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Resolution No. 09915 (3) i. 1 RESOLUTION NO. 9915 2 3 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF 4 VERNON AUTHORIZING AND APPROVING THE ISSUANCE OF ELECTRIC SYSTEM REVENUE BONDS; APPROVING THE 5 SUPPLEMENTAL INDENTURE OF TRUST PURSUANT TO WHICH SUCH BONDS ARE TO BE ISSUED; APPROVING A DISCLOSURE 6 DOCUMENT, A CONTRACT OF PURCHASE AND A CONTINUING DISCLOSURE AGREEMENT IN CONNECTION WITH SUCH BONDS; ~ AUTHORIZING AND APPROVING OTHER DOCUMENTS IN 8 CONNECTION WITH THE ISSUANCE, SECURING AND SALE OF SUCH BONDS; AND .AUTHORIZING CERTAIN OTHER MATTERS g RELATING THERETO 10 11 WHEREAS, the City of Vernon (the "City") is a municipal 12 corporation and a chartered city of the State of~California organized 13 and existing under its Charter and the Constitution of the State of 14 California; and 15 WHEREAS, the City is authorized pursuant to the provisions 16 of its Charter and ;the City of Vernon Municipal Facilities Revenue 17 Bond Law, constituting Article XI of the City Code of the City of 18 Vernon, to issue bonds, notes and other obligations payable from the 19 Net Revenues of the Electric System (capitalized terms used herein and 20 not otherwise defined shall have the meanings given such terms in the 21 Indenture mentioned below) to finance the costs of any land, 22 improvements, facilities, equipment and other property of any nature 23 whatsoever which are used in the Electric System and to refund such 24 bonds, notes and other obligations; and 25 WHEREAS, pursuant to an Indenture of Trust, dated as of 26 September 1, 2008 (the "2008 Master Indenture," and, as amended and 27 supplemented, the "Indenture"), entered into by the City and The Bank 28 of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), 1 the City has provided the terms and conditions for the issuance and 2 securing of its Electric System Revenue Bonds to finance the costs of 3 Capital Improvements to~the City's Electric System or to refund any 4 outstanding Parity Obligations; and 5 WHEREAS,-the City desires to provide for the issuance of its 6 Electric System Revenue Bonds, 2009 Series A (the "2009 Series A 7 Bonds") to, among other things, refinance the City's obligations under 8 the Supply Agreement with respect to the Authority Bonds, by providing 9 for the redemption of all or a portion of the Authority Bonds, fund a 10 deposit to-the Debt Service Reserve Fund, and pay costs of issuance of 11 the 2009 Series,A Bonds; and 12 WHEREAS, the 2009 Series A Bonds are to be issued under and 13 pursuant to the 2008 Master Indenture as supplemented by the Second 14 Supplemental Indenture of Trust, to be dated as of May 1, 2009, and to 15 be entered into by the City and the Trustee (such Second Supplemental 16 Indenture of Trust, in the. form attached hereto as Exhibit A with such 17 changes, insertions and deletions as are made pursuant to this 18 Resolution being referred to herein as the "Second Supplemental 19 Indenture"); and 20 WHEREAS, the 2009 Series A Bonds are to be payable from and 21 secured by a pledge and assignment of the Trust Estate on a parity 22 with all other Bonds issued and Outstanding under the Indenture; and 23 WHEREAS, Citigroup Global Markets Inc., on behalf of itself 24 and E.J. De La Rosa & Co., Inc., as underwriters (the "Underwriters"), 25 has submitted a proposal to purchase the 2009 Series A Bonds in the 26 form of a Contract of Purchase (such Contract of Purchase, in the form 27 attached hereto as Exhibit B with such changes, insertions and 28 deletions as are made pursuant to this Resolution, being referred to - 2 - 1 herein as the "Purchase Contract"); and 2 WHEREAS, in connection with the offering and sale of the 3 2009 Series A Bonds there has been prepared a disclosure document in 4 the form of a Preliminary Official Statement (such Preliminary 5 Official Statement in the form attached hereto as Exhibit C with such 6 changes, insertions and deletions as are made pursuant to this 7 Resolution, being referred to herein as the "Preliminary Official 8 Statement"); and 9 WHEREAS, Rule 15c2-12 requires that, in order to be able to 10 purchase or sell the 2009 Series A Bonds, the Underwriters must have 11 reasonably determined that an obligated person has undertaken in a 12 written agreement or contract for the benefit of the owners of the 13 2009 Series A Bonds to provide disclosure of certain financial 14 information and certain material events on an ongoing basis; and 15 WHEREAS, in order to cause such requirement of Rule 15c2-12 16 to be satisfied, the City desires to enter into a Continuing 17 Disclosure Agreement with the Trustee (such Continuing Disclosure 18 Agreement, in the form attached to the form of the Preliminary 19 Official Statement attached hereto as Exhibit C, with such changes, 20 insertions and deletions as are made pursuant to this Resolution, 21 being referred to herein as the "Continuing Disclosure Agreement"); 22 and 23 WHEREAS, in connection with the redemption of the Authority 24 Bonds there has been prepared an Amendment Number One to the Insurance 25 and Reimbursement Agreement, to be dated as of May 1, 2009, and to be i 26 entered into by the Authority, the City and MBIA Insurance Corporation 27 (such amendment, in the form attached hereto as Exhibit D, with such 28 changes, insertions and deletions as are made pursuant to .this - 3 - 1 Resolution, being referred to herein as "Amendment Number One") 2 amending and supplementing the Insurance and Reimbursement Agreement 3 (the "Insurance Agreement"), dated as of June 1, 2006, by the 4 Authority, the City and MBIA Insurance Corporation; and 5 WHEREAS, there has been prepared a resolution of the Board 6 of Directors of the Authority authorizing the Authority to enter into 7 certain agreements and taking certain actions in connection with the 8 redemption of the Authority .Bonds in the form attached hereto as 9 Exhibit E (the "Authority Resolution"); and 10 WHEREAS, pursuant to an Indenture of Trust (the "2004 Master 11 .Indenture"), dated as of December 1, 2004 between the City and The 12 Bank of New York Trust Company, N.A., as trustee (the "Prior 13 Trustee"), as amended by the First Supplemental Indenture of Trust, 14 the Second Supplemental Indenture of Trust and the Fourth Supplemental 15 Indenture of Trust, each dated as of December 1, 2004, and each 16 between the City and the Prior Trustee, the City previously issued its 17 Electric System Revenue Bonds, ''2004 Series A, 2004 Series B and 2004 18 Taxable Series D (collectively, the "2004 Revenue Bonds"); and 19 WHEREAS, in connection with the 2004 Revenue Bonds, the City 20 entered into three interest rate swap transactions with Morgan Stanley 21 Capital Services Inc ("Morgan Stanley"), pursuant to three 22 confirmations (the "Morgan Stanley Confirmations") to the ISDA Master 23 Agreement and Schedule, each dated as of December 2, 2004, and each 24 between the City and Morgan Stanley; and 25 WHEREAS, in connection with the redemption of Authority 26 Bonds the City and Morgan Stanley are to enter into an amendment to 27 each of the Morgan Stanley Confirmations pursuant to which Morgan i 28 Stanley will agree to substitute the additional bonds test in the 2008 - 4 - 1 Master Indenture for the additional bonds test in the 2004 Master 2 Indenture for purposes of the Morgan Stanley Confirmations; and 3 WHEREAS, there have been submitted to this meeting drafts of 4 the following: 5 (1) the Second Supplemental Indenture; 6 (2) the Purchase Contract; 7 (3) the Preliminary Official Statement, including the g Continuing Disclosure Agreement; 9 (4) Amendment Number One; and 10 (5) the Authority Resolution; and 1.1 WHEREAS, after having reviewed and considered the proposal 12 of the Underwriters to purchase the 2009 Series A Bonds on the terms 13 and conditions contained in the Purchase Contract, this City Council 14 now desires to authorize the issuance and sale of the 2009 Series A 15 Bonds, including the execution of such documents and the performance 16 of such acts as may be necessary or desirable to effect such issuance 17 and sale and the other actions contemplated by this Resolution; and 18 WHEREAS, the City now desires to approve and authorize the 19 Authority's taking such action as may be necessafy or desirable to 20 effect the redemption of the Authority Bonds. 21 NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE 22 CITY OF VERNON AS FOLLOWS: 23 SECTION 1: The City Council of the City of Vernon hereby 24 finds and determines. that the recitals contained hereinabove are true 25 and correct. 26 SECTION 2: The City Council further finds and determines 27 that the continuation of the Swap Transactions (as defined in the 28 Authority Resolution) in full force and effect after the redemption of - 5 - 1 Authority Bonds with the proceeds of the 2009 Series A Bonds is 2 necessary and in the best interests of the City and is in connection 3 with maintaining."the Supply Agreement, the Authority's interest in 4 which is part of the trust estate securing qualified swap transactions 5 such as the Swap Transactions and amounts due under the Insurance 6 Agreement. In addition, as the City is responsible for the Authority's 7 obligations under the Swap Transactions pursuant to the Supply 8 Agreement, and as the 2009 Series A Bonds serve as replacements for 9 the Authority Bonds, the Swap Transactions are properly allocable to 10 2009 Series A Bonds as the Authority Bonds are redeemed with proceeds 11 of the 2009 Series A Bonds. The City Council further finds and 12 determines that the continuation of the Swap Transactions in full 13 force and effect after the redemption of Authority Bonds with the 14 proceeds of the 2009 Series A Bonds is designed to reduce the amount 15 or duration of payment risk and result in a lower cost of borrowing. 16 when used when used in connection with the issuance of the 20.09 Series 17 A Bonds. 18 SECTION 3: The Second Supplemental Indenture, in 19 substantially the form attached hereto as Exhibit A and made a part 20 hereof as though set forth in full herein, be and the same is hereby 21 approved. Each of the Mayor, the Mayor Pro Tem, the City 22 Administrator, the Treasurer, the City Clerk and the City Attorney of 23 the City (each an "Authorized Officer"), acting singly, is hereby 24 authorized to execute and deliver the Second Supplemental Indenture, 25 in the name of and on behalf of the City, in substantially the form 26 attached hereto with such. changes, insertions and deletions as may be 27 approved by the Authorized Officer executing the Second Supplemental 28 Indenture, said execution being conclusive evidence of such approval, - 6 - 1 and the City Clerk is hereby authorized to attest thereto. 2 SECTION 4: Subject to the limitations specified in this 3 Resolution, the issuance of the 2009 Series A Bonds on the terms and 4 conditions set forth in the Second Supplemental Indenture is hereby 5 authori-zed and approved. .The aggregate principal amount of the 2009 6 Series A Bonds shall not exceed Four Hundred Thirty Million Dollars. 7 The 2009 Series A Bonds will be dated as provided in, will bear 8 interest at the rates provided in, will mature on the date or dates 9 provided in, will be issued in the form provided in, will have the 10 Sinking Fund Installments specified in, will be subject to redemption 11 as provided in, and will have such other terms as shall be provided in, 12 the Second Supplemental Indenture as the same is completed as provided 13 in this Resolution, provided that no 2009 Series A Bond shall bear a 14 stated rate of interest in excess of nine percent per annum. 15 SECTION 5: The Authorized Officer executing the Second 16 Supplemental Indenture is hereby authorized, subject to the limitations 17 set forth in Section 3 hereof, to determine the following: (i) the 18 maturity date or dates of the 2009 Series A Bonds (but no 2009 Series A 19 Bond shall mature later than August 1, 2048); (ii) the principal amount 20 of the 2009 Series A Bonds maturing on each maturity date; (iii) the 21 interest rate or rates for the 2009 Series A Bonds maturing on each 22 maturity date; (iv) the maturity or maturities, if any, of the 2009 23 Series A Bonds to be redeemed or paid at maturity from Sinking Fund 24 Installments ("Term 2009 Series A Bonds"); (v) the Sinking Fund , 25 Installments for the Term 2009 Series A Bonds; and (vi) the redemption 26 provisions for the 2009 Series A Bonds. 27 / / / 28 / / / - 7 - 1 SECTION 6: The net proceeds received on. the sale of the 2 2009 Series A Bonds shall be applied to such purposes as are set forth 3 in the recitals to this Resolution in the manner provided in the Second 4 Supplemental Indenture. In the event the net proceeds of the 2009 5 Series A Bonds available therefor are not sufficient to provide for the 6 redemption of all of the outstanding Authority Bonds, such available 7 proceeds shall be applied to the redemption of such Authority Bonds as 8 shall be determined by an Authorized Officer. 9 SECTION 7: The Purchase Contract, in substantially the form 10 attached hereto as Exhibit B and-made a part hereof as though set forth 11 in full herein, be and the same is hereby approved. Each of the. 12 Authorized Officers, acting singly, is hereby authorized to execute and 13 deliver the Purchase Contract, in the name of and on behalf of the 14 City, in substantially the form attached hereto with such changes, 15 insertions and deletions as may be approved by the Authorized Officer 16 executing said Purchase Contract and as are consistent with the 17 determinations of the terms of th.e 2009 Series A Bonds made pursuant to 18 this Resolution, said execution being conclusive evidence of such 19 approval. 20 The Authorized Officer executing the Purchase Contract is 21 hereby authorized to determine the purchase price to be paid for-the 22 2009 Series A Bonds under the Purchase Contract; provided, however, 23 that the aggregate Underwriters' discount (not including original issue 24 discount which shall not exceed five percent of the aggregate principal 25 amount of the 2009 Series A Bonds) for the 2009 Series A Bonds shall be 26 not more than two percent of the aggregate principal amount of the 2009 27 Series A Bonds. The sale of the 2009 Series A Bonds to the 28 Underwriters on the terms and conditions contained in the Purchase - 8 - 1 Contract, as the same may be completed in accordance with the 2 provisions of this Resolution, with such changes, insertions and 3 deletions as are authorized hereby, is hereby approved and authorized. 4 SECTION 8: The Preliminary Official Statement, in 5 substantially the form attached hereto as Exhibit C and made a part 6 hereof as though set forth in full herein, be and the same is hereby 7 approved. Each of the Authorized Officers, acting singly, is hereby 8 authorized to cause the Preliminary Official Statement to be delivered 9 to the Underwriters, in substantially the form attached hereto as 10 Exhibit C with such changes, insertions and deletions as may be 11 approved by the Authorized Officer delivering the .Preliminary Official 12 Statement (including without limitation the insertion of the proposed 13 terms of the 2009 Series A Bonds),_said delivery being conclusive 14 evidence of such approval. The use of the Preliminary Official 15 Statement in connection with the offering and sale of the 2009 Series A 16 Bonds by the Underwriters, including delivery of the Preliminary 17 Official Statement in electronic form, is hereby authorized and 18 approved. Each of the Authorized Officers, acting singly, is hereby 19 authorized to determine that the Preliminary Official Statement is 20 deemed final-for purposes of Rule 15c2-12. 21 The preparation and delivery to the Underwriters of a final 22 Official Statement (the'"Official Statement") relating to the 2009 23 Series A Bonds, and its use by the Underwriters in connection with the 24 offering and sale of the 2009 Series A Bonds, including delivery of the 25 Official Statement in electronic form, be and the same is hereby 26 approved. The Official Statement shall be in substantially the form 27 of the Preliminary Official .Statement with such changes, insertions and 28 deletions as may be approved by the Authorized Officer executing the - 9 - 1 Official Statement (including without limitation the insertion of the 2 final terms of the 2009 Series A Bonds), said execution being 3 conclusive. evidence of such approval. Each of the Authorized Officers, 4 acting singly, is hereby authorized to execute the Official Statement, 5 in the name and on behalf of the City, and thereupon to cause the 6 Official Statement to be delivered to the Underwriters. Each of the 7 Authorized Officers, acting singly, is hereby authorized. to approve and 8 execute any amendment or supplement to the Official Statement 9 contemplated by the Purchase Contract, in the name and on behalf of the 10 City, and thereupon to cause such amendment or supplement, to be 11 delivered to the Underwriters. 12 SECTION 9: The Continuing Disclosure Agreement, in 13 substantially the form attached to the form of the Preliminary Official 14 Statement attached hereto as Exhibit C, be and the same is hereby 15 approved. Each of the Authorized Officers, acting singly, is hereby 16 authorized to execute and deliver the Continuing Disclosure Agreement, 17 in the name of and on behalf of the City, in substantially the form 18 attached hereto with such changes, insertions and deletions as may be 19 approved by the Authorized Officer executing the same, said execution 20 being conclusive evidence of such approval, and the City Clerk is 21 hereby authorized to attest thereto. 22 SECTION 10: Amendment Number One, in substantially the form 23 attached hereto as Exhibit D and made a part hereof as thought set 24 forth in full herein, be and the same is hereby approved. Each of the 25 Authorized Officers, acting singly, is hereby authorized to execute and 26 deliver Amendment Number One, in the name of and on behalf of the City, 27 in substantially the form attached hereto with such changes, insertions 28 and deletions as may be approved by the Authorized Officer-executing - 10 - 1 the same, said execution being conclusive evidence of such approval, 2 and the City Clerk is hereby authorized to attest thereto. 3 SECTION 11: The entry into an amendment to each of the 4 Morgan Stanley Confirmations pursuant to which Morgan Stanley will 5 agree to substitute the additional bonds test in the 2008 Master 6 Indenture for the additional bonds test in the 2004 Master Indenture 7 for purposes of the Morgan Stanley Confirmations, and the adjustment 8 form a one month LIBOR rate to a three month LIBOR rate as the basis 9 .for the floating rate for purposes of the Morgan Stanley Confirmations, 10 is hereby authorized-and approved. To accomplish such purposes, each of 11 the~Authorized Officers, acting singly, is hereby authorized to execute 12 and deliver to Morgan Stanley an amendment for each Morgan Stanley 13 Confirmation, in the name of and on behalf of the City, in 14 substantially the form approved by the Authorized Officer executing the 15 same, said execution being conclusive evidence of such approval, and 16 the City Clerk is hereby authorized to attest thereto. 17 SECTION 12: The City hereby requests and directs that the 18 Authority take all action necessary or convenient to cause Authority 19 Bonds to be redeemed with the available proceeds of the 2009 Series A 20 Bonds on such date or dates as shall be specified by an Authorized 21 Officer. 22 SECTION 13: The City hereby requests and directs the 23 Authority to adopt the Authority Resolution and to undertake the 24 actions authorized or approved by the Authority Resolution. The City 25 hereby approves the Authority Resolution and authorizes and approves 26 the actions, documents, and transactions authorized and approved by the 27 Authority Resolution. Each Authorized Officer is hereby directed to 28 take such action and enter into such agreements and to execute such - 11 - 1 certificates and instruments, in the name of and on behalf of the City, 2 as-may be deemed necessary or appropriate by such Authorized Officer to 3 assist in the implementation of the actions, documents, and 4 transactions authorized or approved by the Authority Resolution. Each 5 Authorized Officer is hereby directed to take .such action and enter 6 into such agreements as may be deemed necessary or appropriate by such 7 Authorized Officer to evidence the City's obligations under the Supply 8 Agreement to provide any collateral required of the Authority under the 9 Restated ISDA Agreement (as defined in the Authority Resolution), and 10 to provide such collateral with cash or securities in the Light and 11 Power Fund or purchased with funds in the Light and Power Fund. 12 SECTION 14: The Mayor, the Mayor Pro Tem, the City 13 Administrator, the Treasurer, the City Clerk and the City Attorney of 14 the City, the Director of Light and Power and any other proper 15 official, officer or employee of the City, acting singly, be and each 16 of them hereby is authorized to execute and deliver any and all 17 documents and instruments and to do and cause to be done any and all 18 -acts and things necessary or convenient in carrying out the actions 19 authorized by this Resolution and the transactions contemplated by the 20 documents and instruments approved or authorized by this Resolution, 21 including, without limitation, making any determinations or submission 22 of any documents or reports which are required by any rule or 23 regulation of any governmental entity in connection with the issuance 24 and sale of the 2009 Series A Bonds and the authorization, execution, 25 delivery and performance by the City of its obligations under the 26 documents and instruments approved or authorized by this Resolution. 27 SECTION 15: All actions heretofore taken by any committee of 28 the City Council, or any official, officer, employee, representative or - 12 - 1 agent of the City, in connection with the issuance and sale of the 2009 2 Series A Bonds or the authorization, execution, delivery, or 3 performance of the City's obligations under the documents and 4 instruments approved or authorized by this Resolution and the other 5 actions contemplated by this Resolution are hereby ratified, approved 6 and confirmed. 7 SECTION 16: The City Clerk of the City of Vernon shall 8 certify to the passage of this resolution, and thereupon and 9 thereafter the same shall be in full force and effect. 10 APPROVED AND ADOPTED this 13th day of April, 2009. 11 12 Donis C ~ Malburg Name: 13 Title : Mayor / ~Ia~-ems--g~- 14 ATTEST: 15 b 16 NUELA GIRON, C ty Clerk 17 . 18 19 20 21 22 23 24 25 26 27 28 - 13 - 1 STATE OF CALIFORNIA ) 2 ) ss COUNTY OF LOS ANGELES ) 3 4 I, MANUELA GIRON, City Clerk of the City of Vernon, do hereby - 5 certify that the foregoing Resolution, being Resolution No. 9915, was 6 duly adopted by the City Council of the City of Vernon at a regular 7 meeting of the City Council duly held on Monday, April 13, 2009, and g thereafter was duly signed by the Mayor or Mayor Pro-Tem of the City of 9 Vernon. 10 11 MANUELA G ON, City Clerk 12 13 (SEAL) 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 14 - EXHIBIT A Exhibit A [Second Supplemental Indenture Attached] A-1 ' Orrick, Herrington & Sutcliffe LLP Draft of 4/ /09 SECOND SUPPLEMENTAL INDENTURE OF TRUST between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Dated as of May 1, 2009 Relating to City of Vernon Electric System Revenue Bonds, 2009 Series A OHS West260528941.4 SECOND SUPPLEMENTAL INDENTURE OF TRUST THIS SECOND SUPPLEMENTAL INDENTURE OF TRUST, dated as of May 1, :2009, is entered into by and between the City of Vernon (the "City"), a municipal corporation and chartered city' of the State of California and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), a nationalbanking association duly organized and. existing under .and by virtue of the laws of the United States of America, authorized to accept and execute trusts of the character in the Indenture set forth; WITNESSETH: WHEREAS, the City has entered into the Indenture of Trust, dated as of September 1, 2008 (the "Master Indenture") by and between the City and the Trustee to provide for the issuance from time to time. by the City of Bonds to, among other things, pay the ;Costs of Capital Improvements (capitalized terms used herein shall have the meanings given such terms pursuant to Section. 1.03); and WHEREAS, the Cost of a Capital Improvements under the Indenture includes all costs of acquiring such Capital Improvement permitted under the Bond Ordinance; and WHEREAS, under the Bond Ordinance the costs of a Capital Improvement includes refinancing any existing indebtedness relating to such Capital Improvement; and WHEREAS, the Master Indenture authorizes the City and the Trustee to enter into Supplemental Indentures to provide for the issuance of Bonds; and WHEREAS, ,pursuant to the Supply Agreement the City has acquired the Gas Supply as a Capital Improvement to the City's Electric System; and WHEREAS, as consideration for the transfer of .the Gas Supply to the City under the Supply Agreement, the City is obligated to make payments to the Authority sufficient. to pay the principal of and interest on the Authority Bonds; and WHEREAS, the City desires to issue its 2009 Series A Bonds in order to provide moneys to `refinance [all} [a portion] of the indebtedness of the City represented by its obligation to pay the principal of and interest on the Authority Bonds, to fund the -Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds; and WHEREAS, the refinancing of [all] [a portion] of the indebtedness of the City represented by its obligation. under the Supply Agreement to pay the principal of and interest on the Authority Bonds is to be accomplished by applying a portion of the proceeds of the 2009 Series A Bonds to [the purchase of Authority Bonds] [the redemption of Authority Bonds]; and WHEREAS, the City has determined that all acts and things have been done and performed which are .necessary. to make the Indenture, as supplemented by this Second Supplemental Indenture, a valid and binding agreement for the. security of the 2009 Series A Bonds authenticated and delivered hereunder; OHS West:260528941.4 NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS SECOND SUPPLEMENTAL INDENTURE OF TRUST WITNESSETH: That, in consideration of the premises, the acceptance by the Trustee of the trusts hereby created and originally created by the Master Indenture, the mutual covenants herein contained and the purchase-and acceptance of the 2009 Series A Bonds by the Owners thereof, and for other valuable consideration, the receipt whereof is hereby acknowledged, and in order to secure the payment of the principal of, Redemption Price, if any; and interest on the -2009 Series A Bonds according to their tenor and effect, and the performance and observance by the City of all the covenants and conditions in the Indenture and in the 2009 Series A Bonds contained on its part to be performed, it is agreed by and between the City and the Trustee as follows: ARTICLE I AUTHORITY AND DEFINITIONS Section 1.01. Supplemental Indenture of Trust. This Second Supplemental Indenture is supplemental to the Master Indenture. Section L02. Authority for the Second Supplemental Indenture of Trust. This Second Supplemental Indenture is entered into (a) pursuant to the Charter and Bond Ordinance and (b) in accordance with Article II and Article VII of the Master Indenture. Section 1.03. Definitions. (a) Except as otherwise defined by this Second Supplemental Indenture, all terms which are defined in Section 1.01 of the Master Indenture shall have the same meanings, respectively; in this Second Supplemental Indenture as such terms are given. in said Section 1.01 of the Master Indenture. (b) Additional Definitions. The following terms shall, with respect to the 2009 Series A Bonds and for all purposes. hereof, have the meanings set forth below: "Authority" means the Vernon Natural Gas Financing Authority. "Authority Bonds" means the Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series A, 2006 Series B and 2006 Series C. "Authorized Denominations" means with respect to the 2009 Series A Bonds $5,000 and any integral multiple thereof. "Business Day" means any day of the year other than (a) a Saturday, (b) a Sunday, (c) any day which shall be .in Los Angeles, California or New York, New York a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close, and (d) any day the city or cities in which the principal or other designated corporate office of the Trustee, is located are required or authorized to close. OHS West:260528941.4 -2- "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of :May 1, 2009, between the City and the Trustee relating to the 2009 Series A Bonds. "Delivery Date" means May , 2009. "First Supplemental Indenture" shall mean the First Supplemental Indenture of Trust, supplementing the Master Indenture, dated as of September 1, 2008, between the City and the Trustee. "Gas Supply" means the natural gas acquired by the City pursuant to the Supply Agreement. "Interest Payment Date" each 1 and 1 commencing 1, 2009. "Principal Office" means, with respect to the. Trustee, the .principal corporate trust office of the Trustee in Los Angeles, which as of-the date hereof is located at 700 South Flower Street, Suite 500, Los Angeles, CA 90017-4104, Attention: Corporate Trust Department, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. "Record Date" means, with respect to an Interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls, whether or not such :day is a Business Day. "Second Supplemental Indenture" shall mean this Second Supplemental Indenture of Trust, supplementing the Master Indenture, as the same may be amended and supplemented in accordance -with the provisions of the Master- Indenture. "Sinking Fund. Installment" means, with respect to the 2009 Series A Bonds maturing on 1, 20 the amount required by Section 3.01(c) hereof to be paid by the City on any single date for the retirement of such 2009 Series A Bonds. "Supply Agreement" means the Natural Gas Purchase Agreement, dated as of June, 1, 2006, between the City and the Authority. "Tax Certificate" means. the Tax Certificate executed by the City at the time of execution and delivery of the. 2009 Series A Bonds relating to the requirements of Section 148 of the- Code, as originally executed and as it may from time to time be amended in accordance with the :provisions thereof. "2009 Costs of Issuance Fund" shall mean the 2009 Series A Bonds Costs of Issuance .Fund established pursuant to Section 4.02. OHS West:260528941.4 -3- "2009 Escrow Agreement" shall mean the .Escrow Agreement, dated as of May 1, 2009; between the Authority and The .Bank of New York .Mellon Trust Company, N.A., as trustee for the Authority Bonds. "2009 Escrow Fund" shall mean the Escrow Fund established pursuant to the Escrow Agreement. "2009 Purchase Fund" shall mean 'the 2009. Authority Bond Purchase Fund established pursuant to Section ~,i "2009 Series A Bonds" shall mean the City's Electric System Revenue Bonds, ICI 2009 Series A Bonds authorized by Article II hereof. Section 1.04. Interpretation. (a) Unless the context otherwise indicates, defined terms shall include all variants thereof, words expressed in the .singular shall include the plural and vice versa and the use of the neuter, masculine or feminine gender is for convenience only and shall be deemed to mean and. include the neuter, masculine or feminine gender, as appropriate. (b) Headings of articles. and sections herein and the table of contents .hereof are solely for convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. (c) References .herein to the Securities Depository shall include: both the Securities Depository and any nominee of the Securities Depository in whose name the 2009 Series A Bonds may be registered. (d) Unless otherwise indicated, references herein to Articles and Sections shall be to the Articles and Sections of this .Second Supplemental Indenture. The words "herein," "hereof," "hereby," "hereunder" and other words of similar import refer to this Second Supplemental Indenture as a whole and not to any particular Article, Section or subdivision hereof. ARTICLE II THE 2009 SERIES A BONDS Section 2.01. Principal Amount and Designation; Conditions to Issuance. (a) Pursuant to the provisions of the Master Indenture and this Second Supplemental Indenture and the provisions of the Charter and the Bond Ordinance, a Series of Bonds entitled to the benefit, protection and security of such provisions are hereby authorized in the aggregate principal amount of $ Such Bonds shall be designated as, and shall be distinguished from the Bonds of all other Series by the title, "City of Vernon Electric System Revenue Bonds, 2009 Series A." The 2009 Series A Bonds shall be in substantially the form attached hereto as Exhibit A with such variations and omissions as are necessary to reflect the particular terms of each 2009 Series A Bond. OHS West:260528941.4 -4- (b) The 2009 Series A Bonds are issued for the purpose of providing moneys to refinance [all] [a portion] of-the indebtedness of the City represented by its obligation under the Supply Agreement to pay the principal of and interest on -the Authority Bonds by applying a portion of the proceeds of the 2009 Series A Bonds to [the purchase of Authority Bonds] [the redemption of Authority Bonds], to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds: (c) All (but not less than all) of the 2009 Series A Bonds shall be executed by the City for issuance under the Indenture and delivered to the Trustee and thereupon shall be authenticated by the Trustee and delivered to the City or upon its order but only upon receipt by the Trustee of the applicable items required pursuant to Section 2.04 and Section 2.07 of the Master Indenture with respect to the 2009 Series A Bonds. Section 2.02. Terms of the 2009 Series A Bonds; Registration; Denominations; Payment of Principal and Interest (a) The 2009 Series A Bonds shall be issued as fully-registered Bonds without coupons in Authorized Denominations.. The 2009 Series A Bonds shall be registered initially in the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository, and shall be evidenced by one bond certificate in the total aggregate principal amount of the 2009 Series A Bonds of each maturity. Registered ownership of the 2009 Series A Bonds, or any portion thereof, may not thereafter be transferred except as set forth in Section 3.04 of the Master Indenture (b) The 2009 Series A Bonds shall be dated the Delivery Date. (c) The 2009 Series A Bonds shall mature on 1 of the years, in the principal amounts, and shall bear interest at the rates, in each case as set forth below:. Maturity Date L 1) Principal Amount Interest Rate ARTICLE III REDEMPTION OF THE 2009 SERIES A BONDS Section 3.01. Terms of Redemption. (a) The 2009 Series A Bonds are subject to redemption prior to their stated maturity, at the option of the City and from any source of available funds, in whole or in part (in such amounts as may be specified by the City), on any date'at a Redemption Price equal to the principal amount of the 2009 Series A Bonds to be redeemed, without premium, plus accrued, unpaid interest to the date of redemption. (b) The 2009 Series A Bonds maturing on 1, 20_ are also subject to mandatory redemption in part prior to their stated maturity from Sinking Fund Installments OHS West:260528941.4 -5- established pursuant to subsection (c) of this Section on any 1 on or after 1, 20_, at a Redemption Price equal to the principal amount of the 2009 Series A Bonds to be redeemed, without premium. (c) The following shall be the. Sinking Fund Installments for the 2009 Series A Bonds maturing on 1, 20 .Such installments shall be due on 1 of each of the years set forth in the following table in the respective amounts set forth opposite such years. in said table: Sinking, Fund Installment Due Sinking Fu>;ad Date ~ 1) Installment * Maturity. (d) The City shall provide the Trustee with revised sinking fund schedules in the event ofpartial redemption pursuant to this Section 3.01. ARTICLE IV APPLICATION OF PROCEEDS Section 4.01. Application of Proceeds of 2009 Series A Bonds. The proceeds of the sale of the 2009 Series A Bonds (equal to the principal amount thereof, [less net origiral issue discount of $ [plus net original issue premium of $ less underwriters' discount of shall be applied simultaneously with the delivery of the 2009 Series A Bonds, as follows: (a) There shall be deposited in the Debt Service Reserve Fund the sum of $ ,representing the amount required so that the balance. on deposit in such Fund shall equal the Debt Service Reserve Requirement calculated. immediately after the authentication and delivery of the 2009 Series A Bonds; (b) There shall be deposited in the 2009 Costs of Issuance Fund the sum of $ ; (c) There shall be .deposited in the 2009. Purchase Fund the sum of [(c) NB Alternate to (c) above: There shall be deposited in the 2009 Escrow Fund the sum of $ OHS West:260528941.4 -6- Section 4.02. 2009 Costs of Issuance Fund. (a) The Trustee shall establish and maintain in trust a separate fund .designated as the "2009 Series A Bonds Costs of Issuance Fund." Money deposited in said fund shall be used to pay Costs of Issuance with respect to the 2009 Series A Bonds as provided in this Section. (b) The Trustee shall make payments from the 2009 Costs of Issuance Fund, except payments and withdrawals pursuant to subsection (e) of this Section, in the amounts, at the .times, in the manner and on the other terms and conditions set forth in this subsection. Before any such payment from the 2009 Costs of Issuance Fund -shall be made, there shall be filed with the Trustee a requisition therefor, signed by an Authorized City Representative. Each such requisition shall state, in respect of the payment to be made (a) the name of the Person to whom payment is due, (b) the amount of such payment, and (c) the particular item of the cost to be paid and that such payment in the stated amount is a proper charge against the 2009- Costs of Issuance Fund and that no part of such payment shall be applied to any item which has previously been paid as a Costs of Issuance of the 2009 Series A Bonds. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in-the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2009 Costs of Issuance Fund to the payment of the Costs of Issuance of the 2009 Series A Bonds identified in the requisition relating to such moneys. Each such requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have rio -duty to confirm the accuracy of such facts. Upon receipt;of each such requisition, signed by an Authorized City Representative, the Trustee shall pay the amount set forth therein as directed by the terms thereof. (c) Upon the receipt by the. Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2009 Costs of Issuance Fund, and after payment from the 2009 Costs of Issuance Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.02(b) hereof, the Trustee shall transfer any moneys remaining in the 2009 Costs of Issuance Fund to the 2009 Capital Improvements Fund. Upon such transfer the Trustee shall close the 2009 Costs of Issuance Fund. (d) Moneys held in the 2009 Costs of Issuance Fund may, be invested and reinvested to the fullest extent practicable in Permitted Investments which mature not later than such times as shall be necessary. to provide moneys when needed for payments to be made from the 2009 Costs of'Issuance Fund: Any investment earnings on moneys on deposit in the 2009 Costs of Issuance Fund shall be deposited in the 2009 Costs of Issuance Fund and be used in the same manner as other amounts on deposit in the 2009 Costs of Issuance Fund. (e) Notwithstanding any of the other provisions of this Section, to the extent that .other moneys are. not available therefor, amounts in the 2009 Costs of Issuance Fund shall be applied to the payment of Bond debt service when due. OHS West:260528941.4 -7- Section 4.03. -2009 Purchase Fund. jThis Section applies only if the alternate 4.01 (c) applies.l (a) , The ...Trustee -shall establish and maintain in trust a separate fund designated as the "2009 Authority Bond Fund." Money deposited in said fund shall be used to purchase Authority Bonds (or beneficial ownership interests therein) as provided in this Section. (b) The Trustee shall make payments .from the .2009 Purchase Fund, except payments-and withdrawals pursuant to subsection (e) of this Section, in the amounts, at the times, in the manner and on the other terms and conditions set forth in this subsection. Before any. such payment from the 2009 Purchase Fund; shall be made, there shall be-filed with the Trustee a requisition therefor,. signed by an Authorized City Representative.. Each such requisition shall. state, in respect. of the payment to be .made (a) .the name of the- Person to whom. payment is due, (b) the amount of such payment, and (c) the particular Authority Bond (or beneficial ownership interests therein) to be purchased and that such payment in the stated amount is a proper charge against the. 2009 Purchase Fund and that no .part of such payment shall be applied to any item which has previously been paid from,the 2009 Purchase. Fund, The Trustee shall promptly issue its check to the City. or to the Person-identified in the requisition in .the amount or amounts specified in each such requisition or, if requested pursuant to -any such requisition, shall by wire transfer, interbank transfer or other method- arrange to promptly make each payment required by such. requisition. The. City shall apply, ,or cause to be applied, .all such moneys received from the 2009 Purchase Fund to the payment of the purchase price of the Authority Bonds (or beneficial ownership interests therein) .identified in the requisition. relating to such moneys. Each such: requisition shall be sufficient evidence o the Trustee of the facts stated therein and the Trustee shall: have no duty to confirm the accuracy of .such facts. Upon receipt of each such requisition, signed by an Authorized City Representative, the Trustee shall pay the amount set forth therein as directed by the terms thereof. (c) The proceeds of any remarketing, sale, transfer or other disposition of any Authority. Bonds purchased by the City .shall be applied to the payment of principal of 2009A Bonds, including the purchase of 2009 Series A Bonds, or the principal portion of the Redemption Price of 2009 Series.. A Bonds. (d) Upon the receipt by the .Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2009 Purchase Fund, and after payment from the 2009 Purchase Fund of all amounts included in requisitions.. submitted by the City pursuant to Section 4.03(b) hereof, the Trustee shall transfer-any moneys remaining in the .2009 Purchase Fund to the Account in the Debt Service Fund or the Redemption Fund. designated by an Authorized City Representative. .Upon such transfer the Trustee shall close the 2009 Purchase Fund. (e) Moneys held in the 2009 Purchase Fund may, be invested and reinvested to the fullest .extent practicable in Permitted Investments which .mature .not later. than such times as shall be necessary to .provide moneys when. needed for payments. to be made from the 2009 Purchase Fund. Any investment earnings on moneys on deposit in the 2009 Purchase. Fund shall OHS West260528941.4 be deposited in the 2009 Purchase Fund and be -used in the same manner as other amounts on deposit in the 2009 Purchase Fund. (f) Notwithstanding anyof the other provisions of this. Section, to the extent that other moneys are not available therefor, amounts in the 2009 Purchase Fund shall be applied to the payment of Bond debt service when due. ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY Section 5.01. Arbitrage Covenants. (a) The City covenants. with all Persons who hold or at any time held Bonds that the City will not directly or indirectly use the proceeds of any of the Bonds or any other funds of the City or permit the use of the proceeds of any of the Bonds or any other funds of the ' City or take or omit, to take any other action which will cause any of the Bonds to be "arbitrage bonds" or otherwise subject to federal. income taxation by reason of Sections 103 and 14T through 150 of the Code and any. applicable regulations .promulgated thereunder. To that end the City covenants to comply with all covenants set forth in the Tax Agreement, which is hereby incorporated herein by reference as though fully set forth herein. (b) Notwithstanding any provisions of this Section and Section 6.12 of the Master Indenture, if the City shall provide to the Trustee an Opinion of Bond Counsel that any specified action required under this Section or Section 6.12 of the Master Indenture or the Tax Certificate is no longer required or that some further or different action is required to maintain the Tax-Exempt status of interesf on the Bonds, the City and the Trustee may conclusively rely on such opinion in complying with the requirements of this Section; and the covenants hereunder shall be deemed to be modified to that extent. ARTICLE VI MISCELLANEOUS - Section 6.01. Indenture to Remain in Effect. Save and except as supplemented by the First Supplemental Indenture :and this Second Supplemental .Indenture, the Master Indenture shall remain in full force and effect. Section 6.02. Continuing Disclosure. The City hereby covenants and agrees to .comply with and carry out all the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Indenture, failure of the .City to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default and the Trustee shall have no right. to accelerate amounts .due under the Indenture. as a result thereof;. provided, however, that the Trustee, upon receipt of indemnification reasonably satisfactory to it, and the Owners of not less than 25% in principal amount of the Outstanding 2009 Series A Bonds may: take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations in this Section and the Continuing Disclosure Agreement. OHS West:260528941.4 -9- Section 6.03. Notice to Rating Agencies. The Trustee or the City, as appropriate, shall provide each Rating Agency with prompt written notice of (a) the appointment of any successor Trustee, (b) the date no 2009 Series A Bonds are Outstanding, (c) any material amendments to the Master Indenture or this Second Supplemental Indenture, (d) arty acceleration of the 2009 Series A Bonds pursuant to Section 10.04 of the Indenture, (g) any redemption in whole of the 2009 Series ABonds. - Section 6.04. Notices. Unless otherwise provided herein, all notices, certificates or other communications hereunder shall be deemed sufficiently given upon actual receipt thereof when received by the City, the Trustee, and the Rating Agencies, as the case may be, at the respective address provided pursuant to this.. Section or, if mailed by first class mail, postage prepaid, addressed to the appropriate address provided pursuant to this Section, six Business Days after deposit in the United States mail, the initial address for notices, counterparts and other communications hereunder is as follows: If to the City: City of Vernon 4305 Santa Fe Avenue Vernon, CA 90058 Attention: City Attorney If to the Trustee: The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, CA 90017 Attention: Corporate Trust Department If to S&P, to: Standard & Poor's Ratings Services 55 Water Street, 38th Floor New York, New York 10041 Attention: Municipal Structured Group If to Moody's, to: Moody's Investors Service, Inc. 7 World Trade Center at 250 Greenwich Street New York, NY 10007 Attn: Public Finance Municipal Structure Group The City, the Trustee, and the Rating Agencies may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Unless otherwise requested by the City, the Trustee or the Rating Agencies, any notice required to be `given hereunder in writing may be given by any form of Electronic Notice capable of making a written record. Each such' party shall file with the Trustee information appropriate to receiving such form of Electronic Notice. Section 6.05. Counterparts.' This Second Supplemental Indenture may be executed in any number of counterparts and by the different parties hereto on separate counterparts, eaeH of which, when so executed and delivered, shall be an original; but such counterparts shall together constitute but one and the same instrument. OHS West:260528941.4 -10- IN WITNESS WHEREOF, City of Vernon has caused these presents to be signed in its name and on its behalf by its Mayor and attested by its City Clerk and to evidence its acceptance of the trusts hereby created, the Trustee has caused these presents to be signed in its name and on its behalf by one of its authorized officers, all as of the f rst day of May, 2009. CITY OF VERNON By: Leonis C. Malburg, Mayor ATTEST: By: Manuela Giron, City Clerk APPROVED AS TO FORM: By: Jeff A. Harrison, City Attorney THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Authorized Officer OHS West:260528941.4 EXHIBIT A FORM OF 2009 SERIES A BONDS [bracketed language applies only to 2009 Series A Bonds to be registered in the name of CEDE & CO.] [UNLESS THIS BOND 'IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE CITY OF VERNON OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME •OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH. AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] CITY OF VERNON ELECTRIC SYSTEM REVENUE BOND, 2009 Series A No. R-_ $ Interest Rate Dated Date Maturity Date CUSIP No. May 6, 2009 1, 20_ REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: CITY OF VERNON (herein. called the "City"), a municipal corporation and chartered city of the State of California, acknowledges itself indebted to, and for value received hereby promises to .pay (but only out of the Net Revenues (capitalized terms used herein shall have the meanings given such terms pursuant to the Indenture mentioned below) and other assets pledged therefor and available for such payment pursuant to the Indenture) to the Registered Owner specified above or registered assigns, on the Maturity Date specified above (unless this Bond shall have been previously called for redemption in whole or in part and payment of the Redemption Price shall have been duly made), the Principal Amount specified above, in lawful money of the United States of America and to pay interest thereon (but only from said Net Revenues and other pledged assets available for such payment pursuant to the Indenture) in like lawful money until payment of such principal sum shall be discharged as provided in the Indenture, at the rate set forth above. The principal or, if applicable, the Redemption Price hereof is payable upon surrender hereof at the designated Principal Office of the Trustee under the Indenture (the OHS West:260528941.4 A-1 "Trustee"). The initial Trustee is The Bank of New York Mellon Trust Company, N.A., and its designated Principal Office is its. principal corporate trust office in Los Angeles, California, or such. other place as designated by the Trustee: Interest hereon is payable by check mailed on each Interest Payment Date to the Owner hereof as of the applicable Record Date at the. address appearing on the Bond Register maintained by the Trustee; provided Owners of at least $1;000,000 aggregate principal amount of .2009 Series A Bonds may, at any- time prior to a Record Date, give the Trustee written instructions for payment of such interest on each succeeding Interest Payment Date for such 2009 Series A Bonds by wire transfer or by deposit to an account within the United States of America. ..This .Bond is one of a duly authorized issue of bonds of-the City designated as "City of Vernon, Electric System Revenue Bonds" (the "Bonds") and of a Series of the Bonds designated as "Electric. System Revenue. Bonds, 2009 Series A" (the "2009 Series A Bonds"). The 2009 Series A Bonds are issued pursuant to the Charter and the Bond Ordinance: The 2009 Series A Bonds have been. issued in the aggregate principal amount of $ .The-2009 Series A Bonds are .issued under, and,: together with all. other Bonds issued and outstanding thereunder, are equally and ratably secured by a pledge of the Trust Estate under, and entitled to the protection given by, the Indenture of Trust, .dated as of September 1, 2008 .:between the City and the Trustee, as amended. and supplemented, including as supplemented. by the Second Supplemental Indenture of Trust, dated as of May 1, 2009 between the City and the Trustee (said Indenture of Trust, as heretofore supplemented and as the_same may be further amended and supplemented, is herein called .the "Indenture"). As provided in the Indenture, Bonds of the City may be issued thereunder from time to time pursuant to Supplemental Indentures in one or more Series, in various principal amounts, may mature: at different times, may bear interest at .different rates and may otherwise -vary as in the Indenture provided. The aggregate principal amount of Bonds which may be issued under the Indenture is not limited except as provided in the Indenture, and all Bonds issued and to be issued under the Indenture are and will be equally secured by the pledge and covenants made therein, except as otherwise expressly provided or permitted in the Indenture. Copies of the Indenture are on file at the City Hall of the City and at the Principal Office of the Trustee- and reference is hereby made to the Indenture and to all amendments and supplements thereto for a description of the provisions, among others, with respect to the. nature and extent of the security, the rights, duties and obligations of the City, the Trustee and the Owners of the Bonds and the terms upon which the Bonds are secured and payable under the Indenture, the rights and remedies of the Owners ofthe 2009 Series A Bonds, the limitations on such rights and remedies and the terms and conditions upon which Bonds are issued and may be issued thereunder. On the Dated Date of this Bond, there were $ aggregate principal amount of Bonds outstanding under the Indenture in addition to the 2009 Series A Bonds. The Indenture'provides that other Parity Obligations secured by a pledge of Revenues and amounts in the `Light and Power Fund on a parity with the Bonds may be issued or incurred by the City on the terms set forth therein. By acceptance of this Bond, the Registered Owner accepts and agrees to the terms of the Indenture. This Bond is a special obligation of the City and the principal of, Redemption Price, if any, and interest on this Bond are payable solely from the Net.Revenues, the amounts in OHS West:260528941.4 A-2 the Light and Power Fund available for such payment pursuant to the Indenture, and the amounts in the Funds held by the Trustee -under the Indenture other than the Rebate: Fund. .The City's obligation to pay and the principal of, Redemption Price, if any, and interest on this ,Bond sfiall not constitute a charge against the general credit of the City. This Bond is -not secured by a legal or equitable pledge of, or lien. or .charge upon, any property of the City or any of its income or receipts except the Trust Estate pledged pursuant to the Indenture which pledge is subject to the provisions of the Indenture permitting the application of the Trust Estate for the purposes and on the .terms and conditions set forth therein. Neither the: faith and credit nor the taxing power of the State of California, the City or any other public .agency is pledged to the payment of the principal or Redemption Price of or the interest on this Bond. The issuance of this Bond shall not directly, indirectly or contingently obligate the City Council of the City ~o levy or pledge any form of taxation or to make any appropriation for the payment of this Bond. The paymentof the principal or Redemption Price of or interest on this Bond does not constitute a debt, liability or obligation of the State of California or any public agency (other than the special obligation of the City as provided in the Indenture). Neither the members of the City Council of the City, nor any person executing this Bond, nor -any officer or employee of the City shall be individually liable for the principal or Redemption Price of or interest on this Bond or be subject to any personal liability or accountability by reason of the issuance of this Bond or in respect of any undertakings by the City under the Indenture. The 2009' Series. A Bonds were issuedfor the purpose of providing moneys to finance a portion of the Costs of a Capital Improvement consisting of the refinancing of a indebtedness of the City relating to the Gas Supply, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds. Interest on the 2009 Series A Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months: The term "Interest Payment Date" means .each 1 and 1, commencing 1, 2009. The. term "Record- Date" means, with respect to an interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls..: The 2009 Series A Bonds are subject to redemption at the. option. of the City from any. source of available funds, in whole or in part (in such amounts as may be specified by the City), on any date at a Redemption ,Price equal to the principal amount of the 2009 Series A Bonds to be redeemed, without premium, plus accrued, unpaid interest to the date of redemption. The 2009 Series A Bonds maturing on 1, 20 are subject to mandatory redemption, in part, on any 1 on and after l,_2O_, at a Redemption Price equal to -the principal amount of such -2009 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2009 Series A Bonds in the Indenture. If less than all of the 2009 Series A Bonds of a maturity are to be redeemed, the particular 2009 Series A Bonds.. of such maturity to be redeemed shall be selected as provided in the Indenture. OHS West:260528941.4 A-3 The 2009 Series A Bonds are payable upon redemption upon surrender thereof at the Principal Office of the Trustee.. The Trustee shall give notice, in the name of the City, of the redemption of 2009 Series A Bonds, which notice shall be mailed, by first class mail,- postage prepaid, not more than sixty (60) nor less than thirty (30) days before the redemption date to the Owners of any 2009 Series A Bonds to be' redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice shall specify the Series and maturity of the Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption shall be payable and, if less than all of the 2009 Series: A Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2009 Series A Bonds so to be redeemed, and, in the case of 2009 Series A Bonds to be redeemed in part only, such notice shall also specify the respective portions of the principal amount thereof to be redeemed. `Subject to the provisions of the next paragraph, such notice shall further state that on such redemption date there shall become due and payable upon each 2009 Series A Bond to be redeemed the Redemption Price thereof (or the Redemption Price of the' specified portion of the principal amount thereof to be redeemed in the case of a 2009 Series A Bond to be .redeemed in part-only) and that-from and after such date interest on such 2009 Series A Bond (or the portion of such 2009 Series A Bond to be redeemed) shall cease to accrue and be payable. In the event that funds required to pay the Redemption Price of 2009 Series A Bonds to be redeemed at the option of the City are not on deposit with the Trustee at the time the Trustee gives notice of redemptionto the Owners of such 2009 Series A Bonds, such notice shall state that such redemption is conditional upon the receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys sufficient to pay the Redemption Price of the 2009 Series A Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the City shall not be required to redeem such 2009 Series A Bonds. In the event a notice of redemption of 2009 Series A Bonds contains such a condition and such moneys are not so received, the redemption of 2009 Series A Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of 2009 Series A Bonds pursuant to the conditional notice of redemption. Receipt of such notice of redemption shall not be a condition precedent to the redemption of 2009 Series A Bonds and failure of any Owner of a 2009 Series A Bond to receive. any such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of 2009 Series A Bonds. To the extent and in the manner permitted by the terms of the Indenture, the provisions of the Indenture, or any indenture amendatory thereof or supplemental thereto, may be modified or amended by the City with,. in certain cases, the written consent of the Owners of at least a majority in principal amount of the Bonds then Outstanding under the Indenture; and, in case less than all of the Bonds would be affected thereby, with such consent of the Owners of a majority in principal amount of the affected Outstanding Bonds; provided, however, that, if such modification or amendment will, by its terms, not take effect so long as any Bonds of any specified like Series and maturity remain Outstanding, the consent of the owners of such Bonds shall not be required and such Bonds shall riot be deemed to be Outstanding for the purpose of OHS West:260528941.4 A-4 the .calculation of .Outstanding Bonds for purposes of such consent.. No such modification or amendment shall permit a change in the terms of any Sinking Fund- Installment or the terms of redemption. or maturity of the principal of any Bond or of any installment of interest thereon or a reduction in the principal amount or Redemption Price thereof or in the rate of interest thereon without the consent of :the Owner of such Bond, or shall reduce the percentages or otherwise affect the classes of .Bonds the consent of the Owners of which is required to effect any such modification or amendment, or shall change or modify any of the rights or obligations of the Trustee or of any Paying Agent without its written assent thereto. The Indenture may also be amended or supplemented without the necessity of the consent of the Owners of the 2009 Series A Bonds for any one or more of the purposes specified in the Indenture. This Bond is transferable, as provided in the Indenture, only.:: upon the Bond Register kept for that purpose at the Principal Office of the Trustee, by the registered: Owner. hereof, or by his .duly authorized attorney, upon surrender of this Bond together with a .written instrument of transfer satisfactory to the Trustee duly. executed by the registered Owner or his duly authorized attorney. Thereupon and upon payment of the charges prescribed in the Indenture a new registered 2009 Series A Bond or 2009 Series A Bonds, without coupons, and for the same. maturity and aggregate principal.. amount, shall be issued to the transferee in exchange therefor as provided in the Indenture.. The City, the Trustee and any Paying Agent may deem and treat the Person in whose namethis Bond is registered as the absolute owner hereof for the purpose of receiving payment of, or on account of, the principal or. Redemption Price hereof and interest due hereon and for all other purposes. The registered Owner of his Bond shall have no right to enforce the provisions of the Indenture or to institute action to enforce the covenants therein, or to take any. action with respect to any Event of Default under the Indenture, or to institute,. appear in or defend any suit or other proceedings with respect thereto,.. except as provided in the Indenture. In certain. events, on the conditions, in the manner and with the effect set forth in the Indenture,. the principal of all the Bonds issued under the Indenture and then Outstanding may become or may be declared due.. and payable before the stated maturity thereof, together with interest accrued thereon. It is hereby certified and recited that all conditions, acts. and things required by law, including the City Charter and. the Bond Ordinance, and the Indenture to exist, to have happened and to have. been performed precedent to and in the issuance of this Bond, exist, have happened and have been performed in due time,. form and. manner and that the 2009 Series A Bonds, together with all other indebtedness of the City, comply in all respects with the applicable laws of the State of California, including the City Charter and the Bond Ordinance. This Bond shall not be entitled to any benefit under the .Indenture or be valid or- become obligatory for any purpose until this Bond (shall have been authenticated by the execution by the Trustee of the Trustee's Certificate of Authentication hereon. OHS West:260528941.4 A-5 IN WITNESS WHEREOF, CITY OF VERNON has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Mayor and the seal (or a facsimile thereof) to be hereunto affixed, imprinted, engraved or otherwise reproduced and attested by the manual or facsimile"signature of its City Clerk, as of the Dated Date specified above. CITY OF VERNON [SEAL] By: Mayor ATTEST: City Clerk OHS West:260528941.4 A-6 .TRUSTEE'S CERTIFICATE OF AUTHENTICATION" This is one of .the 2009 Series A Bonds delivered. pursuant. to the within mentioned Indenture. Dated: May 6, 2009 TIDE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Authorized Signatory OHS West:260528941.4 A-7 ASSIGNMENT FOR VALUE RECEIVED the undersigned sells, assigns and transfers unto (Name, Address and Tax Identification or Social Security Number of Assignee) the within Bond of the City of Vernon and does hereby irrevocably .constitute and appoint attorney to transfer the said Bond on the books kept for registration thereof with full power of substitution in the premises. Dated: Notice: The Signature of this assignment and transfer must correspond with the name as written upon the face of this Bond in every particular, without alteration or enlargement or any change whatsoever. Signature guaranteed by: Notice: Signature guarantee shall be made by a guarantor institution participating in the Securities Transfer Agents .Medallion Program or in such other guarantee program acceptable to the Trustee. 1 OHS West:260528941.4 A-8 TABLE OF CONTENTS Page ARTICLE I AUTHORITY AND DEFINITIONS 2 Section 1.01. Supplemental Indenture of Trust 2 Section 1.02. Authority for the Second Supplemental Indenture of Trust................. 2 Section 1.03. Definitions 2 Section 1.04. Interpretation 4 ARTICLE II THE 2009 SERIES A BONDS 4 Section 2.01. PrincipalAmount'and Designation; Conditions to Issuance 4 Section 2.02. Terms of the 2009 Series A Bonds; Registration; Denominations; Payment of Principal and Interest 5 ARTICLE III REDEMPTION OF THE 2009 SERIES A BONDS 5 Section 3.01. Terms of Redemption 5 ARTICLE IV APPLICATION OF PROCEEDS 6 Section 4A1. Application of Proceeds of 2009 Series A Bonds 6 Section 4.02. 2009 Costs of Issuance Fund 7 Section 4.03. 2009 Purchase Fund. [This Section applies only if the alternate 4.01 (c) applies.] 8 ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY 9 Section 5.01. Arbitrage Covenants 9 ARTICLE VI MISCELLANEOUS 9 Section 6.01. Indenture to Remain in Effect 9 Section 6.02. Continuing Disclosure 9 Section 6.03. Notice to Rating Agencies 10 Section 6.04. Notices 10 Section 6.05. Counterparts 10 EXHIBIT A FORM OF 2009 SERIES A BONDS A-1 I OHS West:260528941.4 -i- II An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. OHS West:260528941.4 EXHIBIT B Exhibit B [Purchase Contract Attached] B-1 ' Stradling Yocca Carlson & Rauth Draft of 3/6/09 CITY OF VERNON Electric System Revenue Bonds 2009 Series A April 2009 CONTRACT OF PURCHASE City of Vernon .4305 Santa Fe Avenue Vernon, California 90058 Ladies and Gentlemen: Citigroup Global Markets Inc. (the "Representative"), acting on behalf of itself and representative of itself and E.J. De La Rosa & Co., Inc. (each an "Underwriter" and collectively the "Underwriters), hereby offers to enter into this Contract of Purchase (this "Purchase Contract") with you, the City of Vernon ("the City"). This offer is made .subject to acceptance by the City prior to 11:00 P.M., California time, on the date hereof, and upon such- acceptance this Purchase Contract shall be in full force and effect in accordance with its terms and shall. be .binding upon the City and the Underwriters..; 1. Upon the terms and conditions and upon the basis of the representations herein set forth, the Underwriters hereby agree to purchase and. the City hereby agrees to sell to the Underwriters all (but not less than all) of the City's $ Electric System Revenue Bonds, 2009 Series A (the "Bonds"). The purchase price for the Bonds shall be $ (representing the $ aggregate principal amount of the Bonds less $ Underwriters' discount and less an original issue discount of $ The Bonds are to be issued pursuant to Article XI of the Vernon City Code and an Indenture of Trust, dated as of September 1, 2008, as supplemented, including as supplemented by the Second Supplemental Indenture,of Trust providing for the issuance of-.the Bonds dated as of May 1, 2009 (the "Indenture"), by and between- the City and The Bank of New York Mellon Trust Company, N.A:; as trustee (the "Trustee"), substantially in the form previously submitted to the Underwriters, with only such changes therein as shall be mutually agreed upon. Terms used herein and not defined shall have the meanings assigned to them in the Official Statement. Proceeds of the Bonds will be used (i) to refinance the Vernon Natural Gas Financing Authority Variable Rate Revenue -Bonds (Vernon Gas Project) 2006 Series A, 2006 Series B and 2006 Series C (the "Authority Bonds"), (ii) to fund the Debt Service Reserve Fund, and (iii) to pay costs of issuance of the Bonds. The City will undertake, pursuant to a Continuing Disclosure Agreement, dated as of May 1, 2009 (the "Continuing Disclosure Agreement"), by and between the City and the Trustee, to provide bOCSOC/ 1318468v4/024322-0142 certain annual financial information and notices of the occurrence of certain events, if material. A form of the Continuing Disclosure Agreement is set forth in the Official Statement (defined below). Tl1e Indenture, the Continuing Disclosure Agreement and this Purchase Contract .are hereinafter referred to as the "Legal Documents." 2., The Underwriters agree to reoffer the Bonds in a bona fide public offering at an initial offering at the offering prices listed in the Official Statement. After the initial offering, the Underwriters reserve the right to change such public offering prices as the Underwriters shall deem .necessary in marketing the Bonds.. The Bonds shall be dated .the date of their delivery and shall mature on the dates and in the principal amounts and. shall bear interest at the rates per annum shown on Schedule 1 hereto. 3. At 8:00 A.M., California time,. on May 2009, or at such other time or on such.. earlier or dater business day as .shall have been mutually agreed .upon by the City and. the Underwriters(the "Closing Date"), the City will deliver to the Underwriters of the offices of Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, the closing documents hereinafter mentioned. The Bonds, registered to Cede & Co. and in definitive form; will be -made: available to the Underwriters one business day prior to the Closing Date at the offices of Orrick, Herrington & Sutcliffe LLP, or . at .such .other: place as may be designated by the Representative and shall be subsequently delivered on the Closing Date to The Depository Trust Company, ("DTC") or to the' Trustee for DTC. It is anticipated that' CUSIP identification numbers will. be printed on the Bonds, but neither the failure to print .such number on any of the Bonds nor any error with respect thereto shall constitute cause for a failure or refusal by the Underwriters to accept delivery of and pay for the -Bonds in accordance with the terms of this Purchase Contract. .Upon release of the Bonds, the Underwriters will pay the purchase price of the Bonds as set forth in Section 1 hereof, in immediately available-.funds to the order of the City. The releases and payments referenced to in this Section 3 are herein called the "Closing." 4. The City hereby ratifies, confirms and approves of the distribution and use by the Underwriters prior to the date hereof of the preliminary official statement dated April 2009, relating to the Bonds (the "Preliminary Official Statement") and the making available of the Preliminary Official .Statement to investors prior to-the. date hereof on the Internet: The City -has deemed final the Preliminary Official Statement as of the date thereof for purposes of Rule 1Sc2-12 promulgated under the Securities Exchange Act of-1934 ("Rule 1Sc2-12"), except-for information permitted to be omitted therefrom in accordance with paragraph (b)(1) of Rule 15c2-12. The City hereby agrees to deliver or cause to be delivered to the Underwriters, within seven (7) business days of the date hereof, copies of the final Official Statement relating to the Bonds, dated the .date hereof, in the form of the Preliminary Official Statement, with such changes thereto, as maybe approved by the Representative (including the appendices-thereto and any amendments or supplements as have been approved by the-City and the Representative, the "Official Statement"), in such quantity as the Underwriters shall- reasonably request. The City hereby approves, of the distribution and use by the Underwriters of the Official Statement in connection with the offer and sale- of the Bonds. The Representative hereby agrees to deliver a copy of the Official Statement to a national repository on or before the .Closing Date and the Underwriters agrees to deliver a copy of the Official 'Statement to each investor that purchases any of the Bonds, and otherwise to comply with all applicable statutes- andregulations in connection with the offering and sale of the Bonds, including, without limitation, MSRB Rule G-32. 2 DOCSOC/ 1318468v4/0243 22-0142 5. The _City represents to the Underwriters that, as of -the -date hereof and as of the Closing Date: (a) The City 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 (the "State"), and' has all power and authority necessary to carry on the public utility business in which it is engaged and to own and operate the Electric System and any other properties used by it in such business; (b) The City has full legal right, power. and authority to cause the Bonds to be authenticated. and delivered, to execute and deliver the Legal Documents and to perform its obligations contained herein and therein in accordance- with the Act and other applicable laws; and, by official action of the City prior to or concurrently with the acceptance hereof, the City has. duly authorized and approved the issuance and delivery of the Bonds, the- execution, delivery and distribution of -the Official Statement, the execution and delivery of the Legal Documents. and the performance of its obligations contained herein and therein and the consummation by it of all other transactions contemplated by the Legal Documents to have been performed or consummated at or prior to the Closing Date, all in accordance with the Act and other applicable laws, and the City is and will be in compliance with the provisions thereof in all material respects; (c) The Official Statement does not and at .all times subsequent hereto up to and including the Closing Date will-not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not .misleading except that no representation is made as to any information included in the Official Statement relating to DTC or its operations; (d) Between the date hereof and the Closing-Date, except as contemplated by the. Official Statement, the City will not have incurred any material liabilities, direct or contingent, payable from Electric System Revenues or entered .into any. material transaction in connection with the Electric System in either case other than in the ordinary course of business, and there shall not .have been any material adverse change in the financial condition or prospects of the Electric System; (e) The City is not in breach of or default .under any applicable. existing ~ constitutional provision, law or administrative regulation of the State of California or the United States binding on the City or any existing applicable judgment or court decree. binding on the City or any existing loan agreement, indenture, bond, note, resolution, agreement or other instrument to which. the City is a party which would materially adversely affect the ability of the City to pay the principal and interest on the Bonds, and no -event has. occurred and is continuing which, with the passage of time or the giving of notice or both, would constitute such an event of default which would have such .effect under any such instrument; and the .execution and delivery of the Legal . Documents and the performance by the City of its obligations under the- Legal Documents will not conflict with or constitute a breach of or default under any existing constitutional provision; law or administrative regulation of the State of California or-the United States binding on the City. or any existing applicable judgment. or court decree binding- on the :City, or any existing. loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the City is a party, which conflict, breach or default would materially. adversely affect .the ability of the City to pay the principal and interest onthe Bonds; (f) Except as disclosed in the Official Statement, no litigation is, or at the Closing Date, will be, pending or, to the knowledge of the City, threatened in any court (i) in any 3 DOCS OC/ 1318468v4/024322-0142 way questioning the corporate existence of the City or, except for criminal matters with respect to the Mayor's residency, the titles of the officers of the City to their respective offices; (ii) seeking to restrain or enjoin the issuance or delivery of any of the Bonds, or the collection of Net Revenues of the Electric System or other amounts pledged or to be pledged to pay the principal of, premium, if any, and interest on the.Bonds, or in any way contesting or affecting the validity of the Bonds; the -Legal Documents or the collection of said Net Revenues, or the pledge thereof, or contesting the powers of the City or any authority for the issuance and delivery of the- Bonds or the performance of its obligations contained therein or the execution and delivery of the Legal Documents or the performance. of its obligations contained therein, (iii) which would be likely to result in any material adverse change in the business, properties, assets or financial condition of the Electric System or to have a material adverse effect on the ability_of the City to meet its obligations under the Bonds or the Legal Documents or (iv) asserting that-the Official Statement contained any untrue statement of a material ..fact or omitted to state any material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; (g) The Bonds, the Legal Documents and the other documents described in the Official Statement conform in all material respects to the descriptions thereof contained in the Official Statement, and the Bonds, when .delivered as provided herein, will be validly issued -and outstanding obligations of the City entitled to the benefits of the Indenture; (h) The City will furnish such .information, execute such instruments and take such other action not inconsistent-with law in cooperation with the Underwriters, as the Underwriters may reasonably request in order (i) to qualify the Bonds for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions of the United States as the Underwriters- may designate and (ii) to determine the eligibility of the Bonds for investment under the laws of such states -and other jurisdictions, and will use its. best efforts to continue such qualification in effect to the End of the Underwriting Period (as hereinafter def ned); provided that the- City shall not be obligated to take any action that would subject it to the general .service of process in any state or jurisdiction where it is not now so subject; ' (i) If between the date hereof and the date that is 25 days after the End of the Underwriting Period (as hereinafter defined) for the Bonds, an event occurs which might or-would cause the information contained in the Official Statement, as then supplemented or amended, to contain an untrue statement of a material fact or to omit to state a material fact necessary to make the statements made therein, in the -light of the circumstances under .which they were .made, not misleading, the City. will notify the Representative, and, if in the .opinion of the City or the Representative, or their respective counsel; such event requires the. preparation and publication of a supplement or amendment to the Official Statement, the City w1T forthwith prepare and furnish to the Underwriters (at the' expense of the City) a reasonable number of copies of an amendment of or supplement to the Official Statement (in form and substance satisfactory to counsel for the Underwriters) .which will amend or supplement the Official Statement so that it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order. to make the statements therein, in the light of the circumstances under which-they were-made, not misleading; (j) After -the, Closing, the City wily not. participate in the issuance of any amendment of or supplement to the Official Statement to which, after being furnished with a copy, the Representative shall reasonably object in writing or which shall be disapproved by counsel for the Underwriters; 4 DOCSOC/ 1318468v4/024322-0142 (k) The financial statements of the City contained as Appendix A to the Off cial Statement do and will fairly present the financial position and results of operations of the City as of the dates and for the periods therein set forth. in accordance with the accounting principles described in Appendix A to -the Official Statement applied consistently,-and there has not been a material adverse change in the business,. properties or financial condition of the City or the Electric System from. that set forth in or contemplated by the Official Statement; (1) The City (i) has .all necessary licenses and permits required to carry on and operate all. of the facilities, equipment. and other property comprising the Electric System the lack of which .would materially adversely affect the operations or financial condition of the. Electric System, and (ii) has not received any notice of an alleged violation. and, to-the .best knowledge of the City, the City is not in violation of any zoning, land use or other similar law. or regulation applicable to any of its property comprising the Electric System,that would materially adversely affect-its operations or financial condition; (m) .Any certificate signed by an authorized. officer of the City and delivered to the Underwriters shall be deemed a representation and warranty by the City to he Underwriters as to the statements made therein; (n) The City has not previously been in default and is not currently in default with respect to any undertaking entered into under Securities and Exchange Commission Rule 15c2- 12; (o) All consents, approvals, authorizations and orders of governmental or regulatory authorities which are required for the consummation. by the .City of the transactions. contemplated on the part of the City by the Indenture, the Official Statement, the Bonds and this Purchase Contract have been obtained. (p) As used herein and for the purposes. of the foregoing, the term "End of the Underwriting Period" for the Bonds .shall. mean the earlier of (i) the Closing Date unless the City shall have been notified in writing to the contrary by the Underwriters on or prior. to the Closing Date as a result of all the Bonds not being distributed,. or (ii) the date on which the End of the Underwriting Period for the Bonds has occurred. under Rule 15c2-12; provided, however, that the City may treat as the End of the Underwriting Period for the Bonds the date specified as such in a notice from the Underwriters stating the date which is the End of the Underwriting Period; 6. .The Underwriters have entered into this Purchase Contract in reliance upon the representations herein and the performance by the City of the City's obligations hereunder, both as of the date hereof and as of the Closing Date: The Underwriters' obligations under this. Purchase Contract-are and shall be subject to the following further conditions: (a) The representations of the City contained herein shall be true and correct in all material respects at the date hereof and on the Closing Date; (b) At the time of the Closing, the Legal. Documents shall be in full force and effect, and shall not have been amended, modified or supplemented (except as may. be agreed to in writing by the'Representative); the ratings quoted in the Official Statement shall be in effect; and the City shall perform or have performed its obligations required- under or specified in the Legal Documents to be performed at or prior to the Closing; 5 DOCSOC/ 1318468v4/024322-0142 (c) The Underwriters may terminate this Purchase Contract by notification to the City if at any time after-the date hereof and prior to the Closing (1) legislation shall be enacted, or actively considered for enactment by the Congress, with an effective date prior to the Closing Date, or a decision by a court of the United States. shall be. rendered, or a ruling or regulation by the Securities -and Exchange Commission or other governmental agency having- jurisdiction of the subject matter shall be made; the effect of which is that (A) the Bonds are not exempt from the registration, qualification or other requirements of the Securities Act of 1933; as amended and as then in effect (the "1933 Act"), or the Securities Exchange Act of 1934; as amended and" as then in effect {thee "1934 Act"), or (B) the Indenture is not exempt from the registration; qualification or other requirements of the Trust Indenture Act of 1939, as amended and as then in effect (the "TIA"); (2) a stop order, ruling or regulation' by the Securities and Exchange Commission shall be issued or made, the effect of which is that the offering or sale of the Bonds, as contemplated herein. or in the Official Statement, is in violation of any provision of the 1933 Act, -the 1934 Act, or the TIA; (3) . there shall have occurred any new outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, calamity or crisis, the effect of which on financial markets is such as to make it, in the sole judgement of the Representative, impracticable or inadvisable to proceed with the. offering and delivery of the Bonds; (4) there shall have occurred a general suspension of trading, minimum or maximum prices for trading shall have. been fixed and be in force or maximum ranges or prices for.. securities shall. have been required.: on the New York Stock Exchange or other national stock exchange whether by virtue. of a determination by that Exchange or by order of the Securities and Exchange Commission or any other governmental agency having jurisdiction or any national securities. exchange shall haver (i) imposed- additional material. restrictions not in force as of the date hereof.. with respect to trading in securities generally; or to the Bonds or similar obligations; or (ii) materially increased restrictions now in -force with respect to the extension of credit by or the charge- to -the net capital requirements of underwriters or broker-dealers such as to make it, in the judgment of the- Representative; impractical or .inadvisable to proceed with the offering of the Bonds as .contemplated in the Official .Statement; (5) a general .banking moratorium shall have been declared by Federal; New York or California authorities having- jurisdiction and shall be in force; (6) there shall. exist any event which, in ..the. sole reasonable judgment of the Representative, causes- the Official Statement to either (A) contain an untrue statement. of a material fact or (B) omit to state a material fact necessary in order to make the statements made in the Official Statement, in light. of the circumstances under which they were-made; not misleading; or (7) a downgrading or suspension of any rating (without regard to credit enhancement) by any national. rating agency of any. debt securities issued by the City, or (ii) there shall have been any official statement as to a possible downgrading (such as being placed on "credit watch" or "negative outlook" or any similar qualification) of any rating of any debt securities issued by the City, including the Bonds. 6 DOCSOC/ 1318468v4/024322-0142 (d) At or prior to the -Closing, the Underwriters. shall receive the. following documents: (1) the. opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, dated the Closing. Date, substantially in the form attached as Appendix E to .the Official Statement, together with a letter addressed to the Underwriters stating the Underwriters-may rely on - such opinion as if it were addressed to the Underwriters. (2) a certificate or .certificates, dated the. Closing Date, of the -City executed by its City .Administrator or other appropriate official, to the .effect that (A) on the date of the Official .Statement and on the date of the.. certificate (i) the descriptions -and statements of or pertaining to the City, the Electric System contained in the-Official Statement were.and are. true and correct in all material respects; and (ii) the Official Statement did -not and does not contain an untrue statement of a material, fact or omit to state a material fact which is necessary to make the statements made. therein, in the light of .the circumstances under. which they .were made, not misleading (provided that no representation .need be made regarding information. relating to DTC and its operations); and (B) the representations and warranties of the City in this Purchase Contract are true and correct on and as of the Closing Date as if made on and as of the Closing Date, and the City has complied with .and performed all of its covenants and agreements in this Purchase Contract on its part to be complied with and performed at or prior to :the Closing; (3) a certificate dated the Closing Date, by the City Administrator or other appropriate official of the City, and by the City Attorney to the effect that other than as described in the Official Statement, no litigation is pending (with the City having received service of process) or, to their knowledge, threatened in any .court (i) in any way questioning the corporate existence of the City or, except for criminal matters with respect to the Mayor's residency, the titles of the officers of the City. to their respective offices; (ii) seeking to restrain or enjoin the delivery of the .Bonds, or the collection of Net Revenues of the .Electric System or other amounts pledged to pay the principal of, premium, if any, and interest on ouch Bonds; (iii): in any way contesting or affecting the validity. of the .Bonds or the Legal Documents; (iv) in -any way. contesting or affecting the collection .of said Net Revenues or the. pledge thereof, or contesting the powers of the .City or any authority .for the issuance and delivery of the Bonds and the performance of its obligations .contained therein or the execution and delivery of the Legal Documents and the performance of its obligations contained wherein; (v) which would be likely to result in any material adverse change in the business; properties, assets or the financial condition of the Electric System or which would be likely to have a material adverse effect on the ability of the. City to meef its obligations under the Indenture; or (vi) asserting-that the Official Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, which .certificate shall be in form and substance acceptable to the Representative; . (4) an opinion of counsel to the Trustee, dated the Closing Date and addressed to the City and the Underwriters, to the effect that: (i) the Trustee is a national banking association duly organized. and validly existing -under the laws o,f the United States- of America; (ii) the Trustee. is duly eligible and qualified to act as Trustee under the Indenture; (iii) the Trustee has all requisite power, authority and -legal right to execute and deliver whe Indenture and the- Continuing Disclosure Agreement and to perform its obligations under such documents; and (iv) the Trustee has duly executed and delivered the Indenture and the Continuing Disclosure Agreement and assuming the due authorization, execution and delivery thereof by the other parties thereto, such 7 DOCSOC/ 1318468v4/024322-0142 documents are the legal,. valid and binding agreements of the Trustee, enforceable in accordance with their terms, except to the extent enforceability thereof may be subject to (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent .conveyance and other similar laws affecting creditors' rights and remedies heretofore or hereafter enacted, and (b) the application of equitable principles and the exercise of judicial discretion in appropriate cases.. (5) a certificate of the Trustee, dated the Closing Date, to the effect that (i) the Trustee is a .national banking association duly organized and existing under the laws of the United States of America; (ii) the Trustee has full corporate trust powers and authority to serve as Trustee .under the Indenture, and .as Dissemination Agent under the 'Continuing Disclosure .Agreement; and (iii) the Trustee has full power and authority to carry out its respective obligations under the. Indenture- and the Continuing Disclosure. Agreement, as applicable, and that such acceptance is ri full compliance with, and does not conflict with, any. applicable law or governmental regulation currently in effect, and: does not.conflict with or violate any contract to which- the Trustee is a party or any administrative or judicial decision by which the Trustee is bound; (6) an opinion of Orrick, Herrington & Sutcliffe- LLP, Bond Counsel; dated the Closing Date, substantially in the form attached hereto as Exhibit A; (7) an opinion of Orrick, Herrington & Sutcliffe -LLP, Bond Counsel to the effect that the Authority Bonds have been. defeased in accordance with the documents pursuant to which they were issued; (8) an opinion of the City Attorney or other counsel to the City acceptable to the Underwriter, dated the Closing Date, .substantially in the form attached hereto as Exhibit B; (9) copies of the documents referred to in Section 6(b); (10) certified copies of all proceedings relating to the authorization.'and issuance of the Bonds certified by the City Administrator or other appropriate official of the City (11) an ..incumbency certificate of the City with respect to those officers executing the Official Statement, this Purchase Contract, and the documents and instruments relating ` to the issuance. of the Bonds; (12) a certificate of the Authority to the effect that the Authority Bonds have been defeased in accordance with the documents. pursuant to which they were issued; (13) evidence that the ratings on the Bonds of " "from Moody's Investor. Services and from Standard and. Poors Rating Services are in full force and effect as of the. Closing Date; (14) the Blanket Issuer Letter .of Representations of the City; (15) such additional certificates, instruments and other documents as the Representative may reasonably deem necessary to evidence the truth and accuracy as of the Closing Date of the City's representations and warranties contained in this Purchase Contract and the due performance or satisfaction by the. City at or prior to such time of all- .agreements then to be performed and all conditions then to be satisfied by the City pursuant to this Purchase Contract. 8 DOCSOC/ 1318468v4/024322-0142 The opinions and certificates and other material referred to above shall be in form and substance satisfactory to the undersigned and to Stradling Yocca Carlson & Rauth, a Professional Corporation, Counsel to the Underwriters: If the City shall be unable to satisfy the conditions to the obligations of-the Underwriters to purchase, accept delivery of and pay for the Bonds contained in this Purchase Contract or if the obligations of the Underwriters to purchase, accept. delivery of and pay for the .Bonds shall be terminated for ariy .reason permitted by this Purchase Contract, this Purchase Contract and all obligations: of the Underwriters hereunder may be terminated by the Representative af, or at any time prior to, the Closing Date by written notice to the- City, and neither the Underwriters nor the City shall have any further obligations.hereunder. 7. .The Underwriters shall be. under no obligation to -pay, .and.. the City shall pay, any expenses iricident to the performance of the City's obligations hereunder, including but not limited to: (i) the. cost of preparation, printing and .distribution of the Legal Documents, the Official Statement and any supplements or amendments whereto; (ii) the cost of preparing and printing. the Bonds; (iii) the fees and disbursements of Bond Counsel and the fees and expenses of counsel to the City; (iv) the fees and disbursements of any engineers, accountants and other experts, consultants or advisors retained by the City; (v) fees for bond ratings (which include fees of rating agencies and travel expenses of the City); and (vi) expenses (included in the expense component of the underwriting .spread) incurred on behalf of the City's employees which are incidental to implementing this agreement, including, but not limited to, meals, transportation, and lodging of those employees, if any. 8. .The Underwriters shall -pay: (i) the cost of preparation and printing of this Purchase Contract and the Preliminary Blue Sky Survey; (ii) all advertising expenses -and Blue Sky filing fees in connection with the public offering of the Bonds; (iii) fees, if any, payable to the California Debt and Investment Advisory Commission in connection with the execution and delivery of the Bonds; and (iv) -all other expenses incurred by the Underwriters in connection with the public offering of the Bonds, including the -fees and disbursements of Underwriters' Counsel. 9. Any notice or other communication to be given to -the City under this Purchase Contract may be given by delivering the same in writing to: City of Vernon, 4305 Santa Fe Avenue, Vernon, California 90058, Attention: City Attorney; and any notice or other communication to be given to the Representative under this Purchase Contract may be given. by delivering the same- in writing to: Citigroup Global Markets Inc.,- One Sansome Street, 28th Floor, San Francisco, California 94104, Attention: Alex Burnett, Managing Director. 10. This Purchase Contract shall be construed in accordance with and governed by the Constitution and laws of the State of California applicable to contracts made and performed in the State. 11. This Purchase Contract may be executed iri ..several counterparts, each. of which shall be an original, and all of which shall constitute but one and the same instrument. g DOCSOC/ 1318468v4/0243 22-0142 12. This Purchase Contract, when accepted by the City in writing as heretofore specified, .shall constitute the entire agreement between the City and the Underwriters in connection- with the subject matter hereof and is made solely for the benefit of the City and the Underwriters (including any successor in business of the Underwriters)..The City acknowledges (i) that the Underwriters are acting as a principal hereunder, and not as an agent or fiduciary for the City and (ii) that the City is .solely responsible for making its .own decisions in connection with the issuance of the Bonds. No other person shall acquire or have any right hereunder or by virtue hereof. All the representations and agreements in this Purchase Contract shall remain operative and in full force and effect, regardless of (a) any investigation made by or on behalf the Underwriters, (b) delivery of and payment for the Bonds hereunder, and (c) any termination of this Purchase Contract. Very truly yours, CITIGROUP GLOBAL MARKETS INC. By: Managing Director Accepted on January 2009 -CITY OF VERNON By; City Attorney ATTEST: By: City Clerk. 10 DOC SOC/ 1318468v4/024322-0142 SCHEDULE 1 CITY OF VERNON. .Electric System Revenue Bonds 2009 Series A Maturity. Date (July 1) Principal Amount Interest Rate Yield DOCSOC/ 1318468v4/0243 22-0 1 42 EXHIBIT A [Letterhead of Orrick, Herrington & Sutcliffe LLP] [Closing Date] Citigroup G1obaLMarkets, as Representative One Sansome Street, 28t~' Floor San Francisco, CA 94104 Re: City of Vernon Electric System Revenue Bonds, 2009 Series A, (Supplemental Opinion) Ladies and Gentlemen: This letter is addressed to you, as Representative of the Underwriters, pursuant to (i) Section 6(d)(6) of the Contract of Purchase, dated April 2009 (the "Contract. of Purchase"), between you and the City of Vernon, California (the. "City"), providing for the purchase of the City's $ Electric System Revenue Bonds, 2009 Series A (the "Bonds"). The Bonds are to be issued pursuant to Article XT of the Vernon City Code and an Indenture of Trust, dated as of September 1, 2008, as supplemented, including as supplemented by the Second Supplemental Indenture of Trust providing for the issuance of the Bonds dated as of May 1, 2009. (the "Indenture"), by and between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture or, if not defined in the Indenture, the Contracts of Purchase. We have delivered our final legal opinion (the "Bond Opinion") as bond counsel to the City concerning the validity of the Bonds and certain other matters, dated the date. hereof and addressed to the City. You may rely on such opinion as though the same were addressed to you. In connection with our role as bond counsel to the City, we have reviewed the Contract of Purchase, the printed version of the Official Statement, dated April 2009, relating to the Bonds (the "Official .Statement"), the Continuing Disclosure Agreement, the documents, certificates, opinions and matters mentioned in the second paragraph of our Bond Opinion, and such other documents, opinions and matters to the extentwe deemed necessary to express the opinions set forth in the numbered paragraphs below. The opinions expressed herein are based on an analysis of existing laws, regulations,- rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions.taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. We have .assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and' legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without undertaking to verify, the accuracy of the factual A-1 Error! Unknown document property name. matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opipions, referred to in the third paragraph hereof. We have further assumed compliance with all covenants and agreements contained in such documents. In addition, we call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Continuing Disclosure Agreement and the Contract of Purchase and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' .rights, to the application of equitable .principles,. to the exercise of judicial discretion irr appropriate cases and to the limitations on legal, remedies against cities in the State of California. We express no opinion with. respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoing documents, nor do we express any opinions with respect to the state or quality of title to or interest in .any assets described in or as subject to the -lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such assets. Finally, we undertake no responsibility for .the accuracy, completeness or fairness of the Official Statement or other offering material relating to the- Bonds and express no opinion relating thereto except as expressly set forth in numbered paragraph 3 below. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: L The Bonds are not subject to the registration requirements of the- Securities Act of 1933, as .amended, and the Indenture is exempt from qualification pursuant. to the Trust Indenture Act of 1939, as amended. 2. TheContract of Purchase. and the Continuing Disclosure Agreement have each been duly authorized, executed acid delivered by the City and each of the Contract of Purchase and the Continuing Disclosure Agreement is a valid and binding agreement of the -City. 3. The statements contained in the Official :Statement under the captions "INTRODUCTION," "THE 2009 BONDS;" "SECURITY AND SOURCES OF PAYMENT FOR THE 2009 BONDS," and "TAX MATTERS," and in "APPENDIX B-SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE," "APPENDIX D -PROPOSED FORM OF OPINION OF BOND COUNSEL" and APPENDIX E-FORM OF CONTINUING DISCLOSURE AGREEMENT," excluding any material that may be treated as included under -such captions by cross-reference, insofar as such statements expressly summarize certain provisions of the Indenture, the Continuing Disclosure Agreement and the Bond Opinion, .are accurate in all material respects. We are not passing -upon and do not assume-any responsibility for the accuracy (except as explicitly stated: in numbered paragraph 3 above), completeness or fairness o~ any of the statements contained in the Official Statement and make no representation that we .have independently verified the accuracy, completeness or fairness of any such statements. We do not assume any responsibility for any electronic version of the. Official Statement and assume that any such version is identical in all respects to the printed version. In our capacity as bond counsel in connection with issuance of the Bonds, we participated in conferences with your representatives, your counsel, representatives of certain consultants to the City, the City and counsel to the City, during which conferences the contents of the Official Statement and related matters were. discussed.. Based on our participation in the above-referenced conferences. (which did not extend beyond the date of the Official- Statement),. and in reliance thereon and on the records,. documents, certificates, opinions and matters herein mentioned (as set forth above), subject to the limitations on our role as A-2 Error! Unknown document property-name. bond counsel, we advise you that no facts came to the attention of the attorneys in our firm rendering legal services in connection with. such issuance which causedus to believe that the Official Statement as of its date and as of the date hereof (except for any CUSIP numbers, financial, accounting, statistical, engineering, demographic or economic data or forecasts, numbers, charts, tables, graphs, estimates,. projections, assumptions or expressions of opinion, any .management analysis or discussion or any information about book-entry, The Depository Trust Company, and the information contained in Appendices A and. C, included or referred to therein, which we expressly exclude from the scope of this paragraph and as to which we express no view), contained or contains any untrue. statement of a material fact or omitted or omits to state any material fact necessary to make the statements made therein, in the light of the circumstances under which they were made,. not misleading. No responsibility is undertaken or view expressed with respect to any other- disclosure document, materials or activity. This letter is furnished by us as bond counsel. No attorney-client relationship has existed or exists between our firm and you in connection with the Bonds or by virtue of this letter. Our-engagement with. respect to the Bonds has concluded with their issuance. We disclaim any obligation to update this letter. This letter is delivered to you as the Underwriters of the Bonds, is solely for your benefit as such Underwriters and is not to be used, circulated, quoted. or otherwise .referred to or relied upon for any other purpose or by any other person. This letter is not intended to, and may not, be relied upon by owners of the. Bonds or by any other party to whom it is not specifically addressed. .Very truly yours, ORRICK, HERRINGTON & SUTCLIFF>? LLP A-3 Error! Unknown document property name. EXHIBIT B FORM OF OPINION OF CITY ATTORNEY [Closing Date] Citigroup Global Markets One Sansome Street, 28th Floor San Francisco, CA 94104 Re:. $ City of Vernon Electric System Revenue Bonds 2009 Series A Ladies and Gentlemen: I am .the City .Attorney of the City of :Vernon (the "City") and as such I have served as counsel to the City in connection with the issuance of the- City's $ Electric .System Revenue. Bonds, 2009 Series A (the "Bonds"). As such counsel, I have examined and am familiar with (i) those documents relating. to the existence; organization and operation of the City; (ii) all necessary documentation of the City relating to the authorization, execution and delivery of (a) the Indenture of Trust, dated as of September 1, 2008, as supplemented, including as supplemented by the Second Supplemental Indenture of Trust providing for the issuance of the Bonds dated as of May 1, 2009 (the "Indenture"), by and between -the .City and The. Bank of New York Mellon Trust Company, N.A., as trustee (the. "Trustee"), (b) the Continuing Disclosure Agreement, dated as of May 2009 (the "Continuing Disclosure Agreement"), between the City and the Trustee, as dissemination agent; and (c) the Contract of Purchase, dated April 2009 -with respect to the Bonds (the "Purchase Contract"), between the City and the Underwriters; (iii) an Official Statement of the City, dated April 2009 (the "Official Statement"), relating to the Bonds. The. Indenture, the Continuing Disclosure Agreement and the Purchase Contract are collectively referred to herein as the "Legal Documents." I am of the opinion that: 1. The City is a chartered city, duly created, organized and existing under the Constitution and laws of the State of California and-duly qualified to furnish electric service within said City, 2. The City has the authority and right to execute, deliver and perform the .Legal Documents, and the City has complied with the provisions of applicable law in all matters relating to the transactions contemplated by the Legal Documents. 3. The Official Statement and the Legal Documents have been duly authorized; executed and delivered by the City and, assuming that the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal Documents constitute the legal, valid and binding agreements of the City enforceable against it in accordance with their C-1 Error! Unknown document property name. respective terms, except, in each case, as enforceability may be limited by laws. relating to bankruptcy; insolvency or other laws affecting the enforcement of creditors' rights generally and by the. application of equitable principles if equitable remedies are sought. 4. No approval; consent or authorization of any governmental or public agency, authority or person is required for the execution and- delivery by the City of the Legal Documents or the performance by the City of its obligations thereunder or the. execution and delivery, on the part of the City, of the Bonds. Under the laws of the State of California, the City has the authority to determine, fix, impose and collect rates and charges for electric service and is not presently subject to the regulatory jurisdiction of any state, regional or local governmental regulatory authority other than to the extent described in the Official- Statement. 5. The execution and delivery of the Legal Documents by the City and compliance with the provisions thereof will not conflict with or constitute a breach. of or default under any instrument relating to the organization, existence or operation of the City, or commitment, agreement or other _ instrument to -which the City is a party or by which it or its property is bound or affected, or any ruling, regulation, ordinance, judgment, order or decree to which the City or any of its officers in their respective capacities as such are subject or any provision of the laws of the State of California relating to the City and its affairs. 6. There is no action, suit, proceeding, inquiry or investigation at law or inequity, or before any court, public board or body, pending or, to the best of my knowledge, threatened against or affecting the City or any entity affiliated with the City or any of its officers in-their respective capacities as such (nor. to the best of my knowledge,- is there any basis therefor) that questions the powers of the .City referred to in paragraph 2 above or in connection with the transactions contemplated by the Official Statement, or the validity of the proceedings .taken by the City in connection with the authorization, execution or delivery of the Legal Documents, or wherein any unfavorable decision, ruling or finding would adversely affect the transactions contemplated by the Legal Documents or the Official Statement,. or that, in any way, would adversely affect the validity or enforceability of the Legal Documents or, in any material respect, the ability of the City to perform its obligations under the Legal- Documents. Capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto in the Purchase Contract. Respectfully submitted, C-2 Error! Unknown document property name. EXHIBIT C Exhibit C [Preliminary Official Statement Attached] C-1 e ~ o Orrick, Herrington & Sutcliffe LLP g Draft of 4/8/09 .~~b PRELIMINARY OFFICIAL STATEMENT DATED APRIL 2009 o a NEW ISSUE-FULL BOOK-ENTRY ONLY ~ RATINGS: Moody's: ~ o ~ S&P: 0 3 In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, based on an analysis of existing laws, ~ ~ regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and o ~ compliance with certain covenants, interest on the 2009 Bonds is excluded from gross income for federal income tax purposes o ~ o ~ under Section 103. of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the w .y ~ further opinion of Bond Counsel, interest on the 2009 Bonds is not a specific preference -item for purposes of the federal 'o y .individual and corporate alternative minimum taxes, nor is it included in adjusted current earnings when calculating corporate ~ ; alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the o ~ ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See "TAX MATTERS" herein. a o ~ •v ~ ~ ~ ~ o o $[PAR AMOUNT]* s w ~ - CITY OF VERNON G os ~ ~ Electric"System Revenue Bonds 2009 Series A ~ C1 .U O Dated: Date of Delivery Due: August 1, as shown on the Inside Cover a ~ •oA ~ o This cover page contains certain information for general reference only. It. is not intended to be a summary of the ~ o security or terms of this issue. Investors must read the entire Official Statement to obtain information essential to the making b •o. of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings p ~ set forth in Appendix B attached hereto. ° ~ The City of Vernon Electric System Revenue Bonds, 2009 Series A (the "2009_ Bonds") are being issued by the City of :o Vernon, California (the "City") pursuant to the City's Municipal Facilities Revenue Bond Law and an Indenture of Trust, dated a ~ as of September 1, 2008 (as amended and supplemented, the "Indenture"), between the 'City and The Bank of New York Mellon o °3 Trust Company, N.A., as trustee (the "Trustee"), as supplemented by a Second Supplemental Indenture of Trust, dated as of o ~ [May] 1, 2009. ~ ~ o The 2009 Bonds are being issued to provide funds (i) to refinance certain City obligations payable from the City's „ Y Electric System Revenues; (tt) to fund a deposit to the Debt Servtce Reserve Fund; and (iii) to pay costs of issuance of the 2009 ~ ~ Bonds. See "PLAN OF FINANCE" and "ESTIMATED SOURCES AND USES OF FUNDS" herein. ~ ~ o w The 2009 Bonds will be issued in fully registered form, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, ("DTC") under the book-entry only system maintained by DTC. While DTC ~ a ~ is the securities depository for the 2009 Bonds, principal of, premium, if any; and interest on the 2009 Bonds will be payable by ~ ~ the Trustee to DTC, which is obligated in turn to remit such payments to its DTC participants for subsequent disbursement to ~ 3 beneficial owners of the 2009 Bonds, as more fully described herein. See APPENDIX C-"Book-Entry Only System." ~ w q w •o The 2009 Bonds are subject to optional and mandatory redemption prior to maturity, as described herein. . q U - Interest on the 2009 Bonds will be payable on each February 1 and August 1, commencing August 1, 2009. a ~ ? ~ MATURITY SCHEDULE ~ (See Inside Cover) ~ ~ ~ The 2009 Bonds are special obligations of the City. The principal and Redemption Price of and interest on the 2009 N Bonds are payable by the City solely from the Net Revenues of the City's Electric System, amounts in the Light and. Power Fund o ~ y other than the Operating Deserve; and the amounts in the Funds, other than the Rebate Fund, held by the Trustee under the w ~ Indenture. ' ~ o ~ ~ ~ ~ ` Prelimin ~ ~ T ary, subject,to change. h ~ OHS West:260621165,8 ~ ~ ~ 42797-2 SJ0/EJC The issuance of the 2009 Bonds does not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to make. any appropriation for their payment. The 2009 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the Trust Estate pledged therefor .pursuant to the Indenture.. Neither the faith and credit nor the taxing power of the City, the State of California (the "State") or any other public agency is pledged to the payment of the principal of, premium, if any, or interest on the 2009 Bonds. The 2009 Bonds do not constitute a debt, liability or obligation of the State or any public agency. (other than the special obligation of the City as provided in the Indenture). The 2009 Bonds are offered, when, as and if issued and delivered to the Underwriters, subject to the approval of legality by Orrick, Herrington & .Sutcliffe LLP, Los Angeles, California,-Bond Counsel, and certain other conditions. Certain legal • matters will be passed upon for the City by the City Attorney and for the Underwriters by Stradling Yocca Carlson & Ratith, a Professional Corporation, as counsel to the Underwriters. It is expected that the 2009 Bonds w111 be available for delivery through the DTC's book-entry system in New York, New York on or about Citi - De La Rosa & Co. Dated: OHS West:260621165.8 42797-2 S70/EJC MATURITY SCIIEDULE $ Seria12009 Bonds Maturity Date Principal Price or . (August 1) Amount Interest Rate Yield CUSIP No. t $ % Term 2009 Bond due August 1, 2021 Yield: % CUSIP No.: t t CUSIP Copyright 2009, American Bankers Association.- CUSIP data herein is provided by Standard & Poor's CUSIP Service Bureau, a division of The.McGraw-Hill Companies, Inc., and is set forth herein for convenience of reference only. The City takes no responsibility for any changes to or errors. in this list of CUSIP numbers. OHS West:260621165.8 42797-2 SJO/EJC No dealer, broker, salesperson or other person has been authorized by the City or the Underwriters to give any information or to make any. representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This. Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the 2009 Bonds by any person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws. of such jurisdiction.- Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriters. The information and expressions of opinions herein are subject to change without notice, and neither the. delivery of this Official Statement nor any sale made hereunder shall create, under any .circumstances, any . implication that there has been no change in the affairs of the City since the date hereof.. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories.. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities -laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. IN .CONNECTION WITH THE OFFERING OF THE 2009 BONDS, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS :THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2009 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The City maintains a website. However, the information presented there is not part of this Official Statement and should not be relied upon in,making an investment decision with respect to the 2009 Bonds. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement and the Appendices hereto constitute "forward-looking statements." Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "budget" or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the. information under the captions "PLAN OF FINANCE;" "THE ELECTRIC SYSTEM" and "DEVELOPMENTS- IN THE CALIFORNIA ENERGY MARKETS" in this Official Statement. Forward-looking statements in .this Official Statement are subject to risks and uncertainties, including particularly those relating to natural gas costs and availability, wholesale and retail electric energy and- capacity prices, federal and state legislation and regulations, competition and industry restructuring, and the economy of the service area of the City's Electric System.. • The achievement of any results or the realization of ;other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors .that may cause actual results,- performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The City does not plan to issue. any updates or revisions to those forward-looking statements.. OHS Wesf;260621165.8 42797-2 SJO/EJC CITY OF VERNON City Council Leonis C, Malburg, Mayor Hilario Gonzales, Mayor Pro Tem William J. Davis, Councilmember W. Michael McCormick, Councilmember Richard J. Maisano, Councilmember City Officers. Eric T. Fresch, Special Counsel'and City Administrator ,Donal O'Callaghan, Director of Utilities and Governmental Infrastructure, - Light and Power and Gas Departments Jeff A. Harrison, City Attorney and Director of Industrial Development Rory Burnett, Director of Finance Manuela Giron, City Clerk Samuel Kevin Wilson, Director of Community Services and Water Lewis Pozzebon, Director of Environmental Health Steve Towles, Police Chief Mark Whitworth, Fire Chief Avigal Horrow, Director of Human Resources Light and Power Department" Executive Management Peter Hervish, Technical Services Manager Abraham Alemu, Electric Resources Planning and Development Manager Krishna Nand, Environmental Compliance Manager Carlos. Fandino, Transmission and Distribution Manager ` SPECIAL SERVICES Orrick, Herrington & Sutcliffe LLP Los Angeles, California Bond Counsel. Bond Logistix LLC Los Angeles, California Financial Advisor The Bank of New York Mellon Trust Company, N.A, Los Angeles, California Trustee -Grant Thornton LLP Minneapolis, Minnesota Verification Agent OHS West:260621165.8 42797-2 SJ0/EJC TABLE OF CONTENTS Page INTRODUCTION ....1 Purpose of Official- Statement ................:......:...........:.............:.........:...................:.....................1 Authority and Use'of Proceeds ...........1 The City .................:.................................:......................:...:...........:.........:.......:...........:........................1 The Electric System ..........................:................:...:.......,.:.................................:.....................:............:1 Security and Sources of Payment. ..:..............................2 Debt Service Reserve Fund .................:.................................:...:.......:....................................................2 Continuing Disclosure ...................:..........:......:................:.......:.............................................................2 Other Matters 3 PLAN OF FINANCE ....................:................................:..........:.....................................................:...:.........3 ESTIMATED SOURCES AND USES OF FUNDS .......................:.............:............................:...............4 THE 2009 BONDS ...............:.......,.......................................:..:..:.............................................:..........................4 General ..:...:4 Redemption of 2009 Bonds .......:...........:.:................................:............:.:..............................................4 SECURITY AND SOURCES OF PAYMENT .................:...............:...:.................................:....................:......5 Pledge Effected by the Indenture ...........................................:.......:...................:...................................5 Deposit and Application of Revenues .......................................................................................:............7 Payments to Trustee for Bonds .....................:..:.,..............................,.......................:..:............7 Rate Covenant 9 Debt Service Reserve Fund ..:.................................................................:.........:.....................................9 . Expense Stabilization Fund......: ......:...............................:...........:........::...............................:................9 Outstanding Electric System Obligations ........................:.............:....:......................:.....:.......:..........:10 Additional Parity Obligations ......:...............................:.........................................:..:.............,............10 Transfers to General Fund ..........................................:..:..............................................:...................:...11 Limitations on Remedies l l ELECTRIC SYSTEM OBLIGATIONS ..........................:.........................................:.......................................11 General .......................................:........................................:..:..................:...............................11. .Power Sales Contract with SCPPA for PVNGS ................................................................:.....:...........11 Gas. Supply Agreement .....................:.................................................:.....................:.........:.............:..12 Interest Rate Swap Transactions ............:...............:...:..:.......................,...:........................::................13 Natural Gas Commodity Price Swap ................................................:.........................................14 Liquidity Facilities for Authority Bonds ..........................................................:...:...................:...........14 i OHS West:260621165.8 42797-2 SJO/F,JC THE ELECTRIC SYSTEM ...................................:.:....,..:.........:..,:.::....:......:..............,..:............:.....................15 General . . .......:................:................:............................................................15 Service Area ...............................:.....................................................................................:...................15 City Plan to Optimize Resource Utilization ............:.......................................:........................:.:.:.......15 Implementation of Resource Optimization Plan ...............:.................................:................................16 Management . . .....................17 Power Supply Resources .............:........::.................:...............................................,............................18 Interconnection and Distribution Facilities ...........:.........................................................:...:......25 Developments Affecting. the Power Supply ............:..........................................................:................25 Capital Requirements.....: .....:.................:....................................................:.....:.........;,.,.....................27 Retail Energy Sales ........................:.............................................:.:.............:.............:.....,.......28 Electric Rates .........:...:,:......:............................:...:..........................:..................................:.......29 Summary of Operating Results ....:......:............:............:.....:.........................:...............32 Employee Relations .........:.....................:.........................:...................................................................38 Insurance 38 Investment Policy and Controls ........:...............:......................................................:...........38 Rate-Regulation 39 Seismic Activity .39 DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS ..................................:............................40 Background; California Electric Market Deregulation ..............................:.::.........:.....:.........40 Environmental Legislation and Regulations .......................:................................................:...............40 Impact of Developments on the City ..................:r...........,..:.:..........................:...................:.....:,.........42 Future Regulation .............:.....:................................:..:........................:...,......:......................:..............43 OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY....:..: ..........................................43 Energy Policy Act'of 1992 .........................................................:................:....:........:.:.:....:....:............43 Federal Energy Legislation ......:..........:.................:.:....:..............:.........................:..........:...................43 American Recovery and Reinvestment Act of 2009 .........:...:..................:...............:.:....:..................,.44 Other General Factors .:...........:.....................::...............................:......:..........................................44 - Environmental Issues ..........................:...:...:.............................:.:................:.:.::..............:...................44 CONSTITUTIONAL LIMITATIONS ON TAXES :...............:..:.........:.................:.:........................................45 Articles XIIIC and XII1D of the State Constitution ...................................................:.........................45 Future Initiatives .........:.......:.......:......:........:.........................:...............:.........:........:.:.:............,....45 LITIGATION ..............46 TAX MATTERS .:.....................................................:......................:..............:....:................................:...........46 APPROVAL OF LEGALITY ..............::....................................................:...........................:.:....:...................47 RATINGS ................:........................47 . ii OHS West:260621165.8 42797-2 S70BJC UNDERWRITING ....................................................48 VERIFICATION REPORT .....................:.............................................................:.........:.................................48 FINANCIAL STATEMENTS ....:...................:....::.:.......:....:..::...:............................:..:...............:.....................48 EXECUTION AND DELIVERY ..........:.48 . APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEARS ENDED JUNE 30, 2008 AND JUNE 30, 2007 A-1 APPENDIX B SUMMARY OF,CERTAIN PROVISIONS OF THE INDENTURE B-1 APPENDIX C BOOK-ENTRY ONLY SYSTEM C-1 APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL D-] APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT .......:..........................:..............E-I. iii OHS West:260621165.8 42797-2 SJO/EJC OFFICIAL STATEMENT $[PAR AMOUNT]* CITY OF VERNON Electric System Revenue Bonds 2009 Series A INTRODUCTION This Introduction is qualified in `its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the :2009 Bonds to potential investors is made only by means of the entire Official Statement. Terms used in this introduction and not otherwise defined shall have the respective meanings assigned to theme elsewhere in this Official Statement. See APPENDIX B-"SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" herein.. Purpose of Official Statement The purpose of this Official Statement (which includes the. cover page and the appendices attached hereto) is to provide information concerning the sale and delivery ,by the City of Vernon, California. (the "City") of its $[PAR AMOUNT]* Electric System Revenue Bonds, 2009 Series A (the "2009 Bonds"). Authority and Use of Proceeds The 2009 Bonds are being issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code, and an Indenture of Trust, (as amended and supplemented, the "Indenture"), dated as of September 1, 2008, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), as supplemented by the Second Supplemental Indenture of Trust, dated as of May 1, 2009. The 2009 Bonds are being issued to provide funds to (i) refinance certain City obligations payable from its Electric System Revenues, (ii) fund a deposit to the Debt Service Reserve Fund, and (iii) pay costs of issuance of the 2009 Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS" and "PLAN OF FINANCE" herein. The City The City is a chartered city of the State of California (the "State"), consisting of approximately 5.2 square miles located in Los Angeles County, approximately 4 miles southeast of downtown Los Angeles. The City was. ' established in 1905 with a view of promoting industrial activity: There are over 1,800 companies doing business in the City employing more than 50,000 persons. The City is almost exclusively industrial, with an estimated resident population of approximately 110.as of January 1, 2009. The City's services are tailored to the industrial needs of the community. These include a Class l rated fire department; a police department with over 60 sworn officers to provide high level security and a quick response time and an environmental health department, which acts as a California Unified Program Agency with .the State's Department of Health Services. In addition, the City owns and operates the Electric System, a water system which provides water within the City and a natural gas system. - The Electric System - The City established its Light and-Power Department in 1933, with responsibility for the operation of the City's Electric System. The- function of the Electric System is to supply the City's inhabitants and the businesses within the City with electricity. For the Fiscal Year ended June 30, 2008, the Electric System provided approximately 1,232 million kilowatt hours ("kWhs") of electricity to over .1,959 customers, based on the number of 'Preliminary, subject to change. OHS West:260621165.8 42797-2 SJOBJC .meters. Almost all of the Electric System's customers are industrial entities. See "THE .ELECTRIC SYSTEM" herein. Security and Sources of Payment The 2009 Bonds are special. obligations of the City. The principal and Redemption Price of and interest on the 2009 Bonds are payable by the City solely from the Net Revenues of the City's Electric System, amounts in the_ Light and Power Fund other than the .Operating Reserve, and the amounts in the Funds, other than the Rebate Fund, held by the Trustee under. the Indenture and are secured by a pledge of -the Trust Estate. See "SECURITY AND SOURCES OF PAYMENT -Pledge Effected by the Indenture." The issuance of the 2009 Bonds shall not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation ar to make any appropriation for their payment. The 2009 Bonds are not- secured by a legal .or equitable pledge of, or lien or charge upon, any property of `the City or any of its income or receipts except the Trust.. Estate pledged therefor pursuant. to the Indenture. Neither the. faith and credit nor the taxing power of the City, the State or.any other public agency is pledged to the payment of the principal of, premium, if any, or interest on the 2009 Bonds. The 2009 Bonds do not constitute a debt, liability or obligation of the State or any public agency (other than the special obligation of the City as provided in the Indenture)'. The City has issued and there remains outstanding $43,765,000 aggregate principal amount of Electric System Revenue Bonds; 2008 Taxable Series A (the "2008 Bonds") under the Indenture. The Indenture permits the issuance. of Additional Bonds and Refunding Bonds in addition to the 2008 Bonds and the 2009 Bonds (the. 2008 Bonds,. the 2009 Bonds and any such Additional Bonds and Refunding Bonds issued under the Indenture being referred to as the "Bonds") on the terms and conditions set forth in the Indenture. All Bonds are equally andratably secured by the pledge of the. Trust Estate under the Indenture. See "SECURITY AND SOURCES OF PAYMENT - Additional Parity Obligations." Debt Service Reserve Fund Pursuant to the Indenture, the Debt Service Reserve. Fund is required to be maintained in an amount equal to the Debt Service Reserve Requirement. Amounts on deposit in the Debt Service Reserve Fund will be applied to make up any deficiency in any .account of the Debt Service Fund for the payment when due of principal or Redemption Price of or interest on Bonds, including the 2009 Bonds. See "SECURITY AND SOURCES OF PAYMENT -Debt Service Reserve Fund" herein. Continuing Disclosure The City has covenanted for the benefit of the holders and beneficial owners of the 2009 Bonds, pursuant to a Continuing Disclosure Agreement with the Trustee,.to provide to the Municipal Securities Rulemaking Board (the "MSRB") through its Electronic Municipal Market Access System (the "EMMA~System") a copy of its annual audited financial statements, as well as certain operating data relating to the Electric System. Such audited financial statements are required to be prepared in accordance with generally accepted accounting principles. The City will provide to the MSRB through the EMMA System such Electric System information and its financial statements (unaudited, if audited financial statements are not then available) within 180 days after the end of its Fiscal Year (which Fiscal Year ends on June 30). If unaudited financial statements are provided, audited financial statements , will be provided. as soon as available. In addition, the City has agreed to give timely notice to the MSRB of the occurrence of certain enumerated events,, if material. These agreements have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the. "Rule"). As of the date hereof, the City has never failed to comply in all material respects with any previous undertakings with regard to the provision of annual reports or notices of material events as required by the Rule. See APPENDIX E - "FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto, 2 OHS West:260621165.8 42797-2 SJOBJC Other Matters The summaries of and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined herein indicates that such word is defined in a particular agreement or other document and, as used herein, has the meaning given to it in such agreement or document. Attached to-this .Official Statement are summaries of certain provisions of the Indenture. Copies of the Indenture. are available for inspection at the offices of the Trustee, and copies of the Indenture will be provided by the Trustee upon request and payment of duplication costs. PLAN OF FINANCE The portion of the net proceeds of the 2009 Bonds not applied to the costs of issuance of the 2009 Bonds or funding the.DebtService. Keserve Fund will be applied to refinancing certain City obligations payable from its Electric System Revenues. See "ESTIMATED SOURCES AND USES OF FUNDS." Proceeds of the 2009 Bonds, and other available funds, will be deposited into an escrow fund (the "Escrow Fund") and applied to the redemption of the following bonds of the Vernon Natural Gas Financing Authority (the "Authority"): $179,650,000 aggregate principal amount of Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series A (the "Series A Authority Bonds"), $103,765,000 aggregate principal amount of Variable Rate- . Revenue Bonds (Vernon Gas Project), 2006 Series B (the"Series B AuthorityBonds'.') and $103,730,000 aggregate principal amount of Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series C (the "Series C Authority Bonds" and, together with the Series A Authority Bonds and the Series B Authority Bonds, the "Authority Bonds"). The City is obligated to make payments to the Authority sufficient to pay 'the principal of and interest on the Authority Bonds pursuant to the Natural Gas Purchase Agreement, dated as of June 1, 2006, between the City and the Authority. See "ELECTRIC SYSTEM OBLIGATIONS -Gas Supply Agreement." In the. event that the available proceeds of the 2009 Bonds are not sufficient to redeem all of the Authority Bonds, the principal amount of each series of Authority Bonds to be redeemed shall be determined by the City in its sole discretion subject to the- provisions of the indenture pursuant to which the Authority Bonds were issued. -The sufficiency of the maturing principal and interest payments on the investments in the Escrow Fund, and the other moneys held in the Escrow Fund, to pay when due-the redemption price of the Authority Bonds to be redeemed. with the proceeds of the 2009 Bonds, will be verified by Grant Thornton LLP. See "VERIFICATION REPORT." 3 OHS West:260621165.8 42797-2 SJO/EJC ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds with respect to the 2009 Bonds as described under "PLAN OF FINANCE" is set forth below. SOURCES: Principal amount of 2009 Bonds $[PAR AMOUNT]- [Original Issue Discount/Premium] ( ) TOTAL SOURCES: $ USES: Deposit to Escrow Fund cl~ $ Deposit to Debt Service Reserve Fund c2~ Deposit to 2009 Costs of Issuance Fund cs) .TOTAL USES: $ To redeem Authority Bonds. See "PLAN OF FINANCE." ca) Amount so that balance of Debt Service Reserve Fund equals the Debt Service Reserve Requirement upon the issuance of the 2009 Bonds. cs) Includes underwriters' discount, legal fees, fees of the Trustee, rating agency fees, financial and consulting fees, printing costs and other expenses' in connection with the issuance of the 2009 Bonds. THE 2009 BONDS The following is a summary of certain provisions of the 2009 Bonds. Reference is made to the 2009 Bonds for the complete text thereof and to the Indenture fora more detailed description of such provisions. The discussion herein is qualified by such reference. See APPENDIX B - "SUMMARY OF CERTAIN PROVISIONS OF THE- . INDENTURE." .General The 2009 Bonds will be issued in theaggregate principal amount, will bear interest at the rates and will mature in the years and amounts all as set forth on the inside cover page of this Official Statement. The 2009 Bonds will be issued in denominations of $5,000 or any integral multiple thereof. The 2009 Bonds will be dated and shall bear interest from their date of original issuance. Interest on the 2009 Bonds will be~payable on each February 1 and August 1, commencing August 1, 2009.. The 2009 Bonds will be registered in the name,of Cede & Co:, the nominee of The Depository Trust Company, New York, New York ("DTC"), and held in DTC's book-entry system. So long as the 2009 Bonds are held in the book-entry system, DTC or its nominee will be the registered owner of the 2009- Bonds for all purposes of the. Indenture: For purposes of this Official Statement, DTC or its nominee, .and. its successors and assigns, are referred to as the "Securities Depository." So long as the 2009 Bonds are held in book- entry form through DTC; all payments with respect to principal of, premium, if any, and interest on each 2009 Bond will be made pursuant to DTC's rules and procedures. See APPENDIX C --`BOOK-ENTRY ONLY SYSTEM" hereto. Redemption of 2009 Bonds Optional Redemption. The 2009 Bonds maturing on and after August 1, are subject to redemption- - prior to their respective stated maturities, at the option of the City and from any source of available funds, as a whole or in part, on any date on and after August 1,~' , in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2009 Bonds to be redeemed, without premium, plus accrued, unpaid interestto the-redemption date, Mandatory Sinking Fund Redemption.. The 2009 Bonds maturing on August 1, are subject to redemption in part prior to their. stated maturity date from mandatory sinking fund payments on each August 1 on or after August 1, , at aRedemption Price equal to the principal amount of the 2009 Bonds of such maturity to be redeemed, without premium, in the amounts and on the dates set forth below: 4 OHS west:260621165.8 42797-2 SJO/EJC .Sinking Fund Principal Amount Redemption Date to be Au ust 1 Redeemed * Maturity Notice of Redemption. The Trustee is to give notice of the redemption of any 2009 Bonds by .first class mail,. postage prepaid, not .more than sixty (60) nor less than thirty (30) days before the redemption date to the Owners of any 2009 Bonds to be redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice shall specify the maturity date of the 2009 Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption shall be payable and, if less than all of the 2009 Bonds of any like maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2009 Bonds so to be redeemed, and, in the case of 2009 Bonds to be redeemed in part only, such notice shall also specify the respective. portions of the principal amount thereof to be redeemed, In the event that funds required. to pay the Redemption Price of 2009 Bonds to be redeemed at the option of the City are not on deposit with the Trustee at the time the notice of redemption of such 2009 Bonds is given, such notice shall state that such redemption is conditional upon the receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys sufficient to pay the .Redemption Price of the 2009 Bonds to be redeemed,. and that if such moneys shall not have been so received said notice shall be of no force and effect and the City shall not be required to redeem such 2009 Bonds. In the event a notice of redemption of 2009 Bonds contains such a condition and such moneys are not so received, the redemption of 2009 Bonds as described in the conditional notice of redemption shall not be made and the Trustee, within a reasonable time after the date on which such redemption was to occur, is to give notice to the persons and in the manner. in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of 2009 Bonds pursuant to the conditional notice of redemption. Receipt of notice of redemption shall not be a condition precedent to the redemption of 2009 Borids and .failure of any Owner of a 2009 Bond to receive any such notice or any insubstantial defect in such notice shall riot. affect the validity of the proceedings for the redemption of 2009 Bonds Effect of Redemption. Notice of redemption having been given and moneys for the payment of the Redemption Price being held by the Trustee, the 2009 Bonds so called for redemption will, on the date. fixed for redemption designated in such notice, become due and payable at the Redemption. Price specified in such notice, interest on the 2009 Bonds to be redeemed will cease to accrue, said 2009 Bonds shall cease to be entitled to any lien, benefit or security under the Indenture and the Owners thereof will have no rights except to receive payment of -the Redemption Price of and unpaid interest, if any, accrued to the date fixed for redemption of such 2009 Bonds. Selection of 2009 Bonds to be Redeemed. The City shall select the principal amount of each maturity of the 2009 Bonds to be redeemed at the option of the City. Whenever less than all of the 2009 Bonds of a maturity are to be redeemed, the Trustee shall select the 2009 Bonds of such maturity to be redeemed from a112009 Bonds of such maturity subject to redemption by lot in any manner which the Trustee. in its sole discretion shall deem appropriate and fair. SECURITY AND SOURCES OF PAYMENT Pledge Effected by the Indenture The 2009 Bonds are special obligations of the City. The principal and Redemption Price of and interest on - the 2009 Bonds are payable solely from the Net Revenues; amounts in the Light and Power Fund other than the 5 OHS West:260621165.8 42797-2 SJO/EJC Operating .Reserve, .and the amounts in the Funds, .other than. the Rebate Fund, held by the Trustee -under the. Indenture. The payment of the principal and Redemption Price of and interest on the 2009 Bonds is secured by a pledge of the Trust Estate under. the Indenture. The Trust. Estate consists of (i) the Revenues, (ii) all amounts on deposit in the Light and Power Fund, including the investments, if-.any, thereof, .and (iii) all amounts on deposit in the Funds, other than the Rebate Fund, held by the Trustee under the:Indenture, including the investments, if any, thereof. The pledge of the Trust Estate in the Indenture is subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and. conditions set forth therein. The. 2009. Bonds and any other. Bonds issued under the Indenture are equally. and ratably secured by the pledge of the Trust Estate pursuant to the Indenture. The. 2009 Bonds and any .other Bonds issued. under .the Indenture are equally and ratably payable from the Net Revenues, amounts in the Light and Power Fund other than the Operating Reserve, and amounts held in the Funds, other than the Rebate Fund, held by the Trustee under the Indenture. The City may issue Parity Obligations which are secured by a pledge of the Revenues and amounts in the Light and Power Fund on a parity with the Bonds and payable from the Net Revenues and amounts in the Light and Power Fund other than the Operating Reserve on a parity with. the Bonds. The City has issued and there are currently outstanding $43,765,000 aggregate principal amount of 2008 Bonds under the Indenture, "Revenues" includes all gross income and revenue received or receivable by the City from the ownership or operation of the Electric System, including all rates and charges for the Electric Service and the other services and facilities of the Electric System, all proceeds of insurance covering business interruption loss. relating to the Electric System and all other income and revenue howsoever derived, by the City from the ownership or operation of the Electric System or otherwise arising from the Electric System, including all net receipts pursuant to Public Finance Contracts. entered into in connection with any Obligations or program of investments relating to the Electric System and all income from the deposit or investment of any money in the Light and Power Fund, but excluding (i) proceeds of taxes, (ii) refundable deposits .made to establish credit,. (iii) advances or contributions in aid of construction and (iv) line extension fees. "Net Revenues" is defined in the Indenture to mean, for any period of time, Revenues for such period less Operation and Maintenance Expenses for such period. "Operation and Maintenance Expenses" is defined in the. Indenture to mean the costs paid or incurred by the City for operating and .maintaining the Electric System including, but not limited to (a)-all costs of electric energy and power generated or purchased by the City for resale, costs of transmission, fuel supply and water supply in connection with the foregoing; (b) all costs and expenses of management of -the Electric System; (c) all costs and expenses. of maintenance and repair,. and .other expenses necessary or appropriate in the judgment. of 'the City to maintain and preserve-the Electric System in good repair and working order; (d) all administrative costs of the several departments of the City that are charged directly or apportioned to the operation or maintenance of the Electric System, such as salaries and wages (including retirement benefits) of employees, overhead, taxes (if any) and insurance premiums; (e) payments in-lieu of taxes to any public agency other than the City in connection with the Electric System, (f) all costs, expenses and charges of the City required to be paid by it to comply with the terms of any Issuing Instrument authorizing the issuance of Parity Obligations, such as compensation, reimbursement and indemnification of the trustee, or .fees and expenses of Independent Certified Public Accountants, Independent Engineers and other consultants; (g) the fees, expenses .and indemnification of. Credit Providers and Reserve Financial Guaranty Providers; (h) all amounts. required to be paid by the City under contracts with joint powers. . agencies for the purchase of capacity rights in an electric .generating station or electric transmission facilities, transmission capability or any other: commodity, right or service in connection with the Electric System, which contracts require .payments to be made by the City thereunder to be treated: as operation and maintenance expenses of the Electric System; (i) all deposits to be made to a rebate fund established with respect to Parity Obligations to provide for any required .rebate to the United States required to maintain the Tax-Exempt status of interest on such Parity Obligations; (j) any cost or expense paid by the City to comply with requirements of law applicable to the Electric System or the City's ownership or operation thereof or in any capacity with respect thereto or any activity in connection therewith, including without limitation the public benefit uses required by Section 385 of the California Public Utilities Code; and. (k) any other costs or expense which, in accordance with Generally Accepted Accounting Principles; is to be treated as a cost of operating or maintaining the Electric System; but excluding in all cases 6 OHS West:260621165.8 42797-2 SJOBJC depreciation, replacement and obsolescence charges or reserves therefor, amortization of intangibles, Franchise Payments to the City and Unrealized Items. Except as provided in clause (d) of this paragraph, no transfer of Revenues to the City, including Franchise Payments, shall constitute an Operation and Maintenance Expense. "Operating Reserve" means, as of any date of calculation, an amount in the Light and Power Fund equal to the amount contained in the then current Budget for Operations and Maintenance Expenses for the four months next succeeding the month in which the date of calculation occurs. "Obligations" is defined in the Indenture to include (a) obligations with respect to borrowed money and includes bonds; notes or~othef evidences of indebtedness, installment purchase payments under any contract, and lease payments under any financing or capital lease (determined to be such in accordance with Generally Accepted Accounting Principles); .which are payable from the Net Revenues and/or amounts. in the Light and. Power Fund; (b) obligations to replenish any debt service reserve fund with respect to obligations of the City described in (a) above; {c) obligations under a Public Finance Contract payable from the Net Revenues and/or amounts in the Light and Power Fund; and (d) Credit Provider Reimbursement Obligations. "Public Finance Contract" is defined in the Indenture to mean (i) any contract providing for payments based on levels of, or changes in; interest rates, currency exchange rates; stock or other indices; (ii) any contract to .exchange cash flows or a series of payments, or (iii) any contract to hedge payment, currency, rate spread or similar exposure, including but not limited to interest, any interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract, any contract providing for payments based on levels of, or changes in; interest rates, currency exchange rates, stock or other indices, any contract to exchange cash flows or a series of payments, or any contract; including, without limitation, an interest rate floor or cap, or an option, put or call, to hedge payment, currency; rate, spread or similar exposure, between the City acid a counterparty. For definitions of certain other terms used herein, see APPENDIX B = "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" herein. The issuance of the 2009 Bonds shall not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to -make any appropriation for their payment. The 2009 Bonds are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the Trust Estate pledged pursuant to the Indenture which is subject to the provisions of the Indenture permitting-the application. thereof for the purposes and on the terms and conditions set forth therein. Neither the faith and credit nor the taxing power of the City, the State or any other public agency is pledged to the payment of the principal of, or premium, if any, or interest on, the 2009 Bonds. The 2009 Bonds do not constitute a debt, liability or obligation of the State or any public agency (other than the special obligation of the'City as provided in the Indenture).- -The members of the City.Council of the City,-and the. officers -and employees of the City, shall not be individually liable on the 2009 Bonds or in .respect of any undertakings by the City under the.Indenture. Deposit and Application of Revenues Pursuant to the Indenture, the City is to deposit or cause to be deposited all Revenues into the Light and Power Fund .upon receipt thereof.. Without limiting the provisions of the Indenture regarding investment of certain. .funds, the City is to apply the Revenues for each Fiscal Year,. as received, first to the payment of Operation and Maintenance Expenses theri due and payable, and then to the payment of amounts required to be paid with respect to Debt Service on,-and reserves for, the Bonds and other Parity Obligations. The City may then-apply any remaining Revenues to any lawful .purpose in connection with the Electric System, including the payment of amounts required to be paid with respect to Subordinate Obligations, the payment of Costs of Capital Improvements and, to the extent permitted by the Indenture, to transfers to the City's General Fund: Payments to Trustee for Bonds During each Fiscal Year the .City shall pay the Trustee, from the Net Revenues of such Fiscal Year, the following. amounts at the following times: OHS West:260621165.8 42797-2 SJOBJC (a) on the fourth Business Day prior to each Interest Payment Date'for any Outstanding Bonds, an amount equal to the interest payable on the Outstanding Bonds on such Interest Payment -Date; provided, however, that such payments shall be reduced by any available amounts on deposit in the Interest Account which are to be applied to such upcoming interest payment; (b) on the fourth Business Day prior to each date on which the principal of Outstanding Bonds which are Serial Obligations mature, an amount equal to the principal of such Outstanding Bonds maturing on such date; provided, however, that .such payments. shall be reduced by any available amounts on deposit'in the Principal Account which are to be applied to the upcomingprincipal payment; {c) on the fourth Business Day prior to each Sinking Fund Installment due date for Outstanding Bonds . which are Term Obligations, an amount equal to the Sinking Fund .Installments due with respect to all Outstanding Bonds .which are Term Obligations on such. Sinking Fund Installment due date; provided, however, that such, payments shall be reduced by any available amounts on deposit in the Sinking Fund Account which are to be applied to the redemption or payment of such Bonds on such Sinking Fund Installment due date and by the amount by which the City's obligations to make payments with respect to such Sinking Fund Installments have been satisfied pursuant to the Indenture; (d) at least one Business Day prior to each date fixed`for the redemption of Outstanding Bonds (other than from Sinking Fund Installments and -other than an optional redemption of Bonds as to which a conditional notice of redemption has been sent. to the Owners pursuant to the Indenture), an amount equal to the. Redemption Price. of the Bonds. to be redeemed; (e) on the date 'on which the principal- of or interest on any Outstanding Bond becomes due and payable, other ,than as provided in (a) through (d) above, the City shall pay an amount in funds which are ' immediately available to the Trustee by 10:00 a.m. (Pacific Time) on the due date, equal to the principal of-and interest on the Outstanding Bonds due on such date; (f) in the event that on any date upon which the City is to make a paymentpursuant to paragraphs (a), (b), (c) (d), and/or (e) above and the amount of Net Revenues' and the_ amount in`the Light and Power Fund available therefor in accordance with the Indenture is not sufficient to make such payment and any payment required to be made on such date with respect to the principal -and redemption premium of and interest on other Parity Obligations (including, with respect to transactions under Qualified Swap Agreements, the Net Payments due), then the City shall apply the Net Revenues and amounts in the Light and Power Fund available therefor in accordance with the Indenture to the payments required by paragraphs {a), (b), (c), (d), and/or (e) above and such payments with respect to the other Parity Obligations ratably (based on the respective amounts to be paid); without any discrimination or preferences; (g) on each Debt Service Reserve Valuation Date, the City, shall pay an amount -for deposit in-the Debt Service Reserve Fund, such that, after the deposit, the amount on deposit in such Fund shall be at least equal to the Debt Service Reserve Requirement, including the amount of any Reserve Financial Guaranties on deposit in the Debt Service Reserve Fund; (h) in the event that on any date upon which -the City is to make a payment pursuant to paragraph (g) above and the amount of Net Revenues and the amount in the Light and Power Fund available therefor in accordance with the Indenture is not sufficient to make such payment and any payment required to be made on such date with respect debt service reserves for other Parity Obligations, then the City; after making the payments required by .paragraphs (a), (b), (c), (d), (e), and (f) above, shall apply the Net Revenues and amounts in the Light and Power Fund available therefor in .accordance with the Indenture to the payments. required by paragraph {g) above and such payments with respect to debt service reserves for Parity -0bligations ratably (based on the. respective amounts to be paid), without any discrimination or preferences; {i) in the event that on any date all payments required to be made pursuant to the preceding paragraphs are not made in full from Net Revenues, then the City shall make up any deficiency from amounts in the Light and Power Fund after setting aside in the ;Light and Power Fund an amount equal to the Operating Reserve; -and 8 OHS West:260621165.8 42797-2 SJO/EJC (j) in the event .that on any date all payments required to be made pursuant to the preceding- . paragraphs are not made in full, then no payment shall be made which has a priority pursuant to the preceding paragraphs lower than the delinquent payment until all delinquent payments with a higher priority have been made in full. Rate Covenant Pursuant to the Indenture, the City has covenanted, at all. times, to fix, .prescribe and collect rates and charges for the Electric Service of the Electric System during each Fiscal Year which shall be at least sufficient to. yield: (a) Adjusted Revenues for such Fiscal Year at least equal to the-sum of the following for such Fiscal Year: (i) Operation and Maintenance Expenses; (ii) Adjusted Debt Service, and (iii) all other payments required to be paid in such Fiscal Year to meet any other obligations of the City which are charges, liens or encumbrances upon or payable from the Revenues {including Net Revenues), including all amounts owed to a Credit Provider-under the terms of its Credit Support Agreement and amounts owed to a Reserve Financial Guaranty Provider under the terms of its Reserve Financial Guaranty; and (b) Adjusted Revenues less Operation and Maintenance Expenses for such Fiscal Year equal. to at least one hundred ten percent (110%) of Adjusted Debt Service for-such Fiscal. Year. "Adjusted Revenues" is defined in the Indenture to mean, for any period of time, the Revenues for such period less the amount of such. Revenues which have been deposited in the: Expense Stabilization Fund plus the .amount of withdrawals during such period from. the Expense Stabilization Fund. "Adjusted Debt Service" is defined in the Indenture to mean, for any period of time, the Debt Service for such period minus the sum of the amount of such Debt Service with respect to Outstanding Parity Obligations to be paid during such period from the proceeds of Parity Obligations or Subordinate Obligations as set forth in a certificate of the City: Debt Service Reserve Fund The Debt Service Reserve Fund is required to be maintained in an amount equal to the Debt Service Reserve Requirement. Upon the issuance of the 2009 Bonds, there will be deposited into the Debt Service Reserve Fund from the proceeds of the- 2009 Bonds an amount so that the amount on deposit in the Debt Service Reserve Fund is equal to the Debt Service Reserve Requirement upon the issuance of the 2009.Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS." Amounts- in the. Debt Service Reserve Fund are to be used to pay principal and Redemption Price of and interest on the Bonds then due and payable in the event of any insufficiency in the amount on deposit in the Debt Service Fund available therefor, Pursuant to the Indenture, in lieu of the. required deposits and transfers of money to the Debt Service. Reserve Fund, the City may cause to be deposited in the Debt Service Reserve Fund a Reserve Financial Guaranty or Guaranties in an amount equal to the difference between the Debt Service Reserve Requirement and the sums, if any, then on deposit in the Debt Service Reserve. Fund or being deposited in such fund concurrently with such Reserve Financial Guaranty or Guaranties. "Reserve Financial Guaranty" is defined in the Indenture to mean a policy of municipal bond insurance or surety bond issued by a .municipal bond insurer or a letter of credit issued by a 'bank or other institution if the obligations insured by such insurer or issued by such bank or other institution, as the case may be, have ratings at the time of issuance of suck policy or surety bond or letter of credit in the highest rating category (without regard to qualifiers) by S&P and Moody's and, if rated by A.M. Best & Company, also in the highest rating category (without regard to qualifiers) by A.M. Best & Company. Expense Stabilization Fund Moneys may be deposited in the Expense Stabilization Fund in such amourits, at such times and from such sources as shall be determined by the City in its sole discretion.. Moneys on deposit in the Expense Stabilization Fund may be withdrawn by the City at any time no Event of Default exists under the Indenture and applied to any lawful. purpose in connection. with the Electric System, including without limitation, payment of Operation and. 9 OHS West;260621165.8 42797-2 SJO/E.TC Maintenance Expenses, payment of Debt Service on the Bonds or other Parity Obligations, payment of principal or premium or interest on Subordinate Obligations, payment of costs of Capital Improvements, payment of'the costs of issuance of Parity Obligations or Subordinate Obligations. If an Event of Default under the Indenture shall have occurred and is continuing, the Trustee shall transfer all moneys. in the Expense Stabilization Fund to the Interest Account. and the Principal Account. of the Debt Service Fund as provided in the Indenture.. Outstanding Electric System Obligations Upon the issuance of the 2009 Bonds, the 2008 Bonds, the 2009 Bonds and net payments due under certain interest rate swap transactions will be, the. only Parity Obligations of the City payable from the Electric System Net Revenues or amounts in the Light and Power Fund. For a description of other. obligations of the City payable-.from Electric System Revenues, including certain "take-or-pay" obligations payable as Operation and Maintenance Expenses, see "ELECTRIC SYSTEM OBLIGATIONS." Additional Parity Obligations The City has covenanted pursuant to -the Indenture that it shalLnot issue any bond, note, or other evidence of indebtedness payable from or secured by the Trust Estate or any part thereof on a basis which is: (i) in any manner prior or superior to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding .Bonds pursuant to the Indenture; or (ii) except for other Parity Obligations with respect to the Revenues and amounts in the Light and Power Fund, in any manner on a parity with the lien on, pledge of and security interest in the. Revenues and amounts in the Light and. Power Fund securing the Outstanding Bonds pursuant to the Indenture. Nothing in the Indenture shall prevent the City from issuing Subordinate Obligations. Pursuant to the Indenture, the City may; at any time and from time to time, issue any Additional Parity Obligations, provided the City obtains or provides either: (a) ~ a certificate or certificates, prepared by the City or at the City's option by an Independent Engineer,.. showing: (ij that the Adjusted Net Revenues -for the applicable Calculation Period, which Calculation Period shall be selected by the City in its sole discretion, shall have amounted to at least 1.25 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations; and (ii) that the Net Revenues for such applicable Calculation Period shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be. Outstanding immediately after the issuance of the proposed Additional Parity Obligations; or (b) a certificate or certificates, `prepared by the City or at the City's option by an Independent Engineer, showing: (i) that the projected Adjusted Net Revenues during each of the five complete Fiscal Years beginning with the first Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, from the proceeds of Parity Obligations or Subordinate Obligations; shall have amounted to at least 1.25 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during such. Fiscal Years; and (ii} that the projected Net Revenues during each of'the five complete Fiscal Years beginning with the first Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, from .the proceeds of Parity Obligations or Subordinate Obligations, shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during such Fiscal Years. For purposes of preparing such certificate or .certificates, the .City and any Independent Engineer -shall utilize and rely on financial statements prepared.by the City which have been audited by an Independent Certified Public Accountant but may utilize. and rely upon the books and: records of the City or any unaudited financial statements prepared by the City if audited financial statements for the particular Calculation Period selected by the City are not available. Notwithstanding the foregoing.(and without satisfying the revenue tests above), the City may at any time but subject to the applicable requirements of the Indenture: (i) issue or enter into an obligation or commitment which is a Qualified. Swap Agreement; (ii) issue Refunding Parity Obligations, provided that the Aggregate 10 OHS West:260621165.8 42797-2 SJOBJC Adjusted Annual Debt Service for all Parity Obligations. to be Outstanding after the issuance of such Refunding Parity Obligations shall not exceed the Aggregate Adjusted Annual Debt Service for all Parity -Obligations- Outstanding immediately prior to the issuance of such Refunding Parity Obligations in each Fiscal Year from the. date of issuance of such Refunding Parity Obligations to the last Fiscal Year in which any Parity Obligations Outstanding immediatelyprior to and subsequent to the issuance of such Refunding Parity Obligations are scheduled to remain Outstanding; and (iii) enter into Credit Support Instruments or otherwise become obligated for Credit Provider Reimbursement Obligations with respect to Parity Obligations. ' See APPENDIX B - "SUMMARY OF CERTAIN PROVISIONS- OF THE INDENTURE" for the definition. of certain terms used above, including the definition of "Debt Service .Adjustments and Assumptions,'.' to be used for purposes of determining Aggregate Adjusted Annual Debt Service. and Maximum Adjusted Annual Debt Service.: Transfers to General Fund The City covenants in the Indenture not to transfer Net Revenues for any Fiscal Year to the City's General Fund, including the Franchise Payment, in an amount exceeding the Net Transferable Income for such Fiscal Year, which amount shall be determined at the end of such Fiscal Year; provided that so long as an Event of Default has occurred and is continuing, under the Indenture, the City shall. not transfer any Net Transferable Income to the City's General. Fund. Limitations on Remedies The rights of the Owners of the 2009 Bonds are subject to the limitations on legal remedies against cities in the State. Additionally, enforceability of the rights and. remedies of the Owners of the 2009 Bonds, and the obligations incurred by the City, may become subject to the following: the Federal Bankruptcy Code and applicable bankruptcy, insolvency, .reorganization, moratorium, or similar laws relating to or affecting the. enforcement of creditor's rights generally, now or hereafter in effect; equity principles which may limit the. specific enforcement under State law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Constitution; and the reasonable and necessary exercise, in appropriate situations, of the police powers inherent in the sovereignty of the State and its governmental. bodies in he interest- of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or State government, if initiated, could subject the Owners of the 2009 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. ELECTRIC SYSTEM OBLIGATIONS General In addition to the 2008 Bondsand the 2009 Bonds; and the Operation and Maintenance Expenses of the Electric System; including short-term and long-term power agreements, the City has entered into transactions providing for payments from the Revenues or Net Revenues of the Electric System. The material transactions are described below. Power Sales Contract with SCPPA for PVNGS - As .described under "Power Supply Resources -SCPPA Palo Verde Nuclear Generating Station Interest," the City has a 4:90% entitlement interest{11.6 MWs) in SCPPA's ownership interest in the PVNGS. The City has. entered into a power sales contract with SCPPA (the "PVNGS Contract"), which provides the City with its share of capacity and energy- from PVNGS. Under the PVNGS Contract, the City is obligated to pay its share of SCPPA costs associated -with PVNGS, including operation and maintenance costs and debt service on SCPPA bonds issued . for the project. The City's payment obligations under the PVNGS Contract are on a "take-or-pay" basis, that is the City is required to make the payments whether or not the output of PVNGS is interrupted, suspended or terminated. The City's payment. obligations under the PVNGS Contract are required to be treated as Operation and Maintenance Expenses under the Indenture and any future electric revenue bond indenture or contract. The PVNGS Contract 11 OHS West:260621165.8 42797-2 SJO/EJC provides that under certain circumstances, the City's share of entitlement to the output of PVNGS and its related payment obligations can be increased to compensate for failures by other SCPPA participants in PVNGS to meet their obligations under contracts with SCPPA in connection with .the project. As of June 30, 2008, SCPPA. had $101,820;000 principal amount of bonds outstanding for PVNGS and the City had a 4.90% entitlement to SCPPA's ownership interest in PVNGS. In the Fiscal Year ended June 30, 2008, the City •paid approximately .$3,960,000 under the PVNGS Contract. Gas Supply Agreement Pursuant to the Natural Gas Purchase Agreement, dated as of June 1, 2006, between the City and. the Authority (the "Supply Agreement"), the City has. acquired a supply of prepaid natural gas (the "Gas Supply"). The Gas Supply remaining to be delivered consists of 5,960 million British thermal units ("MMBtus") of gas for Fiscal Year 2009 reducing in each Fiscal Year to 5,348 MMBtus in Fiscal Year 2021. The Gas Supply is to be delivered by Citigroup Energy Inc. (the "Supplier") pursuant to the Agreement for Purchase and Sale of Natural Gas, dated as of June 27, 2006, between the Authority and the. Supplier.-.(the "Purchase Agreement"). The Authority. prepaid for the -Gas. Supply with the proceeds of-the Authority Bonds which. are: to be redeemed with proceeds of the 2009 Bonds. See "PLAN. OF FINANCE," In connection with the Authority Bonds, .the Authority entered into five interest -rate swap transactions with Citibank, N.A. (the "Citibank -Swap Transactions"). See "Citibank Swap Transactions" below. .Under the. Supply Agreement, the City- is .obligated to make certain payments, including .payments sufficient to pay when due debt service on the Authority Bonds, the- Citibank Swap Transactions, and all. other payments 'to the Supplier under the Purchase Agreement. The City's payment obligations under the Supply Agreement are on a "take-or-pay" basis, that is the City is required to make. the payments whether or not the Gas Supply is interrupted, suspended or terminated. The City's payment obligations under the Supply Agreement are required to be treated as Operation and Maintenance Expenses -under the Indenture and any future. electric revenue . bond indenture or contract. In the Fiscal Year ended June 30, 2008, the City paid approximately $44,000,000 under the Supply Agreement. [The City originally acquired the .Gas Supply to provide fuel for the Malburg Generating Station (the. "MGS"). As described. under "THE ELECTRIC SYSTEM -City Plan to Optimize. Resource Utilization" and Implementation of Resource Optimization Plan," the City has sold the MGS and entered into a Power Purchase and Tolling Agreement to receive the output of the MGS.. As a result of such sale, and•to enable the 2009 Bonds to be issued as tax-exempt bonds, the City has entered into a contract (the "Sale Contract") for the sale to , of an amount of gas equal to the gas to be delivered under the Purchase Agreement. The Sale Contract obligates the City to deliver gas in the amounts and at the times specified in the Sale Contract, which obligation is not dependent. on the delivery of gas under 'the Purchase Agreement. For internal purposes, the City has allocated all gas delivered under the Purchase Agreement as the gas to be delivered under,the Sale Contract.] Events of termination of the Purchase Agreement include the failure of the Supplier to deliver gas over a specified .period and .the failure of the Supplier to make a payment required under the Purchase Agreement which failure is not cured by Citigroup, Inc..(the "Guarantor"), as guarantor of Supplier's payment obligations under the Purchase Agreement. In the event of a termination of the Purchase Agreement, the Supplier (and the Guarantor) are required to make a termination payment which is designed to permit the City to acquire the gas remaining to be • .delivered under the Purchase Agreement until its stated expiration date in 2021 under the market conditions existing. at the time of termination. In the event such termination payments are due but not paid, it would be necessary for the City to purchase replacement gas with Electric System funds as well as paying amounts due under the Supply Agreement .and the debt service on the 2009 Bonds. While such requirement would cause the City to raise electric rates more -than the rates included in ahe projections under "THE ELECTRIC .SYSTEM -Summary of Operating Results -Projected Operating Results and Debt Service Coverage," the City does not expect that such requirement would cause the Electric System's rates to exceed the comparable rates for surrounding utilities. 12 OHS West:260621165.8 42797-2 SJO/EJC Interest Rate Swap Transactions Citibank, Swap Transactions In connection with'the variable rate Authority Bonds, the Authority entered into the five Citibank Swap Transactions, with an aggregate notional amount of $387,145,000.as of April 1, 2009. The terms of the Citibank Swap Transactions are described in Note 7 to .the Basic Financial Statements for the Fiscal Year .Ended June 30, 2008 attached hereto as Appendix A. The City expects that the Citibank Swap Transactions will continue notwithstanding the redemption of the Authority Bonds. The City expects to exercise its optional. termination of the Citibank Swap Transactions when the termination amount payable by the City on such termination reaches an acceptable amount. The City has not set. a specific amount as an acceptable termination amount for the Citibank Swap Transactions. The City will determine such acceptable termination amount based on the trend of interest rates and other factors it deems appropriate. In connection .with the issuance of the- 2009 Bonds, the Authority will enter into amendments to the confirmations-for the Citibank Swap Transactions and the City will enter. into an agreement with MBIA Insurance Corp.- of Illinois (the "Swap Insurer"), as reinsurer of the insurance policies (the "Policies") issued by MBIA Insurance Corporation insuring the Authority's payment obligations under the Citibank Swap Transactions. As a result of such amendments and agreement, the following changes are to be made to -the Citibank Swap Transactions. Each Policy will continue in effect to the earlier of [April 2012], or the termination of the related Citibank Swap Transaction. Citibank, N.A. -will agree to relinquish the Policies for cancellation on [April 2012] if the Citibank Swap Transactions have not been terminated. Upon the relinquishment and cancellation of a Policy, the Authority's payment obligations under the .related Citibank Swap Transaction will be secured by an ISDA form of Credit Support Annex and City will be required to deliver any collateral required to be delivered by the Authority under the Credit Support Annex, and an additional terminationevent relating to the credit rating of Electric System revenue bonds will go into effect. Pursuant to the .Supply Agreement, the City is obligated to make all payments required of the Authority under the Citibank Swap. Transactions as Operations and Maintenance Expenses of the Electric System. As more fully described below under "Swap Termination Amounts," the Citibank Swap Transactions are subject to termination at the option of Citibank, N.A. as a result of certain events of default and termination events where the Authority. is the defaulting or affected party. Upon any such termination, the Citibank -Swap Transactions are marked to market with the resulting market value being payable by Citibank, N.A. if it is positive and by the City if it is negative. As of April 1, 2009, the Citibank Swap Transactions had a negative value of $50,983;318. Morgan Stanley Swap Transactions In connection with the-City's Electric System Revenue Bonds, 2004 Series A; 2004.Series B and 2004 Taxable Series D, which are now retired, the City entered into three interest rate swap transactions (the "Morgan Stanley Swap Transactions") -with Morgan Stanley; The Morgan. Stanley Swap Transactions had an aggregate notional amount of $223.,050,000, as of April 1, 2009. The terms of the Morgan Stanley Swap Transactions are. described in Note 7 to-the Basic Financial Statements for the Fiscal Year ended June 30, 2008 attached hereto as Appendix A. Net payments due- from the City under the Morgan Stanley Swap Transactions are payable from Net Revenues of the .Electric System on a parity with the Bonds, while any termination payments are- junior and subordinate. to the payment of the Bonds. The City expects that the Morgan Stanley Swap Transactions will continue- notwithstanding the retirement of the related 2004 bonds: The City expects to exercise its optional termination of the Morgan Stanley Swap Transactions when the termination amount payable by the City on such termination reaches an acceptable amount. The. City. will determine such acceptable termination amount for the Morgan Stanley Swap Transactions based on the trend of interest rates and other factors it deems appropriate. As more fully described under "Swap Termination Amounts" below, the Morgan Stanley Swap Transactions are subject to termination at the option of Morgan- Stanley as a result of certain events of default and termination events where the City is the defaulting or affected party. Upon any such termination, the Morgan Stanley Swap Transactions are marked to market with the resulting market value being payable by Morgan Stanley if it is positive and by the City if it is negative. The termination amount for the Morgan Stanley Swap Transactions as of April 1, 2009 was a negative $45,437,125. 13 OHS West:260621165.8 42797-2 SJO/EJC l Swap Termination Amounts 'The Citibank Swap Transactions and the Morgan Stanley Swap Transactions are subject to termination at the option of the respective counterparty upon the occurrence of the standard events of default and termination events set forth in the ISDA Master Agreement for interest rate swaps, where the Authority (in the case of the Citibank Swap Transactions) or the City (in the case of the Morgan Stanley Swap Transactions) is the defaulting or affected party. The City anticipates that the Citibank Swap Transactions and the Morgan Stanley Swap Transactions will continue in effect until termination at the option of the City. In the case of the Citibank Swap Transactions, so long as the Policies are in effect, Citibank, N.A. cannot terminate the transactions unless the Swap Insurer is in default under a Policy or the Swap Insurer consents. -Also, in the case of the Citibank Swap Transactions, additional- termination events where the Authority is the affected party include default under a Policy and credit downgrades of the Swap Insurer (so long as the Policies are. in effect), termination of the Purchase Agreement and. credit downgrades of the Electric System revenue bonds. Upon the termination of the Purchase Agreement, the Citibank .Swap Transactions can be terminated by the Authority (as directed by City) with a termination amount of zero. In the case of credit downgrades while the Policies are in effect, the additional termination event will occur if an Insurer Event occurs at a time-when there is any of an event of default or termination event. where the Authority is the defaulting or affected party or the,:rating of the. City's Electric System revenue bonds by a nationally recognized rating agency is not investment grade. An Insurer Event for purposes of the Citibank Swap Transactions is: (i) the failure of the Swap Insurer to have a rating of at least A- from Standard and Poor's Rating Group ("S&P") or an A3 from Moody's Investors Service Inc. ("Moody's"); or (ii) the Swap Insurer fails to have a rating of at least AAA from S&P or Aaa from Moody's and at the same time there have occurred certain payment defaults by the Swap Insurer or other circumstances exist adversely affecting the ability or commitment of the Swap Insurer to make payments. The Morgan Stanley Swap Transactions include an additional termination event where the City is the affected party if Electric System revenue bonds fail to have a rating of at least BBB- from S&P or Baa3 from Moody's. .The City has approximately $38 million .from the proceeds of the 2008 Bonds available to pay termination amounts for the Citibank Swap Transactions and the Morgan Stanley Swap Transactions. In addition to the 20Q8 Bond proceeds, upon providing for the redemption of the Authority Bonds, the City expects to-have approximately $ of other Electric System funds available to pay any anticipated termination amounts for the Citibank Swap Transactions and the Morgan Stanley Swap Transactions. Due to the potential need to use Electric System funds for unexpected. purposes related. to the Electric System and/or any unanticipated rise in the amount of a termination payment,- no assurances can be .given that the City will have sufficient funds to make termination payments on the Citibank Swap Transactions and the Morgan Stanley Swap Transactions should such termination payments become due. In addition, any such termination payment significantly in excess of available 2008 Bond proceeds could materially,- adversely affect the liquidity position of the Electric System. Natural Gas Commodity Price Swap In -July 2006, the City entered into a natural gas commodity price swap transaction with Societe Generale with a notional amount equal to 22,073,637 MMBtus of natural gas.. Under this swap transaction, the City receives a fixed price and pays a variable price based on an indexed price of natural gas. Payments made by the City under the commodity price swap constitute Operation and Maintenance Expenses of the Electric System. As of March 3i, 2009, this commodity swap had a positive value to the City of $11,701,172.-For more information concerning this swap transaction, see Note 7 to the Basic Financial Statements for the Fiscal Year ended June 30, 2008 included in Appendix A. Liquidity Facilities for Authority Bonds In connection with each of the Series B Authority Bonds and the Series C Authority Bond's, the Authority entered into a Standby Bond Purchase Agreement, dated as of June 27, 2006, with- Citibank, N.A. and the trustee for the Authority Bonds (each a "Liquidity Facility"). The terms of each Liquidity Facility are substantially identical. Under each Liquidity Facility, subject to the conditions contained therein, Citibank, N.A. is to provide the purchase price of bonds of the related series of Authority Bonds which are tendered for purchase but not remarketed. -The. 14 OHS west:260621165.8 42797-2 SJO/EJC Authority is obligated under the Liquidity Facilities to pay interest on the unreimbursed advances. and to repay advances over a five year period. Upon an event of default under a Liquidity Facility, Citibank, N.A. can require the immediate payment of all amounts due under the Liquidity Facilities. Under the'Supply Agreement, the City is obligated to advance all payments required of the Authority when due. Such advances- constitute Operation and Maintenance Expenses of the Electric System. As of April 1, 2009, Citibank, N.A. had $119,345,000 of unreimbursed advances under the Liquidity Facilities represented by Series B Authority Bonds and. Series C Authority Bonds, which constitute Bank Bonds for purposes of the Authority. Indenture: The City expects to apply proceeds• of the 2009-Bonds and other available funds to redeem the Authority Bonds held by Citibank, N.A. under the Liquidity Facilities and to pay all other amounts due Citibank, N.A. pursuant to the Liquidity Facilities.. Upon such redemption. and payment, the Liquidity Facilities will be terminated. See "PLAN OF FINANCE." THE ELECTRIC SYSTEM General The City established its Electric System in 1933 through the acquisition of the existing electric distribution system within the City and the construction of a diesel generating .station at Station A (located at 4990 Seville Avenue, Vernon, California).("Station A"). The. City operates the Electric System through its :Light and Power Department with all revenues of the Electric System being credited to, and all expenses of the Electric System being payable from, the Light and Power Fund. The Electric System serves all electric users within the City. In keeping with. the character of the City, the Electric System serves primarily small and large industrial customers. During the Fiscal Year ended June 30,.2008, the. Electric System served 1,959 customers (based on the number of meters), supplied approximately 1,232 million kWhs of .electric energy and had a peak demand of approximately 206 megawatts ("MWs"). See "THE ELECTRIC SYSTEM -Retail Energy Sales" below. Service Area The City's service- area encompasses the entire approximately 5.2 square miles of the City: The City is located in Los Angeles. County,. approximately four. miles southeast of downtown Los Angeles. The City was established in 1905 with a view of promoting industrial activity. There are over 1,800 companies doing business in the City employing more than 50,000 persons. The City is almost exclusively industrial, with an estimated resident population of approximately 110 as of January 1, 2009. The City is a developed industrial rail city, with .major railroads, including Union Pacific ("UP") and the Burlington Northern Santa Fe ("BNSF"), running through it. Part of the City's northern border is formed by some of the country's. largest intermodal freight yards operated by UP and the BNSF. -These 200-acre rail facilities handle LS million containers and trucks on flatcars per year (much of it goods manufactured in the City) heading for domestic and world markets. In addition, the City has excellent-freeway access with State Highway 710 adjacent to the City line. and its proximity to the 10, 710, 5 and 105 highways. The City's location expedites the delivery of raw materials to City businesses and the distribution of finished products in a cost effective and efficient manner. City-Plan to Optimize Resource Utilization Historically; the City supplied only a modest portion- of its customers' load requirements from its own generation resources. To-serve its. load, the Electric System relied first on a partial requirements wholesale power contract with the Southern California Edison Company ("Edison") and then on a combination of wholesale power contracts. See "Power Supply Resources" below. Due to changes in the California electric industry such as the now-abandoned deregulation of the California electric energy markets, unprecedentedvolatility of energy prices in 2000-2001 and the blackouts and power interruptions due to inadequate supplies of electric energy, the City determined it was in the best interests of its mostly industrial customers to establish a significant generation resource connected directly to. the City's distribution system. This would mitigate any dependence on imported energy to maintain electric service within the City. without exposing the Electric System to overdependence on a single source. of power. The City constructed the Malburg Generating Station (the "MGS"), a 120 MW base load, 134 MW full load combined cycle electric generation plant located at Station A designed to provide approximately 60% of the City's then expected requirements for base load electric power. The MGS commenced commercial operation in October 2005 and; except for a period of equipment repair, has been operating as a base load generation resource for 15 OHS West:260621165,8 42797-2 SJO/EJC the City since such. date. See ."Power Supply Resources -Malburg Generating Station-.Operation of Facility to. Date." After the commencement of commercial operation of the MGS, the City. reviewed its portfolio of Electric System resources in light of the City's ultimate objective in having the Electric System serve as part of the economic stabilization and development program for its industrial customer base. The City had already commenced a program of acquiring and realigning properties within the City to assemble parcels of land consistent with the requirements of prospective industrial customers. In addition, the City continued its program of providing superior municipal services to support both existing. and new industrial residents such as fire and police services, community health services and infrastructure improvements. The City also studied options to optimize -the benefits of the existing Electric System resources and to serve projected Electric System requirements in light- of the current state of, and anticipated developments in, the California electric markets. After reviewing the_ available alternatives, the City determined to sell virtually all. of its major transmission ` assets and rely on the California transmission system controlled by the California Independent System Operator ("CAISO") to provide for transmission of energy imported into the City. The -City determined that private ownership and operation. of the MGS, with the City retaining the rights to the capacity` and energy of the facility, provided the City with a resource base that was consistent with its original plan for significant"behind the meter" generation with less operational risk than City ownership, while affording the City an opporttmity to fund a portion of its economic development program... Implementation of Resource Optimization Plan On April 10; 2008; pursuant to the Amended and Restated Purchase and Sale Agreement, dated as of December 13, 2007, between the City and Bicent (California) Power LLC ("Bicent"), an affiliate of Bicent Holdings and Natural Gas Partners, the City sold the MGS to Bicent in a cash transaction. Bicent has assigned -its rights and obligations with respect to the MGS to its affiliate, Bicent (California) .Malburg LLC, a Delaware limited. liability company ("BCM"). BCM has sold the capacity and the energy of the. MGS to the City pursuant to. the Power Purchase Tolling Agreement, dated as of April 10, 2008 (the "PPTA"): See "Power Supply Resources -Malburg Generating Station -Power Purchase Tolling Agreement." In addition, Bicent (California) Hoover LLC, a Delaware limited liability company ("BCH"), an affiliate of Bicent, has acquired the ' benefits and burdens of the City's interest in the Hoover Uprating Project (described below) on the terms set forth in the Hoover Contract for Differences, dated as of April 10, -2008 (the "Hoover Contract for Differences"), between BCH and the City. See "Power Supply Resources -Hoover Uprating Project -Hoover Contract for Differences." In a separate transaction, pursuant to a Purchase and Sale Agreement (the "TANG Agreement"), dated September 28, 2007, between the City and the Transmission Agency of Northern .California ("TANG"), the City sold TANG its interest in-the California Oregon Transmission Project. .Additionally, in a separate transaction, the City sold its- interests in the Mead-Adelanto Transmission .Project and. the Mead-Phoenix Transmission Project pursuant to a Purchase and Sale. Agreement (the "Starwood Agreement"), dated- as of December 13, 2007, between the City and Starwood Energy Infrastructure Fund, L.P. .The proceeds from the sale of the Electric System assets described above. were used to redeem all then outstanding .Electric System revenue bonds, provide -funds for economic development in the City, increase -the Electric-System's cash reserves and fund a portion of the debt service reserve requirement for the Authority Bonds.- A portion of such Electric System reserves are expected to be applied to payment due under the PPTA during the first four years of the contract.. After the completion of the transmission facility sales described above, the City no longer receives Transmission Revenue Requirements ("TRR") relating to such assets., The City continues to receive TRR associated with existing transmission service contracts with Edison and the Department of Water and Power of the-City of Los Angeles ("LADWP"). 16 OHS West:260621165,8 42797-2 SJO/EJC In proposed transactions similar to the sale of MGS and. the purchase by the City of the output of the MGS, the City is 'considering -the- sale of its .interests in the output of the Palo. Verde Nuclear Generating Station ("PVNGS") and the Hoover Uprating Project and the repurchase by the City of such output. (For information on such facilities see "Power Supply Resources" below). The City has determined that~such sale and repurchase would provide an economic benefit to the Electric System over maintaining its current interests while providing the. Electric System with the same power resources. The extent of such benefit is dependent on the benefits available to` potential purchasers of such interests as reflected in the price that may be offered. No assurances can be given by the City that any such transactions will be completed. As .more fully .described below, the .Electric System continues to include ownership interests or capacity rights in other electric facilities and the ownership of the interconnection and distribution system within the boundaries of the City. Management The Electric System is operated and. maintained through the City's Light and Power Department, which is governed by the City Council. The Light and Power Department is managed by the Director of Light and. Power whose duties include overseeing the operation and maintenance of the Electric System's generation, transmission and distribution.. facilities., metering, power purchasing, scheduling, billing and settlements. The Director of Light and Power, who is currently responsible for the management of the City's Gas System, is also the City's Director of Utilities and Governmental Infrastructure, and reports to the City Administrator. City Officials The current members of the City Council are as follows: Leonis C. Malburg, Mayor, was first elected to the City Council in 1956 and was first appointed as Mayor in 1974. Mr. Malburg was. born in the City and is the grandson of the City's founding father, John B. Leonis. Hilario Gonzales, Mayor Pro Tempore, was first: appointed. to the. City Council in 1974 and has been a resident of the City since 1952. William J. Davis, Council Member, was first'elected to the City Council in 1981. Mr: Davis was born in Manila, Philippines and came to the. United States in 1969. Prior to retiring, Mr. Davis worked at Edison. W. Michael McCormick, Council Member, was first elected to the City Council in 1974 and has been a resident of the City since 1969. Prior to retiring, Mr. McCormick worked at the Safeway meat processing plant in the City. Richard J. Maisano, Council Member, was appointed to the City Council in 2009 to fill the seat left vacant when Thomas A. Ybarra retired. Mr. Maisano is a businessman who has lived in the. City for the past five years. Eric T. Fresch, Special Counsel and City Administrator, was appointed to the Administrator's office in November, 2006. Mr. Fresch currently serves, through his law firm, as the City's Special Counsel-and previously served as the City Attorney from November, 2003 to January, 2007. Prior to that time, Mr. Fresch served. as .outside counsel to the City's. Light & Power Department on various matters, including the licensing and financing of electric generating stations. Mr. Fresch graduated from the University of California at Los Angeles (UCLA), Magna Cum Laude, with a degree in.Economics in 1976, completed-the Masters of Science program in Industrial Qrganization with First Honors at the UCLA Graduate School of Management in 1977 and received a Juris Doctor of Laws Degree from the University of San Diego School of Law in 1980. Light and Power Executive Management The following are brief resumes of the senior Light and Power Department management personnel whom are responsible for Electric System operations. 17 OHS West:260621165.8 42797-2 SJO/EJC Donal O'Callaghan serves as both the City's Director of Utilities and Governmental Infrastructure, a department of the City charged with management and oversight of the City's Light and Power, Gas, Community. Services, Water and Business Services Departments, and . as the City's Director of Light and Power, and Gas Departments. Mr. O'Callaghan provides overall direction, structure, control and reporting of the Electric -System and the Gas System. Prior to joining the City in March, 2005, Mr. O'Callaghan was employed by the City of Santa Clara as a Project Manager assigned to the Pico Power Project, a 154 MW combined cycle'power plant. In addition, Mr. O'Callaghan has held positions in various locations throughout North America as a Project Manager for several companies including NEPCO/ENRON and S & B Engineers in which he was responsible for management of the construction andoperation of several power plants. Mr. O'Callaghan received a Bachelor of Science Degree from the University of Ulster, Jordanstown in 1981 and is a member of the:Mechanical Engineers Institute and the Chartered .Engineers .Institute. Mr: O'Callaghan has over. 27 years- of global experience in the power industry including engineering, power generation, transmission, distribution, operations, commissioning/ startup, facility and projects management. Peter Hervish is the Technical Services Manager of the Light and Power Department responsible for engineering and operations support. Mr. Hervish has over 29 years of experience in the power industry spanning all facets of power plant engineering and maintenance. Prior to joining the City in Apri12005, Mr. Hervish held several positions at Progress Energy, Inc., including Manager of Plant Maintenance and Construction Projects and Lead Engineer. Prior to his tenure at Progress Energy, Mr. Hervish held several positions at what is now Siemens/Westinghouse Power -Corporation' and at Foster-Wheeler, Corporation, including Site Installation and Commissioning Manager, Consortium Site Manager, Project Manager Latin America and Senior Plant Thermal. Systems Engineer. Mr. Hervish holds a Bachelor of Science degree and a Masters degree ftom the State University of N.ew York. During his tenure at Siemens/Westirighouse and Foster-Wheeler, Mr. Hervish was .granted several patents and published a number of articles on engineering and plant maintenance/operations. Abraham Alemu : is the Electric Resources Planning and Development Manager of the Light and Power Department. Mr. Alemu has over 16 years of experience in the Light and Power Department and is responsible for . power resources procurement and management, customer service, regulatory compliance and program development. Mr. Alemu holds a .Bachelor of .Science degree in Electrical Engineering from California State University, Los Angeles - and a Masters of Business Administration. from- Woodbury University. Mr. Alemu is a licensed Professional Engineer in the State of California and. a member of the .Institute of Electrical and Electronics Engineers. . Carlos Fandino is the Transmission and Distribution Operations and Maintenance Manager of the Light and Power Department. Mr. Fandino has over 20 years of experience, in the Light and Power Department and has held several positions including Station Operator, Senior Dispatcher and Engineering and Projects Manager: Mr. Fandino is currently- responsible for the day-to-day operations of the electric transmission and distribution facilities, customer metering and operation and maintenance of Station A Power Plant generation resources. ' Mr: Fandino holds a Bachelor of Science Degree in Business Management from the University of Woodbury, where he graduated magna cum laude. Krishna Nand has been the Environmental Compliance Manager for the Light and Power Department since March 2005. Dr. Nand has over 40 years of experience in the area of environmental impacts and permit compliance. Prior to joining the City, Dr. Nand worked for 20 years at Parsons Engineering, Inc. where he achieved: the position of Senior. Project Manager. While at Parsons Engineering, Inc., Dr. Nand was the Application for Certification Project Manager for the MGS as well as the repowering projects at the Haynes Electrical Generating Station and the Valley Electrical Generation Station of the Los Angeles Department of Water and Power and for the Glenarm Electrical Generation Station of the City of Pasadena Water and Power Department.. Dr. Nand holds a Masters of Science and a PhD in Physics, as well as a Bachelor of Science in Physics, Chemistry, and Mathematics, from the. University of Lucknow, India. 18 OHS West:260621165.8 42797-2 SJO/EJC Power Supply Resources General The Electric System's current power supply resources consist of: (i) the PPTA for the MGS; (ii) a long- eterm power purchase contract with the Southern California Public Power Authority ("SCPPA") with respect to a portion of SCPPA's interest in the Palo Verde Nuclear Generating Station ("PVNGS"); (iii) the Contract for Electric Services (the "CES") with the United States Department of Energy-Western Area Power Association ("Western") with- respect to the Hoover Uprating Project; (iv) two 5.75 MW simple cycle gas turbine generating units .(the "H. Gonzales Generating Station") at Station A used for reserve purposes; and (v) a Gong-term contract with American Electric Power. The City also owns the Johnson & Heinz Diesel Plant consisting of five diesel generator • units installed in 1933, which is currently used only for emergency purposes. The PPTA, the power. purchase contract with SCPPA for PVNGS, the CES and the H. Gonzales Generating Station are collectively referred tows the "Committed Resources." For the Fiscal Year .ended June 30, 2008, the Committed Resources provided approximately. 67% of the energy supplied by-the Electric System for the City's load..requirements. In addition to the Committed Resources, the City has entered into short-term and long-term contracts to fulfill the City's remaining 33% load requirements. [The City expects to limit the amount of power it purchases through power purchase contracts with terms of less -than one year to of .the expected load requirement of the Electric. System. Such percentage may be exceeded if the City determines that the current available long-term contract rates are not reflective of the value of the power during the term of the power purchase.] In transactions similar to the sale of the MGS, the City is seeking purchasers of its interests, in the output of PVNGS and the Hoover Uprating Project on terms which provide for the City's repurchase of the output. See "THE ELECTRIC SYSTEM -City Plan to Optimize Resource .Utilization" and- Implementation of Resource Optimization Plan." The power supply resources of the Electric System for the. past five Fiscal Years, are described in the following table. CITY OF VERNON ELECTRIC SYSTEM RESOURCES USED TO SATISFY CITY'S LOAD. REQUIREMENT Fiscal Year Ended June 30 2004 2005 2006 2007 2008 Long-Term Contracts (1) Actual Energy~2~ 857,600 868,000 356,000 245,600 245,600 Percentage of Total Energy 69.63% 73.63% 29.35% 19.57% 19..13% SCPPA Palo Verde Actual Energy~2~ 78,785 79,168 65,888 81,260 77,017 Percentage of Total Energy 6.40% 6.72% 5.43% 6.48% 6.00% Hoover Uprating Actual Energy ~ 25,752 20,004 24,993 24,732 24,061 Percentage of Total Energy 2.09% 1.70% 2.06% 1.97% 1.87% MGS and City-Owned Generation~3~ Actual Energy~2~ 0 0 635,782 904,839 754,108 Percentage of Total Energy 0.00% 0.00% 52.41% 72.12% 58.74% • City's Load Reqirement 1,231,696 1,178,868 1,213,139 .1,254,691 1,283,870 Source: City of Vernon cl) Term of one year or longer. cap Megawatt hours ("MWhs"). cs~ As discussed above in the caption "Implementation of Resoaree Optimization Plan," the City has sold the MGS and entered into a long term contract with the purchaser for 100% of the output from the Station. See "THE lg OHS West:260621165.8 42797-2 SJO/EJC .ELECTRIC SYSTEM -.Power Supply Resources -Malburg Generating Station-Power Purchase Tolling Agreement" below. In addition, there was a reduction in actual energy due to a shutdown commencing in September,- 2007. See "THE ELECTRIC SYSTEM -Power Supply Resources -Malburg Generating Station - Operation of Facility to Date" below. Malburg Generating Station Power Purchase. Tolling Agreement. Pursuant to the PPTA, the City acquired. all of the. capacity and energy of the MGS for a fifteen year term. The term can be extended by Bicent for an additional five years. The City will dispatch the MGS and will be the Scheduling Coordinator for all energy and ancillary services .from the MGS in accordance with the requirements of the CAISO tariff. The City has the right to designate a portion of the MGS capacity and associated energy to provide resource adequacy for the Electric System and ancillary services. The City is to pay a fixed capacity charge under the PPTA based on the per kilowatt demonstrated capacity of the MGS. The fixed capacity payments escalate over the term of the PPTA. The amount of MGS capacity on which the capacity payments are based is subject.to periodic testing and adjustment. If the MGS is not available for specified hours during specified times of the year, the amount of the capacity payment is reduced. During the Fiscal Year ended- June 30, 2008, the City paid approximately $1,757,550. in capacity payments for the MGS, exclusive of amounts paid from the proceeds of thesale of MGS. The City is to pay a fixed amount (subject to escalation) for each MWh of electricity produced by MGS. In addition, a change in the heat rate of MG5 from the standards specified- in the PPTA trigger an adjustment to the energy charge.. If the heat rate improves,: BCM will be entitled to additional payments from the City. If the heat rate deteriorates, the City will be entitled to payments from'BCM. During the Fiscal Year ended June 30, 2008, the City paid.approximately $750,200, in energy payments for the MGS. The City will be responsible for supplying the MGS with natural gas. Because the Authority Bonds bear tax-exempt interest, since the sale of the MGS to Bicent the City has not used the Gas Supply as fuel for the MGS. Instead, the City had been selling the monthly deliveries of the Gas Supply in spot market transactions and using the proceeds to purchase electricity to serve load not met by City-owned facilities; the MGS or -power purchase contracts in existence when the Authority Bonds were issued. [The City has entered into. a contract to sell the Gas Supply to ,under terms requiring payment in each month .for the amount of gas delivered by the City under such contract in the previous month.] The City had been providing,natural gas as fuel for the MGS primarily through spot market purchases. The City continues to monitor-the market for natural gas and may, in the future, enter into contracts for- the purchase of natural gas for the MGS if the City determines the terms of such contracts are beneficial to -the City. Tn connection with its purchase of natural. gas,- the City has established the Fuel Cost Adjustment Billing-Factor (the "FCABF") to-pass through to customers increased costs related to fuel. See "Electric. Rates." To the extent the City fails to provide sufficient natural .gas for operation of the MGS, BCM will be excused from providing energy from the MGS in response to dispatched notices from the City. Except as otherwise provided in the PPTA with respect to scheduled outages and events of force majeure, in the event a dispatch notice to deliver energy cannot be met by the MGS, BCM may provide substitute energy. The amount of substitute energy is limited by California law to 15% of the total contracted energy under the PPTA. In the event BCM cannot satisfy a dispatch notice to provide energy either from MGS or .with substitute energy, then BCM is obligated to pay the City the costs of replacement energy in accordance with the PPTA. Scheduled outages are limited to three hundred thirty-six hours in any contract year except for any additional hours that the City may agree to for additional work that may be required. Scheduled outages from June 1 through October 31 of each year are limited and may only be scheduled with the consent of the City. BCM has covenanted in the PPTA to operate, inspect, maintain and repair the MGS in accordance with applicable law,. required permits and good utility. practices. A party's obligation to perform pursuant to the PPTA, other than the obligation to make payments, are to be suspended when .such performance is prevented by an event of force majeure. If the- party cannot resume 20 OHS West:260621165.8 42797-2 SJO/EJC performance within six months due to the event of force'majeure, the other party may terminate the PPTA with no payment obligation other than for accrued amounts. The PPTA limits the amount of BCM's debts secured by a security interest in, or mortgage on, the MGS. The City has a security interest in and mortgage on the MGS to secure amounts- owed to it under the PPTA. The City's security interest and mortgage is subordinate to the security interest and mortgage granted by BCM to lenders in connection with its financing of the purchase of the MGS. Under the PPTA, BCM is to take the actions specified in the PPTA to establish and continue the City's security interest in, :and mortgage on, the MGS. Events of default under the .PPTA applicable to both parties are: a failure to make: a payment due thereunder within ten days 'of notice; any materially false or misleading representation or warranty; unexcused failure to perform a material covenantor obligation (other than those constituting a separate event of default) within fifteen days of notice; a bankruptcy event (as defined in the PPTA); or a merger, transfer of assets or consolidation occurs and the resulting surviving or transferee entity fails to assume obligations under the PPTA to the satisfaction of the other party..-Events of default under the PPTA with respect to BCM are: uriless otherwise excused under the PPTA, failure of MGS to mainfain capacity at specified a level for a specified time; failure to provide required credit support; BCM sells, or enters into a contract to sell, capacity or energy of the MGS to an entity other-than the City; or BCM assigns the PPTA in violation of its terms. Upon the occurrence of an event of default, the non-defaulting party can designate an early termination date for the PPTA with all events of default other than a failure to pay, .amounts due under the PPTA or a bankruptcy event requiring an opportunity to cure. If an early termination date for. the PPTA. is established, the defaulting party is to pay the .other party its economic loss, if any, as a result of such terminationplus costs. Description of Facility. The MGS is a 120 MW base load/134 MW full load combined cycle, natural gas- fired, electric power plant located adjacent to Station A. The MGS achieved commercial operation in October 2005. The MGS includes two Siemens (formerly Alstom) GTXI00 natural .gas-fired combustion turbine generators ("CTGs") a steam turbine generator ("STG"). The MGS. includes .duct burners and evaporative inlet air coolers and filters to achieve higher levels of power output in selected modes of operation. The MGS is connected to the ` .Electric System distribution facilities at the Vernon Substation, located at Station A. .Operation of Facility to Date. Prior to its sale in .2008, the City had. been operating the MGS since commercial operation commenced in 2005. Except fora 71 day shutdown commencing in September, 2007 due to equipment failure, the. facility has operated consistently as a baseload plant within warranted heat rates and emissions. The cost of repairing the MGS equipment and the cost of replacement power were covered by warranties acid the City's insurance policies. In the. Fiscal Year ended June 30, 2008, the MGS provided 754,-108 MWhs of energy to the City. As described under-"Implementation of Resource Optimization Plan," the City has sold the MGS to Bicent, but retains the rights to the capacity and energy.of the facility for a fifteen year term pursuant to the PPTA. SCPPA Palo Verde Nuclear Generating Station Interest General. PVNGS is located approximately 50 miles west of Phoenix, Arizona. PVNGS consists of three ` nuclear electric generating units (numbered 1, 2 and 3), with a design electricaLrating of 1,333 MWs (unit 1), 1,336 MWs (unit 2) and 1,269 MWs (unit 3). PVNGS's combined dependable capacity is 3,872 MWs and its combined maximum capacity is 3,938 MWs. Each PVNGS generating unit is designed fora 40-year life. and operates under 40-year Full-Power Operating Licenses from the Nuclear Regulatory Commission (the "NRC") expiring in 2024, 2025 and 2027, respectively. Arizona Public Service Company ("APS") is the operating agent for PVNGS. After. the construction and maintenance discussed below [cheek status of this: is complete], the PVNGS generating units will have a design electrical rating of 4,010 MWs and a combined dependable. capacity of 3,872 MWs. -SCPPA is a joint action agency in which the City participates. SCPPA has a 5.91% ownership share in the PVNGS. The City has a 4.90% generation entitlement interest.in SCPPA's ownership share in -PVNGS through the City's- "take-or- pay" power contract with SCPPA (totaling approximately 11 MWs of dependable capacity). Co-owners of PVNGS include APS; the Salt River Project Agricultural Improvement and Power District, a political subdivision of the State of Arizona, (the "Salt River Project"); Edison; El Paso Electric Company; Public Service Company of New Mexico; SCPPA; and the City of Los Angeles. For the Fiscal Year ended June 30, 2008, PVNGS provided over 77,000 21 OHS West:260621165.8 42797-2 SJO/EJC MWhs of energy to the Electric System. During the Fiscal Year ended June 30, 2008, the City paid approximately $3,960,000, pursuant to its power purchase contract with SCPPA for the PVNGS. Nuclear Regulatory .Commission Inspection.. Beginning in 2005, PVNGS experienced increased problems with equipment reliability and .plant availability resulting in increased scrutiny by the NRC. In October 2006, the. NRC conducted an inspection of the PVNGS emergency diesel generators after the PVNGS Unit 3 emergency generator started, but did not provide electrical output. On February 22, 2007, the NRC issued a "white" finding (low to moderate safety significance) for this matter. Under the NRC's Action Matrix, this finding, coupled with a previous NRC "yellow" firiding relating to a 2004 matter involving PVNGS's safety injection systems, resulted in PVNGS Unit 3 being placed in the "multiple/repetitive degraded cornerstone" column of the NRC's Action Matrix ("Column 4"), which resulted in an enhanced NRC inspection regime. Although only PVNGS Unit 3 is in NRC's Column 4, in order to adequately assess the need for improvements, the management of APS advised that it has been conducting site-wide assessments of equipment and operations. On March 24, 2009, the NRC announced that it is removing PVNGS Unit 3 from Column 4 and returning PVNGS Unit. 3 to the "licensee response column" of the NRC's Action Matrix ("Column 1 Preliminary work in support of the NRC's enhanced inspection regime took place throughout the summer of 2007. On June 21, 2007,. the. NRC issued an initial. confirmatory action letter confirming the commitments of APS regarding specific actions it is to take to improve PVNGS's performance. In 2007, a team of NRC inspectors performed on-site, in-depth inspections of PVNGS's equipment and operations. The NRC's inspection results were documented in an NRC letter to APS dated February 1, 2008 (the "Inspection Report"). The Inspection Report indicated that the .facility is being operated safely, .but also identified certain performance deficiencies, On December 31, 2007, APS submitted its improvement plan to the NRC, which addresses issues identified by the- - management of APS during its site-wide assessments of equipment and operations, That occurred during 2007. The NRC reviewed the. adequacy of this improvement plan and issued a revised confirmatory action letter on February 15; 2008 that outlines the actions. APS must take in order for the NRC to return the PVNGS site to the NRC's routine inspection and assessment process. A comprehensive recovery -plan, the Site Integrated Improvement Plan, has been developed at PVNGS to identify changes to be made in various aspects of operations, including in the areas of management, leadership;, personnel, engineering processes, work planning, work backlog reduction, equipment performance, safety, training, emergency preparedness and human performance. The management of APS has advised that full implementation of the-plan will take several years but initial steps are underway, including organizational changes in management and the hiring of additional experts and engineers. The NRC will continue to provide increased oversight at PVNGS until the facility demonstrates sustained performance improvement. Construction and Maintenance. As a result of stress corrosion cracking, the owners of PVNGS approved the replacement of [check this; two steam generators], in each of its generating units, to provide for the continued use of the units to the end of their projected 40-year life. The replacement of the [steam generators] and the turbine rotors resulted in an increase in power output of approximately 210 MWs for PVNGS. Due to anticipated cracks, the-PVNGS owners approved the replacement of the reactor vessel heads in all three generating units beginning in 2009. Anew water reservoir was placed in service in 2007. The owners of PVNGS have approved the relining of the old cooling water reservoir .and relining is in progress..The current evaporation ponds are almost full and the owners of PVNGS have approved the construction of a new evaporation pond, which is required to expand capacity for the storage of waste water, The City is responsible for its share of the costs of all the items described above. Decommissioning Costs. Without extension of the operating licenses; the PVNGS generating units will be decommissioned shortly after the operating licenses expire. The owners of PVNGS have created external trusts in accordance with the PVNGS participation agreement and NRC requirements to fund the costs of decommissioning PVNGS..Based on a 2007 estimate, [check this: which is the most recent estimate. of decommissioning costs], the City .estimates -that its, share of the amount required for decommissioning PVNGS is 100% funded. Such estimates are based on certain assumptions as to decommissioning, costs and investment returns. No assurance or guarantee can be given that anticipated investment will be sufficient to fully fund the City's share of decommissioning PVNGS costs. 22 OHS West:260621165.8 42797-2 SJO/EJC Nuclear. Waste: Storage and Disposal.. Generally, federal and state efforts to provide adequate interim and long-term storage facilities for low-level and high-level nuclear waste have proven unsuccessful to date. Although federal and state efforts continue with respect to such storage and., disposal facilities,. the. City is not able.. to predict the schedule for the permanent. disposal of radioactive wastes generated at PVNGS. APS, which currently stores spent nuclear fuel in on-site pools near. the units, has advised the City (through 5CPPA) that until a permanent repository. for high-level. nuclear waste becomes, available, additional on-site spent fuel storage is required by using dry casks similar to those currently used at 18 other nuclear plants. Since the spent fuel pools ran-out of storage capacity, an Independent Spent Fuel Storage Installation was built to provide additional spent fuel storage at the site while awaiting permanent disposal. at a federally. developed facility. The installation uses dry cask storage and was designed to accept all spent fuel generated by PVNGS during its.lifetime. [Update available?: As of June 30, 2007], 54 casks, each containing 24 spent fuel assemblies, have been put into storage in thelndependent Spent Fuel Storage Installation. APS ships all of its low-level radioactive waste to available disposal sites in Utah and South Carolina. In August 1995, a storage facility for low-level radioactive materials was opened at PVNGS to allow temporary on-site storage in case ,the disposal sites are not available. APS estimates that the storage facility has sufficient storage capacity to store up to nine years of low-level radioactive waste produced at PVNGS and that it could be expanded to allow for additional storage of low-level waste until the end of operation of PVNGS. Hoover Uprating Project General. The City participated in the Hoover Uprating Project. The Hoover Uprating Project consists ..principally of the uprating of the capacity of 17 generating units at the hydroelectric power plant (the "Hoover Plant") of the Hoover Dam, located approximately 25 miles from Las Vegas, Nevada. Modern insulation technology made it possible to "uprate" the nameplate capacity of the existing generators. The U.S. Bureau of Reclamation (the "Bureau") owns and operates the Hoover Dam facility and Western markets the power from .the facility.. Purusant to the CES with Western, the City made an upfront payment for its share of the construction cost of the Hoover Uprating Project, is entitled to approximately 22 MWs of capacity (calculated based on 1.1% of 1,951 MWs of total contingent capacity). and 28;000 MWhs of associated energy annually ..from the Hoover Uprating Project through 2017.. The City is responsible for its share of the operating costs of-the facility. Drought Conditions. Due to recent drought conditions .and- low lake levels,-the City's capacity entitlement at the Hoover Plant was' reduced to approximately 19 MWs (calculated based on 1.1% of 1,717 MWs available capacity). Environmental Considerations. The lower Colorado River has been ,included in a critical Habitat Designated Area which required the Bureau'of Reclamation to prepare and file with the United States Fish and Wildlife Service a Biological Assessment on the effect of its operations of the lower Colorado. River on endangered species therein. Thereafter, the United States Fish and Wildlife Service issued a Biological and Conference Opinion regarding the Bureau of Reclamation's operations and outlined remedial actions to be taken to correct adverse effects to endangered species. Such remedial actions could affect the operation of the Hoover Plant; which would in turn affect the Hoover Plant customers, such as the City. The City believes that any effect on future. operations will be minor; however there is a possibility that a "worst-case" scenario could reduce the Hoover Plant customers' available capacity from the Hoover Plant. by approximately 75%. The Hoover Plant customers, -such as the City, together with certain other parties, are working on a plan in cooperation with. the Bureau of Reclamation and the United States Fish and Wildlife Service to mitigateoperational scenarios that would. negatively affect the Hoover Plant customers and the other parties [Any update available?]. Hoover Contract for Differences. At the.timeof the closing of the sale of the MGS (See "Implementation of Resource Optimization Plan"); the City entered-into the Hoover Contract for Differences with BCH. The Hoover Contract for Differences generally provides. for the City's swapping the economic benefits and burdens under. the CES for fixed energy and capacity payments. Far each month .through September 2017, a monthly payment (the "Monthly. Swap Payment") is to be determined.. The Monthly Swap Payment. is calculated by netting the City payments for- capacity and energy under the CES for the month against specified fixed (subject to escalation) energy and capacity prices. To such netted amount certain credits under the CES are added and certain payments under the CES are subtracted. If the resulting Monthly Swap Payment is a positive number, the City is to pay this amount to 23 OHS West:260621165.8 42797-2 SJO/EJC BCH. If the resulting Monthly Swap Payment is a negative number, BCH is to pay the absolute- value of this amount to the City. Payments under the Hoover Contract for Differences- are to be made monthly as Operation .and Maintenance Expenses of the Electric System and amounts due from each of the parties under the Hoover Contract for Differences for any month are to be netted against each other. During the Fiscal Year ended June 30, 2008, the City paid approximately $264,960, pursuant to the Hoover Contract.for Differences. Events of default under the Hoover Contract for Differences applicable to both parties are: a failure to make a payment due thereunder within ten days. of notice; any materially false or misleading representation or warranty; unexcused failure to perform a material covenant or obligation (other. than-those .constituting a separate event of default) within fifteen days of notice; a bankruptcy event (as defined in the Hoover Contract for Differences); or a merger, transfer of assets or consolidation occurs and the resulting surviving or transferee entity fails to assume obligations under the Hoover Contract for Differences to the satisfaction of the other party. Events of default under the Hoover Contract for Differences with respect. to City are: a termination of the CES by the City or a termination of the CES due to a default or any other action by the City. Upon the occurrence of an event of default, the non-defaulting party can designate an early termination date for the Hoover Contract for Differences with all events of default other than a failure to pay amounts due under the Hoover Contract for Differences or a bankruptcy eventrequiring an opportunity to cure. If an-early termination date for the Hoover Contract for Differences is established, the non-defaulting party is to calculate an amount equal to-the present value of its loss or gain (exclusive of costs) resulting from the termination of the Hoover Contract for Differences. Any such loss (plus costs) is to be paid by the defaulting party to the non-defaulting party.. Any such gain (less costs) is to be paid by the non-defaulting party to the defaulting party. If the .CES- is terminated by Western other than as a result `of a default or other action by the City,' the Hoover Contract for Differences will automatically terminate and no payments by either party-will be due as a result of such termination. Power Purchase Agreements Long-Term Power Contract. The City has one fixed-price contract with. American Electric Power for the purchase of 25 MW of on-peak power. The contract expires in 2010 and is in the form of the Western Systems Power Pool power purchase agreement. Short-Ter?n Power Contracts. The City expects to provide power. for the Electric System's load requirements that are not met by'the Committed Resources or from new long-term power purchase contracts, through short-term power purchases. The cost of power under such contracts will vary depending on then existing market-conditions, which can be affected by a number of factors: Reserve Generating Facilities K Gonzales Generating Station. The City owns the H. Gonzales Generating Station, located at Station A and consisting of two gas turbine units. Each unit has a net capacity of 5.5 MWs. The two units are used for peaking purposes. The City bids these units on a daily basis for dispatch by CAISO under the Market Redesign and Technology Upgrade tariff amendment. Each of the units are restricted to run on natural' gas for no more than six hours per day. Johnson & Heinz Diesel Plant. The City owns. the Johnson & Heinz Diesel Plant, located at Station A and consisting of five diesel generator units installed in 1933. Each unit has a net capacity of 3.5 MWs. -One of the units is currently inoperable. The other four units are currently used only for emergency purposes. These units operate very few hours per year with an operational restriction of 199 hours each, per year. 24 OHS West:260621165.8 42797-2 SJO/EJC Renewable Energy Resources In accordance with State law, the City has adopted renewable energy resource goals for the Electric System which provide that a portion of the Electric System's power resources will be supplied by renewable energy. For . further discussion of,environmental legislation and regulations,. see. "DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS -Environmental Legislation and Regulations." As of April 1, 2009, the City did not own any renewable energy resources or have any renewable energy purchase contracts. In September. 2008, the City: purchased .approximately 30,000 acres of land in Tehachapi, California, for $42 million. A portion of such land adjoins two established wind-powered electric generating facilities, one of which is owned and operated by the. Los Angeles Department, of Water .and Power and the other by [confirm: a subsidiary of] Florida Power and Light Company.. The City estimates that such portion of the property is capable of supporting up to 150 MW of wind-powered :electric generation. The City intends to make such portion of .the property available to a public or private entity which would develop such property as a wind farm. The City expects that such sale would include a provision for. the City to purchase up to [30] MW of the output of such wind farm. The City- believes that another portion of the purchased property is capable of supporting up to MW of wind-powered electric generation.. .The City intends to sell such portion- to public or private entities for .development as another wind farm. The City .has an option to purchase. an additional approximately 5,000 acre parcel adjoining the previously purchased property. The City believes that this property is suitable. for development of .solar-powered.. electric generation. The City intends to exercise its purchase option on such property and reconvey such property to a .public or private entity for development as asolar-powered electric. generating facility. While the City does not anticipate using its own funds to develop any of such renewable energy resources on the purchased or optioned property, the City does anticipate that some of such resources -will be developed enabling it to recover some or all of its investment in the property and. providing power from renewable resources for the Electric System's resource portfolio, The City is pursuing a number of other initiatives to satisfy its renewable energy resource goals and any required. renewable portfolio standard, including the purchase of renewable energy from projects to be developed. While no assurances can be given that the development of the Tehachapi property or any of these other initiatives will be successful, the City intends to take the necessary steps to satisfy its renewable energy resource goals and any required renewable portfolio standard. Southeast Region Energy Project The City,_through its Industrial Development Department, is pursuing the necessary .licenses and permits for an approximately 900 MW natural gas fired combined cycle gas turbine known as the Southeast Region Energy Project which would be located on an approximately 13:7 acre site within the City. No Electric System funds have been expended for this project and the City does not intend to finance the facility with funds of the Electric. System. While the City may purchase a portion of the energy produced by the project, the project is designed as a regional facility to serve other utilities as well. The Southeast Region Energy Project is still in the preliminary stages of development and no assurance-can be given that the project will be constructed. Interconnection and Distribution Facilities The Electric System is interconnected with the Edison system at the Laguna Bell substation: The City owns the facilities within the City limits for the interconnection of the Electric System with the Edison system and the distribution of electric power. The distribution facilities include approximately 30 miles of 66kV power lines (of which .approximately 5% are underground), and .approximately 125 miles of 7kV power lines (of which approximately l5% are underground). The Electric System has eight active primary substations,-three of which are dedicated customer substations and five are regular distribuCion substations. The City is implementing amulti-year Electric System Distribution System Master Plan to replace older facilities and to upgrade the distribution system. See "THE ELECTRIC SYSTEM -Capital Requirements." 25 OHS West:260621165.8 42797-2 SJO/EJC The City currently operates and maintains the Electric System facilities located within the City, except that Petrelli Electrialnc. currently maintains the City's electric distribution system under contract with the City. Developments Affecting the Power Supply The City relied on short-term (less than one year) and long-term (one year and longer) power purchase contracts to provide the approximately 33% of energy delivered by the Electric System in the Fiscal Year ended June- 30, 2008, not provided for by Committed Resources. The City anticipates relying on new power purchase contracts to provide for, current load and any .growth in its customer load not met by Committed Resources. A number of actions have recently been taken by government officials and regulators: which have an impact on the amount of power the City must have available to have resource .adequacy and the nature of generation resources which the City must include in its resource-base. Certain elements of -these actions are described below. Resource Adequacy On February 9, 2006, the CAISO filed with .the Federal Energy Regulatory Commission ("FERC") its Market Redesign and Technology Upgrade ("MRTU") tariff-amendment to implement a comprehensive overhaul of the electricity markets administered by the CAISO. The programs under the MRTU initiative are designed to implement market improvements to assure grid reliability, more efficient and cost-effective use of resources; and to create. technology upgrades that would strengthen the entire CAISO computer system. The redesigned California energy market under the MRTU is expected to include the following new features, among others, which are not part of-the current CAISO real-time only market: (a) An integrated forward market for energy, .ancillary- services and congestion management that operates on a day-ahead basis; (b) Congestion management that represents all network transmission constraints; (c) Congestion Revenue Rights to allow market participants to manage their costs of transmission congestion; (d) Local energy prices by price-nodes (approximately 3;000 nodes in total), also known as locational marginal pricing; and (e) New market rules and penalties to prevent gaming and illegal manipulation of the market as well as modifications to certain existing market rules. The MRTU [became operational on April 1, 2009 and the MRTU tariff filed with FERC went into effect.] Power will be scheduled on a nodal basis, rather than the previous zonal system, which is expected to aid in grid reliability and congestion management. Furthermore, the MRTU incorporates the CPUC's resource adequacy requirements to ensure that there are adequate energy resources in critical areas. The MRTU requires that. all scheduling coordinators for all load-serving entities ("LSEs"), which include the City, meet standards concerning forward capacity and energy procurements to meet their load requirements. _ In September 2005,-the Governor signed into law AB-380, which requires the California Public Utilities Commission (the "CPUC") to establish resource adequacy requirements for all LSEs within -the CPUC's jurisdiction. Municipally-owned utilities such as the City's Electric System, were not included in AB-380. In addition, AB-380 requires publicly-owned utilities to procure adequate resources to meet their peak demands and reserves. In October 2005; -the CPUC issued a decision stating that LSEs under its jurisdiction have acquired capacity sufficient to serve their forecast retail customer load plus a 15-17% reserve margin. The MRTU tariff incorporates the CPUC's resource adequacy requirements. The MRTU tariff imposes the CPUC's resource adequacy requirements on LSEs that are not CPUC jurisdictional entities, such as the City. 26 OHS Westi260621165.8 42797-2 SJO/EJC The City is unable at this time to predict the impact of these filings and decisions on the City and the California electric utility industry generally. The City believes it has sufficient power resources to satisfy the system capacity requirements as required by MRTU and AB-380. Resource Mix SB-1368 (Chapter 598,' Statutes of 2006) provides for a restriction on the negotiation of contracts with baseload fossil fuel electric generating resources that exceed the rate of emissions for greenhouse gases for existing combined-cycle natural gas baseload generation -and provides for the California. State Energy Resources and Conservation Development Commission, commonly. known as the California Energy Commission (the "CEC"), to establish. a regulatory framework necessary to enforce the greenhouse gas emission performance standard for publicly-.owned utilities. The CEC adopted regulations. establishing the same standards as were adopted. by the CPUC with respect to California's investor-owned utilities (the "IOUs") under SB-1368. On July 11, 2008,, the Environmental Protection Agency (the "EPA") issued an Advanced Notice of Proposed Rulemaking (the: "ANPR").requesting public comment on whether and how the EPA should regulate emissions of greenhouse gases using its. authority under the Clean Air Act: This proposal is in response to the United States Supreme Court's 2007 decision in Massachusetts v. EPA, which found that the EPA had the authority to regulate carbon dioxide as a pollutant under the Clean Air Act and directed he EPA to determine whether greenhouse' gases may reasonably be anticipated to endanger public health or welfare within the meaning of the Clean Air Act. The ANPR makes no finding as to whether greenhouse gases pose a threat to human health or welfare. Instead, the ANPR lays out numerous suggestions for reducing greenhouse gases from automobiles, ships, trains, power plants, factories-and. refineries. No assurance can be given as to whether any regulation will be issued by the EPA as a result of the ANPR or that any regulations that are issued in connection with greenhouse gases will .not have an adverse effect on the: operations or financial condition of the Electric System. For further discussion of environmental legislation and regulations, :see "DEVELOPMENTS .IN THE CALIFORNIA ENERGY MARKETS -Environmental Legislation and Regulations." Capital Requirements The City expects capital requirements for the Electric System for the five Fiscal Years ended June 30, 2013 to aggregate approximately $68.5 million. The capital requirements consist primarily of upgrades, improvements and extensions of the Electric System's distribution system, switchyards and transmission interconnection facilities. The :City expects to fund these requirements from funds in the Light and Power Fund, .but may issue additional Bonds -under the Indenture to pay a portion of the requirements. The following table lists the expected annual capital requirements for the Electric System for the five Fiscal Years ending- June. 30, 2009 through 2013: Fiscal Year Capital Requirements Ending June 30 (in thousands) • 2009 $20, 824 2010 13,619 2011 10,411 2012 4,792 2013 18,902 Total 68 548 Source: City of Vernon , [Remainder of Page Intentionally Left Blank] 27 OHS West260621165.8 42797-2 SJO/EJC Retail Energy Sales Customers, Retail Energy Sales Revenues and Demand The number of customers, retail kWh sales and revenues derived from retail sales, by classification of service, and peak demand during the five fiscal Years ended June 30, 2004 through 2008, are listed below. The City's customer mix is primarily large and small industrial businesses, with large industrial customers (monthly demand over 500 KW) comprising 68% and small industrial .customers (monthly demand of 500 KW or less) comprising 30% of the total revenues from retail sales, CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND Fiscal Years Ended June 30 2004 2005 2006 2007 2008- Number of Customers: Residential 26 30 29 28 25 Smalllndustrial 1;020 995 1;048. 1,150 1,174 Large Industrial 858 837 810 707 .676 Other 157 182 161 81 84 Total Customers~l~ 2,061. 2.044 2,048 1.966. 1,959. Kilowatt-Hour Sales (in Millions): Residential 0.1 0.1 0.1 0.1 0.1 Small Industrial 280.4 258.2 296.2 331.1 344.4 Large Industrial 898.5 852.5 848:1 842.3 876.1 Other 12.7 12.8 .12.6 11.7 11.4: - Total kWh Retail Sales • 1.191.7 1,123.6 1,157.0 1,185.2 1.232.0 Revenues from Sale of Retail Energy ($000's): Residential $ 7 $ 6 $ 8 $ 8 $ 7 Small Industrial 24,457 22,938 28,267 29,427. 31,322 Large Industrial 64,175 63,124 63,804 66,709 70,356 Other 896 1,344 1;308 1,205 1.198 Total Revenues from Sale of Energy~z~ 89 535 87 412 93 387 97 349 102 883 Peak Retail Demand (MWs). 194.4 195.9 195.1 206.3 206.0 Source: City of Vernon; derived from audited financial statements. cl~ Some businesses have more than one meter. The City considers each meter to be a customer. cz> Excludes 2.85% AB 1890 public benefit surcharge pursuant to Section 385 of the California Public Utilities Code. [Remainder of Page Intentionally Left Blank] . 28 OHS West:260621165.8 42797-2 SJO/EIC .Largest Customers The Electric System's ten largest customers (by electricity usage) for the Fiscal Year ended June 30, 2008 accounted for approximately 34.6% of the Electric System's energy sales for such period, and the Electric System's 15 largest customers accounted for approximately 41.6% of the Electric System's energy sales for such period. No single customer accounted for more than approximately 7.6% of the Electric System's energy sales during such period. The table below sets forth such ten largest customers. (by electricity usage) for the Fiscal Year ended June. 30, 2008. , CITY OF VERNON ELECTRIC SYSTEM TEN LARGEST CUSTOMERS For Fiscal Year Ended June 30, 2008 In Vernon Business Name Since Type of Business Matheson Tri-Gas 2006 Air Separation Plant .Owens I1linois,Inc. 1944 Glass Containers Clougherty Packing Co. (Hormel Foods) 1944 Food Processing Rehrig Pacific Co. 1973 Plastic Products Overkill Farms, Inc.. 1991 .Food Processing Service Packing (United Food Group) 1974. Food Processing PABCO Paper Products Co. 1957 Paper Products Exide Techonologies 1964 Environmental Recycling U.S. Growers Cold Storage, Inc. 1974 Cold Storage PWP Industries 2001 Plastic Products Source: City of Vernon Electric Rates General The Electric System's retail rates are established by the City Council and are not subject to regulation by the California Public Utility Commission or .any other state. agency. See "THE ELECTRIC SYSTEM -Rate. Regulation" herein. The Electric System provides. no free service. The retail rates include a 3% surcharge for payments. in lieu of franchise tax ("Franchise Payments") to the City's General Fund-and the 2.85% public benefits surcharge under AB 1890. - Prior to the addition of the AB _1890 public benefits surcharge to the rates in 1998, the rates had not been adjusted by the City Council since 1984. Since June 30, 2000, the rates have been increased eight times as indicated in the table below. [Remainder of Page Intentionally Left Blank] 29 OHS West:260621165.8 42797-2 SJO/EJC CITY OF VERNON ELECTRIC SYSTEM PERCENTAGE CHANGE IN ELECTRIC RATES Average Percentlncrease Effective Date in Rate December 1,-2008 5.00%. December 1, 2007 5.00 .November 1, 2006 5:00. June 1, 2005 4.70 November 1, 2003 3.00 . May 1, 2001 19.00 October 1, 2000 9.75 July 1, 2000 16.00 Source: City of Vernon Fuel Cost Adjustment Billing Factor ' The Electric. System has experienced volatility in-the -cost of .natural gas since .the disruption of the California energy markets in 2001 and 2002.. In response, in 2006, the City entered into an agreement with the Vernon Natural Gas Financing Authority (the "Authority") for the purchase of.a supply of prepaid natural gas (see "ELECTRIC SYSTEM OBLIGATIONS -Gas Supply Agreement"). In addition, -the City has established the FCABF in connection with the cost of natural gas related to power generation and purchases. The FCABF went into effect on July 1, 2008 and will be added to all retail customer bills based on electrical consumption. The FCABF, as amended in August 2008, will add an amount to each retail bill to recover the excess over $7.50 per MMBtu the City pays for natural gas and the embedded cost of natural gas in power purchased by the.City. Average Price" The table below sets forth the. average billing price -per kilowatt-hour of the Electric System's various customer classes for the periods indicated. CITY OF VERNON ELECTRIC SYSTEM AVERAGE BILLING PRICE (CENTS PER KILOWATT-HOUR) Fiscal Year Ended June 30, 2004 2005 2006 2007 2008 Residential 4.96 5.06 5.58 5.57 5.72 Small Industrial 9.86 8.89 8.46 8.64 9.29 Large Industrial 6.81 7.41 7.74 7.70 8.20 Other 1.1.03 9.44 10.64 10.01 10.73 Weighted Average 7.47 7:78 7.95 7.98 8.53 Source: City of Vernon All electric bills are due and payable on the date of billing and become delinquent 20 days thereafter. If such bills remain unpaid on the 35th day after billing, all electric services are subject to termination until all fees, . charges, penalties and the entire delinquent balance have- been paid. 30' OHS West260621165.8 42797-2 SJO/F,JC Comparison of Selected Monthly Electric Bills The following- tables show a comparison of selected monthly electric bills for commercial and industrial customers by utilities operating in the Southern California region. The information concerning utilities,. other than the City's Electric System, was derived from schedules .publicly available which may not reflect current billing rates. The information concerning the Electric System was prepared by the City. The monthly electric bills shown in the following tables are for comparison purposes only and may not be reflective of what the electric rates for any category of customers or the average monthly electric bills of the respective utility (other than the City) are or will be at any date subsequent to the date indicated. Since: June, 2008, the City .has implemented the FCABF. See. "Electric Rates -Fuel Cost Adjustment Billing Factor." As described above; the City's Electric System Revenues come primarily from it's small industrial customers (approximately 30% for the Fiscal. Year ended June 30, 2008) and large industrial customers (approximately 68% for .the Fiscal Year ended June 30, 2008).. For another comparison of average charges to customers, see page 12 of Management's Discussion and Analysis in the Annual Financial Report for the Fiscal Year ended June 30, 2008, attached hereto in Appendix A. COMPARISON OF SELECTED MONTHLY ELECTRIC BILLS Medium Commercial (June 2008) 250,000 kWh/350 kW 50,000 kWh/150 kW LADWPt'~ $ 20,889 $ 5,596 Edison 33,024 8,590 Riverside 67,528 7,T15 Anaheim . 20,832 5,253 Pasadena 29,430 6,785 Burbank 30,606 6;937 .Glendale 30,196 7,509 Vernon 19,205 5,722 Source: City of Vernon ~i~ Excludes utility user's taxes. Large Commercial /Industrial (June 2008) 7,000,000 kWh/10,000 kW 2,000,000 kWh/5,000 kW LADWP~~~ $ 567,759 $ 197;475 Edison 644,808 316,930 Riverside - - 556,960 Anaheim - - 199,376 Pasadena 794,396 248,016 Burbank - - 261,324 .Glendale 822,688 261,227 Vernon 509,199. 17.1,891 Source: City of Vernon cl> Excludes utility user's taxes. ,[Remainder of Page Intentionally Left Blank] 31 OHS West:260621165.8 .42797-2 SJO/F.JC Uncollectible Accounts The City considers its write. offs: for uncollectible accounts to be low by electric utility industry standards for urban areas,- The write offs for uncollectible accounts have been less than 0.1% over the last fiveFiscal Years. CITY OF VERNON ELECTRIC SYSTEM UNCOLLECTIBLE ACCOUNTS Fiscal Year Uncollectible Percent of Ended June 30 Revenues Gross Billings 2004 $48,435 ~ 0.054% 2005 46,499 0.053 2006 55,971 _ 0.057 2007 70,774 0.068 2008 79,246 0.073 Source: City of Vernon Summary of Operating Results- A summary of historical revenue, expenses, and debt service coverage forthe City's Electric System for the five Fiscal Years ended June 30,..2004 through 2008 is shown in the following table. This summary was prepared by the City from information derived from its audited annual financial statements for the four Fiscal Years. ended June 30, 2004 through 2008, .The summary below presents the calculation of Net Revenues and Debt Service coverage based upon the flow of funds required under. the Indenture. and not in accordance with the generally accepted accounting principles, used in the preparation of the City's financial staterrtents. In accordance with .the Indenture, depreciation and amortization and other non-cash items and Franchise Payments are not included in Operation and Maintenance- Expenses while amounts payable under the Supply Agreement are included in Operation and Maintenance Expenses. [Remainder of Page Intentionally Left Biank] 32 OHS West:260621165.8 42797-2 SJOBJC CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES and DEBT SERVICE COVERAGE - UNDER INDENTURE~'~ c2~ Fiscal Year Ended June 30, 2004 2005 2006 2007 2008 Operating Revenues: Electric Sales -Retail $ 89,534;509 $ 87,411,719 $ 93,386,559 $ 97,349,384 $102,833,428 Electric Sales -Wholesale 3,686,005. 9,212,800 24,370,170 26,679,488 .32,694,939 Transmission revenue requirement 9,855,236 9,918,860 10,637,068 10,485,050 8,333,814 Other 3,976,750 3,941,516 4,171,221 3,543,849 3,350,465 Total Operating Revenues $107,052,500 $110,484,895 $132,565,018 $138,057,771 $147,262,646 Operation and Maintenance Expenses: .Fuel Costs c3~ $ $ $ 36,501,174 $ 12,977,927 $.10,218,036 Supply Agreement 199,083 33,859,098 43,556,858 Energy Cost~4~ 65,102,748 63;195;37$ 52,902,570 43,377,814 57,095,467 Other Operating Expenses cs) 23,644,811 25,396,689 38,148,025 31;428,341 38,456,200 Total Operating Expenses $ 88,747,559 $ 88,592,067 $127,750,852 $121,643,180 $149,326,561 Operating Income (Loss) $ 18,304,941 $ 21,892,828 $ 4,814,166 $ 16,414,591 $ (2,063,915) Nonoperating Revenues (Expenses): Investment Income c6> $ 2,837,609 $ 5,221,357 $ 4,128,341 $ 6,359,925 $ 4,152,465 Non-Recurring Income (Loss) 7,148,889 (3,666,201) (5,257,580) 631,983 53,383,951 Deposit to Stabilization Fund csl 20,000,000 Total Nonoperating Revenue $ 9,986,498 $ 1,555,156. $ 18,870,761 $ 6,991,908 $.,57,536,416 Net Revenues Available for Debt Service $ 28,291,439 $ 23,447,984 $ 23,684,927 $ 23,406,499. $ 55,472;501 Electric Revenue Bond Debt Service ~9~ $ 4,695,631 $ 9,544,616 $ 15,308,466 $ 15,037,639 $ 14,289,738 Debt Service Coverage Ratio 6.025x 2.457x 1.547x 1.557x 3.882x Remaining Cash After Debt Service $ 23,595,808 $ 13,903;367 $ 8,376,461 $ 8,368,860 $ 41,182,763 Source: City of Vernon. Totals may not add due to rounding. c21 Excludes depreciation and amortization, and other non-cash items, and Franchise Payments. cs) Does not include costs associated with natural gas purchased under the Supply Agreement. c4> Represents energy, capacity, and ancillary service costs (including the PPTA and Hoover Contract for Differences in the Fiscal Year ended June 30, 2008). Excludes $11,250,000 paid from the"proceeds of the sale of the MGS in the Fiscal Year ended June 30, 2008. csl Includes all expenses of operating and maintaining the Electric System other than energy costs. c61 Does not include unrealized gain (loss) on investments or increase (decrease) in fair market value of investments. In the Fiscal Years ended June 30, 2004, June 30, 2005 and June 30, 2006, such amount represents funds received from settlements of disputes with respect to power purchases and sales agreements. For the Fiscal Year ended June 30, 2007, represents primarily net payments received by the City in connection with suspension of interest rate swaps.. For the Fiscal Year ended June 30, 2008, represents the net proceeds from sale of certain generation and transmission assets after repayment of the City's Electric System Revenue Bonds, 2004 Series A, 2004 Series B, 2004 Series C and 2004 Taxable .Series D (the "2004 Bonds"), $39,250,000 reserved for PPTA capacity payments through 201 T, and transaction costs. 33 OHS West:260621165,8 42797-2 SJO/EJC tai Represents a deposit of Genexal Fund moneys to the Expense' Stabilization -Fund primarily to provide for significantly increased fuel. costs due to Hurricane Katrina and other factors. -The City has implemented the FCABF to provide for a timely pass-through to customers ofincreased costs due to fuel. See "ELECTRIC RATES." ~9~. For the Fiscal Year ended June 30, 2008, does not include principal paid on the 2004 Bonds which was paid -with proceeds from the generation and transmission asset sale. • Management's Discussion of Operating Results The City utilizes its Committed Resources along. with other long-term and short-term contracts to meet its overall load requirements-for customers. To the extent the Electric System has excess power, such power is sold into the wholesale market. Factors affecting the amount of wholesale sales include the amount of excess energy and the price at which its sold. During the Fiscal Year ending June 30, 2008, the operating loss was primarily due to increased natural gas and energy prices in the market and increased interest.rates associated with certain variable rate debt obligations caused by economic uncertainty associated with municipal bond insurers and the general economic downturn. Operating Revenues for the Fiscal Year ended June 30, 2008 as compared with the Fiscal Year ended June 30, -2007 Retail Energy Sales: Retail revenues increased $5.5 million over the Fiscal Year ended June 30, 2007, due primarily to the City's 5% rate increase in December 2007. Wholesale Energy Sales: Wholesale sales increased $6:0 million over the Fiscal Year ended June 30, 2007 due primarily to increased market power prices. Operating Expenses for the Fiscal Year ended June 30, 2008 as compared with the Fiscal Year ended June 30, 2007 Supply Agreement: Increase in cost of $9.7 million over the Fiscal Year ended June 30, 2007 primarily as a result of increased interest rates due to the auction rate and variable rate demand market deterioration and the conversion of the 2006 A Authority Bonds to an interest rate period ending August 2 2009. Energy Costs: Increase of -$13.7 million over the Fiscal Year ended June 30, 2007 due primarily to increased market power costs during the second half of the Fiscal Year ended June 30, 2008. Non-Operating Revenues (Expenses) for the Fiscal Year ended June 30, 2008 as compared with the Fiscal Year. ended June 30, 2007 Investment Income: Reduction in investment income of $2.2 million due primarily to lower interest rates and reallocation of portfolio to short-term liquid investments. Non-Recurring Income (Loss): Represents primarily proceeds received from the sale of the City's generation and transmission assets .net of the repayment amount of the 2004 Bonds, amounts set-aside for certain PPTA capacity payments through 2011, and transaction costs associated with the sale of the generation .and- transmission assets. Operating Revenues for the Fiscal- Year ended June 30, 2007 as compared with the Fiscal -Year ended June- 30, 2006 Retail Energy Sales: Retail "revenues increased- approximately $4 million over the Fiscal Year ended June 30, 2006, due primarily to the City's 5% rate increase in November 2006. Operating Expenses for the Fiscal Year ended June 30, 2007 as compared with the Fiscal Year ended June 30, 2006 Fuel Costs. Decrease in fuel costs of $33.5 million due primarily to the commencement of gas supply delivery under the Supply Agreement which replaced 75% of the City's market gas purchases. 34 OHS West260621165.8 42797-2 SJOBJC Energy Costs.: Decrease of $9.5 million over the riscal Year ended June 30, 2006 due primarily to reduced- market power costs post Hurricane Katrina. Non-Operating Revenues (Expenses) for the Fiscal- Year ended June 30, 2007 as .compared with the Fiscal Year ended June 30, 2006 Investment Income: Increase in investment income of $2.2 million due primarily to higher interest rates. Nonrecurring Income: Represents: termination of interest rate .swap resulting in an approximately $1 million payment to_ the City and $0.4 million of expense relating to the settlement of a contract dispute. Operating Revenues for the Fiscal Year ended June 30, 2006 as compared with the Fiscal Year ended June 30, 2005 Retail Energy Sales. -Retail revenues- increased approximately $6 million over the Fiscal Year ended June 30, 2005, due primarily to the,City's 4.7% rate increase in June 2005 and load increase. Wholesale Energy Sales: Wholesale sales increased $15 million over the Fiscal Year ended June 30, 2005 due primarily to sale of energy under long-term energy contracts entered into prior to commercial operation of MGS in October 2005. Operating Expenses for the Fiscal Year ended June 30, 2006 as compared with the Fiscal Year ended June 30, 2005 FueLCosts. Increase in fuel costs of $36.5 million over the Fiscal Year ended June 30, 2005 due primarily to commercial operation of MGS in October 2005. Energy Costs: Decrease of approximately $10 million over the Fiscal. Year ended June 30, 2005 due primarily to commercial operation of MGS in October 2005. Other Operating Expenses: Increase of approximately $12,9 million over•the Fiscal Year ended June 30, 2005 due primarily to commercial operation of MGS in October 2005. 1 Projected Operating Results and Debt Service Coverage. Set forth below are the City's projections of the revenue, expenses and debt service coverage of its Electric System (determined in accordance with the Indenture) for the Fiscal Years ending June 30, 2009 through June 30, 2014. The projected operating results are based on the City's load forecasts, its estimated costs of power and other operating. and non-operating expenses. The City has forecasted such other operating and non-operating expenses taking into consideration the Electric System's historical costs and trends, projected, load growth and inflation. The summary below presents the calculation of net revenues and debt service coverage based upon the flow of funds required under the Indenture and not in accordance with the generally accepted accounting principles. In accordance with the Indenture, depreciation and amortization, other non-cash items, and Franchise Payments, are not included in Operation and Maintenance Expenses while amounts payable under the Supply Agreement are included in Operation and Maintenance Expenses. The projections below also assume that all of the Authority Bonds are refinanced with the-2009 Bonds. To the extent that not enough 2009 Bonds are sold to refinance all of the Authority Bonds, a portion of the Authority Bonds would continue to be treated as an operating expense under the Supply Agreement and the amount of debt service on the2009 Bonds would be reduced... Certain assumptions have been made by .the City in the development of the forecasts. Among the assumptions made by the City are the following: L Economic activity by businesses within the City will continue, and the demand for electricity will continue, consistent with historic levels. 2. The City's electric load is projected to increase by 40 MWs in the Fiscal Year ending June 30, 2010, due to commencement of operations in that Fiscal Year by a large electricity user, 50 MWs in the Fiscal Year 35 OHS West:260621165.8 42797-2 SJO/EJC ending June 30, 2012, due to commencement of operations in that Fiscal Year by data centers on land purchased by " developer for such specific purpose, and 1.5% thereafter. Until such facilities are online with an established power usage, the City expects to supply the load of such facilities through short-term power purchase contracts. 3. Fuel Cost Adjustment includes fuel costs and embedded energy- costs of the City in excess of $7.50, including certain costs associated with the Supply Agreement. 4. Electric service rates are projected to increase 5.0% in the Fiscal Year ending June 30, 2010 and Fiscal Year ending June 30, 2011 and 3% each Fiscal Year thereafter. 5. Other revenue; is projected to increase 3.0% per year beginning in the Fiscal Year ending June 30, 2009. 6. The Supply Agreement payments are based-upon the assumption .that all Authority Bonds are refinanced by the 2009 Bonds. Remaining amounts represent projected payments/receipts. under the Citibank Swap Transactions and the commodity swap with Societe Generale. To the extent that the.amount of 2009 Bonds issued is insufficient to refinance all of the Authority Bonds, the Authority Bonds not .refinanced by the 2009 Bonds would continue to be treated as a expense under the Supply Agreement and the amount of debt service of the 2009 Bonds would be lower. 7. City allocated administrative costs are projected to increase 3.0% per year beginning in the Fiscal Year ending June 30, 2010. 8. Operating Expenses exclude $28,000,000 of the $39,250,000 set aside for certain PPTA capacity payments during the Fiscal Years ending June 30, 2009 through 2011 which are to be paid from proceeds of the MGS sale. 9. Fuel Costs are net of sales of gas delivered under the Supply Agreement. 10. Fuel cost forecast based upon NYMEX forward pricing for SoCal Border as of April 1, 2009. Energy Costs based upon fuel'cost adjusted for market heat rate.- 11. Investment Income assumed at 2.00% in the Fiscal Year ending June 30, 2009, 2.50% in the Fiscal Year ending June 30, 2010, .3.50%. in the Fiscal Year ending June 30, 2011 and 4.00% in the Fiscal Year ending June 30, 2012 and each Fiscal Year thereafter. While the City believes its assumptions are reasonable, there can be no assurance that the assumed conditions will in fact occur. The City's. projections may be affected (favorably or unfavorably) by unforeseen future events which could cause actual results to differ materially from those presented below.. Therefore, the results projected. below cannot be assured. [Remainder of Page Intentionally Left Blank]. 36 . OHS West:260621165.8 42797-2 SJO/EJC CITY OF VERNON ELECTRIC 5Y5TEM PROJECTED REVENUE,.EXPENSES and DEBT SERVICE COVERAGE UNDER INDENTURE cl~ Fiscal Year Ending June 30, 2009 2010 2011 2012 2013 2014 Operating Revenues: Energy Sales -Retail $109,502,387 $147,635,252 $162,704,825 $206,005,549 $226,533,159 $236,829,091 Energy Sales -Wholesale cz~ 28,222,159 8,737,879 12,010,783 15,975,,623 17,695,131 18,293,016 Fuel Cost Adjustment~31 4,014,868 488,151 1,b45,755 1,554,858 576,977 844,559 Transmission Revenue Requirement c4) 918,000 918,000 918,000 918,000 918,000 918,000 Other 3,611,20.1 4,608,755 5,082,847 .6,326,293 423,146 435,840 Total Operating Revenues $146,268,615. $162,388,038 $182,362,209 $230,780,321 $246,146,412 $257,320,507 Operation. and Maintenance Expenses: Fuel costs $ 6,228,839 $ 8,762,330 $ 10,117,358 $ 10,976,680 $ 11,789,526 $ 11,404,704 Supply Agreementt5~ 46,722,175 3,366,379 4,935,190 4,903,417 (840,908) (661,714) Energy Costs~b~ 56,225,680 51,145,400 67,586,755 102,652,457. .114,552,394 119,393,829 Other Operating Expenses 26,895,886 27,702,763 28,533,845- 29,389,861 30,271,557 .31,179,703 Total Operating Expenses $136 072 580 $90 976 872 $111 173 148 $147 922 415 $155 772 568. $161316 522 > > > Operating Income $ 10,196,036 $ 71,411,166. $ .71,189,061 $ 82,857,906 $ 90,373,844 $ 96,003,984 Nonoperating Revenues: Investment income $ 3,558,199 $ 5,967,377. $ 8,602,679 $ 10,337,611 $ 10,135,735 $ 11,921,277 Net Revenues Available for Debt Service $ 13,754,235 $ 77,378,543 $ ,79,791,740 $93,195,517 $100,509,580 $107,925,262 Morgan Stanley-Swap Transaction $ 4,526,250 $ 4,280,434 $ 4,202,143 $ 4,123,853 $ 0 $ 0 payments 2008 Bonds Debt Service 1,002,484 3,720,560 3,975,755 3,975,405 3,973,575 3,975,080 2009 Bonds Debt Service 0 20,408,848 46,840,400 46,815,900 46,791,300 46,769,700 Total Bond Debt Service ~ $ 5,528,734 $ 28,409,843 $ 55,018,298 $ 54,915,158 $ 50,764,875 $ 50,744,780 Debt Service Coverage Ratio ~8~ 2.488x 2.724x 1.450x 1.697x 1.980x 2.127x Net Revenues Remaining After Debt $ 8,225,501 $ 48,968,700 $ 24,773,442 $ 38,280,360 $ 49,744,705 $ 57,180,482 Service Source: City. of Vernon ~l> Totals may not add due to rounding. cz) Represents sales of surplus power from all resources into spot market. cs~ See "ELECTRIC RATES". c4) Receipts for use of transmission assets through Edison and LADWP contracts. cs) See assumption number 6, above. c6~ Represents energy, capacity, and ancillary service costs and payments under the PPTA and Hoover Contract for Differences. Does not include fuel costs associated with PPTA. Includes all expenses of operating and maintaining the Electric System other than energy costs. c8> Net-Revenues divided by Total Bond Debt Service. Assumes no Bonds other. than the 2008 Bonds and the 2009 Bonds are outstanding during the projection period. 37 OHS West:260621165.8 42797-2 SJO/EJC Employee Relations As of June 30, -2008, 43 full-time equivalent .City employees .were assigned to the Electric System.. Additionally,.other City personnel provide support services to the Electric System as required, including the City's Finance Department and the -City Attorney. All of the City's employees, including those assigned to the Electric System,. are non-union. There have been no strikes or other work stoppages against the City within the last twenty years. Retirement benefits to City employees, including those- assigned to the Electric System; are provided through the City's participation in the California Public Employees Retirement System ("Ca1PERS"), an agent multiple-employer retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. The State-requiredCity employee salary contributions of 8% 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 Ca1PERS Board of Administration. The City's total. contribution to Ca1PERS for the year ended June 30, 2008 was $6,007,916. City contribution rates as a percentage of covered payroll were 7.086% for miscellaneous, plan members and 17.958% for safety plan members. The City's contribution was made in accordance with actuarially determined requirements. The most recent actuarial valuation performed as .of June 30, -2006, .indicated the City had no unfunded pension benefit obligation. The: City has contributed its annual pension cost payments with .respect to .all employees as required. by CALPERS and -estimates that it will not have any unfunded pension liability as of the. next actuarial valuation. See Note 9, "PENSION PLAN" in the Basic Financial Statements, City of Vernon, for the Fiscal Year ended June 30, 2008 included in Appendix A. The City Council approved apost-employment benefit plan for all employees with 20 years of service. who retire at 60 or after 30 years or more of service to the City. The plan pays-for qualifiedemployees' medical and dental insurance premiums and claims from age 60 to 65. Funding of the plan is' on apay-as=you-go basis. During the Fiscal .Year ended June 30, 2008, approximately 344 employees (302 current employees and 42 retired employees) were eligible to receive benefits. Amounts paid for premiums for the Fiscal Year ended June 30, 2008 totaled $176,395. See Note 12, "POSTEMPLOYMENT BENEFITS'.' in the Basic Financial Statements, City of . Vernon, for the Fiscal Year ended June 30, 2008 included in Appendix A. Insurance 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. The policy limits for perils other than earthquake and flood are $150 million per occurrence with deductibles of up to $100,000 per occurrence. The earthquake and flood portion of the policies have limits of $SO million per occurrence with a 5% deductible. Due to increasing premiums and limitations on available coverage, the City expects to reduce and possibly .eliminate, earthquake and flood insurance. coverage. The City has also obtained various. insurance policies that provide general liability, automobile liability and employment benefits liability coverage with policy limits of $20 million per occurrence and in the annual aggregate, with a deductible of $2 million. The City has a workmen's compensation insurance policy with a $50 million limit and a $1 million deductible amount.'. Deductibles and amounts in excess of policy 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 Fiscal Years ended 2005, 2006, 2007 and 2008. See Note 8 "RISK MANAGEMENT" in the Basic Financial Statements, City of Vernon, for the Fiscal Year ended June 30, 2008 included in Appendix A. Investment Policy and Controls The City's Investment Policy sets forth the investment guidelines for all funds of the. City, including amounts in the Light and Power Fund. In accordance with California law, the City has adopted an Investment Policy for the investment of City funds which are not currently needed for disbursement. The City Council annually 38 OHS West:260621165.8 42797-2 SJO/EJC appoints the City Treasurer as the officer responsible for making investments of-City funds and approves the City's Investment Policy. The Treasurer is authorized to delegate this authority as deemed appropriate. The Investment Policy requires that the investments be made with the prudent person standard, that is, acting with care, skill prudence, and diligence under the circumstances then prevailing, including but not limited to, the general economic conditions and the anticipated needs of -the City. For :more information on the City's Investment Policy and the allocation of invested City funds as of June 30, 2008, see Note 2 to Basic Financial Statements as of June 30, 2008 attached hereto as Appendix A. As of March 1, 2009, the City's Light and Power Department. (which includes-the City's Gas Department). had invested its funds in the investments below. CITY OF VERNON INVESTMENTS OF LIGIIT AND POWER FUND As of March 1, 2009 Investment Type 'Amount Federal Home Loan Discount Notes $ 10,600,000 Federal Home Loan Bank 5,034,375 Federal Home Loan Mortgage Corporation 5,009,375 Investment Contracts 13,676,789 .Local Agency Investment Fund 531,597 Money Market Mutual Fund 97,101,037 Cash and Cash Deposits 29,736,346 $161,689,519 Rate Regulation The City sets rates., fees and charges for electric service provided at retail within ..its boundaries. The authority of the City to impose and collect rates and charges for retail electric service is not subject to the general regulatory jurisdiction of the CPUC: Currently neither the CPUC nor any other regulatory authority of the State of California nor the FERC reviews such rates and charges. The CEC is authorized to evaluate rate policies for electric energy as related to the goals of -the Energy Resources Conservation and Development Act and to make recommendations to the Governor, the Legislature and publicly owned electric utilities. Seismic Activity The City is located in a region.of seismic activity. The principal earthquake fault in the Los Angeles area is the San Andreas Fault, which extends an estimated 700 miles from north of the San Francisco area to the Salton Sea.. The San Andreas Fault is about 35 miles north of the Los Angeles Civic. Center and approximately 39 miles north of the City. In; April 2008, the Uniform California Earthquake Rupture Forecast (the "Forecast") was issued by the Working Group, on California Earthquake Probabilities (the "Working Group").. Organizations sponsoring the Working Group include the U.S. Geological Survey, the California Geological Survey and the Southern California Earthquake Center. According to-the Forecast, the probability of a magnitude 6.7 or larger earthquake over the next 30 years striking the greater Los Angeles area is 67%. For the entire California region, the fault with the. highest probability of generating at least one magnitude 6.7 quake or larger is the San Andreas Fault (59% in the next 30 :years). Earthquake probabilities .for many parts of the State are similar to those in~previous studies, but the new probabilities calculated for the Elsinore and San Jacinto Faults in southern California are about half those previously determined.. Such quakes occur about once every 5,00 years on average. There are hundreds of other faults throughout Southern California that could also cause damaging earthquakes. It is impossible to accurately predict the cost or effect of a major earthquake on the Electric System or to predict the effect of such an earthquake on the Electric System's ability. to provide continued uninterrupted service to its customers. For a discussion of the City's current earthquake insurance, see "Insurance." 39 .OHS West:260621165.8 42797-2 SJO/EJC DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS Background; California Electric Market Deregulation Financial Difficulties of the,70Us and. Certain Other Market Participants.- In 1996, California partially deregulated its electric energy market. An independent system operator of the transmission, system, the CAISO, was established, as well as an independent power exchange, the California Power Exchange {the "PX"). The PX was originally established to permit power generators to sell power on a competitive spot-.market basis; however, the PX has ceased all power exchange operations and filed for bankruptcy protection. As a consequence of partial deregulation, the California .IOUs sold a large portion of their. generation resources. As a result, three major IOUs in California, Pacific.Gas & Electric Company ("PG&E"); San Diego Gas & Electric Co. ("SDG&E") and Edison, were net buyers of electricity. Following the partial deregulation of the California energy markets; the IOUs were purchasing electricity at fluctuating short-term and. spot wholesale prices while. the retail prices that they-could charge their residential and small business. customers were capped at specified levels. During portions of 2000 and 2001, the market price of electricity in California significantly exceeded such capped. retail prices, resulting in the deterioration of the creditworthiness of PG&E and Edison, and .PG&E eventually declared .bankruptcy. Certain other marketers, power suppliers and. power plant developers experienced downgrades of their credit ratings. PG&B emerged from bankruptcy on April 12, 2004. The credit ratings of PG&E and Edison have improved since the dislocations of the California.energy markets in 2000 and 2001, State and Federal Investigations- and Lawsuits. State of California and federal 'authorities conducted investigations and other proceedings concerning various aspects of the California energy .markets. These include, for example, investigations by FERC into alleged overcharging for the sale of electricity (including .sales by. .municipal utilities) and alleged manipulation of the electricity market. In addition, certain actions for refunds were initiated against. the City and others at FERC and in State courts... All City.-involvement in these investigations and lawsuits has been terminated. See Note 13 "Contingencies" to the Basic Financial Statements, City of Vernon, .for the Fiscal Year ended June 30, 2008 included in Appendix A. Shortages and Volatility.- During 2000 and 2001, California experienced extreme fluctuations in the prices and supplies of natural gas and electricity in-much of the State. Licenses for new power plants have been issued by the CEC, construction on several power plants has been completed and construction of additional power plants is underway. Progress on new transmission line projects within California has been slow. There also has been great volatility in the cost of natural gas, which is the. fuel source for .many of California's electric generating units. State agencies have issued warnings. that further power shortages are possible for Southern California. As a result of the foregoing and other .factors, no assurance -can be given that measures undertaken during the last several years, together with measures to be taken in the future, will. prevent the recurrence of shortages, price volatility or other energy problems. that have adversely affected the City and other California electric utilities in the past. Environmental Legislation and Regulations. In addition to recent legislation affecting the Electric System, a number of bills affecting the electric utility industry have been introduced or enacted by the California Legislature. In general, these bills provide for reduced greenhouse gas emission standards and greater investment in energy-efficient and environmentally friendly ; generation alternatives through more stringent renewables resource portfolio standards and Executive Orders signed by the Governor. The following is a brief summary of certain of these bills. Greenhouse Gas Emissions. In its 2003 Integrated Energy Policy Report, the CEC recommended that utilities account for the cost of ,greenhouse gas emission reductions in utility procurement decisions. In December 2004, the CPUC also established an $8-$25/ton C02 fossil fuel adder for the IOUs to reflect the amount of carbon dioxide that would be emitted by a fossil fuel electric generating unit. The adder represents an estimate of future costs associated with the purchase of carbon dioxide offsets and financial risk associated with potential future, regulation of greenhouse emissions. 40 OHS West:260621165.8 42797-2 SJO/EJC .Executive Order S-3-05 places an emphasis on efforts to reduce greenhouse gas emissions by establishing statewide greenhouse gas reduction targets. The targets are: (i) a reduction to 2000 emissions levels by 2010; (ii) a, reduction to' 1990 levels by 2020; and (iii) a reduction to 80% below 1990 levels by 2050. Executive Order 5-3-OS also called for the California Environmental Protection Agency to lead amulti-agency effort to examine the impacts of climate change on California and develop strategies and mitigation plans to achieve the targets. Executive Order S-06-06 directs the State to meet a 20% biomass utilization target within the renewable generation targets of 2010 and 2020 for the contribution to greenhouse gas emission reduction.. SB-1686 (Chapter 469, Statutes of 2006) authorizes the Wildlife Conservation Board (the,"WCB") to take into .account the potential of forestlands to beneficially reduce or sequester greenhouse gas emissions when it prioritizes. funds available for proposed, acquisitions. SB-1686 also specifies that the WCB may use policies, protocols and other relevant information developed by the California Climate Action Registry in determining a project's potential to reduce .or. sequester greenhouse gas emissions. AB-1925 (C.hapter 471, Statutes of 2006) requires the CEC to develop a cost effective strategy for the geologic sequestration and management. of industrial carbon dioxide. AB-32, the Global Warming Solutions Act of 2006 (Chapter488, Statutes of 2006) (the "GWSA") prescribes a statewide cap on global warming pollution with a goal of reaching 1990. greenhouse gas emission levels by 2020 and 80% below 19901evels by 2050. In addition, the GWSA establishes a mandatory reporting program to the Air Resources Board ("ARB") for significant greenhouse gas emissions and requires. the ARB to adopt regulations for. significant greenhouse gas emission sources (allowing: ARB to design a cap and trade program) and gives ARB the authority to enforce such regulations beginning in 2012. The ARB has published a proposed plan under the GWSA; providing for a RPS for electric utilities of 33% by 2020. On March 10; 2009, the U.S. Environmental .Protection Agency {"EPA") released for publication a proposed.rule that would require monitoring and annual reporting of greenhouse gas emissions in the United States: by thousands of facilities in dozens of major industry categories. Monitoring of greenhouse gas emissions would commence January 1, 2010, and would be reported in 2011: The proposed greenhouse gas emission reporting rule would apply to specific industry "source categories;" including large electric generation units, electronics manufacturing facilities, ethanol production facilities, wastewater treatment plants, photovoltaic manufacturing, facilities; landfills. and many other. sources. In general, the proposed rule targets fossil fuel. combustion sources emitting more than-certain amounts of .greenhouse gas emissions and any. facility that uses or releases into the atmosphere other greenhouse gas emissions, such as methane or refrigerants. The monitoring and reporting requirements apply to "fugitive" emissions,, as well as to emissions from stacks and other identified emission points. Energy Procurement and Efficiency Reporting. Senate Bill 1037, signed by the Governor on September 29, 2005, requires that each municipal electric utility, including the City, prior to procuring new energy generation resources, .first acquire all available energy efficiency, demand reduction, and renewable resources that are cost effective, reliable and feasible. Senate Bill 1037 also requires each municipal electric utility to report annually to its customers and to the CEC its investment in energy efficiency and demand reduction programs. Further, California Assembly Bill-2021 ("AB 2021"); signed by the Governor on September 29,.2006, requires that the publicly-owned utilities establish, report, and explain the basis of the annual energy efficiency and demand reduction targets by June 1, 2007 and every three years thereafter for aten-year horizon. Future reporting requirements under. AB 2021 include: (i) the identification of sources of funding for the investment in energy efficiency and demand reduction .programs; (ii) the methodologies and input assumptions used to determine cost-effectiveness; and (iii) the results of an independent evaluation to measure and verify energy efficiency savings and demand reduction program .impacts.... The information obtained from the local publicly-owned utilities is being used by the CEC to present the progress made by the publicly-owned. utilities on the State's goal of reducing electrical consumption by 10% in ten years and amelioration with the greenhouse gas targets presented in Executive Order S-3-OS enacted by the Governor on June. 1, 2005: In addition, the CEC will. provide recommendations for improvement to assist each local publicly-owned utility in achieving cost-effective, reliable, and feasible savings in conjunction with the established targets for reduction. Renewable Portfolio Standards. In September 2002; the California Legislature enacted and the Governor signed into law Senate Bill 1078. Senate Bill 1078 requires that the IOUs adopt a Renewable Portfolio Standard ("RPS") to meet a minimum of 1% of retail energy sales needs each year from renewable resources and to meet a 41 OHS West:260621165.8 42797-2 SJO/EJC goal of 20% of their retail energy needs from renewable energy resources by the year 2017: Senate Bill 1078 also ` directed the State's municipal electric utilities to implement and enforce an RPS that recognizes the intent of the Legislature to encourage development of renewable resources, taking into consideration the impact on a utility's standard on rates, reliability, financial resources, and the goal of environmental improvement. On September 26, 2006, the Governor signed Senate Bill 107 into law, which requires IOUs to have 20% of their electricity come from renewable sources by 2010 and prescribes that municipal utilities -.meet the intent of the legislation.. Legislative and regulatory proposals, including Senate-Bill 14 and Assembly Bill 64, could increase this mandate to 33% or higher for all utilities. On November 17, 2008 Governor Arnold Schwarzenegger signed Executive Order 5-14-08 (the "Executive Order"). Among :other things, the Executive Order provides that the Renewable Portfolio Standard target established for California shall require retail electricity sellers to serve 33°~0 of their loads with eligible renewable. energy resources by 2020. Since the implementation of Senate Bill 1078, the CPUC and the CEC have taken a number of actions that have had an impact on the renewable energy goals set by the legislation. In order to overcome the challenges associated with meeting .accelerated RPS goals, the CPUC and the CEC supported the implementation of a renewable energy certificate ("REC") trading system to meet the accelerated RPS goals. SB 107 allows this flexibility, with the condition that the energy is delivered to an in-state trading. hub. In parallel, pursuant to Senate Bill 1078, the CEC, .collaboratively. with the. Western Governors Association and the ..Western Electricity Coordinating Council, has established the Western Renewable Energy Gerieration Information System ("WREGIS"), which is expected to ensure the integrity of RECs and prevent the double counting of the certificates. The electronic tracking system became. operational in 2007. On October 29, 2008, a CPUC Administrative Law Judge in Rulemaking 06-02-012 issued a proposed decision, which if approved by the CPUC, would authorize the use of WREGIS in tracking, and approve. the purchase and sale of, tradable renewable energy credits for the investor-owned utilities. The City has been monitoring the development of the WREGIS and remain involved in stakeholder activities in order. obtain the necessary information to evaluate. the necessary requirements and costs, once finalized, for in-state and out of state renewable product purchases and compliance benefits for participating in the electronic tracking system. For a discussion of the City's specific actions related to renewable energy resources, see "THE ELECTRIC SYSTEM -Power Supply Resources -Renewable Energy Resources." Solar Power. On August 21, 2006,- the Governor signed into law California Senate Bill 1 ("SB 1") (also known as the "Million Solar Roofs Initiative"). This legislation would .require municipal utilities to establish a program supporting -the stated goal of .the legislation to install 3,000 MW of -photovoltaic energy in California. Municipal utilities are also required to establish eligibility criteria in collaboration with the CEC for the funding of solar energy systems receiving ratepayer funded incentives. The legislation gives a municipal utility the choice of selecting an incentive based on the installed capacity, starting at $2.80 per watt, or based on the energy produced by the solar energy system, measured in kilowatt-hours. Incentives would be required to decrease at a minimum average rate of 7% per year. Municipal utilities also have to meet certain reporting requirements .regarding the installed capacity, number of installed systems, number of applicants,. amount of awarded incentives and the contribution toward-the program's goals. -Total statewide expenditures for municipal utilities are expected to be approximately $522 million.. Impact of Developments on the City The effect of these developments in the California energy markets. on the Electric System cannot be fully ascertained at this time. Also, volatility in energy prices in California may return due to a variety of factors which affect both the supply and demand for electric energy in -the western United States. These factors include, but are not limited to, the- adequacy of generation resources to meet peak demands, the availability and cost of renewable energy, the impact of greenhouse gas .emission legislation and regulations, fuel costs and availability, weather effects on customer demand, transmissioncongestion,.the strength of the economy in California and surrounding states and levels. of hydroelectric generation within the region (including the Pacific~Northwest). Price volatility for electric energy may contribute to greater volatility in the Electric. System's Revenues from the sale (and purchase) of electric energy ands-therefore, could materially affect .the financial. condition of the Electric System. The City has power supply contracts -and other arrangements relating to its system supply of power which are of specified durations. The City undertakes resource planning activities and plans for its resource needs in order to mitigate 42 OHS West:260621165.8 42797-2 SJOBJC against such price volatility and its' spot market rate exposure. See "THE ELECTRIC SYSTEM -Power Supply Resources" herein. Future Regulation The electric industry is subject to recurrent reform. States routinely :consider major changes to the way in which.. they regulate the electric industry. Recently, both further deregulation and forms of additional regulation have been proposed for an industry that has been highly regulated throughout its history. The City is unable to predict at. this time the impact that any such considerations will have on the operations and finances of the. Electric System or the electric utility industry generally. OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY Energy Policy Act. of 1992 - The Energy Policy Act made fundamental changes in the federal regulation of the electric utility industry, particularly in the area of transmission access under Sections 211, 212 and 213 of the Federal Power Act. The purpose of these changes, in part, was to bring about increased competition in the electric utility industry. As amended by the Energy Policy Act, Sections 211, 212 and 213 of the Federal Power Act provide. FERC authority, upon application by any electric utility, federal power marketing agency or other person or entity generating electric energy for sale or resale, to require. a transmitting 'utility to provide transmission services (including any enlargement of transmission capacity necessary to provide such services) to the applicant at rates; charges, terms and conditions set by FERC based. on standards and provisions in the Federal Power Act. Under the Energy Policy Act, electric utilities owned by municipalities and other public- agencies which- own or operate electric -power transmission facilities which are used for the sale of electric energy at wholesale are "transmitting utilities" subject to the requirements of Sections 211, 212 and 213. The Energy Policy Act specifically denies F$RC the authority to mandate "retail wheeling" under which a retail customer located in one utility's service. area could obtain power from another utility or from anon-utility power generator. Federal Energy Legislation The Energy Policy Act of 2005 ("EPACT 2005") addresses a wide array of energy matters that could affect the entire electric utility industry, including the Electric System. It expands FERC's jurisdiction to require open access transmission by municipal utilities that sell more than four million megawatt hours of energy and to order refunds under. certain circumstances for municipal utilities that sell more than eight million megawatt hours of energy. It also provides for mandatory reliability standards to increase system reliability and minimize blackouts, criminal penalties .for manipulative energy trading practices and the repeal of the Public Utility Holding Company .Act of 1935, which prohibited certain mergers and consolidations involving electric utilities.. EPACT 2005 also requires the. creation of an .electric reliability organization to establish and enforce, under FERC supervision, mandatory reliability standards to increase system reliability and minimize blackouts. Failure to comply with such. mandatory standards exposes a utility to significant fines and penalties by such electric reliability organization. Under EPACT 2005, by February 2007 IOUs were required to offer each of its customer classes atime- based rate schedule to enable customers to manage energy. use through advanced metering and communications technology. It authorizes FERC to exercise eminent domain powers to construct and operate transmission lines if FERC determines a state has unreasonably withheld approval. EPACT 2005 contains. provisions designed to increase imports of liquefied natural gas .and incentives to support renewable energy technologies, including a new two-year program for tax credit bonds for local governments, such as the. City, to finance certain renewable energy facilities.. EPACT 2005 also extends for 20 years the Price-Anderson Act, which concerns nuclear power liability protection, and provides incentives for the construction of new nuclear plants. .The City is unable to predict at this time the impact that EPACT 2005 will have on the operations and finances of the Electric System or the electric utility industry generally. 43 OHS West:260621165.8 42797-2 SJO/EJC American Recovery and Reinvestment Act of 2009 On February 17, 2009, President Obama signed- the American Recovery- and Reinvestment Act of 2009 into law, an economic stimulus-bill which includes a number of investments and tax incentives for certain energy-related projects. The City is reviewing the provisions of the bill to determine what impact it may have on future projects. ' Other General Factors The electric utility industry in general. has been, or in the future may be, affected by a number of factors which could impact the financial condition and competitiveness of many electric utilities and the level of utilization of generating and transmission facilities. Ir? addition to the factors discussed herein, such factors include, among others, (a) effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements, (b) changes resulting from conservation and demand-side management programs on the timing and use of electric energy, (c) changes resulting from a national energy policy, (d) effects of competition from other electric utilities {including increased competition resulting from mergers, acquisitions, and "strategic alliances" of competing electric (and natural gas) utilities and from competitors transmitting less expensive electricity from much greater distances over an nterconnected.systein) and new methods of producing low-cost electricity, (e) increased competition from independent power producers and marketers, brokers and federal power marketing agencies; (f) "self-generation" or "distributed generation" (such as microturbines and fuel cells) by industrial and commercial customers and others, (g) issues relating to the ability to issue tax-exempt obligations, including severe restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission line service from transmission projects financed with outstanding tax-exempt obligations, (h) effects of inflation: on the operating and maintenance costs of an electric utility and its facilities, (i) changes ftom projected future load requirements, (j) increases. in costs and- uncertain availability of capital, (k) shifts in the availability and relative costs of different ..fuels (including the-cost of natural gas), (I) sudden and dramatic increases in the price of energy purchased on the open. market that may occur in times of high peak demand in an. area of the country experiencing such high.-peak demand, such as has :occurred in California, (m) inadequate risk management procedures and practices with respect. to, among other things, the purchase and sale `of energy and transmission capacity, (n) other legislative changes, voter initiatives, referenda and statewide propositions, (o) effects of changes in the economy, population and demand of customers in the. City's service .area, (p) effects. of possible manipulation of the electric markets and (q) natural disasters or other physical calamities, including, but not limited to, earthquakes. Any of these factors (as .well as other factors) could have an adverse effect on the financial condition of any.given electric utility and likely will affect individual utilities in different ways. The City cannot predict what effects such factors will have on its business operations and financial condition; but the effects could be significant. This Official Statement includes a-brief discussion of certain of these. factors. -This discussion does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. 'Extensive' information on the electric utility industry is available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers. of the 2009 Bonds should obtain and review such information. Environmental Issues Electric utilities are subject to continuing environmental. regulation. Federal, state and local standards 'and procedures which regulate the environmental impact of electric'utilities are subject to change. These changes -may arise. from continuing legislative, regulatory and judicial action regarding such standards and procedures. Consequently, there is no assurance that any City facility will remain subject to the regulations currently in effect, will always be in compliance with future regulations or will always be able to obtain all required operating permits. An inability to comply with environmental standards could- result in additional capital expenditures to comply, reduced operating levels or the complete shutdown of individual electric generating units not in compliance. There is concern by the public, the scientific community and Congress regarding- environmental damage resulting from the use of fossil fuels. Congressional support for the increased regulation of air, water and soil contaminants is building, and there are, a number of pending or recently enacted legislative proposals which may ' 44 OHS west:260621165.8 42797-2 SJOBJC affect the electric utility industry."~ For further discussion of environmental legislation and regulations, see "DEVELOPMENTS 1N THE CALIFORNIA ENERGY MARKETS -Environmental Legislation and Regulations." The above-mentioned concerns and Congressional- support have led to an increased level of environmental enforcement by the EPA and state and local authorities. Increased environmental regulation under the provisions of the federal Clean Air Act have .created certain barriers to anew facility. development and .modification of existing facilities. The additional costs, including time, human resources, uncertainty and delay, could affect the rate of return relating to investment in power project development. As such, there may be additional costs for purchased power from affected. resources. Moreover, these additional costs may upset existing cost assumptions for utilities. .The City cannot predict at this time whether any additional .legislation or rules will be enacted which will affect the Electric System's operations, and if such laws or rules are enacted, what the costs to the City-might be in the future because of such action. [A number of studies .have been conducted regarding the potential long-term. health effects resulting from, exposure to electric and. magnetic fields ("EMF").created by high voltage transmission and distribution equipment as well as by electrical .appliances, computers, and other electrical devices. Additional studies are being conducted to determine'therelationship between EMF and certain adverse health effects, if any. At this time, it is not possible to predict the extent of the costs and. other impacts, if any, which the EMF concern may. have on electric. utilities, including-the Electric System.] CONSTITUTIONAL LIMITATIONS ON TAXES Articles XIIIC and XIIID of the State Constitution . I' Proposition 218; a State ballot initiative known,as the "Right to Vote on Taxes Act," was approved by the voters of the State of California on November 5, 1996. Proposition 218 added Articles XIIIC and XIIID to .the State Constitution. Article XIIID creates additional requirements for.. the imposition: by most local governments (including. the :City) of general .taxes, special .taxes, assessments and "property-related" fees and charges. Article XIIID explicitly exempts .fees for .the provision of electric service from the provisions of. such article. Nevertheless, Proposition. 218 could indirectly affect some California municipally-owned electric utilities. For example, to the. extent Proposition 218 reduces a city's general fund revenues, that city could seek to increase the transfers from its electric utility to its .general fund. Article XIIIC expressly extends the people's .initiative power to reduce or repeal previously-authorized local taxes, assessments, and fees and charges. The terms "fees and charges" are not defined in Article XIIIC, although the California- Supreme Court held inBighorn-Desert View Water Agency v. Verjil, 39 Ca1,4th 205 (2006), - that the initiative power described in Article XIIIC may apply to a broader category of fees and charges than the property-related fees and charges .governed by Article XIIID. Moreover, in the case of Bock v. City Council of Lompoc, 109 Ca1.App.3d 52.(1980), the Court of Appeal determined that electric rates are subject to the initiative power. Thus, even electric service charges (which are expressly exempted from the provisions of Article XIIID) might be subject to the initiative provision of Article XIIIC, thereby, subjecting such fees and charges imposed by the City to reduction by the electorate. The City believes that even if the electric rates of the City are subject to the. initiative power, under Article XIIIC or otherwise, the electorate of the City would be precluded from reducing electric rates and charges in a manner adversely affecting the payment of the 2009 Bonds by virtue of the "impairment of .contracts clause" of the United States and California Constitutions. Future Initiatives Articles XIIIC and XIIID, ,were each adopted pursuant to measures qualified for the ballot pursuant to California's constitutional initiative process. From time to time .other initiative measures could be adopted by California voters. The adoption of any such initiatives mightplace limitations on-the ability. of the City to increase revenues or to increase appropriations.' 45 OHS West:260621165.8 42797-2 SJO/EJC LITIGATION There is no .controversy or litigation of any nature 'now pending or threatened restraining or enjoining the issuance.of the 2009-Bonds or in any way contesting or affecting the validity of the 2009 Bonds or any proceedings of the City taken with respect to the issuance or sale thereof. In addition; there is no litigation pending against the City which, in the opinion of the City Attorney, would materially adversely affect the Electric System, the financial conditiorrof the City or the sources ofpayment for the 2009 Bonds. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City {"Bond Counsel"), based on an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2009 Bonds is excluded from gross income for federal income tax purposes under Section 103 of-the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the 2009 Bonds- is not a specific preference item -for purposes of the federal individual and corporate alternative minimum taxes, nor is it .included in adjusted current earnings when .calculating corporate alternative ...minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix D hereto. To the extent-the issue price of any maturity of the 2009 Bonds is-less than the amount to be paid'at the maturity of such 2009 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such 2009 Bonds),: the difference constitutes. "original issue discount," the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest.on the 2009Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue. price of a particular maturity of the 2009 Bonds is the first price at which a substantial amount of such. maturity of the 2009 Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2009 Bonds accrues daily over the term to maturity of such 2009 Bonds on the basis of a constant interest rate compounded -semiannually ,(with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such 2009 Bonds to.determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such 2009 Bonds. Beneficial Owners of the 2009 Bonds- should consult their own tax advisors with respect to the- tax consequences of ownership of 2009 Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such 2009- Bonds in the original offering to the public at the first price at which a substantial amount of such 2009 Bonds is sold to the public. 2009 Bonds purchased, whether at original. issuance or .otherwise, for an amount higher than their principal amount payable. at maturity (or, in some cases, at their earlier call date) ("Premium 2009 Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case. of bonds, like the Premium 2009 Bonds, the interest on which is excluded -from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and aBeneficial-Owner's basis in a Premium 2009 Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium 2009 Bonds should consult their own tax .advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes-various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the 2009 Bonds: The City has made. certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the 2009 Bonds- will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the 2009 Bonds being included in ' gross income for federal income tax .purposes, possibly from the date of original issuance of the 2009 Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants: Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring- (or not occurring), or any other matters coming to Bond Counsel's attention after the date of issuance of the 2009 Bonds may adversely affect the value of, or the tax status of interest on, the 2009 Bonds. 46 OHS West:260621165.8 42797-2 SJO/EJC Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the 2009 Bonds is.excluded from gross income for federal income tax purposes .and is exempt from State of California personal income .taxes, the ownership or disposition of, or the accrual or receipt of interest on, the 2009 Bonds may otherwise affect a Beneficial Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner's-other items of income or deduction. Bond .Counsel expresses no opinion regarding any such other tax consequences. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the 2009 Bonds to be subject, directly- or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit _ of the tax status of such interest:. The ..introduction or enactment of any such future legislative..proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the 2009 Bonds. Prospective purchasers of the 2009 Bonds should consult their own tax advisors regarding any pending or proposed. federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment of the 2009 Bonds for federal .income tax purposes. It is not .binding on the .Internal Revenue Service.. ("IRS") or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code. .Bond Counsel's engagement with respect to the 2009 Bonds ends with the issuance of the 2009 Bonds, and, unless separately engaged, Bond.Counsel is not obligated to defend the City or the Beneficial Owners regarding-the tax-exempt status of the 2009 Bonds in the event of an audit examination by the IRS.. Under current procedures, parties other than the City and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination. of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees may not be practicable. Any action of the IRS; including but not limited to selection of the 2009 Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability.of, the 2009 Bonds, and may cause the City or the Beneficial Owners to incur significant expense. APPROVAL OF LEGALITY The issuance of .the 2009 Bonds is subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Los_ Angeles, California, Bond Counsel to; the City, substantially in the form set forth as Appendix D. Certain legal: matters will be passed upon for the City by the City Attorney and for the Underwriters by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. RATINGS Moody's Investors Service, Inc. and Standard & Poor's Ratings Group have assigned the 2009 Bonds the ratings of and respectively. The ratings reflect only the respective views of the rating agencies and any explanation of the significance of such ratings, may be obtained only from such rating. agencies as follows: Moody's Investors. Service, 7 World Trade Center at 250 Greenwich. Street, New York, New York 10007; and Standard & Poor's, 55 Water Street, New York, New-York 10041. There is no_assurance that the ratings will remain in effect for any given period of time or that. they will .not be revised downward or withdrawn .entirely by such rating agencies,. or either of them, if, in their .respective judgments, circumstances so warrant. Any downward revision or withdrawal of any rating may have an adverse. effect on the market price of the 2009 Bonds. 47 OHS West:260621165.8 42797-2 SJO/EJC UNDERWRITING Citigroup Global Markets Tnc., on behalf of itself and E.J. De La Rosa & Co., Inc., as underwriters (the "Underwriters") has agreed, subject to certain conditions, to purchase the 2009 Bonds at an Underwriters' discount of $ .The purchase contract provides that the Underwriters will purchase all the 2009 Bonds if any are .purchased. The 2009 Bonds may be offered and sold by the Underwriters to certain dealers and others at prices or yields lower than the public offering prices or yields stated on the inside cover page of this Official Statement, and such public offering prices or yields may be changed, from time to time, by the Underwriters. VERIFICATION REPORT Upon delivery of the 2009 Bonds, Grant Thornton LLP, independent certified public accountants, will deliver a report stating that the firm has verified the mathematical accuracy of certain computations relating to the adequacy. of the maturing principal of and interest on the investments in the Escrow Fund to pay, when due, the redemption price of the Series B Authority Bonds and the Series C Authority Bonds on , 2009 and to pay the redemption price of the Series A Authority Bonds on , 2009. See "PLAN OF FINANCE" herein. FINANCIAL STATEMENTS The audited financial statements of the City, as of June 30, 2008 and June 30, 2007, are included in .Appendix A to this Official Statement. The financial statements have been audited by Macias, Gini & O'Connell. LLP, Los Angeles, California, independent accountants (the "Independent Accountants") as stated in their reports appearing in Appendix A. The-City has not requested nor~did the City obtain permission from the Independent Accountants to include the audited financial statements for the Fiscal Years ended June 30, 2008 and June 30, 2007 as an appendix to this Official Statement. No review or investigation with respect to subsequent events has been undertaken in connection with such financial reports by the Independent Accountants. The financial statements set forth in Appendix A include the City's General Fund and all other funds of the, City, in addition to the Light and Power Fund through which the operations of the Electric System are accounted. -The 2009 Bonds are not secured by a legal or equitable pledge of, ar lien or charge upon any property of the City or any of its income or receipts except the Trust Estate, and are not payable from'any City funds other than Net Revenues of the City's Electric System, amounts in the Light and Power Fund other than the Operating Reserve, and amountsin Funds, other than the Rebate Fund, held by the Trustee under the Indenture. Neither the faith and credit nor the taxing power of the City, the State nor any public agency is pledged to the payment of the principal of and interest on the 2009 Bonds. EXECUTION AND DELIVERY . The execution and delivery of this Official Statement-has been duly authorized by the City. CITY OF VERNON, CALIFORNIA By: Leonis C. Malburg Mayor 48 OHS West:260621165.8 42797-2 SJO/EJC 1 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEARS ENDED JUNE 30, 2008 AND JUNE 30, 2007 OHS West:260621165.8 42797-2 SJOBJC .APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following is a 'brief summary of certain provisions of the Indenture not previously discussed in this - Official Statement. Such surremary is not intended to be definitive; and reference is made to the Indenture in its entirety for the complete terms thereof. Capitalized-terms used in this summary which are. not otherwise defined in this Official Statement-have the meanings ascribed to such terms in the Indenture. DEFINITIONS "Accountant's Certificate". means a certificate signed by an Independent Certified Public Accountant selected by the City.. "Accreted Value" means, with respect to any Capital Appreciation Obligation and as of any date,'the Initial Amount thereof plus the interest accrued thereon from its delivery date, compounded at the approximate interest rate with respect to such Capital Appreciation Obligation specified in or pursuant to the Issuing Instrument authorizing the issuance of such Capital Appreciation Obligation on-each date specified therein. Tfie applicable Accreted Value at any date shall be the amount set forth in the Accreted Value Table as of such date, if such date is a compounding date, and if not, shall be determined by straight-line interpolation with reference to such Accreted Value Table. "Accreted Value Table" means, with respect to Capital Appreciation Obligations, the table:denominated as such. in, and to which reference is rrlade in, the Issuing Instrument authorizing the issuance of such Capital Appreciation Obligations. "Additional Bonds" means Bonds issued in accordance with the terms and conditions of -the Indenture for the purposes set forth in the Indenture. , "Additional Parity Obligations" means Parity Obligations, including Additional Bonds, issued for the purposes set .forth in the Indenture and satisfying the conditions set forth in the Indenture. "Adjusted Debt Service" means, for any period of -time, the Debt Service for such period minus the sum of the amount of such Debt Service with respect to Outstanding Parity Obligations to be paid during such period from the proceeds of Parity Obligations, Subordinate Obligations or other funds as set forth in a certificate of the City. "Adjusted Net Revenues" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture, for any Calculation Period, as calculated by the City or an Independent Engineer, the Adjusted Revenues for such Calculation Period less the Operation and.Maintenance Expenses for such Calculation Period, plus at the option of the City, any or all of the following: (i) an allowance for any estimated increase in Revenues from any additions or improvements to or. extensions of the Electric System, made but not in service during the applicable Calculation Period or to be made with the proceeds of any Additional Parity Obligations with respect to which. such certificate relates, -with the. proceeds of other Obligations theretofore issued by the City and available for such purpose or with other available funds of the City reserved by the City for such purpose, such allowance to be in an amount equal to the estimated additional average annual Net Revenues to be derived from such additions; improvements and extensions during the twelve month period after placing each such addition, improvement or extension in service, all as shown by a certificate of the City or an Independent Engineer; and (ii) an allowance for any increases in rates and charges for the. Electric Service of the Electric System and which have been approved by the City Council but which during all or any part of the applicable Calculation Period were not in effect, such allowance to be in an amount equal to seventy-five percent (75%) of the amount by which the Revenues for the applicable Calculation Period would have increased if such increase in rates and- charges -had been, in effect for that portion of such Calculation Period during which such increase was not in effect. B-1 OHS West:260621165.8 42797-2 SJO/EJC "Adjusted Revenues" means, for any period of time, the Revenues for such period less the amount of such Revenues. which have been deposited in .the Expense Stabilization Fund during such period plus the amount of withdrawals during such period from the Expense Stabilization Fund. "Advance-Refunded Municipal Securities" means any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local government. unit of any such state (a) which are rated "AAA" by . Standard and Poor's, "AAA" by Fitch or "Aaa" by Moody's, (b) which are not callable prior to maturity or as to which irrevocable instructions .have been given to the trustee, fiscal. agent or other fiduciary for such bonds or other obligations by the obligor to give due notice of redemption and to call such bonds or -other obligations .for redemption on the date or dates specified in such instructions, (c) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of -cash or bonds or other obligations of the character described in clause (i) of the definition of Defeasance Securities which fund maybe applied only to the payment of such. principal. of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the. redemption date or dates specified in the irrevocable instructions referred to in clause (b) above, as appropriate, and (d) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) of the definition of Defeasance Securities which have been deposited. in such fund, along with any cash on deposit in such fund,. have been verified by an' Accountant's Certificate as .being sufficient .to pay principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or on the redemption date. or dates specified in the. irrevocable instructions referred to in clause..(b) .above, as applicable. "Applicable Parity Obligations" means, -with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture and. as of the date of such certificate, all of the Parity Obligations Outstanding on suchdate plus the AdditionaLParity Obligations proposed to be issued. "Authorized Denominations" means, with respect to Bonds of any Series, the denomination or denominations designated as such in the Supplemental Indenture authorizing such Bonds. , "Authorized City Representative" means the City Administrator of the City, and any other officer of the City duly. authorized to act as an Authorized City Representative for purposes of the Indenture by the City Council or written authorization of the City Administrator of the City.. "Balloon Indebtedness" means, with respect to any Series of Obligations twenty-five percent (25%) or more of the principal of which matures on the same date or within a 12-month period (with Sinking Fund Installments on Term Obligations deemed to be payments of matured principal), that portion of such Series of Obligations which matures on such date or within such 12-month period, For purposes of this definition, the principal amount maturing on any date shall be reduced by the amount of such indebtedness .which is required, by the documents governing such indebtedness, to be amortized by prepayment or redemption prior to its stated maturity date. "Beneficial Owner" means, with-respect any Book-Entry Bond, the beneficial owner of such Bond as determined in accordance with the applicable rules of the Securities Depository for such Book-Entry Bonds. "Bond" means any of the City of Vernon Electric System Revenue Bonds authorized pursuant to the Indenture and a Supplemental Indenture.. "Bond Counsel" means Orrick, Herrington & Sutcliffe LLP or another attorney or firm of attorneys of recognized national standing in the field of law relating to municipal. securities and to exclusion of interest thereon from income for federal income tax purposes. selected by the City. "Bond Debt Service" means, for any period of time, the sum of (a) the interest payable during such period on all Outstanding Bonds, assuming that all Outstanding Bonds which are Serial Obligations are retired as scheduled and that all Outstanding Bonds which are Term Obligations are redeemed or paid from Sinking Fund Installments as scheduled, (b) that portion of the principal amount of all Outstanding Bonds which are Serial Obligations maturing on each principal payment date during such period, including the Final Compounded Amount of any Bonds which are Capital Appreciation Obligations and Serial Obligations, (c) that portion of the principal amount ,of all B-2 OHS West:260621165.8 ' . 42797-2 SJOBJC Outstanding Bonds-which are Term Obligations- required to be redeemed or paid ftom Sinking Fund Installments during such period (together with the redemption premiums, if any, thereon). "Bond Ordinance" means the City of Vernon Municipal Facilities Revenue Bond Law constituting Article XI of the City Code of the City of Vernon. "Bond-Register" means the registration books for the ownership of Bonds maintained by the Trustee pursuant to the Indenture. "Bondowner" or "Owner" means, with respect to a Bond,-the registered owner of such Bond as set forth in the Bond Register. "Book-Entry Bonds" means Bonds registered in .the name of a nominee of DTC, or any successor Securities Depository for the Bonds or a nominee thereof, as the registered owner thereof pursuant to the terms and provisions of the Indenture. "Budget" means, as of any date, the budget for the Electric System prepared by the City pursuant to the Indenture in effect as of such date. "Business Day" :means; with-respect to each Series of Bonds, unless otherwise provided with respect to a Series of Bonds in-the Supplemental Indenture authorizing the issuance of such Series, any day of the year other than (i) a - Saturday, (ii) a Sunday, (iii) any day which shall be in Los Angeles, California or-New York; New York. a legal holiday or a .day on which banking institutions are authorized or required by law or other government action to close, and (iv) any day on which the banks are authorized or required by law or other government action to close`in the State of New York or State of California or .any city in which the Principal Office of any Paying Agent or any Credit Provider for such Series of Bonds is located. "Calculation Period" means, with. respect to any certificate to be provided pursuant to the Indenture, any twelve consecutive month period within the eighteen consecutive months ending. immediately prior to the issuance of the Additional Parity Obligations to which such certificate relates. "Capital Appreciation Obligations" mean any Obligations the interest on which is compounded and not scheduled to be paid -until the maturity or prior redemption of such Obligations. "Capital. Improvement" means, to the extent chargeable to a capital account of the Electric System, or otherwise eligible for amortization, under Generally Accepted Accounting Principles any land, improvement, facility, equipment and .other property of any nature. whatsoever which is used in the Electric System including but not limited to: (i) any addition; betterment, replacement, 'renewal, extension or improvement of or to the Electric System; :including, without limitation, capacity rights in electric generation resources, rights to the transmission capability of electric transmission resources, acquisition of emission credits or other .environmental assets for facilities of the Electric System, land or any interests therein; and (ii) capital costs for-the extension, reinforcement, enlargement or other improvement of facilities or property, or the acquisition of interests therein, not included as part of the Electric System, determined by the City to be necessary or convenient in connection with the utilization of the Electric System. "Charter"means the Charter of the City of Vernon. "City" means the City of Vernon, California and its successors. "City Administrative Code"means the Code of the City of Vernon. "City-Council" means the City Council of the City established pursuant to the Charter. B-3 OHS West:~.60621165.8 42797-2 SJO/EJC "Code" means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code in the Indenture shall be deemed to include the applicable United States Treasury Regulations thereunder and also includes all amendments and successor provisions unless the context clearly requires otherwise. "Collateral Requirement' means; with respect to a Qualified Swap Agreement, that such Qualified Swap Agreement includes provisions to the effect that: (i) if the counterparty's (or, if applicable, the counterparty's guarantor's) ' ratings fall below "Aa" by Moody's or "AA" by S&P, or are suspended or withdrawn, the counterparty shall provide collateral in-the form of cash or Defeasance Securities; or a combination thereof; (ii) that the collateral is to be held by the City or a third party custodian acceptable to the City; (iii) that the City shill have a perfected security interest in the collateral;- (iv) that the amount of the collateral shall be at least equal to one hundred percent of the amount, if .any, that the. counterparty would be obligated to pay the City in the event of the early termination of the transactions under the Qualified Swap Agreement; (v) that there may be deducted from the amount of the collateral a threshold amount of-not more than $1,000,000, except that if the counterparty's (or, if applicable, the counterparty's guarantor's) ratings fall-below "A" by Moody's or "A" by S&P; or are suspended. or withdrawn; the threshold amount shall be zero; and (vi) the amount of the required collateral and the value of the collateral posted shall be valued no less frequently'than monthly. "Commercial Paper Program" means a program of short-term Obligations having the characteristics of commercial - paper in that such Obligations have a stated maturity not later than 270 days from their date of issue and that maturing Obligations of such program may be paid with the proceeds of renewal short-term Obligations. "Cost" means, with respect to any .Capital Improvement, to the extent permitted under the Bond Ordinance, all costs and expenses of planning, .designing,. acquiring, .constructing, installing and financing such Capital Improvement, placing such Capital Improvement in operation, disposal of such Capital Improvement, and obtaining: governmental approvals, certificates, permits and licenses with respect to the applicable Capital Improvement paid or incurred by the City.. Payment of Cost shall include the reimbursement to-the City for. any of the costs included in this definition of Cost paid by the City and not previously reimbursed to the City and which are not to be reimbursed from contributions in aid of construction. The term Cost shall include, but shall not be limited to: (a) costs of preliminary investigation and development, the. performance or acquisition of feasibility and planning studies, and the securing of regulatory approvals, as well as costs for land and land rights, engineering and contractors' fees; labor, materials, equipment, utility services and supplies, legal fees and financing expenses; (b) working capital and reserves therefor, in such amounts as shall be .determined by the City; (c) interest accruing in, whole or in part on Parity Obligations prior to and during the acquisition, construction and installation of a Capital Improvement;. or any portion thereof, and for such additional period as the City may determine; (d) the deposit or deposits from the proceeds of the Bonds ' in any funds or accounts required by the Indenture or .any Supplemental- Indenture; (e) the payment of principal, premium, if'any; and interest when due (whether at the maturity of principal or at the due date of interest. or upon . redemption or otherwise) of any note or other evidence of indebtedness the proceeds of which were applied to any of the costs of the applicable CapitaLImprovement or Capital Asset described in this definition; (f) Training and testing costs. which are properly allocable to the acquisition, placing in operation, or construction of a Capital Improvement; (g) All costs of insurance applicable to the period of acquisition of the. Capital Asset and the acquisition, ~ , construction, instillation and placing the Capital Improvement in operation; (h) All costs relating to injury and damage claims arising out. of. the acquisition, construction, installation and. placing the ,Capital Improvement in operation less proceeds of insurance; (i) legally required or permitted federal, state and local taxes and payments in lieu. of taxes applicable to the acquisition, construction, installation and placing the Capital Improvement- in operation, or any portions thereof; (j) amounts due the United States of America as rebate of .investment earnings with respect to the proceeds of Parity Obligations the proceeds of which were applied, in whole or impart, to the Capital Improvement or as penalties in lieu thereof; (k) amounts payable with respect to capital costs for the expansion, reinforcement, enlargement or other improvement of facilities, whether or not such facilities constitute a part. of the Electric System, determined by the City to be necessary in connection with the utilization of the. applicable Capital Improvement and the costs associated with the removal from service or reductions ir? service. of any facilities as a result of the expansion, reinforcement; enlargement or other improvement of such facilities or the acquisition, construction, installation or placing in service of the Capital Improvement;, (1) Costs of Issuance of any Parity Obligations the proceeds of which were applied, in whole or in part, to the Capital Improvement; (m) fees and expenses pursuant to any lending or credit facility or agreement applicable to the period of the acquisition, construction, installation and placing in operation the Capital Improvement; and (n) To the extent chargeable to a capital account of the Electric System under Generally Accepted Accounting Principles, all other costs incurred. by B-4 OHS West:260621165.8 42797-2 SJO/EJC the City, properly allocable to the acquisition, construction, or installation of the Capital Improvement, or any portion thereof, or the placing of the Capital Improvement or any portion thereof in operation. "Costs of Issuance" means, to the extent permitted by the Bond Ordinance, all items of expense directly or indirectly payable by or reimbursable to the City and related.to the original authorization, execution, sale and delivery of Parity Obligations, including but not limited to advertising and printing costs, costs of preparation and reproduction' of documents, including disclosure documents and documents relating to the sale of such Parity Obligations, initial fees and charges (including counsel fees) of any fiscal agent, any paying agent and any Credit Provider, legal fees and charges, financial advisor fees and expenses, fees and expenses of other consultants 'and professionals, rating. agency fees, fees and charges for preparation, execution, transportation and safekeeping of Parity Obligations and any other cost, charge or fee in connection with the authorization; issuance, sale or original delivery of Parity .Obligations. "Credit Provider" means any municipal bond insurance company, bank or other financial institution or organization which is performing in all material respects its obligations under any Credit Support Instrument for some or all of the Parity Obligations. "Credit Provider Bonds" means. any Bonds paid as to principal;: Redemption Price; Purchase Price and/or interest with funds provided under a Credit Support Instrument for so long as such Bonds are held by or for the account of; or are pledged to, the applicable Credit .Provider or any assignee thereof in accordance with 'the applicable Credit Support Agreement. "Credit Provider Reimbursement Obligations" means' obligations of the City to pay from the Net Revenues and amounts in the Light and Power Fund (other than the Operating Reserve) amounts due under a Credit Support Agreement, including without limitation amounts advanced by a Credit Provider pursuant to a Credit Support Instrument as credit support or liquidity for Parity Obligations and the interest with respect thereto. "Credit Support Agreement" means, with respect to any Credit Support Instrument, the agreement or agreements (which may be the Credit 'Support Instrument itself) between the City and the applicable Credit Provider, as originally executed or as it may from time to time be .replaced, supplemented or amended in accordance with the provisions thereof, providing-for the reimbursement to the"Credit Provider for payments under such Credit Support Instrument or for extensions of credit made to the City by the Credit Provider, and the interest thereon, and includes any subsequent agreement pursuant to which a substitute Credit Support Instrument is provided; together-with any related pledge agreement; security agreement or other security document: "Credit Support Instrument" means a policy of insurance, a; letter of credit, astand-by purchase agreement; revolving credit agreement or other credit arrangement pursuant to which a Credit.Provider provides credit and/or liquidity support with respect to the payment of interest, principal, Redemption Price or Purchase Price of any Parity Obligations but shall not include a Reserve Financial Guaranty.- - "Debt Service" means, for any period of time, the: sum of (a) the interest payable during such period on all Outstanding Parity Obligations, assuming that all Outstanding Serial-Parity Obligations are retired as scheduled and that all Outstanding Term Parity Obligations are redeemed or paid from Sinking Fund Installments as scheduled, (b) that portion.of the principal amount of all Outstanding Serial Parity Obligations maturing on each principal payment date during such period, including the Final Compounded AmounC of any Capital Appreciation Obligations and (c) that portion of the principal amount of all Outstanding Term Parity Obligations required to be redeemed or paid from Sinking Fund Installments becoming due during such period (together with the premiums, if any, thereon). "Debt Service Adjustments and Assumptions" means, for purposes of determining Aggregate Adjusted ` Annual bebt Service and Maximum Adjusted Annual Debt Service, the following adjustments and assumptions to be made with respect to Debt-Service: (a) in determining the amount. of Debt Service constituting principal due in each Fiscal Year, principal payments with respect to Parity Obligations which are or upon issuance shall be, part of a Commercial Paper Program, but which would not constitute Balloon Indebtedness, shall be treated as if such Parity Obligations were to be amortized with substantially level annual Debt Service payments over a term of 40 years commencing on the date the calculation of Aggregate Adjusted Annual Debt Service or Maximum Adjusted Annual Debt Service is made;: (b) if all or any portion or portions of the Parity Obligations constitute, or upon issuance B-5 OHS V?est:260621165:8 42797-2 SJO/EJC would constitute, Balloon Indebtedness, then; for purposes of determining Aggregate Adjusted Annual Debt Service and Maximum Adjusted Annual Debt Service, each maturity which constitutes, or upon issuance would constitute, Balloon Indebtedness shall be treated as if it were to be amortized with substantially level annual Debt Service payments over a term of 40 years commencing on the date which is -the first anniversary of the initial issuance of such Parity Obligations; (c) if any Outstanding Parity Obligations constituter Tax-Exempt Variable Rate. Indebtedness (except to the extent paragraph (g) applies), the interest rate on such Parity Obligations for any period as to which such interest rate has not been. established shall be assumed to be the ten year historical average of the SIFMA .Index ending with .the week preceding the date of calculation; (d) if any Outstanding Parity Obligations constitute Variable Rate Indebtedness .which is not Tax-Exempt (except to the extent paragraph (g) applies), the- interest rate on such Parity Obligations for-any period as to which such interest rate has not been established shall be assumed to be the ten year historical average of the One Month USD LIBOR Rate ending with the month preceding the date the calculation of Aggregate Adjusted Annual Debt Service or Maximum Adjusted Annual Debt Service is made or if the.One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City; (e) if the .Parity Obligations proposed to be issued. shall be Tax-Exempt Variable Rate Indebtedness (except to the. extent subsection (h) applies), then the interest rate on such Parity Obligations shall be assumed to be the ten year historical average pf the SIFMA Index ending with the week preceding the date the calculation of Aggregate Adjusted Annual .Debt Service or Maximum Adjusted Annual Debt Service is made; (f)if the Parity Obligations .proposed to be issued shall be Variable Rate Indebtedness which is not Tax-Exempt (except to the .extent subsection (h) applies). then the interest. rate. on such Parity Obligations. shall be assumed to be the ten year historical average of the.. One Month .USD LIBOR Rate: ending .with the month preceding the date.. the calculation is made, or if the One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City; (g) if a Qualified Swap Agreement has been entered into in connection with any Outstanding Parity Obligations, he interest rate on such Outstanding Parity Obligations for each Fiscal Year or portion thereof during which payments are to be exchanged by the parties under such Qualified Swap.Agreement shall be determined for purposes of calculating Aggregate Adjusted Annual Debt Service and Maximum Adjusted Annual Debt Service by adding: (1) the amount of Debt Service paid or to be paid by the City as interest on the Outstanding Parity Obligations during such Fiscal Year or portion thereof (determined as provided in paragraph (c) or (d), as applicable, if such Outstanding Parity Obligations constitute Variable Rate Indebtedness) and (2) the net amount. (which may be a negative amount). paid or to be paid by the City under the Qualified Swap Agreement (after giving effect to payments .made and received, and to be .made- and received,. by the City ..under the Qualified Swap Agreement). during such Fiscal Year or portion thereof, and for this purpose any variable rate of~interest agreed to be paid under -the Qualified Swap Agreement shall be deemed to be the rate at which the. related Outstanding Parity Obligations constituting Variable Rate Indebtedness is assumed to bear interest; (h) if a Qualified Swap Agreement has been, entered into, or upon issuance of such Parity Obligation will be entered into, _by the City with respect to any Parity Obligations proposed to be issued, the interest on such proposed Parity Obligations for each Fiscal Year. or portion thereof during which .payments are to be exchanged under the Qualified Swap Agreement shall be determined for purposes of calculating Aggregate Adjusted Annual Debt Service and Maximum Adjusted Annual Debt Service by adding: (1) the amount of Debt Service to be paid by the City as interest on such Parity Obligations during such Fiscal Year or .portion thereof (determined as provided in paragraph (e) or (f); as applicable, if such Parity Obligations are to constitute Variable Rate Indebtedness) and (2) the net amount (which may be a negative amount) to be paid by the City under the Qualified Swap Agreement (after giving effect to payments to be made and received by. the City under the Qualified Swap Agreement) during such Fiscal Year or portion thereof, and for this purpose any variable rate of interest agreed to be paid under the Qualified Swap Agreement shall be deemed to be the rate at which the related Parity Obligations which are to constitute Variable Rate Indebtedness shall be assumed to bear interest; and (i)if any of the Parity Obligations are, or upon issuance shall be, Paired Obligations, the interest thereon shall be the resulting linked rate, or effective fixed rate to be paid with respect to such Paired Obligations. "Debt Service Fund" -means the City of Vernon Electric System Debt Service Fund established pursuant to the Indenture. "Debt Service Reserve Fund" means the City of Vernon Electric System Debt Service Reserve Fund established. pursuant to the Indenture. "Debt Service Reserve Requirement" means, as of any date of calculation, an amount equal. to the least of (a) ten percent (10%) of the initial offering price to the public of the Bonds as determined under the Code, or (b) the greatest amount of Bond Debt Service in any Fiscal. Year during the period commencing with the Fiscal Year in B-6 OHS West:260621165.8 42797-2 SJO/EJC which the determination is being made and terminating with the last Fiscal Year in which any Bond is due, or (c) one hundred twenty-five percent (125%) of the sum of the Bond Debt Service for all Fiscal Years during the period' commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the execution and delivery of any Bonds) and terminating with the last Fiscal Year in which any Bond Debt Service is due, divided by the number of such Fiscal Years, all .as computed and determined by the City and specified itl writing to the Trustee; provided, however that in determining .Bond Debt Service with respect to any Bonds that constitute Variable Rate Indebtedness, the interest rate on such Bonds -for any period as to, which such interest rate has not been established shall be assumed to be (i) with respect to Bonds which are Tax-Exempt; the ten year. historical average of the SIFMA Index ending with the week preceding the date of calculation, and (ii) with respect to Bonds which are not Tax-Exempt, the ten year historical average of the One Month.USD LIBOR Rate ending with the month preceding the date the calculation is made or if the One Month USD LIBOR Rate is not. available for such period, another similar rate or index selected by the City. "Debt Service Reserve Valuation Date" means the Business Day preceding each July 1, commencing July 1, 2009. "Defeasance Securities" .means any of the following securities, if and to the extent the same are at the time legal investments for funds of the City: (i) any bonds or other obligations which as to principal and interest constitute direct obligations of; or obligations unconditionally guaranteed: by, the United" States- of America, including obligations of any agency or corporation which has been or may hereafter be created pursuant to an Act of.Congress as an agency or instrumentality of the United States of America to the extent unconditionally guaranteed by the United.States of America; and (ii) Advance Refunded Municipal Securities. "Electric Service" means the services, commodities and products furnished, made available or provided. by the Electric System. "Electric System" means the electrical energy. generation, transmission and distribution system of the City established pursuant to Ordinance No: 1022 of the City (codified as Section 2.91 of the City Administrative Code). and referred to in the City Administrative Code as the Vernon Electric System, comprising all electric generation, transmission and distribution facilities and all general plant facilities related thereto now owned by the City and all other facilities properties, structures or works for the generation, transmission or distribution. of electricity hereafter acquired by the City, including all contractual rights for electricity or the transmission thereof, together with all additions, betterments, extensions , or improvements to such facilities, properties, structures or works or any part thereof, and any additional contract rights for. electricity or the transmission thereof, hereafter acquired. "Event of Default" means an event described as such in the Indenture. "Electronic" means, with respect to notice, notice through telecopy, telegraph, telex, facsimile transmission, Internet, e-mail, dedicated electronic link or other electronic means of communication capable of producing a written record. "Escrow Agent" means the Trustee or a bank or trust company organized under the laws of any state of the United . States, or a national banking association, appointed by the City to-hold in trust moneys set aside for the payment or redemption of, or interest installments on, a Bond or Bonds, or any portion thereof, deemed: paid and defeased pursuant to the Indenture. "Expense Stabilization Fund" means .the City. of Vernon Electric System Expense Stabilization-Fund established pursuant to the Indenture. "Event of Bankruptcy" means any of the following with respect to any Person: (a).thecommencement by such - person of a voluntary case under the Federal Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or similar laws; (b) failure by such Person to timely controvert the filing of a petition with a court having jurisdiction over such Person to commence an involuntary case against such person under the Federal Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or similar laws; (c) such Person shall admit in writing its inability to pay its debts generally as they become due; (d) a receiver; trustee, custodian or liquidator of such Person or such Person's assets shall be appointed in any proceeding brought against the Person or such B-7 OHS West260621165.8 42797-2 SJO/EJC Person's assets; (e) assignment of, assets by such person for the benefit. of its creditors; or {f) the entry by such Person -into an agreement of composition with its creditors... "Favorable Opinion of Bond Counsel" means, with respect to any action requiring- such an opinion, an Opinion of Bond: Counsel to the effect .that such action shall not, in and of itself, adversely affect the Tax-Exempt status of interest on the Bonds or such. portion thereof as shall be specified in the provisions of -the Indenture or the Supplemental Indenture requiring such an opinion. "Federal Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as the same may be amended and supplemented, and any successor statute. "Fiduciary" means. the Trustee and any Paying Agent for Bonds appointed as provided iri the Indenture. "Final Compounded Amount" means the-Accreted Value of any Capital.Appreciation .Obligation on its maturity date.. "First Supplemental' Indenture" means the First Supplemental Indenture of Trust, dated as of September 1, 2008; between the City and the 'Trustee supplementing the Master Indenture; as the :same may be amended and supplemented in accordance with the provisions. of the Master Indenture and relating to the Bonds. "Fiscal. Year" means the period beginning on July 1 of each year and ending on the next succeeding June 30, or any other twelve-month period selected and designated as the official Fiscal Year of the City. "Franchise Payment" means the payment in lieu of franchise tax added to each Electric System. customer bill to be paid to the City's General Fund and any successor or replacement payment. "Fund" means each of the funds established under the Indenture. "Generally Accepted Accounting Principles" means generally accepted accounting principles .applied on a consistent basis set forth in-the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants applicable to a government-owned utility applying all statements and' interpretations issued by the Governmental Accounting Standards Board and statements and pronouncements of the Financial Accounting Standards Board- which are not in conflict with the statements and interpretations issued by the Governmental Accounting Standards Board or in such other statements by such -other entity as may be approved by a significant segment of .the accounting profession, that are applicable to the circumstances as of the date of determination. "Indenture" means, the :Master Indenture, as supplemented -and amended from time to time by Supplemental ' Indentures.- "Independent Certified Public Accountant" means a Person who is: (i) a certified public accountant, or a firm of certified public accountants; (ii) appointed by the City to perform acts, prepare certificates or otherwise carry out the duties provided for an Independent Certified Public Accountant in this Master Indenture or any Supplemental Indenture; (iii) which is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants; (iv) which is of recognized standing .with respect to accounting matters for municipally-owned electric utilities; and (v) which is licensed to practice in the State of California. "Independent Engineer" means a Person who is: (i)'a consulting. engineer, or a firm of consulting engineers; (ii) appointed by the City to perform acts, .prepare .certificates or otherwise carry. out the duties provided for an Independent Engineer in this Master Indenture or any Supplemental Indenture; (iii) which is of national. recognized standing with respect to engineering matters for .electric utilities; and (iv) which is licensed to practice in the State of California. "Initial Amount".means the Accreted Value of a Capital Appreciation Obligation on.its date of issuance and delivery to the original purchaser thereof. B-8 OHS west:260621165.8 42797-2 SJO/EJC "Interest Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Interest Payment Date" means, with respect to a Series of Bonds, each date on which interest on Bonds of such Series is .scheduled to be paid as set forth in, or determined in accordance -with, the Supplemental Indenture authorizing the issuance of such Series. "Issuing Instrument" means .any, indenture, trust agreement or other instrument or agreement under which Obligations are issued. "Light and Power Fund" means the Light-and Power Department Fund established pursuant to Ordinance No. 950 of the. City (codified as Section 2.65 of the City Administrative Code) and shall include any successor or replacement fund established by the City for the collection of revenues and.tlre payment of expenses of the Electric System. "Master Indenture" means the Indenture of Trust, dated as of September 1, 2008 between the City-and the Trustee, as the provisions thereof may be modified or amended from time to time in accordance with-the Indenture. "Maximum Adjusted Annual Debt Service" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to the Indenture, as of any date and with respect to the Applicable Parity Obligations, the maximum amount of Adjusted Debt Service becoming due on the Applicable Parity Obligations in the then current or any future Fiscal Year, as adjusted as provided in this definition-and calculated by the City or by an Independent Engineer. For purposes of calculating Maximum Adjusted Annual Debt Service, the determination of Debt Service on the Applicable Parity Obligations coming due in each Fiscal Year-shall be subject to the Debt. Service Adjustments and Assumptions. "Moody's" means Moody's Investors Service, Inc. and any successor entity rating Parity Obligations at the request of the City. "Net Payments" means with respect to a .Qualified Swap Agreement, the amount payable by the City on each .scheduled payment date under such Qualified Swap Agreement net of the amounts payable by the counterparty .under such Qualified Swap Agreement on such scheduled payment date. "Net Transferable Income" means, with respect to any Fiscal Year, the Net Revenues for such Fiscal Year less the Debt Service for such Fiscal Year. "Nominee" means the nominee of the Securities Depository for the Book-Entry Bonds in whose name such Bonds are to be registered. The initial Nominee shall be Cede 8i Co., as the nominee of DTC. "One Month USD LIBOR Rate" means the British Banker's Association average of interbank offered rates in the London market for United States dollar deposits for a one month period as reported in the Wall Street Journal or, if not reported in such newspaper, as reported in such other source.as may be selected by the City. "Opinion of Bond Counsel" means a written opinion signed by Bond Counsel. "Outstanding" when used as of any particular time with respect to Obligations, means,. except as otherwise provided in the Indenture,.all Obligations theretofore or thereupon being issued or incurred by the City, except (a) Obligations. theretofore cancelled or surrendered for cancellation; (b) Obligations paid or deemed to be paid within the meaning of any defeasance provisions of the Issuing Instrument pursuant such Obligations were issued; and (c) Obligations in lieu of or in substitution for which replacement Obligations have been issued. "Paired Obligations" shall mean any Series (or portion .thereof] of Parity Obligations designated as Paired Obligations in the Issuing Instrument authorizing the. issuance thereof, which are simultaneously issued (a) the principal of which is of equal amount maturing and to be redeemed (or cancelled after acquisition thereof) on the same dates and in the same amounts, and (b) the interest rates which, taken together, result in an irrevocably fixed interest rate obligation of the City for the terms. of such Paired Obligations. B-9 OHS West260621165.8 42797-2 SJO/EJC "Parity Obligations" means fonds and any Obligations which are payable from the Net Revenues and amounts in the Light and Power Fund other than the Operating Reserve on a parity with the payment of the Bonds and which satisfy the applicable conditions of the Indenture, including without limitation Credit Provider Reimbursement Obligations and,. with respect to Qualified Swap Agreements, the Net Payments, but not. the Termination Payments and other.payments, due thereunder.. "Participants" means, with respect to a Securities Depository for Book-Entry Bonds; those participants listed in such Securities Depository's book-entry system as having an interest in such Bonds. "Paying Agent" means, with respect to a Series. of Bonds, the Trustee and any banking corporation, banking association or trust company designated as paying agent for such Series of Bonds pursuant to the Indenture, and its successor or successors appointed in the manner provided in the Indenture. . "Permitted Investments" means any of the following. obligations. if and to the extent that they are permissible investments of-funds of the City as stated in-its current investment policy (the Trustee-may rely on the investment directions of the City that the investment is approved by the City's investment policy) and to the .extent then permitted by law: (a) Direct obligations of the United States (including obligations issued or held in book-entry form on the books of the Department of the Treasury, ,.and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States. (b) Bonds, debentures; notes or other evidence of indebtedness .issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States (stripped securities are only. permitted if they have been stripped by the agency itself): (i) Farmers Home Administration ("FmHA") Certificates of beneficial ownership (ii) Federal Housing Administration Debentures ("FHA") (iii) General Services Administration .Participation certificates (iv) Government National Mortgage Association ("GNMA") GNMA -guaranteed mortgage-backed bonds: GNMA -guaranteed pass-through obligations (participation certificates) (v) United States Maritime Administration Guaranteed Title XI financing (vi) United States Department of Housing and Urban Development Project Notes . Local Authority Bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any. of the following non-full faith and credit United States government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System Senior debt obligations (ii) Federal Home Loan Mortgage Corporation ("FHLMC") Participation Certificates Senior debt obligations B-10 OHS West:26062ll65.8 42797-2 SJO/EJC (iii) Federal National Mortgage Association ("FNMA") Mortgage-backed securities and senior debt obligations (excluded are stripped mortgage securities which are valued greater-than par on the portion of unpaid principal) (iv) Student Loan Marketing Association Senior debt obligations (v) Resolution Funding Corporation obli atg ions (only the interest component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New. York in book entry form are acceptable) (vi) Farm Credit Svstem Consolidated. system-wide bonds and notes- , (d) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of "AAAm-G," "AAA-m" or "AA-m" and if rated by Moody's rated:"Aaa," "Aal" or "Aa2," including funds for which the Trustee or.any of its affiliates (including any holding company, subsidiaries, or other affiliates) provides investment advisory or other management services; provided such-funds satisfy the criteria contained in the Indenture. (e) Certificates of deposit secured at all, times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks (including affiliates of the Trustee), savings and loan associations or mutual savings banks. The collateral must be held by a third party and the City or the Trustee must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by FDIC, including BIF and SAIF. (g) Investment agreements with, or guaranteed by, a domestic or foreign bank or corporation (other than a life or property casualty insurance company) the long-term debt of which is rated at least "AA" by S&P and "Aa" by Moody's; and which agreements are acceptable to each Credit Provider .whose acceptance is required by a Supplemental Indenture or a Credit Support Agreement. (h) Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A-1" or better by S&P. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies. (jj Federal funds- or bankers _ acceptances with a maximum term of one year of any bank (including those of the Trustee and its affiliates) which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "A3" or better by Moody's and "A-1" or "A" or better by S&P. (k) .Repurchase Agreements for 30 days or less must satisfy the following criteria. Repurchase Agreements which exceed 30 days must be acceptable to each Credit- Provider whose acceptance is required by a Supplemental Indenture or a Credit Support Agreement. (i) Repurchase agreements must be between the City or the Trustee and a dealer bank or securities -firm ' . (1) Primary dealers on the Federal Reserve reporting dealer list must be -rated "A" or better by S&P and Moody's, or - (2) Banks must be rated "A" or above by S&P and Moody's. B-11 OHS west:260621165.8 42797-2 SJO/EJC (ii) The written repurchase agreements contract must include the following: (1) Securities which are acceptable for transfer are: (a) Securities described in subsection (a) or (b) of this definition, or (b) Securities of FNMA or FHLMC described in .subsection (c) of this definition (2) The collateral must be delivered to the City, the Trustee (if Trustee is .not supplying the collateral) or third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before/simultaneously with payment. (3) Valuation of Collateral (a) The securities-must be valued weekly, marked-to- market abcurrenCmarket price plus accrued interest (b) The value of collateral in the case of securities described in subsections (a) or (b) of this definition must be equal to 104% of the amount of cash transferred by the City or the Trustee to the dealer bank. or security firm under the repurchase agreements plus accrued interest. The: value of collateral in the case of securities of FNMA or FHLMC described in subsection (c) of this definition must be equal to 105% of the amount of cash: transferred by the City or the Trustee to the dealer bank or securityfirm under the repurchase agreement plus accrued interest. If the value of securities held as collateral. falls below the required percentage of the value of the cash transferred, then additional cash and/or acceptable securities must be transferred. (iii) Le ag 1 Opinion An opinion of counsel selected by the City, which may be the City Attorney. or other counsel.retained by the City, to the effect that the repurchase agreement meets .guidelines under state law for legal investment of public funds must be received by the City or the Trustee. (1) Any state administered pool investment fund in which the City is statutorily permitted or required to invest will be deemed a permitted investment, including, but not limited to the Local Agency Investment Fund in the treasury of the State. (m) Advance Refunded Municipal Securities. "Person" means an individual, corporation, firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political. subdivision thereof. "Principal Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Principal .Office" means, with respect to: (i) the Trustee, the principal office of such Trustee in Los Angeles,, California; and (ii) a Paying Agent or a Credit Provider, the office designated as such in writing by such party to the Trustee, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange B-12 OHS West:260621165.8 42797-2 SJpBJC such term shall mean the office or agency of the Trustee at which, at any particular.time, its corporate trust agency business shall be conducted. "Prudent- Utility Practice" means any of the practices, methods, -and -acts which, in the exercise of reasonable judgment, in light of the facts, including but not limited to, the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry prior thereto, known at the time the decision was made, would fiave been expected to accomplish the desired result consistent. with cost-effectiveness, reliability, safety, and expedition. It is recognized that Prudent Utility Practice is not intended to be limited to optimum practice, method; or act to the exclusion of all .others, but rather is a spectrum of possible practices, methods, or act which could have been expected to accomplish the desired result at the lowest reasonable cost consistent with cost-effectiveness, reliability, safety, and expedition. "Purchase Price" means: (i) with respect to Bonds of any Series, the purchase price set forth or determined pursuant to the Supplemental Indenture authorizing the Bonds of such Series to be paid to the Owners of such. Bonds when such Bonds are tendered for purchase. or deemed tendered for purchase in accordance with the provisions of such Supplemental Indenture; and (ii) with respect to other,Parity Obligations, the purchase price set forth in the Issuing Instrument authorizing such Parity Obligations to be paid to the owners of such Parity Obligations when such Parity Obligations are tendered or, deemed tendered for purchase in accordance with- the provisions of such Issuing Instruments. "Qualified Swap Agreement" means a Public Finance Contract entered into by the City and satisfying the conditions of the Indenture. "Rating Agency" means, as of any time .and. to the extent it is then providing or. maintaining a rating on Parity Obligations at the request of the City; each of Moody's or Standard & Poor's, or in the event that neither Moody's or Standard & Poor's then maintains a rating on Parity Obligations at the request of 'the City, any other nationally recognized rating agency.then providing or maintaining a rating on the Bonds at the request of the City. "Rating Category" means (1) with respect to any long-term rating category, all ratings designated. by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier. and (2) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but -not. any plus or minus. sign or other modifier. "Rating Confirmation" means written evidence from each Rating Agency then rating Outstanding Parity Obligations at the request of the City to the effect that, following the event which requires the Rating Confirmation, the then current rating for each Outstanding Parity Obligation shall not be lowered or withdrawn solely as a result of the occurrence of such event. "Rebate Fund" means the City of Vernon Electric. System Rebate Fund established pursuant to the Indenture. "Record Date" means, with respect to am Interest Payment Date for a Series of Bonds, the date or dates specified as such in the Supplemental Indenture authorizing such Series of Bonds. "Redemption Date" means, with respect to any Bonds to be redeemed in accordance with the Indenture and the. Supplemental Indenture authorizing such Bonds, the redemption date set forth in notice of redemption of such Bonds given in accordance with the terms of the Indenture. "Redemption Fund" means the City of Vernon Electric System Redemption Fund established pursuant to the Indenture. "Redemption Price" means, with respect to any redemption of a Bond prior to its maturity, the amount to be paid upon such redemption of the Bond as set forth in; or determined in accordance with, the Supplemental Indenture authorizing such Bond.. B-13 OHS West:260621165.8 42797-2 SJO/EJC "Refunding Bonds" means Bonds issued in accordance with the terms and conditions of the Indenture for the purposes, and satisfying the conditions of the Indenture. "Refunding Parity Obligations" means Parity Obligations,-including Refunding Bonds, issued for the purposes. set forth in the Indenture and satisfying the conditions set forth in the Indenture . "Representation Letter" the letter or letters of representation from the City to, or other instrument or agreement with, a Securities Depository for Book-Entry Bonds, in which the City, among other things, makes certain representations to the Securities Depository with respect to the Book-Entry Bonds, the payment thereof and delivery of notices with respect thereto. "Reserve Financial Guaranty" means a policy of municipal bond insurance or surety bond issued by a municipal bond insurer or a letter of credit issued by.a bank or other institution if the obligations insured by such insurer or issued by such bank or other° institution, as the case may be, have ratings at the time of issuance of such .policy or surety bond or letter of credit in the highestrating category (without regard to qualifiers) by S&P and Moody's and, if rated by A.M. Best & Company, also in the highest rating category (without regard to qualifiers) by A.M. Best Company. "Reserve Financial Guaranty Provider" means an issuer of a Reserve Financial Guaranty. "Rule 15c2-12" means Rule.15c2-12 of the Securities and Exchange Commission adopted pursuant to the Securities Exchange Act of 1934, as .amended, as the same may be amended and supplemented from time to time. "Second Supplemental Indenture" means the Second Supplemental Indenture of Trust, dated as of [May] 1, 2009, between the City and the Trustee supplementing the Masten Indenture, as the same may be amended and supplemented in accordance with the provisions of the Master Indenture and relating to the Bonds. "Securities Depository" means a trust company or other entity which provides abook-entry system for the registration of ownership interests of Participants in securities and which is acting as security depository for Book- Entry Bonds. "Serial'Obligations" means.Obligations for which no Sinking Fund Installments are established. "Serial Parity Obligations" means Serial Obligations which are Parity Obligations. "Series" means Obligations issued at the same time or sharing some other common term or characteristic and designated in the Issuing Instrument pursuant to which such Obligations were issued as a separate issue or series of Obligations. "SIFMA Index" means, as of any date, The Securities Industry and Financial Markets Association Municipal Swap Index as of the most recent. date for which such index' was published or such other weekly, high-grade. index comprised of seven-day, Tax-Exempt variable rate demand notes produced by Municipal Market- Data, Inc., or its successor, or as otherwise designated by. The Securities Industry and Financial Markets Association; provided, however; that, if such index is no longer produced by Municipal Market Data, Inc. or its successors, then "SIFMA Index" shall mean such other reasonably comparable index as may be selected by the City. "Sinking Fund Account" means the account by that name in the Debt Service Fund established pursuant to the Indenture. "Sinking Fund Installment" means, with respect to any Term Parity Obligations, each amount so designated for such Term Parity Obligations, in the .Issuing Instrument authorizing the issuance of such Parity Obligations requiring payments by the City from the Net Revenues to be applied to the retirement of such Parity Obligations on and prior to the stated maturity date thereof. B-14 OHS West:260621165.8 42797-2 SJO/EJC "Standard & Po.or's" means Standard & Poor's'Rating Services and any successor entity rating Parity Obligations at the request of the City: "State" means the State of California. "Subordinate Obligation" means any Obligation which is expressly made subordinate and junior in right of payment from the Net Revenues and amounts in the Light and Power Fund other than the Operating Reserve to the payment of Parity Obligations and which complies with the provisions of the Indenture: "Supplemental Indenture" means any supplemental indenture .supplementing or amending the Indenture as theretofore in effect, entered into by the City and the Trustee in accordance with the Indenture . "Tax Certificate" means a certificate relating to the requirements. of the Code signed on behalf of the City and delivered in connection with the issuance of a Series of Bonds. "Tax-Exempt" means., with respect to interest on any obligations of a state or local government, including the Bonds, that 'such interest is excluded from the gross income of the holders thereof (other than any holder who is a "substantial user" of facilities financed with such obligations or a "related .person" within the meaning of Section 147(a) of the Code) for federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for. purposes of calculating. other tax liabilities, including any alternative minimum tax or environmental tax under the Code. "Tax-Exempt Securities".means bonds, notes ~r other securities the interest on which is Tax-Exempt. "Tender Indebtedness" means any Parity Obligations or portions of Parity Obligations, a feature of which is an option or obligation, on the part of the owners thereof under the terms of such Parity Obligations, to tender all or a. . portion of such Parity Obligations to the .City, a' fiscal agent, a paying agent; a tender .agent or .other agent for purchase and requiring that such Parity Obligations or portions thereof be purchased. at-the applicable Purchase Price if properly presented. "Termination Payment" means with respect to a Qualified Swap Agreement, the amount payable by the City as a result of the termination of such Qualified Swap Agreement prior to its scheduled expiration date. "Term Obligations"means Obligations which are payable on or before their specified maturity dates from Sinking Fund Installments established for that purpose and calculated to retire such Obligations on or before their specified maturity dates. . "Term Parity Obligations" means Term Obligations which are Parity Obligations. "Trustee" means, The Bank of New York Mellon Trust Company, N.A., as trustee for the Bonds under the Indenture and any successor satisfying the requirements of the Indenture. "Unrealized Item" means each item of revenue or expense of the Electric System recognized as a revenue or expense of the Electric System in accordance with Generally Accepted Accounting Principles which are due to unrealized gains or losses caused by marking assets or liabilities of the Electric System to market. "Variable Rate Indebtedness" means any Obligation, other than Paired Obligations, the interest rate on which to the maturity thereof is not established at a rate which is not subject to fluctuation or subsequent adjustment, either at the time of issuance of such Obligation or some subsequentdate. THE INDENTURE Authorization of Bonds _ B-15 OHS West;260621165,8 42797-2 SJO/EJC The Indenture provides certain terms and conditions. upon. which Bonds of the City to be designated as "City of Vernon Electric System Revenue Bonds" may be issued from time to time as authorized by Supplemental Indentures. The aggregate principal amount of Bonds-which may be executed, authenticated and delivered under the Indenture is not limited except as may be provided therein or as may be limited by law. Indenture to Constitute Contract In consideration of the purchase and acceptance of each -Bond issued under the Indenture by those who shall own the same from time to time, the provisions of each Bond and the provisions of the Indenture applicable to _ such Bond shall be deemed to be and shall constitute a contract between the City and the Owner of such Bond. No Recourse on Bonds Neither the members of the City. nor the officers or employees of the City shall be individually liable on the. Bonds or in respect of any undertakings by the City under the Indenture, any Supplemental Indenture or any Bond. Paying Agent The City appoints the Trustee as a Paying Agent for the Bonds of each Series, and may at any time or from time to time appoint one or more. other Paying Agents having the qualifications set forth in the Indenture as an additional. Paying Agent for the Bonds of one or more Series. The Trustee shall signify its acceptance of the duties and obligations imposed upon it by the Indenture, including the duties of Paying Agent for the Bonds, by the execution and the delivery of the Indenture to the City and by such execution and delivery the Trustee shall be deemed to have accepted such duties and obligations with respect to all . the Bonds thereafter to be issued, but only, however, upon the terms and conditions set forth in the Indenture and no implied covenants shall be read into the Indenture against the Trustee. .Each Paying Agerit other than the Trustee shall signify its acceptance of the duties -and obligations imposed upon it by the Indenture by executing and delivering to the City and to the Trustee a written acceptance thereof. The Principal Offices of the Paying Agents are designated as the respective offices or agencies of the City for the payment of the principal and any applicable Redemption Price of the Bonds. General Provisions for Issuance of Bonds All (but not less than all) the Bonds of each Series •shall be executed by the City for issuance under the Indenture and delivered to the Trustee and thereupon shall be authenticated by the Trustee and by it delivered to .the. City or upon its order, but only upon the receipt by the Trustee of the following items (upon which the Trustee may conclusively rely in determining whether the conditions precedent for the issuance and authentication of such Series of Bonds -have been satisfied): (1) An executed counterpart of the Indenture, as amended- to the date of the initial delivery of such Series of Bonds, and an executed counterpart of the Supplemental Indenture authorizing the issuance of such Series of Bonds, which Supplemental Indenture shall specify; (i) the sources of payment for the Bonds of such Series other than the Trust Estate, if any; (ii) the Series designation of such Bonds; (iii) the authorized principal amount of the Bonds of such Series; (iv) the purposes for which such Series of Bonds, are being issued, which, for Bonds other than the Bonds, shall be one of the purposes specified in the provisions of the. Indenture relating to additional bonds or refunding bonds; (v) the date or manner of determining the date of the Bonds of such Series; (vi) the. maturity date or dates of the Bonds. of such Series and either the principal amount of the Bonds of such .Series maturing on each such maturity date or the method for determining such principal amount; (vii) which, if any, of the Bonds of such Series shall constitute Serial Obligations and which, if any, shall constitute Term Obligations; (viii) the interest rate or rates on the Bonds of such Series or the manner of determining such interest rate or rates; (ix) the Interest Payment Dates for the Bonds of such Series or the manner of establishing such Interest Payment Dates; (x) the Authorized Deriominations of, and the manner of numbering and' lettering, the Bonds of such Series; (xi) the Redemption Price or Prices, if any, and, subject to the applicable provision of the Indenture, the B-16 OHS West:260621165.8 42797-2 SJOBJC redemption terms for. the Bonds of-such Series; (xii) the Sinking Fund Installments, if any, for the Bonds of -such Series which constitute Term Obligations, provided that each Sinking Fund Installment, if any, -shall fall upon an Interest Payment Date for the Bonds of such Series; (xiii) if any of the Bonds of such Series constitute Tender Indebtedness: (A) the source of payment of the Purchase Frice of uch Bonds, (B) the terms and conditions, including Purchase Price, for the exercise by the Owners or Beneficial Owners of such Bonds of the purchase, (C) any extension options granted with respect to such Bonds and (D) the terms and conditions, including. Purchase Price, upon which the Bonds of such Series shall be subject. to mandatory tender for. purchase; (xiv) if the Bonds of such Series are not to be Book-Entry Bonds, a statement to such effect; (xv) if the Bonds of such Series are Tax-Exempt Securities, the account. in the. Rebate Fund established .for such- Series and the. terms and conditions thereof; (xvi) the application of the proceeds of the sale of such Series of Bonds including.the amount; if any, to be deposited in the funds and accounts under the Indenture; (xvii) the forms of the Bonds of such Series and of the certificate of authentication thereon; and (xviii) the appropriate .funds and accounts, if 'any, relating to such Series of Bonds established under such Supplemental Indenture; (2) An Opinion of Bond Counsel, dated the date of the initial delivery of such Series of Bonds, to the effect-that the Indenture, as amended to such date, as supplemented by the Supplemental Indenture authorizing the issuance of such Series of Bonds, constitutes the. valid and binding obligation of the City; (3) With respect to any Additional -Bonds other than the. Bonds, the Trustee shall have received the certificate with respect to the satisfaction of the conditions for .the Issuance of :Additional Parity Obligations contained in the Indenture; - (4) With respect to any Refunding Bonds, the Trustee shall have received a copy of the Opinion of Bond Counsel required by the Indenture; and (5) Such further documents, moneys and securities as are required by the applicable provisions of the Indenture or of the Supplemental .Indenture authorizing the issuance of such Series of Bonds: After the original issuance of Bonds of any Series, no Bonds of such Series shall be issued except in lieu of or in substitution for other Bonds of such Series pursuant to the Indenture. Additional Bonds One or more Series of Additional Bonds may be issued; authenticated and delivered upon original issuance for the purpose of paying all or a portion of the Costs of any. Capital Improvement or Capital Asset. Additional Bonds may be issued in a principal amount sufficient to pay such Costs, including- making of any deposits into the .funds or accounts required by the provisions of the Indenture and providing amounts for Costs of Issuance of such Additional Bonds. Refunding Bonds- One or more Series of Refunding Bonds may be issued, authenticated and delivered upon original issuance for the purpose of refunding all or any portion of the Outstanding Parity Obligations. Refunding Bonds may be issued in a principal amount sufficient to accomplish such refunding including providing amounts for the Costs of Issuance of such Refunding Bonds, and the making of any deposits into the funds and accounts required by the applicable provisions. of the Indenture. Refunding Bonds of each Series shall be authenticated and delivered by-the Trustee only upon receipt by the Trustee (in addition to the documents required by the Indenture) of an Opinion of Bond Counsel to the effect that the Parity ' Obligations (or the portion thereof) to be refunded are deemed paid pursuant to the Issuing Instrument authorizing such Parity Obligations. Such Opinion of Bond Counsel may rely upon an Accountant's Certificate as to the sufficiency of available funds to pay such Parity Obligations. The Trustee may conclusively rely on such Opinion of B-17 OHS West;260621165.8 42797-2 SJO/EJC Bond Counsel in determining whether the conditions. precedent for the issuance and~authentication of such Series of Refunding Bonds have been satisfied. - Conditions to Issuance of Parity Obligations Without regard to the last paragraph under this heading, the City may, at any time and from time to time, issue or . enter into a transaction under a Qualified Swap Agreement, the Net Payments under which shall constitute Parity Obligations, provided (i) the transaction shall relate to a principal amount of Outstanding Parity Obligations or investments held under an.Issuing Instrument for Parity Obligations, in each case as specified by an Authorized City Representative; (ii) the notional amount of the transaction shall not exceed the principal amount of the related Parity ` Obligation or the amount of such investments, as applicable; and (iii) either: (x) at the time of entering-into the transaction, the counterparty (or a guarantor of-the counterparty'.s obligations under the'transaction) shall be rated at least "Aa" by Moody's or "AA" by S&P and the Qualified Swap Agreement shall include the Collateral Requirements; or (y) the City has. received a Rating Confirmation from each Rating Agency then rating Parity Obligations at the request of the City with respect to such transaction. Without regard to the last paragraph under-this heading, the City may, at any time and from time to time, issue Refunding,Parity Obligations provided that the Trustee receives an Opinion of Bond Counsel to the .effect that the Parity Obligations to be refunded are deemed paid pursuant to the Issuing Instrument authorizing such Parity Obligations. Without regard to the last paragraph under-this heading, the City may issue the 2008 Bonds. Without regard to the lastparagraph under this heading, the City may, at any time and_from time to time, enter into Credit Support Agreements or otherwise become obligated for. Credit Provider Reimbursement Obligations with respect to Parity Obligations: The City may, at any time and from time to time, issue any Additional Parity Obligations, provided the City obtains or provides either (x) a certificate or certificates, prepared by the City or at the City's option by an Independent Engineer, showing: (i) that the Adjusted Net Revenues for the applicable Calculation Period, which Calculation Period shall be selected by the City in its sole discretion,. shall have amounted to at least 1.25 -times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be .Outstanding immediately after the issuance of the proposed Additional Parity Obligations; and (ii) that the.Net Revenues for such applicable Calculation Period shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations; or (y) a. certificate or certificates, prepared by the City or at the City's option by an Independent Engineer, showing: (i) that the projected Adjusted Net Revenues during each of the five complete Fiscal Years beginning with the first. Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, shall have amounted to at least .1.25 times the Maximum Adjusted Annual Debt .Service on all Parity Obligations to be Outstanding during the applicable Fiscal Year; and (ii) that the .projected Net Revenues during each of the five complete Fiscal Years beginning with the first Fiscal- Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, shall have amounted to at least 1.00 times the . Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during the applicable Fiscal Year. For purposes of preparing the certificate or certificates described in clause (x) of this subsection, the City and any Independent Engineer shall utilize and rely on financial statements prepared by the City which have been subject to audit liy an Independent Certified Public Accountant but may utilize and rely upon the books andxecords of the City or any financial statements prepared by the City which have not been subject to audit by an Independent Certified Public Accountant if audited financial statements for the particular Calculation Period selected by the City are not available. Conditions of Issuance of Subordinate Obligations The City may, at any time or from time. to time, issue. Subordinate Obligations .without satisfying the. requirements of the Indenture relating to Parity Obligations for any purpose in connection with the Electric System, including, without limitation, the financing of a part of the cost of acquisition and construction of any Capital Improvement or the refunding of any Subordinate Obligations or Outstanding Parity Obligations (or portions B-18 ' OHS West;260621165.8 42797-2 SJO/EJC thereofj. Such Subordinate Obligations may be secured. by a pledge of Revenues and amounts in the Light and Power Fund, provided that any such pledge shall be, and shall be expressed to be, subordinate and junior in all respects to the pledge of the Revenues and amounts in the Light and Power Fund securing such Parity Obligations as may be Outstanding from time to time; including Parity Obligations issued after the issuance of such Subordinate Obligations. Such Subordinate Obligations may be payable from Net Revenues and amounts in the Light and Power Fund other than the Operating Reserve, provided that any such payment shall be„and shall be expressed to be, subordinate and junior in all respects to the payment from such sources of such Parity Obligations as may be Outstanding from time to time, including .Parity Obligations issued after the issuance of .such .Subordinate. Obligations. The Issuing Instrument for Subordinate Obligations shall contain provisions (which shall be binding on all owners of-such Subordinate Obligations) not more favorable to the owners of such Subordinate Obligations than the following: (1) If an Event of Bankruptcy with respect to the City shall occur and be continuing, the owners of all Outstanding Parity -0bligations shall be entitled to receive payment in full in cash of all principal, interest and all other payments due with respect to all such Parity Obligations, including any Termination Payments, before the owners of the Subordinate Obligations are entitled to receive any .payment from the Net Revenues and amounts in the Light and Power Fund with respect to the.Subordinate Obligations. (2) In the event that any Subordinate Obligation is declared due and payable before its expressed maturity .because of the occurrence of an event of default (under circumstances when the provisions of (1) above shall. not be applicable), the owners of all Parity.Obligations .Outstanding at the time such Subordinate Obligation so becomes due and payable because of such event of default, shall be entitled to receive payment in full in cash of all principal, interest and all other payments due with respect to all such Parity Obligations before the owners of such Subordinate Obligation are entitled to receive any accelerated payment from. Net Revenues and amounts in the Light and Power Fund with respect to such Subordinate Obligation:: For .purposes of this subdivision (2), a Termination Payment with respect. to a Public Finance Contract which is not a Qualified Swap Agreement shall not be considered a declaration of amounts due and payable before expressed maturity even if declared due and payable because of the occurrence of an event of default. (3) If any. defaultwith respect to any Outstanding Parity Obligation shall have occurred and be continuing (under circumstances when the provisions of (1) above shall. not be applicable), the owners of _ - all Outstanding Parity Obligations shall be entitled to receive payment in full in cash of all principal,,- interest and all other payments due with, respect to all such Parity Obligations as the.same become due and payable in accordance with the provisions of the Issuing Instrument authorizing the issuance of such Parity Obligations before the owners of the Subordinate Obligations are entitled to receive, subject to the provisions of (Sj below, any payment from the Net Revenues and amounts in the Light and Power Fund with respect to the Subordinate Obligations. (4) No Bondowner or owner of other Outstanding Parity Obligations shall be prejudiced in his right to enforce subordination of the Subordinate Obligations by any act or failure to act on the part of the City or the Trustee.. - (5) The Subordinate Obligations may provide that the provisions (1), (2), (3) and (4) above are solely for the purpose of defining the relative rights of the Owners of the Bonds and the owners of all other Outstanding Parity Obligations on the one hand,'and the owners of Subordinate Obligations on the other-hand, and that nothing therein shall impair, as between the City and the owners of the Subordinate Obligations, the obligation of the. City, which may be unconditional. and. absolute, to pay to the owners of such Subordinate Obligations the principal thereof and premium, if any, and interest thereon in accordance with their- terms, nor shall anything in the Indenture prevent the owners of the Subordinate Obligations from exercising all remedies otherwise permitted by applicable law, or under the Subordinate Obligations or the Issuing Instruments authorizing the Subordinate Obligations, upon default under such Subordinate Obligations or Issuing Instruments, subject to the rights under (1), (2), (3) and (4) above of the Owners of B-19 OHS West:260621165,8 42797-2 SJO/EJC Outstanding Bonds and the owners of other Outstanding Parity Obligations to receive payment from the Net Revenues and amounts in the Light and Power Fund otherwise payable or deliverable to the owners of .the .Subordinate Obligations; and the Subordinate Obligations may provide that, insofar as a trustee, fiscal agent or paying agent for such Subordinate Obligations. is concerned, the foregoing provisions shall not prevent the application by such .trustee, fiscal agent or paying agent of any moneys deposited with such trustee, fiscal agent or paying agent. for the purpose of the payment of or on account of the principal (and premium; if any). and interest on such Subordinate Obligations if such trustee, fiscal agent or paying agent did not have knowledge at the time of such application that such payment was prohibited by the foregoing provisions. Any Subordinate Obligations may -have such rank or priority with respect to any other Subordinate Obligations as may be provided in the Issuing Instrument, authorizing the issuance or securing of such Subordinate Obligations and may contain such other provisions as are not in conflict with the provisions of the Indenture. Credit Provider Bonds. Subject only to the provisions of the Indenture relating to bonds constituting special obligations,. notwithstanding any other provision contained. in the Indenture to the contrary, Bonds which are Credit Provider Bonds shall have -terms and conditions, including terms of maturity, payment, prepayment and interest rate, as shall be specified in the applicable Credit Support Agreement. Funds and Accounts Establishment.' To ensure the payment when due and payable; whether at maturity or upon redemption or upon acceleration, of the principal of, Redemption Price; if any, and interest on the Bonds, the Indenture establishes the following funds and accounts, to be held and maintained by the Trustee and applied as .provided in the Indenture for so long as any of the Bonds are Outstanding: the City of Vernon Electric System Debt Service Fund, comprised of an Interest Account, a Principal Account and a Sinking .Fund Account; the City of Vernon Electric System Redemption Fund; the City of Vernon Electric System Debt Service Reserve Fund; the City of Vernon Electric. System Rebate Fund;-and- the City of Vernon Electric System Expense Stabilization Fund: Debt Service Fund. (a) From -the moneys paid by the City pursuant to the provisions of the Indenture relating to- payments of interest,. principal and Sinking Fund Installments due with respect to Outstanding Bonds by the City, the Trustee, upon receipt of such. moneys, shall deposit the following amounts in the following specified accounts within the Debt Service Fund: (1) For deposit in the Interest Account, an amount equal to the interest payable on the Outstanding Bonds on the applicable Interest Payment Date; (2) For deposit in the Principal Account, an amount equal to the principal of the Outstanding Bonds maturing on the applicable maturity.date; and (3) For deposit in the Sinking Fund Account, an amount equal to the Sinking Fund Installment due on the applicable Sinking Fund Installment due date. (b) From the moneys paid by the City pursuant to the provisions of the Indenture relating to other types of, payments due with respect to Outstanding Bonds by the City, the Trustee, upon receipt of such moneys, shall deposit the .following amounts in the following specified accounts within the Debt Service Fund: (1) For deposit in the Interest Account, an amount equal to the interest on the Outstanding Bonds then payable; and (2) For deposit in the Principal Account, an amount equal to the principal of the Outstanding Bonds then payable. . (c) In the event that Bonds which are Term Obligations purchased or redeemed at the option of the City are deposited with the Trustee for the credit of the Sinking Fund. Accounf not less than forty-five (45) days prior to the due date for any Sinking Fund Installment for such Bonds, such deposit shall satisfy (to the extent of 100% of the principal amount of such Bonds) any obligation of the City to make a payment to the Trustee pursuant to the Indenture, with respect to such Sinking. Fund Installments. Any Bond so deposited. with the Trustee shall be cancelled and shall no longer.be deemed to be Outstanding for anypurpose. Upon making the deposit with the Trustee of Bonds which are Term Obligations as provided in the Indenture, the City may specify the dates and amounts of Sinking Fund Installments for such Bonds as to which the City's obligations to make a payment to the Trustee pursuant to the Indenture shall be satisfied: B-20 OHS West:260621165.8 42797-2 SJO/EJC (d) Except as described below: (i) amounts deposited in the Interest Account shall remain therein until expended for the payment of interest on the Bonds; (ii) amounts deposited in the Principal Account shall remain therein until expended for the payment of principal of the Bonds; and (iii) amounts deposited in the Sinking Fund Account -shall remain therein until expended for the redemption or payment at maturity from Sinking Fund Installments of Bonds which. are Term Obligations. (e) The Trustee shall apply .amounts in the Interest Account to the payment when due of interest on the Outstanding Bonds. The Trustee shall apply amounts in-the Principal Account to the payment when due of principal of the Outstanding Bonds.. The Trustee shall apply amounts in the Sinking Fund .Account to the redemption (or payment at maturity) of the Bonds which are Term Obligations. In the event one or more Paying Agents have been appointed for the Bonds, moneys may be transferred by the Trustee. to such Paying Agents from the appropriate account in the Debt Service Fund for deposit into a special trust account to ensure the payment when due of the principal of, Redemption Price, if any, and interest on the Bonds. In the event that any principal of, Redemption Price or interest on, any Bond has been paid from amounts,-made available pursuant to a Credit Support Instrument, amounts in the appropriate accounts in the Debt Service Fund with respect to such Bond, and any such amounts transferred by the Trustee from the Debt Service Fund to a Paying Agent for such Bond pursuant to the Indenture, shall be paid to the applicable Credit Provider as a reimbursement of the amounts so paid: , Redemption Fund. From the moneys paid by the City pursuant the provisions of the Indenture relating to payments by the City, the'Trustee shall deposit in the Redemption Fund an amount equal to the Redemption Price of the Bonds to be redeemed. Said moneys shall be set aside in said Fund and shall be applied on or after the redemption date to the payment of the Redemption Price of the Bonds to be redeemed -and, except as otherwise provided in the Indenture, shall be used only for that purpose. In the event one or more .Paying Agents .have been appointed for the Bonds which are to be redeemed with moneys in the Redemption Fund, amounts in the Redemption Fund .may be transferred from such Fund by the Trustee to the Paying Agent for the Bonds to be redeemed for deposit into a special trust account held by such Paying,Agent to ensure the payment when due the Redemption Price of the Bonds. to be redeemed. In the event that the Redemption Price of a Bond has been paid by a Credit Provider pursuant to a Credit Support Instrument, amounts in the Redemption Fund-with respect to such Redemption Price, and any such amounts transferred by the- Trustee from the Redemption Fund to a Paying Agent for such Bonds pursuant to the Indenture,-shall be paid to such Credit Provider as a reimbursement of the amounts so paid. If, after all of the Bonds designated for redemption have -been redeemed and cancelled or paid and cancelled, there are moneys remaining in the Redemption Fund, said moneys shall be transferred to the Interest Account; provided; however, that if said moneys are part of the proceeds of Refunding Obligations said moneys shall be applied as provided in the Issuing Instrument authorizing the issuance of such Refunding Obligations. Debt Service Reserve Fund. The Indenture provides the Trustee shall draw upon or otherwise take such action as is necessary in accordance with the terms of the Reserve Financial Guaranties on deposit in the Debt Service Reserve - Fund to receive payments -with respect thereto (including the giving of notice as required thereunder):. (i) on any date on which moneys will be required to be withdrawn from the Debt Service Reserve Fund and applied to the payment of principal or Redemption Price of, or interest on, any Bonds and such withdrawal cannot be met: by amounts on deposit in the Debt-Service Reserve Fund; (ii) on the first Business Day which is at least ten (10) days prior to the expiration date. of each Reserve Financial Guaranty, in an amount equal to the deficiency which would .exist in the Debt Service Reserve Fund if such Reserve Financial Guaranty expired, unless a substitute Reserve Financial Guaranty with an expiration date not earlier than 180 days after the expiration date of the expiring Reserve Financial Guaranty is acquired prior to such date or the City deposits funds in the Debt Service Reserve Fund before such date so that the amount in the Debt Service Reserve Fund on such date (without regard to such expiring Reserve Financial Guaranty) is at least equal to the Debt Service Reserve Requirement. Rebate Fured. Each Supplemental Indenture authorizing a Series of Bonds which .are Tax-Exempt Securities shall establish an account in the Rebate Fund in connection with such Series. -Each such. account. in the- Rebate Fund shall have such terms and conditions as shall be provided in the Supplemental Indenture establishing such account. B-21 OHS west:260621165.8 42797-2 SJOBJC Investment of Certain Funds. Moneys held in the Debt Service Fund and the Redemption Fund. shall be invested and reinvested by the Trustee to the fullest extent practicable in securities described in clauses (a) through (c} of the.. definition of "Permitted Investments" in the Indenture which mature not later than such times as shall be necessary to provide moneys when reasonably expected to be needed. for payments to be made. from such Funds. Moneys held in the Debt. Service Reserve Fund shall be invested and reinvested by the Trustee to the fullest extent practicable in securities described in clauses (a), (b), (c), (g), (j) and (m) of the definition of "Permitted Investments" in the Indenture which mature, or,which may be drawn upon without. penalty, at any. time upon not more -than two Business Days notice not later than five years. from the time of such investment.- Moneys .held in the Expense Stabilization Fund may be invested and reinvested in Permitted Investments which mature or which may be drawn upon without penalty at any time upon not more than two Business Days notice, not later than ten years from the time of such investment. The Trustee shall make all such investments of moneys held by it in accordance with directions of an Authorized City Representative, which directions shall be consistent with the Indenture and applicable law, and , which directions shall be written. Interest or other income any Fund created. under the Indenture shall be-paid into such Fund. In making any investment in-any Permitted Investments with moneys in any Fund established- under the Indenture, the Trustee may combine such moneys with moneys in any other Fund but-solely for the purposes of making such investment in such Investments and provided that-any amount so combined shall be separately accounted for. Nothing in the Indenture shall :prevent any Permitted Investments acquired as investments of moneys in any Fund from being issued or held in book-entry form on the books of the Department of the Treasury or the Federal Reserve System of the United States. Valuation and Sale of Investments. Obligations purchased as an investment of moneys in any Fund shall be deemed at all times to be a part of such Fund and any profit realized from the liquidation of such investment shall be credited to such Fund and any loss resulting from the liquidation of such investment shall be charged to the respective Fund. In. computing the amount in the Debt Service Reserve Fund for any purpose under the Indenture, obligations purchased as an investment of moneys in the Debt Service Reserve Fund are to be valued at ..the amortized cost thereof. Except as otherwise provided in the Indenture, the Trustee may sell or present for redemption, or otherwise liquidate any security purchased as an;investment, and take all actions. necessary to draw funds under any such investment, whenever it shall be necessary in order to provide. moneys to meet any payment or transfer from any Fund held. by it or in accordance with directories of an Authorized City Representative, which directions shall be consistent with the Indenture and applicable law and-which directions shall be written. Any security purchased as an investment may be credited on a pro-rata basis to more than one Fund and need not be sold in order to provide for the transfer of amounts from one Fund to another, provided that such obligation is an appropriate Permitted Investment for the purposes of the Fund to which it is to be transferred... The Trustee shall not be liable or responsible -for making any such investment in the manner provided aUove or for any loss resulting from any such investment. The City acknowledges -that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant. the City the right to receive brokerage confirmations of security transactions as they occur, the City specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the City periodic cash transaction statements which include detail for all investment transactions made by the Trustee-under the Indenture. Covenants - Compliance with Indenture. The City shall punctually pay the Bonds in strict conformity with the terms of the Indenture and the Bonds, and shall faithfully observe and perform all the agreements, conditions, covenants and. terms contained in the Indenture required to be observed and performed by it, which obligations shall be absolute arid unconditional-but which shall be special obligations of the City as provided in the Indenture. B-22 OHS West260621165.8 42797-2 SJO/EJC Collection of Rates and Charges.. The City shall have in effect at all times rules .and regulations requiring each consumer or customer located on any premises connected with the Electric System. to pay the rates and. charges applicable to the Electric.-Service provided to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The. City shall not permit any part of the Electric System or any facility thereof to.be used or taken advantage of free of charge by any corporation, firm or person, or by any public agency (including the United States of America, the State of California and any city, county, district, political subdivision, public corporation or agency of any .thereof). Nothing in the Indenture shall prevent the City, in its sole and exclusive discretion, from permitting other parties from selling electricity to retail customers within the service area of the Electric System; provided, however,- that. permitting such sales shall not relieve the City of its obligations under the Indenture. Application of Light and Power Fund. During each Fiscal--Year, .and subject to the provisions of .the Indenture requiring amounts in the Light and power Fund to be applied to amounts due under the Indenture, the City may apply amounts in the Light and Power Fund, other than the Revenues for such .Fiscal Year; to any lawful purpose as determined by the City; provided that so long as an Event of Default has occurred and is continuing, or the Trustee otherwise has control of amounts in the Light and Power Fund, no amounts may be paid from the Light and Power Fund except for Operation and .Maintenance Expenses; amounts required to be paid in such Fiscal Year pursuant to the Indenture and the Issuing Instrument for any- Parity Obligations or the Issuing Instruments for Subordinate Obligations, or when such payment. has been certified by an Independent Engineer as being consistent with Prudent Utility Practice: Creation of Prior Liens. on Trust Estate. The City shall not issue any bond, note, or other evidence of indebtedness payable from or secured by the Trust Estate or any part thereof on a basis which is in any manner prior or superior to the lien on, pledge of and security interest in the Trust Estate securing the Outstanding Bonds pursuant to-the Indenture; or (ii) except for Parity Obligations with respect to the Revenues and/or amounts in the Light and Power Fund, in any manner on a parity with the lien on, pledge of and security interest in the Revenues and amounts in the Light and Power Fund securing the Outstanding Bonds pursuant to the Indenture. Nothing in the Indenture .shall prevent the City from issuing Subordinate Obligations in accordance with Sectzon 2.08. Against Encumbrances:. The City shall pay or cause to be paid when due all sums of money that may become-due or purporting to be due for any labor, services; materials, supplies or equipment furnished, or alleged to have been furnished; to or for the City in, upon, about or relating to the Electric System and shall keep the Electric System free of any and all liens against any portion of the Electric System. In the event any such lien attaches to or is filed against any portion of the Electric System, the City shall cause-each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that if the City desires to contest any-such lien it may do so if contesting such lien shall not materially impair operation of the Electric System. If any such lien shall be reduced to final'judgment and such judgment or any process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and such stay thereafter expires, the City shall forthwith pay or cause to be paid and discharged such judgment. Sale or Other Disposition of Property. The City shall not sell, transfer or otherwise dispose of any of the works, plant, properties; facilities or other part or rights of the Electric System or any real or personal property comprising a part of the Electric System if such sale, transfer or disposition would cause the City to be unable to satisfy. the requirements of the provisions of the Indenture relating to rates for electric service. .Operation and Maintenance of the Electric System; Budgets. The City shall maintain and preserve the Electric System in good repair- and working order at all times and shall operate the Electric System in an efficient and economical manner-and shall pay all Operation and Maintenance Expenses as they become due and payable. The City shall prepare; not later than the lastday of each Fiscal Year, a Budget for the Electric System approved by the City Council setting forth the estimated Revenues, Operation and Maintenance Expenses, scheduled Debt Service and other payments estimated to be paid from the Revenues and amounts in the Light and Power Fund during the next succeeding Fiscal Year. The Electric System Budget for any Fiscal Year may be amended at any - time during such Fiscal Year provided that. such amended Budget shall include all payments coming due in such Fiscal Year with respect to Obligations payable from Revenues or amounts in the Light and Power Fund: In the event the City fails to have a Budget approved by the City Council as required by the Indenture with respect to any B-23 OHS west:260621165.8 42797-2 SJO/EJC Fiscal Year, then references in the Indenture to the amount of Operation-and Maintenance Expenses included in the Budget as of any time shall be deemed to be the Operation and Maintenance Expenses in the latest Budget approved by the City Council as adjusted for an inflation factor equal to ten percentfor each Fiscal Year from the approval of such Budget by the City Council to the applicable time of determination of the Operation and Maintenance Expenses included in the Budget. Insurance. The City shall procure and maintain such insurance relating to the Electric System which it shall deem advisable or necessary to protect its interests-and the interests of the Trustee and the Owners of the Bonds, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with public electric utility systems similar to the Electric System; provided, that any such. insurance may be maintained under aself-insurance program so long as such self-insurance is maintained in the amounts and manner a's is, in the opinion of an accredited actuary, actuarially sound. All policies of insurance required to be maintained under the Indenture shall provide that the Trustee shall be given thirty (30) days' written notice of any intended cancellation thereof or reduction of coverage provided thereby. Payment of Taxes and Compliance with Governmental Regulations. The City .shall pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Electric. System or . any part .thereof. when the same shall become due. The City shall duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Electric System or any part thereof, but the City shall not be required to comply with any regulations or requirements so long.. as the validity or application thereof shall be contested in good faith and contesting such validity or application shall not materially impair the operations or financial condition of the Electric System or the performance of the City under the. Indenture and all Outstanding Bonds. Tax Covenants. (a) The City covenants it shall not take any action, or fail to take any action, if any such action or failure to take actiori would adversely affect the Tax-exempt status of interest on any Bond under Section 103 of the Code. Without limiting the generality of the foregoing, the City shall comply with the requirements of the Tax Certificate, if any, delivered in connection with the issuance of each Series of Bonds. In the event that at any time the City is of the opinion that, in order to comply with its obligations under paragraph (a) above, it is necessary or helpful to restrict or limit-the yield on the investment of any moneys in any of the Funds held by the Trustee pursuant to the Indenture, the City shall so instruct the. Trustee in writing, and cause the Trustee to take such action as may be necessary in accordance with such `instructions. (b) Notwithstanding-any provisions of the Indenture, if the City shall provide to,the Trustee an Opinion of Bond Counsel to the effect that. any specified action required under the Indenture or a Tax Certificate is no longer required or that some further or different action is required to maintain the Tax-Exempt status of the Bonds under Section 103 of the Code, the City-and. the Trustee may conclusively rely on such opinion in complying with the requirements of the Indenture and of the applicable Tax Certificate, and the covenants under the Indenture shall be deemed to be modified to that extent. (c) The covenants described in the foregoing shall survive payment in full or discharge of the Bonds. Amendments to Indenture Amendments Permitted. (a).Subject to the provisions of paragraph{d) below, the provisions of the Indenture or of any Supplemental Indenture and the rights and obligations of the City and of the Owners of the Outstanding Bonds and of the Fiduciaries may be modified; amended or supplemented from time to time and at any. time by a Supplemental Indenture or Supplemental Indentures, with the written consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement, when the written consent of the Owners of at least a majority in aggregate principal amount of the Bonds then Outstanding shall have been filed with the Trustee; or if less than all of the Outstanding Bonds are affected, the written consent of the Owners of at least a majority in aggregate principal amount of all affected Outstanding Bonds; provided that if such modification, amendment or supplement shall, by its terms, not take effect so long as any Bonds of any particular Series and maturity' remain Outstanding, and, with respect to Bonds which are Tender Indebtedness if the conditions of paragraph (d) below are satisfied, the consent of the Owners of such Bonds shall not be required and such Bonds B-24 DHS West:260621165.8 42797-2 SJO/EJC shall not be deemed to be Outstanding for the purpose of any the calculation of Outstanding Bonds. No such. modification, amendment or supplement shall (1) reduce the aforesaid percentage of Bonds the consent of the Owners of which. is required, to effect any such modification, amendment or supplement without -the consent of the Owners of all of the Bonds then Outstanding; (2) extend the fixed maturity of any Bond; or reduce the principal amount thereof, or reduce the amount of any Sinking Fund Installment therefor, or extend the due date of any such Sinking Fund Installment, or reduce the rate of interest on any Bond or extend the time of payment of interest thereon, without the consent of he Owner of each Bond so affected; (3) except as otherwise provided with respect to a Bond constituting Tender Indebtedness in the Supplemental. Indenture authorizing such Bond and subject. to the satisfaction of the conditions of subsection (g) of -this Section, reduce the Redemption Price due on the redemption of any Bond or change the date or dates when any Bond is subject to redemption; or (4) modify the rights or obligations of any Fiduciary without the consent of such Fiduciary. It shall not be necessary. for the. consent- of the Owners to approve the particular form. of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. ..Unless waived by the Owner of an affected Bond or Bonds; prior to the entry into any Supplemental Indenture by the City and the Trustee for any of the purposes described under this heading, the City shall cause notice of the proposed Supplemental Indenture to be mailed, by first class mail, postage prepaid, to the Owners of all Outstanding Bonds (or the .affected Outstanding Bonds) at their addresses appearing on the Bond Register. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall'state that copies thereof are on file at the office of the Trustee for inspection by each Owner of an Outstanding Bond. Whenever, at any time after the date of the mailing of notice of the proposed entry into a Supplemental Indenture pursuant. to the foregoing, the City shall have received an instrument or instruments in writing executed in accordance with the Indenture by or on behalf of the Owners of not less than a majority in aggregate principal amount,of the Bonds then Outstanding, or if less than. all of the Outstanding Bonds are affected, by the Owners of not less than a majority in aggregate principal amount of the affected Outstanding Bonds, which instrument or ..instruments shall refer to the proposed Supplemental Indenture described in the notice of the proposed Supplemental Indenture and shall consent to. such. Supplemental Indenture in substantially the form referred to in such .notice,. thereupon, but not otherwise, the City and the Trustee may enter into such Supplemental Indenture in substantially -such form, without liability or responsibility to any. Owner of any Bond, whether or not such Owner shall have- consented thereto. (b) The Indenture or any Supplemental Indenture may be supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, which the City and the Trustee may enter into with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement but without the consent of the Owner of -any Bond, to provide for the issuance of a Series of Additional Bonds or a Series of Refunding Bonds in accordance with the terms and conditions of the Indenture, and establishing the terms and conditions thereof, including the. rights of any Credit Provider for such Additional Bonds or Refunding Bonds, which may include permittirig such Credit Provider to act for and on behalf of the Owners of such Additional Bonds or Refunding Bonds for. any or all purposes of the Indenture except that no such Credit Provider shall be authorized to extend the fixed maturity of any-Bond, or reduce the principal amount thereof, or reduce the amount of any Sinking Fund Installment therefor,.or extend the due date of any such Sinking Fund Installment, or reduce the rate of interest on any Bond or extend the time of payment of interest thereon; without the consent of the Owner of each Bond so affected; or except as otherwise provided with respect to a Bond constituting Tender Indebtedness in the Supplemental Indenture authorizing such Bond and subject to the satisfaction of the conditions, of paragraph (g) below, reduce- the Redemption Price due on the redemption of. any. Bond or change the date or dates when any Bond is subject to redemption. (c) -The Indenture and any Supplemental Indenture and the rights and obligations of the City, the Fiduciaries and the Owners of the Outstanding Bonds may also be modified, amended. or supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, which he City and the Trustee may enter into with the consent of each Credit Provider whose consent is required by a Supplemental. Indenture or a Credit Support . Agreement but without the consent of any Owners of Bonds (but with the consent of any affected Fiduciary), so Tong as such modification, amendment or supplement shall not materially; adversely affect the interests of the Owners of the Outstanding Bonds, including without limitation, for any one or more of the following purposes: B-25 OHS West:260621165.8 ' 42797-2 SJOBJC (i) to add to the covenants and agreements of the City contained in the Indenture other covenants and agreements thereafter to be observed, or to surrender any right or power in the Indenture reserved to or conferred upon the City; (ii) to pledge, provide or assign any additional security for the Bonds (or any portion thereof), including transferring control of the amounts in the Light and-Power Fund to the Trustee; provided that if the City transfers control of the amounts in the Light and Power Fund to the Trustee, the Trustee shall return such. control at the request of the City only if no Event of Default has ,occurred and' is .continuing and if such return has been consented to by the Owners of a majority in aggregate principal amount of the Borids then Outstanding and with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement; (iii) to add to the covenants. and agreements of the City contained in the Master Indenture or a Supplemental Indenture other covenants and agreements thereafter to be observed, to pledge, provide or assign any security for the Bonds (or any portion thereof), or to surrender any right or power in ..the Indenture reserved to or conferred upon the City; (iv) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission; or of curing or correcting any defective provision, contained in the Indenture or a Supplemental Indenture, or in regard to matters or questions arising under the Indenture or a Supplemental Indenture; as the City may deem necessary or desirable; or (v) to modify, amend or supplement the Indenture or a Supplemental Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as :may be permitted by said act or similar federal statute, (d) Notwithstanding anything to the contrary contained in the Indenture, the provisions of the Indenture or any Supplemental Indenture may also be modified, amended or supplemented by ' a Supplemental Indenture or Supplemental Indentures, including amendments which would otherwise be described in paragraph (a) above; without the consent of the Owners of Bonds constituting Tender Indebtedness if either (i) the effective date of such Supplemental Indenture is a date bn which such Bonds are subject to mandatory tender for purchase pursuant to the Indenture or (ii) the applicable notice described in the Indenture is given to Owners of such Bonds at least thirty (30) days- before the effective date of such Supplemental Indenture, and on or before such effective date, the Owners of such Bonds have the right to demand purchase of such Bonds pursuant to the Indenture. (e) If the Supplemental Indentureauthorizing the issuance of a Series of Bonds provides thata Credit Provider for all or any portion of the Bonds of such 'Series shall have the right to consent, to Supplemental Indentures which- require the consent of the Owners of the Bonds of such Series pursuant to the Indenture, then for the purposes of sending notice of any proposed Supplemental Indenture and for determining whether. the .Owners of the requisite percentage of Bonds have consented to such Supplemental Indenture, but subject to the provisions of paragraph{b) above, references to the Owners of such Bonds shall be deemed to be to the applicable Credit Provider: (f) For purposes of the foregoing, it shall notce necessary that consents of the Owners of any particular percentage of Outstanding Bonds of ;any affected Series'be obtained but it shall be sufficient for such purposes if the consent of the Owners of a majority in aggregate principal amount of the combination of affected Outstanding Bonds shall be obtained. (g) Notwithstanding ,anything to the contrary contained in the Indenture, if authorized by the. Supplemental Indenture authorizing the issuance of a Bond. constituting Tender Indebtedness, any premium due on the redemption of such Bond and the date or -dates when such Bond is subject to redemption may be modified or amended as provided in such Supplemental Indenture if either: (i) the effective date of such modification or amendment is a date on which such Bond is subject to mandatory tender for purchase pursuant to such Supplemental Indenture; or (ii) notice of such modification or amendment has been mailed to the Owner of such Bond at the address set forth in the B-26 OHS West:26062] 165.8 42797-2 SJOBJC Bond Register at least thirty (30) days before the effective date of such modification or amendment and on or before. - such effective date, the Owner of such Bond has the right to demand purchase of such Bond pursuant to such Supplemental Indenture. Upon the City and the Trustee entering into any Supplemental .Indenture pursuant to the Indenture, the Indenture shall be deemed to be modified, amended or supplemented in accordance therewith, and the respective rights, duties and obligations under the Indenture of the City, the Fiduciaries and all Owners of Outstanding Bonds shall thereafter be determined, exercised and enforced subject in all respects to such modification, amendment and supplement, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and-all purposes. For purposes of modifications, amendments and supplements to the Indenture, Bonds owned or held by or for the accounf of the City, or any funds of the City, shall not be deemed Outstanding for the purpose of consent or other action or any calculation of Outstanding Bonds provided for in the Indenture, and the-City shall not be entitled with respect to such Bonds to give any consent or take any other action provided for in the Indenture as an Owner of Bonds. At the time of any consent or other action taken under the Indenture, the City shall furnish the Trustee a certificate of an Authorized City Representative upon which the Trustee may rely., describing all Bonds so to be excluded. Defeasance - Bonds (or portions of Bonds) for the payment or redemption of which moneys shall have been set aside and shall be . , held in trust by an Escrow Agent at the maturity- date or redemption date or other date when the Owner is entitled to receive the principal thereof,. as applicable, shall be deemed to have been paid within the meaning and with the effect expressed in the provisions of the Indenture relating to payment of bonds upon defeasance: Any Outstanding -Bond (or any portion thereof such that both the portion thereof which is deemed paid .and the portion which is not. deemed paid pursuant to the Indenture shall be in an Authorized Denomination) shall prior to the maturity, redemption date or other payment date thereof, be deemed to have-been paid within the meaning and with the effect expressed in the provisions. of the Indenture relating to payment of bonds upon defeasance (except that the. obligations described under the applicable provisions of the Indenture relating to payment of bonds and the giving of the notices of the redemption of Bonds to be redeemed as provided in the Indenture shall continue) if (1) incase said Bond- (or portion thereof) is to be redeemed on any date prior to maturity, the City shall have given the Trustee irrevocable instructions to give notice of redemption of-such Bond (or portion thereof) on said date as provided in thelndenture, (2) there shall have been deposited with an Escrow Agent either moneys in an amount which shall be sufficient; or Defeasance Securities, the principal of and the interest on which when due shall provide moneys which, together with the moneys, if any, held by such Escrow Agent for such purpose,-shall be sufficient, in each case as evidenced by an Accountant's Certificate, to pay when due the principal amount of, and any redemption premiums on, said Bond. (or portion thereof) and interest due and to become due on said` Bond {or portion thereof). on and prior to the redemptiondate, maturity date or other payment date thereof, as the case may be, and (3) if such Bond (or portion thereof) is not to be paid or redeemed within 60 days. of the date of the deposit required by (2) above, the City shall have given: the Trustee, in form satisfactory to it, instructions to mail, as soon as practicable, by-first class mail, postage prepaid, to the Owner of such Bond, at the last address, if any, appearing upon the Bond Register, a notice that the deposit. required by (2) above has been made with an Escrow Agent and that said Bond (or the applicable. portion thereof] is deemed to have been paid in accordance with the Indenture and'stating such date upon which moneys are to be available for the payment of the principal amount of,-and any redemption premiums on, said Bond. Any notice given pursuant to (3) above with respect to Bonds which constitute less than all of the Outstanding Bonds of any Series and maturity shall. specify the letter and number or other distinguishing mark of each. such Bond. Any notice given pursuant to (3) above with respect to less than the full principal amount of a Bond shall specify the principal amount of such Bond which shall be deemed paid pursuant to the Indenture -and notify the Owner of such-Bond that such Bond must be surrendered as provided in the Indenture. The receipt of any notice required by this paragraph shall not be a condition precedent to any Bond being deemed paid in accordance with' this paragraph and the failure of any Owner to receive any such notice shall not affect the validity of the proceedings for the payment of Bonds in accordance with the Indenture. Neither Defeasance Securities nor moneys deposited with an Escrow Agent pursuant to the Indenture, nor principal or interest payments on any such Defeasance Securities, shall be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal amount of, and any redemption premiums on, said Bonds,and the interest thereon; provided B-27 OHS West:260621165.8 ' 42797-2 SJO/EJC that any cash received from principal or interest payments on such Defeasance Securities deposited with an Escrow Agent, (A) to the extent such cash shall not be required at any time for such payment, as evidenced by an Accountant's Certificate, shall be paid over upon the written direction of an Authorized City Representative, including a transfer to the City free and clear of any trust, lien, pledge or assignment securing said Bonds, and (B) to the extent,such cash shall be required for such payment at a later date, shall, to the extent practicable, at the written direction of an Authorized City Representative, be reinvested in Defeasance Securities .maturing at times and in amounts, which together with the other funds. to be available to the Escrow Agent for such purpose, shall be sufficient to pay when due the principal amount of, and any redemption premiums on; said Bonds and the interest to become due on said Bonds on and prior to such redemption date, maturity date or other payment date thereof, as the case may be, as evidenced by an Accountant's Certificate. Nothing in the Indenture shall prevent the City from substituting for .the Defeasance Securities held for the payment or redemption of Bonds (or portions. thereof) other Defeasance Securities which, together with the moneys held by the Escrow Agent for such purpose, as evidenced by an Accountant's Certificate, shall be sufficient to pay when due the principal amount of; and any redemption premiums on, the Bonds (or portions thereof) to be paid or redeemed, and the interest due on the Bonds (or portions thereof) to be paid or redeemed at the times established with the. initial deposit of Defeasance. Securities .for such purpose provided that the City shall deliver to the Escrow Agent a , Favorable Opinion of Bond Counsel with respect to such substitution. If there shall be deemed paid pnrsuant to the Indenture less than all of the full principal amount of a Bond, the City shall execute and the Trustee shall authenticate and deliver, upon the surrender of such Bond, without charge to the Owner of such Bond, anew-Bond or Bonds for the principal amount of the Bond so .surrendered. which is deemed paid pursuant to the Indenture and another new Bond.or Bonds for the balance of the.principal amount of the Bond so surrendered, in each case of like Series, maturity and. other terms,. and in any of the Authorized Denominations. Upon the deposit with an Escrow Agent, in trust, at or before maturity or the applicable redemption date, of money or Defeasance Securities in the necessary amount to pay or redeem Outstanding Bonds (or portions thereof); and fo pay the .interest thereto to such maturity or :redemption date, as applicable, (provided that, if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to-the Trustee shall have been made for giving .such notice), all liability of the City in respect of such Bonds. shall cease,. terminate and be completely discharged, except that: the. City shall remain liable for such payment but only from, and the Bondowners shall thereafter. be entitled: only to payment (without interest accrued. thereon after such redemption date or maturity .date, . as applicable) out of; the money and Defeasance Securities deposited with the Escrow Agent as aforesaid for their payment, subject, however, to the provisions of the Indenture relating to transfers to thg City's. general fund and- bonds deemed paid; provided that no Bond which constitutes Tender Indebtedne§s shall be deemed to be paid within the meaning of the Indenture unless the Purchase Price. of such Bond, if tendered for purchase in accordance with the Indenture, could be paid when. due from such moneys or Defeasance Securities (as evidenced by an Accountant's Certificate) or a Credit Support Instrument is provided in connection with such Purchase Price. Events of Default; Remedies Events of Default, Each of the following shall constitute an Event'of Default under the Indenture: (i) if default shall be made in the payment of the.principal or Redemption Price of or Sinking Fund Installment for, or interest on, any. Outstanding Bond,. when and as the same shall become due and payable, whether on an Interest Payment. Date, at mattrity; by call for redemption, or otherwise; (ii) if default. shall be made by the City in the performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture or in the Outstanding .Bonds contained, and such default shall continue for a period of 120 days after written notice thereof to the City by the Trustee or to the City and to the Trustee by the Owners of not less than 10% iri principal amount of the Bonds Outstanding;, provided, however, if .such default. is such that it can be corrected -by the City but not within the applicable period specified above, it shall not constitute an Event of Default if corrective action is instituted by the City within thirty (30) days of the City's receipt of the notice of the default required by this paragraph and diligently pursued untilthe default is corrected; or (iii) an Event of Bankruptcy shall have occurred and be continuing with'. respect to the City; or (iv) if'an event of default (as defined in the applicable Issuing Instrument) shall have occurred and be continuing withxespect to any Parity Obligation. B 28 OHS West:260621165.8 42797-2 SJOBJC Application of Revenues and Other Moneys After Default, (a) Notwithstanding anything to the contrary contained in the Indenture, including Article V of this Indenture, the City covenants.that if an Event of Default shall. happen and shall not have been remedied, the City, upon the demand of the Trustee,-shall cause control of amounts in the Light and Power Fund to be transferred to the Trustee and shall cause to be paid over to-the Trustee by the first Business Day of each month; all Revenues received by the City with respect to the preceding month. (b} 'During the continuance of an Event of Default, the Trustee shall apply all Revenues: and amounts' in the Light and Power Fund received by or available to the Trustee pursuant to any right given or action taken under the provisions of the Indenture, in the following order of priority: First: To -the payment of the reasonable and proper- charges,- expenses and liabilities of the Fiduciaries; including ,reasonable fees of counsel, and the- payment of the reasonable and proper charges, expenses and liabilities of the fiduciaries for .Parity Obligations, including reasonable fees of counsel. Second: To the payment of the Operation and Maintenance Expenses. Third: To the payment of the principal and. Redemption Price of and interest on the Outstanding .Bonds, and the principal- and redemption price of and interest on the other - Outstanding Parity Obligations, then due and payable; provided however, that in the-event the amount of Net Revenues and amounts in the Light and Power Fund available for such payment are not sufficient to make all the payments required by this clause, the Trustee shall apply the Net Revenues and available amounts in the Light and Power Fund to the payment of the principal -and Redemption Price of and interest on all Outstanding Parity Obligations then due and payable ratably (based on the respective amounts to be paid), without any discrimination on preferences. Fourth: To the payment of any Termination Payments due and payable under the Qualified Swap Agreements; provided however, that in,the event the amountof Net Revenues and available amounts in the Light and Power Fund are not sufficient to make all the payments required by this clause with respect to all Qualified Swap Agreements, the Trustee shall apply the. Net Revenues and available amounts in the Light and Power Fund to the payment of the Termination Payments then due and payable under all Qualified Swap Agreements ratably (based on thexespective amounts to be paid)., without-any discrimination on preferences. Fifth: To the transfer to the Debt Service Reserve Fund for the Bonds and to each debt service reserve fund for other Outstanding Parity Obligations, the amount, if any, necessary so that the amount on deposit in the Debt Service Reserve Fund shall equal the Debt Service Reserve Requirement and `the .amount in each debt service reserve fund for other Outstanding Parity Obligations.- shall equal the amount required to be on deposit in such debt service reserve fund under the ,applicable Issuing Instrument;` provided that that in the event the amount of Net Revenues and amounts in the Light and Power Fund available for such payment are not sufficient- to make all the payments required by .this clause, the Trustee shall apply the Net Revenues and available amounts in the Light and Power Fund to the transfer to the Debt Service Reserve Fund and each debt service reserve fund-for other Outstanding Parity Obligations ratably (based on the respective amounts to be paid), without any discrimination or preferences. Sixth: To the payment of amounts due with respect to outstanding Subordinate Obligations (which shall -not include Termination Payments for Qualified Swap Agreements) in accordance with the provisions of the Issuing Instrument pursuant to which' such Subordinate Obligation's have been issued. (c) Ir the event thaton any date all payments required to be made from Net Revenues and amounts in the Light and Power Fund available for such payment are not' made in full as required by this Section, then no payment .shall be made which has a priority under this Section lower than the delinquent payment until all delinquent payments with a higher priority have been made in full. B-29 OHS West:260621165,8 42797-2 SJO/EJC (d) If and whenever all overdue installments of interest on all.Outstanding Bonds and Outstanding ' Parity Obligations; together with the reasonable and proper fees, charges, expenses and liabilities of the Trustee and any other fiduciary for Parity Obligations, including reasonable fees of counsel, and all. other sums payable for the account of .the City. under. the Indenture, including the principal and Redemption Price of all Outstanding Bonds .and Outstanding Parity Obligations and unpaid interest on all Outstanding Bonds and Outstanding Parity Obligations which shall then be payable, shall be paid for by the account of the City, or provision satisfactory to the Trustee shall be made for such payment, and all defaults under the Indenture, the Outstanding Bonds and the Outstanding Parity Obligation shall be made good or secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall be made therefor, the Trustee, at the request of the City and with the consent of the Owners of a majority in aggregate principal of the Bonds then Outstanding and with the consent of each Credit Provider whose .consent is required by aSupplemental Indenture ora Credit Support Agreement, shall transfer control of amounts in the Light, and Power Fund to the City and pay over all unexpended Revenues in the hands of the Trustee (except Revenues. deposited or pledged, or required by the terms of the Indenture to be deposited or pledged, with the Trustee), and thereupon. the.City-and the Trustee shall be restored, respectively, to their former positions and rights under the Indenture. No such payment by the Trustee nor such restoration of the City and the Trustee to their former positions and rights shall extend to or affect any subsequent default under .the Indenture or impair any right consequent thereon. {e) The. Trustee may in its discretion establish special .record dates for the determination of the Owners of Bonds for various purposes hereof, including without limitation, payment of defaulted. interest and giving direction or consent to the Trustee. Right to Accelerate Upon Default. Notwithstanding anything contrary in the. Indenture or in the Bonds, upon the occurrence of ari Event of Default, the Trustee may, with the consent of each Credit Providerwhose consent is required by a Supplemental Indenture or a Credit Support Agreement, and shall, at the direction of the Owners of a majority in principal amount of Outstanding Bonds (other than Bonds owned by or on behalf of the City) by written notice to the City, declare the principal of the Outstanding Bonds and the interest thereon to be immediately due and payable, .whereupon. such principal. and interest shall, without further action, become. and. be immediately due and .payable. Appointment of Receiver.. If an Event of Default shall happen.-and shall not have been remedied, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Owners of the Bonds under the Indenture, the Trustee shall be entitled to make application for the appointment of a receiver or custodian of the Revenues and amounts in the Light and Power Fund, pending such proceedings, with such power as the court making such appointment shall confer. Enforcement Proceedings:. (a) If an Event of Default shall happen and shall not have been remedied, then and in .every such case, the Trustee, by its agents and attorneys, may, with the .consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement, proceed, and upon the written request:of the Owners of not less than a majority in principal amount of the Bonds at the time Outstanding (other than Bonds owned by or. on behalf of the City), with the consent of each Credit Provider. whose consent is required by a Supplemental Indenture or a Credit,Support Agreement, after receiving 'indemnification satisfactory to it as set forth in paragraph (d) below, shall proceed, to protect and enforce its rights and the .rights of the Owners of the Outstanding Bonds by a suit or suits in equity or at law, whether for damages or the. specific performance of any covenant contained in the Indenture, to enforce the security interest in, pledge of and lien on the Trust Estate granted pursuant to the Indentures or in aid of the execution of any power granted in the Indenture or any remedy granted under applicable provisions of thelaws of the~State of California, or for an accounting by the City as if the City were the trustee of an express trust, or in the enforcement of any other legal or equitable right as the .Trustee, being advised by counsel, shall deem most effectual to enforce any of its rights or to require the City to perform any of its duties under the Indenture. (b) All rights of .action under the Indenture may be prosecuted. and enforced by the Trustee without the possession of any of the Bonds or the .production thereof in the trial or other proceedings,. and any such suit or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust. B-30 OHS West:26062t165.8 42797-2 SJO/EJC (c)~ If an Event of Default shall occur and be continuing, upon commencing a suit in equity or upon other commencement of judicial proceedings by the Trustee to enforce any right under the Indenture, the Trustee shall be. entitled. to exercise any and .all rights and powers conferred in the Indenture and otherwise. provided by law to be exercised by the Trustee as the trustee of an express trust. (d) Regardless of -the happening of an Event of .Default, the Trustee shall have power to, but unless requested m writing by the Owners of a majority in principal amount of the Bonds then Outstanding and furnished with reasonable security and indemnity, shall be under no obligation to, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient to prevent any impairment of the security under the, Indenture by any acts which may be unlawful or in violation of the Indenture, and' such suits and proceedings as the Trustee may be advised -shall be necessary or expedient to preserve or protect its interests and the interests of the Owners of the Bonds: (e) If the Trustee or any Owner or Owners of Outstanding Bonds have instituted any proceeding to enforce • any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Owner or Owners; then and in every such case the City, the Trustee and 'the..Owners shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions under the: Indenture, and thereafter all rights :and remedies of the Trustee and the. Owners shall continue as though no such proceeding had been instituted. Restriction bn Owner's Action.. (a) Except as otherwise provided in paragraph (b}below; no -Owner of .any Bond shall have any right to institute any suit, action or proceeding at law or in equity for the .enforcement of any provision of the .Indenture or the execution. of .any trust under the Indenture or for any remedy given under the Indenture or existing at law or in equity or by statute unless such Owner shall have previously given to the Trustee written notice of the happening of an Event of Default, as provided in the Indenture, and the Owners of at least twenty-five percent in principal amount of -the Bonds then Outstanding shall have filed a written request with the Trustee, and shall have offered it reasonable opportunity, either to exercise the powers granted in the Indenture or by the applicable laws of the State. of California or to institute such action, suit or proceeding in its own name, and unless such Owners shall have. offered to the Trustee adequate security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall have refused to comply with such request for a. period of 60 days after. receipt by it of such notice, request and offer of indemnity, it being understood and intended -that no one or more Owners of Bonds shall have any right. in any manner whatever by his or their. action to affect; disturb or prejudice the pledge created by-the Indenture, or to enforce any right under the Indenture, except in the manner therein provided; and that all proceedings at law or in equity to enforce any provision of the Indenture shall be instituted, had and maintained in the manner provided in the Indenture and for the ratable benefit of all Owners of the Outstanding Bonds, .subject only to the provisions of the Indenture relating to Credit Providers. (b} Nothing in the Indenture or in the Bonds contained shall affect or impair the obligation of the City, which is absolute and unconditional, to pay on the respective due dates thereof and at the places therein expressed, but solely from the Net Revenues, amounts in the Light and Power Fund available for such payment in accordance with the:. Indenture and the amounts in the Funds, other than the Rebate Fund, held by the Trustee under the Indenture, the principal amount, or Redemption Price if applicable, of the Bonds, and the interest thereon, to the respective Owners thereof, or affect or impair the right, which is also absolute .and .unconditional; of;any Owner to institute suit for the enforcement of any such payment from such sources. Remedies Not Exclusive. No remedy by the terms of the Indenture conferred upon or reserved to the. Trustee or the Owners of the Bonds is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or existing at law or in equity or by statute whether effective on or after the effective date of the Indenture. The assertion or employment of any right or remedy, under the Indenture or otherwise, shall. not prevent the concurrent assertion or employment of any other appropriate right or remedy. Effect of Waiver and Other Circumstances. (a) No delay or omission of the Trustee or any Owner of a Bond to exercise any right or power arising upon the happening of an Event of Default shall impair any right or power or - shall be construed to be a waiver of any such Event of Default or be an acquiescence therein; and every power and B-31 OHS West:260621165.8 42797-2 SJO/EJC remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient by the Trustee or by the Owners of the Bonds. , (b) The Owners of not less than sixty percent in principal amount of the Bonds at the time Outstanding, or their attorneys-in-fact duly authorized, may on behalf of the Owners of all of the Bonds, waive any Event of Default and its consequences. No such waiver -shall extend to any subsequent or Event of Default or impair any right consequent thereon unless the provisions of this paragraph (b) have been satisfied with respect to such subsequent Event of Default. Notice of Default. -The Trustee shall, within thirty (30) days after obtaining knowledge thereof, mail written notice of the occurrence of any Event of Default to each Credit Provider, each Reserve Financial Guaranty Provider and .each Owner of Bonds then Outstanding at such Owner's address appearing in the Bond Register. Credit Providers .Except as limited by the Indenture, a Supplemental Indenture authorizing a Series of Bonds may provide that any Credit Provider providing a Credit Support Instrument with respect to Bonds of such Series may exercise any right under the Indenture or the Supplemental Indenture authorizing the issuance of such.Series of Bonds given to the Owners of the Bonds to which such Credit Support Instrument relates in lieu of such Owners. All provisions under the Indenture or a Supplemental Indenture authorizing the .exercise of rights by a Credit Provider with respect to Bonds of a Series, including without limitation actions relating to consents; approvals, directions, waivers, appointments and requests, shall be deemed not to require or permit such consents, approvals, directions, waivers, appointments, requests or -other actions and shall be read as if the Credit Provider were not mentioned therein (i) during any period during which there is a default by such Credit Provider under the applicable Credit Support Instrument or (ii) after the applicable Credit Support Instrument shall for any reason cease to be valid - and binding on the Credit Provider, or shall be declared- to be null and void by final judgment of a court of competent jurisdiction, or after the Credit Support Instrument has been rescinded, repudiated or terminated (other than in accordance with its terms), or after a receiver, conservator or liquidator has been appointed .for the Credit Provider; provided, however, that the payment of amounts due or that may become due (including without limitation all indemnity payments) to the Credit Provider or any other personidentified under such Credit Provider's Credit Support Agreement pursuant to the terms of -the Indenture, Supplemental Indenture and/or such Credit Support .Agreement shall continue in full force and effect. -The foregoing. shall not affect any other rights of a Credit Provider, including rights as the Owner of a Credit Provider Bond.- All provisions in the Indenture relating to the rights of a Credit Provider shall be of no force and effect if there is no Credit Support Instrument in effect- and all amounts owing to the Credit Provider under the Credit Support Agreement have been paid. Reserve Financial Guaranty Providers All provisions under the Indenture or a Supplemental Indenture authorizing the exercise of rights. by a Reserve. Financial Guaranty Provider with respect to Bonds of a Series, including without limitation actions relating to consents, approvals, directions, waivers, appointments and requests,.shall be deemed not to require orpermit'such consents, approvals, directions, waivers, appointments, requests or other actions and shall be read as if the Reserve Financial Guaranty Provider were not mentioned therein (i) during any period during which there is a default by such Reserve Financial .Guaranty Provider under the applicable Reserve Financial Guaranty or (ii) after the applicable Reserve Financial Guaranty shall for any reason cease to be valid and binding on the Reserve Financial Guaranty Provider, or shall be declared to be null and void by final judgment of a court of competent jurisdiction, or after the Reserve Financial Guaranty has been rescinded, repudiated or terminated, or after a receiver, conservator or liquidator has been appointed for the Reserve Financial Guaranty Provider; provided, however, that the payment of amounts due (including without limitation all indemnity payments) to the Reserve Financial Guaranty Provider pursuant to the terms of the Indenture, any Supplemental Indenture, and/or any Reserve Financial Guaranty- shall continue in full force and effect. The foregoing shall not affect any, other rights of a Reserve Financial Guaranty. B-32 OHS West260621165,8 42797-2 SJO/EJC All provisions in the Indenture relating to the rights of a Reserve Financial Guaranty Provider shall be of no-force and effect if there is no Reserve Financial. Guaranty Provider in effect issued by such Reserve Financial Guaranty. Provider and all amounts owing to such Reserve Financial Guaranty Provider under the Reserve Financial. Guaranty. have been paid. iJnclaimed Moneys Anything in the Indenture or any Supplemental Indenture to the contrary notwithstanding, any moneys held by the Trustee; an Escrow Agent or any Paying Agent in trust .for the payment. and discharge of any of the Bonds which .remain unclaimed for two years after the date when such Bonds have become due and. payable, either at their stated maturity dates, tender for purchase or by call for redemption; if such moneys were held by the Trustee, an Escrow Agent or a Paying Agent at.such date, or for two years after the date of deposit of such moneys if deposited with the Trustee, an Escrow Agent or a Paying Agent after the date when such Bonds or the Purchase Price thereof became due and .payable, shall be repaid by such Trustee, Escrow Agent. or Paying Agent to the City, as its absolute property and free .and clear of any' trust, lien, pledge or assignment securing said Bonds, and such Trustee, Escrow Agent or Paying Agent shall thereupon be released and discharged .with respect thereto and the Owners of such Bonds shall look only to the City for the .payment of such.Bonds; provided, however,. that before being required to make any such payment to the City, the Trustee, the Escrow Agent or the Paying Agent, as applicable, shall, at the expense of the. City, mail, postage prepaid to the Owners of such Bonds, at the last address appearing upon the Bond Register a notice. that said moneys. remain unclaimed and that, after a date named in said notice, which date shall be not less than 30 days after the date of the. mailing of such notice, the balance of such, moneys then unclaimed shall be returned to the City. B-33 OHS West:260621165,8 42797-2 SJOBJC • APPENDIX C BOOK-ENTRY ONLY SYSTEM The information in this section concerning DTC and DTC's book-entry only system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the. Bonds, payment of principal, premium, if any, accreted value, if any; and interest on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Bonds and other related transactions by and between-DTC, the DTC Participants and the Beneficial Owners is based solely on informationprovided by DTC. The Depository Trust Company ("DTC"); New York, NY, will act as securities depository for the Bonds . (thee"Bonds"). The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC'S partnership nominee) or such other name as may be requested by.an authorized representative of'DTC, One fully- registered Bond certificate will be issued for each maturity of the Bonds; in the aggregate principal amount of such- . maturity, and will be deposited with DTC. DTC, the world's largest securities depository,' is alimited-purpose trust company organized under the New York Banking Law; a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of-the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.S million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market .instruments from over -100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants. of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates.- Direct Participants include-both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other, .organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries.. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies; and clearing corporations that clear through- or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information' about DTC can be found at www.dtcc.com and www.dtc.org. - Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial- Owners are,. however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may Abe requested by an authorized representative of DTG. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual. Beneficial Owners of the Bonds; DTC's records reflect only. the identity of the Direct Participants to whose accounts C-1 OHS West:260621165.8 42797-2 SJO/EJC such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants; and by Direct Participants and Indirect.Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as maybe in effect from time to time. Beneficial Owners of -Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, .such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount. of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, Redemption Price and interest payments on the Bonds will be made to .Cede & Co., or such other nominee as .may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information-from the City or the Trustee, on payable.. date in accordance with their respective holdings shown on .DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to'time. Payment pf principal, Redemption Price and interest"payments. to .Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will. be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to'be printed and delivered. The City may decide to discontinue use of the system .of book-entry-only transfers through DTC (or a successor securities depository)..In that event, Bond certificates will be printed and delivered to DTC. G2 OHS West:260621165.8 42797-2 5J0/EJC APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL Upon delivery of the 2009 Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, proposes to render its final opinion in connection with the 2009 Bonds in substantially the following form: Date of Delivery City Council City of Vernon 4305 Santa Fe Avenue Vernon, California 90058 City of Vernon Electric System Revenue Bonds 2009 Series A (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the. City of Vernon, .California (the "City") in connection with the issuance of $ aggregate principal amount of City of Vernon Electric System Revenue Bonds, 2009 Series A (the "2009 Series A Bonds"). The 2009 Series A Bonds. have been issued pursuant to the City of Vernon Ivlunicipal.Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code (the "Bond Law") and an Indenture of Trust, dated. as of September 1, 2008 (as amended and, supplemented, the "Indenture"), between the City. and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), as supplemented by the Second Supplemental Indenture of Trust, dated as of May 1, 2009, between the City and the Trustee., Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.. In such connection, we have reviewed the Charter, the Bond Zaw, the Indenture, the Tax Certificate,- - certificates of the City, the Trustee and others, opinions of counsel to the City, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. . The Indenture provides that the Bonds, including the 2009 Series A Bonds, are special obligations of the City, secured by a pledge' of the Trust Estate, and payable. solely from the Net Revenues, amounts in the Light and Power Fund other than the Operating Reserve, and amounts in the Funds, other than the Rebate Fund, held by the , Trustee under the Indenture.- The Indenture further provides that the Bonds, including the 2009 Series A Bonds, are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the pledge of the Trust Estate and that the pledge of Revenues and amounts in the Light and. Power. Fund pursuant to the Indenture shall be on a parity with any pledge thereof securing Parity Obligations. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such. opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have-not undertaken to determine or to inform any person whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion speaks only as of its date and is not intended to, and may. - not, be relied upon in connection with any such actions, events or matters. Our engagement with respect to the 2009 Series A Bonds has concluded with their issuance, and we disclaim any obligation. to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have D-1 OHS West:260621165,8 42797-2 SJO/EJC assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and certificates, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future. actions, omissions or events will-not cause interest on the 2009 Series A Bonds to be included in gross income for federal tax purposes.. We call attention to-the fact that the rights and obligations . under the 2009 Series A' Bonds, the Indenture and the Tax Certificate and their. enforceability may. be subject to bankruptcy; insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' .rights, o the application of equitable principles, to .the exercise of judicial discretion in appropriate cases and- to the limitations on legal remedies against municipal corporations in the State of California. We .express no opinion with respect to any: indemnification, contribution, .penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoing documents, nor do we .express any opinion with respect to the state or quality of title to or interest in any of the assets .described in or as subject to the lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any of such assets. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the- Official Statement or other offering .material relating to the 2009 Series A Bonds and express no opinion with respect thereto.' Based on and subject to-the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. :The 2009 Series A Bonds constitute valid and binding special obligations of the City. 2. The Indenture -has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the 2009 Series A Bonds, of the Trust Estate, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. 3. Interest on the 2009 Series A Bonds is excluded from gross income for federal income- tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the 2009 Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings v?hen calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences relating to the ownership or"disposition of, or the accrual or receipt of interest on, the 2009 Series A Bonds. . Faithfully yours, D-2 OHS West260621165.A 42797-2 SJO/EJC ' APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT The City of Vernon and the Bank of New York Mellon Trust Company, N.A.. will enter into a Continuing Disclosure Agreement relating to the 2009 Bonds in substantially the following form; .THIS CONTINUING.. DISCLOSURE AGREEMENT (this "Disclosure Agreement"), executed and entered into as of May 1, 2009, is by and between The Bank of New York Mellon Trust Company; N.A., a national- banking. association duly organized and existing under and by virtue of the laws of the United States of America, as Trustee (the "Trustee"); and the City of Vernon, a municipal corporation and chartered city organized and existing under and by virtue of the Constitution of the State of California and its Charter (the "City"). WITNESSETH: .WHEREAS, the City has issued $ aggregate principal amount~of its Electric System Revenue Bonds, 2009 Series A (the "2009 Series A Bonds") pursuant to an Indenture of Trust, dated as of September 1, 2008, as heretofore supplemented and as supplemented by a Second Supplemental Indenture of Trust, dated as of May 1, 2009 (as amended and supplemented, the "Indenture"), each between the City and the Trustee; and WHEREAS, this Disclosure Agreement is being executed and delivered by the City and the Trustee for the benefit of the Owners and Beneficial Owners of the 2009 Series A Bonds and in order to assist the underwriters of the 2009 Series A Bonds in complying with S.E.C. Rule 15c2-12(b)(5); NOW, THEREFORE,' for and in consideration of the mutual promises and covenants. herein contained, the parties hereto agree as follows: Section 1. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure .Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" means any Annual Report provided by the City pursuant to, and as described in, Sections 2 and 3 hereof. "Disclosure Representative" means the City Clerk, the City Administrator of the City, or such other officer or employee of the City as the City shall designate in writing to the Trustee from time to time. "Dissemination Agent" means any Dissemination Agent, including any successor Dissemination Agent, appointed or engaged in writing by the City pursuant to Section 6 hereof and which has filed with the Trustee a • written acceptance of such designation. "EMMA System" means the MSRB's .Electronic Municipal• Market Access system, or such other electronic system designated by the MSRB. "Listed Events" means any of the events listed in subsection (a) of Section 4 hereof. "MSRB" means the Municipal Securities Rulemaking Board, or any successor thereto. "Official Statement" means the Official Statement, dated April 2009, relating to the .2009 Series A Bonds. "Participating Underwriter" means any original underwriter of the 2009 Series A Bonds required to comply with the Rule in connection with the 2009 Series A Bonds. OHS West:260621165.8 42797-2 SJO/EJC E-1 ' "Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange. Act of 1934, as the same may be amended from time. to time.. Section 2. Provision of Annual Reports. (aj The City shall, or shall cause the Dissemination Agent to, not later than 180 days following the -end of each. Fiscal Year of the City (which Fiscal Year ends on June 30), commencing with the report .for the 2008-09 Fiscal Year, provide to the MSRB through the EMMA System, in an electronic format and accompanied by identifying information all as prescribed by the MSRB, an Annual Report which is consistent with the requirements of Section 3 hereof. The Annual Report may be submitted as a single document or as separate documents comprising a .package, and may include by reference other information as provided in Section 3 hereof;. provided that the audited financial. statements of the City may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the City's Fiscal Year changes, it shall give notice of such change in the same manner as.for a Listed Event under subsection (fj of Section 4 hereof. (b) Not later than 15 Business Days prior to the date specified in subsection (a) of this Section for the providing of the Annual Report to the MSRB, the City shall provide the Annual Report to the Dissemination Agent,. if any, and the Trustee (if the Trustee is not the Dissemination Agent). If by such date, the Dissemination Agent has . not received a copy of the. Annual Report, the Dissemination Agent shall contact the City to determine if the City is in compliance with the first sentence of this subsection (b). (c) If the Trustee is unable to confirm that an A~mual Report has beenprovided to the MSRB by the date required in subsection (a) of this Section, .the Trustee shall .send a notice to-the MSRB through the EMMA System in substantially the form attached as Exhibit A. (d) The Dissemination Agent, if any, shall file a report with the City and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided to the MSRB pursuant to this Disclosure Agreement, stating the date it was provided. Section 3. Content of Annual Reports. The City's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements of the City's Electric System including a balance sheet, a statement of revenues, expenses and changes in retained earnings, and a statement of cash flows relating to the City's Light and Power Fund prepared on the accrual basis of accounting. -Such financial statements may be included. as part of the City's general purpose financial statements. If the Electric System's audited financial statements are not: available by the time the Annual Report. is required to be filed pursuant to subsection (a) of Section 2 hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) An update of the information contained in the tables with the following headings in the Official Statement for the most recently ended. Fiscal Year: (i) "CITY OF VERNON ELECTRIC SYSTEM POWER SUPPLY RESOURCES' ; (ii) "CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES, , REVENUES AND DEMAND"; (iii) "CITY OF VERNON ELECTRIC SYSTEM AVERAGE BILLING PRICE (CENTS PER KILOWATT-HOUR)"; and (iv) "CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES AND DEBT SERVICE COVERAGE UNDER INDENTURE". OHS West:260621165.8 42797-2 SJO/EJC E-2 (c) In addition to any of the information expressly required to be provided under subsections (a) and (b) of this Section, the City shall provide such further information, if any, as may be necessary to, make the specifically required statements, in the light of the circumstances under which they are made; not misleading. Any or all of the items listed- above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which have been submitted to the MSRB through the EMMA System, If the document included by reference is a final official statement, it must be available from the MSRB. The City shall clearly identify each such other document so included by reference. Section. 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, the City shall give, or cause to be given, notice of the occurrence of .any _of the following events with respect to -the 2009 Series A Bonds, if material; (1) 'Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) ,Adverse tax opinions or events affecting the tax-exempt status of the security. (7) ~ Modifications to rights of the Owners of the 2009 Series A Bonds. (8) Contingent or unscheduled Series 2009 Bond calls. (9) Defeasances. (10) Release; substitution, or sale of property securing repayment of the securities. (I1) ~ Rating changes. (b) The Trustee shall, within one Business Day of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that 'the City promptly notify the Dissemination Agent, if any, in writing whether or not to report the event pursuant to subsection (f) of this Section. For purposes of this subsection (b), "obtaining actual knowledge" means receipt of actual notice of any of such Listed Events by a responsible officer of the Trustee's Corporate Trust Department. (c) Whenever the City obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Trustee pursuant to subsection (b) of this Section or otherwise, the City shall as soon as possible determine if such event would be material under applicable Federal securities law. (d) If the City has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law,,the City shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f) of this Section. If there is no Dissemination Agent, the City shall report the occurrence pursuant to subsection (f) of this Section. (e) If in response. to a request under subsection (b) of this Section, the City determines that the Listed Event would not be material under applicable Federal securities law, the City shall so notify the Trustee (and the Dissemination Agent, if any) in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f) of this Section. OHS West:260621165.8 42797-2 SJO/EJC E-3 (f) If the Iissemination Agent or the City is to report the occurrence of a Listed Event, pursuant to subsection (d) of this Section,- notice of such occurrence shall be filed with the MSRB. Notwithstanding the foregoing, notice of Listed Events described. in paragraphs (8) and (9) of subsection (a) of this Section need not be given under this subsection any earlier than-the notice (if any) of the underlying event is given to Owners of affected 2009 Series A Bonds pursuant to the Indenture. ' Section 5. Termination of Renortins Oblieation. The City's obligations under this Disclosure Agreement shall terminate upon the legal defeasance; prior redemption or payment in full of-all of the 2009 Series A Bonds. If such termination occurs prior to the final maturity of-the 2009 SeriesA Bonds, the City shall give notice of such termination in the-same manner as for a Listed Event under subsection (f) of Section 4 hereof. -Section 6. Dissemination Aaent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement and may discharge any such Dissemination. Agent, with or without appointing a successor Dissemination Agent; provided the Trustee shall receive written notice of such appointment, engagement and discharge at the time thereof: The Dissemination Agent may resign by providing thirty days written notice to the City. Section 7. A"mendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement; the City and the Trustee may amend this Disclosure Agreement (and'the Trustee shall agree to any amendment so requested~by the City to the extent that such amendment does not adversely affect the Trustee),.and .any provision of.this Disclosure Agreement maybe waived, provided that the following conditions are satisfied:, (a) if the amendment or waiver relates to the provisions of subsection (a) of. Section 2 hereof, Section 3 hereof or subsection (a) of Section 4 hereof, it may only be made in connection - with a change in circumstances that arises from a change in legal requirements, ,change in law, or change in the identity, nature or status of an obligated person with respect to the 2009 Series A Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of Bond Counsel; have complied with the requirements of the-Rule at the time of the primary offering of the 2009 Series A Bonds,- after taking- into account any amendments. or interpretations of :the -Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver (i) is approved by Owners of the 2009 Series A Bonds in the manner. provided in the .Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in the opinion of the Trustee or Bond Counsel; materially impair the interests of the Owners or Beneficial Owners. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the. annual financial information containing the amended operating .data or - financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which-the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of'the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information,. in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice. of the change in the accounting principles shall be given in the same manner as for a Listed Event under Section 4(f). Section 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual- Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. OHS West:260621165.8 42797-2 SJOBJC E-4 If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 9. Default. In the event of a failure of the City, the Trustee or the Dissemination Agent to comply with any provision of .this Disclosure Agreement, the. Trustee may (and, at .the written direction of any Participating Underwriter or the Owners of at least 25% of the aggregate. principal amount of the Outstanding 2009 Series A Bonds, shall with indemnification satisfactory to it), or any Owner or Beneficial Owner of the 2009 Series A Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City, Trustee or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure- Agreement shall not be deemed an Event of Default-under the. Indenture, and the sole remedy under this Disclosure. Agreement in the event of any failure of the City, the Trustee or the Dissemination Agent to comply with .this Disclosure Agreement shall be an action to compel performance. Section 10. DutiesiImmunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Indenture is hereby made applicable to .this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture. The DisseminationAgent shall lie entitled to the protections and limitations from. liability afforded. to the Trustee thereunder. Neither the Trustee-nor the Dissemination Agent .shall be responsible for the form or content of any Annual Report or notice of Listed Event. The Trustee and Dissemination Agent shall. receive reasonable .compensation for- its services provided under this Disclosure Agreement. The. Dissemination Agent (if other- than the Trustee). shall have only such duties pursuant to this Disclosure as are specifically set forth herein, and the City agrees to indemnify and save the Dissemination Agent, its officers,' directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against .any claim of liability, but excluding liabilities due to the Dissemination Agent's gross negligence or willful. misconduct. The obligations. of the City under this Section shall survive resignation or removal.of the Dissemination Agent and payment of the 2009 Series A Bonds. Any company .succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or any further act. .Section 11. Beneficiaries. This Disclosure Agreement shallinure solely to the benefit of the. City, the Trustee, the Dissemination Agent, .each Participating Underwriter and Owners and; Beneficial Owners from time to time of the 2009 Series A Bonds, and shall create no rights in any otlier person or entity. Section 12. GoverninE Law. .This Disclosure Agreement shall be interpreted governed by and construed for all purposes in accordance with the laws of the State for contracts executed and to be performed in the State.. Section 13. Comuliance with Amendments to Rule. On and after July 1, 2009, the Annual Report, all notices of Listed. Events. and such other notices required herein, shall be provided to the MSRB through the EMMA System in an electronic format as prescribed by the MSRB.' All documents provided to the MSRB shall be accompanied by identifying information as prescribed by the MSRB. Section 14. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but-one and the same instrument. OHS West:260621165.8 42797-2 SJO/EJC E-5 IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. CITY OF VERNON By: Leonis C. Malburg, Mayor ATTEST: Manuela Giron, City Clerk . APPROVED AS TO FORM: By: Jeff A. Harrison, City Attorney THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: .Authorized Signatory ' OHS West:260621165.8 42797-2 SJO/EJC E-6 EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Vernon Name of Issuer City of Vernon Electric System Revenue.Bonds, 2009 Series A (the "2009 Series A Bonds") Date of Issuance: _ May 2009 NOTICE IS HEREBY GIVEN that the City of Vernon (the "City") has not provided the Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee") under an Indenture of Trust, dated as of September 1, 2008,. as supplemented by a Second Supplemental Indenture of Trust, dated as of May 1, 2009, each between the City and the Trustee, an Annual Report-with respect to the _2009 Series A Bonds as required Section 6.02 of-such. Second Supplemental Indenture of Trust. [The City- anticipates that the Annual Report will be filed by Dated: The-Bank of New York Mellon Trust Company, N.A., as Trustee, on behalf of the City of Vernon By: Name: Title: cc: City of Vernon E-7 OHS West:260621165,8 42797-2 SJO/EJC EXHIBIT D Exhibit D [Amendment Number One Attached] i E=1 Redeem All Bonds - OH&S Draft of 4/8/09 AMENDMENT NUMBER ONE TO INSURANCE AND REIMBURSEMENT AGREEMENT among VERNON NATURAL GAS FINANCING AUTHORITY, THE CITY OF VERNON, CALIFORNIA and MBIA INSURANCE CORPORATION Dated as of May 1, 2009 OHS West:260636272.3 42797-2 EJC/EJC AMENDMENT NUMBER ONE TO INSURANCE AND REIMBURSEMENT AGREEMENT THIS AMENDMENT NUMBER ONE TO INSURANCE AND REIMBURSEMENT AGREEMENT (this "Amendment") dated as May 1; 2009 is entered into by and among VERNON NATURAL GAS FINANCING AUTHORITY, a joint exercise of powers agency of the. State of California, as issuer. (the "Issuer"), 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 MBIA INSURANCE CORPORATION, a stock insurance corporation, duly organized and existing under the laws of the. State of New York ("MBIA"). Capitalized terms not:otherwise defined shall have the. meanings ascribed thereto in Section 1 of this Amendment. RECITALS: 1. MBIA has issued the Policies insuring the payment of the Bonds and' the Swap Policy insuring payments by the Issuer under the transactions under the Swap Agreement; 2. The Issuer, the City .and MBIA have entered into the Original Agreement in connection with the Policies and the-Swap Policy; 3. ~ The City has issued -the- 2009 Bonds and is to apply a portion of the proceeds thereof to the redemption of the Borids; 4. In connection with the application of proceeds of the 2009 Bonds to the redemption of the Bonds, the Issuer and the Trustee are entering into the Second Supplemental " Indenture; 5. The Issuer and the City have requested, and MBIA has agreed to provide; MBIA's Consent; and 6. This Amendment is entered into in order to set forth the MBIA- Consent and certain agreements of the Issuer and the City with respect to the obligation (a) to reimburse MBIA for any payment -made by' MBIA under the Swap Policy as provided in the Original Agreement and herein and (b) to indemnify or reimburse :MBIA for certain amounts as .more fully set forth in the Original Agreement and herein. AGREEMENT: In consideration of the- premises and the mutual promises set forth below, MBIA; the Issuer and the City agree as follows:. Section 1. Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall, for all purposes of this Amendment, have the meanings herein specified, to be equally applicable to both the singular and plural forms of any of the terms herein defined. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Original Agreement. OHS West:260636272.3 42797-2 EJC/EJC "Consent".means MBIA's consent set forth in Section 2 hereof. "Original Agreement" means the Insurance and. Reimbursement Agreement dated as of June 1, 2006, as originally executed and delivered. "Second Supplemental .Indenture" means .the .Second Supplemental Indenture of Trust, dated as of May L, 2009, between the Issuer. and the Trustee; amending Section 9.01 of the General Indenture. "2009 Bonds" means the $ aggregate principal amount of the City's Electric, System Revenue Bonds, 2009 Series A. Section 2. MBIA Consent. Pursuant to Section 2:01(n) of the Original Agreement and Section 7.02 of the First Supplemental Indenture, MBIA hereby consents: (i) to the redemption of the Bonds with proceeds of the 2009 Bonds without terminating the transactions under the Swap Agreement; and (ii) to the Issuer and the Trustee entering into the Second Supplemental Indenture. substantially in the form attached hereto as Appendix A. Section 3. Issuer Covenant. The Issuer agrees that, no-later than December 31, 2011, the Issuer will take one of the following actions: (i) terminate all transactions under the Swap Agreement; or (ii) cause the Swap Provider to relinquish. its rights to payments from MBIA under the Swap Policy, Section 4. City Covenant. The City agrees to reimburse MBIA for all payments made by MBIA under the terms of the Swap Policy from amounts available therefor in the Light and Power Furid of the City. Section 5. City Obligations under Swap Agreement. The City recognizes, affirms. and agrees that, pursuant to the Germs of the Gas Purchase Agreement; the City is obligated to pay all amounts due with respect to the transactions under .the -Swap Agreement, including net payments due from the Issuer. The City agrees to make all such payments in accordance with the-terms of the Gas Purchase Agreement. Section 6. City Obligation Re~ardin~ Reimbursements. The City recognizes, affirms and agrees that, pursuant to the terms of the Gas Purchase .Agreement, the City is obligated to pay all amounts due from Issuer with respect to the reimbursement to MBIA of amounts paid by MBIA under the Swap Policy. The City agrees to make all such payments in accordance with the terms of the Gas Purchase Agreement. Section 7. Term of Original Agreement. Section 9.10 of the Original Agreement is hereby supplemented by adding the following after. the first sentence of such. Section: This Agreement shall continue in full force and effect notwithstanding the payment or redemption of the .Bonds, or provision for payment of the Bonds in accordance with Article IX of the Indenture. OHS west:260636272.3 42797-2 EJC/EJC 2 Section 8. Original Agreement. Save and except as amended and supplemented by this Amendment, the Original Agreement shall continue in full force and effect as originally executed -and delivered by the Issuer, the City and MBIA. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment Number One to Insurance and Reimbursement Agreement to be executed in its respective name by its duly authorized officer, all as of the date first above written. MBIA INSURANCE CORPORATION By Title VERNON NATURAL GAS FINANCING AUTHORITY By Eric T. Fresch Executive Director APPROVED AS TO FORM: THE CITY OF VERNON CALIFORNIA By By Jeff A. Harrison, City Attorney Leonis C. Malburg, Mayor Attest: By Manuela Giron City Clerk OHS West:260636272.3 42797-2 EJC/EJC 3 Redeem a Portion of Bonds - OH&S Draft of 4/8/09 AMENDMENT NUMBER ONE TO INSURANCE AND REIMBURSEMENT AGREEMENT among VERNON NATURAL GAS FINANCING AUTHORITY, THE CITY OF VERNON, CALIFORNIA and MBIA INSURANCE CORPORATION Dated as of May 1, 2009 OHS West:260641640.1 42797-2 EJC/EJC AMENDMENT NUMBER ONE TO INSURANCE AND REIMBURSEMENT AGREEMENT THIS AMENDMENT NUMBER :ONE TO INSURANCE AND .REIMBURSEMENT AGREEMENT (this "Amendment") dated as May 1; 2009 is entered into by and among VERNON NATURAL GAS FINANCING AUTHORITY, a joint exercise of powers agency of the State of California, as issuer (the "Issuer"), 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 MBIA INSURANCE CORPORATI®N, a stock insurance corporation, duly organized and existing under the laws of the State of New York ("MBIA"). Capitalized terms not otherwise defined shall have the meanings ascribed thereto in Section 1 of this Amendment. RECITALS: 1. MBIA has. issued the Policies insuring the payment of the -Bonds and the Swap Policy insuring payments by the Issuer under the transactions under the -Swap Agreement; 2. The Issuer, -the City and MBIA have entered into the Original Agreement in connection with the Policies and the Swap Policy; 3. The. City has issued -the 2009 Bonds and is to apply a portion of the proceeds thereof to the redemption of a portion of the Bonds; 4. In connection with the application of proceeds of -the 2009 -Bonds to the redemption of Bonds, the Issuer and the Trustee are entering into the Second Supplemental Indenture; 5. The Issuer .and the City have requested, and MBIA .has agreed to provide, MBIA's Consent; and 6. This Amendment is entered into in order to set forth the MBIA Consent and certain agreements of the Issuer and the City with respect to the obligation (a) to reimburse MBIA for any payment made by MBIA under the Swap Policy as provided in -the Original Agreement and herein and' (b) to indemnify or reimburse- MBIA for certain amounts as more fully set forth in the Original Agreement-and herein. AGREEMENT: In consideration of the premises -and the mutual promises set forth below, MBIA, the Issuer and the City. agree as follows: Section 1. Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall, for all purposes of this Amendment, have the meanings herein specified; to be equally applicable to .both the singular and plural forms of any of the terms herein defined. Capitalized terms used herein and not otherwise defined. herein shall have the meanings ascribed thereto in the Original Agreement. OHS West;260641640.1 42797-2 EJC/EJC "Consent" means MBIA's consent. set forth in Section 2 hereof. "Original Agreement" -means the Insurance and Reimbursement Agreement dated as of June 1, 2006, as originally executed and delivered. "Redeemed Bonds" means the. Bonds to be redeemed with the proceeds of the 2009 Bonds, consisting of $ principal. amount of Vernon Natural as Financing Authority Variable Rate Revenue Bonds.. (Vernon Gas .Project), 2006 Series A, $ principal amount of Vernon Natural as. Financing Authority Variable Rate Revenue .Bonds. (Vernon Gas Project), 2006 Series B, and $ principal amount of Vernon. Natural as Financing Authority Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series C. "Second Supplemental Indenture" means the Second Supplemental Indenture of Trust, dated as of May 1, 2009,. between the Issuer and the Trustee, amending Section 9.01 of .the General Indenture. "2009 Bonds" -means the $ aggregate principal amount, of the City's Electric, System Revenue Bonds, 2009 Series A. Section 2. MBIA Consent. Pursuant to Section 2.01(n) of the Original Agreement and Section 7.02 of the First Supplemental Indenture, MBIA hereby consents: (i) to -the redemption of the Redeemed Bonds with proceeds of the 2009 Bonds without terminating the transactions .under the Swap Agreement relating to the Redeemed Bonds or reducing. the notional amounts of the transactions under the Swap Agreement relating to the Redeemed Bonds by an amount equal to the principal amount of the Redeemed Bonds; and (ii) to the Issuer and the Trustee entering into the Second Supplemental Indenture substantially in the ..form attached hereto as Appendix A. Section 3. Issuer Covenant. The Issuer agrees that, no later than December 31, 2011, the Issuer will take one of the following actions: (i) terminate all transactions under the Swap Agreement relating to the Redeemed Bonds; or (ii) reduce the notional amount each transaction under the Swap Agreement. relating to the Redeemed Bonds to an amount not in excess of the principal amount of the Bonds related to such transaction and outstanding on December 31, 2011; or (iii) cause the Swap Provider to relinquish its rights to payments from MBIA under the Swap ,Policy with respect to the transactions under the Swap Agreement relating to -the Redeemed Bonds. Section 4. City Covenant. The City agrees to reimburse MBIA for all payments made by MBIA under the terms of the Swap Policy from amounts available therefor in the Light and Power Fund of the City. Section 5. City Obligations under Swam Agreement. The City recognizes; affirms and agrees that, pursuant to the terms of the Gas Purchase Agreement, the City is obligated to pay all amounts due with respect to the transactions under the Swap Agreement, including net payments due from the Issuer. The City agrees to make all such payments in accordance with the terms of the Gas Purchase Agreement. Section 6. City Obligation Regarding Reimbursements. The City recognizes, affirms and agrees that, pursuant to the terms of the Gas Purchase Agreement, the City is obligated to OHS West:260641640.1 42797-2 EJC/EJC 2 ..pay all amounts due from Issuer with respect to the reimbursement: to MBIA of amounts paid by - MBIA under -the Swap Policy. The City agrees to make all such payments in accordance with the terms of the Gas Purchase Agreement. Section 7. The City agrees to provide to the Trustee, not later than December 15, 2009, an amount which, together with the cash and investments. held by the Trustee in the Debt Service Fund and the Debt Service Reserve Fund (excluding any Reserve Financial Guaranty credited to the Debt Service Reserve Fund) established under the Indenture, shall be equal to the amounts payable with respect to the principal of Bank Bonds during the calendar year 2010, including any mandatory redemption of Bank Bonds, required by the applicable Credit Agreement or Liquidity Agreement.] Section 8. Term of Original Agreement. Section 9.10 of the Original Agreement is hereby supplemented by adding the following' after the first sentence of such Section: This Agreement shall continue in full force and effect notwithstanding the payment or redemption of the Bonds, or provision. for payment of the Bonds in accordance with Article IX of the. Indenture. Section 9. -Original Agreement. Save and except as amended and supplemented by-this . Amendment, the Original Agreement shall continue in full force and effect as originally executed and delivered by the Issuer, the City and MBIA. OHS West:260641640.1 42797-2 EJC/EJC 3 IN WITNESS WHEREOF, :.each of .the parties hereto has caused this Amendment Number One to Insurance and Reimbursement Agreement to be executed in its respective name by its duly authorized officer, all as of the date first above written. MBIA INSURANCE CORPORATION By Title VERNON NATURAL GAS FINANCING AUTHORITY By Eric T. Fresch Executive Director APPROVED AS TO FORM: THE CITY OF VERNON CALIFORNIA By By Jeff A. Harrison, City Attorney Leonis C. Malburg, Mayor Attest: By Manuela Giron City Clerk OHS West:260641640.1 42797-2 EJC/EJC 4 EXHIBIT E 1 Exhibit E 2 3 [Authority Resolution Attached] 4 5 6 7 ° 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 E-1 1 RESOLUTION NO. VNGFA-0013 2 3 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE VERNON NATURAL GAS FINANCING AUTHORITY APPROVING 4 -THE REDEMPTION OF AUTHORITY BONDS; APPROVING A 5 SECOND SUPPLEMENTAL INDENTURE, AN AMENbMENT TO AN INSURANCE AND REIMBURSEMENT AGREEMENT, AMENDMENTS 6 TO INTEREST RATE SWAP DOCUMENTS AND AN ESCROW- AGREEMENT IN CONNECTION THEREWITH; AND AUTHORIZING 7 CERTAIN-OTHER MATTERS RELATING THERETO 8 9 WHEREAS, the _City of Vernon (the "City")-owns and operates a 10 natural gas distribution system .(the "Gas System") for supplying- 11 natural gas to the municipal electric system owned and operated by the 12 City for supplying the inhabitants, businesses and industries within 13 the City with electricity (the "Electric-System") and has expanded the 14 operations of the Gas System to provide natural gas to businesses and 15 industries within the City; and 16 WHEREAS, the Gas System provides natural gas, and the 17 Electric System provides electricity, at rates which promote economic 18 development within the City; and 19 WHEREAS, the Vernon Natural Gas Financing Authority (the 20 "Authority") has been established as a separate entity under the 21 California Joint Exercise of Powers Act to undertake projects and 22 programs that promote economic development within the City; and 23 WHEREAS, such projects and programs include, among other 24 things,. the Authority's issuance of bonds pursuant to any applicable 25 bond law, providing credit facilities and liquidity facilities for such 26 bonds, the entry into interest rate swap agreements with respect to 27 such bonds, the entry into agreements with respect to the purchase of 28 natural gas by the Authority and the sale of natural .gas to the City; 1 and 2 WHEREAS, the Authority has issued its Variable Rate Revenue 3 Bonds (Vernon Gas Project), 2006 Series A, 2006 Series B and 2006 4 Series C (the "Authority Bonds")'which remain outstanding in an 5 aggregate principal amount of $387,145,000; and 6 WHEREAS, the Authority Bonds were issued pursuant to an 7 Indenture of Trust (the."2006 Master Indenture"), dated as of June 1, 8 2006, between the Authority and The Bank of New York Trust. Company,, 9 N.A., as supplemented by the First Supplemental Tndenture of Trust,- 10 dated as of June 1, 2006, between the .Authority and The Bank of New 11 .York Trust Company, N.A. (the 2006 Master Indenture, as so 12 supplemented, being referred to as the "Authority Indenture"); and 13 WHEREAS, in connection with the Authority Bonds. the Authority 14 has entered into five interest. rate swap transactions (the "Swap 15 Transactions") with Citibank, N.A. ("Citibank"), pursuant to five 16 confirmations (the "Confirmations") to the'ISDA Master Agreement (the 17 "Master Agreement"), as amended and supplemented by the Schedule: (the 18 "Schedule") and Credit Support Annex (the "Credit Support Annex") 19 attached thereto (collectively, the "ISDA Agreement"), each dated as of 20 June 27, 2006, and-each between the Authority and Citibank;-and 21 WHEREAS, the Authority and the City have entered into the 22 Agreement (capitalized terms used in this Resolution and not otherwise 23 defined-shall have the meanings herein as such terms are given in the 24 Authority Indenture) pursuant to which the City is obligated to make 25 payments sufficient to'pay when due the debt service on the Authority 26 Bonds-and amounts payable by the Authority under the Swap Transactions; 27 and 28 / / / - 2 - 1 WHEREAS, the City has provided for the issuance of its 2 Electric System Revenue Bonds, 2009 Series A (the "2009 Series A 3 Bonds") to, among other things,. refinance the City's obligations under 4 the .Agreement with respect to the Authority Bonds, by providing for the" 5 redemption of all or a portion of the Authority Bonds; and 6 WHEREAS, in connection with the issuance of the 2009 Series A 7 Bonds and the. redemption of Authority Bonds there has been prepared a 8 Second Supplemental Indenture of Trust (such Second Supplemental- 9 Indenture of Trust, in the form attached hereto as Exhibit- A, with such . 10 changes, insertions-and deletions aS-are made pursuant to this 11 Resolution, being referred to herein as the."Second Supplemental 12 Indenture"), to be dated as of May 1, 2009, and to be entered into by 13 the Authority-and The Bank of New York Mellon Trust Company, N.A., as 14 successor trustee under the .Authority Indenture (the "Trustee"); and 15 WHEREAS,-in connection with the issuance of the 2009 Series A 16 Bonds and the redemption of Authority Bonds there has. been prepared an 17 Amendment Number One to Insurance and Reimbursement Agreement, to be 18 dated as of May 1, 2009, and to be entered ~into,by the Authority, the 19 City and MBIA Insurance Corporation (such amendment, in the form 20 attached hereto as Exhibit B, with such changes, insertions and 21 deletions as are made pursuant. to-this Resolution,. being referred to 22 herein as the "Amendment Number, One") which amends and supplements the 23 Insurance .Agreement; and 24 WHEREAS, in connection with the redemption of the .Authority 25 Bonds there has been prepared an escrow agreement (such escrow. 26 agreement, in the form attached hereto as Exhibit C, with such changes, 27 insertions and deletions a5 are made pursuant to this Resolution, being 28 referred to herein as the "Escrow Agreement"), to be dated as of May 1, _ 3 _ 1 2009, and to be entered into by the Authority and the Trustee; and 2 WHEREAS, in connection with the redemption of Authority Bonds 3 there has-been prepared an amended and restated confirmation to each of 4 the Confirmations and an amended and restated Master Agreement, an 5 amended and restated Schedule and an amended and restated Credit 6 Support Annex. (such amended and restated Confirmations, Master 7 Agreement, Schedule and Credit Support Annex, in the form attached 8 hereto as Exhibit D, with such changes, insertions and deletions as are 9 made pursuant to this Resolution, being collectively referred o herein 10 as the "Restated. ISDA Agreement"); and 11 WHEREAS, under the Restated ISDA Agreement, Citibank agrees,. 12 under the terms and conditions specified therein, to the cancellation 13 of the insurance policy issued by MBIA Insurance Corporation, which 14 insure the~net payments due .under the Restated ISDA Agreement, and the 15 Authority agrees to provide collateral under the Restated Credit 16 Support Annex upon such cancellation; and. 17 WHEREAS, there have been submitted to this meeting drafts of 18 the following: 19 (1) the Second Supplemental Indenture; 20 (2) Amendment Number One; 21 (3) the Escrow Agreement; and 22 (4) the. Restated ISDA Agreement;. and 23 WHEREAS, .pursuant to a resolution adopted this day by the 24 City Council of the City, the City ha s. approved the transactions and 25 the documents authorized and approved by this Resolution; and 26 WHEREAS, this Board of Directors now desires to authorize the 27 execution of such .documents and the performance of such acts as may be 28 - 4 - 1 necessary or desirable to effect the redemption of the Authority Bonds 2 and the other actions contemplated by this Resolution. 3 NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF 4 THE VERNON NATURAL-GAS FINANCING AUTHORITY, AS FOhLOWS; 5 SECTION 1: The Board of Directors of the Authority hereby 6 finds and determines that the recitals contained hereinabove are true 7 and correct. 8 SECTION 2: The Second Supplemental Indenture, in 9 substantially the form attached hereto as Exhibit A and made a part 10 hereof as though set forth in full herein, be and the same is hereby 11 approved. -Each of the Chairman, the Vice Chairman and the Secretary of 12 -the Authority (each an "Authorized Officer"), acting singly, is hereby 13 authorized to execute and deliver the Second Supplemental Indenture, in 14 the name.. of and on behalf of the Authority, in substantially the.form 15 attached hereto with such changes, insertions and deletions as may be 16 approved by the Authorized Officer executing the Second Supplemental 17 Indenture, said execution being conclusive evidence of such approval, 18 and the Secretary is hereby authorized to attest thereto. 19 SECTION 3: Amendment Number One: (i) in substantially the 20 form attached hereto as Exhibit B for the redemption of all Authority 21 Bonds, if all outstanding Authority Bonds are to be redeemed with the 22 proceeds. of the 2009 Bonds.;. and (ii) in the form attached hereto as 23 Exhibit B for the redemption of a portion of the outstanding Authority 24 Bonds, if less than all of the outstanding Authority Bonds are to be 25 redeemed with, the proceeds of the 2009 Bonds, and, in each case made a 26 part hereof as though set forth in full herein, be and the same is 27 hereby approved. Each of the Authorized Officers, acting singly, is 28 hereby authorized to .execute-and deliver Amendment Number One, in the 5 1 name of and on behalf of-the. Authority, in substantially the 2 appropriate form attached hereto with such changes, insertions and 3 deletions as may be approved by the Authorized Officer executing 4 .Amendment Number One, said execution being conclusive evidence of such 5 approval, and the Secretary is hereby authorized to attest thereto. 6 SECTION 4: The Escrow Agreement, in substantially the form 7 attached hereto as Exhibit C and made a part hereof as~thought set 8 forth in full herein, be .and-the same is 'hereby approved. Each of the 9 Authorized Officers, acting singly, is hereby authorized to execute l0. and deliver the Escrow Agreement, in the name of-and on behalf of the 11 Authority, in substantially the form attached hereto with such 12 changes, insertions and deletions as may be approved by the Authorized 13 Officer: executing the same, said execution being conclusive evidence 14 of'such approval, and the Secretary. is hereby authorized to attest 15 thereto. 16 SECTION 5: The Restated ISDA Agreement, in substantially 17 the form attached hereto as Exhibit D and made a part hereof as though 18 set forth in full herein, be and the same. is hereby approved. Each of 19 the Authorized Officers, acting singly, is hereby authorized to 20 execute and-deliver the Restated ISDA Agreement, in the name of and on 21 behalf of the Authority, in substantially the form attached hereto. 22 with such changes, insertions and deletions as may be approved. by the 23 Authorized Officer executing the same, said execution being conclusive 24 evidence of such approval, and the Secretary is hereby authorized to 25 attest thereto. 26~ SECTION 6: The redemption with proceeds of the 2009 Series 27 A Bonds of all the Authority Bonds, or such portion of the Authority 28 Bonds as may be redeemed with available proceeds of the 2009 Series A _ 6 _ 1 Bonds, and on such redemption date or dates, in .each case as shall be 2 specified by an authorized officer of the City is hereby authorized 3 and approved. The Swap Transactions shall continue in full force and 4 effect after the redemption of Authority Bonds with .proceeds of the 5 -2009. Series A Bonds. This Board of Directors finds and determines that 6 the continuation of the .Swap Transactions in full force-and effect 7 after such redemption of Authority Bonds is necessary and in the best 8 interests of the Authority and. the City and is in connection with 9 maintaining the Agreement as the Authority's interest in the Agreement 10 is part of the Trust Estate securing Qualified Swap Transactions-such 11 as the Swap Transactions and amounts-due under the Insurance 12 Agreement. In addition, as the City is responsible for the 13 Authority's obligations under the Swap Transactions pursuant. to the 14 Agreement, and the 2009 Series A Bonds act as replacements for the 15 Authority Bonds, the Swap Transactions are properly allocable to 2009 16 Series A Bonds as the Authority Bonds are redeemed with proceeds of 17 the 2009 Series A Bonds. This Board of Directors further finds and 18 determines that the. continuation of the Swap Transactions in full 19 force and effect after the redemption of Authority Bonds with the 20 proceeds. of .the 2009 Series A Bonds is designed to reduce the amount 21 or duration of payment risk and result, in a lower cost of borrowing 22 when .used when used in connection with the issuance of the 2009 Series 23 A Bonds. 24 SECTION 7: The Chairman, .the Vice Chairman and the 25 Secretary of the Authority, .and any other proper official, officer or 26 employee of the .Authority, .acting singly, be and each of them hereby 27 is authorized to execute and deliver any and all documents and 28 instruments and to do and cause to be done any. and all acts and things - 7 - 1 necessary or convenient in carrying out the actions authorized by this 2 Resolution and the transactions contemplated by the: documents and 3 instruments approved or authorized by this Resolution, including, 4 without limitation, causing notices of redemption of Authority Bonds 5 to be given in accordance with the Authority Bond Indenture, making. 6 any determinations or submission of any documents or reports which are 7 required by any rule or regulation of any governmental entity in 8 connection with the redemption of Authority Bonds or the 9 authorization, execution,' delivery and performance by the Authority of 10 its obligations under :the documents and instruments approved or 11 .authorized by this Resolution. 12 SECTION 8: All actions heretofore-.taken by any committee of 13 the Board of Directors, or any official, officer, employee, 14 representative or agent of the Authority, in connection with the 15 performance of the Authority's obligations under the documents and 16 instruments approved or authorized by this Resolution and the .other 17 actions contemplated by this Resolution are hereby ratified, approved 18 and confirmed. 19 SECTION 9: The Secretary of the Authority shall certify to 20 the passage of this resolution, and thereupon and thereafter the same 21 shall be iri full force and effect. 22 APPROVED AND ADOPTED this 13th-day of April,- 2009. 23 24 25 Name: 26 Title: Chairman / Vice Chairman- ATTEST:- 27 28 WILLIAM M. MCCORMICK, Secretary _ 8 _ 1 STATE OF CALIFORNIA ) 2 ) ss COUNTY -0F LOS ANGELES ) 3 4 T, WILLIAM M. MCCORMICK, Secretary of .the Vernon Natural Gas 5 Financing Authority ("Authority"), do herebycertify that the foregoing 6 Resolution, being Resolution, No. VNGFA-0013, was duly adopted by the ~ Board of Directors of the Authority at a special meeting of the. Board 8 of Directors-duly held on Monday, April 13, 200.9,-and thereafter was 9 duly signed by the Chairman or Vice Chairman of the Authority. 10 11 WILLIAM M. MCCORMICK, Secretary 12 13 (SEAL) 14 15 16 1Z 18 19 20 21 22 . 23 24 25 26 27 28 - 9 - Exhibit A [Second Supplemental-Indenture Attached] A-1 Exhibit B [Amendment Number One Attached] B-1 Exhibit C [Escrow Agreement Attached] C-1 1 Exhibit D 2 3 [Restated ISDA Agreement Attached 4 5 6 7 8 9 10 11 9 12 13 14 15 16 17 l8 19 . 20 21 22 23 24 25 26 27 28 D-1 t o~,KPEq~o L `S}V}:LY IM~Vg CITY ATTORNEY'S OFFICE INTER-DEPARTMENT MEMORANDUM DATE: July 20, 2009 TO: Nelly Giron, City Clerl~ FROM: Jeff A. Harrison RE: Electric System Revenue Bonds 2009 Series A $419,400,000 May 13, 2009 Attached please find for your retention the compact disc containing the signed documents regarding the above-referenced matter. JH:em Enclosure (Resolution No. 9915) r~ _ _ ~ o~:~ ~ , ~ ~ - , ; € r!i ~~,1 ~ J 5 4 n ~1 5~ 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 June 29, 2009 Orrick, Herrington & Sutcliffe, LLP 777 South Figueroa Street Suite 3200 Los Angeles, CA 90017-5855 Attn: Sean J. Baxter Re: Vernon Natural Gas Financing. Authority -Bond Closing May 13, 2009. Dear Sean, As requested, enclosed herewith are the two signed signature. certificates. . incerely, Nelly Giron City Clerk :ng enclosures E.~cCusiveCy IndustriaC $419,400,000 CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS 2009 SERIES A SIGNATURE AND INCUMBENCY CERTIFICATE OF THE AUTHORITY I, Manuela Giron, Executive Director of the Vernon Natural Gas Financing Authority (the "Authority"), HEREBY CERTIFY as follows: 1. that the members of the Board of Directors of the Authority were on April 13, 2009, and continue as such members as of the date hereof as follows: Hilario Gonzales W. Michael McCormick William J. Davis Richard J. Maisano Leonis C. Malburg 2. that the persons holding the following offices and positions and duly appointed thereto and acting therein were on April 27, 2009, and continue to hold such offices and positions as of the date hereof, as follows: Name Office Hilario Gonzales Chairman W. Michael McCormick Vice Chairman William J. Davis Secretary Manuela Giron Executive Director 3. that the signatures set forth opposite the respective names of the following designated officers of the Authority are manual specimens of their signature:. Name Office Si nature Hilario Gonzales Chairman ,,~,.,,~,,~r.L~ .William J. Davis Secretary ~~..----~m ~ Manuela Giron Executive Director OHS West:260683389.1 IN WITNESS WHEREOF, I have hereunto set my hand this 13th day of May, 2009. 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Fee2nyhes HeV. flare 17/OS•Pertf159t79g1997-2005 FadEx•PflINTEO IN U.S.A•SRF Page 1 of 3 Giron, Nelly From: Baxter, Sean [sbaxter@orrick.com] Sent: Wednesday,-June 24, 200911:29 AM To: Giron, Nelly Cc: Harrison, Jeff; Enomoto, Kristen Subject: RE: Vernon Natural Gas Financing Authority Attachments: Gas Authority signature certificate.pdf Good Morning Nelly: Sorry to be bothering you so long after the Bond deal closed in May, but Citibank's counsel has requested a signature certificate for the Vernon Natural Gas Financing Authority which we did not prepare at the time of closing (we only prepared and had one signed for the City). Attached. please find such signature certificate for the Authority, which needs to be signed by Hilario Gonzales, William J. Davis and yourself, as you all signed documents on behalf'of the Authority at the time of closing (which is why it is dated our closing date, May 13, 2009). Please arrange for two (2) originals to be signed and deliver them to be at the address below at your convenience. Again, my apologies for the hassle and as always, please do not hesitate to contact me with any questions. Thank you., Sean !~trK l~'UBLt~ lr'FFIAI~~E Sean J. Baxter Project Manager Orrick, Herrington & Sutcliffe LLP 777 South Figueroa Street Suite 3200 Los Angeles, CA 90017-5855 te/ 213-612-2171 fax 213-612-2499 sbaxter(a~orrick. com vvww.orrick.com From: Enomoto, Kristen [mailto:Kenomoto@ci.vernon.ca.us] Sent: Wednesday, April 29, 2009 9:30 AM To: Baxter, Sean Cc: Eric French (BB); Harrison,. Jeff Subject: Vernon Natural Gas Financing Authority Hi Sean, Actually, at its meeting on 4/27/09, the Gas Authority reorganized as follows. My apologies for not having given 6!25/2009 Page 2 of 3 you this information sooner. Can you please forward this on to anyone else who might need it? Thanks. Chairman - Hilario Gonzales Vice Chairman - W. Michael McCormick Secretary - William J. Davis Executive Director -Manuela Giron Kristen From: Baxter, Sean [mailtoabaxter@orrick.com] Sent: Wednesday, April 29, 2009 9:18 AM To: Enomoto, Kristen Subject: Vernon Natural Gas Financing Authority Hi Kristen, When you have a chance, can you confirm who holds the current positions in the Gas Authority? I assume ~Iliam M. McCormick is still secretary and Manuela Giron is still Executive Director. Is Hilaro Gonzales now the Chairman? Thanks! Sean ~1~'[+ ~uBL~!G IrIN~41~G:E Sean J. Baxter Project Manager Orrick, Herrington & Sutcliffe LLP 777 South Figueroa Street Suite 3200 Los Angeles, CA 90017-5855 te1213 -612-2171 fax 213-612-2499 sbaxter(~orrick.com www. Orrick. com "EMF <orrick.com>" made the following annotations.. IRS Circular 2.30 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) 6/25/2009 Page 3 of 3 addressed herein. NOTICE TO RECIPIENT: THIS E-MAIL IS MEANT FOR ONLY THE INTENDED RECIPIENT OF THE TRANSMISSION, AND MAY BE A COMMUNICATION PRIVILEGED BY LAW. IF YOU RECEIVED THIS E- MAIL IN ERROR, ANY REVIEW, USE, DISSEMINATION, DISTRIBUTION, OR COPYING OF THIS E-MAIL IS STRICTLY PROHIBITED. PLEASE NOTIFY US IMMEDIATELY OF THE ERROR BY RETURN E-MAIL AND PLEASE DELETE THIS MESSAGE FROM YOUR SYSTEM. THANK YOU IN ADVANCE FOR YOUR COOPERATION. For more information about Orrick, please visit http://www.orrick.com/ 6/25/2009 J , 1f . 1/ _ - ~ ~ ~ E. ~.Z .d;~ ~~3 r ~ti ~;t rr5 - 'G OFFICE OF THE CITY ATTORNEY Jeff A. Harrison, City Attorney 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 Fax (323) 826-1438 May 13, 2009 VIA U. S. MAIL Mr. Sean J. Baxter Project.Manager Grrck, Herrington & Sutcliffe LLP 777 S. .Figueroa St., Suite 3.200 Los Angeles, CA 90017-5855 Re: Vernon and Vernon Natural Gas Financing Authority 2009 Bonds Dear Sean: .Enclosed-please find the following regarding the above- rzferen;.ed matter: - 1. Five (5) signed original Certificates Regarding Insurance Agreement with the City seal. 2. Five (5) signed City Attorney Opin-ion Letters to Citigroup Global Markets Inc, and E.J. De La Rosa & Co., Inc. 3. .Five (5) signed City Attorney Gpinior_ Letters to MBIA Insurance Corporation-and National Public Finance Guarantee Corporation. 4. Five (5) signed Legal Counsel Opinion. Letters to MBIA Insurance Corporation and National Public Finance Guarantee Corporation. 5. Five (5) signed Legal Counsel Opinion Letters to Citibank, N.A. E.xcCusiveCy IndustniaC Mr. Sean. J: Baxter May 13, 2009 Page 2 6. Five (5) signed Legal Counsel Opinion-Letters to Orrick, Herrington & Sutcliffe LLP, If you have any questions, please contact me. -Very tr y yours,: f Harrison City Attorney JH:jl Enclosures cc: Ms. Nel1y Giron, City Clerk (w/original opinion letters of City Attorney and Legal Counsel) - Resolution Nos. VNGFA- 0013/0015 and Resolution Nos. 9915 and 9923) . $419,400,000. CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS 2009 SERIES A CERTIFICATE REGARDING INSURANCE AGREEMENT I, Manuela Giron; City Clerlc of the City of Vernon (the ".City"), HEREBY CERTIFY.. that attached hereto is a true, complete and correct copy of the Insurance and Reimbursement Agreement, dated as of June 1, 2006, by and among the Vernon Natural Gas Financing Authority (the "Authority"), the. City and MBIA Insurance Corporation .MBIA") (the "Insurance Agreement") and that the Insurance Agreement has -not been amended, modified, supplemented. (except pursuant. ~to the Amendment, Number One to Insurance and Reimbursement Agreement, dated as of May 1, 2009 ("Amendment Number One")), or rescinded, and the Insurance Agreement, as amended by Amendment Number One is in full force and effect as of the date hereof. IN WITNESS WHEREOF, I have hereunto -set my hand this 13th day of May; -2009. CITY OF VERNON By: Manu ron City Clerk [SEAL] OHS West:260651338.2 ~ ~ f ~,1 t ~ `f~ b~~~'.~4~~ ~ ~ ~7 , 11 ~-1 ~ - ~r~rt,Y.tNU ~ 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 May 13, 2009 Citigroup Global Markets Inc.. E.J. De La Rosa & Co., Inc. One Sansome Street 10866 Wilshire Boulevard San Francisco, California 94104 Los Angeles, CA 90024 City of Vernon Electric System Revenue Bonds, 2009 Series A Ladies and Gentlemen: I am the City Attorney of the City of Vernon (the "City'.') and as such I have served as counsel to the City in connection with the issuance by the City of its $419,400,000 Electric System Revenue Bonds, 2009 Series A (the "Bonds"). As such counsel, I have examined and am familiar with (i) those documents relating to the existence, organization and operation of .the City; (ii) all necessary documentation of the City relating to the authorization; execution and delivery of (a) Resolution No. 9915, adopted by the City Council of the City on April 13, 2009 and Resolution No. 9923,. adopted by the City .Council of the City on April 27, 2009 (collectively, the "Resolutions"), (b) the Indenture of Trust, dated as of September 1, 2008, as ..supplemented, including as supplemented by the Second Supplemental Indenture of Trust providing for the issuance of the Bonds, dated as of May 1, 2009 (as so supplemented, the "Indenture"), by and between the City and The Bank of New York Mellon Trust Company, N.A. (the "Trustee"), (c) the Continuing Disclosure Agreement, dated as of May 1, 2009 (the "Continuing Disclosure Agreement"), by and between the City and the Trustee, and (d) the Contract of Purchase, dated May 6, 2009 with respect to the Bonds (the "Purchase Contract"), between the City and Citigroup Global Markets Inc., acting on behalf of itself and as representative of E.J. De La Rosa & Co., Inc.; and (iii) the .Official Statement of the City, dated May 6, 2009 (the "Official Statement"), relating to the Bonds. The Indenture, the Continuing Disclosure Agreement and the Purchase Contract are collectively referred to herein as the "Legal Documents." Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Indenture. E.xcCusiveCy IndustriaC Citigroup Global Markets Inc. E.J. De La Rosa & Co., Inc. May 13, 2009 Page 2 I am of the opinion that: 1. The City is a chartered city, duly created, organized and existing under the Constitution and laws of the State of California and its charter and duly qualified to furnish electric service within-the City. 2. The Resolutions were duly adopted at meetings of the City Council of the City, which were called and held pursuant to law and with all public notice: required by law and at which a quorum was present and acting throughout and the Resolutions are in full force and effect and have not been amended, modified or supplemented (except as they amend, modify or supplement each other). 3. The City .has the authority and right to execute, deliver and perform the Legal' Documents, and the City has complied with the provisions of applicable law in all matters relating. to the transactions contemplated by the Legal Documents. 4. The Official Statement and the Legal Documents have been duly authorized, executed and delivered by the City and, assuming that the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal Documents constitute the legal, valid and binding agreements of the City enforceable against it in accordance with their respective terms, except, in each- case, as enforceability may be limited by laws relating to bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by the application of equitable principles if equitable remedies are sought. 5. No approval, consent or authorization of any governmental or public agency, authority or person is required for the execution and delivery by the City of the Legal. Documents or the .performance by the City of its obligations thereunder or the execution and delivery, on the part of the City, of the Bonds. Under the laws of the State of California, the City has the authority to determine; fix, impose and collect rates and charges for electric service and is not presently subject to the regulatory jurisdiction of any state, regional or local governmental regulatory authority other than to the extent described in the Official Statement. 6. The execution and delivery of the Legal Documents by the-City and compliance with the provisions thereof will not. conflict .with or constitute a breach of or default under any instrument relating to the organization, existence or operation of the City, or commitment, agreement or other instrument to which the City is a party or by which it or its property is bound or affected, or any ruling, regulation, ordinance, judgment, order or decree to which the City or any of its officers in their respective capacities as such-are subject or any provision of the laws of the State of California relating to the City and its affairs. 7. There is no action, suit, proceeding, inquiry or investigation at law or in equity, or before any court, public board or body, pending or, to the best of my knowledge, threatened against or: affecting the City or any entity affiliated with the City or any of its officers in their respective capacities as such (nor to the best of my knowledge, is there any basis therefor) that questions the powers of the City referred to in paragraph 3 above or in connection with the transactions contemplated by the Official Statement, or the validity of the proceedings taken by City of Vernon, 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811 Citigroup Global Markets Inc. E.J. De La Rosa & Co., Ina May 13, 2009. Page 3 the City in connection with the authorization, execution or delivery of the Legal Documents, or wherein any unfavorable decision, ruling or finding would adversely affect the transactions contemplated by any of the Legal Documents or the Official Statement, or that, in any way, would adversely affect the validity or enforceability of any of the Legal Documents or, in any material respect, the ability of the City to perform its obligations under any of the Legal. Documents.. Based on my participation in the preparation of the Official Statement, I advise you that no facts came to my attention which caused me to believe that the Official Statement as of its date, and as of the date- hereof (except for any CUSIP numbers, financial, statistical or economic data or forecasts, numbers, charts, tables, graphs, estimates, projections, assumptions or expressions of opinion, or any information about book-entry or DTC which I expressly exclude from the scope of this paragraph and as to which I express no opinion or view), contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Respectfull submitted, r J rrison ity Att rney . JH:jI City of Vernon, 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811 f ~ ~ t ~a 1 ~ ~V { a t , a"~;, ~ `r . Y: 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 May 13, 2009 MBIA Insurance Corporation 113 King Street Armonk, New York 10504 National Public Finance Guarantee Corporation 113 King Street Armonk, New York 10504 - City of Vernon Electric System Revenue Bonds, 2009 Series A Ladies and Gentlemen: I am the City Attorney of the City of Vernon (the "City") and- as such I have served as counsel to the City in connection with the issuance by the City of its $419,400,000 Electric System Revenue Bonds, 2009 Series A. As such counsel, I have examined and am familiar with all necessary documentation of the City relating to the authorization,. execution and delivery of the Insurance and Reimbursement Agreement, dated as of June 1, 2006, by and among the Vernon Natural .Gas Financing Authority (the "Authority"), the City and MBIA Insurance Corporation ("MBIA"), as amended by Amendment Number One to Insurance and Reimbursement Agreement, dated as of May 1, 2009 {as so amended, the "Insurance Agreement"), by and among the Authority, the City,- MBIA and National Public Finance Guarantee Corporation. I am of the opinion that: 1. The City has the authority and right to execute, deliver and perform the Insurance Agreement, .and the City has complied with the provisions of applicable law in all matters relating to the transactions contemplated by the Insurance Agreement. 2. The Insurance Agreement has been duly authorized, executed and delivered by the City and, assuming that the .Insurance Agreement constitutes the legal, valid and binding Fa~c~usiveCy IndustriaC MBIA Insurance Corporation National- Public Finance Guarantee Corporation May 13, 2009 Page 2 agreement of the other respective parties thereto, the Insurance Agreement constitutes the .legal, valid and binding agreement of the City enforceable against it in accordance with its respective terms,- except as enforceability may be limited by laws relating to bankruptcy, insolvency or other -laws affecting the enforcement of creditors' rights generally. and by the application of equitable principles if equitable remedies are sought. 3. No approval, consent or authorization of any governmental or public agency, authority or person is required for the execution and. delivery by the City of the Insurance Agreement or the performance by the City of its obligations thereunder. 4. The execution and delivery of the Insurance Agreement by the City and compliance with the provisions thereof will not conflict with or constitute a breach of or default under any instrument relating to the organization, existence or operation of the- City, or commitment, agreement or other instrument to ,which the City is a party or by which it or its property is bound or affected, or any ruling, regulation, ordinance, judgment, order or decree to which the City or any of its officers in their- respective capacities as such are subject or any provision of the laws of the State of California relating to the City and its affairs. 5. There is no action, suit, proceeding, inquiry or investigation at law or in equity, or before any court,. public board or body, pending or, to the best of my knowledge, threatened against or affecting the City or any entity affiliated with the City_ or any of its officers in their respective capacities as such (nor to the best of my knowledge, is there any: basis therefor) that questions the powers of the City referred to in paragraph 1 above or the validity of .the proceedings taken by the City in connection with the authorization, execution or delivery of the Insurance Agreement, or wherein any unfavorabledecision, ruling or finding would adversely affect the transactions contemplated by the Insurance Agreement, or that, in any way, would adversely affect the validity or enforceability- of the Insurance .Agreement or, in any material respect, the ability of the City to perform its obligations under the Insurance Agreement. Respectfull submitted, J A. 'son ty Att ey JH:jI City of Vernon, 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811. ~N M/.T4~ ~b ~g~MUSh``L 4 • ~ J~ ~h111V C~ Vernon Natural Gas Financing Authority 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 May 13, 2009 Orrick, Herrington. & Sutcliffe LLP 777 South Figueroa Street, Suite 3200 Los Angeles, California 90017 City of Vernon Electric System Revenue Bonds, 2009 Series A Ladies and Gentlemen: I am the City Attorney of the City of .Vernon (the "City") and as .such I have served as counsel to the Vernon Natural Gas Financing Authority (the "Authority") in connection with the Indenture of Trust, dated as of June 1, 2006, as supplemented, including as supplemented by the Second. Supplemental Indenture of Trust, dated as of May 1, 2009 (as so supplemented, the "Indenture"), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee (the "Trustee"). As such counsel, I have examined and am familiar with O those- documents relating to the existence, organization and operation of the Authority; and (ii) all necessary documentation of the Authority relating to the authorization, execution and delivery of (a) Resolution No. VNGFA-0013, adopted by the Board of Directors of the Authority on April 13, 2009 and Resolution No. VNGFA-0015, adopted by the Board of Directors of the Authority on April 27, 2009 (collectively, the "Resolutions"), (b) the Indenture, (c) the Escrow Agreement, dated as of May 1, 2009 (the "Escrow Agreement"), by and between the City and the Trustee,-(d) the Insurance and Reimbursement Agreement, dated as of June 1, 2006, as amended by the Amendment Number One. to Insurance and Reimbursement Agreement, dated as of May 1, 2009 (as so amended, the "Insurance Agreement"), each by and among the Authority, the City and MBIA Insurance Corporation relating to the financial guaranty insurance policies for the Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series A, 2006 Series Band 2006 Series C (the "Authority Bonds") and certain interest rate swap transactions entered into by the Authority in connection with the .Authority Bonds .and (e) the ISDA Master Agreement, dated as of June 27, 2006, as amended and restated as of May 13, 2009, between the Authority and Citibank, N.A., as supplemented by the Schedule thereto, a Credit Support. Annex and -five Confirmations, each dated June 27, 2006, .each as amended and restated as of May 13, 2009 (such ISDA Master- Agreement, as supplemented by such Schedule, such Credit Support Annex and such Confirmations. being collectively referred to as the "Interest Rate Swap Agreement"). The Indenture, the Escrow Agreement, the Insurance- Agreement and the Interest Rate Swap Agreement are collectively referred to herein as the "Legal Documents." Orrick, Herrington & Sutcliffe LLP May 13, 2009 Page 2 Capitalized terms used herein and not otherwise defined shall have the meanings given such - terms in the Indenture. I am of the opinion that: 1. The Authority is a joint exercise of powers agency, duly created, organized and existing under the Act and the Joint Powers Agreement. 2. The Resolutions were duly adopted at meetings of the Board of Directors of the Authority, which were called and held pursuant to law and with all public notice required bylaw and at which a quorum was present and acting throughout and the Resolutions are in full force and effect and have not been amended, modified or supplemented (except as they amend, modify or supplement each other). 3. The Authority has the authority and right to execute, deliver and perform the Legal Documents, and the Authority has complied .with the provisions of applicable law in all matters relating to the transactions contemplated by the Legal Documents. 4. The Legal Documents- have been duly authorized, executed and delivered by the Authority and, assuming that the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal. Documents constitute the legal, valid and binding agreements. of the Authority enforceable against it in accordance with their respective terms, except, in each .case, as enforceability may. be limited by laws relating to bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by the application of equitable principles if equitable remedies are sought. 5. No approval, consent or authorization of any governmental or public agency, authority or person is required for the execution and. delivery by the Authority of the Legal Documents or'the performance by the Authority of its obligations thereunder. 6. The execution and delivery of the Legal Documents by the Authority and compliance with the provisions thereof will not :conflict with or constitute a breach of or default . under any instrument relating to the organization, existence or operation of the Authority, or commitment, agreement or other instrument to which the Authority. is a party or by which it or its property is bound or affected, or -any .ruling, regulation, ordinance; judgment, order or decree to which the Authority or any of its officers in their respective capacities as such are subject or any provision of the laws of the State of California relating to the Authority and its affairs. 7. There is no action, suit, proceeding, inquiry or investigation at law. or in equity, or before any court, public board or body, pending or, to the best. of my knowledge, .threatened against or affecting the Authority or any entity affiliated with the Authority or any of its officers in their respective capacities as such .(nor to the best of my knowledge, is there any basis - - therefor) that questions the powers of the Authority referred. to in paragraph 3 above, or the validity of the proceedings taken by the Authority in connection with the authorization, execution or delivery of any of the Legal Documents, or wherein any unfavorable decision, ruling or finding would adversely affect the transactions contemplated by any of the Legal. Documents, or that, in any way, would adversely affect the validity or enforceability of any of 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-881.1 Orrick, Herrington & Sutcliffe LLP May 13, 2009 Page 3 the Legal Documents or, in any material respect, the ability of the Authority to perform its obligations under any of the Legal Documents: Respectfu y submitted, J 'son L gal Co nsel to the Authority 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811 CN N,ry ~21~9HE~Q w ~~hL1V Vernon Natural Gas Financing Authority 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811- May 13, 2009 Citibank, N:A. 390 Greenwich Street New York, New York 10013 City of Vernon Electric System Revenue Bonds, 2009 Series A Ladies and Gentlemen: I am the City Attorney of the City of Vernon (the "City") and as such I have served as counsel to the Vernon Natural Gas Financing Authority (the "Authority") in connection with the Indenture of Trust, dated as of June 1, 2006, as supplemented, including as supplemented by the Second Supplemental Indenture of Trust, dated as of May 1, 2009, by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee. (the "Second Supplemental Indenture"). As such counsel, I have examined and am familiar with all necessary documentation of the Authority relating to the authorization, execution and delivery of the Second. Supplemental Indenture and the ISDA Master Agreement, dated as of June 27, 2006,. as amended and restated as of May 13, 2009, between the Authority and Citibank, N.A., as supplemented by the Schedule thereto,. a Credit Support Annex and five Confirmations, each .dated June 27, 2006, each as :amended and restated as of May 13, 2009 (such ISDA Master Agreement, as .supplemented by such. Schedule, such .Credit Support -Annex and such Confirmations being collectively. referred to as the "Interest Rate Swap Agreement" and, together with the Second Supplemental Indenture, the "Legal Documents"). I am of the opinion that: 1. The City is a chartered city, duly created, organized and existing under the. Constitution .and laws of the State of California and its charter and duly qualified to furnish electric service within the City. 2. The Authority. has the authority and right to .execute, deliver .and perform the Legal Documents, and the Authority has complied with the provisions of applicable law in all matters relating to the transactions contemplated by the Legal Documents. Citibank, N.A. May 13, 2009 Page 2 3. Th'e Legal Documents have been duly authorized, executed and delivered by the Authority and, assuming that the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal .Documents constitute the legal, valid and binding agreements of the Authority enforceable against it in accordance with their respective terms, except as enforceability may be limited by laws relating to bankruptcy, insolvency or other laws affecting the- enforcement of creditors' rights generally and by the application of equitable principles if equitable remedies are sought. 4. No approval, consent or authorization of any governmental or public agency, authority or person is required for the execution and delivery by the Authority of the Legal Documents or the performance by the Authority of its obligations thereunder. 5. The execution and delivery of the Legal Documents by the Authority and compliance with the .provisions thereof will not conflict with or constitute a breach of or default under any instrument relating to the organization, existence or operation of the Authority, or commitment,. agreement or other instrument to which the Authority is a'party or by which it or its property is bound or affected, or-any ruling, regulation, ordinance, judgment, order•or decree to which the Authority or any of its officers in their respective capacities as such are subject or any ,provision of the laws of the State of California relating to the Authority and its affairs. 6. There is no action, .suit, proceeding, inquiry or investigation at law or in equity, or before any court, .public board or body, pending or, to the best of my knowledge, threatened against or affecting the Authority or any entity affiliated with the Authority or any of its officers in their respective capacities as such (nor to the best of my knowledge, is there any basis therefor) that. questions the powers of the Authority referred to in paragraph 1 above, or the validity , of the proceedings taken by the Authority in connection with -the authorization, execution or delivery of any of the Legal Documents, or wherein any unfavorable decision, ruling or f finding would adversely affect the transactions contemplated by any. of the Legal Documents, or that, in any way, would adversely affect the validity or enforceability of any of the Legal Documents or, in any material respect, the ability of the Authority to perform its obligations under the Legal Documents. Respectfully submitted, J . H 'son L 1 Co sel to the Authority JH:jI 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811 ON HATyr~ ~1M~9pPO 4 6 # mM A Vernon Natural Gas Financing Authority 4305 Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 May 13, 2009 MBIA Insurance Corporation 113 King Street Armonk, New York 10504 National Public Finance Guarantee Corporation 113 King Street Armonk, New York 10504 City of Vernon Electric System Revenue Bonds, 2009 Series A Ladies and Gentlemen: I am the City Attorney of the City of Vernon. (the "City") and as such I have served as counsel to the Vernon Natural Gas Financing Authority (the "Authority") in connection with the Indenture of Trust, dated as of June 1, 2006, as supplemented, including as supplemented by the Second Supplemental Indenture of Trust, dated as of May 1, 2009, by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor. trustee (the "Second Supplemental Indenture"). As -such counsel, I have examined and am familiar with all necessary documentation of the Authority relating to the authorization, execution and delivery of the Second Supplemental Indenture and the Insurance and Reimbursement Agreement, dated as of June 1, 2006, by and among the Authority, the City and MBIA Insurance Corporation ("MBIA"), as amended by Amendment Number One to Insurance and Reimbursement Agreement, dated as of May 1, 2009 (as so amended, .the "Insurance Agreement" and, together with the Second Supplemental Indenture, the "Legal Documents"), by and among the Authority, the City, MBIA and National Public Finance Guarantee Corporation. I am of the opinion that: 1. The Authority has -the authority and right to execute, deliver and perform the Legal Documents; and the Authority has complied with the provisions of applicable law in all matters relating to-the transactions contemplated, by the Legal Documents. 2. ,The Legal Documents have been duly authorized, executed and delivered by the Authority -and, assuming that the Legal Documents constitute the legal, valid and binding i MBIA Insurance Corporation National Public Finance Guarantee .Corporation May 13, 2009 Page 2 'agreements of the other respective parties thereto, the .Legal Documents constitute the legal, valid and binding agreements of the Authority enforceable against it in accordance with their respective terms, except as enforceability may be limited by laws relating to bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by the application of equitable principles if equitable remedies are sought. 3. No approval, consent or authorization of any governmental or public agency, authority or person is required -for the execution and delivery by the Authority of the Legal Documents or the performance by the Authority of its obligations thereunder. 4. The execution and delivery of the Legal Documents by the Authority and compliance with the provisions thereof will not conflict with or constitute a breach of or default under any instrument relating to the organization, existence or operation- of the Authority, or commitment, agreement or other instrument to which the Authority is a party or by which it or its property is bound or affected, or any ruling; regulation, ordinance, judgment, order or decree to which the Authority or any of its officers in their respective capacities as such are subject or any provision of the laws of the State of California relating to the Authority'and its affairs. 5. There. is no action, suit, proceeding, inquiry or investigation at law or in equity, or before any court, public board or body, pending or, to .the best of my knowledge, threatened against or affecting the Authority or any entity affiliated with the. Authority or any of its officers in their :respective capacities as such (nor to the best of my knowledge, is there any basis therefor) that questions the powers of the Authority referred to in paragraph 1 above, or the validity of the. proceedings taken by the Authority in connection with the authorization, execution or delivery of any of the Legal Documents, or wherein ariy unfavorable decision, ruling or finding would adversely affect the transactions contemplated by the Legal Documents; or that, in any way, would adversely affect the validity or enforceability of any of the Legal Documents or, in any material respect, the ability of the Authority to perform its obligations under any of the Legal Documents. Respectfully submitted, J . H . on L 1 Coun 1 to the Authority JH:jI 4305 Santa Fe Avenue, Vernon, California 90058 -Telephone (323) 583-8811 Juarez, Debbie From: Enomoto, Kristen Sent: Wednesday, May 06, 2009 10:59 AM To: Giron, Nelly; Juarez, Debbie Subject: City. of Vernon SLGS Subscription Attachments: SLGS Subscription Letter for Vernon 2009 Bonds 5-6-O9.pdf ,I~~° SLGS Subscriptiorr Letter for V... Hello Ladies, Please add the attached file to the 2009 Bonds resolution file (9915). Thanks. Kristen -----Original Message----- From: Enomoto, Kristen Sent: Wednesday, May 06, 2009 10:53. AM To: 'aurora.quiazon@bnymellon.com' Cc: 'Higgins, Jeffrey'; Burnett, Rory.. Subject: City of Vernon SLGS Subscription Hi Aurora, Here's-the corrected and final letter. Kristen -----Original Message----- From: Burnett, Rory Sent: Wednesday, May.06,..2009 10:30 AM To: Higgins, Jeffrey; Enomoto, Kristen Subject: RE: City of Vernon Jeff: Let's just correct acid reissue .the letter .and I will. send it to Aurora and cc you, 'Rory -----Original Message----- From: Higgins, Jeffrey [malto:jhiggins@bondlogistix.com] Sint: Wednesday, May.06,..2009 10:26 AM To: aurora.. quiazon@bnymellon.com Cc: Higgins,.-Jeffrey; .Burnett, Rory; Enomoto, Kristen Subject.:.-FW; City-of Vernon Hi Z-lurora Here is the .authorization letter. I just noticed .that the SLGS issue date say December 13, 2009. That should. read May 13, 2009. Also, the .first box on #3 and'#4 should be 'checked. Let me know if this is ok or if we need the.-City to confirm the: minor changes .Thanks Jeff 1 BLX Jeffrey. R. Higgins j Managing Director. 777 South Figueroa Street I Suite 3200 I Los Angeles, CA 90017-58.55 jhiggins@bondlbgistix.com I PH 213.612.2209 I Fax 213.612.2499 I M.310.383.2237 I www.blxgroup.coma 2 - _ J - } ~ ( _.I ~ rl ? ~~1 i T/ f..~~ . a= i t $4 Q.,;" 4305Santa Fe Avenue, Vernon, California 90058 Telephone (323) 583-8811 May 6, 2009 The- tank of New. York Mallon Trust Company, N:A. 700 South E=lower Strse# Suite 500 Los' Angeles, CA 90017 Attention: Aurora Quia~on Ref:- City of Vernon f=leCtric System Revenue Bonds 2009 Series A Dear Aurora: - The undersigned, a duly authorized officer of the City of Vernon (the "Issuer"), hereby certifies on behalf of the Issuer that:; 1. The Issuer shall comply with.#errns and conditions set forth in Title 31 of the Code of Rederal Regulations, Part 344. Terms used and not defined.herein, but dafined in 31 f?;~.R. 344, shall have the meanings set forth in 31 C.1=.R. 344. 2. You are hereby authorized and directed to subscribe for purchase IJ.S. Treasury Securities -State and' Focal Government Series. ("BEGS") pursuant to, separate written instructions from the Issues:. 7ha Si_GS are to be issued on May 13 .2009 and are to be :issued in the names referenced in such instructions. 3. th® Issuer has marked an "X" by the sentence that applies to this SLGS subscription: The Issuer is notepurchasing a SLGS security with amounts received from the sale or redemption (at the option of the holder) before,.maturity of any mark®tabla security. The Issuer is purchasing a SLC3S security with amounts.- received from thq . salsa) or redsmptic~!n (at the option of the holder) before maturity of a marketable security and the yield on such ~t.GS security does. not exceed the yield at which such marketable security was sold or redeemed. E~cCusiveCy IndustriaC i _ ~ - ~ - ~ May 6, 2009.. Fage 2 4. The Issuer has mark®d an °X" by the sentence that applies to this SL.GS subscription:.. The Issuer is not purchasing a SLGS security with- any amount received from. the redemption before maturity of a-.Time Deposit security. The issuer is purchasing a SLGS security with amounts received from the redemption b®fore maturity of a Time Deposit security (other than a zero inter®st Time Deposit security), and the yield on the ~LGS security being purchased does not exceed the yield that was used to determine the amount of redernptiar? proceeds-for such r®deemed Time D®posit security; 5. If a request for redemption before maturity of a Time Depasit security (other than a zero int®rest Time Deposit secwrify) subscribed for on or after August 15, 2UOS, is being submitted herewith, no amount received from the redemptiomwill be invested at a yield that exdeeds the yield that is used #o determine the amount of r®demptiori proceeds for such redeemed Time Deposit security. ~ineerely, 1 Name: Rory.. urnett Title: Director of Finance City of Vernon, 5305 Santa Fe Avenue, Vernon, California 9U058 ,Telephone (323) 383-8811 Juarez, Debbie From: Enomoto, Kristen -Sent: Wednesday, April 15, 2009 4:03 PM To: Giron, Nelly Cc: Juarez, Debbie Subject: BNY Fee Proposal for 2009A Bonds - .Resolution 9915 Attachments: BNY Fee Proposal for 2009 .Bonds 4-2-09.pdf -I_..J BNY Fee Proposal for 2009 Bond... Hi Nelly, Attached for your file is the BNY fee proposal for trustee services for the 2009A bonds. Kristen -----Original Message.----- -From: Enomoto, Kristen Sent: Wednesday,. April 15, 2009 4:01 PM To: 'aurora. quiazonc~bnymellon.com' Cc: !alexander.dominguez@bnymellon.com'; Burnett, Rory; Leon, Joaquin; Melgar, Angela Subject:..-City of Vernon Electric System Revenue Bonds 2009 Series A Aurora Attached please find a-copy of -.the signed fee proposal for the 2009A bonds.. The original will be mailed to you. Kristen -----Original Message----- From:.aurora. quiazon@bnymellon.com [mailto:aurora.quiazonCbnymellon.com] .Sent: Tuesday, April 07, 200.9.9:48 AM Toc Burnett,. Rory - Cc: Enomoto, Kristen Subject: City of Vernon Electric System Revenue Bonds 2009 Series A Attached is our fee schedule for referenced issue. Please sign and return acknowledged form to: The Bank of New York Mellon Trust Company 700 So. Flower Street, Suite 500 Los Angeles, CA 90017 Attention: Aurora Quiazon (See attached file; City of Vernon Elec fee proposal.doc) Thank you,. Aurora Y. Quiazon, Assistant Vice President The Bank of New York Mellon, The Bank of New York Mellon Trust Company, N.A. CORP TRUST Tel 213.630.6236 Fax 213.630.6215 aurora. quiazon@bnymellon.com 1 The information contained in this e-mail, and any attachment, is confidential and is' intended solely for the use of the intended recipient. Access, copying or re-.use. of the e- mail or any attachment, or any information contained therein, by any other person is not authorized.. If you are not the intended recipient please return the e-mail to .the sender and delete it from your computer. Although we attempt to sweep e-mail and attachments for viruses, we do not guarantee-.that either are virus-free and accept no liability. for any damage sustained as a result of viruses. Please refer. to http://disclaimer.bnymellon.com/eu.htm for certain disclosures relating to Europeanlegal entities. 2 f ~ ~ t - i ~ ~ ~S, 4305 Santa Fe Avenue, Vernon; California 90058 Telephone (323) 383-8811...,. ~ April 1 S, 2009 ~ 1 Ms. Aurora Quiazon - The Bank of New York Mellon Trust Company -700 South Flower Street, Suite SOU ~ Los Angeles, CA 90017-4104 j Re: Apri12, 2009 Fee Schedule for 2009A Bonds .Dear Aurora: c Enclosed please find the signed original Fee Schedule, dated Apri12, 2009, for trustee services for the City of Vernon Electric System Revenue Bonds 2009 :Series A. i Sincerely C Kristen Enomoto ~ ' ec: Nelly Giron, City-Clerk-(Res. 99.15) I~ I 1 l E i i 1 I Ea~cCusiveCy IndustriaC ~ E 1 i ~ i TH); BANK OF NEW YORK.MELLON i _ i i City. of Vernon Electric System Revenue Bonds 2009 Series A Fee Schedule- - Apri12, 2009 Upon appointment of BNYM as trustee, `the Issuer shall be responsible for the payment of the fees, expenses and charges asset forth inthis Fee Schedule. ACCEPTANCE FEE- X500 This one time charge is payable at the time of the closing .and includes the review and execution of the Indenture. and all documents submitted in support thereof, acceptance of the trust, establishment of procedures and controls and set-up of rust accounts. ANNUAL ADMINISTRATIVE FEE $2,000 The annual fee covers the duties and responsibilities related to account administration and bondholder - services which may include maintenance of accounts on various systems, collection and payment of ~ principal and interest to .bondholders, the preparation and distribution of any sinking fund xedemption notices and the monitoring of issuer compliance. This fee is payabie in advance for the year and shall not be prorated...:.- INVESTMENT COMPENSATION With respect to .investments in money market mutual funds, the investment .maintenance -fee will be calculated at an annual rate of -0- basis points on average total monthly account balances. With respect , to investments- in-money market mutual funds for which.-BNYM provides shareholder services BNYM (or its affiliates) may-also receive and retain additional.-fees from the mutual funds (or their affiliates) for shareholder services as set forth- in the Authorization and. Direction to' BNYM to Invest Cash Balances in Money Market Mutual Funds. BNYM will charge a $35 transaction fee :for the purchase, sale, or maturity of commercial paper and U.S. treasuriesand agencies. REQUISITION /DISBURSEMENT FEE. (check or wire) /per transaction $35 INVESTMENT AGREEMENT, OR REPURCHASE/FORWARD PURCHASE AGREEMENT (if applicable) BNYM will charge a one»time fee in the amount of $SOO for review and acceptance of any investment' agreement or repurchase. agreement, Counsel Fees (if any) associated with the review and acceptance of the. above will be billed at cost not to exceed $500. BNYM will charge. a $35 transaction fee for ~ principal. adjustments to the Investment Agreement. i . THE -BANK Op NEW YORK MELLQN ~ COUNSEL, FEE $2,100 A fee covering the fees and expenses of Counsel for its services, including review of governing ' documents, communication with members of the closing party (including representatives of the issuer, investment banker(s), attorney(s) and BNY1Vl), attendance. at meetings-and the closing, and such other services as BNYM may deem necessary. The Counsel fee will be the actual amount of the fees and i expenses charged by Counsel and is payable at closing. Counsel-:fees will be capped at the above price ~ but maybe increased if all documentation required for this financing is not in substantially good order,. numerous drafts or extensive negotiations are required, or the closing is delayed.. Should. closing not ~ occur, you shall-still be responsible for payment of Counsel fees and expenses:: MISCELLANEOUS. FEES The fees for performing extraordinary or other services not contemplated at the'time.of the execution of the transaction or not specifically covered-elsewhere in this schedule will be commensurate with the service to be provided and will be charged in BNYM's sole discretion. These extraordinary services may include, but are not limited to; supplemental agreements,- consent operations, unusual releases, tenders or sinking fund redemptions, the preparation of special or interim reports, custody of collateral, ' a one-time fee to be charged upon termination ofan engagement.. Counsel, accountants, special agents i and: others will be charged at -the actual amount of fees and expenses billed. The fee for non-interest i bearing balances left uninvested with the Bank will be 10 basis points for the quarter, based on quarter- ~ end spot balance levels, in excess of$1,000,000 (held in the U.S. offices of the Bank). OUT-OF-POCKET EXPENSES - 6% of Billed Fees Additional out-of:pocket expenses -may include, but are .not limited to, telephone;- facsimile; courier; copying; postage; supplies;. statutory.. filing charges, .including UCC amendments, continuations, and termination fees; -and- .expenses of BNYIVI's representative(s) and Counsel for .attending special ' meetings. Fees and expenses of BNYM's representatives and Counsel will be charged at the actual amount of -fees and expenses charged and all other expenses will be charged at cost or in an amount equal to 6% of all expenses billed for the year, in BNYM's discretion, and BNYM may charge certain ~ expenses at cost and others on a percentage basis. i' ,Ar" `l°~~ 13ANIC_ Ol~' N1~W X~Id.K ME[,I ~]N 'PERMS AND. DISCLOSURES. ~ TERMS OF PROFOSAL Final acceptance of the appointment as trustee under the Indenture is subjectto approval of authorized officers of BNYM and full review and execution of all documentation related hereto.. Please note that if this transaction does.-not close, -you willbe responsible for paying any expenses incurred, including Counsel fees. We reserve the right to terminate this offer if we do not -enter -into final written documents within three months from the date this document is-first transmitted to you. Fees maybe subject, to adjustment during-the life of the engagement. i i r MISCELLANEOUS -The terms of this Fee Schedule shall govern the matters set forth herein and shall not be superseded or ~ modified by the terms of the Indenture. This Fee Schedule shall be governed by the laws of the-State j of California without reference to laws governing conflicts. BNYM and the undersigned agree to j jurisdiction of the federal and state courts located in the .City/County of Los Angeles, State of i California.. I CUSTOMER NOTICE REQUIRED BY TAE USA PATRIOT ACT. To help the US government fight the funding of terrorism and money laundering activities, US Federal law requires all financial institutions to obtain, verify, and record information .that identifies- each person (whether an individual or organization) for which a relationship is established: I What this means to you: When you .establish a relationship with BNYM,;we will ask you to provide ~ certain information (and documents) that. will help us to identify you.. We .will ask for your organization's name, physical- address, tax dentification,or other government registration number .and other information that will help us to identify you. We may also ask for a Certificate of Incorporation or similar document or other pertinent identifying documentation for your type of organization.. ~ We thank you, for your assistance. .Accepted By: ~ For BNYMTC. Signature ~ ,c~li~. Date: April 15,.2009 Apri12, 2009 Name: Hilario Gonzales Jose Matamoros Title Mayor-Pro Tempore Vice President ATTEST: ,u.c Manuela Giron, C ty Clerk i jj I } -THE, S'ANIZ OF NEW YOR1~ M'ELLON i s i. FEE SUMMARY i _ { Fees due at Closing are as fohows: ! i Acceptance Fee: $ 500.00 Legal Counsel Fee: $2,Q00.00 Annual Administration Fee: 000.00 .Total Due at Closing: $4,500.00. _ , r 7 Please note the above anticipated fees -due at closing include certain assumptions including one fixed rate series of bonds with no investment agreements. Trustee Counsel Sam Waldman, Esq. t Davis Wright Tremaine LLP 64 Oak Knoll Drive San Anselmo, CA 94960. ~ Phone:. (415) 459-4535 ~ Fax: (415)-459-4747 E-mail: waldmansl3@comcast,net i i; a { 6 BACK-U P DOCUMENTATION i f ~ THE BANK OF NEW YORK MELLON ~ Apr12, 2009 4 Mr. Jeff R. Higgins ~ Managing Director BondLogstix LLC 777 S. Figueroa Street, Suite 3200 Los Angeles, CA 90017 ihi ~insrr?bondlogistix:com Re: city of Vernon Electric System Revenue Bonds -2009 Series A Dear Jeff; On behalf of The Bank of New York Trust Mellon Trust Company, N. A. ("BNYM") we greatly appreciate the opportunity to present-.our proposal to provide trustee services :for the above referenced transaction. Attached is our .Fee Schedule,-but please read on to discover more about the differences that BNYM offers: Inherent in the process of identifying the financing team to bring an important debt financing to market is selecting a Trustee who can assist the issuer in the on-going administrative process throughout the I. life. of the engagement and is committed, professional. and experienced. No other institution can demonstrate their commitment to providing trustee services to the public finance marketplace better than BNYM. Through our enhanced. systems and experienced professionals dedicated to serving. the needs of the municipal finance market, we provide our clientele industry leading services for today and the future. 1 f The Bank of New York Mellon is one of the. largest bank holding companies in the US, which has been s ranked the number one overall-trustee in terms of new debt issuance for hree consecutive years, and is one of the leading Corporate Trust banks with over $11 trillion in outstanding debt. A Difference through- Our People-and Service The City will be serviced locally by their existing administrative team from-our Los Angeles office, led by Ms. Aurora Quiazon. Aurora's professional profile is included below, for your review. Aurora Quiazon Assistant Vice President (213) 630-6236 acluiazon c~bankofnv.com Aurora has over twenty-five years banking experience,,-with the last thirteen years being in Corporate Trust administration, she is knowledgeable in the administration-and management of municipal and corporate debt issues. I i _ i .I'I-1E BANIE O~ NSW YORK M~?.LhQN Aurora-holds a Bachelorof Science degree in Education from Philippine Normal College, and has completed the Cannon Financial Institute Corporate Trust School. PLEASE. NOTE'.:. As a standard procedure upon closing a bond issue,. each administrator is prepared to deliver a detailed account synopsis including all information relating to investments, .debt service,. compliance, and requisition payments (as applicable), for use by the issuer -and financing.. team. This- synopsis is not only an aid for -our clients, but for our administrators as well, as it enables -them to thoroughly review the governing documerafs and establish useful ticklers and procedures..-This subsequently serves ~ as a great tool to assist our clients in our long-term relationship between the Issuer-and The Bank of j New York Mellon. Trust Company.... ~ , A Difference Through Our Level of Experience As an experienced member of your financing team, we provide the qualifications you require to ensure ~ that, with your other financing. team members, -you have assembled the finest professionals in their field, thereby making your financing both attractive and.successful. ~ I Attached you .will find our complete Fee Schedule for -this engagement detailing related fees Nand ~ expenses associated with our appointment. i Should you have any questions regarding our proposal or attached- fee schedule,` please feel free to contact me at (213) 630,6457..: I - - - - Very truly yours, } Jose Matamoros Vice President 4 I t.- - I 1 i ~~~5 ~ ti r ~R ~ CITY ATTQRNEY'S OFFICE APR 0 9 2009 INTER-DEPARTMENT MEMORANDUM ~11y CLERK'S O~FlCE DATE- April 9, 2Q09 TO: Honorable City.CounCl FROM: Jeff A. Harrison,, City Attorne REs Staff Report - 2009 Series A Elect~cic System .Revenue. Bonds On April 10, 2006, the City Counci adopted Resolution No: 9014 authorizing>the issuance of the 200&. Series A, B, and C Bonds for the purpose of effectuating the purchase of a 15-year supply of natural gas. In 2006, the Cityprepaid a 15-year supply o'f natural: gas for approximate-ly 75~ of Malburg Generating Station's gas requirements.< The 20:06 Series A Gas Prepay Bonds converted in March 2008 .from auction-rate securities mode to long-term interest rate mode at 5o ending in August. 2009. The 2.006 :Series Band C Gas Prepay Bonds are weekly rate demand with a Citibank, Stand-by Liquidity Facility. The approximate:-total amount. of all 2006 Gas Prepay Bonds is $387,000,OQ0.00._ The issuance of refunding bonds, the recommended Series 2009 Bonds, will. allow the City to fix its outstanding debt costs, which had rsen'sharply over the last year due to-the collapse of the financial markets, specifically-the short-term 'credit markets (auction rate securities and variable rate demand obligations}. In addition, the issuance of the refunding bonds will also eliminate the negative-"gas prepay" credit perception and debt service will be shifted from operation and main enance expense to: direct debt.: Recommendations: I recommend that>the City adopt a resolution approving and authorizing the issuance of Electric System Revenue Bonds. in an ammount not to exceed $430,000,000.00, approving and'authorizng the execution of all documents relating to the. Bonds- including, but not limited to the Supplemental Indenture of Trust, a Contract of Purchase and a Continuing Disclosure Agreement. 'Fiscal Impact The approximate par amount of the 2009 Series A Bonds will be $424,775,000.00. The Bond issuance allows for the release of $37,700,000.00 Debt"Service Reserve-Fund. cc: Eric Fresch CD VERSION OF BOND TRANSACTION IS LOCATED IN RESOLUTION FILE NO. 9915 ~ - ~ - j ~ r ~ i I. CITY OF VERNON ,I I $419,400,000 i Electric System Revenue Bonds ff 2009 Series A 1 May 13, 2009 K ~ • j CITY OF VERNON AND VERNON NATURAL GAS FINANCING AUTHORITY C TERMINATION OF INTEREST RATE SWAP TRANSACTIONS Termination Date: April 12,.2010 PARTIES City of Vernon (the "City") Vernon Natural Gas Financing Authority (the "Authority") Morgan Stanley Capital Services Inc. ("Morgan-Stanley") Citibank, N.A. ("Citibank") Orrick, Herrington. & Sutcliffe LLP ("Authority Counsel") Eugene Kwon, Esq. ("Citibank Counsel") SCHEDULE OF TRANSCRIPT DOCUMENTS 1. Resolution No. 2010-49 of the City, certified by the City Clerlc of the City. 2. Resolution No. VNGFA-0021 of the Authority, certified by the Secretary of the Authority. 3: Signature and Incumbency Certificate of the Authority. 4. Certificate of Incumbency of Citibank. 5. Certificate of the. City Administrator. 6. Letter Agreement Confirmation of Unwind of Morgan Stanley Transaction, dated April 7, 2010, executed by Morgan Stanley and the City.. - 7. Termination Agreement, dated as of Apri17, 2010, between Citibank and the Authority. 8. Opinion of Authority Counsel. 9. ~ Opinion. of Citibank Counsel. - OHS West:260900148.1 42797-2 CERTIFICATE OF CITY CLERK I, Willard G. Yamaguchi, City Clerk of the City of Vernon. (the "City"), HEREBY CERTIFY that attached hereto is a true and complete copy of Resolution No. 2010-49, duly adopted by the City Council of the City at a meeting duly called, noticed and held on April 6, 2010, at which meeting a quorum was present and acting throughout. Such resolution has not been modified, amended or repealed and is in full force and effect in the form attached hereto. IN WITNESS WHEREOF, I have hereunto .set my hand and affixed the seal of the City . this 12th day of April, 2010. By: Wil and agu h' City Clerk of t e ity of ernon [SEAL] C C OHS West:260892411.i C_ CERTIFICATE STATE OF CALIFORNIA ) ss COUNTY OS' LOS ANGELES) I, Willard Yamaguchi, City Clerk of the. City of Vernon, County of Los Angeles, State of California, hereby certify that the attached is a full and complete copy of: RESOLUTION NO. 2010-49 - A Resolution of the City Council of the City of Vernon Authorizing. and Approving the Termination of Interest Rate Swap Transactions; Approving the Related Termination Agreements; and Authorizing Certain Other Matters Relating Thereto IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official Seal of the City o ~~Vernon, County of Los Angeles, State of California, on this ~ day of April 2010. =SEAL : r'~ jj~~,, t..r,,, ~ W~11ard Yr~tt~ g ~ch:~ City C1erJ C RESOLUTION NO. 20.0-9,9 R RESOLUTION OF .THE CITY COUNCIL OF THE CITY OF VERNON AUTHORIZING AND APPROVING THE TERMINATION OF: INTEREST RATE SWAP TRANSACTIONS; APPROVING THE RELATED TERMINATION AGREEMENTS; AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO WHEREAS, the City of Vernon (.the "city") is a municipal corporation and a chartered city of the State of California organized and existing under its Charter and the Constitution of the State of California; and WHEREAS,. pursuant to an Indenture of Trust, datedas of December 1, 2004_between. the City and The Bank of New York Trust Company, N, A., as trustee (the "Prior, Trustee"), as amended by -the First Supplemental Indenture of Trust, the Second Supplemental r Indenture of Trust,. the Third..Supplemental Indenture of Trust and the Fourth Supplemental-.Indenture of Trust, each dated as of December 1, 2004, and each between the City and the Prior Trustee, the City previously issued its Electric System Revenue Bonds, 200:4 Series- . A, 2004 Series B, 2004 Series C and 2004 Taxable Series D (collectively, the "2004. Revenue Bonds"); and WHEREAS, the City and Morgan Stanley Capital Services Ine. ("Morgan Stanley.") have entered into certain interest rate swap transactions relating to the City's 2004 Revenue.BOnds and amendments thereto with respect to some of such. transactions (the "Morgan Stanley ~'ransactions"); and. WHEREAS, the City-.has determinedthat it is in the .public interest-to terminate each of the Morgan Stanley Transactions; which' terminations may be executed on one date or on different dates; and C WHEREAS, in connection with the termination of each Morgan Stanley Transaction, the C:ity may enter into a Termination Agreement with Morgan Stanley (each such Termination Agreement, in substantially the form attached as Exhibit A, with such changes, insertions and deletions as are-made. pursuant to this Resole ion, being referred to herein as a "Morgan Stanley Termination Agreement"); and WHEREAS, the Vernon Natural Gas Financing Authority {the ".Authority") has been established as a separate entity under the California Joint Exercise of Powers Act to undertake projects and programs that promote economic development within the Ci y; and WHEREAS, pursuant to the Natural Gas Purchase Agreement,. dated as of June 1, 20b6, between the Authority and the City (the "Supply Agreement"), the Authority-has sold a supply of natural gas to the City; and WHEREAS, in connection withthe financing of the gas to be supplied under the Supply Agreement, the Authority and Citibank, N.A. ("Citibank") have entered into five interest rate'swap transactions (the "Citibank: Transactions") under the ISDA Master Agreement, the Schedule to the ISDA Master Agreement, the ISDA Credit Support Annex and-five Amended-and Restated Confirmations, .each between the Authority and Citibank, each originally dated as of ~'une 27, 2006 and each amended and restated as of May 13, 2009; and WHEREAS, pursuant;to the. Supply. Agreement all payment obligations of the Authority under the traxisactions are to be paid by the City and the Authority has agreed to terminate a Citibank Transaction .when requested to do so by the .City; .anal WHEREAS, the City has.. determined. that it is in the public interest to-terminate each of the Citibank Transactions as provided herein, which terminations may be made on ane date or on different -2= ~ dates; and WHEREAS., in connection with the termination of each Citibank Transaction the. Authority may :.enter into a Termination Agreement with Citibank (each such Termination Agreement being referred to herein as a "Citibank Termination. Agreement"); and WHEREAS, pursuant to an Indenture of Trust,- dated as of September 1, 2008 between the City and The Bank of New York Mellon Trust Company, N.A., as supplemented by the First Supplemental Indenture of -Trust (the "First Supplemental Indenture"), dated as of Septembear 1, 200.8, between the City and The Bank of New York. Mellon Trust Company, N.A.; the City has issued its Electric System Revenue Bonds, 2008 Taxable Series A (the "2008 Revenue Bonds"}; and WHEREAS, a portion of the proceeds of the .20.08 Revenue .Bonds ~ were to be. applied to make termination paymen s in connection-with the termination of interest rate swap transactions; ,and WHEREAS, there have been prepared and submitted to the-City Council drafts of the :following;. (1) the Morgan Stanley Termination Agreement; and (2) the Citibank Termination Agreement. NOW, .THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF VERNON, AS FOLLOWS: Section 1: The. City Council o~ the City of Vernon hereby finds. and determines that the recitals Contained hereinabove are true `and correct... Section 2: The termination of-.each of the Morgan.Stanley Transactions is hereby approved and authorized. The City. Administrator of the City (the "City Administrator"), is hereby authorized, in the name of and on behalf of the City, to terminate.. ~3_ each of the Morgan Stanley Transactions, on a single date or on different dates; on the terms and conditions deemed by the City Administrator to be in the best interest of the City and to make any payments due from the City in connection with such terminations; provided .that the: City Administrator,shal,l not terminate any Morgan Stanley Transact-ion or request the Authority to terminate any Citibank Transaction if the termination payment required to be paid as a result of such termination, plus the termination payments (which .shall not include any amounts accrued to the date on which the termination payments are determined). paid in connection with prior terminations of Morgan Stanley Transactions and Citibank Transactions, would be in excess of Sixty-Million Dollars. Section 3: The Morgan Stanley Termination Agreement, in substantially. the farm attached hereto as Exhibit A and made a part hereof as though set forth in full herein; is herebyapproved. In connection with the termination of each Morgan Stanley Transaction, the City Administrator is hereby authorized, in the name of and on behalf of the City, to execute and deliver a Morgan Stanley Termination Agreement, in substantially the form attached hereto -with such changes, insertions anal deletions as-may be approved by the City Administrator, as consistent with the intent of the City Council; his execution thereof being conclusive evidence of such approval, and the City Clerk is hereby authori-zed to attest thereto. Section 4: The termination of-each of the Citibank Transactions is hereby approved and authorized. The Authority is hereby requested to take such 'action as may be necessary or ..convenient to terminate each of the Citibank Transactions; on a single date or on. different dates,..when requested to do so by the _4_ City Administrator; provided that the City Administrator shall not terminate any Morgan Stanley Transaction or request the Authority to terminate any Citibank Transaction if the termination. payment xequred to be paid as a result of such termination, plus the termination payments (which shall not include-any amounts accrued to the date on which the termination payments are determined) paid in connection with prior terminations of Morgan Stanley Transactions and Citibank Transactions, would be in excess of Sixty Million Dollars. 'Section 5: The Citibank Termination Agreement, in substantially. the form attached hereto as Exhibit B and made. a-part hereof. as though set forth in fu11 herein, is hereby approved. Section 6: VNGFA Resolution No. VNGFA-0021 (the "VNGFA Resolution''), and all transactions, documents and actions approved or authorized by the VNGFA Resolution, and the erformance of p VNGFA's obligations under, the transactions, documents and instruments approved or authorized by the VNGFA Resolution and the other actions contemplated by the VNGFA Resolution are hereby authorized, approved, ratified, anal confirmed. The City Administrator is hereby authorized. to request the VNGFA and its officers to take whatever action is necessary or convenient to terminate the Citibank Transactons'as provided herein: Section'7: Al 1. moneys. heldpursuant to the First Supplemental Indenture shall be applied as provided in the First Supplemental Indenture and any moneys withdrawn. from-the 2008 .Capital Improvements Fund established under the First Supplemental Indenture as a reimbursement to the City for capital improvements paid for by-the City and not previously reimbursed from bond -s- C _proceeds may be applied to termination payments in connection with - the termination of one or more Morgan Stanley Transactions and/or Citibank Transactions.. Section 8: The Mayor, the Mayor Pro Tem, the City Administrator, the Treasurer, the City Clerk and the City Attorney of the City, and any other proper official, officer or employee of the City, acting singly, is hereby authorized to execute and deliver any and all documents. and instruments (except that only the City Administrator is authorized to execute and deliver a Morgan Stanley Termination Agreement) and to do and cause to be done any. and all acts and things necessary or convenient in carrying out the actions authorized by this Resolution and the transactions contemplated by the documents and instruments approved or authorized by this Resolution. C Section 9: The City Clerk of the City of Vernon shall certify to the passage, approval and adoption of this resolution, and he City Clerk of the City of Vernon sha11 cause this resolution and the-City Clerk's certification to be entered in the File of Resoluaions of the Council of this City. APPROVED AND ADOPTED this 6th day of April, 2010: Name: Hilario Gonzales - Title. Mayor / ~~,T Wi Hard G . ~!amag c}~ii , y Clerk 6 _ STATE OF CALIFORNIA ) ss COUNTY OF LOS ANGELES ) I, Willard G. Yamaguchi, City Clerk of the City of Vernon, do hereby certify that the foregoing Resolution, being Resolution No. 2Q10-~9, was duly passed, approved and adopted by the City Council of the City of Vernon at a special meeting of the City Council duly held on Tuesday, April 6, 2.010, and thereafter was duly signed by the Mayor or Mayor Pro-Tem of the City of Vernon. Executed this ~ day of April, 2010, at Vernon, California. a .i r~ [nIs'~llard ~r. °~r-w~'E~af~u~rhi, City Clerk«~~. l,.:~~j (SEAL) _ 7 _ EXHIBIT A M Q f g C~ n-. ~.l `a n J Munici al Ca ital Markets p p ~ Date:. April 2010 To: City of Vernon From: Morgan Stanley Capital Services Inc. Attn: Contact: NY Deriv Client Services Fax: 323-826-1439 Fax: 212-404-4726 Tel: 323-583-8$11, ext 175 Tel; 212-761-2996 E-mail: E-mail Municonfirm _InC morganstanley.com Re: Unwind of Transaction MSCS Ref. No. (the "Original Transaction") The purpose of this letter agreement is to confirm the terms and conditions of the unwind. of the Original Transaction. Thin letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement. below.. The. definitions and provisions contained in the 2006 ISDA Definitions (as .published, by the International Swaps. and Derivatives Association, Inc.) (the "Definitions") -are incorporated into this Confirmation, In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern.. . L This Confirmation supplements, forms part of; and is subject to, the ISDA Master. Agreement dated as of December 2, 2004, as amended and supplemented from time to -time (the "Agreement") between you and us. .All. provisions contained in the Agreement govern this Confirmation except as expressly C modified below., 2. The terms of the unwind of the Original Transaction to which this Confirmation relates are as follows: Party A: Morgan Stanley Capital Services Inc. Party B: City of Vernon Original Transaction Trade Date: March 16, 2006 Original Transaction Termination Date: April 1, 2018 Unwind Trade Date: April 2010 Party B Unwind Payment: Party B shall pay USD [ ] to Party.A. Unwind Settlement Date: 3. Account Details: Payments to Party A: Citibank, New York ABA No. 021.-000 089 For: Morgan Stanley Capital Services Inc.: Account No. 4072 4601 USActlve 13992243.2 IVY Q f'~ a Cl S `a n ley Munici al Ca ital Markets , p p Party A Operations Contact: Municipal Operations Tel: 410-534-1436 Fax; 410-534-1990 E-mail: MuniOperations@MorganStanley.com Party B Operations Contact: Tel: • Fax: A. Craig Underwood, President BondL,ogistix, LLC Tel: 213-612-2463. Fax:213-612-2499 E-mail: cunderwood@bondlogistx.com 4. Each of Party A and Party B hereby confirms .that (i) with effect from and including the Unwind Trade Date, the Original Transaction is unwound, and (ii) upon payment of the Party B Unwind Payment on the Unwind Settlement Date, Party A and Party B each will be released and :discharged from further obligations to each other under the Original Transaction and their respective rights. against each other under the ..Original Transaction. are terminated; provided, that. such release and discharge will not affect any obligations or rights of Party A or Party B under the Original Transaction with respect to payments or other obligations due and payable or due to be performed on or-prior fo the Unwind Trade Date and all such payments and obligations -shall be paid or performed by Party A or Party B in accordance with the terms of the Original Transaction. - 5. Each of Party A and.Party B hereby agrees that each representation made by Party A or Party B in the Agreement as of the Original Transaction Trade Data will be deemed repeated by such party as of the date of this Confirmation as if such representation were set forth in this Confirmation. l USActive 139822432 -2- J M o rg a n St a n ley Muni c pa Capital Markets Please confirm that the foregoing correctly. sets forth the terms of our agreement MSCS Ref. No, by executing this Confirmation and returning it to us promptly. Best regards, MORGAN STANLEY CAPITAL SERVICES INC.. By: Name: - Title: ACKNOWLEDGED AND AGREED as of the date first written:. CITY OF VERNON By: Name: / Title: USActive 13982243.2 -3- EXHIBIT B r1 - - _ .TERMINATION AGREEMENT Termination Agreement (this "Termination Agreement") dated as of April 2010 among CITIBANK, N.A. ("Party. A"} and VERNON NATURAL GAS FINANCING AUTHORITY ("Party B"), WHEREAS,. Party A and. Party B .are parties to an .ISDA Master- Agreement, dated as of June 27, 2006 and amended and restated as of May 13, 2009 (the "Master Agreement"), a Schedule to the Master Agreement and an ISDA Credit.Support Annex thereto, each dated as of .June 27, 2006 and amended and restated as of May 13, 2009 (the "Schedule" and.-collectively - with the Master Agreement, the "Agreement"); WHEREAS, in: accordance with the terms. of the Master Agreement, Party A and Party B have heretofore. entered into a Transaction pursuant to a Confirmation (Reference . No. MS06713), dated June. 27, 2006, as amended... and .restated as of : May 13, 2009 (the "Confirmation"), with an initial Notional Amount equal to USD 230,845,000 and a Termination Date of August 1, 2021 (the "Transaction"); and WHEREAS, the parties-have. agreed to terminate their obligations under the Transaction; NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, it is hereby agreed as follows:: C 1. Patent and Termination. The Transaction is hereby terminated as of April ..2010. (the "Termination Date"), and. neither Party A nor, Party B shall have any.: obligations thereunder following the Termination. Date except for the obligation of .Party B to pay the .Termination Amount to Party A as specified herein. In full consideration of this Termination Agreement and in complete. satisfaction of all- obligations of all of the parties in respect of the Transaction, Party B-shall pay to Party A on April [_],.2010 the amount of USD [ ] . (the "Termination Amount") (whrh includes all accrued but unpaid regularly scheduled payments under the Transaction). The parties hereby acknowledge and- agree that the Transaction is hereby terminated and Party B shall pay the Termination Amount to Party A notwithstanding Paragraph 5 of .the Confirmation, which .provides that the Termination Amount shall be determined pursuant to Section 6 of the Agreement. 2, Insurer Consent.- By its execution hereof, National Public Finance Guarantee Corporation,. on behalf of itself and as agent for MBIA Insurance Corporation, consents to .the termination of the Transactionon the terms and conditions-set forth herein. 3. Representations. Each party hereto represents to the other party hereto that: (a) it is duly organized and validly existing under the .laws of the jurisdiction of .its organization. or incorporation; (b) it has the power and authority to execute and deliver this Termination Agreement; (c) the person executing this Termination Agreement on its behalf is duly authorized to do so; 1 Ref. MS06713 NYK 1172756-6.071371.0010 / (d) its execution, delivery and performance of this .Termination Agreement do not violate or conflict .with. any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable o it or ; any of its assets or any contractual restriction binding on or affecting it or any of its assets;, (e) it has obtained -all governmental and other consents, if any,. that it is required to obtain in connection with its execution and delivery of this Termination Agreement, ..all .such consents are in full force and effect. and all conditions. of any .such consents have been complied with; (f) its obligations under this Termination Agreement constitute its legal, valid and binding obligations, enforceable in accordance with their. respective terms. (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar. laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of .general application, regardless of whether enforcement is sought in a proceeding in equity or in law); and (g) it-has made its own independent decision to enter into this Termination Agreement based upon its own judgment and upon advice from such advisors as it has deemed necessary and no other party is acting. as _a fiduciary. for or as an advisor to it in respect of this Termination Agreement. 4. Documents to be Delivered. (a) The. following documents shall be delivered by Party B to Party A promptly upon execution of this Termination Agreement: ` (i) an opinion of counsel to Party B with .respect to the enforceability of this Termination Agreement againstParty B; and (ii) evidence reasonably satisfactory to .Party A of the authority and genuine signature of the individual signing this Termination Agreement on behalf of Party B to execute the same. (b) The following documents shall be delivered by Party A to Party B promptly upon execution of this Termination Agreement: (i) an opinion. of counsel to Party A with respect to the enforceability of this Termination Agreement against Party A; and (ii) evidence reasonably satisfactory to Party B of the authority and .genuine. signature of the individual. signing this Termination Agreement on behalf of Party A to execute the same 5. Governing Law,,. This. Termination Agreement shall be governed by and construed in accordance with: the laws of the State of New York, without reference to choice of law. doctrine. 6. Counterparts.- This Termination Agreement :may be executed in counterparts, each of which shall be deemed an original. 2 Ref. MS06713 NYK 1172756-6.07137L.OOlO C IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIBANK, N.A. B y: VERNON NATURAL GAS FINANCING AUTHORITY B y: ` Acknowledged and Agreed: NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION B y: NATIONAL PUBLIC .FINANCE GUARANTEE CORPORATION, as agent for MBIA Insurance Corporation B y: . - - ~ 1j - \ - - - - - 3 Ref: MS06713 NYK 1172756-6.071371.0010 CERTIFICATE OF SECRETARY. I, William J. Davis, Secretary of the Vernon Natural Gas Financing Authority (the "Authority"), HEREBY CERTIFY that attached hereto. is a true and complete copy of Resolution No. VNGFA-0021, duly adopted by the Board of Directors of the Authority at a meeting duly called, noticed and held on April 6, 2010, at which meeting a quorum was present and acting throughout. Such resolution has not been modified, amended or repealed and is in full force and effect in the form attached hereto. . IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Authority this 12th day of April, 2010. By;~'" William J. Davi Secretary of the Vernon Natural Gas Financing Authority [SEAL] C OHS West:2608924ll.1 RESOLUTION NO. VNGFA-0.021 i A RESOLUTION OF THE BpARD OF DIRECTORS OF THE VERNON NATURAL GAS FINANCING AUTHORITY AUTHORIZING _ AND APPROVING THE TERMINATION OF INTEREST RATE.. SWAP TRANSACTIONS.; APPROVING THE RELATED TERMINATION AGREEMENTS; AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO WHEREAS, the Vernon Natural Gas Financing Authority (-the "Authority") has been established as a separate entity under the California Joint Exercise of Powers Act to undertake projects and programs that promote economic development within the City of Vernon (the "City;,) ~ and WHEREAS, pursuant to the Natural Gas Purchase Agreement, dated as of June 1, 2Q06, between the Authority and the City (the "Supply Agreement."), the Authority has sold a supply of natural. gas to the City; and WHEREAS, in connection with .the .financing of the gas to be supplied under. the Supply Agreement.,. the Authority: and Citibank,- N.A. ("Citibank") have entered into five interest rate-swap transactions (the "Transactions") under the ISDA Master_Agreement, the Schedule to the TSDA Mastex' Agreement, the ISDA Credit Support Annex and five Amended and Restated Confirmations, each between the Authority and .Citibank, each originally dated as of June 27, 2006 and each amended . -and restated as of May 13, 2009; and WHEREAS, pursuant to the Supply Agreement, all payment obligations of-the Authority under the transactions are. to be paid by the City and the Authority has agreed to teriminate the Transactions when requested to do so by the City; and WHEREAS, pursuant to a resolution adopted by the .City Council of the-City on the date hereof (the "City Resolution"), the City has requested the actions authorized 'and approved by this Resolution; and WHEREAS, pursuant to the Supply Agreement: and the City.. Resolution, the Authority will terminate the Transactions as requested by the City Administrator of the City (the "City Administrator") and in connection therewith. enter into one or more Termination Agreements with.-Citibank, N.A. (each such Termination Agreement, in substantially the form attached as Exhibit A with such changes, insertions and deletions as are made. pursuant to this Resolution, being referred to herein as a "Termination Agreement'') and to-make any payments due from the Authority in. connection with the Termination Agreement with funds provided by the City pursuant to the Supply Agreement. Ii NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE VERNON NATURAL GAS FINANCING AUTHORITY, AS FOLLOWS: Section This Board of Directors hereby finds and :determines-that the recitals contained herein.above are true and correct. Section 2:, The termination ,of -each of the Transactions, on a single date or an different dates, is hereby authorized and approved when requested by the City Administrator. The Termination Agreement, in substantially the form attached hereto as Exhibit A and made a part hereof as though set forth in full-herein, is hereby approved. In connection with the termination of-each Transaction; when requested by the City Administrator, the Chairman of this-Board .and the Executive Director of the Authority (each an "Authorized Authority Representative"), acting singly, is hereby authorized to \ execute a Termination Agreement:, in the name-of and on behalf of the ,2^ Authority, and deliver such. Termination Agreement to Citibank in substantially the form attached as Exhibit A with such changes, insertions and deletions, including the details of the Transaction or Transactions being. terminated. and the amount of any termination payments to be made by the Authority in connection with. such terminations(s), as may be approved. by the Authorized Authority.- Representativeexecuting the. same as consistent with the intent of-the Authority Board, said execution being conclusi e evidence of such approval. Any payments required to be paid by the Authority in connection with the termination of the Transactions and the -.Termination Agreements entered into by the Authority shall be .special obligations payable only from amounts made available to the Authority -for such payments by the funds supplied by the-.City pursuant to the ( Supply Agreement. Section 3: The Chairman of this Board of Directors,.the Executive Director of .the Authority, the Attorney for the Authority, the Secretary, and any other proper official, officer or employee of -the Authority, acting singly, is hereby authorized to execute and deliver-any and all documents and instruments (except that only an AutY~orized Authority Representative is authorized to execute and deliver a Termination Agreement.). and to do and cause to be done any and all acts and things necessary or convenient in carrying oua the :.actions contemplated by this Resolution and the documents and instruments approved or authorized by-this Resolution.. Section 4: All actions heretofore taken by any.committee of this Board. of Directors, or any official, officer, employee, ( representative or agent ofthe Authority, in connection with the actions, documents and instruments approved or authorized by this _3_ Resolution and the other actions contemplated by this Resolution, are hereby ratified, approved and confirmed. Section 5: The Secretary of the Authority 'shall. certify to the passage, approval and adoption of this Resolution, and'the Secretary of the Authority shall cause this Resolution and the Secretary's certification to be entered in the File of Resolutions of the Board of the Authority. APPROVED AND ADOPTED this 6th day of April, 2010. r s~ `f r Name: Tithe: Chair / Vice. Chair. j' 1 ~ t c -r i ti G 5~~~,~ r'~r a y ~4_ STATE OF CALIFORNIA ) ss COUNTY OF LOS ANGELES ) I, William Davis, Secretary of the Vernon Natural Gas Financing Authority, do hereby certify that the foregoing Resolution, being Resolution No. VNGFA-0021, was duly passed, approved and adopted by the Board of Directors of the Vernon Natural Gas Financing Authority at a special meeting of the Board of Directors duly held on Tuesday, April 6, 2010, and thereafter was duly signed by the Chair or Vice Chair of the Authority. Executed this ~1 day of Ap.ryi,:<[~, 2010, at Vernon, California. i f ' r, n i, i. , ~ ~ ~ t i~a S ~y ~ fit" f (SEAL) C -5- EXHIBIT A TERMINATION AGREEMENT Termination Agreement (this "Termination Agreement") dated as of April 2010 among CITIBANK, N.A. ("Party A") and =VERNON NATURAL GAS FINANCING AUTHORITY.("PartyB„) WHEREAS, Party A and Party B are parties to an ISDA Master Agreement, dated as of June 27, 2006 .and amended and restated. as of May 13, 2009 (the "Master Agreement"), a Schedule to the Master Agreement and an ISDA Credit Support Annex thereto, each dated as of - June 27, 2006 and amended and restated as of May 13, 2009- (the "Schedule" and collectively with the. Master Agreement, the "Agreement"); WHEREAS, in accordance with the terms of the Master Agreement, Party A and Party. B have :heretofore entered into a Transaction pursuant to: a Confirmation.: (Reference No. MS06713), dated June 27, 2006, as amended. and restated as of May 13, 2009 (the "Confirmation"), with an initial Notional: Amount equal to USD 230,845,000 and a Termination Date of August 1, 2021 (the "Transaction"); and .WHEREAS, the parties have agreed to terminate their obligations under. the Transaction; NOW, THEREFORE, inconsideration of the foregoing and other valuable consideration, it is hereby agreed as follows: L Payment and Termination.- The Transaction is hereby terminated as of April 2010 (the "Termination .Date"), and neither Party. Anor -Party. B shall have any obligations .thereunder following .the Termination Date. except for the obligation of Party B to pay the- Termination Amount to Party A as specified herein. In full consideration of this Termination Agreement and in complete satisfaction of all obligations of all of the parties in respect of the. Transaction, Party B-shall pay to Party A on April [_],-2010 the amount of USD [ ] (the "Termination Amount") (which .includes all accrued but unpaid; regularly scheduled .payments under the Transaction). The parties hereby acknowledge. and. agree that the Transaction is hereby terminated and Party B shall pay-the Termination Amount to Party A notwithstanding Paragraph 5 of .the .Confirmation, which provides that the Termination Amount shall be determined pursuant to Section 6 of the Agreement. 2. Insurer Consent. By its execution hereof, National .Public Finance Guarantee Corporation, on behalf of itself and as agent for MBIA Insurance Corporation, consents to the termination of -the Transaction on the terms and conditions set forth herein. 3. Representations. Each party hereto .represents: to the other party hereto that: . (a) it is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation; (b) it has the power and authority to execute-and deliver this Termination Agreement; / (c) the person executing this Termination Agreement on its behalf- is duly l\, authorized to do so; 1 Ref.1VIS06713 NYK 1172756-6.071371.0010 C' (d) its execution; delivery and performance of this Termination Agreement do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order. or judgment. of any court or other agency of .government applicable to it or any of its assets or any contractual restriction.binding on or affecting it or any of its assets; (e) it has: obtained all governmental and other .consents, if any, that it is required to obtain in connection with its execution and delivery of this Termination Agreement, -.all such consents are in .full force and effect and all conditions of any such consents have been. complied with; (f)' its obligations under this Termination .Agreement constitute its legal, valid -and. binding 'obligations, enforceable in accordance .with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or ..similar. laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application, regardless of whether enforcement. is sought in a proceeding in equity or in law); and (g) it has made its own independent decision to enter into this Termination Agreement based upon is own judgment. and upon advice from such advisors as it has deemed necessary and no other party is acting as a fiduciary for or as an advisor to it in respect of this Termination Agreement. 4. Documents to be Delivered. (a) The following documents shall be delivered by Party B to Party A promptly. upon execution of this Termination Agreement:.. . (i) an opinion of counsel to Party B with respect to the enforceability of this Termination Agreement against Party B; and (ii) evidence reasonably satisfactory to Party A of the authority and genuine signature of 'the individual signing this. Termination Agreement on behalf of Party B to execute the same. (b) The following documents shall be delivered by Party A to Party B promptly upon .execution of this Termination Agreement: (i) an opinion of counsel to Party A with respect. to the enforceability of this Termination Agreement against Party A; and (ii) evidence reasonably: satisfactory. to Party B of the authority and genuine signature of the individual signing. this Termination Agreement on behalf of Party A to execute the same. 5. Governing Law. This Termination Agreement shall be governed by and construed in accordance with ..the laws of the State of New York, without reference to choice of law doctrine. 6. Counterparts. This Termination Agreement may be executed in counterparts, each of which shall be deemed an original. 2 Ref. MS0671.3 IVYK 1 1727 56-6.071371.0010 ~ IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIBANK, N.A. ' By: VERNON NATURAL GAS FINANCING AUTHORITY B y: Acknowledged and Agreed:. . NATIONAL PUBLIC. FINANCE GUARANTEE CORPORATION By: NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION, as .agent. for MB IA Insurance Corporation- By: 3 Ref. MSOb713 NYK 1172756-6.071371.0010 SIGNATURE AND INCUMBENCY CERTIFICATE OF THE AUTHORITY I, Willard G. Yamaguchi, Executive Director of the Vernon Natural Gas Financing Authority (the "Authority"), HEREBY CERTIFY as follows: 1. that the members of the Board of Directors of the Authority were on April 1, 2010, and continue as such members as of the date hereof as follows: Hilario Gonzales W. Michael McCormick William J. Davis Richard J. Maisano Daniel D. Newmire 2. that the persons holding the following offices and positions and duly appointed thereto and acting therein were on April 1, 2010, and continue to hold such offices and positions as of the date hereof, as follows: Name Office Hilario Gonzales Chairman W. Michael McCormick Vice Chairman William J. Davis Secretary f Willard G. Yamaguchi Executive Director 1 3. that the signatures set forth opposite .the respective names of the following designated officers of the Authority are manual specimens of their signature: Name Office Si ature Hilario Gonzales Chairman e ` William J. Davis Secretary - Willard G. Executive Director Yamaguchi OHS West:260892411.1 IN WITNESS WHEREOF, I have hereunto set my hand this 12th day of Apri12010. W rd . Y aguchi xe tive irector The undersigned hereby certifies that the above signature of Willard G. Yamaguchi is the true and lawful specimen signature of Willard G. Yamaguchi, Executive Director of the Authority. f William J. Davis ~ Secretary C OHS West:260892411.1 CERTIFICATE OF INCUMBENCY CITIBANK, N.A. I, Paula F. Jones, Assistant Secretary of Citibank, N.A. having its main office at 3900 Paradise Road, Las Vegas, Nevada and its principal place of business at 399 Park Avenue, New York, NY, DO HEREBY CERTIFY that the following is a true and correct copy of Section 2 of Article X of the existing By-Laws of CITIBANK, N.A. in full force and effect as of the date hereof: "Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents, may be signed executed, acknowledged, verified, delivered or accepted in behalf of the Association by the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or any Executive Vice President, or the Chairman Credit Policy Committee, or any Senior Vice President, or the Secretary, or the Chief Auditor, or any Vice President, or anyone holding a position equivalent to the foregoing pursuant to provisions of these By-Laws, or, if in connection with the exercise of any of the fiduciary powers of the Association, by any of said officers or by any Senior Trust Officer. -Any such instruments may also be executed, acknowledged, verified, delivered or accepted in behalf of the Association in such other manner and by such other officers as the Board of Directors may from time to time direct. C The provisions of this Section 2 are supplementary to any other provisions of these By-Laws." I FURTHER CERTIFY that Jerrold Abrahams is a Vice President of CITIBANK, N,A., duly constituted as such, and that the specimen signature set below is a true and genuine signature: Abrahams, Jerrold Vice President ~ LAG'-~-z2~ In WITNESS WHEREOF, I have hereunto affixed my official signature and seal of the said Bank in the City of New York on this 9t" day of April, 2010. Paula F. nes C(77BAN(©" r C CERTIFICATE OF THE CITY ADMINISTRATOR I, Donal O'Callaghan, City Administrator of the City of Vernon (the "City"), HEREBY CERTIFY as follows: 1. that I have directed Hilario Gonzales, Chairman of the Vernon Natural Gas Financing Authority (the "Authority") to sign and enter into the Termination Agreement, dated as of April 7, 2010 (the "Termination Agreement") between Citibank, N.A. and the Authority, attached hereto; and 2. that termination payments due under the Termination Agreement, made by the City on behalf of the Authority, together with any amounts .paid as a result of the termination of interest rate swaps with Morgan Stanley Capital Services Inc., do not exceed the sum of Sixty Million Dollars ($60,000,000). Dated: April 12, 2010 `°.~.~.~..Y Donal 0' Callag City Administrator, City of on • + S C Execution Copy TERMINATION AGREEMENT Termination Agreement (this "Termination Agreement") dated as of Apri17, 2010 among CITIBANK, N.A. ("Party. A") and VERNON NATURAL GAS FINANCING AUTHORITY ("Party B"). WHEREAS, Party A and Party B -are parties to an ISDA Master Agreement, dated as of June. 27, 2006 and amended and restated as of May 13, 2009 (the "Master Agreement"), a Schedule to the Master Agreement. and an ISDA Credit Support Annex thereto, each dated as of June 27, 2006 and amended and restated as of May 13; 2009 (the "Schedule" and collectively with the Master Agreement, the "Agreement"); WHEREAS, in accordance with the terms of the Master Agreement, Party A and Party B have heretofore .entered into five Transactions pursuant to (i) a Confirmation (Reference No. MS06709), dated- June 27; 2006, as amended and restated as of May 13, 2009 ("Confirmation 1"), with an initial Notional Amount equal to USD 50,000,000 and a Termination Date of August 1, 2021 ("Transaction 1"); (ii) a Confirmation (Reference No. MS06710), dated June 27, 2006, as .amended -and restated as of May 13, 2009 ("Confirmation 2"), with an initial Notional Amount equal to USD 50,000,000 and a Termination Date of'August 1; 2021 ("Transaction 2"); (iii.) a Confirmation (Reference No. MS06711); dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 3"), with an initial Notional Amount equal to USD 50,000,000- and aTermination Date of August 1, -2021 ("Transaction 3"); (iv) a Confirmation (Reference No. MS06712), dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 4"), with an initial Notional Amount equal to USD 50,000;000 and a Termination Date. of August 1; 2021 ("Transaction 4"); and (v) a Confirmation (Reference No. MS06713), dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 5" and,. collectively with Confirmation 1, Confirmation 2, Confirmation 3 and Confirmation 4, the "Confirmations"), with an initial Notional Amount equal to USD 230,845,000 and a Termination Date of August 1,-2021 "Transaction 5" and, collectively with Transaction 1, Transaction 2, .Transaction 3 and Transaction 4, the "Transactions"); WHEREAS, the parties have agreed to terminate their obligations under the Transactions;- NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, it is hereby agreed as follows:. 1. Payment and Termination. The Transactions are hereby terminated as of April 7, 2010 (the "Termination Date"), and neither Party A nor Party B shall .have any obligations thereunder following the Termination Date except for the obligation of Party B to -pay the Termination Amount to Party A as specified herein. In full consideration of this Termination Agreement and incomplete satisfaction of all obligations of all of the parties in respect of the Transactions, Party B shall pay to Party A on April 12, 2010 the amount of USD 33,406,000 (the "Termination Amount") (which. includes all .accrued but unpaid regularly scheduled payments under the Transactions). .The parties hereby acknowledge and agree that the Transactions. are hereby terminated and Party B shall pay the Termination Amount to Party A notwithstanding Paragraph 5 of the Confirmations, which provides that the Termination Amount shall be determined pursuant to Section 6 of the Agreement. 1 Ref. MS06709, MS06710, MS067ll, M506712, and MS06713 NYK 1172756-8.071371.0010 2. Representations. Each party hereto represents to the other party hereto that: (a) it is duly organized and validly existing under -the laws of the- jurisdiction of its organization or incorporation; (b) it has the power and authority to execute and deliver this Termination Agreement; (c) the person executing this Termination Agreement on its behalf is duly authorized to do so; (d) its execution, delivery and performance of this Termination Agreement do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government. applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (e) it has obtained .all governmental and other .consents, if any; that it is required to obtain in connection with its execution and delivery of this Termination Agreement, all such- consents are in full force and effect and all conditions of any such consents have been complied with; (f) its obligations .under this :Termination Agreement constitute its legal, valid and binding obligations, enforceable in accordance. with their .respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting .creditors' rights generally and subject, as to enforceability, to equitable principles of general application, regardless of whether enforcement is sought in a proceeding in equity or in law); and (g) it has made its own independent decision to enter into this Termination Agreement based upon its .own judgment and upon advice from such advisors as it has deemed necessary and no other party is acting as a fiduciary for or as an advisor to it in respect of this 'Termination Agreement. 3, Additional Representation of Part~B. Party B hereby represents and warrants to Party A that the -sum of (a) the Termination Amount required to be paid by Party B to Party A hereunder (less any accrued but unpaid regularly scheduled payments under the Transactions included therein), plus (b) the termination payment or termination payments required to be paid by Party B to ,Morgan Stanley Capital Services Inca in connection with the termination of the Morgaa Stanley Transactions (as such term is defined in Resolution No. 2010-49 of the City Council of the City of Vernon adopted Apri16; 2010) (not including accrued but unpaid regularly scheduled payments under the Morgan Stanley Transactions) shall not exceed USD 60,000,000. 4. Documents tote Delivered. (a) The following documents shall be.delivered by Party B to Party A promptly upon. execution of this Termination Agreement: (i) an opinion of counsel- to Party B with respect to the enforceability of this Termination Agreement against Party B; and, C 2 Ref. MS06709; MS06710, MS06711, MS06712, and MS06713 NYK 1172756-8.071371.0010 `r ; (ii) evidence reasonably satisfactory to Party A of the authority and .genuine C signature of the individual signing this Termination Agreement on behalf of-Party B to execute the same. (b) The following documents shall be delivered by Party A to Party B promptly upon. execution of this Termination Agreement: (i) an opinion of counsel to Party A with respect to the enforceability of this Termination Agreement against Party A; and (ii) evidence reasonably satisfactory to Party B of -the authority and genuine .signature of the individual signing this Termination Agreement on behalf of Party A to execute the same.. . 5. Governing Law. This Termination Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to choice of law doctrine. 6. Counterparts. This Termination Agreement may be executed in counterparts, each of which shall be deemed an original. C 3 Ref. MS06709, MS06710, MS06711, MS06712, and MS06713 NYK ! 172756-8.071371.0010 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIBANK, N.A. By: VERNON NATURAL GAS FINANCING AUTHORITY By: I~ilario Gonzales, Chairman ATTEST: William Davis, Secretary 4 Ref. MS06709, MS06710, MS06711, MS06712; and MS06713 NYK 1172756-8.071371.0010 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIBANK, N.A. B y: VERNON NATURAL GAS FINANCING AUTHORITY 4 B y: Hilario Gonzales, hairman ATTEST: r l , William Davis, Secretary _ 4 Ref. MS06709, MS06710, MS06711, MS06712, and M506713 NYK 1172756-8.071371.0010 M o rg a n Sta n ley Municipal Capital Markets Date: Apri17, 2010 EXECUTION COPY To: City of Vernon From: Morgan Stanley Capital Services Inc. Attn: Donal O'Callaghan, City Administrator Contact: NY Deriv Client Services Fax: 323-826-1408 Fax: 212-404-4726 Tel: 323-583-8811 x561 Tel: 212-761-2996 E-mail: docallaghan@ci.vernon.ca.us E-mail: Municonfirms_In@morganstanley.com Re: Unwind of Transaction MSCS Ref. No. AUE37 (the "Original Transaction") The purpose of this letter agreement is to confirm the terms and conditions of the unwind of the Original Transaction. This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement below. The definitions and provisions contained in the 2006 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) (the "Defmitions") are incorporated into this Confirmation. In the event of any inconsistency between the Defmitions and this Confirmation, this Confirmation will govern. 1. This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of December 2, 2004, as amended and supplemented from time to time (the "Agreement") between you and us. All provisions contained in the Agreement govern this Confirmation except as expressly C modified below. 2. The terms of the unwind of the Original Transaction to which this Confirmation relates are as follows: Party A: Morgan Stanley Capital Services Inc. Party B: City of Vernon Original Transaction Trade Date: March 16, 2006 Original Transaction Termination Date: April 1, 2018 Unwind Trade Date: Apri17, 2010 Party B Unwind Payment: Party B shall pay USD 4,700,000 to Party A. Unwind SettlementDate: April 12, 2010 3. Account Details: Payments to Party A: Citibank, New York ABA No. 021 000 089 For: Morgan Stanley Capital Services Inc. Account No. 4072 4601 C USActive 13982243.3 M ~ rg a n S `a n'ley Municipal Capital Markets Party A Operations Contact: Municipal Operations Tel: 410-534-1436 Fax: 410-534-1990 E-mail MuniOperations@MorganStanley.com Party B Operations Contact: Donal O'Callaghan, City Administrator Tel: 323-583-8811 x561 Fax:323-826-1408 E-mail: docallaghan@ci.vernon.ca.us A. Craig Underwood, President BondLogistix, LLC Te1:213-612-2463 Fax:213-612-2499 E-mail: cnderwood@bondlogistix.com 4. Each of Party A and Party B hereby confirms that (i) with effect from and including the Unwind Trade Date, the Original Transaction is unwound, and (ii) upon payment of the Party B Unwind Payment on the Unwind Settlement Date, Party A and Party B each will be released and discharged from further obligations to each other under the Original Transaction and their respective rights against each other under the Original Transaction are terminated; provided, that such release and discharge will not affect any obligations or rights of Party A or Party B under the Original Transaction with respect to payments or other obligations due and payable or due to be performed on or prior to the Unwind Trade Date and all such payments and obligations shall be paid or performed by Party A or Party B in accordance with the terms of the Original Transaction. ( 5. Each of Party A and Party B hereby agrees that each representation made by Party A or Party B in the Agreement as of the Original Transaction Trade Date will be deemed repeated by such party as of the date of this Confirmation as if such representation were set forth in this Confirmation. USActive 13982243.3 -2- M o rg a n Sta n ley Municipal Capital Markets C Please confirm that the foregoing correctly sets forth the terms of our agreement MSCS Ref. No, AUE37 by executing this Confirmation and returning it to us promptly. Best regards, MORGAN STANLEY CAPITAL SERVICES INC. By: Name: Title: ~~1/ill SC~a~~~~t~ ~/1C~ F'i'~Sl~t~i~l~' ACKNOWLEDGED AND AGREED as of the date first written: CITY OF VERNON By: Name: Donal O'Callaghan Title: City Administrator Attest: Willard G. Yamaguchi; City Clerk C USActive 13982243.3 -3- M o rg a n S `a n 1e.1 Municipal Capital Markets i Please confirm that the foregoing correctly sets forth the terms of our agreement MSGS Ref. No. ALTE37 by executing this Confirmation and returning it to us promptly. Best regards,.. MORGAN STANLEY CAPITAL SERVICES INC. By: Name: Title: ACKNOWLEDGED AND AGREED as of the date first written: CITY OF VERNON By: Name: Donal O'Callaghan Title: City Administrator Atte ill rd G. Yamaguc ity ler l USActive 13982243.3 -3- C Execution Copy TERMINATION AGREEMENT Termination Agreement (this "Termination Agreement") dated as of Apri17, 2010 among CITIBANK, N.A. ("Party A") and VERNON NATURAL GAS FINANCING AUTHORITY ("Party B"). WHEREAS, Party A and Party B are parties to an ISDA Master Agreement, dated as of June 27, 2006 and amended and restated as of May 13, 2009 (the "Master Agreement"), a Schedule to the. Master Agreement and an ISDA Credit Support Annex thereto, each dated as of June 27, 2006 and amended .and restated as of May 13, 2009 (the "Schedule", and collectively with the Master Agreement, the "Agreement"); WHEREAS, in accordance with the terms of the Master Agreement, Party A and Party B have heretofore entered into five Transactions pursuant to (i) a Confirmation (Reference No. MS06709), dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 1"), with an initial Notional Amount equal to USD 50,000,000 and a Termination Date ofAugust 1; 2021 ("Transaction 1"); (ii) a Confirmation (Reference No. MS06710), dated June 27, 2006, as amended ° and restated as of May 13, 2009 ("Confirmation 2"), with an initial Notional Amount equal to USD 50,000,000 and a Termination Date of August 1, 2021 ("Transaction 2"); (iii) a Confirmation (Reference No. MS06711), dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 3"), with an initial Notional Amount equal to USD 50,000,000 and a Termination Date of August 1, 2021 ("Transaction 3"); (iv) a Confirmation (Reference No. MS06712), dated June 27, 2006, as amended and restated as of May 13, 2009 ("Confirmation 4"), with an initial Notional Amount equal to USD 50,000,000 and a Termination bate of August 1, 2021 ("Transaction 4"); and (v) a Confirmation (Reference No. MS06713), dated June 27, 2006, as amended and restated. as of May 13, 2009 ("Confirmation 5" and, collectively with Confirmation 1, Confirmation 2, Confirmation 3 and Confirmation 4, the "Confirmations"), with an initial Notional Amount equal to USD 230,845,000 and a Termination Date of August 1, 2021 ("Transaction 5" and, collectively with Transaction. 1, Transaction 2, Transaction 3 and Transaction 4, the "Transactions"); WHEREAS, the parties have agreed to terminate their obligations under the Transactions; NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, it is hereby agreed as follows:. 1. Payment and Termination. The Transactions. are hereby terminated as of April 7, 2010 (the "Termination Date"), and neither Party A nor Party B shall have any obligations thereunder following the Termination Date except for the obligation of Party B to pay the Termination Amount to Party. A as specified herein. In full consideration of this Termination Agreement and in complete satisfaction of all obligations of all of the parties in respect of the Transactions, Party B shall pay to Party A on April 12, 2010 the amount of USD 33,406,000 (the "Termination Amount") (which includes all accrued but unpaid regularly scheduled payments under the Transactions). The parties hereby acknowledge and agree that the Transactions are hereby terminated .and Party B shall pay the Termination Amount to Party A ~ notwithstanding Paragraph 5 of the Confirmations, which provides that the Termination Amount shall be determined pursuant to Section 6 of the Agreement. 1 Ref. MS06709, MS06710, MS06711, MS06712, and MS06713 NYK 1172756-8.071371.0010 2. Representations, Each party hereto represents to the other party hereto that: (a) it is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation; (b) it has the power and authority to execute and deliver this Termination Agreement; (c) the person executing this Termination Agreement on its behalf is duly authorized to do so; (d) its execution, delivery and performance of this Termination Agreement do not violate or conflict with any law applicable to it, any provision of -its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of .its assets or any contractual restriction binding on or affecting it or any of its assets; (e) it has obtained all governmental and other consents, if any, that it is required to obtain in connection with its execution and delivery of this Termination Agreement, all such consents are in full force and effect and all conditions of any such consents have been complied with; (f) its obligations under this Termination Agreement constitute its legal, valid and binding obligations, enforceable in accordance with their respective- terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application, regardless of whether enforcement is sought in a proceeding in equity or in law); and (g) it has made its own independent decision to enter into this Termination Agreement based upon its own judgment and upon advice from such advisors as it has deemed necessary and no other party is acting as a fiduciary for or as an advisor to it in respect of this Termination Agreement. ` 3. Additional Representation of Party B. Party B hereby represents and warrants to Party A that the sum of (a) the.Termination Amount required to be paid by Party B to Party A hereunder (less any accrued but unpaid regularly scheduled payments under the Transactions included therein), plus (b) the termination payment or termination payments required to be paid by Party B to Morgan Stanley Capital Services Inc. in connection with the termination of the Morgan Stanley Transactions (as such term is defined in Resolution No. 2010-49 of the City Council of the City of Vernon adopted Apri16; 2010) (not including accrued but unpaid regularly scheduled payments under the Morgan Stanley Transactions) shall not exceed USD 60,000,000. 4. Documents to be Delivered. (a) The following documents shall be delivered by Party B to Party A promptly upon execution of this Termination Agreement: (i) an opinion of counsel to Party B with respect to the enforceability of this Termination Agreement against Party B; and 2 Ref. MS06709, MS06710, MS06711, MS06712, and MS06713 NYK 1172756-8.071371.0010 (ii) evidence reasonably satisfactory to Party A of the authority and genuine signature of the individual signing this Termination Agreement on behalf of Party B to execute the same. (b) The following documents shall be delivered by Party A to Party B promptly upon execution of this Termination Agreement: (i) an opinion of counsel to Party A with respect to the enforceability of this Termination Agreement against Party A; and (ii) evidence reasonably satisfactory to Party B of the authority and genuine signature of the individual signing this Termination Agreement on behalf of Party A to execute the same. 5. Governing Law. This Termination Agreement shall be governed by and construed in .accordance with the laws of the State of New York, without reference to choice of law doctrine. 6. Counterparts. This Termination Agreement may be executed iri counterparts, each of which shall be deemed an original. 3 Ref. MS06709, MS06710, MS06711, MS06712, and MS06713 NYK 1172756-8.071371.0010 j" IN WITNESS WHEREOF,.the parties have executed this Termination Agreement as of ~ the date first above written. CITIBANK, N.A. By: VERNON NATURAL GAS FINANCING. AUTHORITY By: Hilario Gonzales, Chairman ATTEST: William Davis, Secretary 4 Ref. MS06709, MS06710, MS06711,-MS06712, and MS06713 NYK 1172756-8.071371.0010 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIBANK, N.A. By; VERNON NATURAL GAS FINANCING AUTHORITY By: Hlaro Gonzales, hairman ATTEST: r _ ? ! William Davis, Secretary 4 Ref:. MS06709,-MS06710, MS0671 1, MS06712 and MS06713 - NYK 1172756-8.071.371,0010 ORRICK, HERRINGTON & SUTCLIFFE uP - 777 SOUTH FIGUEROA STREET sulrE 3200 LOS ANGELES, CALIFORNIA 90017-58SS tel +i-zi3-6zg2o2o O R R I C K .fax +s-zsg-612-2499 WWW.ORRICK.COM April 12, 2010 Citibank, N.A. New York, New York Ladies and Gentlemen: We have acted as counsel to the Vernon Natural Gas Financing Authority (the "Authority") in connection with the execution and delivery of the Termination Agreement, dated as of April 7, 2010, between the Authority and Citibank, N.A. (the "Termination Agreement"). This letter is being delivered pursuant to Section 4(a)(i) of the Termination Agreement. Capitalized terms .not otherwise defined herein shall have the meanings ascribed thereto in the Termination Agreement. In such connection, we have reviewed the. Termination Agreement, certificates of the C- Authority, and such other documents, opinions and matters to the extent we deemed necessary to render the opinion set forth herein. The opinion expressed herein is based on an analysis of existing laws, regulations, rulings and court decisions and covers certain matters not directly addressed by such authorities. Such opinion may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions _are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion speaks only as of its date and is not intended to, and may not, be relied upon in connection with any such actions, events or matters. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Authority. We have assumed without undertaking to verify the accuracy of the factual matters represented, warranted or certified in the documents referred to in the second paragraph hereof. We call attention to the fact that the rights and obligations under the Termination Agreement, and its enforceability, may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations on legal remedies against public entities in the State of California. We express no opinion with .respect to choice of law provisions contained in the Termination Agreement. OHS West:260892172.1 O O R R I C K Citibank, N.A. April 12, 2010 Page 2 Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the opinion that the Termination Agreement has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Authority. This letter is furnished by us as counsel to the Authority. No attorney-client relationship has existed or exists between our firm and you in connection with the Termination Agreement or by virtue of this letter. Our engagement with respect to the Termination Agreement has concluded with its execution and delivery. We disclaim any obligation to update this letter. This letter is delivered to the you as the counterparty to the Termination Agreement, is solely for your benefit as such, and is not to be used, circulated, quoted or otherwise referred to or relied upon by you for any other purpose or by any person to whom it is not specifically addressed. Very truly yours, ~ ORRICK, HERRINGTON & SUTCLIFFE LLP C OHS West260892172.1 ~ Apri17, 2010 Vernon Natural Gas Financing Authority 4305 Santa Fe Avenue Vernon, CA 90058 Ladies and Gentlemen: I have acted as counsel to Citibank, N.A. ("Citibank") in connection with the execution and delivery by Citibank of the Termination Agreement dated as of April 7, 2010, (the "Termination Agreement") relating to the Confirmations of Transaction, Reference Nos. MS06709, MS06710, MS06711, MS06712 and MS06713 dated June 27, 2006, as amended and restated as of May 13, 2009, (t`lre "Confirmations"), entered into pursuant to an ISDA Master Agreement dated as of June 27, 2006 and amended and restated as of May 13, 2009 (the "Master Agreement"), each between Vernon Natural Gas Financing Authority (the "Counterparty") and Citibank. In such capacity I have examined a copy of the Termination Agreement, the Master Agreement and the Confirmations. I have also reviewed certain corporate proceedings of Citibank and I have examined originals, or copies certified or otherwise identified to my satisfaction, of such corporate / records of Citibank, certificates of public officials and of officers and representatives of Citibank, and such other documents as I have deemed necessary as a basis for the opinions hereinafter expressed. In such examination, I have assumed the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as certified or otherwise satisfactorily identified copies. I have also assumed that the Agreement and the Confirmations have been duly executed and delivered by Counterparty pursuant to appropriate corporate authority. The opinions given below are limited to matters concerning the laws of the United States of America and the State of New York and the General Corporation Law of the State of Delaware. Based upon the foregoing and having regard for such legal considerations as I deem relevant, I am of the opinion that: 1. Citibank is a corporation duly existing under the laws of the State of Delaware. 2. Citibank has full corporate power to execute and deliver the Termination Agreement and to perform its obligations thereunder. 3. Such actions have been duly authorized by all necessary corporate action and do not violate, and are not in conflict with, any provision of law or of the Restated Certificate of Incorporation or By-laws of Citibank. 4. No authorizations of, exemptions by or filings with any governmental or other authority are required to be obtained. or made in connection with Citibank's execution, delivery and performance of the Termination Agreement. 5. The Termination Agreement has been duly executed and delivered by Citibank, and constitutes a legal, valid and binding obligation of Citibank, enforceable against Citibank in accordance Page 1 of 2 C with its terms (subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, ~ moratorium or other laws affecting creditors' rights generally from time to time in effect). The enforceability of Citibank's obligations is also subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). I am furnishing this opinion to you, solely for your benefit and no other person is entitled to rely hereon. This opinion is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, Eugene Kwon C Page 2 of 2