Resolution No. 9511 (3) Project Coldwater
Starwood Closing Set
Closing Late: April 22, 2008
DOCUMENTS TAB '
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Purchase and Sale Agreement by and between City of Vernon("Vernon")and Starwood Energy
Infrastructure Fund, L.P. ("Starwood"), dated as of December 13,2007............................................... 1
Notice of Extension and Agreement, dated as of March 31,2008.......................................................... 2
Second Extension and Agreement, dated as of April 18, 2008............................................................... 3
Schedules to Purchase and Sale Agreement............................................................................................ 4
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Assignment and Assumption Agreement, dated as of April 22,2008.................................................... 5
Receipt Acknowledging Delivery and Possession of the Assets ............................................................ (,
Designation by City Administrator........... ............................................................................................ 7
3 bl of e 'MA-0orisents
Notice to Mead-Adelanto and Mead-Phoenix Projects........................................................................... 8
CAISO Consent of Mead Projects.......................................................................................................... 9
Noticesof Designation............................................................................................................................ 10
4. a W E ara --�1, menu-and Lertifi �
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Vernon's Corporate Documents and Certificates
Officer's Certificate................................................................................................................... 11
CertifiedCharter........................................................................................................................ 12
Certified Authorizing Resolutions............................................................................................. 13
Secretary/Incumbency Certificate.........<.................................................................................... 14
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DOCUMENTS
Starwood's Corporate Documents and Certificates
Officer's Certificate................................................................................................................... 15
Certified Certificate of Limited Partnership .............................................................................. 16
Amended and Restated Limited Partnership Agreement........................................................... 17
Good Standing Certificates........................................................................................................ 18
Certified Authorizing Resolution............................................................................................... 19
IncumbencyExhibit......:.......................................................................:.................................... 20
Opinion from Vernon City Attorney........................................................................................ 21
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EXHIBIT 1
EXECUTION VERSION
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
CITY OF VERNON,
AND
STARWOOD ENERGY INFRASTRUCTURE FUND, L.P.
DATED AS OF DECEMBER 13,2007
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TABLE OF CONTENTS
Page
ARTICLE1 DEFINITIONS ........ ...............I......... ........... ............................................ 1
1.1 Defined Terms................................................................................................... . ..1
1.2 Interpretation........................... ............................................................... .........8
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ARTICLE 2 PURCHASE AND SALE........................................................................................9
2.1 Purchase and Sale of Assets.....................................................................................9
2.2 Excluded Assets.........................................................................I......................... 10
2.3 Liabilities...............................................................................................................11
2.4 Deposits, Purchase Price and Payment........................................................ .........12
2.5 Closing. ....... ......... ............................................... ........................................14
2.6 Deliveries at Closing................................................................. ........................14
2.7 Non-Assignable Assets................::........................................................................16
ARTICLE 3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
PURCHASER AT CLOSING............................................................................... 17
3.1 Conditions Precedent to Closing....... .............................................................17
ARTICLE 4 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AT
CLOSING........................... .................................................................. ......... 18
4.1 Conditions Precedent-to Closing...................................... ................... .............19
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER ...............................20
5.1 Representations and Warranties with Respect to Seller........................................20
5.2 . Representations and Warranties with Respect to the Mead Transmission
Interests................................................................................................................23
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER.......................25
6.1 Transaction Representations..................................................................................25
6.2 Litigation................................................................................................................26
6.3 Availability of Funds.... ............... . ... ..........................................................26
6.4 Acknowledgement of Passive Interests.................................................................26
6.5 Brokers...................... ........................................................................................26
ARTICLE 7 COVENANTS OF SELLER........ ............ ........................ .. ...................27
7.1 Access and Investigation. ............................................................. .............27
7.2 Preservation of Assets...........................................................................................27
7.3 Governmental Approvals and Agreements...........................................................27
7.4 Notifications to Purchaser. ..................... ............................................ ......28
7.5 Commercially Reasonable Efforts.........................................................................28
7.6 Further Assurances;Post-Closing Assignments....................................................28
7.7 Information Sharing..............................................................................................29
7.8 Financing Cooperation..........................................................................................29
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ARTICLE 8 PURCHASER COVENANTS...............................................................................29
8.1 Actions'Before Closing Date..................................................................................29
8.2 Approvals and Notifications............. .................................................................29
8.3 Availability of Asset Records... .............................. ...... ..............30
.... .... .... ..,.
8.4 Commercially Reasonable Efforts.........................................................................30
8.5 Further Assurances; Post-Closing Assignments....................................................30
ARTICLE 9 CERTAIN AGREEMENTS........... ........... ....................................................31
9.1 Regulatory Matters.........................................................................:......................31
9.2 Taxes.....................................................................................................................32
9.3 TCA.......................................................................................................................34
ARTICLE 10 TERMINATION; SURVIVAL...........................................................................35
10.1 Rights to Terminate.:.............................................................................................35
10.2 Effect of Termination............................................................................................36
10.3 Survival................................... .............................................................. ....36
ARTICLE 11 LIMITED INDEMNITY.................. .................... ............... .....................37
11.1 Limited Indemnity. ......................................................:........ .............................37
11.2 No Recourse Against Third Parties.......................................................................39
11.3 Defense of Claims. ..........I..................... ........................................ .................39
ARTICLE 12 DISPUTE RESOLUTION...................................................................................41
12.1 Dispute Resolution..........................................................................."".................41
12.2 Informal Resolution...............................................................................................41
12.3 Arbitration...................................................................................... ....41
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12.4 Waiver of Jury Trial..............................................................................................42
ARTICLE 13 MISCELLANEOUS AGREEMENTS AND ACKNOWLEDGEMENTS..........42
13.1 Expenses..................................................................................................................42
13.2 Representations and Warranties Exclusive...........................................................42
13.3 Entire Document................................................... .............................................42
13.4 Schedules...............................................................................................................42
13.5 Counterparts.............................................................................. ...........................43
13.6 Severability... .....................................................................................................43
13.7 Assignability. .....................................................................................................43
13.8 Consents..... ..... ..............................................................................................44
13.9 Captions............................................................... ...........:. . .....44
13.10 Governing Law...................................................... ...............................................44
13.11 Limitations on Liability.........................................................................................44
13.12 Notices................................................ ..................................................................45
13.13 Liquidated Damages... ................................................................................46
13.14 Time is of the Essence...........................................................................................47
13.15 No Third Party Beneficiaries.................................................. ...:.......................47
13.16 No Joint Venture........................................................:................. .....................47
13.17 Construction of Agreement....................................................................................47
13.18 Conflicts........................................................... .................................................48
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13.19 Waiver of Sovereign Immunity.................. .............................. ......... ..............48
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Exhibits
Exhibit A Form of Assignment and Assumption Agreement
Exhibit B Form of Opinion
Exhibit C Form of Letter of Credit
Schedules
Schedule 1.1-PE Permitted.Encumbrances
Schedule 1.1-TI Mead Transmission Interests
Schedule 2.1(a) Assigned Agreements
Schedule 2.20) Rights to Recovery
Schedule 2.3(a) Other Assumed Liabilities
Schedule 3.1(a) Purchaser Required Governmental Approvals
Schedule 3.1{b) Required Consents
Schedule 4.1(c) Seller Required Governmental Approvals
Schedule 5.1(c) Violations and Required Filings
Schedule 5.1(d) Seller Required Other Consents,Approvals and Notices
Schedule 5.1(e) Financial Information
Schedule 5.1'(f) Affiliated Transactions
Schedule 5.1(g) Litigation
Schedule 5.1(h) Tax Liabilities
Schedule 5.2 Mead Transmission Interests
Schedule 5.2(b) Mead Interests Entitlement Agreements
Schedule 5.2(c) Mead Transmission Interests Consents, Approvals and Notices
Schedule 6.1(d) Purchaser's Required Consents,Approvals and Notices
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1
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "Agreement'),is made, as of
December 13, 2007,by and between the City of Vernon, California, a municipal corporation and
a chartered city duly organized and existing under and by virtue of the Constitution and laws of
the State of California and its Charter (the "CiV" or "Seller"), and Starwood. Energy
Infrastructure Fund, L.P., a limited partnership ("Purchaser'). Seller and Purchaser are referred
to herein sometimes individually as a"Part _' and collectively as the"Parties."
RECITALS
A. Capitalized terms are defined in Article 1.
B. The City owns certain interests in transmission assets as more particularly
defined in Section 1.1 below (as more particularly defined below, the "Mead Transmission
Interests").
C. Purchaser desires to purchase, and Seller desires to sell, Seller's rights to ;
the Mead Transmission Interests, pursuant to the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the respective covenants and promises
contained herein and for good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged,the Parties agree as follows: {
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. The following terms when used in this Agreement (or in the
Schedules and Exhibits)with initial letters capitalized have the meanings set forth below:
"Accounting Firm"has the meaning set forth in Section 9.2(i).
"Affiliate" of a Person means any other Person that (a) directly or indirectly
controls the specified Person; or (b) is controlled by or is under direct or indirect common {
control with the specified Person. For the purposes of this definition, "control,"when used with
respect to any specified Person, means the power to direct the management or policies of the
specified. Person, directly or indirectly, whether through the ownership of voting securities,
partnership or limited liability company interests,by contract or otherwise.
"Agreement"means this Purchase and Sale Agreement, together with the Exhibits
and Schedules.
"Allocation Schedule"has the meaning set forth in Section 9.2(g).
"Alternative Agreement"has the meaning set forth in Section 2.7(c).
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"Arbitrator"has the meaning set forth in Section 12.3.
"Assets"has the meaning set forth in Section 2.1.
"Asset Record"has the meaning set forth in Section 2.1(b).
"Assign"and "Assignment'have the meaning set forth in Section 13.7.
"Assigned Agreements"has the meaning set forth in Section
"Assignment and Assumption Agreement" has the meaning set forth in Section
2.6(a)(1).
"Assumed Liabilities"has the meaning set forth in Section 2.3(a).
"Business Day' means a day other than Saturday, Sunday or a day on which
banks are legally closed for business in the State of California.
"CAISO".means the California Independent System Operator, a state chartered,
nonprofit, public benefit corporation that controls the transmission facilities of all transmission
owners that have released_operational control of their transmission facilities to the CAISO and
dispatches certain electric generation units and loads, or any successor entity performing the
same functions.
"CAISO Grid" means the system of transmission lines and associated facilities
placed under the CAISO's operational control.
"Capital Expenditures" means, for any period being measured hereunder, the
aggregate of all expenditures (whether paid in cash or other assets or accrued as a liability (but
without duplication)) during such period that, in conformity with GAAP, are required to be
included in or reflected in a fixed asset account; provided, however, that Capital Expenditures
shall include, whether or not such a designation would be in conformity with GAAP, any
amounts characterized as capital expenditures under the Assigned Agreements.
"CERCLA"means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980(42 U.S.C. §§9601 et seq.).
"Cit has the meaning set forth in the Preamble.
"City Approval" means a final order or orders of the City that approves this
Agreement in its entirety, and deems the City's entry into and performance under the Agreement
to be reasonable.
"Claims"has the meaning set forth in Section 2.2(fl.
"Closing"has the meaning set forth in Section 2.5.
"Closing Conditions"has the meaning set forth in Section 3.1.
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"Closing Date"means the date on which the Closing takes place.
"Code"means the Internal Revenue Code of 1986, as amended.
"Commercially Reasonable. Efforts" means efforts which are reasonably within
the contemplation of the Parties at the time of executing this Agreement and which do not
require the performing Party to expend any funds other than expenditures which are customary
and reasonable in transactions of the kind and nature contemplated by this Agreement in order
for the performing Party to satisfy its obligations hereunder. For purposes of this Agreement,
i "Commercially Reasonable Efforts" include incremental costs incurred by the performing Party
to cause its employees and advisors to take any actions which are reasonably necessary in respect
of the required matter, including, without limitation, incremental payroll costs and other related
expenses.
"ConfidentialityAgreement'has the meaning set forth in Section 7.1(b).
"Direct Claim"has the meaning set forth in Section 11.3(c).
"Dispute'has the meaning set forth in Section 12.1.
"Effects"has the meaning set forth in the definition of Material Adverse Effect.
"Environmental Laws" means any Governmental Rules relating to or imposing
liability or standards of conduct with respect to the protection of human health, safety or the
environment (including ambient air, soil, surface water, ground water, wetlands, land or
subsurface strata), including Governmental Rules relating to (a) emissions, discharges, releases
or threatened releases of Hazardous Substances into the environment, (b), manufacture,
generation, processing, distribution, use,.treatment, storage; disposal, transport or handling of
Hazardous Substances, and (b) human exposure to Hazardous Substances or conditions,
including CERCLA,the Hazardous Materials Transportation Act(49 U.S.C. §§ 5101 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq.), the Federal Water
Pollution Control Act(33 U.S.C. §§ 1251 et seq.),the Clean Air Act(42 U.S.C. §§ 7401 et seq.),
the Toxic Substances Control Act (15 U.S.0 §§ 2601 et seq.), the Oil Pollution Act (33 U.S.C.
§§ 2701 et seq.), the Occupational\Safety and Health Act (29 U.S:C. §§ 651 et seq.), the
Emergency Planning and Community Right-to-Know Act (42 U.S.C. `§§11001 et seq.), the
Endangered'Species Act (16 U.S.C. §§ 1531 et seq.), the Porter-Cologne Water Quality Control
Act (Cal. Water Code §§ 13000 et seq.), the Safe Drinking Water and Toxic Enforcement Act of
1986 (Cal. Health & Safety Code §§ 25249.5 et seq.), the Hazardous Substance Account Act
(Cal. Health & Safety Code §§ 25300 et seq.), the Hazardous Waste Control Act (Cal. Health &
Safety Code §§ 25100 et seq.), the California Clean Air Act (Cal. Health & Safety Code
§§ 39000 et seq.), the California Endangered Species Act (Cal. Fish & Game Code §§ 2050 et
seq.), the Warren-Alquist Act (Cal. Public Resources Code §§ 25410 et seq.) and the California
Native Plant Protection Act(Cal.Fish &Game Code §§ 1900 et seq.).
"Excluded Assets"has the meaning set forth in Section 2.2.
"Excluded Liabilities"has the meaning set forth in Section 23(c).
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"FERC"means the Federal Energy Regulatory Commission.
"Final Closing Statement"has the meaning set forth in Section 2.4(b)(3).
"Final Purchase Price Adjustment"has the meaning set forth in_Section 2.4(b)(4).
"Financial Statements"has the meaning set forth in Section 5.1(e).
"GAAP"means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board and the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board or in such other statements by
such other entity as may be in general use by significant segments of the accounting profession
as in effect from time to time.
"Governing Documents"means, with respect to any Person, the documents under
which such Person is organized and existing, including, in the case of a Person that is a
corporation, its articles of incorporation and bylaws,.in the case of a Person that is a limited
liability company, the certificate filed with the jurisdiction in which it was organized and any
applicable limited liability company agreement, or in the case of a Person that is a partnership,
the certificate filed with the jurisdiction in which it was organized and any applicable partnership
agreement.; In the case of the City, it means the City's charter.
"Governmental Approval" means any action, approval, consent, waiver,
exemption, variance, franchise, order,. Permit, authorization, right or license of or from a
Governmental Authority.
"Governmental Authoritv" means any federal, state, local, tribal or other
governmental, quasi-governmental, regulatory or administrative agency, authority, commission,
department,,board, subdivision, court, tribunal, official, arbitrator, arbitral body or other body.
"Governmental Rules" means all applicable laws (including the common law),
statutes, treaties, rules, regulations, ordinances, codes, judgments, enactments, decrees,
injunctions, writs and orders, decisions, directives and agreements, authorizations or other
restrictions of or enacted by any Governmental Authority, or any binding interpretation or
administration of any of the foregoing.
"Hazardous Substance" means, collectively, (a) any chemical, material or
substance that is listed or regulated under applicable Governmental Rules as a "hazardous" or
"toxic" substance or waste, or as a "contaminant" or"pollutant" or words of similar import, (b)
any petroleum or petroleum products, flammable materials, explosives, radioactive materials,
asbestos, urea formaldehyde foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls and (c) any other chemical or other material or substance, exposure to
which is prohibited, limited or regulated by any Governmental Rules,including but not limited to
Environmental Laws.
"Indemnifiable Loss"has the meaning set forth in Section 11.1(a).
"Indemnifying Party'has the meaning set forth in Section 11.1(d).
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"Independent Accountant"has the meaning set forth in Section 2.4(b)(4).
"JAMS"means Judicial Arbitration and Mediation.Services, Inc.
"Knowled>;e" means the actual knowledge after reasonable investigation, with
respect to Seller each of Eric Fresch,Donal O'Callaghan, Abraham Alemu and Mark Thompson,
and with respect to Purchaser each of Brad Nordholm, Steve Zaminski,Madison Grose and Yih
Ran Ma.
"Lender" means one or more financial institutions providing debt,mezzanine or
subordinated financing in one or more tranches for the financing or refinancing of the transaction
contemplated by this Agreement for Purchaser.
"Liens" means (i) with respect to real property, liens, charges, pledges, options,
mortgages, deeds of trust, security interests, claims, easements, and other encumbrances
affecting title to or possession of real property and (ii) with respect to personal property, liens,
charges,pledges, options and security interests, in the case of(i)or(ii), whether imposed by law,
agreement,understanding or otherwise.
"Losses"has the meaning set forth in Section 11:2.
"Material Adverse Effect" means any adverse event, condition, effect, change,
event, development or circumstance (each, an "Effect") that, individually or when considered
together with all other Effects, has had or would reasonably be expected to have a material
adverse effect on the business, assets, condition (financial or otherwise) or results of operations
of the Assets (taken as a whole); provided,however, that, in no event shall any of the following,
alone or in combination, be deemed to constitute,nor shall any of the following be taken into
account in determining whether there has occurred, a Material Adverse Effect: (i) Effects
resulting from conditions generally affecting the electric power generation industry or the U.S: or
global economy or capital markets as a whole, to the extent that such conditions do not have a
disproportionate adverse impact on the Assets; (ii)Effects resulting from changes in
Governmental Rules to the extent that such changes do not have a disproportionate adverse
impact on the Assets; (iii) Effects of any war, act of terrorism,civil unrest or similar event to the
extent that such conditions do not have a disproportionate adverse impact on the Assets; (iv)
Effects of any action taken, or any omission to act, by Purchaser or any of its Affiliates that
constitutes a breach of this Agreement or any Related Agreements; and(v)Effects resulting from
any adverse ruling in the City's TRR Case.
"Mead-Adelanto Transmission Project" means the Mead-Adelanto Transmission
Project, as described more particularly on Schedule 1.1-TI.
"Mead Interests Entitlement Ageements has the meaning set forth in Section
5.2
"Mead-Phoenix Transmission Project" means the Mead-Phoenix Transmission
Project,as described more particularly on Schedule 1.1-TI.
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"Mead Transmission Interests" means Seller's interest in each of the Mead-
Adelanto Transmission Project and the Mead-Phoenix Transmission Project.
"Non-Recourse Person"has the meaning set forth in Section 11.2.
"Notice of Claim"has the meaning set forth in Section 11.1(h).
"Objection Statement"has the meaning set forth in_Section 2.4(b)(4).
"Party" and "Parties" have the meanings set forth in the introductory paragraph
hereto.
"Party Group"has the meaning set forth in Section 11.2.
"Permitted Encumbrances"' means with respect to the Assets: (i) all
encumbrances set forth on Schedule 1.1-PE, and in addition thereto, encumbrances or liens
constituting Assumed Liabilities; (ii) inchoate mechanics', materialmen's, warehouseman's and
similar, liens for sums not yet due (iii) Liens for Taxes not yet due and payable or being
contested in good faith, for which adequate reserves or collateral have been provided; (iv) any
Lien on the Assets granted by Purchaser or its Affiliates, including to the Lender; and (v) any
other encumbrances,if any, to be recorded pursuant to this Agreement against the Assets.
"Person means an individual, partnership, joint venture, corporation, limited
liability company, trust, association or unincorporated organization or any Governmental
Authority.
"Post-Closing Tax Period" means any Tax period beginning after the Closing
Date and the portion of any Straddle Period beginning after the Closing Date.
"Pre-Closing Tax Period" shall mean any Tax period ending on or before the
Closing Date and the portion of any Straddle Period ending on the Closing Date.
"Preliminary Closing Statement"has the meaning set forth in Section 2.4(b)(2).
"Purchase Price"means $39,500,000.
"Purchase Price Adjustment"has the meaning set forth in Section 2.4(b)(1).
"Purchaser"has the meaning set forth in the Preamble.
"Purchaser Indemnitee"has the meaning set forth in Section J 1.1(b).
Section 3.1(a).
"Purchaser Re-uired Governmental A rovals" has the meaning set forth in
"Related Agreements" means, individually or collectively, as the context may so
require,the Assignment and Assumption Agreements.
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"Release" means any releasing, disposing, discharging, injecting, spilling,
leaking, leaching, pumping, dumping, emitting, escaping, emptying, seeping, dispersal,
migration, transporting or placing of Hazardous _Substances, including without limitation, the
I moving of Hazardous Substances through, into or upon, any land, soil, surface water, ground
water or air, or otherwise entering into the environment.
"Required Consents"has the meaning set forth in Section 3.1(b).
"Retained Books and Records" means (a) all official seals, minute books,
resolutions, charter documents, and financial records of Seller; (b) such files,books and records,
including original tax records, to the extent they relate primarily to (i) any of the Excluded
Assets, (ii) Excluded Liabilities or (iii) the organization, existence, capitalization or debt
financing of Seller; or (c) such books,files and records (or to the extent reasonable, only such
portions thereof that could be redacted) that would otherwise constitute an Asset Record but for
the fact that disclosure of such books, files or records (or unredacted portions thereof) could (i)
waive any attorney-client work product or like privilege, (ii) disclose information about Seller
that is unrelated to the Assets, (iii) disclose information about Seller pertaining to energy or
project evaluation methodologies, economic evaluation of the Assets, energy or natural gas price
curves or projections or other economic predictive models,or(iv) all books and records prepared
in connection with or related to any transactions with other Persons relating to a potential sale of
the Assets, including bids received from other Persons prior to (but not after) the date hereof
with respect to and.economic evaluations relating to the Assets or the Assumed Liabilities.
"Seller"has the meaning set forth in the Preamble.
"Seller Indemnitee"has the meaning set forth in Section 11.1(a).
"Seller Required Governmental Approvals has the meaning set forth in Section
"Seller's Account" means the bank account designated by Seller in writing to
Purchaser.
"Straddle Period" means any Tax period beginning before the Closing Date and
ending after the.Closing Date.
"Tax" means any federal, state, local or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Section 59A of the Code), customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment, disability, real
property (including assessments, fees or other charges based on the use or ownership of real
property), personal property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated tax, or other tax of any kind whatsoever, including any interest, penalty or
addition thereto, whether disputed or not, including, without limitation, any item for which
liability arises as a transferee or successor-in-interest.
"Tax Claim"has the meaning set forth in Section 9.2(e).
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"Tax Return" means any return, report, information return, schedule, certificate,
statement or other document (including any related or supporting information)filed or required
to be filed with, or, where none is required to be filed with a Governmental Authority, the
statement or other document issued by, a Governmental Authority in connection with any Tax.
"TCA" means that certain Transmission Control Agreement, dated August 8,
2006,by and between Seller and CAISO.
"Third Party Claim"has the meaning set forth in Section 11.3(a).
"Treasury Re lation" means the temporary and final Treasury regulations
promulgated under the Code.
_"Transmission Owner Tariff" means a tariff setting out Purchaser's (or its
Affiliate's)Transmission Revenue Requirement as accepted by the FERC.
"Transmission Revenue Requirement" has the meaning and use set .forth in
Section 7.3(b)below and on Schedule 3.1(a).
"TRR" means the City's Transmission Revenue Requirement which reflects the
City's costs associated with all transmission interests that the City has placed under operational
control of the CA.ISO, as filed with FERC on November 9, 2000, or any subsequent filing by
Vernon with FERC after the Effective Date.
"TRR Case" means, collectively, Case No. EL00-105 before FERC, and Case
Nos. 05-1402 and 06-1246 before the United States Court of Appeals for the District of
Columbia.Circuit, or any subsequent proceeding before a Governmental Authority relating to the
same subject matter.
1.2 Interpretation. In this Agreement,unless a clear contrary intention appears:
(a) the singular number includes the plural number and vice versa;
(b) reference to any Person in such Person's successors and assigns
but, if applicable, only if such successors and assigns are permitted by this Agreement, and
reference to a Person in.a particular capacity excludes such Person in any other capacity;
(c) reference to any gender includes the other gender;
(d) reference to any agreement (including this Agreement), document or
instrument means such agreement, document or instrument as amended or modified and in
effect from time to time in accordance with the terms thereof and, if applicable, the terms
hereof;
(e) reference to any Article, Section, Schedule or Exhibit means such
Article, Section, Schedule or Exhibit to this Agreement, and references in any Article,
Section, Schedule, Exhibit or definition to any clause means such clause of such Article,
Section, Schedule,Exhibit or definition;
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(f) "hereunder," "hereof," "hereto" and words of similar import are
references to this Agreement as a whole and not to any particular Section or other provision
hereof or thereof,unless otherwise specified;
(g) "including" (and correlative- terms) means "including without
limitation"and"including,but not limited to;"
(h) relative to the determination of any period of time, "from"means"from
and including,""to"means"to but excluding"and"through"means"through and including;"
(i) examples shall not be construed to limit, expressly or by implication,
the matter they illustrate;
0) reference to any law (including statutes and ordinances) means such
law as amended,modified codified or reenacted,.in whole or in part, and in effect from time to
time, including rules and regulations promulgated thereunder;
(k) except where the context otherwise requires, "or" shall;have the
inclusive meaning frequently designated by"and/or'; and
(1) references to Exhibits that are "substantially in the form" shall mean
that the Parties may make conforming changes as necessary to reflect the nature of the
transaction or make other reasonable accommodations to facilitate the Closing but shall not
require the Parties to accept changes that materially affect the agreement of the Parties as
evidenced in such Exhibit.
ARTICLE 2
PURCHASE AND SALE.
2.1 Purchase and Sale of Assets. At the Closing, subject to the terms and conditions of this
Agreement, including satisfaction (or waiver by the Party entitled thereto) of the Closing
Conditions and the closing conditions set forth in Article 4, Seller will sell, convey, assign,
transfer and deliver, and Purchaser will purchase and acquire from Seller, free and clear of any
Liens other than Permitted Encumbrances, all of Seller's right, title and interest in and to the
Assets, including the Assets identified below, but excluding the Excluded Assets (collectively,
the"Assets"):
(a) the assigned agreements set forth on Schedule 2.1(a), which shall
include the Mead Interests Entitlement Agreements (collectively, the "Assigned
Agreements');
(b) subject to Section 7.7, all owned information, files, books, records,
correspondence (including with Governmental Authorities), data, plans, specifications,
procedures, contracts, addresses and recorded knowledge relating primarily to the Assets (in
each case whether in electronic or paper form, but if in electronic form only to the extent
reasonably retrievable and not including e-mails) (the "Asset Records"); provided, however,
that Purchaser shall not acquire or obtain the Retained Books and Records; {
9
LA\1798686.9
(c) all other claims against third parties, if any, with respect to the Assets;
and
(d) to the extent assignable, the firm transmission rights and other
congestion credits related to the Mead Transmission Interests.
2.2 Excluded Assets. Nothing in this Agreement shall constitute or be construed as
conferring on Purchaser, and Purchaser is not hereby acquiring any assets; properties or rights
other than the Assets transferred pursuant to Section 2.1, including the assets, properties and
rights of Seller listed or described in this Section 2.2 (all such assets, properties and rights not
being acquired by Purchaser are herein.referred to as the"Excluded Assets"):
(a) all of Seller's cash and cash equivalents,marketable securities, prepaid
expenses, advance payments, surety accounts, deposits and other similar prepaid items
(including for the purchase of natural gas),checks in transit and undeposited checks;
(b) any assets,property and other rights held or owned by Seller not related
primarily to the Assets;
(c) all of Seller's accounts and notes receivable relating to the Assets, or
any of them (as the case may be) as of 11:59 P.M. on the Closing Date;
(d) forecasts and other proprietary information of Seller that do not consist
of the information provided to Seller for the operation of the Mead Transmission Interests;
(e) all of Seller's rights under contracts that are not Assigned Agreements;
(f) any and all rights, demands, claims,credits, allowances, rebates, causes
of action,known or unknown,pending or threatened, including fraudulent conveyance claims,
or rights of set-off (collectively, "Claims"), of Seller; provided, however, that Excluded
Assets shall not.include Claims described in this paragraph (f) against counterparties to any
Assigned Agreement in their capacities, as such or any Assets transferred under
Sections 2.1(b), (c)or(d);
(g) all rights to Claims, refunds or adjustments with respect to Excluded
Assets, all other refunds or adjustments relating to any proceeding before any Governmental
Authority.relating to the period prior to the Closing Date and all rights to insurance proceeds
or other insurance recoveries to the extent relating to Excluded Liabilities;
(h), all rights of Seller arising under this Agreement and under any other
agreement between Seller and Purchaser entered into in connection with this Agreement;
(i) all Retained Books and Records;
0) all of Seller's rights to recovery of collateral posted as bond or given to
obtain letters of credit and rights to recover amounts drawn or paid on letters of credit related
to the relevant Assets to the extent disclosed on Schedule 2.2(i) provided that Seller shall
provide 30 days notice prior to any recovery thereof, and
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LAV 7986869
(k) all of Seller's rights arising under its TRR, the TRR Case, the TCA or
otherwise against.the CAISO or any other Person, in respect of payments made by any Person
(including Seller pursuant to Section 9.3(b) or Purchaser) to CAISO (or funds withheld by
CAISO) in respect of the Excluded Liability set forth in Section 2.3(c)(10)), including any
such rights in respect of amounts paid by Seller pursuant to Section:9.3(b).
2.3 Liabilities.
(a) Assumed Liabilities, At the Closing, subject to the terms and
conditions of this Agreement, including satisfaction (or waiver by the Party entitled thereto)
of the Closing Conditions and the closing conditions set forth in Article 3, Purchaser shall
assume, and shall be solely and exclusively liable for, the liabilities set forth below, the
liabilities.set forth in Schedule 2.3(a) and no others(collectively,the"Assumed Liabilities")..
(1) all liabilities' and obligations of Seller under the Assigned
Agreements, to the extent arising or occurring after the Closing Date; 'and
(2) all liabilities and obligations relating to the Assets to the extent
arising or occurring after the Closing Date except to the extent specifically provided otherwise
elsewhere in this Agreement.
(b) Limitation. Nothing contained in this Section 2.3 or in any instrument
of assumption executed by Purchaser at;the Closings shall release or relieve Seller from its
respective representations, warranties, covenants and agreements contained in this Agreement
or any certificate, schedule,instrument, agreement or document executed pursuant hereto or in
connection herewith.
(c) Excluded Liabilities. Except as otherwise expressly set forth in this
Agreement, Purchaser does not assume or agree to pay, satisfy, discharge or perform, and
shall not be deemed by virtue of the execution and delivery of this Agreement or any
document delivered in connection with this Agreement, or as a result of the consummation of
the transactions contemplated by this Agreement,to have assumed, or to have agreed to pay,
satisfy, discharge or perform, any liability, obligation or indebtedness of Seller, whether
primary or secondary, direct or indirect, known or unknown, contingent or absolute,
determined or indeterminable (all such liabilities and obligations not assumed by Purchaser
being referred to herein as the "Excluded Liabilities"). Without limiting the generality of the
foregoing, the following shall be Excluded Liabilities:
(l) all liabilities and obligations with respect to .trade accounts
payable (other than those under-Assigned Agreements).arising in connection with the Assets
and in existence on the Closing Date;
(2) liabilities or obligations associated with or arising from the
Excluded Assets and the ownership, operation and. conduct of any business by Seller, its
Affiliates or any of its successors in interest in connection therewith;
(3) liabilities or obligations of Seller associated with or arising under
any agreement other than an Assigned Agreement;
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LA\17986869
(4) liabilities or obligations of Seller resulting from entering into,
performing its respective obligations pursuant to or consummating the transactions
I ontemplated by this Agreement or in connection with Seller's obtaining any consent,
authorization or approval necessary for it to sell, convey, assign, transferor deliver the Assets to
Purchaser hereunder;
(5) liabilities or obligations of Seller with respect to Taxes and
liabilities or obligations of Seller for Taxes attributable to the Assets for any. Pre-Closing Tax
Period(including,without limitation, any liabilities or obligations pursuant to any Tax sharing,
Tax indemnification or similar agreement);
(6) except for any liabilities or obligations arising under any
Assigned Agreements, liabilities or obligations of Seller representing indebtedness for money
borrowed or the deferred portion of the purchase price for any asset (and any refinancing
thereof);
(7) except as otherwise provided in this Agreement, :liabilities or
obligations arising from any injury to or death of any person or damage to or destruction of any
property'relating to the Assets (including, without limitation, workers' compensation claims,
discrimination, wrongful discharge, or unfair labor practice), whether based on negligence,
breach of warranty,,strict liability, enterprise liability or any other legal or equitable theory
arising from actions by for, or on behalf of Seller or any other person or entity, and to the
extent arising,pending or threatened on or before the Closing Date;
(8) liabilities or obligations of Seller relating to any employee of
Seller;
(9) liabilities or obligations of Seller for civil fines or penalties to the
extent arising from any noncompliance or violation of any applicable Environmental Law
relating to the Assets or the activities of Seller prior to the Closing Date; and
(10) all liabilities and obligations of Seller relating to the TRR Case,
including any obligation to pay refunds for monies collected pursuant to the TRR or the TRR
Case for use of the Mead Transmission Interests and any other liability or obligation to .pay
refunds to customers for any period prior to the Closing Date.
2.4 Deposits, Purchase Price and Payinent. The Purchase Price shall be payable by
Purchaser at such time and in accordance with the following terms:
(a) Payment of Purchase Price. On the Closing Date, Purchaser shall
deliver the Purchase Price, as adjusted by the Purchase Price Adjustment, by wire transfer of
immediately available funds to'Seller's Account.
(b) Purchase Price Adiustments.
(1) For purposes of this Section 2.4, the"Purchase Price Adjustment"
shall mean the amount set forth in the Preliminary Closing Statement, whether positive or
negative,that is the sum of. (i) all amounts paid or to be paid directly or indirectly by Seller for
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LA\1798686.9
Capital Expenditures (including, without limitation, amounts withheld from distributions made
to Seller) with respect to any of the Assets pursuant to the Assigned Agreements between the
date hereof and the Closing Date; and (ii) the expenses prepaid by Seller with respect to the
Assets pursuant to the Assigned Agreements for any period after the Closing Date, to the extent
set forth in Section 2.4(c) (other than periodic charges prorated pursuant to Section 2A(c));
minus the sum of: (A) any revenue received by Seller in respect of the Assets pursuant to the
Assigned Agreements for periods after the Closing Date; and.(B) any liability for expenses
assumed or satisfied by Purchaser with respect to the Assets for any period before the Closing
Date, including the expenses set forth in Section 2.4(c). The Purchase Price Adjustment shall
also reflect any prorations pursuant to Section 2.4(c).
(2) As promptly as possible, but in any event no later than ten (10)
days prior to the Closing Date, Seller shall prepare and deliver to Purchaser a reasonably
detailed statement (the "Preliminary Closing Statement') setting forth Seller's reasonable good
faith estimate of the Purchase Price Adjustment. As set forth in Section 2.4(a), the Purchase
Price shall be adjusted to reflect the Purchase Price Adjustment as calculated in the Preliminary
Closing Statement.
(3) No later than ninety (90) days after the Closing Date,.Purchaser
shall prepare and deliver to Seller a reasonably detailed statement (the "Final Closing
Statement") setting forth Purchaser's reasonable good faith calculation of the Purchase Price
Adjustment dated as of the close of business on the Closing Date. Upon receipt of the Final
Closing Statement, and for a period of thirty (30) days thereafter, .Seller shall have on-site
access at all reasonable times to the personnel,properties,books and records of Purchaser to the
extent reasonably required to complete its review of the Final Closing Statement. Either Party
and its accountants may make inquiries of the other Party and its respective accountants and
employees regarding questions concerning or disagreements with the Final Closing Statement
arising in the course of their review thereof, and both Parties shall use Commercially
Reasonable Efforts to share information with respect to such inquiries and to cause any such
accountants and employees to cooperate with and respond to such inquiries.
(4) If Seller has any objections to the Final Closing Statement, Seller
shall deliver to Purchaser a statement setting forth its objections thereto (the "Objections
Statement")within thirty(30)days after receipt thereof. If Seller does not have any objections,
or if the Objections Statement is not delivered to Purchaser within such thirty(30) day period,
the Final Closing Statement shall be final, binding and non-appealable,by the Parties, and the
amounts as calculated in the Final Closing Statement shall constitute the "Final Purchase Price
Adjustment. If Seller delivers the Objections Statement within such thirty (30) day period,
Seller and Purchaser agree to use their reasonable efforts to negotiate in good faith any
objections set forth in the Objections Statement. In the event any dispute is not resolved within
sixty (60) days of the delivery of the Objections Statement, either Party may elect to have the
dispute resolved by a nationally recognized accounting firm that is independent of each of Seller
and Purchaser, and which shall be selected by the mutual agreement of Seller and Purchaser(the
"Independent Accountant"). If any dispute is submitted to the Independent Accountant, each
Party will furnish to the Independent Accountant such work papers and other documents and
information relating to the disputed issues as_the Independent Accountant may request and are
available to that Party or its independent accountants and each Party shall be afforded the
13
LAU 798686.9
opportunity to present to the Independent Accountant material relating to the determination and
to discuss the determination with the Independent Accountant. The results of the resolution of
the Independent Accountant shall be conclusive and binding on Seller and Purchaser, and the
final determination of the Independent Accountant shall constitute the "Final Purchase Price
Adiustment.' Each of Seller and Purchaser shall be responsible for fifty percent (50%) of all
fees and disbursements of such Independent Accountant.
(5) If the Final Purchase Price Adjustment is greater than the
Purchase Price Adjustment, then Purchaser shall pay the amount of the excess to Seller. If the
Final Purchase Price Adjustment is less than the Purchase Price Adjustment, then Seller shall
pay such difference back to Purchaser. The relevant payment shall be due within thirty(30)
days after the date of the final determination of the Final Purchase Price Adjustment.
(c) Proration. The personal property taxes, water, gas, electricity and
other utilities, local business or.other similar license fees or taxes, dues,'rent on leases and other
similar periodic charges payable with respect to the Assets by Seller shall be prorated by
Purchaser as between Purchaser and .Seller effective as of 11:59 P.M. Pacific Time on the
Closing Date.
2.5 - Cl_ °sing. The consummation of the purchase of Seller's right, title and interest in
and to the Assets shall take place at the offices of Latham & Watkins LLP in Los Angeles,
California, as soon as practicable following the satisfaction or waiver of all of the Closing
Conditions (the "Closing'). The Closing shall be deemed to take place at 11:59 P.M. Pacific
Time on the Closing Date.
2.6 Deliveries at Closing.
(a) Deliveries by Seller. At the Closing, Seller shall deliver the following
to Purchaser:
(1) a fully executed assignment and assumption agreement,
substantially in the form of Exhibit B (an "Assignment and Assumption Agreement"), with
respect to the Assigned Agreements,duly executed by Seller;
(2) a certificate executed on behalf of Seller by an authorized official
of Seller,dated as of the Closing Date, representing and certifying in such detail as Purchaser
may reasonably request that (i) all representations and warranties of Seller contained in
Article 5 were true and correct in all material respects without regard to any qualification by
"materiality," "Material'Adverse Effect"or words of similar import as of the date hereof and as
of the Closing Date, with the same effect as though those representations and warranties had
been made again at and as of that time (except to the extent that any such representation or
warranty is made as of a specified date, in which case as of such specified date), except insofar
as any failures to be true and correct, individually or in the aggregate, do not constitute, and
could not reasonably be expected to have, a Material Adverse Effect and (ii) all of the terms,
covenants and conditions to be complied with and performed by Seller on or prior to the
Closing Date have been complied with or performed in all material respects;
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LA\1798686.9
{
i
(3) copies (certified by an authorized official or other representative
of Seller)of Seller's charter, and a certificate of such official or representative that such copy is
true and correct as of the date thereof;
(4) copies (certified by an authorized official or other representative
of Seller) of such resolutions (or other authorizations) of the City Council of.Seller as may be
required to authorize the transactions contemplated by this Agreement and the Related
Agreements and authorizing officials of Seller to execute and deliver this Agreement, the
Related Agreements and any and all other documents or instruments which they deem necessary
and appropriate in connection with this Agreement;
(5) a certificate from an authorized official or other representative of
Seller certifying in such detail as Purchaser may reasonably request that the officer(s) or
representative(s) of Seller executing and delivering this Agreement, the Related Agreements
and the other documents delivered by Seller in connection with the Closing have been duly
authorized to execute and deliver such documents on behalf of Seller;
(6) an opinion of Jeff A. Harrison, City Attorney of Seller,
substantially in the form of Exhibit B; and
(7) such other documents from Seller as Purchaser may reasonably
request for facilitating the consummation or performance of any of the transactions
contemplated by this Agreement.
(b) Deliveries by Purchaser. At the Closing, Purchaser shall deliver the
following to Seller:
(1) the Purchase Price in accordance with Section 2.4;
(2) an Assignment and Assumption Agreement with respect to the
Assigned Agreements, duly executed by Purchaser or an Affiliate of Purchaser;
(3) an instrument.of assumption of liabilities with respect to the
Assumed Liabilities,reasonably satisfactory in form and substance to Seller and Purchaser;
(4) a receipt acknowledging delivery and posses_sion of the Assets in
accordance with this Agreement;
(5) a certificate executed on behalf of Purchaser by an authorized
officer or representative of Purchaser, dated as of the Closing Date, representing and certifying
.in such detail as Seller may reasonably request that (i) all representations and warranties of
Purchaser contained in Article 6 were true and correct in all material respects without regard to
any qualification by "materiality", "Material Adverse Effect" or words of similar import as of
the date hereof and as of the Closing Date, with the same effect as though those representations
and warranties had been made again at and as of that time (except to the extent that any such
representation or warranty is made as of a specified date, in which case as of such specified
date), except insofar as any failures to be true and correct, individually or in the aggregate, do
not constitute, and could not reasonably be expected to have, a Material Adverse Effect and (ii)
15
LA\1798686.9
!
all of the terms, covenants and conditions to be complied with and performed by Purchaser on
or prior to the Closing Date have been complied with or performed in all material respects;
(6) copies (certified by an authorized officer or representative of
Purchaser) of the,Governing Documents of Purchaser, and certificates of good standing of
Purchaser issued by the state in which Purchaser is organized dated within three (3) Business
Days of the Closing Date;
(7) copies (certified by a responsible officer of Purchaser) of such
resolutions (or other authorizations)of the board of directors (or equivalent governing authority)
of Purchaser as may be required to authorize the transactions contemplated by this Agreement
and the Related Agreements and authorizing officers of Purchaser or its Affiliate to execute and
deliver this Agreement,the Related Agreements and any and all other documents or instruments
which they deem necessary and appropriate in connection with this Agreement;
(8) a certificate of Purchaser's secretary, (or other authorized officer
or representative) certifying in such detail as Seller may reasonably request that (i) the
Governing Documents of Purchaser delivered to Seller pursuant to Section 2.6(b)(6) are true
and complete and in full force and effect, (ii) the resolutions (or other authorizations) of the
board of directors (or equivalent governing authority) of Purchaser delivered to Seller-pursuant
to Section 2.6(b)(7) are true and complete and in full force and effect, and (iii) the officer(s) or
representative(s) of Purchaser or any Affiliate thereof, as applicable, executing and delivering
this Agreement, the Related Agreements and the other documents delivered by Purchaser in
connection with the Closing have been duly authorized to execute and deliver such documents
on behalf of Purchaser; and
(9) such other documents from Purchaser as Seller may reasonably
request for facilitating the consummation or performance of any of the transactions
contemplated by this Agreement.
2.7 Non-Assignable Assets.
(a) To the extent that any of the Assets (including, without limitation, any
Assigned Agreements) are not capable of being assigned to Purchaser or an Affiliate designee
at the Closing without the consent of any Person who is not a Party or its Affiliates, or if such
assignment or attempted assignment would constitute a breach of the agreement to be
assigned, or a violation of any Governmental Rule, this Agreement shall not constitute an
assignment thereof, or an attempted assignment, unless and until such consent has been
obtained.
(b) In the event that any Consent referred to in Section 2.7(a) has not been
obtained prior to the Closing, Seller and Purchaser shall use reasonable efforts and shall
cooperate after the Closing, to obtain each and every such consent or otherwise cause the
transition of the rights and obligations under the affected Assets to Purchaser.
Notwithstanding the references herein to cooperation or use of reasonable efforts to obtain the
Consents, nothing herein shall obligate any party to agree to a material modification or
16
LA\1798686.9
amendment to the terms of the Assigned Agreements or take actions other than Commercially
Reasonable Efforts in order to obtain the consents.
(c) To the extent any consents referred to in Section 2.7(a) have not been
obtained by Seller prior to the Closing whether due to impracticalities of assignment or
agreement of the parties, at Closing the Purchaser or an Affiliate thereof and Seller shall enter
into subcontracting, subleasing, transition services or other arrangements that, subject to
applicable Laws entitles the Purchaser or such Affiliate to the claims, rights and benefits of
Seller in accordance with such Assets and, to the extent possible, causes Purchaser or its
Affiliate to assume the thereunder in accordance with this Agreement(each;an "Alternative
Ageement"), and Seller will enforce at the request of and for the benefit of Purchaser or such
Affiliate, with Purchaser or such Affiliate assuming Seller's obligations, any and all claims,
rights and benefits of Seller against any third party thereto. Seller shall pay to Purchaser or its ;
designee all amounts received with respect to such Alternative Agreements.
(d) To the .extent that Purchaser or its Affiliate is provided the benefits
pursuant to Section 2.7(c) of any Assets,Purchaser or its Affiliate.shall perform, on behalf of
Seller, for the benefit of all other parties thereto and/or any other Person, the obligations of
Seller thereunder or in connection therewith, but only to the extent that (i)such action by
Purchaser or its Affiliate would not result in a material default thereunder or in connection
therewith and (ii) such obligation would have been an Assumed Liability but for the non
assignability or non-transferability thereof.
ARTICLE 3
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF PURCHASER AT CLOSING
3.1 Conditions Precedent to Closing. The obligations of Purchaser under this Agreement
to pay the Purchase Price,purchase or cause one or more Affiliates to purchase the Assets and to
take the other actions required to be taken by Purchaser at the Closing are subject to the
satisfaction(or waiver in writing by Purchaser in the exercise of its sole and absolute.discretion),
on or prior to the Closing Date, of each of the following conditions precedent in this Section 3.1
(collectively, the"Closing Conditions"):
(a) Receipt of Governmental Approvals. Purchaser shall have received (or
made, as the case may be), in form. and substance reasonably satisfactory to Purchaser, all
Governmental Approvals required under Governmental Rules to the extent set forth in
Schedule 3.1(a) hereto, for the consummation of the transactions contemplated by this
Agreement with respect to the Assets and the Related Agreements, and for Purchaser's lawful
ownership of the Assets (the "Purchaser Required Governmental Approvals'), and such
Purchaser Required Governmental Approvals shall be in full force and effect.
(b) Receipt of Required Consents. Purchaser shall have received in form .
and substance reasonably satisfactory to Purchaser the consents listed on Schedule 3.1(b) (the
"Required Consents").
i
17
LA\1798686.9
(c) Additional Agreements. Seller shall have entered into each of the
Related Agreements.
(d) Representations and Warranties. Except insofar as there has not been
and could not individually or in the aggregate reasonably be expected to have a Material
Adverse Effect, all representations and warranties of Seller contained herein (without regard
to any qualification by "materiality", "Material Adverse Effect or words of similar import).
shall have been true and correct as of the date hereof; and shall be true and correct as of the
Closing Date, with the same effect as though those representations and warranties had been
made again at and as of that time,except to the extent that any such representation or warranty
is made as of a specified date, in which case such representation or warranty shall have been
true and correct as of such specified date.
(e) Liens. The Assets shall be free of Liens other than Permitted
Encumbrances.
(f) Compliance with Provisions. Seller shall have performed or complied
in all material respects with all'.covenants,: agreements and conditions contained in this
Agreement on its part required to be performed or complied with by the Closing Date and
shall not otherwise be in:breach in any material respect of any of its covenants and agreements
contained herein as of the Closing Date:
(g) No Adverse Proceedings or Events. No injunction or restraining order
shall have issued by, and no suit, action or other proceeding brought before any Governmental
Authority against any Party or its Affiliates is pending before any court or Governmental
Authority (including administrative proceedings) which seeks to restrain or prohibit one or
more of the transactions contemplated by this Agreement or to obtain material damages or
other material relief in connection with this Agreement or the transactions contemplated
hereby or the Assigned Agreements.
(h) Deliveries. Seller shall have delivered, or caused to be delivered, to
Purchaser at Closing the documents,payments and other deliverables listed in Section 2.6(a).
(i) No Material Adverse Affect. Since the date hereof, there has not
occurred any event or circumstance having a Material Adverse Effect or any event or
circumstance that, individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect.
(j) No Termination. Neither Party shall have exercised any termination
right to which such Party was entitled to exercise pursuant to Article 10.
ARTICLE 4
CONDITIONS PRECEDENT TO OBLIGATIONS OF
SELLER AT CLOSING
l
18
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4.1 Conditions Precedent to Closing. The obligations of Seller under this Agreement to
complete the sale of the Assets to Purchaser and to take the other actions required to be taken by
Seller at the Closing are.subject to the satisfaction (or waiver in writing by Seller in its sole
discretion), on or prior to the Closing Date, of each of the following conditions precedent in this
- Section 4.1:
(a) Representations and Warranties. Except insofar as there could not
individually or in the aggregate reasonably be expected to have a Material Adverse Effect in
respect of Purchaser, all representations and warranties of Purchaser contained herein(without
regard to any qualification by "materiality", "Material Adverse Effect" or,words of similar
import) shall have been true and correct as of the date hereof, and shall be true and correct as
of the Closing Date, with the same effect as though those representations and warranties had
been made again at and as of that time, except to the extent that any such representation or
warranty is made as of a specified date,in which case such representation or warranty shall
have been true and correct as of such specified date.
(b) Compliance with Provisions. Purchaser shall have performed or
complied in all material respects with all covenants, agreements and conditions contained in
this Agreement on its part required to be performed or,complied with by the Closing Date and
shall not otherwise be in breach in any material respect of any of its covenants and agreements
contained herein as of the Closing Date.
(c) Receipt of Governmental Approvals. Seller shall have received (or
made, as the case -may be), in form and substance reasonably satisfactory to Seller, all
Governmental Approvals required by Seller under Governmental Rules and as set forth in
Schedule 4.1(c) hereto, for the consummation of the transactions contemplated by this
Agreement with respect to the Assets and the Related Agreements (the "Seller Required
Governmental Approvals"),,and such Seller Required Governmental Approvals shall be in full
force and effect.
(d) Additional Agreements. Purchaser shall have entered into each of the
Related Agreements.
(e) No Adverse Proceedings or Events. No injunction or restraining order
shall have issued and no suit, action or other proceeding brought by any Governmental
Authority (other than Seller or any official of Seller) against any Party or its Affiliates is
pending before any court or Governmental Authority (including administrative proceedings)
which seeks to restrain or prohibit one or more of the transactions contemplated by this
Agreement or to obtain material damages or other material relief in connection with this
Agreement or the transactions contemplated hereby or the Assigned Agreements.
(f) Purchaser Deliveries. Purchaser shall have delivered, and Seller shall
have received, all of the items set forth in Section 2.6(b).
(g) No Termination. Neither Party shall have exercised any termination
right to which such Party was entitled to exercise pursuant to Article 10.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as of the date hereof and as of the Closing
Date as follows in this Article 5:
NOTWITHSTANDING ANYTHING CONTAINED IN THIS. ARTICLE 5 OR ANY
OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPRESS
INTENT OF THE PARTIES THAT SELLER MAKE NO REPRESENTATION OR
WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY IN
RESPECT OF THE ASSETS OR ANY OTHER MATTER BEYOND THOSE EXPRESSLY
GIVEN IN THIS AGREEMENT, AND ANY SUCH REPRESENTATIONS OR
WARRANTIES . ARE EXPRESSLY DISCLAIMED. EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 5 OR ANY
OTHER PROVISION OF THIS AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT
PURCHASER IS PURCHASING THE ASSETS ON AN"AS IS"AND"WHERE IS"BASIS.
5.1 Representations and Warranties with Respect to Seller.
(a) Organization and Existence. Seller is a municipal corporation and a
chartered city duly organized and existing under and by virtue of the Constitution and laws of
the State of California and its charter. Seller has made available to Purchaser copies of the
Governing Documents of Seller as currently in effect.
(b) Execution, Delivery and Enforceability. Seller has full power and
authority to carry on its business and governmental functions as now conducted, and to enter
into, and carry out its obligations under, this Agreement and the Related Agreements. The
execution,delivery and performance by Seller of this Agreement and the Related Agreements,
and the consummation of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate or governmental action required on the part of Seller.
This Agreement has, and as of the Closing Date each of the Related Agreements will have
been, duly and validly executed and delivered by Seller and constitute, or will constitute, as
applicable, the valid-and legally binding obligations of Seller, enforceable against Seller in
accordance with its and their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws of general
application relating to or affecting the enforcement of creditors' rights and by general
equitable principles.
(c) No Violation. Except as set forth on Schedule 5.1(c), subject to the
receipt of the Seller Required Governmental Approvals,none of the execution and delivery of
this Agreement or any of the Related Agreements,the performance of or compliance with any
provision hereof or thereof, or the consummation of the transactions contemplated hereby or
thereby will:
(1) violate, or conflict with, or result in a breach of any provisions of
the Governing Documents of Seller;
ao
LA11798686.9
3
(2) violate any Governmental Rule or Permit applicable to Seller or
result in the suspension or termination of,or require the material modification of,any Permit;
(3) except for the Permitted Encumbrances, result in a breach'of, or
constitute a default under, or give to any other Persons any rights of termination, amendment,
acceleration or cancellation of any material agreement to which Seller is a party or by which
any of its respective properties is bound or affected; or
l.
(4) violate, or conflict with, or result in a breach of any note, deed of
trust, security interest, lease, contract or agreement to which Seller is a party or by which it or
any of its properties or assets may be bound or affected, the effect of which*violation, conflict or
breach would reasonably be expected to result in a material adverse effect on the financial
condition of Seller.
(d) No Approvals. Except as set forth on Schedule 5.1(d), and other than
the Seller Required Governmental Approvals and the Required Consents, no material consent
or approval of, filing with or notice to (i) any Person or (ii) any Governmental Authority is
required to be obtained or made in connection with Seller's execution, delivery and
performance of this Agreement or the Related, Agreements or the consummation of the
transactions contemplated hereby or thereby, which, if not obtained or made,will prevent
Seller from performing its obligations hereunder or thereunder.
(e) Financial Information. Except asset forth on Schedule 5.1(e):,
(1) Seller has furnished Purchaser with copies of its audited financial
statements as of and for the fiscal years ended June 30, 2005 and June 3.0;2006, and the related
notes thereto, accompanied by reports thereon of Macias Gini & O'Connell LLP, independent
public accountants and(b)the unaudited,financial statements of Seller as of June 310,2007(such
audited and unaudited financial statements collectively:being referred to herein as the"Financial
Statements"). Such Financial Statements have been based upon the information concerning
Seller contained in Seller's books and records, have been prepared in accordance with GAAP
(except that the unaudited financial statements do not contain all notes required by GAAP and
are subject to normal year-end audit adjustments) applied on a consistent basis for the periods
covered thereby and present fairly in all material respects the financial condition and results of
operations of Seller as of the times and for the periods referred to therein in accordance with
GAAP.
(2) The projections, assumptions and pro forma financial information
contained in the Confidential Information Memorandum, dated April 2007, are based on good
faith estimates and assumptions believed by management of Seller to be reasonable at the time
made, it being recognized by Purchaser that such financial information as it relates to future
events is not to be viewed as fact and that actual results during the period or periods covered by
such financial information may differ from the projected results set forth therein by a material
amount.
(3) Seller has no material liabilities that, in accordance with GAAP,
would be required to be recorded in the Financial Statements, except for (i) liabilities set forth
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on the face of the Financial Statements (rather than in any notes thereto) or(ii)liabilities which
have arisen after June 30, 2006 in the ordinary course of business of Seller (none of which
results from, arises out of,relates to,is in the nature of,or was caused by any breach of contract,
breach of warranty,tort, environmental matter,infringement or violation of Government Rules).
(f) Affiliated Transactions. Except as set forth on Schedule 5.1(t), (i)none
of Eric Fresch, Donal O'Callaghan or Jeff Harrison, or, to their knowledge, any sibling,
descendant or spouse of any of such persons, or any trust, partnership, corporation or other
entity in which any of such persons has a greater than ten percent(10%) interest is a party to
any material agreement, contract, commitment or transaction with .Seller outside of the
ordinary course of business or has any material interest in any material property or equipment
used by Seller, except in such person's capacity as an officer or employee of Seller or
undertakenlin accordance with applicable Governmental Rules or(ii)to the knowledge of Eric
Fresch, Donal O'Callaghan or Jeff Harrison only, as of the date hereof,no officer or employee
of Seller required to submit statements of economic interests pursuant to Form 700 as required
by the regulations of the California Fair Political Practices Commission and Section 87200 et
seq. of the California Government Code has undisclosed any material agreement, contract,
commitment or transaction with Seller outside of the ordinary course of business or has any
material interest in any material property or equipment used by Seller that should be disclosed
consistent with the breadth and scope of the disclosure required pursuant to such regulations.
(g) Litigation. Except as set forth on Schedule 5.1(g):
(1) As of the .date hereof, there are no pending or to .Seller's
Knowledge, threatened, actions, suits or proceedings by any Person (i) seeking to prohibit or
restrain the performance of this Agreement or any of the Related .Agreements or the
consummation of the transactions.contemplated hereby or thereby, or (ii) asserting a claim for
any material damages as a result of this Agreement or any of the Related Agreements, the
ownership or operation of the Assets or any portion .thereof, or the consummation of the
transactions contemplated hereby or thereby.
(2) As of the Closing Date, there are no pending or, to Seller's
Knowledge, threatened, actions, suits or proceedings by any Person as described in Section
.5.1 1 above, the assertion of which could result in the failure to satisfy the Closing
Condition set forth in Section 3.1(u), or be reasonably be expected to result in damages in
excess of$2,500,000.
(h) Taxes. Except as disclosed on Schedule 5.1(h) and except as could not
reasonably be expected to result in a material adverse effect on Seller:
(1) Seller has duly and timely filed, or will duly and timely file, all
Tax Returns required to be filed on or prior to the Closing Date. All such Tax Returns are true,
correct and complete in all material respects.. All Taxes (whether or not shown as due on such
Tax Returns)have been or will be timely paid.
(2) Seller is not a foreign person.within the meaning of Section 1445
of the Code;
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LAV 798686.9
I.,
(3) Seller has not executed or filed with any taxing authority(whether
federal, state, local or foreign) any agreement or other document extending or having the effect
of extending the period for assessment of any Tax that is due with respect to a material Tax
return that Seller is required to file with respect to the Assets;
(4) There is no Tax deficiency outstanding, assessed or proposed in
writing against Seller. There are no pending or, to the Knowledge of Seller, threatened, audits,
administrative proceedings, discussions, court proceedings or other examinations in respect of
any Tax Return of Seller. No federal, state, local or foreign action, suit, investigation, claim or
assessment is pending or, to the knowledge of such Seller, threatened, in respect of.Taxes of
Seller, nor has Seller received any written notice from any Governmental Authority that any
such action, suit, investigation, audit, claim or assessment is threatened or contemplated. There
are no Tax rulings, requests for rulings, or closing agreements relating to Seller which affect its
liability for Taxes for any period(or portion of a period)after the date hereof; and
(5) Seller does not have currently in effect a waiver of any statute of
limitations in respect of the assessment and collection of Taxes or any extension of time with
respect to a Tax assessment or deficiency. Seller is not party to any Tax allocation or sharing
agreement. No power of attorney on behalf of Seller with.respect to any Tax matter is currently
in force.
(6) Seller has provided to Purchaser copies of all Tax audit reports
affecting the Assets that have been issued with respect to the previous three(3)taxable years of
Seller; and
(7) None of the Assets constitute "tax exempt use property" within
the meaning of section 168(h)(1)of the Code.
(i) Brokers. Other than with respect to Lehman.Brothers, the fees and
expenses of whom are the responsibility of the Seller, no Person is entitled to receive any
brokerage commission, finder's fee or other similar payment.
5.2- Representations and Warranties with Respect to the Mead Transmission Interests.
Except as set forth in Schedule 5.2:
(a) Valid Right in Mead Transmission Interests. Seller has a valid right to
the Mead Transmission Interests, free and clear of all Liens other than Permitted
Encumbrances.
(b) Contracts. Schedule 5:2(b) sets forth each material contract evidencing
Seller's entitlement to the Mead Transmission . Interests ("Mead Interests Entitlement
Agreements"). Except as set forth on Schedule 5.2(b):
(1) True and complete copies of each Mead Interests Entitlement
Agreement,together with all amendments thereto,have been provided to Purchaser.
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LA\1798686.9
(2). None of the Mead Interests Entitlement Agreements have been
modified, supplemented or amended in any material respect, or terminated, in any such case
whether orally or in writing, except as set forth on Schedule 5.2(b).
(3) Assuming that each Mead Interests Entitlement Agreement is a
legal, valid and binding obligation of each of the other parties thereto, each such Mead Interests
Entitlement Agreement is a legal,valid and binding obligation of Seller.
(4) Each of the Mead Interests Entitlement Agreements has been duly
authorized, executed and delivered by Seller and, to the Knowledge of Seller, by each of the
other parties thereto and, except to the extent fully performed in accordance with its terms,is in
full force and effect and is valid and enforceable in accordance with its terms except as
enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights and the enforcement of debtors' obligations generally
and by general principles of equity, regardless of whether enforcement is pursuant to a
proceeding in equity or at law.
(5). Except as set forth on Schedule 5.2(b), no default or event of
default on the part of Seller has occurred and is continuing, under any Mead Interests
Entitlement Agreement, and Seller has not received any notice, oral or written, or has
Knowledge,that a default or event of default on the part of any other party thereto has occurred
and is continuing;or that any other Person has alleged or asserted any such default or event of
default by any other party thereto.
(c) No Approvals. Except as set forth on Schedule 5.2(c), and other than
the Seller Required Governmental Approvals and the Required Consents, and except as would
not reasonably be expected to result in a Material Adverse Effect, no consent or approval of,
filing with or notice to (i) any Person or (ii) any Governmental Authority is required to be
obtained or made in connection with the transfer of the Mead Transmission Interests.
(d) Employees and Labor Matters. Seller does not employ, and does not
contract with any third-party vendor to..provide, any employees in connection with the
I peration of the Mead Transmission Interests.
(e) No :Other Representations. Except for the representations and
warranties.contained in Section 5.2, neither of Seller nor any other Person makes any express
or implied representation or warranty in respect or on behalf of Seller and Seller disclaims any
such representation or warranty, whether by Seller or any of its respective officers, directors,
employees, agents or representatives or any other Person, with respect to the Mead
Transmission Interests ,or the consummation of the transactions . related thereto,
notwithstanding the delivery or disclosure to Purchaser or any of its officers, directors,
employees, agents or representatives or any other Person of any documentation or other
information with respect to the foregoing.
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LA11798686,9
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller of the date hereof and as of the Closing Date
as follows in this Article 6:
6.1 Transaction Representations.
(a) Organization and Existence. Purchaser is a duly organized and validly
existing limited partnership in good standing under the laws of the State of Delaware and
either is or, as of the Closing Date, will be qualified to transact business in all jurisdictions
(including California) where the ownership of its properties or its operations require such
qualification, except where the failure to so qualify would not have a Material Adverse Effect
on its financial condition, its ability to own its properties or transact its business, or to carry
out the transactions contemplated hereby. Purchaser has made available to Seller copies of
the Governing Documents of Purchaser as currently in effect.
(b) Execution, Delivery and Enforceability. Purchaser has fall power and
authority to carry on its business as now conducted, and to enter into or cause its applicable
Affiliate to enter into, and carry out its obligations under, this Agreement and the Related
Agreement. The execution, delivery and performance by Purchaser or its applicable Affiliate
of this Agreement and the Related Agreement, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary corporate or
company action required on the part of Purchaser. This Agreement has, and as of the Closing
Date each of the Related Agreement will have been, duly and validly executed and delivered
by Purchaser or Applicable Affiliate and constitute, or will constitute, as applicable, the valid
and legally binding obligations of Purchaser or applicable Affiliate, enforceable against
Purchaser or applicable Affiliate in accordance with its and their respective terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application relating to or affecting the enforcement of creditors'
rights and by general equitable principles.
(c) No Violation. Subject to the receipt of all Purchaser Required
Governmental Approvals, none of the execution and delivery of this Agreement or any of the
Related Agreements executed by Purchaser or its applicable Affiliate, the compliance with
any provision hereof or thereof, nor the consummation of the transactions contemplated
hereby or thereby will:
(1) violate or conflict with, or result in a breach of any provisions of
the Articles of Incorporation or Bylaws of Purchaser or such applicable Affiliate;or
(2) violate any Governmental Rule, or Permit, or result in the
suspension or termination of, or require the material modification of any Permit, in each case
applicable to Purchaser or applicable Affiliate as of the date hereof.
(d) No Approvals. Except as set forth on Schedule 6.1(d), and subject to
the receipt of all Purchaser Required Governmental Approvals and Required Consents, no
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LA\1798686.9
consent or approval of, filing with or notice to any Person is required to be obtained or made
by Purchaser in connection with Purchaser's or its applicable Affiliate's execution, delivery
and performance of any of this Agreement or the Related Agreement, or the consummation of
the transactions contemplated hereby or thereby, which, if not obtained or made, will prevent
Purchaser or such applicable Affiliate from performing its obligations hereunder or
thereunder.
6.2 Litigation. As of the date hereof, there is no pending or, to Purchaser's Knowledge,
threatened action, suit,proceeding, investigation or request for.information by any Governmental
Authority or other Person to which Purchaser or any of its Affiliates is subject or is a party which
could result, or has resulted, in (a) the institution of legal proceedings to prohibit or restrain the
performance of this Agreement or any of the Related Agreements, or the consummation of the
transactions contemplated hereby or thereby, or (b) a claim for material damages as a result of
this Agreement or any of the Related Agreements, or the consummation of the transactions
contemplated hereby or thereby. As of the date hereof, Purchaser has no Knowledge of any
pending or threatened litigation, claim, investigation or proceeding, private or governmental, or
the existence of a reasonable basis for such a material litigation, claim, investigation or
proceeding,which directly and specifically relates to the Assets.
6.3 Availability of Funds. Purchaser is fully capable of consummating the transactions
contemplated by this Agreement and has sufficient available funds and/or existing committed
credit facilities or equity commitments in amounts sufficient to perform its obligations under this
Agreement.
6.4 Acknowledgement of Passive Interests. PURCHASER ACKNOWLEDGES THAT
(A) SELLER IS A MINORITY PARTICIPANT IN THE OWNERSHIP OR INDIRECT
OWNERSHIP OF THE MEAD-ADELANTO TRANSMISSION PROJECT AND THE MEAD-
PHOENIX TRANSMISSION PROJECT (B) SELLER DOES NOT OPERATE OR CONTROL
SUCH PROJECTS, (C) SELLER HAS MADE AVAILABLE TO PURCHASER THE
RECORDS, REPORTS, FILES AND OTHER INFORMATION REGARDING SUCH
PROJECTS THAT ARE AVAILABLE TO SELLER FROM SCPPA OR THE OPERATORS
OF SUCH PROJECTS (WHICH ITEMS ARE MORE EXTENSIVE THAT WHAT SELLER
HAS POSTED IN ITS DATA ROOM), AND (D) PURCHASER WILL MAKE ITS OWN
EVALUATION WITHOUT RELIANCE ON SELLER REGARDING THE SUFFICIENCY,
ADEQUACY AND ACCEPTABILITY OF THE INFORMATION AVAILABLE TO
PURCHASER REGARDING SUCH PROJECTS.
6.5 Brokers. All negotiations relating to this Agreement and the transactions contemplated
hereby have been carried on by Purchaser without the intervention of any other Person and in
such a manner as not to give rise to any valid claim against Seller (by reason of Purchaser's
actions) for a brokerage commission, finder's fee or other like payment to any Person.
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ARTICLE Z
COVENANTS OF SELLER
Seller covenants and agrees for the benefit of Purchaser as follows:
7.1 Access and Investigation.
(a) Subject to the limitations set forth in Section 7:1(121 upon reasonable
advance notice received from Purchaser, Seller shall afford Purchaser and its representatives
full and free access, during regular business hours to the Assigned Agreements, books and
records and other documents and data primarily related to the Assets:
(b) Notwithstanding the provisions of Section Tl(a) above, the rights of
access contained in this Section 7.1 are subject to, and on, the following terms and conditions:
(i) any such investigation shall be exercised in such a manner as.not to interfere unreasonably
with the operation of Seller's business; (ii) during the period from the date hereof to the
Closing Date, all information provided to Purchaser or its agents or representatives by or on
behalf of Seller or their agents or representatives (whether pursuant to this Section 7.1 or
otherwise)shall be governed by and subject to the confidentiality agreement, dated as of April
9,.2007, by and between Purchaser and Seller (the "Confidentiality Agreement"), but with
said Confidentiality Agreement being hereby deemed modified, as appropriate, to comport
with the Parties' respective duties and obligations under this Agreement(e.g., cooperation and
information sharing with lenders and regulatory agencies); (iii) such rights of access shall not
affect or modify the conditions set forth in Article 3 and Article 4 in,any way; and(iv)subject
to Section 7.7, Purchasers shall not have access to copies of books and records if(y) such
access is not permitted under Law or (z) such books and records are Retained Books and
Records.
7.2 Preservation of Assets. Without the consent of Purchaser, which shall not be
unreasonably withheld, Seller shall not vote or consent to amend in any material respect the
terms of any Assigned Agreements or the Mead Interest Entitlement Agreements, other than in
the ordinary course of business consistent with past practice.
7.3 Governmental Approvals and Agreements.
(a) Seller shall use Commercially Reasonable Efforts to cooperate with
Purchaser in obtaining all Purchaser Required Governmental Approvals, all Required
Consents, and other agreements required to consummate the transactions contemplated by this
Agreement,including maintaining and renewing the same, and make all filings required by
Governmental Rules to be made by Seller in order to consummate the transactions
contemplated by this Agreement. Seller shall cooperate with Purchaser and its representatives
with respect to all filings that Purchaser elects to make or, pursuant to Governmental Rules,
shall be required to make in connection with the transactions contemplated by this Agreement.
Seller shall keep Purchaser informed on a current basis regarding its communications with any
Governmental Authority that has jurisdiction over a Governmental Approval. The aforesaid
cooperation shall extend, as well, to Purchaser's filings pursuant to Section 205 of the Federal
27
LA\1798686.9
i
Power Act of its proposed Transmission Revenue Requirements and Transmission Owner
Tariff for the Mead Transmission Interests; provided, however, that the acceptance for filing
by the FERC of(i) Purchaser's filing pursuant to Section 205 of the Federal Power Act of its
proposed Transmission Revenue Requirements and Transmission Owner Tariff for the Mead
Transmission Interests, or(ii)Purchaser's filing pursuant to Section 204 of the Federal Power
Act of Purchaser's issuance of securities, shall not be conditions precedent to Purchaser's
obligations to close the transactions pursuant to this Agreement.
(b) In addition to Section 7.2(a) above, Seller shall furnish to Purchaser
such reasonably necessary information and assistance as Purchaser may reasonably request in
connection with Purchaser's preparation and filing with the FERC of Purchaser's (and/or its
Affiliate's) own Transmission Revenue Requirement and Transmission Owner.Tariff with
respect to the Mead Transmission Interests; including all of Seller's cost information
underlying Seller's TRR.
7.4 Notifications to Purchaser.
(a) Seller shall promptly notify Purchaser of any proceedings, actions,
claims, suits or investigations pending or threatened relating to the Assets, as well as any
thereof commenced or, to the Knowledge of Seller, threatened against Seller that could affect
the Assets or challenges the transactions contemplated hereby.
(b) Seller shall provide prompt written notice to Purchaser of any material
change in any of the information contained in the representations and warranties'made in
Article 5 or any Exhibits or Schedules and shall promptly furnish any information which
Purchaser may reasonably request in relation to such change; provided, however, that such
notice shall not operate to cure any breach of the representations and warranties made in
Article 5 or any Exhibits or Schedules referred to herein or,attached hereto.
(c) Seller shall promptly, and in any event within three (3) Business Days
after receipt thereof, provide to Purchaser (i) all material notices, correspondence and other
communications from any Governmental Authority with respect to the Assets, and (ii) all
material . notices, ` correspondence and other communications from any contractor or
counterparty to an Assigned Agreement with respect to such Assigned Agreement.
(d) Seller shall promptly notify Purchaser of the occurrence of any event
that has had or could reasonably be expected to result in a Material Adverse Effect.
7.5 Commercially Reasonable Efforts. In addition to the undertakings in Section 7.3,upon
the terms and subject to the conditions of this Agreement, Seller shall use Commercially
Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable consistent with Governmental Rules to consummate and
make effective in the most expeditious manner practicable,the transactions contemplated hereby,
including satisfying the conditions precede_nt to the consummation of such transactions as set
forth herein.
7.6 Further Assurances, Post-Closing Assignments. From time to time following the
Closing, Seller shall execute, acknowledge and deliver such additional documents, instruments
28
LA\1798686.9
i
I
of conveyance, transfer and assignment or assurances and take such other action as Purchaser
may reasonably request to more effectively assign, convey and transfer to Purchaser, and fully
vest title in Purchaser, with respect to the Assets. Without limiting the generality of the
foregoing, after the Closing Date and upon the discovery by Seller of any items included within
the definitions of the Assets or the Assigned Agreements, but not transferred, conveyed or
assigned to or assumed by Purchaser in an Assignment and Assumption Agreement or any other
applicable instrument of conveyance, Seller shall: (i) immediately deliver written.notice to
Purchaser of the existence and non-transfer or non-assumption of such item and provide
Purchaser with all the information about and with access to such item as Purchaser may
reasonably request; and (ii) if notified in writing by Purchaser within thirty (30) days after the
delivery of such notice by Seller,transfer, convey or assign to Purchaser such item in the manner
and on the terms and conditions consistent with this Agreement as if it were a part of assets
transferred under the Agreement as of the Closing Date. If, after the Closing, Seller (or any
Affiliate or creditor of Seller) shall receive any payment or revenue that belongs to Purchaser
pursuant to this Agreement, Seller shall remit or caused to be remitted the same to Purchaser.
7.7 Information Sharing. In the event that Purchaser reasonably determines that it requires
access to any Retained Books and Records, Seller shall use Commercially Reasonable Efforts to
provide to Purchaser(after advance written notice and during normal business hours and without
charge to Purchaser) reasonable access'to all Retained Books and Records, provided, that such
access does not interfere unreasonably with the operation of Seller's business.' With respect to
any litigation and claims that involve Assumed Liabilities, Seller shall render reasonable
assistance that Purchaser may reasonably request in defending such litigation or claim, and shall
make available, upon advance written notice and during normal business hours, the personnel
that are most knowledgeable about the matter in question. For avoidance of doubt, the Retained
Books and Records to which Purchaser shall have access pursuant to the terms of this Section 7,7
shall include e-mails or electronic records; notwithstanding that a-mails will not have been
transferred under Section 2.1(i).
7.8 Financing Cooperation. Seller shall reasonably cooperate with Purchaser
and Purchaser's lenders in connection with Purchaser obtaining debt financing necessary for the
consummation of the transactions contemplated hereby,including providing such information as
Purchaser and Purchaser's lenders may reasonably require and making representatives of such
parties available at reasonable times in connection with the syndication of such debt financing
and related activities.
ARTICLE 8
PURCHASER COVENANTS
8.1 Actions Before Closing Date. Purchaser shall use all Commercially Reasonable
Efforts to perform and satisfy all conditions precedent to Seller's obligations to consummate the
transactions contemplated by this Agreement that are to be performed or satisfied by Purchaser
under this Agreement.
8.2 Approvals and Notifications. Purchaser shall use Commercially,Reasonable Efforts to
cooperate with Seller in obtaining all Seller Required Governmental Approvals and other
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LA\17986869
agreements required to consummate the transactions contemplated by this Agreement, including
maintaining and renewing the same, and make all filings required by Governmental Rules to be
made by Purchaser in order to consummate the transactions contemplated by this Agreement.
Purchaser shall use. all Commercially Reasonable Efforts to obtain the Purchaser Required
Governmental Approvals, all consents and approvals of all other Persons,required to be obtained
by Purchaser and provide notifications to all Persons required to be notified by Purchaser to
effect the transactions contemplated by this Agreement. Purchaser shall keep Seller informed on
a current basis regarding its communications regarding all such Purchaser Required
Governmental Approvals, consents and approvals. Purchaser shall promptly.take all actions as
are reasonably requested by Seller to assist in obtaining any consents and approvals sought by .
Seller, including any consents required for novation in connection with the transfer of the Mead
Transmission Interests to Purchaser, any Seller Required Governmental Approvals and Required
Consents, and with respect to all filings that Seller elects to make or, pursuant to Governmental
Rules, shall be required to make in connection with the transactions contemplated by this
Agreement.
8.3 Availability of Asset Records. After the Closing Date, Purchaser shall provide to
Seller (after advance written notice and during normal business hours and without charge to
Seller) reasonable access to all Asset Records for periods prior to the Closing; provided, that
such access does not interfere unreasonably with the operation of Purchaser's business, and shall
preserve such Asset Records until the later of(a) three(3) years after the Closing Date or(b)the
required retention period for all government contract information, records or documents. In
addition, Purchaser acknowledges that Seller has the right to retain originals or copies of Asset
Records for periods prior to the Closing; provided, that copies of Asset Records are made and
provided to Purchaser in the event originals.are retained. With respect to any litigation and
claims that involve Excluded Liabilities, Purchaser shall render reasonable assistance that Seller
may reasonably request in defending such litigation or claim, and shall make available upon
advance written notice and during normal business hours, the. personnel that are most
knowledgeable about the matter in question. If, after the Closing, Purchaser (or any Affiliate or
creditor of Purchaser) shall receive any payment or revenue that belongs to Seller pursuant to
this Agreement,Purchaser shall remit or caused to be remitted the same to Seller.
8.4 Commercially Reasonable Efforts. In addition to the undertakings in Section 8.2,upon
the terms and subject to the conditions of this Agreement, Purchaser shall use Commercially
Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable consistent with Governmental Rules to consummate and
make effective in the most expeditious manner practicable the transactions contemplated hereby,
including satisfying the conditions precedent to the consummation of such transactions as set
forth herein.
8.5 Further Assurances,Post-Closing Assignments.
(a) From time to time following the Closing, Purchaser shall execute,
acknowledge and deliver such additional documents, instruments of conveyance, transfer.and
assignment or assurances and take such other action as Seller may reasonably request to return
any assets inadvertently conveyed to Purchaser and to release Seller from any ongoing
obligations with respect to the Assets or the Assumed Liabilities. Without limiting the
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LA\1798686.9
4
generality of the foregoing; after the Closing Date, Purchaser shall use its Commercially
Reasonable Efforts to post substitute collateral, letters of credit or bonds in the place of the
collateral, letters of credit or bonds posted by Seller and listed on Schedule 8.5 with respect to
any of the Assets. Purchaser shall cooperate with Seller and shall use Commercially
Reasonable Efforts, whether prior to or following the Closing, to assist Seller to obtain the
consents required to release Seller from its obligations under the Mead Interests Entitlement
Agreements. If, after the Closing, Purchaser (or any Affiliate or creditor of Purchaser),shall
receive any payment or revenue that belongs to Seller pursuant to this Agreement, Purchaser
shall remit or caused to be remitted the same to Seller.
(b) Purchaser shall deliver to Seller on or before December 19, 2007, an
irrevocable standby letter of credit in a stated amount equal to$5,925,000, issued substantially
in the form attached hereto as Exhibit D. Purchaser shall also pay to Seller$100,000 to cover
Seller's expenses for the,transactions contemplated by this Agreement, no later than three
Business Days after the date hereof, by wire transfer of immediately available funds to the
account of Seller as provided in Attachment A hereof. Such letter of credit shall be held by
Seller solely for the purpose of securing Purchaser's obligations under Section 13:.13(a)below
and shall be returned to Purchaser (1) concurrently with the consummation of the Closing or
(2) in the event that the Closing shall not occur and either Purchaser shall not owe any
liquidated damages to Seller pursuant to said Section 13.13(a) or, if such liquidated damages
are owed to Seller, then at such time as same shall have been paid by Purchaser to Seller.
ARTICLE 9
CERTAIN AGREEMENTS -
9.1 Regulatory Matters. Purchaser hereby covenants to Seller, and Seller hereby covenants
to Purchaser, as follows:
(a) Cooperation; Confidentiality Agreement. In connection with any
Governmental Approval, each of the Parties shall use Commercially Reasonable Efforts to (a)
cooperate with each other in connection with any filing or submission and in connection with
any investigation or other inquiry, including any proceeding initiated by a private party; (b)
keep the other Parties informed in all material respects of any material communication
received by such Party from, or given by such Party to, any Governmental Authority and of
any material communication received or given in connection with any proceeding by a private
party, in each case regarding any of the transactions contemplated hereby; and (c) subject to
restrictions of applicable Governmental Rules, permit the other Party to review any material
communication given to it by, and consult with each other in advance of any meeting or
conference with any Governmental Authority,including in connection with any proceeding by
a private party. The foregoing obligations in this Section 9.1(a) shall be subject to the
Confidentiality Agreement and any attorney-client, work product or other privilege, and each
of the Parties shall coordinate and cooperate fully with the other Parties in exchanging such
information and providing such assistance as such other Parties may reasonably request in
connection with the foregoing. The Parties will not knowingly take any action that will have
the effect of delaying, impairing or impeding the receipt of any required Governmental
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Approvals, including the Seller Required Governmental Approvals or the Purchaser Required
Governmental Approvals.
9.2 Taxes.
(a) Allocation of Taxes. Seller shall be liable for all Taxes attributable to
the Assets for any Pre-Closing Tax Period. Purchaser shall be liable for all Taxes attributable
to the Assets for any Post-Closing Tax Period. In the case of any Straddle Period:
(i) Real,personal and intangible property Taxes or other Taxes
levied on a per diem basis (collectively, "Per Diem Taxes") for a Pre-
Closing Tax Period shall be equal to the amount of such Per Diem Taxes
for the entire Straddle Period multiplied by a fraction, the numerator of
which is the number of days during the Straddle Period that are in the Pre-
Closing Tax Period and the denominator of which is the total number of
days in the Straddle Period; and
(ii) Taxes other than Per Diem Taxes for any Pre-Closing Tax
Period shall be computed as if such Tax Period ended on the Closing Date,
except that exemptions,allowances or deductions that are calculated on an
annual basis, such as deductions for depreciation, shall be apportioned on
a pro rata basis.
(b) Transfer and Sales Taxes. Each of Purchaser and Seller shall be
responsible for fifty percent (50%) of the payment of any sales, use, transfer, documentary
and other similar Taxes arising in connection with the sale of the Assets by Seller to
Purchaser.
(c) Tax Refunds. Seller shall be entitled to any refunds or credits of Taxes
attributable to the Assets for any Pre-Closing Tax Period. Purchaser shall promptly notify and
forward to Seller the amounts of any such refunds or credits to Seller within twenty(20) days
after receipt thereof.
(d) Pending or Threatened Actions. After the Closing Date, Purchaser
shall notify Seller in writing, within fifteen (15) days after its receipt of any correspondence,
notice or other communication from a taxing authority or any representative thereof, of any
pending or threatened tax audit, or any pending or threatened judicial or administrative
proceeding that involves Taxes attributable to the Assets for any Pre-Closing Tax Period, and
furnish Seller with copies of all correspondence'received from any taxing authority in
connection with any audit or information request with respect to any such Taxes attributable
to the Assets for any Pre-Closing Tax Period.
(e) Cooperation and Defense of Tax Claims. Notwithstanding any
provision of this Agreement to the contrary, with respect to any claim for refund, audit,
examination, notice of deficiency or assessment or any judicial or administrative proceeding
that involves Taxes attributable to the Assets for either a Pre-Closing Tax Period or a Straddle
Period (collectively, "Tax Claim"), Purchaser and Seller shall reasonably cooperate with each
other in contesting any Tax Claim, including making available original books, records,
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documents and information for inspection, copying and,if necessary,introduction as evidence
at any such Tax Claim contest and making employees available on a mutually convenient
basis to provide additional information or explanation of any material provided hereunder
with respect to such Tax Claim or to testify at proceedings relating to such Tax Claim. Seller
will control all proceedings taken in connection with any Tax Claim that pertains entirely to a
Pre-Closing Tax Period that does not include a Straddle Period, and Seller and Purchaser will
jointly control all proceedings taken in connection with any Tax Claim pertaining to any
Straddle Period. Purchaser has no right to settle or otherwise compromise any Tax Claim
which pertains to a Pre-Closing Tax Period; and neither Party has the right to settle or
otherwise compromise any Tax Claim which pertains to a Straddle Period without the other
Party's prior written consent.
(f) Retention of Tax Records. After the Closing Date and until the seventh
anniversary of the Closing Date, Purchaser shall retain possession of all material accounting,
business, financial and Tax records and information that (a) relate to the Assets and are in
existence on the Closing Date and (b) come into existence after the Closing Date but relate to
the Assets before the Closing Date, and Purchaser shall give Seller reasonable notice and an
opportunity to retain any such records in the event that Purchaser determines to destroy or
dispose of them during such period. In addition, from and after the Closing Date, Purchaser
shall provide to Seller (after reasonable notice and during normal business hours and without
charge to Seller) access to the books, records, documents and other information relating to the
Assets as Seller may reasonably deem necessary to (i)properly prepare for, file, prove,
answer, prosecute and defend any Tax Return, claim, filing, tax audit, tax protest, suit,
proceeding or answer or (ii) administer or complete any cases under Chapter 11 of the
Bankruptcy Code of or including Seller. Such access shall include' access to 'any
computerized information systems that contain data regarding the Assets. Any information
obtained under this Section 9.2(fl and this Article 9 shall be kept strictly confidential, except
as may be otherwise necessary in connection with the filing of Tax Returns, claims for a Tax
refund or in conducting any audit, examination or other proceeding in respect of Taxes..
(g) Allocation of"Purchase Price and Purchase Price Allocation Forms.
The Purchase Price, the Assumed Liabilities and other relevant items shall be allocated among
the Assets in accordance with Section 1060 of the Code. Purchaser shall prepare and deliver
to Seller an allocation schedule setting forth Purchaser's determination of the allocation (the
"Allocation Schedule") within thirty (30) days after the date hereof, which Allocation
Schedule shall be subject to the approval of Seller, which shall not be unreasonably withheld
or delayed. Seller shall have a. reasonable opportunity to review and comment on the
Allocation Schedule before granting such approval The Allocation Schedule shall identify
the transferor and transferee thereof, and shall be prepared in accordance with Treasury
Regulation Section 1.1060-1 (or any comparable provision of state or local Tax Law) or any
successor provision. The Parties agree that they will report the federal; state, local and other
Tax consequences of the purchase and sale hereunder(including in filings on IRS Form 8594)
in a manner consistent with such allocation and that they will not take any position
inconsistent therewith in connection with any Tax Return, refund claim, litigation or
otherwise, unless and to the extent required to do so pursuant to a final determination within
the meaning of Code Section 1313(a)(1). Seller and Purchaser shall cooperate in the filing of
any forms (including Form 8594) with respect to such allocation. Notwithstanding any other
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provision of this Agreement, this Section 9.2(g) shall survive any termination or expiration of
this Agreement.
(h) Tax Returns: Seller shall prepare, in the ordinary course of business
and consistent with past practice, all Tax Returns for Taxes attributable to the Assets for any
Pre-Closing Tax Period. Purchaser shall prepare all Tax Returns for Taxes attributable to the
Assets for any Post-Closing Tax Period, but if such Tax Return is for a Straddle Period,
Purchaser shall present a draft.of the Tax Return to Seller at least thirty(30) days before such
Tax Return is due for Seller's review and approval, and shall refrain from filing such Tax
Return unless and until such approval is granted, which shall not be unreasonably withheld or
delayed.
(i) Tax Indemnity. If a Tax assessment is levied upon any Party by an
authorized tax jurisdiction for Taxes that are the obligation of another Party under this
Agreement, then.the non-assessed Party shall reimburse the assessed Party-for those Taxes
including any interest and penalty within thirty (30) days after notice and proof of the
payment of such Tax assessment. If a Party files a Tax Return and pays Tax due therewith,
but part or all of that Tax is the obligation of another Party under this Agreement, then the
non-paying Party shall reimburse the assessed Party for those Taxes including any interest and
penalty within thirty(30)days after notice and proof of the payment of such Tax.
(j) Disputes Regarding Taxes. Notwithstanding anything to the contrary in
this Agreement, any dispute, controversy, or claim between Seller, on the one hand; and
Purchaser, on the other hand, arising out of or relating to the provisions of this Agreement that
relates to Taxes that cannot be resolved by negotiations between Seller and Purchaser shall be
submitted to an accounting firm mutually agreed upon by Seller and Purchaser (the
"Accounting Finn") for resolution. The Accounting_ Firm shall control the proceedings
related to the dispute resolution and may request such evidence and information as it deems
necessary. The resolution reached by the Accounting Firm shall be binding on Seller and .
Purchaser and their respective affiliates. The expenses of the Accounting Firm shall be borne
equally by Seller, on the one hand, and Purchaser, on the other hand.
9.3 TCA.
(a) In order to facilitate the timely consent of CAISO to the transactions
contemplated by this Agreement, Purchaser confirms that if the CAISO requires Seller to
cause Purchaser (or its applicable Affiliate) to assume, in writing, Seller's obligations under
the TCA, Purchaser (or its applicable Affiliate) shall, in writing, assume such obligations
effective as of the Closing Date. Such assumption may include, as between Purchaser (or its
Affiliate) and CAISO, any pre-Closing obligations of Seller under Section 2.3(c)(10)
(including any refund'obligations), notwithstanding that such liabilities are an Excluded
Liability as between Seller and Purchaser (including Purchaser's Affiliates) and any such
assumption shall not be construed as a modification, waiver or novation of Seller's
responsibility for such Excluded Liability as between Seller and Purchaser (including
Purchaser's Affiliates). If requested by CAISO, Purchaser shall execute such documents as
may reasonably be deemed necessary by CAISO in connection with such CAISO consent.
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r,.
(b) To the extent that either (1) Purchaser (or its Affiliate) is required by
CAISO to pay CAISO, or(2) CAISO offsets or otherwise withholds payment to Purchaser(or
its Affiliate) under its Transmission Revenue Requirement or otherwise, any amounts that
would otherwise have been assessed against Seller pursuant to the TCA or otherwise had the
transactions contemplated hereby not been consummated or in respect of any Excluded
Liability set forth in Section 2.3(c)(10), Seller shall promptly reimburse or pay to Purchaser or
as it directs in cash such amounts within fifteen (15) Business Days of Seller's receipt of a
reasonably detailed invoice for such amounts from Purchaser, together with interest thereon at.
the rate of ten percent (10%)per annum accruing from the date such amounts become due as
set forth in this Section 93(b), if applicable:
(c) To the extent that Purchaser receives a return or refund of any amounts
(other than interest) for which Seller has reimbursed or paid Purchaser or as Purchaser has
directed pursuant to Section 9.3(b)(or otherwise in respect of the Excluded Asset in Section
2.2(k) or the Excluded Liability in Section 2.3(c)(10)) from CAISO or any other party,
Purchaser shall promptly remit to Seller in cash all such amounts within fifteen(15) Business
Days of receipt, with a reasonably detailed statement identifying such amounts, together with
interest thereon at the rate of ten percent (10%) per annum accruing from the date such
amounts become due as set forth in this Section 93(c), if applicable.
(d) Notwithstanding the foregoing, Seller and Purchaser shall use
Commercially Reasonable Efforts to arrange for any such payments required by CAISO to be
made in the first instance by Seller so as to minimize any such payments, offsets or withholds
being made by or against Purchaser(or its Affiliate).
ARTICLE 10
TERMINATION; SURVIVAL
10.1 Rights to Terminate.
The obligations of the Parties with respect to the Assets may,by written notice given on
or prior to the Closing Date, in the manner provided in this Section 10:1, be terminated at any
time prior to the Closing Date as provided below
(a) by Purchaser or Seller, if the Closing has not occurred on or before
March 31, 2008; provided, however, that (1) Purchaser may, at its election, extend such date
to April 30, 2008 in order to provide time for it to remedy any deficiencies in filings pursuant
to (i) Section 205 of the Federal Power Act of its proposed Transmission_-Revenue.
Requirements and Transmission Owner Tariff for the Mead Transmission Interests; or (ii)
Section 204 of the Federal Power Act of its issuance of securities (but provided further,
however, that neither the acceptance for filing of Purchaser's filings pursuant to Sections 204
or 205 of the Federal Power Act, the successful remediation by Purchaser of same,nor the
ultimate approval of the same by FERC shall be conditions precedent to Purchaser's
obligations to proceed with the Closing under this Agreement), and (2) either Purchaser or
Seller may extend to June 30, 2008 in order to provide Purchaser with the necessary time to
obtain approval pursuant to Section 203 of the Federal Power Act of Purchaser's acquisition
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r
of the Mead Transmission Interests. Notwithstanding anything in this Section 10.1(a) to the
contrary, Purchaser shall use its reasonable good faith efforts to obtain all necessary filings in
an expeditious manner.
(b) by Purchaser if there has been a misrepresentation or a material default
or breach by Seller with respect to any of Seller's representations and warranties in this
Agreement or in any Related Agreements or the due and timely performance of any of Seller's
covenants and agreements contained in this Agreement or in any Related Agreements and
such misrepresentation, breach or material default has not been cured using Commercially
Reasonable Efforts and cannot reasonably be expected to,be cured within sixty (60) days of
written notice from Purchaser specifying particularly such misrepresentation, breach or
default by Seller; provided, however; no right of termination shall arise under this subsection
(b) if such misrepresentation, default or breach is not able to be cured using Commercially
Reasonable Efforts in such sixty day period, and Seller is in the process of curing the
misrepresentation, default or breach and shall have cured the misrepresentation, default or
breach by Seller using Commercially Reasonable Efforts on or before the applicable date set
forth in Section 10.1(a);
(c) except as set forth in Section 10.1(d)below,by Seller, if there has been
a misrepresentation or a material default or breach by Purchaser with respect to any of
Purchaser's representations and warranties in this Agreement or in any Related Agreements or
the due and timely performance of any of Purchaser's covenants and agreements contained in
this Agreement or in any Related Agreements, and such misrepresentation, breach or material
default is not cured: (i) within ten (10) days of written notice from Seller specifying
particularly such misrepresentation, default or breach in the case of any of Purchaser's
payment obligations; or (ii) and cannot reasonably be expected to be cured using
Commercially Reasonable Efforts within sixty (60) days of written notice from .Seller
specifying particularly such misrepresentation, default or breach in all other cases;provided,
however, no right of termination shall arise under this subsection (c)(ii) if such
misrepresentation, default or breach is not able to be cured using.Commercially Reasonable
Efforts in such sixty day period, and Purchaser is in the process of curing the
misrepresentation, default or breach in such sixty day period and' shall have cured the
misrepresentation, default or breach by Purchaser using Commercially Reasonable Efforts on
or before the applicable date set forth in Section 10.1(a)-
(d) by Seller, for any failure by Purchaser to perform its obligations set
forth in Section 8.5(b). For avoidance of doubt, Purchaser shall have no cure rights with
respect to any breach of its obligations.set forth in Section 8.5(b); and
(e) by mutual agreement of Seller and Purchaser.
10.2 Effect of Termination. Any termination of this Agreement, including any termination
pursuant to Section 10.1 above, shall not limit or affect either Purchaser's or Seller's right to
seek to recover damages by reason of any breach hereof by the other(s) occurring prior to such
termination.
10.3 Survival.
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. (a) Except as set forth in Section 103(c), none of the representations and
warranties of Seller under Section 5 or in any instrument delivered in connection with the
Closing shall survive the Closing Date.
(b) Except as set forth in Section 103(c), none of the representations and
warranties of Purchaser contained in this Agreement;or in any instrument delivered in
connection herewith shall survive the Closing Date.
(c) The following sections shall survive the Closing only for the time
periods hereby specified: (i) for a period of eighteen (18) months after the Closing Date,
Article 5, except as set forth in clause (iii) below; (ii) for a period of three (3) years, (A)
Sections, 7_6, 8.3, 8.55 and 9.1 a ; and (iii) for the length of applicable limitations periods,
Sections 5.1(b),, 5.1(c)(1) and c 2 , 5.1 h 5Mi 9_2 and Article 12. For avoidance of
doubt,the obligations of the Parties set forth in Sections 2.7 and 9_3 shall survive the Closing
without limitation as to time.
ARTICLE 11
LIMITED INDEMNITY
11.1 Limited Indemnity.
(a) Purchaser shall indemnify, defend and hold harmless Seller, its
authorized representatives, appointed or elected officials, employees, shareholders, and agents
(each, a "Seller Indemnitee") from and against any and all claims, demands, suits, losses, .
liabilities, damages, obligations, payments, costs and expenses (including, without limitation,
the costs and expenses of any and all actions, suits, proceedings, assessments, judgments,
settlements and compromises relating thereto and reasonable attorneys' fees and reasonable
disbursements in connection therewith) (each, an "Indemnifiable Loss"), asserted against or
suffered by any Seller Indemnitee relating to,resulting from or arising out of(i) any breach by
i
Purchaser of any representation, warranty, covenant or agreement of Purchaser contained in
this Agreement and(ii) any Assumed Liabilities, Except with respect to claims arising aut of
fraud and except for rights to equitable remedies, this Article 11 constitutes each Seller
Indemnitee's sole and exclusive remedy for any and all Indemnifiable Losses or other claims
relating to or arising from this Agreement.
(b) Seller shall indemnify, defend and hold harmless Purchaser,its officers,
directors, employees, shareholders, Affiliates and agents (each, a "Purchaser Indemnitee")
from and against any and all Indemniflable Losses asserted against or suffered by any
Purchaser Indemnitee relating to, resulting,from or arising out of(i) any breach by Seller of
any representation, warranty, covenant or agreement of Seller contained in this Agreement,
and (ii)the Excluded Liabilities, except as otherwise set forth in this Agreement. Except with
respect to claims arising out of fraud and except for rights to equitable remedies, this Article
11 constitutes each Purchaser Indemnitee's sole and exclusive remedy for any and all
Indemnifiable Losses or other claims relating to or arising from this Agreement.
l
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(c) Notwithstanding anything to the contrary contained herein, any
Indemnifiable Loss shall be net of the dollar amount of any insurance or other proceeds
actually received by the Indemnitee or any of its Affiliates with respect to the Indemnifiable
Loss. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to
seek coverage (including both costs of defense and indemnity) under applicable insurance
policies with respect to any such Indemnifiable Loss.
(d) The expiration or termination of any representation or warranty shall
not affect .the Parties' obligations under this Section 11.1 if the Indemnitee provided the
Person,required to provide indemnification under this Agreement (the "Indemnifying Part x')
with written notice of the claim or event for which indemnification is sought prior to such
expiration,termination or extinguishment.
(e) Except to the extent otherwise provided expressly herein, and except
for fraud and intentional misconduct, the rights and remedies of Seller and Purchaser under
this Article 11 are exclusive and in lieu of any and all other rights and remedies which Seller
and Purchaser may have under this Agreement, applicable laws (including Environmental
Laws) or otherwise for monetary or equitable relief,with respect to (i) any breach of or failure
to perform any covenant, agreement, or representation or warranty set forth in this Agreement,
after the occurrence of the Closing, or(ii)the Assumed Liabilities or the Excluded Liabilities,
as the case may be. Notwithstanding anything in this Article 11 to the contrary, each Party
shall have the right to seek equitable remedies including specific performance, to the extent
such remedy is available under applicable Governmental Rules.
(f) Purchaser and Seller hereby waive any right to recover punitive,
incidental, special, exemplary and consequential damages arising in connection with or with
respect to this Agreement. The provisions of this Section 11.1(f) shall not apply to
indemnification for a Third Party Claim to the extent such third party seeks or is awarded such
damages.
(g) Notwithstanding anything to the contrary herein, (i) except as set forth
in clause(ii) of this Section 11.10), each Party's liability and obligation to the other Party for
an Indemnifiable Loss relating to, resulting from or arising out of a breach of the
representations or warranties shall be the amount thereof in excess of$500,000 and shall not
exceed in the aggregate fifteen percent (15%) of the Purchase Price; (ii) each Party's liability
and obligation to the other Party for an Indemnifiable Loss relating to; resulting from or
arising out of fraud or intentional misconduct or out of a breach of the representations and
warranties in Sections 5.1(b), 5.1(c)(1) and tc JM, 5.1 , and 5.1 i or Section 9.3(b) shall be
the amount of such Indemnifiable Loss; (iii) any claims for an Indemnifiable Loss as related
to breaches of representations or warranties must be asserted by the claiming Party within the
applicable survival period specified in Section 10.3; and (iv) the amount of any Indemnifiable
Loss shall be calculated without regard: to any qualification of Material Adverse Effect,
materiality or words of similar import.
(h) Except for claims pursuant to Section 9.3(b)hereof(in respect of which
the provisions of that Section will apply), each Party seeking indemnification shall promptly
notify the other Party in writing of any damage, claim, loss, liability or expense which the
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Party seeking indemnification has determined has given or could give rise to a claim (a
"Notice of Claim"). A Notice of Claim shall specify, in reasonable detail,the facts known by
the notifying Party regarding the claim. Subject to the terms of this Agreement, the failure to
provide (or timely provide) a Notice of Claim will not affect the notifying Party's rights to
indemnification,provided, however, the Indemnifying Party is not obligated to indemnify the
other Party for the increased amount of any claim which would otherwise have been payable
to the extent that the increase resulted from the failure to deliver promptly a Notice of Claim.
11.2 No Recourse Against Third Parties. Each Party hereby agrees for itself and for all of
its officers, directors, shareholders, Affiliates, attorneys, agents and any other parties making any
claim by, through or under the rights of such persons (collectively, a "Party Group") that no .
member of a Party Group shall have.any rights against any appointed or elected official,
employee, officer, director, shareholder, Affiliate, attorney, agent, or other representative of the
other Party (each, individually, a "Non-Recourse Person") for any damages, suits, claims,
proceedings, fines, judgments, costs or expenses (including attorneys' fees and incidental,
consequential or punitive .damages) (collectively, "Losses") that such Party may suffer in
connection with this Agreement, but in no event will any party to an Assigned Agreement be
deemed an agent of Seller for purposes of this Section 11.2.
11.3 Defense of Claims.
(a) If any Indemnitee receives notice.of the assertion of any claim or of the
commencement of any claim, action,or proceeding made or brought by any Person who is not
a Party or any Affiliate of a Party (a "Third Party Claim") with respect to which
indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such
Indemnifying Party reasonably prompt written notice thereof, but in any event such notice
shall not be given later than ten (10) calendar days after the Indemnitee's receipt of notice of
such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in
reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable
Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have
the right to participate in or,by giving written notice to the Indemnitee, to elect to assume the
defense of any Third Party Claim at such Indemnifying Party's expense and by such
Indemnifying Party's own counsel,provided, that the counsel for the Indemnifying Party who
shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the
Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such
Indernnitee's own expense. If an Indemnifying Party elects not to assume the defense of any.
Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the
objection of the Indemnifying Party, which settlement or compromise shall conclusively
establish the Indemnifying Party's liability pursuant to this Agreement.
(b) If, within ten(10) calendar days after an Indemnitee provides written
notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written
notice from the Indemnifying Party that such Indemnifying Party has elected to assume the
defense of such Third Party Claim as provided in Section 113(a), the Indemnifying Party will
not be liable for any legal expenses subsequently incurred by the Indemnitee in connection
with the defense thereof except as set forth herein. Without the prior written consent`of the
other Party, no Party shall enter into any settlement of any Third Party Claim which would
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{
lead to liability or create any financial or other obligation on the part of the other Party.' If a
firm offer is made to settle a Third Party Claim without leading to liability or the creation of a
financial or other obligation on the part of the Indemnitee and the Indemnifying Party desires
to accept and agree to such offer, the Indemnifying Party shall give written notice to the
Indemnitee to that effect. If the Indemnitee unreasonably fails to consent to such firm offer
within ten(10) calendar days after its receipt of such notice, the Indemnifying Party shall be
relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or
defend such Third Party Claim. In such event, the maximum liability of the Indemnifying
Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable
costs and expenses paid or incurred by Indemnitee up to the date of said notice.
Notwithstanding anything else to the contrary set forth in this Agreement, to the extent the
_Indemnitee is entitled to indemnification hereunder, the Indemnitee shall not be obligated to
take any other action in connection with a settlement other than the execution of a customary
mutual release.
(c) Any claim by an Indemnitee on account of an .Indemnifiable Loss
which does not result from a Third Party Claim (a"Direct Claim") shall be asserted by giving
the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such
claim in reasonable detail and indicating the estimated amount, if practicable,but in any event
such notice shall not be given later than ten(10) calendar days after the Indemnitee has actual
knowledge of such Direct Claim, and the Indemnifying Party shall have a period of thirty(30)
calendar days within which to respond to such Direct Claim. If the Indemnifying Party does
not respond within such thirty (30) calendar day period, the Indemnifying Party shall be
deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the
Indemnitee will be free to seek enforcement of its right to indemnification under this
Agreement.
(d) If the amount of any Indemnifiable Loss, at any time subsequent to the
making of an indemnity payment in respect thereof, is reduced by recovery, settlement or
otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery,
settlement or payment by, from or against any other entity, the amount of such reduction, less
any costs, expenses or premiums incurred in connection therewith (together with interest.
thereon-from the date of payment thereof at the publicly announced prime rate then in effect
as published in The Wall Street Journal shall promptly be repaid by the Indemnitee to the
Indemnifying Party.
(e) A failure to give timely notice or respond timely to notice as provided
in this Section 11.3 shall not affect the rights or obligations of any Party hereunder except if,
and only to the extent that, as a result of such failure, the Party which was entitled to receive
such notice was actually prejudiced as a result of such failure.
(f) Notwithstanding the foregoing, the Parties agree and acknowledge that
(i) `Seller shall be entitled exclusively to control, defend and settle any litigation,
administrative or regulatory proceeding arising out of or related to any Excluded Liabilities,
and Purchaser agrees to cooperate reasonably, at the Indemnifying Party's expense, in
connection therewith and (ii) Purchaser shall be entitled exclusively to control, defend and
settle any litigation, administrative or regulatory proceeding, arising out of or related to any
40
LA\1798686.9
i
Assumed Liabilities, and Seller agrees to cooperate reasonably, at the Indemnifying Party's
expense,in connection therewith.
ARTICLE 12
DISPUTE RESOLUTION
12.1 Dispute Resolution. Any and all disputes, claims or controversies arising out of,
relating to, concerning or pertaining to the terms of this Agreement, or to either. Party's
performance or failure of performance under this Agreement ("Dispute'), which Dispute the
Parties have been unable to resolve by informal methods after undertaking a good faith effort to
do so, shall first be submitted to an informal dispute resolution under the procedure described in
Section 12.2 below; if the matter is not resolved through such procedures, it shall be referred for
final and binding arbitration under the procedures described in Section 12.3.
12.2 Informal Resolution. Any unresolved Disputes shall initially be referred to Seller's
City Administrator, or designee,and the President of Purchaser for resolution. Such executives
or their respective designees shall meet at least once, and shall negotiate in a commercially
reasonable manner for a period of fifteen(15) Business Days in an effort to resolve the Dispute.
Neither Party shall seek to commence any litigation or arbitration proceeding without first
satisfying this Section 12.2 and any failure of a Party to do so shall constitute.a sufficient basis
for termination without prejudice any proceeding so attempted.
12.3 Arbitration._ Either Party may initiate binding arbitration with respect to the Dispute by
making a written demand for binding arbitration before-an arbitrator that is a former judge or..
attorney with experience resolving major commercial disputes within the electric industry with
JAMS, its successor, or any other mutually.agreeable arbitrator (the "Arbitrator") at any time
following the unsuccessful conclusion of the informal resolution provided for in Section 12.2.
The Parties shall cooperate with one another in promptly selecting the Arbitrator and in
scheduling the arbitration to commence no later than one hundred eighty (180) Days from the
date of the initial written demand for binding arbitration. If, notwithstanding their good faith
efforts,the Parties are unable to agree upon a mutually acceptable Arbitrator,the Arbitrator shall
be appointed as provided for in California Code of Civil.Procedure`Section 128.1.6. Upon a
Party's written demand for binding arbitration, such Dispute, including the determination of the
scope or applicability of this agreement to arbitrate, shall be determined by binding arbitration
before the Arbitrator, in accordance with the laws of the State of California, without regard to
principles of conflicts of laws. Except as provided for herein, the arbitration shall be conducted
by the Arbitrator in accordance with the rules and procedures for arbitration of complex business
disputes for the organization with which the Arbitrator is associated; absent the existence of such
rules' and procedures, the arbitration shall be conducted in accordance with the California
Arbitration Act, California Code of Civil Procedure Section 1280 et seq. However,
notwithstanding the rules and procedures that would otherwise apply to the arbitration; and f'
unless. the Parties agree to a different arrangement, the place of the arbitration shall be in Los
Angeles County, California; each side in the arbitration shall be entitled to take,up to three
depositions, and all direct testimony in the arbitration shall be submitted in the form of affidavits
or declarations under penalty of perjury. Each Party shall cooperate in making available for
cross-examination at the arbitration hearing-its witnesses whose direct testimony has been so
41
LA\1798686.9
submitted. Judgment on the award may be entered in any court having jurisdiction. The
Arbitrator shall,in any award, allocate all of the costs of the binding arbitration(other than each
Party's individual attorneys' fees and costs related to the Party's participation in the arbitration,
which fees and costs shall be borne by such Party), including the fees of the Arbitrator, in such
manner as the Arbitrator shall determine. Until such award is made, however,the Parties shall
share equally in paying the costs of the arbitration.
12.4 Waiver of Jury Trial. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY LITIGATION ARISING UNDER THIS AGREEMENT.
ARTICLE 13
MISCELLANEOUS AGREEMENTS AND ACKNOWLEDGEMENTS
13.1 Expenses. Except as otherwise provided herein, each Party is responsible for its own
costs and expenses (including attorneys' and consultants' fees, costs and expenses) incurred in
connection with this Agreement and the consummation of the transactions contemplated by this
Agreement.
13.2 Representations and Warranties Exclusive. The representations and warranties
contained in this Agreement are the only representations or warranties given by Seller and all
other express or implied warranties are disclaimed. Except as otherwise set forth in this
Agreement, including the representations and warranties contained herein, Purchaser
acknowledges that (i) the Assets are conveyed "AS. IS," "WHERE IS" and "WITH ALL
FAULTS" and .that all warranties of merchantability, usage. or suitability or fitness for a
particular purpose are disclaimed and (ii) no material or information provided by ,or
communications made by Seller or its agents will create any representation or.warranty of any
kind, whether express or implied,with respect to the Assets and the titles thereto, the operation
of the Assets, or the prospects (financial and otherwise), risks and other incidents of the Assets,
including the transmission capability of the Mead-Adelanto Transmission Project or the Mead-
Phoenix Transmission Project.
13.3 Entire Document. Other than the Confidentiality Agreement, this Agreement
(including the Exhibits and Schedules) and the Related Agreements contain the entire agreement
between the Parties with respect to the transactions contemplated hereby, and supersede all
negotiations,representations, warranties,, commitments,offers, contracts and writings prior to the
execution date of this Agreement, written or oral. No waiver and no modification or amendment
of any provision of this Agreement is effective unless made in writing and duly signed by the
Parties referring specifically to this Agreement, and then only to the specific purpose, extent and
interest so provided.
13.4 Schedules.
(a) The Schedules delivered pursuant to the terms of this Agreement.are an
integral part of this Agreement to the same extent as if they were set forth verbatim herein. In
addition to the obligations of Seller in Section 7.4, Seller shall have the right to update the
Schedules in advance of the Closing (an "Update"). Seller shall furnish a copy thereof to
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LA\1798686.9
Purchaser not later than 10 Business Days prior to the Closing Date. No Update shall affect
the determinations to be made under Section 3.1(d). If any Update shall result in a failure of
the Closing Condition set forth in Section 3.1(d), Purchaser may elect either(i)not to proceed
to Closing or(ii) to proceed to Closing and accept the representations and warranties set forth
herein as being qualified by the Updates, provided that Purchaser shall retain the rights and
remedies set forth in Section 13.4(b)below.
(b) If any Update results in a breach of the representations and warranties
set forth in this Agreement, Purchaser will have all rights and remedies under this Agreement
with respect to such breach without regard to the Updates. For avoidance of doubt, Purchaser
does not waive any claim for any other remedy or indemnification with respect to breach of
representation,warranty, covenant,or any other claim under this Agreement by reason of facts
or circumstances Purchaser was aware of as of the Closing Date,but that were not reflected in
the Schedules (prior to any modification by any Updates). Seller may "over disclose"
information on the Schedules and the inclusion of any item on a Schedule that is less material
than the materiality standard in the provisions of this Agreement that make reference to such
Schedule shall not be used to interpret or alter such materiality standard.
13:5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which is an original,but all of which together constitute one and the same instrument.
13.6 Severability. If any provision hereof is held invalid or unenforceable by any arbitrator
or as a result of future legislative action,this holding or action shall be strictly construed and
shall not affect the validity or effect of any other provision hereof. To the extent permitted by
law, the Parties waive,to the maximum extent permissible, any provision of law that renders any
provision hereof prohibited or unenforceable in any respect.
13.7 Assignability. This Agreement is binding upon and inures to the benefit of the
successors and assigns of the Parties. However, neither Party shall Assign this Agreement
without the prior written consent of the other Party, which consent shall not be unreasonably
withheld, except that Purchaser may Assign this Agreement to a wholly owned Affiliate or to its
financing sources for collateral purposes or, after the Closing, to a third party purchaser in
connection with any sale of the Mead Transmission Interests,without the prior written consent of
Seller,provided that such Assignment shall not relieve Purchaser of its obligations as set forth in
this Agreement. For avoidance of doubt, nothing in this Section 13.7 shall limit or otherwise
modify the assignment provisions in any of the Related Agreement or in the Assignment and
Assumption Agreement. In addition, Purchaser may at Closing direct that the Assets will be
purchased by one or more subsidiaries or commonly controlled Affiliates of the Purchaser. Any
such Assignment of this Agreement is conditioned on the assignee's agreement in writing to
assume the assigning Party's duties and obligations under this Agreement (except that a
collateral assignee or successor to Purchaser under this Agreement by foreclosure or other
exercise of creditors' rights in respect of a collateral assignment, as applicable, need not assume
such obligations unless and until such Person shall succeed to ownership of the collateral
assignor's rights under this Agreement). Any Assignment of this Agreement shall not relieve the
assigning Party of its obligations and liabilities under this Agreement, provided, however, that
after the Closing, an Assignment to a non-Affiliate (and that is.other than a collateral
assignment) shall relieve the assigning Party of any liabilities and obligations arising or accruing
43
LAU 798686.9
i
under this Agreement subsequent to such Assignment, provided that such assigning Party
provides prior written notice of such assignment and the assigned Party expressly assumes, in
writing, all liabilities and obligations arising or accruing under this Agreement. For purposes of
this Section 13.7. prior to the Closing, "Assian" or "Assignment' means any direct or indirect
assignment, subcontracting or other transfer of this Agreement including with respect to
Purchaser any change of control of Purchaser; provided, however, that "Assign" or
"Assignment" shall not include any such transaction if, after giving effect to such transaction, no
change of control shall have occurred with respect to Purchaser. For avoidance of any doubt,
and notwithstanding anything to the contrary in this Agreement, Purchaser shall not be a party to
the Related Agreement or Assignment and Assumption Agreement (as one or more single
purpose Affiliates of Purchaser shall be a party to such agreements at Closing) and Purchaser
shall not be an obligor or a guarantor of any obligations arising or accruing under the Related
Agreement or Assignment and Assumption Agreement.
13.8 Consents. Except as otherwise set forth in this Agreement, any consent required by
either Party to take any action shall not be unreasonably withheld,delayed or conditioned.
13.9 Captions. The captions of the various Articles, Sections,Exhibits and Schedules of
this Agreement have been inserted only for convenience of reference and do not modify, explain,
enlarge or restrict any of the provisions of this Agreement.
13.10 Governing Law. The validity, interpretation and effect of this Agreement are governed
by and shall be construed in accordance with the laws of the State of California applicable to
contracts made and performed in such State and without regard to conflicts of law doctrines
except to the extent that certain matters are preempted by Federal law or are governed by the law
of the jurisdiction of organization of the respective Parties.
13.11 Limitations on Liabilitv. UNLESS EXPRESSLY HEREIN PROVIDED, NEITHER
PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE,
EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS
INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY
INDEMNITY PROVISION OR OTHERWISE, EXCEPT UNDER ARTICLE II, TO ONE
ANOTHER OR IN RESPECT OF THIRD-PARTY CLAIMS FOR DAMAGE TO OR
DESTRUCTION OF PROPERTY .OF, OR DEATH OF OR BODILY INJURY TO, ANY
PERSON. UNLESS EXPRESSLY HEREIN PROVIDED, AND SUBJECT TO THE
PROVISIONS OF ARTICLE 11. ,IT IS THE INTENT OF THE PARTIES THAT THE
LIMITATIONS HEREIN IMPOSED ON REM_ EDIES AND THE MEASURE OF DAMAGES,
INCLUDING THE LIMITATIONS OF LIABILITY AND THE EXCLUSION OF
CONSEQUENTIAL DAMAGES, BE WITHOUT REGARD TO THE CAUSE OR CAUSES
RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER
SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE,
AND SHALL APPLY IRRESPECTIVE OF WHETHER A PARTY OR ANY AFFILIATE
THEREOF, OR ANY PARTNER, MEMBER, SHAREHOLDER, OFFICER, DIRECTOR OR
EMPLOYEE OF A PARTY OR AN AFFILIATE THEREOF, ASSERTS A THEORY OF
LIABILITY IN CONTRACT,TORT, NEGLIGENCE, MISREPRESENTATION(INCLUDING
NEGLIGENT MISREPRESENTATION),' STRICT LIABILITY, STATUTORY LIABILITY,
OR ANY THEORY OF LIABILITY OTHER THAN IN THE CASE OF FRAUD. TO THE
44
LA11798686.9
EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED,
THE PARTIES ACKNOWLEDGE THAT THE DAMAGES ARE DIFFICULT .OR
IMPOSSIBLE TO DETERMINE, OR OTHERWISE OBTAINING AN ADEQUATE
REMEDY IS INCONVENIENT AND THE DAMAGES CALCULATED HEREUNDER
CONSTITUTE A REASONABLE APPROXIMATION OF THE HARM OR LOSS.
13.12 Notices. All notices, requests, demands and other communications under this
Agreement must be in writing and must be delivered in person or sent by overnight delivery
using a nationally recognized delivery service, and properly addressed as follows:
If to Seller:
City of Vernon
Attn: Director of Light and Power Department
4305 Santa Fe Avenue
Vernon, CA 90058
Facsimile: (323) 826-1438
With copies to:
Latham&Watkins LLP
Attention: David B.Rogers, Esq. .
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071-2007
Facsimile: (213) 891-8763
r
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LA\1798686.9
City of Vernon
Attn: City Attorney
4305 Santa Fe Avenue
Vernon, CA 90058
Facsimile: (323) 826-1438
If to Purchaser:
Starwood Energy Infrastructure Fund,L.P.
Attn: Madison Grose
591 West Putnam Avenue
Greenwich, CT 06830
Facsimile: 203-422-7814
With,copies to:
Milbank,Tweed,Hadley& McCloy LLP
Attn: Ed Feo, Esq.
601 South Figueroa Street, 30th Floor
Los Angeles, CA 90017-5735
Facsimile: (213)629-5063
Any Party may from time to time change its address for the purpose of notices to that
Party by a similar.notice specifying a new address, but no such change is effective until it is
actually received by the Party sought to be charged with its contents.
All notices and other communications required or permitted under this Agreement that
are addressed as provided in this Section 13.12 are effective upon delivery.
13.13 Liquidated.Damages.
(a) If the Closing does not occur, whether or not this Agreement shall
have been terminated, in no event shall Purchaser or any of its respective current, former or
future directors, officers, employees, agents, partners, managers, members, stockholders,
assignees, representatives or Af liates (collectively, the "Purchaser Parties') be liable for any
loss or damage suffered for failure of the transactions contemplated hereby to be consummated
or for any breach of this Agreement by Purchaser in excess of$5,925,000, it being agreed that
payment of such amount shall constitute liquidated damages and be the sole and exclusive legal
or equitable remedy available to Seller in the event that the Closing does not occur by reason of
Purchaser's default under this Agreement, and none of Purchaser or any Purchaser Party shall
have any further liability or obligation relating to or 'arising out of this Agreement or the
transactions contemplated hereby. Seller's right to receive payment of the amount set forth
above from Purchaser shall be the sole and exclusive remedy of Seller against any and all of the
Purchaser Parties for the loss suffered as a result of the failure of the transactions contemplated
hereby to be consummated by reason of Purchaser's default under this Agreement or for a breach
or failure to perform hereunder or otherwise that, in any such event, results in the Closing not
occurring, and upon payment of such amount none of the Purchaser Parties shall have any further
46
LA\1798686.9
I
liability or obligation relating to or arising out of this Agreement or the transactions
contemplated hereby. For avoidance of doubt, nothing herein shall be construed as requiring
Purchaser to pay any damages in the event that the Closing shall fail to occur due to the failure of
any condition precedent set forth in Article 3 above to be satisfied for reasons other than
Purchaser's breach or default under this Agreement.
(b) If the Closing does not occur, whether or not this Agreement shall
have been terminated, in no event shall Seller be liable for any loss or damage suffered for
failure of the transactions contemplated hereby to be consummated or for any breach of this
Agreement by Seller in excess of an amount equal to $5,925,000,it being agreed that payment of
such amount shall constitute liquidated damages and be the sole and exclusive legal or equitable
remedy available to Purchaser in the event that the Closing does not occur by reason of Seller's
default under this Agreement, and, upon payment of such amount, Seller shall have no fu ther .
liability or obligation relating to or arising out of this Agreement or the transactions
contemplated hereby. For avoidance of doubt, nothing herein shall be construed as requiring
Seller to pay any damages in the event that the Closing shall fail.to occur due to the failure of
any condition precedent set forth in Article 4 to be satisfied for reasons other than Seller's breach
or default under this Agreement.
(c) The parties to this Agreement acknowledge and agree that (i) the
agreements contained in Sections 13.13(a) and 13.13 are an integral part of the transactions
contemplated by this Agreement, (ii) without these agreements, none of the parties would have
entered into this Agreement and (iii) the damages resulting from termination of this Agreement
without the Closing having occurred by reason of a Party's default under this Agreement are
uncertain and incapable of accurate calculation and the amounts payable pursuant to paragraphs
(a) and (b) of this Section 13.13 are reasonable forecasts of the actual damages which may be
incurred and constitute liquidated damages and not a penalty.
13.14 Time is of the Essence. Time is of the essence for each term of this Agreement.
Without limiting the generality of the foregoing,all times provided for in this Agreement for the
performance of any act shall be strictly construed.
13.15 No Third Party Beneficiaries. Except as may be specifically set forth in this
Agreement, nothing in this Agreement, whether express or implied, is intended to confer any
rights or remedies under or by reason of this Agreement on any Persons other than the Parties
and their respective permitted successors and assigns,nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third Persons to any Party, nor give any
third Persons any right of subrogation or action against any Party.
13.16 No Joint Venture. Nothing contained in this Agreement creates or is intended to create
an association, trust, partnership, or joint venture or impose a trust or partnership duty,
obligation, or liability on or with regard to any Party.
13.17 Construction of Agreement. Ambiguities or uncertainties in the wording of this
Agreement shall not be construed for or against any Party either on account of such Party having
drafted.or provided any language in this Agreement or otherwise, and shall be construed in
accordance with the fair meaning of this Agreement.
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13.18 Conflicts. In the event of any conflicts or inconsistencies between the terms of this
Agreement and the terms of any of the Related Agreements, the terms of this Agreement shall
govern and prevail.
13.19 Waiver of Sovereign Immunity. Seller warrants and covenants that with respect to its
contractual obligations hereunder and performance thereof, it will not claim immunity on the
grounds of sovereignty or similar grounds with respect to itself or its revenues or assets from (a)
suit, (b) jurisdiction or court (including a court located outside the jurisdiction of its
organization), (c) relief by way of injunction, order for specific performance or recovery of
property,(d) attachment of assets,or(e) execution or enforcement of any judgment.
[Remainder of Page Intentionally Left Blank]
48
LA\1798686.9
i
IN WITNESS WHEREOF,the Parties have executed this Agreement as or the date first
above written.
SELLER:
CITY OF VERNON
By:
Name:Eric T.fresch
Title: City Administrator
PURCHASER:
STARWOOD ENERGY INFRASTRUCTURE FUND,L.P.
By:
Name:
Title:
i
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Signature Page to Purchase and Sale Agreement-1
i
i
IN'WITNESS WHEREOF,the Parties have executed this Agreement as o#the date first
above written.
J
SELLER:
I
CITY OF VERNON
I
By: I
Name:Eric T.Fresch
Title: City Administrator
i
PURCHASER: I
STARWOOD ENERGY INFRASTRUCTURE FUND,L.P.,
By SEI MANAGEMENT,L.P.,
Its General Partner I
By SEI MANAGEMENT HOLDINGS,L.L.C., Ir
Its General Partner
By STARWOOD ENERGY GROUP GLOBAL,L.L.C.,
Its General Manager 1
i
By i
Madison Grose,Senior Managing Director
i
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L
i
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f
S'1
I All 798696 9
1,
i,.
The execution of this Agreement by the City of Vernon is hereby affirmed and attested to by:
CITY OF VERNON
By:
me: 14ANLIE
Title:City Clerk
Signature Page to Purchase and Sale Agreement-2
i
t
EXHIBIT 2
NOTICE OF EXTENSION AND AGREEMENT
This NOTICE OF EXTENSION AND AGREEMENT (this "Agreement") is
entered into as of March 31, 2008, by and among the City of Vernon, California, a municipal
corporation and a chartered city duly organized and existing under and by virtue of the
Constitution and laws of the State of California and its Charter (the "City"), and Starwood
Energy Infrastructure Fund, L.P., a limited partnership("Starwood"). The City and Starwood are
referred to herein sometimes individually as a "Party" and collectively as the "Parties."
Capitalized terms used herein and not otherwise defined herein shall have the respective
meanings ascribed to them in the Purchase Agreement.
RECITALS
A. The City owns interests and rights in certain transmission assets, including the Mead
Transmission Interests.
B. On December 13, 2007, the City and Starwood entered into that certain Purchase and
Sale Agreement (the "Purchase Agreement") for the purchase of the City's
Entitlement, right, title, and interest in the Mead Transmission Interests, pursuant to
the terms and conditions set forth in the Purchase Agreement.
C. The City and.Starwood desire to extend a certain termination date as set forth in the
Purchase Agreement and make such other agreements as set forth in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and promises
contained herein and for good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the Parties agree as follows:
AGREEMENT
ARTICLE 1. EXTENSION
1.1 Extension of Closing Date. The Parties hereby agree to replace, and hereby replace,
the reference to "March 31, 2008" set forth in Section 10.1(a) of the Purchase Agreement with
"April 18, 2008."
ARTICLE 2. MISCELLANEOUS
2.1 Reference to Agreement. Any and all other agreements, documents or
instruments now or hereafter executed and./or delivered pursuant to the terms hereof or pursuant
to the terms of the Purchase Agreement are hereby amended so that any reference in such
agreement, document or instrument to the Purchase Agreement, whether direct or indirect, shall
mean a reference to the Purchase Agreement as amended by this Agreement.
2.2 Governing Law. The validity, interpretation and effect of-this Agreement-are -
governed by and shall be construed in accordance with the laws of the State of California
applicable to contracts made and performed in such State and without regard to conflicts of law
LA\1840526.1
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
CITY OF VER N
By: SA
"
Jef Har ` n
Cit tonne
PURCHASER:
STARWOOD ENERGY INFRASTRUCTURE FUND, L.P.,
By SEI MANAGEMENT, L.P.,
Its General Partner
By SEI MANAGEMENT HOLDINGS, L.L.C.,
Its General Partner
By STARWOOD ENERGY GROUP GLOBAL, L.L.C.,
Its General Manager
By
Madison Grose, Senior Managing Director
LA\1840526.1
f
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t
r
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written..
i
T.
CITY OF VERNON
i
By:
Jeff A.Harrison
City Attorney
i
PURCHASER:
STARWOOD ENERGY INFRASTRUCTURE FUND,L..P..,
By SEI MANAGEMENI;L.P..,
Its General Partner
By SEI MANAGEMENT HOLDINGS,L.L..C.., i
Its General Partner
f
By STARWOOD ENERGY GROUP GLOBAL,L..L.C.,,
Its General Manager
By --
Madison Grose, Senior Managing Director
i
LA\1840526 1
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The execution of this Agreement by the City of Vernon is hereby affirmed and attested to by:
CITY OF VERNON
'i
By:
Name:
Title: City Clerk
4
LA\1840526.1
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EXHIBIT 3
SECOND EXTENSION AND AGREEMENT
This SECOND EXTENSION AND AGREEMENT (this "Second Extension") is
entered into as of April 18, 2008, by and between the City of Vernon, California, a municipal
corporation and a chartered city duly organized and existing under and by virtue of the
Constitution and laws of the State of California and its Charter (the "Cily"), and Starwood
Energy Infrastructure Fund, L.P., a Delaware limited partnership ("Starwood"). The City and
Starwood are referred to herein sometimes 'individually as a "piny" and collectively as the
"Parties." Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to them in the Purchase Agreement.
RECITALS
A. The City owns interests and rights in certain transmission assets, including the Mead
Transmission.Interests.
B. On December 13, 2007, the City and Starwood entered into that certain Purchase and
Sale Agreement (as amended by the First Extension, the "Purchase Agreement") for
the purchase of the City's Entitlement, right, title, and interest in the Mead
Transmission Interests, pursuant to the terms and conditions set forth in the Purchase
Agreement.
C. On March 31, 2008, the City and Starwood entered into that certain Notice of
Extension and Agreement (the "First Extension"), pursuant to which the City granted
Starwood an extension of the outside closing date as set forth in the Purchase
Agreement.
D. Starwood has requested an additional extension of the Purchase Agreement in order
to finalize its financing of the transactions contemplated by the Purchase Agreement.
E. The City has made a filing at FERC requesting that its TRR be revised to reflect the
sale of the Mead Transmission Interests upon notification from the City that the
Closing has occurred.
F. As more particularly set forth below, the City and Starwood desire to amend the
Purchase Agreement to extend the outside closing date as set forth in Section 10.1(a)
of the Purchase Agreement and make such other amendments and agreements as set
forth in this Amendment.
NOW, THEREFORE, in consideration of the respective covenants and promises
contained herein and for good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged,the Parties agree as follows:
LA\1848273.6
AGREEMENT
ARTICLE 1. AMENDMENTS AND AGREEMENTS
1.1 Extension of Closing Date. In order to permit Purchaser to finalize its financing in
connection with the transactions contemplated by the,Purchase Agreement, the Parties hereby
agree to extend the outside closing date provided in the Purchase Agreement by replacing
Section 10.1(a) of the Purchase Agreement in its entirety and replacing it with the following:
(a) by Purchaser or Seller, if the Closing has not occurred on or before
5:00 p.m. Pacific Daylight Time on April 23, 2008 (the"Outside Closing
Time")
For avoidance of doubt, nothing in this Second Extension or. the Purchase Agreement gives
Starwood a condition precedent to its obligations to close under the Purchase Agreement that it
shall have obtained financing,
1.2 Closing. Notwithstanding anything in the Purchase Agreement to the contrary, the
Parties hereby agree as follows:
(a) The Parties hereby agree that the amount set forth on the Preliminary
Closing Statement, attached hereto as Annex A, shall be used for purposes of calculating the
Purchase Price Adjustment "as set forth in Section 2.4(b) of the Purchase Agreement. The
Parties hereby waive any and all requirements.for prior written consent as set forth in Section
2.4(b)(2) of the Purchase Agreement.
(b) Purchaser shall deliver the Purchase Price, as adjusted by the Purchase
Price Adjustment, by wire transfer of immediately available funds to the Seller's Account as
listed in Annex B hereto no later than the Outside Closing Time. Any interest accrued on the
Purchase Price by the City for any period prior to the actual transfer of the City's rights to the
Mead Transmission Interests to Starwood shall be credited back to Starwood and set forth on
the Final Closing Statement.
1.3 Due Diligence. The Parties hereby agree that Starwood was provided ample time and
opportunity to conduct due diligence and that any failure by Starwood to complete its diligence
or locate certain diligence materials shall not absolve Starwood of its obligations to close under
the Purchase Agreement or provide Starwood with a basis to seek an additional extension of the
Closing Date.
1.4 Liquidated Damages Upon Failure to Close. Notwithstanding anything to the contrary
in the Purchase Agreement, in the event that the Closing does not occur by the Outside Closing
Time, other than as a result of a failure of a.Closing Condition set forth in Section 3.1 of the
Purchase Agreement, Starwood shall be in breach of the Purchase Agreement and shall owe the
City$5,925,000 in liquidated damages as specified in Section 13.13 of the Purchase Agreement.
2
LA\1848273.6
ARTICLE 2. MISCELLANEOUS
2.1 Reference to Agreement. Any and all other agreements, documents or
instruments now or hereafter executed and/or delivered pursuant to the terms hereof or pursuant
to the terms of the Purchase Agreement are hereby amended so that any reference in such
agreement, document or instrument to the Purchase Agreement, whether direct or indirect, shall
mean a reference to the Purchase Agreement as amended by this Second Extension.
2.2 Governing Law. The validity, interpretation and effect of this Second Extension
are governed by and shall be construed in accordance with the laws of the State of California
applicable to contracts made and performed in such State and without regard to conflicts of law
doctrines, except to the extent that certain matters are preempted by Federal law or are governed
by the law of the jurisdiction of organization of the respective Parties.
2.3 Counterparts. This Second Extension may be executed in one or more
counterparts, each of which is an original, but all of which together constitute one and the same
instrument.
. 2.4 Full Force and Effect. Each Party confirms to the other its obligations under the
Purchase Agreement and confirms that it.is not aware of any material breach or default by the
other. .
2.5 No Obligation for Other Agreements. This Second Extension is intended to be a
part of, and will serve as a valid, written amendment to,the Purchase Agreement as required by
Section 13.3 thereof. Except as otherwise set forth herein, this Second Extension shall not by .
implication or otherwise alter, modify, amend or in any way affect any of the terms, conditions,
obligations, covenants or agreements contained in the Purchase Agreement, all of which are
ratified and affirmed in all respects and shall continue in full force and effect, and this Second
Extension will not operate as an extension or waiver by the Parties of any other condition,
covenant, obligation, right, power or privilege under the Purchase Agreement. This Second .
Extension relates only to the specific matters covered herein, and shall not be considered to
create a course of dealing or to otherwise obligate either Party to execute similar extensions,
amendments or agreements, or grant any waivers under the same or similar circumstances in the
future.
[Signature pages follow]
3
LA\1848273.6
IN WITNESS WHEREOF, the Parties have executed this Second Extension as
of the date first above written. {
CITY OF VERN N
By:
J Ha AA on
C y Attorney
STARWOOD:
STARWOOD ENERGY INFRASTRUCTURE FUND, L.P.,
By SEI MANAGEMENT, L.P.,
Its General Partner
By SEI MANAGEMENT HOLDINGS,L.L.C.,
Its General Partner
By STARWOOD ENERGY GROUP GLOBAL, L.L.C.,
Its General Manager
By
Madison Grose, Senior Managing Director
1
LA\1848273.4
1
IN WITNESS WHEREOF, the Parties have executed this Second Extension as
ofthe date first above written..
i
CITY OF VERNON
i
By:
.JeffA.Harxison
City Attorney -
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PURCHASER: ;
I
STARWOOD ENERGY INFRASTRUCTURE FUND, L..P.,
i
By SEI MANAGEMENT, L.P.., I
Its General Partner
r
,
By SEI MANAGEMENI HOLDINGS, L..L..C.., R
Its General Partner
F
}
By STARWOOD ENERGY GROUP GLOBAL, L..L..C..,
Its General Manager
By_
Vadi. son Grose, Senior Managing'Directox
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LA11848273 6
i
The execution of this Second Extension by the City of Vernon is hereby affirmed and attested to
by:
CITY OF VERNON
By: n`
game:
Title: City Clerk
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a
5
LAU 848273.4
Annex A
Purchase Price Adjustment
Preliminary Closing Statement
Mead Adelanto and Mead Phoenix Transmission Projects
Purchase and Sale Agreement
2.4(b)(1)
Name Section Amount
1. (Add) Capital Expenditures § 2.4(b)(1)(i) $1,384.83
2. (Add)Prepaid Expenses of City § 2.4(b)(1)(ii) $23,691.73
3. (Minus)Revenues Received by City for § 2.4(b)(1)(A) $0
Period After Closing
4. (Minus) Expenses Incurred by Bicent § 2.4(b)(1)(B) $0
for Period Before Closing
5. (Add/Minus) Periodic Charges § 2.4(c) $1,804.26
TOTAL $26,880.82
1 Assumes that the Closing Date is April 21, 2008.
6
LA\1848273.6
Annex B
Seller's Account
ABA Routing#: 021000018
Bank: The Bank of New York
Address: 700 South Flower Street, Ste. 500,Los Angeles, CA
Phone: 213-630-6236
Fax: 213/630-6215
Bank Contact: Aurora Quizon
Account#: GLA 4 111-565;TAS#800452
Account Name: Vernon Light&Power Custody Escrow Account
i
7
LA\1848273.6
EXHIBIT 4
SCHEDULES TO THE
CITY OF VERNON PURCHASE AND SALE AGREEMENT
Schedule M-PE
Permitted Encumbrances
None.
r
1.1-PE-1
Schedule 1.1-TI
Mead Transmission Interests
MEAD-PHOENIX PROJECT
The Mead-Phoenix Project (MPP) is a 1300 MW, 500 kV AC transmission line extending 256-
miles from the Perkins Switchyard near Sun City Arizona to Marketplace Switching Station in
Southern Nevada. The MPP.is utilized to transmit electrical energy between Central Arizona
and Southern Nevada.
The transmission capacity in the MPP varies between the facilities and there are three
components:
(1) The Westwing-Mead Component includes the Perkins to Mead 500 kV transmission line,
Perkins Switchyard, Westwing Interconnection, Westwing Tie Line, Communications System
from Westwing to Mead, Perkins line compensation at Mead and one-third of the Mead 500 kV
yard. Perkins Switchyard contains series capacitor bank, shunt reactors, circuit breakers and
phrase shifting transformers.
(2) The Mead Substation Component includes the Mead 500/230 kV transformer, 230 kV
interconnection and one-third of the Mead 500 kV yard.
(3) The Mead-Marketplace Component includes the Mead to Marketplace 500 kV transmission
line, one-third of the Mead'500 kV yard, Communications Systems Mead to Marketplace, and
Mead line termination at Marketplace. It also includes 50 percent ownership of the Marketplace
Common Facilities, Marketplace SVC, Marketplace to McCullough Tie Line, McCullough
Interconnection,Adelanto SVC and the Adelanto SVC termination.
MEAD-ADELANTO PROJECT
The Mead-Adelanto Project (MAP) is a 1296 MW, 500 kV AC transmission line extending 202-
miles from Marketplace Switching Station in Southern Nevada to the Adelanto Switching Station
in Southern California. It is utilized to deliver electrical energy between Southern Nevada and
Southern California.
The MAP is constructed with series capacitor line compensation of 45 percent at Marketplace.
Marketplace Substation is the common terminal for the Mead-Phoenix and Mead-Adelanto
Projects and includes the Marketplace-McCullough tie line as common facilities. Marketplace
consists of 500 kV switchyard configured as a four-breaker, four-position ring bus with series
capacitors,and shunt compensation for the Marketplace-Adelanto transmission line.
The MAP facilities include two Static Var Compensators approximately 388 megavar each (one
located in Marketplace and the other at Adelanto for network stability synchronization).
1.1-TI-1
The Marketplace-McCullough Tie Line is approximately a one (1) mile transmission line
between Marketplace and McCullough. A 500 kV position is installed at the McCullough
switching station for terminating the Marketplace-McCullough tie line.
The MAP includes two communication paths between Marketplace, Adelanto, McCullough, and
Mead for line protection,telemetry, and voice channel. -
1.1-TI-2
i ,
Schedule 2.1(a)
Assigned Agreements
1. Mead-Phoenix Joint Ownership Agreement and Definitions,dated August 4, 1992
2. Mead-Phoenix Fiscal Agency Agreement,dated August 4, 1992
3. Mead-Phoenix Operation Agreement,dated August 4, 1992
4. Mead-Phoenix Project Land Rights Agreement,dated August 4, 1992
5. Mead-Phoenix Project Mead Substation Interconnection Agreement,dated August 4, 1992
6. Mead-Phoenix Project Mead-Westwing Transmission Line,Westwing Substation
Interconnection Agreement(DWP No. 10408),dated August 4, 1992
7. Mead-Adelanto Joint Ownership Agreement,dated August 4, 1992
8. Mead-Adelanto Fiscal Agency Agreement,dated August 4, 1992
9. Mead-Adelanto Operation Agreement,dated August 4, 1992
10. Mead-Adelanto Project,Marketplace-Adelanto Transmission Line,Adelanto Switching
Station Interconnection Agreement,dated August 4, 1992
11. Marketplace Substation Participation Agreement(DWP No. 10330),dated August 4, 1992
12. Marketplace-McCullough Interconnection Agreement,dated May 26, 1998
13. Marketplace Static Var Compensator Adelanto Switching Station Interconnection
Agreement,dated August 18, 1992
2.1(a)-1
r
Schedule 2.20)
Rights to Recovery
None.
t
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2.2a)-1
Schedule 2.3(a)
Other Assumed Liabilities
None.
2.3(a)-1
Schedule 3.1(a)
Purchaser(*)Required Governmental Approvals
1. Authorization by the FERC pursuant to Section 203 of the Federal Power Act of
Purchaser's acquisition of the Mead Transmission Interests.
(*) References herein and in Schedule 3.1(b)to"Purchaser"include,individually or
collectively,Purchaser and its applicable Affiliates.
t.
3.1(a)-1
Schedule 3.1(b)
Required Consents
1.Execution by Purchaser and CAISO of a Transmission Control Agreement(regardless of
whether or not it has been approved by the FERC)
2.Application by Purchaser to CAISO to become a Participating Transmission Owner and
approval by CAISO of same
3.1(b)-1
I
Schedule.4.1(c)
Seller Required Governmental Approvals
None.
Dock US1:5106199v2 4.1(c)-1
Schedule 5.1(c)
Violations and Required Filings
None.
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Schedule 5.1(d)
Seller Required Other.Consents,Approvals and Notices
1. All notices set forth in Schedule 5.3(c)
2. Seller to obtain consent for assignment from CAISO pursuant to Section 4.4 of that certain
Transmission Control Agreement,dated August 8,2006
{
{
5.1(d)-1
Schedule 5.1(e)
Financial Statements
[Separately provided]
CITY OF VERNON,CALIFORNIA
Annual Financial Report
Fiscal Year Ended June 30,2006
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CITY OF VERNON
For the Fiscal Year Ended June 30,2006
Table of Contents
Page(s)
FINANCIAL SECTION:
IndependentAuditor's Report..................................................................................................................1
Management's Discussion and Analysis(Required Supplementary Information-Unaudited)....................2
Basic Financial Statements:
Government-wide Financial Statements:
Statementof Net Assets......................................................................................................... 13
Statementof Activities.................I........................................................................................ 14
Fund Financial Statements:
Governmental Funds:
BalanceSheet...................... . ............................................................................................15
Reconciliation of the Governmental Funds Balance Sheet
to the Government-wide Statement of Net Assets-Govemmental Activities.....................16
Statement of Revenues,Expenditures,and Changes in Fund Bal ances................................ 17
Reconciliation of the Statement of Revenues,Expenditures,and Changes in
Fund Balances to the Government-wide Statement of Activities-
GovernmentalActivities..................................................................................................18
Proprietary Funds:
Statement of Fund Net Assets(Deficit).............................................................................. 19
Statement of Revenues,Expenses,and Changes in Fund Net Assets(Deficit).....................20
Statementof Cash Flows....................................................................................................21
Notes to the Basic Financial Statements...............................................................................22-58
Required Supplementary Information(Other than Management's Discussion and Analysis-Unaudited):`
General Fund Budgetary Comparison Schedule..........., ..................... ......... . ................59
Notes to General Fund Budgetary Comparison Schedule..........................:................................60
1
et T,' 3000 S Street Suite 300
t~ � Sacramento.CA 95016
416.920.460D 1
�..� 2175 N.California Boulevard,Suite 645
Walnut Creek,CA 945%
97.5.774.0190
MACIAS GINI & 01\i^QNNEI_I_uP 515 S.Figueroa Street.Suite 32S
CERTIFIED PUBLIC ACCOUNTANTS S MANAGEMENT CON5ULTANT5 - Los Angeles,CA 9DO71
21 3.2114.6406
402 West Broadway,.Suite 400
San Dlego,CA 92101
619.573.1112
INDEPENDENT AUDITOR'S REPORT
City Council
City of Vernon,California
We have audited the accompanying financial statements of the governmental activities,the business-type
activities, each major fund, and the aggregate remaining fund information of the City of Vernon,
California(City)as of and for the fiscal year ended June 30,2006,which collectively comprise the City's
basic financial statements as listed in the table of contents. These financial statements are the
responsibility of the City's management. Our responsibility is to express opinions on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.An audit includes consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's
internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements,assessing the accounting principles used and the significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinions.
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In our opinion, the financial statements referred to above present fairly, in all material respects, the
respective financial position of the governmental activities,the business-type activities,each major fund,
and the aggregate remaining fund information of the City as of June 30,2006,and the respective changes
in financial position and,where applicable,cash flows thereof for the fiscal year then ended in conformity
with accounting principles generally accepted in the United States of America.
The management's discussion and analysis and budgetary comparison information on pages 3 through 15
and 61 through 62, are not a required part of the basic financial statements but are supplementary
information required by accounting principles generally accepted in the United States of America. We
have applied certain limited procedures, which consisted principally of inquiries of management
regarding the methods of measurement and presentation of the required supplementary information.
However,we did not audit the information and express no opinion on it.
Certified Public Accountants
Los Angeles,California
December 15,2006
.www.mgocpa.com _ J_ ��� An Independent Member of the BDO Seidman Alllonce
CITY OF VERNON,CALIFORNIA
Management's Discussion and Analysis
For the Fiscal Year Ended June 30,2006
(Unaudited)
As management of the City of Vernon ("the City"), we offer readers of the financial statements this
narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30,
2006.
Financial Highlights
• The assets of the City exceeded its liabilities at the close of the most recent fiscal year by
$308,808,855(net assets). Of this amount,$61,260,285(unrestricted net assets)may be used to meet
the City's ongoing obligations to citizens and creditors.
• The City's total net assets decreased by $26,823,957. This decrease is attributable to the
governmental activities generating'a decrease in net assets before transfers of$12,300,323 and the
business-type activities generating a decrease in net assets before transfers of$14,523,634.
• As of the close of the current fiscal year, the City's governmental funds reported combined ending
fund balances of $59,741,236, a decrease of $4,554,758 in comparison with the prior year.
Approximately 21%of the governmental funds balances,$12,808,623,are available for spending at
the City's discretion(unreserved fund balances).
Overview of the Financial Statements
This .discussion and analysis are intended to serve as an introduction to the City's basic financial
statements. The City's basic financial statements comprise three components: 1) government-wide
financial statements,2)fund financial statements,and 3)notes to the basic financial statements.
Government-wide financial statements. The government-wide financial statements are designed to
provide readers with a broad overview of the City's finances, in a manner similar to a private-sector
business.
The statement of net assets presents information on all of the City's assets and liabilities, with the
difference between the two reported as net assets. Over time,increases or decreases in net assets may
serve as a useful indicator of whether the financial position of the City is improving or deteriorating.
The statement of activities presents information showing how the City's net assets changed during the
most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise
to the change occurs, regardless of the liming of related Bash flows. Thus,revenues and expenses are
reported in this statement for some items that will only result in cash flows in future fiscal periods(e.g.,
uncollected taxes and earned but unused vacation leave).
Both of the government-wide financial statements distinguish functions of the City that are principally
supported by taxes and intergovernmental revenues(governmental activities)from other functions that are
intended to recover all or a significant portion of their costs through user fees and charges(business-type
activities): The governmental activities of the City include general government, public safety, public
works, and health services. The business-type activities of the City include the Light and Power
Department,Gas Department and Water Department.
The government-wide financial statements can be found on pages 13-14 of this report.
Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over
resources that have been segregated for specific activities or objectives. The City, like other state and
-2-
local governments,uses fund accounting to ensure and demonstrate compliance with finance-related legal
requirements. All of the funds of the City can be divided into two categories: governmental funds and
proprietary funds.
Governmental funds. Governmental funds are used to account for essentially the same functions reported
as governmental activities in the government-wide financial statements. However, unlike the .
government-wide-financial statements, governmental fund financial statements focus on near-term
inflows and ouy?ows of spendable resources, as well as on balances of spendable resources available at
the end of the fiscal year. Such information may be useful in evaluating a government's near-term
financing requirements.
Because the focus of governmental funds is narrower than that of the government-wide financial
statements, it is useful to compare the information presented for governmental funds with similar
information presented for governmental activities in the government-wide financial statements. By doing
so, readers may better understand the long-term impact of the government's near-term financing
decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues,
expenditures,and changes in fund balances provide a reconciliation to facilitate this comparison between
governmental funds and governmental activities.
The City adopts an annual appropriated budget for its General Fund. A budgetary comparison schedule
has been provided for the general fund to demonstrate compliance with this budget.
The basic governmental funds financial statements can be found on pages 15-18 of this report.
Proprietary funds. The City maintains two different types of proprietary funds, Enterprise funds are
used to report the same functions presented as business-type activities in the government-wide financial
statements. The City uses enterprise funds to account for its Light and Power Department, Water
Department, Gas Department and Fiber Optic Department. Internal service funds are an accounting
device used to accumulate and allocate costs internally among the City's various functions. The City uses
internal service funds to account for its fleet of vehicles, insurance, and retirement, Because these
services predominantly benefit governmental rather than business-type functions,they have been included
within governmental activities in the govermnent-wide financial statements.
Proprietary funds provide the same type of information as the government-wide financial statements,only
in more detail. The proprietary fund financial statements provide separate information for the Light and
Power Fund and the Gas Fund, which are,considered to be major funds of the City. Conversely,the
internal service funds are combined into a single,aggregated presentation in the proprietary fund financial
statements.
The basic proprietary fund financial statements can be found on pages 19-21 of this report.
Government-wide Financial Analysis
As noted earlier,net assets may serve over time as a useful indicator of a government's financial position.
In the case of the City,assets exceeded liabilities by$308,808,855 at the close of the most recent fiscal
year.
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City's Net Assets
At the end of the current fiscal year,the City is able to report positive balances in all categories of net
assets, both for the government as a whole,as well as for its separate governmental and business-type
activities.
The category of the City's net assets with the largest balance totaling $213,975,958 (69%) represents
resources that are invested in capital assets,net of related debt.
The second largest category of net assets,$61,260,285(20%)represents unrestricted net assets that can be
used to meet the City's ongoing obligations to its citizens and creditors.
The last remaining category of net assets, totaling $33,572,612 (110/6) represents the City's restricted
assets,which is restricted for special purposes and payment of long-term debt.
Changes in Net Assets
Governmental activities' net assets decreased by $33,745,927 and business-type activities' net assets
increased by$6,921,970 for a net decrease of$26,823,957 for the City. The decrease in the governmental
activities was caused by the governmental activities reporting a$12,300,323 decrease in net asset before
transfers and a $21,445,604 operating transfer out to the business-type activities, The increase in the
business-type activities was caused by the $21,445,604 of operating transfer in from the governmental
activities less the$14,523,634 of decrease in net asset reported by the business-type activities.
City of Vernon
Net Assets
June 30,2006 and 2005
Govemmentnl Activities Business- Activities Totals
2006 2005 2006 2005 2006 2005
Assets:
Current and other assets S 51,354,912 S 81,468,279 $ 561,097,165 S 123,914,496 S 612,452,077 $ 205,382,775
Restricted assets 40,015,669 388,508 47,550,737 73,744,545 87,566,406 74,133,053
Capital assets 89,347 037 74,614,172 316,293,591 282,137,513 405,636,628 356,751,685
Total assets 180,713,618 156,470,959 924,941,493 479,796,554 1,105 655,111 636,267 513
Liabilities
Current liabilities 13,378,105 7,244,297 29,528,656 23,916,473 42,906,761 31,160,770
Long-term liabilities 55,183416 3,328,638 698,756,079 266,145,293 753,939,495 269,473,931
Total liabilities• 68,561,521 10,572,935 728,284 735 290061 766 796,846,256 300,634,701
Net Assets:
Invested in capital -
assets,net of related debt 89,889,751 74,614,172 124,086,207 114,353,358 213,975,958 188,967,530
Restricted 3,296,917 338,664 30,275,695 42,935,885 33,572,612 43,274,549
Unrestricted 18,965,429 70,945,188 42,294,856 32,445,545 61,260,285 103,390 733
Total net assets S 112,152,097 S 145,898,024 S 196,656,758 S _189.734,7881 S 308,808,855 S 335,632,812
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City of Vernon
Changes in Net Assets
Fiscal Year Ended June 30,2006 and 2005
Governmental Activities Business-type Activities Totals
2006 2005 2006 2005 2006 2005
Revenues.,
Program Revenues:
Charges for services $ 10,850,093 $ 10,691,792 $ 175,611,547 S 116,68.1,653 $ 186,461,640 $ 127,373,445
Operating grants and
contributions 290,414 192,335 290,414 192,335
General Revenues:
'taxes 17,021,021 17,093,349 17,021,021 17,093,349
State allocations 4,685,752 4,835,991 4,685,752 4,835,991
Investment income 2,624,478 902,085 2,254,436 4,771,013 4,878,914 5,673,098
Gain on sale of property 43,985 1,659,870 43,985 1,659,870
01herrcvcnues 406,334 738,463 406,334 738,463
Total rcvcnucs 35,922,077 36,113,885 177,865,983 121,452,666 213,788,060 157,566,551
Program Expenses
Governmental activities
General government 19,944,193 13,667,855 19,944,193 13,667,855
Public safety' f9,613,951 20,240,186 19,613,951 20,240,186
Public works 5,542,660 4,857,135 5,542,660 4,857,135
Health services 1,397,083 1,311,479 1,397,083 1,311,479
Interest on long-term debt 1,724,513 373,879 1,724,513 373,879
Business-type activities
Light and Power - 149,424,972 97,683,923 149,424,972 97,683,923
Gas 36,953,697 36,953,697
Other 6,010,948 5,845,618 6,010,949 5,845,618
Total•expenscs 48,222,400 40,450,534 192,389,617 103,529,541 240;612,017 143,980,075
Increase(decrease)in net
assets before transfers (12,300,323) (4,336,649) (14,523,634) 17,923,125 (26,823,957) 13,586,476
Transfers . (21,445,604) 72,515,570 21,445,604 (72;515,570)
Increase(decrease)in net assets (33,745,927) 68,178,921 6,921,970 (54,592,445) (26,823,957) 13,586,476
Netassets-beginning ofycar 145,898,024 77,719,103 189,734,788 244,327,233 335,632,812 322,046,336
Net assets-end ofycar $. 112,152,097 $ 145,898,024 1$ 196,656,758 $ 189,734,788 S 308,808,855 $ 335,632,812
Governmental activities. Governmental activities decreased the City's net assets by$33,745,927.This is
a decrease of$101,924,848 from the prior year. The key reasons for this decrease and change in net
assets are as follows:
• In the prior year,the Light and Power Fund transferred$66,846,257 of its 2004 Taxable Series D
Bond proceeds to the General Fund to reimburse the General Fund for costs incurred in
connection with the City's Electric System since inception(1934).
• In the current year, the governmental funds transferred a net of$21,445,604 to the enterprise
funds. The main reason for this transfer was to complete the construction of the Malburg
Generating Station and to upgrade the City's electric transmission and distribution systems.
• In the current year, decrease in net assets before transfers increased $7,963,674 from the prior
year. The main reasons for this increase are as follows:
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• r
o In the current year, program expenses of the general government increased $6,276,338
from the prior year. The key components of the increases were as follows:
• Administration costs increased $1,050,749 from the prior year due to an
administrative reorganization,legal and consultant fees and the installation of 9-
1 I security measures,including personnel,•at the City's new power plant facility.
■ Finance costs increased $1,058,715 from the prior year due to the additional
consulting cost related with the implementation of a new finance system.
■ Insurance costs increased$956,965 from the prior year due to additional property
being insured.
• Legal costs increased$1,001,828 from the prior year due to various legal matters
of the City.
■ Personnel costs related to the City Clerk, Elections, Treasurer, and Personnel
increased in total$1,068,848 From the prior year due management reorganization
and various legal matters of the City.
• The City earned a higher return on its investments as compared to the prior year due to additional
debt proceeds invested in the current year. However,this higher return was offset with the higher
interest expense associated with the debt.
Expenses and Program Revenues=Governmental Activities
For the Fiscal Years Ended June 30,2006 and 2005
$24,000,000 , ; t f
$20,000,000 l ._� d 1 °t
x 02006 Program
$16,000,000
Revenues
®2006 Expenses
$12,000,000 4 `
�s, a . : ❑2005 Program
$8,000,000 Revenues
n
fa. � 'f�{ ❑2005 Expenses
$4,000,000 a �;
•€ � v,.
$0
0� +t0 1`p� ww`` IQ
5V
2,\ Q
\Gofer Q �\
J J 1ti
�5
sec
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i
Revenues by Source-Governmental Activities
For the Fiscal Years Ended June 30,2006and 2005
2006 Governmental Activities Revenues
Other Taxes 8 Revenues
Franchise Taxes 13%
4%
x i
Parcel Taxes
19%
¢ Charges for Services
31% -
s
Sales and Use Taxes
13% °
Property Taxes
20%
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2005 Governmental Activities Revenues
_ Transfers
57%
Charges for Services
10%
Olher Taxes d Revenues Properly Taxes
4% 7%
Franchise Taxes Sales and Use Taxes
1% - 4%
Parcel Taxes
7%
Business-type activities.
j Business-type activities decreased the City's net assets by$14,523,634 before transfers. The key reasons
for this decrease and change in net assets are as follows:
• Light and Power's operating revenue was$132,565,018 for the current year which is$22,080,123
higher than the previous year. This increase in revenue was mainly due to the Malburg
Generating Station becoming operational on October 17,2005. However, the cost of sales was
$127,551,769 which is$38,959,701 higher than the previous year. The increase in cost of sales
was mainly due to the unfavorable cost of fuel and wholesale energy market.
• Light and Power's depreciation expense was$7,203,894 for the current year which is$2,972,874
higher than the previous year. This increase was due to the Malburg Generating Station
becoming operational on October 17,2005.
• Light and Power's interest expense was $9,179,326 for the current year which is $7,868,491
higher than the previous year. The main reason for this increase is that the interest expense
related to the Light and Power 2004 Taxable Series A,Series B,and Series C Bonds are no longer
being capitalized since October 17,2005 when Malburg Generating Station became operational.
• Light and Power's net legal settlement loss was$5,257,580 for the current year. In July 2006,
Light and Power settled a dispute over wholesale power purchase contracts with Mirant Americas
Energy Marketing, LP for incurring a loss of$15,000,000, and in November 2006, Light and
Power settled a dispute over contract obligations with its former electric distribution system
maintenance provider,Resource Management International,Inc:,for a gain of$7,400,000.
• The Gas Fund became operational in the current year with its main customer being the Light and
I Power Fund. The Gas Fund generated operating revenue of$36,509,697 with a cost of sales of
$36,671,275.Services were provided primarily to the Light&Power fund.
z
-8-
I..
I._
Expenses and Program Revenues—Business-type Activities
For the Fiscal Years Ended June 30,2006 and 2005
$160,00D,000
$140,000.000 ,r a: �v3ta ra
$120,000,000 zr! F
192006 Program Revenues
$1D0,000,000 ®2006 Expenses
$80,000,000 02005 Program Revenues
$60,000,000 02005 Expenses
$40,000,ODO
$20,000,000 3
$0 Piz
Light and Gas Other
Power.
Revenues by Source—Business-type Activities
For the Fiscal Years Ended June 30,2006 and 2005
2006 Business-type Activities Revenues 2005 Business-type Activities Revenues
Investment Investment
Earnings Earnings
1% 4%
pd
Program Program
Revvm&s Revsmwas
99% 96%
Financial Analysis of the Governmental Funds
As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-
related legal requirements.
Governmental funds. The focus of the City's governmental funds is to provide information on near-term
inflows,outflows,and balances of spendable resources. Such information is useful in assessing the City's
financing requirements. In particular, unreserved fund balance may serve as a useful measure of a
government's net resources available for spending at the end of the fiscal year.
9-
At of the end of the current fiscal year, the City's governmental funds reported combined ending fund
balances of$59,741,236, a decrease of$4,554,758 in comparison with the prior year. Approximately
21%of total fund balance amount,$12,808,623,constitutes unreserved fund balance,which is available .
for spending at the City's discretion. The remainder of fund balance,$46,932,613,is reserved to indicate
that it'is not available for new spending because it has already been committed 1)to liquidate contracts
and purchase orders of the current period($1,812,002),2)advances and loans receivable in the event of a
default by.other funds($4,975,646),3)to be used for debt service($2,984,715),4)to be used for special
purpose($36,007,050),and 5)for a.variety of other purposes($1,153,200).
The General Fund is the operating fund of the City. At the end of the current fiscal year, the total fund
balance was$20,960,762 of which$14,019,385(67%)is unreserved.
Proprietary funds. The City's proprietary funds provide the same type of information found in the
government-wide financial statements,but in more detail.
Unrestricted net assets for the Light and Power Fund at the end of the year amounted to$69,763,390.
Unrestricted net assets of the Gas Fund at the end of the year amounted to a deficit of$27,725,222.
Unrestricted net assets of the non-major enterprise funds(Water and Fiber Optic Funds)amounted to a
deficit of$477,760. This deficit balance in unrestricted net assets for the Gas Fund is primarily due to the
Gas Fund heavily invested in capital assets for which it has not yet recovered the cost of capital invested.
The natural gas lines are currently operational and the Gas Fund expects to eliminate this deficit balance
through increased revenues from customers on future gas sales,including the Light&Power fund.
Total increase(decrease) in net assets for the Light and Power Fund, Gas Fund, and the non-major
enterprise funds was$7,027,023,($444,000), and$338,947,respectively. Other factors concerning the
finances of these funds have already been addressed in the discussion of the City's business-type
activities.
Governmental Funds Budgetary Highlights
For the current year,the City's original and final budget for general fund expenditures was$46,456,421.
The General Fund's total variance between the final budgeted amount and actual amount was$6,530,042.
The key reason for this variance was excess expenditures over appropriations for capital outlay
expenditures of$7,274,739 incurred by the City in its current industrial development programs. The
excess expenditures over appropriations in the general government were $6,338,061.. However, these
excess expenditures over appropriations were offset by the under expenditures of$3,615,057 in public
safety and$3;205,155 in public works.
Capital Asset and Debt Administration
Capital assets. The City's investment in capital assets for its governmental and business-type activities
as of June 30, 2006, amounts to $405,636,628 (net of accumulated depreciation). This investment in
capital assets includes land, buildings, utilities system improvements,machinery and equipment, and
infrastructure such as roads. The total increase in the City's investment in capital assets for the current
fiscal year was$48,884,943(net of depreciation).
Major capital asset events during the current fiscal year included the following:
• Construction on the Malburg Generating Station and City's electric system;construction in progress
costs for the fiscal year were $17,836,584. On October 17, 2005, the Malburg Generating Station
10-
became operational and its entire construction cost of 1208,352,126 was reclassified from
construction in progress to a utility plant in service.
Construction in progress costs related to a variety of construction projects were$36,339,669.
• In the current year,the Redevelopment Agency Fund has elected to reclassify$8,401;673 of its land
to land held for resale.
• As of June 30,2006,there were no significant construction commitments outstanding.'
Additional information on the City's capital.assets can be found in Note 5 on pages 35-37 of this report.
Outstanding Debt
During the fiscal year 2006,the City issued a total of$480,265,000 in long-term obligations consisting of
the following:
• $49,420,000 Redevelopment Agency of the City of Vernon Industrial Redevelopment Project Tax
Allocation Bonds,2005 Series
• $200,000,000 Vernon Gas Project Variable Rate Revenue Bonds,2006 Series A
$115,440,000 Vernon Gas Project Variable Rate Revenue Bonds,2006 Series B,and
• $115,405,000 Vernon Gas Project Variable Rate Revenue Bonds,2006 Series C
1 '
The Industrial Redevelopment Project Tax Allocation Bonds,Series 2005 were issued to provide funds to
(i) finance various redevelopment projects in or benefiting the Agency's Industrial Redevelopment
Project area, (ii) fund the reserve requirement for the Series 2005 Bonds, and (iii) pay the costs of
issuance related to the Series 2005 Bonds.
On April 1,2006,the City and the RDA created the Vernon Natural Gas Financing Authority(Authority)
pursuant to the Joint Powers Agreement,for the express purpose of undertaking projects and programs
that promote economic development within the City. Such projects and programs include assisting the
City in procuring natural gas for use as fuel for electric generating units that are part of the City's Electric
System,which is accounted for in the City's Light and Power fund. During the year ended June 30,2006,
the Authority issued $430,845,000 in variable rate bonds and subsequently purchased natural gas in
accordance with the Natural Gas Agreement between the Authority and the City. As a result of this
financing arrangement,the debt and related asset(prepaid natural gas)associated with the Authority have
been blended with the City's Light and Power fund for financial reporting purposes.
Bonds outstanding at June 30,2006 and issued in the prior year consist of$90,150,000,2004 Series A,
$83,575,000, 2004 Series B, $39,875,000, 2004 Series C, and $61,825,000, 2004 Series D, Electric
System Revenue Bonds. The 2004 Bonds were issued to provide funds (i) to refund $162,610,000 of
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;(iii)to finance the reimbursement to the City of certain costs incurred in connection
with the City's electric system facilities;(iv)to fund a deposit to the Debt Service Reserve Fund;and(v)
to pay the costs of issuance of the 2004 Bonds.
As of June 30,2006,all bonds issued by the City,Vernon Redevelopment Agency, and Authority had a
rating of"Aaa"by Moody's.
Additional information on the City's long-term debt can be found in Notes 6 and 7 on pages 38-50 of this
report.
-11 -
I
Economic Factors and Next Year's Budgets and Rates
These factors were considered in preparing the City's budget for the 2007 fiscal year.
• The unemployment rate for the City and adjacent communities is currently 2.2%.This compares
favorably to the state's average unemployment rate of 4.9%and the national average rate of 4.6%.
• The occupancy rate of the City's central business district has remained at 98% for the current
year.
• Inflationary trends in the region compare favorably to national indices.
Requests for Information
This financial report is designed to provide a general overview of the City's finances for all those with an
interest in the City's finances. Questions concerning any of the information provided in this report of
requests for additional financial information should be addressed to the Office of.the Finance Director,
4305 Santa Fe Avenue,Vernon,California 90058.
- 12_
CITY OF VERNON,CALIFORNIA
Statement of Nei Assets
June 30,2006
Governmental Business-type
Activities Activities Total
ASSETS:
Cash and investments S 55,722,859 S 50,806,818 $ 106,529,677
Receivables,net ofallowancesof$1,400,000 4,317,781;: -' 13,852,228 18,170,009
Legal settlement receivable - 7,400,000 7,400,000
Accrued unbilled revenue _ - 7,737,303 7,737,303
Accrued interest receivable 226,988 1,431,950 1,658,938
Inventories 773,684 81,480 855,164
Internal balances (21,2)2,306) 21,212,306 -
Prepaid natural gas 423,374,475 423,374,475
Deposits and prepaid expenses 672,815 471,698 1,144,513
Restricted cash and investments - - 40,015,669 47,550,737 87,566,406
Note receivable - 4,113,951 4,113,951
Bond issuance costs 2,451,418 13,836,974 16,288,392
Other assets - 16,777,982 16,777,982 ('-
Land held for resale 8,401,673 - 8,401,673
Capital assets:
Nondepreciable 65,422,758 16,743,478 82,166,236
Depreciable,net 23,920,279 299,550,113 323,470,392
Total assets 180,713,618 924,941,493 1,105,655,111
LIABILITIES: -
Accounts payable 6,696,563 14,048,501 20,745,064
_Accrued wages and benefits 1,397,177 283,574 1,680,751
Customer deposits and funds held for others 261,993 776,754 1,038,747
Unearned revenue 932,844 - 932,844
Long-term liabilities:
Due within one year.
Legal settlement payable 9,666,667 9,66607
Bonds payable,net 44,345 3,567,547 3,611,892
Bond interest 663,800 985,445 1,649,245
Claims payable - 2,452,858 - 2,452,858
Cornpnwirdabsences _ 928,525 200;168 ),)28,693
Due in more than one year:
Legal settlement payable - 5,333,333 5,333,333
Bonds payable,net 50,277,701 693,422,746 743,700,447
Claims payable 4,905,715 4,905,715
Total liabilities 68,561,521 728,284,735. 796,846,256.
NET ASSETS:
Invested in capital assets,net of related debt 81,488,078 124,086,207 205,574,285
Restricted for.
GraoD 3)2,1D2 - 312,2172
Alternative energy - - 16,532,856 16,532,856
Debt service 2,984,715 13,742,839 16,727,554
Unrestricted 27,367,102 42,294,856 69,661,958
Total net assets S 112,152,097 S 196,656,758 $ 308,808,855
See accompanying notes to the basic financial statements.
13-
i
i.
CITY OF VERNON,CALIFORNIA
Sfaternent of Activities
For the Fiscal Year Ended June 30,2006
Net(Expenses)Revenues and
Program Revenues Change in Net Assets
Operating Business.
Charges for Grants and Governmental type
Expenses - Services Contributions Activities Activities Total
FUNCTION/PROGRAM ACTIVITIES:
Governmental activities:
General government S 19.944,193 S 2,450,172 S 290,414 S (17,203,607) S S (17,203,607)
Public safety 19,613.951 5,008,884 - (14,605,067) (14,605,067)
Publicworks 5,542,660 2,064,894 - (3,477,766) - (3,477,766)
Health services 1,397,083 1,326,143 - (70,940) - (70,940)
Interest on long-term debt 1,724,513 (1,724,513) (1,724,513)
Total governmental activities 48,222,400 101850,093 290,414 (37,081,893) (37,081,893)
Business-typo activities:
Light and power 149,424,972. 132,565,018 - (16,859,954) (16,859,954)
Gas 36,953,697 36,509,697 - - (444,000) (444,000)
Other 6,010,948 6,536,832 525,884 525,884
Total business-typo activities 192,389,617 175,611,547 - (16,778,070) (16,778,070)
Total S 240,612,017 S 18,461,640 S 290,414 (37,081,893) (16,778,070) (53,859,963)
- General Revenues:
Property taxes 7,270,383 - 7,270,383
Parcel=as 7,001,828 - 7,001,828
Franchise taxes 1,479,619 - - 1,479,619
Business license taxes 1,159,618 - 1,159,618
Other license taxes _ 109,573 - - 109,573
Invcstmant income 2,631,641 4,128,341 6.759,982
Net decrease in fair value of investments (7,163) _ (1,873,905) (1-,881,068)
State contribution-sales and use taxes 4,685,752 - 4,685,752
Gain on sale of property - 43,985 - 43,985
Other revenues 406,334 - - 406,374
Transfers (21,445,604) - 21,445,604
Total general revenues and transfers 3,335,966 23,700,040 27,036,006
Change in net assets (33.745,927) 6,921,970 (26,823,957)
NET ASSETS,BEGINNING OF YEAR 145,898,024 189,734,788 335,632,812
NET ASSETS,END OF YEAR S 112,152,097 S 196,656,758 S 308,808,855
Sea accompanying notes to tho basic financial statements.. -
14-
CITY OF VERNON,CALIFORNIA
Balance Sheet
Governmental Funds
June 30,2006
Redevelopment Other. Total
General Agency Governmental Governmental
Fund Fund Funds Funds
ASSETS:
Cash and investments $ 27,136,100 $ 521,925 $ 17,605,525 $ 45,263,550
Receivables 1,424,205 889,126 2,004,450 4,317,781
Accrued interest receivable 9,129 217,859 - 226,988
Advances to other funds 4,975,646 - 4,975,646
Inventories 773,684 773,684
Restricted cash and investments 360,104 39,655,565 40,015,669
Other assets 115,815 557,000 672,815
Land held for resale - 8,401,673 - 8,401,673
Total assets $ 34,794,683 $ 50,243,148 $ 19,609,975 $ 104,647,806
LIABILITIES AND FUND BALANCES:
Liabilities:
Accounts payable $ 4,715,489 $ 1,071,149 $ 836,151 $ 6,622,789
Accrued wages and benefits 1,391,554 268 5,355 1,397,177
Advances from other funds - 16,860 19,739,433 19,756,293
Due to other funds 6,314,779 8,665 34,100 6,357,544
Customer deposits and funds held for others 261,993 - - 261,993
Deferred revenue 1,150,106 8,401,673 958,995 10,510,774
Total liabilities 13,833,921 9,498,615 21,574,034 44,906,570
Fund balances:
Reserved for:
Federal forfeiture funds 312,202 312,202
Advances to other funds 4,975,646 4,975,646
Inventories 773,684 - 773,684
Encumbrances 812,531 806,742 192,729 1,812,002
Employee loans receivable 67,314 - - 67,314
Debt service - 2,984,715 29984,715
Redevelopment projects 36,007,050 36,007,050
Unreserved 14,019,385 946,026 - f4,965,411
Unreserved,reported in nonmajor:
Special revenue funds - - 15,528,565 15,528,565
Capital projects funds - - (17,685,353) (17,685,353)
Total fund balances 20,960,762 40,744,533 (1,964,059) 59,741,236
Total liabilities and fund balances $ 34,794,683 $ 50,243,148 $ 19,609,975 $ 104,647,806
See accompanying notes to the basic financial statements.
•15-
CITY OF VERNON,CALIFORNIA
Reconciliation of the Governmental Funds Balance Sheet to
Statement of Net Assets-Governmental Activities
June 30,2006
Fund balances-total governmental funds(page 15) $ 59,741,236
Amounts reported for governmental activities in the statement of net assets are different because:
Capital assets used in governmental activities are not financial resources and therefore are not reported in the
governmental funds. 89,343,037
Because the focus of governmental funds is on short-term financing,some assets will not be available to pay for
current period expenditures.Those assets are offset by deferred revenue in the governmental funds. 8,401,673
Other assets used in governmental activities do not consume current financial resources and therefore are not
reported in the governmental fund.
Unamortized bond issuance costs 2,451,418
Compensated absences are not due and payable in the current period and therefore,are not reported in the funds. (928,525)
Internal service funds are used by management to charge the costs of employee benefits for health insurance,
workers compensation, etc., to individual funds. The assets and liabilities of these funds are included in
governmental activities in the statement,of net assets
2,952,847
Long-term liabilities are not due and payable in the current period and therefore are not reported in the
governmental fund.
Bonds payable (49,420,000)
Bond interest payable (663,800)
Unamortized bond premium (902,046)
The City recognized uncollected property taxes that were earned but unavailable as of June 30,2006.
1,176,257
Net assets of governmental activities(page 13) $ 1 12,152,097
See accompanying notes to the basic financial statements.
-16-
i.
CITY OF VERNON,CALIFORNIA
Statement of Revenues,Expenditures and Changes in Fund Balances
Governmental Funds
For the Fiscal Year Ended June 30,2006
Redevelopment Other Total'
General Agency Governmental Governmental
Fund Fund Funds Funds
REVENUES:
Taxes $ 8,943,668 $ 6,469,211 $ 6,509,334 $ 21,922,213
Special assessments 736,221 - - 736,221
Licenses and permits 1,161,188 518,260 1,679,448
Fines,forfeitures and penalties 188,988 188,988
Investment income 1,725,347 906,066 228 2,631,641
Net(decrease)increase in fair value of investments (24,546) 17,383 - (7,163)
Intergovernmental revenues 290,414 - 290,414
Charges for services enterprise funds 8,674,077 - 8,674,077
Other revenues 697,254 118,780 383,878 1,199,912
Total revenues 22,392,611 7,511,440 7,411,700 37,315,751
EXPENDITURES:
General government 15,754,912 556,609 197,604 16,509,125
Public safety 1 18,657,690 - 71,585 18,729,275
Public works 5,010,187 282,475 5,292,662
Health services 1,246,963 - 87,106 1,334,069
Capital outlay 11,504,180 3,595,389 13,406,141 28,505,710
Interest on advances - 213,603 - 213,603
Interest on bonds 878,522 878,522
Bond issuance cost 2,536,782 2,536,782
Total expenditures 52,173,932 7,780,905 14,044,911 73,999,748
Deficiency ofrevcnues under cxpendittmes (29,781,321) (269,465) (6,633,211) (36,683,997)
Other financing sources(uses):
Sale of land - 3,267,400 3,267,400
Sale of property 43,985 - 43,985
Proceeds from long-term debt 49,420,000 49,420,000
Bond premium - 933,458 - 933,458
Transfers in 2,975,870 - 624,824 3,600,694
Transfers out (24,511,474) (624,824) - (25,136,298)
Total other financing sources(uses) (21,491,619) 52,996,034 624,824 32,129,239
NET CHANGE IN FUND BALANCES (51,272,940) 52,726,569 (6,008,387) (4,554,758)
i
FUND BALANCES,BEGINNING OF YEAR 72,233,702 (11,982,036) 4,044,328 64,295,994
FUND BALANCES,END OF YEAR $ 20,960,762 $ 40,744,533 $ (1,964,059) $ 59,741,236
i.
See accompanying notes to the basic financial statements.
-17-
j.
i.
CITY OF VERNON,CALIFORNIA
Reconciliation of the Statement of Revenues,Expenditures,and
Changes in Fund Balances of Governmental Funds to the
Statement of Activities-Governmental Activities
For the Fiscal Year Ended June 30,2006
Net change in fund balances-total governmental funds(page 17) $ (4,554,758)
Amounts reported for governmental activities in the statement of activities are different
because,
Expenditures for capital assets $ 28,505,710
Less current year depreciation (2,092,732) 26,412,978
Change in long-term compensated absences 16,243
The effect of various miscellaneous transactions involving capital assets (i.e., sales,
trade-ins,and donations)is to decrease net assets.
Sale of and loss on capital assets (3,282,440)
Internal service funds are used by management to charge the costs of certain activities to
individual funds. The net loss of the internal service funds is reported with
governmental activities. (2,349,622)
Other assets used in govemmental activities do not consume current financial resources
and therefore,are not reported in the governmental fund.
Unamortized bond issuance costs 2,451,418
Long-term debt proceeds provide current financial resources to governmental funds,but
issuing debt increases long-term liabilities in the statement of net assets.
Accrued interest expense on bond payable (663,800)
Bond issuance (49,420,000)
Unamortized bond premium (902,046)
Revenue timing differences result in less revenue in government-wide statements. (1,453,900)
Change in net assets of governmental activities(page 14) $ (33,745,927)
See accompanying notes to the basic financial statements.
18-
CITY OF VERNON,CALIFORNIA
Statement of Fund Net Assets(Deficit)
Proprietary Eunds
June 30,2006
Business-type Govcmmental
Activities Activities-
Enterprise Funds Internal
Light and Power Other Service
Fund Gas Fund Enterprise Funds Totals Funds
ASSETS:
Current assets:
Cash nod investments S 43,415,460 S 829,395 S 6,561,963 5 50,806,818 S 10,459,309
Receivable,net of allowances ol'S1,400,000 13,775,644 - 76,584 13,852,228 -
Legal settlement receivable 7,400,000 - - 7,400,000 -
Accrued unbilled revenue 7,318,063 419,240 7,737,303
Accrued interest receivable - 1,431,950 - - 1,431,950 - I
Bond issuance costs 232,403 232,403
Due from other funds 6,760,148 6,760,148
Inventories 81,480 81,480
Prepaid natural gas 423,374,415 423,374,475
Deposits and prepaid expense 471,698 - 471,698
Restricted cash and investments 31,017,881 31,017,881
Other assets 16,777,982 16,777,982
Total current assets 552,057,184 829,395 7,057,787 559,944,366 10,459,309
Noncurrent assets:
Restricted cash and investments 16,532,856 16,532,856.. -
Advances to other funds 45,307,418 45,307,418
Note receivable 4,113,951 4,113,951
Bond issuance costs 13,604,571 t3,604,571
Capital assets:
Nondepreciable 13,580,995 3,162,483 16,743,478 -
Depreciable,net 273,342,132 21,200,011 5,007,970 - 299,550,113
Total noncurrent assets 366,481,923 21,200,011 8,170,453 395,852,387
Total assets 918,539,107 22,029,406 13,228,240 955,796,753 10,459,309
LIABILITIES:
Accounts payable 9,344,599 3,322,164 1,381,738 14,048,501 73,774
Accrued wages and benefits 214,296 5,970 63,309 283,574 -
Customer deposits 372,276 - 404,478 776,754
Due to other funds - 328,489 328,489 74,115
Long-term liabilities:
Due within one year. - -
Claims payable - 2,452,858
Legal settlement payable 9,666,667 9,666,667
Bonds payable,net 3,567,547 3,567,547
Bond interest 985,445 985,445
Compensated'abscnccs 142,922 1,569 55,677 200,168
Total current liabilities 24,293,752 3,329,703 2,233,690 29,857,145 2,600,747
Due in more than one year. - -
Claims payable - 4,905,715
Advances from other funds - 25,224,914 5,301,857 30,526,771 -
Legal settlement payable 5,333,333 - 5,333,333
Bonds payable,net 693,422,746 693,422,746
Total noncurrent liabilities 698,756,079 25,224,914 5,301,857 729,282,850 4,905,715
Total liabilities 723,049,831 28,554,617 7,535,547 759,139,995 7,506,462
NET ASSETS:
Invested in capital assets,net of related debt 95,450,191 21,200,011 8,170,453 124,820,655
Restricted for alternative energy 16,532,856 - - 16,532,856
Restricted for debt service 13,742,839 13,742,839 -
Unrestricted(deficit) 69,763,390 (27,725,222) (477,760 41,560,409 2,952,847
Total net assets(deficit) $ 1951489,276 S (6,525,2,1 I) S 7,692,693 S 196,656,758 S 2,952,847
See accompanying notes to the basic financial statonems. ;
19.
1
CITY OF VERNON,CALIFORNIA
Statement of Revenues,Expenses and Changes in Fund Net Assets(Deficit)
Proprietary Funds
For the Fiscal Year Ended June 30,2006
Business-type Governmental
Activities Activities-
Enterprise Funds Internal
Light and Power Other Service
Fund Gas Fund Enterprise Funds Totals Funds
OPERATING REVENUES: ,
Charges for services $ 132,565,018 $ 36,509,697 $ 6,536,832 $ 175,611,547 $ 10,262,058
Total operating revenues 132,565,018 36,509,697 6,536,832 175,611,547 10,262,058
OPERATING EXPENSES:
Costofsales 127;551,769 36,671,275 5,649,885 169,872,929 -
Depreciation and amortization 7,436,297 282,422 361,063 8,079,782
Claims expense - - - 3,157,196
Employee benefits - 9,544,484
Total operating expenses 134,988,066 36,953,697 6,010,948 177,952,711 12,701,680
Operating(loss)income (2,423,048) (444,000) 525,884 (2,341,164) (2,439,622)
NONOPERATING REVENUE(EXPENSES):
Investment income . 4,128,341 4,128,341
Net decrease in fair value of investments (1,873,905) (1,873,905)
Bond interest expense (9,179,326) (9,179,326)
Legal settlements,net (5,257,580) (5,257,580)
Total nonoperating expenses (12,182,470) (12,182,470)
Income before transfers (14,605,518) (444,000) 525,884 (14,523,634) (2,439,622)
Transfers in 24,421,474 - 24,421,474 90,000
Transfers out (2,788,933) (186,937) (2,975,870)
Change in net assets 7,027,023 (444,000) 338,947 6,921,970 (2,349,622)
Net assets(deficit),beginning of the year 188,462,253 (6,081,211) 7,353,746 189,734,788 5,302,469
Net assets(deficit),end of the year $ 195,489,276 $$ ($52521 l)I) $ 7,692,693 $ 196,656,758 $ 2,952,847
See accompanying notes to the basic financial statements.
-20-
I..
CITY OF VERNON
FAalement of Cash Flows
Pmpnelary Funds
For the Fiscal Year Ended June 30,2006
- GWermnenhl
BuSirIe45-IYpe AC11MCf-
Ac3ivilies-Enterprise Funds 1.W—1
Light&Power Odle Savior
Fund Gas Fwd Enterprise Funds Total Fuah
Cash Goes f—npemhrn8 rnvroes:
Cub mdwd Rom aWo—JWxr funds S 128,032,121 S 36,309,697 S 6,615,362 5 111,157,780 S IQ262,058
Cob paid to nipplierS fm GOO&and serwce (140,183,714) (33,725,691) (4,374,533) (178,283,938) -
CobpaidmCity generalfuMtBrsmnw - (11,911,194) (460,665) (12.371,859) -
Cob paid far prepaidoaNnlgas (473,374,475) - - (427,374,475) -
Cash Paidfay clabm eapnCe and employee benefits - - - - - (10,750,924)
Nu msh pnwdd by(usad in)op.."4awilw (447,437,262) 7,784,006 1,780,364 (442,872,892) (88,866)
Cash flaws ft——.pd.l Boari germ.. -
Trawlersrecdvd(paid)- - 21,672,541 (186,937) 21,445,604 90,000
Pmecah ft.2006 Bonds 430,845,DDD - - - 430,845,000 -
Advances from(ta)Other f�ds (4,781,504) 439,%6 (135,165) (4,436,703) -
- Dondndated Wets (6,970,536). - - - (6.970,536) -
Canrclionafn,ne—ii.abie 237.045 237,045
Nermsh p rwidW by noncapAd Gnaneiry apivilie 440,962,546 459,966 (J22,102) 441,100,410 90,000
Cash Bows fmm.01.1 and rdated fl..dg Whoa: _
RepaymW f7W4 WIM (7,800,000) - (3.800.000) .
13oM 1.te-a paid (8,213,311) (8,213.377)
Aequisiq—aid son,ena npf.uphal arse[ (391275,888) (2,414,577) (1,360,933) (42,011,398) - -
Net mshumdincapitalalldrdmedfinarneingatdvities (50.249,763) (2,414,377) (1,360,933) (54,024,775)
Cub flaws Eoe Inv.13nq ad,ides: -
Purchases ardaalaoflnveswenls,no (68.124,268) - (68,124,268) -
In—t—A in— 4.847.915 4,847,915
Net crib used In 4rvmflrlg adivi ie (63,276,333) (63,276,353)
Net inarsse(decnoe)in cash ad essh equivsl<ms (180,0fA334) 829,395 - 97,729 (119.073,610) 1,134
Cut and msh egdol mbmiming of year 140,199,903 6,464,634 146,664,377 14458,175
Cash and ash equi.leift end ory— S 20,199,569 S 829,395 S 6,561,%3 3 27.590,977 S .18459,309
Rma lisum ofoperaling ineanro to net 0011
provided by(used in)operahnit aaivi0w.
opmung iommc(hb) S - (21427.048) S (444,000) 1 525,884 S (2,341,164) S (2,439,622)
Ad)atenenh to reconcile opeedlreg inWrne I
W na cohpmvided by(msd In)opermiry ahWhks:
Deprecimion and amonimion 7.436,297 282,422 361,063 8,079,782
Psovhioo fordaubl6li acmunla 1,400,000 1,40D,0(10
Changes in operating pees and liabimiex
Deceeare(lnaeue)ine
Recd.abks (3,977,391) (44,626) (3,978,017) -
1—ri. (78.813) - (78.813)
- Prepaidaapemes and deposit ..(272,251) - - (272,251) -
PrepaidNaNmlGas _ (423,374,475) - - (423,374,473) -
off. a es (12.233,112) - - (12,233.112)
Inereoc(deerroe)in: -
Accoumspay" - (6,327,279) 2.965,889 136,973 (3.204,417) (14,860)
China payable - - - - 2,365.616
Acmaed wag.and bareflh (308,907) (20.305). 10.294 (718,818)
_
D.Q.)from other lbrds - (6.760,148) - 647,420 (6,112,128)
Cmlo=depnit (599,507) .- 123,356 (476,151) -
Campensmed amain 17.776 - - 17,776 -
DlhnP y bke 19.496 19,496 -
Ndmshpmvi0ed by(used in)apadileg adivilua S (447,437,262) S 2,794,006 S 1,190,364 S (447,877,892) S (88.866)
Rccerldlisdon ofash and cash equivalsnh m -
SmleaeN of Nei Ands I
Cash and W.I." S 43.415,460 S 929,395 5 6,561•963 S 50,806,818 S 10.439.309
Curren restdaed cuh and i-1—is 31,017,881 - - 31,017,881 -
Noxurraa rebidd each and immm" 16.S32,956 Z 1032,956
Total S 90,966,197 S 829,395 S 6,561,963 S 99,357.553 5 10,459,309
Lan.Investment with m"hes ofmoa Ilan 90days S (70.766,628) S (70,766,628)
Tmal mh and cuh equivalents - S 20,199,569 S 829.395 S 6,561,963 S 27,590,927 S 10.459.3D9
tJmcash.C*IaL[westing and Fit—ing Adivilie
Acquisilion ofelpihi users in acroums payable S 422,845 S - S S 422.945 S -
Dmeasein fair M eofinvesimenu (081,619) - - (1.381.619)
See aecomparrying nines to the Dish:financial sumen ft -
-21-
I.
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements
June 30,2006
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the City of Vernon, California (City) have been prepared in conformity with U.S.
generally accepted accounting principles(GAAP). The Governmental Accounting Standards Board(GASB)is the
accepted standard-setting body for establishing governmental accounting and financial reporting principles. The
more significant of the City's accounting policies are described below.
Reporting Entity
The City was incorporated on September 16,1905 as a General Law City. Effective July 1, 1988,the City became
a Charter City. The City operates under a Council-City Administrator form of government. As required by
generally accepted accounting principles,the accompanying basic financial statements present the City of Vernon
(primary government) and its component units, entities for which the primary government is considered to be
financially accountable. In accordance with GASB Statement No. 14, the City's component units are considered
blended component units. Although legally separate entities,they are,in substance,part of the City's operations,
and therefore,data from these units are combined with data of the primary government.
Blended Component Units
Vernon Redevelopment Agency(RDA). The governing body of the RDA is comprised of members of the City
Council and the Mayor.Among its duties,it approves the RDA's budget and appoints the management.
Separately issued financial statements for the RDA may be obtained through the City of Vernon,4305 Santa Fe
Avenue,Vernon,California,90058.
Vemon Natural Gas Financing Authority
On April I,2006,the City and the RDA created the Vernon Natural Gas Financing Authority(Authority)pursuant
to the Joint Powers Agreement, for the express purpose of undertaking projects and programs that promote
economic development within the City. Such projects and programs include assisting the City in procuring natural
gas for use as fuel for electric generating units that are part of the City's Electric System,which is accounted for in
the City's Light and Power fund., During the year ended'June 30, 2006, the Authority issued $430,845,000 in
variable rate bonds and subsequently purchased natural gas in accordance with the Natural Gas Agreement between
the Authority and the City. As a result of this financing arrangement,the debt and related asset(prepaid natural gas)
associated with the Authority have been blended with the City's Light and Power fund for financial reporting
purposes.
Basis of Presentation
Government-wide Financial Statements
The statement of net assets and statement of activities display information about the primary government(the City)
and its component units. These statements include the financial activities of the overall government. It is the City's
policy to make eliminations to minimize the double counting-oF internal activities,except for services rendered by
governmental activities to business-type activities as well as charges from the Gas Fund to the Light&Power Fund.
These statements distinguish between the governmental and business-type activities of the City. Governmental
activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from
business-type activities,which rely to a significant extent on fees charged to external parties.
-22-
i
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE l—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Basis of Presentation(Continued)
The statement of activities presents a comparison between direct expenses and program revenues for each segment
of the business-type activities of the City and for each function of the City's governmental activities. Direct
expenses are those that are specifically associated with a program or function;and therefore,are clearly identifiable
to a particular function. Expenses by function have been adjusted for.any internal service profit/loss existing at
fiscal year-end. Program revenues include(I)charges paid by the recipients of goods or services offered by the
programs and(2)giants and contributions that are restricted to meeting the operational or capital requirements of a
particular program. Revenues that are not classified as program revenues,including all taxes,are presented instead
as general revenues.
Fund Financial Statements
The fund financial statements provide information about the City's funds and blended component units. Separate
statements for each fund category—governmental and proprietary—are presented_ The emphasis of fund financial
statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining
governmental and enterprise funds are separately aggregated and reported as nonmajor funds.
Proprietary funds distinguish operating revenues and expenses from nonoperating items. Proprietary fund
operating revenues, such as charges for services,result from exchange transactions associated with the principal
activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal
values. Nonoperaling revenues,such as subsidies and investment earnings,result from nonexchange transactions or
ancillary activities. Operating expenses include the cost of sales and services, administrative expenses and
depreciation on capital assets. All expenses not meeting this definition are reported as nonoperating expenses.
The City reports the following major governmental funds:
The General Fund is the City's primary operating fund. It is used to account for all revenues and expenditures
necessary to carry out basic governmental activities of the City.that are not accounted for through other funds.For
the City,the General Fund includes such activities as general government,public safety,and public works,
The Vernon Redevelopment Agency was activated September 16, 1986, by action of the Vernon City Council
pursuant to the Community Redevelopment.Law of California. The Agency has the broad authority to acquire,
rehabilitate, develop, administer, and sell or lease property. Additionally, the Agency has the right of eminent
domain to facilitate acquisition of property. The principal objectives of the Agency are to improve the commercial
environment, provide new public improvements,strengthen the City of Vernon's(City)economic base,generate
added employment opportunities,and expand the City's industrial base.
The City reports the following major enterprise funds:
i
• The Light and Power Fund accounts for the maintenance and operations of the City's electric utility plant.
Revenue for this fund is primarily from charges for services.
• The Gas Fund accounts for maintenance and operations of the City's gas utility system. Revenue for this fund
is primarily from charges for services. Natural gas is provided primarily to the Light & Power Fund at
wholesale cost.In addition,the Gas'Fund provides natural gas to several outside companies.
Additionally,the City reports the following fund types:
• The City's Special Revenue Funds are used to account for the proceeds of specific revenue sources that are
legally restricted to expenditures for specific purposes.
_23-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Basis ofPresenladon(Continued)
• The City's Capital Projects Funds are used to account for financial resources designated for the acquisition or
construction of major capital facilities other than those financed by proprietary fund types.
• The City's Internal Service Funds ate speci ficaily designed to account for goods and services that are provided
on a cost-reimbursement basis. That is,the goal of an internal service fund should be to measure the full cost of
providing goods and services for She purpose of fully recovering that cost through fees or charges. Some
examples of the City's services accounted for in the internal service funds are self-insurance activities for
worker's compensation,general liability, group medical and dental, and vehicle replacement. The Internal
Service Funds are presented in summary form as part of the proprietary fund financial statements. In the
government-wide financial statements,the changes in net assets at the end of the fiscal year,as presented in the
statements of activities,were allocated to the user functions of the governmental activities,to reflect the entire
activity for the year. Since the predominant users of the internal services are the City's governmental activities,
the asset and liability balances of the Internal Service Funds are consolidated into the governmental activities
,. column at the government-wide level.
The government-wide and proprietary fund financial statements are reported using the economic resources
measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are
recorded at the time liabilities are incurred,regardless of when the related cash flows take place. Nonexchange
transactions, in which the City gives (or receives) value without directly receiving (or giving) equal value in
exchange,include property and sales taxes,grants,entitlements and donations. On an accrual basis,revenue from
property taxes is recognized in the fiscal year for which the taxes are levied. Revenues from sales taxes are
recognized when the underlying transactions take place. Revenues from grants, entitlements and donations are
recognized in the fiscal year in which all eligible requirements have been:satisfied.
Governmental fund type financial statements are reported using the current financial resources measurement focus
and the modified accrual basis of accounting. Under this method, revenues and other governmental fund type
financial resources are recognized when they become susceptible to accrual —that is, when they become both
measurable and available. Revenues are considered to be available when they are collectible within.the current
period or soon enough thereafter to pay liabilities of the current period. Property, sales, and other taxes are
considered available and are accrued when received within sixty days after fiscal year-end. Additionally,all other
revenue sources are considered available and are accrued when received within 60 days of year-end. Expenditures
generally are recorded when a liability is incurred,as under accrual accounting.However,debt service expenditures,
as well as expenditures related to compensated absences and claims and judgments,are recorded only when payment
is due. General capital assets acquisitions are reported as expenditures in governmental fund statements.
For the government-wide financial statements and proprietary fund financial statements,the City has elected under
GASB Statement No. 20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental
Entities That Use Proprietary Pund Accounting, to apply all applicable GASB pronouncements as well as any
applicable pronouncements of the Financial Accounting Standards Board,the Accounting Principles Board or.any
Accounting Research Bulletins issued on or before November 30, 1989 unless those pronouncements conflict with
or contradict GASB.pronouncements, The City has elected not to adopt FASB pronouncements issued after
November 30,1989 for its government-wide and enterprise fund financial statements.
Because the governmental fund financial statements are presented on a different measurement focus and basis of
accounting than the government-wide financial statements for governmental activities,reconciliations are presented
which briefly explain the adjustments necessary to reconcile the fund financial statements to the governmental-wide
statements.
When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted
resources first,and then unrestricted resources,as they are needed.
-24-
CITY OF VERNON;CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Cash Deposits and Investments
The City follows the practice of pooling cash and investments of all funds to maximize returns for all funds,except
for funds held by trustee or fiscal agents.
For purposes of the statement of cash flows, the City considers all highly liquid investments(including restricted
cash and investments)with an original maturity of three months or less when purchased to be cash equivalents.
Investment transactions are recorded on the trade date. Investments in nonparticipating interest-earning investment
contracts are reported at cost, and all other investments are reported at fair value. Fair value is defined as the
amount that the City could reasonably expect to receive for an investment in a current sale between a willing buyer
and a seller and is generally measured by quoted market prices.
Interfnnd Receivables/Pavables
Short-term interfund receivables and payables are classified as"due from other funds"and"due to other funds"
respectively on the balance sheet/statement of fund net assets. Long-term interfund receivables and payables are
classified as"advances to/from other funds,"respectively,on the balance sheettstatement of fund net assets.
Inventories
Inventories consist of consumable supplies and fuel stock,which are stated at cost on a first-in,first-out basis. The
cost of inventories is recorded as an expenditures/expense when the items are used.
Capital Assets
Capital assets (including infrastructure) are recorded at historical cost or at estimated historical cost if actual
historical cost is not available. Contributed capital assets are valued at their estimated fair market value on the date
contributed. Capital assets include public domain (infrastructure) general capital assets consisting of certain
improvements including roads and bridges,sidewalks,curbs and gutters,and traffic light system. The capitalization
threshold for all capital assets is$5,000. Capital assets used in operations are depreciated using the straight-line
method over their estimated useful lives in the government-wide statements and proprietary funds.
The estimated useful lives are as follows:
Infrastructure 10 to 50 years
Utility plant and buildings 25 to 50 years
Improvements 10 to 20 years
Machinery and equipment 3 to 35 years
Maintenance and repairs are charged to operations when incurred. Betterments and major improvements, which
significantly increase values,change capacities or extend useful lives,are capitalized. Upon sale or retirement of
capital assets, the cost and related accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in the changes in financial position. For tax-exempt securities,interest income and
expense associated with construction of capital assets is capitalized during the construction phase up until the capital
asset is substantially complete and ready for its intended use.
-25-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Compensated Absences
Accumulated vacation is accrued when incurred in the government-wide and proprietary fund financial statements.
A liability for accrued vacation is recorded in the governmental funds only to the extent that such amounts have
matured(i.e.,as a result of employee resignations and retirements). Upon termination of employment,the City will
pay the employee all accumulated vacation leave at 1110%of the employee's base hourly rate.
Deferred Revenue
Deferred revenue arises when a potential revenue transaction does not meet the"available"criteria for recognition in
the current period. Deferred revenue also arises when resources are received before the City has a legal claim to
them,as when grant monies are received in advance of incurring qualified expenditures.
Lone-term Oblileations
Certain of the City's governmental fund obligations not currently due and payable at year-end are reported in the
government-wide statement of net assets. Long-term debt and other obligations financed by proprietary funds are
reported as liabilities in the appropriate proprietary fund and government-wide statement of net assets. Bond
issuance costs,discounts and premiums and deferred amounts on refunding are amortized over the life of the bonds
using the straight-line method.
Net Assets
The govemmenl-wide financial statements and proprietary fund financial statements utilize a net assets-presentation.
Net assets are categorized as invested in capital assets(net of related debt),restricted and unrestricted.
3 Invested In Capital Assets, Net of Related Debt — This category groups all capital assets, including
infrastructure,into one component of net assets. Accumulated depreciation and the outstanding balances of
debt that are attributable to the acquisition,construction or improvement of these assets reduce the balance
in this category.
O Restricted Net Assets — This category presents external restrictions imposed by creditors, grantors,
contributors or laws or regulations of other governments and restrictions imposed by law through
constitutional provisions or enabling legislation.
01 Unrestricted Net Assets—This category net assets of the City,not restricted for any project or
other purpose.
Frond Equity
In the fund financial statements,governmental funds report reservations of fund balance for amounts that are not
appropriable or legally restricted for a specific purpose. Designations of fund balance represent tentative
management plans that are subject to change.
Use of Estimates
The preparation of basic financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly,actual results could differ from those estimates.
-26-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE I—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Property Taxes
The County of Los Angeles(County)levies,collects and apportions property taxes for all taxing jurisdictions with
the County. Property taxes are determined by applying approved rates to the properties' assessed values. The
County remits property taxes applicable to the City less an administrative fee throughout the year.
Article XIiIA of the State of California Constitution limits the property tax levy to support general government
services of the various taxing jurisdictions to$1.00 per$100 of assessed value. Taxes levied to service voter-
approved debt prior to June 30, 1978 are excluded from this limitation.
Secured property taxes are levied in two installments,November 1 and February L They become delinquent with
penalties on December 10 and April 10, respectively. The lien date is January 1 of each year for secured and
unsecured property taxes and the levy date occurs on the 4'h Monday of September of the tax year. Unsecured
property taxes on the tax roll as of July 31 become delinquent with penalties on August 31,
GASB Pronouncements
In November 2003,GASB issued Statement No.42,Accounting and Financial Reporting for Impairment of Capital
Assets and for Insurance Recoveries. This statement establishes accounting and financial reporting standards for
impairment of capital assets.A capital asset is considered impaired when its service utility has declined significantly
and unexpectedly.This statement also clarifies and establishes accounting requirements for insurance recoveries. _
This statement had-no impact on the City.
In December 2004,GASB issued Statement No.46,Net Assets Restricted Enabling Legislation—An amendment of
GASB Statement No.34. This Statement establishes and modifies requirements related to restrictions of net assets
resulting from enabling legislation. It amends GASB Statement No. 34, Basic Financial Statements--and
Management-s Discussion and Analysis for State and Local Governments,paragraph 34. GASB Statement No.34,
Basic Financial Statements—and Management's Discussion and Analysis-for State and Local Governments,
requires that limitations on the use of net assets imposed by enabling legislation be reported as restricted net assets.
This Statement clarifies that a legally enforceable enabling legislation restriction is one that a party external to a
government—such as citizens,public interest groups, or the judiciary---can compel a government to honor. The
Statement states that the legal enforceability of an enabling legislation restriction should be reevaluated if any of the
resources raised by the enabling legislation are used for a purpose not specified by the enabling legislation or if a
government has other cause for reconsideration.Although the determination that a particular restridlion is not legally
enforceable may cause a government to review the enforceability of other restrictions,it should not necessarily lead
a government to the same conclusion for all enabling legislation restrictions. This Statement also specifies the
accounting and financial reporting requirements if new enabling legislation replaces existing enabling legislation or
if legal enforceability is reevaluated.Finally,this Statement requires governments to disclose the portion of total net
assets that is restricted by enabling legislation. This statement had no impact on the City.
in June 2005,GASB issued Statement No. 47,Accounting for Termination Benefits. This Statement provides l
guidance to governmental ernployers far measuring,recognizing,and reporting liabilities and expense/'expenditures
related to all termination benefits, including voluntary termination benefits,without limitation as to the period of
time during which the benefits are offered,and involuntary termination benefits. This statement had no impact on
the City.
-27-
• CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS
Cash and Inveshnents
Cash and investments as of June 30,2006 are classified in the accompanying financial statements as follows:
Statement of net assets:
Cash and investments $ 106,529,677
Restricted cash and investments 87,566,406
Total cash and investments $ 194,096,083
Cash and investments as of June 30,2006 consist of the following:
Cash on hand $ 1,300
Deposits with financial institutions 18,950,714
Investments 175,144,069
Total cash and investments $ 194,096,083
The City's Investment Policy
The City's Investment Policy sets forth the investment guidelines for.all funds of the City:The Investment Policy
conforms to the Califomia Government Code Section 53600 et.seq. The authority to manage the City's investment
program is derived from the City Council. Pursuant to Section 53607 of the California Government Code,the City
Council annually appoints the City Treasurer and approves the City's investment policy. The Treasurer is
authorized to delegate this authority.as deemed appropriate. No person may engage in investment transactions
except as provided under the terms of the Investment Policy and the procedures established by the Treasurer.
This Policy requires that the investments be made with the prudent person standard, that is,when investing,
reinvesting, purchasing,acquiring,exchanging selling or managing public funds,the trustee(Treasurer and staff)
will act with care,skill,prudence,and diligence under the circumstances then prevailing,including but not limited
to,the general economic conditions and the anticipated needs orthe City.
The Investment Policy also requires that when following the investing actions cited above,that the primary objective
of the trustee be to safeguard the principal,secondarily meet the liquidity needs of depositors,and then achieve a
return on the funds under the trustee's control. Further,the intent of the Investment Policy is to minimize risk of
loss on the City's held investments from:
`A. Credit risk
B. Custodial credit risk
C. Concentration of credit risk
D. Interest rate risk
-28-
1,
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS(CONTINUED)
Investments Authorized by the California Government Code and the City's Investment Policy
The table below identifies the investment types that are authorized for the City by the California Government Code
and the City's Investment Policy.. The table also identifies certain provisions of the California Government Code
that address interest rate risk,credit risk,and concentration of credit risk. This table does not address investment of
debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the City,rather than
the general provisions of the California Government Code or the City's Investment Policy.
Maximum Maximum
Authorized Maximum Percentage Investment
Investment Type Maturity of*Portfolio in One Issuer
Securities of the U.S.Government,or it agencies None None None
Certain Asset-Backed Securities None None None
Certificate of Deposit None 30% None
Bankers Acceptances 180 days 400/a 30%
Commercial Paper 270 days 25% 10%
Repurchase Agreements 1 year None None
Reverse Repurchase Agreements 92 days 20%of base value None
Medium-Term Notes None 300/0 None
Mutual Funds N/A 20% 10%
Money Market Mutual Funds N/A 20% 100/0
Mortgage Pass-Through Securities 5 years 20% None
State Administered Pool Investment N/A None None
'Excluding amounts held by band trustee that are not subject to California Government Code restrictions.
Investments Authorized by Debt Agreements
Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements,rather than the
general provisions of the California Government Code or the City's Investment Policy. The table below identifies'
the investment types that are authorized for investments held by bond trustee. The table also identifies certain
provisions of these debt agreements that address interest rate risk,credit risk,and concentration of credit risk.
Maximum Maximum
'Authorized Maximum Percentage Investment
Investment Type Maturity of Portfolio in One Issuer
Securities of the U.S.Government,or it agencies None None None
Certain Asset-Backed Securities None None None
Certificate of Deposit None None None
Bankers Acceptances 1 year None None
Commercial Paper None None None
Money Market Mutual Funds N/A None None
State Administered Pool Investment N/A None None
Investment Contracts None None None
-29-
r.
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS(CONTINUED)
Disclosure Relating to Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment.
Generally,the longer the maturity of an investment,the greater the sensitivity of its fair value to changes in market
interest rates. One of the ways that the City manages its exposure to interest rate risk is by purchasing a
combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion
of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and
liquidity needed for operations. The City monitors the interest rate risk inherent in its portfolio by measuring the
weighted average maturity of its portfolio. The City has no specific limitations with respect to this metric,
Weighted
Average
Maturity %of
Investment Type Amount (in years) Total
Commercial Paper $ 5,397,750 0.01 3.08%
Local Agency Investment Fund 529,038 0.42 0.30%
United States Treasury Notes 9,818,750 3.16 5.61%
Federal Farm Credit Bank 8,305,250 3.27 4.74%
Federal Home Loan Bank 33,111,250 1.68 18.91%
Federal National Mortgage Association 26,757,180 0.88 15.28%
Federal Home Loan Mortgage Corporation 40,837,533 1.09 23.32%
Medium-Term Corporate Notes 18,007,669 0.36 10.28%
Money Market Mutual Fund 19,848,921 - 11.33%
Investment Contracts 12,530,728 27.77 7.15%
$ 175;144,069 3,06 100.00%
-30-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS(CONTINUED)
Disclosures Relalke to Credit Risk
Generally,credit risk is The risk that an issuer of an investment will not fulfill its obligation to the holder of the
investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization.
Presented below is the minimum rating required by the California Government Code,the City's Investment,Policy,
or debt agreements,and the actual rating as of the year end for each investment type.
Minimum Actual Fair %
Required Credit Rating Value as of of
Rating Moody's/S&P June 30,2006 Total
In custody of Treasurer:
Cash on hand Not Rated Not Rated $ 1,300 0.00%
Deposits with financial institutions Not Rated Not Rated 18,950,714 9.76%
Investments held by Treasurer:
Commercial Paper P-1/A-1+ P-1/A-1+ 5,397,750 2.78%
Local Agency Investment Fund Not Rated Not Rated 529,038, 0,27%
1.
Total in custody of Treasurer 24,878,802 12.82%
In custody of Trustee:
Investments held by Trustee:
United States Treasury Notes Not Rated Not Rated 9,818,750 5.06%
Federal Farm Credit Bank Aaa/AAA Aaa/AAA 8,305,250 4.28%
Federal Home Loan Bank Aaa/AAA Aaa/AAA 33,111,250 17.06%
Federal National Mortgage Association Aaa/AAA Aaa/AAA 26,757,180 13.79%
Federal Home Loan Mortgage Corporation Aaa/AAA Aaa/AAA 40,837,533 21.04%
Medium-Term Corporate Notes P-1/A-1+ P-1/A-1+ 18,007,669 9.28%
Money Market Mutual Fund Aaa/AAA Aaa/AAA 1%848,921 10.23%
Investment Contracts Not Rated Not Rated 12,530,728 6.46%
Total in custody of Trustee 169,217,281 87.18%
Total cash and investments held by Treasurer and Trustee $ 194,096 083 100.00%
-31
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS(CONTINUED)
Concentration of Credit Risk
The City's Investment Policy places no limit on the amount the City'may invest in any one issuer excluding a 10%
limitation on commercial paper,mutual funds,and money market mutual funds. As of June 30,2006,there was no
investment-in any one issuer that represented 10%or more of the City's total investments.As of June 30,2006,the
City's investments in any one issuer exceeding 5%were as follows:
Minimum Actual Fair %
Required, Credit Rating Value as of of
Rating Moody's/S&P June 30 2006 Total
Federal Home Loan Bank Ana/AAA Aaa/AAA $ 33,111,250 17.06%
Federal National Mortgage Association Ann/AAA Ann/AAA 26,757,180 13:79%
Federal Home Loan Mortgage Corporation Ana/AAA` Ana/AAA 40,837,533 21.04%
Medium-Term Corporate Notes P-1/A-I+ P-1/A-I+ 18,007,669 9.28%
Money Market Mutual Fund Aaa/AAA Ann/AAA 19,848,921 10.23%
Investment Contracts Not Rated Not Rated 12,530,728 6.46%
Custodial Credit Risk
Custodial credit risk for deposits is the risk that,in the event of the failure of a depository financial institution,a
government will not be able to recover its deposits or will not be able to recover collateral securities that are in the
possession of an outside party. The custodial credit risk for investments is the risk that,in the event of the failure of
the counterparty to a transaction,a government will not be able to recover the value of its investment or collateral
securities that are in the possession of another party. The California Government Code and the City's Investment
Policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits
or investments.
At year-end,the carrying amount of the City's deposits was$18,950,714 and the bank balance was$19,424,101.
The difference between the bank balance and the carrying amount represents outstanding checks and deposits in
transit. Of the bank balance, $200,000 was covered by federal depository insurance and $19,224,101 was
collateralized by the pledging financial institution as required by Section 53652 of the California Government Code.
Under the California Government Code,a financial institution is required to secure deposits in excess of$100,000
made by state or local governmental units by pledging government securities held in the form of an undivided
collateral pool. The market value of the pledged securities in the collateral pool must equal at least 110%of the
total amount deposited by the public agencies. California law also allows financial institutions to secure City
deposits by pledging first trust deed mortgage notes having a value of 150%of the secured public deposits. Such
collateral is held by the pledging financial institution's trust department or agent in the City's name.
As of June 30,2006,the City had some risk in this area.
Local Agency Investment Fund(LAIF)
The Agency also maintained cash balances with the State of California Local Agency Investment Fund (LAIF)
amounting to$529,038 at June 30,2006.LAIF is an external investment pool sponsored by the State of California.
These pooled funds approximate fair value. The administration of LAIF is provided by the California State
Treasurer and regulatory oversight is provided by the Pooled Money Investment Board and the Local Investment
Advisory Board.The value of the pool shares in LAIF,which may be withdrawn,is determined on an amortized
cost basis,which is different than the fair value of the Agency's position in the pool
-32-
i._
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 2—CASH AND INVESTMENTS(CONTINUED)
The total amount invested by all public agencies in LAW at June 30,2006 was$16,392,041,241.LAIF is part of the
State of California Pooled Money Investment Account(PMIA)whose balance was$63,616,592,927 at June 30,
2006.Of this amount,2.567%was invested in structures notes and asset-backed securities.PMIA is not.SEC-
registered,but is required to invest according to California State Code.The average maturity of PMIA investments
was 0.42 years as of June 30,2006.LAIF does not maintain a credit rating.
NOTE 3-RECEIVABLES
The City's receivables at June 30,2006 are as follows:
Redevelopment Other Total
Receivables- General Agency Governmental Governmental
Governmental Activities: Fund Fund Funds Activities
Accounts $ 536,223 $ $ 204,228 $ 740,451
Taxes 820,668 889,126 1,800,222 3,510,016
Notes or loans 67,314 - - 67,314
Total receivables $ 1,424,205 $ 889,126 $ 2,004,450 $ 4,317,781
Other Total
Receivables- Light and Power Enterprise Business-type
Business-type Activities: Fund Funds Activities
Accounts $ 15,175,644 $ 76,584 $ 15,252,228
Allowances (1,400,000) - (1,400,000)
Total receivables $ 13,775,644 $ 76,584 $ 13,852,228
The business-type activities allowances for doubtful accounts consists of$1,000,000 reserved for the California
Power Exchange(See Note 13)and$400,000 reserved for all other doubtful accounts of Light and Power Fund's
retail utility customers.
NOTE 4—INTERFUND TRANSACTIONS
The following tables summarize the City's interfund balances and transactions at June 30,2006:
Due To/From Other Funds
Receivable Fund Payable Fund Amount
j
Light and Power Fund General Fund $ 6314,779
Redevelopment Agency Fund 8,665
Other Governmental Funds 34,100
Other Enterprise Funds 328,489
Internal Service Funds 74,115
$ 6,760,148
The above balances represent interfund borrowings payable due within one year.
-.33.
CITY OF VERNON,CALI FORMA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 4—INTERFUND TRANSACTIONS(CONTINUED)
Advances to/lrom other funds
Receivable Fund Payable Fund Amount
General Fund Redevelopment Agency Fund $ 16,860
Other Governmental Funds 5,979
Other Enterprise Funds 4,952,807
$ 4,975,646
Light and Power Fund Other Governmental Funds $ 19,733,454
Gas Fund 25,224,914
Other Enterprise Funds 349,050
$ 45,307,418
The above balances represent interfund borrowings payable beyond one year. These borrowings were for purchase
of land and capital improvements.
Transfers
Transfers In Transfer Out Amount
General Fund Light and Power Fund $ 2,788,933
Other Enterprise Funds 186,937
$ 2,975,870
Light and Power Fund General Fund $ 24,421,474
$ 24,421,474
Other Governmental Funds Redevelopment Agency Fund $ 624,824
$ 624,824
Internal Service Funds General Fund $ 90,000
$ 90,000
Transfers are used to move revenues from the fund that statute or budget requires to collect them to the fund that
statute or budget requires to expend them,or move revenues collected in certain enterprise funds to the General
Fund to cover overhead costs provided by the General Fund and for the payment of in-lieu franchise taxes.
For the current year,the Light and Power Fund and the Other Enterprise Funds transferred a total of$2,975,870 in
in-lieu franchise taxes.
For the current year,the General Fund transferred$24,421,474 to the Light and Power Fund. The main.reason for
this transfer was to complete the construction of the Malburg Generating Station and to upgrade the City's electric
transmission and distribution systems.
For the current year,the City elected to have the Redevelopment Agency Fund transfer$624,824 to the Parcel Tax
Fund (Other Governmental Fund) to reimburse the Parcel Tax Fund for capital expenditures related with the
construction of new fire stations.
-34-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 5—CAPITAL ASSETS
Capital asset activity of governmental activities for the year ended June 30;2006 was as follows:
. i
Balance Transfers& Balance
July 1,2005 Additions Deletions Adjustments June 30,2006
Governmental activities:
Capital assets,not being depreciated.
Land-General Fund $ 28,502,457 $ 20,180,836 $ $ $ 48,683,293
Land-Redevelopment Agency Fund(RDA) 23,172,030 864,485 (3,282,440) (8,401,673) 12,352,402
Total land 51,674,487 21,045,321 (3,282,440) (8,401,673) 61,035,695
Construction in progress-General Fund 1,266,211 2,446,579 (288,610) 3,424,180
Construction in progress-RDA - 962,883 962,883
Total construction in progress 1,266,211 3,409,462 (288,610) 4,387,063
Total capital assets,not being depreciated 52,940,698 24,454,783 (3,282,440) (8,690,283) 65,422,758
Capital assets,being depreciated
Infastructure-General Fund 23,684,060 312,068 288,610 24,284,738
Building and Improvements-General Fund 15,836,515 - - 15,836,515
Building and Improvements-RDA - 1,768,021 1,768,021
Machinery and Equipment-General Fund 11,372,970 1,970,838 - 13,343,808
Total capital assets,being depreciated 50,893,545 4,050,927 288,610 55,233,082
Less accumulated depreciation for:
Infastructure-General Fund (17,685,205) (595,703) - (18,280;908)
Building and Improvements-General Fund (5,556,719) (353,579) (5,910,298)
Building and Improvements-RDA (22,100) (22,100)
Machinery and Equipment-General Fund (5,978,147) (1,121,350) (7,099,497)
Total accumulated depreciation (29,220,071) (2,092,732) (31,312,803)
Total capital assets,being depreciated,net
Infastructure-General Fund 5,998;855 (283,635) 288,610 6,003,830
Building and Improvements-General Fund 10,279,796 (353,579) - 9,926,217
Building and Improvements-RDA - 1,745,921 1,745,921
Machinery and Equipment-General Fund 5,394,823 849,488 6,244,311
Total 21,673,474 1,958,195 288,610 23,920,279
Governmental activities capital assets,net $ 74,614,172 $ 26,412,978 $ (3,282,440) $ (8,401,673) $ 89,343,037
In the current year,the'Redevelopment Agency Fund has elected to reclassify$8,401,673 of its land to land held for
resale.
Depreciation
Depreciation expense was charged to governmental functions as follows:
General government $ 850,722
Public safety 923,748
Public works 253,970
Health services 64,292
Total depreciation expense-governmental functions $ 2,092,732
-35-
i
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 5—CAPITAL ASSETS(CONTINUED)
Capital asset activity of business-type activities for the year ended June 30,2006 was as follows:
Balance Transfers& Balance
July I,2005 Additions Deletions Adjustments June 30,2006
Business-type activities:
Capital assets,not being depreciated.-
Land $ 45,000 $ $ $ $ 45,000
Construction in progress-
Light and Power 190,514,579 31,417,580 (208,351,163) 13,580,996
Construction in progress-Water 839,848 - (2,586) 837,262
Construction in progress-Gas 19,023,822 1,300,849 (20,324,671)
Construction in progress-Fiber Optic 2,068,442 211,778 2,280,220
Total capital assets,not being depreciated 212,491,691 32,930,207 (228,678,420) 16,743,478
Capital assets,being depreciated
Production plant-Light and Power 10,015,455 684,659 10,700,114
Transmission plant-Light and Power 61,448,019 4,212,884 65,660,903
Distribution plant-Light and Power 49,652,505 1,015,173 50,667,678
General plant-,Light and Power 3,976,419 897,651 4,874,070
Malburg Generating Station plant-
Light and Power - 208,352,126 208,352,126
Buildings-Light and Power 481,800 481,800
Water utility plant 14,434,164 397,498 14,831,662
Gas utility plant 46,970 1,113,728 20,324,671 21,485,369
Fiber Optic utility plant 753,280 - 753,280
Total capital assets,being depreciated 140,055,332 9,074,873 228,676,797 377,807,002
Less accumulated depreciation for:
Production plant-Light and Power (5,495,705) (372,027) (5,867,732)
Transmission plant-Light and Power (34,446,396) (2,282,919) (36,729,315)
Distribution plant-Light and Power (17,891,311) (1,761,630) (19,652,941)
General plant-Light and Power (2,191,418) (169,464) (2,260,882)
Melburg Generating Station plant
Light and Power (2,604,402) (2,604,402)
Buildings-Light and Power (265,836) (13,452) i (279,288)
Water utility plant (10,215,908) (342,231) (10,558,139)
Gas utility plant " (2,936) (282,422) (285,358)
Fiber Optic utility plant (18,832) (18,832)
Total accumulated depreciation (70,409,510) (7,847,379) (78,256,889)
Total capital assets,being depreciated,net
Production plant-Light and Power 4,519,750 312,632 4,832,382
Transmissiort piant-Ltgh(andPower 27,W(,623 1,929,465 Z8,931'sm
Distribution plant-Light and Power 31,761,194 (746,457) 31,014,737
General plant-Light and Power 1,885,001 728,187 2,613,188
Malburg Generating Station plant-
Light and Power - (2,604,402) 208,352,126 205,747,724
Buildings-Light and Power 215,964 (13,452) - 202,512
Water utility plant 4,218,256 55,267 - 4,273,523
Gas utility plant 44,034 831,306 20,324,671 21,200,011
Fiber Optic utility plant 734,448 - 734,448
Total 69,645,822 1,227,494 228,676,797 299,550,113
BuS(nrs4-IYpexsjyjjjrsraita)mwis,j)rJ $ 232,131,513 S 34,157,?DJ S - 3 �
,lb3) S },b,�9},39!
-36-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 5—CAPITAL ASSETS(CONTINUED)
Deprecialion
Depreciation expense was charged to the business-type functions as follows:
Light and Power depreciation $ 7,203,894
Gas Fund depreciation 282,422
Other Enterprise Fund depreciation 361,063
Total depreciation expense-business-type functions $ 7,847,379
Capitalized bond Interest
For the period July 1, 2005 through October 17, 2005 the City capitalized interest paid in relation to the Series
2004A,2004B,and 2004C bonds. These bonds were issued in 2004 in order to finance the construction of the
Malburg Generating Station which became operational on October 17,2005. City incurred$1,659,254 of interest
expense that was capitalized during the year ended June 30,2006 net of tax exempt investment income.
NOTE 6—LONG-TERM OBLIGATIONS
During the fiscal year 2006,a total of$480,265,000 in long-term obligations consisting of the following:
• $49,420,000 Redevelopment Agency of the City of Vernon Industrial Redevelopment Project Tax
Allocation Bonds,Series 2005
• $200,000,000 Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds (Vernon Gas
Project),2006 Series A
$115,440,000 Vernon Gas Project Variable Rate Revenue Bonds,2006 Series B,and
• $115,405,000 Vernon Gas Project Variable Rate Revenue Bonds,2006 Series C
The Industrial Redevelopment Project Tax Allocation Bonds,Series 2005 were issued to provide funds to(i)finance
various redevelopment projects in or benefiting the.Agency's Industrial Redevelopment Project area,(ii) fund the
reserve requirement for the Series 2005 Bonds,and(iii)pay the costs of issuance related to the Series 2005 Bonds.
The Vernon Gas Project 2006 Variable Rate Revenue Bonds were issued to provide funds to(i)finance a portion of
the purchase by the City of a fifteen-year,prepaid supply of natural gas from Citigroup Energy Inc.pursuant to an
Agreement for Purchase and Sale of Natural Gas,between the City and Citigroup Energy Inc.;and(ii)pay the costs
of issuing the 2006 Bonds.
During the fiscal year 2005,the City issued$90,150,000,2004 Series A,$83,575,000,2004 Series B,$39,875,000,
2004 Series C,and$69,100,000,_2004 Series D,Electric System Revenue Bonds. The 2004 Bonds were issued to
provide funds(i)to refund$162,610,000 of 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; (iii) to finance the reimbursement to the City of certain costs incurred in
connection with the City's electric system facilities;(iv)to fund a deposit to the Debt Service Reserve Fund;and(v)
to pay the costs of issuance of the 2004 Bonds.
-37 '
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 6-LONG-TERM OBLIGATIONS(CONTINUED)
A summary of bonds payable for governmental and business-type activities is as follows:
Annual
Interest Principal Original issue Outstanding at
Bonds Maturity Rates Installments Amount June 30,2006
E lectric System Reven me 04/01/37 Variable To begin 04/01/29: $ 90,150,000 $ 90,150,000
Bonds,2004 Series A $2,000,000-
$12,925,000
Electric System Revenue 04/01/29 Variable To begin 04/01/18: 83,575,000 83,575,000
Bonds,2004 Series B $50,000-
$9,525,000
Electric System Revenue 04/01/39 Variable To begin 04/01/37: 39,875,000 39,875,000
Bonds,2004 Series C $11,500,000-
$14,400,000
Electric System Reven tie 04/01/18 Variable $3,800,000- 69,100,000 61,825,000
Bonds,2004 Series D $6,525,000
RDA Industrial 09/01/35 Fixed To begin 09/01/09: 49,420,000 49,420,000
Redevelopment Project Tax $1,160,000-
Allocation Bonds,2005 Series $3,460,000
Variable Rare Revenue Bonds 08/01/21 Variable To begin 08/01/07: 200,000,000 200,000,000
(Vernon Gas Project),2006 $9,950,000-
Series A $17,300,000
Variable Rate Revenue Bonds 08/01/21 Variable To begin 08/01/07: 115,440,000 115,440,000
(Vernon Gas Project),2006 $5,710,000-
Series B. $10,070,000
Variable Rate Revenue Bonds 08/01/21 Variable To begin 08101/07: 115,405,000 115,405,000
(Vernon Gas Project),2006 $5,710,000-
Series C $10,070,000
Premium 902,046
Discount (1,559,893)
Deferred amount on refunding (7,719,814)
Total Revenue Bonds $762,965,000 $747,312,339
*The Series 2004 Bonds variable rate is set periodically through an auction process. Rates on the 2004A and 2004B
bonds are reset through an auction process every 7 days. Rates on the 2004C and 2004D bonds are reset through an
auction process every 28 days. Rates on the Series 2005 Bonds are fixed rates ranging from 3.25%to 5.25%. Rates
on the 2006A Bonds arc based on 7-day Auction Periods. Rates on the 2006B and 2006C Bonds are based on a
Weekly Interest Rate determined by Citigroup Global Markets,Inc.utilizing best efforts to remarket the 2006B and
2006C Bonds which are subject to optional and mandatory tender.
-38-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 6—LONG-TERM OBLIGATIONS(CONTINUED)
•
As of June 30,2006,annual debt service requirements of business-type activities to maturity are as follows:
Electric System Revenue Bonds Payable
Year ending June 30: Principal Interest*
2007 $ 3,975,000 $ 11,999,551
2008 4,175,000 11,784,176
2009 4,350,000 11,558,277
2010 4,550,000 11,322,752
2011 4,775,000 11,076,256
2012-2016 27,200,000 51,304,143
2017-2021 34,025,000 43,490,707
2022-2026 41,075,000 35,685,826
2027-2031 49,550,000 26,528,703
2032-2036 59,875,000 15,476,094
2037-2039 41,875,000 3,085,770
Total requirements $ 275,425,000 $ 233,312,255
* As of June 30,2006,interest on the 2004 Series A,B,and C was calculated at the June 30,2006 BMA rate'of
3.970%. Interest on the 2004 Series D was calculated at the June 30,2006 one month LIBOR rate of 5.3344%. For
additional disclosure on interest rate swaps see Note 7.
Industrial Redevelopment Project Tax
Allocation Bonds Payable
Year ending June 30: Principal Interest*
2007 $ $ 2,175,093
2008 2,175,093
2009 2,175,093
2010 1,160,000 2,157,419
2011 1,285,000 2,120,167
2012.2016 6,720,000 9,928,127
2017-2021 7,720,000 8,452,644
2022-2026 7,300,000 6,679,092
2027-2031 10,020,000 4,837,959
2032-2036 15,215,000 1,931,242
$ 49,420,000 $ 42,631,929
* As of June 30,2006,debt service was calculated based upon the fixed coupon rates of the bonds ranging from
3.25%to 5.25%. For additional disclosure on basis swap see Note T
i
-39-
i
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 6—LONG-TERM OBLIGATIONS(CONTINUED)
Variable Rate Revenue Bonds
Payable
Year ending June 30: Principal Interest*
2007 $ S 18,475,892
2008 21,370,000 17,712,207
2009 22,330,000 16,761,476
2010 23,135,000 15,775,117
2011 24,055,000 14,750,127
2012.2016 136,020,000 56,842,086
2017.2021 166,495,000 24,079,795
2022 37,440,000 267,583
Total requirements S 430,845,000 $ 164,664,283
• As of June 30,2006,debt service for 2006 Series A,B,and C was calculated at the June 30,2006 BMA rate of
3.970%. For additional disclosure on interest rate swaps see Note 7.
Changes in lonr-term liabilities
The following is a summary of long-term liabilities transactions for the fiscal year ended June 30,2006:
_ Amounts
Balance - -Balance Due Within
July 1,2005 Additions Reductions June 30,2006 One Year
Governmental Activities - -
Bonds payable S S 49,420,000 S - S 49,420,000 S
Bond premium .933,457 (31,411) 902,046 44,345
Claims payable 4,992,957 2,998,117 (632,501) 7,358,573 2,452,858
Compensated absences 944,768 928,525 (944,768) 928,525 928,525
$ 5,937,725 $ 54,280,099 $ (1,608,680) S 58,609,144 S 3,425,728
Business-type activities
Bonds payable S 279,225,000 S 430,845,000 S (3,800,000) $ -706,270,000 S 3,975,000
Bond discount (1,634,532) - 74,639 (1,559,893) (74,639)
Deferred amount on refunding (8,052,628) 332,814 (7,719,814) (332,814)
Compensated absences '125,146 , 200,168 (125,146) 200,168 200,168
S 269,662,986 S 431,045,168 S (3,517,693) S 697,190,461 S 3,767,715
-40-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS
Basis Swan—2003 Series A and B Bonds
Objective of the interest rate swap:As a means to mitigate its exposure to interest rate risk,the City entered into an i
interest basis swap in connection with its$87.5 million 2003 Electric System Series A and Series B bonds(the
"2003 Series AB Bonds").
Terms: As originally structured, the 2003 Series AB Bonds and the related swap agreement were scheduled to
mature on April 1,2033,and the swap's aggregate notional amount of$87.5 million matched the par amount of the
2003 Series AB Bonds. The swap was entered into in July 2003. Under the swap,the City pays the counterparty
payments equal to the average of the weekly Bond Market Association (BMA) variable rate index and receives {
payments equal to 80.2%,the London Interbank Offered Rate(LIBOR)one-month index_
Fair value:Because the differential between the BMA index and LIBOR index has increased since execution of the
swaps,the swap has an aggregate positive fair value of$1,521,441 as of June 30,2006.The fair value was estimated
using the zero-coupon method. This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate.future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is positive,the City has credit exposure to the counterparty
equal to the fair value amount. The swap counterparty Bank of America,was rated AA by Standard&Poor's and
Aa by Moody's Investors Service as of June 30,2005.To mitigate the potential for credit risk,if the counterparties
credit quality falls below A+fAa2,the fair value of the swap will be fully collateralized by the counterparty with
U.S.government securities. Collateral would be posted with a third-party custodian.
Basis risk:The swap exposes the City to basis risk should the relationship between LIBOR and BMA.converge to a
ratio higher than that stated in the swap. If a change occurs that results in the rates moving to a convergence ratio
greater than that stated in the swap,the swap may not provide the expected interest rate risk mitigation.
Termination risk:The City or its counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. The swap may be terminated by the City if the counterparty's credit quality rating falls below
"A—"as issued by Standard&Poor's or"A3"as issued by Moody's Investors Service. ]fat the time of termination,
the swap has a negative fair value,the City would be liable to the counterparty for a payment equal to the swap's fair
value.
Swap payments and associated debt: In December 2004,the City defeased the 2003 Series AB Bonds with proceeds
of its 2004 Series A bonds. Because interest payments on the 2004 Series A bonds are determined based on a
variable rate short term basis,the City elected to retain the swap. The City expects that as interest rates rise,the
difference,or spread,between short-term tax-exempt rates and short-term taxable rates will increase. Under this
expectation,the City will receive payments under the swap greater than its payments to the counterparty. As a net
receiver on the swap,the City would then have such monies available to offset higher debt service requirements on
its 2004 Series A bonds.
-41 -
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Basis Swap—2003 Series C Bonds
Objective of the interest rate swap: As a means to reduce its bond interest cost,the City entered into an interest
basis swap in connection with its$75.11 million 2003 Electric System Series C bonds(the"2003 Series C Bonds").
Terms:As originally structured,the 2003 Series C Bonds and the related swap agreement mature on April 1,2033,
and the swap's aggregate notional amount of$75.11 million matches the par amount of the 2003 Series C Bonds.
The swap was entered into in August 2003.Under the swap,the City pays the counterparty payments equal to the
average of the weekly Bond Market Association(BMA)variable rate index and receives payments equal to 78.6%
of the London Interbank Offered Rate(LIBOR)one-month index.
Fair value:Because the differential between the BMA index and LIBOR index has increased since execution of the
swaps, the swaps have an aggregate positive fair value of$624,884 as of June 30,2006. The fair value was
estimated using the zero-coupon method.This method calculates the future net settlement payments required by the
sw2p, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest
rates.These payments are then discounted using the spot rates implied by the current yield curve for hypothetical
zero-coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is positive,the City has credit exposure to the counterparty
equal to the fair value amount. The swap counterparty,Wachovia,was rated AA-by Standard&Poor's and Aa2 by
Moody's Investors Service as of June 30,2005. To mitigate the potential for credit risk,if the counterparty's credit
quality falls below A+/Aa2, the fair value of the swap will be fully collateralized by the counterparty with U.S.
government securities:Collateral would be posted with a third-party custodian.
Basis risk:The swap exposes the City to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than that stated in the swap.If a change occurs that results in the rates moving to a convergence ratio
greater than that stated in the swap,the swap may not provide the expected interest cost savings.
Termination risk:The City or its counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. The swap may be terminated by the City if the counterparty's credit quality rating falls below
"A—"as issued by Standard&Poor's or"A3"as issued by Moody's Investors Service.If at the time of termination,
the swap has a negative fair value,the City would be liable to the counterparty for a payment equal to the swap's fair
value.
Swap payments and associated debt: In December 2004,the City defeased the 2003 Series C with proceeds of its
2004 Series B bonds. Because interest payments on the 2004 Series B bonds are determined based on variable rate
short term basis,the City elected to retain the swap. The City expects that as interest rates rise the difference,or
spread,between short-term tax-exempt rates and short-term taxable rates will increase. Under this expectation,the
City will receive payments under the swap greater than its payments to the counterparty. As a net receiver on the
swap,the City would then have such monies available to offset higher debt service requirements on its 2004 Series
B bonds.
-42-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Fixed to Variable Swap—2003 Series C Bonds
Objective of the interest rate swap:For this bond issuance the City's asset/liability strategy is to have variable rate
debt exposure consistent with its variable rate asset exposure; the result being that as interest rates increase,the
City's investment income will offset its increased variable rate debt costs.
r
Terms: In April 2003, the City entered into a pay-variable, receive-fixed interest rate swap for the term of its
$75,110,000 2003 Series C Electric System revenue bonds.The notional amount,of the swap was$75,110,000. In
June 2003,the City elected to terminate the portion of the swap through April 2008 in exchange for a payment of
$4,170,000 from the swap counterparty. Under the remaining terms of the swap,the swap becomes effective in I
April 2008 and terminates in April 2033; the City pays a variable rate equal to the Bond Market Association
Municipal Swap Index (BMA), which was 3.97 percent at June 30, 2006, plus 0.84% and receives fixed-rate
.payments equal to the actual semi-annual interest payments due on the Series C bonds. In December 2004,the City
defeased the 2003 Series C Bonds with proceeds of its 2004 Series B bonds. The City expects to terminate this
swap prior to its effective date of April 2008.
Fair value:As of June 30,2006,the swap had a negative fair value of$3,023,394. The fair value was estimated
using the zero-coupon method.This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is negative,the City does not have any credit exposure to
the counterparty. Should the swap's fair value become positive, the City would have credit exposure to the
counterparty equal to the fair value amount. As of June 30,2006, the swap counterparty, Bank of America, was
rated AA by Standard'&Poor's and Aa by Moody's Investors Service. To mitigate the potential for credit risk;if
the counterparty's credit quality falls below A+/Aa2,the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities.Collateral would be posted with a third-party custodian.
Interest rate risk•. Beginning in April 2008,if the swap is not previously terminated,the swap increases the City's
exposure to interest rate risk.As BMA increases,the City's net payment on the swap increases.
Termination risk: The City or the counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. In addition, the City may optionally terminate the agreement on any date. If at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: The debt associated with the swap,2003 C Bonds,has been defeased. The
City expects to terminate this swap prior to its effective date of April 2008.
i.
-43-
{
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Variable to Fixed Swan—2004 Series A Bonds
Objective of the interest rate swap:As a means to reducing its overall exposure to interest rate risk and achieving a
lower cost of capital relative to long term fixed rate bonds,the City elected to issue its$90,150,000 2004 Series A
Electric-System revenue bonds(the"2004 Series A Bonds")in a variable rate mode and enter to a fixed payer swap
to achieve synthetic fixed debt.
Terms:In December 2004,the City entered into a pay-fixed,receive-variable interest rate swap for the term of the
2004 Series A Bonds.The notional amount of the swap is$90,150,000. Under the original terms of the swap,the
City pays the counterparty a fixed rate of 3.637%and receives from the counterparty variable-rate payments equal to
62.87%of the London Interbank Offered Rate(LIBOR)one-month index plus 0.119%. On March 16,2006,the
City amended its fixed payment to 3.607%to the counterparty. The City expects that the variable-rate payments
from the swap will approximate the interest payments on the 2004 Series A Bonds,thereby creating synthetic fixed
rate debt. The notional amount of the swap and the amortization of the principal of the 2004 A Bonds are exactly
matched.
Fair value: As of June 30, 2006, the swap had a positive fair value of$1;305,648. The fair value was estimated
using the zero-coupon method. This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is positive,the City has credit exposure to the counterparty
equal to the fair value amount.As of June 30, 2006, the swap counterparty, Morgan Stanley was rated A+ by
Standard & Poor's and Aa3 by Moody's Investors Service. To mitigate the potential for credit risk, if the
counterparty's credit quality falls below(BBBBaa2),the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities.Collateral would be posted with a third-party custodian.
Interest rate risk: The swap is structured to reduce the City's exposure to interest rate risk.
Basis risk:The swap exposes the City to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than variable leg of the swap.
Termination risk: The City or the counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. In addition,the City may optionally terminate the agreement on any date.If at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: It is expected that the variable payments received by the City on the swap will
approximate the variable interest payments on the 2004 Series A Bonds,resulting in the City's net interest exposure
being equaled to the fixed payment on the swap to the counterparty. Because the variable payments on the 2004
Series A Bonds and the swap are on different bases,some basis differential is expected from time to time.
-44-
I_
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
The following summarizes the expected net debt service if BMA remains constant 3.970%and I Month LIBOR
remains constant at 5.334%(actual rates as of June 30,2006).
Year Ending Principal Interest Rate Total
June 30 Amount Interest Swap,Net Debt Service
2007 $ $ 3,578,955 $ 121,038 $ 3,699,993
2008 3,578,955 121,038 3,699,993
2009 3,578,955 121,038 3,699,993
2010 3,578,955 121,038 3.699,993
2011 1,578,955 121,038 3,699,993
2012-2016 17,894,775 605,189 18,499,%4
2017.2021 17,894,775 605,189 18,499,964
2022-2026 17,894,775 605,189 18,499,964
2027-2031 28,275,000 16,718,166 565,397 45,558,563
2032-2036 59,875,000 7,313,567 247,340 67,435,907
2037 2,000.000 66,167 2,238 2,068,404
$ 90,150,000 $ 95,677,000 $ 3,235,732 $ 189,062,732
Variable to Fixed Swap—2004 Series B Bonds
Objective of the interest rate swap:As a means to reducing its overall exposure to interest rate risk and achieving a
lower cost of capital relative to long term fixed rate bonds,the City elected to issue its$83,575,000 2004 Series B
Electric System revenue bonds(the"2004 Series B Bonds")in a variable rate mode and enter to a fixed payer swap
to achieve synthetic fixed debt.
Terms:In December 2004,the City entered into a pay-fixed,receive-variable interest rate swap for the term.of its
2004 Series B Bonds.The notional amount of the swap is$83,575,000. Under the terms of the swap,the City pays a
fixed rate of 3.572%and receives variable-rate payments equal to 62.87%of the London Interbank Offered Rate
(LIBOR)one-month index plus,l 19%. On March 16,2006,the City revised its fixed payment to 3.542%to the
counterparty. The City expects that the variable-rate payments from the swap will approximate the interest
payments on the 2004 Series B Bonds. The notional amount of the swap and the amortization of the principal of the
2004 Series B Bonds are exactly matched.
Fair value:As of June 30,2006,the swap had a positive fair value of$1,455,922. The fair value was estimated
using the zero-coupon method. This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is positive,the City has credit exposure to the counterparty
equal to the fair value amount. As of June 30,2006, the swap counterparty, Morgan Stanley was rated A+ by
Standard & Poor's and Aa3 by Moody's Investors Service. To mitigate the potential for credit risk, if the
counterparty's credit quality falls below(BBB/Baal),the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities.Collateral would be posted with a Ihird-party custodian.
Interest rate risk: The swap is structured to reduce the City's exposure to interest rate risk.
Basis risk:The swap exposes the City to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than variable leg of the swap.
-45-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Termination risk: The City or the counterparty may terminate the swap if the other patty fails to perform under the
terms of the contract. In addition,the City may optionally terminate the agreement on any date.if at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: It is expected that the variable payments received by the City-on the swap will
approximate the variable interest payments on the 2004 Series B Bonds,resulting in the City's net interest exposure
being equal to the fixed payment on the swap to the counterparty. Because the variable payments on the 2004 Series
B Bonds and the swap are on different bases,some basis differential is expected from time to time.
The following summarizes the expected net debt service if BMA remains constant 3.970%and 1 Month LIBOR
remains constant at.5.334%(actual rates as of June 30,2006).
Year Ending Principal Interest Rate Total
June 30 Amount Interest Swap,Net Debt Service
2007 $ $ 3,317,928 5 112,210 $ 3,430,138
2008 3,317,928 112,210 3,430,138
2009 3,317,928 112,210 3,430,138
2010 3,317,928 112,210 3,430,138
2011 3,317,928 112,210 3,430,138
2012-2016 16,589,638 561,050 17,150,688
2017-2021 21,225,000 15,623,439 528,374 37,376,813
2022-2026 41,075,000 8,967,403 303,272 50,345,674
2027-2029 21,275,000 1,286,445 43,507 22,604,952
$ 83,575,000 S 59,056,562 S 1,997,253 S 144,628,815
Variable to Fixed Swap—2004 Taxable Series D Bonds
Objective of the interest rate swap:As a means to reducing its overall exposure to interest rate risk,the City elected
to enter into a Fixed payer swap to achieve synthetic fixed debt with respect to its$69,100,000 2004 Taxable Series
D Electric System revenue bonds(the"2004 Taxable Series D Bonds")issued in a variable rate mode.
Terms:On March 16,2006,the City entered into a pay-fixed,receive-variable interest rate swap for the term of its
2004 Taxable Series D Bonds.The notional amount of the swap is$61,825,000. Under the terms of the swap,the
City pays a fixed rate of 5.227%and receives variable-rate payments equal to 100.00%of the London Interbank
Offered Rate(LIBOR) three-month index. The City expects that the variable-rate payments from the swap will
approximate the interest payments on the 2004 Taxable Series D Bonds. The notional amount of the swap and the
amortization of the principal of the 2004 Taxable Series D Bonds are exactly matched.
Fair value: As of June 30,2006,the swap had a positive fair value of$1,364,979. The fair value was estimated
using the zero-coupon method.This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are(hen discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the dale of each future net settlement on the swap.
Credit risk. As the swap's fair value as of June 30,2006 is positive,the City has credit exposure to the counterparty
equal to the Fair value amount. As of June 30, 2006, the swap counterparty, Morgan Stanfey was rated Af by
Standard & Poor's and Aa3 by Moody's Investors Service. To mitigate the potential for credit risk, if the
counterparty's credit quality falls below(BBBBaa2),the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities.Collateral would be posted with a third-party custodian.
Interest rate risk: The swap is structured to reduce the City's exposure to interest rate risk.
-46-
1
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Basis risk:The swap exposes the City to basis risk should the three month LIBOR rate be less than the rate on the
2004 Taxable Series D Bonds.
Termination risk: The City or the counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. In addition,the City may optionally terminate the agreement on any date. If at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: It is expected that the variable payments received by the City on the swap will
approximate the variable interest payments on the 2004 Taxable Series D Bonds,resulting in the City's net interest
exposure being equaled to the fixed payment on the swap to the counterparty. Because the variable_payments on the
2004 Taxable Series D Bonds and the swap are on different bases,some basis differential is expected from time to
time.
The following summarizes the expected net debt service if I Month LIBOR remains constant at 5.3344%and the 3
Month LIBOR remains constant at 5.4806%(actual rates as of June 30,2006).
i.
Year Ending Principal Interest Rate Total
June 30 Amount Interest Swap,Net Debt Service
2007 $ 3,975,000 $ 3,352,072 $ (65,689) $ 7,261,383
2008 4,175,000 3,132,391 (61,384) 7,246,007
2009 4,350,000 2,901,978 (56,868) 7,195,110
2010 4,550,000 2,661,745 (52,161) 7,159,584
2011 4,775,000 2,410,122 (47,234) 7,138,088
2012-2016 27,200,000 7,892,977 (154,674) 34,938,303
2017-2018 12,800,000 942,206 (18,464) 13,723,742
S 61,825,000 $ 23,293,691 $ (456,472) $ 84,662,219
Basis Swap—Series 2005
Objective of the interest rate swap:As a means to reduce its bond interest cost, the RDA entered into an interest
basis swap in connection with its$49,420,000 Industrial Redevelopment Project Tax Allocation Bonds,Series 2005
(the"Series 2005 Bonds").
Terms:As originally structured, the Series 2005 Bonds and the related swap agreement mature on September 1,
2035,and the swap's aggregate notional,amount of$49,420,000 million matches the par amount of the Series 2005
Bonds. The swap was entered into on February 16,2006.Under the swap,the RDA pays the counterparty payments
equal to the average of the weekly Bond Market Association (BMA) variable rate index and receives payments
equal to 63.0%plus 0.72%of the London Interbank Offered Rate(LIBOR)three-month index.
Fair value:Because the differential between the BMA index and LIBOR index has decreased since execution of the
swaps, the swaps have an aggregate negative fair value of$231,699 as of June 30, 2006. The fair value was
estimated using the zero-coupon method.This method calculates the future net settlement payments required by the
swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest
rates.These payments are then discounted using the spot rates implied by the current yield curve for hypothetical
zero-coupon bonds due on the date of each future net settlement on the swap.
-47-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Credit risk: As the swap's fair value as of June 30,2006 was negative,the RDA does not have credit exposure to
the counterparty. Should the RDA's fair value become positive, the RDA would have credit exposure to the
counterparty equal to the fair value amount. The swap counterparty,Lehman Brothers,was.rated At by Standard&
Poor's and AI by Moody's Investors Service as of June 30,2006. To mitigate the potential for credit risk,if the
counterparty's credit quality falls below"A- or"A3",the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities. Collateral would be posted with a third-party custodian.
Basis risk:The swap exposes the RDA to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than that stated in the swap.If a change occurs that results in the rates moving to a convergence ratio
greater than that stated in the swap,the swap may not provide the expected interest cost savings.
Termination risk:The RDA or its counterparry may terminate the swap if the other party fails to perform under the
terms of the contract. The swap may be terminated by the RDA at any time. If at the time of termination,the swap
has a negative fair value,the RDA would be liable to the counterparty for a payment equal to the swap's fair value.
The following summarizes the expected net debt service if BMA remains constant 3.970%and 3 Month LIBOR
remains constant at 5.4806%(actual rates as of June 30,2006).
.Year Ending Principal Basis Total
June 30 Amount interest Swap,Net Debt Service
2007 $ S 2,275,306 S (100,213) $ 2,175,093
2008 2,275,306 (100,213) 2,175,093
2009 2,275,306 (100,213) 2,175,093
2010 1,160,000 2,256,456 (99,037) 1,317,419
2011 1,285,000 2,216,725 (96,558) 3,405,167
2012-2016 6,720,00!! 10,371,369 (443,242) 16,648,126
2017-2021 7,720,000 8,822,491 (369,847) 16,172,644
2022-2026 7,300,000 6,972,025 (292,933) 13,979,092
2027-2031 10,020,000 5,046,719 (208,760) 14,857,950
2032-2036 15,215,000 2,012,875 (81,633) 17,146,242
$ 49,420,000 $ 44,524,578 S (1,892,649) S 92,051,929
Variable to Fixed Swap—2006 Series A Gas Bonds
Objective of the interest rate swap:As a means to reducing its overall exposure to interest rate risk,the Vernon
Natural Gas Financing Authority elected to enter into a fixed payer swap to achieve synthetic fixed debt with respect
to its$200,000,000 Variable Rate Revenue Bonds(Vernon Gas Project),2006 Series A (the"2006 Series A Gas
Bonds")issued in a variable rate mode.
Terms:The City entered into four(4)pay-fixed,receive-variable interest rate swaps for the term of its 2006 Series A
Gas Bonds.The notional amounts of each of the four(4)swaps is$50,000,000. Under the terms of the swaps,the
City pays a fixed rate of 3.683% and receives variable-rate payments equal to 62.6%of the London Interbank
Offered Rate (LIBOR)one month index. The City expects that the variable-rate payments from the swaps will
approximate the,interest payments on the 2006 Series A Gas Bonds. The notional amount of the swaps and the
amortization of the principal of the 2006 Series A Gas Bonds are exactly matched.
Fair value:As of June 30,2006,the swaps had a negative fair value of$1,929,994. The fair value was estimated
using the zero-coupon method.'This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
-48-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Credit risk: As the swap's fair value as of June 30,2006 is negative,the City does not have credit exposure to the
counterparty. Should the City's fair value become positive,the City would have credit exposure to the counterparly
equal to the fair value amount. As of June 30,2006, the swap counterparty, Citibank, N.A. was rated AA by
Standard & Poor's and Aal by Moody's Investors Service. To mitigate the potential for credit risk, if the
counterparty's credit quality falls below (A-!A3),the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities. Collateral would be posted with a third-party custodian.
Interest rate risk: The swap is structured to reduce the City's exposure to interest rate risk.
Basis risk:The swap exposes the City to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than variable leg of the swap.
Termination risk: The City or the counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. In addition,the City may optionally terminate the agreement on any date.If at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: It is expected that the variable payments received by the City on the swap will
approximate the variable interest payments on the 2006 Series A Gas Bonds, resulting in the City's net interest
exposure being equaled to the fixed payment on the swap to the counterparty. Because the variable payments on the
2006 Series A Gas Bonds and the swap are on different bases,some basis differential is expected from time to time.
The following summarizes the expected net debt service if BMA remains constant 3.970%and 1 Month LIBOR
remains constant at 5.3344%(actual rates as of June 30,2006).
Year Ending Principal Interest Rate Total
June 30 Amount Interest Swap,Net Debt Service
2007 7,940,000 687,331 8,627,331
2008 9,950,000 7,610,821 658,836 18,219,656
2009 10,400,000 7,200,918 623,352 18,224,270
2010 10.,775,000 6,775,632 586,537 , 18,137,169
2011 11,200,000 6,333,804 548,290 18,082,094
2012-2016 63,225,000 24,385,229 2,110,923 89,721,152
2017-2021 77,150,000 10,312,406 892,700 88,355,106
2022 17,300,000 114,468 9,909 17,424,377
S 20,W0,,DW S 70,03,278 3 b,JJ?873 3 27b,79J,J5b
Variable to Fixed Swap—2006 Series B and C Gas Bonds
Objective of the interest rate swap: As a means to reducing its overall exposure to interest rate risk,the Vernon
Natural Gas Financing Authority elected to enter into a fixed payer swap to achieve synthetic fixed debt with respect
to its$115,440,000 Variable Rate Revenue Bonds(Vernon Gas Project),2006 Series B and$115,405,000 Variable
Rate Revenue Bonds (Vernon Gas Project), 2006 Series C (the "2006 Series B and C Gas Bonds") issued in a
variable rate mode.
Terms:The City entered into a pay-fixed,receive-variable interest rate swap for the term of its 2006 Series B and
Series C Gas Bonds. The notional amount for the swap is$23Q,845,000._Under the terms of the swaps,the City
pays a fixed rate of 3.753%and receives variable-rate payments equal to 64.8%of the London Interbank Offered
Rate(LIBOR)one month index. The City expects that the variable-rate payments from the swaps will approximate
the interest payments on the 2006 Series B and C Gas Bonds. The notional amount of the swaps and the
amortization of the principal of the 2006 Series BC Gas Bonds are exactly matched.
-49-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued) _
June 30,2006
NOTE 7—BOND INTEREST RATE SWAP AGREEMENTS(CONTINUED)
Fair value:As of June 30,2006,the swaps had a negative fair value of$1,341,639. The fair value was estimated
using the zero-coupon method. This method calculates the future net settlement payments required by the swap,
assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates.
These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-
coupon bonds due on the date of each future net settlement on the swap.
Credit risk: As the swap's fair value as of June 30,2006 is negative,the City does not have credit exposure to the
counterparty. Should the City's fair market value become positive, the City would have credit exposure to the
counterparty equal to the fair value_amount. As of June 30,2006,the swap counterparty,Citibank,N.A.was rated
AA by Standard&Poor's and Aal by Moody's Investors Service. To mitigate the potential for credit risk,if the
counterparty's credit quality falls below (A-/A3), the fair value of the swap will be fully collateralized by the
counterparty with U.S.government securities. Collateral would be posted with a third-party custodian.
Interest rate risk: The swap is structured to reduce the City's exposure to interest rate risk.
Basis risk.The swap exposes the City to basis risk should the relationship between LIBOR and BMA converge to a
ratio higher than variable leg of the swap.
Termination risk: The City or the counterparty may terminate the swap if the other party fails to perform under the
terms of the contract. In addition,the City may optionally terminate the agreement on any date.If at the time of
termination the swap has a negative fair value,the City would be liable to the counterparty for an amount equal to
the negative fair value.
Swap payments and associated debt: It is expected that the variable payments received by the City on the swap will
approximate the variable interest payments on the 2006 Series B and Series C Gas Bonds,resulting in the City's net
interest exposure being equaled to the fixed payment on the swap to the counterparty. Because the variable
payments on the 2006 Series BC Gas Bonds and the swap are on different bases,some basis differential is expected
from time to time.
The following summarizes the expected net debt service if BMA remains constant 3,970%and 1 Month LIBOR
remains constant at 5.3344%(actual rates as of June 30,2006).
Year Ending Principal Interest Rate Total
June 30 Amount Interest Swap,Net Debt Service
2007 $ S 9,164,547 S 684,014 S 9,848,561
2008 11,420,000 8,786,735 655,815 20,862,550
2009 11,930,000 8,316,488 620,718 20,867,206
2010 12,360,000 7,828,642 584,306 20,772,948
2011 12,855,000 7,321,573 546,460 20,723,033
2012.2016 . 72,795,000 28,238,312 2,107,622 103,140,935
2017-2021 89,345,000 11,98D,501 894,188 102,219,689
2022 20,140,000 133,260 9,946 20,283,206
S 230,845,000 S 81,770,057 $ 6,103,070 S 318,718,127
-50-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 8—OTHER DERIVATIVE FINANCIAL INSTRUMENTS
The City's Light and Power Fund(Fund),which accounts for the maintenance and operations of the City's electric
utility plant,enters into contracts for electricity and natural gas to meet the expected needs of its retail customers.
The Fund also sells excess electricity capacity during periods when it is not needed to meet its retail.requirements.
Derivative contracts(futures and options) designated as cash flow hedges are entered into by the Fund to hedge
variableprice risk associated with the purchase and sale of commodities and extend out to March 30,20(17. At June
30, 2006, the Fund's derivative contracts totaled $6,109,607 and are recorded at cost in the Fund's financial
statements and are included with other assets. For the year ended June 30,2006,the City realized a net loss of
$3,433,453 on closed derivative contracts. The fair value of the'derivative instruments at June 30,2006 totaled
$937,615. Unrealized gains and losses on the derivative instruments are not recognized in the accompanying
financial statements since the Fund does not apply FASB statements issued after November I, 1989.
NOTE 9—RISK MANAGEMENT
The City is exposed to various risks of loss related to torts;theft of,damage to,and destruction of assets;errors and
omissions;injuries to employees;natural disasters;unemployment coverage,and providing health benefits to
employees,retirees,and their dependents. The City is self-insured for its general liability,workers'compensation,
and property liability. The City has chosen to establish risk financing Internal Service Funds,whereby assets are set
aside for claim settlements associated with the above risks of loss up to certain limits.
The City has obtained various insurance policies that provide coverage for"Special Form Perils"against 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 the
City,real and personal property total insured values equaled$293,136,673.
Crime(Employee Theft and,Depositors Forgery and Alteration,and Computer and Funds Transfer Fraud)coverage
in also in force with a limit$100,000 for each line of coverage.
The City is self insured for the first$300,000 of workers'compensation claims and for the first$2,000,000 of its
general liability coverage.
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, Excess coverage is provided by
ICRMA, 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
-51 -
CITY OF VERNON,CALIFORNIA
Notes.to Basic Financial Statements(Continued)
June 30,2006
NOTE 9—RISK MANAGEMENT(CONTINUED)
Insured limits are:
Type of Covera a Limits
Excess General Liability $10,000,000 excess of$2,000,000(self insured)
Excess General Liability $10,000,000 excess of$10,000,000
Amounts in excess of these limits are self-insured.There have been no significant reductions of coverage from the
prior year.There have been no settlements exceeding insurance coverage for each of the past three fiscal years.
The unpaid claims liabilities included in each of the self-insurance Internal Service Funds are based on the results of
actuarial studies and third-party administrator claim reports and include amounts for claims incurred but not
reported,including loss adjustment expenses.Claims liabilities are calculated considering the effects of inflation and
recent claim settlement trends,including frequency and amount of payouts and other economic and social factor;.
Changes in the balances of claims liabilities during the past two fiscal years for all self-insurance funds combined
are as follows:
Fiscal Year Ended June 30
2006 2005
Claims payable,beginning of fiscal year $ 4,992,957 $ 5,252,825
Incurred claims 2998,117 409,603
Claims payments (632,501) (669,471)
Claims payable,end of fiscal year $ 7,358,573 $4,992,957
NOTE 10—PENSION PLAN
The City contributes to the California Public Employees'Retirement System(PERS),an agent multiple-employer
retirement system that acts as a common investment and administrative agent for participating public entities within
the State of California.
All full-time safety(police and fire personnel)and miscellaneous personnel and temporary or part-time employees
who have worked 1,000 hours in a fiscal year are eligible to participate in the PERS.Benefits vest after five years of
service. Employees who retire at age 50 with five years of credited service are entitled to retirement benefits.
Monthly retirement benefits are based on an employee's average compensation for his or her single highest year of
compensation for each year of credited service.
Miscellaneous members with five years of credited service may retire at age 55 with full benefits based on a benefit
factor derived from the "2% at 55 Miscellaneous Factor"benefit factor table and between age 50 and 54 with
reduced retirement benefits.Safety members may retire at age 50 with full benefits based on a benefit factor derived
from the"3% at 50 Safety Factor" for Police Department Employees and "2% at 50 Safety Factor" for Fire
Department Employees benefit factor table with five years of credited service.The PERS also provides death and
disability benefits. These benefit provisions and all other requirements are established by State statute and City
ordinance.
The City's plan does not issue a stand-alone financial report but is included in the PERS report, which can be
obtained from PERS at Lincoln Plaza,400,P Street,Sacramento,California 95814.
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CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 10—PENSION PLAN(CONTINUED)
The State-required City employee salary contributions of 7% for miscellaneous employees and 9% for safety
members are subsidized by the City.The City is required to contribute the remaining amounts necessary to fund the
benefits for its members,using the actuarial basis adopted by the PERS Board of Administration.
The City's total contribution to the PERS for the year ended June 30,2006 was$5,792,468.City contribution rates
as a percentage of covered payroll were 8.605% for miscellaneous plan members and 25.426"/o 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 30,2003:
The PERS uses the entry age normal actuarial cost method,which is a projected benefit cost method.that takes into
account those benefits expected to be earned in the future as well as those already accrued.According to this cost
method,the normal cost for an employee is the level amount that would fund the projected benefit if it were paid
annually from the date of employment until retirement:The PERS uses a modification of the entry age normal cost
method whereby the employer's total normal cost is expressed as a level percentage of payroll.Unfunded liabilities
are amortized over a closed,20-year period
Significant actuarial assumptions used in the valuation included(a)a rate of return on.the investment of present and
future assets of 7.75%a year,compounded annually;(b)overall payroll growth of 3.25%,compounded annually;
and(c)a merit scale varying by duration of employment coupled with an assumed annual inflation growth of 3.00%
and an annual production growth of 0.25%.
The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the
market value of investments over IS year period.
Trend information for the current and two preceding fiscal years is as follows:
Percentage
Fiscal Year Annual Pension of
Ended Cost(APC) Amount APC Net Pension
June 30 Contributed Contributed Obligation
2006 $ 5,792;468 $ 5,792,468 100% -
2005 4,610,702 4,610,702 100°/" -
2004 2,742,685 2,742,685 100"/0 -
The following schedule represents the required supplemental information for the three most recent actuarial
valuations.This schedule provides information about progress made in,accumulating sufficient assets to pay benefits
when due(dollar amounts in millions)(unaudited):
Actuarial Actuarial Actuarial Unfunded Funded Annual UAAL
Valuation Accrued Value of (Overfunded) Ratio Covered (OAAL)As a
Date June 30 Liability Assets' UAAL Payroll %of Covered
(AA L) (OAAL) Payroll
(a) (b) (a)-(b) (b)/(a) (c) [(a)-(b)l/(e)
2004 $ 180.3 $ 170.5 $ 9.8 94.5% $ 22.0 44.6%
2003 172.2 164.8 7.4 95.7% 21.6 34.1%
2002 . 161.6 166.3 (4.6) 102.9 19.9 (233)
-53-
f
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 11—LEGAL SETTLEMENT
In July 2006,the City settled a dispute over a wholesale power purchase contract with Mirant Americas Energy
Marketing,LP("MAEM")for$15,000,000. This sum shall be paid to MAEM in installments,beginning in August
2006,over 30 months,plus interest at 7%per annum. The controversy arose in connection with the delivery of
power under the contract and the filing by MAEM of a petition in bankruptcy court.
In November 2006,the City settled a dispute over contract obligations with its former electric distribution system
maintenance provider,Resource Management International,Inc.("RMI"). RMI has paid the sum of$7,400,000 to
the City in order to settle all disputes between the parties.
NOTE 12-DEFICITS IN FUND EQUITY
The Gas Enterprise Fund has negative net assets of$6,525,211 at June 30, 2006, which will be recovered from
future operating revenues from customers.
The Equipment Replacement Internal Service Fund has negative net assets of$149,848 at June 30,2006. To the
extent such deficit is attributed to shortfalls in charges to other funds,such deficit will be recovered through future
i rate increases. A deficit arising from decreases in fair value of pooled investments will not be recovered through
charges to other funds.
NOTE l3-EXCESS OF EXPENDITURES OVER APPROPRIATIONS
For the current year,the City's excess expenditures over appropriations in the general government were$6,338,061.
However,these excess expenditures over appropriations were offset by the under expenditures of$3,615,057 in
public safety and$3,205,155 in public works.The City's,excess expenditures over appropriations for capital outlay
were$7,274,739.These expenditures were incurred by the City in its current industrial development programs and
were funded by available fund balance in the general fund.'
NOTE 14—LIGHT AND POWER OPERATIONS AND COMMITMENTS
Dererulallon
Effective April 1, 1998,competition was introduced into California's electric utility market,and customers of the
state's investor-owned utilities (IOUs) became eligible for direct access. The implementation of competition in
accordance with State.Assembly Bill 1890(AB 1890)resulted in significant structural changes to the electric power
industry,including mandated direct'access for IOU customers,energy sales through the California Power Exchange
("CPX' ,and management of transmission assets through an Independent System Operator(ISO). AB 1890 also
legislated the recovery of stranded investment through the assessment of a non-by passable competition transition
change(CTC). The original deregulation legislation.applied to the State's IOUs and did not compel participation by
publicly owned utilities,such as the City's electric utility.
During the fiscal year 2001,the City made sates of energy to CPX. CPX made minimal payments on these sales and
filed for protection under Chapter 1 I of the Federal Bankruptcy Statue in January 2001. As of June 30,2Q06 a total
of$3,061,069 was due the City from CPX. The City has recorded a$1,000,000 reserve for uncollectible accounts
against this$3,061,069 receivable at June 30,2006.
Part0yarine Transmission Owner
On August 30,2000,the City filed a.petition for declaratory order with the Federal Energy Regulatory Commission
(FERC).requesting a determination by the FERC that the City's Transmission Revenue Requirement (TRR), as
approved by its rate setting body, the City Council, is proper for purposes of the City becoming a Participating
Transmission Owner(PTO) in the California ISO.The FERC issued its order accepting the City's petition, with
certain modification; on October 27,2000, Certain aspects of the FF�RC order were rJaaJJenged by some of the
State's other PTOs. Recently,a federal appeals court ruled that the way the FERC arrived at its decision was
improper and remanded the case back to the FERC for further proceedings.The City's expected outcome of these
proceedings is discussed in Note 15.As a PTO, the City has turned over operational control of its transmission
entitlements to the ISO effective January 1,2001 and shall be reimbursed based upon its TRR by the ISO through
the ISO's collection of a transmission access charge(TAC).
-54-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 14-LIGHT AND POWER OPERATIONS AND COMMITMENTS(CONTINUED)
On December 21, 2000, the.ISO filed, on behalf of itself and the Participating Transmission Owners (PTO), a
number of changes to its Transmission Control Agreement(TCA)to recognize Vernon's application to become a
Participating Transmission Owner. The ISO also filed revisions to identify the transmission interests that the City
will be turning over to the ISO's operational control and the inclusion of an explicit contract provision to ensure that
all PTOs,including an entity such as the City,which is not subject to the rate jurisdiction or refund jurisdiction of
FERC under section 205 and 206 of the Federal Power Act (FPA), make appropriate refunds or payment
adjustments to implement any relevant FERC order.
Project Commitments
A. Southern California Public Power Authority
In 1980, the City entered into a joint powers agreement with nine(9) Southern California cities and an
irrigation district to form the Southern California Public Power Authority (the "Authority'). The
Authority's purpose is the planning, financing, acquiring, constructing and operating of projects that
generate or transmit electric energy.
The Authority purchased a 5.91%interest in the Palo Verde Nuclear Generating Station(the"Station"),a
nuclear-fired generating station near Phoenix, Arizona, from the Salt River Project Agricultural
Improvement and Power District, and a 6.55%share of the right to use certain portions of the Arizona
Nuclear Power Project Valley Transmission System. The City has a 4.9% entitlement share of the
Authority's interest in the station.
Between 1983 and 2062,the Authority issued$3.166 billion of Power Project Revenue Bonds to finance
the purchase of the Authority's share of the Station and related transmission rights. The bonds are not
obligations of any member of the Authority or public agency other than the Authority.Under a power sales
contract with the Authority, the City is obligated on a"take or pay"basis for its proportionate share of
power generated,as well as to make payments for its proportionate share of the operating and maintenance
expenses of the Station,debt service on the bonds and any other debt,whether or not the project or any part
thereof or its output is suspended,reduced or terminated.The,City's proportionate share of costs during
fiscal year 2006 was$2,300,256.
B. Hoover Dam Power Plant Upgrade Program
In January 1987,the City entered into a contract with the Federal Bureau of Reclamation to fund part of an
upgrading program of the Hoover Dam power plant to increase the plant's generating capacity. In
exchange,the City will receive its pro rata share of the additional power produced. Total program costs are
estimated to be$155 million.
As of June 30,2006,the City's total advances were$6,736,123 for the upgrading program.At June 30,
2006,the outstanding note receivable was$4,113,951. The City has no obligation to advance funds in the
future.The note is being repaid with interest over a period of 30 years.The City must also make payments
for its pro rata share of operating and maintenance costs not recovered by the plant through revenues. The
amount paid during the current year for purchased power was reduced by principal and interest amounts
totaling$489,356 due the City on the outstanding note receivable. The contract expires in June 2017.
C. California-Oregon Transmission Project
In 1991,the City entered into the interim Participation Agreement with several Northern California entities
and the Western-Area Power Administration.This agreement calls for the construction and operation of the
project.Each party in the agreement has been allocated a respective share of the construction costs.The
City's share is 8.05%.As of June 30,2006,the City's share of total costs incurred for the project's planning
and construction was$37,316,527.
-55-
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 14—LIGHT AND POWER OPERATIONS AND COMMITMENTS(CONTINUED)
Power Purchase Commitments
As of June 30, 2006, the City has entered into long-term commitments to purchase power subject to certain
conditions.The following table summarizes the value of the commitments at June 30,2006(in thousands):
Fiscal Year Amount
2006-07 $ 14,091
2007-08 14,091
2008-09 10,358
2009-10 6,600
2010-11 3,311
$ 48,451
Electric Rate Increase
Effective November 1,2006,the City increased its electric rates 5%charged for electrical energy distributed and
supplied by the City within its boundaries.
NOTE 15-POST-EMPLOYMENT BENEFITS
The City Council approved a post-employment benefit plan for all employees with 20 years of service who retire at
60 or 30 years or more of service to the City. The plan pays for qualified employees'medical and dental insurance
premiums and claims from age 60 to 65. Funding of the plan is on a pay-as-you-go basis. During the year ended
June 30,2006,approximately 105(including HMO and PPO participants,City paid and non-City paid)employees
were eligible to receive benefits. Amounts paid for premiums for the year ended June 30,"2006 totaled$161,421.
NOTE 16—CONTINGENCIES
At June 30,2006,a number of lawsuits and claims were pending against the City that arose in.the normal course of
operations. Management estimates that certain pending lawsuits and claims may result in additional liabilities of
approximately$500,000.
The City is currently in proceedings with the FERC and certain other utilities and agencies regarding the appropriate
Transmission Revenue Requirement("TRR")for the City. The City is currently receiving revenue from the 150
based on a TRR of approximately$10,6 million annually. In addition,the City is involved in litigation over the
market price charged by the City for certain electric energy sales made during the period October 2,2000 through
June 20,2001. FERC has ordered reductions in certain of the market prices for electric energy during that period,
and.the legitimacy of that order and its impact on entities such as the City is being litigated before the United States
Court of Appeals and other courts. The City cannot predict the outcome of either of these proceedings,but it is
possible that those outcomes could affect the level of the City's TRR and/or cause the City to be subject to one or
more refund obligations. The ultimate loss related to these matters,if any,is unknown at this time and no amount
has been accrued in the accompanying financial statements.
i
-56-
I,
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE.17—FUTURE GASB PRONOUNCEMENTS
The City is currently analyzing its accounting practices to determine the potential impact on the financial statements
for the following GASB Siatements:
i
In April 2004,GASB issued Statement No.43,Financial Repotting for Postemployment Benefit Plans Other Than
Pension Plans.This statement establishes uniform financial reporting standards for other postemployment benefits
(OPEB)plans. The approach followed in this statement generally is consistent with the approach adopted for
defined benefit pension plans with modifications to reflect differences between pension plans and OPEB plans. The
statement applies for OPEB trust funds included in the financial repots of plan sponsors or employers,as well as for
the stand-alone financial reports of OPEB plans or the public employee retirement systems,or other third parties,
that administer them.This statement also provides requirements for reporting of OPEB funds by administrators of
multiple-employer OPEB plans,when the fund used to accumulate assets and pay benefits or premiums when due is
not a trust fund. This statement is effective for the City's fiscal year ending June 30,2007.
In June 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for
Postemployment Benefits Other Than Pensions,which addresses how state and local governments should account
for and report their costs and obligations related to postemployment healthcare and other nonpension benefits.
Collectively,these benefits are'commonly referred to as other Postemployment benefits,or OPEB. The statement
generally requires that employers account for and report the annual cost of OPEB and the outstanding obligations
and commitments related to OPEB in essentially the same manner as they currently do for pensions.Annual OPEB
cost for most employers will be based on actuarially determined amounts that,if paid on an ongoing basis,generally
would provide sufficient resources to pay benefits as they come due.This statement's provisions may he applied
prospectively and'do not require governments to fund their OPEB plans. An employer may establish its OPEB
liability at zero as of the beginning of the initial year of implementation;however,the unfunded actuarial liability is
required to be amortized over future periods. This statement also establishes disclosure requirements for
information about the plans in which an employer participates,the funding policy followed,the actuarial valuation
process and assumptions,and,for certain employers,the extent to which the plan has been funded over time. This
statement is effective for the City's fiscal year ending.June 30,2008.
In June 2005, GASB issued Statement No. 47, Accounting for Termination Benefits. This statement provides
guidance to governmental employers for measuring,recognizing,and reporting liabilities and expensetexpenditures
related to all termination benefits, including voluntary termination benefits,without limitation as to the period of
time during which the benefits are offered,and involuntary termination benefits. The requirements of this Statement
are effective in two parts. For termination benefits provided through an existing defined benefit OPEB plan,the
provisions should be implemented simultaneously with GASB Statement No.45. For all other termination benefits,
this Statement is effective for fiscal periods beginning after June 15,2005. There was no impact on the financial
statements for the fiscal year ended June 30,2006,as a result of implementing this Statement.
In September 2006,GASB issued Statement No.48,Sales and Pledges of Receivables and Future Revenues and
Intra-Entity Transfers of Assets and Future Revenues. This Statement establishes criteria that governments will use
to ascertain whether the proceeds received should be reported as revenue or as a liability and provides additional
guidance for sales of receivables and future revenues within the same financial reporting entity. This Statement
includes,a provision that stipulates that governments should not revalue assets that are transferred between financial
reporting entity components. This Statement also includes guidance to be used for recognizing other assets and
liabilities arising from a sale of specific receivables or future revenues, including residual interests and recourse
provisions. The disclosures pertaining to future revenues that have been pledged or sold are intended to provide
financial statement users with information about which revenues will be unavailable for other purposes and how
long they will continue to be so. This Statement is effective for the City's fiscal year ending June 30,2008.
-57-
ti
CITY OF VERNON,CALIFORNIA
Notes to Basic Financial Statements(Continued)
June 30,2006
NOTE 17—FUTURE GASS PRONOUNCEMENTS(CONTINUED)
In December 2006,GASS issued Statement No.49,Accounting and Financial Reporling forPollutlon Remediation
Obligations. This statement requires state and local governments to provide the public with better information about
the financial impact of environmental cleanup and identifies the circumstances under which a governmental entity
would be required to report a liability related to pollution remediation and how to measure that liability. The
statement also requires governments to disclose information about their pollution obligations associated with clean
up efforts in the notes to the financial statements. GAS13 Statement No.49 will be effective for financial statements
for periods beginning after December 15, 2007,but liabilities will be measured at the beginning of that period
so that beginning net assets can be restated_
The City has not determined the impact on the City of the adoption of these statements.
-59-
REQUIRED SUPPLEMENTARY INFORMATION
r
i
CITY OF VERNON,CALIFORNIA
Required Supplemeniary Infortnalion
Budgetary Comparison Schedule
General Fund
For the Fiscal Year Ended June 30,2006
- Variance with - -
Final Budget
Budgeted Amounts Actual Positive
Origiml Final Amounts (Negative)
REVENUES:
- Tuxes - S 10,108,600 S 10,108,600 $ 8,943,668 S (1,164,932)
Special assessments 65000 650,000 736,221 86,221
Littnses and permits 1,2251000 1,225,000 1,161,188 (63,812)
Fines,forfeitures and penahies 267,000 267,000 188,988 (78,012)
Revenues from use ufmonies and properties - .1,725,347 1,725,347
Nei decrease in fair value of investments - (24,546) (24546).
Intergovernmental revenue - -290,414 290,414
Charges for services 9,600,000 9,000,000 8,674,OT1 (325,923)
Otberrevenues 1,552,680 1,552,680 697,254 (855,426)
Total revenues '.22,803,280 . 22,803,280 22,392,611 (410,669)
EXPENDITURES:
General government - 10,229,382 10,229,382 16,567,443 (6,338,161)
Public safety 22,272,747 22,272,747 18,657,690 3,615,057
Public works 8,215,342 8,215,342. 5,010,187 3,205,155
Health services 1,509,509 1,509509 1,246,963 262S46
Capital oudav 4,229441 4,229,441 11,504,180 .(7,274,739) -
Total expenditures 46,456,421 46,456,421 52,986,463 (6,530,042)
Deficiency or revenues under expenditures (23,653,141) (23,653,141) (30,593,852) (6,940,711)
Other finoncing sources: - -
Transfers inI(out) 8,320,505 8,320,505 (21,491,619) (29,812,124)
Net change S (15,332,636) S (15,332,636) -
Reconciliation ofGAAP basis fund balance
Current year encumbrances 812,531 812,531
NET CHANGE 1N FUND BALANCE - (51,272,940) (35,94004) -
- FUND BALANCE,BEGINNING OF YEAR - 72,233,702 82,900,733
FUND BALANCE,END OF YEAR S 20,960,762 S 46,960,429
See accompanying note to the required supplementary information.
-59.
CITY OF VERNON,CALIFORNIA
Notes to Required Supplementary Information
June 30,2006
NOTE I—BUDGET
The City adheres to the following general procedures in establishing its annual budget,which is reflected
in the accompanying General Fund budgetary comparison schedule.
• An annual budget is adopted by the City Council that provides for the general operation of the
City. The budget includes authorized expenditures and estimated revenues of the General Fund,.
Special Revenue Funds and Capital Projects Funds;
• The budget is formally integrated into the accounting system and employed as a management
control device during the year;
• Encumbrances,which are commitments related to executory contracts for goods and services,are
recorded to assure effective budgetary control and accountability;
• Encumbrances outstanding at year-end do not constitute expenditures or liabilities under GAAP.
Encumbrances outstanding at year-end are reported as reservations of fund balance for
subsequent year expenditures. Unencumbered appropriations lapse at year-end;
• The budget is adopted on a modified accrual basis, except that encumbrances are treated as
budgetary basis expenditures in the year of incurrence of the commitment to purchase;
• The City Administrator is authorized to transfer appropriations.between activities within any
fund. Expenditures may not exceed appropriations at the fund level. Excess expenditures over
appropriations are financed by beginning fund balances. The final budgeted amounts used in the
accompanying general fund budgetary comparison schedule include any amendments made
during fiscal year 2006. Encumbrances carried forward from the prior year are reflected in the
original budget.
y
60
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Schedule 5.1(f)
Affiliated Transactions
None.
S.1(fj-1
Section 5.1(g)
Litigation
None.
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5.1(g)-1
Section
Tax Liabilities
None.
5.1(h)-1
Schedule 5.2
Mead Transmission Interests
None.
5.3-1
S.
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Schedule 5.2(h)
Mead Transmission Interests Entitlement Agreements
1. Mead-Phoenix Joint Ownership Agreement and Definitions,dated August 4, 1992
2. Mead-Phoenix Fiscal.Agency Agreement,dated August 4, 1992
3. Mead-Phoenix Operation Agreement,dated August 4, 1992
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4. Mead-Phoenix Project Land Rights Agreement,dated August 4, 1992
5. Mead-Phoenix Project Mead Substation Interconnection Agreement,dated August 4, 1992
6. Mead-Phoenix Project,Mead-Westwing Transmission Line, Westwing Substation
Interconnection Agreement(DWP No. 10408), dated August 4, 1992
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7. Mead-Adelanto Joint Ownership Agreement,dated August 4, 1992
81 Mead-Adelanto Fiscal Agency Agreement,dated August 4, 1992
9. Mead-Adelanto Operation Agreement,dated August 4, 1992
10. Mead-Adelanto Project,Marketplace-Adelanto Transmission Line,Adelanto Switching
Station Interconnection Agreement,dated August 4, 1992
11. Marketplace Substation Participation Agreement(DWP No. 10330), dated August 4, 1992
12. Marketplace-McCullough Interconnection Agreement,dated May 26, 1998
13.Marketplace Static Var Compensator Adelanto Switching Station Interconnection
Agreement,dated August 18, 1992
5.3(b)-1
Schedule 5.2(c)
Mead Transmission Interests Consents,Approvals and Notices
1. Notice to Mead-Phoenix Project Management Committee pursuant to Section 16.3 of the
Mead-Phoenix Joint Ownership Agreement and Definitions,dated August 4, 1992
2. Notice to Mead-Adelanto Project Coordinating Committee pursuant to Section 16.3 of the
Mead-Adelanto Joint Ownership Agreement,dated August 4, 1992
5.3(c)-1
Schedule 6.1(d)
Purchaser's Required Consents,Approvals and Notices
See Schedules 3.1(a)and 3.1(b).
Purchaser Affiliate(s)that will take title at Closing to the Assets have not yet been formed
but will be formed by Purchaser prior to the Closing Date and Purchaser's representations
in Article 6 shall be true with respect to such Affiliates as of the Closing Date.
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6.1(d)-1
EXHIBIT 5
Assignment and Assumption Agreement
This ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment"),
is made as of April 22, 2008 (the "Effective Date"), by and between the City of Vernon, a
municipal corporation and a chartered city duly organized and existing under and by virtue of the
Constitution and laws of the State of California ("Assignor"), and Starwood Energy
Infrastructure Fund, L.P., a Delaware limited partnership ("Assignee").
WITNESSETH:
WHEREAS, the parties have entered into that certain Purchase and Sale
Agreement, dated as of December 13, 2007, by and between Assignor and Assignee (the
"Purchase and Sale Agreement"); and
WHEREAS, pursuant to Section 2.1(a), Section 2.6(a)(1), Section 2.6(b)(2) and
Section 2.6(b)(3) of the Purchase and Sale Agreement,Assignor desires to assign and transfer to
Assignee; and Assignee desires to assume and accept, all of Assignor's rights and duties under
the Assigned Agreements and all of Assignor's obligations under the Assigned Agreements
arising or occurring after the Closing Date. .
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby
covenant and agree as follows:
L Definitions. Capitalized terms used herein and not otherwise defined
herein shall have the meanings given to them in the Purchase and Sale Agreement.
2. Assignment. Effective as;of 11:59 p.m., Los Angeles time, on the date
hereof(the "Effective Time"), Assignor hereby irrevocably assigns and transfers to Assignee all
of its right, title and interest in, to and under, and all of its duties, liabilities and obligations under
or pursuant to, the Assigned Agreements and, to the extent assignable, the firm transmission
rights and other congestion credits related to the Mead Transmission Interests, except for any
liabilities under the Assigned Agreements arising or occurring on or prior to the Closing Date,
which liabilities are retained by and remain the responsibility of Assignor (the "Retained
Liabilities").
3. Assumption. Assignee shall assume and accept all of Assignor's right,
title and interest in, to and under, and all of Assignor's duties, liabilities and obligations under or
pursuant to, the Assigned Agreements on the Closing Date, except for the Retained Liabilities,
and agrees to perform under and be bound by the terms of the Assigned Agreements. For the
avoidance of doubt, Assignee assumes no Excluded Liabilities, and the parties hereto agree that
all such Excluded Liabilities shall remain the sole responsibility of the Assignor.
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4. Non-Interference. Each of Assignor and Assignee agrees that the
assignment and assumption of the assigned rights and responsibilities hereunder is irrevocable
and that neither party shall take any action or make any other assignment or direction which
could prejudice the other's rights hereunder, and that any such action or assignment shall be
void.
5. Representations and Warranties. Assignor hereby represents and warrants
to Assignee that neither its execution, delivery or performance of this Agreement, nor the
consummation by it of the transactions contemplated hereby will (a) require any consent,
agreement or acknowledgement of any Person that has not been obtained„ (b) require any
Governmental Approval that it has not obtained, .or (c) violate any Governmental Rules
applicable to Assignor.
6. Effectiveness. This Assignment shall become effective as of the Effective
Time.
7. Further Assurances. Each of the parties will, from time to time and at all
times hereafter, at its own expense, upon every reasonable request to do so by another party
hereto, promptly make, do, execute and deliver, or cause to be made, done, executed and
delivered, all such further acts, deeds, assurances and things as may be legally required or
reasonably necessary in order to further implement and carry out the assignments and
assumptions contemplated by this Assignment.
8. Successors and Assigns. The provisions of this Assignment are binding
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upon, and will inure to the benefit of, the successors and assigns of Assignor and Assignee,
respectively.
9. Governing Law. The validity, interpretation and effect of this Assignment
shall be governed by and will be construed in accordance with the laws of the State of California
applicable to contracts made and performed in such State and without regard to conflicts of law
doctrines except to the extent that certain matters are preempted by Federal law or are governed
by the law of the jurisdiction of organization of the respective parties.
10. Severability. If one or more of the provisions of this Assignment shall be
deemed invalid, illegal or unenforceable in any respect, such provisions shall be deemed to be
severed from this Assignment, and the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected or impaired in any way thereby.
11. Construction. This Assignment is delivered pursuant to and is subject to
the terms of the Purchase and Sale Agreement, The terms of the Purchase and Sale Agreement,
including but not limited to Assignor's representations,.warranties, covenants, agreements and
indemnities relating to the Assumed Liabilities, are incorporated herein by this reference.
Assignor acknowledges and agrees that the representations, warranties, covenants, agreements
and indemnities contained in the Purchase and Sale Agreement shall not be superseded hereby
but shall remain in full force and effect to the full extent provided therein. In the event of any
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LA\1813669.3
conflict or ambiguity between the terms of the Purchase and Sale Agreement and the terms of
this Assignment,the terms of the Purchase and Sale Agreement shall control.
12. Counterparts. This Assignment may be executed in any number of
counterparts, all such counterparts together constituting but one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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LA\1813669.3
IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers,
have executed and delivered this Assignment as of the day and year first above set forth.
CITY OF VERNON
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4.
Name- f amson
Title: i y At mey
STARWOOD ENERGY INFRASTRUCTURE FUND,
L.P.,
By SEI MANAGEMENT, L.P., -
Its General Partner
By SEI MANAGEMENT HOLDINGS, L.L.C.,
Its General Partner
By STARWOOD ENERGY GROUP GLOBAL,
L.L.C.,
Its General Manager
By
Madison Grose, Senior Managing
Director
[Signature Page to Assignment and Assumption Agreement—Starwood]
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IN WIINESS WHEREOF, the patties hereto, by their- duly authorized officers,
have executed and delivered this Assignment as ofthe day and year first above set forth..
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CITY OF VERNON
By:
Name: Leff A Harrison 1
Title: City Attorney
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SIARWOOD ENERGY INFRASTRUCTURE FUND,
L.P.,
}
By SEI MANAGEMENT,L.P.,
Its General Partner
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By SEI MANAGEMENI HOLDINGS,L.L..C.,
Its General Partner
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By STARWOOD ENERGY GROUP GLOBAL,
L..L..C., i
Its General Manager
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By ------�
Madison Grose, Senior Managing Director i
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[Signature Page to Assignment and Assumption Agreement—Starwood]
W1817669 2 i
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The execution of this Assignment and Assumption Agreement by the City of Vernon is hereby
affirmed and attested to by:
CITY OF VERNON
By: r
Namd: Manuela Giron
Title: City Clerk
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[Attestation Page to Assignment and Assumption Agreement—Starwood]
EXHIBIT 6
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RECEIPT
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Reference is made to that certain Purchase and Sale Agreement (as amended,
supplemented, or otherwise modified, the "Purchase Agreement'), dated as of December 13,
2007,by and among City of Veinon,a municipal corporation and a chartered city duly organized
and existing under and by virtue of the Constitution and laws of the State of Califbrnia and its
Charter (the "Seller"), and Stanwood Energy Infrastructure Fund, L.P., a Delaware limited
partnership (the "Purchaser"}.. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings ascr ibed to them in the Purchase Agreement.
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In accordance with Section 2.6(b)(4) of the Purchase Agreement, Purchaser hereby
acknowledges and confirms delivery and possession of`all of the Assets set forth in Section 2.1 j
of the Purchase Agreement put suant to the terms and conditions set forth therein.
PURCHASER:
STARWOOD ENERGY INFRASTRUCTURE FUND,
L.P.,
By SEI MANAGEMENT,L P.,
Its General Partner-
By SEI MANAGEMENT HOLDINGS,L LC..,
Its General Partner-
By STARWOOD ENERGY GROUP GLOBAL,
L.L.C.,
Its General Manager-
By _
Madison Grose, Senior Managing Director
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L A\1847846.1 '
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