemental Indenture of Trust, to be dated as March 1, 2003, and to be entered into by the City and the Trustee (the "Third Supplemental Indenture" and, together with the Master Indenture, the "Indenture"); land WHEREAS, this City Council desires to authorize certain officers of the City to enter into one or more interest rate swap agreements with respect to the 2003 Series C Bonds as authorized by law, including the City Charter and Section 5922 of the California Government Code; and WHEREAS, there has been presented to this meeting a form of ISDA Master Agreement, as amended and supplemented by the Schedule to the Master Agreement and the Credit Support Annex, each between the City and Bank of America, N.A. (such ISDA Master Agreement, as so amended and -supplemented, as the same may be modified and completed in accordance with this Resolution, being referred to as the "Swap Agreement"); and WHEREAS, each interest rate swap transaction authorized hereby shall constitute a Transaction under the Swap Agreement (a "Transaction"), the specific terms of which shall be contained in a Confirmation (a "Confirmation") to be delivered on the date such Transaction is agreed upon by the parties; and WHEREAS, each Transaction is to constitute a Qualified Swap - 2 - 1 ,. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 HM 19 20 21 22 23 24 25 26 27 Agreement under the Master Indenture and the City's obligations under each Transaction will be a special obligation payable solely from the Net Revenues of the Electric System and the other funds included in the Trust Estate as provided in the Indenture. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF VERNON AS FOLLOWS: SECTION 1: The City Council of the City of Vernon hereby finds and determines that the recitals contained hereinabove are true land correct. SECTION 2: The Swap Agreement, in substantially the form submitted to this meeting and made a part thereof as though set forth in full herein, is hereby approved. Each of the Mayor and the City Administrator (each an "Authorized Officer"), acting singly, is hereby authorized to execute the Swap Agreement in the name of and on behalf of the City and to deliver the executed Swap Agreement to Bank of America, N.A., in substantially the form submitted to this meeting with such changes, insertions and deletions to such Swap Agreement as Imay be consistent with this Resolution and the determinations made pursuant hereto and as may be approved by the officer executing such (Swap Agreement, said execution being conclusive evidence of such approval, and the.City Clerk of the City of Vernon (the "City Clerk") is hereby authorized to attest thereto. SECTION 3: (a) In connection with the issuance or carrying of the 2003 Series C Bonds, at any time that the adjustable rate to be paid by the City under the initial Transaction under the Swap Agreement on the date the fixed rate to be received by the City thereunder is established is at least fifty (50) basis points less than the fixed rate to be received by the City under such Transaction, - 3 - 1 2 3 4 5 6 7 8 X, 10 11 12 13 14 15 M-1 17 18 19 20 21 22 23 24 25 26 27 28 each of the Authorized Officers, acting singly, is hereby authorized to enter into a Transaction in connection with the issuance and carrying of the 2003 Series C Bonds and accept, execute and deliver (and the City Clerk is hereby authorized to attest). the Confirmation describing such Transaction; provided, however, that the following limitations shall be applicable to such Confirmation and Transaction: (i) the term of the Transaction shall not exceed the final maturity of the 2003 Series C Bonds, (ii) the notional amount of such Transaction shall not exceed the principal amount of the then outstanding 2003 Series C Bonds, (iii) the rate payable by the City at any time under such Transaction shall not exceed twenty percent (20%) per annum, (iv) the fixed rate to be received by the City under such Transaction shall not be less than three percent (3%) per annum, and (v) all payment obligations, of the City under such Confirmation and such Transaction shall be special obligations of the City payable as provided in the Indenture solely from the Net Revenues and the other funds included in the Trust Estate. (b) In addition to the initial Transaction entered into pursuant to subsection (a) of this Section, when determined by an Authorized Officer to be in the best interest of the City in managing the City's interest rate position under the Transactions entered into under the Swap Agreement on an ongoing basis, each of the Authorized Officers, acting singly, is hereby authorized to enter into one or more Transactions and to accept, execute and deliver (and the City Clerk is hereby authorized to attest) the Confirmation describing each such Transaction; provided, however, that the following limitations (and not the limitations in subsection (a) of this Section) shall be applicable to each such Confirmation and Transaction: (i) the term of - 4 - 1 the Transaction shall not exceed the final maturity of the 2003 Series 2 C Bonds; (ii) the aggregate notional amount of all Transactions then 3 in effect (and not economically reversed with another Transaction) 4 shall not exceed the principal amount of the outstanding 2003 Series C 5 Bonds; (iii) the rate payable by the City at any time under any such 6 Transaction shall not exceed twenty percent (20%) per annum; and (iv) 7 all payment obligations of the City under the Confirmation and the 8 Transaction shall be special obligations of the City payable as 9 provided in the Indenture solely from the Net Revenues and the other 10 funds included in the Trust Estate. 11 SECTION 4: This City Council hereby finds and determines 12 that the Transactions authorized hereby are designed to reduce the 13 amount of interest cost to the City with respect to the 2003 Series C 14 Bonds. 15 SECTION 5: Each of the Mayor, the City Administrator, the 16 City Clerk, the Director of Utilities, the Deputy Director of 17 Utilities, and any other proper officer of the City is hereby 18 authorized and directed, acting singly, to execute such other 19 agreements, documents and certificates, and to take such actions, 20 including providing securities as required by the Credit Support 21 Annex, as may be necessary or convenient to carry out the City's 22 obligations under and to effect the purposes of the Swap Agreement, 23 each Transaction, each Confirmation, this Resolution and the 24 transactions herein authorized. 25 SECTION 6: All actions heretofore taken by any committee of 26 the City Council, or any officer, representative or agent of the City 27 in connection with the execution and delivery of the Swap Agreement 28 and the performance of the Transactions and the other actions 5 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 contemplated by this Resolution, is hereby ratified, approved and confirmed. SECTION 7: In the event that the 2003 Series B Bonds (as defined in the Bond Resolution) are not issued, references herein to the 2003 Series C Bonds shall be deemed to refer to the fixed rate bonds issued pursuant to the Bond Resolution and references herein to the Third Supplemental Indenture shall be deemed to refer to the Supplemental Indenture of Trust pursuant to which such fixed rate bonds are issued. SECTION 8: The City Clerk of the City of Vernon shall certify to the passage of this resolution, and thereupon and thereafter the same shall be in full force and effect. APPROVED AND ADOPTED this 19th day of February, 2003. FATTEST: IBRUCE V. MALKENHORST, City Clerk rr r LEONIS C. MAL URG, M yor — 6 — 1 STATE OF CALIFORNIA ) 2 ) ss COUNTY OF LOS ANGELES ) 3 4 I, BRUCE V. MALKENHORST, City Clerk of the City of Vernon, do 5 hereby certify that the foregoing Resolution, being Resolution No. 6 8151, was duly adopted by the City Council of the City of Vernon at a 7 regular meeting of the City Council duly held on Wednesday, 8 February 19, 2003, and thereafter was duly signed by the Mayor of the 9 City of Vernon. 10 11 BRUCE V. MALKENHORST, City Clerk 12 13 (SEAL) 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 - SUPPORTING DOCUMENTS EXHIBIT 0 CITY COUNCIL LEONIS C. MALBURG Mayor THOMAS A. YBARRA Mayor Pro -Ter WM. 'BILL" DAVIS Councilman H. "LARRY" GONZALES Councilman W. MICHAEL MCCORMICK Councilman BRUCE V. MALKENHORST City Administrator/City Clerk FAX (323) 826-1438 City Council Cit of V CITY HALL 4305 SANTA FE AVENUE, VERNON, CALIFORNIA 90058 TELEPHONE (323) 583-8811 February 13, 2003 EDUARDO OLIVO City Attorney FAX: (562) 869-1883 KEVIN WILSON Director of Community Services & Water FAX: (323) 826-1435 KENNETH J. DeDARIO Director of Utilities FAX: (323) 826-1425 STEVEN E. PARKER Fire Chief FAX: (323) 826-1407 BRUCE W. OLSON Police Chief FAX: (323) 826-1481 ;1901 y ernon ®/ Honorable Members: \ 1i' At this time it is necessary to approve the issuance of bonds to finance the acquisition and construction of the Malburg Generating Station Project. The bond financing documents, bond swap agreement, and the amendment to the City's existing Investment Policy, set forth the approval and authorization to issue the bonds in the principal sum of $165,000 000.00. This has been reviewed by the City Attorney, our Finance Administrator, and the Director of Utilities. It is hereby recommended that the bond financing documents, bond swap agreement and the amendment to the City's existing Investment Policy be approved and executed. Submitted herewith is the following documents: 1. 2. 3. 4 5. 6. 7. 8. BVM/gm Indenture of Trust First Supplement Indenture of Trust Second Supplemental Indenture of Trust Preliminary Official Statement Bond Purchase Contract, Series A Bond Purchase Contract, Series B Reimbursement Agreement Sez-ies A Bond Remarketing Agreement Very truly yours, �r V �. Bruce V. Malkenhorst. City Administrator/City Clerk S CITY COUNCIL LEONIS C. MALBURG Mayor THOMAS A. YBARRA Mayor Pro--Tem WM. 'BILL" DAVIS Councilman H. "LARRY" GONZALES Councilman W. MICHAEL MCCORMICK Councilman BRUCE V. MALKENHORST City Administrator / City Clerk FAX (323) 581-7924 FBI 8 z� ATpRs EDUARDO OLIVO City Attorney FAX: (562) 927-8722 KEVIN WILSON "�'�r of Community Services & Water FAX: (323) 588-2761 a4,3 ONCE CITY HALL 4305 SANTA FE AVENUE, VERNON, CALIFORNIA 90058 TELEPHONE (323) 583-8811 February 13, 2003 Mr. Bruce V. Malkenhorst City Administrator City Of Vernon 4305 Santa Fe Avenue Vernon, California 90058 KENNETH J. DeDARIO Director of Municipal Utilities FAX: (323) 583-1983 STEVEN E. PARKER Fire Chief FAX: (323) 581-1385 BRUCE W. OLSON Police Chief FAX: (323) 583-5236 Re: Malburg Generating Station Project: Bond Financing Documents for Approval by City Council Dear Bruce: The purpose of this letter is to recommend to you that the City Council of the City of Vernon authorize the issuance of Bonds to, finance a portion of the cost of the acquisition and construction of the Malburg Generating Station Project. The bond financing documents and the resolutions approvethe issuance of the Bonds, the Bond Swap Agreement and revisions to the City's existing Investment Policy. The City Council will approve and authorize the issuance of Bonds in the principal sum of $165 million pursuant to the financial structure outlined in these documents. The structure of the proposed financing represents the lowest cost available to the City given its current credit ratings from Moody's (A2) and Standard & Poor's (BBB+) . The City will issue $50 million in Variable Rate Demand Note (VRDN) obligations, or Series A Bonds, and $115 million in fixed rate, or Series B Bonds. The VRDN obligations are very short- term (7 days) tax-exempt notes that trade at an index rate (Bond Mr. Bruce V. Malkenhorst February 13, 2003 Page 2 Market Association or BMA) plus a margin. These VRDNs are supported by a Letter of Credit by a rated bank, Bank of America. The City will also issue $115 million in long-term maturity fixed rate bond obligations that will mature on the dates and in the principal amounts to be established on the sale date of those bonds which is currently scheduled for March 4, 2003. Both the variable and fixed rate bonds will have a nominal maturity of 30 years. All of the City's bond obligations are supported by the Net Revenues (Revenues minus Operation and Maintenance Expenses for the period) of the City's Electric System. Net Revenues would include all the gross income and revenue received or receivable by the City from the ownership or operation of the Electric System. In addition, the City promises or covenants in the Indenture of Trust document to fix, prescribe and collect rates and charges for the Electric Service of the Electric System during each fiscal year which shall be at least sufficient to yield sufficient Adjusted Revenues to cover Operation and Maintenance Expenses; Adjusted Debt Service; and other payments, including debt service coverage ratios and other charges. The City has retained Banc of America Securities to underwrite and remarket the Bond issue and is accepting credit being granted to the City from Bank of America in the form of (1) a Letter of Credit (to support the short-term variable rate debt); and (2) a Bond Swap Agreement (to reduce the interest rate on the fixed rate debt). The various documents contained in the Agenda package, in substantially the form presented at the meeting, include the following: 1. Indenture of Trust; 2. First Supplemental Indenture of Trust; 3. Second Supplemental Indenture of Trust; 4. Preliminary Official Statement; 5. Bond Purchase Contract, Series A; 6. Bond Purchase Contract, Series B; 7. Reimbursement Agreement; Mr.. Bruce V. Malkenhorst February 13, 2003 Page 3 8. Series A Bonds Remarketing Agreement; and 9. Swap Agreement. The appropriate resolutions have been prepared by the City's bond counsel firm, Orrick, Herrington & Sutcliffe, and have been reviewed by the City Attorney. These resolutions satisfy the requirements of the Internal Revenue Code of 1986, as amended for tax-exempt bond financings. The resolutions authorize the issuance of the bonds, the structure of the financing and fulfill some the credit promises the City must make in order to receive the ratings on the bonds. One of these promises concerns the commitment to limit to five (5) years the maturity of securities the City invests in, in its Light & Power Fund. This promise is accomplished by an amendment to the City's Investment Policy. The bond swap resolution enables the City to swap the interest rate on its Series B fixed rate bonds for a lower variable rate debt service. I look forward to discussing these matters with you at your earliest convenience. Sincerely, Eric Fresch Finance Administrator EF: j 1 cc: Eduardo Olivo, City Attorney Ken DeDario, Director of Utilities SAB&W I.LP Draft of 02/10/03 PRELEVIINARY OFFICIAL STATEMENT DATED 92003 O G NEW ISSUE — FULL BOOK -ENTRY ONLY a ° In the opinion of Orrick, Herrington & Sutcliffe LuP Bond Counsel, based on an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, compliance with certain covenants, interest on the 2003 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the ° c Internal Revenue Code of 1986. In the further opinion of Bond Counsel, interest on the 2003 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings in calculating federal corporate alternative ° minimum taxable income. In the further opinion of Bond Counsel, interest on the 2003 Bonds is exempt from present State of California personal income taxes. Bond 0 Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the 2003 Bonds. See "TAXMATTERS" herein. 0 $ w ° CITY OF VERNON o Malburg Generating Station Project Electric System Revenue Bonds o. $ * $ x c 2003 Series A 2003 Series B o(Variable Rate Demand Bonds) (Fixed Rate Bonds) cExpected Ratings: Moody's: Aal/P-1 Ratings: Moody's: A2 S&P: AA/A-1+ S&P: BBB+ o Dated, Priced, and Due as set forth on the inside front cover This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover a page not otherwise defined shaft have the meanings setforth herein. The Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series A (the "2003A Bonds') and 2003 Series B (the "2003B Bonds" and p collectively with the 2003A Bonds, the "2003 Bonds"), are being issued by the City of Vernon (the "City') pursuant to an Indenture of Trust, as supplemented by a First Supplemental Indenture of Trust and a Second Supplemental Indenture of Trust, each dated as of March 1, 2003 (collectively, the "Indenture'), each by and between the City ' and BNY Western Trust Company, as trustee (the "Trustee'). q The 2003 Bonds are beingissued to provide funds i to finance the costs of the Ci s Malburg Generating Station, a 134 MW combined cycle combustion P (�) tY' g g Y turbine project (the "Project'), (ii) to fund a deposit to the Debt Service Reserve Fund for the 2003 Bonds, (iii) to fund capitalized interest on the 2003 Bonds, and (iv) to pay o costs of issuance of the 2003 Bonds. See "PLAN OF FINANCE" herein. a The 2003 Bonds will be issued in fully registered form, registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC) under the y book -entry only system maintained by DTC. While DTC is the securities depository for the 2003 Bonds, principal and Purchase Price of, premium, if any, and interest on the 2003 Bonds will be payable by the Trustee to DTC, which is obligated in turn to remit such payments to its DTC participants for subsequent disbursement to beneficial b 8 owners of the 2003 Bonds, as more fully described herein. a The 2003A Bonds will bear interest at variable rates determined for each Interest Rate Period as provided in the Indenture. The 2003A Bonds will initially be in a Weekly Interest Rate Period and will bear interest at Weekly Interest Rates. The 2003A Bonds are deliverable in minimum denominations of $100,000 or any integral multiple of $5,000 in excess thereof during a Weekly Interest Rate Period. While bearing interest at a Weekly Interest Rate, interest on the 2003A Bonds will be payable on d the first Wednesday of each calendar month (or the next succeeding Business Day if such Wednesday is not a Business Day) commencing April 3, 2003. The Interest Rate Period for the 2003A Bonds may be Converted from a Weekly Interest Rate Period to a Daily Interest Rate Period, a Commercial Paper Interest Rate Period, a Long -Term Interest Rate Period or an ARB Interest Rate Period. The 2003A Bonds are subject to mandatory tender for purchase upon any such Conversion, except a Conversion to a o o Daily Interest Rate Period, all as described herein. THIS OFFICIAL STATEMENT DESCRIBES CERTAIN TERMS OF THE 2003A BONDS WHILE IN A WEEKLY INTEREST RATE PERIOD. THERE ARE SIGNIFICANT CHANGES IN THE TERMS OF THE 2003A BONDS IN OTHER INTEREST RATE PERIODS. THIS o H OFFICIAL STATEMENT IS NOT INTENDED TO PROVIDE INFORMATION WITH RESPECT TO THE 2003A BONDS IN ANY INTEREST RATE PERIOD OTHER o `o THAN THE WEEKLY INTEREST RATE PERIOD. o Payment of the principal of and interest on the 2003A Bonds and the Purchase Price of the 2003A Bonds tendered or deemed tendered for purchase during a Weekly Interest Rate Period will be payable from draws under an irrevocable, direct -pay Letter of Credit to be issued simultaneously with the delivery of the 2003A Bonds yby Bank of America, N.A. The Letter of Credit will be issued on an amount equal to (a) the initial aggregate principal amount of the 2003A Bonds, plus (b) 40 days interest a 1 thereon at an assumed interest rate of 121/o per annum based on a 365-day year. The Letter of Credit which is described herein will expire on March. or at v o such earlier time as described herein. The City is not liable for the payment of the Purchase Price of the 2003A Bonds; such Purchase Price is payable solely from the remarketing of such 2003A Bonds or from draws under the Letter of Credit. y The 2003B Bonds initially will be delivered in denominations of $5,000 principal amount or any integral multiple thereof. Interest on the 2003B Bonds is a 2 payable on October 1, 2003 and semi-annually thereafter on April 1 and October 1 of each year. 3 o 0 The 2003 Bonds are subject to mandatory and optional redemption prior to maturity as more fully described herein. The 2003A Bonds are also subject g .0 to mandatory or optional tender for purchase, as described herein. to '19 The 2003 Bonds are special obligations of the City. The principal of, premium, if any, and interest on the 2003 Bonds are payable by the City solely from the Net Revenues of the City's Electric System and the other funds pledged therefor under the Indenture. The issuance of the 2003 Bonds shall not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to make any appropriation for their payment. The 2003 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the funds pledged therefor pursuant to the Indenture. Neither the faith and credit nor the taxing power of the City, the State of 3r California or any public agency thereof is pledged to the payment of the principal, or Purchase Price of, or premium, if any, or interest on the 2003 Bonds. The rn x 2003 Bonds do not constitute a debt, liability or obligation of the State of California or any public agency (other than the special obligation of the City as provided a N in the Indenture). Oo The 2003 Bonds are offered, when, as and if issued and delivered to the Underwriter, subject to the approval of legality by Orrick, Herrington & Sutcliffe HP, 2 Los Angeles, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the Underwriter by Sidley Austin Brown & Wood LLP, Los Angeles, California, and for the Co by the City Attorney of the City of Vernon and by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California. It is expected that e the 2003 Bonds will be available for delivery through the DTC book -entry system in New York New York on or aboutMarch _, 2003. a� BANC OF AMERICA SECURITIES LLC 2003 "Preliminary, subject to change. SF1 131736lvl2 42379/276 MATURITY SCHEDULES* $ * 2003A Bonds Dated: Date of Delivery $ * 2003 Series A Bonds due April 1, 2033 — Price 100% Dated: March 1, 2003 $ " 2003B Bonds Due: April 1, as shown below $ " Serial 2003B Bonds Maturity Principal Interest Price or Maturity Principal Interest Price or (April 1) Amount Rate Yield (April 1) Amount Rate Yield $ % Term 2003B Bonds due April 1, 20_ — Price _% $ % Term 2003B Bonds due April 1, 20_ — Price % (Plus Accrued Interest) * Preliminary, subject to change. SF1 131736lv12 42379/276 No dealer, broker, salesperson or other person has been authorized by the City 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 representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the 2003 Bonds by any person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriter. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any implication that there has been no change in the affairs of the City since the date hereof This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THE OFFERING OF THE 2003 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH 2O03 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. CAUTIONARY STATEMENTS REGARDING FORWARD -LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement and the Appendices hereto constitute "forward -looking statements." Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "budget" or other similar words. Such forward - looking statements include, but are not limited to, certain statements contained in the information under the captions "PLAN OF FINANCE — The Project," "DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS," "RATE REGULATION" and "THE ELECTRIC SYSTEM — Summary of Condensed Operating Results and Balance Sheet Information," —"Management's Discussion of Operating Results," — "City's Operations Since Industry Restructuring," — "Projected Operating Results and Debt Service Coverage" and "APPENDIX A — CONSULTING ENGINEER'S REPORT" in this Official Statement. Forward -looking statements in Appendix A and elsewhere in this Official Statement are subject to risks and uncertainties, including particularly those relating to natural gas costs and availability, wholesale and retail electric energy and capacity prices, federal and state legislation and regulations, competition and industry restructuring, and the economy of the service area of the City. The achievement of any results or the realization of other expectations contained in such forward - looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward -looking statements. The City does not plan to issue any updates or revisions to those forward -looking statements. SFl 131736lvl2 42379/276 CITY OF VERNON City Council Leonis C. Malburg, Mayor Thomas A. Ybarra, Mayor Pro Tem William J. Davis, Councilmember Hilario Gonzales, Councilmember W. Michael McCormick, Councilmember City Officers Bruce V. Malkenhorst, City Administrator/City Clerk Eduardo Olivo, City Attorney Kenneth J. DeDario, Director of Utilities Samuel Kevin Wilson, Director of Community Services and Water Lewis Pozzenbon, Director of F,nvironmental Health City Staff Jorge C. Somoano, Deputy Director of Utilities Ramon Z. Abueg, Assistant Director of Engineering & Operations Gloria J. Orosco, Chief Deputy City Clerk Sharon L. Johnson, Deputy City Treasurer Eric T. Fresch, Administrative, Finance and Legal SPECIAL SERVICES Orrick, Herrington & Sutcliffe LLP BNY Western Trust Company Los Angeles, California Los Angeles, California Bond Counsel Trustee Banc of America Securities LLC Macias, Gini & Company LLP Los Angeles, California Los Angeles, California Remarketing Agent for 2003A Bonds Independent Accountants Navigant Consulting, Inc. Sacramento, California Consulting Engineer SFl 1317361vl2 42379/276 TABLE OF CONTENTS INTRODUCTION........................................................................................ Purpose of Official Statement........................................................... Authority and Use of Proceeds......................................................... TheCity..................................................................................... Security and Sources of Payment for the 2003 Bonds ....................... Letter of Credit for 2003A Bonds ..................................................... Debt Service Reserve Fund.............................................................. OtherMatters................................................................................... CONTINUING DISCLOSURE.................................................................... PLANOF FINANCE ................................................................................. General........................................................................................... . TheProject....................................................................................... Swap Agreement for the 2003B Bonds ............................................. ESTIMATED APPLICATION OF PROCEEDS .......................................... THE2003 BONDS....................................................................................... General Provisions........................................................................... 2003ABonds................................................................................... 2003BBonds................................................................................... Redemption of 2003 Bonds.............................................................. SECURITY AND SOURCES OF PAYMENT FOR THE 2003 BONDS ...... Pledge Effected by the Indenture ...................................................... Letter of Credit for 2003A Bonds ..................................................... RateCovenant........................................................: ......................... Debt Service Reserve Fund.............................................................. Expense Stabilization Fund.............................................................. Issuance of Parity Obligations.......................................................... Swap Agreement for the 2003B Bonds ............................................. Limitations on Remedies.................................................................. THEBANK.................................................................................................I DEVELOPMENTS IN THE ENERGY MARKETS ..................................... Market Deregulation and the Energy Crisis ...................................... Impact of Energy Crisis on the City :................................................. OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY Federal Regulation of Transmission Access ...................................... Proposed Federal Deregulation and Tax Legislation ......................... OtherFactors................................................................................... RATEREGULATION................................................................................. THEELECTRIC SYSTEM.......................................................................... General........................................................................................... . Management.................................................................................... EmployeeRelations....................................................................... Insurance Page ....................................... 1 ..........................................1 .......................................... .......................................... 2 ............................ ..........2 .......................................... 2 ....................:..................... 3 .......................................... 3 .......................................... 3 ..:....................................... 3 ........................................... 3 .......................................... 4 .......................................... 6 .......................................... 6 .......................................... 6 ..........................................6 .......................................... 7 ........................................11 ........................................11 ........................................13 .............................. ......13 ........................................15 ........................................15 .............I..........................15 .................................. 16 ........................................16 ........................................17 ........................................17 ........................................18 .................................... 19 ........................................19 ........................................ 21 ........................................21 ........................................ 21 ........................................ 22 ........................................ 22 ................................... 23 ........................................ 24 ........................................ 24 ........................................ 24 ........................................ 25 ...............................................I...................................................................... .26 Electric System Facilities.......................................................................................................... 26 PowerSupply Resources........................................................................................................... 26 Agreements With Edison........................................................................................................... 29 TransmissionResources............................................................................................................ 30 Transmission Services for Third Party Generators.....................................................................32 i SF1 1317361v12 42379/276 Page CapitalRequirements................................................................................................................ 32 Customers, Retail Energy Sales, Revenues and Demand............................................................ 33 Largest Electric Customers .......................................... ..............................................................34 Electric Rates and Average Billing Price................................................................................... 35 Comparison of Selected Monthly Electric Bills..........................................................................36 Indebtedness......................................................... 37 Summaryof Operating Results.................................................................................................. 38 Ci 's Operations Since Industry Restructuring ...........................................39 Projected Operating Results and Debt Service Coverage............................................................ 40 CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS.....................................42 California Constitution Articles XIIIA and XIIIB...................................................................... 42 Constitutional Changes in California......................................................................................... 43 FutureInitiatives ........................................................... ............................................................ 43 ABSENCE OF LITIGATION................................................................................................................43 TAXMATTERS ....................................................................... 44 ............................................................ APPROVAL OF LEGALITY ............................................... .......................45 .......................................... THE CONSULTING ENGINEER.........................................................................................................45 RATINGS........................................................................... 45 UNDERWRITING................................................................................................................................46 GENERAL PURPOSE FINANCIAL STATEMENTS........................................................................... 46 EXECUTION AND DELIVERY...........................................................................................................47 APPENDIX A — CONSULTING ENGINEER'S REPORT................................................................. A-1 APPENDIX B — AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEARS ENDED JUNE 30, 2002 AND JUNE 30, 2001............................................ B-1 APPENDIX C - THE CITY OF VERNON......................................................................................... C—1 APPENDIX D — BOOK —ENTRY ONLY SYSTEM................._.......................................................... D—I APPENDIX E — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ......................... E-1 APPENDIX F — PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT FOR THE 2003B BONDS ................................... .................... ......................................... F-1 APPENDIX G — PROPOSED FORM OF OPINION OF BOND COUNSEL ....................................... G-1 APPENDIX H — SUMMARY OF THE LETTER OF CREDIT AND THE REIMBURSEMENT AGREEMENT FOR THE 2003A BONDS............................................................... H-1 u SF1 1317361v12 42379/276 $ * 2003 Series A (Variable Rate Demand Bonds) OFFICIAL STATEMENT $ CITY OF VERNON Malburg Generating Station Project Electric System Revenue Bonds INTRODUCTION 2003 Series B (Fixed Rate Bonds) This Introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the 2003 Bonds to potential investors is made only by means of the entire Official Statement. Terms used in this Introduction and not otherwise defined shall have the respective meanings assigned to them elsewhere in this Official Statement. See "APPENDIX E - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE- Definitions " herein. Purpose of Official Statement The purpose of this Official Statement (which includes the cover page and the appendices attached hereto) is to provide information concerning the sale and delivery by the City of Vernon, California (the "City") of its Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series A (the "2003A Bonds") and 2003 Series B (the "2003B Bonds" and collectively with the 2003A Bonds, the "2003 Bonds"), in the aggregate principal amount of $ *, composed of $ * principal amount of 2003A Bonds and $ * principal amount of 2003B Bonds. THIS OFFICIAL STATEMENT DESCRIBES CERTAIN TERMS OF THE 2003A BONDS WHILE IN A WEEKLY INTEREST RATE PERIOD. THERE ARE SIGNIFICANT CHANGES IN THE TERMS OF THE 2003A BONDS IN OTHER INTEREST RATE PERIODS. THIS OFFICIAL STATEMENT IS NOT INTENDED TO PROVIDE INFORMATION WITH RESPECT TO THE 2003A BONDS IN ANY INTEREST RATE PERIOD OTHER THAN THE WEEKLY INTEREST RATE PERIOD. Authority and Use of Proceeds The 2003 Bonds are being issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code, and an Indenture of Trust, as supplemented by a First Supplemental Indenture of Trust and a Second Supplemental Indenture of Trust, each dated as of March 1, 2003 (collectively, the "Indenture"), each by and between the City and BNY Western Trust Company, as trustee (the "Trustee"). The 2003 Bonds are being issued to provide funds (i) to finance the costs of acquisition and construction of the City's Malburg Generating Station, a 134 MW combined cycle combustion turbine project (the "Project") (ii) to fund a deposit to the Debt Service Reserve Fund * Preliminary, subject to change. SFl 1317361v12 42379/276 for the 2003 Bonds, (iii) fund capitalized interest on the 2003 Bonds, and (iv) to pay costs of issuance of the 2003 Bonds. See "THE PROJECT" herein. The City The City is a chartered city of the State of California, consisting of approximately 5.2 square miles and located in Los Angeles County, approximately four miles southeast of downtown Los Angeles. The City was established in 1905 with a view of promoting industrial activity. There are approximately 1,200 businesses located in the City employing more than 44,000 persons. The City is almost exclusively industrial, with an estimated resident population of 96 as of January 1, 2003. See "APPENDIX C — THE CITY OF VERNON" herein. Pursuant to California law and its Charter, the City has established its Utilities Department, which is responsible for the operation of the City Electric System (the "Electric System") and the City gas department. The Utilities Department maintains separate funds, the Light and Power Department Fund and the Gas Department Fund, and operates and accounts for each of the Utilities Department enterprise operations separately. The Light and Power Department of the Utilities Department function is to supply the City's inhabitants, businesses and industries within the City with electricity. See "THE ELECTRIC SYSTEM" herein. Security and Sources of Payment for the 2003 Bonds The 2003 Bonds are special obligations. of the City. The principal of, premium, if any, and interest on the 2003 Bonds are payable by the City solely from the Net Revenues of the City's Electric System and the other funds pledged therefor under the Indenture. The City is not liable for the payment of the Purchase Price of the 2003A; Bonds such Purchase Price is payable solely from the remarketing of such 2003A Bonds or from draws under the Letter of Credit (deemed below). The issuance of the 2003 Bonds shall not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to make any appropriation for their payment. The 2003 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the funds pledged therefor pursuant to the Indenture. Neither the faith and credit nor the taxing power of the City, the State of California or any public agency thereof is pledged to the payment of the principal of, premium, if any, Purchase Price or interest on the 2003 Bonds. The 2003 Bonds do not constitute a debt, liability or obligation of the State of California or any public agency (other than the special obligation of the City as provided in the Indenture). Letter of Credit for 2003A Bonds Payment of the principal of and interest on the 2003A Bonds and the Purchase Price of the 2003A Bonds tendered or deemed tendered for purchase during a Weekly Interest Rate Period will be payable from draws under an irrevocable, direct -pay Letter of Credit (the "Letter of Credit") to be issued simultaneously with the delivery of the 2003A Bonds by Bank of America, N.A. (the `Bank") pursuant to a Reimbursement Agreement to be dated as of March 1, 2003 (the "Reimbursement Agreement"), between the City and the Bank. See "APPENDIX H — SUMMARY OF THE LETTER OF CREDIT AND THE REIMBURSEMENT AGREEMENT FOR THE 2003A BONDS" and "THE BANK" herein. Payment of the principal of and interest on the 2003B Bonds is not secured by the Letter of Credit which relates only to the 2003A Bonds. 2 SFI 131736lv12 42379/276 Debt Service Reserve Fund Pursuant to the Indenture, the Debt Service Reserve Fund is required to be maintained in an amount equal to the Debt Service Reserve Requirement. Amounts on deposit in the Debt Service Reserve Fund will be applied to make up any deficiency in the Debt Service Account for the payment of principal of and or interest on the 2003 Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2003 BONDS — Debt Service Reserve Fund" herein. Other Matters The summaries of and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined herein indicates that such word is defined in a particular agreement or other document and, as used herein, has the meaning given to it in such agreement or document. Attached to this Official Statement are summaries of certain provisions of the Indenture. Copies of the Indenture are available for inspection at the offices of the Trustee, and will be available upon request and payment of duplication costs from the Trustee. CONTINUING DISCLOSURE The City will covenant pursuant to a Continuing Disclosure Agreement, dated as of March 1, 2003 (the "Continuing Disclosure Agreement"), by and between the City and the Trustee, and relating to the 2003B Bonds, to provide certain financial information and operating data relating to the City by not later than six months following the end of the City's Fiscal Year, which Fiscal Year presently ends June 30 (the "Annual Report"), commencing with the Annual Report for the 2002-03 Fiscal Year, and to provide notices of the occurrence of certain enumerated events, if material, under federal securities law. The Annual Report will be filed by or on behalf of the City with each nationally recognized municipal securities information repository and with the appropriate State repository, if any (collectively, the "Repositories"). The notices of material events will be filed by the City with the Municipal Securities Rulemaking Board and the Repositories. The specific nature of the information to be contained in the Annual Report and the notices of material events is set forth in "APPENDIX F — PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT FOR THE 2003B BONDS" herein. The City has retained [Bond Logistix] to assist the City in meeting its their continuing disclosure obligations. These covenants have been made to assist the Underwriter in complying with Rule 15c2-12 of the Securities and Exchange Commission (the "Rule"). As of the date hereof, the City is not currently obligated under any other continuing disclosure undertakings, including any such undertaking in connection with the 2003A Bonds while in a Weekly Interest Rate Period, with regard to the provision of annual reports or material events notices as required by the Rule. PLAN OF FINANCE General The 2003 Bonds are being issued to provide funds (i) to finance the costs of acquisition and construction of the Project, (ii) to fund a deposit to the Debt Service Reserve Fund for the Bonds, (iii) to fund capitalized interest on the 2003 Bonds, and (iv) to pay costs of issuance of the 2003 Bonds. SFI 1317361v12 42379/276 The Project General The Project consists of the City's Malburg Generating Station, a proposed 134 MW electric generating facility to be located on approximately 3.4 acres of the City of Vernon's existing Station A (the "Station") at 2715 East 50th Street, in Vernon, California. The generating capacity of the Project will be provided by two natural gas -fired combustion turbine generators, each equipped with a fired heat recovery steam generator ("HRSG"), that provide steam to power a single steam turbine generator. Each combustion turbine and steam turbine will be connected to one of three separate electric generators. The Project will be connected to the existing 66-kilovolt (kV) bus (rated 69'kV) in the Vernon Substation located within the Station. The power generated by these three generators will be distributed through the existing Vernon Substation and distribution lines. The City expects to operate the Project as a base -load resource to provide energy to serve the City's electric utility customers. The Project is expected to operate with a capacity factor between 60% and 85%, and have an availability factor of 90%to 98%. It is projected that the Project will operate from 5 to 7 days per week and generally 24 hours per day depending upon customer load and weather conditions. Other factors that can affect the operation of the Project are market and control area conditions for both energy and ancillary services requirements. The Project is designed to use reclaimed water as the primary source of cooling tower, evaporation coolers, and steam cycle makeup water. The reclaimed water will be purchased by the City and supplied by the Central Basin Municipal Water District. This will significantly reduce the additional consumption of potable water by the Project. Potable water is expected to be utilized only for domestic and sanitary use (although in the event of a disruption in the supply of reclaimed water by Central Basin Municipal Water District, the City can, subject to applicable license restrictions, supply potable water to the Project from its water system). Additional facilities included in the Project are a new 1,300-foot long natural gas pipeline, sewer pipeline additions to the City's existing sewer system, and a new 18-inch diameter, 10,000-foot long reclaimed water pipeline to deliver reclaimed water to the Station site from the Central Basin Municipal Water District reclaimed water supply system. The Project will be fueled by natural gas. The 1,300 foot long natural gas pipeline to be constructed as part of the Project facilities will deliver natural gas to the Project site from the local natural gas distribution system of the City, which is interconnected to the local natural gas distribution system of SoCal Gas. Licenses, Permits and Approvals. The construction and operation of the Project will require numerous licenses, permits and approvals from various federal, state and local regulatory agencies. Under California law, the California Energy Commission (the "CEC") is the lead agency for the licensing of power plants with primary authority and responsibility to regulate the siting, construction, operation and closure of any new power plant within the State with a net generating capacity of 50 MW or more. Compliance with the CEC power plant site certification program also satisfies the California Environmental Quality Act ("CEQA") environmental review and documentation requirements. Pursuant to the CEC licensing process, the City must comply with all laws, ordinances, regulations and standards of all relevant governmental regulatory agencies. Once the City has demonstrated to the CEC that it has complied or will comply with all such laws, ordinances, regulations and standards, through its filing of an Application for Certification with the CEC, as well as the 4 SFl 1317361v12 42379/276 submission of various other information and data by the City and other relevant parties, then the CEC will render a proposed decision on the Project. The CEC final evidentiary hearing for the Project was held on February 10, 2003. The CEC, in its scheduling order, has determined that the record was closed at the conclusion of the hearing. The City is not aware of any disputed issues between any parties to the licensing proceedings. The City expects a favorable decision to be issued by the CEC in late March 2003, providing certification for the City to construct and operate the Project in April 2003, following a 30-day Comment period on the decision. The Project is subject to the jurisdiction of the South Coast Air Quality Management District ("SCAQMD") with respect to air quality permitting. The City has obtained SCAQMD's Final Determination of Compliance with respect to the Project. The final SCAQMD Authority to Construct Permit, the required Title V permit and the SCAQMD RECLAIM permit will be issued once the CEC renders its decision for certification of the Project and after the City obtains all necessary emissions offsets. The regulated air pollutant emissions of the Project will be offset by the City's purchasing of emission reduction credits ("ERCs") and reclaim trading credits ("RTCs") from the SCAQMD or the open market. The costs of purchasing the ERCs will be financed with the proceeds of the 2003 Bonds. The City expects to procure all ERCs required by the SCAQMD by late February 2003. The City is in the process of obtaining other permits necessary for the Project, such as its water quality permit from the Los Angeles Regional Water Quality Control Board, its wastewater discharge permit from the Sanitation Districts of Los Angeles County, and various minor construction and other permits. The City expects that all such permits will be obtained in a timely manner as necessary for Project completion and operation. For additional information regarding the permitting process and the status of Project with respect thereto, see "APPENDIX A — CONSULTING ENGINEER'S REPORT" herein. Schedule and Budget. The City expects construction on the Project to begin during April 2003. Commercial operation of the Project is scheduled for September 2004. The total estimated installed cost of the Project is approximately $142.0 million. The City has executed contracts and committed costs totaling approximately $111.6 million as of February 2003 for engineering, equipment, construction, emission reduction credits and system improvements, of which $63.5 million (which will be reimbursed to the City from the proceeds of the 2003 Bonds) has been expended. The estimated costs of the Project are as follows: • Permitting $ • Engineering • Equipment • Construction • ERC Purchases • Project Management • Transmission, gas, misc. • Contingency Total SFl 1317361v12 42379/276 Swap Agreement for the 2003B Bonds The City plans to enter into an interest rate swap agreement (the "Transaction") with Bank of America, N.A. with respect to the 2003B Bonds in an initial notional amount of $ million pursuant to which the City will pay a variable interest rate (based on ___) on the notional amount and will receive from Bank of America, N.A. a fixed rate on a like notional amount. The Transaction will be entered into pursuant to and subject to the terms of the ISDA Master Agreement and Schedule thereto, dated as of , 2003 and related documents (collectively, the "Swap Agreement"), between the City and Bank of America, N.A. Net payments due from the City under the Swap Agreement constitute Purity Obligations payable from Net Revenues of the Electric System on a parity with the 2003 Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2003 BONDS — Swap Agreement for the 2003B Bonds" herein. ESTIMATED APPLICATION OF PROCEEDS The proceeds of the 2003 Bonds are expected to be applied as follows: Costs of the Project $ Capitalized Interest Debt Service Reserve Fund Underwriter's Discount Costs of Issuance(') Total $ Includes legal fees, fees of the Trustee, rating agency fees, legal, financial and consulting fees, bank fees, printing costs and other miscellaneous expenses. THE 2003 BONDS The following is a summary of certain provisions of the 2003 Bonds. Reference is made to the 2003 Bonds for the complete text thereof and to the Indenture for all of the provisions relating to the 2003 Bonds. The discussion herein is qualified by such reference. For definitions of capitalized terms used herein as defined in the Indenture, see ` APPENDIX E — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE- DEFINITIONS" herein. General Provisions The 2003 Bonds will be issued in the aggregate principal amount of $ *, comprised of $ * principal amount of 2003A Bonds and $ * principal amount of 2003B Bonds. The 2003 Bonds will be prepared as one fully registered certificate for each Series and maturity and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the 2003 Bonds. Principal, Purchase Price, premium, if any, and interest on the 2003 Bonds are payable by the Trustee to DTC, which is obligated in turn to remit such principal, Purchase Price, premium, if any, and * Preliminary, subject to change. 6 SF1 1317361v12 42379/276 interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2003 Bonds. See "APPENDIX D — BOOK -ENTRY ONLY SYSTEM" herein. 2003A Bonds General THIS OFFICIAL STATEMENT DESCRIBES CERTAIN TERMS OF THE 2003A BONDS WHILE IN A WEEKLY INTEREST RATE PERIOD. THERE ARE SIGNIFICANT CHANGES IN THE TERMS OF THE 2003A BONDS IN OTHER INTEREST RATE PERIODS. THIS OFFICIAL STATEMENT IS NOT INTENDED TO PROVIDE INFORMATION WITH RESPECT TO THE 2003A BONDS IN ANY INTEREST RATE PERIOD OTHER THAN THE WEEKLY INTEREST RATE PERIOD. In addition, there are a number of provisions in the Indenture relating to the terms of Bank Bonds (that is, 2003A Bonds purchased by the Bank pursuant to the Letter of Credit) which are not described in the forepart of this Official Statement. All references to the terms of the 2003A Bonds in this Official Statement only describe 2003A Bonds which are not owned by the Bank unless expressly indicated herein. The 2003A Bonds will bear interest at variable rates determined for each Interest Rate Period as provided in the Indenture. The 2003A Bonds will initially be in a Weekly Interest Rate Period and will bear interest at Weekly Interest Rates as described below. The 2003A Bonds will initially be delivered in authorized denominations of $100,000 principal amount and any integral multiple of $5,000 in excess thereof while in a Weekly Interest Rate Period. During a Weekly Interest Rate Period, interest on the 2003A Bonds will be payable the first Wednesday of each calendar month (or the next succeeding Business Day if such Wednesday is not a Business Day) commencing April 3, 2003. During the Weekly Interest Rate Period, interest on the 2003A Bonds shall be computed on the basis of a 365-or 366-day year, as appropriate, and the actual number of days elapsed. The City may elect to Convert all, but not less than all, of the 2003A Bonds from the Weekly Interest Rate Period to a Daily Interest Rate Period, a Commercial Paper Interest Rate Period, a Long -Term Interest Rate Period or an ARB Interest Rate Period as provided in the Indenture. The 2003A Bonds in a Weekly Interest Rate Period are subject to mandatory tender for purchase upon any such Conversion, except a Conversion to a Daily Interest Rate Period, as described below. At no time shall any 2003A Bond (other than Bank Bonds) bear interest at a rate in excess of the Maximum Interest Rate. 2003A Bonds in Weekly Interest Period Weekly Interest Rates. During each Weekly Interest Rate Period, the 2003A Bonds shall bear interest at Weekly Interest Rates. Except as otherwise provided in the Indenture (and described below) the Weekly Interest Rate for each Calendar Week shall be determined by the Remarketing Agent by no later than 5:00 p.m., New York City time, on the Tuesday immediately preceding such Calendar Week, or if such day shall not be a Business Day, then by 12:00 noon, New York City time, on the next succeeding Business Day. The Weekly Interest Rate for each Calendar Week shall be the rate of interest per annum determined by the Remarketing Agent to be the minimum interest rate which, if borne by the 2003A Bonds, would enable the Remarketing Agent to sell the 2003A Bonds on the effective date of such rate at a price (without regard to accrued interest) equal to the principal amount thereof. If the Remarketing Agent fails to establish a Weekly Interest Rate for the 2003A Bonds for any Calendar Week, then the Weekly Interest Rate for such Calendar Week shall be the same as the Weekly Interest Rate for the immediately preceding Calendar Week, if the Weekly Interest Rate for such SFl 131736lv12 42379/276 preceding week was determined by the Remarketing Agent. If for any reason such Remarketing Agent did not determine the Weekly Interest Rate for the immediately preceding Calendar Week, or if a Weekly Interest Rate determined by such Remarketing Agent shall be held to be invalid or unenforceable by a court of law, then the interest rate for such Calendar Week shall be equal to the Variable Index on the day the Weekly Interest Rate would otherwise be determined by such Remarketing Agent. Conversion to Alternate Interest Rate Period The City may by written direction of the Trustee, elect to Convert all, but not less than all, of the 2003A Bonds from the Weekly Interest Rate Period to an alternate Interest Rate Period. The direction of the City shall be accompanied by (i) a letter of Bond Counsel stating that it expects to deliver a Favorable Opinion of Bond Counsel on the effective date of the Conversion to an alternate Interest Rate Period and (ii) a form of the notice to be mailed by the Trustee to the Owners of the 2003A Bonds, as provided in the Indenture. Upon such election and satisfaction of certain conditions, all of the 2003A Bonds will be subject to the alternate Interest Rate Period. The Trustee is required to give notice (by registered or certified mail, or by telecopy confirmed by registered or certified mail) of Conversion of the 2003A Bonds from a Weekly Interest Rate Period to an alternate Interest Rate Period not less than 30 days (or [101 days in the case of a Conversion to a Daily Interest Rate Period and [121 days if the then current Interest Rate Period shall be a Long -Term Interest Rate Period) prior to the proposed Conversion Date to such alternate Interest Rate Period. While the 2003A Bonds are registered in the name of Cede & Co., such notice shall be given only to DTC, and not to any Beneficial Owner of the 2003A Bonds. Such notice will state (i) that subject to the satisfaction of the conditions to such Conversion contained in the Indenture, the Interest Rate Period for the 2003A Bonds will be Converted to a Daily Interest Rate, Long -Term Interest Rate, a Commercial Paper Interest Rate, or ARB Interest Rates, as appropriate unless the City rescinds its election to convert the Interest Rate Period for the 2003A Bonds, pursuant to the Indenture; (ii) the proposed Conversion Date to such alternate Interest Rate Period; and (iii) except for the Conversion of the 2003A Bonds to a Daily Interest Rate Period from a Weekly Interest Rate Period, that: (A) all 2003A Bonds are subject to mandatory tender for purchase on the Conversion Date, (B) that all 2003A Bonds are subject to mandatory tender for purchase on the proposed Conversion Date if the proposed Conversion to such alternate Interest Rate Period does not occur, (C) the applicable Purchase Price and place of Proper Delivery for such purchase, and (D) that the Purchase Price of the 2003A Bonds tendered or deemed tendered shall be payable only from the sources specified in the Indenture, specifying such sources. The Indenture provides that no Conversion from one Interest Rate Period to another shall take effect unless each of the following conditions, to the extent applicable, shall have been satisfied: (i) the Trustee shall have received a Favorable Opinion of Bond Counsel with respect to such Conversion on the Conversion Date; (ii) the remarketing proceeds available on the Conversion Date and the amount available under the 2003 Credit Support Instrument is not less than the amount required to purchase all of the 2003A Bonds at the applicable Purchase Price; (iii) in the case of any Conversion to an ARB Interest Rate Period, prior to the Conversion Date the City shall have appointed an Auction Agent, a Market Agent and a Broker -Dealer with respect to the 2003A Bonds and there shall have been executed and delivered with respect to the 2003A Bonds, a Market Agent Agreement, an Auction Agent Agreement and a Broker -Dealer Agreement; and (iv) prior to any Conversion to an ARB Interest Rate Period, the City shall receive a firm underwriting commitment or contract to purchase the 2003A Bonds from an investment bank or other purchaser. In the case of any Conversion of the 2003A Bonds from an ARB Interest Rate Period to any other Interest Rate Period (except a Long -Term Interest Rate Period effective to the day immediately preceding the Maturity Date), prior to the Conversion Date the City shall have appointed a Tender Agent 8 SF1 131736iv12 42379/276 and a Remarketing Agent with respect to the 2003A Bonds, there shall have been executed and delivered with respect to the 2003A Bonds a Tender Agent Agreement and a Remarketing Agreement and the City has caused a 2003 Credit Support Instrument in the Required Stated Amount to be delivered to the Tender Agent. If any condition to the Conversion of the 2003A Bonds from a Weekly Interest Rate Period to another Interest Rate Period shall not have been satisfied, then the Weekly Interest Rate Period shall not be Converted and the 2003A Bonds shall continue to bear interest in the Weekly Interest Rate Period in effect immediately prior to such proposed Conversion, and the 2003A Bonds (except ARBs) shall continue to be subject to mandatory tender for purchase -on the date which would have been the Conversion Date. Rescission of Election to Convert. Notwithstanding anything in the Indenture to the contrary, the City shall have the right to deliver to the Trustee, on or prior to 10:00 a.m. on the second Business Day preceding the proposed Conversion Date of any Conversion of the Interest Rate Period for the 2003A Bonds, a notice to the effect that the City elects to rescind its election to make such Conversion. If the City delivers such rescission notice, then the Interest Rate Period shall not be Converted and the 2003A Bonds shall continue to bear interest at the Weekly Interest Rate Period as in effect immediately prior to such proposed Conversion. If the City delivers such rescission notice after notice of Conversion has been mailed to the Owners of the 2003A Bonds, then the 2003A Bonds shall continue to be subject to mandatory tender for purchase on the date which would have been the Conversion Date of the Conversion. Tender of 2003A Bonds for Purchase Subject to DTC Procedures. As long as the DTC book -entry only system is in effect with respect to the 2003A Bonds, all optional and mandatory tenders of 2003A Bonds for purchase shall be made pursuant to DTC's procedures as in effect from time to time, and neither the City, the Bank, the Trustee nor the Remarketing Agent shall have any responsibility for or liability with respect to the implementation of such procedures. For a description of the tender procedures through DTC, see "APPENDIX D -- BOOK -ENTRY ONLY SYSTEM" herein. Tender for Purchase Upon Election of Owner. During a Weekly Interest Rate Period, the Owner of each 2003A Bond shall have the option to tender its 2003A Bond (or a portion thereof as provided in the Indenture) to the Tender Agent for purchase on any Business Day at the applicable Purchase Price. An Owner may exercise such option by delivering to the Tender Agent, at its Principal Office for delivery of notices, an irrevocable written notice which states the principal amount (or portion thereof) that is being tendered and the date on which such 2003A Bond is to be purchased, which date shall be a Business Day not prior to the seventh (7th) day next succeeding the date of the delivery of such notice to the Tender Agent. Any notice delivered to the Tender Agent after 4:00 p.m., New York City time, shall be deemed to have been received by the Tender Agent on the next succeeding Business Day. Mandatory Tender for Purchase on Conversion to Alternate Interest Rate Period The 2003A Bonds in a Weekly Interest Rate Period shall be subject to mandatory tender for purchase at the applicable Purchase Price on the first day of each Interest Rate Period (other than upon the Conversion from a Daily Interest Rate Period to a Weekly Interest Rate Period or the Conversion from a Weekly Interest Rate Period to a Daily Interest Rate Period) and (except for any conversion from an ARB Interest Rate Period) on the proposed Conversion Date specified in the notice of Conversion). M SF1 1317361v12 42379/276 Mandatory Tender for Purchase Upon Termination of the 2003 Credit Support Instrument. The 2003A Bonds in a Weekly Interest Rate Period shall be subject to mandatory tender for purchase, at the applicable Purchase Price, on the date which is the first business day which is not less than five days prior to each of the following with respect to the 2003 Credit Support Instrument then in effect for the 2003A Bonds: (a) a termination of such 2003 Credit Support Instrument upon the delivery of an Alternate 2003 Credit Support Instrument; (b) the termination date set forth in a Notice of Termination of such 2003 Credit Support Instrument; or (c) the Expiration Date for such 2003 Credit Support Instrument. The Trustee shall give notice of any of the events set forth in the paragraph above to the Owners of the 2003A Bonds as provided in the Indenture. Applicable Purchase Price. The term "Purchase Price" means, with respect to any tendered 2003A Bond (or portion thereof), an amount, payable in funds immediately available on the applicable Purchase Date, equal to the principal amount thereof plus accrued interest from and including the Interest Accrual Date immediately preceding the applicable Purchase Date but not including the applicable Purchase Date; provided, however, that (i) if the Purchase Date for any Tendered Bond is on or after the Record Date for an Interest Payment Date and on or prior to such Interest Payment Date, the Purchase Price thereof shall be the principal amount thereof, and interest on such Tendered Bond shall be paid to the Owner of such Tendered Bond as of the applicable Record Date as provided for the payment of, interest on 2003A Bonds in the Indenture and (ii) in the case of a Purchase Date which is the first day of an Interest Rate Period which is preceded by a Long -Term Interest Rate Period and which commences prior to the day originally established as the last day of such preceding Long -Term Interest Rate Period, "Purchase Price" of any Tendered Bond means the optional redemption price determined pursuant to the Indenture which would have been applicable to the redemption of such Tendered Bond on such Purchase Date pursuant to the Indenture if the preceding Long -Term Interest Rate Period had continued to the day originally established as its last day. Effect of Election to Tender or Mandatory Tender for Purchase of 2003A Bonds. The giving of notice by an Owner of a 2003A Bond of its election to have its 2003A Bond purchased during a Weekly Interest Rate Period shall constitute the irrevocable tender for purchase of such 2003A Bond on the Purchase Date specified in such notice in accordance with the Indenture. Any 2003A Bond as to which Proper Delivery is not made to the Tender Agent by 10:00 a.m., New York City time on such Purchase Date is referred to as an "Undelivered Bond" in the Indenture. If funds in the amount of the applicable Purchase Price are available for payment to such Owner on the applicable Purchase Date, from and after such Purchase Date, (i) such Undelivered Bond shall be deemed to be purchased and shall no longer be deemed to be Outstanding under the Indenture; (ii) interest shall no longer accrue with respect to such Undelivered Bond; and (iii) funds in the amount of the Purchase Price of the Undelivered Bond shall be held by the Tender Agent in the Bond Purchase Fund for the benefit of the Owner of such Undelivered Bond, to be paid when Proper Delivery of such Undelivered Bond is made to the Tender Agent. Any funds held by the Tender Agent as described in clause (iii) of the preceding sentence shall be held uninvested. "Proper Delivery" means, with respect to the delivery of a Tendered Bond to the Tender Agent to receive the Purchase Price thereof in connection with any optional or mandatory tender of such Tendered Bond for purchase pursuant to the Indenture: (a) if such Tendered Bond is held in book -entry form by a securities depository, the making of, or the irrevocable authorization to make, entries on the books of the securities depository or a participant of such securities depository; and (b) if such Tendered Bond is not held in book -entry form by a securities depository, the delivery of such Tendered Bond to the Tender Agent at its Principal Office, accompanied by an instrument of transfer thereof in form satisfactory to the Tender Agent, executed in blank by the Owner thereof or by the Owner's duly 10 SF1 1317361v12 42379/276 authorized attorney, with such signature guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. 2003B Bonds The 2003B Bonds will be delivered in authorized denominations of $5,000 or any integral multiple thereof. Interest on the 2003B Bonds is payable on October 1, 2003 and semi-annually thereafter on April 1 and October 1 of each year (each, an "Interest Payment Date" for the 2003B Bonds), computed on the basis of a 360-day year comprised of twelve 30-day months. The 2003B Bonds will be dated March 1, 2003, will mature on the dates and in the principal amounts and bear interest at the rates, all as set forth on the inside front cover of this Official Statement. Redemption of 2003 Bonds 2003A Bonds Optional Redemption — 2003A Bonds. While a Weekly Interest Rate Period is in effect, the 2003A Bonds are subject to redemption prior to their stated maturity, at the option of the City, in whole or in part, in such amounts as may be specified by the City, on any date, at a redemption price equal to the amount of 2003A Bonds called for redemption, plus unpaid accrued interest to the date fixed for redemption, without premium. Mandatory Redemption — 2003A Bonds. While a Weekly Interest Rate Period is in erect, the 2003A Bonds are also subject to mandatory redemption prior to their stated maturity, in part, on the dates and in the amounts set forth below, from Sinking Fund Installments established pursuant to the Indenture, at a redemption price equal to the principal amount thereof to be redeemed, together with interest unpaid accrued thereon to the date fixed for redemption, without premium. Date Principal (April 1) Amount 2003B Bonds Optional Redemption — 2003B Bonds The 2003B Bonds maturing on or before April 1, are not subject to optional redemption prior to maturity. The 2003B Bonds maturing on or after April 1, are subject to redemption prior to their stated maturity, at the option of the City, in whole or in part, in such amounts as may be specified by the City, on any date on and after April 1, at a redemption price equal to the principal amount thereof to be redeemed together with unpaid accrued interest thereon to the date fixed for redemption without premium. Mandatory Redemption — 2003B Bonds The 2003B Bonds maturing on April 1, and April 1, are also subject to mandatory redemption prior to their respective stated maturity, in part, on the dates and in the amounts set forth below, from Sinking Fund Installments established pursuant to 11 SF1 1317361v12 42379/276 the Indenture, at a redemption price equal to the principal amount thereof to be redeemed, together with interest unpaid accrued thereon to the date fixed for redemption, without premium: 2003B Bonds due April 1, 2003B Bonds due April 1, Date (April 1) Principal Amount Selection of 2003 Bonds for Redemption Date Principal (April 1) Amount Whenever provision is made in the Indenture for the redemption of less than all of the 2003 Bonds, the Trustee shall select the 2003 Bonds to be redeemed from all 2003 Bonds subject to redemption, by lot in any manner which the Trustee in its sole discretion shall deem appropriate and fair; provided, however, that 2003A Bonds shall be redeemed in the following order of priority (and by lot within each priority): First: Any 2003A Bonds which are stated Bank Bonds; and Second: Any other 2003A Bonds. Notice of Redemption The Indenture requires the Trustee to give notice of any redemption of the 2003 Bonds by mailing by first-class mail, postage prepaid, a notice of redemption of such 2003 Bonds not more than 60 nor less than 30 days before the redemption date, to the Owners of any 2003 Bonds or portions of 2003 Bonds which are to be redeemed (in whole or in part), at their last address appearing upon the Bond Register. Among other things, such notice shall state that on the redemption date there shall become due and payable on each 2003 Bonds to be redeemed the redemption price thereof, or the redemption price of the specified portions of the principal thereof in the case of 2003 Bonds to be redeemed in part only, and that on and after such date, interest thereon shall cease to accrue and be payable. Receipt of such notice shall not be a condition precedent to such redemption and failure so to receive such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of 2003 Bonds. So long as the 2003 Bonds are in book -entry form, such notice of redemption will be mailed only to DTC (or its nominee). 12 SF1 1317361v12 42379/276 SECURITY AND SOURCES OF PAYMENT FOR THE 2003 BONDS Pledge Effected by the Indenture The 2003 Bonds are special obligations of the City. The principal of, premium, if any, and interest on the 2003 Bonds are payable solely from and secured solely by a lien and security interest in and pledge of the following pursuant to the Indenture, which constitutes the Trust Estate: (i) the Net Revenues of the City's Electric System and (ii) all amounts on deposit in the Debt Service Fund, the Debt Service Reserve Fund, the Redemption Fund and the Expense Stabilization Fund established by the Indenture, including the investments, if any, thereof. The pledge of the Trust Estate in the Indenture is subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. The pledge of the Trust Estate pursuant to the Indenture secures the 2003 Bonds and any other Bonds which the City may issue on a parity basis. The pledge of the Net Revenues to secure the Bonds is on a parity with any other Parity Obligations which the City may issue or incur in accordance with the Indenture. The City is not liable for the payment of the Purchase Price of the 2003A Bonds; such Purchase Price is payable solely from the remarketing of such 2003A Bonds or from draws under the Letter of Credit, as described herein. "Net Revenues" is defined in the Indenture to mean, for any period of time, "Revenues" for such period less Operation and Maintenance Expenses for such Period. "Revenues" includes all gross income and revenue received or receivable by the City from the ownership or operation of the Electric System, including all rates and charges for the Electric Service of the Electric System, all proceeds of insurance covering business interruption loss relating to the Electric System and all other income and revenue howsoever derived by the City from the ownership or operation of the Electric System or otherwise arising from the Electric System, including all receipts and payments pursuant to Public Finance Contracts entered into in connection with any Obligations or program of investments relating to the Electric System and all income from the deposit or investment of any money in the Light and Power Department Fund, but excluding (i) proceeds of taxes and (ii) refundable deposits made to establish credit and advances or contributions in aid of construction and line extension fees. "Operation and Maintenance Expenses" is defined in the Indenture to mean the costs paid or incurred by the City for operating and maintaining the Electric System including, but not limited to (a) all costs of electric energy and power generated or purchased by the City for resale, costs of transmission, fuel supply and water supply in connection with the foregoing; (b) all costs and expenses of management of the Electric System; (c) all costs and expenses of maintenance and repair, and other expenses necessary or appropriate in the judgment of the City to maintain and preserve, the Electric System in good repair and working order; (d) all administrative costs of the several departments of the City that are charged directly or apportioned to the operation or maintenance of the Electric System, such as salaries and wages (including retirement benefits) of employees, overhead, taxes (if any) and insurance premiums; (e) payments in -lieu of taxes to the City or any other public agency in connection with the Electric System, (f) all other reasonable costs, expenses and charges of the City required to be paid by it to comply with the terms of any Issuing Instrument authorizing the issuance of Parity Obligations, such as compensation, reimbursement and indemnification of the trustee, remarketing agent or fees and expenses of Independent Certified Public Accountants and other Consultants; (g) the fees, expenses and indemnification of Credit Providers and Reserve Financial Guaranty Providers; (h) all amounts required to be paid by the City under contracts with joint powers agencies for the purchase of capacity, rights in an electric generating station or electric transmission facilities, transmission capability or any other commodity right or service in connection with the Electric System, which contracts require payments to be made by the City thereunder to be treated as operation and maintenance expenses of the 13 SF1 1317361v12 42379/276 Electric System; (i) all deposits to be made to a rebate fund established with respect to Parity Obligations to provide for any required rebate to the United States required to maintain the Tax -Exempt status of interest on such Parity Obligations; 0) any cost or expense paid by the City to comply with requirements of law applicable to the Electric System or the City's ownership or operation thereof or in any capacity with respect thereto or any activity in connection therewith, including without limitation the public benefit uses required by Section 385 of the California Public Utilities Code; and (k) any other costs or expense which, in accordance with Generally Accepted Accounting Principles, is to be treated as a cost of operating or maintaining the Electric System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor, and amortization of intangibles. Except as provided in clause (d) or clause (e) of this paragraph, no transfer of Revenues to the City shall constitute an Operation and Maintenance Expense. "Obligations" is defined in the Indenture to include (a) obligations with respect to borrowed money and includes bonds, notes or other evidences of indebtedness, installment purchase payments under any contract, and lease payments under any financing or capital lease (determined to be such in accordance with Generally Accepted Accounting Principles), which are payable from the Net Revenues, (b) obligations to replenish any debt service reserve fund with respect to obligations of the City described in (a) above; (c) obligations secured by or payable from any of obligations of the City described in (a) above; (d) obligations payable from the Net Revenues and entered into in connection with, relating to, or otherwise serving as a hedge with respect to, an obligation described in (a), (b) or (c) above under any Public Finance Contract; and (e) Credit Provider Reimbursement Obligations. "Public Finance Contract" means (i) any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, (ii) any contract to exchange cash flows of a series of payments, or (iii) any contract to hedge payment, currency, rate spread or similar exposure, including but not limited to interest, any interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract, any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, any contract to exchange cash flows or a series of payments, or any contract, including, without limitation, an interest rate floor or cap, or an option, put or call, to hedge payment, currency, rate, spread or similar exposure, between the City and a counterparty. See "Swap Agreement for the 2003B Bonds" below. For definitions of certain other terms used herein, see "APPENDIX E — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE — Definitions" herein. The issuance of the 2003 Bonds shall not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to make any appropriation for their payment. The 2003 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the Trust Estate pledged pursuant to the Indenture which is subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. Neither the faith and credit nor the taxing power of the City, the State of California or any public agency thereof is pledged to the payment of the principal or Purchase Price of, or premium if any, or interest on, the 2003 Bonds. The 2003 Bonds do not constitute a debt, liability or obligation of the State of California or any public agency thereof (other than the special obligation of the City as provided in the Indenture). The members of the City Council of the City, and the officers and employees of the City, shall not be individually liable on the 2003 Bonds or in respect of any undertakings by the City under the Indenture. 14 SF1 1317361v12 42379/276 Letter of Credit for 2003A Bonds While the 2003A Bonds bear interest at a Weekly Interest Rate, the Purchase Price and principal of and interest on the 2003A Bonds will be payable from amounts available to be drawn by the Trustee under an irrevocable direct -pay Letter of Credit issued by the Bank. The Letter of Credit shall constitute a Credit Support Instrument (the "2003 Credit Support Instrument") and the Bank shall constitute a Credit Provider (the "2003 Credit Provider") pursuant to the Indenture. See "APPENDIX H — SUMMARY OF THE LETTER OF CREDIT AND THE REIMBURSEMENT AGREEMENT FOR THE 2003A BONDS" herein. Payment of the principal of and interest on the 2003B Bonds is not secured by the Letter of Credit, which relates only to the 2003A Bonds. Deposit and Application of Revenues Pursuant to the Indenture, the City will deposit or cause to be deposited all Revenues into the Light and Power Department Fund upon receipt thereof. Without limiting the provisions of the Indenture regarding investment of certain funds, the City will apply moneys in the Light and Power Department Fund for the following purposes: to the payment of Operation and Maintenance Expenses, payment of amounts required to be paid pursuant to the Indenture or the Issuing Instrument for any Parity Obligations, payment of amounts required to be paid pursuant to the Issuing Instrument for any Subordinated Obligations, payment of Costs of Capital Improvements, or to any other lawful purpose in connection with the Electric System, and to the extent permitted by the Indenture, to transfers to the City's General Fund. Rate Covenant Pursuant to the Indenture, the City has covenanted, at all times, to fix, prescribe and collect rates and charges for the Electric Service of the Electric System during each Fiscal Year which shall be at least sufficient to yield: (a) Adjusted Revenues for such Fiscal Year at least equal to the sum of the following for such Fiscal Year: (i) Operation and Maintenance Expenses; (ii) Adjusted Debt Service, and (iii) all other payments required to be paid in such Fiscal Year to meet any other obligations of the City which are charges, liens or encumbrances upon or payable from the Revenues, including all amounts owed to a Credit Provider under the terms of its Credit Support Agreement and amounts owed to a Reserve Financial Guaranty Provider under the terms of its Reserve Financial Guaranty; and (b) Adjusted Revenues less Operation and Maintenance Expenses for such Fiscal Year equal to at least one hundred ten percent (1101/o) of Adjusted Debt Service for such Fiscal Year. Debt Service Reserve Fund The Debt Service Reserve Fund is required to be maintained in an amount equal to the Debt Service Reserve Requirement. Upon the issuance of the 2003 Bonds, there will be deposited into the Debt Service Reserve Fund from the proceeds of the 2003 Bonds an amount equal to the Debt Service Reserve Requirement of ($ ). Amounts in the Debt Service Reserve Fund are to be used to pay principal and redemption price of and interest on the Bonds then due and payable in the event of any insufficiency in the amount or deposit in the Debt Service Fund available therefor. Pursuant to the Indenture, in lieu of the required deposits and transfers of money to the Debt Service Reserve Fund, the City may cause to be deposited in the Debt Service Reserve Fund a Reserve Financial Guaranty or Guaranties in an amount equal to the difference between the Debt Service Reserve Requirement and the sums, if any, then on deposit in the Debt Service Reserve Fund or being deposited in such Fund concurrently with such Reserve Financial Guaranty or Guaranties. 15 SF1 1317361v12 42379/276 "Reserve Financial Guaranty" means a policy of municipal bond insurance or surety bond issued by a municipal bond insurer or a letter of credit issued by a bank or other institution if the obligations insured by such insurer or issued by such bank or other institution, as the case may be, have ratings at the time of issuance of such policy or surety bond or letter of credit in the highest rating category (without regard to qualifiers) by S&P and Moody's and, if rated by A.M. Best & Company, also in the highest rating category (without regard to qualifiers) by A.M. Best & Company. The Trustee shall draw upon or otherwise take such action as is necessary in accordance with the terms of the Reserve Financial Guaranties to receive payments with respect thereto (including the giving of notice as required thereunder): (i) on any date on which moneys will be required to be withdrawn from the Debt Service Reserve Fund and applied to the payment of principal or redemption price of, or interest on, any 2003 Bonds and such withdrawal cannot be met by amounts on deposit in the Debt Service Reserve Fund; (ii) on the first Business Day which is at least ten (10) days prior to the expiration date of each Reserve Financial Guaranty, in an amount equal to the deficiency which would exist in the Debt Service Reserve Fund if such Reserve Financial Guaranty expired, unless a substitute Reserve Financial Guaranty with an expiration date not earlier than 180 days after the expiration date of the expiring Reserve Financial Guaranty is acquired prior to such date or the City deposits funds in the Debt Service Reserve Fund before such date so that the amount in the Debt Service Reserve Fund on such date (without regard to such expiring Reserve Financial Guaranty) is at least equal to the Debt Service Reserve Requirement. Expense Stabilization Fund Moneys shall be deposited in the Expense Stabilization Fund in such amounts, at such times and from such sources as shall be determined by the City in its sole discretion. Moneys on deposit in the Expense Stabilization Fund may be withdrawn by the City at any time no Event of Default exists under the Indenture and applied to any lawful purpose in connection with the Electric System, including without limitation, payment of Operation and Maintenance Expenses, payment of Debt Service on the 2003 Bonds or Parity Obligations, payment of principal, premium or interest on Subordinated Obligations, payment of costs of capital improvements, payment of the costs of issuance of Parity Obligations or Subordinated Obligations. Issuance of Parity Obligations The City has covenanted pursuant to the Indenture that it shall not issue any bond, note, or other evidence of indebtedness payable from or secured by the Trust Estate on a basis which is: (i) in any manner prior or superior to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture; (ii) except for Parity Obligations with respect to the Net Revenues, in any manner on a parity with the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture; or (iii) except for Subordinate Obligations, in any manner subordinate to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture. Pursuant to the Indenture, the City may, at any time and from time to time, issue any Additional Parity Obligations, provided the City obtains or provides a certificate or certificates, prepared by the City or at the City's option by a Consultant, showing: (i) that the Adjusted Net Revenues for the applicable Calculation Period, which Calculation Period shall be selected by the City in its sole discretion, shall have amounted to at least 1.25 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations; and (ii) that the Net Revenues for such applicable Calculation Period shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be 16 SF1 1317361vl2 42379/276 Outstanding immediately after the issuance of the proposed Additional Parity Obligations. For purposes of preparing such certificate or certificates, the City and any Consultant shall utilize and rely on financial statements prepared by the City which have been audited by an Independent Certified Public Accountant but may utilize and rely upon the books and records of the City or any unaudited financial statements prepared by the City if audited financial statements for the particular Calculation Period selected by the City are not available. Notwithstanding the foregoing (and without satisfying the requirements of the preceding paragraph), the City may at any time but subject to the applicable requirements of the Indenture: (i) issue or enter into an obligation or commitment which is a Qualified Swap Agreement; (ii) issue Refunding Parity Obligations, and (iii) enter into Credit Support Instruments or otherwise become obligated for Credit Provider Reimbursement Obligations with respect to Parity Obligations. See "APPENDIX E — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE Conditions to Issuance of Parity Obligations" herein. Swap Agreement for the 2003B Bonds The City plans to enter into the interest rate swap transaction under the Swap Agreement in connection with the 2003B Bonds. In general, the terms of the Swap Agreement provide that, on a same -day net -payment basis determined by reference to a notional amount equal to the principal amount of the 2003B Bonds outstanding, the City will pay a variable interest rate (based upon ) on the notional amount. In return, Bank of America, N.A. will pay a fixed rate of interest on a like notional amount. Amounts received by the City from Bank of America, N.A. (or its successors or assigns) constitute "Revenues" under the Indenture. The agreement by Bank of America, N.A. to make payments under the Swap Agreement does not affect the City's obligation under the Indenture for the payment of the 2003 Bonds from Net Revenues of the City's Electric System. Neither the Owners of the 2003B Bonds nor any other person other than the City will have any rights under the Swap Agreement or against Bank of America, N.A. Regularly scheduled payments due to Bank of America, N.A. from the City under the Swap Agreement are payable from and secured by a lien on Net Revenues on a parity with the lien for the payment of the 2003 Bonds and any Parity Obligations. Under certain circumstances, the Swap Agreement is subject to early termination prior to the maturity of the 2003B Bonds, in which event the City may be obligated to make a substantial payment to Bank of America, N.A. Amounts due to Bank of America, N.A. upon any early termination of the Swap Agreement constitute Subordinate Obligations payable from Net Revenues on a basis that is junior and subordinate to the 2003 Bonds and Parity Obligations. Limitations on Remedies The rights of the Owners of the 2003 Bonds are subject to the limitations on legal remedies against cities in the State. Additionally, enforceability of the rights and remedies of the Owners of the 2003 Bonds, and the obligations incurred by the City, 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 creditor's rights generally, now or hereafter in effect; equity 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 Constitution; and the reasonable and necessary exercise, in appropriate situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or State government, if initiated, could 17 SFl 131736lvl2 42379/276 subject the Owners of the 2003 Bonds 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. THE BANK The information in this Section has been furnished by the Bank for inclusion herein. The City cannot and does not make any representation as to the accuracy or completeness of such information or the absence of material adverse changes in such information subsequent to the date hereof. The delivery of this Official Statement shall not create any implication that there has been no changes in the affairs of the Bank since the date hereof, or that the information contained and referred to in this section is correct as ofany time subsequent to the date hereof. Bank of America, N.A. (the `Bank"), is a national banking association organized under the laws of the United States, and its principal executive offices are located in Charlotte, North Carolina. The Bank is a wholly owned indirect subsidiary of Bank of America Corporation and is engaged in general consumer banking, commercial banking and trust business, offering a wide range of commercial, corporate, international, financial market, retail and fiduciary banking services. As of September 30, 2002, the Bank had consolidated assets of $576 billion, consolidated deposits of $394 billion and stockholder's equity of $50 billion based on regulatory accounting principles. Bank of America Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, with its principal executive offices located in Charlotte, North Carolina. Additional information regarding Bank of America. Corporation is set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, together with any subsequent documents it filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Letter of Credit has been issued by the Bank. Moody's Investors Service, Inc. ("Moody's") currently rates the Bank's long-term certificates of deposit as "Aal" and short-term certificates of deposit as "P-1". Standard & Poor's Rating Services ("S&P") rates the Bank's long-term certificates of deposit as "AA-" and its short-term certificates of deposit as "A-1+". Fitch, Inc. ("Fitch") rates long- term certificates of deposit of the Bank as "AA" and short-term certificates of deposit as "F-1+." Further information with respect to such ratings may be obtained from Moody's, S&P and Fitch, respectively. No assurances can be given that the current ratings of the Bank's instruments will be maintained. The Bank will provide copies of the most recent Bank of America Corporation Annual Report on Form 10-K, any subsequent reports on Form 10-Q, and any required reports on Form 8-K_ (in each case as filed with the Commission pursuant to the Exchange Act), and the most recent publicly available portions of the quarterly Call Reports of the Bank delivered to the Comptroller of the Currency, without charge, to each person to whom this document is delivered, on the written request of such person. Written requests should be directed to: Bank of America Corporate Communications 100 North Tryon Street, 18th Floor Charlotte, North Carolina 28255 Attention: Corporate Communications PAYMENTS OF PRINCIPAL AND INTEREST ON THE 2003A BONDS WILL BE MADE FROM DRAWINGS UNDER THE LETTER OF CREDIT. PAYMENTS OF THE PURCHASE PRICE 18 SF1 1317361v12 42379/276 OF THE 2003A BONDS WILL BE MADE FROM DRAWINGS UNDER THE LETTER OF CREDIT IF REMARKETING PROCEEDS ARE NOT AVAILABLE. ALTHOUGH THE LETTER OF CREDIT IS A BINDING OBLIGATION OF THE BANK, THE 2003A BONDS ARE NOT DEPOSITS OR OBLIGATIONS OF BANK OF AMERICA CORPORATION OR ANY OF ITS AFFILIATED BANKS AND ARE NOT GUARANTEED BY ANY OF THESE ENTITIES. THE 2003A BONDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY AND ARE SUBJECT TO CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. The information contained in this section relates to and has been obtained from the Bank. The information concerning Bank of America Corporation and the Bank contained herein is furnished solely to provide limited introductory information regarding Bank of America Corporation and the Bank and does not purport to be comprehensive. Such information is qualified in its entirety by the detailed information appearing in the documents and financial statements referenced above. DEVELOPMENTS IN THE ENERGY MARKETS Market Deregulation and the Energy Crisis Background Following FERC actions in the 1990s to allow suppliers of wholesale electric generation services to make sales of capacity and energy at negotiated "market -based" rates and the enactment by FERC (in 1996) of Order No. 888 requiring the provision of open access transmission services on a non-discriminatory basis by jurisdictional utilities (see ""OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY — Federal Regulation of Transmission Access" herein), the State of California attempted to establish a more competitive electric energy market. By September 1996, State Legislative Assembly Bill 1890 ("AB 1890") had become effective, which established a framework for the deregulation of the California electric energy market. AB 1890 mandated the organization of an Independent System Operator, or "ISO", to regulate non-discriminatory access to transmission facilities, consistent with FERC-approved tariffs, and an independent power exchange, or "PX," to provide a spot market for the purchase of output of the IOUs' generating assets and for the sale of electricity to meet the IOU's power requirements. Although AB 1890 applied primarily to the California IOUs, municipal utilities were encouraged to participate in the competitive framework by gradually providing open access to competitive energy providers. In mid-2000, wholesale electricity prices in California began to rise, swiftly and dramatically. Retail electricity rates permitted to be charged by the three major IOUs in California, Pacific Gas & Electric Company ("PG&E"), San Diego Gas & Electric Co. ("SDG&E") and Southern California Edison ("Edison"), at the time were frozen by California law (pursuant to provisions of AB 1890). Although SDG&E satisfied the statutory condition which permitted it to "unfreeze" its rates, PG&E and Edison continued to be subject to the rate freeze and their financial condition deteriorated rapidly. An emergency, 30% rate increase by the CPUC in March 2001 proved insufficient to stem the losses. On April 6, 2001, PG&E filed for bankruptcy protection. PG&E remains in bankruptcy today. In order to avert a second bankruptcy, the State, in October, 2001, announced a settlement with Edison allowing Edison to recover from ratepayers a substantial portion of its accumulated debts. The settlement between Edison and the CPUC was approved by the district court over the objections of The Utility Reform Network ("TURN"), a nonprofit consumer organization. TURN appealed the stipulated judgment resulting from the settlement. The Ninth Circuit Court of Appeals affirmed the decision of the district court as to certain questions arising under federal law, but certified to the California Supreme Court certain questions relating to the validity of the settlement agreement under California law. The potential impacts of further proceedings relating to this suit on the creditworthiness of Edison are uncertain. 19 SF1 131736lvl2 42379/276 At the same time, the creditworthiness of the ISO and the PX, which was directly tied to creditworthiness of the IOUs, also deteriorated. On December 15, 2000, the PX had functionally ceased operation and filed for bankruptcy protection shortly thereafter, and the ISO was effectively frozen out of the energy market. At present, the City is owed approximately $4.2 million from PG&E and Edison relating to the transactions through the ISO and the PX. State Intervention. In response to the chaotic energy situation and the reluctance of energy providers to engage in transactions with the State's two largest IOUs, the Governor of the State of California declared a state of emergency and ordered the State's Department of Water Resources ("DWR") to begin buying power for the IOUs. Shortly thereafter, the State formally authorized DWR's power purchase program by enacting Assembly Bill 1X ("AB 1X"). AB 1X authorized DWR to enter into power supply contracts in order to supply the shortfall (the "net short") between each IOU's power needs and its own retained generation. AB 1X also required the IOUs to deliver DWR's energy to the IOU customers, and authorized DWR to collect a charge from the IOU customers to allow DWR to recover its costs, including repayment of over $11 billion of revenue bonds issued by DWR in November 2002. DWR's contracting power expired on December 31, 2002, although DWR continues to supply power to the IOUs under contracts entered into prior to this date. On January 1, 2003 the IOUs, under the auspices of the CPUC, resumed responsibility for the provision of the residual net short and the administration of DWR contracts although for the foreseeable future DWR will remain the named contractual party to the contracts. AB 1X also required the CPUC to suspend the right of retail customers of the IOUs to purchase electricity from suppliers other than DWR and the IOUs (i.e., direct access) until DWR is no longer a supplier of electricity. In March 2002, the CPUC adopted a decision suspending, as of September 20, 2001, any new direct access. In a subsequent decision, the CPUC established a surcharge mechanism under which direct access customers were made responsible for paying costs incurred by DWR and by the IOUs during the energy crisis. The decision adopted an initial interim cap of 2.7 cents/kWh, in response to concerns that the surcharges might cause direct access to become uneconomic. Bundled (IOU) customers will finance any undercollection resulting from the cap, and they will be repaid with interest over a reasonable period. The cap is subject to adjustment as determined in further proceedings ordered in the decision. FERC Price Mitigation and Other FERC Actions. Beginning in late 2000, FERC took several steps to address the spiraling cost of energy in the California markets, including the implementation of cost -based price mitigation in the spot electricity markets. In July, 2002 FERC replaced the previous formula for calculating the price cap with a hard cap of $91.87 per MWh, effective through September 30, 2002. FERC subsequently issued an order establishing a hard price cap of $250 per MWh effective October 1, 2002 which remains in place. FERC indicated it established the price cap at this level to promote further development of new generating resources in California. The CPUC and the California Electricity Oversight Board have each brought action (which actions have been consolidated) at FERC against all sellers of energy under long-term contracts to DWR. These actions seek rescission of, or in the alternative, a reduction in the rates charged under the long- term contracts on the basis that such rates are unjust and unreasonable. In April 2002, FERC required that the parties first engage in mediation to attempt to achieve resolution through settlement prior to the matter going to hearing. As a result of the mediation process, the CPUC and the California Electricity Oversight Board have withdrawn their complaints against certain of the generators with whom negotiations have resulted in renegotiated contracts. On December 17, 2002, FERC directed that a number of the contracts be granted expidited treatment with briefs to be filed directly with FERC. On 20 SF1 131736lvl2 42379/276 January 16, 2003, the Administrative Law Judge issued a decision on the standard of review to be applied to the remaining contracts and certified the record to FERC for a decision on the remaining issues. Impact of Energy Crisis on the City As a result of the volatility and conditions in the California energy markets, the City experienced a variety of impacts on its operations, including increased power supply costs and natural gas costs during the energy crisis. While the difficult market conditions have moderated substantially, volatility in energy prices in California may return due to a variety of factors which affect both the supply and demand for electric energy in the Western United States. These factors include, but are not limited to, insufficient generation resources, fuel costs and availability, weather, transmission congestion and levels of hydroelectric generation within the region. This price volatility may contribute to greater volatility in the City's revenues and/or expenses from the sale and/or purchase of electric energy and natural gas, and therefore could materially adversely affect the financial condition of the City electric utility. The City has power supply contracts and other arrangements relating to its system supply of power which are of specified durations. The City undertakes resource planning activities and plans for its resource needs in the normal course of operations and as part of prudent utility practices. See "THE ELECTRIC SYSTEM Power Supply Resources" herein. The City sells a small amount of energy into the wholesale energy market that is not needed to serve its retail customers. Following the issuance of FERC's June 19, 2001 order on price mitigation in the spot electricity markets in California (see "FERC Price Mitigation and Other FERC Actions" above), FERC entered an order to conduct a fact finding hearing to calculate refunds for spot market transactions in California. The City was both a buyer and a seller during the relevant time period and does not expect to have any significant refund OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY Federal Regulation of Transmission Access The Energy Policy Act made fundamental changes in the Federal regulation of the electric utility industry, particularly in the area of transmission access. The Act provided FERC with the authority to require a transmitting utility to provide transmission services at rates, charges, terms and conditions set by FERC. The purpose of these changes, in part, was to bring about increased competition in the electric utility industry. Under the Energy Policy Act, electric utilities owned by municipalities and other public agencies which own or operate electric power transmission facilities which are used for the sale of electric energy at wholesale are "transmitting utilities" subject to the requirements of the Energy Policy Act. In April, 1996, FERC issued its Order No. 888 to implement the competitive open access to transmission lines authorized by the Energy Policy Act. Order No. 888 requires the provision of open access transmission services on a nondiscriminatory basis by all "jurisdictional utilities (which, by definition, does not include municipal entities like TANC and the Member -Participants) by requiring all such utilities to file tariffs that offer other entities seeking to effect wholesale power transactions the same transmission services they provide themselves, under comparable terms and conditions. Order 888 also requires "nonjurisdictional utilities" (which, by definition, does include TANC and the Member - Participants) that purchases transmission services from a jurisdictional utility under an open access tariff and that owns or controls transmission facilities to, in turn, provide open access service to the jurisdictional utility under terms that are comparable to the service that the nonjurisdictional utility 21 SF1 131736lvl2 42379/276 provides itself. This is referred to as the reciprocity requirement. Order No. 888 also includes provisions which permits a jurisdictional utility to recover under certain conditions so-called "stranded costs" for generating and other facilities from wholesale customers of a utility which use open access transmission service to purchase from other power suppliers. FERC is encouraging the voluntary formation of regional transmission organizations ("RTOs") independent from owners of generation and other market participants that will provide transmission access on a non-discriminatory basis to buyers and sellers of power. IOUs and publicly -owned utilities are being encouraged to participate in the formation and operation of RTOs, but are not, at this time, being ordered by FERC to participate. After receiving comments from interested parties, FERC issued a final rule on December 20, 1999 (i.e., Order 2000). Under the rule, IOUs were required to file with FERC a proposal for an RTO, or, alternatively, a description of efforts to participate in an RTO, any existing obstacles to RTO participation, and any plans to work toward RTO participation. California entities did not submit an RTO proposal to FERC until June 1, 2001. Since that time, FERC has adopted a "go slow" approach to the issue of RTO formation in the West, as it is engaged in a wholesale overhaul of the California market design, referred to as the "MD02 proceeding." These FERC proceedings will have potential impacts on every electric utility doing business in California. It is not certain at this time what impact, if any, FERC's final rule will have on the ISO or the City. Proposed Federal Deregulation and Tag Legislation Many bills have been introduced in the United States House of Representatives and the United States Senate to deregulate the electric utility industry on the federal or state level. Many of the bills provide for open competition in the furnishing of electricity to all retail customers (i.e., retail wheeling). In addition, various bills have been introduced which would impact the issuance of tax-exempt bonds for transmission and generation facilities. No prediction can be made by the City as to whether any of these bills or any similar federal bills proposed in the future will become law or, if they become law, what their final form or effect would be. Such effect, however, could be material the City. Other Factors The electric utility industry in general has been, or in the future may be, affected by a number of other factors which could impact the financial condition and competitiveness of many electric utilities and the level of utilization of generating and transmission facilities. In addition to the factors discussed above, such factors include, among others, (a) effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements other than those described above, (b) changes resulting from conservation and demand -side management programs on the timing and use of electric energy, (c) changes resulting from a national energy policy, (d) effects of competition from other electric utilities (including increased competition resulting from mergers, acquisitions, and "strategic alliances" of competing electric and natural gas utilities and from competitors transmitting less expensive electricity from much greater distances over an interconnected system) and new methods of, and new facilities for, producing low-cost electricity, (e) the proposed repeal of certain federal statutes that would have the effect of increasing the competitiveness of many IOUs, (f) increased competition from independent power producers and marketers, brokers and federal power marketing agencies, (g) "self -generation" or "distributed generation" (such as microturbines and fuel cells) by industrial and commercial customers and others, (h) issues relating to the ability to issue tax-exempt obligations, including severe restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission service from transmission line projects financed with outstanding tax-exempt obligations, (i) effects of inflation on the operating and maintenance costs of an electric utility and its facilities, 0) changes from projected future load requirements, (k) increases in costs and uncertain availability of capital, (1) shifts in the availability and relative costs of different fuels (including the cost 22 SF1 1317361v12 42379/276 of natural gas), (m) sudden and dramatic increases in the price of energy purchased on the open market that may occur in times of high peak demand in an area of the country experiencing such high peak demand, such as has occurred in California, (n) inadequate risk management procedures and practices with respect to, among other things, the purchase and sale of energy and transmission capacity, (o) other legislative changes, voter initiatives, referenda and statewide propositions, (p) effects of changes in the economy, (q) effects of the filing by Enron Corporation for bankruptcy protection under Chapter 11 of the federal Bankruptcy Code and (r) effects of possible manipulation of electric markets. Any of these factors (as well as other factors) could have an adverse effect on the financial condition of any given electric utility and likely will affect individual utilities in different ways. The City cannot predict what effects such factors will have on the business operations and financial condition of the City electric utility, but the effects could be significant. The foregoing is a brief discussion of certain of these factors. This discussion does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. Extensive information on the electric utility industry is, and will be, available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers of the 2003 Bonds should obtain and review such information. RATE REGULATION The City sets rates, fees and charges for electric service provided at retail within its city boundaries. The authority of the City to impose and collect rates and charges for electric power and energy sold and delivered at retail within its city boundaries is not subject to the general regulatory jurisdiction of the CPUC. Currently neither the CPUC nor any other regulatory authority of the State of California nor FERC reviews such rates and charges. It is possible that future Constitutional, legislative, and/or regulatory changes could subject such rates and/or service area of the City to the jurisdiction of the CPUC or to other limitations or requirements under Federal or state law. The California Energy Commission is authorized to evaluate rate policies for electric energy as related to the goals of the Energy Resources Conservation and Development Act and to make recommendations to the Governor, the Legislature and publicly owned electric utilities. As described under "THE ELECTRIC SYSTEM —Transmission Resources" herein, the City turned over operational control of its transmission facilities to the ISO effective January 1, 2001 and thereby became a "Participating Transmission Owner" in the ISO. As a result of its status as a Participating Transmission Owner, certain of the City's revenue requirements (which are recovered through rates set by the City Council) relating to its rights (ownership and contractual) to high voltage transmission facilities are subject to review by FERC. In late 2000, FERC approved the transmission revenue requirements ("TRR") of the City, conditioned on certain modifications. The City made such modifications and the City's TRR became effective on January 1, 2001, at which time the ISO began collecting rates for use of transmission services on its system (including the City's transmission facilities to which it has operational control) based in part upon the City's TRR. Petitions for review of FERC's approval of the City's TRR were filed in the United States Court of Appeals for District of Columbia Circuit, Case No. 01-1187. Among other things, petitioners PG&E and Edison contend in briefs that FERC applied incorrect standards in approving the City's TRR, that the level of the City's TRR was not adequately supported, that the City's TRR and individual components of the City's TRR are impermissibly high, and that FERC erred on a number of procedural grounds. FERC and the City have filed briefs in support of FERC's orders. The ISO and the Northern California Power Agency, intervenors in the Court proceeding, likewise filed 23 SF1 1317361v12 42379/276 certificates supporting the briefs of FERC and/or the City. On October 15, 2002, the Court remanded the proceeding to FERC for further explanations by FERC of its rulings. The FERC issued an order consolidating the remand with the petitions for declaratory order of the Cities of Azusa, Anaheim, Banning, and Riverside, California wherein those cities seek FERC approval, among other things, of their TRRs for purposes of their .becoming Participating Transmission Owners. The consolidated dockets have been set for settlement discussions before a Settlement Judge at FERC. The City has sought rehearing on FERC's order consolidating the proceedings. The City's TRR is currently approximately $10 million annually. The City cannot predict the outcome of this proceeding, but it is possible that the outcome could affect the City's TRR in certain ways including, among others, the level of the TRR, how the TRR is established, and under what standards it is considered by FERC. As a Participating Transmission Owner, the City is required to make an annual filing with FERC relating to its transmission revenue balancing account in order to credit or debit certain revenues against the City's base TRR. The City recently filed its second filing of its transmission revenue balance account with FERC. The first such filing is the subject of a unanimous settlement among parties to the docket which is pending before FERC. THE ELECTRIC SYSTEM General The City was incorporated on September 16, 1905 as a general law city. Effective July 1, 1988, the City became a chartered city. The City is located in Los Angeles County, California, approximately four miles southeast of downtown Los Angeles. The City is predominantly industrial, with an estimated resident population of 96 as of January 2002. The City has nearly 1,200 businesses (primarily industrial) located within its 5.2 square miles and a work day population of more than 44,000. The City provides electric service through its Utilities Department. The legal responsibilities and powers of the Utilities Department are exercised through the five member City Council. The members of the City Council are elected at -large for four year terms. The City operates under a Council - City Administrator form of government. The Utilities Department is under the direction of the Director of Utilities who is appointed by the City Council. In addition to electric service, the City provides other services to its inhabitants such as police and fire protection and water and sewer service. During the Fiscal Year ended June 30, 2002, the Electric Systet served 2,068 customers, supplied 1,110.8 million kWh of energy and had a peak demand of 184.1 MW. Management The Utilities Department exercises jurisdiction over the Light and Power Department, which operates the Electric System and the Gas Department which operates the local gas distribution system of the City. The following is a brief description of the senior management personnel of the Utilities Department which are responsible for Electric System operations. Bruce V. Malkenhorst is the City Administrator, a position that he has held since September 1978. Mr. Malkenhorst holds a Bachelor of Science degree from Woodbury University. Mr. Malkenhorst has the responsibilities of Chief Executive Officer of the Utilities Department. As the Utilities' senior officer, Mr. Malkenhorst restructured the operations of the Department, reducing and ultimately eliminating the City's dependence on Edison for its power requirements. In 24 SF1 1317361v12 42379/276 1979, Mr. Malkenhorst re -fired the City's existing five diesel generator units and began the then unusual practice for a small municipal utility of purchasing power from other, more economical sources, including going across state lines, by establishing an energy supply relationship with Nevada Power Company. Kenneth J. DeDario is the Director of the Utilities Department, responsible for managing and operating the Electric System, a position he has held since July 1990. Mr. DeDario is a registered electrical engineer, licensed in the state of California, and has held licenses in the states of Colorado, Nebraska, and Wyoming. Mr. DeDario holds a Certificate of Business Management from the Graduate School of Management of the University of California at Los Angeles and Bachelor's and Master's degrees in Electrical Engineering from Purdue University and the University of Southern California, respectively. In his 36-year career, Mr. DeDario has held positions at the Department of Water and Power of the City of Los Angeles as the Production Planning Supervisor; Tri-State Generation and Transmission Association as the Planning Division Manager; and the City of Palo Alto Utilities as an Assistant Director. Mr. DeDario is immediate past President of the Board of the Southern California Public Power Authority and a past alternate Director of the Northern California Power Agency. Jorge C. Somoano is the Deputy Director of the Utilities Department, responsible for assisting the Director in the management and operation of the Electric System. Mr. Somoano has 19 years experience with the Utilities Department and holds a Bachelor of Science Degree in Electrical Engineering from the California State Polytechnic University, Pomona and a Master's Degree in Business Administration from Woodbury University. Mr. Somoano participates in the design and equipment approval for the Project, including contract negotiations and cost evaluations. See "TIE PROJECT" herein. Ramon Z. Abueg is the Assistant Director of Engineering & Operations of the Utilities Department, responsible for the day-to-day management and operations of the Electric System, including the existing electrical generating plant site. Mr. Abueg has held his current position with the City since 1997. Mr. Abueg is a registered electrical engineer in California and holds a Bachelor of Science degree in Electrical and Electronics Engineering from California State University, Sacramento and a Master's Degree in Business Administration from Woodbury University. Mr. Abueg is the Project Manager for the Project, responsible for design and equipment approval, construction management, and the requirements analysis and drafting of all relevant permits for the Project, including the air quality permits with SCAQMD. Employee Relations As of December 31, 2002, 41 full-time equivalent City employees were assigned to the Electric System. Certain functions supporting Electric System operations are performed under contract. RMI Utility Services ("RMIUS") has performed maintenance of the City's electric distribution system under contract with the City since 1989. All of the City employees, including those assigned to the Electric System, are non -union. The Electric System has faced no strikes or other work stoppages within the last ten years. Retirement benefits to City employees, including those assigned to the Electric System, are provided through the City's participation in the California Public Employees Retirement System 25 SF1 131736lvl2 42379/276 (Ca1PERS). See Note 4 to the City's audited financial statements for the Fiscal Year ended June 30, 2002 included in Appendix B hereto. Insurance The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; natural disasters; unemployment coverage, and providing health benefits to employees, retirees and their dependants. The City is self -insured for its general liability, workers' compensation, and property liability. The City has chosen to establish certain Internal Service Funds, whereby assets are set aside for claim settlements associated with the above risks of loss up to certain limits. Excess coverage is provided by the Independent Cities Risk Management Authority (the "ICRMA"), a joint powers authority whose purpose is to develop and fund programs of excess insurance for its member cities. The ICRMA is governed by a board of directors consisting of representatives of its member cities. Self-insurance and ICRMA limits are as follows: Type of Coverage General Liability Workers' Compensation Property Self -Insurance Up to $300,000 Up to $300,000 Up to $10,000 ICRMA $300,000 to $10,000,000 $300,000 to $10,000,000 $10,000 to $20,000,000 Amounts in excess of these limits are self -insured. There have been no significant reductions of coverage from the prior year. There have been no settlements exceeding insurance coverage for each of the past three Fiscal Years. Electric System Facilities To provide electric service within its service area (which is coterminous with the City's corporate city boundaries) the City owns and operates the Electric System, which includes generation, transmission and distribution facilities. The City has owned its own electric distribution system since 1931. The City also purchases power and transmission service from others. The City receives energy through the Laguna Bell Substation from Edison. The energy is distributed from Laguna Bell across the City's five 66-kV transmission lines and to four distribution substations within the City's service territory. Power Supply Resources Historically, the City purchased virtually all of its power requirements from Edison. In the early 1980's, the City began the process of expanding its resource base. In 1981, the City joined the Southern California Public Power Authority ("SCPPA"), a joint powers authority created for financing, acquiring and constructing electric generating and transmission projects for participation by its members. The City participates in SCPPA's projects when determined appropriate by the City. In addition, the City has developed electric dispatch and transmission capabilities that support the City's electric needs. The City currently continues to rely on power purchases for the majority of its power requirements. The Project is being undertaken by the City in order to enhance the City's local generating resources. Following commencement of operation of the Project, the City will reduce purchases made under contract. The City has a number of power purchase arrangements of varying durations. A number of these contracts (representing 75MW of capacity each year) are scheduled to expire by the third quarter of 2005. Prior to the expiration of these contracts, the City plans to sell surplus power not needed to serve its retail users in the market when economic. See "Power Purchase Agreements below and "APPENDIX A— CONSULTING ENGINEER'S REPORT" herein. 26 SF1 1317361v12 42379/276 The various power supply resources of the City during the Fiscal Year ended June 30, 2002 are described below. During the Fiscal Year ended June 30, 2002, the Electric System generated and purchased approximately 1,329,762 megawatt -hours ("M%") of electricity (prior to transmission losses). The following table sets forth by category, the amounts, in MWh and percentages, of electricity obtained by the City for sales to customers throughout the City during the Fiscal Year ended June 30, 2002. CITY OF VERNON POWER SUPPLY RESOURCES (Fiscal Year Ended June 30, 2002) Actual Energy Percent of Resource (MWh) (I) Total Energy Long -Term Contracts(2x3) 1,174,375 88.31% Short -Term Contracts(4) 40,627 9.65 On -Site Generation 621 0.05 SCCPA Palo Verde 85,305 6.42 Hoover 28,834 2.17 Total 1,329,762 100.0% tl� Reflects net transaction quantities. (2) A term of one year or longer. (3) The majority of the purchased energy during this period was supplied by firm energy contracts from American Electric Power, Avista, Coral, Ida Corp, Reliant and Southern. See "Power Purchase Agreements" below. (4) A term of less than one year. Power Purchase Agreements Firm Power. The City has a number of power purchase agreements to help meet its power requirements. The City has entered into contracts to purchase most of its electricity requirements through June 30, 2005. These power purchase agreements consist of arrangements with various power suppliers for varying amounts of firm power annually. Each of the arrangements is in the form of the Western Systems Power Pool power purchase agreement. The supplies vary from year to year with the quantity of supply decreasing over time. These agreements are fixed price arrangements. Agreements totaling 50 MW of firm power annually extend past calendar year 2005. Two agreements, each amounting to 25 MW of on -peak energy, have a remaining life of over five years. The last agreement expires in 2010. The City's average cost of power purchased under these agreements was $41.99/MWh for calendar year 2002. Short -Term Power. The City expects to provide for its energy needs that are not covered by long-term power supply arrangements primarily from short-term (monthly, weekly, daily or hourly) purchases on the spot market. Short-term purchases are made under the Western Systems Power Pool power purchase agreement and/or from the ISO. The cost of obtaining the necessary energy is dependent upon such factors as the availability of generating resources in the region, cost of fuel and weather conditions. Joint Powers Agency Resources SCPPA Palo Verde Nuclear Generating Station (PVNGS) Interest. Through its participation in SCPPA, the City has an entitlement to the Palo Verde Nuclear Generating Station ("PVNGS") near 27 SF1 131736lv12 42379/276 Phoenix, Arizona. SCPPA, pursuant to the Arizona Nuclear Power Project Participation Agreement, has a 5.91% interest in PVNGS, consisting of three nuclear electric generating units, each with a nominal rating of 1,270 MW. The maximum dependable capacity of the three units under adverse atmospheric conditions is 1,243 MW, 1,243 MW and 1,247 MW, respectively. SCPPA has also purchased (i) a 5.56% undivided ownership interest in the Arizona Nuclear Power Project ("ANPP") High Voltage Switchyard and contractual rights thereto; and (ii) a 6.55% share of the right to use certain portions of the Arizona Nuclear Power Project Valley Transmission System in order to transmit PVNGS power to its members which are participating in the Project. The City has a 4.900% entitlement interest (11.03 MW) in SCPPA's ownership interest in the PVNGS, the ANPP High Voltage Switchyard and the ANPP Valley Transmission System. The City has entered into a power sales agreement with SCPPA which provides the City with its share of capacity and energy from PVNGS on a "take -or -pay" basis. As of December 31, 2002, SCPPA had outstanding approximately $761,455,000 principal amount of bonds issued to finance its interest in PVNGS. In the Fiscal Year ended June 30, 2002, PVNGS provided 85,305 MWh of energy to the City an average cost of delivered energy of $ per MWh (which reflects an accelerated debt service repayment program through June 30, 2004 as described below) at which time the cost of delivered energy from PVNGS is expected to drop considerably). SCPPA has undertaken certain actions (as described below), including collections of amounts in excess of operating and maintenance expenses and current debt service on its bonds for PVNGS to reduce the future cost of power from this project. In response to increased competition in the electric utility business, in 1997 SCPPA began taking steps designed to accelerate the payment of all fixed rate subordinate bonds relating to PVNGS by July 1, 2004 (the "PVNGS Restructuring Plan"). Such steps consisted primarily of refunding certain outstanding bonds for savings and accelerating payments by the PVNGS project participants on the bonds issued by SCPPA for PVNGS. The PVNGS Restructuring Plan has largely been completed and has resulted in increased payments (approximately $65,000,000 per year) to be made by the PVNGS project participants until July 1, 2004. Under the PVNGS Restructuring Plan, the delivered cost of energy produced by PVNGS is expected to decrease significantly after July 1, 2004. The co -owners of PVNGS have created external accounts for the decommissioning of PVNGS at the end of its life. The amounts accumulated in the external accounts are reported to the co -owners annually or more frequently, if requested by any co-owner. The external accounts for decommissioning were approximately $106 million at June 30, 2002. Estimates of decommissioning costs are revised every three years. Based on the most recent estimate of decommissioning costs of an independent consultant delivered in 2002, SCPPA has advised the City that it estimates that SCPPA's share of the amount required for decommissioning of PVNGS is approximately 72% funded. Under the foregoing assumptions, an additional approximately $10.6 million would be required currently for SCPPA to fully fund, together with interest earnings, its share of decommissioning costs; the City's share of such amount would be $519,400. Generally, federal and state efforts to provide adequate interim and long-term storage facilities for low-level and high-level nuclear waste have proven unsuccessful to date. Currently, nuclear waste from PVNGS is either stored on -site or sent to outside disposal facilities. Although federal and state efforts continue with respect to such storage facilities, SCPPA has advised the City that it is not able to predict when sufficient facilities will exist to accommodate the long-term storage needs of PVNGS. Hoover Uprating Program. Through its membership in SCPPA, the City participates in the Hoover Uprating Project. The Hoover Uprating Project consists principally of the uprating of the capacity of 17 generating units at the hydroelectric power plant of the Hoover Dam, located approximately 25 miles from Las Vegas, Nevada. Modern insulation technology made it possible to 28 SFI 1317361v12 42379/276 "uprate" the nameplate capacity of existing generator. The City, as well as the Cities of Anaheim, Azusa, Banning, Burbank, Colton, Glendale, Pasadena and Riverside have obtained entitlements totaling approximately 127 MW of capacity and approximately 143,000 MWh of associated energy annually from the Hoover Uprating Project (of which the City's share is approximately 22 MW of capacity and 28,000 MWh of associated energy annually). In 1987, to reflect its entitlements, the City entered into a contract with the United States Bureau of Reclamation (the "Bureau") providing for the advancement of funds for the uprating and with the Western Area Power Administration for the purchase of power from the Hoover Uprating Project. The lower Colorado River has been included in a Critical Habitat Designated Area ("Habitat"), which required the Bureau of Reclamation (the "Bureau") to prepare and file with the United States Fish and Wildlife Service (the "Service") a Biological Assessment of the effect of its operations of the lower Colorado River on endangered species within the Critical Habitat Designated Area. The Service has issued a Biological Opinion regarding the Bureau's operations and will outline remedial actions to be taken to correct any adverse effects to endangered species. Such remedial actions could adversely affect the operation of the Hoover power plant, which would in turn adversely affect the Hoover customers. The Hoover customers, together with certain other parties, are working on a plan in cooperation with the Bureau and the Service to mitigate operational scenarios which would adversely affect the Hoover participants and the other parties. Generating Facilities The City owns five diesel generator units each with a net capacity of 3.5 MW. Total net capacity for the five units is 17.5 MW. One of the units is currently inoperable. The other four units are currently used only for emergency purposes. These units operate very few hours per year with an operational restriction of 199 hours each per year. The diesel generating units are located at the City's existing Station A generation site. The site also contains the H. Gonzales Generating Station consisting of two small gas turbine units each with a net capacity of 5.5 MW. The two units are used for peaking purposes and are not expected to be used more than 500 hours per year. Each of the units are restricted to run on natural gas for no more than six hours per day or on diesel fuel for no more than five hours per day. The Project will add 134 MW of combined cycle combustion turbine generating capacity through the addition of two gas -fired combustion turbine generators and one steam turbine generator at the site. See "THE PROJECT" herein. Wholesale Power As a net purchaser of energy, the City engages in wholesale power transactions designed to minimize its net purchased power costs by capturing the maximum value its energy resources through wholesale power sales, when appropriate. Agreements With Edison The City entered into an interconnection service agreement with Edison in 1997 (the "Laguna Bell — Vernon Interconnection Service Agreement") which provides the City with firm bi-directional transmission service between Edison's Laguna Bell 220 kV Interconnection Point and the City's facilities. The City's Electric System is dependent on the Edison transmission lines and the Laguna Bell Substation to reach the ISO controlled grid. Currently there are five 66 kV transmission lines between the City limits and the Laguna Bell Substation. The agreement provides for all power schedules to be scheduled through the ISO. 29 SM 1317361v12 42379/276 Transmission Resources California Independent System Operator. Pursuant to AB 1890 (see "DEVELOPMENTS IN THE ENERGY MARKETS "), the ISO assumed the operational control of the PG&E/Edison/SDG&E transmission systems on March 31, 1998 and became the Control Area Operator in the PG&E/Edison/SDG&E service territories. The three IOUs and the City, as well as several other municipal utilities, have signed "Utility Distribution Company" agreements with the ISO. This agreement provides the relationship between the Control Area Operator, and the utility responsible for transmitting energy to the load. Effective January 1, 2001, the City became the first municipal utility to turn over operational control of its transmission entitlements to the ISO thereby becoming a Participating Transmission Owner in the ISO. In exchange for the transfer of control to the ISO of its transmission facilities and certain contractual transmission rights, the City is entitled to receive, for a period of ten years, firm transmission rights commensurate with the transmission facilities and transmission rights, the operational control of which it turned over to the ISO. As a Participating Transmission Owner in the ISO, the City continues to own its transmission facilities and to be bound by its contractual arrangements. The ISO provides to the City (as well as other Participating Transmission Owners, including the IOUs) access to the ISO Controlled Grid; however, the ISO maintains operational control for the benefit of all market participants by providing non- discriminatory transmission access, congestion management, grid security, and control area services. The City acts as Scheduling Coordinator for all of its load though the ISO and for all costs associated with serving its load. The City is a part owner of several transmission projects which are described below. Operational control of the City's interests in these facilities have been transferred to the ISO. These transmission rights are made available by the ISO to customers as transmission services on the ISO Controlled Grid. The City is recompensed for use of its transmission facilities through FERC-approved ISO tariff rates. Currently, the ISO tariff transmission rate (referred to as the "transmission access charge" or "TAC" rate) is established based in part upon the TRRs of the Participating Transmission Owners in Vernon's TAC Area (a regional area designated in the California ISO's transmission tariff and corresponding to the control area of Southern California Edison), which is the East/Central TAC area, and in part upon the TRRs of all Participating Transmission Owners. Each Participating Transmission Owner's entitlement to portions of ISO rates collected by the ISO for transmission services is thus largely determined by that Participating Transmission Owner's TRR relative to the TRRs of other Participating Transmission Owners, particularly those Participating Transmission Owners in the same TAC area as the Participating Transmission Owner. The formula for compensation to the City for the ISO's use of the City transmission facilities contains certain caps applicable for the period ending December 31, 2010 that could limit the City's collection of its full TRR from the ISO if additional entities become Participating Transmission Owners. The FERC orders that established this rate and compensation methodology are not filed, and certain issues in the docket in which they were issued have been set for hearing by FERC and are presently before an Administrative Law Judge. Among other things, the caps on TRR recovery described above will likely be one of the subjects of this litigation. The City cannot predict what the ultimate outcome or impact of this litigation will be. Mead -Phoenix Transmission Project. The Mead -Phoenix Transmission Project consists of a 256-mile, 500-kV AC transmission line that extends between a southern terminus at the existing Westwing Substation (in the vicinity of Phoenix, Arizona) and a northern terminus at Marketplace Substation, a substation located approximately 17 miles southwest of Boulder City, Nevada. The line is looped through the new 500-kV switchyard constructed in the existing Mead Substation in southern 30 SF1 1317361v12 42379/276 Nevada with a transfer capability of 1,300 MW. By connecting to Marketplace Substation, the Mead - Phoenix Transmission Project interconnects with the Mead-Adelanto Transmission Project and with the existing McCullough Substation. The Mead -Phoenix Transmission Project is comprised of three project components. The City has executed an ownership agreement providing it with an 2.1538% member - related ownership share in the Westwing-Mead project component, a 3.7934% member -related ownership share in the Mead Substation project component, and a 4.0497% member -related ownership share in the Mead -Marketplace project component. Other owners of the line are SCPPA, Arizona Public Service Company,' M-S-R Public Power Agency ("M-S-R") and the Salt River Project Agricultural Improvement and Power District ("Salt River Project"). The construction costs for the project were approximately $230 million. The commercial operation date for the project was April 15, 1996. The City paid for its share of the costs of the Mead -Phoenix Project from revenues of the Electric System. Mead Adelanto Transmission Project. The Mead-Adelanto Transmission Project, which was undertaken in connection with the Mead -Phoenix Transmission Project, consists of a 202-mile, 500-kV AC transmission line that extends between a southwest terminus at the existing Adelanto Substation in southern California and a northeast terminus at Marketplace Substation, a substation located approximately 17 miles southwest of Boulder City, Nevada. By connecting to Marketplace Substation, the line interconnects with the Mead -Phoenix Transmission Project and the Mead-Adelanto Transmission Project interconnects with the existing McCullough Substation in southern Nevada. The line has a transfer capability of 1,200 MW. SCPPA has executed an ownership agreement providing it with a total of a 67.9167% member -related ownership share in the project. The other owners of the line are M-S-R and the City. The construction costs for the project were approximately $204 million. The commercial operation date for the project was April 15, 1996, which coincided with the completion of the Mead -Phoenix Transmission Project. The City paid for its share of costs of the Mead-Adelanto Project from revenues of the Electric System. California -Oregon Transmission Project. The California -Oregon Transmission Project ("COTP") is a 339-mile long, 1,600 MW, 500 kilovolt ("kV") alternating current ("AC") transmission project between southern Oregon and central California. The COTP was placed in service on March 24, 1993, at a cost of approximately $430 million. The COTP is owned and operated by the Transmission Agency of Northern California (79.3022%), the City (7.54970/o), Western (9.37500/o), the City of Shasta Lake (1.58560/o), two California districts (0.1250%) and PG&E (2.0625%) (referred to herein as the "COTP Participants") pursuant to the terms of an Interim Participation Agreement, executed as of September 30, 1991 (the "Interim Participation Agreement"), among the COTP Participants. Under the Interim Participation Agreement, each COTP Participant is granted a percentage entitlement in Project transfer capability ("Entitlements") and was required to provide a percentage of the costs of the Project and betterments thereto. The City paid for its share of the costs of the COTP from revenues of the Electric System. The Interim Participation Agreement provides for a management committee (the "Management Committee") to provide for governance of the Project. Each COTP Participant has representation on the Management Committee. All actions or decisions by the Management Committee are required to be made by agreement of COW Participants having Entitlements aggregating at least 75%. The purpose of the Management Committee is to secure managerial and policy direction, cooperation and interchange of information, provide consultation among the COTP Participants in connection with the Project and to oversee and approve all project work on behalf of the COTP Participants. To utilize the full transfer capability of the COTP on a firm basis and maximize the benefits of the line, the COTP must be operated on a coordinated basis with the Pacific AC intertie ("PACI'), a two line system which, like the COTP, connects California utilities with those in the Pacific Northwest. The 31 SF1 131736lvl2 42379/276 three -line system, collectively referred to as the California -Oregon Interconnection ("COI'), was operated by PG&E, acting as the control area operator, under a Coordinated Operations Agreement ("COX), dated as of , among the COTP Participants and the owners of the PACI, and a FERC conforms rate schedule, which cos to FERC Opinion No. 389, issued May 26, 1994 and Opinion No. 389A, issued November 16, 1998. Under operating instructions designed to implement the COA, the ISO began operating the PACI on March 31, 1998. On September 3, 1992, the City entered into a transmission service exchange agreement with PG&E (the "Vernon/PG&E Exchange Agreement") pursuant to which PG&E provides the City with transmission service from its entitlement in a 500 kV direct current transmission line entitlement (the "DC Line") between northern Oregon and southern California in exchange for the use by PG&E of the City's share of the COTP. The Vernon/PG&E Exchange Agreement remains in effect for 50 years, subject to certain priortermination rights, including: (i) termination in 2007 (upon one year's prior notice) by PG&E if PG&E has not retained at least a 659 MW transmission entitlement in the DC line after such time, (ii) termination in 2007 by the City if arrangements entered into by PG&E for operation of the DC line are such as to reduce the transmission capability thereof, (iii) if either the COT? or DC Line facilities are retired, (iv) termination upon five years' advance notice in the event the City elects to participate in an alternate project that provides the City with transmission capability between the southern terminus of the COTP and the City's system, and (v) termination (after compliance with certain procedures) in the event that an action by one of the parties or third parties has so affected the operation of the COTP or the DC Line as to reduce the transmission capability to the City or PG&E. Transfer of operational control of the City's COTP interest to the ISO is subject to the terms of the Vernon/PG&E Exchange Agreement. Sierra Pacific Power ("Sierra Pacific") has constructed a 345 kV transmission line from the Reno, Nevada area to Alturas, California (the "Alturas Intertie Project"). The Alturas Intertie Project interconnects with the Bonneville Power Administration system in California. Western Systems Coordinating Council has given the Alturas Intertie Project a 300-MW non -simultaneous transfer capability rating. However, the simultaneous operation of the Alturas Intertie Project with the COI could potentially reduce the COI delivery capability on a MW for MW basis, thereby directly impacting the interests of the COTP Owners. Sierra Pacific has filed an Alturas Intertie Project Interconnection Agreement and an Operating and Scheduling Agreement for the Alturas Intertie Project, which have been accepted by FERC. Pursuant to the terms of the Vernon/PG&E Exchange Agreement, in the event of any changes in the transmission capability of the COTP (e.g., as a result of a reduction in delivery capability), the City's transmission service exchange rights from PG&E under the Vernon/PG&E Exchange Agreement may be subject to adjustment if determined appropriate by the City and PG&E. Transmission Services for Third Party Generators The City has entered into firm transmission service agreements with three generators (98 MW total) located within the City which permits the generators to transmit and sell energy from the facilities on the ISO Controlled Grid. All three of the transmission service agreements will terminate by December 31, 2003. Capital Requirements In addition to the Project, the Utilities Department expects capital requirements for the Electric System for the five Fiscal Years 2002-03 through 2006-07 to aggregate approximately $22.0 million, exclusive of the Project. The capital requirements are for the expansion of distribution facilities, substation upgrades, switch gear improvements, transformer improvements, generation facility equipment purchases and other electric system improvements. It is expected that these requirements will 32 SF1 1317361v12 42379/276 be funded from Electric System revenues and reserves, although the City may seek reimbursement for the proceeds of future tax-exempt financings. The following table lists the expected annual capital requirements: Capital Requirements Fiscal Year (in thousands) 2002-03..................................... $6,180 2003-04..................................... 2,920 2004-05..................................... 5,185 2005-06..................................... 4,351 2006-07..................................... 3,368 Source: City of Vernon. Customers, Retail Energy Sales, Revenues and Demand The average number of customers, retail kWh sales and revenues derived from retail sales, by classification of service, and peak demand during the past five Fiscal Years, are listed below. 33 SF1 1317361v12 42379/276 CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND (Fiscal Years Ended June 30) Number of Customers: Residential Commercial Industrial Other Total Customers Kilowatt -Hour Sales (in Millions): Residential Commercial Industrial Other Total kWh Retail Sales Revenues from Sale of Retail Energy ($000's): Residential Commercial Industrial Other Total Revenues from Sale of Energy(') Peak Retail Demand (MW) 1998 1999 2000 2001 2002 27 27 27 27 27 1,026 993 1,002 1,015 1,026 829 862 856 869 870 142 144 146 148 145 2,024 2,026 2,031 2,059 2,068 0.1 0.1 0.1 0.1 0.1 247.8 166.5 200.0 235.3 231.0 884.7 981.0 964.1 926.3 869.2 9.6 13.6 9.7 10.2 10.5 1,142.2 1,161.2 1,173.9 1,171.9 1,110.8 $ 3 $ 3 $ 3 $ 5 $ 6 13,868 9,292 11,044 16,162 18,445 39,836 44,779 45,390 54,399 61,171 830 982 1,232 915 1,076 $54,537 $55,056 $57,669 $71,481 $80,698 183.9 191.4 194.8 195.8 184.1 "'Excludes 2.85% AB 1890 public benefit surcharge pursuant to Section 385 of the California Public Utilities Code. Source: City of Vernon Largest Electric Customers The City's single largest electric customer accounted for less than 10% of the City's energy sales for the Fiscal Year ended June 30, 2002. The City's 10 largest electric customers, accounted for approximately 37% of the City's energy sales for the Fiscal Year ended June 30, 2002, and the City's 25 largest electric customers accounted for approximately 51 % of the City's energy sales for the Fiscal Year ended June 30, 2002. The table below sets forth the City's ten largest electric customers (in alphabetical order) as of Fiscal Year ended June 30, 2002. 34 SF1 1317361v12 42379/276 CITY OF VERNON ELECTRIC SYSTEM TEN LARGEST CUSTOMERS (In Alphabetical Order) Fiscal Year Ended June 30, 2002 Business Name Clougherty Packing/Farmer John Container Corp. of America/Jefferson Smurfit Exide/GNB Batteries Kal Kan Foods NI Industries/Norris Owens Brockway/Owens Illinois PABCO Paper Products Pacific Cold Storage Saint-Gobain Containers/Ball Foster Service Packing (United Food Group) Electric Rates and Average Billing Price In Vernon Since June 1, 1944 October 26, 1967 June 10, 1964 November 7, 1967 November 7, 1946 January 6, 1944 April 15, 1957 July 1, 1974 April 21, 1936 April 24, 1974 Type of Business Meat Packing Plants Paperboard Mills Primary Batteries, Dry And Wet Wet Corn Milling Household Appliances Glass Containers Paperboard Boxes Refrigerated Warehousing and Storage Glass Containers Meat Packing Plants Electric rates are established by the City Council. Retail electric rates are not subject to regulation by the CPUC or by any other state agency. See "RATE REGULATION" herein. Although its retail rates are not subject to approval by any federal agency, the City is subject to certain ratemaking provisions of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA"). The City believes that it is operating in compliance with PURPA. The current electric rates were approved by the City Council and became effective on May 1, 2001.. The City provides no free electric service. The City's rates include a 3% charge for payment in - lieu of tax and franchise fees to the City by the Electric System. Pursuant to California Assembly Bill 1890, on January 1, 1998, the City instituted a 2.85% public benefits surcharge. The Electric System's rates have been changed three times since January 1, 1998. The most recent increase occurred on May 1, 2001 and was a 19% average increase for electric customers. The following table sets forth the percentage change in rates. PERCENTAGE CHANGE IN ELECTRIC RATES Average Percent Change Effective Date in Rate July 1, 2000 October 1, 2000 May 1, 2001 Source: City of Vernon 35 SFl 1317361v12 42379/276 16.00% 9.75 19.00 The table below sets forth the average billing price per kilowatt-hour of the City's various customer classes for the period indicated. Average Billing Price (Cents per Kilowatt -Hour) Fiscal Year Ended June 30 1998 2000 2001 2002 Residential 3.00 _1999 3.00 3.00 3.77 4.82 Commercial 5.60 5.58 5.52 6.87 7.99 Industrial 4.50 4.56 4.71 5.87 7.04 Other 8.65 7.22 12.69 8.97 10.26 Average 4.77 4.74 4.91 6.10 7.26 Source: City of Vernon All electric bills are due and payable on the date of billing and become delinquent 20 days thereafter. If such bills remain unpaid on the 35th day after billing, all electric services are subject to termination until all fees, charges, penalties and the entire delinquent balance have been paid. The City considers its write-offs for uncollectible accounts to be low by electric utility industry standards for urban areas. The write-offs for uncollectible accounts have averaged less than 0.07% annually over the last five Fiscal Years. Fiscal Year Ended June 30 1998 1999 2000 2001 2002 Source: City of Vernon Uncollectible Percent of Revenues Gross Billings $36,537 0.067% 21,973 0.040 27,834 0.048 90,567 0.126 69,397 0.086 Comparison of Selected Monthly Electric Bills The following tables show a comparison of selected monthly electric bills for regional utilities as of September 2002. 36 SF1 1317361v12 42379/276 Comparison of Selected Monthly Electric Bills September 2002 Residential 500 kWh/500 kW 1,000 kWh/1,000 kW Edison ........................... $ 68.23 $ 178.45 SDG&E.......................... 75.60 165.08 Burbank ......................... 63.43 134.38 Glendale ........................ 65.09 138.74 Pasadena ........................ 65.57 128.32 LADWP ......................... 52.18 104.05 Anaheim ........................ 50.71 110.47 Riverside ........................ 54.54 115.82 Azusa ............................. 47.71 101.34 Banning .......................... 54.34 129.59 Colton ............................ 51.13 106.43 Imperial Irrigation District 44.75 85.90 Vernon ........................... 24.80 48.00 Commercial 250,000 kWh/350 kW 50,000 kWh/150 kW 10,000 kWh/40 kW 2,000 kWh/2,000 kW Edison ............................... $ 36,766.01 $ 8,080.75 $ 1,780.50 $ 410.32 PG&E ................................. 33,373.92 8,004.75 1,715.25 397.75 SDG&E.............................. 30,662.08 7,437.71 1,683.61 368.12 Burbank .............................. 28,755.78 6,875.44 1,366.74 251.13 Glendale ............................ 25,193.00 6,753.15 1,412.13 307.23 Pasadena ............................. 24,227.04 5,479.08 1,197.38 236.49 LADWP ............................. 18,401.85 5,073.47 1,196.70 209.52 Anaheim ............................. 19,807.10 5,008.13 1,067.09 245.69 Riverside ............................ 21,277.20 5,442.31 1,165.60 219.05 Azusa ................................. 19,937.47 4,397.50 1,017.50 221.25 Banning .............................. 26,709.00 5,709.00 1,194.00 265.00 Colton ................................ 22,749.25 4,996.82 1,145.59 255.56 Imperial Irrigation District... 18,412.50 3,902.50 808.00 181.00 Vernon ............................... 19,274.81 4,812.87 1,065.83 233.79 7,000,000 kWh/10,000 kW 2,000,000 kWh/5,000 kW 300,000 kWh/1,00 Edison ................................. $ 919,432.91 $ 366,168.60 $ 61,751.45 SDG&E................................ 737,610.23 277,216.76 45,581.06 Burbank ................................ - - 241,718.94 38,108.58 Glendale .............................. 684,053.00 227,683.00 38,603.70 Pasadena ............................... 648,541.47 199,661.47 33,035.19 LADWP................................ 498,058.80 176,874.80 30,326.04 Anaheim ............................... - - 210,540.80 37,499.76 Riverside .............................. - - 187,266.71 31,052.99 Azusa ................................... - - - - 29,379.20 Banning ................................ - - - - 34,659.00 Colton ................................... 631,665.00 203,290.00 33,366.00 Imperial Irrigation District..... 516,100.00 153,350.00 23,690.00 Vernon ................................. 514,467.32 173,316.96 29,194.71 Source: Southern California Public Power Authority. Indebtedness Joint Power Agency Obligations As previously discussed, the City participates in SCPPA's interest in PVNG's. Obligations of the City under its agreement with SCPPA constitute Operation and Maintenance Expenses of the Electric System the City payable prior to any of the payments required to 37 SF1 1317361v12 42379/276 be made on the 2003 Bonds and any Parity Obligations. Agreements between the City and SCPPA are on a "take -or -pay" basis, which requires payments to be made whether or not applicable projects are operating or operable, or whether the output from such projects is suspended, interfered with, reduced, curtailed or terminated in whole or in part. Electric System Revenue Obligations. The City has no outstanding direct indebtedness payable from Electric System revenues. Summary of Operating Results A summary of operating results for the City's Electric System for the five Fiscal Years ended June 30, 1998 through 2002 is shown in the following table. The financial results for Fiscal Years ended June 30, 1998 through 2002 were prepared by the City on the basis of its audited annual financial reports. CITY OF VERNON ELECTRIC SYSTEM SUMMARY OF OPERATING RESULTS Fiscal Year Ended June 30, 1998 1999 2000 2001 2002 Operating Revenues: Electric Sales (1) $ 55,851,094 $ 54,628,629 $ 57,652,154 $ 96,878,328 $ 99,579,546 Charges for Services 4,902 2,172 5,678 - Other 1,864,677 9,267,361 5,257,142 - - Total Operating Revenues $ 57,720,673 $ 63,898,162 $ 62,914,974 $ 969878,328 $ 99,579,546 Operating Expenses: Cost of Sales (2) $ 41,392,623 $ 47,726,808 $ 62,994,545 $ 97,387,167 $ 100,602,170 In Lieu of Franchise Tax 1,675,533 1,715,533 1,729,560 2,202,633 2,455,094 General and Administrative 2,050,497 1,784,369 1,892,267 - - Depreciation 2,519,874 2,501,394 2,602,807 2,798,753 3,203,832 Total Operating Expenses $ 479638,527 $ 53,728,104 $ 69,219,179 $102,388,553 $ 106,261,096 Operating Income (Loss) 10,082,146 10,170,058 (6,304,205) (5,510,225) (6,681,550) Nonoperating Revenues (Expenses): Investment Income $ 7,953,302 $ 1,617,947 $ 2,290,005 $ 3,764,824 $ 8,938,625 Net Increase (Decrease) in Fair Value of Investments - (10,810,981) 4,484,089 5,036,815 521,451 Interest Expense �3� (220,408) (201,909) (197,767) (95,796) - Total Nonoperating Revenue, Net $ 7,732,894 $ (9,394,943) $ 6,576,327 $ 8,705,843 $ 9,460,076 Income (Loss) Before Operating Transfers $ 17,815,040 $ 775,115 $ 272,122 $ 3,195,618 $ 2,778,526 Operating Transfers(4) - $ (6,177,000) $ (5,000,000) $ (7,612,243) $ (8,503,702) Net Income (Loss) $ 17,815,040 $ (5,401,885) $ (4,727,878) $ (4,416,625) $ (5,725,176) (1) Increases in 2000-01 and 2001-02 primarily reflect implementation of three rate increases in Fiscal Year 2000-0 1, as well as increased wholesale sales and increased revenues from transmission services. (2) Increases in 2000-01 and 2001-02 primarily reflect increased costs of natural gas and short-term energy purchases due to market conditions. (3) Represents interest expense in connection with certificates of participation issued by the Independent Cities Lease Finance Authority for the purpose of financing the purchase of gas turbines and the third floor addition to City Hall for the Utilities Department, which obligations were retired in September 2000. (4) See ".Management's Discussion of Operating Results" below. Includes interest income on unrestricted funds of the electric utility which are transferred to the City's General Fund and for Fiscal Years 1997-98 through 2000-01, the electric utility's proportionate share of the City's overhead and operating expenses attributable to the Electric System. Source: City of Vernon. Management's Discussion of Operating Results. The City experienced an operating loss in each of the last three fiscal years primarily as a result of increased costs of purchased power due to 38 SF1 1317361v12 42379/276 market conditions. The significant increase in Operating Expenses in fiscal years 2000-01 and 2001-02 also reflect increased costs of ancillary services and a higher value of purchases related to wholesale transactions. The City's operating losses were offset by the City through the application of its Power Resource Cost Reduction Account (see "City's Operations Since Industry Restructuring" below) in order to mitigate rate increases adopted by the City over such time period. Over the three Fiscal Years 1997- 98 through 1999-2000, the City's electric sales revenue experienced an average annual increase of approximately 4.5% over that time period. Electric sales revenues increased dramatically in 2000-01 and 2001-02 as a result of the institution of three rate increases (see "Rates and Charges" above), and revenues received from transmission services provided through the ISO. For fiscal year 2001-02 revenue increased approximately 2.8% reflecting the full impact of the rate increases for an entire year. Energy sales for 2001-02 were lower in part due to the City's program to encourage energy conservation especially during the first quarter of fiscal year 2001-02 where the City provided nearly $1 million in credits for customers who reduced energy usage by more than 10%. Sales have been increasing since fiscal year 2001-02 even though the City has had an approximately 50% rate increase over the past several years. The City continues to attract new loads as a result of the City's continued competitive rates when compared to neighboring utilities. The electric utility makes annual payments to the City of Vernon's General Fund in -lieu of tax and franchise fees (approximately $2.0 million per year over the last five Fiscal Years), in addition to paying its proportionate share of the City's general and administrative overhead expenses (included in Operating Transfers in the table) attributable to the Electric System. These amounts constitute Operation and Maintenance Expenses of the Electric System. Pursuant to resolution of the City Council, the payment in -lieu of tax and franchise fees is established at 3% of gross retail rate revenues. This amount is imbedded in the electric rate. [Beginning in Fiscal Year 2001-02, the general and administrative expenses attributable to the Electric System is included in the Operation and Maintenance Expenses.] Earnings on unrestricted electric utility funds are also transferred to the City's General Fund. As of June 30, 2002, the balance in the unrestricted electric utility funds was $ . Upon reimbursement of Project -related expenditures from 2003 Bond proceeds, the balance in the unrestricted Electric System Funds will be approximately $ million and in the Power Cost Reduction Account will be approximately $ million. City's Operations Since Industry Restructuring Since the onset of deregulation efforts in California, the City Council of the City has taken actions designed to assure the Utilities Department would remain competitive in an environment of increased competition in the electric utility industry. In 1996, the City Council created a Power Resource Cost Reduction Account for the purpose of retiring the costs of the City's power resource investments or assets which could become "stranded" as a result of competitive market forces in the electric utility industry. As noted above, as of June 30, 2002, there was approximately $35.6 million on deposit in the Power Resource Cost Reduction Account to reduce power resource costs of the Electric System. In 1997, the City Council approved various agreements (see "Agreements With Edison" above) which significantly changed the relationship between Edison and the City. The Vernon/Edison 1997 Restructuring Agreement terminated Edison's obligation to provide power and ancillary services and required the City to assume responsibility for procuring all of its power and ancillary services needs from its own resources or from the market as required by the ISO Tariff. The City historically maintained a net short position on its load/resource balance. The City accomplished its energy delivery obligations to its customers primarily through the purchase and sale of energy and related products and services in the short term wholesale electricity market. This short 39 SF1 1317361v12 42379/276 position has historically been to the City's competitive advantage. With low cost energy and low distribution costs, the City established a history of having one of the lowest average retail rates among California electric utilities. Due to competitive pressures, the City has begun to participate in different markets on a variety of transactions with associated risks to purchase low cost, reliable energy. In order to participate in the ISO and the PX markets, the City became a Scheduling Coordinator with the ISO. The City adopted a resource procurement plan and credit risk management policy that provided the framework for the City to plan, execute, and control the management of a variety of risks inherent in power resource procurement. The policy specifies that the City will participate in the marketplace for those commodities and financial markets to which it has a physical market exposure and will trade only within pre -defined risk parameters approved by City Council. Projected Operating Results and Debt Service Coverage Set forth below are the City's projections of the operating results of its Electric System for the Fiscal Years ending June 30, 2003 through June 30, 2009, as prepared by the Utilities Department. The projected operating results are based on the City's load forecasts, its estimated costs of power and other operating and non -operating expenses. Such other operating and non -operating expenses have been forecast taking into consideration the City's Electric System's historical costs and trends, projected load growth and inflation. Certain assumptions have been made by the Utilities Department in the development of the forecasts. Among the assumptions made by the City are the following: 1. No electric service rate increases are assumed to be instituted during the projection period, fiscal years 2003 through 2009. 2. Energy sales are projected to increase at a rate of 1.3% each year after 2003. Peak demand is projected to grow at a rate of 1.6% per year. 3. Operation and Maintenance Expenses (excluding power supply, transmission and depreciation expenses) will increase at a rate of 2.6% per year. 4. Operation and Maintenance Expenses of the Project will be as estimated in the Consulting Engineer's Report attached as Exhibit A hereto. 5. Wholesale power and ancillary services sales in fiscal years 2005 and 2006 will be realized from the sale of excess energy and capacity from the City's resources available after taking into account existing power purchase contracts. Such power is to be sold at the prices projected by the City based upon CEC projections adjusted by the City to account for certain variables deemed appropriate by the City. If the City chooses to back -down its generation from the plant in order to reduce its excess capacity and energy, the resulting decrease in wholesale power sales is estimated to be $22,771,572 for fiscal year 2005 and $12,143,302 for fiscal year 2006. Correspondingly, the resulting decrease in Operating and Maintenance Expenses for the forgone electricity generation is estimated to be $17,067,742 for fiscal year 2005 and $7,485,869 for fiscal year 2006. 6. The average investment rate on funds of the Electric System is estimated to be 4.5%. 7. Average net interest cost (including annual costs of the Letter of Credit in connection with the 2003A Bonds) on the 2003 Bonds is estimated to be 4.6% per annum. 40 SF1 131736lv12 42379/276 While the City believes its assumptions are reasonable, there can be no assurance that the assumed conditions will in fact occur. The City's projections may be affected (favorably or unfavorably) by unforeseen future events. Therefore, the results projected below cannot be assured. 41 SFI 1317361v12 42379/276 Operating Revenues: Retail power sales Wholesale power and ancillary services sales(') Transmission Revenue Requirement(2) Other(') Total Operating Revenue Operating Expenses: Cost of Sales(4) In lieu of franchise tax0) General and Administrative Total Operating Expenses Operating Income Nonoperating Revenues (Expemes): hrvestment revenue: Interest income —Unrestricted Account(') htterest income—PRCRA AccountO) Total Nonoperating Revenues/(Expenses) Net Revenues CITY OF VERNON ELECTRIC SYSTEM Pro —Forma Operating Results Projections Fiscal Years 2002-03 through 2008-09 Fiscal Year Ending June 30, 2003 2004 2005 2006 2007 2008 2009 $86,055,499 $ 88,639,720 $ 90,210,272 S 91,396,067 $ 92,224,755 $ 92,830,272 S 93,450,751 985,884 702,079 24,137,130 13,565,218 11,271,363 11,685,720 11,064,817 10, 236, 639 10, 216,178 10, 216,178 10, 216,178 10, 216,178 10, 216,178 10, 216,178 1,281,527 890,000 540,000 540,000 380,000 60,000 60,000 $98,559,549 $100,447,976 $125,103,580 5115,7 77,464 $114,092,295 5114,7 22,170 $114,791,746 $73,332,456 S 78,128,402 $ 89,777,301 $ 85,933,608 S 80,892,878 $ 85,801,184 $ 91,970,167 2,470,700 2,659,192 2,706,308 2,741,882 2,766,743 2,784,908 2,803,523 6,757,554 6,892,705 7,030,559 7,171,170 7,314,594 7,460,886 7,610,103 $82,560,710 $ 87,680,299 $ 99,514,168 $ 95,8 66,660 $ 90,974,215 S 96,046,978 $102,383,792 $15,998,839 $ 12,767,678 $ 25,589,412 $ 19,870,804 $ 23,118,081 $ 18,745,192 $ 12,407,954 $912,776 $ 5,415,224 $ 4,038,574 $ 4,582,655 $ 4,907,658 $ 5,424,050 $ 5,748,476 1,552,500 1,622,363 1,695,369 1,771,660 1,851,385 1,934,697 2,021,759 $ 2,465,276 $ 7,037,587 $ 5,7 33,942 S 6,3 44,315 $ 6,759,043 S 7,3 88,748 S 7,770,235 $18,464,115 $ 19,805,265 $ 31,323,354 $ 26,225,119 S 29,977,124 $ 26,103,940 $ 20,178,189 Debt Service() Debt Service Coverage Ratio(9) N/A N/A (1) Represents sales ofsurplus power from all resources into spot market. (2) Receipts for use of transmission assets. See "THE ELECTRIC SYSTEM — Transmission Resources" herein. (3) Mainly represents Edison payments for certain ancillary services cost pursuant to the Edison - Vernon 1997 Restructuring Agreement and revenues from transmission service provided. (4) Purchased power, fuel, tax and franchise payments and other operating expenses. (5) 3% of gross sales to reflect payments to the General Fund for payment in -lieu of tax and franchise fees. (6) General and administrative includes Electric Utilities, proportionate share of City's overhead and operating expenses which covenants are paid to the City's General Fund. (7) Although included for coverage purposes, earnings on unrestricted electric system funds are transferred to the City General Fund annually. (8) The Power Resource Cost Reduction Account is maintained to reduce power resource costs of the electric utility. (9) Assumes average annual interest costs of 3.5% per annum on the 2003 Bonds. No future revenue bonds are anticipated to be issued during the projection period. (10) Net Revenues divided by Debt Service. CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS California Constitution Articles XIIIA and XIIIB Article XIIIA of the California Constitution limits the taxing powers of California public agencies. Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed one percent of the "full cash value" of the property, and effectively prohibits the levying of any other ad property tax except for taxes above that level required to pay debt service on voter -approved general obligation bonds. "Full cash value" is defined as "the County Assessor's valuation of real property as shown on the 1975-76 tax bill under `full cash value' or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." The "full cash value" is subject to annual adjustment to reflect inflation at a rate not to exceed two percent or a reduction in the consumer price index or comparable local data, or declining property value caused by damage, destruction or other factors. The foregoing limitation does not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters before July 1, 1978 or any bonded indebtedness for the acquisition or improvement of real property approved by two-thirds of the votes cast by the voters voting on the proposition. 42 SF1 1317361v12 42379/276 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 consist 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. The City is of the opinion that the electric service and use charges imposed by the City do not exceed the costs the City reasonably bears in providing the electric service. In general terms, the "appropriations limit" is to be based on certain 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. Constitutional Changes in California Proposition 218, a State ballot initiative known as the "Right to Vote on Taxes Act," was approved by the voters of the State of California on November 5, 1996. Proposition 218 added Articles XIIIC and XIIID to the State Constitution. Article XIIID creates additional requirements for the imposition by most local governments (including the City) of general taxes, special taxes, assessments and "property -related" fees and charges. Article XIIID explicitly exempts fees for the provision of electric service from the provisions of such article. Article XIIIC expressly extends the people's initiative power to reduce or repeal previously -authorized local taxes, assessments, and fees and charges. Since the terms "fees and charges" are not defined in Article XIIIC, the initiative powers may affect more than "property -related" fees and charges as defined in Article XIIID. Additionally, in the case of Bock v. City Council of Lompoc, 109 Cal.App.3d 43 (1980), the Court of Appeal determined that electric rate ordinances are not subject to the same constitutional restrictions that are applied to the use of the initiative process for tax measures. However, the City believes that even if the electric rates of the City are subject to the initiative power, under Article XIIIC or otherwise, the electorate of the City would be precluded from reducing electric rates and charges in a manner adversely affecting the payment of the 2003 Bonds by virtue of the "impairments clause" of the United States and California Constitutions. Future Initiatives Article XIIIA, Article XIIIB, and Articles XIIIC and XIIID, were each adopted pursuant to measures qualified for the ballot pursuant to California's constitutional initiative process. From time to time other initiative measures could be adopted by California voters. The adoption of any such initiatives might place limitations on the ability of the City to increase revenues or to increase appropriations. ABSENCE OF LITIGATION There is no controversy or litigation of any nature now pending or threatened restraining or enjoining the issuance of the 2003 Bonds or in any way contesting or affecting the validity of the 2003 Bonds or any proceedings of the City taken with respect to the issuance or sale thereof. In addition, there is no litigation pending or threatened against the City which, in the opinion of the City Attorney, would materially adversely affect the Electric System, the financial condition of the City or the sources of payment for the 2003 Bonds. At any given time, including the present, there are certain other claims and disputes, including those currently in litigation, that arise in the normal course of the City's activities. Such matters could, if 43 SF1 1317361v12 42379/276 determined adversely to the City, affect expenditures by the City, and in some cases, its revenues. The City's management and the City Attorney are of the opinion that no pending actions are likely to have a material adverse effect on the City's ability to pay the 2003 Bonds when due. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP (`Bond Counsel"), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2003 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the 2003 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. In the further opinion of Bond Counsel, interest on the 2003 Bonds is exempt from present State of California personal income taxes. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix G hereto. The Code imposes various requirements that must be met in order for interest on the 2003 Bonds to be excluded from gross income for federal income tax purposes. The City made representations related to certain of these requirements and has covenanted to comply with certain of these requirements. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the 2003 Bonds being included in gross income for federal incomes tax purposes, possibly from the date of original execution and delivery of the 2003 Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after the date of issuance of the 2003 Bonds may adversely affect the value of, or the tax status of interest on the 2003 Bonds. Certain requirements and procedures contained or referred to in the 2003 Bonds, the Tax Certificate and other relevant documents may be changed and certain actions (including without limitation, redemption of 2003 Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any 2003 Bonds or the interest thereon if any such change occurs or actions is taken or omitted upon the advice or approval of bond counsel other than Orrick, Herrington & Sutcliffe LLP. Although Bond Counsel is of the opinion that interest on the 2003 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or dispositions of, or the accrual or receipt of the interest may otherwise affect a 2003 Bond Owner's federal or state tax liability. The nature and extent of these other taxes consequences will depend upon the particular tax status of the 2003 Bond Owner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. In addition, no assurance can be given that any future legislation, including amendments to the Code, if enacted into law, or changes in interpretation of the Code, will not cause the interest on the 2003 Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. Prospective purchasers of the 2003 Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Further, no assurance can be given that the introduction or enactment of any such future legislation, or any action of the Internal Revenue Service ("IRS"), including but not limited to 44 SF1 1317361vl2 42379/276 regulation, ruling, or selection of the 2003 Bonds for audit examination, or the course or result of any IRS examination of the 2003 Bonds, or obligations which present similar tax issues, will not affect the market price for the 2003 Bonds. APPROVAL OF LEGALITY The execution and delivery of the 2003 Bonds is subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Bond Counsel, substantially in the form set forth as Appendix G. Certain legal matters will be passed upon for the Underwriter by Sidley Austin Brown & Wood LLP, Los Angeles, California and for the City by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, and by the City Attorney of the City of Vernon. The Bank, Bank of America, N.A., and the Underwriter, Banc of America Securities LLC, are affiliates, both being subsidiaries of Bank of America Corporation. THE CONSULTING ENGINEER The City has engaged Navigant Consulting, Inc., the Consulting Engineer, to prepare the Consulting Engineer's Report for the purpose of this Official Statement. The Consulting Engineer's Report is attached as Appendix A and should be read in its entirety. The City has retained RMI Utility Services ("RMIUS"), which is a wholly owned subsidiary of Navigant Consulting, Inc., to maintain the City's electric utility distribution system. The City's agreement with RMIUS allows the City to utilize Navigant Consulting, Inc. staff for major system additions and other City projects. One Navigant Consulting, Inc. engineer designed modifications to the existing switchyard at the Project site that are necessary to interconnect the Project to the City's distribution system. Another Navigant Consulting, Inc. staff engineer is providing support to the City's Project Manager for the Project, including development of a Project filing system, review and comment on design documents submitted by contractors, review of operation and maintenance plans for the Project, and other general mechanical engineering related services as requested by the City. See the Consulting Engineer's Report attached hereto as Appendix A (including, but not limited to, the section entitled "INTRODUCTION") for additional information regarding the services provided to the City by the Consulting Engineer and its subsidiary. RATINGS Moody's and S&P are expected to assign the 2003A Bonds the short-term ratings of "P-1" and "A-1+", and the long-term ratings of "Aal" and "AA-," respectively, with the understanding that upon delivery of the 2003A Bonds, the Letter of Credit will be issued by the Bank. Moody's and S&P have assigned the 2003B Bonds the long-term ratings of "A2" and "BBB+", respectively. The ratings reflect only the respective views of the rating agencies and any explanation of the significance of such ratings may be obtained only from such rating agencies as follows: Moody's Investors Service, 99 Church Street, New York, New York 10007; and Standard & Poor's, 55 Water Street, New York, New York 10041. There is no assurance that the ratings will remain in effect for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies, or any of them, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal of any rating may have an adverse effect on the market price of the 2003 Bonds. 45 SF1 1317361v12 42379/276 UNDERWRITING The Underwriter has agreed, subject to certain conditions, to purchase the 2003A Bonds at a price of $ (representing the $ aggregate principal amount of the 2003B Bonds less $ Underwriter's discount) and the 2003B Bonds at a price of $ (representing the $ aggregate principal amount of the 2003A Bonds less $ net original issue discount and less $ Underwriters discount). Each Purchase Contract provides that the Underwriter will purchase all the 2003 Bonds of the Series purchased thereunder if any are purchased. The 2003 Bonds may be offered and sold by the Underwriter to certain dealers and others at prices lower than such public offering price stated on the cover page of this Official Statement, and such public offering price may be changed, from time to time, by the Underwriter. GENERAL PURPOSE FINANCIAL STATEMENTS The audited General Purpose Financial Statements of the City, as of June 30, 2002 and June 30, 2001, are included in Appendix B to this Official Statement. The General Purpose Financial Statements have been audited by Macias, Gini & Company LLP, Los Angeles, California, independent accountants (the "Independent Accountants") as stated in their reports appearing in Appendix B. The City has not requested nor did the City obtain permission from the Independent Accountants to include the audited financial statements for the Fiscal Years ended June 30, 2002 and June 30, 2001 as an appendix to this Official Statement. No review or investigation with respect to subsequent events has been undertaken in connection with such General Purpose Financial Statements by the Independent Accountants. The financial statements set forth in Appendix B include the City's General Fund and all other funds of the City, in addition to the Light and Power Department Fund through the operations of the Electric System are accounted. The financial statements relating to the Light and Power Fund are included in the Supplemental Combining Statements attached to the General Purpose Financial Statements. The 2003 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon any property of the City or any of its income or receipts except Net Revenues of the City's Electric System and the other funds pledged therefor pursuant to the Indenture. Neither the faith and credit nor the taxing power of the City, the State of California nor any public agency is pledged to the payment of the principal of and interest on the 2003 Bonds. 46 SF1 131736lvl2 42379/276 EXECUTION AND DELIVERY The execution and delivery of this Official Statement has been duly authorized by the City. CITY OF VERNON, CALIFORNIA Mayor 47 SF1 131736lv12 42379/276 APPENDIX A MALBURG GENERATING STATION PROJECT CONSULTING ENGINEER'S REPORT Prepared By Navig�ntTM CONSULTING, INC. NAVIGANT CONSULTING, INC. 3100 ZINFANDEL DRIVE, SUITE 600 RANCHO CORDOVA, CA 95670-6026 UNPUBLISHED WORK 0 FEBRUARY, 2003 INTRODUCTION Presented herein is the Consulting Engineer's Report ("Report") of Navigant Consulting, Inc. ("NCI") with respect to the plans of the City of Vernon, California, ("City") to develop, engineer, procure, construct, start up, fuel, operate and maintain the Malburg Generating Station, a new 134 megawatt combined -cycle natural gas -fired power generating plant and appurtenant facilities to be built on a site in the City ("Project"). The Project consists of two natural gas -fired combustion turbine generators (" CTGs"), two heat recovery steam generators ("HRSGs") each with supplemental duct firing and a catalytic reduction pollution control system, a steam turbine generator (" STG" ), a control and administrative building, a wet mechanical -draft cooling tower, a re -circulating water system, main step-up transformers and switchgerr at the existing Station A switchyard. The City expects that this Project will contribute to a portfolio of low-cost energy for City customers and additional capacity for the overall southern California region. NCI has been retained by the City to prepare this Report in support of a bond issue by the City for financing of the development, engineering, procurement and construction of the Project. This Report presents a summary of our relevant findings and conclusions concerning the Project through the date of this Report. This Report includes (i) an assessment of the reasonableness of the projected construction costs and construction schedule for the Project, (ii) an assessment of the power generation technology to be employed at the Project and if it is consistent with the availability levels for the Project that have been forecast by the City, (iii) a review of the reasonableness of the natural gas price forecast provided by the City and the availability and security of natural gas fuel, (iv) a review of the status of permitting for the Project, and (v) a summary of projected operating results. The City has not requested that NCI review the need for power from the Project, nor the price that the City may realize from sale of Project output to third parties, nor the adequacy of revenues to pay debt service on bonds to be issued by the City to finance construction of the Project. Finally, we have not been asked to evaluate any legal matters except in respect to the environmental permitting. NCI is a nationally recognized firm of management consultants, engineers, economists, and regulatory specialists headquartered in Chicago, Illinois, with offices throughout the United States, including a major office in Sacramento, California, that provides in-depth expertise on the power market in California and the western United States. NCI's Energy and Water Practice provides services to energy firms and public agencies, including but not limited to electric and gas utilities, power producers, fuel suppliers and power marketers. Typical services include power marketing analysis, transmission and distribution system planning, generation facilities evaluation, rate and pricing studies, environmental assessments, conservation and demand -side management (" DSM") program development and evaluation, strategic planning, marketing studies, and related services. NCI has been retained by the City to perform other services. RMI Utility Services (RMIUS), a wholly owned subsidiary of NCI, maintains the City's electric utility distribution system. Under a management contract, RMIUS directs a staff that includes a division manager, line foreman, two troubleshooters, six linemen, and clerical staff. RMIUS provides for the ability of the City to utilize NCI staff for major system additions and other work. One NCI engineer designed modifications to the existing switchyard at the Project site that are necessary to interconnect the Project to the City's distribution system. Another NCI staff engineer is providing support to the City's Project Manager for the Project, including development of a Project filing system, review and comment on design Page 2 of 34 documents submitted by contractors, review of operation and maintenance plans for the Project, and other general mechanical engineering -related services as requested by the City. The individuals performing these services are located in NCI offices (Austin and Vernon) distant from Sacramento where this Report was prepared. They did not perform any work related to this Report, and were not consulted by the NCI staff that prepared this Report. They did not develop any of the plans, designs, cost estimates or other documents that were reviewed by NCI Sacramento staff in preparation of this Report. THE PROJECT Power Generation The Project will be a 134-megawatt (MW) natural gas -fired power plant to be located on approximately 3.4 acres of land at 2715 East 50th Street in the City. The Project site has been an active electric generation and distribution station since 1933 and is known as Station A. Station A currently consists of the Vernon Substation 69 kilovolt (kV) Switchyard, the Johnson & Heinze Diesel Plant, the H. Gonzales Generating Station, and a control room. The Johnson & Heinze plant consists of five diesel -fueled reciprocating internal combustion generators, Units 1 through 5 rated at 3.5 MW each, which commenced operation in 1933. The H. Gonzales Generating Station consists of two natural gas -fired combustion turbine generators, Units 6 and 7 rated at 5.5 MW each, which commenced operation in 1988. Natural gas is brought to the site by pipeline, and diesel fuel is brought by tanker truck. Station A also contains a cooling tower, heat exchangers, and transmission towers. The Project will include two Alstom GTX100 natural gas -fired CTGs to be known as Malburg Units 1 and 2. Hot exhaust gases from the CTGs will be directed to parallel HRSGs. Steam from the HRSGs will be directed to a new STG known as Malburg Unit 3. The HRSGs will include duct burners to increase steam output and achieve higher levels of power output from the steam turbine in selected modes of operation. The CTGs will each be equipped with an evaporative inlet air cooler/filter to cool combustion turbine inlet air and achieve higher levels of power from the CTGs in selected modes of operation. The exhaust gases from each HRSG will be released to the atmosphere through a 110-foot high stack. Each CTG and the STG will be connected to separate electric generators. Each generator, rated at 13.2 kV, will be connected to the existing 66 kV bus at the Vernon Substation, located at Station A, through three separate 69kV generator step up transformers (GSUs). The Project will also include a new staff parking area, a control building, electrical equipment buildings, cooling tower, condenser, a gas metering and pressure regulating station, fuel gas compressor skid, water storage tank, water treatment and wastewater treatment facilities. There will also be pipelines for gas supply, water supply, and wastewater discharge. Air emission control technology employed at the Project will consist of dry low-NOx (" DLN" ) combustors in the CTGs, with a Selective Catalytic Reduction ("SCR") system in the HRSGs to achieve the Best Available Control Technology (" BACT")/Lowest Available Emission Rate (" LAER" ) requirements of the local air quality management district. This technology is designed to reduce emissions of oxides of nitrogen (" NOx" ), carbon monoxide ("CO") and volatile organic compound (" VOC") from the Project to 2 parts per million by dry volume (ppmvd) at 15% oxygen, 2 ppmvd and 1.2 ppmvd, respectively. Emissions of particulate matter less than 10 microns in diameter (" PM10" ) will be 3.89 pounds per hour (lb/hr) from each HRSG. Page 3 of 34 The power generated by the Project will be distributed through the existing Vernon Substation to retail electric customers of the City. The commercial operation date (COD) of the Project is expected to occur in September 2004. Fuel Interconnection The Project will be fueled entirely by pipeline quality natural gas. A new looped 10-inch diameter, 1,300-foot long natural gas pipeline will deliver natural gas to the Project site from the local natural gas distribution system of the City. The City system, in turn, is interconnected to line 765 at the Spence Street station of the Southern California Gas Company ("SoCal Gas"). While the SoCal Gas line is rated at a maximum allowable operating pressure (MAOP) of 720 psig, SoCal Gas will not guarantee the delivery pressure. The City expects the delivered gas pressure to the Project site will be between 275 and 400 pounds per square inch gauge (psig). During times of the year when the delivery pressures are less than the required minimum CTG inlet pressure requirement of 378 psig, three new 50 percent natural gas compressors will be used to boost the natural gas pressure to the minimum required. Water Supply and Wastewater Discharge The Project will consume water for cooling tower makeup, steam cycle makeup, the CTG inlet air evaporative cooler, fire protection, and domestic uses. Reclaimed water will be the primary source used for cooling tower makeup and steam cycle makeup. The Project will consume up to 1,000 gallons per minute (gpm) of reclaimed water during peak demand conditions. Reclaimed water is domestic wastewater purified through primary, secondary, and tertiary treatment. Reclaimed water is acceptable, with the design treatment in place, for non -potable cooling tower and steam cycle makeup water purposes. Reclaimed water will be supplied by the Central Basin Municipal Water District ("CBMWD") via a new 1.8-mile long, 12 to 14-inch diameter pipeline. In addition to the pipeline, the CBMWD must install booster pump and pressure reducing stations,to meet the needs of the Project. Potable water from the City will be the primary source for fire protection and domestic uses. The Project will consume a maximum level of 17 gpm of potable water. Potable water will be supplied from the City water distribution system through an existing 6-inch diameter pipeline presently serving Station A. The CBMWD has estimated that reclaimed water service to the Project could be interrupted for up to 9 days per year'. A new 480,000-gallon reclaimed water storage tank will be provided to store enough reclaimed water for 8 hours of continuous Project operation in the event of reclaimed water supply interruption. The City states that the City potable water system is capable of supplying up to 1,000 gpm of potable water to the Project, currently permitted for up to 9 days (unless a longer period is approved by the CEC), as a temporary replacement for reclaimed water if and when this storage becomes depleted or in the case of an emergency. Wastewater discharge from the Project w down, CTG wash water, potential reclaimed wai equipment drains. Wastewater will be discharged 11 include cooling tower blow down, HRSG blow ;r and treated water storage tank overflows, and to the existing Sanitation Districts of Los Angeles 'Memorandum from Samuel Kevin Wilson, Director of Community Services & Water to Kenneth DeDario, Director of Utilities, dated February 11, 2002. Page 4 of 34 County (" SDLAC") sewer system via a clarifier and oily water separator. A new 1,300-foot long, 12- inch diameter pipeline will be provided to discharge the wastewater to the existing SDLAC sewer system. Electric Interconnection No new transmission lines are required for the Project. The Project will be directly interconnected from the high side of the Project's three GSUs to three new bays on the existing 69 kilovolt (kV) bus at the Vernon Substation via 3 new underground 69 kV connections on the site. Two will connect the CTG step-up transformers, and the third will connect the STG step-up transformer to the substation. Each line will be approximately 300 feet in length. Although no new transmission lines are required, the City did request a study of the impact of the Project on the adjoining Laguna Bell 230/66kV substation and transmission systems of Southern California Edison ("SCE") and the Los Angeles Department of Water and Power ("LADWP") to provide information required for the Application for Certification ("AFC") to the California Energy Commission ("CEC" ).2Since the City system is not part of the California Independent System Operator (CAISO) grid, the CAISO is not responsible for providing electric system reliability for the interconnection and therefore did not provide input into the CEC process. Results of the SCE studies revealed that there would be some overloads on the SCE system due to the aggregate of planned power projects including the Project. Mitigation includes either the reconductoring of some existing lines or the implementation of Remedial Action Schemes (RAS) and curtailment of generation from Project. The City has chosen the later. Additionally, the City will have to install electrical communication devices known as a Remote Terminal Unit (RTU) and wavetraps. SCE is the process of finalizing their internal position with regard to charging a non -market project (such this Project) for the RAS and the wavetraps. Regardless, the City will be responsible for the cost of the RTU. The contingency budget, included in the Project cost estimate, is sufficient to cover any costs that may be determined to be the responsibility of the City. The short circuit study performed by SCE concluded that no replacement or upgrades of circuit breakers on the SCE distribution and transmission system will be required. However, the City has determined that forty of 66 kV circuit breakers' on the City system will have to be replaced. Additionally, an independent LADWP study concluded that there were pre-existing fault current overstresses in their system. LADWP plans to replace and upgrade fifty-six 230kV breakers at nearby substations prior to the Commercial Operation Date (COD) of the Project. At this time it is not known whether LADWP may charge the City for a portion of the 230kV breaker replacement costs. If they do there is sufficient contingency budget included within the Project cost estimate. PARTICIPANTS The City of Vernon The Project will be owned by the City. The City was founded on September 16, 1905 as the first industrial city in the southwestern United States. In 1932, the City differed with SCE over industrial rates for electricity. A bond measure was authorized to construct the City's own power plant, which is still operational today as part of Station A. Today, the City has over 1,200 businesses (primarily industrial) employing more than 44,000 people within its 5.2 square miles. The City is a ' System Impact/Facilities Study, City of Vernon, Malburg Generating Station Project, March 2002. 'The City will purchase 69kV breakers but operate them at 66kV for a greater factor of safety. Page 5 of 34 chartered California municipal corporation that operates under a City Council/City Administrator form of government. The City of Vernon Utilities Department (the "Utilities Department") has been established by the City to perform the operation of the Light and Power Department and the Gas Department. While the Utilities Department performs both, the revenues and expenses of these two departments are accounted for separately through the Light and Power Department Fund and the Gas Fund. The Utilities Department operates a fully integrated electric utility including generation, transmission, distribution, and customer service functions, and receives supporting legal, finance, and personnel services from other City departments. The Utilities Department is in the process of building a natural gas distribution system to offer customers an alternative to SoCal Gas for natural gas service. The Project will be the first customer served by the natural gas distribution system of the City. The Utilities Department is responsible for the overall development and execution of the Project. This includes the original siting and sizing of the Project, identification and recommendation of major equipment purchase and key contractors, review and approval of key design and permitting documents, coordination with interconnecting utilities, payment of all costs, maintenance of the overall Project schedule and budget, and reporting of progress to the City Administrator and City Council. The Utilities Department is also responsible for operating, maintaining, dispatching and providing natural gas fuel to the Project. Operation and maintenance of the Project is planned to be sub -contracted to a qualified power plant operation and maintenance firm. Fuel supply and management services are planned to be performed by the City. The Utilities Department, as part of the Project, will also install a new 1,300-foot, 10-inch diameter pipeline lateral from the Project site to a point of interconnection with the existing gas distribution system of the City. The City of Vernon Department of Community Services & Water ("Water Department") is responsible for supplying potable water to the Project. The Water Department has concluded that the existing City water system is capable of providing potable water to the Project, including provision of up to 1,000 gallons per minute for up to 9 days per year as an emergency replacement for reclaimed water.4 The provision of an emergency water supply for greater than a 9 day duration is possible with CEC approval. The Water Department will install and maintain the necessary water lines and meters to ensure adequate and continuous water service to the Project. Owner's Engineer The City has selected WRMS, a wholly owned subsidiary of Calpine Corporation ("Calpine" ) to be the Owners Engineer ("OE") for the Project. As OE, WRMS will act as the City's representative in overseeing Project detailed engineering and design, the procurement of the balance of equipment, and site construction activities. WRMS has offices in Walnut Creek and Dublin, California. The Dublin office is the location from which the WRMS work will be managed. Prior to being acquired by Calpine, WRMS's work experience was historically concentrated in the telephone emergency power system and facilities field for AT&T. Consequently, they are not identified by ENR in their annual ranking of power engineering firms. WRMS intends to draw support staff from Calpine's construction group located in Folsom, California to complete their Owner's Engineering team. ° Memorandum from Samuel Kevin Wilson, Director of Community Services & Water to Kenneth DeDario, Director of Utilities, dated February 11, 2002. Page 6 of 34 Under the terms of the agreement WRMS will perform services, for an approved Scope of Work, on a time and materials basis up to a maximum of $2,400,000. They will act as the City's representative for reviewing the detailed engineering and design work performed by Power Engineers, the construction work performed by UMM/Trico (see below), the permit compliance requirements of the California Energy Commission (CEC) and the permit requirements of the South Coast Air Quality Management District (SCAQMD). They will also mitigate change order impacts from the engineering and construction contractors, monitor progress, conduct vendor surveillance, review progress payment requests, report the status of the Project, prepare performance test procedures, prepare a request for proposal (RFP) for an independent contractor to perform the tests, witness the performance tests, develop contractor punch lists for construction closeout, review constructor lien releases, waivers and warranty issues, prepare an RFP for an independent Operation and Maintenance (O&M) contractor to operate the Project, assist in training the O&M workforce and review the first year O&M budget. Engineering Design Power Engineers Inc. ("Power Engineers") is a design -engineering firm headquartered in Hailey, Idaho. Established in 1976, Power Engineers ranked 95th among the design -engineering firms on the ENR list of the Top 500 Design Firms for 2002.5 Among the firms on this list, Power Engineers also ranked 19th among the design firms active in the power sector. These rankings are based on overall revenue in 2001 for all design engineering services, and for power sector design services, respectively. Power Engineers also provided the balance -of -plant detailed design for the other two GTX-100 based plants in the U.S.: in Chaska, Minnesota and Redding, California. See the "Power Generation Technology" section of this report for a description of these plants. Power Engineers has performed work on the Project since August 2002 under an agreement with Scott Mechanical Contractors. They have entered into an agreement with the City to complete the detailed design and engineering of the Project including the power block, all balance -of -plant items not included in the structural design responsibilities of Alstom Power Inc. (" Alstom") and the foundation design responsibilities for a lump sum fixed price of $2,328,721 subject to a defined engineering Work Plan. The Work Plan includes project management, preparation of site layout drawings, finalizing design criteria, preparing equipment specifications, preparing construction specifications, assisting in bid evaluations for contractor purchased equipment and materials, preparing civil, structural, foundation, architectural, mechanical, piping, HVAC, instrumentation and electrical design drawings, supporting construction and start-up, preparing as -built record drawings, designing the central plant Distributed Control System (DCS) including start-up and training on the DCS. To date Power Engineers reports that it has achieved 25 percent completion on structural, mechanical, instrumentation and electrical design drawings. Construction Contractor The procurement of materials, balance of plant equipment and construction of the Project is to be performed by Marelich Mechanical Co., doing business as (" dba") University Marelich (UMM) and Galliera Inc., dba Trico Construction (Trico). UMM and Trico will work together as the 5 "The Top 500 Design Firms," Engineering News -Record, April 15, 2002. Page 7 of 34 ("Contractor") under a joint venture agreement: Both companies are union contractors and the Project will be executed under a project labor agreement. The Procurement, Construction, and Startup agreement will be on a Cost plus fee basis up to a guaranteed maximum price of $41,070,000, including a $1,000,000 contingency fund which has been established for any unforeseen construction costs. If the Project completion cost is less than $40,070,000 the. City and Contactor will share the savings on a 60%/40% basis. If the completion costs exceed $41,070,000 the responsibility will be solely to the Contractor. The City intends to award Commissioning and Performance testing to an independent company under a separate contract. UMM have offices in Los Angeles and Anaheim, California. They are a wholly owned subsidiary of EMCOR Group, Inc. of Norwalk, Connecticut. EMCOR Group is rated as number 2 out of the top 600 specialty contractors in the 2001 edition of Engineering News Record (ENR). EMCOR is traded on the New York Stock Exchange ("NYSE"). Galliera Inc., the corporate name for Trico Construction, has offices in San Francisco, California and Yakima, Washington. Galliera is not rated in ENR. No parent guarantees are being offered through the construction contract. The credit support for the construction contract with the City will be through a Performance Bond and a Labor and Materials Payment bond for 100 % of the contract price placed through a surety company with a Best rating of "A" or better. The surety will exclude any liability for Performance Guarantees and will be subject to the terms and conditions of Standard AlA Form 312. Major Equipment Supplier Alstom Power, Inc. ("Alstom") is responsible for providing the major power generation equipment for the Project. This includes two new GTX100 model CTGs, two HRSGs, and one MP24 model STG. Alstom is a Brussels, Belgium -based manufacturer of power -generation equipment, with manufacturing facilities in Western Europe and the United States. Alstom has historically had a strong European presence with limited U.S. operations. In mid-2000, Alstom acquired ABB's U.S. interests as well as the former worldwide power -generation business of ABB Power. This acquisition gave Alstom a stronger presence in the North American market. The City has entered into four separate agreements with Alstom. These include an Equipment and Service Contract for the CTGs (" CTG Contract"), an HRSG Contract, a Steam Turbine Contract, and an agreement to provide certain performance guarantees for the Project ("Wrap Contract"). Under the Wrap Contract, Alstom guarantees that the Project will produce at least 136,000 kilowatts measured at the terminals of the CTGs and the STG (net of electric loads from Alstom- provided equipment) while achieving a power island net plant heat rate of 7,065 Btu/kWH or less (on a lower heating value basis) under specified ambient temperature and other conditions (the Plant Performance Guarantees). The City will perform a test of the Project upon initial operation (the Plant Performance Test) according to specified standards. If the Project fails to meet the Plant Performance Guarantees after a specified cure period, then Alstom must pay liquidated damages to the City based on the performance deficiencies at specified rates. The aggregate amount of all liquidated damages payable by Alstom is limited to 15 percent of aggregate value of the CTG Contract, the HRSG Contract and the STG Contract. Satisfaction of the Plant Performance Guarantees will satisfy the performance requirements of the CTGs, STG and HRSG under the Wrap Contract. Alstom will also provide project management functions under the Wrap Contract. Page 8 of 34 Negotiations with Alstom to delay the delivery of the CTGs and STG until later in 2003 were necessary to better coordinate delivery of the CTGs and STG with the expected Project construction schedule. The City has budgeted amounts in Contingency Project budget to cover this payment. Alstom will invoice the City for the incremental costs of storage, insurance, and transportation of the CTGs and STG that result from the delayed shipment in advance on a monthly basis. The City must take delivery of the CTGs and STG no later than June 30, 2003. The warranty period under the CTG contract is 36 months from August 15, 2002 and the warranty period under the STG contract is 24 months from deemed delivery which is January 28, 2003. Risk of loss now passes to the City upon Alstom delivering the CTGs and STG to Long Beach or Port Hueneme, California. Regarding the HRSG, Alstom has provided a delay proposal for the storage and warranty extension which would modify the terms outlined in the HRSG contract. The City has decided to take delivery and title of this equipment rather than accept Alstom's proposal to store it. The City is obtaining quotes from the Contractor to perform storage services for them and believes these quotes will result in Project cost savings. The City has budgeted amounts in the Contingency Project budget to cover this delay storage payment. The warranty period under the HRSG contract is 21 months from the deemed delivery date of December 08, 2002. As a result of the CTG, STG and HRSG delay negotiations, Alstom will be excused from shipping delay liquidated damages'. Alstom is responsible for providing technical supervision during the erection and commissioning of the CTGs, the HRSGs, and the STG unless the schedule is delayed by the City. The actual erection, startup and commissioning, however, remains the responsibility of the City. The City will use the Contractor to perform erection and startup services while commissioning will be performed by an independent contractor yet to be chosen. Alstom has also provided certain emission level guarantees to the City under the CTG Contract (the "CTG Emission Guarantee") and the HRSG Contract (the "HRSG Emission Guarantee"). If a CTG or an HRSG fails to meet the relevant emission guarantee, Alstom must make repairs at its own expense such that the emission guarantee is met or pay liquidated damages, after a work-out period of attempting to correct deficiencies in the equipment supplied by Alstom. Based on the current HRSG contract warranty completion date, the City will need to perform emission and performance tests prior to the end of September, 2004 or negotiate an extension with Alstom to the warranty period. Under each of the CTG Contract, HRSG Contract, and the Steam Turbine Contract, Alstom has posted an irrevocable letter of credit in favor of the City equal to 10 percent of the relevant contract price. Each letter of credit will expire on the date that the Plant Performance Guarantees have been achieved, or on the date 10 months from delivery of the relevant equipment, whichever occurs first. Alstom warrants that equipment supplied under the CTG contract will be free from defects in material and workmanship to the date 24 months from successful completion of the Plant Performance Test, or 36 months from delivery of the equipment, whichever occurs first (12/21 months, respectively, for the HRSG Contract and 12/24 months, respectively, for the Steam Turbine Contract). Due to the deemed delivery dates for the CTGs and STG, the City has made full payment for this equipment. Full payment for the HRSG has nearly been made with only a final payment based on delivery remaining. Natural Gas Transportation and Commodity SoCal Gas is responsible for transporting natural gas for the Project from the southern California border (or other points of delivery into the SoCal Gas system) to the natural gas distribution ' City of Vernon, Ramon Abueg, Assistant Director of Engineering and Operations, telecom dated February 04, 2003 Page 9 of 34 system of the City. Service is expected to be provided under term of SoCal Gas rate schedule GW-VRN, which is a special schedule applicable only for service to the City since it is a wholesale customer. The Project will be a full requirement, non -core customer under terms of the rate schedule with the Utilities Department and is planning to receive firm intrastate transportation service. The City must execute a Master Services Agreement ("MSA") with SoCal Gas to initiate service. The MSA provides for a minimum two-year term for firm intrastate transportation. Also included is the provision for the City to obtain gas storage capacity. In the MSA, there is no "use -or -pay" requirements associated with full requirement service but the City would have to agree not to bypass the SoCal Gas system to a competing pipeline, or to use alternative fuels except in the event of curtailment.' The City will be required to provide estimates of the usage of its firm service customers including the Project. The Utilities Department has entered into a Collectability Agreement with SoCal Gas for the installation of two high pressure meter sets which will monitor the supply of gas to the City. As stated earlier, the Project will contract with the Utilities Department for the supply of gas to the CTGs at a rate between wholesale and market, delivered to the burner tip. . As for the commodity, the City plans to formulate and subsequently implement its gas strategy 12 months prior to COD. The City intends to structure a portfolio supply with long term, short term and spot market purchases. As a result, the City has not yet executed a MSA with SoCal Gas. The Utilities Department has retained a contractor, Raymundo Engineering, to design and engineer the 1300 ft. lateral extension, as well as, the gas metering station from the City natural gas distribution system to the Project site.' The construction of the lateral and the gas metering station will be completed by a contractor which is yet to be determined. Reclaimed Water Supplier The Central Basis Municipal Water District ("CBMWD") will be responsible for providing reclaimed water to meet the needs of the Project on an as -available basis. The CBMWD is a public agency that sells fresh and reclaimed water to cities, mutual water companies, private companies, and. investor -owned utilities over a 227 square mile service territory in southeast Los Angeles County. It was established in 1952 by public vote to help mitigate the over pumping of underground water resources. The CBMWD obtains reclaimed water from sanitation districts in Los Angeles County. The CBMWD currently distributes up to 4,000 acre-feet per year (AFY) of reclaimed water to more than 150 industrial, commercial, and landscape irrigation customers through its Central Basin Recycled Water Project. The Central Basin Recycled Water Project consists of 3 pumping stations, a reservoir, and over 50 miles of distribution piping. The Project is expected to consume up to 1,500 AFY of recycled water, at a maximum demand of 1,000 gpm. At this time, the CBMWD has provided a will -serve letter to the City for purchase of reclaimed water for the Project.9 CBMWD expects that the required modifications will be in service in time to meet the expected commercial operation date of the Project. The CBMWD must construct a new 12 to 14 inch diameter, 1.8 mile reclaimed water pipeline extension from the Central Basin ' City of Vernon, Jorge Somoano, Deputy Director of Utilities, email dated February 13, 2003. 8 Utilities Department, City of Vernon, Malburg Generating Station Project, Project Manager Status Report, May 9, 2002. ' Letter from Darryl G. Miller, General Manager of the Central Basin Municipal Water District to Kenneth DeDario, Director of Utilities for the City of Vernon, dated November 19, 2001. Page 10 of 34 Recycled Water Project, and add new booster pump and pressure reducing stations in order to serve the Project. The flow capacity in the portion of the CBMWD system to which the Project will connect is approximately 3,000 gpm, of which existing customers currently utilize only 200 gpm.io CONSTRUCTION COSTS AND SCHEDULE Construction The Project site is modestly sized to accommodate the necessary facilities and construction activity for the Project. Construction activities will likely be staged to allow placement of the largest and heaviest pieces on the interior of the site first, followed by placement of exterior equipment. The City states that no pilings or deep excavations should be required. Equipment and structures will rest on mat foundations and spread footings. The bottoms of these foundations will be 7 feet below finished grade. Given a need to either cut the side slopes of these excavations at an angle of 45 degrees or to sheet the excavations for stability, sufficient area on the site to accommodate a perimeter that is at least 7 feet beyond the footprint of the finished power block and other facilities will be required to facilitate foundation construction. The largest single foundation in terms of area will be a mat foundation that will accommodate both HRSGs and both exhaust stacks. This mat will measure 129 feet in length by 94 feet in width. The mat foundations for each of the CTGs will measure 78 feet in length by 38 feet in width at their widest points. The closest that any of these foundations will come to any of the site boundaries will be 30 feet. This is adequate room to accommodate the dimensions of the excavations themselves plus construction equipment access. There is inadequate space on the site for construction lay down, construction parking, or for temporary storage of excavation spoils. However, the City has identified a construction parking area diagonally across from the site that should eliminate the need to shuttle workers to the site. The site of the principal construction lay -down areas will be directly across the street from the Project site and on leased property at 2650 Leonis Blvd. which is to the west of the Project site. The City has also identified a temporary excavation spoil area in the general vicinity of the site. The- availability of these areas in the immediate vicinity of the Project site will largely mitigate construction difficulties that would otherwise be present if parking and construction lay -down areas had to be located remote from the site. The Contractor will determine the exact use of these offsite areas. Movement of equipment and materials from the lay -down areas to the site will have to be coordinated with local traffic patterns. Seville Avenue will be closed during the construction of the Project. This will provide much needed lay -down areas and provide better accessibility to the Project site when delivering and staging large pieces of equipment. It is expected that the . Contractor will schedule installation of the major components to occur as they are received. The need to truck excavation spoil away from the site will also somewhat complicate construction, but not beyond any reasonable and commonly experienced extent in urban -area construction. Estimated Installed Cost As of February 04, 2003, the City has estimated that the total installed costs of the Project will be $142 million excluding capitalized interest. As of this date, the City has executed contracts and committed costs totaling $111.6 million for engineering, equipment, construction, emission reduction credits, and system improvements. The City reports that $63.5 million has been expended towards these "Application for Certification for the Malburg Generating Station, City of Vernon, December 2001, Section 3 - Facility Description and Operation. Page 11 of 34 contracts. Further, the report indicates that all of the major equipment required for the Project has been purchased." This equipment includes: • Two Alstom GTX100 CTGs • One Alstom MP24 STG • Two Alstom HRSGs • One steam surface condenser and vacuum pump skid from Holtec, Inc. • Three natural gas fuel compressors from Gas Packagers, Inc. • One mechanical draft wet cooling tower from Marley, Inc. • Three 13.2 kilovolt generator circuit breakers from General Electric, Inc. • Four 13.2/69 kilovolt generator step-up transformers (including one spare) from Delta Star, Inc. • Two continuous emissions monitoring systems from CISCO, Inc. The above referenced Project Cost Estimate includes construction cost, owner's engineer, design engineering, site preparation, substation modification, offsite construction, switchgear upgrade, permitting, purchase of emission reduction credits (ERC's), commissioning, sales and use taxes, water services advance payments, property leases, spare parts plus a $6.9 million contingency allowance. As the Project is well advanced in its environmental permitting and the purchasing of major equipment, over two thirds of the Project budget has been committed to contracts. The remainder of the major budget categories, in the uncommitted budget, relate to construction, spare parts purchase, environmental offset purchase, system upgrades, water supply, switchgear upgrades, commissioning and contingency. NCI notes that there is an expenditure against the Project contingency budget for $3.97 million to cover amounts previously advanced against a cancelled eontract and for CO emission reduction credits not received. This leaves $2.9 million left in the Project contingency budget to provide for the Alstom CTGs and STG delay storage costs, the storage by the City of the Alstom HRSG, a possible charge by SCE for the remedial action schemes (" RAS") proposed and accepted by the City to mitigate the electrical interconnection impacts of the Project, a possible charge from LADWP for the City to participate in the fifty-six 230kV breaker upgrades and any unforeseen Project costs going forward. However, the City expects and NCI believes the City is justified in receiving, a refund in excess of $2 million of the previously expended $3.97 million amount against the Project contingency budget. Assuming this amount is received, The City would have a Project contingency budget equal to 5 % of the remaining un-expended Project budget. NCI views this amount is sufficient to cover the above mentioned possible unbudgeted project costs, the budgeted items left to be committed, as well as, any unforeseen Project related costs. " City of Vernon, Jorge Somoano, Deputy Director of Utilities, Malburg Generating Station, Project Cost Estimate Report, February 04, 2003. Page 12 of 34 This Project cost estimate is consistent with published costs for the gas -fired 107-MW combined -cycle power plant constructed at Kennedy International Airport in Brooklyn, New York.12 That plant consists of two General Electric LM6000 CTGs, two HRSGs, each with duct burners, SCR, and oxidation catalysts, one condensing STG, and a cooling tower. Although produced by different manufacturers, the CTGs of this Kennedy project and the Project are similarly sized, modularized, factory -packaged, and skid -mounted, which facilitates erection in the field. Based on reported costs of the Kennedy project, the engineering, procurement and construction budget price range for a similarly sized urban area plant, when adjusted to 2003 dollars, could be from $120 million to $150 million depending upon the cost of labor.13 This estimate reflects EPC costs only, not the costs of permitting, property acquisition, financing, and owner's home -office costs, which could add another $3 to $5 million. Estimated Construction Schedule The City estimates that construction of the Project will require 16 months from commencement of construction to commercial operation. The City is assuming completion risk and will not require schedule guarantees to be provided by the Contractor. Any construction schedule delays will require the City to continue to purchase electrical power from other sources. The detailed engineering, performed by Power Engineers, began in August 2002. Site construction is scheduled to begin in April 2003 after the CEC issues its certification and the South Coast Air Quality Management District (" SCAQMD" ) issues its Permit to Construct (" PTC" ). Therefore, the COD is expected to occur in September 2004. Manufacturers of combustion turbines and steam turbines, such as Alstom, General Electric, and Siemens -Westinghouse, have made significant strides in the modularization of their equipment. This, coupled with modularization now present in HRSG manufacture, has reduced field construction time for a typical heavy-duty combustion turbine -based combined -cycle plant to 18 months from notice to proceed through commercial operation. Manufacture and delivery of the steam turbine is typically the critical path activity. As of January 23, 2003, manufacturing was 100 %, 100 % and 95 % complete for the CTGs, HRSGs and STG, respectively.1' Although construction of the Project will be more difficult than average due to limited site access and space, a 16-month construction period for the Project seems reasonable since manufacture of the major equipment is nearly completed and because the prevailing weather is conducive to year-round construction. POWER GENERATION TECHNOLOGY Combined -Cycle Technology The Project will utilize combined -cycle combustion turbine (" CCCT") power generation technology, consisting of two CTGs, two HRSGs and one STG. This arrangement derives the name, "combined -cycle," from the fact that it combines two distinct thermal -power cycles, the Brayton Cycle and the Rankine Cycle, into a single integrated unit. The Brayton Cycle is the thermal cycle upon which a combustion turbine operates, while the Rankine Cycle is the thermal cycle upon which a steam 12 "Turnkey Combined -cycle Modules," Gas Turbine World 1998-99 Handbook, vol 19, 1998. p 19. 13 "Annual Construction Cost Indexes," U.S. Census Bureau, Construction Expenditures Branch, Manufacturing & Construction Div., http://ftp.census.gov/pub/const/C30/annindex.pdf, April 22, 2002. 14 Email from Ramon Abueg, Assistant Director of Engineering and Operations, City of Vernon, Jan.23, 2003. Page 13 of 34 turbine operates. The Brayton Cycle uses air as its working fluid, while the Rankine cycle uses water and steam as its working fluid. In terms of net generating capacity, CCCT plants are the most popular type of generating plant for new construction in the U.S. today. Their popularity is due to their relatively low capital - construction costs and high fuel efficiencies in comparison to other types of plants. Unlike conventional power plants that employ a boiler, CCCT plants are generally capable of burning only natural gas and distillate oil fuels. However, in an area with severe emission restrictions such as southern California, this limited capability is not restrictive. To control emissions of NOx, the CTGs will be equipped with Alstom AEV burners, which are their most advanced low-NOx-emissions burners. These burners are designed to achieve a NOx- emissions level of 22 ppmvd at 15 percent oxygen in the gas exhausted from the CTGs. Further reduction in the level of NOx emissions will be achieved by the provision of a SCR system in each of the HRSGs. These systems are designed to reduce the level of NOx in the gas exiting the CTGs by approximately 91 percent, to a permitted level of 2 ppmvd at 15 percent oxygen. In order to minimize the levels of CO and VOCs, each HRSG will also be equipped with an oxidation catalyst. The CTGs will be equipped with evaporative coolers. Air drawn into the CTG will be passed through a continuously wetted filter medium. The air is both humidified and reduced in temperature. This increases the electric power output of the CTGs and the mass flow of hot combustion gas to the HRSGs. This, in turn, results in increased steam production and power output from the STG. This power augmentation with evaporative cooling is normally employed only at ambient -air temperatures of 60 degrees Fahrenheit ("degF") and higher. The HRSGs will be equipped with duct burners. The duct burners will allow increased steam generation, and therefore increased power generation from the steam turbine. The duct burners are expected to be utilized only during periods of peak electricity demand. The use of duct burners in the HRSG of a combined -cycle unit is possible because the combustion of the fuel in the CTG consumes only a small portion of the oxygen in the air ingested into the CTG, leaving excess oxygen to support the combustion of additional fuel downstream in the HRSG. Since the gas turbine exhaust gas will already be at a temperature of about 1,000 degF, air entering the region of the duct burners will, in effect, be preheated. This will result in an incremental heat rate for peak power that compares favorably with the heat rate of a conventional steam plant, or of a combustion turbine in simple -cycle duty. Under ISO conditions the output of the Project is 134 mW. With an ambient temperature of 92 degF gas turbine power plant performance will degrade to 118.2 mW. However, the Project is capable of duct firing natural gas to increase the output of the Project at 92 degF to 129.5 mW The incremental heat rate for these additional 11.3 mW will be 10,030 Btu/kWh. The GTX100 The GTX100 CTGs that will be used in the Project were initially offered by Alstom in 1995. However, the first of these machines intended for commercial service was not manufactured until 1997, and did not enter service until 1999. At this time, there are only ten GTX100 CTGs in service. Eight are located in Western Europe, two in the U.S. at Chaska, Minnesota and Redding California. The Project will be the third power plant to utilize the Alstom GTX100 CTG in the U.S. The Chaska plant entered service in February 2001, and is owned by the City of Chaska, Minnesota. It consists of a single GTX100 in stand-alone operation for peaking service. The second Page 14 of 34 plant to entered service in June 2002 and is owned by the City of Redding, California. It will utilize a single GTX100 CTG along with an existing steam turbine to form a combined -cycle plant. Initial teething problems associated with the NOx control system and an evaporative cooler seal were handled under warranty by Alstom. A representative of the City of Redding involved with the construction, startup and operation of the plant expressed satisfaction with how Alstom addressed the startup issues. He also stated that the equipment performed better than the Alstom guarantees in the areas of net plant output, heat rate and NOx emissions." The GTX100 is an industrial -grade machine that is designed specifically for stationary applications. Its design was not constrained by weight considerations, which was a major concern of the designers of two other popular CTGs in the 40 MW size range; the General Electric LM6000 and the Pratt & Whitney FT8 Twin Pack. The combustion turbines used in these CTGs were originally intended for use in aircraft -propulsion applications. They were subsequently modified for stationary power generation use as "aeroderivative" CTGs. Consequently, the GTX100 can be expected to be of heavier construction compared with the aero derivative design resulting in longer, recommended planned -maintenance intervals. Another advantage of the GTX100 over the aeroderivatives is that it provides higher combined -cycle efficiency. Due to their design for use as aircraft engines, aeroderivatives have relatively high efficiencies in simple -cycle operation. However, their exhaust temperatures are too low to yield similarly high relative efficiencies in combined -cycle applications. Availability Forecast The City has estimated that the annual equivalent availability factor ("EAF") of the Project will range from 90 percent to 98 percent.16 EAF is the ratio of i) the amount of power that a generating plant was capable of producing over a particular time period, divided by ii) the amount of power that it could have produced if it were operating at its full rated output. EAF will be less than 100 percent to the extent that a plant experience forced or scheduled outages (or deratings) during the period. The industry average EAF for combined -cycle plants has been reported as 86.5 percent for the years 1996 through 2000." At this time, there are only ten currently operating power plants that use the Alstom GTX100 CTG. The fleet leader in terms of operating hours is the Arjo Wiggins Unit in Besse sur Braye, France. This unit entered service in a cogeneration application in December 1999. As of March 31, 2002, it has accumulated 7,594 operating hours. Two other similar units are currently in service in France. They are Emin Leydier in Saint Velliers, and Cerestar in Lille. These units entered commercial service in December 1999 and July 2000, and have accumulated 6,918 and 4,799 operating hours, respectively. From November 1, 2001 through March 31, 2002 these three units achieved a collective reliability factor ("RF") in excess of 98.5 percent. RF is similar to EAF, except that it considers the effect of forced outages only. RF is the most relevant measure of the reliability of these plants since none have yet undergone any major maintenance. Combustion turbine major maintenance is typically the critical path activity for maintenance outages of CCCT plants. If the CTGs of the Project were to experience this same level of reliability, and if the duration of scheduled outages for CTG major maintenance were to be as forecast by 15 Teleconference with Mr. Bob Bassett, Power Operations Manager for the City of Redding, January 29, 2003 16 Application for Certification for the Malburg Generating Station, City of Vernon, December 2001, Section 3 - Facility Description and Operation, pp 3-46. 17 North American Electric Reliability Council. (NERC), Generation Availability Data System, 1982-2000Generating Unit Statistics, June 2002, Combined -cycle Units, Un-weighted EAF, 1996-2000. Page 15 of 34 Alstom,18 then the Project would achieve an annual average EAF of 94 percent. EAF would be higher in years when no CTG major maintenance occurred. EAF would be lower to the extent that the balance of plant equipment is less reliable than the CTGs or requires longer duration maintenance outages. Although an annual average EAF of 94 percent for the Project would be consistent with recent performance of the GTX100, and with the maintenance outage durations forecast by Alstom, it is higher than the reported industry average for CCCT type projects. However, we do expect that the annual average EAF for the Project will be higher than the industry average since older CCCT plants likely dominate the industry average. Therefore, we find that an average annual EAF of 90 percent for the Project, which is at the low end of the range forecast by the City, is reasonable. NATURAL GAS MARKET ASSESSMENT Natural Gas Price Forecast The City provided a natural gas price forecast for the Project to NCI. The City forecast includes both a southern California border price and a "burner -tip" price forecast. The burner -tip price equals the southern California border price plus the cost of transportation across the SoCal Gas distribution system to the Project. The City forecast is expressed in constant year 2002 dollars. NCI compared the City forecast against a national forecast from the U.S. Department of Energy Information Administration ("EIA")" and a regional southern California gas price forecast used by NCI for internal purposes. The EIA forecast calendar year 2004 average price is $3.28 per mmBtu delivered to the Pacific region, compared to $4.17 in the City forecast and $3.50 in the NCI forecast. Average prices under the national EIA forecast escalate in subsequent years to a high of $3.81 in 2008, compared to $4.97 under the City forecast. The NCI forecast assumes moderate price volatility driven by a boom/bust gas demand cycle, which results in a Q4 2004 forecast of $3.37 and a $3.45 average 2008 price delivered to Topock, Arizona. NCI also reviewed the seasonal variation shown in the City forecast. The variation appears to be inconsistent with actual historical prices in the natural gas market. Figure 1 below compares the City forecast against the City forecast as adjusted by seasonally differentiated price factors derived by NCI from historical monthly natural gas prices. NCI uses monthly gas forecasts in its financial proformas and Prosym runs. Results show that the City forecast does not accurately reflect historical seasonal natural gas price changes. Natural gas prices have traditionally displayed two "highs" over the course of the year: one during the winter, and another between July and September. Prices in the City forecast peak during the winter months only. Historical prices have also displayed somewhat more volatility than shown in the City forecast. Based on the foregoing, the fuel forecast provided by the City appears to be higher than other similar forecasts and reflective of a winter peak only. Nevertheless, NCI concludes that the City forecast is reasonable for conservatively estimating the average annual cost of fuel for the Project. 18 Equipment and Service Contract between Alstom Power Inc. and the City of Vernon, May 23, 2001, Appendix 4 Scope of Supply, Document X120700E, GTX100-60Hz Description, Chapter 9 - Operation and Maintenance, paragraph 9.7.2. - Maintenance. 19 U.S. Department of Energy Information Administration (EIA) Annual Energy Outlook 2003 Table 106. Natural Gas Delivered Prices by End -Use Sector and Census Division, Electric Generator sector, Pacific region. Page 16 of 34 $4.60 $4.40 $4.20 $4.00 rs� $3.80 v $3.60 a. $3.40 $3.20 $3.00 Figure 1 City Gas Price Forecast - Southern California Border boa 4e 4s, 'e 4s, vs� ion" —0 City Forecast 'City Forecast Using Historical Seasonal Pattern Natural Gas Market Fundamentals Natural Gas Resource Base The United States Geological Survey ("USGS") estimates a resource base in the U.S. of approximately 1,000 Trillion Cubic Feet (Tcf), which when combined with a Canadian resource base of approximately 500 Tcf yields enough natural gas in the ground to meet demand for 50 years.20 The EIA has reported a level of proved and probable reserves of 1,281 Tcf for the Lower-48 states.21 A December 1999 report of the National Petroleum Council ("NPC") reported a resource base of 1,466 Tcf in the Lower-48, 333 Tcf in Alaska, and 667 Tcf in Canada, for a total of 2,289 Tcf.22 The EIA estimated reserves would be sufficient to sustain current production levels of approximately 19 Tcf per year for the next 65 to 70 years. The NPC estimated reserves would be sufficient for more than 100 years. By either the NPC or EIA estimate, the total reserve base, combined with an understanding of reserve appreciation due to improving technology, leads NCI to conclude that reserves are adequate to meet market demand, including the gas demand of the Project. Interstate Transportation Infrastructure Over the next ten years, there appears to be sufficient infrastructure to meet U.S. demand for natural gas. Compared to current U.S. production of approximately 19 Tcf, the U.S. consumes approximately 25 Tcf, with the bulk of the difference between consumption and production coming from Canadian natural gas production and a very small amount of liquefied natural gas delivered from 20 The term "resource base" usually refers to the sum of proved and probable reserves. Proved reserves are those where development drilling allows one to estimate with a high degree of certainty potential production. They are "booked" on balance sheets and typically are under -estimated relative to ultimate production from a given resource. Probable reserves are those that have been discovered by drilling but their extent has not been completely delineated by development drilling in order to confirm the quantity expected to be produced. Possible reserves are those postulated to exist outside known fields in association with a productive formation in a productive province. NCI's review excludes this latter category of possible reserves. Z' EIA, Annual Energy Outlook 2001 - Issues in Focus, December 2000, p. 11. 22 National Petroleum Council, Natural Gas: Meeting the Challenges of the Nation's Growing Natural Gas Demand, Volume 1, December 2000, pp. 7-9. Page 17 of 34 other countries via tanker. These volumes, plus some 3 Tcf of natural gas that moves in and out of underground gas storage facilities, keep the 94 Bcf of inter -regional transfer capability of existing natural gas pipelines operating at a 63 percent annual load factor.23 At this load factor there is sufficient capacity to satisfy the present and near term market demand. The remaining question is whether California has enough gas pipeline capacity. It is generally known that approximately 6.6 Bcf per day of interstate pipeline capacity exists to bring natural gas to California. PG&E is adding 0.2 Bcf per day to its import pipeline from Canada, and SoCal Gas is adding 0.375 Bcf per day of new backbone capacity. In addition, Kern River Gas Transmission added 0.135 Bcf per day to its system and will add 0.900 Bcf per day by 2004. A tally of true deliverability into the SoCal Gas system that incorporates only the pipeline capacity existing or approved to date shows 3.8 Bcf per day of usable delivery capacity.` Compared to the 2000 California Gas Report (" CGR" )'s demand projections of 3.1 Bcf per day for the SoCal Gas system, this capacity is sufficient to meet the demand needs of customers on the SoCal Gas distribution system for the next 4 to 5 years. Fuel Delivery Constraints into the SoCal Gas System NCI believes that over the next ten years, the delivery constraints from interstate pipelines into the SoCal Gas system, observed in early 2001, are not likely to repeat themselves. Near term gas demand is lower due to the economic recession, while the availability of hydroelectric power is high. In the longer term, however, NCI is not as sanguine as the CPUC or SoCal Gas itself. Both the later expect that most new power projects will be built outside of southern California, and will displace power from existing power plants in southern California, resulting in a significant reduction in natural gas demand on the SoCal Gas distribution system.26 On the other hand, NCI believes that constraints on existing electric transmission lines, and the difficulty in siting of new transmission lines into southern California, will cause new gas -fired power plants to be built in southern California. This still will not result in an increase in natural gas demand on the SoCal Gas system because the electricity produced will displace the need to operate the older less efficient steam driven power plants. Therefore the newer gas turbine generation units, with their lower heat rates, are expected to reduce SoCal Gas system demand. If, under difficult to predict conditions, gas system constraints lead to higher natural gas prices, allocation of supply would go to those willing to pay a higher price, much as happened during winter 2000 — 2001. The City states it will design a fuel plan for the Project that will recognize the possibility of potential price spikes by purchasing a mix of contract durations and quantities.2' EIA, Natural Gas Transportation - Infrastructure Issues and Operational Trends, October 2001, Table 1. Some pipeline projects will not proceed to construction, as many are speculative proposals launched to test market reaction. Now that the price differential between the gas supply basins and the California border has returned to more normal levels, some of these projects are uneconomic. An important point is that FERC policy is to approve pipeline projects that demonstrate economic support and that pass environmental muster. NCI is confident that pipelines will be built as the market demands them, but consumers and lenders should recognize that there may be periods of high prices as capacity utilization increases and temporary constraints may occur. zs SoCal Gas and Pacific Gas & Electric, 2000 California Gas Report, a joint publication required by the CPUC under decision D95-01039. w See, for example, SoCal Gas Application No. 01-09-025 and the CPUC's November 2001California Natural Gas Infrastructure Outlook 2002 - 2006. The CPUC report was prepared at the direction of AB6x, which created the California Power Authority (CPA). The conclusion of the report is that the CPA does not need to intervene to finance new pipeline projects because the CPUC will ensure that new capacity is built when it is needed. 2' We must also point out that while the 2000 - 2001 price spike in California was extreme, Henry Hub prices also climbed to. $9.88 per MMBtu for the January 2001 monthly index. Gas users must realize that the nature of the gas industry is boom and Page 18 of 34 Access to Delivery Alternatives In the best of all worlds, electric generators would have access to more than one natural gas pipeline. This would be both for reliability purposes should one fail and for competitive purposes to obtain access to more sellers. NCI, however, expects the only source of transportation service to deliver natural gas to the Project will be SoCal Gas (via the City of Vernon) for the foreseeable future. Our discussions with market participants indicate that Questar Corporation will construct only the eastern segment of its Southern Trails Pipeline so that it will terminate at Kingman, Arizona (near the California border at Topock, Arizona). The reason for this is that the CPUC has in place a rate schedule known as the Residual Load Service ("RLS") tariff. This tariff allows SoCal Gas to charge what is best described as a "penalty" rate to customers who attempt to bypass SoCal Gas but who, for reliability purposes, contract for a small amount of natural gas from SoCal Gas just to keep the service (especially important since the bypass pipelines have no underground gas storage available on their systems). The RLS makes it economically prohibitive for a customer to risk contracting for service from an alternative pipeline. While the RLS should ultimately disappear under the new configuration creating "backbone" transmission service on SoCal Gas, NCI's experience (and, indeed, Vernon's as well) is that the California local distribution companies (" LDCs") possess enormous resources to thwart direct competition for transportation service, particularly near their load centers. Should the Southern Trails Pipeline, or another pipeline project, succeed in bringing competition for transmission service to the LA Basin, the Project would be some 8 to 10 miles from the proposed route for Southern Trails Pipeline on its way into Long Beach.28 Local Transportation Infrastructure and Security of Supply NCI reviewed the nature of the gas distribution systems in the vicinity of the Project to ascertain if local constraints could threaten delivery of natural gas to the Project burner -tip. Natural gas will be delivered to the Project site through the distribution system of the City. The City distribution system consists of a 10-inch loop that runs through the City, passing close to several large industrial sites that currently receive service from SoCal Gas. The City system receives gas from the local distribution system of SoCal Gas via two interconnections. Although installed, the City system is not yet in service. The Project will be the first customer served by the City gas distribution system.29 Maps of the SoCal Gas distribution system indicate that multiple pipelines are looped around the City. This loop structure gives SoCal Gas the ability to re -direct service to the Project in the event of a line failure. NCI therefore believes the risk of a local outage interrupting SoCal Gas service to the Project to be low. Although SoCal Gas has not yet formally evaluated its ability to serve the Project ( since a MSA has not been requested), NCI believes that the SoCal Gas system should have more than enough capacity to serve the Project. SoCal Gas, in its gas rate application currently pending before the bust and should be prepared for variable and volatile prices. Prices between $2 and $10 have to be recognized as feasible outcomes, depending on immediate conditions, regardless of the presence or absence of California capacity constraints. 28 NCI confirmed the route of Southern Trails' west segment pipeline into Long Beach; it approaches Long Beach from nearly due east, along Highway 91 from Riverside, through Buena Park and Artesia, to a terminus 5 miles north of the Long Beach city center. At its closest point, NCI estimates the distance to the Project at approximately 8 to 10 miles. 29. Conversation with Jorge Somoano, City of Vernon, April 24, 2002. Page 19 of 34 CPUC, states that it is not planning any further expansion of its backbone pipeline system at this time.30 The City has stated that it informed SoCal Gas of its intentions to build the Project with the associated gas demand. The City states that SoCal Gas has folded the City's gas demand requirements into its internal load forecasts. Additions to local gas transmission are also deemed unnecessary at this time. SoCal Gas states that its local distribution system is designed to serve "the sum of core demand on a 1 in 10-year cold winter day and the maximum daily contract quantities in all firm non -core customer contracts over the winter. i 31 Their policy is to expand the quantity of non -core firm service in an area if sufficient non -core customers sign long-term contracts that ensure revenues to justify investment in the area. They will also expand non -core firm service if they feel they can no longer guarantee the firmness of transmission without adding facilities. In either case, they would hold an open season asking non -core customers to commit to 15-year contracts in order to obtain a continuous guarantee of firm service.32 As of today, SoCal Gas has held open seasons for three areas of local transmission on its system.33 None of those three areas are near the City, nor would affect service to the City. SoCal Gas suggests in its application (and has confirmed via teleconference) that no other areas on their system are close to requiring an open season. If SoCal Gas were to declare an open season on their system in the area of the Project, the City may need to commit to a long-term service agreement with SoCal Gas and pay a higher tariff rate in order to protect the Project from an increased risk of curtailments. It is difficult to estimate the potential tariff increase since the specific facilities, affected customers, and required rate treatment is unknown at this time. This same risk of tariff increase is faced by all customers of SoCal Gas. LICENSES, PERMITS, AND APPROVALS The construction and operation of the Project will require numerous licenses, permits, and approvals from various federal, state, and local regulatory agencies. The major licenses, permits, and approvals necessary to construct and operate the Project are identified and reviewed below. Other minor construction and operation permits that would be required are also identified. Application for State Certification Under California statute, the City must obtain certification of the Project, including its associated linear facilities, from the CEC. The CEC has the primary authority and responsibility under California law to regulate the siting, construction, operation, and closure of any new power plant within the state with a net generating capacity of 50 megawatts or greater. The California Secretary for Resources has certified the CEC power plant site certification program as meeting the requirements of 3° SoCal Gas rate Application No. 01-09-024, Attachment K, Prepared Direct Testimony of Steve Watson, pp. 10 - 13. However, SoCal Gas will hold an open season to ascertain whether shippers are willing to pay to add another 100 - 200 MMcfd. 31 California policy is to preserve service to core customers at all costs; non -core customers (including electric generators) are assumed to prefer lower rates in exchange for accepting some (small) probability that they could be curtailed on a very cold day. The " 1 in 10 year Cold Winter Day plus firm non -core load" criterion used to size local transmission facilities implies that non -core customers who had not firmed up their service by paying to expand facilities would be curtailed after non -core interruptible customers. 32 Please note that firm service to non -core customers (including all electric generators) still assumes that non -core customers will be curtailed in order to preserve service to core customers on a one -in -forty year cold scenario. 33 SoCal Gas held open seasons on the following local transmission lines: Line 6900 serving SDG&E, Line 6900 serving Imperial Valley, and Line 7000 serving San Joaquin Valley. Of these, only SDG&E committed to long-term firm service on Line 6900. SoCal Gas rate application No. 01-09-024, Attachment K, Prepared Direct Testimony of Steve Watson, pp. 12-13. Page 20 of 34 Section 21080.5 of the California Environmental Quality Act (" CEQA") for environmental review and written documentation under that statute. The CEC requires preparation of an Application for Certification ("AFC") by the applicant. The AFC must address the affected environment, environmental impacts, mitigation measures, preliminary engineering design, expected performance, reliability, public health and safety impacts, and conformance with all applicable laws, ordinances, regulations, and standards applicable to the proposed project. The CEC then evaluates the AFC; solicits input from other applicable local, state, and federal agencies; prepares independent staff assessments; and develops preliminary and final proposed decisions that are then voted on by a board of appointed commissioners. Granting of a certificate by the CEC allows the proponent to begin construction. The CEC certification of the Project is intended to be a "one stop" regulatory permitting process that results in a single decision for the applicant within a specified timeframe from the date on which the CEC deems the AFC to be complete or "data adequate." The CEC typically certifies projects under a 12-month permitting process, where the certificate may be granted within 12 months of data adequacy. Under certain conditions the applicant could be eligible for a 6-month expedited process. The applicant is also responsible for identifying, coordinating, and obtaining all other applicable federal, state, and local agency permits and authorizations to keep the overall CEC licensing effort on track. On December 21, 2001, the City filed an AFC for the Project. The City requested that the Project be permitted under the expedited 6-month process. CEC staff reviewed the AFC to determine whether or not it met all the information requirements and could be deemed data adequate. In a finding made on January 16, 2002, CEC staff found that the AFC did not contain all of the information required by Cal. Code of Regs., Title 20, § 1704, Appendix B for either the 6-month process or the standard 12-month permitting process and therefore could not be deemed data adequate. The City subsequently filed responses to the data adequacy recommendations and requested that the Project be reviewed under the CEC 6-month expedited process. The CEC reviewed the responses and approved the AFC for data adequacy by a unanimous vote on May 8, 2002. The Project has been reviewed under the 6-month expedited process. On January 9, 2003, CEC staff scheduled a Pre -Hearing Conference ("PHC") to determine if the Project was ready to proceed to an Evidentiary Hearing ("EH" ). At the PHC, the City and CEC staff indicated that (1) there were no disputed issues, (2) they were ready to proceed to the Evidentiary Hearing, and (3) they would submit testimony by declaration on all topics. The EH on the Project was held on February 10, 2003. No interveners participated in the hearing nor has any party taken any action in opposition to the CEC Certification of the Project. The City believes that all conditions to the issuance of the CEC Certification have been satisfied. The CEC will now close the record on the application allowing for a Presiding Members Proposed Decision ("PMPD") to be effective after a 30-day comment period. The Permit to Construct (PTC) permit from the South Coast Air Quality Management District ("SCAQMD") cannot be issued until the CEC has finalized its certification. Therefore, the schedule for the Project to receive all its preconstruction permits is by April 2003. Under terms of the expedited process, the City must begin construction of the Project within 12 months from the certification date. Page 21 of 34 Air Quality Permits The Project will be located in an area that falls under the jurisdiction of the SCAQMD with respect to air quality permitting. The Project will trigger the requirements of the federal Non - attainment New Source Review ("NSR" ), New Standards of Performance for New Stationary Sources (" NSPS"), Title IV (Acid Rain Permit), and Title V (Operating Permit) permitting programs. The U.S. Environmental Protection Agency ("EPA") has delegated implementation of these programs to SCAQMD. SCAQMD implements these programs through its own rules and regulations, which are, at a minimum, as stringent as the federal regulations. The Project will also be subject to the rules of the SCAQMD Regional Clean Air Incentives Market ("RECLAIM") program. RECLAIM is an incentive program designed to allow participating facilities some flexibility in achieving emission reduction requirements for NOx and SOx. Reductions can be achieved through a combination of additional emission controls, equipment modification, reformulation of products, operating changes, shutdowns, and the purchase of excess emission reductions from other participants. NSR/RECLAIM As a first step in the air quality permitting process, SCAQMD performs a NSR/RECLAIM pre - construction review. The application for this review must demonstrate that the proposed facility will use Best Available Control Technology ("BACT"), will provide any necessary emission offsets, will not interfere with the attainment or maintenance of the applicable Ambient Air Quality Standards, will not exceed SCAQMD significance levels, and will not impair visibility in nearby Class I areas. Emission Control Technology The area of southern California under the jurisdiction of SCAQMD is classified as attainment for nitrogen dioxide ("NOx") and sulfur dioxide ("SOx") under federal and state regulations. However, it is classified as non -attainment for ozone (formed through the emission of Volatile Organic Carbon (" VOCs") and NOx), particulate matter under 10 microns (" PM10" ), and Carbon Monoxide ("CO"). As a result, various emission controls are required for the Project under NSR regulations. NOx emissions will be minimized by the use of dry low-NOx combustors in the CTGs. The CTGs will generate approximately 22 ppmvd of NOx, corrected to 15 percent oxygen. The HRSGs will be equipped with a Selective Catalytic Reduction ("SCR") system to further reduce CTG NOx emissions to 2.0 ppmvd, corrected, on a one -hour average basis. BACT for CO emissions will be achieved through the use of dry low-NOx combustors and a CO catalyst. With this technology, the Project will meet a CO limit of 2 ppmvd corrected to 15 percent oxygen (on a three-hour average basis). BACT for VOC emissions will be achieved by use of dry low- NOx combustors. With the use of the dry low-NOx combustor and the CO catalyst, Project VOC emissions are not expected to exceed 1.2 ppmvd, corrected to 15 percent oxygen (3-hr average). BACT for PM10 is best combustion practices and the use of gaseous fuels. Use of clean burning natural gas fuel will result in minimal particulate emissions. SOx emissions will also be kept at a minimum by firing natural gas. These control technologies and levels of emissions comply with BACT requirements for the specified pollutants. Page 22 of 34 Emission Offsets In addition to implementing emission control measures, an applicant may be required to obtain emission offsets. Emission offsets are reductions in emissions from other sources within the same air quality basin. For new facilities, the procurement of adequate emission offsets is a prerequisite to obtaining a construction permit from the local air quality management district. In the SCAQMD jurisdictional area, offsets consist of both Emission Reduction Credits ("ERCs") and RECLAIM Trading Credits ("RTCs"). RTCs are specific to NOx emissions and are a part of the RECLAIM program. SCAQMD Rule 1304 (d) (2) exempts a facility from the need to obtain offsets if the expected post modification emission levels are below certain thresholds. These threshold levels are 4 tons per year (tpy) of VOC, 4 tpy of NOx, 4 tpy of SOx, 4 tpy of PM10, and 29 tpy of CO. If offsets are required, a new or modified facility must provide ERCs at a ratio of 1.2:1 over expected emissions of SOx, PM10, VOC, and CO, and NOx RTCs at a ratio of 1:1. In 2001, SCAQMD established the Priority Reserve for CO and PM10 ERCs (Rule 1309.1). The Priority Reserve was established in response to the general lack of CO and PM10 ERCs available in the SCAQMD jurisdictional area. Power plants may purchase CO and PM10 ERCs from the Priority Reserve. If an applicant obtains ERCs from the Priority Reserve, the required ratio is only 1:1. Emissions of VOC, NOx, PM10 and CO from the Project will exceed the threshold levels, and therefore the City must obtain offsets for these pollutants. SOx emissions from the Project will be less than the threshold level and therefore no SOx offsets are required. On November 28, 2001, the Vernon City Council passed a resolution authorizing the City to obtain, purchase, and secure , all the ERCs and RTCs necessary to permit, commission, startup and operate the Project. All would need to be procured prior to the issuance of any permits from SCAQMD. The City has an existing allocation that will account for 49 percent of the NOx RTCs required for the Project. The balance of required RTCs are being procured through the local market, and the City is currently in negotiations with a market broker. The City has already purchased 100 percent of the necessary VOC offsets through the open local market. The City has already purchased 50% of the required CO ERCs and is currently finalizing the contract. As the open market for CO ERCs is limited, the City intends to obtain the required CO ERCs from the SCAQMD Priority Reserve if it is unable to reach agreement with the market seller.. The City has identified a local open market source for purchase of the required PM10 ERCs and is currently in negotiations through a market broker. As the open market for PM10 ERCs is limited, the City intends to purchase the majority of the required PM10 ERC's from the Priority Reserve if it is unable to reach agreement with the market seller. Protection of Visibility NSR Rule 1303 (b) (5) (C) requires that emissions from a new source be modeled to assess the impact of plume visibility on nearby Class I areas. Class I areas typically include wilderness areas, parks, scenic views, and other specific landmarks as designated under air quality regulations. Modeling Page 23 of 34 is necessary only if the NOx and PM10 emission increases from the new or modified source are expected to exceed 40 tpy and 15 tpy, respectively, and the source is within a specified distance to the boundary of the Class I area. There are no Class I areas within the specified distance to the Project. Therefore, no visibility analysis is required and none was performed for the Project. Status of NSR Applications The City submitted a Permit to Construct (" PTC") application for the Project to SCAQMD on December 7, 2001, which was deemed complete by SCAQMD on January 11, 2002. The City provided supplemental information on February 4, 2002. On April 13, 2002 SCAQMD issued a first draft of the Preliminary PTC for the Project. SCAQMD must then prepare and issue a Preliminary Determination of Compliance (" PDOC") for the Project. The PDOC serves to satisfy the requirements of the CEC AFC and the Federal EPA process with respect to air quality impacts and mitigation. The PDOC was filed on August 27, 2002. By October 20, 2002, the EPA did not file any comments. A Final Determination of Compliance (FDOC), along with a proposed Title V and AQMD RECLAIM permit, was issued to the CEC on December 13, 2002. In its cover letter, the SCAQMD noted that "the FDOC does not constitute a final Title V permit. The final permit will be issued pending the Commission Decision on the Project and after all necessary offsets are provided in the form of either ERC certificates or credits from the AQMD Priority Reserve." As stated above, it is anticipated that the PTC for the Project will be issued by SCAQMD after the CEC has issued a certificate for the Project on or before March 26, 2003. Prevention of Significant Deterioration ("PSD") Permit The PSD permitting process (SCAQMD Regulation VXII) applies to major sources (and major modifications of major sources) that are located in attainment areas. The PSD process allows new sources of air pollution to be constructed, or existing sources to be modified, while preventing significant deterioration of the existing ambient air quality levels. Emission limits are set for regulated pollutants to determine whether or not a facility is considered a major stationary source. The existing generating facilities at Station A are not considered a major source, and the net emissions increase associated with the installation of new equipment associated with Project will be below the threshold emission levels. Therefore, the Project will not be considered a major new stationary source, and will not be subject to PSD requirements. Title V Permit (Operating Permit) The Title V program applies to facilities that are considered major sources, with the potential to emit more than 10 tpy for VOC or NOx, 50 tpy for SOx, 70 tpy for PM10, or 100 tpy for CO. The existing Station A Power Plant is not considered a major source, and therefore SCAQMD has not issued a Title V permit for Station A. However, addition of the Project will cause the site to become a major source. Therefore, the City prepared and submitted a Title V permit application for the entire site (including Station A and Project). As stated above, the SCAQMD issued its proposed Title V permit on December 13, 2002. The final Title V permit will be issued after the , CEC decision of certification of the Project. Page 24 of 34 Title IV (Acid Rain Permit) The acid rain requirements of Regulation XXXI (Title IV program) are applicable to both Station A and the Project. Therefore, the City must obtain an acid rain permit as mandated by Title IV of the Clean Air Act. A permit application must be submitted to the SCAQMD before operation of the Project. The application must identify all relevant sources at Station A and the Project, present a compliance plan for each unit, identify applicable standards, and identify an estimated commencement date for operation. An application was submitted by the City in December 2001. In the December 2002, FDOC the SCAQMD states that the Project will be subject to acid rain program requirements. This will require the Project to monitor and to cover SO2 emissions with SO2 allowances (similar to RTCs) or purchase SO2 offsets on the open market. Water -Related Permits The U.S. EPA and other jurisdictional federal agencies have delegated most authority for water quality permitting to the environmental agencies of the states. In California, the California State Water Resources Control Board (" SWRCB") has in turn delegated authority for implementation of federal regulations to nine local regional water quality control boards located throughout the state. The local boards are the primary agencies for regulating surface water and groundwater pollution in California. They determine allowable concentration limits for effluents, issue permits, and enforce the regulations within their jurisdictions. The Project is located in an area that is under the jurisdiction of the Los Angeles Regional Water Quality Control Board (" LARWQCB"). Reclaimed Water Reclaimed water will be purchased by the City and supplied by the CBMWD. The CBMWD has not indicated that it will need to modify or obtain any new water quality permits in order to provide reclaimed water to the Project. Potable Water Potable water is currently supplied to the site by the City's Water Department, which obtains water from local groundwater wells and from the Metropolitan Water District. The Water Department has not indicated that it will need to modify or obtain any new water quality permits, or any new supply sources, in order to provide potable water to the Project. Wastewater and Storm water Discharge Wastewater from the Project will flow to the SDLAC sewer system. Therefore, the City must obtain a permit for Industrial Wastewater Discharge. An Industrial Wastewater Discharge Permit application has been prepared and submitted to the City's Water Department for review and approval. Once approved, the City's Water Department will forward the application to the SDLAC for review, approval, and issuance of the permit. On February 21, 2002, the City prepared and submitted to the SWRCB a Notice of Intent (" NOI") - General Permit to Discharge Storm Water Associated with Construction Activities, and a Notice of Intent - General Permit to Discharge Storm Water Associated with Industrial Activities. The City has also prepared a draft Construction and Industrial Activities Storm Water Pollution Prevention Plans (" SWPPP") / Monitoring Programs for the Project as required under National Pollutant Discharge Elimination System (" NPDES") regulations. Consequently, the SWRCB has assigned the Page 25 of 34 WDID Identification Numbers 419S317697 and 419SO17169 for the construction and industrial activities, respectively. Other Permits and Regulatory Approvals In addition to the permit identified above, numerous other minor permits and/or authorizations will be required either prior to construction or prior to operation of the Project. These minor permits will include: • Grading Permit. This permit must be applied for at least 30 days prior to construction. The City would issue the permit. • Various Encroachment, Construction and Building Permits. These permits would be issued by the City prior to construction of the Project. • Transportation Permits for Oversized and/or Excessive Loads. These would be issued by the City and the California State Department of Transportation (" Caltrans") prior to the transportation of heavy equipment to the site. • Trench Excavation Permit, Permit to Erect and Operate the Tower Crane. The California Occupational Safety and Health Administration would issue these at least 30 days prior to construction. • Hazardous Materials Inventory and Emergency Business Plan and California Accidental Release Prevention Program (Risk Management Plan). Applications must be submitted to City of Vernon Environmental Health Department at least 30 days and 90 days prior to start of operations, respectively. The attached Table 1 summarizes the status of the Project pre -construction permits requirements. Table 1 — Major Permits and Status Permit Status CEC Certification of AFC (CEC License) Air Quality Permits Final Determination of Compliance ("FDOC") Permit to Construct ("PTC") — (Federal PSD and Non -attainment NSR permits) Title IV Permit (Acid Rain Permit) Evidentiary Hearing to be held 02/10/03 based on CEC staff Pre -File Hearing on 01/09/03 . Committee should soon issue Presiding Member's Proposed Decision ("PMPD") and Notice of Committee Conference (30-day review). City expects certification to be granted by March 26, 2003. Issued to CEC December 13, 2002 SCAQMD should issue PTC by April 2003 after CEC issues AFC Certificate for the Project. Project not a major source and EPA will not issue a PSD permit. SCAQMD should issue as part of PTC. Page 26 of 34 Permit Status Title V Permit SCAQMD should issue once City provides offset package and CEC certifies the Project. RECLAIM Trading Credits, City has acquired 49% of first year NOx Reclaim Trading Credits (RTCs) and is negotiating for the remainder. For the second year and beyond the City will need 71,215 lbs. of NOx RTCs. Emission Reduction Credits and The City has purchased and/or contracted for 100% of Offsets CO Emission Reduction Credits. City has purchased 100% of VOC offsets. City is negotiating for PM10 offsets and expects to obtain from the SCAQMD Priority Reserve any amounts not attainable from the market. City may have to purchase S02 offsets if not covered with S02 allowances. Water -Related Permits General NPDES Storm water Notice of Intent needs to be filed prior to construction Construction Activity Permit activities; Storm Water Pollution Prevention Plan needs to be prepared. Waste Management Regulations Remedial Action Plan ("RAP") and Dept. of Toxic Substances Control and CEC Remediation Compliance Project Manager must approve RAP; site must be remediated to their satisfaction. In summary, we find that the City has identified and applied for all material environmental permits for the Project. Given the recent decision by the CEC to close the record, in its February 10, 2003 Evidentiary Hearing, we believe that the majority of permitting issues are behind the Project. Given the lack of Intervener response, it is highly likely that the Project will meet its scheduled receipt of the required preconstruction permits by April 2003. PROJECTED OPERATING RESULTS NCI prepared a projection of the financial operating results of the Project for the months of January 2004 through December 2009 for the purpose of estimating the expected cost of power from the Project during this period. A software model was developed to forecast certain key performance and cost parameters and calculate the resulting cash flows. Debt service costs are not considered in these projections since they are beyond the scope of this Report, and are considered in detail in the Official Statement of the Project Bonds. The forecasts and assumptions are described below. Dispatch and Operation The retail electric load of the City typically peaks during summer weekday periods, and drops on Sundays and holidays. The City expects that the Project will normally be base -loaded to serve this Page 27 of 34 load, with duct firing not used. The Project would also be shut down during periods when cheaper energy is available for purchase on the spot market.34 For purposes of projected operating results, commercial operation of the Project was assumed to occur on September 1, 2004. Generation of test power was assumed to begin one month prior to this date. It was assumed that the City would schedule the base capacity of the Project at full load for all hours of each month, except during periods of scheduled maintenance and forced outage as described below. No duct firing operation was assumed. No part load operation was assumed. Forced outages of the Project were assumed to occur every month at a rate of 3 percent. This is consistent with historical forced outage rates for combined -cycle power plants35. As a conservative measure, a forced outage rate of 6 percent was assumed for the first operating year to reflect outages caused by operator error, design shortcomings, or other factors that typically surface and are remedied during the first year of operation for any power plant. Scheduled outages were assumed to occur as necessary for maintenance of the CTGs as described in guidelines from Alstom36. These include Level - A inspections at 10,000 equivalent operating hours ("EOH") and every 20,000 EOH thereafter, Level- B inspections at 20,000 and 100,000 EOH, Level-C overhaul at 40,000 and 80,000 EOH, and a Level- D inspection at 60,000 EOH. EOH is a function of operating hours and startup/shutdown cycles experienced by the CTGs, as defined by Alstom.37 Additional scheduled outage hours were assumed to occur such that the annual average EAF of the Project was 90 percent. Project capacity and heat rate were assumed to equal the estimates provided by the City as adjusted to a higher heating value (" HHV") basis.38 Use of HHV accurately calculates the additional gas that must be burned in the CTGs to compensate for the heat of combustion that is absorbed by the water entrained in the gas. Capacity and heat rate were increased or decreased for each month based on the historical average annual ambient temperature for the general area of the site39. Performance was assumed to degrade with increasing operating hours, to a maximum of 4.5 percent degradation of capacity and a 2 percent degradation (increase) in heat rate with respect to initial operating values. This degradation pattern is typical in the industry for combustion turbines, and is due to normal wear of combustion turbine components. Some of this degradation would be recovered after each off-line water wash of a CTG, and after each CTG overhaul. 34 Conversation with Jorge Somoano, City of Vernon, April 24, 2002. 35 North American Electric Reliability Council (NERC), Generation Availability Data System, 1982-1999 Generating Unit Statistics, October 2000, Combined -cycle Units, Un-weighted Forced Outage Rate. 36 Equipment and Service Contract between Alstom Power Inc, and the City of Vernon, May 23, 2001, Appendix 4 Scope of Supply, Document X120700E, GTXI00-60Hz Description, Chapter 9 - Operation and Maintenance, paragraph 9.7.2. - Maintenance. 37 Equipment and Service Contract between Alstom Power Inc. and the City of Vernon, May 23, 2001, Appendix 4 Scope of Supply, Document X120700E, GTX100-60Hz Description, Chapter 9 - Operation and Maintenance, paragraph 9.7.2. - Maintenance. 38 Application for Certification for the Malburg Generating Station, City of Vernon, December 2001, Tables 3.4-2 through 3.4- 6 - Power Cycle Heat Balances. 39 Western Regional Climate Center, Western U.S. Climate Historical Summaries, Southern California, Montebello, NCDC 1971-2000 Monthly Normals. Page 28 of 34 Forecast of Operating and Maintenance Costs Projected annual fixed and variable operating costs of the Project for the year 2005 (first full year of operation) is shown in Table 2 below. Table 2 - Forecast of Project Fixed and Variable Operating Costs for 2005 Cost of Operations Fixed Costs O&M Labor 2,167 Indirects and Overheads 108 Capital Additions, Improvements 260 Major Maintenance 178 Minor Repair and Maintenance 217 Insurance 1,083 Other 220 Total Fixed Costs ($000's) 4,286 Variable Costs Fuel Cost 30,936 Chemicals 165 Water 612 Overtime 68 Consumables 27 Total Variable Costs ($0001s) 31,811 Total Cost of Operations ($000's) 36,097 Note: Water cost does not include the credit for funding the reclaim water line extension Page 29 of 34 O&M Labor includes the estimated cost of labor and fees that would be charged to the City by the O&M Contractor for services. Indirects and Overheads include the cost of training, travel, safety equipment, and other operator -related costs billed through to the City by the O&M Contractor. Capital Additions and Improvements include the cost of spare parts and other capital items. These estimates are based on costs for other similar CCCT plants observed by NCI, prorated based on differences in equipment size and location. Major Maintenance includes the cost of major maintenance on the CTGs, the STG, and the balance of plant equipment, including replacement of the Catalysts. Major maintenance was assumed to occur during the annual April economic shutdown. The cost of CTG major maintenance was based on the repair and replacement requirements, cost, and outage duration information from Alstom.40 The Catalysts are forecast to require replacement every 30,000 EOH (approximately every 3 years) consistent with the Catalyst warranty provided by Alstom under terms of the HRSG Contract. For the year 2004, no major maintenance is expected. Minor Repair and Maintenance cost includes repair of other equipment at the Project. This estimate is based on costs for other similar CCCT plants observed by NCI, prorated based on differences in equipment size and location. Insurance Cost includes the cost of casualty insurance for the Project. This estimate is based on costs for other similar CCCT plants observed by NCI, prorated based on differences in Project size and location. Other represents additional costs incurred due to unforeseen circumstances such as excessive CTG component replacement or repair costs and insurance cost increases. It is based on 5 percent of the total fixed cost estimate. It was assumed that no charges would be incurred for electricity taken from the City electric distribution system during outages and for Project startup. Project. All fixed costs were assumed to escalate at 2.5 percent annually throughout the life of the Forecast of Fuel and Other Variable Costs Fuel Cost is based on the southern California border gas price forecast provided by the City, the forecast heat rate of the Project, and the forecast power production from the Project. Fuel consumed during each startup (prior to synchronization and power generation). was also estimated assuming it would be consumed at 30 percent of the normal full load rate. It was assumed that actual gas consumption by the Project would fall within plus or minus 10 percent of gas delivered into the SoCal Gas system at the California border, and therefore SoCal Gas would levy no transportation imbalance charges. Similarly, it was assumed that the Project would consume at least 75 percent of the annual contract quantity as specified by the City to SoCal Gas each year, and therefore SoCal Gas would levy no take -or -pay or use -or -pay charges. This assumes that City will identify the Project as a full requirement, non -core customer for firm infra -state transmission service from SoCal Gas under GW-VRN. 40 Equipment and Service Contract between Alstom Power Inc. and the City of Vernon, May 23, 2001, Appendix 4 Scope of Supply, Document X120700E, GTX100-60Hz Description, Chapter 9 - Operation and Maintenance, paragraph 9.7.2. - Maintenance. Page 30 of 34 Chemicals and Consumables cost estimates are based on costs for other similar CCCT plants observed by NCI, prorated based on differences in Project size and location. Water cost is estimated based on the forecast reclaimed and potable water consumption rates multiplied by the tariff rates to be charged by the Water Department to the Utilities Department.41 Reclaimed and potable water consumption rates were estimated as a function of average monthly ambient temperature and the maximum and minimum consumption rates identified in the AFC42. Overtime costs were estimated assuming that 6 hours of overtime would accumulate across the entire operating staff for every hour of forced outage time, multiplied by an average rate of $40 per hour. This was assumed to be charged through to the City by the O&M Contractor in addition to the fixed monthly labor costs. All variable costs, other than fuel and water, were assumed to escalate at 2.5 percent annually throughout the life of the Project. Projected Operating Results A summary of projected operating results for the Project is shown in Table 3 below. 41 Memo from Samuel Kevin Wilson, Director of Community Services & Water to Bruce V. Malkenhorst, City Administrator, dated February 26, 2002 - Recycled Water Rates. ' California Energy Commission, Application for Certification, Malburg Generating Station Power Project, Table 3.4-9 Estimated Normal and Maximum Water Requirements. Page 31 of 34 Table 3 - Projected Operating Results for the Years 2004 through 2009 2004 ZOOS 2006 2007 2008 2009 Operations Average Capacity (MW) * 120 117 116 116 116 116 Energy (MWH) 365,289 933,228 896,744 930,930 924,370 885,511 Average Fuel Cost (SIMb1Btu) * $4.23 S4.44 $4.61 $4.81 $5.03 $5.25 Average Heat Rate (Btu/kwh, HHV, net) * 7,397 7,496 7,534 7,544 7,549 7,550 Equivalent Availability Factor (EAF) * 89*/0 91% 88% 92°/u 91% 88% Capacity Factor 89% 86% 86% 86% 85% 85% Cost of Operations Fixed Costs O&M Labor Indirects and Overheads Capital Additions, Improvements Major Maintenance Minor Repair and Maintenance Insurance Other Total Fixed Costs ($000Is) Variable Casts Fuel Cost Chemicals Water Overtime Consumables Total Variable Costs ($000's) Total Cost of Operations ($000's) Average Cost per MWH 710 2,167 2,222 2,278 2,335 2,395 36 108 ill 114 117 120 85 260 267 273 280 287 0 178 5,848 0 772 7,309 71 217 222 228 234 239 355 1,083 1,111 1,139 1,168 1,197 68 220 544 233 289 692 1,348 4,286 10,378 4,319 5,251 12,297 11,659 30,936 30,949 33,512 34,829 34,973 64 165 163 174 177 174 255 612 612 612 612 612 53 68 70 72 74 76 11 27 27 29 29 .29 12,043 31811 31,824 34,400 35,723 35,867 13,391 36,097 42,202 38,720 40,974 48,165 $36.66 $38.68 $47.06 $41.59 $44.33 $54.39 * Excluding the effect of economic shutdowns. Average capacity is less than 134 MW due to no use of duct firing. Data for 2004 represents four months of full load operation (Sept through December). Results show that operating costs are forecast to remain reasonably constant from year to year except for the years when CTG maintenance is required per the Alstom maintenance recommendations. It is expected that the City will draw from maintenance reserve funds to cover maintenance in these years. PRINCIPAL CONSIDERATIONS AND ASSUMPTIONS This Report summarizes our review and analyses of the Project to the date of this Report. The results of the analyses performed in preparation of this Report are predicated upon the general condition that the assumptions presented herein will continue, as stated, for the period under consideration without significant change. Although we believe our considerations and the use of the assumptions and information to be reasonable for the purposes of this Report, NCI makes no representation that alternative or additional assumptions would be unreasonable or that the assumed conditions will, in fact, occur. Additional issues for consideration may arise in the future, actual future conditions and events may differ from those assumed, and information provided to us by others may prove to be inaccurate. Our forecasts, findings, and conclusions stated herein would change generally to the extent that the actual conditions and data are different from the considerations, assumptions, and information stated herein. NCI undertakes no obligation to update or revise any portion of this Report to reflect any events or circumstances that occur after the date of this Report. In addition, our studies, analyses, investigations, and projections have been based on our understanding of certain documents and Page 32 of 34 information provided to us by the City. While we believe these sources to be reliable, they have not been independently verified for accuracy or validity, and no assurances are offered with respect thereto. The provisions of certain written Project agreements are described in general in this Report. Such descriptions are illustrative summaries only, and are not intended to be legal conclusions of the meanings or interpretations of the actual agreements. The description of any Project agreement contained in this Report should not be considered an alteration or modification of any such agreement, nor a waiver of any provision therein. The principal considerations and assumptions made by us in preparation of this Report, and the information provided to us by others, include the following: 1. All of the agreements, authorizations, and permits related to the Project are valid and enforceable in accordance with their terms, and all parties to them will comply with the respective provisions; 2. The date of commercial operation of the Project will be in September 1, 2004; 3. The capital costs and construction schedule of the Project will be as forecast by the City; 4. The fuel commodity cost for the Project will be as forecast by the City; 5. The capacity and heat rate of the Project upon the date of commercial operation will be as forecast by the City for the various ambient temperature and duct firing conditions; 6. The City will dispatch the Project as forecast by the City, at base load, with the possibility of duct firing during the summer months to compensate for a seasonal decrease in efficiency or an increase in demand from the City's electrical customers; 7. Forced outages of the Project will occur 3 percent of the time each month, except for the first year of operation where they will occur 6 percent of the time each month; 8. The frequency, cost, and duration of CTG major maintenance will be as forecast by Alstom; 9. Scheduled outages of the Project for maintenance of other Project equipment will be coordinated such that the annual average EAF of the Project is approximately 90 percent; 10. The cost of fuel transportation for the Project across the SoCal Gas system will be as calculated from SoCal Gas rate schedule GW-VRN assuming classification as a non -core, full requirements, firm intrastate transportation customer; 11. The Project will be operated and maintained consistent with accepted industry standards and equipment manufacturer recommendations, will not experience significant damage, and will remain in service during the years considered in this Report; Page 33 of 34 12. Any necessary renewals of Project -related authorizations and permits during the years considered in this Report will not require significant capital improvements or introduce significant new operating constraints; 13. Provision of natural gas transportation service by SoCal Gas will not require significant capital upgrades or introduce significant operating constraints to the Project. FINDINGS AND CONCLUSIONS Our findings and conclusions relative to the Project are as follows: 1. The capital costs and construction schedule of the Project as forecast by the City are reasonable and achievable. 2. The Project design is based on proven technology. 3. No critical flaws have been found that would materially impact the technical or economic feasibility of the Project. 4. State-of-the-art design and equipment will be utilized, and an annual average EAF of 90 percent for the Project, which is at the low end of the range forecast by the City, is reasonable. 5. The natural gas fuel price forecast provided by the City is reasonable for purposes of estimating average annual cost, and there should be adequate natural gas available in the market to fuel the Project, and there is a low probability of supply interruption to the Project due to delivery constraints on the SoCal Gas and City natural gas distribution systems. 6. The City has received notice from the CEC that it is closing the docket on evidentiary hearings. The Project is expected to shortly receive all of the necessary material pre - construction and operation permits, approvals and conditions. 7. The assumptions made in this Report for determination of the projected operating results of the Project, including those related to dispatch, operating and maintenance costs, and performance degradation, are reasonable. This Report has been prepared solely for the City for the purposes set forth in the Report, and the Report may not be used for any other purpose. In particular, this Report does not express any recommendation, opinion or advice as to the wisdom, desirability or prudence of the issuance, sale or purchase of any bonds, notes or other securities or as to the action any person should take in connection with the offer, issuance, purchase or sale of such bonds, notes or other securities. NCI and its employees are independent contractors providing professional services to the City and are not officers, employees, or agents of the City. NCI and its employees are not and shall not be considered to be fiduciaries of the City, any purchaser or offeree of any bonds, notes or other securities, or any other person named in this Report. This Report should be read in its entirety. Page 34 of 34 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2002 AND NNE 30, 2001 B-1 SFl 131736lvl2 42379/276 CITY OF VERNON General -Purpose Financial Statements and Supplemental Combining Statements with Independent Auditor's Reports { i Fiscal Year Ended June 30, 2002 j i Macias, Gini & Company LLP Certified Public Accountants and Management Consultants CITY OF VERNON FISCAL YEAR ENDED DUNE 30, 2002 Table of Contents Paes IndependentAuditor's Report...................................................................................................................1 General -Purpose Financial Statements: Combined Balance Sheet — All Fund Types and Account Group..............................................................2-5 Combined Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits) - All Governmental Fund Types....................................................................6-7 Combined Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits) — Budget and Actual on a Budgetary Basis — General Fund, Special Revenue Funds and Capital Projects Funds.......................................................8-9 Combined Statement of Revenues, Expenses and Changes in Retained Earnings - All Proprietary Fund Types...................................................................................................10 Combined Statement of Cash Flows - All Proprietary Fund Types......................................................11-12 Notes to General -Purpose Financial Statements....................................................................................13-28 Supplemental Combining Statements: Combining Balance Sheet — All Enterprise Funds......................................................................................29 Combining Statement of Revenues, Expenses and Changes in Retained Earnings (Deficit) — All Enterprise Funds................................................................................................30 Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of General -Purpose Financial Statements Performed in Accordance With Government Auditing Standards.............................31-32 �J MIA C-, Macias, Gini & Company l�r Certified Pu011c Accountants and Management Consultdn#s Honorable City Council City of Vernon, California Partners Kenneth A. Macias, Managing Partner Ernest J. Gini Kevin J. O'Connell Richard A. Green Jan A. Rosati James V. Godsey us INDEPENDENT AUDITOR'S REPORT 515 South Figueroa Street Suite 325 Los Angeles, CA 90071 213e612.0200 213.286*6426FA% www.maciasgini.com We have audited the accompanying general-purpose financial statements' of the City of Vernon, California (the "City"), as of June 30, 2002, and for the fiscal year then ended, as listed in the accompanying table of contents. These general-purpose financial statements are the responsibility of the City's management. Our responsibility is to express an opinion on these general-purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general-purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general-purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall general-purpose financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such general-purpose financial statements referred to above present fairly, in all material respects, the financial position of the City as of June 30, 2002, and the results of its operations and cash flows of its proprietary fund types for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated January 24, 2003, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Our audit was made for the purpose of forming an opinion on the general-purpose financial statements taken as a whole. The supplemental combining statements listed in the accompanying table of contents are presented for purposes of additional analysis and are not a required part of the general-purpose financial statements of the City. Such supplemental combining statements have been subjected to the auditing procedures applied in our audit of the general-purpose financial statements and, in our opinion, are fairly stated, in all material respects, in relation to the general-purpose financial statements taken as a whole. ,a ti i..." / Certified Public Accountants Los Angeles, California January 24, 2003 4-pv� LGP Offices Located Throughout California i GENERAL PURPOSE FINANCIAL STATEMENTS CITY OF VERNON COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUP JUNE 30, 2002 Governmental Fund Types Special Capital ASSETS General Revenue Projects Cash and investments $ 11,897,514 $ 3,405,121 $ 2,225,746 Accrued interest receivable - - 25,000 Accounts receivable 848,058 330,982 - Taxes receivable 715,493 549,015 - Employee loans receivable 73,042 - - Accrued unbilled revenue - " Due from other funds 1,586,070 - 167,824 Inventories, at cost 710,377 - - Deposits 153,933 - - Advance receivable from outside party - - Advances to other funds 12,580,488 - - Loans receivable - - 3,000,000 Restricted cash and investments - 9,172,742 - Fixed assets Accumulated depreciation Other assets - - " TOTAL $ 28,564,975 $ 13,457,860 $ 5,418,570 7 See accompanying notes to general-purpose financial statements. 2 Proprietary Fund Types Account Group General Totals Internal Fixed (Memorandum Enterprise Service Assets Only) $ 59,609,999 $ 10,147,624 $ - $ 87,286,004 1,035,659 - - 1,060,659 9,576,368 - - 10,755,408 - - - 1,264,508 - - - 73,042 6,783,720 - - 6,783,720 - 66,124 - 1,820,018 7,398 - - 717,775 7,860 - - 161,793 4,819,543 - - 4,819,543 29,795,941 - - 42,376,429 - - - 3,000,000 7,044,206 - - 16,216,948 182,622,928 - 38,149,245 220,772,173 (59,173,697) - - (59,173,697) 1,208,848 - 1,208,848 S 243,338,773 $ 10,213,748 S 38,149,245 S 339,143,171 (Continued) See accompanying notes to general-purpose financial statements. 3 CITY OF VERNON BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUP COMBINED JUNE 30, Governmental Fund Special Capital LIABILITIES, FUND EQUITY General Revenue Ptects — ro�— (DEFICIT) AND OTHER CREDIT LIABILITIES: Accounts payable and accrued 2,564,749 $ 81,423 $ 593,940 liabilities Customer deposits and advances $ 725,292 " _ Accrued in lieu of taxes due to _ _ - General Fund 167,824 _ Due to other funds 1,088,274 438,389 " 17,000,218 Deferred revenue _ _ Advances from other funds 4,546,139 519,812 17,594,058 Total liabilities FUND EQUITY (DEFICIT) AND OTHER CREDIT: Investment in general fixed assets _ _ - Contributed capital Retained earnings 15,103,816 _ 3,000,000 Reserved fund balances Unreserved, undesignated fund 8,915,020 12,938,048 (15,175,488) balances (deficit) Total fund equity (deficit) and 24,018,836 12,938,048 J2,175,488) other credit $ 28,564,975 $ 13,457,860 $ 5,418,570 TOTAL See accompanying notes to general-purpose financial statements• A Proprietary Fund Types Account Group General Totals Internal Fixed (Memorandum Enterprise Service Assets Only) $ 12,959,496 $ 4,598,056 $ - $ 20,797,564 1,021,630 - - 1,746,922 1,196,413 - 1,196,413 389,657 66,124 - 623,605 - _ _ 1,526,663 25,376,211 - - 42,376,429 40,943,407 - 4,664,180 - 68,267,596 - - 38,149,245 38,149,245 2,402,205 4,388,676 - 6,790,881 199,993,161 1,160,892 - 201,154,053 - - - 18,103,816 - - - 6,677,580 202,395,366 5,549,568 38,149,245 270,875,575 $ 243,338,773 $ 10,213,748 $ 38,149,245 $ 339,143,171 See accompanying notes to general-purpose financial statements. 5 • CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES (DEFICITS) ALL GOVERNMENTAL FUND TYPES FISCAL YEAR ENDED JUNE 30, 2002 REVENUES: Sales and use taxes Franchise taxes Property taxes Building permits and plan check fees Community services Business licenses Intergovernmental Investment income (loss): Interest income, including gains (losses) on sale of investments Net increase (decrease) in fair value of investments Fines and forteitures Miscellaneous Charges for services to Enterprise Funds Total revenues EXPENDITURES: Current: General government Fire protection Police protection Public works Health services Debt service - interest Capital outlay Total expenditures EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES OTHER FINANCING SOURCES: Operating transfers in EXCESS OF REVENUES AND OTHER SOURCES OVER EXPENDITURES FUND BALANCES (DEFICITS), BEGINNING OF YEAR FUND BALANCES (DEFICITS), END OF YEAR Special General Revenue $ 4,510,113 $ " 3,969,222 ' 2,033,154 4,741,0.13 1,469,055 598,328 8,587 973,337 326,826 9,760 473,938 - 11,771 (94,867) 346,910 600,374 ' 7,131,953 ' 22,118,155 4,991,319 5,497,074 - 7,656,174 96,076 6,484,560 - 5,285,970 10,245 906,896 137,490 1,199,385 - 27,030,059 243,811 (4,911,904) 4,747,508 8,860,618 - 3,948,714 4,747,508 20,070,122 8,190,540 $ 24,018,836 $ 12,938,048 See accompanying notes to general-purpose financial statements. 6 Totals Capital (Memorandum Projects Only) $ - $ 4,510,113 - 3,969,222 3,490,258 10,264,425 - 1,469,055 - 606,915 - 1,300,163 - 9,760 183,124 657,062 3,229 (79,867) - 346,910 12,300 612,674 - 7,131,953 3,688,911 30,798,385 392,914 5,889,988 7,752,250 - 6,484,560 2,118,513 7,414,728 - 1,044,386 512,661 512,661 - 1,199,385 3,024,088 30,297,958 664,823 500,427 - 8,860,618 664,823 9,361,045 (12,840,311) 15,420,351 $ (12,175,488) $ 24,781,396 See accompanying notes to general-purpose financial statements. 7 CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENDITURES AND - CHANGES IN FUND BALANCES (DEFICITS) - BUDGET AND ACTUAL ON A BUDGETARY BASIS FUND, SPECIAL REVENUE FUNDS AND CAPITAL PROJECTS FUNDS GENERAL FISCAL YEAR ENDED JUNE 30, 2002 General Fund S social Revenue Funds Actual on a Varian" Actual on a Variance, Favorable Budgetary Bask Favorable (Unfavorable) Budget. Budgetary Bob (Uafavonbk). - Budget REVENUES: S 5.000,000 S 4,510,1)3. S (715.222 5 S S . Sales and use taxes 3,254,Oo0 3,969,222 715,222 - - 4.741.,013 4,741.013 Franchise taxes 4398,400 2,033.154 (2,365.246) - property taxes Building permits and plan check. fees 1.479,500 1.469,055 (l0.445) 443,32E _ - $1587 8.587 Community semen I55,000 IAW'000 973.337 973,337 (426.663) 700,000 326.826 (373,174) Business licenses 8.800 9,760 960 Intergovernmental _ 7,0,000 495,709 (6,514.291). (94•W) (94'967) Investment income (loss) 150,000 I5 346910 196.910 " Fines and forfeitures 693390 600,374 (93.016) Miscellaneous Charges for services m Enteprise Funds I6,750,000 7,131953 (2,868.000 (6,750.000) Reserve 6,750,000 40,270,290 22118155 (18,152,135) 708.300 4,991,319 4,232.519 - Total revenues EXPENDITURES: Current General government 7.957,052 8,099,53 8,p99.530 1(142,478 (142,478) - 96.076 (96.076) . Fire protection 7,957,052 7,833.454 6,535,469 t 297985 - 10245 (10245) Poiicepr eaion Public works 7.027,921 5,571,924 1,455,997 232.943 137,490 (137,490) Health services 1,170,833 937,"0 - Debt service - interest 3,318,922 118,546 3.200376 - Capital outlay _ 34,079,748 26,932,280 _7.147.468. - 243.811 {343,811) Total expenditures EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 6,190542 (4,814,125) (11,004,667) 708.800 4,747,50E 4,038,70E OTHER FINANCING SOURCES: 8.860,61E 8.160,618 " Operating trmsfea in EXCESS (DEFICIENCY)OFREVENUES AND OTHER 4,046.493 (2,144,049) 708.800 4,747,508 4,039,708 SOURCES OVER EXPENDITURES 6,190,542 FUND BALANCES (DEFICITS), BEGINNING OF YEAR 20,070,122_ 20.070,122 - 9.190,540 8.190,540 - 5 26,260,664 S 24,116,615 (ILI-,049) 3 FUND BALANCES (DEFIC[fS),END OFYEAR i V' ii anaa�a an See accompanying notes to general-purpose financial statements. 8 Capital project Funds Totals (Memorandum Only) Actual on a Variance Actual on a Variance Budgetary Favorable fladvetery Favorable Budget Basis (Unfavorable) Budget Basis (Unievorable) $ S S S 5.000,000 S 4,510,113 S (489,897) - 3254.000 3,969.222 715.= 3,490258 3,490258 4.398.400 10.264,425 5,866.025 1,47%500 1,469,055 (10.445) 135.000 606.915 451.915 2,100.000 1,300,)63 (799.837) - - Sim 9,760 960 186.353 186,353 7.000,000 577,195 (6,422.805) - 1501000 346910 196910 12,300 12.300 693,390 612,674 (70,716) 10,000,000 7,13 U53 (2,869.047) 6,750,000 (6.750,000) 3.688,911 3.688.911 40,979.090 30,798.395 (10,190,705) • 392.914 (392,914) 6,771.566 6,061.735 709,831 - 7,957,052 8,195.606 (238.554) - 7,833.454 6,535,469 1,297,985 1,926,000 2,118,513 (192,513) 8,953.921 7,700,012 1.253,239 1,170,833 1.075,480 95353 - 512,661 (512,661) - 512,661 (512.661) 1.709,496 1,709.496 5.028,418 118.546 4909,972 3,635,4% 3,024,088 611,409 37,715.244 30,200,179 7,515,065 (3,635,496) 664,823 4300.319 3.263.946 598,206 (2.665.640) 8.960,618 8,860.619 (3,635,496) 664,823 4,300319 3.263,846 9,453,824 6,194.978 (12,940.311) (12.840.311) - 15,420.351 15,420351 _$ _24,8791175 See accompanying notes to general-purpose floaDCW statements- 9 CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2002 Totals Internal (Memorandum Enterprise Service Only) OPERATING REVENUES: Power and water sales $ 105,798,713 $ - $ 105,798,713 Charges for services - 5,770,977 5,770,977 Total operating revenues 105,798,713 5,770,977 111,569,690 OPERATING EXPENSES: Cost of sales 105,072,189 105,072,189 In lieu of franchise tax 2,638,046 = 2,638,046 Depreciation 3,430,317 - 3,430,317 Employee benefits - 6,486,421 6,486,421 Total operating expenses 111,140,552 6,486,421 117,626,973 OPERATING LOSS (5,341,839) (715,444) (6,057,283) NONOPERATING REVENUES: Investment income Interest income, including gains (losses) on sale of investments 8,938,625 - 8,938,625 Net increase in fair value of investments 521,451 22,839 544,290 Total nonoperating revenues, net 9,460,076 22,839 9,482,915 NET INCOME (LOSS) BEFORE OPERATING TRANSFERS 4,118,237 (692,605) 3,425,632 OPERATING TRANSFERS OUT (8,503,702) (356,916) (8,860,618) NET LOSS (4,385,465) (1,049,521) (5,434,986) RETAINED EARNINGS, BEGINNING OF YEAR 204,378,626 2,210,413 206,589,039 RETAINED EARNINGS, END OF YEAR $ 199,993,161 $ 1,160,892 201,154,053 See accompanying notes to general-purpose financial statements. . 10 I CITY OF VERNON COMBINED STATEMENT OF CASH FLOWS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2002 Totals Internal (Memorandum Enterprise Service Only) RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Operating loss $ (5,341,839) S (715,444) S (6,057,283) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation 3>430,317 - 3,430,317 (Increase) decrease in: Accounts receivable 6,624,897 - 6,624,897 Accrued unbilled revenue 231,579 231,579 Due from other funds - (9,448) (9,448) Inventories 38,292 - 38,292 Other assets (1,144,756) - (1,144,756) Increase (decrease)in: Accounts payable and accrued liabilities 3,847,704 315,177 4,162,881 Customer deposits and advances 253,161 - 253,161 Due to other funds (10,345) 66,124 55,779 Due to General Fund 83,261 - 83,261 Net cash provided by (used in) operating activities 8,012,271 (343,591) 7,668,680 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Operating transfers to other funds (8,503,702) (356,916) (8,860,618) Advances to outside party 487,630 - 487,630 Advances to other funds (3,622,721) - (3,622,721) Advances from other funds 2,420,005 - 2,420,005 Net cash used in noncapital financing activities (9,218,788) (356,916) (9,575,704) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition of fixed assets (47,383,164) - (47,383,164) Net cash used in capital and related financing activities $ (47,383,164) S - S (47,383,164) (Continued) See accompanying notes to general-purpose financial statements. 11 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in fair value of investments Interest income received Net cash provided by investing activities NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR CITY OF VERNON COMBINED STATEMENT OF CASH FLOWS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2002 Totals Internal (Memorandum Enterprise Service Only) S 521,451 S 22,839 S 544,290 7,540,705 - 7,540,705 8,062,156 22,839 8,084,995 (40,527,525) (677,668) (41,205,193) 107,181,730 10,825,292 118,007,022 $ 66,654,205 S 10,147,624 S 76,801,829 See accompanying notes to general-purpose financial statements. 12 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 1, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES " Reporting Entity— The City of Vernon (the City") was incorporated on Sep tember ye tity operates under a General Law City. Effective July 1, 1988, the City became a Charter City - Council -City Administrator form of government. The general-purpose financial statements of the City include the operations n "Agency"). in financial The finant 1 activities of the g p City and its component unit, the City of Vernon Redevelopment Agency the City Council is financially operations of the Agency are closely related to those of the City,composed of the accountable for it. The Agency is a separate legal entity that is governed unit is a board oital Projects Fund d Council. Accordingly, the Agency is reported as a blended p are available at the City in the account group. Separate audited financialstatements California 90058. ency Administrator/City Clerk's Office at 4305 Santa Fe Avenue, Accounting — The accounts of the City are organized on the basis now o and �d ar accccounted oup. A Fund A b' fund is defined as an independent fiscal and accounting entity The opera revenues for in a separate set of self balancing accounts that comprise its assets, editolestablish accounting g control and expenditures, or expenses, as appropriate. An account gro p device to account and accountability for the City's general fixed assets. The account group is a reporting for fixed assets of the governmental funds not recorded directly in those funds. The following is a summary of the fund types and account group utilized by the City: A. Governmental Fund Types all financial resources except those required to be accounted General Fund —Used to account for for in other funds count for the proceeds Specia 1 Revenue Funds —Used to aceds of specific revenue sources .(other than Capital Projects Funds) that are legally restricted to expenditures for specific purposes d for acquisiti Capital Projects Funds —Used to account for financial resouced by Prop r Petary Fed Types. on or construction of major capital facilities other than those man B. Proprietary Fund Types er Enterprise Funds — Used to account for operations that o f theagoverning o ern ngand o�y is that the perated in a costs similar to private business enterprises, for which the inter g expenses, including depreciation) of providing goodsourhsuserahto ge e The City'suenterprise continuing. basis be financed or recovered primarily through operations include power, water and gas utilities. t are Internal Service Funds - Are specifically designed to accountoof for terna/service fitnd shouods or services ld be to provided on a cost -reimbursement basis. That is, the goal of purpose of fully recovering that cost measure the full cost of providing goods or services for the pure through fees or charges. 13 E CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Account Group General Fixed Assets Account Group — Used to maintain control and cost information of capital assets owned by the City, other than those accounted for in the Proprietary Fund Types. Basis of Accounting — Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. All Governmental Fund Types are maintained on the modified accrual basis of accounting. Revenues are recognized when they become measurable and available to finance operations during the current year. Available means collectible within the current period or within 60 days after year-end. Revenues that are susceptible to accrual include taxes, charges for services, intergovernmental revenues and investment income. Expenditures are generally recognized when the related fund liability is incurred. Expenditures for principal and interest on long-term debt are recognized when due. Proprietary Fund Types are maintained on the accrual basis of accounting. Revenues are recognized when they are earned, and expenses are recognized when the related liabilities are incurred. Budgetary Control and Accounting — The City adheres to the following general procedures in establishing its annual budget, which is reflected in the accompanying general-purpose financial statements: ■ An annual budget is adopted by the City Council that provides for the general operation of the City. The budget includes authorized expenditures and estimated revenues of the General Fund, Special Revenue Funds and Capital Projects Funds; The budget is formally integrated into the accounting system and employed as a management control device during the year; ■ Encumbrances, which are commitments related to executory contracts for goods and services, are recorded to assure effective budgetary control and accountability; ■ Encumbrances outstanding at year-end do not constitute expenditures or liabilities. Encumbrances outstanding at year-end are reported as reservations of fund balance for subsequent year expenditures. JJ Unencumbered appropriations lapse at year-end; ■ The budget is adopted on a modified accrual basis, except that encumbrances are treated as budgeted expenditures in the year of incurrence of the commitment to purchase; 14 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 1, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) • The City Administrator is authorized to transfer appropriations between activities within any fund. fund s over Expenditures may not exceed appropriations at thebalancesTheebudgetedeamountsnus de in the appropriations are financed by beginning fiscal year accompanying general-purpose financial statements include any amendments made during y 2002. reconciles General Fund expenditures on the modified accrual basis with The following schedule expenditures on a budgetary basis: Less Expenditures Actual Add Related to Expenditures on Encumbrances Encumbrances Actual. Modified Outstanding Outstanding in Expenditures on Accrual Basis June 30, 2002 Prior Years Budgetary Basis Current: 197,839 $ 26,092 $ 5,668,821 General government $ 5,497,074 $ 197,839 24,574 8,099,530 Fire protection 7,656,174 54,570 6,535,469 Police protection 6,484,560 110,051 5,571,924 5,285,970 311,327 25,373 Public works 31,094 - 937,990 Health services 906,896 118,546 1,199,3 85 161,347 1,242,186 Capital outlay 932.280 j Total $ 27,030,059 $ 1,279,584 $ 1,377,363 $ 26, No reconciling items existed for the Special Revenue or Capital Projects Funds. Accrued Unbilled Revenue — Accrued unbilled revenue consists of utility services delivered to customers but not billed as of June 30, 2002. t on a Inventories - Inventories consist of consumable supplies and fuel stock, which erase when theitems stated at are used. first in first out basis. The cost of inventories is recorded as an expen P Fun Fixed Assets General fixed assets are recorded as expenditures in the h Governmental The City does not d Types at the time of purchase and are recorded at cost in the General Fixed Assets Fixed Assets Account Grou.record the purchase or construction of public domain or the General Fixed Assets Account Group at infrastructure assets in the General market value Account Group. Donations are recorded in at the time received. No depreciation is provided for on general fixed assets. Fixed assets that are disposed of are removed from the accounts on the basis of their historical costs. Enterprise Fund fixed assets are recorded at cost or, if contributed,testimated ed fair Darer the estimavalue at ted time received. Depreciation of such assets is computed on thestraight-line useful lives of the assets. 15 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) A summary of the estimated useful lives of Enterprise Fund fixed assets is as follows: Utility plant and buildings 25 to 50 years Improvements 10 to 20 years Machinery and equipment 3 to 35 years Vacation Benefits — The City pays accumulated vacation benefits to employees upon retirement or termination of employment. The liability for the benefits has been recorded in accounts payable and accrued liabilities. Insurance Programs — The City is partially self -insured for claims arising under workers' compensation, general liability and medical claims. (See Note 8.) Property Taxes — The County of Los Angeles (the "County") levies, collects and apportions property taxes for all taxing jurisdictions within the County. Property taxes are determined by applying approved rates to the properties' assessed values. The County remits property taxes applicable to the City less an administrative fee throughout the year. Article XII1A of the State of California Constitution limits the property tax levy to support general government services of the various taxing jurisdictions to $1.00 per $100 of assessed value. Taxes levied to service voter -approved debt prior to June 30, 1978 are excluded from this limitation. , Secured property taxes are levied in two equal installments, November 1 and February 1. They become delinquent with penalties on December 10 and April 10, respectively. The lien date is January 1 of each year for secured and unsecured property taxes and the levy date occurs on the Ah Monday of September of the tax year. Unsecured property taxes on the tax roll as of July 31 become delinquent with penalties on August 31. Total Columns on General -Purpose Financial Statements - Total columns on the accompanying general-purpose financial statements are captioned "Memorandum Only" to indicate that they are presented only to facilitate financial analysis. Such data is not comparable to a consolidation. Interf ind eliminations have not been made in the aggregation of this data. Therefore, amounts in these columns do not purport to present financial position, results of operations, or cash flows of the City in conformity with generally accepted accounting principles. Statement of Cash Flows — For the purpose of reporting cash flows, cash and cash equivalents include cash and investments in the City's pooled program and any investments with original maturities of three months or less at the time of purchase. Use of Estimates — The preparation of general-purpose financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported. amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates. [3 16 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2002 2. CASH AND INVESTMENTS Deposits — At June 30, 2002, the carrying amount of the City's cash deposits was $1,574,746. The bank balance of such deposits was $1,895,407. Of the total bank balance, $700,000 was covered by federal depository insurance, and $1,195,407 was on deposit with California financial institutions and collateralized with government securities or first trust deed mortgage notes held by the pledging financial institution or by its trust department or agent. The California Government Code requires California financial institutions to secure the City's deposits by pledging government securities or first trust deed mortgage notes as collateral. The market value of pledged government securities and first trust deed mortgage notes must equal at least 110% and 150%, respectively, of the City's deposits. Such collateral is considered to be held in the name of the City. Investments - Statutes authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; bankers' acceptances; medium -term corporate notes; repurchase agreements; negotiable certificates of deposit; commercial paper of the highest quality or of the highest letter and numerical rating as provided by Moody's Investors Service Incorporated or Standard and Poor's Corporation; the Los Angeles County treasury pool and the State Treasurer's investment pool. Investments with original maturity dates greater than one year are stated at fair value based on quoted market prices. The City's investments at June 30, 2002, are categorized below to give an indication of the level of custodial credit risk assumed by the City at year-end. Category 1 includes investments that are insured or registered or for which the securities are held by the City or its agent in the City's name. Category 2 includes uninsured and unregistered investments for which the securities are held by the counterparty's trust department or agent in the City's name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty, or by its trust department or agent, but not in the City's name. Certain investments held by the City are not subject to categorization, including deposits in the State Treasurer's Local Agency Investment Fund and money market mutual funds. 17 CITY OF VERNON NOTES TO GENERAL-PuRpOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2002 2• CASH AND INVESTMENTS (Continued) Investments (Continued) Categorized investments: U.S. government and agency securities Commercial paper Investments not subject to categorization: State of California Local Agency Investment Fund Money market mutual funds Total investments at fair value Cate ory 1 2 3 Total $ 51,231,640 $ - $ - $ 51,231,640 19,595,285 19,595,285 $ 70,826,925 $ - $ - 70,826,925 10,000,000 21,101.281 $ 101,928,206 As of June 30, 2002, the City's investment in LAIF is $10,000,000. The fair value of the total amount invested by all public agencies in LAIF at that date is $47,889,555,193. Of that amount, 96.92%o is invested in non -derivative financial products and 3.08% in structured notes and asset -backed securities. The Local Investment Advisory Board (the `Board") has oversight responsibility for LAIF. The Board consists of five members as designated by State Statute. The value of the pool shares in LAIF that may be withdrawn is determined on an amortized cost basis, which is different than the fair value of the City's position in the pool. For the year ended June 30, 2002, interest earned by the Enterprise Funds' equity in pooled cash and investments is now reported as interest income in the respective Enterprise Funds. In accordance with City Council Resolution No. 6102 and California Government Code Section 53647, interest earned by the Enterprise Funds may be transferred to the General Fund. During the fiscal year ended June 30, 2002, interest of $8,503,702 was transferred to the General Fund. 3• FIXED ASSETS Fixed assets of the Enterprise Funds consist of the following at June 30, 2002: Utilities: Utility plant, including related machinery and equipment $ 105,972,820 Buildings 481,800 Construction in progress 48,3D5,451 Total Utilities 1,860,071 154,760, Water utility plant Gas lines - construction in progress 1,56,,071 72 135 Total $ 182,622,928 18 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 3. FIXED ASSETS (Continued) Changes in the fixed assets reported in the General Fixed Assets Account Group during the year ended June 30, 2002 were as follows: . Land Structures and improvements Equipment Construction in progress Total Balance July 1, 2001 $ 7,615,728 10,874,568 14,864,059 Additions EI Balance Transfers June 30, 2002 $ 1,574,296 3,179,800 (1,574,296) 1,235,383 $ 9,190,024 12,480,072 16,099,442 375,290 4,417 - 379,707 $ 33 729,645 $ 4,419,600 $ - $ 38,149,245 4. PENSION PLAN The City contributes to the California Public Employees' Retirement System (the "PERS"), an agent multiple -employer retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. All full-time safety (police and fire personnel) and miscellaneous personnel and temporary or part-time employees who have worked 1000 hours in a fiscal year are eligible to participate in the PERS. Benefits vest after five years of service. Employees who retire at age 50 with five years of credited service are entitled to retirement benefits. Monthly retirement benefits are based on an employee's average compensation for his or her single highest year of compensation for each year of credited service. Miscellaneous members with five years of credited service may retire at age 55 with full benefits based on a benefit factor derived from the "2% at 55 Miscellaneous Factor" benefit factor table and between age 50 and 54 with reduced retirement benefits. Safety members may retire at age 50 with full benefits based on a benefit factor derived from the "2% at 55 Safety Factor" efts These benefit provisions and all ctor table with five years of credited service. The.PERS also provides death and disability ben other requirements are established by State statute and City ordinance. The City's plan does not issue a stand-alone financial report but is included in the PERS report, which can be obtained from PERS at Lincoln Plaza, 400 P Street, Sacramento, California 95814. The State -required City employee salary contributions of 7% for miscellaneous employees and 9% for safety members are subsidized by the City. The City is required to contribute the remaining amounts necessary to fund the benefits for its members, using the actuarial basis adopted by the PERS Board of Administration. 19 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2002 4. PENSION PLAN (Continued) The City's total contribution to the PERS for the year ended June 30, 2002 was $1,726,373. City contribution rates as a percentage of covered payroll were 0% for miscellaneous plan members and 1.994% for safety plan members. The City's contribution was made in accordance with actuarially determined requirements based on an actuarial valuation performed as of June 30, 1999. The PERS uses the entry age normal actuarial cost method, which is a projected benefit cost method that takes into account those benefits expected to be earned in the future as well as those already accrued. According to this cost method, the normal cost for an employee is the level amount that would fund the projected benefit if it were paid annually from the date of employment until retirement. The PERS uses a modification of the entry age normal cost method whereby the employer's total normal cost is expressed as a level percentage of payroll. PERS also uses the level percentage of payroll method to amortize any unfunded accrued actuarial liabilities. The amortization period of the unfunded accrued actuarial liability ends on June 30, 2011. Significant actuarial assumptions used in the valuation included (a) a rate of return on the investment of present and future assets of 8.25% a year, compounded annually; (b) projected salary increases of 3.75% a year, compounded annually, and 3.50% attributable to inflation; (c) additional projected salary increases of 0.0% a year, attributable to cost -of -living increases; and (d) merit raises that vary by length of service and age of entry. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a two- to five-year period. Trend information for the current and two preceding fiscal years is as follows: Percentage Fiscal Year, Annual of Ended Pension Amount APC Net Pension June 30 Cost (APC) Contributed Contributed Obligation 2002 $ 1,726,373 $ 1,726,373 100% - 2001 1,459,905 1,459,905 100% 2000 1,491,531 1,491,531 100% The following schedule represents the required supplemental information for the three most recent actuarial valuations. This schedule provides information about progress made in accumulating sufficient assets to pay benefits when due (dollar amounts in millions): Actuarial Actuarial Actuarial Accrued Overfunded Annual OAAL as °lo Valuation Value of Liability AAL Funded Covered of Covered Date June 30 Plan Assets (AAL) (OAAL) . Ratio Payroll Payroll 2001 $ 179.8 $ 155.7 $ (24.1) 115.5% $ 18.9 (127.5%) 2000 164.3 148.1 (16.2) 110.9 18.5 (87.6%) 1999 160.3 133.8 (26.5) 119.8 18.1 (146.4%) 20 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 5. DEFICITS IN FUND EQUITY The deficit fund balance of $12,175,488 in the Capital Projects Funds relates to recording the Agency's loan from the City on its balance sheet, which will be repaid through future property tax increments. The Gas Enterprise Fund has an accumulated deficit of $6,068,705 at June 30, 2002, which will be recovered from customers once the fund commences operations. The following Internal Service Funds have accumulated deficits at June 30, 2002: Unemployment Insurance $ 34,836 Equipment Replacement 190,522 Group Medical Insurance 82,417 To the extent such deficits are attributed to shortfalls in charges to other funds, such deficits will be recovered through future rate increases. Deficits arising from decreases in fair value of pooled investments will not be recovered through charges to other funds. 6. UTILITY OPERATIONS AND COMMITMENTS Deregulation Effective April 1, 1998, competition was introduced into California's electric utility market, and customers of the state's investor -owned utilities ("IOUs") became eligible for direct access. The implementation of competition in accordance with State Assembly Bill 1890 ("AB1890") resulted in significant structural changes to the electric power industry, including mandated direct access for IOU customers, energy sales through a Power Exchange, and management of transmission assets through an Independent System Operator ("ISO"). AB 1890 also legislated the recovery of stranded investment through the assessment of a non -by passable competition transition change ("CTC"). The original deregulation legislation applied to the State's IOUs and did not compel participation by publicly owned utilities, such as the City's electric utility. Participating Transmission Owner On August 30, 2000, the City filed a petition for declaratory order with the Federal Energy Regulatory Commission ("FERC") requesting a determination by the FERC that the City's Transmission Revenue Requirement ("TRR"), as approved by its rate setting body, the City Council, is proper for purposes of the City becoming a Participating Transmission Owner ("PTO") in the California ISO. The FERC issued its order accepting the City's petition, with certain modification, on October 27, 2000. Certain aspects of the FERC order were challenged by some of the State's other PTOs. Recently, a federal appeals court ruled that the way the FERC arrived of its decision was improper and remanded the case back to the FERC for further proceedings. The City expects the outcome to remain the same. As a PTO, the City has turned over operational control of its transmission entitlements to the ISO effective January 1, 2001 and shall be reimbursed based upon its TRR by the ISO through the ISO's collection of a transmission access charge ("TAC"). 21 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE30, 2002 6. UTILITY OPERATIONS AND COMMITMENTS (Continued) On December 21, 2000, the ISO filed, on behalf of itself and the Participating Transmission Owners (PTO), a number of changes to its Transmission Control Agreement (TCA) to recognize Vernon's application to become a Participating Transmission Owner. The ISO also filed revisions. to identify the transmission interests that the City will be turning over to the ISO's operational control and the inclusion of an explicit contract provision to ensure that all PTOs, including an entity such as the City, which is not subject to the rate jurisdiction of FERC under section 205 and 206 of the Federal Power Act (FPA), make all refunds or payment adjustments to implement any relevant FERC order. Project Commitments A. Southern California Public Power Authority In. 1980, the City entered into a joint powers agreement with nine (9) Southern California cities and an irrigation district to form the Southern California Public Power Authority (the "Authority"). The Authority's purpose is the planning, financing, acquiring, constructing and operating of projects that generate or transmit electric energy. The Authority purchased a 5.91% interest in the Palo Verde Nuclear Generating Station (the "Station"), a nuclear -fired generating station near Phoenix, Arizona, from the Salt River Project Agricultural Improvement and Power District, and a 6.55% share of the right to use certain portions of the Arizona Nuclear Power Project Valley Transmission System. The City has a 4.9% entitlement share of the Authority's interest in the station. Between 1983 and 2002, the Authority issued $3.166 billion (with $630 million currently outstanding) of Power Project Revenue Bonds to finance the purchase of the Authority's share of the Station and related transmission rights. The bonds are not obligations of any member of the Authority or public agency other than the Authority. Under a power sales contract with the Authority, the City is obligated on a "take or pay" basis for its proportionate share of power generated, as well as to make payments for its proportionate share of the operating and maintenance expenses of the Station, debt service on the bonds and any other debt, whether or not the project or any part thereof or its . output is suspended, reduced or terminated. The City's proportionate share of costs duringscal year 2002 was $9,199,445. The City estimates its proportionate share of costs will be approximately $9,037,000 for the fiscal years ending 2003 and approximately $9,476,000 for fiscal year ending 2004. At June 30 2002, the City designated $35,506,654 of cash and investments of the Utilities Department Enterprise Fund for payment of its future above market costs. During the year ended June 30, 2002, the account earned $548,766 of interest and the City used $3,073,693 to pay the Palo Verde Project power costs to the Authority. B. Hoover Dam Power Plant Upgrade Program In January 1987, the City entered into a contract with the Federal Bureau of Reclamation to fund part of an upgrading program of the Hoover Dam power plant to increase the plant's generating 22 F. 6. C. CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2002 UTILITY OPERATIONS AND COMMITMENTS (Continued ca aci � P ty. In exchange, the City will receive its pro rata share - Of the additional Total program costs are estimated to be $155 million. power produc ed d As of June 30, 2002, the City's total advances were $ 6,731,123 for June 30, 2002, the outstanding advances receivable were 731,$4,812 54 the upgrading to advance funds in the future. The advances are being repaid with interest over prom Al 3. The City has no obligation years. The City must also make payments for its pro rata share th o er a period of 30 costs not recovered by the plant through revenues. The contract expires in June 2017. Operating and maintenance Mead -Phoenix Transmission Project In 1992, the City entered into Project Agreements for the construction an Phoenix Transmission Project. The City's cost shares are currently 2.154% Mead Component, 3.793% for the Mead -Substation d Operation of the Mead - Marketplace Component. The for the Westwing- Component, and 4.050010 for the Mead project was completed April 15, 1996. The City's share of construction costs was $6,443,915. Mead-Adelanto Transmission Project In 1992, the City entered into Project Agreements Adelanto Transmission Project. The City's cost share is 6.25%. This Project was for the construction and operation of the Mead- 15, 1996. The City's share of construction costs was $13,984,362. of April E. California -Oregon Transmission Project In 1991, the City entered into the Interim Participation Agreement with several California entities and the Western Area Power Administration. This a Northern construction and operation of the project. Each respective share of the construction costs. The City's share is 8.05%. A agreement been calls for the Party in the agreement has been allocated a City's share of total costs incurred for the project's planning and construction was $35 s of June 30, 2002, the In 2001 and 2002, the project added a second 500 kV transformer,480,802. Beginning February 2001 through the June 2002 service monthe City'st prop Tracy Substation. costs was $1,122,656. p portionate share of Santa Clara Demonstration Project In January 1993, the City entered into an agreement with the Los Angeles Department and Power, Southern California Edison, the City of Santa Clara, the Sacramento District and the National Rural Electric Cooperative Association to research eP ant l Water utility-scaleMunicipal Utility carbonatefuel cell power plant. Total funding by all of the and develop the first be $22.05 million; the City's share is $3.15 million. In exchange for funding, each participants is expected to own rights to the technology and any future royalty the physical plant will be dismantled. The project was completed April Participant will y ty Payments. Following a demonstration period, 1996. The City's share 23 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 6. UTILITY OPERATIONS AND COMMITMENTS (Continued) of total costs for research and development was $3,005,235. These costs were expensed as incurred. G. California Independent System Operator In December 2000, the City entered into an agreement with California Independent System Operator Corporation (ISO) to establish the rights and obligations of the City and the ISO with respect to the City's cooperation and coordination with the ISO to aid the reliability and the operational control of the ISO controlled grid and the City's Distribution System. The City owns and operates a Distribution System within the ISO Control area subject to the authority of a Local Regulatory Authority. H. Alstom Power Inc. In May 2001 and September 2001, the City entered into agreements with Alstom Power Inc., for the purchase and delivery of generating units, a steam turbine generator, heat - recovery steam generator and emissions control equipment at an approximate cost of $60 million. Progress payments to Alstom Power Inc., will be made as the units are manufactured, beginning in June 2001. Delivery of the units is anticipated in March 2003. Total payments made to Alstom Power Inc. at June 30, 2002 were $48,004,191. Power Purchase Commitments As of June 30, 2002, the City has entered into long-term commitments to purchase power subject to certain conditions. The following table summarizes the value of the commitments at June 30, 2002 (in thousands): Fiscal Year Amount 2002-03 $ 40,611 2003-04 38,659 2004-05 36,054 2005-06 19,038 2006-07 14,091 2007-11 34,361 $ 182,814 7. FUND BALANCE RESERVES Fund balances, which are not available for general ap propriation ppropriation and expenditure, are reserved at June 30, 2002, for the following purposes: 24 'CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL, STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 7• FUND BALANCE RESERVES (Continued) Capital General Fund Projects Fund Federal forfeiture funds Advances to other funds $ 460,325 $ Inventories 12,580,488 - Encumbrances 710,377 - Employee loans receivable 1,279,584 - Loans receivable 73,042 Total 3 000 000 g• $ 15,103,816 $ 3,000,000 SELF-INSURANCE AND CONTINGENCIES The City is exposed to various risks of loss related to torts; theft of, damage to, and des errors and omissions; Of to employees; natural disasters; unem to health benefits to employees, retirees, and their dependents, traction of assets; P Yin coverage, and providing liability, workers' eneral compensation, and roey. The City is self -insured for its Internal Service Funds, whereby asset are se property el for claim settlementsCity has associated i establish risk financing rngs of loss up to certain limit. Excess coverage is provided by the Independent Cities associated with the above risks Authority (the "ICRMA" ), a joint powers authority whose Risk Management excess insurance for its member cities. The IRCMA is governed by a Board of Directors cons' representatives of its member. cities. Self-insurance and I pose is to develop and fund programs of C1tMA limits are as follows: ishng of _Type of Cove Self -Insurance ICRMA General Liability Workers' Compensation UP to $300,000 $300,000 to $10,000,000 Property UP to $300,000 $300,000 to $10,000,000 Up to $ 10,000 $ 10,000 to $20,000,000 Amounts in excess of these limits are self -insured. There have been no significant settlements exceeding insurance coverage &� reductions of coverage from the prior year. There have been no settle three fiscal years for each of the past Health benefits risks are covered on an occurrence basis for amount in excess of $75,000 per person up to $2,000,000 per person by commercial insurance purchased from independent third The unpaid claims liabilities included in each of the self-insuran Parties. the results of actuarial studies and third-paratorrty ce Internal Service Funds are based on incurred but not reported, including loss adjustment expenses.laim reports and include amounts for claims Claims ms liabilitie s are calculated considering 25 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2002 8. SELF-INSURANCE AND CONTINGENCIES (Continued) the effects of inflation and recent claim settlement trends, including frequency and amount of payouts and other economic and social factors. Changes in the balances of claims liabilities during the past two fiscal years for all self-insurance funds combined are as follows: Unpaid claims, beginning of fiscal year Incurred claims Claim payments Unpaid claims, end of fiscal year Fiscal Year Ended June 30 2002 2001 $ 4,078,995 821,364 (290,571) $ 4,207,452 169,374 (297,831) $ 4,609,788 $ 4,078,995 At June 30, 2002, a number of lawsuits and claims were pending against the City that arose in the normal course of operations. Management estimates that certain pending lawsuits and claims may result in additional liabilities of approximately $500,000. However, the ultimate loss, if any, is unknown at this time and no amount has been accrued in the accompanying financial statements because it is not probable that a loss has been incurred as of June 30, 2002. 9. POST -RETIREMENT BENEFITS The City Council approved a post -retirement benefit plan for all employees with 30 years or more of service to the City. The plan pays for qualified employees' medical and dental insurance premiums and claims from age 60 to 65. Funding of the plan is on a pay-as-you-go basis. During the year ended June 30, 2002, approximately 36 employees were eligible to receive benefits. Amounts paid for the year ended June 30, 2002 are as follows: Total premiums paid for retirees $ 43,345 Medical and dental claims paid 290,571 Total $ 333,916 10. EFFECTS OF NEW PRONOUNCEMENTS In June 1999, GASB issued Statement No. 34, Basic Financial Statements - and Management's ' Discussion and Analysis —for State and Local Governments (GASB 34), which is effective for the City's fiscal year ending June 30, 2003. GASB 34 establishes new financial reporting requirements for state 4nd local governments throughout the United States. When implemented, it will create new information and ' will restructure much of the information that governments have presented in the past. GASB 34 represents the most important single change in history of accounting and financial reporting for state and local governments. One of the most significant changes is that all capital assets, including infrastructure, will 26 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 10. EFFECTS OF NEW PRONOUNCEMENTS (Continued) be reported within the basic financial statements, along with depreciation expense and accumula depreciation. Currently, infrastructure related to governmental funds is not reported in the fmanc statements. GASB 34 provides an alternative to depreciation for infrastructure, termed the "modif approach." The modified approach requires the use of a qualified asset management system and additional schedu; to be reported in another new element of the financial statements, the "Managem's a Analysis (MD&A)" section. The costs to implement GASB entDiscussion 34, are unknown at this time. In June 2002, GASB issued Statement No. 37, Basic Financial Statements -and Man Discussions and Analysis for State and Local Governments: Omnibus - an amendment of and clarifies � e GAS Statements No. 21 and 34. This Statement is effective for the same periods as GASB - modifies certain provisions in GASB Statements No. 21 Accounting for Escheat property and No. 34. establishes guidance in the following areas: reporting of escheat property, topics for discussion in Management's Discussion and Analysis (MD&Anue � detail required for business -type activities in the statement of activi ties, e catiThe the is analyzing el e impact of implementation of this new statement in fiscal year 2003. th Also in June 2002, GASB issued Statement No. 38, Certain Financial Statement Note Disclosures, whicl is effective for the same periods as GASB Statement No. 34. This statement modifies, establishes anc rescinds certain financial statement disclosure requirements. Modifications to the note disclosure; primarily focus on: a) revenue recognition policies; b) actions taken in response to significant violations of legal or contractual provisions; c) debt service requirements; d) lease obligations; e) short-term debt; and f) interfund balances. These new disclosure requirements address the needs of users of financial statements identified by GASB. The analysis required for the implementation of this new statement is being completed along with GASB 34. Finally, GASB issued Interpretation No. 6, Recognition and Measurement of Certain Liabilities Expenditures in Governmental Fund Financial Statements. This interpretation clarifies the application of standards for modified accrual recognition of certain liabilities and interpretation expenditures in areas where differences have arisen, or potentially could arise, in interpretation and'practice. This impacts the fund level financial statements required by GASB Statement No. abut has is direct impact on the government -wide financial statements. 11. SUBSEQUENT EVENTS Since calendar year 2000, the California energy crisis has produced significant events and caused financial difficulties for several major companies. These include the state's two largest IOUs and numerous power marketing companies, including the Enron Corporation. Pacific Gas & Electric (PG&E filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code (Code). PG&E has filed a Plan of Reorganization, intending to pay most of the debts it owes to various creditors, which includes significant amounts due to the California Power Exchange (PX) and the California Independent 27 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMEP FISCAL YEAR ENDED JUNE 30, 2002 11. SUBSEQUENT EVENTS (Continued) System Operator (ISO). The Southern California Edison Company (Edison) has experienced severe liquidity problems, but worked out its difficulties through revised billing rate schedules recently approved by the California Public Utilities Commission (CPUC). The PX, a state organized power trading company, closed operations, filed for bankruptcy protection and left unsettled billions of dollars in wholesale electricity transactions. The PX's principal assets,. block forward wholesale electricity contracts, which would be sufficient to nearly cover all of its unsettled transactions, were seized by the Governor of the State of California during the height of the energy crisis. The Ninth Circuit Court of Appeals found that the seizure by the Governor and the state was unconstitutional and that both are liable for damages to the PX and its various market participants. Currently, a retired Judge of the Superior Court in Sacramento has been assigned various cases, all related to this matter, to determine what sums of money each of the various PX market participants are owed (Sacramento proceedings). The PX Plan of Reorganization is currently working its way through the approval process of the Federal bankruptcy court and the Federal Energy Regulatory Commission. The ultimate impact of all these events on the City's operations is unknown at this time. However, the following facts exist. The PX did not settle wholesale electricity transactions with the City, which totals approximately $3.0 million. The City is currently actively involved in the Sacramento proceedings. The City believes it will receive the moneys owed to it within the next two years and has not provided an allowance against the account. The City and PG&E are parties to a high voltage transmission exchange agreement that has a term remaining of nearly 40 years. PG&E chose not to reject this agreement under the Code. PG&E does not owe the City any moneys under this agreement. 1 28 SUPPLEMENTAL COMBINING STATEMENTS ASSETS Cash and investments Accrued Interest Receivable Accounts receivable Accrued unbilled revenue Inventories, at cost Deposits Advance receivable from outside party Advances to other funds Restricted cash and investments Fixed assets Accumulated depreciation Other assets TOTAL LIABILITIES AND FUND EQUITY (DEFICIT) LIABILIITIES: Accounts payable and accrued liabilities Customer deposits and advances Accrued in lieu of taxes due to General Fund Due to other funds Advances from other funds Total liabilities . FUND EQUITY (DEFICIT): Contributed capital Retained earnings (deficit) Total fund equity (deficit) TOTAL CITY OF VERNON SUPPLEMENTAL COMBINING BALANCE SHEET ALL ENTERPRISE FUNDS JUNE 30, 2002 Light &Power Water Gas Total Enterpris, Department Department Department Funds $ 52,546,970 $ 7,073,854 $ (10,825)' $ 59,609,S 1,035,659 9,496,540 79,828 1,035,E 6,440,009 343,711 - 9,57E,3 7,398 6,783,7 7,860 _ - 7,3. 4,819,543 - T8i 29,795,941 _ - 4,819,5� 7,044,20E 29,795,9� 154,760,071 11,856,722 16,006,135 7,044,2( 182,622,9s (49,820,254) (9,353,443) - (59,173,69 1,208,848 $ 217,342,791 $ 10,000,672 $ 15,995,310 1,208.84 $ 243,338,77 $ 12,267,066 $ 495,597 $ 196,833 $ 12,959,49E 713,958 307,672 - 1,021,63C 1,114,306 82,107 389,657 - 1,1 %,413 - 389,657 3,509,029 21,867,182 25,376,211 14,484.987 4,394,405 22,064,015 40,943,407 1,682,205 720,000 - 2,402,205 201,175,599 4,886,267 (6,068,705) 199,993,161 202,857,804 5,606,267 (6,068,705) 202,395,36E $ 217,342,791 $ 10,000,672 $ 15,995,310 $ 24�3,338,773 29 CITY OF VERNON SUPPLEMENTAL COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS (DEFICIT) - ALL ENTERPRISE FUNDS FISCAL YEAR ENDED JUNE 30, 2002 Total Light & Power Water Gas Enterprise Department Department Department Funds OPERATING REVENUES: $ 99.579.546 $ 6,219,167 $ - $ 105,798,713 Power and water sales OPERATING EXPENSES: 100,602,170 4,470,019 - l05,072,189 Cost of sales In lieu of franchise tax 2,455,094 182,952 2,638,046 Depreciation 3.203.832 226,485 3,430,317 Total operating expenses 106,261.096 4,879,456 - 111,140,552 OPERATING (INCOME (LOSS) (6,681,550) 1,339,711 - (5,341,839) NONOPERATING REVENUES (EXPENSES): Investment income: Interest income, including gains (losses) on sale of investments 8,938,625 - - - 8,521,51 521,451 Net increase in fair value of investments 521,451 Total nonoperating revenues, net 9,460.076 - - 9,460,076 NET INCOME (LOSS) BEFORE OPERATING TRANSFERS 2.778,526 1,339,711 - 4,118,237 OPERATING TRANSFERS OUT (8,503,702) _ - (8,503,722) NET INCOME (LOSS) (5,725,176) 1,339,711 (4,385,465) RETAINED EARNINGS (DEFICIT), BEGINNING 206.900.775 3,546,556 (6,068,705) 204,378,626 OF YEAR RETAINED EARNINGS (DEFICIT), END OF YEAR $ 201.175,599 $ 4,886,267 $ (6,068,705) $ 199,993.161 30 Partners 515 South Figueroa Street Kenneth A. Macias, Managing Partner Suite 325 ................. Ernest J. Gini Los Angeles, CA 90071 `" Macias, Gini & Company P �' w.P Kevin J. O'Connell 213.612.0200 Richard A. Green 213.286.6426 FAx C•tfiO•d PUDIIC AeCoUntantf and titanay.mont conattdnts Jan A. Rosati www.maciasgini.com James V. Godsey Honorable City Council City of Vernon, California INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF GENERAL-PURPOSE FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT A UDITING STANDARDS We have audited the general-purpose financial statements of the City of Vernon, California (City), as of June 30, 2002, and for the fiscal year ended, and have issued our report thereon dated January 24, 2003. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the City's general-purpose financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct. and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing the audit, we considered the City's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the general- purpose financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the general-purpose financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Offices Located Throughout California i This report is intended solely for the information anduse of the Mayor, City Council, and the City's management and is not intended to be and should not be used by anyone other than these specified varties. / Z�- G G. Certified Public Accountants Los Angeles, California January 24, 2003 32 CITY OF VERNON FISCAL YEAR ENDED JUKE 30, 2001 Table of Contents Pa e s IndependentAuditor's Report ...................................................................................................................1 General -Purpose Financial Statements: Combined Balance Sheet — All Fund Types and Account Group............................................................2-5 . Combined Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits) — All Governmental Fund Types....................................................................6-7 Combined Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits) — Budget and Actual on a Budgetary Basis - General Fund, Special Revenue Funds and Capital Projects Funds.......................................................8-9 Combined Statement of Revenues, Expenses and Changes in Retained Earnings — All Proprietary Fund Types...................................................................................................10 Combined Statement of Cash Flows — All Proprietary Fund Types......................................................11-12 Notes to General -Purpose Financial Statements....................................................................................13-29 Supplemental Combining Statements: Combining Balance Sheet — All Enterprise Funds......................................................................................30 Combining Statement of Revenues, Expenses and Changes in Retained Earnings (Deficit) — All Enterprise Funds...............................................................................................31 Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of General -Purpose Financial - Statements Performed in Accordance With Government Auditing Standards.............................32-33 0 F Partners 515 South Figueroa Street Kenneth A. Macias, Managing Partner Suite 325 Ernest J. Gini Los Angeles, CA 90071 Kevin J. O'Connell 213.612.0200 Macias, Gini &Company u.r Green Richard A. Certified Public Accountants and 213.683.0443 FAx Management consultants Jan A. Rosati www.maciasgini.com James V. Godsey Honorable City Council City of Vernon, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying general-purpose financial statements of the City of Vernon, California (the "City'), as of June 30, 2001, and for the fiscal year then ended, as listed in the foregoing table of contents. These general-purpose financial statements are the responsibility of the City's management. Our responsibility is to express an opinion on these general-purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general-purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general-purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall general-purpose financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such general-purpose financial statements referred to above present fairly, in all material respects, the financial position of the City as of June 30, 2001, and the results of its operations and cash flows of its proprietary fund types for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated March 11, 2002, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Our audit was made for the purpose of forming an opinion on the general-purpose financial statements taken as a whole. The supplemental combining statements listed in the foregoing table of contents are presented for purposes of additional analysis and are not a required part of the general-purpose financial statements of the City. Such supplemental combining statements have been subjected to the auditing procedures applied in our audit of the general-purpose financial statements and, in our opinion, are fairly presented, in all material respects, when considered in relation to the general-purpose financial statements -taken as a whole. Certified Public Accountants Los Angeles, California March 11, 2002 OFFICE LOCATIONS i-cP Sacramento 9 Los Angeles a Fresno a San Francisco Bay Area 14 GENERAL PURPOSE FINANCIAL STATEMENTS i 1 CITY OF VERNON _ COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUP JUNE 30, 2001 Governmental Fund Types ASSETS General Special Debt Revenue Service Capital Projects Cash and investments Accrued interest receivable $ 5,915,582 $ 7,787,970 $ - $ 2,222,125 270,779 _ Accounts receivable 368,757 _ _ 2,726 Taxes receivable 597,323 151,945 Employee loans receivable 58,108 _ __ Accrued unbilled revenue ' Due from other funds 1,502,809 - Inventories, at cost, 676,329 - _ 41,384 Deposits 65,835 _ __ Advance receivable from outside party - Advances to other funds 14,903,300 Loans receivable Restricted cash and investments - 380,146 - 3,23I,097 Fixed assets - - Accumulated depreciation Other assets 28,240 - TOTAL $ 24,387,062 $ 8,320,061 $ - $ 5,497,332 See accompanying notes to general-purpose financial statements. 2 I I Proprietary Fund Types Account Group General Totals Internal Fixed (Memorandum Enterprise Service Assets Only) $ 101,962,080 $ 10,825,292 $ - S. 128,713,049 - - - 270,779 16,201,265 - - 16,572,748 - - - 749,268 - - - 58,108 7,015,299 - - 7,015,299 - 56,676 - 1,600,869 45,690 - - 722,019 7,860 - - 73,695 5,307,173 - - 5,307,173 26,173,220 - - 41,076,520 - - - 3,611,243 5,219,650 - - 5,219,650 135,239,764 - 33,729,645 168,969,409 (56,104,729) - - (56,104,729) 64,092 - - 92,332 $ 241,131,364 $ 10,881,968 $ 33,729,645 $ 323,947,432 (Continued) See accompanying notes to general-purpose financial statements. 3 Im CITY OF VERNON - COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUP JUNE 30, 2001 LIABILITIES, FUND EQUITY (DEFICIT) AND OTHER CREDIT LIABILITIES: Accounts payable and accrued liabilities Customer deposits and advances Accrued in lieu of taxes due to General Fund Due to other funds Deferred revenue Advances from other funds Total liabilities FUND EQUITY (DEFICIT) AND OTHER CREDIT: Investment in general fixed assets Contributed capital Retained earnings Reserved fund balances Unreserved, undesignated fund balances (deficit) Total fund equity (deficit) and other credit TOTAL Governmental Fund Types Special Debt Capital General Revenue Service Projects $ 2,926,673 $ 4,821 $ - $ 216,574 835,843 - _ - 86,834 126 - 755 467,590 124,574 _ - - 18,120,314 4,316,940 129,521 - 18,337,643 17,451,996 380,146 - 3,231,097 2,618,126 7,810,394 - (16,071,408) 20,070,122 8,190,540 - (12,840,311) $ 24,387,062 $ 8,320,061 $ - $ 5,497,332 See accompanying notes to general-purpose financial statements. 4 Proprietary Fund Types Account Group General Totals Internal Fixed (Memorandum Enterprise Service Assets Only) $ 9,111,792 $ 4,282,879 $ - $ 16,542,739 768,469 - - 1,604,312 1,113,152 - - 1,113,152 400,002 - - 487,717 - - - 592,164 22,956,206 - - 41,076,520 34,349,621 4,282,879 - 61,416,604 - - 33,729,645 33,729,645 2,403,117 4,388,676 - 6,791,793 204,378,626 2,210,413 - 206,589,039 - - - 21,063,239 - (5,642,888) 206,781,743 6,599,089 33,729,645 262,530,828 $ 241,131,364 $ 10,881,968 $ 33,729,645 $ 323,947,432 See accompanying notes to general-purpose financial statements. 5 CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES (DEFICITS) ALL GOVERNMENTAL FUND TYPES FISCAL YEAR ENDED JUNE 30, 2001 Special REVENUES: General Revenue Sales and use taxes $ 4,862,883 $ _ Franchise taxes 3,687,291 _ Property taxes 1,968,294 4,510,884 Building permits and plan check fees 852,679 - Community services 55,265 12,509 Business licenses 953,460 651,339 Intergovernmental - 8,081 Investment income (loss): Interest income 299,392 141,248 Net increase (decrease) in fair value of investments 240,951 9,357 Fines and forteitures 146,426 - Miscellaneous 2,324,134 _ Total revenues 15,390,775 5,333,418 EXPENDITURES: Current: General government 4,886,956 6,281 Fire protection 6,882,748 51,975 Police protection 5,919,050 1,020 Public works 5,198,473 7,595 Health services 885,967 41,183 Debt service: Interest Principal Capital outlay 941,099 - Total expenditures 24,714,293 108,054 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES (9,323,518) 5,225,364 OTHER FINANCING SOURCES AND USES: Operating transfers in 7,788,213 - Operating transfers out (1,412,848) - EXCESS (DEFICIENCY) OF REVENUES AND OTHER SOURCES OVER EXPENDITURES AND OTHER USES (2,948,153) 5,225,364 FUND BALANCES (DEFICITS), BEGINNING OF YEAR 23,018,275 2,965,176 FUND BALANCES (DEFICITS), END OF YEAR $ 20,070,122 $ 8,190,540 See accompanying notes to general-purpose financial statements. 6 1 Totals Debt Capital (Memorandum Sevice Projects Only) $ 4,862,883 3,687,291 2,794,833 9,274,011 - 852,679 67,774 1,604,799 8,081 150,087 590,727 (40,636) 209,672 - 146,426 - 2,324,134 2,904,284 23,628,477 975,455 5,868,692 - 6,934,723 - - 5,920,070 1,843,816 7,049,884 - 927,150 50,156 564,755 614,911 1,362,363 - 1,362,363 - 4,133,027 5,074,126 1,412,519 7,517,053 33,751,919 (1,412,519) (4,612,769) (10,123,442) 1,412,519 329 9,201,061 - - (1,412,848) (4,612,440) (2,335,229) (8,227,871) 17,755,580 $ - $ (12,840,311) $ 15,420,351 See accompanying notes to general-purpose financial statements. 7 ` CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES (DEFICITS) - BUDGET AND ACTUAL ON A BUDGETARY BASIS GENERAL FUND, SPECIAL REVENUE FUNDS AND CAPITAL PROJECTS FUNDS FISCAL YEAR ENDED JUNE 30, 2001 REVENUES: Sales and use taxes Franchise taxes Property taxes Building permits and plan check fees Community services Business licenses Intergovernmental Investment income Fines and forfeitures Miscellaneous Utilities contribution Reserve Total revenues EXPENDITURES: Current: General government Fire protection Police protection Public works Health services Debt service Capital outlay Total expenditures EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES OTHER FINANCING SOURCES AND USES: Operating transfers in Operating transfers out EXCESS (DEFICIENCY) OF REVENUES AND OTHER SOURCES OVER EXPENDITURES AND OTHER USES FUND BALANCES (DEFICITS), BEGINNING OF YEAR FUND BALANCES (DEFICITS)r END OF YEAR General Fund Special Revenue Funds Actual on Variance Actual oo a Variance Budgetary Favorable Budgetary Favorable Budget Basis (Unfavorable) Budget Basis (Unfavorable) S 4,600,000. 5 4.362,883 5 262,883 S - S S - 3,125,000 3,687.291 562,291 - - - 2,714,700 1,968,294. (746,406) - 4,510,884 4,510,884 948,000 $52,679 (95,321) - - - 95,000 55.265 (39,735) 12509 12,509 1,000,000 953,460 (46,540) 650,000 651,339 1,339 - - - 8,800 8,081 (719) 9,500,000 540,343 (8,959,657) - 150,605 150,605 160,000 146,426 (13,574) - - - 8,399,295 2,324,134 (6,075,161)- 10,000,000 5,000,000 (510001000) - - - 5,500,000 (5,500,000) 46,041,995 20.390,775 (25,651,220) 658,800 5,333,418 4,674,619 6,311,416 4,843,466 1,467,950 - 6,281 (6,291) 8,494,125 6,895,205 1,598.920 180,800 51,975 128,825 7,963,586 5,973,851 1,989.735 - 1,020 (1,020) 7,612,331 5,178,158 2,434,173 226,000 7,595 218,405 1,082,596 885.967 196,629. - 188,060 41,183 146,877 2.401,970 1,956.700 445,270 33,866,024 25,733.347 8.132,677 594,860 108.054 486,806 12,175,971 (5,342,572) (17,518,543) 63,940 5.2-15.364 5,161,424 7,788213 7,788213 - - (1,412,848) (1,412,848) 12,175,971 1.032,793 (11,143,178) 63,940 5,21-5,364 5,161,424 23,018275 23,018,275 2/9654176 2.965,176 S 35,194,246 S 24,051,068 S (11,143.178) S 3,029,116 S 8,190,540 5 5,161,424 See accompanying notes to general-purpose financial statements. 8 C 0_0 _P I ILI Capital Project Funds Totals (Memorandum Only) Actual on a Variance Actual on a Variance Budgetary Favorable Budgetary Favorable Budget Buis (Unfavorable) Budget Basis (Unfavorable) S S S S 4,600,000 S 4.862,883 S 262.883 - - - 3,125,000 3,687,291 562.291 - 2,794,833 2,794,833 2,714,700 9,274,011 6.559.311 - - - 948,000 852,679 (95,321) - - 95,000 67,774 (27,226) - - 1,650,000 1,604,799 (45,201) - - - 8,800 8,081 (719) - 109,451 109,451 9,500,000 800,399 (8,699,601) - - - 160,000 146,426 (13,574) • - - 8,399,295 2,324,134 (6,075,161) 10,000,000 5,000,000 (5.000,000) 5,500,000 (5,500,000) 2,904,284 2,904,284 46,700,795 28,628,477 (18,072,318) - 975,455 (975,455) 6,311,416 5,825.202 496.214 - - 8,674,925 6.947,180 1,727,745 7,963,586 5,974,871 1,988.715 10,153,854 1,843,816 8,310,038 17,992.185 7,029,569 10,962,616 - - - 1,270,656 927,150 343,506 564,755 (564.755) - 564,755 (564,755) 3.834,000 4,133,027 (299,027) 6,235,970 6,089,727 146.243 13,987.854 7,517,053 6,470,801 48,448,738 33.358,454 15,090,284 (13,987,854) (4,612,769) 9,375,085 (1,747,943) (4,729,977) (2,982,034) - 329 329 - 7.788,542 7,788,542 (1.412,848) (1,412,848): (13,987,854) (4,612,440) 9,375,414 (1.747,943) 1,645,717 3,393,660 (8,227,871) (8,227.871) 17,755,580 17.755.580 S (22r 15,725) S (12,840,311) S 9,375,414 S 16.007.637 S 19.401297 S 3.393.660 See accompanying notes to general-purpose financial statements. 9 CITY OF VERNON COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2001 OPERATING REVENUES: Power and water sales Charges for services Total operating revenues OPERATING EXPENSES: Cost of sales In lieu of franchise tax General and administrative Depreciation Employee benefits Total operating expenses OPERATING INCOME (LOSS) NONOPERATING REVENUES (EXPENSES): Investment income: Interest income Net increase (decrease) in fair value of investments Interest expense Total nonoperating revenues, net NET INCOME BEFORE OPERATING TRANSFERS OPERATING TRANSFERS OUT NET INCOME (LOSS) RETAINED EARNINGS, BEGINNING OF YEAR RETAINED EARNINGS, END OF YEAR Totals Internal (Memorandum Enterprise Service Only) $ 102,245,826 $ - $ 102,245,826 - 4,692,651 4,692,651 102,245,826 4,692,651 106,938,477 102,168,464 - 102,168,464 2,357,146 - 2,357,146 514,931 - 514,931 2,998,407 - 2,998,407 - 4,600,321 4,600,321 108,038,948 4,600,321 112,639,269 (5,793,122) 92,330 (5,700,792) 3,764,824 764,632 4,529,456 5,404,930 (179,510) 5,225,420 (95,796) - (95,796) 9,073,958 585,122 9,659,080 3,280,836 677,452 3,958,288 (7,612,243) (175,970) (7,788,213) (4,331,407) 501,482 (3,829,925) 208,710,033 1,708,931 210,418,964 $ 204,378,626 $ 2,210,413 S 206,589,039 See accompanying notes to general-purpose financial statements. 10 CITY OF VERNON COMBINED STATEMENT OF CASH FLOWS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2001 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash used in operating activities: Depreciation (Increase) decrease in: Accounts receivable Accrued unbilled revenue Due from other funds Inventory Prepaid items Increase (decrease) in: Accounts payable and accrued liabilities Customer deposits and advances Due to other funds Due to General Fund Net cash used in operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Operating transfers to other funds Advances to outside party Advances to other funds Advances from other funds Net cash used in noncapital financing activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Interest paid Principal payments on certificates of participation Acquisition of capital assets Net cash used in capital and related financing activities Enterprise Internal Service Totals (Memorandum Only) $ (5,793,122) $ 92,330 $ (5,700,792) 2,998,407 - 2,998,407 (12,776,792) - (12,776,792) (1,901,788) - (1,901,788) 3,915,636 16,784 3,932,420 (25,345) - (25,345) (64,092) (64,092) (2,879,186) (127,604) (3,006,790) 1,211 - 1,211 (624,340) (34,336) (658,676) 308,504 - 308,504 (16,840,907) (52,826) (16,893,733) (7,612,243) (175,970) (7,788,213) 133,640 - 133,640 (14,572,522) (14,572,522) 1,149,770 - 1,149,770 (20,901,355) (175,970) (21,077,325) (172,274) - (172,274) (2,602,637) - (2,602,637) (6,568,420) - (6,568,420) $ (9,343,331) $ - $ (9,343,331) (Continued) See accompanying notes to general-purpose financial statements. CITY OF VERNON COMBINED STATEMENT OF CASH FLOWS ALL PROPRIETARY FUND TYPES FISCAL YEAR ENDED JUNE 30, 2001 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase (decrease) in fair value of investments Interest income received Net cash provided by investing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR Totals Internal (Memorandum Enterprise Service Only) $ 5,404,930 $ (179,510) $ 5,225,420 4,028,661 764,632 4,793,293 9,433,591 585,122 10,018,713 (37,652,002) 356,326 (37,295,676) 144,833,732 10,468,966 155,302,698 $ 107,181,730 $ 10,825,292 $ 118,007,022 See accompanying notes to general-purpose financial statements 12 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The City of Vernon (the "City") was incorporated on September 16, 1905 as a General Law City. Effective July 1, 1988, the City became a Charter City. The City operates under a Council -City Administrator form of government. The general-purpose financial statements of the City include the operations and financial activities of the City and its component units, the City of Vernon Redevelopment Agency (the "Agency") and the City's share of the financing activities of the Independent Cities Lease Financing Authority (the "ICLFA"). The financial operations of the Agency are closely related to those of the City, and the City Council is financially accountable for it. The Agency is a separate legal entity that is governed by a board composed of the City Council. Accordingly, the Agency is reported as a blended component unit in a Capital Projects Fund and in the account group. Separate audited financial statements of the Agency are available at the City Administrator/City Clerk's Office at 4305 Santa Fe Avenue, Vernon, California 90058. The ICLFA is a separate legal entity that acts as a public financing authority for certain City assets for the sole benefit of the City, and is as a blended component unit. The City's share of the ICLFA's financing activities related to City assets is reported in the Debt Service Fund, Enterprise Funds and the account group. During the year ended June 30, 2001, the City paid in full its share of the outstanding certificates of participation (see Note 6). Fund Accounting — The accounts of the City are organized on the basis of funds and account groups. A fund is defined as an independent fiscal and accounting entity. The operations of each fund are accounted for in a separate set of self -balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures, or expenses, as appropriate. Account groups are used to establish accounting control and accountability for the City's general fixed assets and general long-term debt. Account groups are a reporting device to account for certain assets and liabilities of the governmental funds not recorded directly in those funds. The following is a summary of the fund types and account groups utilized by the City: A. Governmental Fund Types General Fund — Used to account for all financial resources except those required to be accounted for in other funds. Special Revenue Funds — Used to account for the proceeds of specific revenue sources (other than Capital Projects Funds) that are legally restricted to expenditures for specific purposes. Debt Service Fund — Used to account for the interest and principal payments on the City's certificates of participation payable. Capital Projects Funds — Used to account for financial resources designated for the acquisition or construction of major capital facilities other than those financed by Proprietary Fund Types. 13 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) B. Proprietary Fund Types Enterprise Funds — Used to account for operations that are financed and operated in a manner similar to private business enterprises, for which the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The City's enterprise operations include power, water and gas utilities. Internal Service Fund - Are specifically designed for goods or services that are provided on a cost -reimbursement basis. That is, the goal of an internal service fund should be to measure the full cost of providing goods or services for the purpose of fully recovering that cost through fees or charges. C. Account Groups General Fixed Assets Account Group — Used to maintain control and cost information of capital assets owned by the City, other than those accounted for in the Proprietary Fund Types. General Long -Term Debt Account Group — Used to maintain control and accountability for long- term obligations of the City. At June 30, 2001, the City had no outstanding general long-term obligations. Basis of Accounting Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. All Governmental Fund Types are maintained on the modified accrual basis of accounting. Revenues are recognized when they become measurable and available to finance operations during the current year. Available means collectible within the current period or within 60 days after year-end. Revenues that are susceptible to accrual include taxes, intergovernmental and investment income. Expenditures are generally recognized when the related fund liability is incurred. Expenditures for principal and interest on long-term debt are recognized when due. Proprietary Fund Types are maintained on the accrual basis of accounting. Revenues are recognized when they are earned, and expenses are recognized when the related liabilities are incurred. Budgetary Control and Accounting — The City adheres to the following general procedures in establishing its annual budget, which is reflected in the accompanying general-purpose financial statements: ■ An annual budget is adopted by the City Council that provides for the general operation of the City. The budget includes authorized expenditures and estimated revenues of the General Fund, Special Revenue Funds and Capital Projects Funds; ■ The budget is formally integrated into the accounting system and employed as a management control device during the year; 14 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) ■ Encumbrances, which are commitments related to executory contracts for goods and services, are recorded to assure effective budgetary control and accountability; ■ Encumbrances outstanding at year-end do not constitute expenditures or liabilities. Encumbrances outstanding at year-end are reported as reservations of fund balance for subsequent year expenditures. Unencumbered appropriations lapse at year-end; ■ The budget is adopted on a modified accrual basis, except that encumbrances are treated as budgeted expenditures in the year of incurrence of the commitment to purchase and operating transfers from the Utilities Department Enterprise Fund to the General Fund are reported as utilities contribution revenue; and ■ The City Administrator is authorized to transfer appropriations between activities within any fund. Expenditures may not exceed appropriations at the fund level. Excess expenditures over appropriations are financed by beginning fund balances. The budgeted amounts used in the accompanying general-purpose financial statements include any amendments made during fiscal year 2001. The following schedule reconciles General Fund expenditures on the modified accrual basis with expenditures on a budgetary basis: Current: General government Fire protection Police protection Public works Health services Capital outlay Total Actual Expenditures on Modified Accrual Basis $ 4,886,956 6,882,748 5,919,050 5,198,473 885,967 941,099 $ 24,714,293 Add Encumbrances Outstanding June 30, 2001 Less Expenditures Related to Encumbrances Outstanding in Prior Years Actual Expenditures on Budgetary Basis $ 26,092 $ 69,582 $ 4,843,466 24,570 12,113 6,895,205 59,142 4,341 5,973,851 25,373 45,688 5,178,158 _ - 885,967 1,242,186 226,585 1,956,700 $ 1,377,363 $ 358,309 $ 25,733,347 No reconciling items existed for the Special Revenue or Capital Projects Funds. Accrued Unbilled Revenue — Accrued unbilled revenue consists of utility services delivered to customers but not billed as of June 30, 2001. 15 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories —Inventories consist of consumable supplies and fuel stock, which are stated at cost. The cost of inventories is recorded as an expenditure/expense when the items are used. Fixed Assets — General fixed assets are recorded as expenditures in the Governmental Fund Types at the time of purchase and are recorded at cost in the General Fixed Assets Account Group. The City does not record the purchase or construction of public domain or infrastructure assets in the General Fixed Assets Account Group. Donations are recorded in the General Fixed Assets Account Group at fair market value at the time received. No depreciation is provided for on general fixed assets. Fixed assets that are disposed of are removed from the accounts on the basis of their historical costs. Enterprise Fund fixed assets are recorded at cost or, if contributed, at estimated fair market value at the time received. Depreciation of such assets is computed on the straight-line method over the estimated useful lives of the assets. A summary of the estimated useful lives of Enterprise Fund fixed assets is as follows: Utility plant and buildings Improvements Machinery and equipment 25 to 50 years 10 to 20 years 3 to 35 years Vacation Benefits — The City pays accumulated vacation benefits to employees upon retirement or termination of employment. The liability for the benefits has been recorded in accounts payable and accrued liabilities. Insurance Programs — The City is partially self -insured for claims arising under workers' compensation, general liability and medical claims. (See Note 9.) Property Taxes — The County of Los Angeles (the "County") levies, collects and apportions property taxes for all taxing jurisdictions within the County. Property taxes are determined by applying approved rates to the properties' assessed values. The County remits property taxes applicable to the City less an administrative fee throughout the year. Article XIIIA of the State of California Constitution limits the property tax levy to support general government services of the various taxing jurisdictions to $1.00 per $100 of assessed value. Taxes levied to service voter -approved debt prior to June 30, 1978 are excluded from this limitation. Secured property taxes are levied in two equal installments, November 1 and February 1. They become delinquent with penalties on December 10 and April 10, respectively. The lien date is January 1 of each year for secured and unsecured property taxes and the levy date occurs on the 4`h Monday of September of the tax year. Unsecured property taxes on the tax roll as of July 31 become delinquent with penalties on August 31. 16 0 0 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Total Columns on General -Purpose Financial Statements — Total columns on the accompanying general-purpose financial statements are captioned "Memorandum Only" to indicate that they are presented only to facilitate financial analysis. Such data is not comparable to a consolidation. Interf ind eliminations have not been made in the aggregation of this data. Therefore, amounts in these columns do not purport to present financial position, results of operations, or cash flows of the City in conformity with generally accepted accounting principles. Statement of Cash Flows — For the purpose of reporting cash flows, cash and cash equivalents include cash and investments in the City's pooled program and any investments with original maturities of three months or less. Use of Estimates — The preparation of general-purpose financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates. 2. CASH AND INVESTMENTS Deposits At June 30, 2001, the carrying amount of the City's cash deposits was $1,837,409. The bank balance of such deposits was $2,266,613. Of the total bank balance, $700,000 was covered by federal depository insurance, and $1,566,613 was on deposit with California financial institutions and collateralized with government securities and first trust deed mortgage notes held by the pledging financial institution or by its trust department or agent. The California Government Code requires California financial institutions to secure the City's deposits by pledging government securities or first trust deed mortgage notes as collateral. The market value of pledged government securities and first trust deed mortgage notes must equal at least 110% and 150%, respectively, of the City's deposits. Such collateral is considered to be held in the name of the City. Investments Statutes authorize the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities; bankers' acceptances; medium -term corporate notes; repurchase agreements; negotiable certificates of deposit; commercial paper of the highest quality or of the highest letter and numerical rating as provided by Moody's Investors Service Incorporated or Standard and Poor's Corporation; the Los Angeles County treasury pool and the State Treasurer's investment pool. Investments with original maturity dates greater than one year are stated at fair value based on quoted market prices. The City's investments at June 30, 2001, are categorized below to give an indication of the level of custodial credit risk assumed by the City at year-end. Category 1 includes investments that are insured or registered or for which the securities are held by the City or its agent in the City's name. Category 2 includes uninsured and unregistered investments for which the securities are held by the counterparty's trust department or agent in the City's name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty, or by its trust department or agent, but not in the City's name. Certain investments held by the City are not subject to categorization, including deposits in the State Treasurer's Local Agency Investment Fund and money market mutual funds. 17 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 2. CASH AND INVESTMENTS (Continued) Investments (Continued) Categorized investments: U.S. government and agency securities Commercial paper Investments not subject to categorization: State of California Local Agency Investment Fund Money market mutual funds Total investments at fair value Category 1 2 3 $ 94,720,835 22,681,254 $117,402,089 Total $ 94,720,835 22,681,254 117,402,089 5,000,000 9,693,201 $132,095,290 As of June 30, 2001, the City's investment in LAIF is $5,000,000. The fair value of the total amount invested by all public agencies in LAIF at that date is $54,496,268,000. Of that amount, 95.49% is invested in non -derivative financial products and 4.51% in structured notes and asset -backed securities. The Local Investment Advisory Board (the "Board") has oversight responsibility for LAIF. The Board consists of five members as designated by State Statute. The value of the pool shares in LAIF which may be withdrawn is determined on an amortized cost basis, which is different than the fair value of the City's position in the pool. During the year ended June 30, 2001, the City changed its method of reporting interest earned by the Enterprise Funds. Interest earned by the Enterprise Funds' equity in pooled cash and investments is now reported as interest income in the respective Enterprise Funds. In prior years, such interest, although posted to the Enterprise Funds on the City's general ledger during the year, was reported as interest income in the General Fund. This change in accounting had no effect on the results of operations of the funds. In accordance with City Council Resolution No. 6102 and California Government Code Section 53647, interest earned by the Enterprise Funds may be transferred to the General Fund. During the fiscal year ended June 30, 2001, interest of $2,612,243 was transferred to the General Fund. 3. FIXED ASSETS Fixed assets of the Enterprise Funds consist of the following at June 30, 2001: Utilities: Utility plant Buildings Construction in progress Total Utilities Water utility plant Gas lines - construction in progress Total $104,195,225 481,800 5,188,416 109,865,441 11,492,470 13,881,853 $135,239,764 EJ 0 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2001 3. FIXED ASSETS (Continued) Changes in the fixed assets reported in the General Fixed Assets Account Group during the year ended June 30, 2001 were as follows: Balance Balance July 1, 2000 Additions Transfers June 30, 2001 Land $ 3,482,701 $ 4,133,027 $ - $ 7,615,728 Structures and improvements 6,422,917 766,798 3,684,853 10,874,568 Equipment 12,143,874 2,720,185 - 14,864,059 Construction in progress 3,684,853 375,290 (3,684,853) 375,290 Total $ 25,734,345 $ 7,995,300 $ - $ 33,729,645 4. PENSION PLAN The City contributes to the California Public Employees' Retirement System (the "PERS"), an agent multiple -employer retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. All full-time safety (police and fire personnel) and miscellaneous personnel and temporary or part-time employees who have worked 1000 hours in a fiscal year are eligible to participate in the PERS. Benefits vest after five years of service. Employees who retire at age 50 with five years of credited service are entitled to retirement benefits. Monthly retirement benefits are based on an employee's average compensation for his or her single highest year of compensation for each year of credited service. Miscellaneous members with five years of credited service may retire at age 55 with full benefits based on a benefit factor derived from the "2% at 55 Miscellaneous Factor" benefit factor table and between age 50 and 54 with reduced retirement benefits. Safety members may retire at age 50 with full benefits based on a benefit factor derived from the "2% at 55 Miscellaneous Factor" benefit factor table with five years of credited service. The PERS also provides death and disability benefits. These benefit provisions and all other requirements are established by State statute and City ordinance. The City's plan does not issue a stand-alone financial report but is included in the PERS report, which can be obtained from PERS at Lincoln Plaza, 400 P Street, Sacramento, California 95814. The State -required City employee salary contributions of 7% for miscellaneous employees and 9% for safety members are subsidized by the City. The City is required to contribute the remaining amounts necessary to fund the benefits for its members, using the actuarial basis adopted by the PERS Board of Administration. 19 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 4. PENSION PLAN (Continued) The City's total contribution to the PERS for the year ended June 30, 2001 was $1,459,905. City contribution rates as a percentage of covered payroll were 0% for miscellaneous plan members and .086% for safety plan members. The City's contribution was made in accordance with actuarially determined requirements based on an actuarial valuation performed as of June 30, 1998. The PERS uses the entry age normal actuarial cost method, which is a projected benefit cost method that takes into account those benefits expected to be earned in the future as well as those already accrued. According to this cost method, the normal cost for an employee is the level amount that would fund the projected benefit if it were paid annually from the date of employment until retirement. The PERS uses a modification of the entry age normal cost method whereby the employer's total normal cost is expressed as a level percentage of payroll. PERS also uses the level percentage of payroll method to amortize any unfunded accrued actuarial liabilities. The amortization period of the unfunded accrued actuarial liability ends on June 30, 2011. Significant actuarial assumptions used in the valuation included (a) a rate of return on the investment of present and future assets of 8.25% a year, compounded annually; (b) projected salary increases of 3.75% a year, compounded annually, and 3.50% attributable to inflation; (c) additional projected salary increases of 0.0% a year, attributable to cost -of -living increases; and (d) merit raises that vary by length of service and age of entry. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a two- to five-year period. Trend information for the current and two preceding fiscal years is as follows: Fiscal Year Ended June 30 Annual Pension Amount Cost (APC) Contributed Percentage of APC Contributed 2001 $ 1,459,905 $ 1,459,905 100% 2000 1,491,531 1,491,531 100% 1999 2,321,215 2,321,215 100% Net Pension Obligation The following schedule represents the required supplemental information for the three most recent actuarial valuations. This schedule provides information about progress made in accumulating sufficient assets to pay benefits when due (dollar amounts in millions): Actuarial Actuarial Actuarial Accrued Overfunded Annual OAAL as % Valuation Value of Liability AAL Funded Covered of Covered Date June 30 Plan Assets (AAL) (ORAL) Ratio Payroll Payroll 2000 $ 164.3 $ 148.1 $ (16.2) 110.9% $ 18.5 (87.6%) 1999 160.3 133.8 (26.5) 119.8% 18.1 (146.4%) 1998 135.3 125.1 (10.2) 108.2% 17.0 (60.0%) 20 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2001 5. DEFICIT FUND EQUITY The deficit fund balance of $12,840,311 in the Capital Projects Funds relates to recording the Agency's loan from the City on its balance sheet, which will be repaid through future property tax increments. The Gas Enterprise Fund has an accumulated deficit of $6,068,705 at June 30, 2001, which will be recovered from customers once the fund commences operations. The following Internal Service Funds have accumulated deficits at June 30, 2001: Retirement Worker's compensation Unemployment insurance Equipment replacement Group medical $ 303,862 104,439 84,336 539,032 154,087 To the extent such deficits are attributed to shortfalls in charges to other funds, such deficits will be recovered through future rate increases. Deficits arising from decreases in fair value of pooled investments will not be recovered through charges to other funds. 6. CERTIFICATES OF PARTICIPATION The City, in association, with the cities of Hermosa Beach and Lynwood, California, issued $13,210,000 of certificates of participation (the "Certificates") on September 1, 1989. The Certificates represent evidence of an undivided fractional interest in lease payments to be made by one or more of the cities of Hermosa Beach, Lynwood, and Vernon, California, to the ICLFA. The Certificates mature over a period of 20 years and bear interest at 7.17%. The City used its share of the proceeds for the addition of a third floor to the City Hall and for the reimbursement of the cost of two gas turbine electric generators. The following is the change in the General Long -Term Debt Account Group for the year ended June 30, 2001: Long-term debt, at July 1, 2000 Principal payment Long-term debt, at June 30, 2001 $ 1,362,363 (1,362,363) On August 29, 2000, the City paid the outstanding Certificates of $3,965,000 of which $1,362,363 was recorded in the General Long -Term Debt Account Group and $2,602,637 was recorded in the Enterprise Funds. 21 0 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 7. UTILITY OPERATIONS AND COMMITMENTS Deregulation Effective April 1, 1998, competition was introduced into California's electric utility market, and customers of the state's investor -owned utilities ("IOUs") became eligible for direct access. The implementation of competition in accordance with State Assembly Bill 1890 ("AB1890") resulted in significant structural changes to the electric power industry, including mandated direct access for IOU customers, energy sales through a Power Exchange, and management of transmission assets through an Independent System Operator ("ISO"). AB 1890 also legislated the recovery of stranded investment through the assessment of a non-bypassable competition transition change ("CTC"). The deregulation legislation applies to the State's IOUs and does not compel participation by publicly owned utilities, such as the City's electric utility. Management is currently considering the benefits involved with providing direct access within the City. Participating Transmission Owner On August 30, 2000, the City filed a petition for declaratory order with the Federal Energy Regulatory Commission ("FERC") requesting a determination by the FERC that the City's Transmission Revenue Requirement ("TRR"), as approved by its rate setting body, the City Council, is proper for purposes of the City becoming a Participating Transmission Owner ("PTO") in the California ISO. The FERC issued its order accepting the City's petition, with certain modification, on October 27, 2000. As a PTO, the City has turned over operational control of its transmission entitlements to the ISO effective January 1, 2001 and shall be reimbursed based upon its TRR by the ISO through the ISO's collection of a transmission access charge ("TAC"). On December 21, 2000, the ISO filed, on behalf of itself and the Participating Transmission Owners (PTO), a number of changes to its Transmission Control Agreement (TCA) to recognize Vernon's application to become a Participating Transmission Owner. The ISO also filed revisions to identify the transmission interests that Vernon will be turning over to the ISO's operational control and the inclusion of an explicit contract provision to ensure that all PTOs, including an entity such as Vernon, which is not subject to the rate jurisdiction of FERC under section 205 and 206 of the Federal Power Act (FPA), make all refunds or payment adjustments to implement any relevant FERC order. Project Commitments A. Southern California Public Power Authority In 1980, the City entered into a joint powers agreement with nine (9) Southern California cities and an irrigation district to form the Southern California Public Power Authority (the "Authority"). The Authority's purpose is the planning, financing, acquiring, constructing and operating of projects that generate or transmit electric energy. P 22 G CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 7. UTILITY OPERATIONS AND COMMITMENTS (Continued) The Authority purchased a 5.91% interest in the Palo Verde Nuclear Generating Station (the "Station"), a nuclear -fired generating station near Phoenix, Arizona, from the Salt River Project Agricultural Improvement and Power District, and a 6.55% share of the right to use certain portions of the Arizona Nuclear Power Project Valley Transmission System. The City has a 4.9% entitlement share of the Authority's interest in the station. Between 1983 and 2001, the Authority issued $3.166 billion (with $898 million currently outstanding) of Power Project Revenue Bonds to finance the purchase of the Authority's share of the Station and related transmission rights. The bonds are not obligations of any member of the Authority or public agency other than the Authority. Under a power sales contract with the Authority, the City is obligated on a "take or pay" basis for its proportionate share of power generated, as well as to make payments for its proportionate share of the operating and maintenance expenses of the Station, debt service on the bonds and any other debt, whether or not the project or any part thereof or its output is suspended, reduced or terminated. The City's proportionate share of costs during fiscal year 2001 was $8,680,377. The City estimates its proportionate share of costs will be approximately $9,107,000 for the fiscal years ending 2002 and 2003. At June 30 2001, the City designated $31,147,516 of cash and investments of the Utilities Department Enterprise Fund for payment of its future above market costs under the contract which expires October 31, 2030. During the year ended June 30, 2001, the account earned $1,217,757 of interest and the City used $8,68%377 to pay the Palo Verde Project power costs to the Authority. B. Hoover Dam Power Plant Upgrade Program In January 1987, the City entered into a contract with the Federal Bureau of Reclamation to fund part of an upgrading program of the Hoover Dam power plant to increase the plant's generating capacity. In exchange, the City will receive its pro rata share of the additional power produced. Total program costs are estimated to be $155 million. As of June 30, 2001, the City's total advances were $6,731,123 for the upgrading program. At June 30, 2001, the outstanding advances receivable were $5,307,173. The City has no obligations to advance funds in the future. The advances are being repaid with interest over a period of 30 years. The City must also make payments for its pro rata share of operating and maintenance costs not recovered by the plant through revenues. The contract expires in June 2017. C. Mead -Phoenix Transmission Project In 1992, the City entered into Project Agreements for the construction and operation of the Mead - Phoenix Transmission Project. The City's cost shares are currently 2.154% for the Westwing- Mead Component, 3.793% for the Mead -Substation Component, and 4.050% for the Mead - Marketplace Component. The project was competed April 15, 1996. The City's share of construction costs was $6,458,970. 23 7 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED .TUNE 30, 2001 ` UTILITY OPERATIONS AND COMMITMENTS (Continued) D. Mead-Adelanto Transmission Project In 1992, the City entered into Project Agreements for the construction and operation of the Mead- Adelanto Transmission Project. The City's cost share is 6.25%. This project was completed April 15, 1996. The City's share of construction costs was $13, 984,362. E. California -Oregon Transmission Project In 1991, the City entered into the Interim Participation Agreement with several Northern California entities and the Western Area Power Administration. This agreement calls for the construction and operation of the project. Each party in the agreement has been allocated a respective share of the construction costs. The City's share is 8.05%. As of June 30, 2001, the City's share of total costs incurred for the project's planning and construction was $34,280,399. F. Santa Clara Demonstration Project In January 1993, the City entered into an agreement with the Los Angeles Department of Water and Power, Southern California Edison, the City of Santa Clara, the Sacramento Municipal Utility District and the National Rural Electric Cooperative Association to research and develop the first utility -scale carbonate fuel cell power plant. Total funding by all of the participants is expected to be $22.05 million; the City's share is $3.15 million. In exchange for funding, each participant will own rights to the technology and any future royalty payments. Following a demonstration period, the physical plant will be dismantled. The project was completed in April 1996. The City's share of total costs for research and development was $3,005,235. These costs were expensed as incurred. G. California Independent System Operator In December 2000, the City entered into an agreement with California Independent System Operator Corporation (ISO) to establish the rights and obligations of the City and the ISO with respect to the City's cooperation and coordination with the ISO to aid the reliability and the operational control of the ISO controlled grid and the City's Distribution System. The City owns and operates a Distribution System within the ISO Control area subject to the authority of a Local Regulatory Authority. H. Alstom Power Inc. In May 2001, the City entered into an agreement with Alstom Power Inc_., for the purchase and installation of generating units with a cost of $28.2 million. Progress payments to Alstom Power Inc., will be made as the units are manufactured, beginning in June 2001. Delivery of the units is anticipated in December 2003. 0 24 1 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 7. UTILITY OPERATIONS AND COMMITMENTS (Continued) Power Purchase Commitments As of June 30, 2001, the City has entered into long-term commitments to purchase power subject to certain conditions. The following table summarizes the value of the commitments at June 30, 2001 (in thousands): Fiscal Year Amount 2001-02 $ 38,749 2002-03 40,611 2003-04 38,659 2004-05 36,054 2005-06 19,038 2006-11 48,452 $ 221,563 8. FUND BALANCE RESERVES Fund balances, which are not available for general appropriation and expenditure, are reserved at June 30, 2001, for the following purposes: Special Capital Revenue Projects General Fund Fund Fund Federal forfeiture funds $ 408,656 $ - $ ' Advances to other funds 14,903,300 - - Inventories 676,329 Encumbrances 1,377,363 Employee loans receivable 58,108 - - Other assets Loans receivable 28,240 - - 380,146 " 3,231,097 Total $17,451,996 $ 380,146 $ 3,231,097 25 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED NNE 30, 2001 9. SELF-INSURANCE AND CONTINGENCIES The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; natural disasters; unemployment coverage, and providing health benefits to employees, retirees, and their dependents. The City is self -insured for its general liability, workers' compensation, and property liability. The City has chosen to establish risk financing Internal Service Funds, whereby assets are set aside for claim settlements associated with the above risks of loss up to certain limits. Excess coverage is provided by the Independent Cities Risk Management Authority (the "ICRMA"), a joint powers authority whose purpose is to develop and fund programs of excess insurance for its member cities. The ICCMA is governed by a Board of Directors consisting of representatives of its member cities. Self-insurance and ICRMA limits are as follows: Type of Coverage Self -Insurance ICRMA General Liability Up to $300,000 $300,000 to $10,000,000 Workers' Compensation Up to $300,000 $300,000 to $10,000,000 Property Up to $ 10,000 $ 10,000 to $20,000,000 Amounts in excess of these limits are self -insured. There have been no significant reductions of coverage from the prior year. There have been no settlements exceeding insurance coverage for each of the past three fiscal years. Health benefits risks are covered on an occurrence basis for amounts in excess of $75,000 per person up to $2,000,000 per person by commercial insurance purchased from independent third parties. The unpaid claims liabilities included in each of the self-insurance Internal Service Funds are based on the results of actuarial studies and third -party administrator claim reports and include amounts for claims incurred but not reported, including loss adjustment expenses. Claims liabilities are calculated considering the effects of inflation and recent claim settlement trends, including frequency and amount of pay -outs and other economic and social factors. Changes in the balances of claims liabilities during the past two fiscal years for all self-insurance funds combined are as follows: Unpaid claims, beginning of fiscal year Incurred claims Claim payments Unpaid claims, end of fiscal year 26 Fiscal Year Ended June 30 2001 2000 $ 4,207,452 $ 3,646,795 169,374 907,725 (297,831) (347,068) $ 4,078,995 $ 4,207.452 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED DUNE 30, 2001 9. SELF-INSURANCE AND CONTINGENCIES (Continued) At June 30, 2001, a number of lawsuits and claims were pending against the City that arose in the normal course of operations. Management estimates that certain pending lawsuits and claims may result in additional liabilities of approximately $1.3 million. However, the ultimate loss, if any, is unknown at this time and no amount has been accrued in the accompanying financial statements because it is not probable that a loss has been incurred as of June 30, 2001. 10. POST -RETIREMENT BENEFITS The City Council approved a post -retirement benefit plan for all employees with 30 years or more of service to the City. The plan pays for qualified employees' medical and dental insurance premiums and claims from age 60 to 65. Funding of the plan is on a pay-as-you-go basis. During the year ended June 30, 2001, approximately 32 employees were eligible to receive benefits. Amounts. paid for the year ended June 30, 2001 are as follows: Total premiums paid for retirees $ 34,881 Medical and dental claims paid 172,953 Total $ 207,834 11. EFFECTS OF NEW PRONOUNCEMENTS In December 1998, GASB issued Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions (GASB 33), which the City implemented effective July 1, 2000. GASB 33 establishes financial reporting standards to guide state and local governments' decisions about when (in which fiscal year) to report the results of nonexchange transactions (including taxes on retail sales of goods and services, property taxes, grants, and donations by nongovernmental entities) involving cash and other financial and capital resources. In April 2000, GASB issued Statement No. 36, "Recipient Reporting for Certain Shared Nonexchange Revenues -an amendment of GASB Statement No. 33, " which was also implemented effective July 1, 2000. This statement eliminates the timing difference in the recognition of shared portions of derived tax or imposed nonexchange revenues between a provider and recipient government that was previously in GASB 33. Recipient governments are now required to account for the sharing of revenues in the same manner as provider governments. Implementation of GASB 33 and 36 had no impact on the City's general-purpose financial statements for the fiscal year ended June 30, 2001. In June 1999, GASB issued Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis —for State and Local Governments (GASB 34), which is effective for the City's fiscal year ending June 30, 2003. GASB 34 establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that governments have presented in the past. GASB 34 represents the most important single change in history of accounting and financial reporting for state and local governments. One of the most significant changes is that all capital assets, including infrastructure, will be reported within the basic financial statements, along with depreciation expense and accumulated depreciation. Currently, infrastructure related to governmental funds is not reported in the financial statements. GASB 34 provides an alternative to depreciation for infrastructure, termed the "modified approach." 27 CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2001 11. EFFECTS OF NEW PRONOUNCEMENTS (Continued) The modified approach requires the use of a qualified asset management system and additional schedules to be reported in another new element of the financial statements, the "Management's Discussion and Analysis (MD&A)" section. The costs to implement GASB 34 are unknown at this time. In June 2001, GASB issued Statement No. 37, Basic Financial Statements -and Management's Discussions and Analysis for State and Local Governments: Omnibus - an amendment of GASB Statements No. 21 and 34. This Statement is effective for the same periods as GASB 34 and clarifies or modifies certain provisions in GASB Statements No. 21 Accounting for Escheat Property and No. 34. It establishes guidance in the following areas: reporting of escheat property, topics for discussion in the Management's Discussion and Analysis (MD&A), program revenue classifications, the minimum level of detail required for business -type activities in the statement of activities, etc. The City is analyzing the impact of implementation of this new statement in fiscal year 2003. Also in June 2001, GASB issued Statement No. 38, Certain Financial Statement Note Disclosures, which is effective for the same periods as GASB Statement No. 34. This statement modifies, establishes, and rescinds certain financial statement disclosure requirements. Modifications to the note disclosures primarily focus on: a) revenue recognition policies; b) actions taken in response to significant violations of legal or contractual provisions; c) debt service requirements; d) lease obligations; e) short-term debt; and f) interfund balances. These new disclosure requirements address the needs of users of financial statements identified by GASB. The analysis required for the implementation of this new statement is being completed along with GASB 34. 12. SUBSEQUENT EVENTS Since calendar year 2000, the California energy crisis has produced significant events and caused financial difficulties for several major companies. These include the state's two largest IOUs and numerous power marketing companies, including the Enron Corporation. Pacific Gas & Electric (PG&E) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code (Code). PG&E has filed a Plan of Reorganization, intending to pay most of the debts it owes to various creditors, which includes significant amounts due to the California Power Exchange (PX) and the California Independent System Operator (ISO). The Southern California Edison Company (Edison) has experienced severe liquidity problems, but worked out its difficulties through revised billing rate schedules recently approved by the California Public Utilities Commission (CPUC). The PX, a state organized power trading company, closed operations, filed for bankruptcy protection and left unsettled billions of dollars in wholesale electricity transactions. The PX's principal assets, block forward wholesale electricity contracts, which would be sufficient to nearly cover all of its unsettled transactions, were seized by the Governor of the State of California during the height of the energy crisis. Recently, the Ninth Circuit Court of Appeals has found that the seizure by the Governor and the state was unconstitutional and that both are liable for damages to the PX and its various market participants. Currently, a retired Judge of the Superior Court in Sacramento has been assigned various cases, all related to this matter, to determine what sums of money each of the various PX market participants are owed (Sacramento proceedings). 28 17 r_ 17 ■ ■ 0 Im Im CITY OF VERNON NOTES TO GENERAL-PURPOSE FINANCIAL STATEMENTS FISCAL YEAR ENDED JUKE 30, 2001 12. SUBSEQUENT EVENTS (Continued) The ultimate impact of all these events on the City's operations is unknown at this time. However, the following facts exist. As of August 2000, Edison stopped paying the City moneys owed monthly to it pursuant to electricity restructuring agreements entered into several years ago. Initially, the City withheld from Edison other lesser payments owed to Edison for electricity services. Recently, the City determined that Edison resolved most of its financial difficulties and completely settled its account with Edison. On March 1, 2002, Edison paid the City $5,736,103, reflecting most of the past due amount under the Restructuring Agreement. The PX did not settle wholesale electricity transactions with the City, which totals approximately $3.0 million. The City is currently actively involved in the Sacramento proceedings. The City believes it will receive the moneys owed to it within the next three years and has not provided an allowance against the account. The City and PG&E are parties to a high voltage transmission exchange agreement that has a term remaining of nearly 40 years. PG&E chose not to reject this agreement under the Code. PG&E does not owe the City any moneys under this agreement. 29 CITY OF VERNON SUPPLEMENTAL COMBINING BALANCE SHEET ALL ENTERPRISE FUNDS NNE 30, 2001 Total Utilities Water Gas Enterprise Department Department Department Funds ' ASSETS Cash and investments $ 96,462,923 $ 5,498,199 $ 958 $ 101,962080 16,201:265 Accounts receivable 15,835,135 366,130 - Accrued unbilled revenue 6,684,674 330,625 - 7,015,299 Inventories, at cost 45,690 - r 45,690 Deposits 7,860 - - 7,860 Advance receivable from outside party 5,307,173 - - 5,307,173 Advances to other funds 26,173,220 - - 26,173,220 Restricted cash and investments 5,219,650 - - 5,219,650 Fixed assets 109,865,441 11,492,470 13,881,853 135,239,764 Accumulated depreciation (46,977,771) (9,126,958) - (56,104,729) Other assets 64,092 - - 64,092 TOTAL $ 218,688,087 $ 8,560,466 $ 13,882,811 $ 241,131,364 LIABILITIES AND FUND EQUITY (DEFICIT) LIABILIITIES: Accounts payable and accrued liabilities $ 8,013,654 $ 594,702 $ 503,436 $ 9,111,792 Customer deposits and advances 647,050 121,419 - 768,469 Accrued in lieu of taxes due to General Fund 1,046,904 66,248 - 1,113,152 Due to other funds 396,587 2,512 903 400,002 Advances from other funds - 3,509,029 19,447,177 22,956,206 Total liabilities 10,104,195 4,293,910 19,951,516 34,349,621 FUND EQUITY (DEFICIT): Contributed capital 1,683,117 720,000 - 2,403,117 Retained earnings (deficit) 206,900,775 3,546,556 (6,068,705) 204,378,626 Total fund equity 208,583,892 4,266,556 (6,068,705) 206,781,743 TOTAL $ 218,688,087 $ 8,560,466 $ 13,882,811 $ 241,131,364 30 CITY OF VERNON SUPPLEMENTAL COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS (DEFICIT) - ALL ENTERPRISE FUNDS FISCAL YEAR ENDED NNE 30, 2001 Total Utilities Water Gas Enterprise Department Department Department Funds OPERATING REVENUES: Power and water sales $ 96,878,328 $ 5,367,498 $ $ 102,245,826 OPERATING EXPENSES: Cost of sales 97,387,167 4,781,297 102,168,464 In lieu of franchise tax 2,202,633 154,513 - 2,357,146 General and administrative - - 514,931 514,931 Depreciation 2,798,753 199,654 - 2,998,407 Total operating expenses 102,388,553 5,135,464 514,931 108,038,948 OPERATING IINCOME (LOSS) (5,510,225) 232,034 (514,931) (5,793,122) NONOPERATING REVENUES (EXPENSES): Investment income: Interest income 3,764,824 - - 3,764,824 Net increase in fair value of investments 5;036,815 368,115 - 5,404,930 Interest expense (95,796) - - (95,796) Total nonoperating revenues, net 8,705,843 368,115 - 9,073,958 NET INCOME (LOSS) BEFORE OPERATING TRANSFERS 3,195,618 600,149 (514,931) 3,280,836 OPERATING TRANSFERS OUT (7,612,243) - (7,612,243) NET INCOME (LOSS) (4,416,625) 600,149 (514,931) (4,331,407) RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR 211?317,400 2,946,407 (5,553,774) 208,710,033 RETAINED EARNINGS (DEFICIT), END OF YEAR $ 206,900,775 $ 3,546,556 $ (6,068,705) $ 204,378,626 31 *,.tG Macias, Gini & Company Certified Public Accountants and Management Consultants Honorable City Council City of Vernon, California Partners Kenneth A. Macias, Managing Partner Ernest J. Gini Kevin J. O'Connell Richard A. Green Jan A. Rosati James V. Godsey 515 South Figueroa Street Suite 325 Los Angeles, CA 90071 213.612.0200 213.683.0443 FAx www.maciasgim.com INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF GENERAL-PURPOSE FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS We have audited the general-purpose financial statements of the City of Vernon, California (City), as of June 30, 2001, and for the fiscal year ended, and have issued our report thereon dated March 11, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the City's general-purpose financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing the audit, we considered the City's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the general- purpose financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the general-purpose financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. OFFICE LOCATIONS Sacramento 9 Los Angeles a Fresno a San Francisco Bay Area This report is intended solely for the information and use of the Mayor, City Council, the City's management and is not intended to be and should not be used by anyone other than these specified parties. LLn Certified Public Accountants Los Angeles, California March 11, 2002 33 APPENDIX C THE CITY OF VERNON General Description The City of Vernon (the "City") is located in Los Angeles County, California, approximately four miles southeast of downtown Los Angeles. The City is almost exclusively industrial, with an estimated resident population of 96 as of January 1, 2003. The City has approximately 1,200 businesses (primarily industrial) located within its 5.2 square miles and a work day population of more than 44,000. The City has owned its own electric distribution system since 1931. Municipal Government The City was incorporated on September 16, 1905 as a general law city. Effective July 1, 1988, the City became a charter city form of government. The City Council consists of five members elected "at large" for four-year overlapping terms. The Mayor is selected by the City Council from among its members. The current members of the City Council are as follows: LEONIS C. MALBURG, Mayor, was elected to the City Council in 1956 and was appointed as Mayor in 1974. Mr. Malburg was born in the City and is the grandson of founding father, John B. Leonis. THOMAS A. YBARRA, Mayor Pro Tempore, was elected to the City Council in 1966. WILLIAM J. DAVIS, Council Member, was elected to the City Council in 1981. HILARIO GONZALEZ, Council Member, was appointed to the City Council in 1974. W. MICHAEL McCORMICK, Council Member, was elected to the City Council in 1974. The City Administrator is appointed by the City Council and is responsible for and acts as the Council's staff advisor and oversees the day -today operation of the City, including public relations, legislative matters, execution and implementation of the City's policies, the City's financial status, and it is the City Administrator's responsibility to assist the City Council with the essential information needed to be utilized in the decision -making process. A full-time staff of 319 employees and 8 part-time workers carry out the functions of municipal government. Vernon Police Officer's Benefit Association is composed of 52 members of the Police Department and has an employment agreement with the City, which is due to expire in 2011. C-1 SFl 1317361v12 42379/276 Population Characteristics The following table indicates population change for the City and the County from 1980 to 2002 City of Vernon and County of Los Angeles Population from 1980 to 2002 City of Vernon Annualized Percent Change Year Number Over Interval County of Los Angeles Annualized Percent Change Number Over Interval 1980 90 -- 7,477,503 -- 1990 82 (8.9%) 8,863,052 18.5% 2000 90 9.8 9,643,073 8.8 2001 94 4.4 9,802,780 1.7 2002 93 (1.1) 9,824,807 0.2 Source: 1980-2000 figures from U.S. Census. 2001 and 2002 estimates from the California State Department of Finance. Transportation In 1905, the City was incorporated as the first industrial city in the Southwest. The City is a developed industrial rail city, with major railroads running through it. Part of the City's northern border is formed by vast railroad freight yards. The 200-acre facility handles 1.5 million container and trucks on flatcars per year, much of it goods manufactured in the City, heading for domestic and world markets. Utilities and Community Services The City owns its electric system, since 1933, which provides electrical service to all property within the City boundary. In addition, the City provides normal city services to its inhabitants such as police and fire protection and water service. Sewer service is provided by the Los Angeles County Sanitation District. The City is also currently developing a gas distribution system to serve the City. Assessed Valuations The assessment and collection of taxes is the responsibility of the County. City taxes are collected at the same time and on the same tax rolls as are the County, school district, and special district taxes. Assessed valuations are the same for both City and the County taxing purposes. California law exempts $7,000 of the full cash value of an owner -occupied dwelling, but this exemption does not result in any loss of revenue to local agencies, since an amount equivalent to the taxes which would have been payable on such exempt values is paid by the State. The following table shows the taxable valuation of the City by tax roll for the last five fiscal years. C-2 SF1 1317361v12 42379/276 City of Vernon Assessed Actual Value of Taxable Property For Fiscal Years 1997-98 through 2001-02 Fiscal Year Secured Roll Unsecured Roll Total 1997-98 $1,738,960,965 $615,801,672 $2,203,149,864 1998-99 1,738,661,525 682,515,235 2,207,944,258 1999-00 1,798,641,170 760,140,466 2,247,505,910 2000-01 1,861,649,621 764,288,661 2,251,331,839 2001-02 1,890,204,489 824,859,877 2,280,435,827 Source: California Municipal Statistics. Direct and Overlapping Bonded Debt The following table shows a statement of direct and overlapping bonded debt for the City as of June 1, 2002. The total net direct and overlapping bonded debt is $31,246,071. City of Vernon Statement of Direct and Overlapping Bonded Debt as of February 1, 2003 2002-03 Assessed Valuation: $2,897,671,198 Redevelopment Incremental Valuation: 621345.157 Adjusted Assessed Valuation: $2,275,926,041 OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 2/l/03 Los Angeles County 0.3871/o $ 141,274 Los Angeles County Flood Control District 0.337 44,973 Metropolitan Water District 0.201 1,010,146 Los Angeles Community College District 0.687 3,483,296 Los Angeles Unified School District 0.845 14,847,875 Los Angeles County Regional Park and Open Space Assessment District 0.387 1527.624 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $21,055,188 DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT: Los Angeles County General Fund Obligations 0.387°/u $ 6,253,424 Los Angeles County Pension Obligations 0.387 6,780,191 Los Angeles County Superintendent of Schools Certificates of Participation 0.387 107,409 Los Angeles County Flood Control District Certificates of Participation 0.337 532,915 Los Angeles Community College District Certificates of Participation 0.687 592,744 Los Angeles Unified School District Certificates of Participation 0.845 5,718,453 . City of Vernon General Fund Obligations 100. 3,383,021n) Los Angeles County Sanitation District No. I Authority 7.016 1,596,313 Los Angeles County Sanitation District No. 2 Authority 0.746 262,665 Los Angeles County Sanitation District No. 23 Authority 99.842 5387.075 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND $30,614,210 OBLIGATION DEBT Less: Los Angeles County Certificates of Participation (100% self-supporting from leasehold revenues on 322.100 properties in Marina Del Rey) TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT $30,292,110 ,GROSS COMBINED TOTAL DEBT $51,669,398a1 NET COMBINED TOTAL DEBT $51,347,298 (1) Excludes issue to be sold. R1 Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non -bonded capital lease obligations Ratios to 2002-03 Assessed Valuation: Total Overlapping Tax and Assessment Debt ...................... ................................................ 0.73% Ratios to Adjusted Assessed Valuation: Combined Direct Debt($3,383,021)....................................................................................0.15% GrossCombined Total Debt..................................................................................................2.27% NetCombined Total Debt......................................................................................................2.26% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/02: $19,744 Source: California Municipal Statistics. C-3 SFl 131736lv12 42379/276 APPENDIX D BOOK -ENTRY ONLY SYSTEM General The 2003 Bonds will be delivered in book -entry only form. DTC will act as securities depository for the 2003 Bonds. The 2003 Bonds will be issued as fully -registered certificates registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered will be prepared for each Series and maturity of the 2003 Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non- U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post - trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of the 2003 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2003 Bonds on DTC's records. The ownership interest of each actual purchaser of each 2003 Bond (`Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2003 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2003 Bonds, except in the event that use of the book -entry system for the 2003 Bonds is discontinued. To facilitate subsequent transfers, all 2003 Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co, or such other name as may be requested by an authorized representatives of DTC. The deposit of 2003 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial D-1 SFI 131736lvl2 42379/276 ownership. DTC has no knowledge of the actual Beneficial Owners of the 2003 Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such 2003 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The City and the Trustee will not have any responsibility or obligation to such DTC Participants or the persons for whom they act as nominees with respect to the 2003 Bonds. Redemption notices shall be sent to DTC. If less than all of the 2003 Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the 2003 Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the 2003 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium, if any, and interest payments with respect to the 2003 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the Trustee, on each payment date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owner will be governed by standing instructions and customer practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC, is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the 2003 Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2003 Bonds are required to be printed and delivered as described in the Indenture. The City may decide to discontinue use of the system of book -entry transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered. Procedures in the Event of a Request of Beneficial Owner to Tender Its Interests in a 2003A Bond. As more fully described in this Official Statement, the Owner of a 2003A Bond may elect to have its 2003A Bond purchased at a purchase price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the date of purchase on the purchase dates, at the times and in the manner set forth herein. So long as Cede & Co. is the registered owner of the 2003A Bonds, as nominee of DTC, the right of an Owner to tender any 2003A Bond for purchase, the mechanics for exercising such right to tender and the right of such Owner to receive payment of the purchase price of any 2003A Bond tendered for purchase as described herein pertain only to the rights Cede & Co. and not the rights of any Beneficial Owner. The ability of any Beneficial Owner to tender its interest in any 2003A Bond and receive D-2 SFl 131736lv12 42379/276 payment therefor is based solely upon and subject to the procedures and limitations of the book -entry only system, including the contractual arrangement of such Beneficial Owner with one of the Direct or Indirect Participants and the contractual arrangements of such Direct or Indirect Participants with DTC. Such procedures and limitations may cause a delay in the ability of a Beneficial Owner to exercise a right to tender its interest in the 2003A Bonds, or to receive timely payment of the purchase price thereof in the manner described in this Official Statement. As noted above, neither the City, the Trustee, the Tender Agent nor the Remarketing Agent will have any responsibility to any Beneficial Owner with respect to the timely exercise by DTC or any Direct or Indirect Participant of any direction by a Beneficial Owner with respect to its election to tender its interest in the 2003A Bonds or with respect to the timely remittance by DTC or any Direct or Indirect Participant of the purchase price of the 2003A Bonds. The City and the Trustee cannot and do not give any assurance that DTC, DTC Participants or others will distribute payments of principal, interest or any premium with respect to the 2003 Bonds paid to DTC or its nominee as the registered owner, or any prepayment or other notices, to the Beneficial Owner, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The City and the Trustee are not 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 2003 Bonds or any error or delay relating thereto. The foregoing description of the procedures and record -keeping with respect to beneficial ownership interest in the 2003 Bonds, payment of principal, premium, if any, interest and other payments on the 2003 Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in such 2003 Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. Discontinuance of DTC Services In the event that (a) DTC determines not to continue to act as securities depository for the 2003 Bonds or (b) the City determines to remove DTC from its functions as a depository, DTC's role as securities depository for the 2003 Bonds and use of the book -entry system will be discontinued. If the City fails to select a qualified securities depository to replace DTC, the City will cause the Trustee to execute and deliver new 2003 Bonds in fully registered form in such denominations and numbered in the manner determined by the Trustee and registered in the names of such persons as are requested in a written request of the City. The Trustee shall not be required to deliver such new 2003 Bonds within a period of less than 60 days from the date of receipt of such written request of the City. Upon such registration, such persons in whose names the 2003 Bonds are registered will become the registered owners of the 2003 Bonds for all purposes. In the event that the book -entry system is discontinued, the following provisions would also apply: (a) 2003 Bonds may be transferred or exchanged by the Owner thereof, in person or by an agent duly authorized in writing by the Owner, at the Principal Office of the Trustee for such purpose in the books required to be kept by the Trustee pursuant to the Indenture, upon surrender of such 2003 Bonds accompanied by delivery of a duly executed written instrument of transfer or exchange in a form approved by the Trustee; (b) the Trustee shall require the payment by any Owner requesting such transfer or exchange of any tax, governmental charge or transfer fee that may be imposed with respect to such transfer or exchange; (c) all interest payments with respect to the 2003 Bonds will be payable on the respective interest payment dates by check mailed by first class mail by the Trustee on the date such interest is due to the respective Owners of the 2003 Bonds as shown in the registration books maintained D-3 SF1 1317361v12 42379/276 by the Trustee as of the close of business on the record date therefor (except that in the case of an Owner of $1,000,000 or greater in aggregate principal amount of Outstanding 2003 Bonds, such payment shall, at such Owner's written request received by the Trustee at least 30 days before any interest payment date, be made by wire transfer of immediately available funds in accordance with instructions provided by such Owner); and (d) all payments of principal and payment premiums, if any, evidenced and represented by the 2003 Bonds will be payable on the respective payment dates or upon prepayment prior thereto by the respective Owners at the principal office of the Trustee specified for such purpose. D-4 SFl 1317361v12 42379/276 APPENDIX E SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following is a brief summary of certain provisions of the Indenture not previously discussed in this Official Statement. Such summary is not intended to be definitive, and reference is made to the Indenture in its entiretyfor the complete terms thereof. Capitalized terms used in this summary which are not otherwise defined in this Official Statement have the meanings ascribed to such terms in the Indenture. DEFINITIONS "Accountant's Certificate" means a certificate signed by an Independent Certified Public Accountant selected by the City. "Accreted Value" means, with respect to any Capital Appreciation Obligation and as of any date, the Initial Amount thereof plus the interest accrued thereon from its delivery date, compounded at the approximate interest rate with respect to such Capital Appreciation Obligation specified in or pursuant to the Issuing Instrument authorizing the issuance of such Capital Appreciation Obligation on each date specified therein. The applicable Accreted Value at any date shall be the amount set forth in the Accreted Value Table as of such date, if such date is a compounding date, and if not, shall be determined by straight-line interpolation with reference to such Accreted Value Table. "Accreted Value Table" means, with respect to Capital Appreciation Obligations, the table denominated as such in, and to which reference is made in, the Issuing Instrument authorizing the issuance of such Capital Appreciation Obligations. "Additional Bonds" means Bonds issued in accordance with the terms and conditions of the Indenture for the purposes set forth in the Indenture. "Additional Parity Obligations" means Parity Obligations, including Additional Bonds, issued for the purposes set forth in the Indenture and satisfying the conditions set forth in the Indenture. "Adjusted Debt Service" means, for any period of time, the Debt Service for such period minus the sum of the amount of such Debt Service with respect to Outstanding Parity Obligations to be paid during such period from the proceeds of Parity Obligations as set forth in a Certificate of the City. "Adjusted Net Revenues" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture, for any Calculation Period, as calculated by the City or a Consultant, the Adjusted Revenues for such Calculation Period less the Operation and Maintenance Expenses for such Calculation Period, plus at the option of the City, any or all of the following: (i) an allowance for any estimated increase in Revenues from any additions or improvements to or extensions of the Electric System, made but not in service during the applicable Calculation Period or to be made with the proceeds of any Additional Parity Obligations with respect to which such certificate relates, with the proceeds of other Obligations theretofore issued by the City and available for such purpose or with other available funds of the City reserved by the City for such purpose, such allowance to be in an amount equal to the estimated additional average annual Revenues to be derived from such additions, improvements and extensions during the twelve month period after placing each such addition, improvement or extension in service, all as shown by a Certificate of the City or a Consultant; and (ii) an allowance for any increases in rates and charges for the Electric Service of the Electric System and which have been approved by the City Council but which during all or any part of the applicable Calculation Period were not in effect, such allowance to be in an amount equal to seventy-five percent (75%) of the amount by which the Revenues for the applicable Calculation Period would have increased if such increase in rates and charges had been in effect for that portion of such Calculation Period during which such increase was not in effect. "Adjusted Revenues" means, for any period of time, the Revenues for such period less the amount of such Revenues which have been deposited in the Expense Stabilization Fund plus the amount of withdrawals during such period from the Expense Stabilization Fund. E-1 "Advance Refunded Municipal Securities" means any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local government unit of any such state (a) which are rated "AAA" by Standard and Poor's, "AAA" by Fitch or "Aaa" by Moody's, (b) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee, fiscal agent or other fiduciary for such bonds or other obligations by the obligor to give due notice of redemption and to call such bonds or other obligations for redemption on the date or dates specified in such instructions, (c) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described in clause (i) of the definition of Defeasance Securities which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the redemption date or dates specified in the irrevocable instructions referred to in clause (b) above, as appropriate, and (d) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) of the definition of Defeasance Securities which have been deposited in such fund, along with any cash on deposit in such fund, have been verified by an Accountant's Certificate as being sufficient to pay principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in clause (b) above, as applicable. "Applicable Parity Obligations" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture and as of the date of such certificate, all of the Parity Obligations Outstanding on such date plus the Additional Parity Obligations proposed to be issued. "Authorized Denominations" means, with respect to Bonds of any Series, the denomination or denominations designated as such in the Supplemental Indenture authorizing such Bonds. "Authorized City Representative" means the City Administrator of the City, and any other officer of the City duly authorized to act as an Authorized City Representative for purposes of the Indenture by the City Council or written authorization of the City Administrator of the City. "Balloon Indebtedness" means, with respect to any Series of Obligations twenty-five percent (25%) or more of the principal of which matures on the same date or within a 12-month period (with Sinking Fund Installments on Term Obligations deemed to be payments of matured principal), that portion of such Series of Obligations which matures on such date or within such 12-month period. For purposes of this definition, the principal amount maturing on any date shall be reduced by the amount of such indebtedness which is required, by the documents governing such indebtedness, to be amortized by prepayment or redemption prior to its stated maturity date. "Beneficial Owner" means, with respect any Book -Entry Bond, the beneficial owner of such Bond as determined in accordance with the applicable rules of the Securities Depository for such Book -Entry Bonds. "Bond Ordinance" means the City of Vernon Municipal Facilities Revenue Bond Law constituting Article XI of the City Code of the City of Vernon. "Bond" means any of the City of Vernon Electric System Revenue Bonds authorized pursuant to of the Indenture and a Supplemental Indenture. "Bond Debt Service" means, for any period of time, the sum of (a) the interest payable during such period on all Outstanding Bonds, assuming that all Outstanding Bonds which are Serial Obligations are retired as scheduled and that all Outstanding Bonds which are Term Obligations are redeemed or paid from Sinking Fund Installment as scheduled, (b) that portion of the principal amount of all Outstanding Bonds which are Serial Obligations maturing on each principal payment date during such period, including the Final Compounded Amount of any Bonds which are Capital Appreciation Obligations and Serial Obligations, (c) that portion of the principal amount of all Outstanding Bonds which are Term Obligations required to be redeemed or paid from Sinking Fund Installments during such period (together with the redemption premiums, if any, thereon), including the Accreted Value of any Bonds which are Capital Appreciation Obligations and Term Obligations. "Bond Register" means the registration books for the ownership of Bonds maintained by the Trustee pursuant to the Indenture. E-2 "Bondowner" or "Owner" means, with respect to a Bond, the registered owner of such Bond as set forth in the Bond Register. "Book -Entry Bonds" means Bonds registered in the name of a nominee of DTC, or any successor Securities Depository for the Bonds or a nominee thereof, as the registered owner thereof pursuant to the terms and provisions of the Indenture. "Business Day" means, with respect to each Series of Bonds, unless otherwise provided with respect to a Series of Bonds in the Supplemental Indenture authorizing the issuance of such Series, any day, other than a Saturday, Sunday or other day on which the New York Stock Exchange or banks are authorized or obligated by law or executive order to close in the State of New York or State of California or any city in which the Principal Office of any Paying Agent or any Credit Provider for such Series of Bonds is located. "Calculation Period" means, with respect to any certificate to be provided pursuant to the Indenture, any twelve consecutive month period within the eighteen consecutive months ending immediately prior to the issuance of the Additional Parity Obligations to which such certificate relates. "Calendar Week" means with respect to the 2003 A Bonds in a Weekly Interest Rate Period the period during which interest accrues with respect to the 2003A Bonds at a particular Weekly Interest Rate and will be the period from Wednesday of one week (whether or not a Business Day) to and including the Tuesday of the following week (whether or not a Business Day); provided that the initial Calendar Week for each Weekly Interest Rate Period shall be the period from the first day of such Weekly Interest Rate Period to the next succeeding Tuesday (whether or not a Business Day); and provided further that the final Calendar Week for a Weekly Interest Rate Period which ends on a day other than a Tuesday shall be the period from the Wednesday (whether or not a Business Day) preceding the last day of such Weekly Interest Rate Period to the last day of such Weekly Interest Rate Period. "Capital Appreciation Obligations" means any Obligations the interest on which is compounded and not scheduled to be paid until the maturity or prior redemption of such Obligations. "Capital Improvement" means, to the extent chargeable to a capital account of the Electric System under Generally Accepted Accounting Principles: (i) any addition, betterment, replacement, renewal, extension or improvement of or to the Electric System, including, without limitation, capacity rights in electric generation resources, rights to the transmission capability of electric transmission resources, acquisition of emission credits or other environmental assets for facilities of the Electric System, land or any interests therein; and (ii) capital costs for the extension, reinforcement, enlargement or other improvement of facilities or property, or the acquisition of interests therein, not included as part of the Electric System, determined by the City to be necessary or convenient in connection with the utilization of the Electric System. "Charter" means the Charter of the City of Vernon approved by the electorate of the City on April 12, 1988. "City" means the City of Vernon, California and its successors. "City Administrative Code" means the Code of the City of Vernon. "City Council" means the City Council of the City established pursuant to the Charter. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code in the Indenture shall be deemed to include the applicable United States Treasury Regulations thereunder and also includes all amendments and successor provisions unless the context clearly requires otherwise. "Commercial Paper Program" means a program of short-term Obligations having the characteristics of commercial paper in that such Parity Obligations have a stated maturity not later than 270 days from their date of issue and that maturing Obligations of such program may be paid with the proceeds of renewal short-term Obligations. E-3 "Consultant" means a consultant, consulting firm, engineer, architect, engineering firm, architectural firm, accountant or accounting firm retained by the City to perform acts, prepare certificates or otherwise carry out the duties provided for a Consultant in the Indenture or any Supplemental Indenture. Such consultant, consulting firm, engineer, architect, engineering firm or architectural firm shall be nationally recognized within its profession for works of the character required. Such accountants or accounting firm shall be Independent Certified Public Accountants licensed to practice in the State of California. "Cost" means, with respect to any Capital Improvement, to the extent permitted under the Bond Ordinance, all costs and expenses of planning, designing, acquiring, constructing, installing and financing such Capital Improvement, placing such Capital Improvement in operation, disposal of such Capital Improvement, and obtaining governmental approvals, certificates, permits and licenses with respect thereto, heretofore or hereafter paid or incurred by the City. Payment of Cost shall include the reimbursement to the City for any of the costs included in this definition of Cost paid by the City and not previously reimbursed to the City and which are not to be reimbursed from contributions in aid of construction. The term Cost shall include, but shall not be limited to, funds required for: (a) Costs of preliminary investigation and development, the performance or acquisition of feasibility and planning studies, and the securing of regulatory approvals, as well as costs for land and land rights, engineering and contractors' fees, labor, materials, equipment, utility services and supplies, legal fees and financing expenses; (b) Working capital and reserves therefor in such amounts as shall be determined by the City; (c) Interest accruing in whole or in part on Parity Obligations prior to and during construction of a Capital Improvement or any portion thereof, and for such additional period as the City may determine; (d) The deposit or deposits from the proceeds of the Bonds in any funds or accounts which deposit or deposits are required by the Indenture or any Supplemental Indenture; (e) The payment of principal, premium, if any, and interest when due (whether at the maturity of principal or at the due date of interest or upon redemption or otherwise) of any note or other evidence of indebtedness the proceeds of which were applied to any of the costs of a Capital Improvement described in the Indenture; (f) Training and testing costs which are properly allocable to the acquisition, placing in operation, or construction of a Capital Improvement; (g) All costs of insurance applicable to the period of construction and placing a Capital Improvement in operation; (h) All costs relating to injury and damage claims arising out of the acquisition or construction of a Capital Improvement less proceeds of insurance; (i) Legally required or permitted federal, state and local taxes and payments in lieu of taxes applicable to: (i) the acquisition or construction of the Capital Improvement or any portion thereof or materials in connection therewith; and (ii) the period of construction and placing a Capital Improvement in operation; 0) Amounts due the United States of America as rebate of investment earnings with respect to the proceeds of Parity Obligations or as penalties in lieu thereof, (k) Amounts payable with respect to capital costs for the expansion, reinforcement, enlargement or other improvement of facilities determined by the City to be necessary in connection with the utilization of a Capital Improvement and the costs associated with the removal from service or reductions in service of any facilities as a result of the expansion, reinforcement, enlargement or other improvement of such facilities or the construction of a Capital Improvement; (1) Costs of Issuance of any Parity Obligations; (m) Fees and expenses pursuant to any lending or credit facility or agreement applicable to the period for construction and placing a Capital Improvement in operation; (n) To the extent chargeable to a capital account of the Electric System under Generally Accepted Accounting Principles, all other costs incurred by the City, properly allocable to the acquisition, construction, or, placing a Capital Improvement or any portion thereof in operation. "Costs of Issuance" means, to the extent permitted by the'Bond Ordinance, all items of expense directly or indirectly payable by or reimbursable to the City and related to the original authorization, execution, sale and delivery of Parity Obligations, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, including disclosure documents and documents relating to the sale of such Parity Obligations, initial fees and charges (including counsel fees) of any fiscal agent, any paying agent and any Credit Provider, legal fees and charges, financial advisor fees and expenses, fees and expenses of other consultants and professionals, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Parity Obligations and any other cost, charge or fee in connection with the authorization, issuance, sale or original delivery of Parity Obligations. E-4 "Credit Provider" means any municipal bond insurance company, bank or other financial institution or organization which is performing in all material respects its obligations under any Credit Support Instrument for some or all of the Parity Obligations. "Credit Provider Reimbursement Obligations" means obligations of the City to pay from the Net Revenues amounts due under a Credit Support Agreement, including without limitation amounts advanced by a Credit Provider pursuant to a Credit Support Instrument as credit support or liquidity for Parity Obligations and the interest with respect thereto. "Credit Provider Bonds" means any Bonds paid as to principal, Redemption Price, Purchase Price and/or interest with funds provided under a Credit Support Instrument for so long as such Bonds are held by or for the account of, or are pledged to, the applicable Credit Provider in accordance with the applicable Credit Support Agreement. "Credit Support Agreement" means, with respect to any Credit Support Instrument, the agreement or agreements (which may be the Credit Support Instrument itself) between the City and the applicable Credit Provider, as originally executed or as it may from time to time be replaced, supplemented or amended in accordance with the provisions thereof, providing for the reimbursement to the Credit Provider for payments under such Credit Support Instrument, and the interest thereon, and includes any subsequent agreement pursuant to which a substitute Credit Support Instrument is provided, together with any related pledge agreement, security agreement or other security document. "Credit Support Instrument" means a policy of insurance, a letter of credit, a stand-by purchase agreement, revolving credit agreement or other credit arrangement pursuant to which a Credit Provider provides credit and/or liquidity support with respect to the payment of interest, principal, Redemption Price or Purchase Price of any Parity Obligations but shall not include a Reserve Financial Guaranty. "Crossover Date" means, with respect to a Series of Refunding Parity Obligations constituting Crossover Refunding Obligations, the date on which the proceeds of the sale of such Refunding Parity Obligations are to be applied to the payment of the principal of and premium, if any, on the Parity Obligations to be refunded with the proceeds of such Refunding Parity Obligations in accordance with the applicable Crossover Refunding Instructions. "Crossover Refunding Escrow" means, with respect to any Series of Refunding Parity Obligations constituting Crossover Refunding Obligations, a trust or escrow fund or account established with an Escrow Agent into which proceeds of the sale of such Series of Refunding Parity Obligations and, if necessary, other available funds have been deposited in an amount sufficient to pay when due, or to purchase bonds, notes or other evidences of indebtedness the scheduled payments of principal of and interest on which shall provide moneys at the times and in amounts sufficient to pay when due, the applicable Crossover Refunding Requirements in accordance with the applicable Crossover Refunding Instructions. "Crossover Refunding Instructions" means, with respect to a Series of Refunding Parity Obligations which constitute Crossover Refunding Obligations, a certificate, order, escrow deposit agreement, or other direction from an Authorized City Representative to the Escrow Agent for the applicable Crossover Refunding Escrow to apply amounts in the applicable Crossover Refunding Escrow to the payments of principal and interest scheduled to be made on the Crossover Refunding Obligations to and including the applicable Crossover Date and on such Crossover Date to apply moneys in the applicable Crossover Refunding Escrow to the payment or redemption of the Parity Obligations to be refunded or, in the event that the conditions to such payment or redemption contained in the Issuing Instrument authorizing the issuance of such Crossover Refunding Obligations are not satisfied, to the payment or redemption of the Crossover Refunding Obligations on the terms and conditions set forth in such Issuing Instrument. "Crossover Refunding Obligations" means Refunding Parity Obligations as to which a Crossover Refunding Escrow has been established and which are payable, prior to the application of moneys in the applicable Crossover Refunding Escrow to the payment or redemption of the Parity Obligations to be refunded, only from amounts in such Crossover Refunding Escrow. E-5 "Crossover Refunding Requirements" means, with respect to a Series of Parity Refunding Obligations constituting Crossover Refunding Obligations and the Parity Obligations to be refunded with the proceeds of the sale of such Refunding Parity Obligations, moneys sufficient o pay when due: (i) the scheduled principal of and interest on the Series of Parity Refunding Obligations coming due on and before the applicable Crossover Date (other than as a result of the failure to apply moneys in the applicable Crossover Refunding Escrow to the refunding of the Parity Obligations to be refunded with the proceeds of the sale of such Refunding Parity Obligations on the Crossover Date); (ii) the principal of, premium, if any, and interest on such Refunding Parity Obligations which are payable in accordance with the applicable Crossover Refunding Instructions in the event the amounts in the applicable Crossover Refunding Escrow are not applied to the payment or redemption of the Parity Obligations to be refunded with the proceeds of the sale of such Refunding Parity Obligations; and (iii) the principal of and premium, if any, on the Parity Obligations to be refunded with the proceeds of the sale of the Refunding Parity Obligations coming due in accordance with the applicable Crossover Refunding Instructions. "Debt Service" means, for any period of time, the sum of (a) the interest payable during such period on all Outstanding Parity Obligations, assuming that all Outstanding Serial Parity Obligations are retired as scheduled and that all Outstanding Term Parity Obligations are redeemed or paid from Sinking Fund Installments as scheduled, (b) that portion of the principal amount of all Outstanding Serial Parity Obligations maturing on each principal payment date during such period, including the Final Compounded Amount of any Capital Appreciation Obligations which are Serial Parity Obligations, (c) that portion of the principal amount of all Outstanding Term Parity Obligations required to be redeemed or paid from Sinking Fund Installments becoming due during such period (together with the premiums, if any, thereon), including the Accreted Value of any Capital Appreciation Obligations which are Term Parity Obligations, and (d) the Parity Purchase Price of Parity Obligations which are Tender Indebtedness. "Debt Service Fund" means the City of Vernon Electric System Debt Service Fund established pursuant to the Indenture. "Debt Service Reserve Fund" means the City of Vernon Electric System Debt Service Reserve Fund established pursuant to the Indenture. "Debt Service Reserve Requirement" means, as of any date of calculation, an amount equal to the least of (i) ten percent (101/o) of the initial offering price to the public of the Bonds as determined under the Code, or (b) the greatest amount of Bond Debt Service in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any Bond is due, or (c) one hundred twenty-five percent (1251/o) of the sum of the Bond Debt Service for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the execution and delivery of any Bonds) and terminating with the last Fiscal Year in which any Bond Debt Service is due, divided by the number of such Fiscal Years, all as computed and determined by the City and specified in writing to the Trustee; provided, however that in determining Bond Debt Service with respect to any Bonds that constitute Variable Rate Indebtedness, the interest rate on such Bonds for any period as to which such interest rate has not been established shall be assumed to be 110% of the daily average interest rate on such Bonds during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Bonds shall have been Outstanding. "Defeasance Securities" means any of the following securities, if and to the extent the same are at the time legal investments for funds of the City: (i) any bonds or other obligations which as to principal and interest constitute direct obligations of, or obligations unconditionally guaranteed by, the United States of America, including obligations of any agency or corporation which has been or may hereafter be created pursuant to an Act of Congress as an agency or instrumentality of the United States of America to the extent unconditionally guaranteed by the United States of America; and (ii) Advance Refunded Municipal Securities. "Electric Service" means the services, commodities and products furnished, made available or provided by the Electric System. E-6 "Electric System" means the electrical energy generation, transmission and distribution system of the City established pursuant to Ordinance No. 1022 of the City (codified as Section 2.91 of the City Administrative Code) and referred to in the City Administrative Code as the Vernon Electric System, comprising all electric generation, transmission and distribution facilities and all general plant facilities related thereto now owned by the City and all other facilities properties, structures or works for the generation, transmission or distribution of electricity hereafter acquired by the City, including all contractual rights for electricity or the transmission thereof, together with all additions, betterments, extensions or improvements to such facilities, properties, structures or works or any part thereof, and any additional contract rights for electricity or the transmission thereof, hereafter acquired. "Event of Default" means an event described as such in the Indenture "Electronic" means, with respect to notice, notice through telecopy, telegraph, telex, facsimile transmission, internet, e-mail, dedicated electronic link or other electronic means of communication capable of producing a written record. "Escrow Agent" means the Trustee or a bank or trust company organized under the laws of any state of the United States, or a national banking association, appointed by the City to hold in trust moneys set aside for either: (i) the payment or redemption of, or interest installments on, a Bond or Bonds, or any portion thereof, deemed paid and defeased pursuant to the Indenture ; or (ii) the payment of the principal, premium, if any, or interest on Crossover Refunding Bonds or the Parity Obligations to be refunded with the proceeds of the sale of such Crossover Refunding Bonds. "Expense Stabilization Fund" means the City of Vernon Electric System Expense Stabilization Fund established pursuant to the Indenture. "Event of Bankruptcy" means any of the following with respect to any Person: (a) the commencement by such person of a voluntary case under the Federal Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or similar laws; (b) failure by such Person to timely controvert the filing of a petition with a court having jurisdiction over such Person to commence an involuntary case against such person under the Federal Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or similar laws; (c) such Person shall admit in writing its inability to pay its debts generally as they become due; (d) a receiver, trustee, custodian or liquidator of such Person or such Person's assets shall be appointed in any proceeding brought against the Person or such Person's assets; (e) assignment of assets by such person for the benefit of its creditors; or (f) the entry by such Person into an agreement of composition with its creditors. "Favorable Opinion of Bond Counsel" means, with respect to any action requiring such an opinion, an Opinion of Bond Counsel to the effect that such action shall not, in and of itself, adversely affect the Tax -Exempt status of interest on the Bonds or such portion thereof as shall be specified in the provisions of the Indenture or the Supplemental Indenture requiring such an opinion. "Federal Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as the same may be amended and supplemented, and any successor statute. "Fiduciarymeans the Trustee and each Paying Agent for the Bonds appointed as provided in the Indenture. "Final Compounded Amount" means the Accreted Value of any Capital Appreciation Obligation on its maturity date. "First Supplemental Indenture" means the First Supplemental Indenture of Trust, dated as of March 1, 2003, between the City and the Trustee supplementing The Indenture of Trust. "Fiscal Year" means the period beginning on July 1 of each year and ending on the next succeeding June 30, or any other twelve-month period selected and designated as the official Fiscal Year of the City. "Generally Accepted Accounting Principles" means generally accepted accounting principles applied on a consistent basis set forth in the opinions and pronouncements of the Accounting Principles Board of the American E-7 Institute of Certified Public Accountants applicable to a government -owned utility applying all statements and interpretations issued by the Governmental Accounting Standards Board and statements and pronouncements of the Financial Accounting Standards Board which are not in conflict with the statements and interpretations issued by the Governmental Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination. "Independent Certified Public Accountant" means any firm of certified public accountants appointed by the City, and each of whom is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants. "Indenture" means, the Indenture of Trust, as supplemented and amended from time to time by Supplemental Indentures. "Indenture of Trust" means The Indenture of Trust, dated as of March 1, 2003 between the City and the Trustee, as may be modified or amended from time to time in accordance with the Indenture. "Initial Amount" means the Accreted Value of a Capital Appreciation Obligation on its date of issuance and delivery to the original purchaser thereof. "Interest Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Interest Payment Date" means, with respect to a Series of Bonds, each date on which interest on Bonds of such Series is scheduled to be paid as set forth in, or determined in accordance with, the Supplemental Indenture authorizing the issuance of such Series. "Issuing Instrument" means any, indenture, trust agreement or other instrument or agreement under which Obligations are issued. "Light and Power Department Fund" means the Light and Power Department Fund established pursuant to Ordinance No. 950 of the City (codified as Section 2.65 of the City Administrative Code) and shall include any successor or replacement fund established by the City for the collection of revenues and the payment of expenses of the Electric System. "Maximum Adjusted Annual Debt Service" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture, as of any date and with respect to the Applicable Parity Obligations, the maximum amount of Adjusted Debt Service becoming due on the Applicable Parity Obligations in the then current or any future Fiscal Year, as adjusted as provided in this definition and calculated by the City or by a Consultant. For purposes of calculating Maximum Adjusted Annual Debt Service, the following adjustments and assumptions shall be made with respect to Debt Service on the Applicable Parity Obligations coming due in each Fiscal Year: (a) in determining the amount of Debt Service constituting principal due in each Fiscal Year, principal payments with respect to Applicable Parity Obligations which are or upon issuance shall be, part of a Commercial Paper Program, but which would not constitute Balloon Indebtedness, shall be treated as if such Applicable Parity Obligations were to be amortized with substantially level annual Debt Service payments over a term of 40 years commencing on the date the calculation of Maximum Adjusted Annual Debt Service is made: (b) if all or any portion or portions of the Applicable Parity Obligations constitute, or upon issuance would constitute, Balloon Indebtedness, then, for purposes of determining Maximum Adjusted Annual Debt Service, each maturity which constitutes, or upon issuance would constitute, Balloon Indebtedness shall be treated as if it were to be amortized with substantially level annual Debt Service payments over a term of 40 years commencing on the date which is the first anniversary of the initial issuance of such Applicable Parity Obligations; E-8 (c) if any Outstanding Parity Obligations constitute Tax -Exempt Variable Rate Indebtedness (except to the extent paragraph (g) applies), the interest rate on such Parity Obligations for any period as to which such interest rate has not been established shall be assumed to be 110% of the daily average interest rate on such Parity Obligations during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Parity Obligations shall have been Outstanding; (d) if any Outstanding Parity Obligations constitute Variable Rate Indebtedness which is not Tax -Exempt (except to the extent paragraph (g) applies), the interest rate on such Parity Obligations for any period as to which such interest rate has not been established shall be assumed to be 110% of the average One Month USD LIBOR Rate during the calendar quarter preceding the calendar quarter in which the calculation of Maximum Adjusted Annual Debt Service is made or if the One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City. (e) if the Additional Parity Obligations proposed to be issued shall be Tax -Exempt Variable Rate Indebtedness (except to the extent paragraph (h) applies), then the interest rate on such Additional Parity Obligations shall be assumed to be 110% of the average TBMA Index during the calendar quarter preceding the calendar quarter in which the calculation of Maximum Adjusted Annual Debt Service is made, or if that index is no longer published, seventy-five percent (751/o) of the One Month USD LIBOR Rate, or if the One Month USD LIBOR Rate is not available, another similar rate or index selected by the City; (f) if the Additional Parity Obligations proposed to be issued shall be Variable Rate Indebtedness which is not Tax -Exempt (except to the extent subsection (h) applies) then the interest rate on such Additional Parity Obligations shall be assumed to be 110% of the average One Month USD LIBOR Rate during the calendar quarter preceding the calendar quarter in which the calculation is made, or if the One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City; (g) if a Qualified Swap Agreement has been entered into in connection with any Outstanding Parity Obligations, the interest rate on such Outstanding Parity Obligations for each Fiscal Year or portion thereof during which payments are to be exchanged by the parties under such Qualified Swap Agreement shall be determined for purposes of calculating Maximum Adjusted Annual Debt Service by adding: (1) the amount of Debt Service paid or to be paid by the City as interest on the Outstanding Parity Obligations during such Fiscal Year or portion thereof (determined as provided in paragraph (c) or (d), as applicable, if such Outstanding Parity Obligations constitute Variable Rate Indebtedness) and (2) the net amount (which may be a negative amount) paid or to be paid by the City under the Qualified Swap Agreement (after giving effect to payments made and received, and to be made and received, by the City under the Qualified Swap Agreement) during such Fiscal Year or portion thereof, and for this purpose any variable rate of interest agreed to be paid under the Qualified Swap Agreement shall be deemed to be the rate at which the related Outstanding Parity Obligations constituting Variable Rate Indebtedness is assumed to bear interest; (h) if a Qualified Swap Agreement has been entered into by the City with respect to any Additional Parity Obligations proposed to be issued, the interest on such proposed Additional Parity Obligations for each. Fiscal Year or portion thereof during which payments are to be exchanged under the Qualified Swap Agreement shall be determined for purposes of calculating Maximum Adjusted Annual Debt service by adding: (1) the amount of Debt Service to be paid by the City as interest on such Additional Parity Obligations during such Fiscal Year or portion thereof (determined as provided in paragraph (e) or (f), as applicable, if such Additional Parity Obligations are to constitute Variable Rate Indebtedness) and (2) the net amount (which may be a negative amount) to be paid by the City under the Qualified Swap Agreement (after giving effect to payments to be made and received by the City under the Qualified Swap Agreement) during such Fiscal Year or portion thereof, and for this purpose any variable rate of interest agreed to be paid under the Qualified Swap Agreement shall be deemed to be the rate at which the related Additional Parity Obligations which are to constitute Variable Rate Indebtedness shall be assumed to bear interest; and E-9 (i) if any of the Applicable Parity Obligations are, or upon issuance shall be, Paired Obligations, the interest thereon shall be the resulting linked rate or effective fixed rate to be paid with respect to such Paired Obligations. "Moody's" means Moody's Investors Service, Inc. and any successor entity rating Parity Obligations at the request of the City. "Net Payments" means with respect to a Qualified Swap Agreement, the amount payable by the City on each scheduled payment date under such Qualified Swap Agreement net of the amounts payable by the counterparty under such Qualified Swap Agreement on such scheduled payment date. "Net Transferable Income" means, with respect to any Fiscal Year, the Net Revenues for such Fiscal Year less the Debt Service for such Fiscal Year. "Nominee" means the nominee of the Securities Depository for the Book -Entry Bonds in whose name such Bonds are to be registered. The initial Nominee shall be Cede & Co., as the nominee of DTC. "One Month USD LIBOR Rate" means the British Banker's Association average of interbank offered rates in the London market for United States dollar deposits for a one month period as reported in the Wall Street Journal or, if not reported in such newspaper, as reported in such other source as may be selected by the City. "Opinion of Bond Counsel" means a written opinion signed by Bond Counsel "Outstanding" when used as of any particular time with respect to Obligations, means, except as otherwise provided in the Indenture, all Obligations theretofore or thereupon being issued or incurred by the City, except (a) Obligations theretofore cancelled or surrendered for cancellation; (b) Obligations paid or deemed to be paid within the meaning of any defeasance provisions of the Issuing Instrument pursuant such Obligations were issued; (c) Obligations in lieu of or in substitution for which replacement Obligations have been issued; and (d) prior to the applicable Crossover Date, Refunding Parity Obligations which are Crossover Refunding Obligations. "Paired Obligations" shall mean any Series (or portion thereof) of Parity Obligations designated as Paired Obligations in the Issuing Instrument authorizing the issuance thereof, which are simultaneously issued (a) the principal of which is of equal amount maturing and to be redeemed (or cancelled after acquisition thereof) on the same dates and in the same amounts, and (b) the interest rates which, taken together, result in an irrevocably fixed interest rate obligation of the City for the terms of such Paired Obligations. "Parity Obligations" means Bonds and any Obligations which are payable from the Net Revenues on a parity with the payment of the Bonds and which satisfy the applicable conditions of the Indenture, including without limitation Credit Provider Reimbursement Obligations and Net Payments due under Qualified Swap Agreements. "Parity Purchase Price" means with respect to Parity Obligations which are Tender Indebtedness, the Purchase Price of such Parity Obligations if and to the extent payable from Net Revenues on a parity with the payment of principal of and interest on the Bonds. "Participants" means, with respect to a Securities Depository for Book -Entry Bonds, those participants listed in such Securities Depository's book -entry system as having an interest in such Bonds. "Paying Agent" means, with respect to a Series of Bonds, the Trustee and any banking corporation, banking association or trust company designated as paying agent for such Series of Bonds pursuant to the Indenture, and its successor or successors appointed in the manner provided in the Indenture. "Permitted Investments" means any of the following obligations if and to the extent that they are permissible investments of funds of the City as stated in its current investment policy (the Trustee may rely on the investment directions of the City that the investment is approved by the City's investment policy) and to the extent then permitted by law: E-10 (a) Direct obligations of the United States (including obligations issued or held in book - entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States. (b) 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 (stripped securities are only permitted if they have been stripped by the agency itself): (i) Farmers Home Administration ("FmHA") Certificates of beneficial ownership (ii) Federal Housing Administration Debentures ("FHA') (iii) General Services Administration Participation certificates (iv) Government National Mortgage Association ("GNMA") GNMA - guaranteed mortgage -backed bonds GNMA - guaranteed pass -through obligations (participation certificates) (v) United States Maritime Administration Guaranteed Title XI financing (vi) United States Department of Housing and Urban Development Project Notes Local Authority Bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non -full faith and credit United States government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System Senior debt obligations (ii) Federal Home Loan Mortgage Corporation (" FHLMC") Participation Certificates Senior debt obligations (iii) Federal National Mortgage Association ("FNMA") Mortgage -backed securities and senior debt obligations (excluded are stripped mortgage securities which are valued greater than par on the portion of unpaid principal) (iv) Student Loan Marketing Association Senior debt obligations (v) Resolution Funding Corporation obligations (only the interest component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form are acceptable) (vi) Farm Credit Svstem Consolidated system -wide bonds and notes E-11 (d) 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," "Aal" or "Aa2," including funds for which the Trustee or any of its affiliates (including any holding company, subsidiaries, or other affiliates) provides investment advisory or other management services, provided such funds satisfy the criteria in the Indenture contained. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks (including affiliates of the Trustee), savings and loan associations or mutual savings banks. The collateral must be held by a third party and the City or the Trustee must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by the Federal Deposit Insurance Corporation. (g) Investment agreements, including guaranteed investment contracts, acceptable to each Credit Provider whose consent is required by a Supplemental Indenture. (h) Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A-1" or better by S&P. (i) 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. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank (including those of the Trustee and its affiliates) which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or"AY or better by Moody's and "A-l" or "A" or better by S&P. (k) Repurchase Agreements for 30 days or less must satisfy the following criteria. Repurchase Agreements which exceed 30 days must be acceptable to each Credit Provider whose consent is required by a Supplemental Indenture. (i) Repurchase agreements must be between the City or the Trustee and a dealer bank or securities firm (1) Primary dealers on the Federal Reserve reporting dealer list must be rated "A" or better by S&P and Moody's, or (2) Banks must be rated "A" or above by S&P and Moody's. (ii) The written repurchase agreements contract must include the following: (1) Securities which are acceptable for transfer are: (a) Securities described in subsection (a) or (b) of this definition, or (b) Securities of FNMA or FBLMC described in subsection (c) of this definition (2) The collateral must be delivered to the City, the Trustee (if Trustee is not supplying the collateral) or third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before/simultaneously with payment. E-12 (3) Valuation of Collateral (a) The securities must be valued weekly, marked -to -market at current market price plus accrued interest (i) The value of collateral in the case of securities described in subsections (a) or (b) of this definition must be equal to 104% of the amount of cash transferred by the City or the Trustee to the dealer bank or security firm under the repurchase agreements plus accrued interest. The value of collateral in the case of securities of FNMA or FHLMC described in subsection (c) of this definition must be equal to 105% of the amount of cash transferred by the City or the Trustee to the dealer bank or security firm under the repurchase agreement plus accrued interest. If the value of securities held as collateral falls below the required percentage of the value of the cash transferred, then additional cash and/or acceptable securities must be transferred. (iii) Legal Opinion An .opinion of counsel selected by the City, which may be the City Attorney or other counsel retained by the City, to the effect that the repurchase agreement meets guidelines under state law for legal investment of public funds must be received by the City or the Trustee. (1) Any state administered pool investment fund in which the City is statutorily permitted or required to invest will be deemed a permitted investment, including, but not limited to the Local Agency Investment Fund in the treasury of the State. (m) Advance Refunded Municipal Securities. "Person" means an individual, corporation; firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Principal Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Principal Office" means, with respect to: (i) the Trustee, the principal office of such Trustee in [Los Angeles], California; and (ii) a Paying Agent or a Credit Provider, the office designated as such in writing by such party to the Trustee. "Purchase Price" means: (i) with respect to Bonds of any Series, the purchase price set forth in the Supplemental Indenture authorizing the Bonds of such Series to be paid to the Owners of such Bonds when such Bonds are tendered for purchase or deemed tendered for purchase in accordance with the provisions of such Supplemental Indenture; and (ii) with respect to other Parity Obligations, the purchase price set forth in the Issuing Instrument authorizing such Parity Obligations to be paid to the owners of such Parity Obligations when such Parity Obligations are tendered or deemed tendered for purchase in accordance with the provisions of such Issuing Instruments. "Qualified Swap Agreement" means a Public Finance Contract, the City's obligations to make Net Payments under which are payable from the Net Revenues on a parity with the payment of other Parity Obligations and satisfying the conditions of the Indenture, intended to place Parity Obligations or the applicable investments on the interest rate, currency, cash flow or other basis desired by the City. E-13 "Rating Agency" means, as of any time and to the extent it is then providing or maintaining a rating on Parity Obligations at the request of the City, each of Moody's or Standard & Poor's, or in the event that neither Moody's or Standard & Poor's then maintains a rating on Parity Obligations at the request of the City, any other nationally recognized rating agency then providing or maintaining a rating on the Bonds at the request of the City. "Rating Category" means (1) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (2) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier. "Rating Confirmation" means written evidence from each Rating Agency then rating Outstanding Panty Obligations at the request of the City to the effect that, following the event which requires the Rating Confirmation, the then current rating for each Outstanding Parity Obligation shall not be lowered or withdrawn solely as a result of the occurrence of such event. "Record Date" means, with respect to an Interest Payment Date for a Series of Bonds, the date or dates specified as such in the Supplemental Indenture authorizing such Series of Bonds. "Redemption Fund" means the City of Vernon Electric System Redemption Fund established pursuant to the Indenture. "Redemption Price" means, with respect to any redemption of a Bond prior to its maturity, the amount to be paid upon such redemption of the Bond as set forth in, or determined in accordance with, the Supplemental Indenture authorizing such Bond. "Refunding Bonds" means Bonds issued in accordance with the terms and conditions of the Indenture for the purposes, and satisfying the conditions of the Indenture. "Refunding Parity Obligations" means Parity Obligations, including Refunding Bonds, issued for the purposes set forth in the Indenture and satisfying the conditions set forth in the Indenture . "Representation Letter" the letter or letters of representation from the City to, or other instrument or agreement with, a Securities Depository for Book -Entry Bonds, in which the City, among other things, makes certain representations to the Securities Depository with respect to the Book -Entry Bonds, the payment thereof and delivery of notices with respect thereto. "Reserve Financial Guaranty Provider" means an issuer of a Reserve Financial Guaranty. "Rule 15c2-12" means Rule 15c2-12 of the Securities and Exchange Commission adopted pursuant to the Securities Exchange Act of 1934, as amended, as the same may be amended and supplemented from time to time. "Second Supplemental Indenture" means the Second Supplemental Indenture of Trust, dated as of March 1, 2003, between the City and the Trustee supplementing The Indenture of Trust. "Securities Depository" means a trust company or other entity which provides a book -entry system for the registration of ownership interests of Participants in securities and which is acting as security depository for Book - Entry Bonds. "Serial Obligations" means Obligations for which no Sinking Fund Installments are established. "Serial Panty Obligations" means Serial Obligations which are Panty Obligations. "Series" means Obligations issued at the same time or sharing some other common term or characteristic and designated in the Issuing Instrument pursuant to which such Obligations were issued as a separate issue or series of Obligations. E-14 "Sinking Fund Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Sinking Fund Installment" means, with respect to any Term Parity Obligations, each amount so designated for such Term Parity Obligations in the Issuing Instrument authorizing the issuance of such Parity Obligations requiring payments by the City from the Net Revenues to be applied to the retirement of such Parity Obligations on and prior to the stated maturity date thereof. "Standard & Poor's" means Standard & Poor's Rating Services and any successor entity rating Parity Obligations at the request of the City. "State" means the State of California. "Subordinated Obligation" means any Obligation which is expressly made subordinate and junior in right of payment from the Net Revenues to the payment of Parity Obligations and which complies with the provisions of the Indenture. "Supplemental Indenture" means any supplemental indenture supplementing or amending the Indenture as theretofore in effect, entered into by the City and the Trustee in accordance with the Indenture . "Tax Certificate" means a certificate relating to the requirements of the Code signed on behalf of the City and delivered in connection with the issuance of a Series of Bonds. "Tax -Exempt" means, with respect to interest on any obligations of a state or local government, including the Bonds, that such interest is excluded from the gross income of the holders thereof (other than any holder who is a "substantial user" of facilities financed with such obligations or a "related person" within the meaning of Section 147(a) of the Code) for federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating other tax liabilities, including any alternative minimum tax or environmental tax under the Code. "Tax -Exempt Securities" means bonds, notes or other securities the interest on which is Tax -Exempt. "TBMA Index" means The Bond Market Association Municipal Index as of the most recent date for which such index was published or such other weekly, high-grade index comprised of seven-day, Tax -Exempt variable rate demand notes produced by Municipal Market Data, Inc., or its successor, or as otherwise designated by The Bond Market Association; provided, however, that, if such index is no longer produced by Municipal Market Data, Inc. or its successors, then "TBMA Index" shall mean such other reasonably comparable index selected by the City. "Tender Indebtedness" means any Parity Obligations or portions of Parity Obligations, a feature of which is an option or obligation, on the part of the owners thereof under the terms of such Parity Obligations, to tender all or a portion of such Parity Obligations to the City, a fiscal agent, a paying agent, a tender agent or other agent for purchase and requiring that such Parity Obligations or portions thereof be purchased at the applicable Purchase Price if properly presented. "Termination Payment" means with respect to a Qualified Swap Agreement, the Amount payable by the City as a result of the termination of such Qualified Swap Agreement prior to its scheduled expiration date. "Term Obligations" means Obligations which are payable on or before their specified maturity dates .from Sinking Fund Installments established for that purpose and calculated to retire such Obligations on or before their specified maturity dates. "Term Parity Obligations" means Term Obligations which are Parity Obligations. "Trustee" means, BNY Western Trust Company, as trustee for the Bonds under the Indenture and any successor satisfying the requirements of the Indenture. E-15 "2003 Series A Bonds" means the Bonds authorized by the First Supplemental Indenture. "2003 Series B Bonds" means the Bonds authorized by the Second Supplemental Indenture. "Variable Rate Indebtedness means any Obligation, other than Paired Obligations, the interest rate on which to the maturity thereof is not established at a rate which is not subject to fluctuation .or subsequent adjustment, either at the time of issuance of such Obligation or some subsequent date,. THE INDENTURE Authorization of Bonds The Indenture provides certain terms and conditions upon which Bonds of the City to be designated as "City of Vernon Electric System Revenue Bonds" may be issued from time to time as authorized by Supplemental Indentures. The aggregate principal amount of Bonds which may be executed, authenticated and delivered under the Indenture is not limited except as may be provided therein or as may be limited by law. Bonds Constitute Special Obligations The Bonds shall not constitute a charge against the general credit of the City but shall constitute and evidence special obligations of the City payable as to principal, Redemption Price, if any, and interest solely from the Net Revenues and the other funds pledged therefor under the Indenture and, with respect to any particular Series of Bonds, from such other sources as shall be specified in the Supplemental Indenture authorizing the issuance of such Series. The Purchase Price for the Bonds of any Series which are Tender Indebtedness shall be payable from such sources as are specified in the Supplemental Indenture authorizing the issuance of such Series. The provisions of the Indenture shall not preclude the payment or redemption of Bonds, at the election of the City, from any other legally available funds. The Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the Net Revenues pledged therefor pursuant to the Indenture which pledged is subject to the provisions of the Indenture permitting the application of the Net Revenues for the purposes and on the terms and conditions set forth therein. Neither the faith and credit nor the taxing power of the State of California, the City or any other public agency is pledged to the payment of the principal or Redemption Price of or the interest on the Bonds. The issuance of the Bonds shall not directly, indirectly or contingently obligate the City Council of the City to levy or pledge any form of taxation or to make any appropriation for the payment of the Bonds. The payment of the principal or Redemption Price of or interest on the Bonds does not constitute a debt, liability or obligation of the State of California or any public agency (other than the special obligation of the City as provided in the Indenture). Neither the members of the City Council of the City, nor any person executing a Bond, nor any officer or employee of the City shall be liable personally for the principal or Redemption Price of or interest on the Bonds or be subject to any personal liability or accountability by reason of the issuance of the Bonds or in respect of any undertakings by the City under the Indenture. Indenture to Constitute Contract In consideration of the purchase and acceptance of each Bond issued under the Indenture by those who shall own the same from time to time, the provisions of each Bond and the provisions of the Indenture applicable to such Bond, and unless otherwise provided in the Supplemental Indenture authorizing such Bond, the provisions of the State Constitution, the Charter, the City Administrative Code and any general laws of the State applicable to such Bond, the Light and Power Department Fund and the Electric System, shall be deemed to be and shall constitute a contract between the City and the Owner of such Bond. No Recourse on Bonds Neither the members of the City nor the officers or employees of the City shall be individually liable on the Bonds or in respect of any undertakings by the City under the Indenture, any Supplemental Indenture or any Bond. E-16 Paying Agent The City appoints the Trustee as a Paying Agent for the Bonds of each Series, and may at any time or from time to time appoint one or more other Paying Agents having the qualifications set forth in the Indenture as an additional Paying Agent for the Bonds of one or more Series. The Trustee shall signify its acceptance of the duties and obligations imposed upon it by the Indenture, including the duties of Paying Agent for the Bonds, by the execution and the delivery of the Indenture to the City and by such execution and delivery the Trustee shall be deemed to have accepted such duties and obligations with respect to all the Bonds thereafter to be issued, but only, however, upon the terms and conditions set forth in the Indenture and no implied covenants shall be read into the Indenture against the Trustee. Each Paying Agent other than the Trustee shall signify its acceptance of the duties and obligations imposed upon it by the Indenture by executing and delivering to the City and to the Trustee a written acceptance thereof. The Principal Offices of the Paying Agents are designated as the respective offices or agencies of the City for the payment of the principal and any applicable Redemption Price of the Bonds. General Provisions for Issuance of Bonds All (but not less than all) the Bonds of each Series shall be executed by the City for issuance under the Indenture and delivered to the Trustee and thereupon shall be authenticated by the Trustee and by it delivered to the City or upon its order, but only upon the receipt by the Trustee of the following items (upon which the Trustee may conclusively rely in determining whether the conditions precedent for the issuance and authentication of such Series of Bonds have been satisfied): (1) A copy of the Indenture, as amended to the date of the initial delivery of such Series of Bonds, and a copy of the Supplemental Indenture authorizing the issuance of such Series of Bonds, each certified by an Authorized City Representative to be in full force and effect, which Supplemental Indenture shall specify: (i) the sources of payment for the Bonds of such Series other than the Trust Estate, if any; (ii) the Series designation of such Bonds; (iii) the authorized principal amount of the Bonds of such Series; (iv) the purposes for which such Series of Bonds are being issued, which shall be one of the purposes specified in the provisions of the Indenture relating to additional bonds or refunding bonds; (v) the date or manner of determining the date of the Bonds of such Series; (vi) the maturity date or dates of the Bonds of such Series and the principal amount of the Bonds of such Series maturing on each such maturity date; (vii) which, if any, of the Bonds of such Series shall constitute Serial Obligations and which, if any, shall constitute Term Obligations; (viii) the interest rate or rates on the Bonds of such Series or the manner of determining such interest rate or rates; (ix) the Interest Payment Dates for the Bonds of such Series or the manner of establishing such Interest Payment Dates; (x) the Authorized Denominations of, and the manner of numbering and lettering, the Bonds of such Series; (xi) the Redemption Price or Prices, if any, and, subject to the applicable provision of the Indenture, the redemption terms for the Bonds of such Series; (xii) the Sinking Fund Installments, if any, for the Bonds of such Series which constitute Term Obligations, provided that each Sinking Fund Installment, if any, shall fall upon an Interest Payment Date for the Bonds of such Series; (xiii) if any of the Bonds of such Series constitute Tender Indebtedness, the terms and conditions, including Purchase Price, for the exercise by the Owners or Beneficial Owners of such Bonds of the purchase and extension options granted with respect to such Bonds and the terms and conditions, including Purchase Price, upon which the Bonds of such Series shall be subject to mandatory tender for purchase; (xiv) if the Bonds of such Series are not to be Book -Entry Bonds, a statement to such effect; (xv) the application of the proceeds of the sale of such Series of Bonds including the amount, if any, to be deposited in the funds and accounts under the Indenture; (xvi) the forms of the Bonds of such Series and of the certificate of authentication thereon; and (xvii) the appropriate funds and accounts, if any, relating to such Series of Bonds established under such Supplemental Indenture; E-17 (2) an Opinion of Bond Counsel, dated the date of the initial delivery of such Series of Bonds, to the effect that the Indenture, as amended to such date, including the Supplemental Indenture authorizing the issuance of such Series of Bonds, constitutes the valid and binding obligation of the City; (3) With respect to any Additional Bonds, the Trustee shall have received the certificate with respect to the satisfaction of the conditions for the Issuance of Additional Parity Obligations contained in the Indenture; (4) With respect to any Refunding Bonds which are not Crossover Refunding Obligations, the Trustee shall have received a copy of the Opinion of Bond Counsel required by the Indenture or with respect to Refunding Bonds constituting Crossover Refunding Obligations, the Accountant's Certificate and Crossover Escrow Instructions required by the Indenture, as applicable; and (5) Such further documents, moneys and securities as are required by the applicable provisions of the Indenture or of the Supplemental Indenture authorizing the issuance of such Series of Bonds. After the original issuance of Bonds of any Series, no Bonds of such Series shall be issued except in lieu of or in substitution for other Bonds of such Series pursuant to the Indenture. Additional Bonds One or more Series of Additional Bonds may be issued, authenticated and delivered upon original issuance for the purpose of paying all or a portion of the Costs of any Capital Improvement. Additional Bonds may be issued in a principal amount sufficient to pay such Costs, including making of any deposits into the funds or accounts required by the provisions of the Indenture. Refunding Bonds One or more Series of Refunding Bonds may be issued, authenticated and delivered upon original issuance for the purpose of refunding all or any portion of the Outstanding Parity Obligations. Refunding Bonds may be issued in a principal amount sufficient to accomplish such refunding including providing amounts for the Costs of Issuance of such Refunding Bonds, and the making of any deposits into the funds and accounts required by the applicable provisions of the Indenture. Refunding Bonds of each Series shall be authenticated and delivered by the Trustee only upon receipt by the Trustee (in addition to the documents required by the Indenture and except as otherwise described below with respect to Refunding Bonds constituting Crossover Refunding Obligations) of an Opinion of Bond Counsel to the effect that the Parity Obligations (or the portion thereof) to be refunded are deemed paid pursuant to the Issuing Instrument authorizing such Parity Obligations. Such Opinion of Bond Counsel may rely upon an Accountant's Certificate as to the sufficiency of available funds to pay such Parity Obligations. The Trustee may conclusively rely on such Opinion of Bond Counsel in determining whether the conditions precedent for the issuance and authentication of such Series of Refunding Bonds have been satisfied. A Series of Refunding Bonds which constitute Crossover Refunding Obligations shall be authenticated and delivered by the Trustee upon the receipt of the Trustee (in addition to the documents required by the Indenture) of. (i) an Accountant's Certificate to the effect that the moneys scheduled to be available in the applicable Crossover Refunding Escrow are sufficient to pay the applicable Crossover Escrow Requirements when due; and (ii) a copy of the Crossover Escrow Instructions relating to such Series of Refunding Bonds and the Parity Obligations to be refunded. Conditions to Issuance of Parity Obligations Without regard to the last paragraph under this heading, the City may, at any time and from time to time, issue or enter into an obligation or commitment which is a Qualified Swap Agreement, the Net Payments under which shall constitute Parity Obligations, provided (i) the Qualified Swap Agreement shall relate to a principal amount of Outstanding Parity Obligations or investments held under an Issuing Instrument for Parity Obligations, in each case specified by an Authorized City Representative; (ii) the notional amount of the Qualified Swap E-18 Agreement shall not exceed the principal amount of the related Parity Obligation or the amount of such investments, as applicable; and (iii) the City has received a Rating Confirmation from each Rating Agency with respect to such Qualified Swap Agreement. Without regard to the last paragraph under this heading, the City may, at any time and from time to time, issue Refunding Parity Obligations provided that the Trustee receives an Opinion of Bond Counsel to the effect that the Parity Obligations to be refunded are deemed paid pursuant to the Issuing Instrument authorizing such Parity Obligations; except that, with respect to Refunding Parity Obligations which constitute Crossover Refunding Obligations, in lieu of such Opinion of Bond Counsel, the Trustee shall have received an Accountant's Certificate to the effect that the moneys scheduled to be available in the applicable Crossover Refunding Escrow are sufficient to pay the applicable Crossover Escrow Requirements when due and a copy of the Crossover Escrow Instructions relating to such Refunding Parity Obligations and the Parity Obligations to be refunded. . Without regard to the last paragraph under this heading, the City may issue the 2003 Series A Bonds and the 2003 Series B Bonds. Without regard to the last paragraph under this heading, the City may, at any time and from time to time, enter into Credit Support Agreements or otherwise become obligated for Credit Provider Reimbursement Obligations with respect to Parity Obligations. The City may, at any time and from time to time, issue any Additional Parity Obligations, provided the City obtains or provides a certificate or certificates, prepared by the City or at the City's option by a Consultant, showing: (i) that the Adjusted Net Revenues for the applicable Calculation Period, which Calculation Period shall be selected by the City in its sole discretion, shall have amounted to at least 1.25 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations; and (ii) that the Net Revenues for such applicable Calculation Period shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations. For purposes of preparing the certificate or certificates described in the foregoing, the City and any Consultant shall utilize and rely on financial statements prepared by the City which have been subject to audit by an Independent Certified Public Accountant but may utilize and rely upon the books and records of the City or any financial statements prepared by the City which have not been subject to audit by an Independent Certified Public Accountant if audited financial statements for the particular Calculation Period selected by the City are not available. Conditions of Issuance of Subordinated Obligations The City may, at any time or from time to time, issue Subordinated Obligations without satisfying the requirements relating to Parity Obligations for any purpose in connection with the Electric System, including, without limitation, the financing of a part of the cost of acquisition and construction of any additions to or improvements of the Electric System or the refunding of any Subordinated Obligations or Outstanding Parity Obligations (or portions thereof). Such Subordinated Obligations shall be payable out of amounts in the Net Revenues as may from time to time be available therefor, provided that any such payment shall be, and shall be expressed to be, subordinate and junior in all respects to the payment of such Parity Obligations as may be Outstanding from time to time, including Parity Obligations issued after the issuance of such Subordinated Obligations. The indenture or other instrument authorizing the issuance of Subordinated Obligations shall contain provisions (which shall be binding on all owners of such Subordinated Obligations) not more favorable to the owners of such Subordinated Obligations than the following: (1) In the event of any insolvency or bankruptcy proceedings, and any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the City or to its creditors, as such, or to its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the City, whether or not involving insolvency or bankruptcy, the owners of all Outstanding Parity Obligations shall be entitled to receive payment in full of all principal and interest on all such Parity E-19 Obligations before the owners of the Subordinated Obligations are entitled to receive any payment from the Net Revenues with respect to the Subordinated Obligations, including Termination Payments. (2) In the event that any Subordinated Obligation is declared due and payable before its expressed maturity because of the occurrence of an event of default (under circumstances when the provisions of (1) above shall not be applicable), the owners of all Parity Obligations Outstanding at the time such Subordinated Obligation so becomes due and payable because of such event of default, shall be entitled to receive payment in full of all principal and interest on all such Parity Obligations before the owners of such Subordinated Obligation are entitled to receive any accelerated payment with respect to such Subordinated Obligation. For purposes of this subdivision (2), a Termination Payment shall not be considered a declaration of amounts due and payable before expressed maturity even if declared due and payable because of the occurrence of an event of default. (3) If any default with respect to any Outstanding Parity Obligation shall have occurred and be continuing (under circumstances when the provisions of (1) above shall not be applicable), the owners of all Outstanding Parity Obligations shall be entitled to receive payment in full of all principal and interest on all such Panty Obligations as the same become due and payable in accordance with the provisions of the Issuing Instrument authorizing the issuance of such Parity Obligations before the owners of the Subordinated Obligations are entitled to receive, subject to the provisions of (5) below, any payment from the Net Revenues with respect to the Subordinated Obligations. (4) No Bondowner shall be prejudiced in his right to enforce subordination of the Subordinated Obligations by any act or failure to act on the part of the City or the Trustee. (5) The Subordinated Obligations may provide that the provisions (1), (2), (3) and (4) above are solely for the purpose of defining the relative rights of the Owners of the Bonds and the owners of all other Outstanding Parity Obligations on the one hand, and the owners of Subordinated Obligations on the other hand, and that nothing therein shall impair, as between the City and the owners of the Subordinated Obligations, the obligation of the City, which may be unconditional and absolute, to pay to the owners of such Subordinated Obligations the principal thereof and premium, if any, and interest thereon in accordance with their terms, nor shall anything therein prevent the owners of the Subordinated Obligations from exercising all remedies otherwise permitted by applicable law or thereunder upon default thereunder, subject to the rights under (1), (2), (3) and (4) above of the Owners of Outstanding Bonds and the owners of other Outstanding Parity Obligations to receive payment from the Net Revenues otherwise payable or deliverable to the owners of the Subordinated Obligations; and the Subordinated Obligations may provide that, insofar as a trustee, fiscal agent or paying agent for such Subordinated Obligations is concerned, the foregoing provisions shall not prevent the application by such trustee, fiscal agent or paying agent of any moneys deposited with such trustee, fiscal agent or paying agent for the purpose of the payment of or on account of the principal (and premium, if any) and interest on such Subordinated Obligations if such trustee, fiscal agent or paying agent did not have knowledge at the time of such application that such payment was prohibited by the foregoing provisions. Any Subordinated Obligations may have such rank or priority with respect to any other Subordinated Obligations as may be provided in the Indenture, indenture or other instrument, authorizing the issuance or incurrence, or securing of such Subordinated Obligations and may contain such other provisions as are not in conflict with the provisions of the Indenture. Credit Provider Bonds. Subject only to the provisions of the Indenture relating to bonds constituting special obligations, notwithstanding any other provision contained in the Indenture to the contrary, Bonds which are Credit Provider Bonds shall have terms and conditions, including terms of maturity, payment, prepayment and interest rate, as shall be specified in the applicable Credit Support Agreement. E-20 Funds and Accounts Establishment. To ensure the payment when due and payable, whether at maturity or upon redemption or upon acceleration, of the principal of, Redemption Price, if any, and interest on the Bonds, the Indenture establishes the following funds and accounts, to be held and maintained by the Trustee and applied as provided in the Indenture for so long as any of the Bonds are Outstanding: the City of Vernon Electric System Debt Service Fund, comprised of an Interest Account, a Principal Account and a Sinking Fund Account; the City of Vernon Electric System Redemption Fund; the City of Vernon Electric System Debt Service Reserve Fund; and the City of Vernon Electric System Expense Stabilization Fund. Debt Service Fund. (a) From the moneys paid by the City pursuant to the provisions of the Indenture relating to payments by the City, the Trustee, upon receipt of such moneys, shall deposit the following amounts in the following specified accounts within the Debt Service Fund: (1) For deposit in the Interest Account, an amount equal to the interest payable on the Outstanding Bonds on the applicable Interest Payment Date; (2) For deposit in the Principal Account, an amount equal to the principal of the Outstanding Bonds maturing on the applicable maturity date; and (3) For deposit in the Sinking Fund Account, an amount equal to the Sinking Fund Installment due on the applicable Sinking Fund Installment due date. (b) From the moneys paid by the City pursuant to the provisions of the Indenture relating to payments by the City, the Trustee, upon receipt of such moneys, shall deposit the following amounts in the following specified accounts within the Debt Service Fund: (1) For deposit in the Interest Account, an amount equal to the interest on the Outstanding Bonds then payable; and (3) For deposit in the Principal Account, an amount equal to the principal of the Outstanding Bonds then payable. (c) In the event that Bonds which are Term Obligations purchased or redeemed at the option of the City are deposited with the Trustee for the credit of the Sinking Fund Account not less than forty-five 45 days prior to the due date for any Sinking Fund Installment for such Bonds, such deposit shall satisfy (to the extent of 100% of the principal amount of such Bonds) any obligation of the City to make a payment to the Trustee pursuant to the Indenture, with respect to such Sinking Fund Installments. Any Bond so deposited with the Trustee shall be cancelled and shall no longer be deemed to be Outstanding for any purpose. Upon making the deposit with the Trustee of Bonds which are Term Obligations as provided in the Indenture, the City may specify the dates and amounts of Sinking Fund Installments for such Bonds as to which the City's obligations to make a payment to the Trustee pursuant to the Indenture with respect to Sinking Fund Installments for such Bonds shall be satisfied. (d) Except as described below: (i) amounts deposited in the Interest Account shall remain therein until expended for the payment of interest on the Bonds; (ii) amounts deposited in the Principal Account shall remain therein until expended for the payment of principal of the Bonds; and (iii) amounts deposited in the Sinking Fund Account shall remain therein until expended for the redemption or payment at maturity from Sinking Fund Installments of Bonds which are Term Obligations. (e) The Trustee shall apply amounts in the Interest Account to the payment when due of interest on the Outstanding Bonds. The Trustee shall apply amounts in the Principal Account to the payment when due of principal of the Outstanding Bonds. The Trustee shall apply amounts in the Sinking Fund Account to the redemption (or payment at maturity) of the Bonds which are Term Obligations. In the event one or more Paying Agents have been appointed for the Bonds, moneys may be transferred by the Trustee to such Paying Agents from the appropriate account in the Debt Service Fund for deposit into a special trust account to ensure the payment when due of the principal of, Redemption Price, if any, and interest on the Bonds. In the event that any principal of, Redemption Price or interest on, any Bond has been paid by a Credit Provider pursuant to a Credit Support Instrument, amounts in the appropriate accounts in the Debt Service Fund with respect to such Bond, and any such amounts transferred by the Trustee from the Debt Service Fund to a Paying Agent for such Bond pursuant to the Indenture, shall be paid to such Credit Provider as a reimbursement of the amounts so paid. E-21 Redemption Fund. From the moneys paid by the City pursuant the provisions of the Indenture relating to payments by the City, the Trustee shall deposit in the Redemption Fund an amount equal to the Redemption Price of the Bonds to be redeemed. Said moneys shall be set aside in said Fund and shall be applied on or after the redemption date to the payment of the Redemption Price of the Bonds to be redeemed and, except as otherwise provided in the Indenture, shall be used only for that purpose. In the event one or more Paying Agents have been appointed for the Bonds which are to be redeemed with moneys in the Redemption Fund, amounts in the Redemption Fund may be transferred from such Fund by the Trustee to the Paying Agent for the Bonds to be redeemed for deposit into a special trust account held by such Paying Agent to ensure the payment when due the Redemption Price of the Bonds to be redeemed. In the event that the Redemption Price of a Bond has been paid by a Credit Provider pursuant to a Credit Support Instrument, amounts in the Redemption Fund with respect to such Redemption Price, and any such amounts transferred by the Trustee from the Redemption Fund to a Paying Agent for such Bonds pursuant to the Indenture, shall be paid to such Credit Provider as a reimbursement of the amounts so paid. If, after all of the Bonds designated for redemption have been redeemed and cancelled or paid and cancelled, there are moneys remaining in the Redemption Fund, said moneys shall be transferred to the Interest Account; provided, however, that if said moneys are part of the proceeds of Refunding Obligations said moneys shall be applied as provided in the Issuing Instrument authorizing the issuance of such Refunding Obligations. Debt Service Reserve Fund. (a) If on any date on which the principal or Redemption Price of, or interest on, Bonds is due, the amount in the applicable account in the Debt Service Fund available for such payment is less than the amount of the principal and Redemption Price of and interest on the Bonds due on such date, the Trustee shall apply amounts from the Debt Service Reserve Fund to the extent necessary to make good the deficiency. (b) Except as provided in paragraph (e) below, if on the last Business Day of any month the amount on deposit in any Debt Service Reserve Fund shall exceed the Debt Service Reserve Requirement, such excess shall be applied to the reimbursement of each drawing on a Reserve Financial Guaranty deposited in or credited to such Fund and to the payment of interest or other amounts due with respect to such a Reserve Financial Guaranty and any remaining moneys shall be deposited in the Interest Account. (c) Whenever the amount in the Debt Service Reserve Fund (excluding Reserve Financial Guaranties), together with the amount in the Debt Service Fund, is sufficient to pay in full all of the Outstanding Bonds in accordance with their terms (including principal or Redemption Price and interest thereon), the funds on deposit in the Debt Service Reserve Fund shall be transferred to the Debt Service Fund. (d) In the event of the refunding of one or more Bonds (or portions thereof), the Trustee shall, upon the written direction of an Authorized City Representative, withdraw from the Debt Service Reserve Fund any or all of the amounts on deposit therein (excluding Reserve Financial Guaranties) and deposit such amounts with itself as Trustee, or the Escrow Agent for the Bonds to be refunded, to be held for the payment of the principal or Redemption Price, if any, of, and interest on, the Bonds (or portions thereof) being refunded; provided that such withdrawal shall not be made unless (a) immediately thereafter the Bonds (or portions thereof) being refunded shall be deemed to have been paid pursuant to the provisions of the Indenture relating to bonds deemed paid, and (b) the amount remaining in the Debt Service Reserve Fund after such withdrawal, taking into account any deposits to be made in the Debt Service Reserve Fund in connection with such refunding, shall not be less than the Debt Service Reserve Requirement. (e) In lieu of the deposits and transfers to the Debt Service Reserve Fund required by the Indenture, the City may cause to be deposited in the Debt Service Reserve Fund a Reserve Financial Guaranty or Reserve Financial Guaranties in an amount equal to the difference between the Debt Service Reserve Requirement and the sums, if any, then on deposit in the Debt Service Reserve Fund or being deposited in such Fund concurrently with such Reserve Financial Guaranty or Guaranties. The Trustee shall draw upon or otherwise take such action as is necessary in accordance with the terms of the Reserve Financial Guaranties to receive payments with respect to the Reserve Financial Guaranties (including the giving of notice as required thereunder): (i) on any date on which moneys shall be required to be withdrawn from the Debt Service Reserve Fund and applied to the payment of principal or Redemption Price of, or interest on, any Bonds and such withdrawal cannot be met by amounts on deposit in the applicable accounts in the Debt Service Reserve Fund; (ii) on the first Business Day which is at least E-22 ten (10) days prior to the expiration date of each Reserve Financial Guaranty, in an amount equal to the deficiency which would exist in the Debt Service Reserve Fund if the Reserve Financial Guaranty expired, unless a substitute Reserve Financial Guaranty with an expiration date not earlier than 180 days after the expiration date of the expiring Reserve Financial Guaranty is acquired prior to such date or the City deposits funds in the Debt Service Reserve Fund on or before such date such that the amount in the Debt Service Reserve Fund on such date (without regard to such expiring Reserve Financial Guaranty) is at least equal to the Debt Service Reserve Requirement. If, upon the deposit of a Reserve Financial Guaranty into the Debt Service Reserve Fund pursuant to the foregoing, there shall be any amount in the Debt Service Reserve Fund in excess of the Debt Service Reserve Requirement, such excess amount may be applied to the cost of acquiring such Reserve Financial Guaranty and, to the extent not so applied, shall be transferred to the Interest Account. If at any time obligations insured or issued by the issuer of a Financial Guaranty shall no longer maintain the required ratings set forth in the definition of "Reserve Financial Guaranty" in the Indenture, the City shall provide or cause to be provided cash or a substitute Reserve Financial Guaranty meeting such requirements to the extent necessary to satisfy the Debt Service Reserve Requirement with either cash, qualified Reserve Financial Guaranties or a combination thereof. Expense Stabilization Fund. Moneys shall be deposited in the Expense Stabilization Fund in such amounts, at such times and from such sources as shall be determined by the City in its sole discretion. Moneys on deposit in the Expense Stabilization Fund may be withdrawn at any time no Event of Default exists upon the order of an Authorized City Representative and applied to any lawful purpose in connection with the Electric System, including without limitation, payment of Operation and Maintenance Expenses, payment of Debt Service on Parity Obligations, payment of principal, premium or interest on Subordinated Obligations, payment of Costs of Capital Improvements, payment of the Costs of Issuance of Parity Obligations or payment of the costs of issuance of Subordinated Obligations. Investment of Certain Funds. Moneys held in the Debt Service Fund and the Redemption Fund shall be invested and reinvested by the Trustee to the fullest extent practicable in securities described in clauses (a) through (c) of the definition of "Permitted Investments" in the Indenture which mature not later than such times as shall be necessary to provide moneys when reasonably expected to be needed for payments to be made from such Funds. Moneys held in the Debt Service Reserve Fund shall be invested and reinvested by the Trustee to the fullest extent practicable in securities described in clauses (a), (b), (c), 0) and (m) of the definition of "Permitted Investments" in the Indenture which mature or which may be drawn upon not later than such times as shall be necessary to provide moneys when reasonably expected to be needed for payments to be made from such Fund, but in any event not later than five years from the time of such investment. Moneys held in the Expense Stabilization Fund may be invested and reinvested in Permitted Investments which mature or which may be drawn upon not later than such times as shall be necessary to provide moneys when reasonably expected to be needed for payments to be made from such Fund. The Trustee shall make all such investments of moneys held by it and shall sell or otherwise liquidate any such investment and take all actions necessary to draw funds under any such investment, including the giving of necessary notices of the drawing of any moneys under any investment, in each case in accordance with directions of an Authorized City Representative, which directions shall be consistent with the Indenture and applicable law, and which directions can either be written or oral; provided that if such directions are oral they shall be promptly confirmed in writing by such Authorized City Representative. Interest or other income (net of that which (i) represents a return of accrued interest paid in connection with the purchase of any investment or (ii) is required to effect the amortization of any premium paid in connection with the purchase of any investment) earned on any moneys or investments in the Funds created under the Indenture shall be paid into the Interest Account. In making any investment in any Permitted Investments with moneys in any Fund established under the Indenture, any Fiduciary may combine such moneys with moneys in any other Fund but solely for the purposes of making such investment in such Investments and provided that any amount so combined shall be separately accounted for. E-23 Nothing in the Indenture shall prevent any Permitted Investments Securities acquired as investments of moneys in any Fund from being issued or held in book -entry form on the books of the Department of the Treasury or the Federal Reserve System of the United States. Valuation and Sale of Investments. Obligations purchased as an investment of moneys in any Fund shall be deemed at all times to be a part of such Fund and any profit realized from the liquidation of such investment shall be credited to such Fund and any loss resulting from the liquidation of such investment shall be charged to the respective Fund. In computing the amount in the Debt Service Reserve Fund for any purpose under the Indenture, obligations purchased as an investment of moneys in the Debt Service Reserve Fund are to be valued at the amortized cost thereof. Except as otherwise provided in the Indenture, the Trustee may sell at the best price reasonably obtainable, or present for redemption, any obligation purchased as an investment whenever it shall be directed by the City so to do or whenever it shall be necessary in order to provide moneys to meet any payment or transfer from any Fund held by it. Any obligation purchased as an investment may be credited on a pro-rata basis to more than one Fund and need not be sold in order to provide for the transfer of amounts from one Fund to another, provided that such obligation is an appropriate Permitted Investment for the purposes of the Fund to which it is to be transferred. The Trustee shall not be liable or responsible for making any such investment in the manner provided above or for any loss resulting from any such investment. Covenants Compliance with Indenture. The City shall punctually pay the Bonds in strict conformity with the terms of the Indenture and the Bonds, and shall faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Indenture required to be observed and performed by it, and shall not fail to make any payment required by the Indenture for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to all or a portion of the Electric System, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State or any political subdivision of either or any failure of any party to observe or perform any agreement, condition, covenant or term contained in any contractor agreement required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected with any such contract or agreement or the insolvency, or deemed insolvency, or bankruptcy or liquidation of any party or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lockouts, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. Rates for Electric Service. The City shall at all times fix, prescribe and collect rates and charges for the Electric Service of the Electric System during each Fiscal Year which shall be at least sufficient to yield: (a) Adjusted Revenues for such Fiscal Year at least equal to the sum of the following for such Fiscal Year: (i) Operation and Maintenance Expenses; (ii) Adjusted Debt Service, and (iii) all other payments required to be paid in such Fiscal Year to meet any other obligations of the City which are charges, liens or encumbrances upon or payable from the Revenues, including all amounts owed to a Credit Provider under the terms of its Credit Support Agreement and amounts owed to a Reserve Financial Guaranty Provider under the terms of its Reserve Financial Guaranty; and (b) Adjusted Revenues less Operation and Maintenance Expenses for such Fiscal Year equal to at least one hundred ten percent (110%) of Adjusted Debt Service for such Fiscal Year. The City may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Adjusted Revenues and the Adjusted Net Revenues from such reduced rates and charges shall at all times be sufficient to meet the requirements of the Indenture. Collection of Rates and Charges. The City shall have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the Electric System to pay the rates and charges applicable to the Electric Service provided to such premises and providing for the billing thereof and for a E-24 due date and a delinquency date for each bill. The City shall not permit any part of the Electric System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or person, or by any public agency (including the United States of America, the State of California and any city, county, district, political subdivision, public corporation or agency of any thereof). Nothing in the Indenture shall prevent the City, in its sole and exclusive discretion, from permitting other parties from selling electricity to retail customers within the service area of the Electric System; provided, however, that permitting such sales shall not relieve the City of its obligations under the Indenture. Creation of Prior Liens on Trust Estate. The City shall not issue any bond, note, or other evidence of indebtedness payable from or secured by the Trust Estate on a basis which is: (i) in any manner prior or superior to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture; (ii) except for Parity Obligations with respect to the Net Revenues, in any manner on a parity with the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture; or (iii) except for Subordinate Obligations, in any manner subordinate to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to the Indenture. Against Encumbrances. The City shall pay or cause to be paid when due all sums of money that may become due or purporting to be due for any labor, services, materials, supplies or equipment furnished, or alleged to have been furnished, to or for the City in, upon, about or relating to the Electric System and shall keep the Electric System free of any and all liens against any portion of the Electric System. In the event any such lien attaches to or is filed against any portion of the Electric System, the City shall cause each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that if the City desires to contest any such lien it may do so if contesting such lien shall not materially impair operation of the Electric System. If any such lien shall be reduced to final judgment and such judgment or any process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and such stay thereafter expires, the City shall forthwith pay or cause to be paid and discharged such judgment. Sale or Other Disposition of Property. The City shall not sell, transfer or otherwise dispose of any of the works, plant, properties, facilities or other part or rights of the Electric System or any real or personal property comprising a part of the Electric System if such sale, transfer or disposition would cause the City to be unable to satisfy the requirements of the provisions of the Indenture relating to rates for electric service. Operation and Maintenance of the Electric System; Budgets. The City shall maintain and preserve the Electric System in good repair and working order at all times and shall operate the Electric System in an efficient and economical manner and shall pay all Operation and Maintenance Expenses as they become due and payable. The City shall prepare not later than July 30 of each Fiscal Year, a budget for the Electric System approved by the City Council setting forth the estimated Operation and Maintenance Expenses and scheduled Debt Service for such Fiscal Year and shall take such action as may be necessary to include all Debt Service payments and all other payments required to be made under the Indenture coming due in such Fiscal Year with respect to Obligations payable from Revenues in the budget for the Electric System. Any such budget may be amended at any time during any Fiscal Year; provided that such amended budget shall include all payments coming due in such Fiscal Year with respect to Obligations payable from Revenues. Insurance. The City shall procure and maintain such insurance relating to the Electric System which it shall deem advisable or necessary to protect its interests and the interests of the Trustee and the Owners of the Bonds, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with public electric utility systems similar to the Electric System; provided, that any such insurance may be maintained under a self-insurance program so long as such self-insurance is maintained in the amounts and manner as is, in the opinion of an accredited actuary, actuarially sound. All policies of insurance required to be maintained under the Indenture shall provide that the Trustee shall be given thirty (30) days' written notice of any intended cancellation thereof or reduction of coverage provided thereby. Payment of Taxes and Compliance with Governmental Regulations. The City shall pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Electric System or any part thereof when the same shall become due. The City shall duly observe and conform with all E-25 valid regulations and requirements of any governmental authority relative to the operation of the Electric System or any part thereof, but the City shall not be required to comply with any regulations or requirements so long as the validity or application thereof shall be contested in good faith and contesting such validity or application shall not materially impair the operations or financial condition of the Electric System. Tax Covenants. The City covenants it shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the Tax-exempt status of interest on any Bond under Section 103 of the Code. Without limiting the generality of the foregoing, the City shall comply with the requirements of the Tax Certificate, if any, delivered in connection with the issuance of each Series of Bonds. In the event that at any time the City is of the opinion that, in order to comply with its obligations under paragraph (a) below, it. is necessary or helpful to restrict or limit the yield on the investment of any moneys in any of the Funds held by the Trustee pursuant to the Indenture, the City shall so instruct the Trustee in writing, and cause the Trustee to take such action as may be necessary in accordance with such instructions. (a) Notwithstanding any provisions of the Indenture, if the City shall provide to the Trustee an Opinion of Bond Counsel to the effect that any specified action required under the Indenture or a Tax Certificate is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest on the Bonds under Section 103 of the Code, the City and the Trustee may conclusively rely on such opinion in complying with the requirements of the Indenture and of the applicable Tax Certificate, and the covenants under the Indenture shall be deemed to be modified to that extent. (b) The covenants described in the foregoing shall survive payment in full or discharge of the Bonds. Transfers to General Fund. The City covenants that it shall not transfer Net Revenues for any Fiscal Year to the City's General Fund in an amount exceeding the Net Transferable Income for such Fiscal Year. Amendments to Indenture Amendments Permitted. (a) Subject to the provisions of paragraph (d) below, the provisions of the Indenture or of any Supplemental Indenture and the rights and obligations of the City and of the Owners of the Outstanding Bonds and of the Fiduciaries may be modified, amended or supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, with the written consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement, when the written consent of the Owners of at least a majority in aggregate principal amount of the Bonds then Outstanding shall have been filed with the Trustee; or if less than all of the Outstanding Bonds are affected, the written consent of the Owners of at least a majority in aggregate principal amount of all affected Outstanding Bonds; provided that if such modification, amendment or supplement shall, by its terms, not take effect so long as any Bonds of any particular Series and maturity remain Outstanding, and, with respect to Bonds which are Tender Indebtedness if the conditions of paragraph (d) below are satisfied, the consent of the Owners of such Bonds shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of any the calculation of Outstanding Bonds. No such modification, amendment or supplement shall (1) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification, amendment or supplement without the consent of the Owners of all of the Bonds then Outstanding; or (2) modify the rights or obligations of any Fiduciary without the consent of such Fiduciary. It shall not be necessary for the consent of the Owners to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the entry into any Supplemental Indenture by the City and the Trustee for any of the purposes described under this heading, the City shall cause notice of the proposed Supplemental Indenture to be mailed, by first class mail, postage prepaid, to the Owners of all Outstanding Bonds (or the affected Outstanding Bonds) at their addresses appearing on the Bond Register. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that copies thereof are on file at the office of the Trustee for inspection by each Owner of an Outstanding Bond. E-26 Whenever, at any time after the date of the mailing of notice of the proposed entry into a Supplemental Indenture pursuant to the foregoing, the City shall have received an instrument or instruments in writing executed in accordance with the Indenture by or on behalf of the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding, or if less than all of the Outstanding Bonds are affected, by the Owners of not less than a majority in aggregate principal amount of the affected Outstanding Bonds, which instrument or instruments shall refer to the proposed Supplemental Indenture described in the notice of the proposed Supplemental Indenture and shall consent to such Supplemental Indenture in substantially the form referred to in such notice, thereupon, but not otherwise, the City and the Trustee may enter into such Supplemental Indenture in substantially such form, without liability or responsibility to any Owner of any Bond, whether or not such Owner shall have consented thereto. (b) The Indenture or any Supplemental Indenture may be supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, which the City and the Trustee may enter into with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement but without the consent of the Owner of any Bond, to provide for the issuance of a Series of Additional Bonds or a Series of Refunding Bonds in accordance with the terms and conditions of the Indenture, and establishing the terms and conditions thereof, including the rights of any Credit Provider for such Additional Bonds or Refunding Bonds, which may include permitting such Credit Provider to act for and on behalf of the Owners of such Additional Bonds or Refunding Bonds for any or all purposes of the Indenture except that no such Credit Provider shall be authorized to extend the fixed maturity of any Bond, or reduce the principal amount thereof, or reduce the amount of any Sinking Fund Installment therefor, or extend the due date of any such Sinking Fund Installment, or reduce the rate of interest on any Bond or extend the time of payment of interest thereon, without the consent of the Owner of each Bond so affected; or except as otherwise provided with respect to a Bond constituting Tender Indebtedness in the Supplemental Indenture authorizing such Bond and subject to the satisfaction of the conditions of paragraph (f) below, reduce the Redemption Price due on the redemption of any Bond or change the date or dates when any Bond is subject to redemption. (c) The Indenture and any Supplemental Indenture and the rights and obligations of the City, the Fiduciaries and the Owners of the Outstanding Bonds may also be modified, amended or supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, which the City and the Trustee may enter into with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement but without the consent of any Owners of Bonds (but with the consent of any affected Fiduciary), so long as such modification, amendment or supplement shall not materially, adversely affect the interests of the Owners of the Outstanding Bonds, including without limitation, for any one or more of the following purposes: (i) to add to the covenants and agreements of the City contained in the Indenture or a Supplemental Indenture other covenants and agreements thereafter to be observed, to pledge, provide or assign any security for the Bonds (or any portion thereof), or to surrender any right or power in the Indenture reserved to or conferred upon the City; (ii) 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 a Supplemental Indenture, or in regard to matters or questions arising under the Indenture or a Supplemental Indenture, as the City may deem necessary or desirable; or (iii) to modify, amend or supplement the Indenture or a Supplemental 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) Notwithstanding anything to the contrary contained in the Indenture, the provisions of the Indenture or any Supplemental Indenture may also be modified, amended or supplemented by a Supplemental Indenture or Supplemental Indentures, including amendments which would otherwise be described in paragraph (a) above, E-27 without the consent of the Owners of Bonds constituting Tender Indebtedness if either (i) the effective date of such Supplemental Indenture is a date on which such Bonds are subject to mandatory tender for purchase pursuant to the Indenture or (ii) the applicable notice described in the Indenture is given to Owners of such Bonds at least thirty (30) days before the effective date of such Supplemental Indenture, and on or before such effective date, the Owners of such Bonds have the right to demand purchase of such Bonds pursuant to the Indenture. (e) If the Supplemental Indenture authorizing the issuance of a Series of Bonds provides that a Credit Provider for all or any portion of the Bonds of such Series shall have the right to consent to Supplemental Indentures which require the consent of the Owners of the Bonds of such Series pursuant to the Indenture, then for the purposes of sending notice of any proposed Supplemental Indenture and for determining whether the Owners of the requisite percentage of Bonds have consented to such Supplemental Indenture, but subject to the provisions of paragraph (b) above, references to the Owners of such Bonds shall be deemed to be to the applicable Credit Provider. (f) For purposes of the foregoing, it shall not be necessary that consents of the Owners of any particular percentage of Outstanding Bonds of any affected Series be obtained but it shall be sufficient for such purposes if the consent of the Owners of a majority in aggregate principal amount of the combination of affected Outstanding Bonds shall be obtained. (g) Notwithstanding anything to the contrary contained in the Indenture, if authorized by the Supplemental Indenture authorizing the issuance of a Bond constituting Tender Indebtedness, any premium due on the redemption of such Bond and the date or dates when such Bond is subject to redemption may be modified or amended as provided in such Supplemental Indenture if either: (i) the effective date of such modification or amendment is a date on which such Bond is subject to mandatory tender for purchase pursuant to such Supplemental Indenture; or (ii) notice of such modification or amendment has been mailed to the Owner of such Bond at the address set forth in the Bond Register at least thirty (30) days before the effective date of such modification or amendment and on or before such effective date, the Owner of such Bond has the right to demand purchase of such Bond pursuant to such Supplemental Indenture. Upon the City and the Trustee entering into any Supplemental Indenture pursuant to the Indenture, the Indenture shall be deemed to be modified, amended or supplemented in accordance therewith, and the respective rights, duties and obligations under the Indenture of the City, the Fiduciaries and all Owners of Outstanding Bonds shall thereafter be determined, exercised and enforced subject in all respects to such modification, amendment and supplement, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes. For purposes of modifications, amendments and supplements to the Indenture, Bonds owned or held by or for the account of the City, or any funds of the City, shall not be deemed Outstanding for the purpose of consent or other action or any calculation of Outstanding Bonds provided for in the Indenture, and the City shall not be entitled with respect to such Bonds to give any consent or take any other action provided for in the Indenture as an Owner of Bonds. At the time of any consent or other action taken under the Indenture, the City shall furnish the Trustee a certificate of an Authorized City Representative upon which the Trustee may rely, describing all Bonds so to be excluded. Defeasance Bonds (or portions of Bonds) for the payment or redemption of which moneys shall have been set aside and shall be held in trust by an Escrow Agent (through deposit pursuant to a deposit of funds for such payment or redemption or otherwise) at the maturity or redemption date thereof, as applicable, shall be deemed to have been paid within the meaning and with the effect expressed in the provisions of the Indenture relating to payment of bonds upon defeasance. Any Outstanding Bond (or any portion thereof such that both the portion thereof which is deemed paid and the portion which is not deemed paid pursuant to the Indenture shall be in an Authorized Denomination) shall prior to the maturity or redemption date thereof be deemed to have been paid within the meaning and with the effect expressed in the provisions of the Indenture relating to payment of bonds upon defeasance (except that the obligations described under the applicable provisions of the Indenture relating to E-28 payment of bonds and the giving of the notices of the redemption of Bonds to be redeemed as provided in the Indenture shall continue) if (1) in case said Bond (or portion thereof) is to be redeemed on any date prior to maturity, the City shall have given the Trustee irrevocable instructions to give notice of redemption of such Bond (or portion thereof) on said date as provided in the Indenture, (2) there shall have been deposited with an Escrow Agent either moneys in an amount which shall be sufficient, or Defeasance Securities, the principal of and the interest on which when due shall provide moneys which, together with the moneys, if any, held by such Escrow Agent for such purpose, shall be sufficient, in each case as evidenced by an Accountant's Certificate, to pay when due the principal amount of, and any redemption premiums on, said Bond (or portion thereof) and interest due and to become due on said Bond (or portion thereof) on and prior to the redemption date or maturity date thereof, as the case may be, and (3) if such Bond (or portion thereof) is not to be paid or redeemed within 60 days of the date of the deposit required by (2) above, the City shall have given the Trustee, in form satisfactory to it, instructions to mail, as soon as practicable, by first class mail, postage prepaid, to the Owner of such Bond, at the last address, if any, appearing upon the Bond Register, a notice that the deposit required by (2) above has been made with an Escrow Agent and that said Bond (or the applicable portion thereof) is deemed to have been paid in accordance with the Indenture and stating such maturity or redemption date upon which moneys are to be available for the payment of the principal amount of, and any redemption premiums on, said Bond. Any notice given pursuant to (3) above with respect to Bonds which constitute less than all of the Outstanding Bonds of any Series and maturity shall specify the letter and number or other distinguishing mark of each such Bond. Any notice given pursuant to (3) above with respect to less than the full principal amount of a Bond shall specify the principal amount of such Bond which shall be deemed paid pursuant to the Indenture and notify the Owner of such Bond that such Bond must be surrendered as provided in the Indenture. The receipt of any notice required by this paragraph shall not be a condition precedent to any Bond being deemed paid in accordance with this paragraph and the failure of any Owner to receive any such notice shall not affect the validity of the proceedings for the payment of Bonds in accordance with the Indenture. Neither Defeasance Securities nor moneys deposited with an Escrow Agent pursuant to the Indenture, nor principal or interest payments on any such Defeasance Securities, shall be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal amount of, and any redemption premiums on, said Bonds and the interest thereon; provided that any cash received from principal or interest payments on such Defeasance Securities deposited with an Escrow Agent, (A) to the extent such cash shall not be required at any time for such payment, as evidenced by an Accountant's Certificate, shall be paid over upon the written direction of an Authorized City Representative, including a transfer to the City free and clear of any trust, lien, pledge or assignment securing said Bonds, and (B) to the extent such cash shall be required for such payment at a later date, shall, to the extent practicable, at the written direction of an Authorized City Representative, be reinvested in Defeasance Securities maturing at times and in amounts, which together with the other funds to be available to the Escrow Agent for such purpose, shall be sufficient to pay when due the principal amount of, and any redemption premiums on, said Bonds and the interest to become due on said Bonds on and prior to such redemption date or maturity date thereof, as the case may be, as evidenced by an Accountant's Certificate. Nothing in the Indenture shall prevent the City from substituting for the Defeasance Securities held for the payment or redemption of Bonds (or portions thereof) other Defeasance Securities which, together with the moneys held by the Escrow Agent for such purpose, as evidenced by an Accountant's Certificate, shall be sufficient to pay when due the principal amount of, and any redemption premiums on, the Bonds (or portions thereof) to be paid or redeemed, and the interest due on the Bonds (or portions thereof) to be paid or redeemed at the times established with the initial deposit of Defeasance Securities for such purpose provided that the City shall deliver to the Escrow Agent a Favorable Opinion of Bond Counsel with respect to such substitution. If there shall be deemed paid pursuant to the Indenture less than all of the full principal amount of a Bond, the City shall execute and the Trustee shall authenticate and deliver, upon the surrender of such Bond, without charge to the Owner of such Bond, a new Bond or Bonds for the principal amount of the Bond so surrendered which is deemed paid pursuant to the Indenture and another new Bond or Bonds for the balance of the principal amount of the Bond so surrendered, in each case of like Series, maturity and other terms, and in any of the Authorized Denominations. E-29 Upon the deposit with an Escrow Agent, in trust, at or before maturity or the applicable redemption date, of money or Defeasance Securities in the necessary amount to pay or redeem Outstanding Bonds (or portions thereof), and to pay the interest thereto to such maturity or redemption date, as applicable, (provided that, if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for giving such notice), all liability of the City in respect of such Bonds shall cease, terminate and be completely discharged, except that the City shall remain liable for such payment but only from, and the Bondowners shall thereafter be entitled only to payment (without interest accrued thereon after such redemption date or maturity date, as applicable) out of, the money and Defeasance Securities deposited with the Escrow Agent as aforesaid for their payment, subject, however, to the provisions of the Indenture relating to transfers to the City's general fund and bonds deemed paid; provided that. no Bond which constitutes Tender Indebtedness shall be deemed to be paid within the meaning of the Indenture unless the Purchase Price of such Bond, if tendered for purchase in accordance with the Indenture, could be paid when due from such moneys or Defeasance Securities (as evidenced by an Accountant's Certificate) or a Credit Support Instrument is provided in connection with such Purchase Price. Events of Default; Remedies Events of Default. Each of the following shall constitute an Event of Default under the Indenture: (i) if default shall be made in the payment of the principal or Redemption Price of or Sinking Fund Installment for, or interest on, any Outstanding Bond or other Parity Obligations, when and as the same shall become due and payable, whether on an Interest Payment Date, at maturity, by call for redemption, or otherwise; (ii) if default shall be made in the payment of the Parity Purchase Price of any Bonds or other Parity Obligations which are Tender Indebtedness; (iii) if default shall be made by the City in the performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture or in the Outstanding Bonds contained, and such default shall continue for a period of 120 days after written notice thereof to the City by the Trustee or to the City and to the Trustee by the Owners of not less than 10% in principal amount of the Bonds Outstanding; provided, however, if such default is such that it can be corrected by the City but not within the applicable period specified above, it shall not constitute an Event of Default if corrective action is instituted by the City within thirty (30) days of the City's receipt of the notice of the default required by this paragraph and diligently pursued until the default is correct; or (iv) an Event of Bankruptcy shall have occurred and be continuing with respect to the City. Application of Net Revenues and Other Moneys After Default. (a) Notwithstanding anything to the contrary contained in the Indenture, the City covenants that if an Event of Default shall happen and shall not have been remedied, the City, upon the demand of the Trustee, shall cause to be paid over to the Trustee by the first Business Day of each month, all Net Revenues with respect to the preceding month. (b) During the continuance of an Event of Default, the Trustee shall apply all Net Revenues received by the Trustee pursuant to any right given or action taken under the provisions of the Indenture which are held by the Trustee pursuant and subject to the terms and conditions of the Indenture, as follows and in the following order of priority: First: To the payment of the reasonable and proper charges, expenses and liabilities of the Fiduciaries and the payment of the reasonable and proper charges, expenses and liabilities of the fiduciaries for Parity Obligations. Second: To the payment of the principal, Redemption Price and Parity Purchase Price of and interest on the Outstanding Bonds, and the principal, redemption price and Parity Purchase Price of and interest on the other Outstanding Parity Obligations then due and payable; provided however, that in the event the amount of Net Revenues available to the Trustee is not sufficient to make all the payments required by this clause, the Trustee shall apply the available Net Revenues to the payment of the principal, redemption price and Parity Purchase Price of and interest on all Outstanding Parity Obligations then due and payable ratably (based on the respective amounts to be paid), without any discrimination on preferences. Third: To the payment of any Termination Amount due and payable under the Qualified Swap Agreements; provided however, that in the event the amount of Net Revenues available to the Trustee is E-30 not sufficient to make all the payments required by this clause with respect to all Qualified Swap Agreements, the Trustee shall apply the available Net Revenues to the payment of the Termination Payments then due and payable under all Qualified Swap Agreements ratably (based on the respective amounts to be paid), without any discrimination on preferences. Fourth: To the transfer to the Debt Service Reserve Fund for the Bonds and to each debt service reserve fund for other Outstanding Parity Obligations, the amount, if any, necessary so that the amount on deposit in the Debt Service Reserve Fund shall equal the Debt Service Reserve Requirement and the amount in each debt service reserve fund for other Outstanding Parity Obligations shall equal the amount required to be on deposit in such debt service reserve fund under the applicable Issuing Instrument; provided that in the event the amount of Net Revenues available to the Trustee is not sufficient to make all the payments required by this clause, the Trustee shall apply the available Net Revenues to the transfer to the. Debt Service Reserve Fund and each debt service reserve fund for other Outstanding Parity Obligations ratably (based on the respective amounts to be paid), without any discrimination on preferences. Fifth: To the payment of amounts due with respect to outstanding Subordinated Obligations (other than Termination Payments) in accordance with the provisions of the Issuing Instrument pursuant to which such Subordinated Obligations have been issued; provided that in the event the amount of Net Revenues available to the Trustee is not sufficient to make all the payments required by this clause, the Trustee shall apply the available Net Revenues to the payments of amounts due with respect to all Subordinated Obligations ratably (based on the respective amounts to be paid), without any discrimination on preferences except as otherwise provided in the Issuing Instruments pursuant to which such Subordinated Obligations have been issued. (c) If and whenever all overdue installments of interest on all Outstanding Bonds, together with the reasonable and proper charges, expenses and liabilities of the Trustee, and all other sums payable for the account of the City under the Indenture, including the principal and Redemption Price of all Outstanding Bonds and unpaid interest on all Outstanding Bonds which shall then be payable, shall be paid for by the account of the City, or provision satisfactory to the Trustee shall be made for such payment, and all defaults under the Indenture or the Outstanding Bonds shall be made good or secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall be made therefor, the Trustee shall pay over all unexpended Net Revenues in the hands of the Trustee (except Net Revenues deposited or pledged, or required by the terms of the Indenture to be deposited or pledged, with the Trustee), and thereupon the City and the Trustee shall be restored,, respectively, to their former positions and rights under the Indenture. No such payment by the Trustee nor such restoration of the City and the Trustee to their former positions and rights shall extend to or affect any subsequent default under the Indenture or impair any right consequent thereon. (d) The Trustee may in its discretion establish special record dates for the determination of the Owners of Bonds for various purposes of the Indenture, including without limitation, payment of defaulted interest and giving direction to the Trustee. Right to Accelerate Upon Default. Notwithstanding anything contrary in the Indenture or in the Bonds, upon the occurrence of an Event of Default, the Trustee may, with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement, and shall, at the direction of the Owners of a majority in principal amount of Outstanding Bonds (other than Bonds owned by or on behalf of the City) by written notice to the City, declare the principal of the Outstanding Bonds to be immediately due and payable, whereupon the principal of the Bonds thereby coming due and the interest thereon accrued to the date of payment shall, without further action, become and be immediately due and payable. Appointment of Receiver. If an Event of Default shall happen and shall not have been remedied, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Owners of the Bonds under the Indenture, the Trustee shall be entitled to make application for the appointment of a receiver or custodian of the Net Revenues, pending such proceedings, with such power as the court making such appointment shall confer. E-31 Enforcement Proceedings. (a) If an Event of Default shall happen and shall not have been remedied, then and in every such case, the Trustee, by its agents and attorneys, may proceed, and upon the written request of the Owners of not less than a majority in principal amount of the Bonds at the time Outstanding shall proceed, to protect and enforce its rights and the rights of the Owners of the Outstanding Bonds by a suit or suits in equityor at law, whether for damages or the specific performance of any covenant contained in the Indenture, to enforce the security interest in, pledge of and lien on the Net Revenues granted pursuant to the Indenture, or in aid of the execution of any power granted in the Indenture or any remedy granted under applicable provisions of the laws of the State of California, or for an accounting by the City as if the City were the trustee of an express trust, or in the enforcement of any other legal or equitable right as the Trustee, being advised by counsel, shall deem most effectual to enforce any of its nights or to perform any of its duties under the Indenture. (b) All rights of action under the Indenture may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in the trial or other proceedings, and any such suit or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust. (c) Upon commencing a suit in equity or upon other commencement of judicial proceedings by the Trustee to enforce any right under the Indenture, the Trustee shall be entitled to exercise any and all rights and powers conferred in the Indenture and provided to be exercised by the Trustee upon the occurrence of any Event of Default. (d) Regardless of the happening of an Event of Default, the Trustee shall have power to, but unless requested in writing by the Owners of a majority in principal amount of the Bonds then Outstanding and furnished with reasonable security and indemnity, shall be under no obligation to, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient to prevent any impairment of the security under the Indenture by any acts which may be unlawful or in violation of the Indenture, and such suits and proceedings as the Trustee may be advised shall be necessary or expedient to preserve or protect its interests and the interests of the Owners of the Bonds. (e) If the Trustee or any Owner or Owners of Outstanding Bonds have instituted any proceeding to enforce any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Owner or Owners, then and in every such case the City, the Trustee and the Owners shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions under the Indenture, and thereafter all rights and remedies of the Trustee and the Owners shall continue as though no such proceeding had been instituted. Restriction on Owner's Action. (a) Except as otherwise provided in paragraph (b) below, no Owner of any Bond shall have any right to institute any suit, action or proceeding at law or in equity for the enforcement of any provision of the Indenture or the execution of any trust under the Indenture or for any remedy under the Indenture unless such Owner shall have previously given to the Trustee written notice of the happening of an Event of Default, as provided in the Indenture, and the Owners of at least 25% in principal amount of the Bonds then Outstanding shall have filed a written request with the Trustee, and shall have offered it reasonable opportunity, either to exercise the powers granted in the Indenture or by the applicable laws of the State of California or to institute such action, suit or proceeding in its own name, and unless such Owners shall have offered to the Trustee adequate security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall have refused to comply with such request for a period of 60 days after receipt by it of such notice, request and offer of indemnity, it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the pledge created by the Indenture, or to enforce any right under the Indenture, except in the manner therein provided; and that all proceedings at law or in equity to enforce any provision of the Indenture shall be instituted, had and maintained in the manner provided in the Indenture and for the ratable benefit of all Owners of the Outstanding Bonds, subject only to the provisions of the Indenture relating to Credit Providers. (b) Nothing in the Indenture or in the Bonds contained shall affect or impair the obligation of the City, which is absolute and unconditional, to pay on the respective due dates thereof and at the places therein expressed, but solely from the Net Revenues and the other moneys pledged under the Indenture, the principal amount, or Redemption Price if applicable, of the Bonds, and the interest thereon, to the respective Owners thereof, or affect or E-32 impair the right, which is also absolute and unconditional, of any Owner to institute suit for the enforcement of any such payment. Remedies Not Exclusive. No remedy by the terms of the Indenture conferred upon or reserved to the Trustee or the Owners of the Bonds is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or existing at law or in equity or by statute whether effective on or after the effective date of the Indenture. The assertion or employment of any right or remedy, under the Indenture or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Effect of Waiver and Other Circumstances. (a) No delay or omission of the Trustee or any Owner of a Bond to exercise any right or power arising upon the happening of an Event of Default shall impair any right or power or shall be construed to be a waiver of any such Event of Default or be an acquiescence therein; and every power and remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient by the Trustee or by the Owners of the Bonds. (b) The Owners of not less than sixty percent in principal amount of the Bonds at the time Outstanding, or their attorneys -in -fact duly authorized, may on behalf of the Owners of all of the Bonds, waive any Event of Default and its consequences. No such waiver shall extend to any subsequent or Event of Default or impair any right consequent thereon unless the provisions of this paragraph (b) have been satisfied with respect to such subsequent Event of Default. Notice of Default. The Trustee shall, within thirty (30) days after obtaining knowledge thereof, mail written notice of the occurrence of any Event of Default of which the Trustee has knowledge to each Credit Provider, each Reserve Financial Guaranty Provider and each Owner of Bonds then Outstanding at such Owner's address, if any, appearing in the Bond Register. Credit Providers Except as limited by the Indenture, a Supplemental Indenture authorizing a Series of Bonds may provide that any Credit Provider providing a Credit Support Instrument with respect to Bonds of such Series may exercise any right under the Indenture or the Supplemental Indenture authorizing the issuance of such Series of Bonds given to the Owners of the Bonds to which such Credit Support Instrument relates in lieu of such Owners. All provisions under the Indenture or a Supplemental Indenture authorizing the exercise of rights by a Credit Provider with respect to Bonds of a Series, including without limitation actions relating to consents, approvals, directions, waivers, appointments and requests, shall be deemed not to require or permit such consents, approvals, directions, waivers, appointments, requests or other actions and shall be read as if the Credit Provider were not mentioned therein (i) during any period during which there is a default by such Credit Provider under the applicable Credit Support Instrument or (ii) after the applicable Credit Support Instrument shall at anytime for any reason cease to be valid and binding on the Credit Provider, or shall be declared to be null and void by final judgment of a court of competent jurisdiction, or after the Credit Support Instrument has been rescinded, repudiated or terminated, or after a receiver, conservator or liquidator has been appointed for the Credit Provider; provided, however, that the payment of amounts due (including without limitation all indemnity payments) to the Credit Provider pursuant to the terms of the Indenture, any Supplemental Indenture, any Credit Support Agreement shall continue in full force and effect. The foregoing shall not affect any other rights of a Credit Provider. All provisions in the Indenture relating to the rights of a Credit Provider shall be of no force and effect if there is no Credit Support Instrument in effect and all amounts owing to the Credit Provider under the Credit Support Instrument have been paid. Reserve Financial Guaranty Providers All provisions under the Indenture or a Supplemental Indenture authorizing the exercise of rights by a Reserve Financial Guaranty Provider with respect to Bonds of a Series, including without limitation actions relating to consents, approvals, directions, waivers,' appointments and requests, shall be deemed not to require or permit such consents, approvals, directions, waivers, appointments, requests or other actions and shall be read as if the Reserve E-33 Financial Guaranty Provider were not mentioned therein (i) during any period during which there is a default by such Reserve Financial Guaranty Provider under the applicable Reserve Financial Guaranty or (ii) after the applicable Reserve Financial Guaranty shall at any time for any reason cease to be valid and binding on the Reserve Financial Guaranty Provider, or shall be declared to be null and void by final judgment of a court of competent jurisdiction, or after the Reserve Financial Guaranty has been rescinded, repudiated or terminated, or after a receiver, conservator or liquidator has been appointed for the Reserve Financial Guaranty Provider; provided, however, that the payment of amounts due (including without limitation all indemnity payments) to the Reserve Financial Guaranty Provider pursuant to the terms of the Indenture, any Supplemental Indenture, any Reserve Financial Guaranty shall continue in full force and effect. The foregoing shall not affect any other rights of a Reserve Financial Guaranty Provider. All provisions in the Indenture relating to the rights of a Reserve Financial Guaranty Provider shall be of no force and effect if there is no Reserve Financial Guaranty Provider in effect issued by such Reserve Financial Guaranty Provider and all amounts owing to such Reserve Financial Guaranty Provider Credit Provider under the Reserve Financial Guaranty have been paid. Unclaimed Moneys Anything in the Indenture or any Supplemental Indenture to the contrary notwithstanding, any moneys held by the Trustee, an Escrow Agent or any Paying Agent in trust for the payment and discharge of any of the Bonds which remain unclaimed for two years after the date when such Bonds have become due and payable, either at their stated maturity dates, tender for purchase or by call for redemption, if such moneys were held by the Trustee, an Escrow Agent or a Paying Agent at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee, an Escrow Agent or a Paying Agent after the date when such Bonds or the Purchase Price thereof became due and payable, shall, at the written request of an Authorized City Representative be repaid by such Trustee, Escrow Agent or Paying Agent to the City, as its absolute property and free and clear of any trust, lien, pledge or assignment securing said Bonds, and such Trustee, Escrow Agent or Paying Agent shall thereupon be released and discharged with respect thereto and the Owners of such Bonds shall look only to the City for the payment of such Bonds; provided, however, that before being required to make any such payment to the City, the Trustee, the Escrow Agent or the Paying Agent, as applicable, shall, at the expense of the City, mail, postage prepaid to the Owners of such Bonds, at the last address, if any, appearing upon the Bond Register a notice that said moneys remain unclaimed and that, after a date named in said notice, which date shall be not less than 30 days after the date of the mailing of such notice, the balance of such moneys then unclaimed shall be returned to the City. E-34 APPENDIX F PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), executed and entered into as of March 1, 2003, is by and between BNY Western Trust Company, a banking corporation, duly established and existing under and pursuant to the laws of the State of California, as Trustee (the "Trustee"), and the CITY OF VERNON, a municipal. corporation and chartered city organized and existing under and by virtue of the Constitution of the State of California and its Charter (the "City"). WITNESSETH: WHEREAS, the City has issued the City of Vernon Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series B (the "Bonds"), in the aggregated amount of $ , pursuant to an Indenture of Trust, as supplemented by a Second Supplemental Indenture of Trust, each dated as of March 1, 2003 (collectively, the "Indenture"), each by and between the Trustee and the City; and WHEREAS, this Disclosure Agreement is being executed and delivered by the City and the Trustee for the benefit of the Owners and Beneficial Owners of the Bonds and in order to assist the underwriter of the Bonds in complying with S.E:C. Rule 15c2-12(b)(5); NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: Section 1. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" means any Annual Report provided by the City pursuant to, and as described in, Sections 2 and 3 hereof. "Disclosure Representative" means the City Administrator of the City, or such other officer or employee of the City as the City shall designate in writing to the Trustee from time to time. "Dissemination Agent" means any Dissemination Agent, including any successor Dissemination Agent, appointed or engaged in writing by the City pursuant to Section 6 hereof and which has filed with the Trustee a written acceptance of such designation. "Listed Events" means any of the events listed in subsection (a) of Section 4 hereof. "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. "Official Statement" means the Official Statement, dated , 2003, relating to the Bonds. F-1 "Participating Underwriter" means any original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds. "Repository" means each National Repository and each State Repository. "Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository. Section 2. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent to, not later than 180 days following the end of each Fiscal Year of the City (which Fiscal Year ends on June 30), commencing with the report for the 2002-03 Fiscal Year, provide to each Repository an Annual Report which is consistent with the requirements of Section 3 hereof. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof, provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the City's Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under subsection (f) of Section 4 hereof. (b) Not later than 15 Business Days prior to the date specified in subsection (a) of this Section for the providing of the. Annual Report to the Repositories, the City shall provide the Annual Report to the Dissemination Agent, if any, and the Trustee (if the Trustee is not the Dissemination Agent). If by such date, the Trustee has not received a copy of the Annual Report, the Trustee shall contact the City and the Dissemination Agent, if any, (if the Trustee is not the Dissemination Agent) to determine if the City is in compliance with the first sentence of this subsection (b). (c) If the Trustee is unable to confirm that an Annual Report has been provided to Repositories by the date required in subsection (a) of this Section, the Trustee shall send a notice to the Municipal Securities Rulemaking Board and each State Repository, if any, in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and (ii) file a report with the City and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. F-2 Section 3. Content of Annual Reports. The City's Annual Report shall contain or incorporate by reference the following: (a) Audited general purpose financial statements of the City prepared in accordance with [generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board ("GASB") and all statements and interpretations issued by the Financial Accounting Standards Board, which are not in conflict with the statements issued by the GASB]. If the City's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to subsection (a) of Section 2 hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) An update of the information contained in the tables with the following headings in the Official Statement for the most recently ended Fiscal Year: (i) CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND; (ii) Average Billing Price; and (iii) SUMMARY OF OPERATING RESULTS. (c) In addition to any of the information expressly required to be provided under subsections (a) and (b) of this Section, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other document so included by reference. Section 4. Reporting of SiEnificant Events. (a) Pursuant to the provisions of this Section, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material: (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. F-3 (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the security. (7) Modifications to rights of the Owners of the Bonds. (8) Contingent or unscheduled Bond calls. (9) Defeasances. (10) Release, substitution, or sale of property securing repayment of the securities. (11) Rating changes. (b) The Trustee shall, within one Business Day of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the City promptly notify the Trustee in writing whether or not to report the event pursuant to subsection (f) of this Section. (c) Whenever the City obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Trustee pursuant to subsection (b) of this Section or otherwise, the City shall as soon as possible determine if such event would be material under applicable Federal securities law. (d) If the City has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the City shall promptly notify the Trustee in writing. Such notice shall instruct the Trustee to report the occurrence pursuant to subsection (f) of this Section. (e) If in response to a request under subsection (b) of this Section, the City determines that the Listed Event would not be material under applicable Federal securities law, the City shall so notify the Trustee in writing and instruct the Trustee not to report the occurrence pursuant to subsection (f) of this Section. (f) If the Trustee has been instructed by the City to report the occurrence of a Listed Event, the Trustee shall file a notice .of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in paragraphs (8) and (9) of subsection (a) of this Section need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Owners of affected Bonds pursuant to the Indenture. F-4 Section 5. Termination of Reporting Obligation. The City's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under subsection (f) of Section 4 hereof. Section 6. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent; provided the Trustee shall receive written notice of such appointment, engagement and discharge at the time thereof. Section 7. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Trustee may amend this Disclosure Agreement (and the Trustee shall agree to any amendment so requested by the City), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of subsection (a) of Section 2 hereof, Section 3 hereof or subsection (a) of Section 4 hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of Bond Counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver (i) is approved by Owners of the Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in the opinion of the Trustee or Bond Counsel, materially impair the interests of the Owners or Beneficial Owners. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably F-5 feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories. Section 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 9. Default. In the event of a failure 'of the City, the Trustee or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the written direction of any Participating Underwriter or the Owners of at least 25% of the aggregate amount of principal evidenced by Outstanding Bonds, shall), or any Owner or Beneficial Owner of the Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City, Trustee or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the City, the Trustee or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 10. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture. Neither the Trustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report or notice of Listed Event. The Trustee and Dissemination Agent shall receive reasonable compensation for its services provided under this Disclosure Agreement. The Dissemination Agent (if other than the Trustee) shall have only such duties pursuant to this Disclosure as are specifically set forth herein, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's gross negligence or willful misconduct. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Section 11. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Trustee, the Dissemination Agent, the Participating Underwriter and Owners and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. F-6 Section 12. Governing Law. This Disclosure Agreement shall be interpreted governed by and construed for all purposes in accordance with the laws of the State for contracts executed and to be performed in the State. Section 13. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. ATTEST: Bruce V. Malkenhorst, City Clerk APPROVED AS TO FORM: an CITY OF VERNON By: Leonis Malburg, Mayor BNY WESTERN TRUST COMPANY, AS TRUSTEE LE Authorized Signatory F-7 EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Vernon Name of Issue: City of Vernon Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series B (the "Bonds") Date of Issuance: , 2003 NOTICE IS HEREBY GIVEN that the City of Vernon (the "City") has not provided an Annual Report with respect to the above -named Bonds as required Section 4.02 of the Second Supplemental Indenture of Trust relating to the Bonds, dated as of March 1, 2003, by and between BNY Western Trust Company, as Trustee and the City. [The City anticipates that the Annual Report will be filed by .] Dated: cc: City of Vernon BNY Western Trust Company, as Trustee, on behalf of the City of Vernon By: _ Name: Title: F-8 APPENDIX G PROPOSED FORM OF BOND COUNSEL OPINION Upon delivery of the 2003 Bonds in definitive form, Bond Counsel, proposes to render its final approvin City Council City of Vernon 4305 Santa Fe Avenue Vernon, California 90058 g Re: City of Vernon Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series A and 2003 Series B (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel in connection with the issuance by the City of Vernon, California (the "City") of $ aggregate principal amount of its Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series A (the "2003A Bonds") and $ aggregate principal amount of its Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series B (the "2003B Bonds" and, together with the 2003A Bonds, the "2003 Bonds"). The 2003 Bonds have been issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code (the "Bond Law") and an Indenture of Trust, as supplemented by the First Supplemental Indenture of Trust and the Second Supplemental Indenture of Trust (collectively, the "Indenture"), each dated as of March 1, 2003 and each between the City and BNY Western Trust Company, as trustee (the "Trustee"). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. In such connection, we have reviewed the Charter, the Bond Law, the Indenture, the Tax Certificate, dated the date hereof, relating to the 2003 Bonds (the "Tax Certificate"), certificates of the City, the Trustee and others, opinions of counsel to the City, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The Indenture provides that the 2003 Bonds are special obligations of the City payable solely from the Net Revenues and the other funds included in the Trust Estate pledged therefor pursuant to the Indenture The Indenture further provides that the 2003 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its G-1 income or receipts except the pledge of the Trust Estate and that the pledge of Net Revenues pursuant to the Indenture shall be on a parity with any pledge thereof securing Parity Obligations. The interest rate mode for the 2003A Bonds and certain agreements, requirements and procedures contained or referred to in the Indenture, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of 2003 Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any 2003 Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine or to inform any person whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the 2003 Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and certificates, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture and the Tax Certificate, including without limitation covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the 2003 Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the 2003 Bonds, the Indenture and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against municipal corporations in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents, nor doe we express any opinion with respect to the state or quality of title to or interest in any of the assets described in or as subject to the lien of the Indenture or the accuracy of the description contained therein of, the remedies available to enforce liens on, any of such assets. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the 2003 Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: The 2003 Bonds constitute the valid and binding special obligations of the City. 2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the 2003 Bonds, of the Trust Estate, subject to the provisions G-2 of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. 3. Interest on the 2003 Bonds is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the 2003 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the 2003 Bonds. G-3 APPENDIX H SUMMARY OF THE LETTER OF CREDIT AND THE REIMBURSEMENT AGREEMENT FOR THE 2003A BONDS While the 2003A Bonds bear interest at a Weekly Interest Rate, the Purchase Price of and principal and interest on the 2003A Bonds will be payable from -amounts available to be drawn by the Trustee under an irrevocable direct -pay Letter of Credit issued by the Bank. See "THE BANK" for a description of the Bank. The -following is a brief description of certain provisions of the Letter of Credit and the Reimbursement Agreement for the 2003A Bonds and is not to be considered as a full statement of the provisions thereof. This Summary is qualified by reference to and is subject to each such document. THE LETTER OF CREDIT General The payment of the principal of, interest on, Redemption Price of, and Purchase Price of, the 2003A Bonds will initially be paid from proceeds drawn under an irrevocable direct -pay letter of credit (the "Letter of Credit") issued by Bank of America, N.A. (the "Bank"). Stated Amount; Term The Letter of Credit will have an initial stated amount equal to the aggregate principal amount of the 2003A Bonds (the "Principal Portion") plus interest thereon (the "Interest Portion") at an assumed rate of 12% per annum for 40 days, calculated on the basis of a 365-day year and actual days elapsed (such method of calculating interest on any principal amount of 2003A Bonds, the "Interest Coverage Amount"). The scheduled expiration date of the Letter of Credit is the three-year anniversary of the date of issuance. The Letter of Credit will be issued on the date the 2003A Bonds are issued. The Letter of Credit will support 2003A Bonds while they bear interest at the Daily Interest Rate or the Weekly Interest Rate. The Trustee will be the beneficiary of the Letter of Credit. No person other than the Trustee shall be permitted to present drawings under the Letter of Credit. The Letter of Credit may be transferred to a successor Trustee. Source of Payment The Bank will pay from its own funds all drawings made under the Letter of Credit. Termination The Letter of Credit will terminate on the earliest to occur of the following: (1) The three-year anniversary of the date of issuance of the Letter of Credit or such later date or dates (the "Stated Expiration Date") as the Bank shall specify from time to time in a written notice to the Trustee; H-1 SFI 131736lvl2 42379/276 (2) The date on which the Bank honors payment of a drawing in respect of the payment of the principal of the 2003A Bonds in which the Trustee certifies that no such 2003A Bonds will remain "outstanding" after the application of the proceeds of such drawing; (3) The date on which the Bank honors payment of a drawing in respect of the payment of the redemption price of the 2003A Bonds of the subseries supported by the Letter of Credit in which the Trustee certifies that no such 2003A Bonds will remain "outstanding" after the application of the proceeds of such drawing; (4) The date on which the Bank honors payment of a mandatory tender drawing in connection with (a) the substitution of the Letter of Credit with an Alternate 2003 Credit Support Instrument, (b) a conversion of all of the 2003A Bonds to an interest rate mode other than a Daily Interest Rate or a Weekly Interest Rate (e.g., a conversion of all of the 2003A Bonds to a Fixed Interest Rate mode), (c) the occurrence of the Stated Expiration Date or (d) the receipt by the Trustee of a Default Notice; (5) Fifteen days after the Trustee receives written notice from the Bank (a) of the occurrence of an "Event of Default" under the Reimbursement Agreement between the City and the Bank (the "Reimbursement Agreement", see "Reimbursement Agreement — Events of Default" below for a description of these events), and (b) instructing the Trustee to make its final drawing under the Letter of Credit (a "Default Notice"); or (6) The date on which the Letter of Credit is surrendered by the Trustee to the Bank accompanied by a certificate in the form prescribed by the Letter of Credit (for a description of the circumstances in which the Trustee may release the Letter of Credit, see "APPENDIX E-SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE'). Following the termination of the Letter of Credit, the Bank shall have no further obligation to honor drawings made (or attempted to be made) thereunder by the Trustee. Reduction and Reinstatement of Stated Amount After the Bank honors payment of a drawing in respect of the payment of regularly scheduled interest on the 2003A Bonds, the Interest Portion of the stated amount of the Letter of Credit shall be reduced by the amount of such drawing. The Interest Portion shall be reinstated by the amount of such drawing at the opening of business of the Bank in Los Angeles, California on the third business day following such drawing. After the Bank honors payment of a drawing in respect of the payment of the principal or Redemption Price of the 2003A Bonds, the stated amount shall be automatically and permanently reduced as follows: (1) the Principal Portion shall be reduced by the amount so drawn with respect to the payment of principal of the 2003A Bonds of such sub series and (2) the Interest Portion shall be reduced by the Interest Coverage Amount calculated with respect to such principal amount. After the Bank honors payment of a drawing (other than a final drawing) in respect of the payment of the Purchase Price of 2003A Bonds in connection with the tender for purchase thereof at the request of the owner or in connection with a mandatory tender for purchase of all 2003A Bonds of such subseries, the stated amount shall be automatically reduced as follows: (1) the Principal Portion shall be reduced by the amount so drawn with respect to the payment of principal of the 2003A Bonds and (2) the Interest Portion shall be reduced by the Interest Coverage Amount calculated with respect to such principal amount. The stated amount shall automatically be reinstated as follows: (a) the Principal H-2 SF1 1317361v12 42379/276 Portion shall be reinstated by an amount equal to the principal amount of 2003A Bonds of such subseries that are remarketed following a purchase with the proceeds of an optional tender drawing or a mandatory tender drawing (other than the final drawing) and the receipt (or provision for receipt) by the Bank of payment therefor and (b) the Interest Portion shall be reinstated by an amount equal to the Interest Coverage Amount calculated with respect to such principal amount. After the Bank honors payment of the Trustee's final drawing, the stated amount, the Principal Portion and the Interest Portion shall be automatically and permanently be reduced to zero and the Letter of Credit will terminate. THE REIMBURSEMENT AGREEMENT Set forth below is a summary of certain provisions of the Reimbursement Agreement as well as the defined terms necessary for a complete understanding thereof. Defined Terms "Business Day" means a day which is not (a) a Saturday, Sunday or any other day bank institutions located in New York, New York, or the city or cities in which the principal or other designated corporate office of the Trustee, the Tender Agent, the Remarketing Agent or the Bank is located are required or authorized to close, or (b) a day on which The New York Stock Exchange is closed. "Construction Documents" means the , the and the "Debt" means (a) all indebtedness (including principal, interest, fees and charges) of the City for borrowed money that is payable from, or secured in whole or in part by, the Trust Estate, (b) the deferred purchase price of property or services (other than accrued expenses and current trade accounts payable incurred in the ordinary course of business) that is payable from, or secured in whole or in part by, the Trust Estate and which, in accordance with generally accepted accounting principles, would be shown on the liability side of the balance sheet of the Light and Power Department Fund, provided that amounts payable with respect to property and/or services which are included within the defined term "Operating and Maintenance Expenses" shall not constitute "Debt," (c) the face amount of all letters of credit issued for the account of the City and all drafts drawn thereunder to the extent issued in support of obligations which themselves are "Debt", (d) all obligations other than power purchase obligations under conditional sale or other title retention agreements relating to property purchased by the City and payable from, or secured in whole or in part by, the Trust Estate, (e) all liabilities secured by any lien on any part of the Trust Estate but not exceeding the fair market value of the Trust Estate securing such lien, whether or not such liabilities have been assumed by the City, (f) the aggregate amount required to be capitalized under leases under which the City is the lessee to the extent that the lease payments thereunder are payable from, or secured in whole or in part by, the Trust Estate, (g) the amount of all indebtedness, obligations or other liabilities of the City that are payable from, or secured in whole or in part by, the Trust Estate (other than power purchase obligations) to its counter parties in respect of interest rate and currency protection agreements (e.g., swaps, caps and collars) after netting out the amount of all indebtedness, obligations or other liabilities owed to the City by its counter parties in respect of such agreements (provided such net indebtedness, obligations and liabilities are greater than zero) and (h) all contingent obligations of the City in respect of any indebtedness, obligations or liabilities of any other Person of the type referred to in clauses (a) through (g) of this defmition. H-3 SF1 1317361v12 42379/276 "Default" means any condition or event which constitutes an Event of Default hereunder or which, with the giving of notice or lapse of time or both could reasonably be expected to, unless cured or waived, become an Event of Default. "Drawing" means a drawing made or permitted to be made pursuant to the terms of the Letter of Credit. "Expiration Drawing" means a drawing made under the Letter of Credit for the purpose of purchasing 2003A Bonds tendered or deemed tendered for purchase as a result of (a) the conversion of the interest rate mode of the 2003A Bonds to a mode other than a Daily Interest Rate or a Weekly Interest Rate; (b) the substitution of the Letter of Credit with an Alternate 2003 Credit Support Instrument; (c) the expiration of the Letter of Credit; or (d) the delivery to the Trustee of a Default Notice. "Obligations" means the City's obligation to reimburse all Drawings, to repay all Advances and Term Loans, to pay debt service on the Bank Bonds, to pay the principal, interest, fees, expenses, costs and other amounts owed to the Bank or the Bank's parent pursuant to the terms of the Reimbursement Agreement, any Related Document or any other document, instrument or agreement entered into by the City with or in favor of the Bank in connection herewith or therewith and to make net payments to the Bank or any affiliate of the Bank under the terms of any qualified swap agreement entered into by the City and the Bank or any affiliate of the Bank, together with all guaranties, covenants and duties owing by the City to the Bank of any kind or description, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. "Related Documents" means the Indenture of Trust relating to the 2003A Bonds, the First Supplemental Indenture of Trust relating to the 2003A Bonds, the 2003A Bonds, the remarketing agreement between the City and the Remarketing Agent for the 2003A Bonds, the contract of purchase relating to the 2003A Bonds, the custodian agreement between the Bank and the Tender Agent, any qualified swap agreement entered into by the City and the Bank or any affiliate of the Bank and the Official Statement. "Tender Drawing" means a drawing made under the Letter of Credit for the purpose of purchasing 2003A Bonds tendered for purchase at the option of the owner thereof and not. remarketed. Reimbursement of Drawings under Letters of Credit If the Bank honors a drawing made under the Letter of Credit, the City shall, or shall cause the Trustee to, reimburse the aggregate amount of such drawing to the Bank on the Business Day on which, such drawing is honored; provided, however, under the circumstances described below the Bank may makes advances or term loans to the City, the proceeds of which will be deemed to reimburse unpaid Tender Drawings and the Expiration Drawing. Unless the commitment of the Bank to make advances to the City has terminated (see "Reimbursement Agreement — Remedies"), if the Bank honors payment of any Tender Drawing or a drawing made under the Letter of Credit to fund a mandatory tender of 2003A Bonds upon a conversion of the interest rate mode of the 2003A Bonds from a Daily Interest Rate to a Weekly Interest Rate or vice versa and if the City does not reimburse the full amount of such drawing on the same Business Day, then, subject to the continued correctness of the representations and warranties of the City made in the Reimbursement Agreement and so long as no event has occurred and is continuing, or would result from the making of an advance to the City on such date in the amount of such drawing, which constitutes an Event of Default or a Default, the City shall be deemed to have requested, and the Bank shall be deemed to have made, an advance to the City on the date and in the amount of such drawing (each, an H-4 SF1 1317361v12 42379/276 "Advance"). Each Advance shall mature and the outstanding principal amount of such Advance shall be due and payable on the earliest to occur of (the "Advance Payment Date") (i) the date on which the Letter of Credit terminates in accordance with its terms and (ii) thirty-first day following the day on which such Advance is made. Interest shall accrue on each Advance from the date made to but excluding the applicable Advance Payment Date, at the rate(s) set forth in the Reimbursement Agreement, and shall be payable on the Advance Payment Date for such Advance and on each date of prepayment. Unless the commitment of the Bank to make term loans to the City has terminated (see "Reimbursement Agreement — Remedies") or unless the City has given prior notice to the Bank that it intends to pay in full an Advance on the Advance Payment Date therefor, subject to the continued correctness of the representations and warranties of the City made in the Reimbursement Agreement and so long as no event has occurred and is continuing, or would result from the making of a term loan to the City on such Advance Payment Date in the amount of the Advance (or portion thereof) to be repaid, which constitutes an Event of Default or a Default, on the applicable Advance Payment Date the City shall be deemed to have requested, and the Bank shall be deemed to have made, a term loan to the City on the date and in the amount of the Advance maturing on such date (each, an "Advance Term Loan'), which Advance Term Loan shall be deemed used to pay the maturing Advance. Unless the commitment of the Bank to make term loans to the City. has terminated (see "Reimbursement Agreement — Remedies") or unless the City has given prior notice to the Bank that it intends to pay in full the Expiration Drawing on the date the Bank honors payment thereof, subject to the continued correctness of the representations and warranties of the City made in the Reimbursement Agreement and so long as no event has occurred and is continuing, or would result from the making of a term loan to the City on the date and in the amount of the Expiration Drawing, which constitutes an Event of Default or a Default, on the date the Bank honors payment of the Expiration Drawing the City shall be deemed to have requested, and the Bank shall be deemed to have made, a term loan to the City on the date and in the amount of the Expiration Date (the "Expiration Term Loan"; the Expiration Term Loan and each Advance Term Loan are hereinafter referred to as a "Term Loan"), which Expiration Term Loan shall be deemed used to pay the unreimbursed Expiration Drawing. Unless the obligation of the City to pay all outstanding Term Loans has been accelerated (see "Reimbursement Agreement — Remedies"), payment of the principal of each Term Loan shall be made in twelve equal quarterly installments, commencing on the three month anniversary of the date on which a Term Loan is extended and continuing on each three month anniversary thereafter or, if any three month anniversary is not a Business Day, the next succeeding Business Day (each a "Term Loan Payment Date"). Interest shall accrue on each Term Loan from the date of incurrence thereof to and excluding each Term Loan Payment Date, at the rate(s) set forth in the Reimbursement Agreement, and shall be payable on each Term Loan Payment Date and on each date of prepayment Remarketing proceeds, redemption price and other payments, if any, received by the Bank in respect of Bank Bonds purchased with the proceeds of a drawing made under the Letter of Credit shall be applied against the Advance or Term Loan derived from such drawing. Payment of Other Amounts Pursuant to the Reimbursement Agreement, the City has agreed to pay certain fees to the Bank, to pay increased costs and compensate the Bank for loss of return in the event of certain changes in law and to indemnify to the Bank and certain other persons in certain circumstances. The City has also agreed to pay, in the manner set forth in the Reimbursement Agreement, interest (or, if interest is already accruing, interest at a higher interest rate) on amounts that are not paid when due. H-5 SFl 131736lvl2 42379/276 Obligations Secured on a Parity with 2003A Bonds Pursuant to the terms of the Reimbursement Agreement, the City has granted the Bank a security interest over the Net Revenues to secure the Obligation, which security interest is on a parity with the security interest of the Trustee over the Net Revenues that is contained in the Indenture. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2003 BONDS -Pledge Effected by the Indenture." Representations and Warranties of the City In connection with the execution and delivery of the Reimbursement Agreement, the City will make a number of representations and warranties, including, without limitation: the scope of its power and authority; the fact that no violation of law or agreement will result from the transactions contemplated by the Reimbursement Agreement; that all consents and authorizations necessary to enter into and perform the transactions contemplated by the Reimbursement Agreement have been obtained; the compliance by the City with certain statutes and orders; the enforceability of certain agreements; the absence of certain litigation; the fair presentation of certain financial information; the absence of certain material adverse changes; the absence of certain liabilities and obligations; the continued accuracy of certain disclosures made by the City to the Bank; as to environmental matters; the accuracy of certain representations that are incorporated by reference into the Reimbursement Agreement; as to the uses of the proceeds of the 2003A Bonds; that the obligations of the City under the Reimbursement Agreement are "Parity Obligations" and, as such, are on a parity with the 2003A Bonds; that the lien over the Net Revenues contemplated by the Reimbursement Agreement is a valid and enforceable pledge; lack of aware of certain changes in law; and that the City is not immune from actions brought in contract. Covenants and Agreements of the City In connection with the execution and delivery of the Reimbursement Agreement, the City will covenant to do or not to do certain things, including, without limitation: to provide certain information to the Bank ("Information Covenant"); to provide access to its books and records; to maintain its existence ("Existence Covenant"); to comply with laws, regulations and orders of governmental authorities; to comply with the provisions of the Reimbursement Agreement, the Related Documents and the Financial Documents entered into by the City; to comply with the provisions of certain covenants that are incorporated by reference into the Reimbursement Agreement (including the Rate Covenant) and not to amend or modify those incorporated covenants without first obtaining certain consents (the "Incorporated Provisions"); to maintain certain minimum ratings ("Ratings Covenant"); to maintain certain amounts of cash and cash equivalents on deposit in the City's Light and Power Department Fund on certain test dates ("Minimum Cash Covenant"); not to reimburse the City for out -of -pockets expenses incurred in connection with the Malburg Generating Station until the final approval of the California Energy Commission has been obtained and construction of the Malburg Generating Station has commenced ("Holdback Covenant'); subject to certain exceptions, not to issue, create, incur, assume or otherwise become or remain obligated in respect of, or permit to be outstanding, or suffer to exist, any obligation secured by the Trust Estate ("Debt Covenant"); subject to certain exceptions, not to amend, modify, supplement or terminate the Related Documents or the Construction Documents ("Key Documents Covenant"); to defend the lien over the Trust Estate; subject to certain exceptions, not to dismiss, replace or permit the resignation of the Trustee, the Tender Agent or the Remarketing Agent; as condition to the substitution of the Letter of Credit with an Alternate 2003 Credit Support Instrument, that the City or the issuer of the Alternate 2003 Credit Support Instrument provide funds on the date of substitution, which funds, when taken together with funds available to the Bank under the Indenture, will be sufficient to insure the payment of all Obligations due to the Bank hereunder; to cause the Trustee to return the Letter of Credit following a final drawing thereunder; not to change any reference to the Bank in any disclosure H-6 SFl 131736lvl2 42379/276 document related to the 2003A Bonds without first obtaining the consent of the Covenant'); to use the proceeds of the 2003A Bonds solely as permitted by the In Covenant"); not to optionally redeem the 2003A Bonds ("Optional Redemption Covl any action that would result in the Obligations not ranking at least pari passu in right i obligations of the City to the other creditors that are secured by the Trust Estate ("R not to assert any rights of immunity the City might have in lawsuits brought by the B, persons under the Reimbursement Agreement; and to execute other documents and reasonably necessary to effectuate the transactions contemplated by the Reimbursemen better assure and confirm to the Bank its rights, powers and remedies under t Agreement and the Related Documents. Events of Default The occurrence or existence of any of the following specified events shall "Event of Default": (1) The City shall fail to pay when due (i) the amount of any principal of any Advance or any Term Loan; (iii) the interest on any Advance or ar such default shall continue unremedied for 2 Business Days, or (iv) any other amount and such default shall continue unremedied for 5 days; or (2) The City shall (i) default in the due performance or obser Incorporated Provision (other than the incorporated provisions relating to accountin reports and payment of taxes) or the Existence Covenant, the Ratings Covenant, 1 Covenant, the Holdback Covenant, the Debt Covenant, the Key Documents Cover Covenant, the Proceeds Covenant, the Optional Redemption Covenant or the Ranking provisions of the Information Covenant; (ii) default in the due performance or observ. provisions of the Information Covenant and such default shall continue unremedied fa or (iii) default in the due performance or observance by it of the Incorporated Pr accounting records, financial reports and payment of taxes or any other term, cov contained in the Reimbursement Agreement (other than those referred to in para; clauses (i) or (ii) of this paragraph (2)) and such default shall continue unremedied for after written notice to the City by the Bank; or (3) Any representation, warranty, certification or statement made the City in the Reimbursement Agreement, any Related Document, any Construction certificate, financial statement or other document delivered pursuant to the Reimbu shall prove when made or deemed made, in the reasonable judgment of the Bank, to I and misleading in any material respect; or (4) The City shall (i) default in any payment of any Debt beyond (not to exceed 30 days), if any, provided in the instrument or agreement under wh created, or (ii) default in the observance or performance of any agreement or condit Debt contained in any instrument or agreement evidencing, securing or relating thereto. shall occur or condition exist, the effect of which default or other event or conditioi permit the holder or holders of any Debt (or a trustee or agent on behalf of such he cause, with the giving of notice if required, such Debt to become due prior to its stag any Debt shall be declared to be due and payable, or required to be prepaid other t scheduled required prepayment, prior to the stated maturity thereof, or H-7 SF1 131736lvl2 42379/276 ank ("Disclosure enture ("Proceeds t"); not to take f payment with all inking Covenant"); Lnk or certain other take other actions t Agreement and to ie Reimbursement each constitute an Drawing; (ii) the V Term Loan, and )ayable hereunder, ance by it of any records, financial le Minimum Cash ant, the Disclosure ;ovenant or certain ice by it of certain a period of 5 days; visions relating to nant or agreement raph (1) above or t period of 30 days deemed made by ;ument, or in any ment Agreement been inaccurate he period of grace ;h such Debt was on relating to any or any other event is to cause, or to der or holders) to d maturity; or (iii) ian by a regularly (5) The City shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of itself or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally, or in the reasonable judgment of the Bank be unable, to pay its debts as they become due, or shall take any action to authorize any of the foregoing; or (6) An involuntary case or other proceeding shall be commenced against the City seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and such case or proceeding is not controverted within 30 days and dismissed within 90 days; or an order for relief shall be entered against the City under the federal bankruptcy laws; or (7) A court of competent jurisdiction shall enter a final and non -appealable judgment, order or decree declaring (i) the Indenture of Trust relating to the 2003A Bonds; (ii) the First Supplemental Indenture of Trust relating to the 2003A Bonds or (iii) any obligation of the City contained in the Reimbursement Agreement to be invalid, not binding or unenforceable against the City; or (8) A moratorium shall have been declared or announced by a governmental authority (whether or not in writing) with respect to any Debt of the City; or (9) A judgment or order for the payment of money in excess of $1,000,000 and for which insurance proceeds shall not be available shall be rendered against the City and such judgment or order shall continue unstayed, unbonded or unsatisfied for a period of 60 days; or (10) Any event which materially and adversely affects the financial condition of the Electric System or the ability of the City to observe and perform its obligations under the Reimbursement Agreement and the Related Documents and Construction Documents to which it is a party shall have occurred and be continuing; or (11) An "event of default" shall have occurred under any of the Related Documents or Construction Documents. Rights and Remedies Upon the occurrence of an Event of Default the Bank, in its sole discretion, may do any, none or all of the following: (1) Deliver a written notice to the Trustee requiring the Trustee to (i) cause a mandatory purchase of all Outstanding 2003A Bonds pursuant and (ii) submit a final Drawing under the Letter of Credit to pay the purchase price of such 2003A Bonds upon their mandatory purchase; or (2) The Bank may by written notice to the City take any or all of the following actions, without prejudice to the rights of the Bank to enforce its claims against the City (provided, that, if an Event of Default specified in paragraph (5) or paragraph (6) under the caption "Reimbursement Agreement — Event of Default" shall occur, the result which would occur upon the giving of written notice by the Bank to the City as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the commitment of the Bank to make Advances and Term H-8 SF1 1317361v12 42379/276 7 Loans terminated, whereupon such commitment shall forthwith terminate immediately; and (ii) declare the principal of and any accrued interest in respect of all Advances, all Term Loans and all other Obligations (other than the payment of the principal of and interest on Bank Bonds) owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the City; or (3) Exercise any rights and remedies available to the Bank at law, equity or under any Related Document, including, without limitation, directing the Trustee to accelerate the payment of the principal of and interest on the 2003A Bonds to the extent permitted by the Indenture. H-9 SF1 1317361vl2 42379/276 RESOLUTION NO. 8151 Documents to be presented per Section 2: Swap Agreement (ISDA Master Agreement, Schedule to Master Agreement and Credit Support Annex) (Local Currency —Single Jurisdiction) ISDAS International Swap Dealers Association, Inc. MASTER AGREEMENT Dated as of BANK OF AMERICA, N.A. and CITY OF VERNON have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows:- 1. Interpretation (a) Definitions. The terms defined in Section 12 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. Copyright C 1992 by International Swap Dealers Association, Inc. (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of branches or offices through which the parties make and receive payments or deliveries. (d) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other parry on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. Representations Each parry represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that: — (a) Basic Representations. (i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) No isolation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; ISDA®1992 (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. 4. Agreements Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: — (a) Furnish Specified Information. It will deliver to the other party any forms, documents or certificates specified in the Schedule or any Confirmation by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. S. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a parry or, if applicable, any Credit Support Provider of such parry or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:— (i) Failure to Pay or Deliver. Failure by the parry to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)) to be complied with or performed by the parry in accordance with this Agreement if ISDA®1992 such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) Misrepresentation. A representation made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) Cross Default. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: — (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its 4 ISDAO 1992 winding -up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding -up or liquidation or (13) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding -up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets, or has a distress, execution, attachment, sequestration or other legal process levied enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer: — (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (ii) below or an Additional Termination Event if the event is specified pursuant to (iii) below: — (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):— (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ('X'), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or ISDA®1992 (iii) Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non -defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Two Affected Parties. If an Illegality under section 5(b)(i)(1) occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iii) Right to Terminate. I£— (1) an agreement under Section 6(b)(ii) has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality other than that referred to in Section 6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs, either party in the case of an Illegality, any Affected Party in the case of an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. ISDA®1992 (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(d) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment), from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default:— (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non -defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non -defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non -defaulting Party over (B) the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non -defaulting Party, if a positive number, the Non -defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non -defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non -defaulting Party less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non -defaulting Party; if it is a negative number, the Non -defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non -defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non -defaulting Party; if it is a negative ISDA®1992 number, the Non -defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4). if Loss applies, except that, in either case, references to the Defaulting Party and to the Non -defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties: — (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Unpaid Amounts owing to X less (II) the Unpaid Amounts owing to Y; and (13) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y") If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre -Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre -estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. Transfer Neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: — (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void ISDA®1992 8. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) Amendments No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) Survival of Obligations Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 9. Expenses A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 10. Notices (a) Effectiveness Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated: — (i) if in writing and delivered in person or by courier, on the date it is delivered; (h) if sent by telex, on the date the recipient's answerback is received; ISDA®1992 (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) Change of Addresses. Either parry may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 11. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably:— (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its Iassets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwisebe entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 12. Definitions As used in this Agreement: — "Additional Termination Event" has the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). 10 ISDA®1992 "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control' of any entity or person means ownership of a majority of the voting power of the entity or person. "Applicable Rate" means: — (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either parry from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non -defaulting Party, the Non -default Rate; and (d) in all other cases, the Termination Rate. "consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. "Credit Support Provider" has the meaning specified in the Schedule. "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "Defaulting Party" has the meaning specified in Section 6(a). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iii). "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Illegality" has the meaning specified in Section 5(b). "law" includes any treaty, law, rule or regulation and "lawful" and "unlawful" will be construed accordingly. "Local Business Day" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section. 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain 11 ISDA®1992 resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 9. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "Market Quotation" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market -makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such parry (taking into account any existing Credit Support Document with respect to the obligations of such parry) and the quoting Reference Market -maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market -maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market -maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the parry obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "Non -default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non -defaulting Party (as certified by it) if it were to fund the relevant amount. "Non -defaulting Party" has the meaning specified in Section 6(a). "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Reference Market -makers" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "Scheduled Payment Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Set-off" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under 12 ISDA®1992 this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of. — (a) the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such parry's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "Specified Entity" has the meaning specified in the Schedule. "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross - currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "Terminated Transactions" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "Termination Event" means an Illegality or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined 13 ISDA®1992 by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. BANK OF AMERICA, N.A. By: ................................ Name: Roger H. Heintzelman Title: Principal Date: CITY OF VERNON By: ................................ Name: Title: Date: 14 ISDA®1992 DRAFT (Local Currency— Single Jurisdiction) ISDAO International Swap Dealers Association, Inc. U.S. MUNICIPAL COUNTERPARTY SCHEDULE to the Master Agreement dated as of Between BANK OF AMERICA, N.A. and CITY OF VERNON ("Party A„) ("Party B„) PART 1: Termination Provisions (a) "Specified Entity" means in relation to Party A for the purpose of Section 5(a)(v) (Default under Specified Transaction), none; Section 5(a)(vi) (Cross Default), none; Section 5(a)(vii) (Bankruptcy), none; and Section 5(b)(ii) (Credit Event Upon Merger), none; in relation to Party B for the purpose of: - Section 5(a)(v) (Default under Specified Transaction) none; Section 5(a)(vi) (Cross Default), none; Section 5(a)(vii) (Bankruptcy), none; and Section 5(b)(ii) (Credit Event Upon Merger), none. (b) "Specified Transaction" will have the meaning specified in Section 12. (c) The "Cross Default" provisions of Section 5(a)(vi) (as amended in Part 5(f)) will apply to Party A and will apply to Party B. In connection therewith: 1 DRAFT "Specified Indebtedness", with respect to Party A, will have the meaning specified in Section 12, except that such term shall not include obligations in respect of deposits received in the ordinary course of a parry's banking business, and with respect to Parry B, will mean Debt, as defined in the Credit Agreement. "Threshold Amount" means, with respect to Party A, an amount equal to three percent (3%) of the Shareholders' Equity of Bank of America Corporation and, with respect to Party B, any amount. "Shareholders' Equity" means, with respect to Parry A, at any time, the sum (as shown in its most recent annual audited financial statements) of (i) its capital stock (including preferred stock) outstanding, taken at par value, (ii) its capital surplus and (iii) its retained earnings, minus (iv) treasury stock, each to be determined in accordance with generally accepted accounting principles. (d) The following new Section 5(a)(ix) is hereby added to the Agreement: "(ix) Default under Covered Indenture. With respect to the Government Entity, any default (howsoever defined) under the Covered Indenture shall be an Event of Default under this Agreement." (e) The "Credit Event Upon Merger" provisions of Section 5(b)(10 will apply to Parry A will apply to Parry B. (f) The "Automatic Early Termination " provision of Section 6(a) will not apply to Party A will apply to Party B. (g) Payments on Early Termination. For the purpose of Section 6(e): (i) Market Quotation will apply. (ii) The Second Method will apply. (h) "Additional Termination Event. " Additional Termination Event will apply. The following events shall constitute Additional Termination Events hereunder: (i) If, without the consent of Party A, the Covered Indenture is amended, modifed, or supplemented in such a way as to adversely affect any of Parry A's rights or obligations under this Agreement or modify the obligations of, or impact the ability of Party B to fully perform any of Parry B's obligations under, this Agreement. Parry B shall be the Affected Parry for purposes of this Additional Termination Event. (ii) If a Ratings Event (as defined below) occurs with respect to Parry B. For purpose of this Part 1(h), "Ratings Event" shall occur with respect to Party B if the Bonds (as defined in the Covered Indenture) cease to be rated, on an unenhanced basis, at least `Baa3" by Moody's Investor Services, Inc. or any successor thereto ("Moody's") or "BBB-" by Standard and Poor's Ratings Group, a division of The McGraw Hill Companies, Inc. or 2 DRAFT any successor thereto (S&P). Party B shall be the Affected Parry for purposes of this Additional Termination Event. (iii) If a Ratings Event (as defined below) occurs with respect to Parry A. For purpose of this Part 1(h), "Ratings Event" shall occur with respect to Party A if the long-term certificates of deposit of Party A cease to be rated, on an unenhanced basis, at least "BaaY by Moody's, "BBB-" by S&P, or "BBB-" by Fitch, in each case while S&P, Moody's and Fitch are in their current business. Party A shall be the Affected Party for purposes of this Additional Termination Event. (i) Events of Default. (i) Bankruptcy. Clause (6) of Section 5(a)(vii) of this Agreement is hereby amended to read in its entirety as follows: "(6)(A) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets or (B) in the case of a Government Entity, any Credit Support Provider of such Government Entity or any applicable Specified Entity of such Government Entity, (I) there shall be appointed or designated with respect to it, an entity such as an organization, board, commission, authority, agency or body to monitor, review, oversee, recommend or declare a financial emergency or similar state of financial distress with respect to it or (II) there shall be declared or introduced or proposed for considerations by it or by any legislative or regulatory body with competent jurisdiction over it, the existence of a state of financial emergency or similar state of financial distress in respect of it;". (ii) Merger Without Assumption. Section 5(a)(viii) of this Agreement is hereby amended to read in its entirety as follows: "(viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity (or, without limiting the foregoing, if such party is a Government Entity, an entity such as an organization, board, commission, authority, agency or body succeeds to the principal functions of, or powers and duties granted to, such party or any Credit Support Provider of such parry) and, at the time of such consolidation, amalgamation, merger, transfer or succession: (1) the resulting, surviving, transferee or successor entity fails to assume all the obligations of such parry or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving, transferee or successor entity of its obligations under this Agreement." 0) Termination Events. Section 5(b)(ii) of this Agreement is hereby amended to read in its entirety as follows: "(ii) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the parry, such parry ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity (or, without limiting the foregoing, if X is a Government Entity, an entity such as an organization, board, commission, authority, agency or body succeeds to the principal functions of, or powers and duties granted to, X, any Credit Support Provider of X or any Specified Entity of X) and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving, transferee or successor entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or". PART 2: Agreement to Deliver Documents For the purpose of Section 4(a) of this Agreement, each party agrees to deliver the following documents: - Party Form/Document/Certificate Date by which to be Covered by required to delivered Section 3(d) deliver Representation document Parry B Annual Report of Party B and of As soon as available Yes any Credit Support Provider and in any event thereof containing audited, within 120 days after consolidated financial statements the end of each fiscal certified by independent certified year of Parry B and of public accountants and prepared in the Credit Support accordance with generally accepted Provider accounting principles in the country in which such party and such Credit Support Provider is organized Party B Quarterly Financial Statements of Upon Request Yes Party B and any Credit Support Provider thereof containing unaudited, consolidated financial statements of such party's fiscal. quarter prepared in accordance with generally accepted accounting principles in the country in which such party and such Credit Support Provider is organized 4 DRAFT Party required to deliver document Form/Document/Certificate Date by which to be delivered Party B Credit Support Document(s) Upon execution and delivery of this Agreement Party B Opinion of Counsel satisfactory to Upon execution and Party A substantially in the form of delivery of this Exhibit I hereto. Agreement Party A and Certified copies of all corporate Upon execution and Party B authorizations and any other delivery of this documents with respect to the Agreement execution, delivery and performance of this Agreement and any Credit Support Document, as applicable. Party A and Certificate of incumbency and/or Upon execution and Party B specimen signatures of individuals delivery of this executing this Agreement, any Agreement and Credit Support Document, and thereafter upon Confirmations. request of the other party Party B Executed copy of the Covered Upon execution and Indenture delivery of this Agreement Party B Copy of any amendment, Upon execution and modification or supplement to the delivery of such Covered Indenture which may amendment, adversely affect Party A modification or supplement PART 3: Miscellaneous (a) Address for Notices. For the purpose of Section 10(a) of this Agreement: - Address for notice or communications to Party A: Bank of America, N.A. Covered by Section 3(d) Representation No MM Yes Yes Yes Yes 5 1�. Sears Tower 233 South Wacker Drive, Suite 2800 Chicago, IL 60606 Attention: Swap Operations with a copy to: Bank of America, N.A. 100 N. Tryon St., NC1-007-13-01 Charlotte, North Carolina. 28255 Attention: Capital Markets Documentation Facsimile No.: 704-386-4113 Address for financial statements to Party A: Bank of America, N.A. Mail Code: CA9-706-08-06 555 S. Flower St. Los Angeles, CA 90071-2385 Attention: Michael C. Jones, Vice President Phone: 213.345.6906 Fax: 213.345.0213 Address for notice or communications to Party B: City of Vernon 4305 Santa Fe Avenue Vernon, CA 90058 Attention: Kenneth J. DeDario, Director of Utilities Telephone No.: 323-583-8811 Facsimile No.: 323-826-1425 (b) Calculation Agent. The Calculation Agent is Party A. (c) Credit Support Document. Details of any Credit Support Document: Each of the following, as amended, supplemented, modified, renewed, replaced, consolidated, substituted or extended from time to time, is a "Credit Support Document": In relation to Party B, the Covered Indenture, and in relation to Party A and Party B, the ISDA Credit Support Annex in the form annexed hereto. Party B agrees that the security interests in collateral granted to Party A under the foregoing Credit Support Documents shall secure the obligations of Party B to Party A under this Agreement. (d) Credit Support Provider. Credit Support Provider means in relation to Party A: Not applicable. 6 (e) Credit Support Provider means in relation to Parry B: Not applicable. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York (without reference to its conflict of laws doctrine). (f) Netting of Payments. All amounts payable on the same date, in the same currency and in respect of the same Transaction shall be netted in accordance with Section 2(c) of this Agreement. The election contained in the last paragraph of Section 2(c) of this Agreement shall not apply for the purposes of this Agreement. (g) "Affiliate" will have the meaning specified in Section 12 of this Agreement. (h) "Covered indenture" means collectively 1) the Indenture of Trust, as supplemented by a First Supplemental Indenture of Trust and Second Supplemental Indenture of Trust, each dated as of March 1, 2003, and each between Party B and BNY Western Trust Company, as trustee, as amended or further supplemented from time to time and 2) the Credit Agreement. (i) "Covered Indenture Incorporation Date" means the date hereof. 0) "Government Entity" means Party B. (k) "Credit Agreement" means the Reimbursement Agreement dated as of March 1, 2003 between Party B and Party A relating to $50,000,000 City of Vernon Malburg Generating Station Project Electric System Revenue Bonds, 2003 Series A (as amended, restated, extended, supplemented or otherwise modified in writing from time to time). PART 4: Municipal Counteryarty Provisions (a) Obligations. Section 2(a)(iii) of this Agreement is hereby amended to read in its entirety as follows: "(iii) Each obligation of each parry under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default, Potential Event of Default or Incipient Illegality with respect to the other parry has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement." (b) Representations. (i) The introductory clause of Section 3 of this Agreement is hereby amended to read in its entirety as follows: "Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(a) and 3(e), at all times until the termination of this Agreement) that:". (ii) Section 3(a)(ii) of this Agreement is hereby amended to read in its entirety as follows: 7 "(ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a parry, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action and made all necessary determinations and findings to authorize such execution, delivery and performance;" (iii) Section 3(b) of this Agreement is hereby amended to read in its entirety as follows: "(b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Incipient Illegality (in the case of a Government Entity) or Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party." (iv) Section 3 of this Agreement is hereby amended by adding the following subsection "(e)" thereto, which subsection shall only apply to the Government Entity: "(e) Non -Speculation. This Agreement has been, and each Transaction hereunder will be (and, if applicable, has been), entered into for purposes of managing its borrowings or investments and not for purposes of speculation." (v) Section 3 of this Agreement is hereby amended by adding the following subsection "(f)" thereto: "(f) No Immunity. It is not entitled to claim immunity on the grounds of sovereignty or other similar grounds with respect to itself or its revenues or assets (irrespective of their use or intended use) from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) or (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be made subject to in any Proceedings (as defined in Section II(b)) in the courts of any jurisdiction and no such immunity (whether or not claimed) may be attributed to such party or its revenues or assets." (c) Agreements. (i) The introductory clause of Section 4 of this Agreement is hereby amended to read in its entirety as follows: "Each party agrees with the other (or, in the case of Section 4(d) and (e), the Government Entity agrees with the other party) that, so long as either parry has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: it (ii) Section 4 of this Agreement is hereby amended by adding the following subsections "(d)" and "(e)" thereto: (d) "(d) Compliance with Covered Indenture, The Government Entity will observe, perform and fulfill each provision in the Covered Indenture applicable to such Government Entity in effect on the Covered Indenture Incorporation Date, as any of those provisions may be amended, supplemented or modified for purposes of this Agreement with the prior written consent of the other party hereto (the "Incorporated Provisions"), with the effect that such other party hereto will have the benefit of each of the Incorporated Provisions (including without limitation, covenants, right to consent to certain actions subject to consent under the Covered Indenture and delivery of financial statements and other notices and information). In the event the Covered Indenture ceases to be in effect prior to the termination of this Agreement, the Incorporated Provisions (other than those provisions requiring payments in respect of bonds, notes, warrants or other similar instruments issued under the Covered Indenture) will remain in full force and effect for purposes of this Agreement as though set forth herein until such date on which all of the obligations of the Government Entity under this Agreement and any obligations of the Government Entity or any Credit Support Provider of the Government Entity under a Credit Support Document have been fully satisfied. The Incorporated Provisions are hereby incorporated by reference and made a part of this Agreement to the same extent as if such provisions were set forth herein. For purposes of this Agreement, the Incorporated Provisions shall be construed as though (i) all references therein to any parry making loans, extensions of credit or financial accommodations thereunder or commitments therefor (the "Financings") were to the other party hereto and (ii) to the extent that such Incorporated Provisions are conditioned on or relate to the existence of such Financings or the Government Entity having any obligations in connection therewith, all references to such Financings or obligations were to the obligations of the Government Entity under this Agreement. Any amendment, supplement, modification or waiver of any of the Incorporated Provisions without the prior written consent of the other party hereto shall have no force and effect with respect to this Agreement. Any amendment, supplement or modification for which such consent is obtained shall be part of the Incorporated Provisions for purposes of this Agreement. (e) Notice of Incipient Illegality. If an Incipient Illegality occurs, the Government Entity will, promptly upon becoming aware of it, notify the other parry, specifying the nature of that Incipient Illegality and will also give such other information about that Incipient Illegality as the other parry may reasonably require." Jurisdiction. Section 11(b) of this Agreement is hereby amended to read in its entirety as follows: "(b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ('Proceedings'), each party irrevocably: (i) submits, to the fullest extent permitted by applicable law, to the non- exclusive jurisdiction of each of the courts of the State of New York, the United States District Court located in the Borough of Manhattan in New York City, the courts of the state in which the Government Entity or the other parry's principal executive offices are located and the United States District Court with jurisdiction over the location of the Government Entity or the other party's principal executive offices; and (ii) waives, to the fullest extent permitted by applicable law, (1) any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, (2) any claim that such 1'• Proceedings have been brought in an inconvenient forum and (3) the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such parry. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction." (e) Definitions. Section 12 of this Agreement is hereby amended to add the following definitions in their appropriate alphabetical order: " 'Covered Indenture' has the meaning specified in the Schedule." " 'Covered Indenture Incorporation Date' has the meaning specified in the Schedule." " 'Credit Agreement' has the meaning specified in the Schedule." " 'Government Entity' has the meaning specified in the Schedule." " 'Incipient Illegality' means (a) the enactment by any legislative body with competent jurisdiction over a Government Entity of legislation which, if adopted as law, would render unlawful (i) the performance by such Government Entity of any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of a Transaction or the compliance by such Government Entity with any other material provision of this Agreement relating to such Transaction or (ii) the performance by a Government Entity or a Credit Support Provider of such Government Entity of any contingent or other obligation which the Government Entity (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction, (b) any assertion in any proceeding, forum or action by a Government Entity, in respect of such Government Entity or in respect of any entity located or organized under the laws of the state in which such Government Entity is located to the effect that performance under this Agreement or similar agreements is unlawful or (c) the occurrence with respect to a Government Entity or any Credit Support Provider of such Government Entity of any event that constitutes an. Illegality." PART 5: Other Provisions (a) Set-off. Any amount (the 'Early Termination Amount") payable to one parry (the Payee) by the other party (the Payer) under Section 6(e), in circumstances where there is a Defaulting Party or one Affected Parry in the case where a Termination Event under Section 5(b)(ii) or (iii) has occurred, will, at the option of the parry ("X") other than the Defaulting Parry or the Affected Party (and without prior notice to the Defaulting Parry or the Affected Party), be reduced by its set-off against any amount(s) (the "Other Agreement Amount") payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement(s) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favor of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so set-off). X will give notice to the other party of any set-off effected under this Part 5(a). 10 DRAFT For this purpose, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. If an obligation is unascertained, X may in good faith estimate that obligation and set-off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this Part 5(a) shall be effective to create a charge or other security interest. This Part 5(a) shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise). (b) Delivery of Confirmations. For each Transaction entered into hereunder, Party A shall promptly send to Party B a Confirmation via facsimile transmission. Party B agrees to respond to such Confirmation within two (2) Local Business Days, either confirming agreement thereto or requesting a correction of any errors) contained therein. Failure by Party A to send a Confirmation or of Party B to respond within such period shall not affect the validity or enforceability of such Transaction. Absent manifest error, there shall be a presumption that the terms contained in such Confirmation are the terms of the Transaction. (c) Bankruptcy. Section 5(a)(vii)(3) of this Agreement is hereby amended by the substitution of the following therefor: "(3) sends a notice convening a meeting to propose a voluntary arrangement of creditors, or any class thereof, or makes a general assignment, arrangement or composition with or for the benefit of its creditors, or any class thereof;" (d) Notice by Facsimile Transmission. Section 10(a) is hereby amended by deleting the parenthetical "(except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system)". (e) Recording of Conversations. Each party to this Agreement acknowledges and agrees to the tape recording of conversations between trading and marketing personnel of the parties to this Agreement whether by one or other or both of the parties or their agents, and that any such tape recordings may be submitted in evidence in any proceedings relating to the Agreement. (f) Cross Default. Section 5(a)(vi) of this Agreement is hereby amended adding the following after the semicolon at the end thereof: "provided, however, that notwithstanding the foregoing (but subject to any provision to the contrary contained in any such agreement or instrument), an Event of Default shall not occur under either (1) or (2) above if the default, event of default or other similar condition or event referred to in (1) or the failure to pay referred to in (2) is caused not (even in part) by the unavailability of funds but is caused solely due to a technical or administrative error which has been remedied within three Local Business Days after notice of such failure is given to the party." 11 (g) Section 3(a) of this Agreement is amended by (i) deleting the word "and" at the end of clause (iv); (ii) deleting the period at the end of clause (v) and inserting therein "; and " ; and (iii) by inserting the following additional representation: "(vi) Eligible Contract Participant. Each party represents to the other party (which representation will be deemed to be repeated by each party on each date on which a Transaction is entered into) that it is an "eligible contract participant" as defined in Section la(12) of the U.S. Commodity Exchange Act, 7 U.S.C. Section la(12)," (h) Additional Representations. Section 3 is revised so as to add the following Section (e) at the end thereof: "(e) Relationship Between Parties. Each party will be deemed to represent to the other party on the date on which it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction): (i) Non -Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other parry shall be deemed to be an assurance or guarantee as to the expected results of that Transaction. (ii) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. (iii) Status of Parties. The other party is not acting as a fiduciary for or an adviser to it in respect of that Transaction." (i) Waiver of Right to Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 0) Qualified Swap Agreement. Parry B acknowledges and agrees that, pursuant to the Covered Indenture: (i) this Agreement constitutes a Qualified Swap Agreement and a Public Finance Contract, (ii) all of Party B's obligations to make Net Payments hereunder constitute Parity Obligations, and (iii) all of Party B's obligations to make Termination Payments hereunder constitute ' '' `'`" `e '.` .'li''as as each such term is defined in the Covered Indenture. Ccxr.�tE ...g (k) Security and Source of Payment of Party B's Obligations. Notwithstanding any other provision of the Master Agreement, the Schedule, or Confirmation, Parry B's obligation to make Net Payments under this Agreement and each Transaction hereunder shall be secured by a pledge of 12 DRAFT and lien and charge upon the Net Revenues and other security as and to the extent provided in the Covered Indenture, on parity with the lien granted to the owners of the Bonds, and Parry B's obligation to make Termination Payments under this Agreement and each Transaction hereunder shall be secured by a pledge of and lien and charge upon the Net Revenues and other security as and to the extent provided in the Covered Indenture, on a basis that is junior and subordinate to the Bonds and Parity Obligations. Parry B covenants not to create or cause to be created or permit the creation of any lien or charge upon the Net Revenues senior to or on parity with the lien granted to Party A under this Agreement. For purposes of subsection (k) of Section 5, capitalized terms used but not defined in this Agreement shall have the meanings ascribed to them in the Covered Indenture. (1) Additional Covenant of Party B. Party B hereby covenants that it shall not terminate any Transaction hereunder unless it has funds immediately available to pay any and all termination payments owed by it upon such termination. Accepted and agreed: BANK OF AMERICA, N.A. By: ................................ Name: Roger H. Heintzelman Title: Principal CITY OF VERNON By: ................................ Name: Title: 13 DRAFT EXHIBIT I , 200 Bank of America, N.A. 100 N. Tryon Street NC 1-007-13-01 Charlotte, NC 28255 Ladies and Gentlemen: I have acted as counsel to [ ] (the "Counterparty") in connection with its execution and delivery of the ISDA Master Agreement and the ISDA Schedule to the Master Agreement, each dated , 200_ (collectively, the "Agreement"), between Bank of America, N.A. and the Counterparty. Capitalized terms used but not defined herein shall have their respective meanings as set forth in the Agreement. I have examined an executed copy of the Agreement and such other documents, instruments and certificates as I have deemed necessary or appropriate for the opinions expressed herein. I have assumed, without independent verification, (i) the genuineness of all signatures, other than the signatures of persons signing on behalf of the Counterparty, (ii) the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as certified, conformed or photostatic copies, and (m) the truth, accuracy and completeness of the factual matters contained in the representations and warranties set forth in the Agreement. Although the Agreement refers to a procedure whereby the parties might from time to time enter into Transactions governed by the Agreement, I express no opinion regarding any Transactions or any Confirmations thereof or the Agreement as supplemented by any Transactions or Confirmations thereof. Based on the foregoing, I am of the opinion that: The Counterparty is a duly organized, validly existing and in good standing under the laws of the , and has full power and authority to execute and deliver the Agreement and to perform its obligations thereunder. The execution, delivery and performance by the Counterparty of the Agreement has been duly authorized by all necessary organizational action of the Counterparty and do not conflict with or result in a breach of the Counterparty's organizational documents. No authorization, consent, approval, exemption or license from, or filing of any registration with, any federal or state governmental authority is required to be obtained or made by the Counterparty as a condition to its execution and delivery of the Agreement, or to the performance by it of its obligations thereunder. 4. To my actual knowledge without independent investigation, the execution, delivery and performance by the Counterparty of the Agreement do not violate, conflict with, or result in a 14 DRAFT breach of, any law, rule or regulation applicable to the Counterparty, or any material contractual restriction, order or judgment binding on the Counterparty or its assets. 5. The Counterparty has executed and delivered the Agreement, and assuming that the laws of the State of are the same as the laws of the State of New York, such Agreement constitutes the legal, valid and binding obligation of the Counterparty, enforceable against the Counterparty in accordance with its terms, subject to the qualification that the enforceability of such Agreement may be limited by bankruptcy, reorganization, insolvency, moratorium and other similar laws of general application affecting the enforcement of creditor's rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 6. The Counterparty is not entitled to claim immunity on the grounds of sovereignty or other similar grounds with respect to itself or its revenues or assets (irrespective of their use or intended use) from (i) suit, (ii) jurisdiction of any court, (Ili) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) or (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be made subject to in any Proceedings (as defined in Section II(b) of the Agreement) in the courts of any jurisdiction and no such immunity (whether or not claimed) may be attributed to such party or its revenues or assets. 7. [Add statement regarding Security and Source of Payments] The opinions expressed herein are limited to matters concerning the federal laws of the United States of America and the laws of the State of [ . I express no opinion as to the laws of any other jurisdiction. This opinion has been furnished to you for your use in connection with the Agreement and may not be relied upon by any other person, or by you for any other purpose, without my written consent. This opinion is given as of the date hereof, and I disclaim any obligation to advise you of any change of law that occurs, or any facts of which I become aware, after the date of this opinion. The opinions expressed herein are limited to those matters expressly set forth, and no opinion is to be inferred or implied beyond the matters expressly so stated. Very truly yours, 15 DRAFT (Bilateral Form) (ISDA Agreements Subject to New York Law Only) ISDA. International Swap Dealers Association, Inc. CREDIT SUPPORT ANNEX to the Schedule to the MASTER AGREEMENT dated as of ......... between BANK OF AMERICA, N.A. and CITY OF VERNON ("Patty A„) ("Party B") This Annex supplements, forms part of, and is subject to, the above -referenced Agreement, is part of its Schedule and is a Credit Support Document under this Agreement with respect to each party. Accordingly, the parties agree as follows: Paragraph 1. Interpretation (a) Definitions and Inconsistency. Capitalized terms not otherwise defined herein or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 12, and all references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will prevail, and in the event of any inconsistency between Paragraph 13 and the other provisions of this Annex, Paragraph 13 will prevail. (b) Secured Party and Pledgor. All references in this Annex to the "Secured Party" will be to either party when acting in that capacity and all corresponding references to the "Pledgor" will be to the other party when acting in that capacity; provided, however, that if Other Posted Support is held by a party to this Annex, all references herein to that party as the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary, thereof and will not subject that support or that party as the beneficiary thereof to provisions of law generally relating to security interests and secured parties. Paragraph 2. Security Interest Each party, as the Pledgor, hereby pledges to the other party, as the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either party. DRAFT Copyright © 1994 by International Swaps and Derivatives Association, Inc. Paragraph 3. Credit Support Obligations (a) Delivery Amount. Subject to Paragraphs 4 and 5, upon a demand made by the Secured Party on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount, then the Pledgor will Transfer to the Secured Party Eligible Credit Support having a Value as of the date of Transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Delivery Amount" applicable to the Pledgor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party. (b) Return Amount. Subject to Paragraphs 4 and 5, upon a demand made by the Pledgor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Secured Parry's Minimum Transfer Amount, then the Secured Party will Transfer to the Pledgor Posted Credit Support specified by the Pledgor in that demand having a Value as of the date of Transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Return Amount" applicable to the Secured Party for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party exceeds (ii) the Credit Support Amount. "Credit Support Amount" means, unless otherwise specified in Paragraph 13, for any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus (ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any, minus (iii) all Independent Amounts applicable to the Secured Party, if any, minus (iv) the Pledgor's Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero. Paragraph 4. Conditions Precedent, Transfer Timing, Calculations and Substitutions (a) Conditions Precedent. Each Transfer obligation of the Pledgor under Paragraphs 3(a) and 5 and of the Secured Party under Paragraphs 3(b), 4(d)(ii), 5 and 6(d) is subject to the conditions precedent that: (i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and (ii) no Early Termination Date for which any unsatisfied payment obligations exist has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the other party. (b) Transfer Timing. Subject to Paragraphs 4(a) and 5 and unless otherwise specified, if a demand for the Transfer of Eligible Credit Support or Posted Credit Support is made by the Notification Time, then the relevant Transfer will be made not later than the close of business on the next Local Business Day; if a demand is made after the Notification Time, then the relevant Transfer will be made not later than the close of business on the 2 ISDA 01994 DRAFT second Local Business Day thereafter. (c) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or in the case of Paragraph 6(d), following the date of calculation). (d) Substitutions. (i) Unless otherwise specified in Paragraph 13, upon notice to the Secured Party specifying the items of Posted Credit Support to be exchanged, the Pledgor may, on any Local Business Day, Transfer to the Secured Party substitute Eligible Credit Support (the "Substitute Credit Support"); and (ii) subject to Paragraph 4(a), the Secured Party will Transfer to the Pledgor the items of Posted Credit Support specified by the Pledgor in its notice not later than the Local Business Day following the date on which the Secured Party receives the Substitute Credit Support, unless otherwise specified in Paragraph 13 (the "Substitution Date"); provided that the Secured Party only will be obligated to Transfer Posted Credit Support with a Value as of the date of Transfer of that Posted Credit Support equal to the Value as of that date of the Substitute Credit Support. Paragraph 5. Dispute Resolution If a party (a "Disputing Party") disputes (I) the Valuation Agent's calculation of a Delivery Amount or a Return Amount or (II) the Value of any Transfer of Eligible Credit Support or Posted Credit Support, then (1) the Disputing Party will notify the Valuation Agent (if the Valuation Agent is not the Disputing Party) and the other party (if the Valuation Agent is not that other party) not later than the close of business on the Local Business Day following M the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (2) subject to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to the other party not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties will consult with each other in an attempt to resolve the dispute and (4) if they fail to resolve the dispute by the Resolution Time, then: (i) In the case of a dispute involving a Delivery Amount or Return Amount, unless otherwise specified in Paragraph 13, the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by: (A) utilizing any calculations of Exposure for the Transactions (or Swap Transactions) that the parties have agreed are not in dispute; (B) calculating the Exposure for the Transactions (or Swap Transactions) in dispute by seeking four actual quotations at mid -market from Reference Market -makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction (or Swap Transaction), then fewer than four quotations may be used for that Transaction (or Swap Transaction); and if no quotations are available for a particular Transaction (or Swap Transaction), then the Valuation Agent's original calculations will be used for that Transaction (or Swap Transaction); and (C) utilizing the procedures specified in Paragraph 13 for calculating the Value, if disputed, of Posted Credit Support. ISDA 01994 DRAFT (ii) In the case of a dispute involving the Value of any Transfer of Eligible Credit Support or Posted Credit Support, the Valuation Agent will recalculate the Value as of the date of Transfer pursuant to Paragraph 13. Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each parry (or the other party, if the Valuation Agent is a party) not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following that notice by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraphs 4(a) and 4(b), make the appropriate Transfer. Paragraph 6. Holding and Using Posted Collateral (a) Care of Posted Collateral. Without limiting the Secured Party's rights under Paragraph 6(c), the Secured Party will exercise reasonable care to assure the safe custody of all Posted Collateral to the extent required by applicable law, and in any event the Secured Party will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Collateral, including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto. (b) Eligibility to Hold Posted Collateral; Custodians. (i) General. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral, the Secured Party will be entitled to hold Posted Collateral or to appoint an agent (a "Custodian") to hold Posted Collateral for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian, the Pledgor's obligations to make any Transfer will be discharged by making the Transfer to that Custodian. The holding of Posted Collateral by a Custodian will be deemed to be the holding of that Posted Collateral by the Secured Party for which the Custodian is acting. (ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian fails to satisfy any conditions for holding Posted Collateral, then upon a demand made by the Pledgor, the Secured Party will, not later than five Local Business Days after the demand, Transfer or cause its Custodian to Transfer all Posted Collateral held by it to a Custodian that satisfies those conditions or to the Secured Party if it satisfies those conditions. (iii) Liability. The Secured Party will be liable for the acts or omissions of its Custodian to the same extent that the Secured Party would be liable hereunder for its own acts or omissions. (c) Use of Posted Collateral. Unless otherwise specified in Paragraph 13 and without limiting the rights and obligations of the parties under Paragraphs 3, 4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an Affected Parry with respect to a Specified Condition and no Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then the Secured Party will, notwithstanding Section 9-207 of the New York Uniform Commercial Code, have the right to: (i) sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Collateral it holds, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor; and (ii) register any Posted Collateral in the name of the Secured Party, its Custodian or a nominee for either. ISDA 01994 DRAFT For purposes of the obligation to Transfer Eligible Credit Support or Posted Credit Support pursuant to Paragraphs 3 and 5 and any rights or remedies authorized under this Agreement, the Secured Parry will be deemed to continue to hold all Posted Collateral and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral pursuant to (i) or (ii) above. (d) Distributions and Interest Amount. (i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives or is deemed to receive Distributions on a Local Business Day, it will Transfer to the Pledgor not later than the following Local Business Day any Distributions it receives or is deemed to receive to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). 5 ISDA 01994 DRAFT (ii) Interest Amount. Unless otherwise specified in Paragraph 13 and subject to Paragraph 4(a), in lieu of any interest, dividends or other amounts paid or deemed to have been paid with respect to Posted Collateral in the form of Cash (all of which may be retained by the Secured Party), the Secured Party will Transfer to the Pledgor at the times specified in Paragraph 13 the Interest Amount to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). The Interest Amount or portion thereof not Transferred pursuant to this Paragraph will constitute Posted Collateral in the form of Cash and will be subject to the security interest granted under Paragraph 2. Paragraph 7. Events of Default For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will exist with respect to a party if: (i) that party fails (or fails to cause its Custodian) to make, when due, any Transfer of Eligible Collateral, Posted Collateral or the Interest Amount, as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that failure is given to that party; (ii) that party fails to comply with any restriction or prohibition specified in this Annex with respect to any of the rights specified in Paragraph 6(c) and that failure continues for five Local Business Days after notice of that failure is given to that party; or (iii) that party fails to comply with or perform any agreement or obligation other than those specified in Paragraphs 7(i) and 7(ii) and that failure continues for 30 days after notice of that failure is given to that party. Paragraph 8. Certain Rights and Remedies (a) Secured Party Is Rights and Remedies. If at any time (1) an Event of Default or Specified Condition with respect to the Pledgor has occurred and is continuing or (2) an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Pledgor, then, unless the Pledgor has paid in full all of its Obligations that are then due, the Secured Party may exercise one or more of the following rights and remedies: (i) all rights and remedies available to a secured party under applicable law with respect to Posted Collateral held by the Secured Parry; (ii) any other rights and remedies available to the Secured Party under the terms of Other Posted Support, if any; (iii) the right to Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Parry (or any obligation of the Secured Party to Transfer that Posted Collateral); and (iv) the right to liquidate any Posted Collateral held by the Secured Parry through one or more public or private sales or other dispositions with such notice, if any, as may be required by applicable law, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor (with the Secured Party having the right to purchase any or all of the Posted Collateral to be sold) and to apply the proceeds (or the Cash equivalent thereof) from the liquidation of the Posted Collateral to any amounts payable by the Pledgor with respect to any Obligations in that order as the Secured Party may elect. Each party acknowledges and agrees that Posted Collateral in the form of securities may decline speedily in value ISDA 01994 DRAFT and is of a type customarily sold on a recognized market, and, accordingly, the Pledgor is not entitled to prior notice of any sale of that Posted Collateral by the Secured Party, except any notice that is required by law and cannot be waived. (b) Pledgor's Rights and Remedies If at any time an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then (except in the case of an Early Termination Date relating to less than all Transactions (or Swap Transactions) where the Secured Party has paid in full all of its obligations that are then due under Section 6(e) of this Agreement): (i) the Pledgor may exercise all rights and remedies available to a pledgor under applicable law with respect to Posted Collateral held by the Secured Party; (ii) the Pledgor may exercise any other rights and remedies available to the Pledgor under the terms of Other Posted Support, if any; (iii) the Secured Party will be obligated immediately to Transfer all Posted Collateral and the Interest Amount to the Pledgor; and (iv) to the extent that Posted Collateral or the Interest Amount is not so Transferred pursuant to (iii) above, the Pledgor may: (A) Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (B) to the extent that the Pledgor does not Set-off under (iv)(A) above, withhold payment of any remaining amounts payable by the Pledgor with respect to any Obligations, up to the Value of any remaining Posted Collateral held by the Secured Party, until that Posted Collateral is Transferred to the Pledgor. (c) Deficiencies and Excess Proceeds. The Secured Party will Transfer to the Pledgor any proceeds and Posted Credit Support remaining after liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in full of all amounts payable by the Pledgor with respect to any Obligations; the Pledgor in all events will remain liable for any amounts remaining unpaid after any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b). (d) Final Returns. When no amounts are or thereafter may become payable by the Pledgor with respect to any Obligations (except for any potential liability under Section 2(d) of this Agreement), the Secured Party will Transfer to the Pledgor all Posted Credit Support and the Interest Amount, if any. Paragraph 9. Representations Each party represents to the other party (which representations will be deemed to be repeated as of each date on which it, as the Pledgor, Transfers Eligible Collateral) that: (i) it has the power to grant a security interest in and lien on any Eligible Collateral it Transfers as the Pledgor and has taken all necessary actions to authorize the granting of that security interest and lien; (ii) it is the sole owner of or otherwise has the right to Transfer all Eligible Collateral Transferred to the Secured Party hereunder, free and clear of any security interest, lien, encumbrance or other restrictions 7 ISDA 01994 other than the security interest and lien granted under Paragraph 2; (iii) upon the Transfer of any Eligible Collateral to the Secured Party under the terms of this Annex, the Secured Party will have a valid and perfected first priority security interest therein. (assuming that any central clearing corporation or any third -party financial intermediary or other entity not within the control of the Pledgor involved in the Transfer of that Eligible Collateral gives the notices and takes the action required of it under relevant law for perfection of that interest); and (iv) the performance by it of its obligations under this Annex will not result in the creation of any security interest, lien or other encumbrance on any Posted Collateral other than the security interest and lien granted under Paragraph 2. Paragraph 10. Expenses (a) General, Except as otherwise provided in Paragraphs 10(b) and 10(c), each party will pay its own costs and expenses in connection with performing its obligations under this Annex and neither party will be liable for any costs and expenses incurred by the other party in connection herewith. (b) Posted Credit Support. The Pledgor will promptly pay when due all taxes, assessments or charges of any nature that are imposed with respect to Posted Credit Support held by the Secured Party upon becoming aware of the same, regardless of whether any portion of that Posted Credit Support is subsequently disposed of under Paragraph 6(c), except for those taxes, assessments and charges that result from the exercise of the Secured Party's rights under Paragraph 6(c). (c) Liquidation/Application of Posted Credit Support. All reasonable costs and expenses incurred by or on behalf of the Secured Party or the Pledgor in connection with the liquidation and/or application of any Posted Credit Support under Paragraph 8 will be payable, on demand and pursuant to the Expenses Section of this Agreement, by the Defaulting Party or, if there is no Defaulting Party, equally by the parties. Paragraph 11. Miscellaneous (a) Default Interest. A Secured Party that fails to make, when due, any Transfer of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value of the items of property that were required to be Transferred, from (and including) the date that Posted Collateral or Interest Amount was required to be Transferred to (but excluding) the date of Transfer of that Posted Collateral or Interest Amount. This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (b) Further Assurance& Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest or lien granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Annex with respect to Posted Credit Support or an Interest Amount or to effect or document a release of a security interest on Posted Collateral or an Interest Amount. (c) Further Protection. The Pledgor promptly will give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Credit Support Transferred by the Pledgor or that could adversely affect the security interest and lien granted by it under Paragraph 2, unless that suit, action, proceeding or lien results from the exercise of the Secured Party's rights under Paragraph 6(c). (d) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Annex ISDA 0 1994 including, but not limited to, all calculations, valuations and determinations made by either party, will be made in good faith and in a commercially reasonable manner. (e) Demands and Notices. All demands and notices made by a party under this Annex will be made as specified in the Notices Section of this Agreement, except as otherwise provided in Paragraph 13. (f) Specifications of Certain Matters. Anything referred to in this Annex as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly. 9 ISDA 01994 Paragraph 12. Definitions As used in this Annex: -- "Cash" means the lawful currency of the United States of America. "Credit Support Amount" has the meaning specified in Paragraph 3. "Custodian" has the meaning specified in Paragraphs 6(b)(i) and 13. "Delivery Amount" has the meaning specified in Paragraph 3(a). "Disputing Party" has the meaning specified in Paragraph 5. "Distributions" means with respect to Posted Collateral other than Cash, all principal, interest and other payments and distributions of cash or other property with respect thereto, regardless of whether the Secured Party has disposed of that Posted Collateral under Paragraph 6(c). Distributions will not include any item of property acquired by the Secured Party upon any disposition or liquidation of Posted Collateral or, with respect to any Posted Collateral in the form of Cash, any distributions on that collateral, unless otherwise specified herein. "Eligible Collateral" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "Eligible Credit Support" means Eligible Collateral and Other Eligible Support. "Exposure" means for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(2)(A) of this Agreement as if all Transactions (or Swap Transactions) were being terminated as of the relevant Valuation Time; provided that Market Quotation will be determined by the Valuation Agent using its estimates at mid -market of the amounts that would be paid for Replacement Transactions (as that term is defined in the definition of "Market Quotation"). "Independent Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Interest Amount" means, with respect to an Interest Period, the aggregate sum of the amounts of interest calculated for each day in that Interest Period on the principal amount of Posted Collateral in the form of Cash held by the Secured Party on that day, determined by the Secured Party for each such day as follows: (x) the amount of that Cash on that day; multiplied by (y) the Interest Rate in effect for that day; divided by (z) 360. "Interest Period" means the period from (and including) the last Local Business Day on which an Interest Amount was Transferred (or, if no Interest Amount has yet been Transferred, the Local Business Day on which Posted Collateral in the form of Cash was Transferred to or received by the Secured Party) to (but excluding) the Local Business Day on which the current Interest Amount is to be Transferred. "Interest Rate" means the rate specified in Paragraph 13. 10 ISDA 01994 DRAFT "Local Business Day", unless otherwise specified in Paragraph 13, has the meaning specified in the Definitions Section of this Agreement, except that references to a payment in clause (b) thereof will be deemed to include a Transfer under this Annex. "Minimum Transfer Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Notification Time" has the meaning specified in Paragraph 13. "Obligations" means, with respect to a party, all present and future obligations of that parry under this Agreement and any additional obligations specified for that party in Paragraph 13. "Other Eligible Support" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "Other Posted Support" means all Other Eligible Support Transferred to the Secured Party that remains in effect for the benefit of that Secured Party. "Pledgor" means either party, when that party(i) receives a demand for or is required to Transfer Eligible Credit Support under Paragraph 3(a) or (ii) has Transferred Eligible Credit Support under Paragraph 3(a). "Posted Collateral" means all Eligible Collateral, other property, Distributions, and all proceeds thereof that have been Transferred to or received by the Secured Party under this Annex and not Transferred to the Pledgor pursuant to Paragraph 3(b), 4(d)(ii) or 6(d)(i) or released by the Secured Party under Paragraph 8. Any Interest Amount or portion thereof not Transferred pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in the form of Cash. "Posted Credit Support" means Posted Collateral and Other Posted Support. "Recalculation Date" means the Valuation Date that gives rise to the dispute under Paragraph 5; provided, however, that if a subsequent Valuation Date occurs under Paragraph 3 prior to the resolution of the dispute, then the "Recalculation Date" means the most recent Valuation Date under Paragraph 3. "Resolution Time" has the meaning specified in Paragraph 13. "Return Amount" has the meaning specified in Paragraph 3(b). "Secured Party" means either party, when that party (i) makes a demand for or is entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds or is deemed to hold Posted Credit Support. "Specified Condition" means, with respect to a party, any event specified as such for that party in Paragraph 13. "Substitute Credit Support" has the meaning specified in Paragraph 4(d)(i). "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). "Threshold" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Transfer" means, with respect to any Eligible Credit Support, Posted Credit Support or Interest Amount, and in accordance with the instructions of the Secured Party, Pledgor or Custodian, as applicable: (i) in the case of Cash, payment or delivery by wire transfer into one or more bank accounts specified by the recipient; (ii) in the case of certificated securities that cannot be paid or delivered by book -entry, payment or delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, assignments in blank, transfer tax stamps and any other documents necessary to constitute a legally valid transfer to the recipient; 11 ISDA 01994 DRAFT (iii) in the case of securities that can be paid or delivered by book -entry, the giving of written instructions to the relevant depository institution or other entity specified by the recipient, together with a written copy thereof to the recipient, sufficient if complied with to result in a legally effective transfer of the relevant interest to the recipient; and (iv) in the case of Other Eligible Support or Other Posted Support, as specified in Paragraph 13. "Valuation Agent" has the meaning specified in Paragraph 13. "Valuation Date" means each date specified in or otherwise determined pursuant to Paragraph 13. "Valuation Percentage" means, for any item of Eligible Collateral, the percentage specified in Paragraph 13. "Valuation Time" has the meaning specified in Paragraph 13. "Value" means for any Valuation Date or other date for which Value is calculated and subject to Paragraph 5 in the case of a dispute, with respect to: (i) Eligible Collateral or Posted Collateral that is: (A) Cash, the amount thereof; and (B) a security, the bid price obtained by the Valuation Agent multiplied by the applicable Valuation Percentage, if any; (ii) Posted Collateral that consists of items that are not specified as Eligible Collateral, zero; and (iii) Other Eligible Support and Other Posted Support, as specified in Paragraph 13. 12 ISDA 01994 Paragraph 13. Elections and Variables (a) Security Interest for "Obligations". The term "Obligations" as used in this Annex includes no additional obligations with respect to Party A or Parry B. (b) Credit Support Obligations. (i) "Delivery Amount", "Return Amount" and "Credit Support Amount" will have the meanings specified in Paragraphs 3(a), 3(b) and 3, respectively. (ii) The following items will qualify as "Eligible Collateral' for Party A and Party B: (A) Cash (U.S. Dollars) Valuation Percentage 100% (B) U.S. Treasury Obligations and U.S. Government 99.5% Agency Fixed Rate Fixed Maturity Securities, and U.S. Government Agency Single Class Mortgage -Backed Securities, having, in each case, remaining stated maturity as of the relevant Valuation Date of not more than one year (C) U.S. Treasury Obligations and U.S. Government 98 % Agency Fixed Rate Fixed Maturity Securities, and U.S. Government Agency Single Class Mortgage -Backed Securities, having, in each case, remaining stated maturity as of the relevant Valuation Date of more than one year but not more than 5 years (D) U.S. Treasury Obligations and U.S. Government 95% Agency Fixed Rate Fixed Maturity Securities, and U.S. Government Agency Single Class Mortgage -Backed Securities, having, in each case, remaining stated maturity as of the relevant Valuation Date of more than 5 years (E) U.S. Treasury STRIPS 90% (F) Other U.S. Government Agency Mortgage -Backed 90% Securities For purposes of this Paragraph 13(b)(ii): 13 ISDA 01994 NW74MAD_ I (I) A "U.S. Treasury Obligation" means a negotiable obligation issued by the United States Treasury Department which meets all of the requirements numbered (1) through (4) of the definition of "U.S. Government Agency Fixed Rate Fixed Maturity Security". (However, for purposes of this Paragraph 13(b)(ii), a "U.S. Treasury Obligation" does not include "U.S. Treasury STRIPS", as defined hereinbelow.) (II) A "U.S. Government Agency Fixed Rate Fixed Maturity Security" means a negotiable obligation which (x) is issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation or is issued on behalf of all of the Federal Home Loan Banks in the Federal Home Loan Bank System and constitutes the joint and several obligation of all of the Federal Home Loan Banks and (y) meets all of the following requirements: (1) it is a debt obligation in a stated fixed U.S. dollar principal amount and its stated fixed U.S. dollar principal amount has a non -variable fixed maturity and cannot be called for redemption by its issuer before its maturity and cannot be put to its issuer for redemption before its maturity; (2) it bears interest on its stated fixed U.S. dollar principal amount at a non -variable fixed rate throughout its life until its maturity (or, in the case of an obligation with an original maturity at issuance of one year or less, bears no interest at all); (3) it is the unconditional direct obligation of its issuer or is the unconditional direct joint and several obligation of all of the Federal Home Loan Banks; and (4) it is issued in uncertificated form and is transferable only on the securities transfer system of the Federal Reserve System. (III) "U.S. Treasury STRIPS" means securities which are interest components or principal components stripped from U.S. Treasury Obligations (as defined hereinabove) under the program of the United States Department of Treasury called "Separate Trading of Registered Interest and Principal Securities". (M A "U.S. Government Agency Single Class Mortgage -Backed Security" means a negotiable obligation which is issued or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (each, an "Agency") and which meets all of the following requirements: (1) it represents the right to receive payment of principal and interest payable under first lien single family residential mortgage loans (the "Loans") in one or more pools and it either is an undivided interest in the Loans or is directly or indirectly secured by the Loans; (2) all such obligations issued with respect to any such pools of Loans constitute a single class of such obligations and each such obligation represents the right to receive a prorata share of all principal and interest payable under all Loans in such pools; 14 ISDA 01994 DRAFT (3) full payment of principal and interest payable under the obligation is either the unconditional direct obligation of one of the Agencies or is unconditionally and fully guaranteed by one of the Agencies; and (4) either (x) it is issued in uncertificated form and is transferable only on the securities transfer system of the Federal Reserve System or (y) it is issued in the form of a certificate which is held by the Participants Trust Corporation ("PTC") or PTC's nominee and interests therein are transferable only by entry on the books of PTC or PTC's nominee (or the custodian or transfer agent for PTC or PTC's nominee), or (z) it is issued in the form of a certificate which is held by the Depository Trust Company ("DTC") or DTC's nominee and interests therein are transferable only by entry on the books of DTC or DTC's nominee (or the custodian or transfer agent for DTC or DTC's nominee). (V) An "Other U.S. Government Agency Mortgage -Backed Security" means a negotiable obligation which is issued or guaranteed by an Agency and which is not a U.S. Government Agency Single Class Mortgage -Backed Security and which meets all of the following requirements: (1) it represents the right to receive payment of principal and interest payable under first lien single family residential mortgage loans (the "Loans") in one or more pools and it either is an undivided interest in the Loans or is directly or indirectly secured by the Loans; (2) market prices for it are (at the time of Transferto Secured Parry and on each Valuation Date thereafter) obtained from independent third party pricing vendors; (3) full payment of principal and interest payable under the obligation is either the unconditional direct obligation of one of the Agencies or is unconditionally and fully guaranteed by one of the Agencies; and (4) either (x) it is issued in uncertificated form and is transferable only on the securities transfer system of the Federal Reserve System or (y) it is issued in the form of a certificate which is held by the Participants Trust Corporation ("PTC") or PTC's nominee and interests therein are transferable only by entry on the books of PTC or PTC's nominee (or the custodian or transfer agent for PTC or PTC's nominee), or (z) it is issued in the form of a certificate which is held by the Depository Trust Company ("DTC") or DTC's nominee and interests therein are transferable only by entry on the books of DTC or DTC's nominee (or the custodian or transfer agent for DTC or DTC's nominee). (III) There shall be no "Other Eligible Support" for Party A or Party B for purposes of this Annex. (iv) Thresholds. (A) "Independent Amount" means with respect to Parry A: Not applicable. "Independent Amount" means, with respect to Party B: Not applicable. (B) "Threshold" means, on any day, with respect to a parry as Pledgor, the amount set forth under the caption "Threshold" below opposite the unenhanced rating classification assigned to, with respect to Parry A, its outstanding unsecured unsubordinated debt, 15 ISDA 01994 long-term deposits or certificates of deposit, as applicable, and with respect to Party B, its Bonds, as defined in the Covered Indenture, by the Rating Agencies on that day, as determined pursuant to terms of this provision (such party's "Credit Rating"). Where a party's indebtedness or deposits is rated by more than one Rating Agency and the ratings are split, the Threshold will be based on the lower of the two ratings. Where a party's indebtedness or deposits is rated by only one Rating Agency, the Threshold will be based on the rating of that Rating Agency. If at any time (1) no long-term unsecured unsubordinated indebtedness or long-term deposits, as applicable, of a party are rated by either Rating Agency, or (2) an Event of Default has occurred and is continuing with respect to a parry, the Threshold for that party shall be zero. "Rating Agencies" means Moody's Investor Services, Inc. ("Moody's"), and Standard and Poor's Ratings Group, a division of McGraw Hill, Inc. ("S&P"), or any successor to either such entity which is a successor to its rating business. Threshold Not applicable $45,000,000 $40,000,000 $35,000,000 $25,000,000 $15,000,000 $0 Credit Rating By S&P by Moody's AA- (and above) Aa3 (and above) A+ A A - BBB+ BBB BBB- (and below) Al A2 A3 Baal Baa2 Baa3 (and below) (B) "Minimum Transfer Amount" means with respect to Parry A: $250,000. "Minimum Transfer Amount" means with respect to Parry B: $250,000. (D) Rounding. The Delivery Amount will be rounded up and the Return Amount will be rounded down to the nearest integral multiple of $100,000.00, respectively. (c) Valuation and Timing. (i) "Valuation Agent" means, for the purposes of Paragraphs 3 and 5, the party making the demand under Paragraph 3, and, for the purposes of Paragraph 6(d), the Secured Party receiving or deemed to receive the Distributions or the Interest Amount, as applicable. (ii) "Valuation Date" means: Each and every Local Business Day commencing on the first such date following the date hereof. (ill) "Valuation Time" means: [ ] the close of business in the city of the Valuation Agent on the Valuation Date or date of calculation, as applicable; [ X ] the close of business on the Local Business Day before the Valuation Date or date of calculation, as applicable; 16 ISDA 01994 provided that the calculations of Value and Exposure will be made as of approximately the same time on the same date. (iv) "Notification Time" means 1:00 p.m., New York time, on a Local Business Day. (d) Conditions Precedent and Secured Parry's Rights and Remedies. The following Termination Event(s) will be a "Specified Condition" for each party (that party being the Affected Parry if the Termination Event occurs with respect to that party) for the purposes of the Paragraphs specified below: Paragraph 4(a) Paragraph 6(c), 8(a) and (y_.) Illegality 0 ❑ Tax Event 0 ❑ Tax Event Upon Merger 0 ❑ Credit Event Upon Merger 0 ❑x Additional Termination Event 0 0 (e) Substitution. (i) "Substitution Date" means the Local Business Day in New York on which the Secured Party is able to confirm irrevocable receipt of the Substitute Credit Support, provided that (x) such receipt is confirmed before 3:00 p.m. (New York time) on such Local Business Day in New York and (y) the Secured Parry has received, before 1:00 p.m. (New York time) on the immediately preceding Local Business Day in New York, the notice of substitution described in Paragraph 4(d)(i). (ii) Consent. The Pledgor is not required to obtain the Secured Parry's consent for any substitution pursuant to Paragraph 4(d). (f) Dispute Resolution. (i) "Resolution Time" means 1:00 p.m., New York time, on the Local Business Day following the date on which a notice is given that gives rise to a dispute under Paragraph 5. (ii) Value. For the purpose of Paragraphs 5(i)(C) and 5(11), the Value of Posted Credit Support will be calculated as follows: for Cash, the U.S. dollar value thereof, and for each item of Eligible Collateral (except for Cash), an amount in U.S. dollars equal to the product of (i) either (A) the bid price for such security quoted on such day by a principal market -maker for such security selected in good faith by the Secured Party or (B) the most recent publicly available bid price for such security as reported by a quotation service or in a medium selected in good. faith and in a commercially reasonable manner by Secured Party, multiplied by (ii) the percentage figure listed in Paragraph 13(b)(ii) hereof with respect to such security. (HO Alternative. The provisions of Paragraph 5 will apply. (g) Holding and Using Posted Collateral. 17 ISDA 01994 DRAFT (i) Eligibility to Hold Posted Collateral; Custodians. Parry A and its Custodian, and Parry B and its Custodian, will be entitled to hold Posted Collateral, as applicable, pursuant to Paragraph 6(b); provided that the following conditions applicable to each party are satisfied: (A) Party A, as the Secured Parry, is not a Defaulting Parry. (B) Party B, as the Secured Party, is not a Defaulting Parry. (C) Each party hereby covenants and agrees that it will cause all Posted Collateral received from the other party to be entered in one or more accounts (each, a "Collateral Account") with a domestic office of a commercial bank, trust company or financial institution organized under the laws of the United States (or any state or a political subdivision thereof) having assets of at least $10 Billion and a long term debt or deposit rating of at least (i) Baa2 from Moody's Investors Services, Inc. and (ii) BBB from Standard and Poor's (a "Qualified Institution"), each of which accounts may include property of other parties but will bear a title indicating the Secured Party's interest in said account and the Posted Collateral in such account. In addition the Secured Party may direct the Pledgor to transfer or deliver Eligible Collateral directly into the Secured Parry's Collateral Account(s). If otherwise qualified, the Secured Party may act as such Qualified Institution and the Secured Parry may move the Collateral Accounts from one Qualified Institution to another upon reasonable notice to the Pledgor. The Secured Party shall cause statements concerning the Posted Collateral transferred or delivered by the Pledgor to be sent to the Pledgor on request, which may not be made more frequently than once in each calendar month. Initially the Custodian, for Party A and Parry B is:- Not applicable. (ii) Use of Posted Collateral. The provisions of Paragraph 6(c) will apply to Party A and will apply to Party B. (h) Distributions and Interest Amount. (i) The "Interest Rate", with respect to. cash Collateral, will be the Federal Funds Rate which means, for any day, the simple interest rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1 %) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Local Business Day next succeeding such day, provide d that (a) if such day is not a Local Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Local Business Day, and (b) if no such rate is so published on such next succeeding Local Business Day, the Federal Funds Rate for such day shall be the arithmetic mean of the rates for the last transaction in overnight Federal funds arranged by three leading brokers of Federal funds transactions in New York City selected by Bank of America in good faith on such day. (ii) The "Transfer of Interest Amount" will be made within 3 Local Business Days after the last Local Business Day of each calendar month. (iii) Alternative Interest Amount. The provisions of Paragraph 6(d)(ii) will apply 18 ISDA 01994 DRAFT (i) Additional Representations. None. 0) Other Eligible Support and Other Posted Support. [Not Applicable] (k) Demands and Notices. All demands, specifications and notices made by a parry to this Annex will be made pursuant to the Notices Section of this Agreement. Party A: Bank of America, N.A. Sears Tower 233 South Wacker Drive, Suite 2800 Chicago, Illinois 60606-6306 Telephone No.: (312) 234-3030 Facsimile: (312) 234-2731 Party B: City of Vernon 4305 Santa Fe Avenue Vernon, CA 90058 Attention: Kenneth J. DeDario, Director of Utilities Telephone No.: 323-583-8811 Facsimile No.: 323-826-1425 (1) Addresses for Transfers. Parry A: Cash/Interest Payments: (USD Only Bank of America —Chicago, IL ABA# 071 000 039 FOR: Bank of America, N.A. ARB Account Account# 8188311449 Eligible Collateral (other than cash): BK AMERICA NC/INV ABA# .053 000 196 Parry B: Please provide, to avoid operational delays: Cash: Eligible Collateral (other than cash): (m) Other Provisions. (i) This Credit Support Annex is a Security Agreement under the New York UCC. (ii) At any time when the Pledgor's Credit Rating is either BBB- or below by S&P or Baa3 or below by Moody's, or no long-term unsecured unsubordinated indebtedness or long-term 19 ISDA 01994 DRAFT deposits, as applicable, of the Pledgor is rated by either Rating Agency, or an Event of Default has occurred and is continuing with respect to the Pledgor: (A) With respect to any Transfer of Eligible Credit Support demanded under Paragraph 3(a), Paragraph 4(b) of this Annex shall be deemed to be amended as follows: (I) replace the word "next" in the third line thereof with the word "same" and (II) replace the word "second" in the last line thereof with the word "next." (B) Paragraph 5 of this Annex shall be deemed to be amended by deleting clause (2) thereof in its entirety and inserting in lieu thereof the following: "(2) subject to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to the other parry not later than (X) the date the Transfer otherwise would have been due if no dispute had existed in the case of (I) above, or (YY) the close of business on the Local Business Day following the date of Transfer in the case (II) above," (C) Paragraph 7 of this Annex shall be deemed to be amended by deleting clause (i) thereof in its entirety and inserting in lieu thereof the following: "(i) the Pledgor fails (or fails to cause its Custodian) to make, when due, any Transfer of Eligible Collateral or Posted Collateral, as applicable, required to be made by it, or the Secured Party fails (or fails to cause. its Custodian) to make, when due, any Transfer of Eligible Collateral, Posted Collateral or Interest Amount, as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that failure is given to the Secured Party;" The deemed amendments to this Annex set forth above shall cease to be effective on the date that all the conditions set forth in the first sentence of this provision no longer exist, but shall be reinstated from time to time if any of those conditions exists at a later time. Accepted and agreed: BANK OF AMERICA, N.A. By: ................................. Name: Roger H. Heintzelman Title: Principal Date: CITY OF VERNON By: .......................... Name: Title: Date: 20 ISDA ®1994