Resolution No. 86011
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RESOLUTION NO. 8601
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
VERNON AUTHORIZING AND APPROVING THE ISSUANCE OF
NOT TO EXCEED $350,000,000 AGGREGATE PRINCIPAL
AMOUNT OF ELECTRIC SYSTEM REVENUE BONDS; APPROVING
THE FORM OF A CONTRACT OF PURCHASE AND CERTAIN
OTHER DOCUMENTS BY AND BETWEEN THE CITY AND MORGAN
STANLEY & CO. INCORPORATED IN CONNECTION WITH THE
SALE OF SUCH BONDS; AUTHORIZING AND APPROVING
CERTAIN OTHER AGREEMENTS FOR BROKER -DEALER
SERVICES, FINANCIAL ADVISORY SERVICES, AND LEGAL
SERVICES IN CONNECTION WITH THE ISSUANCE, SECURING
AND SALE OF SUCH BONDS; AND AUTHORIZING CERTAIN
OTHER MATTERS 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
California; 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, the City has determined to make certain
improvements and additions to its Electric System consisting of (1)
the 134 megawatt, combined cycle electric generating station and
certain facilities, improvements and equipment relating thereto
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consisting of the Malburg Generating Station and (2) upgrades,
improvements and additions to its substation, distribution system and
control center (collectively, the "System Improvements"); and
WHEREAS, the City has determined to provide for the
financing of a portion of the Costs of the Malburg Generating Station
and System Improvements through the issuance of Bonds; and
WHEREAS, the City desires to provide for the issuance of its
Electric System Revenue Bonds, 2004 Series A, B, C and D (the "2004
Series Bonds") to, among other things, finance a portion of the Costs
of the Malburg Generating Station and the System Improvements; and
WHEREAS, the 2004 Series Bonds are to be issued under and
pursuant to a Master Indenture as supplemented by Supplemental
Indentures of Trust, all such Indentures by and between the City and
Trustee to be submitted to the City Council at a subsequent meeting;
and
WHEREAS, in order to provide for the issuance of the 2004
Series Bonds, the City has determined to approve the Proposal of The
Bank of New York Trust Company, N.A. ("BNY") and appoint BNY as the
Trustee for the 2004 Series Bonds, presented to this meeting; and
WHEREAS, the 2004 Series Bonds are to be issued as Auction
Rate Securities (as defined in the Supplemental Indentures) and,
therefore, the City has determined that the services of an Auction
Agent and Broker -Dealer will be necessary; and
WHEREAS, in order to provide for the services of an Auction
Agent with respect to the 2004 Series Bonds, the City has determined
to approve the Proposal of the Deutsche Bank Trust Company Americas
("Deutsche Bank") to perform the services of the Auction Agent,
presented to this meeting; and
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WHEREAS, to provide for the ongoing marketing of the Auction
Rate Securities for the 2004 Series Bonds, the City has determined to
provide for and acknowledge a Broker -Dealer Agreement among Deutsche
Bank, as Auction Agent, BNY, as Trustee, and various Broker -Dealers,
Ito be named at a later date (such Broker -Dealer Agreement, in the form
presented to this meeting with such changes, insertions and deletions
as are made pursuant to this Resolution, being referred to herein as
the "Broker -Dealer Agreement"); and
WHEREAS, the City desires to provide for the services of a
Verification Agent in connection with the issuance of the 2004 Series
Bonds; and
WHEREAS, Grant Thornton LLP has submitted a proposal for
Verification Services for the refunding of the City's outstanding
Electric System Revenue Bonds, 2003 Series A, B and C, in connection
with the issuance of the 2004 Series Bonds; and
WHEREAS, the City desires to provide for the services of a
Financial Advisor and Financial Derivatives Services in connection
with the issuance of its 2004 Series Bonds and on an ongoing basis
thereafter; and
WHEREAS, Bond Logistix LLC ("BLX") has submitted a proposal
for Financial Advisory and Financial Derivative Services in the form
of a Letter Agreement ("Letter Agreement"); and
WHEREAS, the City desires to provide for legal services in
connection with the issuance of its 2004 Series Bonds and on an
ongoing basis thereafter; and
WHEREAS, Karns & Karabian has submitted a Retainer Agreement
Ifor Legal Services, Transaction Structure, Closing and Advisory
Services ("Retainer Agreement"); and
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WHEREAS, Morgan Stanley & Co. Incorporated (the
"Underwriter") has submitted a proposal to purchase the 2004 Series
Bonds in the form of a Contract of Purchase (such Contract of
Purchase, in the form presented to this meeting with such changes,
insertions and deletions as are made pursuant to this Resolution,
being referred to herein as the "Purchase Contract"); and
WHEREAS, there have been prepared and submitted to this
(meeting the following:
(1) Proposal for Trustee services;
(2) Proposal for Auction Agent Services;
(3) the Broker -Dealer Agreement;
(4) Proposal for Verification services
(5) the Financial Advisory and Financial Derivative Service:
(Letter Agreement;
(6) the Retainer Agreement for Legal Services, Transaction
Structure, Closing and Advisory Services;
(7) the Preliminary Official Statement to be used in
connection with the offering and sale of the 2004 Series Bonds (such
Preliminary Official Statement in the form presented to this meeting
with such changes, insertions and deletions as are made pursuant to
this Resolution, being referred to herein as the "Preliminary Official
Statement"); and
(8) the Purchase Contract.
WHEREAS, having reviewed and considered the proposal of the
Underwriter to purchase the 2004 Series Bonds on the terms and
conditions contained in the Purchase Contract, this City Council shall
authorize the issuance and sale of the 2004 Series Bonds, including
the execution of such documents and the performance of such acts as
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may be necessary or desirable to effect such issuance and sale and the
other actions contemplated by this Resolution after the City Council
has approved the Master Indenture and Supplemental Indentures at a
subsequent meeting of the City Council.
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
and correct.
SECTION 2: The Proposal for Trustee Services with The Bank
of New York Trust Company, N.A., a copy of which is attached hereto as
Exhibit A and incorporated by reference, be and the same is hereby
approved and BNY is appointed as the Trustee for the 2004 Series
Bonds. Each of the Mayor and the City Administrator (each an
"Authorized Officer"), acting singly, is hereby authorized to execute
and deliver the Proposal for Trustee Services, in the name of and on
behalf of the City, and the City Clerk of the City of Vernon (the
"City Clerk") is hereby authorized to attest thereto.
SECTION 3: The Proposal for Auction Agent Services with
Deutsche Bank Trust Company Americas, a copy of which is attached
hereto as Exhibit B and incorporated by reference, be and the same is
hereby approved. Each of the Mayor and the City Administrator (each
an "Authorized Officer"), acting singly, is hereby authorized to
execute and deliver the Proposal for Auction Agent Services, in the
name of and on behalf of the City, and the City Clerk of the City of
Vernon (the "City Clerk") is hereby authorized to attest thereto.
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SECTION 4: The Broker -Dealer Agreement, in substantially
the form submitted to this meeting and made a part thereof as though
set forth in full herein, be and the same is hereby approved. Each of
the Authorized Officers, acting singly, is hereby authorized to
execute and deliver the Broker -Dealer Agreement, in the name of and on
behalf of the City, in substantially the form presented to this
meeting with such changes, insertions and deletions as may be approved
by the Authorized Officer executing the Master Indenture, said
execution being conclusive evidence of such approval, and the City
Clerk is hereby authorized to attest thereto.
SECTION 5: The Proposal for Verification Agent Services
with Grant Thornton LLC, a copy of which is attached hereto as Exhibit
C and incorporated by reference, be and the same is hereby approved.
Each of the Mayor and the City Administrator (each an "Authorized
Officer"), acting singly, is hereby authorized to execute and deliver
the Proposal for Verification Agent Services, in the name of and on
behalf of the City, and the City Clerk of the City of Vernon (the
"City Clerk") is hereby authorized to attest thereto.
SECTION 6: The Letter Agreement with Bond Logistix LLC for
Financial Advisory and Financial Derivative Services, a copy of which
is attached hereto as Exhibit D and incorporated by reference, be and
the same is hereby approved. Each of the Mayor and the City
Administrator (each an "Authorized Officer"), acting singly, is hereby
authorized to execute and deliver the Letter Agreement, in the name of
and on behalf of the City, and the City Clerk of the City of Vernon
(the "City Clerk") is hereby authorized to attest thereto.
SECTION 7: The Retainer Agreement with Karns & Karabian for
Legal Services, Transaction Structure, Closing and Advisory Services,
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a copy of which is attached hereto as Exhibit E and incorporated by
reference, be and the same is hereby approved. Each of the Mayor and
the City Administrator (each an "Authorized Officer"), acting singly,
is hereby authorized to execute and deliver the Retainer Agreement, in
the name of and on behalf of the City, and the City Clerk of the City
of Vernon (the "City Clerk") is hereby authorized to attest thereto.
SECTION 8: The issuance of the 2004 Series Bonds, on the
terms and conditions set forth in the Supplemental Indentures of Trust
being submitted at a subsequent City Council meeting, and subject to
the limitations specified in this Resolution, is hereby authorized and
approved. The aggregate principal amount of the 2004 Series Bonds,
shall not exceed Three Hundred Fifty Million Dollars
($350,000,000.00). The 2004 Series Bonds will be dated as provided
in, will bear interest at the rates determined in accordance with
(subject to the maximum interest rates for the 2004 Series Bonds set
forth in the form of the Supplemental Indentures of Trust being
submitted at a subsequent City Council meeting), will mature on the
date or dates provided in, will be issued in the form provided in,
will have the Sinking Fund Installments specified in, will be subject
to redemption as provided in, and will have such other terms as shall
be provided in, the Supplemental Indentures of Trust as the same is
completed as provided in a subsequent Resolution.
SECTION 9: The Purchase Contract, in substantially the form
submitted to this meeting and made a part hereof as though set forth
in full herein, be and the same is hereby approved. Each of the
Authorized Officers, acting singly, is hereby authorized to execute
and deliver the Purchase Contract, in the name of and on behalf of the
City, in substantially the form presented to this meeting with such
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changes, insertions and deletions as may be approved by the Authorized
Officer executing said Purchase Contract and as are consistent with
the determinations of the terms of the 2004 Series Bonds made pursuant
to this Resolution, said execution being conclusive evidence of such
japproval.
Each of the Authorized Officers, acting singly, is hereby
authorized to determine the purchase price to be paid for the 2004
Series Bonds under the Purchase Contract; provided, however, that the
aggregate Underwriter's discount (not including original issue
discount which shall not exceed five percent of the aggregate
principal amount of the 2004 Series Bonds) for the 2004 Series Bonds
shall be not more than one percent of the aggregate principal amount
of the 2004 Series Bonds. The sale of the 2004 Series Bonds to the
lUnderwriter on the terms and conditions contained in the Purchase
Contract, as the same may be completed in accordance with the
provisions of this Resolution, with such changes, insertions and
deletions as are authorized hereby, is hereby approved and authorized.
SECTION 10: The Preliminary Official Statement, in
substantially the form presented to this meeting and made a part
hereof as though set forth in full herein, be and the same is hereby
approved. Each of the Authorized Officers, acting singly, is hereby
authorized to deliver the Preliminary Official Statement to the
Underwriter in substantially the form presented to this meeting with
such changes, insertions and deletions as may be approved by the
Authorized Officer delivering the Preliminary Official Statement to
the Underwriter and as are consistent with the determinations of the
terms of the 2004 Series Bonds made pursuant to this Resolution
(including without limitation the insertion of the terms of the
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Supplemental Indentures, as appropriate), said delivery being
conclusive evidence of such approval. The use of the Preliminary
Official Statement in connection with the offering and sale of the
2004 Series Bonds by the Underwriter is hereby authorized and
japproved.
SECTION 11: The preparation and delivery of a final Official
Statement relating to the 2004 Series Bonds (the "Official
Statement"), and its use by the Underwriter in connection with the
offering and sale of the 2004 Series Bonds, be and the same is hereby
lauthorized and approved. Each of the Authorized Officers, acting
singly, is hereby authorized to execute the Official Statement and any
amendment or supplement thereto contemplated by the Purchase Contract,
in the name and on behalf of the City, and thereupon to cause the
Official Statement and any such amendment or supplement to be
delivered to the Underwriter. The Official Statement shall be in
substantially the form of the Preliminary Official Statement delivered
to the Underwriter pursuant to Section 10 with such changes,
insertions and deletions as may be approved by the Authorized Officer
executing said Official Statement, said execution being conclusive
evidence of such approval.
Each of the Authorized Officers, acting singly, is hereby
authorized to determine that the Preliminary Official Statement and/or
the final Official Statement is deemed final for purposes of Rule
15c2-12 of the Securities and Exchange Commission ("Rule 15c2-12").
SECTION 12: The Continuing Disclosure Agreement, in
substantially the form attached to the Preliminary Official Statement
presented to this meeting and made a part hereof as though set forth
in full herein, be and the same is hereby approved. Each of the
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Authorized Officers, acting singly, is hereby authorized to execute
and deliver the Continuing Disclosure Agreement, in the name of and on
behalf of the City, in substantially the form presented to this
meeting with such changes, insertions and deletions as may be approved
by the Authorized Officer executing the same, said execution being
(conclusive evidence of such approval, and the City Clerk is hereby
lauthorized to attest thereto.
SECTION 13: The Mayor, the City Administrator, the City
Clerk, Chief Executive Officer of the Light & Power Department and any
other proper officer of the City, as so designated by either the Mayor
or the City Administrator, acting singly, be and each of them hereby
is authorized to execute and deliver any and all documents and
instruments and to do and cause to be done any and all acts and things
necessary or convenient in carrying out the transactions contemplated
by the documents and instruments approved or authorized by this
Resolution, including without limitation, entering into any agreements
with respect to continuing disclosure required by Rule 15c2-12 and
making any determinations or submission of any documents or reports
which are required by any rule or regulation of any governmental
entity in connection with the issuance and sale of the 2004 Series
Bonds and the authorization, execution, delivery and performance by
the City of its obligations under the documents and instruments
approved or authorized by this Resolution.
SECTION 14: All acts and actions heretofore taken by any
Section or Committee of the City Council, the City Administrator, or
any officer, representative or agent of the City, in connection with
the issuance and sale of the 2004 Series Bonds, in connection with the
disbursement of City funds from the BNY Custody Escrow Account No.
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1800452, commencing August 1, 2003, and the disbursement of 2003 Serie's
Bond proceeds from the various funds established by the Master
Indenture of Trust and the various Supplemental Indentures, approved
by Resolution No. 8150, held by BNY, commencing April 1, 2003, all for
the financing, development, licensing, equipment, construction and
start-up of the Malburg Generating Station Project and Electric
System, or in connection with the authorization, execution, delivery,
or performance of the City's obligations under, the documents and
instruments approved or authorized by this Resolution, Resolution No.
8150, and the other actions contemplated by this Resolution and
Resolution No. 8150 is hereby ratified, approved and confirmed.
SECTION 15: 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 17th day of November, 2004.
ATTEST:
BRUCE V. MALKENHORST, City Clerk
LEONIS C. MAC URG, gayor
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STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
I, BRUCE V. MALKENHORST, City Clerk of the City of Vernon, do
hereby certify that the foregoing Resolution, being Resolution No.
8601, was duly adopted by the City Council of the City of Vernon at a
regular meeting of the City Council duly held on Wednesday,
November 17, 2004, and thereafter was duly signed by the Mayor of the
City of Vernon.
(SEAL)
BRUCE V. MALKENHORST, City Clerk
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EXHIBIT
0
THE BANK OF NEW YORK TRUST COMPANY, N.A.
700 SO= FLOwn Sr, S=R 500, L01- A =¢e , CA 90017
November 9, 2004
Mr. Eric Fresch
City Attorney
City of Vernon
C/o
Mr. Craig Underwood
President
Bond Logistix, LLC
777 S. Figueroa Street, Ste. 3200
Los Angeles, CA 90017
cunderwood@bondlogistix.com
Re: Trustee and Auction Agent Services for the $275,000,000 City of Vernon,
Malberg Electrical System Revenue Bonds 2004 Series A, B and C (Taxable)
Auction Rate Securities
Dear Eric,
On behalf of The Bank of New York Trust Company, N. A. (`BNY") we greatly appreciate the
opportunity to present our proposal to provide trustee and auction agent services on the above referenced
transactions. Attached is our Fee Schedule, but please read on to discover more about the differences
that BNY offers.
Inherent in the process of identifying the financing team to bring an important debt financing to market is
selecting a Trustee who can assist the issuer in the on -going administrative process throughout the life of
the engagement and is committed, professional and experienced. No other institution can demonstrate
their commitment to providing trustee services to the public finance marketplace better than BNY.
Through our enhanced systems and experienced professionals dedicated to serving the needs of the
municipal finance market, we provide our clientele industry leading services for today and the future.
The Bank of New York Company, Inc., is one of the largest bank holding companies in the US, which
has been ranked the number one overall trustee in terms of new debt issuance for three consecutive years,
and is one of the leading Corporate Trust banks with over $1 trillion in outstanding debt.
A Difference through Our People and Service
The City will be serviced locally by their existing administrative team from our Los Angeles office, led
by Ms. Aurora Quiazon. Aurora's professional profile is included below, for your review.
Aurora Quiazon
Trust Officer
(213)630-6236
aquiazon@bankofny.com
Aurora has over twenty-five years banking experience, with the last thirteen years being in
Corporate Trust administration, she is knowledgeable in the administration and management of
municipal and corporate debt issues.
700 South Flower Street • Suite 500 • Los Angeles • California 90017
Mr. Eric Fresch
November 11, 2004
Page 2
Aurora holds a Bachelor of Science degree in Education from Philippine Normal College, and
has completed the Cannon Financial Institute Corporate Trust School.
PLEASE NOTE:
As a standard procedure upon closing a bond issue, each administrator is prepared to deliver a detailed
account synopsis including all information relating to investments, debt service, compliance, and
requisition payments (as applicable), for use by the issuer and financing team. This synopsis is not only
an aid for our clients, but for our administrators as well, as it enables them to thoroughly review the
governing documents and establish useful ticklers and procedures. This subsequently serves as a great
tool to assist our clients in our long-term relationship between the City of Vernon and The Bank of New
York Trust Company.
A Difference Throueh Our Level of Experience
As an experienced member of your financing team, we provide the qualifications you require to ensure
that, with your other financing team members, you have assembled the finest professionals in their field,
thereby making your financing both attractive and successful.
A Difference Through Our Available Technoloev
Recognizing that our most frequent form of communication with our clients is through our monthly
statements, we have continued to develop more informative and helpful solutions going beyond simply
supplying information on paper. Ask us about INFORM, BNY's internet based data retrieval system,
allowing our clients internet access to review bond proceeds held with us as trustee.
Attached you will find our complete Fee Schedule for this engagement detailing related fees and
expenses associated with our appointment.
You will find that the ultimate success of your offering is as critical to the Bank as it is to you. Further,
you will discover that the responsiveness and superior service that characterize our performance are the
very strengths that have made The Bank of New York Trust Company, N. A. a leading provider of
securities services and a prime candidate for all your trustee and agency needs.
Should you have any questions regarding our proposal or attached fee schedule, please feel free to
contact me at (213) 630-6456.
Very truly yours,
Frank Sulzberger
Vice President
FS/jh
THE BANK OF NEW YORK
TRUST COMPANY, N.A.
$275,000,000 CITY OF VERNON
MALBERG ELECTRICAL SYSTEM REVENUE BONDS
2004 SERIES A, B AND C (TAXABLE)
Fee Schedule
November 11, 2004
Upon appointment of BNY as Trustee the issuer shall be responsible for the payment of the fees,
expenses and charges as set forth in this Fee Schedule.
ACCEPTANCE FEE $1,000
This one time charge of $1,000 is payable at the time of the closing and includes the review and
execution of the Indenture and all documents submitted in support thereof, acceptance of the trust,
establishment of procedures and controls and set-up of trust accounts.
ANNUAL ADMINISTRATIVE FEE/per series $2,750
An annual fee of $2,750 per series covering the duties and responsibilities related to account
administration and bondholder services, which may include maintenance of accounts on various
systems, collection and payment of principal and interest to bondholders, the preparation and
distribution of any sinking fund redemption notices and the monitoring of issuer compliance. This fee
is payable in advance for the year and shall not be prorated.
INVESTMENT COMPENSATION
With respect to investments in money market mutual funds (other than the Hamilton Funds), the
investment maintenance fee will be calculated at an annual rate of 37 basis points on average total
monthly account balances. With respect to investments in money market mutual funds for which BNY
provides shareholder services BNY (or its affiliates) may also receive and retain additional fees from
the mutual funds (or their affiliates) for shareholder services as set forth in the Authorization and
Direction to BNY to Invest Cash Balances in Money Market Mutual Funds.
BNY will charge a $35 transaction fee for the purchase, sale, or maturity of commercial paper and U.S.
treasuries and agencies.
REQUISITION/DISBURSEMENT FEE (CHECK OR WIRE) PER TRANSACTION
A fee of $35 per disbursement will be assessed for each cash disbursement or requisition.
FEE FOR REVIEW AND ADMINISTRATION OF INVESTMENT AGREEMENT OR
REPURCHASE/FORWARD PURCHASE AGREEMENT
BNY will assess a one-time fee of $500 covering the review and negotiation of each investment
agreement or repurchase agreement and ongoing administration of each agreement. In addition, the
C:TRESCH%CeyoN«non2004SaiesABC.doc
THE BANK OF NEW YORK
TRUST COMPANY, N.A.
fees and expenses of BNY's Counsel incurred in connection with the review and negotiation will be
billed at the actual amount of fees and expenses charged by Counsel.
COUNSEL FEE $3,000
A fee covering the fees and expenses of Counsel for its services, including review of governing
documents, communication with members of the closing party (including representatives of the issuer,
investment banker(s), attorney(s) and BNY), attendance at meetings and the closing, and such other
services as BNY may deem necessary. The Counsel fee will be the actual amount of the fees and
expenses charged by Counsel and is payable at closing. Counsel fees will be capped at $3,000 but may
be increased if all documentation required for this financing is not in substantially good order,
numerous drafts or extensive negotiations are required, or the closing is delayed. Should closing not
occur, you shall still be responsible for payment of Counsel fees and expenses.
MISCELLANEOUS FEES
The fees for performing extraordinary or other services not contemplated at the time of the execution of
the transaction or not specificarly covered elsewhere in this schedule will be commensurate with the
service to be provided and will be charged in BNY's sole discretion. These extraordinary services may
include, but are not limited to, supplemental agreements, consent operations, unusual releases, tenders
or sinking fund redemptions, the preparation of special or interim reports, custody of collateral, a one-
time fee to be charged upon termination of an engagement. Counsel, accountants, special agents and
others will be charged at the actual amount of fees and expenses billed.
OUT-OF-POCKET EXPENSES
Additional out-of-pocket expenses may include, but are not limited to, telephone; facsimile; courier;
copying; postage; supplies; statutory filing charges, including UCC amendments, continuations, and
termination fees; and expenses of BNY's representative(s) and Counsel for attending special meetings.
Fees and expenses of BNY's representatives and Counsel will be charged at the actual amount of fees
and expenses charged and all other expenses will be charged at cost or in an amount equal to 6% of all
expenses billed for the year, in BNY's discretion, and BNY may charge certain expenses at cost and
others on a percentage basis.
TERMS AND DISCLOSURES
TERMS OF PROPOSAL
Final acceptance of the appointment as trustee under the Indenture is subject to approval of authorized
officers of BNY and full review and execution of all documentation related hereto. Please note that if
this transaction does not close, you will be responsible for paying any expenses incurred, including
Counsel fees. We reserve the right to terminate this offer if we do not enter into final written
documents within three months from the date this document is first transmitted to you. Fees may be
subject to adjustment during the life of the engagement.
c:\FRESCHCk,orv«,bnzooas«;«nsc.aa
THE BANK OF NEW YORK
TRUST COMPANY, N.A.
MISCELLANEOUS
The terms of this Fee Schedule shall govern the matters set forth herein and shall not be superseded or
modified by the terms of the Indenture. This Fee Schedule shall be governed by the laws of the State
of California without reference to laws governing conflicts. BNY and the undersigned agree to
jurisdiction of the federal and state courts located in the City/County of Los Angeles, State of
California.
CUSTOMER NOTICE REQUIRED BY THE USA PATRIOT ACT
To help the US government fight the funding of terrorism and money laundering activities, US Federal
law requires all financial institutions to obtain, verify, and record information that identifies each
person (whether an individual or organization) for which a relationship is established.
What this means to you: When you establish a relationship with BNY, we will ask you to provide
certain information (and documents) that will help us to identify you. We will ask for your
organization's name, physical address, tax identification or other government registration number and
other information that will help us to identify you. We may also ask for a Certificate of Incorporation
or similar document or other pertinent identifying documentation for your type of organization.
We thank you for your assistance.
Accepted By: For BNY:
Signature
Date:
Name:
Title
aNFRESCH%CkyofVemnzooas«i«nec.aa
THE BANK OF NEW YORK
TRUST COMPANY, N.A.
The Bank of New York
Dealing and Trading Group
Proposal to serve as Auction Agent for
$275,000,000 City of Vernon
Malberg Electrical System Revenue Bonds
2004 Series A, B and C (Taxable)
ACCEPTANCE FEE: waived
This one-time charge is payable at the time of closing and includes the following services:
• Review of the Auction Agent Agreement, Broker -Dealer Agreement and all
supporting documents.
• Establishing administrative and operational procedures.
ANNUAL ADMINISTRATION FEE .S basis points
This fee is calculated on the principal amount outstanding and is paid in advance on each
anniversary date, with a minimum annual fee of $3,500.00, and includes the following
services:
• Monitoring and maintenance of Broker -Dealer Agreements.
• Maintenance of current holder file.
• Processing of transfer requests
• Calculation of minimum and maximum applicable rates.
• Receipt and compilation of bids and determination of winning auction rate
within the specified timeframe.
• Communication of auction result.
• Response to all inquiries from Issuer, Trustee, Broker -Dealer, DTC and
holder.
• Payment of principal at maturity or redemption.
Out-of-pocket Expenses:
Fees quoted do not include out-of-pocket expenses such as, but not limited to, stationery,
postage, telephone and overnight courier or messenger service which will be billed to the
account. In the event the transaction terminates prior to closing, all out-of-pocket
expenses incurred, if applicable, will also be billed to the account.
Outside Counsel Fees:
The maximum Counsel fee is $2,500.00 plus disbursements. A bill for counsel fees
incurred will be presented for payment on the date of the closing.
Miscellaneous Services:
The charges for performing services not contemplated at the time of the execution of the
Agreement or not specifically covered elsewhere in the schedule will be determined by
appraisal in amounts commensurate with the service. These extraordinary services may
partially be as amendments and releases; the preparation of special or interim reports
which the trustee or agent must submit to security holders, unusual studies, considerations
THE BANK OF NEW YORK
TRUST COMPANY, N.A.
and actions taken with respect to document provisions; and the custody of collateral
which is diversified, voluminous in bulk which involves the trustee or agent in unusual
activity.
General:
The Bank of New York's final acceptance is subject to the full review of all
documentation related hereto, and standard conflict procedures. Please note that if this
transaction does not proceed to a successful conclusion, expenses incurred for the
transaction will be presented for payment. This offer shall be deemed terminated if a
written agreement is not entered into within three months from the date of transmittal.
Dated: November 9, 2004
EXHIBIT
Deutsche Bank
Deutsche Bank Trust Company Americas
Trust & Securities Services
Proposal
For
Auction Agent Services
On the Proposed Issuance of
Presented By:
Oneaka Hendricks
Associate
Deutsche Bank Trust Company Americas
Trust & Securities Services
60 Wall Street, MS 2715
New York, NY 10005
Tel: 212-250-4964
Fax: 212-797-8600
Email: oneaka.hendricks@db.com
November 12, 2004 Private and Confidential
Deutsche Bank
Deutsche Bank Trust Company Americas
Trust & Securities Services
City of Vernon, California
$290 Million; 4 Series;
7 & 28-Day Rate Resets
Our fees to serve as Auction Agent are calculated as follows:
Acceptance Fee:
Waived
Annual Administration Fee: .4 Basis Point
Legal Counsel: Waived, if no opinions are required
$2,000, if opinions are required
Caveats:
• This proposal is subject to satisfactory documentation review of the transaction as well as our own internal credit, conflict and
approval process for both new transactions and new clients.
• All documentation will be subject to New York law.
• We reserve the right to take separate legal advice during documentation review. As Auction Agent we also reserve the right to
take legal advice during the life of the transaction as circumstances warrant. In the event legal charges are incurred, these
charges are your sole responsibility.
• If the aforementioned transaction should fail to close for reasons beyond our control, we reserve the right to charge our
acceptance fee plus reimbursement for legal fees and costs associated with due diligence on the transaction.
• You are responsible for extraordinary expenses and fees for the performance of services not contemplated at the time of the
execution of the documents or not specifically covered in this proposal. Such extraordinary fees and expenses include, but are
not limited to those arising from Bondholder meetings, activities relating to default and workout situations, and amendments and
releases.
• We reserve the right to review our fee arrangement should circumstances warrant.
November 12, 2004 Private and Confidential
Deutsche Bank a
Deutsche Bank Trust Company Americas
Trust & Securities Services
Notice of Acceptance
Should you have any questions regarding this proposal please contact:
Oneaka Hendricks
Associate
(212) 250-4964 phone
(212) 797-8600 fax
oneaka.hendricks a db.com
Please indicate your acceptance to the above fee proposal and caveats by signing in the space provided
below.
Print name:
Signature:
Company name:
Date:
This signed copy should be returned via facsimile to the contact listed above.
Thank you.
November 12, 2004 Private and Confidential
EXHIBIT
C
Grant Thornton So
Accountants and Business Advisors
November 15, 2004
City of Vernon
c/o Mr. Craig Underwood
Bond Logistix
777 South Figueroa Street
Los Angeles, California 90017
Dear Mr. Uudciwood:
This letter is to confirm our understanding of the terms and objectives of our engagement and the nature
and limitations of the services we will provide to the City of Vernon, California (the "City"), Bond
Logistix (the "Financial Advisor's and Morgan Stanley (the "Underwriter'.
We will apply the following procedures, which the City and the Underwriter have specified to verify the
mathematical accuracy of certaih schedules provided to us in connection with the issuance of the City's
Electric System Revenue Bonds, 2004 Series A, B, C and D (the `Bonds' and the refunding of the City's
outstanding Electric System Revenue Bonds, Series A, B and C (the "Refunded Bonds':
(1) We will recalculate the debt service requirement on the Refunded Bonds and the receipt from
the United States Treasury Securities (the "Open -Market Securities' delivered to the escrow
account as shown in the schedules provided by the Underwriter. We will prepare an escrow
account cash flow schedule confirming that the receipt from the Open -Market Securities will
be sufficient to pay the debt service requirement of the Refunded Bonds. As part of our
engagement we will read the applicable pages from the following documents to confirm the
information used in our calculations:
n Official Statement and schedules for the Refunded Bonds to obtain the principal
amounts, principal maturity dates, interest payment dates, interest rates and optional
redemption date and price on the Refunded Bonds; and
(u) Trade Confirmations for the Open -Market Securities to obtain the principal amounts,
interest rates, maturity dates and purchase price.
(2) We will recalculate the yield on the Bonds and the Open -Market Securities as shown
in the schedules provided by the Underwriter. As part of our engagement we will read
the applicable pages from the following documents to confirm the information used in
our calculations:
n Trade Confirmations for the Open -Market Securities to obtain the principal amounts, interest
rates, maturity dates and purchase prices; and
Sure 500
200 South SbM street
MtmeapofS, Minnesota 55402
6128775237 Tel
612J32-M Fax
Grant Thornton LLP
US Member of Grant Thornton international
Mr. Craig Underwood
November 15, 2004
(n) Official Statement for the Bonds insofar as the Bonds are described as to maturity
dates, interest payment dates and principal amounts. The interest rates on the Bonds
were provided by the Underwriter.
This engagement to apply agreed -upon procedures will be performed in accordance with attestation
standards established by the American Institute of Certified Public Accountants. The sufficiency of
these procedures is solely the responsibility of the City, its counsel, the Underwriter and the trustee.
Consequently, we make no representation regarding the sufficiency of the procedures described in
this letter either for the purpose for which this report has been requested or for any other purpose.
The schedules provided to us are the responsibility of the Underwriter. It is understood that our
report is intended solely for the information and use of the City, its counsel, the Underwriter and the
trustee, and is not intended to be and should not be used by anyone other than these specified
parties.
These agreed -upon procedures do not constitute an examination or review of the information and
assumptions obtained from the documents provided to us, the objective of which would be the
expression of an opinion on the completeness or accuracy of the information for purposes of these
calculations. Accordingly, we will not express such an opinion or render such a report. Thus, an
agreed -upon procedures engagement does not provide assurance that we will become aware of all
significant matters that would be disclosed in an examination or review. II; as a result of applying
the above procedures, any matters come to our attention that cause us to believe that such
information should be adjusted, we will disclose those matters in our report
Our fee for this engagement will be $2,500 for a current refunding and $7,500 for a current and
advance refunding. This quote includes all expenses. This quote includes only those services outlined
above and any additional services such as appearing before judicial proceedings will be billed for
separately.
We appreciate the opportunity to work with you on this engagement If you have any questions
about the engagement please feel free to call me at (612) 677-5237.
Sincerely,
GRANT THORNTON LLP
M. Joseph Smith
Partner - Public Finance
injs
The foregoing letter fully describes the services required and is accepted by us.
Date Signature
sufte 500
200 South Sbdh street
MirnmPolis, Minnesota 5M
612-M-5237 Tel
61233ZW Fax
Grant Thornton LLP
US Member of Grant Thornton Intematlonal
EXHIBIT
BOND LOGISTIXuc
INSIGHT. INNOVATION. INTEGRATION.
November 11, 2004
Eric Fresch
City Attorney
City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Re: City of Vernon
Financial Advisory and Financial Derivative Services
Dear Mr. Fresch:
777 South Figueroa Street, Suite 3200
Los Angeles, CA 90017
Phone 213 612 2200 Fax 213 612 2499
www.bondlogistix.com
This letter (the "Agreement's will confirm the engagement by the City of Vernon (the "City") of
Bond Logistix LLC CTLXto provide various financial advisory and financial derivative services (the
"Services"). The Services will generally relate to the City's debt and capital financing plans and economic
development activities. Specific projects, assignments, and tasks requested of BLX by the City will be at the
City's discretion. Prior to taking action on each such request, BLX will provide a written description to the
City of the scope and limitations of its assignment. BLX reserves the right to decline any such request.
Although BLX is a wholly -owned subsidiary of Orrick, Herrington & Sutcliffe LLP ("Orrick'D, a law
firm, BLX's services will not include the delivery of legal services, legal advice or legal opinions of any kind.
Compensation
For financial advisor services to be provided under the Agreement, BLX will charge the hourly rates
as shown on Exhibit A, plus reasonable expenses. In addition, in connection with the closing of any
transactions for which BLX has provided financial advisory services , BLX will charge fees on a per
transaction basis as follows: fifty basis points (50%) applied to the first $30 million of notional amount of
each transaction; thirty basis points (.30%) applied to the notional amount of each transaction between $30
million and $100 million; and .25% applied to the notional amount of each transaction amount greater than
$100 million.
For financial derivative services to be provided under the Agreement, BLX will charge fees equal to
the present value of five (5) basis points multiplied by the notional amount of each derivative transaction.
Payment
BLX's fees for its hourly charges and expenses will be invoiced to the City on a quarterly basis.
BLX's fees due in connection with the closing of any transactions for which BLX provides financial advisory
or financial derivative services will be invoiced upon the execution of such transactions. All amounts
invoiced to the City shall be due within 25 days.
Termination of Agreement
This Agreement may be terminated at any time by written notice from the City or BLX, with or
without cause. In that event, all finished and unfinished documents prepared for adoption or execution by
the City shall, at the option of the City, become its property and shall be delivered to it or to any party it may
designate; provided that BLX shall have no liability whatsoever for any subsequent use of such documents.
In the event of termination by the City, BLX shall be paid for all satisfactory work performed herein, unless
the termination is made for cause, in which event compensation, if any shall be adjusted in the light of the
particular facts and circumstances involved in the termination.
1) .A I I, :A S 1 O S ;A \1 (; F I. 1 S \ I_ AVY O K h SA \ I R -A \ ( I S (()
City of Vernon
JBONO LUG I S T I X November 11, 2004
-swwr. �wwor•now. �wnaa•now.
Page 2
If the foregoing is acceptable to the City, please so indicate by returning the enclosed copy of this
letter, signed by an authorized officer, and retain the original for your files. Thank you again for this
opportunity to work with the City on these matters. We look forward to working with you.
Very truly yours,
BOND LOGISTIX LLC
I:A
A. Craig Underwood
President
ACCEPTED AND AGREED:
CITY OF VERNON
LEONIS C. MALBURG, Mayor
ATTEST:
BRUCE V. MALKENHORST, City Clerk
APPROVED AS TO FORM:
4�-� :Z-1�
ERIC T. FR CH, City Attorney
C:\Documents and Settings\IfS\My Documents\Vernon Financial and Derivative Advisor Contrac t.doc
City of Vernon
80NO LOGISTIX;;c November 11, 2W4
INf ION t. 1 N NOYATI ON. IN T[O• AT I O M.
Page 3
Exhibit A
Professional Designation Rate
Consultant:
$210
Sr. Consultant:
$285
Managing Consultant:
$315
Associate Directors:
$335
Managing Directors:
$400
President:
$465
C Documents and SettingsufS\My DocumentsWcrnon Financial and Derivative Advisor Contract.doc
EXHIBIT
_9
LAW OFFICES
KARNS & KARABIAN
JOHN KARNS
WALTER J. KARABIAN
DAVID E. KENNEY
JEFF A. HARRISON
Eric Fresch
City Attorney
City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Re: City of Vernon
Capital Projects Financings, including
2004 Electric System Revenue Bonds
Retainer Agreement for Legal Services,
Transaction Structure, Closing and
Advisory Services
Dear Mr. Fresch:
SUITE 530
WILSHIRE GRAND OFFICE CENTRE
900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90017-4706
TELEPHONE
(213) 680-9522
FAX
(213) 627-3602
November 17, 2004
This letter (the "Agreement") will confirm the engagement by the City of Vernon (the
"City") of Karns & Karabian to provide legal opinions, various legal and transaction
structure advisory work, other consulting and research services (the "Legal Services")
The Legal Services will generally relate to the City's debt and capital financing plans
and/or transactions (the "Transactions") and arrangements related to financial derivative
instrument contracts. Special projects, assignments and tasks requested of Karns &
Karabian by the City will be at the City's discretion. Prior to taking action on each such
request, Karns & Karabian will provide a written description to the City of the scope and
limitations (if any) of its assignment.
Compensation
For general services to be provided under the Agreement, Karns & Karabian will charge
its current hourly rates, as it does under its General Counsel retainer agreement with
the City as shown on Exhibit A, plus reasonable expenses.
In addition, and in connection with the closing of Transactions, Karns & Karabian will
charge 35 basis points (0.35%) multiplied by the par amount of bonds issued by the
City, payable from the proceeds of the particular financing or bond issue, or payable
directly by the City from other available funds.
J
KARNS & KARABIAN
Eric Fresch
November 17, 2004
Page 2
Separate, apart and in addition thereto from the fees payable in connection with the
closing of Transactions, the City shall pay Karns & Karabian a fee in connection with
the closing of financial derivative instrument contracts, which shall include, but not be
limited to, interest rate swaps, basis swaps, swaption (option on interest rate swaps),
interest rate caps and commodity swaps. Karns & Karabian shall receive a fee of 5
basis points (0.005%) per year based on the expected notional amount and average life
of the derivative instrument and financial contract.
Karns & Karabian will undertake legal and other services necessary to enable the City
to more effectively manage its debt and investments. Karns & Karabian will opine as to
the City's compliance with the provisions of Governmental Accounting Standards Board
("GASB"), Technical Bulletin 2003-1, related GASB Statements and Financial
Accounting Standards Board Statements, as applicable to the financial derivatives
contracts the City may enter into, and the disclosure requirements for derivatives in the
City's financial statements.
If the foregoing is acceptable to the City, please so indicate by returning an executed
copy of this letter, and retain the original for your files. Thank you again for this
opportunity to work with the City.
ATTEST:
Bruce V. Malkenhorst, City Clerk
APPROVED AS TO FORM:
i��- ��A /'
Eric T. Fresch, City Attorney
Very truly yours,
IAN
ACCEPTED AND AGREED:
City of Vernon
Leonis C. Malburg, Mayor
EXHIBIT "A"
General Counsel Retainer Agreement
Hourly Rate Schedule as of November 17, 2004
John Karns
Walter Karabian
Jeff Harrison
Robert Koeller
Michael Bowler
David Kenney
$500.00
$500.00
$420.00
$475.00
$420.00
$420.00
SUPPORTING
DOCUMENTS
INDEX OF DOCUMENTS FOR RESOLUTION NO. 8601
(EITHER AS AN EXHIBIT OR SUBMITTED CONCURRENTLY)
EXHIBITS
EXHIBIT A: BNY TRUSTEE PROPOSAL
EXHIBIT B: DEUTSCHE BANK AUCTION AGENT PROPOSAL
EXHIBIT C: GRANT THORNTON VERIFICATION AGENT PROPOSAL
EXHIBIT D: BOND LOGISTIX FINANCIAL SERVICES PROPOSAL
EXHIBIT E: KARNS & KARABIAN LEGAL SERVICES RETAINER
AGREEMENT
SUBMITTED CONCURRENTLY
BROKER -DEALER AGREEMENT
PURCHASE CONTRACT
PRELIMINARY OFFICIAL STATEMENT
CONTINUING DISCLOSURE AGREEMENT (ATTACHED TO PRELIMINARY
OFFICIAL STATEMENT)
BROKER -DEALER AGREEMENT
Dated as of 1, 2004
among
as Auction Agent
and
as Broker -Dealers
and
BNY WESTERN TRUST COMPANY,
as Trustee
relating to
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BONDS,
2004 SERIES A
DOCSLA1:484346.1
TABLE OF CONTENTS
SECTION 1.
DEFINITIONS AND RULES OF CONSTRUCTION .............................................. 2
1.1
Terms Defined by Reference to the Indenture..................................................................
2
1.2
Terms Defined Herein.......................................................................................................
2
1.3
Rules of Construction........................................................................................................
2
1.4
Warranties of each BD......................................................................................................
3
1.4
Warranties of the Auction Agent.......................................................................................
3
1.4
Warranties of the Trustee..................................................................................................
3
SECTION2.
THE AUCTION..........................................................................................................
3
2.1
Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures.........................................................................................................................
3
2.2
Preparation for Each Auction............................................................................................
4
2.3
Auction Schedule; Method of Submission of Orders........................................................
5
2.4
Notices...............................................................................................................................6
2.5
Compensation....................................................................................................................6
2.6
Settlement..........................................................................................................................7
SECTION 3.
THE AUCTION AGENT...........................................................................................
7
3.1
Duties and Responsibilities of the Auction Agent.............................................................
7
3.2
Rights of the Auction Agent..............................................................................................
8
3.3
Auction Agent's Disclaimer..............................................................................................
9
SECTION4.
DISCLOSURE............................................................................................................
9
4.1
Disclosure..........................................................................................................................9
SECTION 5.
MISCELLANEOUS.................................................................................................
10
5.1
Termination.....................................................................................................................10
5.2
Participant........................................................................................................................10
5.3
Communications..............................................................................................................10
5.4
Entire Agreement............................................................................................................
12
5.5
Benefits; Successors and Assigns; Third Party Beneficiaries .........................................
13
5.6
Amendment; Waiver.......................................................................................................
13
5.7
Severability......................................................................................................................13
5.8
Execution in Counterparts...............................................................................................
13
5.9
Governing Law; Jurisdiction; Waiver of Trial by Jury ...................................................
13
5.10
No Implied Duties...........................................................................................................
13
5.11
Trustee.............................................................................................................................14
1
DOCSLAt :484346.1
BROKER -DEALER AGREEMENT
THIS BROKER -DEALER AGREEMENT, dated as of 1, 2004 (the `Broker -
Dealer Agreement"), among (1) , a Delaware banking corporation (the
"Auction Agent"), not in its individual capacity but solely as Auction Agent, pursuant to
authority granted to the Auction Agent in the Auction Agent Agreement, dated as of
1, 2004 (the "Auction Agent Agreement"), between BNY WESTERN TRUST COMPANY, as
trustee (the "Trustee"), and the Auction Agent, and acknowledged by the City of Vernon (the
"City"); (2) , as broker -dealers (each, a `BD" or a "Broker -Dealer" and, collectively,
the "BDs" or the "Broker -Dealers"); and (3) the Trustee;
WITNESSETH
WHEREAS, $ aggregate principal amount of City of Vernon Electric System
Revenue Bonds, 2004 Series A (the "Bonds") are being issued pursuant to and Indenture of
Trust, dated as of April 1, 2003 between the City and the Trustee, as amended and supplemented
by the Fourth Supplemental Indenture of Trust, dated as of 1, 2004 between the City
and the Trustee (said Indenture of Trust, as amended and supplemented and as the same may be
amended and supplemented, is herein called the "Indenture"); and
WHEREAS, the BDs are to perform certain duties set forth herein; and
WHEREAS, the Indenture provides that, except as provided therein, the interest rate with
respect to the Bonds, as of the date of issuance and until converted to bear interest at another
rate, shall be the ARB Interest Rate which shall be, except as otherwise provided therein, the rate
per annum that the Auction Agent determines to have resulted from the implementation of the
Auction Procedures; and
WHEREAS,
of the Auction Agent
Agreement, the Auction
Agreement; and
has been appointed as Auction Agent for purposes
Agreement, and pursuant to Section 2.6(a) of the Auction Agent
Agent has been directed to execute and deliver this Broker -Dealer
WHEREAS, the Auction Procedures require the participation of one or more Broker -
Dealers;
NOW, THEREFORE, the Auction Agent, the BDs, for the benefit of the Existing Owners
and the Potential Owners of the Bonds, and the Trustee agree as follows:
SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1 Terms Defined by Reference to the Indenture. Capitalized terms not
defined herein shall have the respective meanings specified in the Indenture. Unless otherwise
specified, Section references to the Auction Agent Agreement refer to such Sections in the
Auction Agent Agreement.
1.2 Terms Defined Herein. As used herein and in the exhibits hereto, the
following terms shall have the following meanings, unless the context otherwise requires.
DOCSLA1:484346.1
(a) "Authorized Officers" shall mean, in the case of the Trustee, each Vice
President, Assistant Vice President and Assistant Secretary of the Trustee's Corporate Trust
Department and every other officer or employee of the Trustee designated as an "Authorized
Officer" for purposes hereof in a written communication to a BD, and, in the case of the Auction
Agent, each [Vice President, Assistant Vice President and authorized representative of the
Auction Agent assigned to its Corporate Capital Markets Division] and every other officer or
employee of the Auction Agent designated as an "Authorized Officer" for purposes hereof in a
written communication to a BD.
(b) "BD Officer" shall mean each officer or employee of a BD designated as a
"BD Officer" for purposes of this Broker -Dealer Agreement in a communication to the Auction
Agent.
(c) "Broker -Dealer Agreement" shall mean this Broker -Dealer Agreement
and any substantially similar agreement among the Auction Agent, a BD and the Trustee.
(d) "Person" shall mean an individual, association, unincorporated
organization, corporation, partnership, joint venture, business trust or a government or an agency
or a political subdivision thereof, or any other entity.
(e) "Settlement Procedures" shall mean the Settlement Procedures for the
Bonds and shall be substantially in the form attached hereto as Exhibit A.
1.3 Rules of Construction. Unless the context or rules indicates another or
different meaning or intent, the following rules shall apply to the construction of this Broker -
Dealer Agreement:
(a) Words importing the singular number shall include the plural number and
vice versa.
(b) The captions and headings herein are solely for convenience of reference
and shall not constitute a part of this Broker -Dealer Agreement nor shall they affect its meaning,
construction or effect.
(c) The words "herein," "hereof," "hereto," and "hereunder" and other words
of similar import refer to this Broker -Dealer Agreement as a whole and not to any particular
Section or other subdivision.
(d) All references herein to a particular time of day shall be to New York City
time.
(e) Each reference to the "purchase," "sale" or "holding" of the Bonds shall
refer to beneficial ownership interests in the Bonds unless the context clearly requires otherwise.
(f) Any reference herein to the Bonds shall be deemed to be references to the
Bonds while such Bonds bear interest at an ARB Interest Rate. Any reference to Bonds shall be
deemed to be references to each series and subseries of Bonds. References herein to an Auction
and the Auction Procedures shall apply separately to each series and subseries of Bonds.
DOCSLA1:484346.1 2
1.4 Warranties of each BD. Each BD hereby represents and warrants that this
Broker -Dealer Agreement has been duly authorized, executed and delivered by such BD and
that, assuming the due authorization, execution and delivery hereof by the Auction Agent and the
Trustee, this Broker -Dealer Agreement constitutes a valid and binding agreement of such BD,
enforceable against it in accordance with its terms.
1.5 Warranties of the Auction Agent. The Auction Agent hereby represents
and warrants that this Broker -Dealer Agreement has been duly authorized, executed and
delivered by the Auction Agent and that, assuming the due authorization, execution and delivery
hereof by each BD and the Trustee, this Broker -Dealer Agreement constitutes a valid and
binding agreement of the Auction Agent, enforceable against it in accordance with its terms,
except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization,
receivership, fraudulent conveyance, moratorium or other laws of general application relating to
or affecting the enforcement of creditors' rights and remedies, as from time to time in effect, (b)
application of equitable principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or (c) principles of course of dealing or course of performance
and standards of good faith, fair dealing, materiality or reasonableness that may be applied by a
court to the exercise of rights or remedies.
1.6 Warranties of the Trustee. The Trustee hereby represents and warrants
that this Broker -Dealer Agreement has been duly authorized, executed and delivered by the
Trustee and that, assuming the due authorization, execution and delivery hereof by the Auction
Agent and each BD, this Broker -Dealer Agreement constitutes a valid and binding agreement of
the Trustee, enforceable against it in accordance with its terms. Other than as set forth in this
Section 1.6, the Trustee makes no representation as to the validity or adequacy of this Broker -
Dealer Agreement.
SECTION 2. THE AUCTION.
2.1 Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The Auction Procedures will be followed by the Auction Agent for the
purpose of determining the ARB Interest Rate for the Bonds for each Auction Period after the
first Interest Period for the Bonds. Each periodic implementation of such procedures is
hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and shall be deemed
to be a part of this Broker -Dealer Agreement to the same extent as if such provisions were fully
set forth herein.
(c) Each BD agrees to act as, and assumes the obligations of, and limitations
and restrictions placed upon, a Broker -Dealer under this Broker -Dealer Agreement. Each BD
understands that other Persons meeting the requirements specified in the definition of `Broker -
Dealer" contained in Exhibit B to the Indenture may execute Broker -Dealer Agreements and
DOCSLA1:484346.1 3
participate as Broker -Dealers in Auctions. Each BD agrees to handle customer orders in
accordance with its respective duties under applicable securities laws and rules.
(d) Each BD and other Broker -Dealers may participate in Auctions for their
own accounts. The City may, however, by notice to each BD and all other Broker -Dealers,
prohibit all of the Broker -Dealers from submitting Bids in Auctions for their own accounts,
provided that Broker -Dealers may continue to submit Hold Orders and Sell Orders.
Notwithstanding the foregoing, if a BD is an affiliate of the City, it may not submit Bids to
purchase the Bonds in Auctions for its own account, but may submit Hold Orders and Sell
Orders in Auctions with respect to the Bonds otherwise acquired for its own account. The
Auction Agent shall be under no duty or liability with respect to monitoring or enforcing
compliance with this Section 2.1(d).
2.2 Preparation for Each Auction.
(a) Not later than 9:30 a.m. on each Auction Date for the Bonds, the Auction
Agent shall advise the Broker -Dealers and the Trustee by telephone or other electronic
communication acceptable to the parties of the All -Hold Rate and the Index for the Bonds.
(b) On the Delivery Date and from time to time thereafter as the Auction
Agent shall request, each BD shall provide the Auction Agent with a list, substantially in the
form of Exhibit E hereto, of the names of its customers that it believes are Existing Owners of
the Bonds and the principal amount of the Bonds held by each of such customers. The Auction
Agent shall not disclose any such information so provided to any Person other than the Trustee,
the City or such BD except as otherwise required by law; provided, that the Auction Agent
reserves the right and is authorized to disclose any such information if (a) it is ordered to do so
by a court of competent jurisdiction or a regulatory, judicial or quasi-judicial agency or authority
having the authority to compel such disclosure, (b) it is advised by its counsel that its failure to
do so would be unlawful or (c) failure to do so would expose the Auction Agent to loss, liability,
claim, damage or expense for which it has not received indemnity satisfactory to it.
(c) Not later than 3:00 p.m. on the Record Date preceding each Auction Date,
the Auction Agent shall notify each BD of any change in the aggregate principal amount of the
Bonds, as of the opening of business on such Record Date by delivering a notice to such BD by
telecopy or other electronic communication acceptable to the parties.
DOCSLA1:484346.1 4
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Auction Agent shall conduct Auctions for the Bonds in accordance
with the schedule set forth below. Such schedule may be amended in accordance with the
provisions of Section 2.10(h) of the Indenture.
Time Event
By 9:30 a.m. Auction Agent advises each BD of the All -Hold Rate
and the Index, as set forth in Section 2.2(a) hereof and
Section 2.03(a) of Exhibit B of the Indenture.
Promptly after applicable Auction Agent assembles Orders submitted or deemed
Submission Deadline submitted to it by each BD as provided in Section
2.03(b) of Exhibit B of the Indenture and makes
determinations pursuant to Section 2.03(b) of Exhibit B
of the Indenture.
By not later than the close of Submitted Bids and Submitted Sell Orders are accepted
business and rejected and the Bonds allocated as provided in
Section 2.04 of Exhibit B of the Indenture. Auction
Agent gives notice of Auction results as set forth in
Section 2.4(a) hereof.
(b) Each BD agrees, for the purpose of implementing the Auctions (and
thereby achieving the lowest possible interest rate with respect to the Bonds), to contact Potential
Owners, including Persons that are not Existing Owners, prior to the Submission Deadline on
each Auction Date to determine the principal amount of the Bonds, if any, that each such
Potential Owner offers to purchase if the rate determined by the Auction Procedures for the next
succeeding Auction Period is not less than the rate per annum requested by such Potential
Owner. BD further agrees, upon request, to deliver a copy of the Auction Procedures and other
relevant documents prepared for the purpose of disclosure to Potential Owners by the City
relating to the Bonds to each Potential Owner prior to such Potential Owner's participation in
any Auction.
(c) In each Auction in which a BD submits one or more Orders, such BD shall
submit a separate Order to the Auction Agent for each Potential Owner or Existing Owner on
whose behalf such BD is submitting an Order and shall not net the Orders of different Potential
Owners or Existing Owners on whose behalf such BD is submitting Orders. Each Order shall be
in writing or communicated via electronic means in substantially the form attached hereto as
Exhibit B or in such other form as may be reasonably acceptable to the Auction Agent.
(d) Each BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C of transfers of the Bonds made through BD
by an Existing Owner to another Person other than pursuant to an Auction, and (ii) a written
notice, substantially in the form attached hereto as Exhibit D of the failure of any of the Bonds to
be transferred to or by any Person that purchased or sold the Bonds through such BD pursuant to
DOCSLA1:484346.1 5
an Auction. The Auction Agent is not required to accept any such notice specified in this
subsection (d) for an Auction if it is received by it after 3:00 p.m. on the Business Day preceding
such Auction.
(e) Each BD agrees to handle its customers' orders in accordance with its
duties under applicable securities laws and rules.
2.4 Notices.
(a) On each Auction Date, the Auction Agent shall notify each BD by
telephone or other electronic communication acceptable to the parties of the results of the
Auction as set forth in the Settlement Procedures. As soon as reasonably practicable thereafter,
the Auction Agent shall notify such BD, if so requested, in writing of the disposition of all
Orders submitted by such BD in the Auction held on such Auction Date.
(b) The Auction Agent shall notify each BD of any amendment of the Auction
schedule set forth in Section 2.3(a).
(c) Each BD shall notify each Existing Owner or Potential Owner on whose
behalf such BD has submitted an Order as set forth in paragraph (b) of the Settlement
Procedures, and take such other action as is required of such BD pursuant to the Settlement
Procedures.
(d) The Auction Agent shall deliver to each BD after receipt all notices and
certificates which the Auction Agent is required to deliver to such BD pursuant to Section 2 of
the Auction Agent Agreement at the times and in the manner set forth in the Auction Agent
Agreement.
2.5 Compensation.
(a) On each ARB Interest Payment Date, the City shall pay to the Trustee, for
the benefit of each BD, the fees determined as set forth in subsection (b) hereof (the `Broker -
Dealer Fee"), in arrears, in compensation for the services of such BD in facilitating Auctions for
the benefit of the beneficial owners of the Bonds.
(b) Each BD shall be entitled to receive a Broker -Dealer Fee equal to either
(1) if an Auction was held, the product of (x) [0.25] of 1% multiplied by (y) the aggregate
principal amount of Outstanding Bonds for which such BD is the Broker -Dealer, multiplied by
(z) a fraction, the numerator of which is (i) if the Auction Period is daily, seven days, 28 days, 35
days or three months, the actual number of days in the Auction Period next succeeding such
Auction Date or (ii) if the Auction Period is six months, the number of days in the Auction
Period next succeeding such Auction Date calculated on the basis of twelve 30-day months in a
year, and in either case the denominator of which is 360; or (2) if an Auction was not held, the
product of (x) [0.25] of 1% multiplied by (y) the aggregate principal amount of Outstanding
Bonds for which such BD is the Broker -Dealer. The Broker -Dealer Fee shall be calculated by the
Auction Agent, which shall be conclusive absent manifest error. Such amounts shall be
communicated by the Auction Agent to the City and the Trustee by 4:00 p.m., New York City
time, on the Business Day immediately preceding each ARB Interest Payment Date. On or
DOCSLA1:484346.1 6
before 10:00 a.m. on each ARB Interest Payment Date, the City shall pay to the Trustee the
amount due to the Broker -Dealer. By noon on each ARB Interest Payment Date, the Trustee
shall deliver to the Auction Agent the amount constituting the Broker -Dealer Fee for each BD,
by wire transfer of immediately available funds to such accounts as the Auction Agent may
designate. The amount constituting the Broker -Dealer Fee shall be held by the Auction Agent on
behalf of each BD and, immediately upon receipt of such Fee, the Auction Agent shall deliver
such Fee to the applicable BD, pursuant to the written instructions of such BD. If any Existing
Owner who acquired the Bonds through the BD transfers any such Bonds to another Person other
than through an Auction, the BD for the Bonds so transferred shall continue to be the BD with
respect to such Bonds, provided, however, that if the transfer was effected by, or if the transferee
is, another Person who has met the requirements specified in the definition of "Broker -Dealer"
contained in the Indenture and executed a Broker -Dealer Agreement, such Person shall be the
Broker -Dealer for such Bonds.
2.6 Settlement.
(a) If any Potential Owner on whose behalf a BD has submitted an Order fails
to deliver funds with respect to any Auction, such BD shall promptly deliver such funds to the
party entitled to receive such funds. If any Existing Owner on whose behalf a BD has submitted
an Order fails to instruct its Agent Member to deliver the Bonds subject to such Order against
payment therefor, such BD shall instruct such Agent Member to deliver such Bonds against
payment therefor. The delivery of funds by a BD for the purchase of the Bonds by a Potential
Owner, as provided above, shall not relieve such Potential Owner of any liability to such BD for
payment for such Bonds. Notwithstanding the foregoing provisions of this Section 2.6(a), any
delivery or nondelivery of the Bonds which represents any departure from the results of an
Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction
Agent shall have been notified of such delivery or non -delivery in accordance with the terms of
Section 2.3(d). The Auction Agent shall have no duty or liability with respect to monitoring or
enforcement of this Section 2.6(a).
(b) The Auction Agent, the Trustee and the City shall have no responsibility
or liability with respect to the failure of an Existing Owner, a Potential Owner or its respective
Agent Member to deliver the Bonds or to pay for the Bonds sold or purchased pursuant to the
Auction Procedures or otherwise. The Auction Agent shall have no responsibility for any
adjustment to the fees paid pursuant to Section 2.5 hereof as a result of any failure described in
this Section 2.6(b).
DOCSLA1:484346.1 7
SECTION 3. THE AUCTION AGENT.
3.1 Duties and Responsibilities of the Auction Agent.
(a) The Auction Agent is acting solely as the non -fiduciary agent of the
Trustee and owes no duties, fiduciary or otherwise, to any other Person by reason of this Broker -
Dealer Agreement, and no implied duties, fiduciary or otherwise, shall be read into this Broker -
Dealer Agreement against the Auction Agent.
(b) The Auction Agent undertakes to perform such duties and only such duties
as are expressly set forth herein, or expressly incorporated herein by reference pursuant to
Section 2.1(b), to be performed by it, and no implied covenants or obligations shall be read into
this Broker -Dealer Agreement against the Auction Agent.
(c) In the absence of negligence or willful misconduct on its part, the Auction
Agent, whether acting directly or through agents or attorneys as provided in Section 3.2(d), shall
not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in
the performance of its duties hereunder. The Auction Agent shall not be liable for any error of
judgment made in good faith unless the Auction Agent shall have been negligent in ascertaining
the pertinent facts necessary to make such judgment, whether acting directly or through agents or
attorneys appointed with due care by the Auction Agent, as provided in Section 3.2(d) hereof.
(d) The Auction Agent shall not be: (i) required to and does not make any
representations nor have any responsibilities as to the validity, accuracy, value or genuineness of
any signatures or endorsements, other than its own, on any document delivered pursuant to or as
contemplated by this Broker -Dealer Agreement; (ii) obligated to take any legal action hereunder
that might, in its judgment, involve any expense or liability, unless it has been furnished with
reasonable indemnity; and (iii) responsible for or liable in any respect on account of the identity,
authority or rights of any Person executing or delivering or purporting to execute or deliver any
document under this Broker -Dealer Agreement.
3.2 Rights of the Auction Agent.
(a) The Auction Agent may conclusively rely upon, and shall be fully
protected in acting or refraining from acting upon, any communication authorized hereby and
upon any such written instruction, notice, request, direction, consent, report, certificate, share
certificate or other instrument, paper or other document believed by it to be genuine. The
Auction Agent shall not be liable for acting or refraining from acting in good faith upon any such
communication made by telephone, telecopier or other electronic communication acceptable to
the parties which the Auction Agent reasonably believes (or has no reason not to believe) to have
been given by the particular party or parties. To the extent permitted by law, the Auction Agent
may record telephone communications with BD, and BD may record telephone communications
with the Auction Agent.
(b) The Auction Agent may consult with counsel of its choice (provided that
such selection is made with reasonable care), and the advice of such counsel shall be full and
complete authorization and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
DOCSLAI:484346.1 8
(c) The Auction Agent shall not be required to advance, expend or risk its
own funds or otherwise incur or become exposed to financial liability in the performance of its
duties or the exercise of its rights hereunder.
(d) The Auction Agent may perform any of its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and the Auction Agent shall not be
responsible for any misconduct or negligence on the part of any agent or attorney appointed by it
hereunder with due care.
(e) The Auction Agent shall have no obligation to monitor, or liability in
respect of, the registration or exemption therefrom of the Bonds (or any beneficial ownership
interest therein) under any federal or state securities laws or in respect of any transfer of the
Bonds (or any beneficial ownership interest therein) pursuant to the terms of this or any other
Broker -Dealer Agreement, the Auction Agent Agreement, the Indenture, any other document
contemplated by any thereof, or otherwise, including, but not limited to, compliance with any
such laws in regards to any such registration, exemption or transfer or in respect of any of the
Securities Depository's procedures applicable to transactions between itself and its Agent
Members or others.
(f) Notwithstanding anything to the contrary herein, (i) any corporation or
other entity into which the Auction Agent may be merged or converted or with which it may be
consolidated, (ii) any corporation or other entity resulting from any merger, conversion or
consolidation to which the Auction Agent may be a party or (iii) any corporation or other entity
succeeding to the business of the Auction Agent shall be the successor of the Auction Agent
hereunder without the execution or filing of any paper with any party hereto or any further act on
the part of any of the parties hereto, except where any instrument of transfer or assignment is
required by law to effect such succession; provided that the Auction Agent shall provide prior
written notice of such succession to the City.
3.3 Auction Agent's Disclaimer. The Auction Agent makes no representations
as to and shall have no liability with respect to the correctness of the recitals in, or the validity as
to parties other than the Auction Agent, accuracy or adequacy of, this Broker -Dealer Agreement,
the Auction Agent Agreement, the Indenture, the Bonds or any Official Statement or any other
offering material used in connection with the offer and sale of the Bonds or any other agreement
or instrument executed in connection with the transactions contemplated herein or in any thereof.
SECTION 4. DISCLOSURE
4.1 Disclosure.
(a) The City agrees to supply to each BD, at the City's expense, such number
of copies of the Official Statement, dated , 2004, including any amendments thereto
(the "Official Statement"), as a BD shall reasonably request from time to time. Upon request of a
BD and the City will amend the Official Statement so that the Official Statement will not contain
any untrue statement of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they are made, not misleading.
DOCSLA1:484346.1 9
(b) The City agrees to promptly notify the BDs of any material adverse
change in the condition of the City, financial or otherwise. If a BD determines (upon
consultation and mutual agreement with the City) that it is necessary or desirable to use a
disclosure statement (other than the Official Statement) relating specifically to the Bonds (a
"Disclosure Statement") in connection with the solicitation of Orders for the Bonds, such BD
will notify the City, and the City will provide such BD with a Disclosure Statement reasonably
satisfactory to such BD and its counsel. The City will supply all BDs, at the City's expense, with
such number of copies of such Disclosure Statement as any BD requests from time to time and
will, upon request of a BD, amend such Disclosure Statement (as well as the documents
incorporated by reference therein) so that such Disclosure Statement will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they are made, not misleading. In
connection with the use of any Disclosure Statement by a BD in its solicitation of Orders for the
Bonds (other than the Official Statement), the City will furnish to such BD such certificates,
accountants' letters and opinions of counsel as would be customary in a public offering of tax-
exempt securities underwritten by such BD. In addition, the City will, at the City's expense, take
all steps reasonably requested by a BD that such BD or its counsel may consider necessary or
desirable to effect compliance with applicable federal or state securities laws.
SECTION 5. MISCELLANEOUS.
5.1 Termination. A BD may resign and be discharged of its duties at any time
by giving at least thirty (30) days' notice to the City and the Trustee; provided, however, that BD
may resign immediately if it determines, in its reasonable judgment, that for any reason,
including, without limitation, (i) a pending or proposed change in applicable tax laws, (ii) a
material adverse change in the financial condition of the City, (iii) hostilities involving the
United States, (iv) a down -rating of the Bonds, or (v) an imposition of material restrictions on the
Bonds or similar obligations, it is not advisable to attempt to Auction the Bonds. A BD may be
removed by the Trustee, at the direction of the City and upon five (5) days' written notice to such
BD and to the other parties hereto. This Broker -Dealer Agreement shall terminate automatically
(i) upon the termination of the Auction Agent Agreement or (b) with respect to a BD who has
resigned or been removed pursuant to this Section 5.1, upon the resignation or removal of such
BD pursuant to this Section 5.1.
5.2 Participant. BD is and for the term of this Broker -Dealer Agreement shall
remain a member of, a direct participant in, or an affiliate of such a member or participant in, the
Securities Depository; and will give the Auction Agent, each other Broker -Dealer, the City and
the Trustee two Business Days' notice if it ceases to be so or if it changes its participation or
affiliation to a different Securities Depository.
5.3 Communications. Except for (i) communications authorized to be by
telephone pursuant to this Broker -Dealer Agreement or the Auction Procedures and
(ii) communications in connection with Auctions (other than those expressly required to be in
writing) all notices, requests and other communications to any party hereunder shall be in writing
(for the purposes of this Broker -Dealer Agreement, telecopy or similar writing or other electronic
communication acceptable to the parties shall be deemed to be in writing) and shall be given to
DOCSLA1:484346.1 10
such party, addressed to it, at its address, telecopy number or e-mail address, if any, set forth
below and, where appropriate, reference the particular Auction to which such notice relates:
If to the BDs,
addressed, as applicable:
If to the Auction Agent,
addressed:
If to the City,
addressed:
If to the Trustee,
addressed:
Attention:
Phone:
Fax:
Email:
Attention:
Phone:
Fax:
Email:
City of Vernon
Attention:
Phone:
Fax:
Email:
BNY Western Trust Company
Attention:
Phone:
Fax:
Email:
or such other address, telecopy number or e-mail address, if any, as such party may hereafter
specify for such purpose by notice to the other party. Each such notice, request or
communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to
the telecopy number specified herein or (ii) if given by any other means, when delivered at the
address specified herein. Communications shall be given on behalf of BD by a BD Officer and
on behalf of the Auction Agent and the Trustee by an Authorized Officer.
5.4 Entire Agreement. This Broker -Dealer Agreement, and the other
agreements and instruments executed and delivered in connection with the issuance of the
DOCSLA1:484346.1 I 1
Bonds, contain the entire agreement between the parties relating to the subject matter hereof, and
there are no other representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties relating to the subject matter hereof.
5.5 Benefits; Successors and Assigns; Third Party Beneficiaries. This Broker -
Dealer Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the
respective successors and assigns of each BD, the Auction Agent and the Trustee, including, but
not limited to, those under Section 3.2(f) hereof. Nothing in this Broker -Dealer Agreement,
express or implied, shall give to any Person, other than each BD, the Auction Agent and the
Trustee and their respective successors and assigns, including, but not limited to, those under
Section 3.2(f) hereof, any benefit of any legal or equitable right, remedy or claim under this
Broker -Dealer Agreement, other than the rights expressly granted to the City herein.
Notwithstanding the foregoing, the City is an express third -parry beneficiary of this Broker -
Dealer Agreement, entitled to enforce its terms as if a party hereto.
5.6 Amendment; Waiver.
(a) This Broker -Dealer Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of each of the parties hereto.
(b) Failure of any party to this Broker -Dealer Agreement to exercise any right
or remedy hereunder in the event of a breach of this Broker -Dealer Agreement by any other party
shall not constitute a waiver of any such right or remedy with respect to any subsequent breach.
5.7 Severability. If any clause, provision or section of this Broker -Dealer
Agreement shall be ruled invalid or unenforceable by any court of competent jurisdiction, the
invalidity or unenforceability of such clause, provision or section shall not affect any of the
remaining clauses, provisions or sections hereof.
5.8 Execution in Counterparts. This Broker -Dealer 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.
5.9 Governing Law; Jurisdiction; Waiver of Trial by Jury. This Broker -Dealer
Agreement shall be governed by and construed in accordance with the laws of the State of
California applicable to agreements made and to be performed within the State of California,
except that with regard to the rights and duties of the Auction Agent, Delaware law applicable to
agreements made to be performed within the State of Delaware shall apply. The parties agree
that all actions and proceedings arising out of this Auction Agent Agreement or any of the
transactions contemplated hereby shall be brought in the United States District Court for the
Eastern District of California or in a California State Court in the County of Los Angeles and
that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue
in, such court. Each of the parties hereto also irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim arising out of this Auction Agent Agreement or the
transactions contemplated hereby.
DOCSLA1:484346.1 12
5.10 No Implied Duties. Nothing contained in this Broker -Dealer Agreement,
the Indenture or the Auction Agent Agreement shall be deemed to imply any duties, covenants or
obligations on the part of the City not otherwise expressly set forth herein or therein.
5.11 Trustee. All privileges, rights and immunities granted to the Trustee in the
Indenture are hereby extended and applicable to the Trustee's obligations hereunder.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
DOCSLA1:484346.1 13
IN WITNESS WHEREOF, the parties hereto have caused this Broker -Dealer Agreement
to be duly executed and delivered by their proper and duly authorized officers as of the date first
above written.
as Auction Agent
Lo
Authorized Signatory
as Broker Dealer
LN
Authorized Signatory
BNY WESTERN TRUST COMPANY,
as Trustee
Authorized Signatory
ACKNOWLEDGEMENT AND AGREEMENT
The City hereby acknowledges and agrees to its obligations under Sections 2.5 and 4.1
and agrees that such obligations shall survive the termination of this Broker -Dealer Agreement
for any reason and the resignation and removal of any BD.
CITY OF VERNON
Authorized Signatory
DOCSLA1:484346.1 14
EXHIBIT A
SETTLEMENT PROCEDURES FOR THE BONDS
DOCSLA1:484346.1 A-1
EXHIBIT B
(Submit only one Order on this Order Form)
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BONDS,
2004 SERIES A
Attention:
Date of Auction
The undersigned Broker -Dealer submits the following Order on behalf of the Bidder listed
below:
Name of Bidder:
Bidder places the Order listed below covering the Bonds indicated (complete only one blank):
Bonds now held by Bidder (an Existing Owner), and the Order is a
(check one):
Hold Order; or
Bid at rate of %; or
Sell Order.
or
$ Bonds not now held by Bidder (a Potential Owner), and the Order is a
Bid at a rate of %.
DOCSLA1:484346.1 B-1
Notes: (1) If submitting more than one Order for one Bidder, use additional Order
Forms.
(2) If one or more Orders covering in the aggregate more than the number of
Outstanding Bonds held by any Existing Owner are submitted, such Orders
shall be considered valid in the order or priority set forth in the Auction
Procedures.
(3) A Hold Order may be placed only by an Existing Owner covering a number
of Outstanding Bonds not greater than the number of Outstanding Bonds
currently held.
(4) Potential Owners may make only Bids, each of which must specify a rate. If
more than one Bid is submitted on behalf of any Potential Owner, each Bid
submitted shall be a separate Bid with the rate specified.
(5) Bids may contain no more than three figures to the right of the decimal
point.
(6) An Order must be submitted in integral multiples of $25,000.
Name of Broker -Dealer:
DOCSLA1:484346.1 B-2
EXHIBIT C
(To be used only for transfers of the Bonds made other than pursuant to an Auction)
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BONDS,
2004 SERIES A
TRANSFER FORM
Attention:
Check I, II or III
We are the Existing Owner named below.
II. We are the Agent Member for such Existing Owner.
III. We are a Broker -Dealer for such Existing Owner.
We hereby notify you that the Existing Owner named below has transferred:
Bonds* to
* Bonds may only be transferred in integral multiples of $25,000.
DOCSLA1:484346.1 C-1
Complete either I or II
I. Corporate Name of Existing Owner:
LI-A
Printed Name:
Title:
II. Corporate Name of Existing Owner:
LE
Name of Agent Member or Broker -Dealer
Submitting this notice:
Printed Name:
Title:
DOCSLA1:484346.1 C-2
EXHIBIT D
(To be used for failure to deliver the Bonds sold pursuant to an Auction)
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BONDS,
2004 SERIES A
NOTICE OF FAILURE TO DELIVER
Attention:
Complete either I or II
I. We are a Broker -Dealer for (the "Purchaser"), who was to
purchase $ Bonds* in the Auction held on
II. We are a Broker -Dealer for (the "Seller"), who was to sell
$ Bonds* in the Auction held on
We hereby notify you that (check one):
❑ the Seller failed to deliver such Bonds to us.
❑ the Purchaser failed to make payment to us upon delivery of such Bonds.
❑ the following Broker -Dealer failed to deliver to us such Bonds.
❑ the following Broker -Dealer failed to make payment to us upon delivery of such
Bonds:
(Name of Broker -Dealer submitting this notice)
By:
Printed Name:
Title:
* Bonds may only be transferred in integral multiples of $25,000.
DOCSLA1:484346.1 D-1
EXHIBIT E
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BONDS,
2004 SERIES A
LISTING OF EXISTING OWNERS OF THE BONDS
Attention:
The undersigned Broker -Dealer hereby provides the names and related principal amounts
of each of its customers that it believes is an Existing Owner of the Bonds:
Name of Existing Owner Principal Amount of the Bonds
Name of Broker -Dealer:
LOW
Name:
Title:
DOCSLA1:484346.1 E-1
SAB&W LLP Draft
November 3, 2004
$[principal amount]
CITY OF VERNON
Electric System Revenue Bonds
$[Series A principal amount] $[Series B principal amount]
2004 Series A 2004 Series B (Taxable)
(Auction Rate Securities) (Auction Rate Securities)
[Pricing Date], 2004
CONTRACT OF PURCHASE
City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Ladies and Gentlemen:
Morgan Stanley & Co. Incorporated, as underwriter (the "Underwriter"), hereby offers to
enter into this Contract of Purchase (this "Purchase Contract") with you, the City of Vernon ("the
City"). This offer is made subject to acceptance by the City prior to 11:00 P.M., California time,
on the date hereof, and upon such acceptance this Purchase Contract shall be in full force and
effect in accordance with its terms and shall be binding upon the City and the Underwriter.
1. Upon the terms and conditions and upon the basis of the representations herein set
forth, the Underwriter hereby agrees to purchase and the City hereby agrees to sell to the
Underwriter all (but not less than all) of the City's $[Series A principal amount] Electric System
Revenue Bonds, 2004 Series A (Auction Rate Securities) (the "2004A Bonds") and $[Series B
principal amount] Electric System Revenue Bonds, 2004 Series B (Taxable) (Auction Rate
Securities) (the "2004B Bonds" and collectively with the 2004A Bonds, the "Bonds"). The
purchase price for the 2004A Bonds shall be $ (representing the $[Series A principal
amount].00 aggregate principal amount of the 2004A Bonds less $ Underwriter's
discount). The purchase price for the 2004B Bonds shall be $ (representing the $[Series B
principal amount].00 aggregate principal amount of the 2004B Bonds less $ Underwriter's
discount).
The Bonds are to be issued pursuant to Article XI of the Vernon City Code and an
Indenture of Trust, dated as of [December] 1, 2004, as supplemented, including by the Fourth
Supplemental Indenture of Trust and the Fifth Supplemental Indenture of Trust, each dated as of
[December] 1, 2004 (collectively, the "Indenture"), by and between the City and The Bank of
New York Trust Company, N.A., as trustee (the "Trustee"), substantially in the forms previously
submitted to the Underwriter, with only such changes therein as shall be mutually agreed upon.
LAI 621910d2
Terms used herein and not defined shall have the meanings assigned to them in the Official
Statement.
Simultaneously with the delivery of the Bonds, the Trustee will enter into an Auction
Agent Agreement, dated as of [December] 1, 2004 (the "Auction Agreement") with , as
Auction Agent (the "Auction Agent"), which Auction Agent Agreement shall be acknowledged
by the City. The Trustee will also enter into a Broker -Dealer Agreement, dated as of [December]
1, 2004 (the "Broker -Dealer Agreement"), with the Auction Agent and Morgan Stanley & Co.
Incorporated, as Broker -Dealer, which Broker -Dealer Agreement shall be acknowledged by the
City.
Payment of the principal of and interest on the Bonds as the same shall become due will
be insured by a municipal bond insurance policy (the "Insurance Policy") to be issued by
(the "Insurer") simultaneously with the delivery of the Bonds.
[Pursuant to an Escrow Agreement, dated as of [December] 1, 2004 (the "Escrow
Agreement"), by and between the City and The Bank of New York Trust Company, N.A., as
escrow agent (the "Escrow Agent"), a portion of the proceeds of the 2004A Bonds, together with
other available moneys, will be deposited into an escrow fund and applied to refund the City's
$162,610,000 outstanding principal amount of Malburg Generating Station Project Electric
System Revenue Bonds, 2003 Series A, B and C.]
The City will undertake, pursuant to a Continuing Disclosure Agreement, dated as of
[December] 1, 2004 (the "Continuing Disclosure Agreement"), by and between the City and the
Trustee, to provide certain annual financial information and notices of the occurrence of certain
events, if material. A form of the Continuing Disclosure Agreement is set forth in the
Preliminary Official Statement (defined below) and will also be set forth in the Official
Statement (defined below).
Concurrently with the issuance of the Bonds, the City will enter into a swap agreement
(the "Swap Agreement") with (the "Swap Provider") for the purpose of converting the
auction rate interest payments the City is required to make on the Bonds into variable rate
payments based on an index.
The Indenture, the Auction Agreement, the Broker -Dealer Agreement, [the Escrow
Agreement,] the Continuing Disclosure Agreement, the Swap Agreement and the Purchase
Contract are hereinafter referred to as the "Legal Documents."
2. The Underwriter agrees to reoffer the Bonds in a bona fide public offering at an
initial offering of 100% of the principal amount thereof. After the initial offering, the
Underwriter reserves the right to change such public offering prices as the Underwriter shall
deem necessary in marketing the Bonds.
3. At 8:00 A.M., California time, on , 2004, or at such other time or on such
earlier or later business day as shall have been mutually agreed upon by the City and the
Underwriter, the City will deliver to the Underwriter at the offices of Orrick, Herrington &
Sutcliffe LLP, Los Angeles, California, the closing documents hereinafter mentioned. The
Bonds, registered to Cede & Co. and in definitive form, will be made available to the
2
LAI 621910d2
Underwriter one business day prior to the Closing Date (hereinafter defined) at the offices of
Orrick, Herrington & Sutcliffe LLP, or at such other place as may be designated by the
Underwriter and shall be subsequently delivered on such date to The Depository Trust Company
("DTC") or the Trustee as may be designated by the Underwriter to be held in safe custody on
behalf of the City until Closing. It is anticipated that CUSIP identification numbers will be
printed on the Bonds, but neither the failure to print such number on any of the Bonds nor any
error with respect thereto shall constitute cause for a failure or refusal by the Underwriter to
accept delivery of and pay for the Bonds in accordance with the terms of this Purchase Contract.
Upon release of the Bonds, the Underwriter will pay the purchase price of the Bonds as set forth
in Section 1 hereof, in immediately available funds to the order of the City. The releases and
payments referenced to in this Section 3 are herein called the "Closing" or "Closing Date."
4. The City ratifies, confirms and approves the use by the Underwriter of the official
statement of the City in preliminary form dated , 2004 (which, including all appendices
thereto, is herein called the "Preliminary Official Statement"), in connection with the prospective
offering of the Bonds prior to the date hereof. [The City hereby acknowledges that the
Preliminary Official Statement has been made available to investors on the internet at
http://www. com.] The City will deliver to the Underwriter copies of its official statement
dated [Pricing Date], 2004 (such official statement, including the cover page and all appendices
included therein or attached thereto, being herein called the "Official Statement"), signed on
behalf of the City by its Mayor or other appropriate official and, as promptly as practicable after
acceptance hereof (but in any event within seven business days after the City's acceptance hereof
and in sufficient time to accompany any order confirmation requesting payment from any
customer), a sufficient number of conformed copies to comply with the rules of the Securities
and Exchange Commission and the Municipal Securities Rulemaking Board. The City hereby
approves the Official Statement and authorizes the use of copies of the Official Statement and
the documents referred to therein in connection with the offering and sale of the Bonds by the
Underwriter. The Underwriter hereby agrees that it will not confirm the sale of any Bond unless
the confirmation requesting payment from the customer is accompanied or preceded by a copy of
the Official Statement.
5. The City represents to the Underwriter that, as of the date hereof and as of the
Closing Date:
(a) The City is duly existing as a charter city organized under the laws of the
State of California (the "State");
(b) The City has full legal right, power and authority to cause the Bonds to be
authenticated and delivered, to execute and deliver or acknowledge, as applicable, the
Legal Documents and to perform its obligations contained herein and therein in
accordance with the Act and other applicable laws; and, by official action of the City
prior to or concurrently with the acceptance hereof, the City has duly authorized and
approved the issuance and delivery of the Bonds, the distribution of the Preliminary
Official Statement, the execution, delivery and distribution of the Official Statement, the
execution and delivery or acknowledgement, as applicable, of the Legal Documents and
the performance of its obligations contained herein and therein and the consummation by
it of all other transactions contemplated by the Official Statement and the Legal
LAl 62191M
Documents to have been performed or consummated at or prior to the Closing Date, all in
accordance with the Act and other applicable laws, and the City is and will be in
compliance with the provisions thereof in all material respects;
(c) The Official Statement is and at all times subsequent hereto up to and
including the date that is 25 days after the end of the Underwriting Period (as hereinafter
defined) for the Bonds of the Closing will be, true and correct in all material respects; and
the Official Statement does not and will not omit any statement or information necessary
to make the statements therein, in the light of the circumstances under which they were
made, not misleading except that no representation is made as to any information
included in the Official Statement relating to DTC or its operations, or the Insurer;
(d) Between the date hereof and the date that is 25 days after the end of the
Underwriting Period (as hereinafter defined) for the Bonds, except as contemplated by
the Official Statement, the City will not have incurred any material liabilities, direct or
contingent, or entered into any material transaction in either case other than in the
ordinary course of business, and there shall not have been any material adverse change in
the financial condition or prospects of the Electric System;
(e) The performance of its obligations contained in the Bonds and the
execution and delivery or acknowledgement, as applicable, of the Legal Documents and
the performance of its obligations contained herein and therein do not and will not in any
material respect conflict with or constitute a breach of or default under any law,
administrative regulation, court decree, resolution or agreement to which the City is
subject or by which it is bound;
(f) Except as disclosed in the Official Statement, no litigation is, or at the date
that is 25 days after the end of the Underwriting Period (as hereinafter defined) for the
Bonds, will be, pending or, to the knowledge of the City, threatened in any court (i) in
any way questioning the corporate existence of the City or the titles of the officers of the
City to their respective offices; (ii) seeking to restrain or enjoin the issuance or delivery
of any of the Bonds, or the collection of Net Revenues of the Electric System or other
amounts pledged or to be pledged to pay the principal of, premium, if any, and interest on
the Bonds, or in any way contesting or affecting the validity of the Bonds, the Legal
Documents or the collection of said Net Revenues, or the pledge thereof, or contesting
the powers of the City or any authority for the issuance and delivery of the Bonds or the
performance of its obligations contained therein or the execution and delivery or
acknowledgement, as applicable, of the Legal Documents or the performance of its
obligations contained herein or therein, (iii) which would be likely to result in any
material adverse change in the business, properties, assets or financial condition of the
Electric System or to have a material adverse effect on the ability of the City to meet its
obligations under the Bonds or the Legal Documents or (iv) asserting that the Official
Statement contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that if the Underwriter
accepts at the Closing any change in the certificate referred to in Section 6(d)(3) hereof,
4
LA1 621910v2
the representations contained in this Section 5(f) shall be deemed modified to a like
extent;
(g) All material studies undertaken by or on behalf of the City with respect to
the Project have been disclosed and/or made available to the Underwriter;
(h) The Bonds, the Legal Documents and the other documents described in
the Official Statement conform in all material respects to the descriptions thereof
contained in the Official Statement, and the Bonds, when delivered as provided herein,
will be validly issued and outstanding obligations of the City entitled to the benefits of
the Indenture;
(i) The City will furnish such information, execute such instruments and take
such other action not inconsistent with law in cooperation with the Underwriter as the
Underwriter may reasonably request in order (i) to qualify the Bonds for offer and sale
under the Blue Sky or other securities laws and regulations of such states and other
jurisdictions of the United States as the Underwriter may designate and (ii) to determine
the eligibility of the Bonds for investment under the laws of such states and other
jurisdictions, and will use its best efforts to continue such qualification in effect so long
as required for the distribution of the Bonds; provided that the City shall not be obligated
to take any action that would subject it to the general service of process in any state or
jurisdiction where it is not now so subject;
0) If between the date hereof and the date that is 25 days after the end of the
Underwriting Period for the Bonds, an event occurs which might or would cause the
information contained in the Official Statement, as then supplemented or amended, to
contain an untrue statement of a material fact or to omit to state a material fact required to
be stated therein or necessary to make such information therein, in the light of the
circumstances under which it was presented, not misleading, the City will notify the
Underwriter, and, if in the opinion of the City or the Underwriter, or their respective
counsel, such event requires the preparation and publication of a supplement or
amendment to the Official Statement, the City will forthwith prepare and furnish to the
Underwriter (at the expense of the City) a reasonable number of copies of an amendment
of or supplement to the Official Statement (in form and substance satisfactory to counsel
for the Underwriter) which will amend or supplement the Official Statement so that it
will not contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the circumstances
existing at the time the Official Statement is delivered to prospective purchasers, not
misleading;
(k) If the information contained in the Official Statement is amended or
supplemented pursuant to paragraph 0) hereof, at the time of each supplement or
amendment thereto and (unless subsequently again supplemented or amended pursuant to
such subparagraph) at all times subsequent thereto up to and including the date that is
25 days after the end of the Underwriting Period for the Bonds, the portions of the
Official Statement so supplemented or amended (including any financial and statistical
data contained therein) will not contain any untrue statement of a material fact or omit to
5
LAI 621910v2
state a material fact required to be stated therein or necessary to make such information
therein, in the light of the circumstances under which it was presented, not misleading;
(1) After the Closing, the City will not participate in the issuance of any
amendment of or supplement to the Official Statement to which, after being furnished
with a copy, the Underwriter shall reasonably object in writing or which shall be
disapproved by counsel for the Underwriter;
(m) The financial statements of the City contained as Appendix A to the
Official Statement do and will fairly present the financial position and results of
operations of the City as of the dates and for the periods therein set forth in accordance
with generally accepted accounting principles applied consistently; and
(n) As used herein and for the purposes of the foregoing, the term "End of the
Underwriting Period" for the Bonds shall mean the earlier of (i) the Closing Date unless
the City shall have been notified in writing to the contrary by the Underwriter on or prior
to the Closing Date, or (ii) the date on which the End of the Underwriting Period for the
Bonds has occurred under Rule 15c2-12; provided, however, that the City may treat as
the End of the Underwriting Period for the Bonds the date specified as such in a notice
from the Underwriter stating the date which is the End of the Underwriting Period;
6. The Underwriter has entered into this Purchase Contract in reliance upon the
representations herein and the performance by the City of the City's obligations hereunder, both
as of the date hereof and as of the Closing Date. The Underwriter's obligations under this
Purchase Contract are and shall be subject to the following further conditions:
(a) The representations of the City contained herein shall be true and correct
in all material respects at the date hereof and on the Closing Date;
(b) At the time of the Closing, the Legal Documents shall be in full force and
effect, and shall not have been amended, modified or supplemented (except as may be
agreed to in writing by the Underwriter); the ratings quoted in the Official Statement shall
be in effect; and the City shall perform or have performed its obligations required under
or specified in the Official Statement and the Legal Documents to be performed at or
prior to the Closing;
(c) The Underwriter may terminate this Purchase Contract by notification to
the City if at any time after the date hereof and prior to the Closing (i) legislation shall be
enacted by the Congress of the United States or introduced and pending in or adopted by
either House thereof or a decision by a Court of the United States or the Tax Court of the
United States shall be rendered or a ruling, regulation or official statement by or on
behalf of the Treasury Department of the United States, the Internal Revenue Service or
other governmental agency shall be made with respect to federal taxation upon revenues
or other income of the general character expected to be derived by the City or upon
interest received on securities of the general character of the 2004A Bonds in the hands
of the holders thereof which, in the reasonable judgment of the Underwriter, materially
adversely affects the market price of the 2004A Bonds or (ii) there shall have occurred
6
LAI 62191M
any new outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war, calamity or crisis, the effect of which on financial markets is
such as to make it, in the sole judgement of the Underwriter, impracticable or inadvisable
to proceed with the offering and delivery of the Bonds, or (iii) there shall be in force a
general suspension of trading on the New York Stock Exchange or minimum or
maximum prices for trading shall have been fixed and be in force, or maximum ranges
for prices for securities shall have been required and be in force on the New York Stock
Exchange, whether by virtue of a determination by that Exchange or by order of the
Securities and Exchange Commission or any other governmental authority having
jurisdiction, or (iv) a general banking moratorium shall have been declared by Federal,
New York or California authorities having jurisdiction and shall be in force or (v) there
shall exist any event which, in the sole judgment of the Underwriter, either (A) makes
untrue or incorrect in any material respect any statement or information contained in the
Official Statement or (B) is not reflected in the Official Statement but should be reflected
therein in order to make the statements and information contained therein not misleading
in any material respect;
(d) At or prior to the Closing, the Underwriter shall receive the following
documents:
(1) the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to
the City, dated the Closing Date, substantially in the form attached as Appendix G
to the Official Statement;
(2) a certificate or certificates, dated the Closing Date, of the City
executed by its City Administrator, its Director of Utilities Department, or other
appropriate official, to the effect that (A) on the date of the Official Statement and
on the date of the certificate (i) the descriptions and statements of or pertaining to
the City, the Electric System and the Project contained in the Official Statement
were and are true and correct in all material respects; (ii) the Official Statement
did not and does not contain an untrue statement of a material fact or omit any
statement or information which is necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading (provided
that no representation is made regarding information relating to DTC and its
operations, and the Insurer); and (iii) insofar as the descriptions and statements,
including financial data, of or pertaining to entities other than the City and their
activities contained in the Official Statement are concerned, such descriptions,
statements and data have been obtained from sources which the City believes to
be reliable and the City has no reason to believe that they are untrue in any
material respect; and (B) the representations and warranties of the City in this
Purchase Contract are true and correct on and as of the Closing Date as if made on
and as of the Closing Date, and the City has complied with and performed all of
its covenants and agreements in this Purchase Contract to be complied with and
performed at or prior to the Closing;
(3) a certificate dated the Closing Date, by the City Administrator, or
other appropriate official of the City, and by the City Attorney to the effect that
7
LAl 62191M
other than as described in the Official Statement, no litigation is pending (with the
City having received service of process) or, to their knowledge, threatened in any
court (i) in any way questioning the corporate existence of the City or the titles of
the officers of the City to their respective offices; (ii) seeking to restrain or enjoin
the delivery of the Bonds, or the collection of Net Revenues of the Electric
System or other amounts pledged or to be pledged to pay the principal of,
premium, if any, and interest on such Bonds; (iii) in any way contesting or
affecting the validity of the Bonds, the Legal Documents; (iv) in any way
contesting or affecting the collection of said Net Revenues or the pledge thereof,
or contesting the powers of the City or any authority for the issuance and delivery
of the Bonds and the performance of its obligations contained therein or the
execution and delivery or acknowledgement, as applicable, of the Legal
Documents and the performance of its obligations contained therein or herein;
(v) which would be likely to result in any material adverse change in the business,
properties, assets or the financial condition of the Electric System or which would
be likely to have a material adverse effect on the ability of the City to meet its
obligations under the Indenture; or (vi) asserting that the Official Statement
contained any untrue statement of a material fact or omitted to state any material
fact necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, which certificate shall be in form and
substance acceptable to the Underwriter (but in lieu of such certificate, the
Underwriter may in its sole discretion accept an opinion of Bond Counsel or
Counsel to the City, acceptable to the Underwriter in form and substance, that in
their opinion the issues raised in any such pending or threatened litigation are
without substance or that the contentions of any plaintiffs therein are without
merit);
(4) an opinion of counsel to the Trustee and the Escrow Agent, dated
the Closing Date and addressed to the City and the Underwriter, to the effect that,
the Trustee's and Escrow Agent's obligations under the Indenture, the Escrow
Agreement, the Auction Agreement, the Broker -Dealer Agreement and the
Continuing Disclosure Agreement constitute legal, valid and binding obligations
of the Trustee and the Escrow Agent, as applicable, enforceable in accordance
with their respective terms under California law except that the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws in effect from time to time affecting the rights of
creditors generally and except to the extent that the enforceability thereof may be
limited by the application of general principles of equity;
(5) a certificate of the Trustee [and the Escrow Agent], dated the
Closing Date, to the effect that (i) the Trustee [and the Escrow Agent] are a
national banking association duly organized and existing under the laws of the
United States of America; (ii) the Trustee [and the Escrow Agent] have full
corporate trust powers and authority to serve as Trustee under the Indenture, as
Escrow Agent under the Escrow Agreement and as Dissemination Agent under
the Continuing Disclosure Agreement; and (iii) the Trustee [and the Escrow
Agent] acknowledge and accept its obligations under the Indenture, [the Escrow
8
LAI 621910v2
Agreement] and the Continuing Disclosure Agreement and that such acceptance is
in full compliance with, and does not conflict with, any applicable law or
governmental regulation currently in effect, and does not conflict with or violate
any contract to which the Trustee or the Escrow Agent is a party or any
administrative or judicial decision by which the Trustee or the Escrow Agent is
bound;
(6) opinions of Orrick, Herrington & Sutcliffe LLP and the City
Attorney, dated the Closing Date, substantially in the respective forms attached
hereto as Exhibits A and B, with such changes as Counsel to the Underwriter may
approve;
(7) an opinion of Sidley Austin Brown & Wood LLP, Counsel to the
Underwriter, dated the Closing Date, substantially in the form attached hereto as
Exhibit C;
(8) copies of the documents referred to in Section 6(b);
(9) certified copies of all proceedings relating to the authorization and
issuance of the Bonds certified by the City Administrator or other appropriate
official of the City;
(10) evidence that any ratings on the Bonds are in full force and effect
as of the Closing Date;
(11) a copy of the Insurance Policy;
(12) an opinion of counsel to the Insurer, dated the Closing Date and
addressed to the City and the Underwriter, in the form previously submitted to the
Underwriter;
(13) a certificate from the Insurer to the effect that the description of the
Insurer and its Insurance Policy included in the Official Statement under the
caption `BOND INSURANCE" and in APPENDIX H — "SPECIMEN
MUNICIPAL BOND INSURANCE POLICY" is accurate and as to such other
matters as the Underwriter may request;
(14) a certificate of the Auction Agent, dated the Closing Date,
executed by an authorized representative of the Auction Agent, to the effect that:
(i) the Auction Agent has complied and will comply in all respects with the
covenants and agreements contained in the Auction Agreement and the Broker -
Dealer Agreement; (ii) the Auction Agreement and the Broker -Dealer Agreement
have been duly authorized, executed and delivered by the Auction Agent; (iii) the
Auction Agent has full power and authority to carry out its obligations under the
Auction Agreement and the Broker -Dealer Agreement; and (iv) there is no action,
suit, proceeding, inquiry or investigation at law or in equity before or by any
court, public board or body pending or known to be threatened against or
affecting the Auction Agent where an unfavorable decision, ruling or finding
9
LA1 621910v2
would adversely affect the transactions contemplated by the Auction Agreement
and the Broker -Dealer Agreement.
(15) the Blanket Issuer Letter of Representations of the City;
(16) a copy of any Blue Sky Survey with respect to the Bonds, prepared
by Underwriter's Counsel;
(17) the opinion of Counsel to the City with respect to the Swap
Agreement, dated the Closing Date, addressed to the Swap Provider, in
substantially the form previously submitted to the Underwriter; and
(18) such additional certificates, instruments and other documents as
the Underwriter may reasonably deem necessary to evidence the truth and
accuracy as of the time of the Closing of the City's representations and warranties
contained in this Purchase Contract and the due performance or satisfaction by the
City at or prior to such time of all agreements then to be performed and all
conditions then to be satisfied by the City pursuant to this Purchase Contract.
The opinions and certificates and other material referred to above shall be in form and
substance satisfactory to the undersigned and to Sidley Austin Brown & Wood LLP, Counsel to
the Underwriter.
If the City shall be unable to satisfy the conditions to the obligations of the Underwriter
to purchase, accept delivery of and pay for the Bonds contained in this Purchase Contract or if
the obligations of the Underwriter to purchase, accept delivery of and pay for the Bonds shall be
terminated for any reason permitted by this Purchase Contract, this Purchase Contract and all
obligations of the Underwriter hereunder may be terminated by the Underwriter at or at any time
prior to the Closing Date by written notice to the City, and neither the Underwriter nor the City
shall have any further obligations hereunder. In the event that the Underwriter fails (other than
for a reason permitted by this Purchase Contract) to accept and pay for the Bonds at the Closing,
the amount of one percent (1 %) of the principal amount of the Bonds shall be paid by the
Underwriter, as liquidated damages for such failure and for any and all defaults hereunder on the
part of the Underwriter and the acceptance of such amount shall constitute a full release and
discharge of all claims and rights of the City against the Underwriter as result of such failure and
such default.
7. At the time of or prior to the Closing, the Underwriter shall file a copy of the
Official Statement with the Municipal Securities Rulemaking Board and with a nationally
recognized municipal securities information repository. The Underwriter shall advise the City of
the date and repository of such filing.
8. The Underwriter shall be under no obligation to pay, and the City shall pay, any
expenses incident to the performance of the City's obligations hereunder, including but not
limited to: (i) the cost of preparation, printing and distribution of the Legal Documents, the
Preliminary Official Statement, the Official Statement and any supplements or amendments
thereto (including the word processing costs of Underwriter's Counsel in preparing the
Preliminary Official Statement and the Official Statement); (ii) the cost of preparing and printing
10
LAI 62191M
the Bonds; (iii) the fees and disbursements of Bond Counsel and the fees and expenses of
counsel to the City; (iv) the fees and disbursements of any engineers, accountants and other
experts, consultants or advisors retained by the City; (v) fees for bond ratings (which include fees
of rating agencies and travel expenses of the City); and (vi) expenses (included in the expense
component of the underwriting spread) incurred on behalf of the City's employees which are
incidental to implementing this agreement, including, but not limited to, meals, transportation,
and lodging of those employees, if any.
9. The Underwriter shall pay: (i) the cost of preparation and printing of this Purchase
Contract, the Preliminary Blue Sky Survey; (ii) all advertising expenses and Blue Sky filing fees
in connection with the public offering of the Bonds; (iii) fees, if any, payable to the California
Debt Investment and Advisory Commission in connection with the execution and delivery of the
Bonds; and (iv) all other expenses incurred by the Underwriter in connection with the public
offering of the Bonds, including the fees and disbursements of Underwriter's Counsel (except as
provided above).
10. Any notice or other communication to be given to the City under this Purchase
Contract may be given by delivering the same in writing to: City of Vernon, 4305 Santa Fe
Avenue, Vernon, California 90058, Attention: Director of Public Utilities; and any notice or
other communication to be given to the Underwriter under this Purchase Contract may be given
by delivering the same in writing to: Morgan Stanley & Co. Incorporated, 555 California Street,
San Francisco, CA 94104, Attention: Celeste Davis, Executive Director.
11
LAl 62191M
11. This Purchase Contract, when accepted by the City in writing as heretofore
specified, shall constitute the entire agreement between the City and the Underwriter and is made
solely for the benefit of the City and the Underwriter (including any successor in business of the
Underwriter). No other person shall acquire or have any right hereunder or by virtue hereof. All
the representations and agreements in this Purchase Contract shall remain operative and in full
force and effect, regardless of (a) any investigation made by or on behalf the Underwriter,
(b) delivery of and payment for the Bonds hereunder, and (c) any termination of this Purchase
Contract.
Accepted on [Pricing Date], 2004
CITY OF VERNON
ATTEST:
IM
Mayor
City Clerk
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
Lo
12
LA1 621910d2
SCHEDULEI
to the
Contract of Purchase
$[principal amount]
CITY OF VERNON
Electric System Revenue Bonds
$[Series A principal amount]
2004 Series A
(Auction Rate Securities)
Initial Length of
Principal
Auction Initial
Series Tax Status
Amount
Date Period
2004A Tax -Exempt
$
_ days
2004B Taxable
$
_ days
$[Series B principal amount]
2004 Series B
(Auction Rate Securities)
Initial
Interest
Auction Date
Payment
Generally
Date
Every _
Every _
Final
Maturity
Initial Rate Date
CUSIP
Number'
(Base 924397)
Copyright 2003, American Bankers Association. CUSIP data herein are provided by Standard & Poor's
CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc.
I-1
LAl 621910v2
EXHIBIT A
[Letterhead of Orrick, Herrington & Sutcliffe LLP]
, 2004
Morgan Stanley & Co. Incorporated
As Underwriter
Re: $[principal amount] City of Vernon Electric System Revenue Bonds
2004 Series A (Auction Rate Securities) and
2004 Series B (Taxable) (Auction Rate Securities)
Ladies and Gentlemen:
This letter is being delivered pursuant to Section 6(d)(6) of the Contract of Purchase,
dated [Pricing Date], 2004 (the "Purchase Contract"), between the City of Vernon (the "City")
and Morgan Stanley & Co. Incorporated (the "Underwriter"), providing for the purchase of the
City's $[Series A principal amount] Electric System Revenue Bonds, 2004 Series A (Auction
Rate Securities) (the "2004A Bonds") and $[Series B principal amount] Electric System Revenue
Bonds, 2004 Series B (Taxable) (Auction Rate Securities) (the "2004B Bonds" and collectively
with the 2004A Bonds, the "Bonds"). The Bonds are being issued pursuant to an Indenture of
Trust, as supplemented, including by the Fourth Supplemental Indenture of Trust and the Fifth
Supplemental Indenture of Trust, each dated as of [December] 1, 2004 (collectively, the
"Indenture"), each by and between the City and The Bank of New York Trust Company, N.A.,
as trustee. Capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Indenture or, if not defined in the Indenture, the Contract of Purchase.
In connection with our role as bond counsel, we have reviewed the Indenture, the Official
Statement, the Purchase Contract, certificates of the City, the Trustee, the Underwriter and
others, opinions of counsel to the City and others, and such other documents, opinions and
matters to the extent we deemed necessary to render the opinions and conclusions set forth
herein.
Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we
are of the following opinions or conclusions:
1. The Official Statement has been duly authorized, executed and delivered by the
City and the Purchase Contract and the Continuing Disclosure Agreement have each been duly
authorized, executed and delivered by the City and, assuming due authorization, execution and
delivery by and validity against the other parties thereto, each is a valid and binding agreement
of the City, except as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, arrangement and other laws affecting creditors' rights, by the application of
equitable principles and the exercise of judicial discretion in appropriate cases, and by the
limitations on legal remedies against municipal corporations in the State of California. We
A-1
LAl 62191M
express no opinion with respect to any indemnification, contribution, choice of law, choice of
forum or waiver provisions contained therein.
2. The Bonds are not subject to the registration requirements of the Securities Act of
1933, as amended, and the Indenture is exempt from qualification pursuant to the Trust Indenture
Act of 1939, as amended.
3. The statements contained in the Official Statement under the captions
"INTRODUCTION," "CONTINUING DISCLOSURE," "PLAN OF FINANCE," "THE 2004
BONDS," "SECURITY AND SOURCES OF PAYMENT FOR THE 2004 BONDS," "TAX
MATTERS," "APPENDIX C — SUMMARY OF CERTAIN PROVISIONS OF THE
INDENTURE," "APPENDIX D — AUCTION PROCEDURES," "APPENDIX F — PROPOSED
FORM OF CONTINUING DISCLOSURE AGREEMENT" and "APPENDIX G — PROPOSED
FORM OF OPINION OF BOND COUNSEL" insofar as the statements contained under such
captions expressly summarize certain provisions of the Bonds, the Indenture and the Continuing
Disclosure Agreement are accurate in all material respects; provided, however, that no opinion is
expressed with respect to any statements relating to The Depository Trust Company ("DTC") or
its operations or the Insurer.
We are not passing upon and do not assume any responsibility for the accuracy (except as
explicitly stated in the previous paragraph), completeness or fairness of any of the statements
contained in the Official Statement. In our capacity as bond counsel in connection with the
issuance of the Bonds, we participated in conferences with your representatives, your counsel,
representatives of the City and its counsel, and other consultants to the City, during which
conferences the contents of the Official Statement and related matters were discussed. Based on
our participation in the above -referenced conferences (which did not extend beyond the date of
the Official Statement), and in reliance thereon and on the records, documents, certificates and
opinions herein mentioned (as set forth above), we advise you that during such conferences, no
information came to the attention of the attorneys in our firm rendering legal services in
connection with such issuance which caused us to believe that the Official Statement as of its
date (except for any financial, statistical or economic data or forecasts, numbers, charts, tables,
graphs, estimates, projections, assumptions or expression of opinions required to be stated
therein or information relating to the Insurer, DTC, any investment agreement provider and the
information contained in Appendices A, B, E and H included therein as to which we express no
opinion or view), contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
This letter is furnished by us as bond counsel. No attorney -client relationship has existed
or exists between our firm and yourselves in connection with the Bonds or by virtue of this letter.
Our engagement with respect to the Bonds has concluded with their issuance. We disclaim any
obligation to update this letter. This letter is delivered to you as the Underwriter of the Bonds,
and is solely for the benefit of such Underwriter, and is not to be used, circulated, quoted or
otherwise referred to or relied upon for any other purpose or by any other person. This letter is
not intended to, and may not, be relied upon by owners of the Bonds.
Very truly yours,
A-2
LAl 62191M
EXHIBIT B
FORM OF OPINION OF CITY ATTORNEY
92004
Morgan Stanley & Co. Incorporated
As Underwriter
Re: $[principal amount] City of Vernon Electric System Revenue Bonds
2004 Series A (Auction Rate Securities) and
2004 Series B (Taxable) (Auction Rate Securities)
Ladies and Gentlemen:
I am City Attorney of the City of Vernon (the "City") and as such I have served as
Counsel to the City in connection with the issuance of the City's $[Series A principal amount]
Electric System Revenue Bonds, 2004 Series A (Auction Rate Securities) (the "2004A Bonds")
and $[Series B principal amount] Electric System Revenue Bonds, 2004 Series B (Taxable)
(Auction Rate Securities) (the "2004B Bonds" and collectively with the 2004A Bonds, the
"Bonds"). As such counsel, I have examined and am familiar with (i) those documents relating
to the existence, organization and operation of the City; (ii) all necessary documentation of the
City relating to the authorization, execution and delivery of (a) the Indenture of Trust, as
supplemented, including by the Fourth Supplemental Indenture of Trust and the Fifth
Supplemental Indenture of Trust, each dated as of [December] 1, 2004 (collectively, the
"Indenture"), each by and between the City and The Bank of New York Trust Company, N.A.,
as trustee thereunder (the "Trustee"), providing for the issuance of the Bonds, (b) the Auction
Agent Agreement, dated as of [December] 1, 2004 (the "Auction Agent Agreement"), by and
between the Trustee and , as Auction Agent (the "Auction Agent"), and
acknowledged by the City, (c) the Broker -Dealer Agreement, dated as of [December] 1, 2004
(the "Broker -Dealer Agreement"), by and between the Trustee, the Auction Agent and Morgan
Stanley & Co. Incorporated, as Broker -Dealer, and acknowledged by the City; (d) the Continuing
Disclosure Agreement, dated as of [December] 1, 2004 (the "Continuing Disclosure
Agreement"), between the City and the Trustee, as dissemination agent; (e) the Contract of
Purchase, dated [Pricing Date], 2004 (the "Purchase Contract"), between the City and the
Underwriter; and (iii) an Official Statement of the City, dated [Pricing Date], 2004 (the "Official
Statement"), relating to the Bonds. The Indenture, the Auction Agreement, the Broker -Dealer
Agreement, the Continuing Disclosure Agreement and the Purchase Contract are collectively
referred to herein as the "Legal Documents."
B-1
LAI 62191M
I am of the opinion that:
1. The City is a charter city, duly created, organized and existing under the
Constitution and laws of the State of California and duly qualified to furnish electric service
within said City.
2. The City has the authority and right to execute, deliver and perform the Legal
Documents, and the City has complied with the provisions of applicable law in all matters
relating to the transactions contemplated by the Legal Documents.
3. The distribution of the Preliminary Official Statement, the execution and delivery
of the Official Statement and the Legal Documents have been duly authorized, executed and
delivered by the City and, assuming that the Legal Documents constitute the legal, valid and
binding agreements of the other respective parties thereto, the Legal Documents constitute the
legal, valid and binding agreements of the City enforceable against it in accordance with their
respective terms, except, in each case, as enforceability may be limited by laws relating to
bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and
by the application of equitable principles if equitable remedies are sought.
4. No approval, consent or authorization of any governmental or public agency,
authority or person is required for the execution and delivery by the City of the Legal Documents
or the performance by the City of its obligations thereunder or the execution and delivery, on the
part of the City, of the Bonds. Under the laws of the State of California, the City has the
authority to determine, fix, impose and collect rates and charges for electric service and is not
presently subject to the regulatory jurisdiction of any state, regional or local governmental
regulatory authority other than to the extent described in the Official Statement.
5. The execution and delivery of the Legal Documents by the City and compliance
with the provisions thereof will not conflict with or constitute a breach of or default under any
instrument relating to the organization, existence or operation of the City, or commitment,
agreement or other instrument to which the City is a party or by which it or its property is bound
or affected, or any ruling, regulation, ordinance, judgment, order or decree to which the City or
any of its officers in their respective capacities as such are subject or any provision of the laws of
the State of California relating to the City and its affairs.
6. There is no action, suit, proceeding, inquiry or investigation at law or in equity, or
before any court, public board or body, pending or, to the best of my knowledge, threatened
against or affecting the City or any entity affiliated with the City or any of its officers in their
respective capacities as such (nor to the best of my knowledge, is there any basis therefor) that
questions the powers of the City referred to in paragraph 2 above or in connection with the
transactions contemplated by the Official Statement, or the validity of the proceedings taken by
the City in connection with the authorization, execution or delivery of the Legal Documents, or
wherein any unfavorable decision, ruling or finding would adversely affect the transactions
contemplated by the Legal Documents or the Official Statement, or that, in any way, would
adversely affect the validity or enforceability of the Legal Documents or, in any material respect,
the ability of the City to perform its obligations under the Legal Documents. Capitalized terms
B-2
LAI 621910d2
used herein not otherwise defined shall have the meanings ascribed thereto in the Purchase
Contract.
Respectfully submitted,
Eric Fresch, Esq.
City Attorney
B-3
LAl 62191M
EXHIBIT C
[Letterhead of Sidley Austin Brown & Wood LLP]
12004
Morgan Stanley & Co. Incorporated
As Underwriter
Re: $[principal amount] City of Vernon Electric System Revenue Bonds
2004 Series A (Auction Rate Securities) and
2004 Series B (Taxable) (Auction Rate Securities)
We have acted as counsel to you in your capacity as underwriter (the "Underwriter")
under the Contract of Purchase dated [Pricing Date], 2004 (the "Purchase Contract"), between
you and the City of Vernon (the "City"), in connection with your purchase from the City of its
$[Series A principal amount] Electric System Revenue Bonds, 2004 Series A (Auction Rate
Securities) (the "2004A Bonds") and $[Series B principal amount] Electric System Revenue
Bonds, 2004 Series B (Taxable) (Auction Rate Securities) (the "2004B Bonds" and collectively
with the 2004A Bonds, the "Bonds"). Terms used herein which are not defined shall have the
meanings assigned to them in the Contract of Purchase or in the City's Official Statement dated
[Pricing Date], 2004, relating to the Bonds (the Official Statement, in the form prepared for use
by the Underwriter in confirming sales of the Bonds, being hereinafter referred to as the "Official
Statement").
As such counsel, we have examined originals or copies certified or otherwise identified to
our satisfaction of such documents, records and other instruments as we deemed necessary or
appropriate for the purpose of this opinion, including the Indenture providing for the issuance of
the Bonds.
We are not expressing any opinion or view on the validity, accuracy or sufficiency of
documents, certificates or opinions that we have examined. Further, we have assumed but have
not independently verified that the signatures on all documents, certificates and opinions that we
have reviewed are genuine. In rendering this opinion, we are not expressing any opinion or view
on the authorization, execution, issuance, delivery or validity of the Bonds, nor the exclusion
from gross income for federal income tax purposes of interest on the Bonds or the exemption
from State of California personal income taxes of interest on the Bonds. We understand you are
relying on the opinion of Orrick, Herrington & Sutcliffe LLP, as bond counsel, in that regard.
Based on and subject to the foregoing, we are of the opinion that the Bonds are not
subject to the registration requirements of the Securities Act of 1933, as amended, the Bonds are
municipal securities within the meaning of the Securities Exchange Act of 1934, as amended,
C-1
LAI 62191M
and the Indenture is exempt from qualification under the Trust Indenture Act of 1939, as
amended.
Because the primary purpose of our professional engagement was not to establish factual
matters and because of the wholly or partially non -legal character of many determinations
involved in the preparation of the Official Statement, we are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of any of the statements contained
in the Official Statement and make no representation that we have independently verified the
accuracy, completeness or fairness of any such statements. However, in our capacity as your
counsel, during the course of preparation of the Official Statement, we participated in
conferences with representatives of the City, the City Attorney, legal counsel to the City, Orrick
Herrington & Sutcliffe LLP, as bond counsel, BondLogistix, LLC, as financial consultant,
others, and you, at which conferences the contents of the Official Statement and related matters
were discussed. Based on our participation in such conferences and in reliance thereon and on
the certificates, opinions and other documents we have reviewed, we advise you that no
information has come to the attention of the lawyers in this firm rendering professional legal
services in connection with your purchase of the Bonds that would cause us to believe that the
Official Statement as of its date and as of the date hereof (except for any financial or statistical
data or forecasts and the information relating to the Insurer or the Insurance Policy, DTC and the
book -entry system included therein, and Appendices A, and C through H thereto, as to which we
express no opinion or view), contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
The opinions expressed herein are based on an analysis of existing laws, regulations,
rulings and court decisions. Such opinions may be adversely affected by actions taken or events
occurring, including a change in law, regulation or ruling (or in the application of official
interpretation of any law, regulation or ruling) after the date hereof. We have not undertaken to
determine, or to inform any person, whether such actions are taken or such events occur, and we
have no obligation to update this opinion in light of such actions or events.
This opinion is being rendered to you solely for your benefit and may not be relied on by
anyone else without our prior written consent. This letter is not intended to and may not be
relied upon by the owners of the Bonds or by any other party to whom it is not specifically
addressed.
Respectfully submitted,
C-2
LA1 621910d2
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SAB&W LLP
November 16, 2004
NEW ISSUE — FULL BOOK -ENTRY ONLY
In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, based on 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 2004A Bonds is excluded from
gross income for federal income tax purposes under Section 103 of the Internal Revemae Code of 1986. In the further opinion of Bond Counsel, interest on the
2004A 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. Bond Counsel also observes that interest
on the 2004B Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel is also of the opinion that
interest on the 2004A Bonds and the 2004B Bonds is exempt from State of California personal income taxes. Bond Counsel expresses no opinton regarding any
other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See "TAX MATTERS" herein.
$[principal amount
CITY OF VERNON
Electric System Revenue Bonds
$[Series A principal amount] $[Series B principal amount] $[Series B principal amount]" $[Series B principal amount]
2004 Series A 2004 Series B 2004 Series C 2004 Taxable Series D
(Auction Rate Securities) (Auction Rate Securities) (Auction Rate Securities) (Auction Rate Securities)
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 dectsion. Capitalized terms
used on this cover page not otherwise defined shall have the meanings set forth herein.
The Electric System Revenue Bonds, 2NA Series A (the "2004A Bonds") 2004 Series B (the "2004B Bonds"), 2004 Series C (the "2004C Bonds"), and
2004 Taxable Series D (the "2004D Bonds" and collectively with the 2004A Bonds, the "2004 Bonds") are being issued by the City of Vernon (the "City")
pursuant to an Indenture of Trust, dated as of December 1, 2004, the 2004B Bonds and the 2004C Bonds, as supplemented by a First Supplemental Indenture of
Trust, a Second Supplemental Indenture of Trust, a Third Supplemental Indenture of Trust and a Fitch Supplemental Indenture of Trust, each dated as of
[December] 1, 2004 (collectively, the "Indenture"), each by and between the City and The Bank of New York Trust Company, N.A., as trustee (the "Trustee").
The 2004A Bonds are being issued to provide funds (i) to refund certain outstanding Electric System Revenue Bonds of the City; (ii) to finance the costs of
improvements to the City's substation and distribution facilities and certain costs of completion of the City's Malburg Generating Station (the "Project"); (iii) to
fund a deposit to the Debt Service Reserve Fund; and (iv) to pay costs of issuance of the 2004A Bonds. The 2004B Bonds are being issued to provide funds (i) to
finance the reimbursement to the City of certain costs incurred in connection with the City's electric system facilities; (ii) to fund a deposit to the Debt Service
Reserve Fund; and (iii) to pay costs of issuance of the 2004B Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS" herein.
The 2004 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 book -entry only system maintained by DTC. While DTC is the securities depository for the 2004 Bonds, principal, premium, if any, and interest on the 2004
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
owners of the 2004 Bonds, as more fully described herein.
Each Series of the 2004 Bonds will initially be issued as auction rate securities and bear interest at an ARB Interest Rate, initially for the Auction
Periods indicated for each Series on the inside cover hereof, and interest will be payable on [to be conformed once Auction Period is determined —the Business
Day immediately following each Auction Period]. The ARB Interest Rate to be home by each Series of 2004 Bonds will generally be the rate of interest that
results from the implementation of the Auction Procedures described in the Indenture and APPENDIX D hereto. Prospective purchasers of the 2004 Bonds
should carefully review the Auction Procedures and should note that such procedures provide that (i) a Bid or Sell Order constitutes a commitment to purchase or
sell 2004 Bonds based upon the results of an Auction and (ii) while the 2004 Bonds of each Series are in a [#]-day Auction Period, settlement for purchases and
sales will be made on the Business Day following the Auction Period. While hearing interest at an ARB Interest Rate, the 2004 Bonds of each Series will be
delivered in denominations of $25,000 and integral multiples thereof. See "THE 2004 BONDS" herein. Pursuant to the Indenture, the 2004 Bonds of each Series
may bear interest in one of several different Interest Rate Periods: Commercial Paper Interest Rate Period, Daily Interest Rate Period, Weekly Interest Rate Period,
Long -Tenn Interest Rate Period, Index Interest Rate Period or an ARB Interest Rate Period. All of the 2004 Bonds of a Series must be in the same Interest Rate
Period at the same time; however, the City may elect to convert the Interest Rate Period on each Series to another Interest Rate Period from time to time as
described herein. This Official Statement is not intended to provide information with respect to the 2004 Bonds (including the terms o such 2004 Bonds) after
conversion from an ARB Interest Rate Period. Owners and prospective purchasers of the 2004 Bonds should not rely on this Official of
for information
concerning the 2004 Bonds in connection with any conversion of the 2004 Bonds, but should look solely to the offering document to be used in connection with
any such conversion.
While in an ARB Interest Rate Period, the 2004 Bonds are subject to optional and mandatory sinidng fund redemption prior to maturity as
more fully described herein. See "THE 2004 BONDS —Redemption" herein. The 2004 Bonds will not be subject to optional tender, nor will they be
purchased in the event Sufficient Clearing Bids do not exist in any Auction, although they will be subject to mandatory purchase upon Conversion to
another Interest Rate Period, as described herein. Upon such Conversion to another Interest Rate Period, the Purchase Price of tendered 2004 Bonds is
payable solely from the proceeds of the remarketing of such 2004 Bonds upon such conversion. See "THE 2004 BONDS —Auction Rate Securities —
Conversion" herein.
Payment of the principal of and interest on each Series of the 2004 Bonds when due will be insured by a municipal bond insurance policy to be issued
by simultaneously with the delivery of the 2004 Bonds.
[logo]
The 2004 Bonds are special obligations of the City. The principal ot, premium, if any, and interest on the 2004 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 2004 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 2004 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 other public agency is pledged to the payment of the principal or Purchase Price of, or premium, if any, or interest on the
2004 Bonds. The 2004 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).
The 2004 Bonds are offered, when, as and if issued and delivered to the Underwriter, subject to the approval of legality by Orrick, Herrington &
Sutcliffe LLP, 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 City by the City Attorney of the City of Vernon and by Orrick, Herrington & Sutcliffe LLP, Los
Angeles, California. It is expected that the 2004 Bonds will be available for delivery through the DTC book -entry system in New York, New York on or about
—2004.
MORGAN STANLEY
—2004
617560v6
MATURITY SCHEDULE
$[principal amount]
CITY OF VERNON
Electric System Revenue Bonds
Length of
Initial
Initial Initial
Interest
Federal Principal
Auction Auction Auction Date
Payment
Series
Tax Status Amount
Date Period Generally
Date
2004A
Tax -Exempt $
7 days Every _
2004B
Tax -Exempt
7 days Every _
2004C
Tax -Exempt
28 day Every
2004D
Taxable
28 days Every _
Interest
Payment
Date
Generally
Every
Every
Every
Every
Final CUSIP
Maturity Number*
Date (Base 924397)
The 2004 Bonds of each Series will bear interest from the date of original delivery for the initial period set forth above at
the rate established by the Broker -Dealer prior to the date of delivery thereof. Thereafter, the 2004 Bonds of each Series will bear
interest at an ARB Interest Rate for generally [#]-day Auction Periods, until a change to another Auction Period occurs or a
Conversion to an Interest Rate Period other than the ARB Interest Rate Period, at the City's election, as described herein. Interest
will be payable on the initial Interest Payment Date set forth above for each Series and thereafter on the [to be conformed once
Auction Periods are determined -Business Day following the end of each Auction Period] for the 2004 Bonds of each Series.
* Copyright 2003, American Bankers Association. CUSIP data herein are provided by Standard & Poor's CUSIP
Service Bureau, a division of The McGraw-Hill Companies, Inc.
617560v6
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 2004 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 2004 BONDS, THE UNDERWRITER
MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE 2004 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," "DEVELOPMENTS IN THE ENERGY MARKETS," "RATE
REGULATION" and "THE ELECTRIC SYSTEM — Summary of Operating Results," "—Management's
Discussion of Operating Results" and "—Projected Operating Results and Debt Service Coverage" in this
Official Statement. Forward -looking statements 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's Electric System.
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.
61756Ov6
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/Chief Executive Officer of Light & Power
Eric T. Fresch, City Attorney
Samuel Kevin Wilson, Director of Community Services and Water
Lewis Pozzebon, Director of Environmental Health
Sol Benudiz, Chief of Police
Steven E. Parker, Fire Chief
City Staff
Willard G. Yamaguchi, Deputy City Attorney
Manuel G. Garcia, Light & Power Generation Operations Manager
Jorge C. Somoano, Engineering Operations Manager
Daniel E. Garcia, Bulk Power Manager
Sharon L. Johnson, Deputy City Treasurer
Bruce V. Malkenhorst, Jr., Assistant to the City Attorney
SPECIAL SERVICES
Orrick, Herrington & Sutcliffe LLP
Los Angeles, California
Bond Counsel
Deutsche Bank Trust Company Americas
New York, New York
Auction Agent
Macias, Gini & Company LLP
Los Angeles, California
Independent Accountants
The Bank of New York Trust Company, N.A.
Los Angeles, California
Trustee
Morgan Stanley & Co. Incorporated
New York, New York
John Karns
Karns & Karabian
Los Angeles, California
General Counsel
Broker -Dealer
Rory Burnett
Gursey Schneider & Co.
Los Angeles, California
City Accountant
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TABLE OF CONTENTS
Page
INTRODUCTION.........................................................................................................................................1
Purpose of Official Statement.......................................................................................................... I
Authority and Use of Proceeds.........................................................................................................1
TheCity............................................................................................................................................2
TheElectric System.........................................................................................................................2
Security and Sources of Payment for the 2004 Bonds..................................................................... 2
BondInsurance.................................................................................................................................2
Debt Service Reserve Fund..............................................................................................................2
OtherMatters...................................................................................................................................3
CONTINUINGDISCLOSURE....................................................................................................................
3
PLANOF FINANCE....................................................................................................................................3
The2004A Bonds............................................................................................................................
3
The2004B Bonds.............................................................................................................................4
SwapAgreement..............................................................................................................................
4
ESTIMATED SOURCES AND USES OF FUNDS.....................................................................................
5
THE2004 BONDS.......................................................................................................................................5
General.............................................................................................................................................
6
AuctionRate Securities....................................................................................................................6
Special Considerations for Purchasers of 2004 Bonds While Bearing Interest at Auction Rates ..13
Redemptionof 2004 Bonds............................................................................................................14
BONDINSURANCE..................................................................................................................................16
SECURITY AND SOURCES OF PAYMENT FOR THE 2004 BONDS.................................................16
Pledge Effected by the Indenture...................................................................................................16
Deposit and Application of Revenues............................................................................................18
RateCovenant................................................................................................................................18
DebtService Reserve Fund............................................................................................................19
ExpenseStabilization Fund............................................................................................................19
OutstandingParity Obligations......................................................................................................
20
Additional Parity Obligations........................................................................................................20
Limitationson Remedies................................................................................................................21
DEVELOPMENTS IN THE ENERGY MARKETS..................................................................................21
Industry Restructuring and the Energy Crisis................................................................................
21
Impact of Restructuring and the Energy Crisis on the Electric System.........................................22
ProposedState Legislation.............................................................................................................22
OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY...........................................23
EnergyPolicy Act of 1992.............................................................................................................23
Changes in Federal Regulation of Electric Utilities.......................................................................23
Proposed Federal Deregulation and Tax Legislation.....................................................................
23
OtherFactors..................................................................................................................................23
RATEREGULATION................................................................................................................................24
THEELECTRIC SYSTEM........................................................................................................................25
General ................................
Management ........................
Employee Relations ............
Insurance .............................
Electric System Facilities....
Power Supply Resources.....
....................................................25
.................................................... 26
.................................................... 27
.................................................... 27
.................................................... 28
1)R
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TransmissionResources.................................................................................................................
3
CapitalRPaiiin— :=_ : ...................................................................................................................
^"
. ..
Customers, Retail Energy Sales, Revenues and Demand..............................................................39
LargestCustomers..........................................................................................................................40
ElectricRates.................................................................................................................................40
Comparison of Selected Monthly Electric Bills.............................................................................42
Indebtedness...................................................................................................................................
43
Summaryof Operating Results......................................................................................................
44
Management's Discussion of Operating Results...........................................................................
44
Projected Operating Results and Debt Service Coverage [to be updated]....................................45
CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS.......................................47
California Constitution Articles XIIIA and XIIIB.........................................................................47
Constitutional Changes in California.............................................................................................48
FutureInitiatives............................................................................................................................48
ABSENCEOF LITIGATION.....................................................................................................................48
TAXMATTERS.........................................................................................................................................49
APPROVALOF LEGALITY.....................................................................................................................50
RATINGS...................................................................................................................................................51
UNDERWRITING......................................................................................................................................
51
GENERAL PURPOSE FINANCIAL STATEMENTS..............................................................................51
EXECUTIONAND DELIVERY...............................................................................................................
52
APPENDIX A — AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL
YEARS ENDED JUNE 30, 2004 AND JUKE 30, 2003............................................ A-1
APPENDIX B — THE CITY OF VERNON........................................................................................... B-1
APPENDIX C — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ........................ C-1
APPENDIX D — AUCTION PROCEDURES........................................................................................ D—I
APPENDIX E — BOOK ENTRY -ONLY SYSTEM.............................................................................. E-1
APPENDIX F — PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT .................F-1
APPENDIX G — PROPOSED FORM OF OPINION OF BOND COUNSEL ...................................... G-1
APPENDIX H — SPECIMEN MUNICIPAL BOND INSURANCE POLICY ...................................... H-1
ii
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$[Series A principal
amount]
2004 Series A
(Auction Rate Securities)
OFFICIAL STATEMENT
$[principal amount]
CITY OF VERNON
Electric System Revenue Bonds
$[Series B principal
amount]
2004 Series B
(Auction Rate Securities)
$[Series B principal
amount]*
2004 Series C
(Auction Rate Securities)
INTRODUCTION
$[Series B principal
amount]
2004 'Taxable Series D
(Auction Rate Securities)
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 2004 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 C - 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 Electric System Revenue Bonds, 2004 Series A (the "2004A Bonds"),
2004 Series B (the "2004B Bonds"), 2004 Series C (the "2004C Bonds"), and 2004 Taxable Series D
(the "2004D Bonds" and collectively with the 2004A Bonds, the 2004B Bonds and the 2004C Bonds,
the "2004 Bonds"), in the aggregate principal amount of $[principal amount], composed of $[Series A
principal amount] principal amount of 2004A Bonds and $[Series B principal amount] principal amount
of 2004B Bonds.
THIS OFFICIAL STATEMENT DESCRIBES CERTAIN TERMS OF THE 2004 BONDS
WHILE IN AN ARB INTEREST RATE PERIOD. THERE ARE SIGNIFICANT CHANGES IN THE
TERMS OF THE 2004 BONDS IN OTHER INTEREST RATE PERIODS. THIS OFFICIAL
STATEMENT IS NOT INTENDED TO PROVIDE INFORMATION WITH RESPECT TO THE 2004
BONDS IN ANY INTEREST RATE PERIOD OTHER THAN THE ARB INTEREST RATE PERIOD.
Authority and Use of Proceeds
The 2004 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, dated as of
December 1, 2004, as supplement by a First Supplemental Indenture of Trust, as Second Supplemental
Indenture of Trust, a Third Supplemental Indenture of Trust, Supplemental Indenture of Trust and a
Fourth Supplemental Indenture of Trust, each dated as of [December] 1, 2004 (collectively, the
"Indenture"), each by and between the City and The Bank of New York Trust Company, N.A., as trustee
(the "Trustee"). The 2004A Bonds are being issued to provide funds (i) to refund certain outstanding
Electric System Revenue Bonds of the City; (ii) to finance the costs of improvements to the City's
substation and distribution facilities and certain costs of completion of the City's Malburg Generating
Station (the "Project"); (iii) to fund a deposit to the Debt Service Reserve Fund; and (iv) to pay costs of
issuance of the 2004A Bonds. The 2004B Bonds are being issued to provide funds (i) to finance the
61756ov6
reimbursement to the City of certain costs incurred in connection with the City's electric system
facilities; (ii) to fund a deposit to the Debt Service Reserve Fund; and (iii) to pay costs of issuance of the
2004B Bonds. See "PLAN OF FINANCE" 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 1,260 businesses located in the City employing more than 44,000 persons. The City is
almost exclusively industrial, with an estimated resident population of 95 as of January 1, 2004. See
"APPENDIX B — THE CITY OF VERNON" herein.
The Electric System
Pursuant to California law and its Charter, the City has established its Light & Power
Department, which is responsible for the operation of the City's electric system (the `Electric System").
The function of the Electric System is to supply the City's inhabitants and the businesses and industries
within the City with electricity. The Electric System has been in operation since 1933. For the Fiscal
Year ended June 30, 2004, the Electric System provided approximately 1,191,900 kWh of electricity to
2,060 customers, almost all of which are commercial and industrial entities. See "THE ELECTRIC
SYSTEM" herein.
Security and Sources of Payment for the 2004 Bonds
The 2004 Bonds are special obligations of the City. The principal of, premium, if any, and
interest on the 2004 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 2004 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
2004 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 other public agency is pledged to the payment of the principal or premium, if any, or interest
on the 2004 Bonds. The 2004 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).
Bond Insurance
Payment of the principal of and interest on each Series of the 2004 Bonds when due will be
insured by a municipal bond insurance policy (the "Policy") to be issued by (the "Insurer")
simultaneously with the delivery of the 2004 Bonds of each Series. See `BOND INSURANCE" herein.
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
when due of principal or redemption price of or interest on the Bonds issued under the Indenture
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including the 2004 Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2004
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 copies of the Indenture will
be provided by the Trustee upon request and payment of duplication costs.
CONTINUING DISCLOSURE
The City will covenant pursuant to a Continuing Disclosure Agreement, dated as of
[December] 1, 2004 (the "Continuing Disclosure Agreement"), by and between the City and the Trustee,
and relating to the 2004 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 Fiscal Year
ending June 30, 2005, 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
BONDS" herein. 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
has never failed to comply in all material respects with any previous undertakings with respect to the
provision of annual reports or notices of material events as required by the Rule.
PLAN OF FINANCE
The 2004A Bonds
The 2004A Bonds are being issued to provide funds (i) to refund the City's Malburg Generating
Station Project Electric System Revenue Bonds, 2003 Series A, in the outstanding principal amount of
$50,000,000, 2003 Series B, in the outstanding principal amount of $37,500,000 and 2003 Series C, in
the outstanding principal amount of $75,110,000 (collectively, the "Refunded 2003 Bonds"); (ii) to
finance the costs of improvements to the City's substation and distribution facilities and certain costs of
completion of the City's Malburg Generating Station (the "Project"); (iii) to fund a deposit to the Debt
Service Reserve Fund; and (iv) to pay costs of issuance of the 2004A Bonds.
A portion of the proceeds of the 2004A Bonds will be deposited into an escrow fund established
under an escrow agreement dated as of [December 1, 20041 (the "Escrow Agreement"), by and between
the Bank of New York Trust Company, N.A., as escrow agent, and the City, to be invested in certain
3
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federal securities in an amount sufficient, together with investment earnings thereon, to refund the
Refunded 2003 Bonds on or about , 2004. The Refunded 2003 Bonds were issued pursuant to the
Indenture, the First Supplemental Indenture of Trust, the Second Supplemental Indenture of Trust and
the Third Supplemental Indenture of Trust, each dated as of April 1, 2003, for the purpose of financing a
portion of the costs of the City's Malburg Generating Station Project.
Approximately $ million of the proceeds of the 2004A Bonds will be applied to finance the
costs of certain improvements to the City's substation and distribution facilities and certain costs of
completion of the City's Malburg Generating Station. The substation and distribution facility
improvements expected to be financed with proceeds of the 2004A Bonds include the following: [list of
expected improvements to be financed] [In addition, approximately $ of proceeds of the 2004A
Bonds are expected to be applied to finance a portion of the costs of completion of the Malburg
Generating Station Project. See "THE ELECTRIC SYSTEM —Power Supply Resources —Future Power
Supply Resources" herein for information regarding the City's Malburg Generating Station Project.
The 2004B Bonds
The 2004B Bonds are being issued to provide funds (i) to finance the reimbursement to the City
of certain costs incurred in connection with the Electric System, including certain investments made by
the City in the acquisition and construction of the Electric System facilities; (ii) to fund a deposit to the
Debt Service Reserve Fund; and (iii) to pay costs of issuance of the 2004B Bonds. Such proceeds will
be reimbursed to the City's General Fund and are expected to be deposited by the City into a special
fund to be applied to the acquisition of land by the City to be leased by the City for such purposes as are
consistent with the City's economic development goals of promoting industrial development and
employment within the City's boundaries.
Swap Agreement
The City expects to enter into an interest rate swap agreement in the form of an ISDA Master
Agreement and Schedule and related Transactions (the "2004 Swap Agreement") with Morgan Stanley
Capital Services Inc. ("Morgan Stanley") in connection with the 2004A, 2004B and 2004C Bonds. The
2004 Swap Agreement will have a term of _ years. Pursuant to the Transactions under the 2004 Swap
Agreement, the City will pay a fixed rate of interest on an initial notional amount of $ . In return,
Morgan Stanley will pay a variable rate of interest equal to % of a one -month London Interbank
Offering Rate ("LIBOR") on a like notional amount. The amounts payable by a party under the 2004
Swap Agreement are due monthly but are netted against the payments to be received by such party
thereunder. Both the City and the counterparty will have the right to terminate the 2004 Swap
Agreement prior to its stated maturity date under certain conditions, in which event a termination
payment may be outstanding. Such termination payment would be substantial. See "SECURITY AND
SOURCES OF PAYMENT FOR THE 2004 BONDS —Outstanding Parity Obligations" herein.
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ESTIMATED SOURCES AND USES OF FUNDS
2004A Bonds
SOURCES:
2004A Bond Proceeds...................................................... $[Series A principal
amount]
Transfer from Refunded 2003 Bonds funds and
accounts........................................................................
TOTAL SOURCES: .................................................. $
USES:
Construction Fund............................................................
EscrowFund.....................................................................
Debt Service Reserve Fund ..............................................
Underwriter's Discount ....................................................
Costs of Issuance(l)...........................................................
TOTAL USES: .......................................................... $
Includes legal fees, fees of the Trustee, rating agency fees, legal, financial and consulting fees, bond insurance premium,
printing costs and other miscellaneous expenses.
2004B Bonds
SOURCES:
2004B Bond Proceeds...................................................... $[Series B principal
amount]
TOTAL SOURCES: .................................................. $
USES:
Reimbursement to City General Fund ..............................
Debt Service Reserve Fund ..............................................
Underwriter's Discount ....................................................
Costs of IssuanceM...........................................................
TOTAL USES: ..........................................................
Includes legal fees, fees of the Trustee, rating agency fees, legal, financial and consulting fees, bond insurance premium,
printing costs and other miscellaneous expenses.
THE 2004 BONDS
The following is a summary of certain provisions of the 2004 Bonds. Reference is made to the
2004 Bonds for the complete text thereof and to the Indenture for a more detailed description of such
provisions. The discussion herein is qualified by such reference. See "APPENDIX C — SUMMARY OF
CERTAIN PROVISIONS OF THE INDENTURE" and "APPENDIX D AUCTION PROCEDURES"
herein. This Official Statement provides information as of its date with respect to the 2004 Bonds
(including the terms of such 2004 Bonds) prior to a Conversion from an ARB Interest Rate Period.
There are significant changes in the terms of the 2004 Bonds not described in this Official Statement
when the 2004 Bonds are not in an ARB Interest Rate Period. Purchasers of the 2004 Bonds should not
rely on this Official Statement for information concerning the 2004 Bonds in connection with any
Conversion of the 2004 Bonds, but should look solely to the offering document to be used in connection
with any such Conversion.
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General
Pursuant to the Indenture, the 2004 Bonds of a Series may bear interest at Daily Interest Rates,
Weekly Interest Rates, Commercial Paper Rates, Index Interest Rates, ARB Interest Rates or Long -Term
Interest Rates, as specified from time to time by the City. The 2004 Bonds of each Series will initially
bear interest at ARB Interest Rates, determined pursuant to the Auction Procedures as described in
"APPENDIX D — AUCTION PROCEDURES" herein. The initial ARB Interest Rate for each Series of
2004 Bonds will be set by the Broker -Dealer. The 2004 Bonds will initially be issued in authorized
denominations of $25,000 and integral multiples thereof.
The 2004 Bonds of each Series will be registered in the name of Cede & Co., the nominee of
DTC, and held in DTC's book -entry system. So long as the 2004 Bonds are held in the book -entry
system, DTC or its nominee will be the registered owner of the 2004 Bonds for all purposes of the
Indenture and the 2004 Bonds. For purposes of this Official Statement, DTC or its nominee, and its
successors and assigns, are referred to as the "Securities Depository." So long as the 2004 Bonds are
held in book -entry form through DTC, all payments with respect to principal of, premium, if any, and
interest on each Bond will be made pursuant to DTC's rules and procedures. See "APPENDIX E —
BOOK -ENTRY ONLY SYSTEM" herein.
The Bank of New York Trust Company, N.A., Los Angeles, California is the Trustee for the
2004 Bonds. Deutsche Bank Trust Company Americas has been appointed the Auction Agent for the
2004 Bonds of each Series. Morgan Stanley & Co. Incorporated has been appointed under the Indenture
and the Broker -Dealer Agreement to serve as Broker -Dealer for the 2004 Bonds of each Series. The
Broker -Dealer may resign or be removed and a successor Broker -Dealer may be appointed, all in
accordance with the terms of the Indenture and the Broker -Dealer Agreement.
Auction Rate Securities
General Each Series of the 2004 Bonds will initially bear interest at an ARB Interest Rate and
thereafter are subject to subsequent Conversion, if any, of all, but not less than all, of such Series of 2004
Bonds to a Daily Interest Rate, Weekly Interest Rate, Commercial Paper Rate, Index Interest Rate or
Long -Term Interest Rate, as described herein. See "— Conversion" below.
While any 2004 Bonds bear interest at an ARB Interest Rate during an Auction Period
(including the initial Auction Period), except as otherwise specifically provided in the Indenture, the
provisions of the Indenture and the auction and settlement procedures specified in APPENDIX D hereto
shall govern the interest rates per annum and the payment terms of the 2004 Bonds. The initial Auction
Period for the Series 2004A Bonds shall be the period commencing on and including the date of delivery
and ending on and including , 200_ with interest payable for the initial Auction Period on ,
200, and thereafter shall be a [fl-day Auction Period with Auctions generally conducted on . The
initial Auction for the Series 2004A Bonds shall occur on , 200. The initial Auction Period for the
Series 2004B Bonds shall be the period commencing on and including the date of delivery and ending on
and including , 200, with interest payable for the initial Auction Period on , 200_ and ,
200, and thereafter the Auction Period shall be a [#]-day Auction Period with Auctions generally
conducted on . The initial Auction for the Series 2004B Bonds shall occur on , 200.
While the 2004 Bonds are book -entry bonds, as described below, payment of the principal or
premium, if any, and interest on any 2004 Bond will be made by wire transfer by the Trustee to DTC, to
the account of Cede & Co. The interest on the 2004 Bonds of a Series will be payable [conform once
Auction Period is determined —on the business day immediately following each Auction Period] for the
2004 Bonds of said Series (an "ARB Interest Payment Date"). In the event the 2004 Bonds of a Series
6
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are no longer book -entry bonds, principal or premium, if any, with respect to the ARB of such Series
will be payable at the Principal Office of the Trustee, and interest payments on the ARB of such Series
will be paid by check mailed by the Trustee to the registered owners of such 2004 Bonds as of the
Record Date; provided, however, that if an Owner of $1,000,OOO or more aggregate outstanding principal
amount of a Series of 2004 Bonds gives the Trustee written notice of such holding accompanied by
sufficient wire transfer instructions, the payments of interest with respect to such 2004 Bonds will be
payable by wire transfer of immediately available funds. The Record Date with respect to the 2004
Bonds of a Series will be the second Business Day next preceding each applicable ARB Interest
Payment Date.
Applicable ARB Interest Rate. The rate per annum at which interest accrues with respect to a
Series of 2004 Bonds for any Auction Period is referred to as the "ARB Interest Rate" which cannot
exceed the Maximum Rate of 12% per annum. The interest rate on a Series of 2004 Bonds during the
initial Auction Period will be determined by the Broker -Dealer on or prior to the day preceding the date
of delivery of such Series of 2004 Bonds. Thereafter, the rate of interest for each Auction Period for such
Series shall be equal to the rate of interest that results from the implementation of the Auction
Procedures described in APPENDIX D — "AUCTION PROCEDURES" hereto.
Interest on the 2004 Bonds bearing ARB Interest Rates during an Auction Period (including the
initial Auction Period) of less than 180 days shall be computed on the basis of a 360-day year and the
number of days actually elapsed. Interest on the 2004 Bonds bearing ARB Interest Rates during an
Auction Period of equal to or more than 180 days shall be computed upon the basis of a 360-day year of
twelve 30-day months. The Series 2004 Bonds of each Series shall mature, unless sooner paid, on the
Maturity Date for such Series. Interest accrued on the 2004 Bonds shall be paid on each ARB Interest
Payment Date, as applicable for such Series, for the period from and including the date of delivery or
preceding Interest Payment Date, as applicable, to and including the day before such Interest Payment
Date (whether or not such day is a Business Day) to the Owners on the Record Date.
Subsequent Auction Dates. With respect to 2004 Bonds of a Series, during any period in which
the Auction Procedures are not suspended in accordance with the provisions of the Indenture, the
Auction Dates shall be (i) if the 2004 Bonds of such Series are in a daily Auction Period, each Business
Day, (ii) if the 2004 Bonds of such Series are in a Flexible Auction Period, the last Business Day of the
Flexible Auction Period, and (iii) if the 2004 Bonds of such Series are in any other Auction Period, the
Business Day immediately preceding each ARB Interest Payment Date for such 2004 Bonds (whether or
not an Auction will be conducted on such date); provided, that the last Auction Date with respect to the
2004 Bonds of such Series in an Auction Period other than a daily Auction Period or a Flexible Auction
Period will be the earlier of (a) the Business Day immediately preceding the ARB Interest Payment Date
immediately preceding the effective date of a change in the Interest Rate Period from an ARB Interest
Rate Period to a different Interest Rate Period for such 2004 Bonds and (b) the Business Day
immediately preceding the Interest Payment Date immediately preceding the Maturity Date for such
2004 Bonds; and provided further, that if such 2004 Bonds of such Series are in a daily Auction Period,
the last Auction Date will be the earlier of (x) the Business Day immediately preceding the effective date
of a change in the Interest Rate Period applicable to such 2004 Bonds from an ARB Interest Rate Period
to a different Interest Rate Period and (y) the Business Day immediately preceding the Maturity Date for
such 2004 Bonds; and provided further, that the last Business Day of a Flexible Auction Period shall be
the Auction Date for the Auction Period which begins on the next succeeding Business Day, if any. On
the Business Day preceding the change, if any, from a daily Auction Period to another Auction Period,
there will be two Auctions, one for the last daily Auction Period and one for the first (1st) Auction
Period following the such change in Auction Period.
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"Auction Period" means:
(a) a Flexible Auction Period (as defined in Appendix C);
(b) with respect to 2004 Bonds of a Series in a daily Auction Period, a period beginning on each
Business Day and extending to but not including the next succeeding Business Day;
(c) with respect to 2004 Bonds of a Series in a seven (7)-day Auction Period and with Auctions
generally conducted on (i) Fridays, a period of generally seven (7) days beginning on a Monday (or the
day following the last day of the prior Auction Period if the prior Auction Period does not end on a
Sunday) and ending on the Sunday thereafter (unless such Sunday is not followed by a Business Day, in
which case on the next succeeding day which is followed by a Business Day), (ii) Mondays, a period of
generally seven (7) days beginning on a Tuesday (or the day following the last day of the prior Auction
Period if the prior Auction Period does not end on a Monday) and ending on the Monday thereafter
(unless such Monday is not followed by a Business Day, in which case on the next succeeding day which
is followed by a Business Day), (iii) Tuesdays, a period of generally seven (7) days beginning on a
Wednesday (or the day following the last day of the prior Auction Period if the prior Auction Period
does not end on a Tuesday) and ending on the Tuesday thereafter (unless such Tuesday is not followed
by a Business Day, in which case on the next succeeding day which is followed by a Business Day),
(iv) Wednesdays, a period of generally seven (7) days beginning on a Thursday (or the day following the
last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and
ending on the Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in
which case on the next succeeding day which is followed by a Business Day, provided, that if such
Wednesday is the day before Thanksgiving Day, on the Monday following such Wednesday), and
(v) Thursdays, a period of generally seven (7) days beginning on a Friday (or the day following the last
day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on
the Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case on the
next succeeding day which is followed by a Business Day, provided, that if such Thursday is
Thanksgiving Day, on the Monday following such Thursday);
(d) with respect to 2004 Bonds of a Series in a twenty-eight (28)-day Auction Period and with
Auctions generally conducted on (i) Fridays, a period of generally twenty-eight (28) days beginning on a
Monday (or the last day of the prior Auction Period if the prior Auction Period does not end on a
Sunday) and ending on the fourth (4th) Sunday thereafter (unless such Sunday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a Business Day),
(ii) Mondays, a period of generally twenty-eight (28) days beginning on a Tuesday (or the last day of the
prior Auction Period if the prior Auction Period does not end on a Monday) and ending on the fourth
(4th) Monday thereafter (unless such Monday is not followed by a Business Day, in which case on the
next succeeding day which is followed by a Business Day), (iii) Tuesdays, a period of generally twenty-
eight (28) days beginning on a Wednesday (or the last day of the prior Auction Period if the prior
Auction Period does not end on a Tuesday) and ending on the fourth (4th) Tuesday thereafter (unless
such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is
followed by a Business Day), (iv) Wednesdays, a period of generally twenty-eight (28) days beginning
on a Thursday (or the last day of the prior Auction Period if the prior Auction Period does not end on a
Wednesday) and ending on the fourth (4th) Wednesday thereafter (unless such Wednesday is not
followed by a Business Day, in which case on the next succeeding day which is followed by a Business
Day, provided, that if such Wednesday is the day before Thanksgiving Day, on the Monday following
such Wednesday), and (v) Thursdays, a period of generally twenty-eight (28) days beginning on a Friday
(or the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and
ending on the fourth (4th) Thursday thereafter (unless such Thursday is not followed by a Business Day,
61756Ov6
in which case on the next succeeding day which is followed by a Business Day, provided, that if such
Thursday is Thanksgiving Day, on the Monday following such Thursday);
(e) with respect to 2004 Bonds of a Series in a thirty-five (35)-day Auction Period and with
Auctions generally conducted on (i) Fridays, a period of generally thirty-five (35) days beginning on a
Monday (or the last day of the prior Auction Period if the prior Auction Period does not end on Sunday)
and ending on the fifth (5th) Sunday thereafter (unless such Sunday is not followed by a Business Day,
in which case on the next succeeding day which is followed by a Business Day), (ii) Mondays, a period
of generally thirty-five (35) days beginning on a Tuesday (or the last day of the prior Auction Period if
the prior Auction Period does not end on Monday) and ending on the fifth (5th) Monday thereafter
(unless such Monday is not followed by a Business Day, in which case on the next succeeding day which
is followed by a Business Day), (iii) Tuesdays, a period of generally thirty-five (35) days beginning on a
Wednesday (or the last day of the prior Auction Period if the prior Auction Period does not end on
Tuesday) and ending on the fifth (5th) Tuesday thereafter (unless such Tuesday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a Business Day),
(iv) Wednesdays, a period of generally thirty-five (35) days beginning on a Thursday (or the last day of
the prior Auction Period if the prior Auction Period does not end on Wednesday) and ending on the fifth
(5th) Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case on
the next succeeding day which is followed by a Business Day, provided, that if such Wednesday is the
day before Thanksgiving Day, on the Monday following such Wednesday), and (v) Thursdays, a period
of generally thirty-five (35) days beginning on a Friday (or the last day of the prior Auction Period if the
prior Auction Period does not end on Thursday) and ending on the fifth (5th) Thursday thereafter (unless
such Thursday is not followed by a Business Day, in which case on the next succeeding day which is
followed by a Business Day, provided, that if such Thursday is Thanksgiving Day, on the Monday
following such Thursday);
(f) with respect to 2004 Bonds of a Series in a three (3)-month Auction Period, a period of
generally three (3) months (or shorter period upon a conversion, if any, from another Auction Period)
beginning on the day following the last day of the prior Auction Period and ending on the day that is
ninety (90) days thereafter (unless such day is not Wednesday, in which case on the first (1 st)
Wednesday succeeding such day), provided, that if such day is not followed by a Business Day, on the
next succeeding day which is followed by a Business Day and provided further, that if such Wednesday
is the day before Thanksgiving Day, on the Monday following such Wednesday; and
(g) with respect to 2004 Bonds of a Series in a six (6)-month Auction Period, a period of
generally six (6) months (or shorter period upon a conversion, if any, from another Auction Period)
beginning on the day following the last day of the prior Auction Period and ending on the day that is
one hundred eighty (180) days thereafter (unless such day is not Wednesday, in which case on the first
(1 st) Wednesday succeeding such day), provided, that if such day is not followed by a Business Day, on
the next succeeding day which is followed by a Business Day and provided further, that if such
Wednesday is the day before Thanksgiving Day, on the Monday following such Wednesday.
provided, that:
(a) if there is a conversion of a Series of 2004 Bonds with Auctions generally to be
conducted on Fridays (i) from a daily Auction Period to a 7-day Auction Period, the next Auction Period
shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the prior Auction
Period) and shall end on the next succeeding Sunday (unless such Sunday is not followed by a Business
Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from a daily
Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the
conversion (i.e. the ARB Interest Payment Date for the prior Auction Period) and shall end on the
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Sunday (unless such Sunday is not followed by a Business Day, in which case on the next succeeding
day which is followed by a Business Day) which is more than 21 days but not more than 28 days from
such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next
Auction Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the
prior Auction Period) and shall end on Sunday (unless such Sunday is not followed by a Business Day,
in which case on the next succeeding day which is followed by a Business Day) which is more than 28
days but no more than 35 days from such date of conversion;
(b) if there is a conversion of a Series of 2004 Bonds with Auctions generally to be
conducted on Mondays (i) from a daily Auction Period to a 7-day Auction Period, the next Auction
Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the prior
Auction Period) and shall end on the next succeeding Monday (unless such Monday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from
a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the
conversion (i.e. the ARB Interest Payment Date for the prior Auction Period) and shall end on the
Monday (unless such Monday is not followed by a Business Day, in which case on the next succeeding
day which is followed by a Business Day) which is more than 21 days but not more than 28 days from
such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next
Auction Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the
prior Auction Period) and shall end on Monday (unless such Monday is not followed by a Business Day,
in which case on the next succeeding day which is followed by a Business Day) which is more than 28
days but no more than 35 days from such date of conversion;
(c) if there is a conversion of a Series of 2004 Bonds with Auctions generally to be
conducted on Tuesdays (i) from a daily Auction Period to a 7-day Auction Period, the next Auction
Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the prior
Auction Period) and shall end on the next succeeding Tuesday (unless such Tuesday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a Business Day), (ii) from
a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the date of the
conversion (i.e. the ARB Interest Payment Date for the prior Auction Period) and shall end on the
Tuesday (unless such Tuesday is not followed by a Business Day, in which case on the next succeeding
day which is followed by a Business Day) which is more than 21 days but not more than 28 days from
such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the next
Auction Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the
prior Auction Period) and shall end on Tuesday (unless such Tuesday is not followed by a Business Day,
in which case on the next succeeding day which is followed by a Business Day) which is more than 28
days but no more than 35 days from such date of conversion;
(d) if there is a conversion of a Series of 2004 Bonds with Auctions generally to be
conducted on Wednesdays (i) from a daily Auction Period to a 7-day Auction Period, the next Auction
Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the prior
Auction Period) and shall end on the next succeeding Wednesday (unless such Wednesday is not
followed by a Business Day, in which case on the next succeeding day which is followed by a Business
Day), (ii) from a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin
on the date of the conversion (i.e. the ARB Interest Payment Date for the prior Auction Period) and shall
end on the Wednesday (unless such Wednesday is not followed by a Business Day, in which case on the
next succeeding day which is followed by a Business Day) which is more than 21 days but not more than
28 days from such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period,
the next Auction Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for
the prior Auction Period) and shall end on Wednesday (unless such Wednesday is not followed by a
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Business Day, in which case on the next succeeding day which is followed by a Business Day) which is
more than 28 days but no more than 35 days from such date of conversion; and
(e) if there is a conversion of A Series of 2004 Bonds with Auctions generally to be
conducted on Thursdays (i) from a daily Auction Period to a 7-day Auction Period, the next Auction
Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the prior
Auction Period) and shall end on the next succeeding Thursday (unless such Thursday is not followed by
a Business Day, in which case on the next succeeding day which is followed by a Business Day),
(ii) from a daily Auction Period to a 28-day Auction Period, the next Auction Period shall begin on the
date of the conversion (i.e. the ARB Interest Payment Date for the prior Auction Period) and shall end on
the Thursday (unless such Thursday is not followed by a Business Day, in which case on the next
succeeding day which is followed by a Business Day) which is more than 21 days but not more than 28
days from such date of conversion, and (iii) from a daily Auction Period to a 35-day Auction Period, the
next Auction Period shall begin on the date of the conversion (i.e. the ARB Interest Payment Date for the
prior Auction Period) and shall end on Thursday (unless such Thursday is not followed by a Business
Day, in which case on the next succeeding day which is followed by a Business Day) which is more than
28 days but no more than 35 days from such date of conversion;
provided further, that any Auction Period that is greater than 35 days may be extended as provided in the
Auction Procedures. See "APPENDIX D- "AUCTION PROCEDURES" herein.
Changes in Auction Period During any Auction Period, the City may, from time to time on
any ARB Interest Payment Date, change the length of the Auction Period with respect to all of the 2004
Bonds of a Series .among daily, seven (7) days, twenty-eight (28) days, thirty-five (35) days, three
(3) months, six (6) months and a Flexible Auction Period in order to accommodate economic and
financial factors that may affect or be relevant to the length of the Auction Period and the interest rate
borne by such Series of 2004 Bonds. The City will initiate the change in the length of the Auction
Period by giving notice by mail to the Auction Agent, the Broker -Dealers and the Securities Depository
that the Auction Period will change if the conditions described herein are satisfied and the proposed
effective date of the change, at least ten Business Days prior to the Auction Date for such Auction
Period.
Any such changed Auction Period will be for a period of one (1) day, seven (7) days, twenty-
eight (28) days, thirty-five (35) days, three (3) months, six (6) months or a Flexible Auction Period and
will be for all of a Series of 2004 Bonds in an ARB Interest Rate Period. The change in the length of the
Auction Period for any Series of 2004 Bonds will not be allowed unless Sufficient Clearing Bids existed
at both the Auction before the date on which the notice of the proposed change was given as provided in
the Indenture and the Auction immediately preceding the proposed change.
The change in length of the Auction Period for any Series of 2004 Bonds will take effect only if
(A) the Trustee and the Auction Agent receive, by 11:00 a.m., New York City time, on the Business Day
before the Auction Date for the first (1st) such Auction Period, notice from the City specifying the
change in the length of the Auction Period and (B) Sufficient Clearing Bids exist at the Auction on the
Auction Date for such first (1st) Auction Period. For purposes of the Auction for such first (1st) Auction
Period only, each Existing Owner will be deemed to have submitted Sell Orders with respect to all of its
2004 Bonds of a Series except to the extent such Existing Owner submits an Order with respect to such
2004 Bonds of a Series. If the condition referred to in (A) above is not met, the ARB Interest Rate for
the next Auction Period will be determined pursuant to the Auction Procedures and the Auction Period
will be the Auction Period determined without reference to the proposed change. If the condition
referred to in (A) is met but the condition referred to in (B) above is not met, the ARB Interest Rate for
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the next Auction Period will be the ARB Maximum Rate, and the Auction Period will be a seven (7)-day
Auction Period.
On the conversion date for 2004 Bonds of a Series selected for conversion from one Auction
Period to another, any 2004 Bonds of such Series which are not the subject of a specific Hold Order or
Bid will be deemed to be subject to a Sell Order. See APPENDIX D — "AUCTION PROCEDURES"
hereto.
Changes in Auction Date. During any Auction Period, the Auction Agent, with the written
consent of the City, may specify an earlier Auction Date for any Series of 2004 Bonds (but in no event
more than five (5) Business Days earlier) than the Auction Date that would otherwise be determined in
accordance with the definition of "Auction Date" in order to conform with then current market practice
with respect to similar securities or to accommodate economic and financial factors that may affect or be
relevant to the day of the week constituting an Auction Date and the interest rate borne on such 2004
Bonds of a Series. The Auction Agent will provide notice of its determination to specify an earlier
Auction Date for an Auction Period by means of a notice by mail delivered at least forty-five (45) days
prior to the proposed changed Auction Date to the City, the Trustee, the Broker -Dealer and the Securities
Depository.
Conversion. The Interest Rate Period applicable to all or a portion of the 2004 Bonds of a Series
may be converted from an ARB Interest Rate Period to a Daily Interest Rate Period, a Weekly Interest
Rate Period, a Commercial Paper Interest Rate Period, a Long -Term Interest Rate Period, or an Index
Interest Rate Period in accordance with the Indenture. See APPENDIX C — "SUMMARY OF CERTAIN
PROVISIONS OF THE INDENTURE" hereto.
The 2004 Bonds are subject to mandatory tender for purchase at the applicable Purchase Price
on each Conversion Date, if any. See APPENDIX C — "SUMMARY OF CERTAIN PROVISIONS OF
THE INDENTURE" hereto.
The payment of the Purchase Price of any 2004 Bonds to be converted to a Daily Interest Rate
Period, a Weekly Interest Rate Period, a Commercial Paper Rate Period, a Long -Term Interest Rate
Period or an Index Interest Rate Period is not secured by any liquidity facility or credit facility and the
City is not liable for the payment thereof except from the proceeds of the remarketing of such Series of
2004 Bonds being Converted to another Interest Rate Period. In the event that the City elected to
convert any Series of 2004 Bonds to a Daily Interest Rate Period, a Weekly Interest Rate Period, a
Commercial Paper Rate Period, a Long -Term Interest Rate Period or an Index Interest Rate Period, and
the proceeds from the remarketing of such Series of 2004 Bonds were insufficient, a failed conversion
would occur.
In the event of a failed conversion with respect to the 2004 Bonds of a Series to a Daily Interest
Rate, a Weekly Interest Rate, a Commercial Paper Rate, a Long -Term Interest Rate or an Index Interest
Rate, or in the event of a failure to change the length of the current Auction Period due to the lack of
Sufficient Clearing Bids at the Auction on the Auction Date for the first new Auction Period, the ARB
Interest Rate for the next Auction Period will be the Maximum Rate of 12% per annum and the Auction
Period will be a seven (7)-day Auction Period.
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Special Considerations for Purchasers of 2004 Bonds While Bearing Interest at Auction Rates
Prospective purchasers of the 2004 Bonds should note the following:
During an ARB Interest Rate Period, the beneficial owner of a 2004 Bond may sell, transfer or
dispose of a 2004 Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures
or through a Broker -Dealer. See "APPENDIX D — AUCTION PROCEDURES" herein. The ability of
any beneficial owner of 2004 Bonds to sell such 2004 Bonds in any Auction is directly contingent upon
the Auction Agent's receipt of Sufficient Clearing Bids. If Sufficient Clearing Bids are not received,
Submitted Orders shall be accepted or rejected as summarized in "APPENDIX D — AUCTION
PROCEDURES — Allocation of Bonds," and a beneficial owner of 2004 Bonds who submits a Sell
Order may be required to continue to hold such 2004 Bonds.
The Indenture and the Auction Agent Agreement provide that the Auction Agent may resign
from its duties as Auction Agent by giving at least ninety (90) days notice to the City, the Broker -Dealer
and the Trustee. The City may remove the Auction Agent by giving notice to the Auction Agent and the
Trustee. No such resignation or removal shall take effect until a successor Auction Agent has been
appointed in accordance with the qualifications set forth in the Indenture; provided, however, that if the
Auction Agent has not been compensated for its services, the Auction Agent may resign upon giving at
least 30 days notice to the City and the Trustee and such resignation shall take effect upon the expiration
of such 30 days if the Auction Agent has not then been paid, even if a successor Auction Agent has not
been appointed. The Indenture provides that a Broker -Dealer thereunder may be removed at any time at
the written request of the City, and does not require, as a condition to the effectiveness of such
resignation, that a replacement Broker -Dealer be in place. The Broker -Dealer Agreement provides that
the Broker -Dealer may resign upon 30 days notice to the City and Trustee and that the Trustee, at the
direction of the City, may remove the Broker -Dealer upon five days written notice. For any Auction
Period during which there is no duly appointed Auction Agent, or during which there is no duly
appointed Broker -Dealer, it will not be possible to hold Auctions, with the result that the interest rate on
the 2004 Bonds will be the same as the Auction Rate for the preceding Auction Period.
The Auction Procedures shall be suspended during the period commencing on the date of the
Auction Agent's receipt of notice from the Trustee of the occurrence of a default of the City resulting
from the failure to pay principal, sinking fund installment, premium or interest on any 2004 Bond of
such Series when due, but will resume two Business Days after the date on which the Auction Agent
receives notice from the Trustee that such default has been waived or cured, with the next Auction to
occur on the next regularly scheduled Auction Date occurring thereafter.
Any ratings on the 2004 Bonds do not address the likelihood that any Auction will be successful
or that a beneficial owner will be able to sell 2004 Bonds in any Auction. Any reduction in ratings may
affect the ability of any beneficial owner of 2004 Bonds to sell such 2004 Bonds in any Auction.
The Broker -Dealer has advised the City that it intends initially to make a market for the 2004
Bonds between Auctions; however, the Broker -Dealer is not obligated to make such a market, and no
assurance can be given that secondary market therefor will develop.
The Broker -Dealer Agreement provides that a Broker -Dealer may submit Orders in Auctions for
its own account. If a Broker -Dealer submits an Order for its own account in any Auction, it would have
an advantage over other Bidders in that it would have knowledge of Orders placed through it in that
Auction; such Broker -Dealer, however, would not have knowledge of Orders submitted by other Broker -
Dealers (if any) in that Auction. In the Broker -Dealer Agreement, the Broker -Dealer agrees to handle
customer orders in accordance with its respective duties under applicable securities laws and rules.
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The Broker -Dealer has advised the City that it and certain other participants in the auction rate
securities markets, including both taxable and tax-exempt markets, have received letters from the
Securities and Exchange Commission (the "SEC") requesting that each of them voluntarily conduct a
review regarding their respective practices and procedures in those markets. The Broker -Dealer is
cooperating fully with the SEC in this process. No assurance can be given as to whether the results of
this process will affect the market for the 2004 Bonds or the auctions therefor.
Redemption of 2004 Bonds
While an ARB Interest Rate Period is in effect, the 2004 Bonds are subject to redemption prior
to stated maturity, as described below:
Optional Redemption. The 2004 Bonds of a Series will be subject to redemption at the option
of the City, in whole, or in part by lot in Authorized Denominations, prior to their stated maturity date,
on any ARB Interest Payment Date for said Series at a redemption price equal to the principal amount of
the 2004 Bonds of such Series called for redemption, plus unpaid accrued interest to the date fixed for
redemption, without premium.
Mandatory Sinking Fund Redemption. The 2004 Bonds of each Series are subject to
redemption from mandatory sinking fund payments, at a redemption price equal to the principal amount
of the 2004 Bonds of such Series to be redeemed plus unpaid accrued interest to the date fixed for
redemption, without premium, in the amounts and on the dates set forth below (subject to adjustment in
the event of optional redemption of 2004 Bonds as described above):
Series 2004A Bonds
Payment Date Payment Date
(April 1 Principal Amount Aril 1
*Maturity.
Series 2004B Bonds
Payment Date Payment Date
(April 1 Principal Amount (April 1)
*Maturity.
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617560v6
Principal Amount
Principal Amount
Series 2004C Bonds
Payment Date Payment Date
(April 1 Principal Amount Aril 1
*Maturity.
Series 2004D Bonds
Payment Date Payment Date
(April 1 Principal Amount (April 1)
*Maturity.
Principal Amount
Principal Amount
Notwithstanding the foregoing, if April 1 is not an ARB Interest Payment Date for the 2004
Bonds of a Series subject to mandatory sinking fund redemption, such redemption shall occur on the
ARB Interest Payment Date for said Series immediately preceding such April I.
Notice of Redemption. The Trustee will give notice of any redemption of 2004 Bonds, by first-
class mail, postage prepaid, to the Owners of all Bonds to be redeemed, at the addresses appearing in the
registration books kept for such purpose, not less than thirty (30) days nor more than sixty (60) days
prior to the date fixed for redemption. Each notice of redemption of 2004 Bonds will identify the Series
and maturity date of the 2004 Bonds to be redeemed and will state, among other things, the date fixed for
redemption, the redemption price and the place of redemption. So long as DTC or its nominee is the sole
registered owner of the 2004 Bonds under the book -entry system, redemption notices will be sent to
Cede & Co.
With respect to any notice of optional redemption as described above, unless upon the giving of
such notice the 2004 Bonds to be redeemed are deemed to have been paid, such notice must state that
such redemption is conditional upon the receipt by the Trustee on or prior to the date fixed for such
redemption of moneys sufficient to pay the principal of, and premium, if any, and interest on, the 2004
Bonds to be redeemed, and that if such moneys are not received, such notice will be of no force and
effect and the City will not be required to redeem such Bonds. If such redemption is not effectuated, the
Trustee will, within a reasonable time thereafter, give notice that such moneys were not so received.
Effect of Redemption. Notice of redemption having been given and moneys for the payment of
the redemption price being held by the Trustee, the 2004 Bonds so called for redemption will on the date
fixed for redemption designated in such notice, become due and payable at the redemption price
specified in such notice, interest on the 2004 Bonds to be redeemed will cease to accrue, said Bonds
shall cease to be entitled to any lien, benefit or security under the Indenture and the Owners thereof will
have no rights except to receive payment of the redemption price of and interest, if any, accrued to the
date fixed for redemption on the 2004 Bonds.
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Selection of 2004 Bonds to be Redeemed If less than all the outstanding Bonds of a Series are
called for redemption, the Trustee will select the 2004 Bonds of such Series or portions thereof to be
redeemed from the outstanding Bonds of such Series or such portion thereof not previously called for
redemption, by lot in any manner which the Trustee in its sole discretion shall deem appropriate and fair.
If less than all the outstanding Bonds of a Series are to be redeemed and so long as DTC or its nominee
is the sole registered owner of the 2004 Bonds of such Series under the book -entry system, selection of
2004 Bonds for redemption will be in accordance with DTC's customary practices. If less than all the
2004 Bonds of a Series are to be redeemed, the 2004 Bonds of such Series that remain outstanding must
be in Authorized Denominations.
BOND INSURANCE
The following information has been furnished by the Insurer for use in this Official Statement.
Such information has not been independently verified or confirmed by the City or the Underwriter. No
representation is made herein by the City or the Underwriter as to the accuracy or adequacy of such
information, or that the information contained and incorporated herein by reference is correct.
Reference is made to Appendix Hfor a specimen of the Policy with respect to the 2004 Bonds.
[TO COME]
SECURITY AND SOURCES OF PAYMENT FOR THE 2004 BONDS
Pledge Effected by the Indenture
The 2004 Bonds are special obligations of the City. The principal of, premium, if any, and
interest on the 2004 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 2004 Bonds and any other Bonds which the City may issue on a panty 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.
Upon conversion of a Series of 2004 Bonds from an ARB Interest Rate Period to another Interest
Rate Period, as described herein, the City is not liable for the payment of the Purchase Price of such
Series of 2004 Bonds; such Purchase Price is payable solely from the remarketing of such Series of 2004
Bonds. See "THE 2004 BONDS — Auction Rate Securities — Conversion" 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 and the other services and facilities 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
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617560v6
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 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 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" is defined in the Indenture to mean (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 or 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
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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 "PLAN OF
FINANCE —Swap Agreement" herein. See also "Outstanding Party Obligations —Swap Agreement for
the 2004 Bonds" below.
For definitions of certain other terms used herein, see "APPENDIX C — SUMMARY OF
CERTAIN PROVISIONS OF THE INDENTURE — DEFINITIONS" herein.
The issuance of the 2004 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
2004 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 other public agency is pledged to the
payment of the principal or Purchase Price of, or premium, if any, or interest on, the 2004 Bonds.
The 2004 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). The
members of the City Council of the City, and the officers and employees of the City, shall not be
individually liable on the 2004 Bonds or in respect of any undertakings by the City under the
Indenture.
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 Net 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.
"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.
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"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.
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 2004 Bonds, there will be deposited into the
Debt Service Reserve Fund from the proceeds of the 2004 Bonds an amount ($), which together
with other amounts on deposit in the Debt Service Reserve Fund, will be equal to the Debt Service
Reserve Requirement for the Bonds ($_ ). 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.
"Reserve Financial Guaranty" is defined in the Indenture to mean 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 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
2004 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; provided, however, that if an Event of Default under the
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Indenture shall have occurred and is continuing, the Trustee shall transfer all moneys in the Expense
Stabilization Fund to the Interest Account and the Principal Account of the Debt Service Fund as
provided in the Indenture.
Outstanding Parity Obligations
Electric Revenue Bonds. After giving effept to the refunding of the Refunded 2003 Bonds, no
other Electric System Revenue Bonds of the City, other than the 2004 Bonds, will be outstanding.
Swamp Agreement for the 2003 Bonds. [To Come.]
Swap Agreement for the 2004 Bonds. As described under "PLAN OF FINANCE — Swap
Agreement" herein, the City expects to enter into the 2004 Swap Agreement in connection with the
2004 Bonds. [Net payments due from the City under the Swap Agreement constitute Parity Obligations
payable from Net Revenues of the Electric System on a parity with the 2004 Bonds and other Parity
Obligations. Amounts received by the City under the 2004 Swap Agreement constitute "Revenues"
under the Indenture. The agreement by the counterparty to make payments under the Swap Agreement
does not affect the City's obligation under the Indenture for the payment of the 2004 Bonds from Net
Revenues of the Electric System. Neither the Owners of the 2004 Bonds, nor any other person other
than the City will have any rights under the 2004 Swap Agreement. Under certain circumstances, the
2004 Swap Agreement is subject to early termination prior to the maturity of the 2004 Bonds, in which
event the City may be obligated to make a substantial payment to the counterparty. Amounts due from
the City upon any early termination of the 2004 Swap Agreement constitute Subordinate Obligations
payable from Net Revenues on a basis that is junior and subordinate to the 2004 Bonds and Parity
Obligations. [The obligation of the City to make regularly scheduled payments to Morgan Stanley under
the 2004 Swap Agreement are insured by .] [confirm terms once swap docs finalized ]
Additional 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
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
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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 C — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE —
Conditions to Issuance of Parity Obligations" herein.
Limitations on Remedies
The rights of the Owners of the 2004 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
2004 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
subject the Owners of the 2004 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.
DEVELOPMENTS IN THE ENERGY MARKETS
Industry Restructuring and the Energy Crisis
Background In 1996, California partially deregulated its electric energy market. An
independent system operator of the transmission system, the California Independent System Operator
(the "ISO"), was established, as well as an independent power exchange, the California Power Exchange
(the "PX"). The PX was originally established to permit power generators to sell power on a
competitive spot -market basis; however, the PX has ceased all operations and filed for bankruptcy
protection.
Financial Difficulties of Market Participants. As a consequence of deregulation, the California
investor -owned utilities (the "IOUs") sold a large portion of their generation resources. As a result, three
major IOUs in California, Pacific Gas & Electric Company ("PG&E"), San Diego Gas & Electric Co.
("SDG&E") and Southern California Edison ("Edison") are net buyers of electricity. Following the
deregulation of the California energy markets, the IOUs were purchasing electricity at fluctuating short-
term and spot wholesale prices while the retail prices that they would charge their residential and small
business customers were capped at specified levels. During portions of 2000 and 2001, the market price
of electricity in California significantly exceeded such capped prices, resulting in the deterioration of the
creditworthiness of PG&E and Edison. In April 2001, PG&E filed for voluntary protection under
Chapter 11 of the federal Bankruptcy Code. PG&E ultimately emerged from bankruptcy in April 2004.
In 2001, Enron Corporation experienced severe financial difficulties and voluntarily filed for bankruptcy
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protection under Chapter 11 of the federal Bankruptcy Code. Since then, certain other marketers, power
suppliers and power plant developers have experienced downgrades of their credit ratings.
State and Federal Investigations. State and federal authorities are conducting investigations
and other proceedings concerning various aspects of the California energy crisis. These include, for
example, investigations by the Federal Energy Regulatory Commission ("FERC") into alleged
overcharging for the sale of electricity (the "Refund Cases") and alleged manipulation of the electricity
market (the "Gaming Crisis"). The City has participated in these investigations and they remain
unresolved. [Update to come from Eric I
Impact of Restructuring and the Energy Crisis on the Electric System
As a result of the volatility and conditions in the California energy markets, the Electric System
experienced a variety of impacts on its operations, including in most cases, substantially 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 Electric System's revenues from the sale of electric energy and
therefore could materially adversely affect the financial condition of the Electric System. 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
order to mitigate against such price volatility and its spot market rate exposure. See "THE ELECTRIC
SYSTEM — Power Supply Resources" herein.
Proposed State Legislation
Various bills have been considered by the State Legislature which would dismantle much of the
deregulation framework established under State Legislative Assembly Bill 1890 ("AB 1890") and
subsequent California Public Utilities Commission ("CPUC") decisions. (See "Industry Restructuring
and the Energy Crisis —Background" above for a discussion of that deregulation framework.) Among
other provisions, one or more of these bills would abolish the now -defunct PX, which was originally
intended to be the principal spot market for electrical energy in the State; require the IOUs to dedicate
their retained generating assets to serve their customers; establish standards for the recovery of costs and
return on investment for the IOUs; require the IOUs to invest in new generating assets to serve their
customers, or to contract for such investment with the California Consumer Power and Conservation
Financing Authority; eliminate so-called "direct access" transactions and load aggregation on a
prospective basis; and require the Legislature to approve the entry of the ISO into a multi -state or
regional transmission organization. At least one such bill would repeal certain provisions of AB 1890
relating to publicly owned utilities (such as the City's Electric System) which encouraged municipal
utilities to commit control of certain transmission assets to the ISO, and required direct access in the
service territories of public owned utilities. As the City already controls its own transmission assets and
direct access within its electric system service areas, these bills are not expected to have a material
impact upon the City's electric system operations.
No prediction can be made by the City as to whether any of these bills or any similar bills
proposed in the future will be become law or, if they become law, what their final form or effect would
be.
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OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY
Energy Policy Act of 1992
The Energy Policy Act of 1992 (the "Energy Policy Act") made fundamental changes in the
federal regulation of the electric utility industry, particularly in the area of transmission access under
Sections 211, 212 and 213 of the Federal Power Act. The purpose of these changes, in part, was to bring
about increased competition in the electric utility industry.
As amended by the Energy Policy Act, Sections 211, 212 and 213 of the Federal Power Act
provide FERC authority, upon application by any electric utility, federal power marketing agency or
other person or entity generating. electric energy for sale or resale, to require a transmitting utility to
provide transmission services (including any enlargement of transmission capacity necessary to provide
such services) to the applicant at rates, charges, terms and conditions set by FERC based on standards
and provisions in the Federal Power Act. 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 Sections 211, 212 and 213.
Changes in Federal Regulation of Electric Utilities
In 1996, FERC issued a final rule that effected significant changes in the regulation of
transmission services provided by public utilities (as defined in the Federal Power Act) that own, operate
or control interstate transmission facilities and which are subject to FERC jurisdiction over wholesale
contracts, rates and services ("jurisdictional utilities"). The Electric System is not a public utility (as
defined in the Federal Power Act) and is not a jurisdictional utility under the Federal Power Act.
FERC is encouraging the voluntary formation of regional transmission organizations ("RTOs")
that are independent from owners of generation and other market participants and 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. FERC also supports a national standard for the
exchange of electricity and transmission services. It is not certain at this time what impact, if any, the
formation of RTOs or the adoption of a national standard for exchange of electric services will have on
the City's Electric System.
Proposed Federal Deregulation and Tax Legislation
Bills have been introduced in the United States House of Representatives and the United States
Senate affecting the electric utility industry and the issuance of tax-exempt bonds for utility
infrastructure. The City is unable to predict 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 to the Electric System.
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
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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
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 and (q) 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 Electric System, 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 2004
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 high voltage transmission facilities to the ISO effective January 1,
2001 and thereby became a "Participating Transmission Owner" with the ISO. As a result of its status as
a Participating Transmission Owner, the City is compensated for the use of the Electric System's high
voltage transmission assets (including both ownership interests in, and contractual rights to, high voltage
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transmission facilities) through the recovery of its transmission revenue requirements ("TW'). The
Electric System's TRR is recovered from amounts paid by the ISO from the rates it charges users of the
transmission system under its operational control. See "THE ELECTRIC SYSTEM — Transmission
Resources — California Independent System Operator" herein. The City Council establishes the TRR for
the Electric System but such TRR is subject to approval by FERC in connection with FERC's approval
of the rates charged to users of the transmission facilities controlled by the ISO.
In October 2000, FERC approved the TRR for the Electric System, conditioned on certain
modifications. The City made such modifications and the Electric System'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 Electric System's transmission facilities) based in part upon the Electric System's
TRR. Petitions for review of FERC's approval of the Electric System's TRR were filed by PG&E and
Edison in the United States Court of Appeals for District of Columbia Circuit, Case No. 01-1187. On
October 15, 2002, the Court ruled that the way FERC arrived at its decision was improper and remanded
the case back to FERC for further proceedings. 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. On February 17, 2004, FERC denied the City's request and
established hearing procedures. The City approved its remand case -in -chief and filed it on April 28,
2004. Hearing on the Electric System's TRR was held on September 2004 and the initial briefs were
filed on October 25, 2004.
The Electric System'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 Electric
System'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 Electric System'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.
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 ELECTRIC SYSTEM
General
The City established the Electric System in 1933 through the acquisition of the existing electric
distribution system within the City and the construction of a diesel generating station at Station A
(located at 2715 East 50d' Street, Vernon, California) ("Station A"), the site of the City's Malburg
Generating Station, which is currently under construction (see "Power Supply Resources —Future Power
Supply Resources" below). The Electric System serves the entire 5.2 square mile area of the City. In
keeping with the character of the City (see "APPENDIX B — THE CITY OF VERNON"), the Electric
System serves primarily industrial and commercial customers. During the Fiscal Year ended June 30,
2004, the Electric System served 2,060 customers, supplied approximately 1,191,900 kWh of electric
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energy and had a peak demand of 194.4 MW. See "Customers, Retail Sales, Revenues and Demands"
below.
The Electric System is governed by the City Council. The Light & Power Department's
generation assets, including all power plants, transmission and distribution facilities, metering, operation
and maintenance, power purchasing, scheduling, billing and settlements is managed on a day-to-day
basis by the Generation Operations Manager under the supervision of the Chief Executive Officer. The
Generation Operations Manager is also responsible for the management of the Gas System. The Light &
Power Department maintains separate funds for the operation of the Electric System and the Gas System
with the revenues and expenses of each such system being accounted for separately.
Management
The following are brief resumes of the City Administrator and Chief Executive Officer of the
Light & Power Department, as well as the senior management personnel, whom are responsible for
Electric System operations.
Bruce V. Malkenhorst is the City Administrator and Chief Executive Officer of the Light &
Power Department. Mr. Malkenhorst has been the City Administrator since September 1978.
Mr. Malkenhorst holds a Bachelor of Science degree from Woodbury University.
As Chief Executive Officer of the Light & Power Department, Mr. Malkenhorst was
instrumental in restructuring its operations, reducing and ultimately eliminating the City's dependence
on Edison for its power requirements.
Manuel G. Garcia is the Generation Operations Manager of the Light & Power Department,
responsible for the management and operation of the Electric System. Mr. Garcia holds a Bachelor of
Science summa cum laude and a Master of Business Administration degree from the University of
Redlands.
Mr. Garcia has 20 years of experience with the Light & Power Department, which includes
power generation, operation and maintenance, electric system transmission and distribution, energy
resource management, metering and substation operations. Mr. Garcia holds certificates from the
Western Systems Coordinating Council in electric systems subtransmission operations and
interconnected system operations.
Jorge C. Somoano is the Engineering Operations Manager of the Light & Power Department,
responsible for FERC regulatory matters and the engineering of the Electric System. Mr. Somoano
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.
Daniel E. Garcia is the Bulk Power Manager of the Light & Power Department. Mr. Garcia has
worked in the utility industry (Resource Management) for 20 years. Mr. Garcia holds a Bachelor of
Science Degree in Business Management cum laude from Woodbury University.
His current responsibilities are focused on managing the energy portfolio for the City. Before
assuming his current role, Mr. Garcia held the positions of Energy Dispatcher, Resource Scheduler and
Power Resource Coordinator. Mr. Garcia has previously worked with Southern California Edison
(Edison Source; Energy Analyst) specializing in power origination and procurement.
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Employee Relations
As of June 30, 2004, 41 full-time equivalent City employees were assigned to the Electric
System. Additionally, other City personnel provide support services to the Electric System as required,
including the City's Finance Department and the City Attorney. Petrelli Electric Inc. currently maintains
the City's electric distribution system under contract with the City. All of the City employees, including
those assigned to the Electric System, are non -union. There have been no strikes or other work
stoppages against the City within the last twenty 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
(CalPERS), an agent multiple -employer retirement system that acts as a common investment and
administrative agent for participating public entities within the State of California.
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
CalPERS Board of Administration.
The City's total contribution to CalPERS for the year ended June 30, 2004 was $2,742,685. City
contribution rates as a percentage of covered payroll were 0% for miscellaneous plan members and
9.562% 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, 2000. [As of June 30,
2000, the City had no unfunded pension benefit obligation.]
CalPERS is estimating that the City's Miscellaneous contribution rates for Fiscal Year 2003-04
will remain at 0%. However, based on the negative performance of the CalPERS fund, the City's Safety
contribution rates for Fiscal Year 2003-04 will increase to 7.613%. Fiscal Year 2004-05 rates are
projected to increase to 2.5% (Miscellaneous) and 25.0% (Safety). These increases will be accounted for
in the City's 2003-04 budget and in future budget years. See Note 8 to the City's audited financial
statements for the Fiscal Year ended June 30, 2004 included in Appendix A hereto.
The City Council approved a post -retirement benefit plan for all employees with 20 years of
service who retire at 60 or after 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, approximately 43 employees were eligible to
receive benefits. Amounts paid for the year ended June 30, 2004 totaled $312,300. See Note 12 to the
City audited financial statements for the Fiscal Year ended June 30, 2004 included in Appendix A
hereto.
Insurance
The City has obtained various insurance policies that provide coverage against "Special Form
" of direct physical loss or damage, including earthquake and flood, to all real and personal
property of the City, including equipment, business and revenue interruption, errors and omissions,
boiler and machinery and pollution legal liability. The earthquake and flood portion of the policies have
a 5% deductible of the total insurable values per building, structure or covered item at the time and place
of loss. In the most recent "Statement of Values" for City real and personal property, total insured
values equaled $98,553,142 and total insured earthquake/flood values equaled $81,100,439. The City is
self -insured for its general liability and workers' compensation. The City has established certain Internal
Service Funds, whereby assets are set aside for claim settlements associated with the self -insured risks.
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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 Self -Insurance ICRMA
General Liability Up to $2,000,000 Not applicable
Workers' Compensation Up to $300,000 $300,000 to $10,000,000
Property Up to $10,000 Not applicable
[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.]
A Builder Risk insurance policy is in place with respect to the construction of the Malburg
Generating Station with limits of $150,000,000 for each and every loss/accident combined single limit.
Earthquake coverage has an annual aggregate sublimit of $20,000,000 with a 5% on Earthquake.
Electric System Facilities
To provide electric service within its service area (which is coterminous with the City's
corporate 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
1933. 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
General
While the Electric System was established in 1933 with the City's construction of five small
diesel -powered generating units, four of which still serve as an emergency source of power, the City has
relied primarily on purchased power to supply the needs of its customers. Historically, the City
purchased virtually all of its power requirements under a contract with Edison. In the 1980's the City
expanded its resource base by entering into a long-term power purchase contract with the Southern
California Public Power Authority ("SCPPA") with respect to a portion of SCPPA's interest in the Palo
Verde Nuclear Generating Station ("PVNGS"), participating in a project to upgrade the generating
resources of the Hoover Dam (the "Hoover Uprating Project") and constructing two small gas generating
units at Station A. At this time the City was a partial requirements customer of Edison. Because its own
resources supplied less than ten percent of the Electric System's requirements and the cost of power in
the short-term market was substantially less than comparable power purchased under its Edison contract,
in the 1990's the City commenced a program of purchasing power in the short-term market to meet the
bulk of its load. In 1998, in connection with Edison's changing role under the California electric
industry deregulation, the City terminated Edison's obligation to provide power, high voltage
transmission services and ancillary services to the City. During the period from 1998 to 2000, the City
purchased almost all of its power requirements not met from its own resources in the short-term market.
In early 2000, the market price of power increased. See "DEVELOPMENTS IN THE ENERGY
MARKETS — Industry Restructuring and the Energy Crisis" herein. To stabilize its cost of power the
City entered into a number of long-term power purchase contracts to supply the bulk of the Electric
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System's power. The City expects to use power from its Malburg Generating Station, which is currently
under construction, to replace much of the power currently being supplied under these long-term
contracts as these contracts expire. See "Future Power Supply Resources" below.
The power supply resources of the Electric System for the past five Fiscal Years are described in
the following table.
CITY OF VERNON
ELECTRIC SYSTEM
POWER SUPPLY RESOURCES
Short -Term Contracts (1)
Actual Energy (MWh)
Percentage of Total Energy
Long -Term Contracts (2)
Actual Energy (MWh)
Percentage of Total Energy
SCPPA Palo Verde
Actual Energy (MWh)
Percentage of Total Energy
Hoover Upgrade
Actual Energy (MWh)
Percentage of Total Energy
City -Owned Generation
Actual Energy (MWh)
Percentage of Total Energy
Total Energy
Source: City of Vernon
(') Term of less than one year.
(2) Term of one year or longer.
Power Purchase Agreements
Fiscal Year Ended June 30,
2000
2001
2002
2003
2004
948,283
736,606
307,666
276,407
376,996
79.07%
52.25%
22.69%
21.00%
28.15%
127,200
553,200
933,375
924,800
857,600
10.61%
39.24%
68.84%
70.27%
64.04%
88,441
86,953
85,305
88,024
78,785
7.37%
6.17%
6.29%
6.68%
5.88%
30,755
27,887
28,834
26,455
25,752
2.56%
1.98%
2.13%
2.01%
1.92%
4,653
5,027
621
349
0
0.39%
0.36%
0.05%
0.02%
0.00%
1,199,332
1,409,6 73
1,355,801
1,316,035
1,339,133
Long -Term Power Contracts. The City has numerous fixed -price contracts for the purchase of
power (some for on -peak and some for off-peak) with a remaining term of more than one year. The City
expects to provide most of the Electric System's power requirements through June 2005 through such
contracts. Each of these contracts except one expires on or before June 30, 2005. The amount of power
to be delivered under such contracts is 25 MWs off-peak through the Fiscal Year ending June 30, 2005
and 25 MWs on -peak through calendar year 2010. Each such contract is in the form of the Western
Systems Power Pool power purchase agreement. The cost of power under each of these contracts is
different and is expected to average $31.05/MWh off-peak and $51.45 MWh on -peak for the Fiscal Year
ending June 30, 2005. The City expects that power from the Malburg Generating Station will replace
most of the power from expiring contracts and anticipates entering into further long-term power purchase
contracts to supplement power from the Malburg Generating Station, as necessary. The City expects to
provide for any additional power supply requirements due to delays in the construction of the Malburg
Generating Station through short-term power purchase as described below.
Short -Term Power Contracts. The City expects to provide power for the Electric System's load
requirements that are not met from its own resources (including the Malburg Generating Station) or from
long-term power purchase contracts through short-term power purchases. The City expects to make
these short-term power purchases under contracts in the form of the Western Systems Power Pool power
purchase agreement with the ISO. The cost of power under such contracts will vary depending on then
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existing market conditions, which can be affected by a number of factors. See "DEVELOPMENTS IN
THE ENERGY MARKETS — Industry Restructuring and the Energy Crisis" herein.
SCPPA Palo Verde Nuclear Generating Station Interest
Through its participation in SCPPA, the City has an entitlement to the Palo Verde Nuclear
Generating Station near 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, and certain associated facilities and contractual rights..
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 contract with SCPPA which provides the City with its share of capacity and
energy from PVNGS on a "take -or -pay" basis. In the Fiscal Year ended June 30, 2004, PVNGS
provided 78,705 MWh of energy to the City at an average cost of delivered energy of $7.40 per MWh
(which reflects an accelerated debt service repayment program through June 30, 2004 (as described
below), following which the cost of delivered energy from PVNGS is expected to drop considerably).
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 been completed and resulted
in increased payments (approximately $65,000,000 per year) by the PVNGS project participants until
July 1, 2004. Following the completion of the PVNGS Restructuring Plan on July 1, 2004 and the
defeasance of a significant portion of SCPPA's outstanding PVNGS project bonds, approximately
$148,440,000 principal amount of bonds relating to PVNGS remain outstanding. [Describe how much
City obligations to decline in current and future fiscal years due to retirement of Palo Verde
Subordinated Bonds ]
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, 2004. 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 91% 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
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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
The City participated 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 "uprate" the nameplate capacity of existing generator. The U.S. Bureau of
Reclamation (the "Bureau") owns and operates the Hoover Dam facility and the Western Area Power
Association ("Western") markets the power from the facility. The City has a power purchase agreement
with Western pursuant to which the City made an upfront payment for its share of the construction cost
of the Hoover Upgrading Project, is entitled to approximately 22 MW of capacity and 28,000 MWh of
associated energy annually from the Hoover Upgrading Project and is responsible for its share of the
operating costs of the facility.
The lower Colorado River has been included in a Critical Habitat Designated Area, which
required the Bureau to prepare and file with the United States Fish and Wildlife Service (the "Service") a
Biological Assessmentof 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 materially adversely affect the amount of power available to 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.
City -Owned Generating Facilities
The City owns the Johnson & Heinz Diesel Plant consisting of five diesel generator units
installed in 1933. Each unit has a net capacity of 3.5 MW for a total net capacity for the plant of
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 Johnson & Heinz Diesel Plant is located at the City's existing Station A.
Station A 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. As described below,
the Malburg Generating Station 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 Station A.
Future Power Supply Resources
Malburg Generating Station. The Malburg Generating Station will be a 134 megawatt ("MW")
combined cycle natural gas -fired, electric power plant located at Station A, an approximately 3.4 acres
site at 2715 East 50th Street in the City. The Malburg Generating Station was financed with the
proceeds of the City's Malburg Generating Station Project Electric Revenue Bonds, Series A, Series B
and Series C (which Series A Bonds, Series B Bonds and Series C Bonds are being refunded with
proceeds of the 2004A Bonds as described herein).
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The Malburg Generating Station will include two Siemens (formerly Alstom GTX100 natural
gas -fired combustion turbine generators ("CTGs") to be known as Malburg Units 1 and 2. Hot exhaust
gases from the CTGs will be directed to two parallel heat recovery steam generators ("HRSGs"). Steam
from the HRSGs will be directed to a new steam turbine generator ("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 I I0-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 13.2/66 kV generator step up
transformers ("GSUs").
The Malburg Generating Station will also include a new staff parking area, electrical equipment
building, 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 Malburg Generating Station will consist of dry
low nitrogen oxide combustors in the CTGs, with a selective catalytic reduction system in the HRSGs to
achieve the Best Available Control Technology/Lowest Available Emission Rate requirements of the
local air quality management district.
The City expects to operate the Malburg Generating Station as a base -load resource to provide
energy to serve the City's electric utility customers. The Malburg Generating Station is expected to
operate with a capacity factor between 60% and 85%, and have an availability factor of between 90%
and 98%. It is projected that the Malburg Generating Station 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 Malburg Generating Station are market and control area conditions for both
energy and ancillary services.
Fuel Interconnection. The Malburg Generating Station will be fueled entirely by pipeline
quality natural gas. A new looped 10-inch diameter lateral, 1,300-foot long natural gas pipeline will
deliver natural gas to Station A from the local natural gas distribution system of the City. The City
system, in turn, is interconnected to a line at the Spence Street station of the Southern California Gas
Company ("SoCal Gas Company"). While the SoCal Gas Company line is rated at a maximum
allowable operating pressure of 720 pounds per square inch gauge ("psig7% SoCal Gas Company does
not guarantee the delivery pressure. The City expects the delivered gas pressure to Station A will be
between 275 and 400 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. See "Natural Gas
Procurement" below.
Water Supply and Wastewater Discharge. The Malburg Generating Station 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 Malburg Generating Station is designed to consume up to 1,000 gallons per minute
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
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USU _11;
long, 12 to 14-inch diameter pipeline. In addition to the pipeline, the CBMWD has installed a booster
pump and pressure reducing station to meet the needs of the Malburg Generating Station.
Potable water from the City will be the primary source for fire protection and domestic uses.
The Malburg Generating Station will consume a maximum level of 17 gallons per minute 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 [at Station
A] to store enough reclaimed water for 8 hours of continuous project operation in the event of reclaimed
water supply interruption. The City potable water system is capable of supplying up to 1,000 gallons per
minute of potable water to the Malburg Generating Station, currently permitted for up to 9 days (unless a
longer period is approved by the California Energy Commission ("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 Malburg Generating Station will include cooling tower blow
down, HRSG blow down, CTG wash water, potential reclaimed water and treated water storage tank
overflows, and equipment drains. Wastewater will be discharged to the existing sanitation districts of
the Los Angeles County sewer system via a clarifier and oily water separator.
Electric Interconnection. No new transmission lines are required for the Malburg Generating
Station. The Malburg Generating Station will be directly interconnected from the project's three GSUs
to three new bays on the existing 66 kilovolt ("kV") bus at the Vernon Substation via three new
underground 66 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.
Status of Construction. As of November 1, 2004, construction of the Malburg Generating
Station is approximately 55% complete. The remaining components and subsystems of the Malburg
Generating Station are fabricated as units ready for installation with minimal site preparation. In
addition the various gas, water, wastewater and electrical facilities and equipment, including the gas
lateral to the City's gas distribution system, which are necessary to provide utility service to, and
connect, the various components of the power plant and monitor and control station operations will be
installed. All construction and installation work is expected to be completed to permit the initial firing
of the generation units by April 2005.
Budget. The City's original budget for the construction of the Malburg Generating Station was
$141,976,000. The City now estimates that the construction cost of the Malburg Generating Station will
be approximately $167,045,000, including commissioning cost of the station. As of November 1, 2004,
the City had disbursed approximately $117,067,000 for construction costs (including approximately
$[$60 million] of reimbursements to the City), leaving approximately $50,277,000 of construction costs
remaining to be paid. As of November 1, 2004, there was approximately $36,300,000 in the
Construction Fund for the Malburg Generating Station and approximately $23,900,000 of the 2004 Bond
proceeds are to be deposited in the Construction Fund. The City expects to pay any construction and
commissioning costs of the Malburg Generating Station not paid from amounts in the Construction Fund
from Electric System reserves.
Schedule. While the City previously anticipated completing the construction of the Malburg
Generating Station in time for the power plant to commence commercial operation in September 2004,
the City now estimates commercial operation will commence in June 2005. The delay in the schedule
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was caused by a number of unanticipated factors, including the resubmission of previously -approved
drawings to the CEC-appointed Compliance Building Officer (the "CBO"), the submission of drawings
for project components manufactured off -site to the CBO for approval, disagreements with the CBO
over the application and interpretation of building codes and regulations, changes in the project's
specifications initiated by the City and weather -related delays.
Performance Guarantees. [This section is to be modified to conform to the language of the
Siemens performance guarantees.] To operate as planned, the Malburg Generating Station must comply
with the conditions of certification contained in CEC Decision 01-AFC-25 (the "License"). The most
significant conditions of the License relate to environmental emissions. Siemens. has extended to
December 31, 2005 its performance guaranty that, subject to the conditions contained therein, the
Siemens supplied equipment will satisfy the environmental emission conditions of the License. The
economics of operating the Malburg Generating Station are dependent in large part on the heat rate of
the steam -generating facilities of the power plant. Siemens has extended to December 31, 2005 its
performance guaranty that, subject to the conditions contained therein, the Siemens supplied equipment
will operate at the specified heat rate.
Commissioning and Initial Operation. It is expected that the commissioning of the various
components, equipment and systems of the Malburg Generating Station will take approximately five
months to complete and will consist of starting, running and testing each such component, equipment
and system to ensure proper operation and compliance with the License. It is expected that the
commissioning process of completed components, equipment and systems will begin in February 2005
while the remaining construction and installation elements of the power plant are being completed.
The City has contracted with the Construction Manager for the Malburg Generating Station, to
supervise the commissioning and initial operation of the Malburg Generating Station. The Construction
Manager will direct certain of the contractors providing key pieces of equipment and systems of the
Malburg Generating Station and specialized service providers for the initial start-up, testing and initial
operation of the Malburg Generating Station. These contractors and specialized service providers will
also train the City employees to permit them to assume operation of the power plant. In addition to
assigning approximately 17 current Electric System employees familiar with the existing Electric System
resources and operations, the City intends to hire six new employees to assist in the commissioning,
operations and maintenance of the Malburg Generating Station.
Operation and Maintenance. The City will be responsible for operation and maintenance the
Malburg Generating Station. The City initially intended to contract for the operation and maintenance of
the Malburg Generating Station with a qualified power plant operation and maintenance firm. However,
the City believes that it will be more cost effective to transition the operations and maintenance to City
employees.
Natural Gas Procurement. Since 1988, the City has provided for the acquisition and delivery of
natural gas to Station A to serve the H. Gonzales gas units. Upon completion of the Malburg Generating
Station, the City will obtain the natural gas for the Malburg Generating Station and the H. Gonzales
Station through its Gas Department. The City anticipates that gas will be required for the Malburg
Generating Station commencing in April 2005. The City expects to implement a natural gas
procurement program for the Malburg Generating Station and the H. Gonzales Station consisting of
approximately 60% fixed priced gas and approximately 40% indexed price gas.
In connection with the H. Gonzales Station gas turbines, the City entered into a Master Purchase
and Sale Agreement with British Petroleum (the `BP Contract"), which is scheduled to terminate in
. The BP Contract permits the City to submit confirmations requiring British Petroleum to deliver
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specified quantities of natural gas to the City for specified periods. The confirmations for a period must
be delivered at least one month prior to the initial delivery for the period. The price of the natural gas is
based on [a recognized gas price index] and the City is obligated to accept minimum amounts of gas
during the specified periods. The City has not entered into any other contracts for the physical delivery
of natural gas. As described below, the City monitors the price of natural gas on a regular basis. The
City anticipates entering into both long-term and short-term fixed -price contracts for gas when available
at targeted prices. The City may also enter into indexed -priced gas contracts for certain periods other
than the BP Contract. To the extent the City does not enter into contracts providing sufficient gas to the
Malburg Generating Station, the City intends to order gas through the BP Contract. The BP Contract
will support orders to provide all needed gas to the Malburg Generating Station and the H. Gonzales
Station.
To provide a hedge against rising prices for indexed -priced gas, the City has commenced a
financial hedging program using NYMEX contracts. The City has purchased call options for NYMEX
contracts totaling approximately six months of the gas requirements for the Malburg Generating Station.
A portion of the options expire each month through July 2005. The call prices range from $5.75
MMBTU to $9.00 MMBTU.
For purposes of planning with respect to natural gas prices, the City uses Global Energy
Decisions' natural gas price forecast (Power Market Advisory Service, WECC Fall 2004). Global
Energy Decisions forecasts an average price of $6.64 per MMBTU at the Southern California burner tip
for calendar 2005. Average prices under the forecast decline in subsequent years to a low of $4.28 per
MMBTU in 2010. The average price for the years 2005-2010 is $5.22 per MMBTU. Global Energy
Decisions indicates its gas price forecast assumes gas price volatility to remain the same and possibly
increase due to demand from electric generators.
To provide for the transportation of purchased gas from the California border to the City, the
City is negotiating a Master Services Agreement (the "Master Services Agreement") with the SoCal Gas
Company. The City will take firm service under the Master Services Agreement pursuant to SoCal Gas
Company's wholesale transportation tariff Schedule GW-VRN. SoCal Gas Company's service under the
Master Services Agreement and such tariff is subject to regulation by the California Public Utilities
Commission.
Transmission Resources
Agreement 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 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 to
be scheduled through the ISO.
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.
35
61756Ov6
Effective January 1, 2001, the City became the first municipal utility to turn over operational
control of its high voltage 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 high voltage
transmission facilities and certain contractual transmission rights, the City is entitled to receive until
2011, 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 transmitted over 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 the City's TAC Area (a regional area designated in the ISO's transmission tariff and
corresponding to the former 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. [Any update?] See "RATE REGULATION" herein.
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
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 as described below. 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
36
61756Ov6
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 construction 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 also 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. The City has a 6.25% ownership share in the project. The
other owners of the project are SCPPA and M-S-R. 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
the construction 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 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 by the Transmission Agency of Northern California (79.3022%), the City
(7.5497%), Western (9.3750%), the City of Shasta Lake (1.5856%), 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
construction 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 COTP 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. In March 1993, the COTP
Participants entered into the Project Operation and Maintenance Agreement (the "POMA"). The POMA
provides for the conduct and payment for the operation, maintenance, and capital improvements for the
COTP. Pursuant to the POMA, TANC and Western share various duties regarding operation and
maintenance of the COTP and related facilities.
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
three -line system, collectively referred to as the California -Oregon Interconnection ("COP'), was
operated by PG&E, acting as the control area operator, under a Coordinated Operations Agreement
("COA"), among the COTP Participants and the owners of the PACI, and a FERC rate schedule, which
conforms to FERC Opinion No. 389, issued May 26, 1994 and Opinion No. 389A, issued November 16,
37
617560v6
1998. Under operating instructions designed to implement the COA, the ISO began operating the PACI
on March 31, 1998 and a portion of the COTP is operated by the Transmission Agency of Northern
California and the balance of the COTP is operated by Western.
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 from
its date, subject to certain prior termination 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) termination if
either the COTP 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 Electric 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 Participants. 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 Vemon/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 Vemon/PG&E
Exchange Agreement may be subject to adjustment if determined appropriate by the City and PG&E.
Capital Requirements
Exclusive of the Malburg Generating Station which was financed with the proceeds of the
2003 Bonds and amounts to be financed from the 2004 Bonds, the City expects capital requirements for
the Electric System for the five Fiscal Years ended June 30, 2005 through 2009 to aggregate
approximately $11 million. 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
be funded from Electric System revenues and reserves, although the City may seek reimbursement from
the proceeds of future tax-exempt financings. The following table lists the expected annual capital
requirements:
38
61756Ov6
Fiscal Year
2004-05.......................................
2005-06.......................................
2006-07.......................................
2007-08.......................................
2008-09.......................................
Source: City of Vernon
Customers, Retail Energy Sales, Revenues and Demand
Capital Requirements
(in thousands)
$ 500
1,100
1,700
2,900
4,800
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.
CITY OF VERNON
ELECTRIC SYSTEM
CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND
[Need footnote to explain if reclassification occurred)
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(l)
Peak Retail Demand (MW)
Fiscal Years Ended June 30
2000 2001 2002 2003 2004
27
27
27
30
31
1,002
1,015
1,026
[1,6661
[1,6681
856
869
870
[182]
[185]
146
148
145
179
177
2,031
2,059
2,068
2,058
2,0 0606
0.1
0.1
0.1
0.1
0.1
200.0
235.3
231.0
243.1
246.7
964.1
926.3
869.2
889.0
936.8
9.7
10.2
10.5
9.0
8.0
1,173.9
1,171.9
1,110.8
1,141.4
1,191.8
$ 3
$ 5
$ 6
$ 6
$ 7
11,044
16,162
18,445
23,659
24,329
45,390
54,399
61,171
60,017
63,838
1,232
915
1,076
1,003
891
$57,669
$71,481
$80,698
$84,686
$89,067
194.8
195.8
184.1
190.53
194.4
Source: City of Vernon
(') Excludes 2.85% AB 1890 public benefit surcharge pursuant to Section 385 of the California Public Utilities Code.
(2) The City has approximately 1,260 businesses, some of which have more than one meter. The City considers one meter to be a
Customer.
9
61756Ov6
Largest Customers
[Confirm] The Electric System's single largest electric customer accounted for less than I10%]
of the Electric System's energy sales for the Fiscal Year ended June 30, 2004. The Electric System's ten
largest electric customers accounted for approximately 1371% of the Electric System's energy sales for
the Fiscal Year ended June 30, 2004, and the Electric System's 25 largest electric customers accounted
for approximately 1511% of the Electric System's energy sales for the Fiscal Year ended June 30, 2004.
The table below sets forth the Electric System's ten largest customers (in alphabetical order) for the
Fiscal Year ended June 30, 2004.
CITY OF VERNON
ELECTRIC SYSTEM
TEN LARGEST CUSTOMERS
(In Alphabetical Order)
Fiscal Year Ended June 30, 2004
Business Name
In Vernon Since
Type of Business
Clougherty Packing/Farmer John
1944
Meat Packing Plants
Container Corp. of America/Jefferson Smurfit
1967
Paperboard Mills
Exide/GNB Batteries
1964
Primary Batteries, Dry And Wet
Kal Kan Foods
1967
Wet Corn Milling
Owens Brockway/Owens Illinois
1944
Glass Containers
PABCO Paper Products
1957
Paperboard Boxes
Pacific Cold Storage
1974
Refrigerated Warehousing and Storage
Rehrig Pacific
1973
Plastic Products
Saint-Gobain Containers/Ball Foster
1936
Glass Containers
Service Packing (United Food Group)
1974
Meat Packing Plants
Source: City of Vernon
Electric Rates
The Electric System's retail rates are established by the City Council and are not subject to
regulation by the California Public Utility Commission or any other state agency. See "RATE
REGULATION" herein. The Electric System provides no free service. The retail rates include a 3%
surcharge for payments in lieu of franchise tax to the City's General Fund and the 2.85% public benefits
surcharge under AB 1890.
Prior to the addition of the AB 1890 public benefits surcharge to the rates in 1998, the rates had
not been adjusted by the City Council since 1984. Since 2000, the rates have been increased four times
as indicated in the table below.
40
61756ov6
PERCENTAGE CHANGE IN
ELECTRIC RATES
Average
Percent
Effective Date Increase in Rate
November 1, 2003
3.00%
May 1, 2001
19.00
October 1, 2000
9.75
July 1, 2000
16.00
Source: City of Vernon
The table below sets forth the average billing price per kilowatt-hour of the Electric System's
various customer classes for the period indicated.
AVERAGE BILLING PRICE
(CENTS PER KILOWATT-HOUR)
Fiscal Year Ended June 30,
2000
2001
2002
2003
2004
Residential
3.00
3.77
4.82
4.94
4.96
Commercial
5.52
6.87
7.99
9.73
9.86
Industrial
4.71
5.87
7.04
6.75
6.81
Other
12.69
8.97
10.26
11.04
11.03
Weighted Average 4.91
Source: City of Vernon
6.10 7.26 7.42 7.47
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 been less than 0.13% over the
last five Fiscal Years.
Fiscal Year
Uncollectible
Percent of
Ended June 30
Revenues
Gross Billings
2000
$27,834
0.048%
2001
90,567
0.126
2002
69,397
0.086
2003
36,406
0.042
2004
48,435
0.054
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61756Ov6
Comparison of Selected Monthly Electric Bills
utilities:
The following tables show a comparison of selected monthly electric bills for regional
COMPARISON OF SELECTED MONTHLY ELECTRIC BILLS
Residential (September 2004)
500 kWh
1,000 kWh
Edison ...................................
$ 65.50
$ 148.91
PG&E ....................................
64.99
189.75
SDG&E.................................
74.60
172.89
SWD...................................
45.29
103.30
Burbank .................................
63.43
134.38
Glendale ................................
65.09
138.74
Pasadena ................................
65.57
128.32
LAD WP.................................
52.18
104.05
Anaheim ................................
50.71
110.47
Riverside ................................
57.07
121.20
Azusa .....................................
58.30
120.23
Banning .................................
63.94
141.34
Colton ....................................
51.13
106.43
Imperial Irrigation District.....
51.05
98.50
Vernon ...................................
25.54
49.44
Commercial (September 2004)
250,000 kWh/350 kW
50,000 k)WI50 kW
10,000 kWh/40 kW
2,000 kWh
Edison ..................................
$ 29,924
$ 7,033
$ 1,608
$ 321.93
PG&E ...................................
39,884
10,064
2,223
451.01
SDG&E.................................
25,662
6,530
1,779
397.13
SMUD...................................
25,905
4,480
1,062
199.13
Burbank ................................
28,756
6,875
1,367
251.13
Glendale ...............................
25,177
6,753
1,412
307.23
Pasadena ...............................
24,227
5,479
1,197
236.49
LADWP................................
18,402
5,073
1,197
209.52
Anaheim ................................
19,582
4,963
1,058
243.89
Riverside ...............................
22,025
5,630
1,206
226.61
Azusa ....................................
20,171
5,083
1,181
225.58
Banning .................................
27,470
5,872
1,228
272.55
Colton ...................................
22,749
4,997
1,146
255.56
Imperial Irrigation District....
21,563
4,553
934
203.60
Vernon ..................................
10,321
4,958
1,098
240.80
42
617560v6
Industrial (September 2002).
7,000,000 kWh/10,000 kW
2,000,000 kWh/5,000 kW
300,000 kW l,000 kW
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
* Most recent data available.
Source: Southern California Public Power Authority.
Indebtedness
Direct Electric System Revenue Indebtedness. Upon the refunding of the Refunded
2003 Bonds, there will be outstanding the 2004 Bonds and the Swap Agreement which are payable on a
parity and secured by a pledge of Net Revenues of the City's Electric System as described herein. See
"SECURITY AND SOURCES OF PAYMENT FOR THE 2004 BONDS —Outstanding Parity
Obligations" herein.
Palo Verde Nuclear Generating Station. The City has entered into a power purchase contract
with SCPPA with respect to the Palo Verde Nuclear Generating Station. See "Power Supply Resources
— SCPPA Palo Verde Nuclear Generating Station Interest" above. The PVNGS contract requires the City
to pay its share of SCPPA's costs for the project including operation and maintenance expenses and debt
service on bonds issued by SCPPA for the project. As of June 30, 2004 SCPPA had approximately
$1148,440,0001 of bonds outstanding for the PVNGS, of which the City's share was approximately
$[ 1. Obligations of the City under its contract with SCPPA constitute Operation and Maintenance
Expenses of the Electric System payable prior to any of the payments required to be made on the 2004
Bonds and any Parity Obligations. The PVNGS power purchase contact is on a "take -or -pay" basis,
which requires payments to be made whether or not the project is operating or operable, or whether the
output from the project is suspended, interfered with, reduced, curtailed or terminated in whole or in part.
Amounts otherwise payable by the City under the PVNGS power purchase contract can be increased due
to the default of other SCPPA participants in the project. For further information, see "Project
Commitments - Southern California Public Power Authority" under Note 1 I of the notes to the financial
statements for the Fiscal Year ended June 30, 2004 in APPENDIX A.
43
61756Ov6
Summary of Operating Results
A summary of operating results for the City's Electric System for the five Fiscal Years ended
June 30, 2000 through 2004 is shown in the following table. This summary was prepared by the City in
a format consistent with the City's pro -forma projections of operating results (see "Projected Operating
Results and Debt Service Coverage") based on the information in its audited annual financial statements
for the five Fiscal Years ended June 30, 2000 through 2004. Under this format, depreciation expense is
not included in operating expenses.
CITY OF VERNON
ELECTRIC SYSTEM
SUMMARY OF OPERATING RESULTS
Operating Revenues:
Electric Salesll�
Total Operating Revenues
Operating Expenses:
Cost of Sales
In Lieu of Franchise Tax
Total Operating Expenses( )
Operating Income (Loss)
Nonoperating Revenues (Expenses):
Investment Income
Net Increase (Decrease) in Fair Value of
Investments
Interest Expense(')
Total Nonoperating Revenue, Net
Income Before Operating
Transfers to General Fund(2)
Operating Transfers to General Fund(4)
Net Income (Lossr
Depreciation
Includes all operating income.
Excludes depreciation.
Fiscal Year Ended June 30,
(Audited)
2000 2001 2002 2003 2004
$62,914,974 $96,878,328 $99,393,077 $101,393,301 $107,052,000
$62,914,974 $%,878,328 $99,393,077 $101,393,301 $107,052,000
$64,886,812 $97,387,167 $95,140,712 $80,683,555 $ 88,755,276
1,729,560 2,202,633 2,455,094 3,728,886 2,686,035
$66,616,372 $99,589,800 $97,595,806 $83,412,441 $91,441,311
$(3,701,398) $(2,711,472) $1,797,271 $17,980,860 $15,611,189
$2,290,005 $3,764,824 $8,938,625 $8,928,145 $2,837,609
4,484,089 5,036,815 521,451 — (981,890)
(197,767) (95,796) —
$6,576,327 $8,705,843 $9,460,076 $8,928,145
$ 2,874,929 $ 5,994,371 $11,257,347 $26,909,005
(5,000,000) (7,612,243) (8,503,702) (7,314,305)
$(2,125,071) $(1,617,872) $2,753,645 $17,594,700
$2,602,807 $2,798,753 $3,203,832 $2,972,243 $3,316,122
In Fiscal Years 1999-00 and 20W-01, 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
Light & Power and Gas Departments, which obligations were retired in September 2000. Beginning in Fiscal Year 2003-04 represents
interest expense for 2003 Electric Revenue Bonds.
(4) For the Fiscal Years ended June 30, 2000 and 2001, includes investment income on certain Electric System funds and the Electric System's
share of the City's allocated administrative costs. For the Fiscal Year ended June 30, 2002 through 2004, includes only investment income
on certain Electric System funds. Beginning in the Fiscal Year ended June 30, 2002, the Electric System's share of the City's allocated
administrative costs is included in Cost of Sales.
Management's Discussion of Operating Results
[to be updated after audit report is finished]
General. While the Electric System experienced an operating loss in each of the three fiscal
years 1999-00, 2000-01 and 2001-02 (after depreciation for the Fiscal Year ended June 30, 2002), the
Electric System had operating income of over $15 million in 2002-03 and over $14 million in 2003-04.
44
617560v6
Operating loss in prior years were primarily the result of increased purchased power costs, including
ancillary services, due to the effect of industry restructuring and the energy crisis. The Electric System's
purchased power costs were $44.9 million in Fiscal Year 1999-00, $58.2 million in Fiscal Year 2000-01
and $62.8 million in Fiscal Year 2001-02. [Statement about 2002-03 and 2003-04?] To mitigate the
impact of rate increases, the City elected to fund a portion of such increased purchased power costs from
its cash reserves rather than covering all such cost from the Electric System rates. In response to the
California energy crisis in early 2000, the City began the process to increase the Electric System rates in
conjunction with contracting for long-term power. See "DEVELOPMENTS IN THE ENERGY
MARKETS —Impact of Restructuring and the Energy Crisis on the City" and "THE ELECTRIC
SYSTEM — Power Supply Resources" herein. As a result of this process, the City instituted four Electric
System rate increases in the period from July 1, 2000 to November 1, 2003 for an approximately [501/6]
increase in the average rate. See "THE ELECTRIC SYSTEM —Electric Rates" herein. See "Projected
Operating Results and Debt Service Coverage" below.
The City's current policy is to make a transfer from the Electric System to the City's General
Fund in each year in an amount equal to the investment earnings on moneys in the Light and Power
Department Fund other than amounts in the Power Resource Cost Reduction Account. Subject to the
satisfaction of the City's covenant in the Indenture limiting transfers of Electric System moneys to the
General Fund (see "APPENDIX C — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
— Covenants — Transfers to General Fund" herein), the City expects to continue such transfer policy in
addition to having the Electric System pay to the City amounts due as Operation and Maintenance
Expenses.
Other Operating Results. Set forth below is a summary year-to-year comparison of certain
components of the City's operating results for the last three fiscal years.
For the Fiscal Year ended June 30, 2002 as compared with the Fiscal Year ended June 30, 2001:
Nonoperating Revenues increased by $0.9 million (an increase of approximately 8%) over
the prior year due to an increase of $5.1 million in investment income resulting from further
favorable changes in long-term interest rates and reinvestment of earnings when long-term
investments were sold, and an offsetting decrease in the fair value of investments of
$4.5 million primarily due to the substantial reduction of longer term investments.
For the Fiscal Year ended June 30, 2003 as compared with the Fiscal Year ended June 30, 2002:
[TO COME]
For the Fiscal Year ended June 30, 2004 as compared with the Fiscal Year ended June 30, 2003:
• [TO COME]
Projected Operating Results and Debt Service Coverage [to be updated]
Set forth below are the City's projections of the operating results of its Electric System for the
Fiscal Years ending June 30, 2005 through June 30, 2009. The projected operating results are based on
the City's load forecasts, its estimated costs of power and other operating and non -operating expenses.
The City has forecasted such other operating and non -operating expenses taking into consideration the
Electric System's historical costs and trends, projected load growth and inflation.
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Certain assumptions have been made by the City in the development of the forecasts. Among
the assumptions made by the City are the following: [To be updated]
1. No electric service rate increases are instituted during the projection period.
2. Energy sales are projected to increase at an average rate of 1.4% per year, and peak
demand is projected to grow at a rate of 1.6% per year, after the Fiscal Year ending June 30,
2003.
3. Operation and Maintenance Expenses (excluding power supply and transmission
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 APPENDIX A hereto.
5. Wholesale power and ancillary services sales in the Fiscal Years ended June 30, 2005
and 2006 will be realized from the sale of excess energy and capacity from the City's available
resources, including the Project and 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 not to generate excess
power from the Project, the resulting decrease in wholesale power sales is estimated to be
$22,771,572 for the Fiscal Year ending June 30, 2005 and $12,143,302 for the Fiscal Year
ending June 30, 2006. Correspondingly, the resulting decrease in Operating and Maintenance
Expenses for the forgone electricity generation is estimated to be $17,067,742 for the Fiscal
Year ending June 30, 2005 and $7,485,869 for the Fiscal Year ending June 30, 2006.
6. The average investment rate on funds of the Electric System is estimated at 4.5%.
7. Average net interest cost on the 2004 Bonds (including annual costs of the Letters of
Credit in connection with the 2004A Bonds and 2004B Bonds) is estimated at 4.6% per annum.
Principal amortization is assumed to begin in 2005 and is structured to result in approximately
level debt service from 2006 until final maturity of the 2004 Bonds.
8. No additional Parity Obligations are issued during the projection period.
9. Project commences commercial operation on September 1, 2004.
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.
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CITY OF VERNON ELECTRIC SYSTEM
PRO -FORMA OPERATING RESULTS PROJECTIONS
[TO COME]
Fiscal Year Ending June 30,
2005 2006 2007 2008 2009
Operating Revenues:
Retail power sales
Wholesale power and ancillary
services sales(')
Transmission Revenue Requirement(2)
Other�31
Total Operating Revenue
Operating Expenses:
Cost of Sales(4)
In lieu of franchise tax(5)
City Allocated Administrative Costs
Total Operating Expenses
Operating Income
Nonoperating Revenues:
Investment revenue
Total Nonoperating Revenues
Net Revenues
Debt Service
Debt Service Coverage Ratio1161
Depreciation (in millions)
Source: City of Vernon
(1) Represents sales of surplus power from all resources into spot market.
(2) Receipts for use of transmission assets. See "THE ELECTRIC SYSTEM — Transmission Resources" herein.
(3) Edison payments in connection with termination of certain agreements in 1998 and miscellaneous operating revenues.
(4) Includes purchased power, fuel and all other operating expenses except payments in lieu of franchise tax.
(5) 3% of gross retail sales.
(6) Net Revenues divided by Debt Service.
CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS
California Constitution Articles XIIIA and XMB
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.
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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.
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 XIHC, 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
2004 Bonds by virtue of the "impairment clauses" of the United States and California Constitutions.
Future Initiatives
Article XIIIA, Article XHIB, 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 2004 Bonds or in any way contesting or affecting the validity of the 2004
Bonds or any proceedings of the City taken with respect to the issuance or sale thereof.
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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 2004 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
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 2004 Bonds when due.
TAX MATTERS
In the opinion of Orrick, Herrington & Sutcliffe LLP ("Bond Counsel"), based on 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 2004A Bonds is
excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue
Code of 1986 (the "Code"). Bond Counsel is of the further opinion that interest on the 2004A 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. Bond Counsel also observes that interest on
the 2004B Bonds is not excluded from gross income for federal income tax purposes under Section 103
of the Code. Bond Counsel is also of the opinion that interest on the 2004A Bonds and the 2004B Bonds
is exempt from 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.
2004A Bonds purchased, whether at original issuance or otherwise, for an amount higher than
their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium
Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the
amortizable bond premium in the case of 2004A Bonds, like the Premium Bonds, the interest on which is
excluded from gross income for federal income tax purposes. However, the amount of tax-exempt
interest received, and a Beneficial Owner's basis in a Premium Bond, will be reduced by the amount of
amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium
Bonds should consult their own tax advisors with respect to the proper treatment. of amortizable bond
premium in their particular circumstances.
The Code imposes various restrictions, conditions and requirements relating to the exclusion
from gross income for federal income tax purposes of interest on obligations such as the 2004A Bonds.
The City has made certain representations and covenanted to comply with certain restrictions, conditions
and requirements designed to ensure that interest on the 2004A Bonds will not be included in federal
gross income. Inaccuracy of these representations or failure to comply with these covenants may result
in interest on the 2004A Bonds being included in gross income for federal income tax purposes, possibly
from the date of original issuance of the 2004A 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), or any other matters coming to Bond Counsel's attention after the date of
issuance of the 2004A Bonds may adversely affect the value of, or the tax status of interest on, the
2004A Bonds.
The interest rate mode and certain requirements and procedures contained or referred to in the
Indenture, the Tax Certificate, and other relevant documents may be changed and certain actions
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(including, without limitation, defeasance of 2004A 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 2004A Bond or the interest thereon if any such change occurs or action 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 2004A Bonds is excluded from
gross income for federal income tax purposes and that interest on the 2004A Bonds and the 2004B
Bonds is exempt from State of California personal income taxes, the ownership or disposition of, or the
accrual or receipt of interest on, the 2004A Bonds and 2004B Bonds may otherwise affect a Beneficial
Owner's federal, state or local tax liability. The nature and extent of these other tax consequences
depend upon the particular tax status of the Beneficial Owner or the Beneficial Owner's other items of
income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.
Future legislation, if enacted into law, or clarification of the Code may cause interest on the
2004A 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. The
introduction or enactment of any such future legislation or clarification of the Code may also affect the
market price for, or marketability of, the 2004A Bonds. Prospective purchasers of the 2004A Bonds
should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to
which Bond Counsel expresses no opinion.
The opinion of Bond Counsel is based on current legal authority, covers certain matters not
directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper
treatment of the 2004A Bonds for federal income tax purposes. It is not binding on the Internal Revenue
Service ("IRS") or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or
assurance about the future activities of the City, or about the effect of future changes in the Code, the
applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has
covenanted, however, to comply with the requirements of the Code.
Bond Counsel's engagement with respect to the 2004 Bonds ends with the issuance of the
2004 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the
Beneficial Owners regarding the tax-exempt status of the 2004A Bonds in the event of an audit
examination by the IRS. Under current procedures, parties other than the City and its appointed counsel,
including the Beneficial Owners, would have little, if any, right to participate in the audit examination
process. Moreover, because achieving judicial review in connection with an audit examination of tax-
exempt bonds is difficult, obtaining an independent review of IRS positions with which the City
legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to
selection of the 2004A Bonds for audit, or the course or result of such audit, or an audit of 2004A Bonds
presenting similar tax issues may affect the market price for, or the marketability of, the 2004A Bonds,
and may cause the City or the Beneficial Owners to incur significant expense.
APPROVAL OF LEGALITY
The issuance of the 2004 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.
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RATINGS
Moody's and S&P have assigned the 2004 Bonds the ratings of and
respectively, with the understanding that upon delivery of the 2004 Bonds,
will issue its municipal bond insurance policy guaranteeing the
scheduled payment of principal and interest on the 2004 Bonds when due. [Underlying Ratings?] 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 either
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 2004 Bonds.
UNDERWRITING
The Underwriter has agreed, subject to certain conditions, to purchase the 2004A Bonds at a
price of $ (representing the $[Series A principal amount].00 aggregate principal amount of the
2004A Bonds less $ Underwriter's discount) and to purchase the 2004B Bonds at a price of
$ (representing the $[Series B principal amount].00 aggregate principal amount of the 2004B
Bonds less $ Underwriter's discount). The Purchase Contract provides that the Underwriter will
purchase all the 2004 Bonds if any are purchased. The 2004 Bonds may be offered and sold by the
Underwriter to certain dealers and others at prices lower than the 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, 2004 and
June 30, 2003, are included in APPENDIX A 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 A.
[CONFIRM —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, 2004 and
June 30, 2003 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 A include the City's General Fund and all other
funds of the City, in addition to the Light and Power Department Fund through which the operations of
the Electric System are accounted. The financial statements relating to the Light and Power Department
Fund are included in the Supplemental Combining Statements attached to the General Purpose Financial
Statements. The 2004 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 2004 Bonds,
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EXECUTION AND DELIVERY
The execution and delivery of this Official Statement has been duly authorized by the City.
CITY OF VERNON, CALIFORNIA
By: /s/ Leonis C. Malburg
Leonis C. Malburg
Mayor
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APPENDIX A
AUDITED FINANCIAL STATEMENTS OF THE CITY
FOR THE FISCAL YEARS ENDED JUNE 30, 2004 AND JUKE 30, 2003
A-1
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APPENDIX B
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 was incorporated on September 16, 1905 as a
general law city, with a goal of promoting industry within its borders. Effective July 1, 1988, the City
became a chartered city. The City is almost exclusively industrial, with an estimated resident population
of 95 as of January 1, 2004. The City has approximately 1,260 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 1933.
Municipal Government
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. After
serving with the U.S. Army's 20`h Infantry Regiment of the 6"' Infantry Division in Korea, Mr. Ybarra
worked for the American Can Company for 30 years.
WILLIAM J. DAVIS, Council Member, was elected to the City Council in 1981. Mr. Davis was
born in Manila, Philippines and came to the United States in 1969. Mr. Davis works at Southern
California Edison.
HILARIO GONZALEZ, Council Member, was appointed to the City Council in 1974 and has
been a resident of the City since 1952.
W. MICHAEL McCORMICK, Council Member, was elected to the City Council in 1974 and has
been a resident of the City since 1969. Mr. McCormick works at the Safeway Meat Processing plant.
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-to-day 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 provide the City Council with the essential information
needed in the decision -making process.
A full-time staff of 313 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.
61756ov6 B-2
Population Characteristics
The following table indicates population change for the City and the County from 1980 to 2004.
CITY OF VERNON AND COUNTY OF LOS ANGELES
POPULATION FROM 1980 TO 2004
City of Vernon County of Los Angeles
Annualized Percent Annualized Percent
Year Number Change Over Interval Number Change Over Interval
1980
90
--
7,477,500
--
1990
82
(8.9%)
8,863,052
18.6%
2000
90
9.8
9,643,073
8.1
2001
94
4.4
9,802,780
1.6
2002
93
(1.1)
9,824,807
0.2
2003
95
2.1
9,966,200
1.4
2004
95
0.0
10,103,000
1.4
Source: 1980-2004 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.
Light & Power and Community Services
The City has owned 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 has developed 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.
61756ov6 B-3
The following table shows the City's taxable valuation by tax roll for the last five fiscal years.
CITY OF VERNON ASSESSED ACTUAL VALUE OF TAXABLE PROPERTY
FOR FISCAL YEARS ENDED JUNE 30, 2001 THROUGH 2O05
Fiscal Year Secured Roll
Unsecured Roll
Total
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
2002-03
2,078,779,047
818,892,151
2,897,671,198
2003-04
2,181,873,473
864,835,680
3,046,709,153
2004-05
2,326,484,146
782,008,130
3,108,492,276
Source: California Municipal Statistics.
617560v6 B-4
Direct and Overlapping Bonded Debt
The following table shows a statement of direct and overlapping bonded debt for the City as of
October 1, 2004. The total net direct and overlapping bonded debt is $24,890,301.
CITY OF VERNON
STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT
AS OF OCTOBER 1, 2004
2004-05 Assessed Valuation: $3,108,492,276
Redevelopment Incremental Valuation: 722,482,097
Adjusted Assessed Valuation: $2,386,010,179
OVERLAPPING TAX AND ASSESSMENT DEBT:
% Applicabl
Debt 10/1/04
Los Angeles County
0.368%
$ 86,370
Los Angeles County Flood Control District
0.319
438,131
Metropolitan Water District
0.190
850,203
Los Angeles Community College District
0.654
4,101,986
Los Angeles Unified School District
0.802
35,941,750
Los Angeles County Regional Park and Open Space Assessment District
0.368
1,312,454
TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT
$42,730,894
DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT:
Los Angeles County General Fund Obligations
0.368%
$ 5,236,910
Los Angeles County Pension Obligations
0.368
4,860,737
Los Angeles County Superintendent of Schools Certificates of Participation
0.368
87,461
Los Angeles Unified School District Certificates of Participation
0.802
5,724,257
City of Vernon General Fund Obligations
100.000
2,315,694(2)
Los Angeles County Sanitation District No. 1 Authority
6.795
1,876,815
Los Angeles County Sanitation District No. 2 Authority
0.699
298,110
Los Angeles County Sanitation District No. 23 Authority
99.843
.4,693,987
TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND
$25,093,971
OBLIGATION DEBT
Less: Los Angeles County Certificates of Participation (100% self-supporting
203,670
from leasehold revenues on properties in Marina Del Rey)
TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND
$24,890,301
OBLIGATION DEBT
GROSS COMBINED TOTAL DEBT
$67,824,8650)
NET COMBINED TOTAL DEBT
$67,621,195
(I) Based on 2003-04 ratios.
(2) Excludes issue to be sold.
(3) 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 ........................1.37%
Ratios to Adjusted Assessed Valuation:
Combined Direct Debt($2,315,694)........................... ........ 0.10%
Gross Combined Total Debt...................................................2.84%
Net Combined Total Debt......................................................2.83%
STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/04: $12,851
Source: California Municipal Statistics,
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B-5
APPENDIX C
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
C-1
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APPENDIX D
AUCTION PROCEDURES
D-1
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APPENDIX E
BOOK -ENTRY ONLY SYSTEM
General
The 2004 Bonds will be delivered in book -entry only form. DTC will act as securities depository
for the 2004 Bonds. The 2004 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 certificate will be prepared for each Series and maturity of
the 2004 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 2004 Bonds under the DTC system must be made by or through Direct
Participants, which will receive a credit for the 2004 Bonds on DTC's records. The ownership interest of
each actual purchaser of each 2004 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
2004 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 2004 Bonds, except in the event that use of the book -entry system for the 2004
Bonds is discontinued.
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To facilitate subsequent transfers, all 2004 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 2004 Bonds with DTC and their
registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the 2004 Bonds; DTC's records
reflect only the identity of the Direct Participants to whose accounts such 2004 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 2004 Bonds.
Redemption notices shall be sent to DTC. If less than all of the 2004 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 2004 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 2004 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 2004 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 2004 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, 2004 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.
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 2004 Bonds paid to DTC or its nominee as the registered owner, or any prepayment or other
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61756Ov6
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 2004 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 2004 Bonds, payment of principal, premium, if any, interest and other payments
on the 2004 Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial
ownership interests in such 2004 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 2004
Bonds or (b) the City determines to remove DTC from its functions as a depository, DTC's role as
securities depository for the 2004 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 2004 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 2004 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 2004 Bonds are registered will become the registered
owners of the 2004 Bonds for all purposes.
In the event that the book -entry system is discontinued, the following provisions would also
apply: (a) 2004 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 2004 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 2004 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 2004 Bonds as shown in the registration books maintained
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 2004 Bonds, such payment shall,
at such Owner's written request received by the Trustee at any time prior to the record date for the
applicable 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 2004 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.
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APPENDIX F
PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT
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61756Ov6
APPENDIX G
PROPOSED FORM OF OPINION OF BOND COUNSEL
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61756Ov6
D49 34�I1► iA
SPECIMEN MUNICIPAL BOND INSURANCE POLICY
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Page 1 of l
Juarez, Debbie
From: Tolmasoff, Robin
Sent: Thursday, May 13, 2010 11:20 AM
To: (wiener@rwglaw.com; Muro, Evangelina; Juarez, Debbie
Subject: FW:Resolution No: 8601 (Exhibit D)
Importance: High
Attachments: Vernon_ FA_ Derivative Services —Nov 2004.pdf; Vernon_City of eng-new fees 41987
333_2007. pdf ,
Larry / Ladies
Attached is the signed agreement for Resolution No. 8601. Larry this copy belongs in the red binder that I gave
you yesterday.
From: Underwood, Craig [mailto:cunderwood@blxgroup.com]
Sent: Thursday, May 13, 2010 10:04 AM
To: Tolmasoff, Robin
Subject: RE: Resolution No. 8601 (Exhibit D)
Robin: attached are our contract approved in 2004 and a revised contract approved in 2007.
Let me know if you need anything further.
From: Tolmasoff, Robin [maiIto: RTolmasoff@ci.vernon.ca.us]
Sent: Thursday, May 13, 2010 8:32 AM
To: Underwood, Craig; Higgins, Jeffrey
Subject: Resolution No. 8601 (Exhibit D)
Importance: High
Craig / Jeff
Hello. I am looking for a copy of the Bond Logistix agreement which would be the City's Resolution No. 8601
(fourth agreement with Bond Logistix— approved in 2004. For some reason our Clerk's office does not have a
copy in their file. Can either of you send me a copy? Thank you.
Robin M. Tolmasoff
Executive Secretary to the City Administrator
City of Vernon
(323) 583-8811, Ext. 561
5/17/2010
LOG
t T - 777 South Figueroa Street. Smae 'J1
BOND
iClin -
Y O N D L O U. 1 ,9 i 1 X LLC Los Angeles, CA 90017
INSIGHT. INNOVATION. INTEGRATION. Phone 213 612 220o/ Fax 21624
90
www.bondlogistix. cono
November 11, 2004
Eric Fresch
City Attorney
City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Re: City of Vernon
Financial Advisory and Financial Derivative Services
Dear Mr. Fresch:
This letter (the "Agreement") will confirm the engagement by the City of Vernon (the "City'") of _
Bond Logistix LLC (" BUT) to provide various Financial advisory and financial derivative services (the
"Services"), The Services will generally relate to the City's debt and capital financing plans and economic
development activities. Specific projects, assignments, and tasks requested of BLX by the City will be at the
City's discretion. Prior to taking action on each such request, BLX will provide a written description to the
City of the scope and limitations of its assignment, B1X reserves' the right to decline any such request -
Although BLX is a wholly -owned subsidiary of Orrick, Herrington & Sutcliffe LLP ("Orrick'); a law
firm, BLX's services will not include the delivery of legal services, legal advice or legal opinions of any kind
Compensation
For financial advisor services to be provided under the Agreement, BLX will charge the hourly rates
as shown on Exhibit A, plus reasonable expenses. In addition, in connection with the closing of any
transactions for which BLX has provided financial advisory services BLX will charge fees on a per
transaction basis as follows: fifty basis points (.50%) applied to the first $30 million of notional amount of
each transaction; thirty basis points (.30%) applied to the notional amount of each transaction betwicen $30
million and $100 million; and .25% applied to the notional amount of each transaction amount greater them
$100 million.
For financial derivative services to be provided under the Agreement, BLX will charge fees equal to
the present value of five (5) basis points multiplied by the notional amount of each derivative transaction_
Payment
BLX's fees for its hourly charges and expenses will be invoiced to the City on a quarterly basis.
BLX's fees due in connection with the closing of any transactions for which BLX provides financial adwisoay
or financial derivative services will be invoiced upon the execution of such transactions. All amouttts
invoiced to the City shall be due within 25 days.
Termination of Agreement
This Agreement may be terminated at any time by written notice from the City or BLX, with or
without cause. In that event, all finished and unfinished documents prepared for adoption or execution lily -
the City shall, at the option of the City, become its property and shall be delivered to it or to any party it may
designate; provided that BLX shall have no liability whatsoever for any subsequent use of such documents_
In the event of termination by the City, BLX shall be paid for all satisfactory work performed herein, unless
DOCSLAI :485807.1
41612-1 ACU
City of Vernon
November 11, 2004
B0N0 Paget
,be tenumtion its MWk JkW woe, in Which event c=Trnsation, if any shall be adjusted in the light of the
Particular &M and cimmutances nvolved in tw tea unation:
if the 's; `Pmblc tn➢ +e City, PICM 50 indicate by returning the enclosed copy of this
ktwrr $imc b = zu &OfiizM ®f m-r, sand retain the original for your files. Thank you again for this
OPPmumitY t® wDA dbe Gly on ffiese M . We look forward to working with you
vcq truly yours,
BONED LOGISTTX ILC
- By
C ' rider► o d
President
ACCEPTED AND AGREED-
Byr
ONIS C. I.B G,�vlay®r
ATnEST-
Ole"
APPROVED AS TO &OAl
EPJC k t�iitw tttrr mew
DOCKABAWMA
J BOND..i
i �. S•4 it :MNDVAiION INiEL 0.R*i 01.'.
Professional Designation
Consultant:
Sr. Consultant:
Managing Consultant:
Associate Directors:
Managing Directors:
President:
DOCSLA1:4858O9.1
41612-1 ACU
Exhibit A
Rate
$210
$285
$315
$335
$400
$465