Resolution No. 2011-185RESOLUTION NO. 2011-185
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
VERNON AUTHORIZING AND APPROVING THE ISSUANCE OF
ELECTRIC SYSTEM REVENUE BONDS; APPROVING THE
SUPPLEMENTAL INDENTURE OF TRUST PURSUANT TO WHICH
SUCH BONDS ARE TO BE ISSUED; APPROVING A DISCLOSURE
DOCUMENT, A CONTRACT OF PURCHASE, A CONTINUING
DISCLOSURE AGREEMENT AND OTHER DOCUMENTS IN
CONNECTION WITH SUCH BONDS; AND AUTHORIZING CERTAIN
OTHER MATTERS RELATING THERETO
WHEREAS, the City of Vernon (the "City") is a municipal
corporation and a chartered city of the State of California organized
and existing under its Charter and the Constitution of the State of
California; and
WHEREAS, the City is authorized pursuant to the provisions of
its Charter and the City of Vernon Municipal Facilities Revenue Bond
Law, constituting Article XI of the City Code of the City of Vernon, to
issue bonds, notes and other obligations payable from the Net Revenues
of the Electric System (capitalized terms used herein and not otherwise
defined shall have the meanings given such terms in the Indenture
mentioned below) to finance the costs of any land, improvements,
facilities, equipment and other property of any nature whatsoever which
are used in the Electric System and to refund such bonds, notes and
other obligations; and
WHEREAS, pursuant to an Indenture of Trust, dated as of
September 1, 2008 (the "2008 Master Indenture," and, as amended and
supplemented, the "Indenture"), entered into by the City and The Bank
of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), the
City has provided the terms and conditions for the issuance and
securing of its Electric System Revenue Bonds to finance the costs of
Capital Improvements to the City's Electric System or to refund any
outstanding Parity Obligations; and
WHEREAS, the City desires to provide for the issuance of its
Electric System Revenue Bonds, 2011 Series A (the "2011 Series A
Bonds") to provide moneys to pay a portion of the Cost, including
capitalized interest to the extent authorized by the Bond Ordinance, of
certain Capital Improvements to the Electric System included in the
2011 Project (as defined in the Third Supplemental Indenture of Trust
referred to below) and pay costs of issuance of the 2011 Series A
Bonds; and
WHEREAS, the City desires to provide for the issuance of its
Electric System Revenue Bonds, 2011 Taxable Series B (the "2011 Series
B Bonds" and, together with the 2011 Series A Bonds, the 112011 Series
Bonds") to provide moneys to refund the City's Electric System Revenue
Bonds, 2009 Series A maturing on August 1, 2012 (the "Refunded 2009
Series A Bonds"), to provide moneys to pay a portion of the Cost of the
2011 Project and pay costs of issuance of the 2011 Series B Bonds; and
WHEREAS, the 2011 Series Bonds are to be issued under and
pursuant to the 2008 Master Indenture as supplemented by the Third
Supplemental Indenture of Trust, expected to be dated as of December 1,
2011, and to be entered into by the City and the Trustee (such Third
Supplemental Indenture of Trust, in the form attached hereto as
Exhibit A with such changes, insertions and deletions as are made
pursuant to this Resolution being referred to herein as the "Third
Supplemental Indenture"); and
WHEREAS, the 2011 Series Bonds are to be payable from and
secured by a pledge and assignment of the Trust Estate on a parity with
all other Bonds issued and Outstanding under the Indenture; and
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WHEREAS, in connection with the refunding of the Refunded
2009 Series A Bonds there has been prepared an escrow agreement between
the City and the Trustee (such escrow agreement in the form attached
hereto as Exhibit D with such changes, insertions and deletions as are
made pursuant to this Resolution, being referred to herein as the
"Escrow Agreement"); and
WHEREAS, E.J. De La Rosa & Co., Inc., as underwriter (the
"Underwriter"), has submitted a proposal to purchase the 2011 Series
Bonds in the form of a Contract of Purchase (such Contract of Purchase,
in the form attached hereto as Exhibit B with such changes, insertions
and deletions as are made pursuant to this Resolution, being referred
to herein as the "Purchase Contract"); and
WHEREAS, in connection with the offering and sale of the 2011
Series Bonds there has been prepared a disclosure document in the form
of a Preliminary Official Statement (such Preliminary Official
Statement in the form attached hereto as Exhibit C with such changes,
insertions and deletions as are made pursuant to this Resolution, being
referred to herein as the "Preliminary official Statement"); and
WHEREAS, Rule 15c2-12 requires that, in order to be able to
purchase or sell the 2011 Series Bonds, the Underwriter must have
reasonably determined that an obligated person has undertaken in a
written agreement or contract for the benefit of the owners of the 2011
Series Bonds to provide disclosure of certain financial information and
certain material events on an ongoing basis; and
WHEREAS, in order to cause such requirement of Rule 15c2-12
to be satisfied, the City desires to enter into a Continuing Disclosure
Agreement with the Trustee (such Continuing Disclosure Agreement, in
the form attached to the form of the Preliminary Official Statement
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attached hereto as Exhibit C, with such changes, insertions and
deletions as are made pursuant to this Resolution, being referred to
herein as the "Continuing Disclosure Agreement,,); and
WHEREAS, there have been submitted to this meeting drafts of
the following:
(1) the Third Supplemental Indenture;
(2) the Purchase Contract;
(3) the Preliminary Official Statement, including the
Continuing Disclosure Agreement; and
(4) the Escrow Agreement; and
WHEREAS, after having reviewed and considered the proposal of
the Underwriter to purchase the 2011 Series Bonds on the terms and
conditions contained in the Purchase Contract, this City Council now
desires to authorize the issuance and sale of the 2011 Series Bonds,
including the execution of such documents and the performance of such
acts as may be necessary or desirable to effect such issuance and sale
and the other actions contemplated by this Resolution.
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE
CITY OF VERNON, AS FOLLOWS:
SECTION 1: The City Council of the City of Vernon hereby
finds and determines that the recitals contained hereinabove are true
and correct.
SECTION 2: The Third Supplemental Indenture, in
substantially the same form as the copy which is attached hereto as
Exhibit A and made a part hereof as though set forth in full herein, be
and the same is hereby approved. Each of the Mayor, the Mayor Pro Tem,
the City Administrator, and the Treasurer (each an "Authorized
Officer"), acting singly, is hereby authorized to execute and deliver
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the Third Supplemental Indenture, in the name of and on behalf of the
City, in substantially the form attached hereto with such changes,
insertions and deletions as may be approved by the Authorized Officer
executing the Third Supplemental Indenture, said execution being
conclusive evidence of such approval, and the City Clerk is hereby
authorized to attest thereto.
SECTION 3: Subject to the limitations specified in this
Resolution, the issuance of the 2011 Series Bonds on the terms and
conditions set forth in the Third Supplemental Indenture is hereby
authorized and approved. The aggregate principal amount of the 2011
Series Bonds shall not exceed eighty-five million dollars
($85,000,000). The 2011 Series Bonds will be dated as provided in,
will bear interest at the rates provided in, will mature on the date or
dates provided in, will be issued in the form provided in, will have
the Sinking Fund Installments specified in, will be subject to
redemption as provided in, and will have such other terms as shall be
provided in, the Third Supplemental Indenture as the same is completed
as provided in this Resolution, provided that no 2011 Series Bond shall
bear a stated rate of interest in excess of nine percent per annum.
SECTION 4: The Authorized Officer executing the Third
Supplemental Indenture is hereby authorized, subject to the limitations
set forth in Section 3 hereof, to determine the following: (i) the
maturity date or dates of the 2011 Series Bonds of each Series (but no
2011 Series Bond shall mature later than August 1, 2042); (ii) the
principal amount of the 2011 Series Bonds of each Series maturing on
each maturity date; (iii) the interest rate or rates for the 2011
Series Bonds of each Series maturing on each maturity date; (iv) the
maturity or maturities, if any, of the 2011 Series Bonds of each Series
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to be redeemed or paid at maturity from Sinking Fund Installments
("Term 2011 Series Bonds,,); (v) the Sinking Fund Installments for the
Term 2011 Series Bonds; and (vi) the redemption provisions for the 2011
Series Bonds of each Series.
SECTION 5: The net proceeds received on the sale of each
Series of the 2011 Series Bonds shall be applied to such purposes as
are set forth in the recitals to this Resolution in the manner provided
in the Third Supplemental Indenture.
SECTION 6: The Purchase Contract, in substantially the same
form as the copy which is attached hereto as Exhibit B and made a part
hereof as though set forth in full herein, be and the same is hereby
approved. Each of the Authorized Officers, acting singly, is hereby
authorized to execute and deliver the Purchase Contract, in the name of
and on behalf of the City, in substantially the form attached hereto
with such changes, insertions and deletions as may be approved by the
Authorized Officer executing said Purchase Contract and as are
consistent with the determinations of the terms of the 2011 Series
Bonds of each Series made pursuant to this Resolution, said execution
being conclusive evidence of such approval.
The Authorized Officer executing the Purchase Contract is
hereby authorized to determine the purchase price to be paid for the
2011 Series Bonds of each Series under the Purchase Contract; provided,
however, that the aggregate Underwriter's discount (not including
original issue discount which, as to each Series of the 2011 Series
Bonds, shall not exceed five percent of the aggregate principal amount
such Series) for the 2011 Series Bonds of each Series shall be not more
than two percent of the aggregate principal amount of the 2011 Series
Bonds of such Series. The sale of the 2011 Series Bonds to the
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Underwriter on the terms and conditions contained in the Purchase
Contract, as the same may be completed in accordance with the
provisions of this Resolution, with such changes, insertions and
deletions as are authorized hereby, is hereby approved and authorized.
SECTION 7: The Preliminary Official Statement, in
substantially the same form as the copy which is attached hereto as
Exhibit C and made a part hereof as though set forth in full herein, be
and the same is hereby approved. Each of the Authorized Officers,
acting singly, is hereby authorized to cause the Preliminary Official
Statement to be delivered to the Underwriter, in substantially the form
attached hereto as Exhibit C with such changes, insertions and
deletions as may be approved by the Authorized Officer delivering the
Preliminary Official Statement (including without limitation the
insertion of the proposed terms of the 2011 Series Bonds of each
Series), said delivery being conclusive evidence of such,approval.
The use of the Preliminary Official Statement in connection with the
offering and sale of the 2011 Series Bonds by the Underwriter,
including delivery of the Preliminary Official Statement in electronic
form, is hereby authorized and approved. Each of the Authorized
Officers, acting singly, is hereby authorized to determine that the
Preliminary Official Statement is deemed final for purposes of Rule
15c2-12.
The preparation and delivery to the Underwriter of a final
Official Statement (the "Official Statement") relating to the 2011
Series Bonds, and its use by the Underwriter in connection with the
offering and sale of the 2011 Series Bonds, including delivery of the
Official Statement in electronic form, be and the same is hereby
approved. The Official Statement shall be in substantially the form
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of the Preliminary Official Statement with such changes, insertions and
deletions as may be approved by the Authorized Officer executing the
Official Statement (including without limitation the insertion of the
final terms of the 2011 Series Bonds of each Series), said execution
being conclusive evidence of such approval. Each of the Authorized
Officers, acting singly, is hereby authorized to execute the Official
Statement, in the name and on behalf of the City, and thereupon to
cause the Official Statement to be delivered to the Underwriter. Each
of the Authorized Officers, acting singly, is hereby authorized to
approve and execute any amendment or supplement to the Official
Statement contemplated by the Purchase Contract, in the name and on
behalf of the City, and thereupon to cause such amendment or
supplement, to be delivered to the Underwriter.
SECTION 8: The Continuing Disclosure Agreement, in
substantially the form attached to the form of the Preliminary Official
Statement attached hereto as Exhibit C, be and the same is hereby
approved. Each of the Authorized Officers, acting singly, is hereby
authorized to execute and deliver the Continuing Disclosure Agreement,
in the name of and on behalf of the City, in substantially such form
with such changes, insertions and deletions as may be approved by the
Authorized Officer executing the same, said execution being conclusive
evidence of such approval, and the City Clerk is hereby authorized to
attest thereto.
SECTION 9: The Escrow Agreement, in substantially the same
form as the copy which is attached hereto as Exhibit D and made a part
hereof as thought set forth in full herein, be and the same is hereby
approved. Each of the Authorized Officers, acting singly, is hereby
authorized to execute and deliver the Escrow Agreement, in the name of
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and on behalf of the City, in substantially the form attached hereto
with such changes, insertions and deletions as may be approved by the
Authorized Officer executing the same, said execution being conclusive
evidence of such approval, and the City Clerk is hereby authorized to
attest thereto.
SECTION 10: The refunding of the Refunded 2009 Series A
Bonds on the terms provided in the Escrow Agreement is hereby
authorized and approved.
SECTION 11: The Mayor, the Mayor Pro Tem, the City
Administrator, the Treasurer, the City Clerk, the City Attorney and the
Chief Deputy City Attorney of the City, the Director of the Light and
Power Department and any other proper official, officer or employee of
the City, acting singly, be and each of them hereby is authorized to
execute and deliver any and all documents and instruments and to do and
cause to be done any and all acts and things necessary or convenient in
carrying out the actions authorized by this Resolution and the
transactions contemplated by the documents and instruments approved or
authorized by this Resolution, including, without limitation, making
any determinations or submission of any documents or reports which are
required by any rule or regulation of any governmental entity in
connection with the issuance and sale of the 2011 Series Bonds and the
authorization, execution, delivery and performance by the City of its
obligations under the documents and instruments approved or authorized
by this Resolution.
SECTION 12: All actions heretofore taken by any committee of
the City Council, or any official, officer, employee, representative or
agent of the City, in connection with the issuance and sale of the 2011
Series Bonds or the authorization, execution, delivery, or performance
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of the City's obligations under the documents and instruments approved
or authorized by this Resolution, and the other actions contemplated by
this Resolution, are hereby ratified, approved and confirmed.
SECTION 13: The City Clerk of the City of Vernon shall
certify to the passage, approval and adoption of this resolution, and
the City Clerk of the City of Vernon shall cause this resolution and
the City Clerk's certification to be entered in the File of Resolutions
of the Council of this City.
APPROVED AND ADOPTED this 15t" day of November, 2011.
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Name: Hilario Gonzales
Title: Mayor /, -T�
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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. 2011-185, was duly passed, approved and adopted by the City Council
of the City of Vernon at a regular meeting of the City Council duly
held on Tuesday, November 15, 2011, and thereafter was duly signed by
the Mayor or Mayor Pro-Tem of the City of Vernon.
Executed this (7 day of November, 2011, at Vernon, California.
(SEAL)
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EXHIBIT A
Exhibit A
[Third Supplemental Indenture Attached]
A-1
DRAFT
November 9, 2011
THIRD SUPPLEMENTAL
INDENTURE OF TRUST
between
CITY OF VERNON
and
THE BANK OF NEW YORK ME, LLON TRUST COMPANY, N.A., as Trustee
Dated as of December 1, 2011
Relating to
City of Vernon
Electric System Revenue Bonds,
2011 Series A and 2011 Taxable Series B
TABLE OF CONTENTS
Page
ARTICLE I AUTHORITY AND DEFINITIONS............................................................... 2
Section 1.01.
Supplemental Indenture of Trust..........................................................2
Section 1.02.
Authority for the Third Supplemental Indenture of Trust....................2
Section1.03.
Definitions............................................................................................2
Section 1.04.
Interpretation........................................................................................4
ARTICLE II THE 2011 SERIES A BONDS........................................................................
5
Section 2.01.
Principal Amount and Designation; Conditions to Issuance ................
5
Section 2.02.
Terms of the 2011 Series A Bonds; Registration;
Denominations; Payment of Principal and Interest ..............................
5
Section 2.03.
Terms of Redemption...........................................................................6
Section 2.04.
Application of Proceeds of 2011 Series A Bonds ................................
7
ARTICLE III THE 2011 SERIES B BONDS.........................................................................7
Section 3.01.
Principal Amount and Designation; Conditions to Issuance................7
Section 3.02.
Terms of the 2011 Series B Bonds; Registration;
Denominations; Payment of Principal and Interest ..............................7
Section 3.03.
Terms of Redemption...........................................................................
8
Section 3.04.
Application of Proceeds of 2011 Series B Bonds................................9
ARTICLE IV FUNDS.....................................................................................................:.......9
Section 4.01.
2011 Costs of Issuance Fund................................................................9
Section 4.02.
2011 Capital Improvement Fund........................................................10
Section 4.03.
2011 Capitalized Interest Fund..........................................................12
ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY.................................13
Section 5.01.
Arbitrage Covenants...........................................................................13
ARTICLE VI MISCELLANEOUS
.......................................................................................13
Section 6.01.
Indenture to Remain in Effect............................................................13
Section 6.02.
Continuing Disclosure........................................................................13
Section 6.03.
Notice to Rating Agencies..................................................................13
Section6.04.
Notices................................................................................................14
Section 6.05.
Counterparts.......................................................................................14
EXHIBIT A FORM OF 2011 SERIES BONDS..............................................................A-1
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THIRD SUPPLEMENTAL INDENTURE OF TRUST
THIS THIRD SUPPLEMENTAL INDENTURE OF TRUST, dated as of
December 1, 2011, 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 national banking 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 to refund Outstanding Bonds; and
WHEREAS, the Cost of the Capital Improvements under the Indenture includes
all costs of acquiring such Capital Improvement permitted under the Bond Ordinance; 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, the City desires to issue its 2011 Series A Bonds in order to provide
moneys to pay a portion of the Cost of the Capital Improvements to the Electric System
constituting the 2011 Project and to pay the Costs of Issuance of the 2011 Series A Bonds; and
WHEREAS, pursuant to the Master Indenture, as supplemented by the Second
Supplemental Indenture, the City has issued the 2009 Series A Bonds; and
WHEREAS, the City desires to issue its 2011 Series B Bonds in order to provide
moneys to refund the Refunded 2009 Series A Bonds, to provide moneys to pay a portion of the
Cost of Capital Improvements to the Electric System constituting the 2011 Project and to pay the
Costs of Issuance of the 2011 Series B 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 Third
Supplemental Indenture, a valid and binding agreement for the security of the 2011 Series Bonds
authenticated and delivered hereunder;
NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS
THIRD 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 2011 Series 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 2011 Series
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 2011 Series 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 Third Supplemental Indenture is
supplemental to the Master Indenture.
Section 1.02. Authority for the Third Supplemental Indenture of Trust. This Third
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 Third Supplemental Indenture, all terms
which are defined in Section 1.01 of the Master Indenture, as supplemented by the First
Supplemental Indenture of Trust, dated as of September 1, 2008, between the City and the
Trustee and the Second Supplemental Indenture of Trust, dated as of May 1, 2009, between the
City and the Trustee shall have the same meanings, respectively, in this Third Supplemental
Indenture as such terms are given in said Section 1.01 of the Master Indenture, Section 1.03 of
such First Supplemental Indenture of Trust and Section 1.03 of such Second Supplemental
Indenture of Trust.
(b) Amended Definition. The definition of the following term in Section 1.01 of the
Master Indenture is hereby amended in its entirety to read as follows:
"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; provided that,
commencing with the Fiscal Year ended June 30, 2013, the Net Transferable Income for any
Fiscal. Year shall not exceed 11.5% of the retail sales for such Fiscal Year less the amount paid
pursuant to clause (d) of the definition of Operation and Maintenance Expenses and less the
amount, if any, paid to the City as a Franchise Payment.
(c) Additional Definitions. The following terms shall, with respect to the 2011
Series Bonds and for all purposes hereof, have the meanings set forth below:
"Authorized Denominations" means with respect to the 2011 Series 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 Office of the
Trustee, is located are required or authorized to close.
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"Continuing Disclosure Agreement" means the Continuing Disclosure
Agreement, dated as of December 1, 2011, between the City and the Trustee relating to the 2011
Series Bonds.
"Delivery Date" means December [21], 2011.
"Interest Payment Date" each February 1 and August 1, commencing [August]
1, 2012,
"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.
"Refunded 2009 Series A Bonds" means the $28,680,000 aggregate principal
amount of 2009 Series A Bonds maturing on August 1, 2012.
"Second Supplemental Indenture" shall mean the Second Supplemental
Indenture of Trust, supplementing the Master Indenture, dated as of May 1, 2009, between the
City and the Trustee.
"Sinking Fund Installment" means: (i) with respect to the 2011 Series A Bonds
maturing on August 1, _ the amount required by Section 2.03(c) hereof to be paid by the City
on any single date for the retirement of such 2011 Series A Bonds; and (ii) with respect to the
2011 Series B Bonds maturing on August 1, the amount required by Section 4.03(c)
hereof to be paid by the City on any single date for the retirement of such 2011 Series B Bonds.
"Tax Certificate" means the Tax Certificate executed by the City at the time of
execution and delivery of the 2011 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
its provisions.
"Third Supplemental Indenture" means this Third 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.
"2011 Capital Improvement Fund" means the 2011 Capital Improvement Fund
established pursuant to Section 4.02,
"2011 Costs of Issuance Fund" means the 2011 Costs of Issuance Fund
established pursuant to Section 4.01.
"2011 Escrow Agreement" means the Escrow Agreement, dated as of December
1, 2011, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee
for the Refunded 2009 Bonds.
"2011 Escrow Fund" means the Escrow Fund established pursuant to the 2011
Escrow Agreement.
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"2011 Project" means the following Capital Improvements to the .Electric
System: (i) upgrades to the distribution facilities of the Electric System consisting primarily of
the conversion of such facilities from a 7 kV capability to a 16 kV capability; (ii) the
undergrounding of distribution facilities; (iii) improvements to and expansions of existing
substations; and (iv) street and other improvements in connection with each of the foregoing.
"2011 Series A Account" means the 2011 Series A Account within the 2011
Capital Improvement Fund established pursuant to Section 4,02.
"2011 Series A Bonds" means the City's Electric System Revenue Bonds, 2011
Series A Bonds authorized by Article II hereof.
"2011 Series B Account" means the 2011 Series B Account within the 2011
Capital Improvement Fund established pursuant to Section 4.02.
"2011 Series B Bonds" means the City's Electric System Revenue Bonds, 2011
Taxable Series B Bonds authorized by Article III hereof.
Bonds.
"2011 Series Bonds" means the 2011 Series A Bonds and the 2011 Series B
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 2011 Series Bonds
may be registered.
(d) Unless otherwise indicated, references herein to Articles and Sections shall be to
the Articles and Sections of this Third Supplemental Indenture. The words "herein," "hereof,"
"hereby," "hereunder" and other words of similar import refer to this Third Supplemental
Indenture as a whole and not to any particular Article, Section or subdivision hereof..
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ARTICLE II
THE 2011 SERIES A BONDS
Section 2.01. Principal Amount and Designation; Conditions to Issuance.
(a) Pursuant to the provisions of the Master Indenture and this Third 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, 2011 Series A." The 2011 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 2011 Series A Bond.
(b) The 2011 Series A Bonds are issued for the purpose of providing moneys to pay a
portion of the Costs of the 2011 Project, including providing for capitalized interest on the 2011
Series A Bonds, and to pay the Costs of Issuance of the 2011 Series A Bonds.
(c) All (but not less than all) of the 2011 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 2011 Series A Bonds.
Section 2.02. Terms of the 2011 Series A Bonds; Re istration• Denominations;
Payment of Principal and Interest.
(a) The 2011 Series A Bonds shall be issued as fully registered Bonds without
coupons in Authorized Denominations. The 2011 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 2011 Series A
Bonds of each maturity. Registered ownership of the 2011 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 2011 Series A Bonds shall be dated the Delivery Date.
(c) The 2011 Series A Bonds shall mature on August 1 of the years, in the principal
amounts, and shall bear interest at the rates, in each case as set forth below:
Maturity Date
(August 1) Principal Amount Interest Rate
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Section 2.03. Terms of Redemption.
(a) The 2011 Series A 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 2011 Series A Bonds to be redeemed, without premium, plus
accrued, unpaid interest to the redemption date.
(b) The 2011 Series A Bonds maturing on August 1, _ are also subject to
mandatory redemption in part prior to their stated maturity from Sinking Fund Installments
established pursuant to subsection (c) of this Section on any August 1 on or after August 1, _,
at a Redemption Price equal to the principal amount of the 2011 Series A Bonds to be redeemed,
without premium.
(c) The following shall be the Sinking Fund Installments for the 2011 Series A Bonds
maturing on August 1, _. Such installments shall be due on August 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 Fund.
Date (August 1) Installment
* Maturity
(d) The City shall provide the Trustee with revised sinking fund schedules in the
event a credit for the Sinking Fund Installments for the 2011 Series A Bonds maturing on
August 1, _ is to apply as provided in Section 5.04(c) of the Master Indenture.
0
Section 2.04. Application of Proceeds of 2011 Series A Bonds. As the amount on
deposit in the Debt Service Reserve Fund upon the issuance of the 2011 Series Bonds is not less
than the Debt Service Reserve Requirement upon the issuance of such Bonds, no deposit to the
Debt Service Reserve Fund is required in connection with the issuance of the 2011 Series Bonds.
The proceeds of the sale of the 2011 Series A Bonds (equal to the principal amount thereof, [less
net original issue discount of $ J less underwriter's discount of $ ) shall be
applied simultaneously with the delivery of the 2011 Series A Bonds, as follows:
(a) There shall be deposited in the 2011 Capitalized Interest Fund the sum of
(b) There shall be deposited in the 2011 Costs of Issuance Fund the sum of
$ ; and
(c) There shall be deposited in the 2011 Series A Account within the 2011 Capital
Improvement Fund the sum of $
ARTICLE III
THE 2011 SERIES B BONDS
Section 3.01. Principal Amount and Designation; Conditions to Issuance.
(a) Pursuant to the provisions of the Master Indenture and this Third 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,
2011 Taxable Series B." The 2011 Series B 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 2011 Series B Bond.
(b) The 2011 Series B Bonds are issued for the purpose of providing moneys to
refund the Refunded 2009 Series A Bonds, to pay a portion of the Costs of the 2011 Project and
to pay the Costs of Issuance of the 2011 Series B Bonds.
(c) All (but not less than all) of the 2011 Series B 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 2011 Series B Bonds.
Section 3.02. Terms of the 2011 Series B Bonds; Registration; Denominations;
Payment of Principal and Interest.
(a) The 2011 Series B Bonds shall be issued as fully registered Bonds without
coupons in Authorized Denominations. The 2011 Series B Bonds shall be registered initially in
the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository, and shall be
7
evidenced by one bond certificate in the total aggregate principal amount of the 2011 Series B
Bonds of each maturity. Registered ownership of the 2011 Series B Bonds, or any portion
thereof, may not thereafter be transferred except as set forth in Section 3.04 of the Master
Indenture.
(b) The 2011 Series B Bonds shall be dated the Delivery Date.
(c) The 2011 Series B Bonds shall mature on August 1 of the years, in the principal
amounts, and shall bear interest at the rates, in each case as set forth below:
Maturity Date
(August 1) Principal Amount
Section 3.03. Terms of Redemption.
Interest Rate
(a) [The 2011 Series B 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
(b) The 2011 Series B Bonds maturing on August 1, _ are also subject to
mandatory redemption in part prior to their stated maturity from Sinking Fund Installments
established pursuant to subsection (c) of this Section on any August 1 on or after August 1, _,
at a Redemption Price equal to the principal amount of the 2011 Series B Bonds to be redeemed,
without premium.
9
(c) The following shall be the Sinking Fund Installments for the 2011 Series B Bonds
maturing on August 1, _. Such installments shall be due on August 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 Fund
Date (August 1) Installment
* Maturity
(d) The City shall provide the Trustee with revised sinking fund schedules in the
event a credit for the Sinking Fund Installments for the 2011 Series B Bonds maturing on August
1, _ is to apply as provided in Section 5.04(c) of the Master Indenture.
Section 3.04. Application of Proceeds of 2011 Series B Bonds. As the amount on
deposit in the Debt Service Reserve Fund upon the issuance of the 2011 Series Bonds is not less
than the Debt Service Reserve Requirement upon the issuance of such Bonds, no deposit to the
Debt Service Reserve Fund is required in connection with the issuance of the 2011 Series Bonds.
The proceeds of the sale of the 2011 Series B Bonds (equal to the principal amount thereof,[ less
net original issue discount of $ ], less underwriter's discount of $ )
shall be applied simultaneously with the delivery of the 2011 Series B Bonds, as follows:
(a) There shall be deposited in the 2011 Escrow Fund the sum of $
(b) There shall be deposited in the 2011 Costs of Issuance Fund the sum of
$ ; and
(c) There shall be deposited in the 2011 Series B Account within the 2011 Capital
Improvement Fund the sum of $
ARTICLE IV
FUNDS
Section 4.01. 2011 Costs of Issuance Fund.
(a) The Trustee shall establish and maintain in trust a separate fund designated as the
"2011 Costs of Issuance Fund." Money deposited in said fund shall be used to pay Costs of
Issuance with respect to the 2011 Series Bonds as provided in this Section.
(b) The Trustee shall make payments from the 2011 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 2011 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 2011 Costs of Issuance
Fund and that no part of such payment shall be applied to any item which has previously been
paid as a Cost of Issuance of the 2011 Series 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 2011
Costs of Issuance Fund to the payment of the Costs of Issuance of the 2011 Series 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 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) Upon the receipt by the Trustee of a certificate of an Authorized City
Representative requesting the Trustee to close the 2011 Costs of Issuance Fund, and after
payment from the 2011 Costs of Issuance Fund of all amounts included in requisitions submitted
by the City pursuant to Section 4.01(b) hereof, the Trustee shall transfer any moneys remaining
in the 2011 Costs of Issuance Fund to the 2011 Series A Account within the 2011 Capital
Improvement Fund. Upon such transfer the Trustee shall close the 2011 Costs of Issuance Fund.
(d) Moneys held in the 2011 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 2011
Costs of Issuance Fund. Any investment earnings on moneys on deposit in the 2011 Costs of
Issuance Fund shall be deposited in the 2011 Costs of Issuance Fund and be used in the same
manner as other amounts on deposit in the 2011 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 2011 Costs of Issuance Fund shall be
applied to the payment of Bond debt service when due.
Section 4.02. 2011 Capital Improvement Fund.
(a) The Trustee shall establish and maintain in trust a separate fund designated as the
"2011 Capital Improvement Fund." The Trustee shall establish within the Project Fund the
"2011 Series A Account" and the "2011 Series B Account." Money deposited in the 2011 Series
A Account shall be used to pay a portion of the Costs of the 2011 Project as provided in
subsection (b) of this Section; provided that any Costs paid from the Series A Account shall have
III
been incurred no earlier than September _, 2011. Money deposited in the 2011 Series B
Account shall be used to pay a portion of the Costs of the 2011 Project as provided in subsection
(c) of this Section.
(b) The Trustee shall make payments from the 2011 Series A Account, except
payments and withdrawals pursuant to subsection (f) 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 2011 Series A Account 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 (i) the name of the Person to whom payment is due,
(ii) the amount of such payment, and (iii) the particular item of the Cost of the 2011 Project to be
paid and that such payment in the stated amount is a proper charge against the 2011 Series A
Account, that no part of such payment shall be applied to any item which has previously been
paid as a Cost of the 2011 Project and that such Cost of the 2011 Project was incurred no earlier
than September _, 2011. 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 2011 Series A Account to the
payment of the Cost of the 2011 Project 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 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 Trustee shall make payments from the 2011 Series B Account, except
payments and withdrawals pursuant to subsection (f) 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 2011 Series B Account 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 (i) the name of the Person to whom payment is due,
(ii) the amount of such payment, and (iii) the particular item of the Cost of the Capital
Improvement to be reimbursed and that such reimbursement in the stated amount is a proper
charge against the 2011 Series B Account and that no part of such payment shall be applied to
any item which has previously been paid as a Cost of the Capital Improvement. 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 2011 Series B Account to the reimbursement of the Cost of the Capital
Improvement 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 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.
11
(d) Upon the receipt by the Trustee of a certificate of an Authorized City
Representative requesting the Trustee to close the 2011 Capital Improvement Fund (or any
account therein), and after payment from the 2011 Capital Improvement Fund (or any account
therein) of all amounts included in requisitions submitted by the City pursuant to Section 4.02(b)
or Section 4.02(c) hereof, the Trustee shall transfer any moneys remaining in the 2011 Capital
Improvement Fund (or any account therein) to the account in the Debt Service Fund specified by
the City. Upon such transfer the Trustee shall close the 2011 Capital Improvement Fund (or any
account therein).
(e) Moneys held in the 2011 Capital Improvement Fund (or any account therein) 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 2011 Capital Improvement Fund (or any account therein). Any
investment earnings on moneys on deposit in the 2011 Capital Improvement Fund (or any
account therein) shall be deposited in the 2011 Capital Improvement Fund (or any account
therein) and be used in the same manner as other amounts on deposit in the 2011 Capital
Improvement Fund (or any account therein).
(f) Notwithstanding any of the other provisions of this Section, to the extent that
other moneys are not available therefor, amounts in the 2011 Capital Improvement Fund (or any
account therein) shall be applied to the payment of Bond debt service when due.
Section 4.03. 2011 Capitalized Interest Fund.
(a) The Trustee shall establish and maintain in trust a separate fund designated as the
"2011 Capitalized Interest Fund." Money deposited in said fund shall be used to pay interest on
the Bonds as provided in this Section.
(b) Subject to the provisions of subsection (e) of this Section, on each Interest
Payment Date for the 2011 Series A Bonds the Trustee shall transfer from the 2011 Capitalized
Interest Fund to the Interest Account an amount equal to the interest due on the 2011 Series A
Bonds on such Interest Payment Date (or all the moneys then on deposit in the 2011 Capitalized
Interest Fund if less than such interest due on the 2011 Series A Bonds).
(c) Upon the transfer of all amounts in the 2011 Capitalized Interest Fund, the
Trustee shall close the 2011 Capitalized Interest Fund.
(d) Moneys held in the 2011 Capitalized Interest 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 2011 Capitalized Interest Fund. Any investment earnings on moneys on deposit in the 2011
Capitalized Interest Fund shall be deposited in the 2011 Capitalized Interest Fund and be used in
the same manner as other amounts on deposit in the 2011 Capitalized Interest Fund.
(e) Notwithstanding any of the other provisions of this Section, to the extent that
other moneys are not available therefor, amounts in the 2011 Capitalized Interest Fund shall be
applied to the payment of Bond debt service when due.
12
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 2011 Series A
Bonds that the City will not directly or indirectly use the proceeds of any of the 2011 Series A
Bonds or any other funds of the City or permit the use of the proceeds of any of the 2011 Series
A Bonds or any other funds of the City or take or omit to take any other action which will cause
any of the 2011 Series A Bonds to be "arbitrage bonds" or otherwise subject to federal income
taxation by reason of Sections 103 and 141 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 interest on the 2011 Series A 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, the First Supplemental Indenture and this Third 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 hndenture, 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 2011 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.
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 2011 Series Bonds are Outstanding, (c) any material amendments to the
13
Master Indenture or this Third Supplemental Indenture, (d) any acceleration of the 2011 Series
Bonds pursuant to Section 10.04 of the Master Indenture, (g) any redemption in whole of the
2011 Series A Bonds or the 2011 Series B Bonds.
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 Administrator
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 Third Supplemental Indenture may be executed in
any number of counterparts and by the different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original; but such counterparts shall together
constitute but one and the same instrument.
14
IN WITNESS WHEREOF, City of Vernon has caused these presents to be
signed in its name and on its behalf by its 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 first day of
December, 2011.
ATTEST:
M
City Clerk
APPROVED AS TO FORM:
Chief Deputy City Attorney
CITY OF VERNON
M.
Name:
Title:
THE BANK OF NEW YORK MELLON
TRUST COMPANY, N.A., as Trustee
By:
Authorized Officer
EXHIBIT A
FORM OF 2011 SERIES BONDS
[bracketed language applies only to 2011 Series 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.]
-No. R-
Interest Rate
CITY OF VERNON
ELECTRIC SYSTEM REVENUE BOND,
2011 [TAXABLE] SERIES [A] [B]
Dated Date Maturity Date CUSIP No.
December _, 2011 August 1, _
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
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 2011 Series [A] [B] 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 2011 Series [A] [B] 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, 2011 [Taxable]Series [A]"[B] (the "2011 Series
[A] [B] Bonds"). The 2011 Series [A] [B] Bonds are issued pursuant to the Charter and the
Bond Ordinance. The 2011 Series [A] [B] Bonds have been issued in the aggregate principal
amount of $ . The 2011 Series [A] [B] 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 Third Supplemental Indenture of Trust, dated as of December 1, 2011
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 of the 2011 Series [A] [B] 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 2011
Series [A] [B] Bonds and simultaneously with the issuance of the 2011 Series [A] [B] Bonds the
City is issuing under the Indenture $_ aggregate principal amount of its Electric System
Revenue Bonds, 2011 [Taxable] Series [A] [B] 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.
A-2
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
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 shall
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 to levy or pledge any
form of taxation or to make any appropriation for the payment of this Bond. The payment of 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 2011 Series [A] [B] Bonds were issued for the purpose of providing moneys
to [finance a portion of the Costs of Capital Improvements to the City Electric System
constituting the 2011 Project, including providing capitalized interest,] [refund certain
outstanding Bonds, to finance a portion of the Costs of Capital Improvements to the City Electric
System constituting the 2011 Project] and to pay the Costs of Issuance of the 2011 Series [A] [B]
Bonds.
Interest on the 2011 Series [A] [B] 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 February 1 and August 1,
commencing [February] 1, 2012.
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 2011 Series A 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 2011 Series A Bonds to be redeemed, without premium, plus
accrued, unpaid interest to the redemption date.
The 2011 Series A Bonds maturing on August 1, are subject to mandatory
redemption, in part, on any August 1 on and after August 1, _, at a Redemption Price equal to
A-3
the principal amount of such 2011 Series A Bonds to be redeemed, without premium, from the
Sinking Fund Installments established for such 2011 Series A Bonds in the Indenture.]
[The 2011 Series B 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 2011 Series B Bonds maturing on August 1, are subject to mandatory
redemption, in part, on any August 1 on and after August 1, _, at a Redemption Price equal to
the principal amount of such 2011 Series B Bonds to be redeemed, without premium, from the
Sinking Fund Installments established for such 2011 Series [A] [B] Bonds in the Indenture.]
If less than all of the 2011 Series [A] [B] Bonds of a maturity are to be redeemed,
the particular 2011 Series [A] [B] Bonds of such maturity to be redeemed shall be selected as
provided in the Indenture.
The 2011 Series [A] [B] 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 2011 Series [A] [B] 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 2011 Series [A] [B] 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 2011 Series [A]
[B] Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing
marks of such 2011 Series [A] [B] Bonds so to be redeemed, and, in the case of 2011 Series [A]
[B] 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 2011 Series [A] [B] 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 2011 Series [A] [B] Bond to be redeemed in part only) and that from and after such
date interest on such 2011 Series [A] [B] Bond (or the portion of such 2011 Series [A] [B] Bond
to be redeemed) shall cease to accrue and be payable.
In the event that funds required to pay the Redemption Price of 2011 Series [A]
[B] 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 redemption to the Owners of such 2011 Series [A] [B] 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
2011 Series [A] [B] 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 2011 Series [A] [B] Bonds. In the event a notice of redemption of 2011 Series [A] [B]
Bonds contains such a condition and such moneys are not so received, the redemption of 2011
Series [A] [B] Bonds as described in the conditional notice of redemption shall not be made and
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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 2011 Series [A] [B]
Bonds pursuant to the conditional notice of redemption.
Receipt of such notice of redemption shall not be a condition precedent to the
redemption of 2011 Series [A] [B] Bonds and failure of any Owner of a 2011 Series [A] [B]
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 2011 Series [A] [B] 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 not be deemed to be Outstanding for the purpose of
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 2011 Series [A] [B] 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 2011 Series [A] [B] Bond or 2011 Series [A] [B] 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 name this 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 this 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
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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 2011 Series [A]
[B] 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.
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 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.
[SEAL]
ATTEST:
City Clerk
CITY OF VERNON
M.
[Title]
M
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 2011 Series [A] [B] Bonds delivered pursuant to the within
mentioned Indenture.
Dated:
THE BANK OF NEW YORK MELLON
TRUST COMPANY, N.A., as Trustee
M.
Authorized Signatory
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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:
Signature guaranteed by:
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.
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.
W-?
EXHIBIT B
Exhibit B
[Purchase Contract Attached]
Draft 11/10/11
CITY OF VERNON
Electric System Revenue Bonds
2011 Series A
City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Ladies and Gentlemen:
CITY OF VERNON
Electric System Revenue Bonds
2011 Taxable Series B
CONTRACT OF PURCHASE
December _, 2011
RE De La Rosa & Co., Inc. (the "Underwriter") hereby offers to enter into this Contract of
Purchase (this "Purchase Contract") with you, the City of Vernon ("the City"). This offer is made
subject to acceptance by the City prior to 11:00 P.M., California time, on the date hereof, and upon
such acceptance this Purchase Contract shall be in full force and effect in accordance with its terms
and shall be binding upon the City and the Underwriter.
1. Upon the terms and conditions and upon the basis of the representations herein set
forth, the Underwriter hereby agrees to purchase and the City hereby agrees to sell to the Underwriter
all (but not less than all) of the City's $ Electric System Revenue Bonds, 2011 Series
A (the "Series A Bonds") and $ Electric System Revenue Bonds, 2011 Series B (the
"Series B Bonds" and, together with the Series A Bonds, the "Bonds"). The purchase price for the
Bonds shall be $ (representing the sum of (i) the purchase price of the Series A Bonds which
is equal to the $ aggregate principal amount of the Series Bonds less $
Underwriter's discount relating to the Series A Bonds and less original issue discount of
$ relating to the Series A Bonds plus (ii) the purchase price of the Series B Bonds which
is equal to the $ aggregate principal amount of the Series Bonds less $
Underwriter's discount relating to the Series B Bonds and less original issue discount of
$ relating to the Series B Bonds).
The Bonds are to be issued pursuant to Article XI of the Vernon City Code (the "Act") and
an Indenture of Trust, dated as of September 1, 2008, as supplemented, including as supplemented by
the Third Supplemental Indenture of Trust providing for the issuance of the Bonds dated as of
December 1, 2011 (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
Underwriter, 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 (as defined
below).
The 2011 Series A Bonds are being issued to provide funds (i) to pay Costs of certain Capital
Improvements to the City's Electric System, as further described in the Official Statement; (ii) to
provide for capitalized interest on the 2011 Series A Bonds; and (iii) to pay costs of issuance of the
2011 Series A Bonds. The 2011 Series B Bonds are being issued to provide funds (A) to pay the
principal and interest on the Refunded 2009 Bonds (as defined in the Official Statement); and (B) to
pay costs of issuance of the 2011 Series B Bonds.
The City will undertake, pursuant to a Continuing Disclosure Agreement, dated as of
December 1, 2011 (the "Continuing Disclosure Agreement"), by and between the City and the
Trustee, to provide certain annual financial information and notices of the occurrence of certain
events, if material. A form of the Continuing Disclosure Agreement is set forth in the Official
Statement.
The Indenture, the Continuing Disclosure Agreement and this Purchase Contract are
hereinafter referred to as the "Legal Documents."
2. The Underwriter agrees to reoffer the Bonds in a bona fide public offering at an
initial offering at the offering prices listed in the Official Statement. After the initial offering, the
Underwriter reserves the right to change such public offering prices as the Underwriter shall deem
necessary in marketing the Bonds. 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 December _, 2011, or at such other time or on
such earlier or later business day as shall have been mutually agreed upon by the City and the
Underwriter (the "Closing Date"), the City will deliver to the Underwriter at the offices of Orrick,
Herrington & Sutcliffe LLP, Los Angeles, California, the closing documents hereinafter mentioned.
The Bonds, registered to Cede & Co. and in definitive form, will be made available to the
Underwriter 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 Underwriter 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 Underwriter to accept delivery of and pay for the
Bonds in accordance with the terms of this Purchase Contract. Upon release of the Bonds, the
Underwriter will pay the purchase price of the Bonds as set forth in Section 1 hereof, in immediately
available funds to the order of the City. The releases and payments referenced to in this Section 3 are
herein called the "Closing."
4. The City hereby ratifies, confirms and approves of the distribution and use by the
Underwriter prior to the date hereof of the preliminary official statement dated December _, 2011,
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 15c2-12
promulgated under the Securities Exchange Act of 1934 (`Rule 15c2-12"), 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 Underwriter, 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 may be approved by
the Underwriter (including the appendices thereto and any amendments or supplements as have been
approved by the City and the Underwriter, the "Official Statement'), in such quantity as the
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Underwriter shall reasonably request. The City hereby approves of the distribution and use by the
Underwriter of the Official Statement in connection with the offer and sale of the Bonds. The
Underwriter hereby agrees to deliver a copy of the Official Statement to the Municipal Securities
Rulemaking Board, through its EMMA system, on or before the Closing Date and the Underwriter
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 and regulations in connection with the offering
and sale of the Bonds, including, without limitation, MSRB Rule G-32.
5. The City represents to the Underwriter 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
its charter, 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 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 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 on the 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
way questioning the corporate existence of the City or the titles of the officers of the City to their
respective offices; (ii) seeking to restrain or enjoin the issuance or delivery of any of the Bonds, or
the collection of Net Revenues of the Electric System or other amounts pledged or to be pledged to
pay the principal of, premium, if any, and interest on the Bonds, or in any way contesting or affecting
the validity of the Bonds, the Legal Documents or the collection of said Net Revenues, or the pledge
thereof, or contesting the powers of the City or any authority for the issuance and delivery of the
Bonds or the performance of its obligations contained therein or the execution and delivery 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; provided, however, that if the Underwriter accepts at the Closing any changes to the
certificate referred to in Section 6(d)(3) hereof, the representations contained in this Section 5(f) shall
be deemed modified to a like extent.
(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 Underwriter as the Underwriter
may reasonably request in order (i) to qualify the Bonds for offer and sale under the Blue Sky or
other securities laws and regulations of such states and other jurisdictions of the United States as the
Underwriter may designate and (ii) to determine the eligibility of the Bonds for investment under the
laws of such states and other jurisdictions, and will use its best efforts to continue such qualification
in effect to the End of the Underwriting Period (as hereinafter defined); provided that the City shall
not be obligated to take any action that would subject it to the 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 Underwriter, and, if in the opinion of the City or the Underwriter,
or its counsel, such event requires the preparation and publication of a supplement or amendment to
the Official Statement, the City will forthwith prepare and furnish to the Underwriter (at the expense
of the City) a reasonable number of copies of an amendment of or supplement to the Official
Statement (in form and substance satisfactory to counsel for the Underwriter) which will amend or
supplement the Official Statement so that it will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
0) After the Closing, the City will not participate in the issuance of any
amendment of or supplement to the Official Statement to which, after being furnished with a copy,
the Underwriter shall reasonably object in writing or which shall be disapproved by counsel for the
Underwriter as not satisfying the requirements of Section 5(i);
(k) The financial statements of the City contained as Appendix A to the Official
Statement do and will fairly present the financial position and results of operations of the City as of
the dates and for the periods therein set forth in accordance with 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 Underwriter shall be deemed a representation and warranty by the City to the Underwriter 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; and
(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 Underwriter 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 Underwriter stating the date which is the End of the Underwriting Period.
6. The Underwriter has entered into this Purchase Contract in reliance upon the
representations herein and the performance by the City of the City's obligations hereunder, both as of
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the date hereof and as of the Closing Date. The Underwriter's obligations under this Purchase
Contract are and shall be subject to the following further conditions:
(a) The representations of the City contained herein shall be true and correct in
all material respects at the date hereof and on the Closing Date;
(b) At the time of the Closing, the Legal Documents shall be in full force and
effect, and shall not have been amended, modified or supplemented (except as may be agreed to in
writing by the Underwriter); the ratings quoted in the Official Statement shall be in effect; and the
City shall perform or have performed its obligations required under or specified in the Legal
Documents to be performed at or prior to the Closing;
(c) The Underwriter may terminate this Purchase Contract by notification to the
City if at any time after the date hereof and prior to the Closing
(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 (the "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 " 1TA");
(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, war, calamity or crisis, the effect
of which on financial markets is such as to make it, in the sole judgement of the Underwriter,
impracticable or inadvisable to proceed with the offering and delivery of the Bonds;
(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 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 have: (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 Underwriter, 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;
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(6) there shall occur or exist any event which, in the sole reasonable
judgment of the Underwriter, 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 and payable
from the Net Revenues of the Electric System on a parity with the Bonds, 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.
(d) At or prior to the Closing, the Underwriter shall receive the following
documents:
(1) the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to
the City, dated the Closing Date, substantially in the form attached as Appendix E to the Official
Statement;
(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 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 such 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 therein; (v) which would be likely to result in any material
adverse change in the business, properties, assets or the financial condition of the Electric System or
which would be likely to have a material adverse effect on the ability of the City to meet its
obligations under the Indenture; or (vi) asserting that the Official Statement contained any untrue
statement of a material fact or omitted to state any material fact necessary to make the statements
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 Underwriter; provided, however, in lieu of
such certificate, the Underwriter may in its sole discretion accept an opinion of Bond Counsel or
counsel to the City acceptable to the Underwriter in form and substance, that in such counsel's
opinion, the issues raised in any such pending or threatened litigation are without substance or that
the contentions of the plaintiffs therein are without merit;
(4) an opinion of counsel to the Trustee, dated the Closing Date and
addressed to the City and the Underwriter, to the effect that: (i) the Trustee is a national banking
association duly organized and validly existing under the laws of 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 the 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
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 in full compliance with, and does not conflict with, any applicable law or governmental
regulation currently in effect, and does not conflict with or violate any contract to which the Trustee
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 Refunded 2009 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) 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;
(13) the Blanket Issuer Letter of Representations of the City;
(14) such additional certificates, instruments and other documents as the
Underwriter 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.
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 Underwriter.
If the City shall be unable to satisfy the conditions to the obligations of the Underwriter to
purchase, accept delivery of and pay for the Bonds contained in this Purchase Contract or if the
obligations of the Underwriter to purchase, accept delivery of and pay for the Bonds shall be
terminated for any reason permitted by this Purchase Contract, this Purchase Contract and all
obligations of the Underwriter hereunder may be terminated by the Underwriter at, or at any time
prior to, the Closing Date by written notice to the City, and neither the Underwriter nor the City shall
have any further obligations hereunder.
7. The Underwriter shall be under no obligation to pay, and the City shall pay, any
expenses incident to the performance of the City's obligations hereunder, including but not limited
to: (i) the cost of preparation, printing and distribution of the Legal Documents, the Official
Statement and any supplements or amendments thereto; (ii) the cost of preparing and printing the
Bonds; (iii) the fees and disbursements of Bond Counsel, the fees and expenses of counsel to the
City, and the fees and disbursements of Underwriter's Counsel and Swap Counsel; (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 Purchase Contract,
including, but not limited to, meals, transportation, and lodging of those employees, if any.
8. The Underwriter shall pay: (i) the cost of preparation and printing of this Purchase
Contract; (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 Underwriter in connection with the public offering of the Bonds.
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 Underwriter under this Purchase Contract may be given by delivering the same in
writing to: E.J. De La Rosa & Co., Inc., 456 Montgomery Street, 19th Floor, San Francisco,
California 94104, Attention: Ralph Holmes.
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 in several counterparts, each of which shall
be an original, and all of which shall constitute but one and the same instrument.
12. The City acknowledges and agrees that (i) the purchase and sale of the Bonds
pursuant to this Contract of Purchase is an arm's-length commercial transaction between the City and
the Underwriter, (ii) in connection therewith and with the discussions, undertakings and procedures
leading up to the consummation of such transaction, the Underwriter is and has been acting solely as
a principal and is not acting as a municipal advisor (as defined in Section 1513(e)(4) of the Securities
Exchange Act of 1934, as amended), or agents, advisors or fiduciaries of the City, (iii) the
Underwriter has not assumed an advisory or fiduciary responsibility in favor of the City with respect
to the offering of the Bonds contemplated hereby or the discussions, undertakings and procedures
leading thereto (irrespective of whether the Underwriter, or any affiliate of the Underwriter, has
provided other services or are currently providing other services to the City on other matters) and the
Underwriter has no obligation to the City with respect to the offering of the Bonds contemplated
hereby except the obligations expressly set forth in this Contract of Purchase, (iv) the Underwriter
has financial and other interests that differ from those of the City, and (v) the City has consulted with
its own legal, financial and other advisors to the extent it deemed appropriate in connection with the
offering of the Bonds.
13.
(a) The City agrees to indemnify and hold harmless the Underwriter, and each
person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) the Underwriter, and their directors, officers, agents and employees, against any
and all losses, claims, damages, liabilities and expenses to which the Underwriter may become
subject, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof),
arise out of or are based upon (i) a claim in connection with the public offering of the Bonds to the
effect that the Bonds or any related security are required to be registered under the Securities Act or
the Indenture is required to be qualified under the Trust Indenture Act, or (ii) any statement or
information in the Preliminary Official Statement or in the Official Statement that is or is alleged to
be untrue or incorrect in any material respect, or any omission or alleged omission of any statement
or information in the Preliminary Official Statement or the Official Statement (other than information
relating to DTC and the book -entry system) which is necessary in order to make the statements
therein not misleading. The foregoing indemnity agreement shall be in addition to any liability that
the City otherwise may have.
(b) The Underwriter will indemnify and hold harmless the City, each of its
members, directors, officers and employees, and each person who controls the City within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as
the foregoing indemnity from the City to the Underwriter, but only with reference to the statements
under the caption "Underwriting" in the Preliminary Official Statement and the Official Statement.
10
(c) In case any claim shall be made or action brought against an indemnified
party for which indemnity may be sought against any indemnifying party, as provided above, the
indemnified party shall promptly notify the indemnifying party in writing setting forth the particulars
of such claim or action; but the omission to so notify the indemnifying party (i) shall not relieve it
from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of
such action and such failure results in the forfeiture by the indemnifying party of substantial rights
and defenses and (ii) shall not relieve it from any liability which it may have to any indemnified
party otherwise than under paragraph (a) or (b) above. The indemnifying party shall assume the
defense thereof, including the retention of counsel acceptable to such indemnified party and the
payment of all expenses and shall have the right to negotiate and consent to settlement. An
indemnified party shall have the right to retain separate counsel in any such action and to participate
in the defense thereof but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless the employment of such counsel has been specifically authorized by the
indemnifying party or the indemnifying party shall not have employed counsel reasonably acceptable
to the indemnified party to have charge of the defense of such action or proceeding or the
indemnified party shall have reasonably concluded that there may be defenses available to it which
are different from or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to direct the defense of such action or proceeding on
behalf of the indemnified party), in any of which events, such legal or other expenses shall be borne
by the indemnifying party. No party shall be liable for any settlement of any action effected without
its consent, but if settled with the consent of the indemnifying party or if there is a final judgment for
the plaintiff in any action with or without written consent of the indemnifying party, the
indemnifying party agrees to indemnify and hold harmless the indemnified parties to the extent of the
indemnities set forth above from and against any loss or liability by reason of such settlement or
judgment. Any such settlement must include an unconditional release of each indemnified party from
all liability arising out of such action.
(d) If the indemnification provided for above is unenforceable, or is unavailable
to an indemnifying party in respect of any losses, claims, damages or liabilities (or actions in respect
thereof) of the type subject to indemnification herein, then the indemnifying party shall, in lieu of
indemnifying such person, contribute to the amount paid or payable by such person as a result of
such losses, claims, damages, or liabilities (or actions in respect thereof). In the case of the City and
the Underwriter, contribution shall be in such proportion as is appropriate to reflect the relative
benefits received by the City, on the one hand, and the Underwriter, on the other, from the sale of the
Securities. If, however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then the indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the City, on the one hand, and the Underwriter, on the
other, in connection with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or action in respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the City on the one hand and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds of sale of the Securities paid to the City
pursuant to this Agreement (before deducting expenses) bear to the underwriting discount or
commission received by the Underwriter. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information supplied by the City or the
Underwriter and the parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The City and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this paragraph were determined by pro
11
rata allocation or by any other method of allocation which does not take account of the equitable
considerations referred to above in this paragraph. The amount paid or payable by any person as a
result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other expenses reasonably incurred by such person in
connection with investigating or defending any such action or claim. Notwithstanding the provisions
of this paragraph, however, the Underwriter shall not be required to contribute an amount in excess
of the amount of the underwriting discount or commission applicable to the purchase of the Bonds.
No person guilty of fraudulent misrepresentation (within the meaning of Section 10(b) of the
Securities Act) shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
12
14. This Purchase Contract, when accepted by the City in writing as heretofore specified,
shall constitute the entire agreement between the City and the Underwriter in connection with the
subject matter hereof and is made solely for the benefit of the City and the Underwriter (including
any successor in business of the Underwriter). No other person shall acquire or have any right
hereunder or by virtue hereof. All the representations and agreements in this Purchase Contract shall
remain operative and in full force and effect, regardless of (a) any investigation made by or on behalf
the Underwriter, (b) delivery of and payment for the Bonds hereunder, and (c) any termination of this
Purchase Contract.
Accepted on December _, 2011
CITY OF VERNON
By:
City Administrator
ATTEST:
0
City Clerk
APPROVED AS TO FORM:
City Attorney
Very truly yours,
E.J. DE LA ROSA & CO., INC.
By:
Authorized Representative
13
SCHEDULEI
CITY OF VERNON
Electric System Revenue Bonds
2011 Series A
$ Serial 2011 Series A Bonds
Maturity Date Principal Interest
(August 1) Amount Rate Yield
$ % Term 2011 Series A Bond due August 1, 20_
Yield:
%
$ % Term 2011 Series A Bond due August 1, 20_
Yield:
%
CITY OF VERNON
Electric System Revenue Bonds
Taxable 2011 Series B
$ Serial Taxable 2011 Series B Bonds
Maturity Date Principal Interest
(August 1) Amount Rate Yield
$ % Term Taxable 2011 Series B Bond due August 1, 20_ Yield: %
15
EXHIBIT A
[Letterhead of Orrick, Herrington & Sutcliffe LLP]
[Closing Date]
E.J. De La Rosa & Co., Inc.
San Francisco, CA
Re: $ City of Vernon Electric System Revenue Bonds, 2011 Series A
$ City of Vernon Electric System Revenue Bonds, 2011 Series B
(Supplemental Opinion)
Ladies and Gentlemen:
This letter is addressed to you, as Underwriter, pursuant to Section 6(d)(6) of the
Contract of Purchase, dated December _, 2011 (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, 2011 Series A and $ Electric System Revenue Bonds,
2011 Series B (collectively, the "Bonds"). The Bonds are being 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 December 1, 2011 (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 December _, 2011,
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 extent we 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
matters represented, warranted or certified in the documents, and of the legal conclusions contained
in the opinions, referred to in the third paragraph hereof. We have further assumed compliance with
A-1
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 in 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:
1. 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. The Contract of Purchase and the Continuing Disclosure Agreement have
each been duly authorized, executed and 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 2011 BONDS," "SECURITY AND SOURCES OF PAYMENT," 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 of any of the
statements contained in the Official Statement and make no representation that we have
independently verified the accuracy, completeness or fairness of any such statements. 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
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 caused us to believe that the Official Statement
A-2
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 underwriter of the Bonds, is
solely for your benefit as such Underwriter and is not to be used, circulated, quoted or otherwise
referred to or relied upon for any other purpose or by any other person. This letter is not intended to,
and may not, be relied upon by owners of the Bonds or by any other party to whom it is not
specifically addressed.
Very truly yours,
ORRICK, HERRINGTON & SUTCLIFFE LLP
A-3
EXHIBIT B
FORM OF OPINION OF CITY ATTORNEY
[Closing Date]
E.J. De La Rosa & Co., Inc.
San Francisco, CA
Re: $ City of Vernon Electric System Revenue Bonds, 2011 Series A
$ City of Vernon Electric System Revenue Bonds, 2011 Series B
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, 2011 Series A and $ Electric System Revenue Bonds, 2011 Series B
(collectively, 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 Third
Supplemental Indenture of Trust providing for the issuance of the Bonds dated as of December 1,
2011 (the "Indenture"), by and between the City and The Bank of New York Mellon Trust Company,
N.A., as trustee (the "Frustee"), (b) the Continuing Disclosure Agreement, dated as of December 1,
2011 (the "Continuing Disclosure Agreement"), between the City and the Trustee; and (c) the
Contract of Purchase, dated December—, 2011 with respect to the Bonds (the "Purchase Contract"),
between the City and the Underwriter; (iii) an Official Statement of the City, dated December _,
2011 (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 its charter 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
respective terms, except, in each case, as enforceability may be limited by laws relating to
C-1
bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by
the application of equitable principles if equitable remedies are sought.
4. No approval, consent or authorization of any governmental or public agency,
authority or person is required for the execution and delivery by the City of the Legal Documents or
the performance by the City of its obligations thereunder or the execution and delivery, on the part of
the City, of the Bonds. Under the laws of the State of California, the City has the authority to
determine, fix, impose and collect rates and charges for electric service and is not presently subject to
the regulatory jurisdiction of any state, regional or local governmental regulatory authority other than
to the extent described in the Official Statement.
5. The execution and delivery of the Legal Documents by the City and compliance with
the provisions thereof will not conflict with or constitute a breach of or default under any instrument
relating to the organization, existence or operation of the City, or commitment, agreement or other
instrument to which the City is a party or by which it or its property is bound or affected, or any
ruling, regulation, ordinance, judgment, order or decree to which the City or any of its officers in
their respective capacities as such are subject or any provision of the laws of the State of California
relating to the City and its affairs.
6. There is no action, suit, proceeding, inquiry or investigation at law or in equity, or
before any court, public board or body, pending or, to the best of my knowledge, threatened against
or affecting the City or any entity affiliated with the City or any of its officers in their respective
capacities as such (nor to the best of my knowledge, is there any basis therefor) that questions the
powers of the City referred to in paragraph 2 above or in connection with the transactions
contemplated by the Official Statement, or the validity of the proceedings taken by the City in
connection with the authorization, execution or delivery of the Legal Documents, or wherein any
unfavorable decision, ruling or finding would adversely affect the transactions contemplated by the
Legal Documents or the Official Statement, or that, in any way, would adversely affect the validity or
enforceability of the Legal Documents or, in any material respect, the ability of the City to perform
its obligations under the Legal Documents.
Capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto
in the Purchase Contract.
Respectfully submitted,
C-2
EXHIBIT C
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PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER 2011
NEW ISSUE —FULL BOOK -ENTRY ONLY
RATINGS: Moody's:
S&P: _
(See "RATINGS" herein)
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
compliance with certain covenants, interest on the 2011 Series A Bonds is excluded from gross income for federal income tax
purposes under Section 103 of the Internal Revenue Code of 1986. In the further opinion of Bond Counsel, interest on the 2011
Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes,
although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate
alternative minimum taxable income. Bond Counsel is also of the opinion that interest on the 2011 Bonds is exempt from State
of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences related to the
ownership or disposition of, or the accrual or receipt ofinterest on, the 2011 Bonds. See "TAXMATTERS" herein.
CITY OF VERNON
Electric System Revenue Bonds
2011 Series A
Dated: Date of Delivery
x
CITY OF VERNON
Electric System Revenue Bonds
2011 Taxable Series B
Due: August 1, as shown on the Inside Cover
This cover page contains certain information for general reference only. It is not intended to be a summary of the
security or terms of this issue. Investors must read the entire Official Statement to obtain information essential to the making
of an informed investment decision. Capitalized terms used on this coverpage not otherwise defined shall have the meanings,
set forth in APPENDIX B attached hereto.
The City of Vernon Electric System Revenue Bonds, 2011 Series A (the "2011 Series A Bonds") and the City of
Vemon Electric System Revenue Bonds, 2011 Taxable Series B (the "2011 Series B Bonds" and, together with the 2011 Series
A Bonds, the "2011 Bonds") are being issued by the City of Vernon, California (the "City") pursuant to the City's Municipal
Facilities Revenue 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 a Third Supplemental Indenture of Trust, dated as of December 1, 2011.
The 2011 Series A Bonds are being issued to provide funds (i) to pay a portion of the Costs of certain Capital
Improvements to the City's Electric System, as further described herein; (ii) to provide for capitalized interest on the 2011 Series
A Bonds, and (iii) to pay costs of issuance of the 2011 Series A Bonds. The 2011 Series B Bonds are being issued to provide
funds (i) to refund certain Outstanding obligations payable from the City's Electric System Revenues; (ii) to pay a portion of the
Costs of certain Capital Improvements to the City's Electric System, as further described herein; and (iii) to pay costs of issuance
of the 2011 Series B Bonds. See "PLAN OF FINANCE" and "ESTIMATED SOURCES AND USES OF FUNDS" herein.
The 2011 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
is the securities depository for the 2011 Bonds, principal of, premium, if any, and interest on the 2011 Bonds will be payable by
the Trustee to DTC, which is obligated in turn to remit such payments to its DTC participants for subsequent disbursement to
beneficial owners of the 2011 Bonds, as more fully described herein. See APPENDIX C—"Book-Entry Only System."
The 2011 Bonds are subject to optional and mandatory redemption prior to maturity, as described herein.
Interest on the 2011 Bonds will be payable on each February 1 and August 1, commencing August 1, 2012.
MATURITY SCHEDULE
(See Inside Cover)
The 2011 Bonds will be special obligations of the City. The principal and Redemption Price of and interest on the 2011
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. See "SECURITY AND SOURCES OF PAYMENT."
The issuance of the 2011 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 2011 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 2011 Bonds. The 2011 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 2011 Bonds are offered, when, as and if issued and delivered to the Underwriter, subject to the approval of legality
by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Bond Counsel, and certain other conditions. Certain legal
matters will be passed upon for the City by the City Attorney and for the Underwriter by Stradling Yocca Carlson & Rauth, a
Professional Corporation, as counsel to the Underwriter. It is expected that the 2011 Bonds will be available for delivery through
the DTC's book -entry system in New York, New York on or about December , 2011.
De La Rosa & Co.
Dated: 2011
' Preliminary; subject to change.
MATURITY SCHEDULE
CITY OF VERNON
Electric System Revenue Bonds
2011 Series A
$ Serial 2011 Series A Bonds
Maturity Date Principal Interest
(August 1) Amount Rate Yield CUSIP No. t
$ % Term 2011 Series A Bond due August 1, 20_
Yield: % CUSIP No.:
$ % Term 2011 Series A Bond due August 1, 20
Yield: % CUSIP No.:
CITY OF VERNON
Electric System Revenue Bonds
Taxable 2011 Series B
$ Serial Taxable 2011 Series B Bonds
Maturity Date Principal Interest
(August 1) Amount Rate Yield CUSIP No!
Preliminary; subject to change
t CUSIP Copyright 2011, 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.
Term Taxable 2011 Series B Bond due August 1, 20
Yield: % CUSIP No.:
No dealer, broker, salesperson or other person has been authorized by the City or the Underwriter to give
any information or to make any representations other than those contained herein and, if given or made, such other
information or representation must not be relied upon as having been authorized by any of the foregoing. This
Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale
of the 2011 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 famished by the City and by other sources that are believed to be
reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the
Underwriter. The information and expressions of opinions herein are subject to change without notice, and neither
the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any
implication that there has been no change in the affairs of the City since the date hereof. This Official Statement,
including any supplement or amendment hereto, is intended to be deposited with one or more repositories.
The Underwriter has provided the following sentence for inclusion in this Official Statement: The
Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their
responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this
transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.
IN CONNECTION WITH THE OFFERING OF THE 2011 BONDS, THE UNDERWRITER MAY
OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET
PRICE OF THE 2011 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 2011 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,"
"ELECTRIC SYSTEM FINANCIAL INFORMATION — Projected Operating Results and Debt Service Coverage,"
"FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY" 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.
17011V&4) &V W7 ISM
City Council
[Hilario Gonzales, Mayor]
William J. Davis, Mayor Pro Tem
W. Michael McCormick, Councilmember
Richard J. Maisano, Councilmember
Daniel D. Newmire, Councilmember
City Officers
Mark C. Whitworth, City Administrator
Carlos Fandino, Director of Light and Power and Gas Departments
Willard G. Yamaguchi, City Clerk and ChiefDepuly City Attorney
Rory Burnett, Director of Finance and City Treasurer
Dan Bergmann, Gas Department Manager
Samuel Kevin Wilson, Director of Community Services and Water
Lewis Pozzebon, Director of Environmental Health
Daniel Calleros, Interim Police Chief
Mark C. Whitworth, Fire Chief
Martha Valenzuela, Director of Personnel
Light and Power Department Executive Management
Carlos Fandino, Director of Light and Power and Gas Departments
and Transmission and Distribution Manager
Abraham Alemu, Electric Resources Planning and Development Manager
Ali Nourmohamadian, Engineering Manager
SPECIAL SERVICES
Orrick, Herrington & Sutcliffe LLP
Los Angeles, California
Bond Counsel
BLX Group 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
TABLE OF CONTENTS
Page
INTRODUCTION.........................................:.....................................................................................................
I
Purposeof Official Statement................................................................................................................
I
Authority................................................................................................................................................
I
Useof Proceeds......................................................................................................................................1
TheCity.................................................................................................................................................
l
TheElectric System...............................................................................................................................2
Security and Sources of Payment...........................................................................................................2
DebtService Reserve Fund....................................................................................................................2
ContinuingDisclosure............................................................................................................................2
RecentEvents Regarding the City.........................................................................................................
3
OtherMatters.........................................................................................................................................3
PLANOF FINANCE..........................................................................................................................................
3
2011 Series A Bonds..............................................................................................................................3
2011 Series B Bonds..............................................................................................................................3
ESTIMATED SOURCES AND USES OF FUNDS...........................................................................................4
DEBTSERVICE SCHEDULE...........................................................................................................................5
THE2011 BONDS..............................................................................................................................................6
General..................................................................................................................................................
6
Redemptionof 2011 Bonds....................................................................................................................6
SECURITY AND SOURCES OF PAYMENT...................................................................................................8
PledgeEffected by the htdenture...........................................................................................................
8
Deposit and Application of Revenues....................................................................................................9
Payments to Trustee for Bonds............................................................................................................10
RateCovenant......................................................................................................................................
I I
DebtService Reserve Fund.....................................................................................................:............
I I
ExpenseStabilization Fund..................................................................................................................12
Outstanding Electric System Obligations............................................................................................12
Additional Parity Obligations..............................................................................................................12
Transfersto General Fund....................................................................................................................13
Limitationson Remedies.....................................................................................................................13
RECENT EVENTS REGARDING THE CITY................................................................................................14
Recent Convictions of Former City Officials......................................................................................14
Failed Legislation to Disincorporate City ............................................................................................14
i
Auditsand Investigations.....................................................................................................................14
CityReform.........................................................................................................................................16
FutureEvents.......................................................................................................................................17
ELECTRIC SYSTEM OBLIGATIONS............................................................................................................17
General................................................................................................................................................17
Power Sales Contract with SCPPA for PVNGS..................................................................................17
GasSupply Agreements.......................................................................................................................17
Interest Rate Swap Transactions..........................................................................................................18
THEELECTRIC SYSTEM...............................................................................................................................19
General................................................................................................................................................19
ServiceArea.........................................................................................................................................19
City Plan to Optimize Resource Utilization.........................................................................................20
Implementation of Resource Optimization Plan ..................................................................................20
Management.........................................................................................................................................
21
PowerSupply Resources......................................................................................................................22
Interconnection and Distribution Facilities..........................................................................................31
Developments Affecting the Power Supply.........................................................................................31
CapitalRequirements...........................................................................................................................32
LargestCustomers...............................................................................................................................33
RateRegulation....................................................................................................................................33
ElectricRates.......................................................................................................................................34
EmployeeRelations.............................................................................................................................37
Insurance..............................................................................................................................................37
Investment Policy and Controls...........................................................................................................38
SeismicActivity...................................................................................................................................38
ELECTRIC SYSTEM FINANCIAL INFORMATION....................................................................................39
RetailEnergy Sales..............................................................................................................................39
Summary of Operating Results............................................................................................................39
Management's Discussion of Operating Results.................................................................................41
Projected Operating Results and Debt Service Coverage....................................................................41
FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY................................................................44
California Climate Change Policy Developments...............................................................................44
EnergyEfficiency Initiatives...............................................................................................................48
Environmental and Regulatory Factors................................................................................................48
Developments in the California Energy Market..................................................................................53
Future Regulation of the Electric Utility Industry ...............................................................................54
ii
EnergyPolicy Act of1992...................................................................................................................54
EnergyPolicy Act of 2005...................................................................................................................54
Currently Proposed Federal Legislation...............................................................................................55
Impact of Developments on the City ...................................................................................................56
Other General Factors..........................................................................................................................56
CONSTITUTIONAL LIMITATIONS ON TAXES.........................................................................................57
Articles XIIIC and XIIID of the State Constitution.............................................................................57
FutureInitiatives..................................................................................................................................58
LITIGATION....................................................................................................................................................58
TAXMATTERS...............................................................................................................................................58
2011 Series A Bonds............................................................................................................................58
2011 Series B Bonds.......................................................................:....................................................60
Circular230.........................................................................................................................................
62
APPROVAL OF LEGALITY...........................................................................................................................62
RATINGS..........................................................................................................................................................
62
UNDERWRITING............................................................................................................................................
63
VERIFICATION REPORT...............................................................................................................................63
FINANCIAL STATEMENTS...........................................................................................................................63
CONTINUINGDISCLOSURE.........................................................................................................................63
MISCELLANEOUS..........................................................................................................................................
64
APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE ELECTRIC SYSTEM FOR THE
FISCAL YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2010.....................................
.......... A--1
APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ..........................................
B-1
APPENDIXC BOOK -ENTRY ONLY SYSTEM...............................................................................................
C-1
APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL........................................................D-1
APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT.......................................................
E-1
iii
OFFICIAL STATEMENT
CITY OF VERNON CITY OF VERNON
Electric System Revenue Bonds Electric System Revenue Bonds
2011 Series A 2011 Taxable Series B
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 2011 Bonds to potential investors is made only
by means of the entire Official Statement. All capitalized terms used in this Official Statement and not otherwise
defined herein have the meanings set forth in the Indenture. See APPENDIXB — "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
$ Electric System Revenue Bonds, 2011 Series A (the "2011 Series A Bonds") and its $
Electric System Revenue Bonds, 2011 Taxable Series B (the "2011 Series B Bonds" and, together with the 2011
Series A Bonds, the "2011 Bonds").
Authority
The 2011 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 Third Supplemental Indenture of Trust, dated as of
December 1, 2011.
Use of Proceeds
The 2011 Series A Bonds are being issued to provide funds (i) to pay a portion of the Costs of certain
Capital Improvements to the City's Electric System, as further described herein; (ii) to provide for capitalized
interest on the 2011 Series A Bonds; and (iii) to pay costs of issuance of the 2011 Series A Bonds. The 2011 Series
B Bonds are being issued to provide funds (i) to refund the Refunded 2009 Bonds (as defined herein); (ii) to pay a
portion of the Costs of certain Capital Improvements to the City's Electric System, as further described herein; and
(iii) to pay costs of issuance of the 2011 Series B 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 1,200 companies doing business in
the City employing more than 50,000 persons. The City is almost exclusively industrial, with an industrial space
occupancy rate of over 96% as of 1, 2011. The City had an estimated resident population of
approximately [110] as of 1, 2011.
The City's services are tailored to the industrial needs of the community. These include a Class 1 rated fire
department, a police department with over [60] sworn officers to provide high level security and a quick response
Preliminary; subject to change.
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, 2011, the Electric System provided
approximately 1,137.5 million kilowatt hours CTWhs") of electricity to 1,893 customers, based on the number of
meters. Almost all of the Electric System's customers are industrial entities. See "THE ELECTRIC SYSTEM"
herein.
Security and Sources of Payment
The 2011 Bonds are special obligations of the City. The principal and Redemption Price of and interest on
the 2011 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 2011 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 2011 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 2011 Bonds. The 2011 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 currently remains outstanding $43,215,000 aggregate principal amount of
Electric System Revenue Bonds, 2008 Taxable Series A (the "2008 Bonds") under the Indenture and $360,745,000
aggregate principal amount of Electric System Revenue Bonds, 2009 Series A (the "2009 Bonds"), which
outstanding principal amount includes the $28,680,000 aggregate principal amount of 2009 Bonds maturing on
August 1, 2012 (the "Refunded 2009 Bonds"). The Indenture permits the issuance of Additional Bonds and
Refunding Bonds in addition to the 2008 Bonds, the 2009 Bonds and the 2011 Bonds (the 2008 Bonds, the 2009
Bonds, the 2011 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 and ratably
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 2011 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 2011 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. See "CONTINUING
DISCLOSURE" herein.
Recent Events Regarding the City
Three City officials have been convicted of crimes in the last twenty-four months involving City matters.
The City has also recently been the subject of certain investigations and legislative proposals, including an attempt
to disincorporate the City and to transfer the Electric System to a special district governed by the Board of
Supervisors of Los Angeles County. Though the disincorporation bill was defeated, the City is currently
implementing various reform measures and the City is under ongoing audits, including an audit by the Internal
Revenue Service (the "IRS") and the Bureau of State Audits. For more information, see "RECENT EVENTS
REGARDING THE CITY" herein.
Other Matters
The summaries of and references to all documents, statutes, reports and other instruments referred to herein
do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its
entirety by reference to each document, statute, report or instrument. The capitalization of any word not
conventionally capitalized or otherwise defined herein indicates that such word is defined in a particular agreement
or other document and, as used herein, has the meaning given to it in such agreement or document.
Attached to this Official Statement are summaries of certain provisions of the Indenture. Copies of the
Indenture are available for inspection at the offices of the Trustee, and copies of the Indenture will be provided by
the Trustee upon request and payment of costs.
PLAN OF FINANCE
2011 Series A Bonds
The proceeds of the 2011 Series A Bonds will be applied (i) to pay a portion of the Costs of certain Capital
Improvements to the City's Electric System, included in the 2011 Project (as defined below), which Costs were
incurred (or are to be incurred) on and after September . 2011; (ii) to provide for capitalized interest on the 2011
Series A Bonds through August 1, 2013; and (iii) to pay costs of issuance of the 2011 Series A Bonds. See
"ESTIMATED SOURCES AND USES OF FUNDS."
The "2011 Project" means the following Capital Improvements to the City's Electric System: (i) upgrades
to the distribution facilities of the Electric System consisting primarily of the conversion of such facilities from a 7
kV capability to a 16 kV capability; (ii) the undergrounding of distribution facilities; (iii) improvements to and
expansion of existing substations; and (iv) street and other improvements in connection with each of the foregoing.
2011 Series B Bonds
The proceeds of the 2011 Series H Bonds will be applied (i) to refund the $28,680,000 aggregate principal
amount of 2009 Bonds maturing on August 1, 2012; (ii) to pay a portion of the Costs of the 2011 Project; and (iii) to
pay costs of issuance of the 2011 Series B Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS."
Certain of the proceeds of the 2011 Bonds will be deposited into an escrow fund (the "Escrow Fund") and
applied[, together with other available funds,] to the payment of accrued interest on the Refunded 2009 Bonds due
on February 1, 2012 and August 1, 2012, and to the payment of the principal of the Refunded 2009 Bonds at their
maturity on August 1, 2012, all in accordance with the Escrow Agreement, dated as of December 1, 2011 (the
"Escrow Agreement"), by and between the City and The Bank of New York Mellon Trust Company, N.A., as
trustee of the 2009 Bonds. Upon deposit of such proceeds in the Escrow Fund in accordance with the Escrow
Agreement, the Refunded Bonds will no longer be deemed Outstanding under the Indenture. The refunding of the
Refunded 2009 Bonds is being undertaken to modify the Electric System's cash flow requirements.
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 principal of and interest on the Refunded 2009
Bonds with amounts in the Escrow Fund will be verified by Grant Thornton LLP. See "VERIFICATION
REPORT."
ESTIMATED SOURCES AND USES OF FUNDS
The estimated sources and uses of funds with respect to the 2011 Bonds as described under "PLAN OF
FINANCE" are set forth below.
SOURCES:
Principal amount of 2011 Bonds
Net Original Issue [Premium/Discount]
TOTAL SOURCES:
USES:
Deposit to Escrow Fund to
Deposit to 2011 Capital Improvement Fund (2)
Deposit to 2011 Capitalized Interest Fund Irl
Underwriter's Discount
Deposit to 2011 Costs of Issuance Fund I4)
TOTAL USES:
2011 Series A 2011 Series B
Bonds Bonds Total
t�l To pay principal and interest, when due, on the Refunded 2009 Bonds.
(Z) To pay for the Costs of the 2011 Project.
(3> To provide for capitalized interest on the 2011 Series A Bonds through August 1, 2013.
(4) Includes 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 respective Series of the 2011 Bonds.
DEBT SERVICE SCHEDULE
The following table shows the debt service schedule for the City's outstanding Bonds upon the issuance of
the 2011 Bonds, and reflects the refunding of the Refunded 2009 Bonds.
Fiscal Year
Debt Service on
Ended
Outstanding
June 30,
Bonds(l)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
TOTAL:
2011 Series A Bonds
Principal I.nterest
2011 Series B Bonds
Principal Interest
tq Consisting of the 2008 Bonds and the 2009 Bonds (excluding the Refunded 2009 Bonds).
Total Debt
Service
5
THE 2011 BONDS
The following is a summary of certain provisions of the 2011 Bonds. Reference is made to the 2011 Bonds
for the complete text thereof and to the Indenture for a more detailed description of such provisions. The discussion
herein is qualified by such reference. See APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE
INDENTURE."
General
The 2011 Bonds will be issued in the aggregate 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 2011 Bonds
will be issued in denominations of $5,000 or any integral multiple thereof. The 2011 Bonds will be dated and shall
bear interest from their date of original issuance. Interest on the 2011 Bonds will be payable on each February 1 and
August 1, commencing August 1, 2012. The 2011 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 2011 Bonds are held in the book -entry system, DTC or its nominee will be the registered owner of the 2011
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 2011 Bonds are held in book -
entry form through DTC, all payments with respect to principal of, premium, if any, and interest on each 2011 Bond
will be made pursuant to DTC's rules and procedures. See APPENDIX C — "BOOK -ENTRY ONLY SYSTEM."
Redemption of 2011 Bonds
Optional Redemption! [The 2011 Series A 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 2011 Series A Bonds to be
redeemed, without premium, plus accrued, unpaid interest to the redemption date.]
[The 2011 Series B 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 [TO BE DETERMINED].]
Mandatory Sinking Fund Redemption.* [The 2011 Series A Bonds maturing on August 1, _ are
subject to mandatory redemption in part prior to their stated maturity date from mandatory sinking fund payments on
each August 1 on or after August 1, , at a Redemption Price equal to the principal amount of the 2011 Series A
Bonds of such maturity to be redeemed, without premium, in the amounts and on the dates set forth below:]
Preliminary; subject to change.
Sinking Fund
Redemption Date
Au ust 1
t Maturity
Principal Amount
to be
Redeemed
[The 2011 Series B Bonds maturing on August 1, _ are subject to mandatory redemption in part prior
to their stated maturity date from mandatory sinking fund payments on each August 1 on or after August 1, , at
a Redemption Price equal to the principal amount of the 2011 Series B Bonds of such maturity to be redeemed,
without premium, in the amounts and on the dates set forth below:]
Sinking Fund
Redemption Date
(August 1
t Maturity
Principal Amount
to be
Redeemed
Notice of Redemption. The Trustee is to give notice of the redemption of any 2011 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 2011 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 date of the 2011 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 2011 Bonds
of any like Series and maturity are to be redeemed, the letters and numbers or other distinguishing marks of such
2011 Bonds so to be redeemed, and, in the case of 2011 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 2011 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 2011 Bonds is given, such
notice shall state that such redemption is conditioned 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 2011 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 2011 Bonds. In the event a notice of redemption of 2011 Bonds contains such a condition
and such moneys are not so received, the redemption of 2011 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 2011 Bonds pursuant to the conditional notice
of redemption.
Receipt of notice of redemption shall not be a condition precedent to the redemption of 2011 Bonds and
failure of any Owner of a 2011 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 2011 Bonds.
Effect of Redemption. Notice of redemption having been given, and as to redemptions at the option of the
City, moneys for the payment of the Redemption Price being held by the Trustee, the 2011 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 2011 Bonds to be redeemed will cease to accrue, such
2011 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 2011 Bonds.
Selection of 2011 Bonds to be Redeemed. The City shall select the principal amount of each Series and
maturity of the 2011 Bonds to be redeemed at the option of the City. Whenever less than all of the 2011 Bonds of a
Series and maturity are to be redeemed, the Trustee shall select at random the 2011 Bonds of such Series and
maturity to be redeemed from all 2011 Bonds of such Series and 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 2011 Bonds are special obligations of the City. The principal and Redemption Price of and interest on
the 2011 Bonds are payable solely from the Net Revenues, 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.
The payment of the principal and Redemption Price of and interest on the 2011 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 2011 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 2011 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 is currently
outstanding $43,215,000 aggregate principal amount of 2008 Bonds under the Indenture and $360,745,000
aggregate principal amount of 2009 Bonds (including the Refunded 2009 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; 0) any cost or expense paid by the City to comply with requirements of law applicable to the
Electric System or the City's ownership or operation thereof or in any capacity with respect thereto or any activity in
connection therewith, including without limitation the public benefit uses required by Section 385 of the California
Public Utilities Code; and (k) any other costs or expense which, in accordance with Generally Accepted Accounting
Principles, is to be treated as a cost of operating or maintaining the Electric System; but excluding in all cases
depreciation, replacement and obsolescence charges or reserves therefor, 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 other evidences of indebtedness, installment purchase payments under any contract, and
lease payments under any financing or capital lease (determined to be such in accordance with Generally Accepted
Accounting Principles), which are payable from the Net Revenues 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 and 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 2011 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 2011 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 2011 Bonds. The 2011
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 2011 Bonds or in respect of any
undertakings by the City tinder 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 then 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:
(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 upcoming principal 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 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 payment pursuant 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; and
(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 Obligations ratably (based on the
respective amounts to be paid), without any discrimination or preferences.
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. In the event that on
any date all payments required to be made pursuant to the preceding paragraphs (a) through (h) are not made in full,
then no payment shall be made which has a priority 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.
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"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. No deposit will be made to the Debt Service Reserve Fund from the proceeds of the 2011
Bonds as there are sufficient amounts on deposit in the Debt Service Reserve Fund as of the date hereof to satisfy
the Debt Service Reserve Requirement for the Bonds, including the 2011 Bonds. Amounts in the Debt Service
Reserve Fund are to be used to pay principal and Redemption Price of and interest on the Bonds then due and
payable in the event of any insufficiency in the amount 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 such policy or surety bond or letter of credit in the highest rating category (without regard to
qualifiers) by S&P and Moody's and, if rated by A.M. Best & Company, also in the highest rating category (without
regard to qualifiers) by A.M. Best & Company.
Expense Stabilization Fund
Moneys may be deposited in the Expense Stabilization Fund held by the Trustee in such amounts, at such
times and from such sources as shall be determined by the City in its sole discretion. Moneys on deposit in the
Expense Stabilization Fund may be withdrawn by the City at any time no Event of Default exists under the
Indenture and applied to any lawful purpose in connection with the Electric System, including without limitation,
payment of Operation and Maintenance Expenses, payment of Debt Service on the 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. [As of November 1, 2011, [no amounts] were on deposit in the Expense Stabilization Fund. — TO
UPDATE]
Outstanding Electric System Obligations
Upon the issuance of the 2011 Bonds, the 2008 Bonds, the 2009 Bonds, the 2011 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 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: (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
12
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: (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
(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 fast 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
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 immediately prior 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.
The 2011 Bonds are authorized to be issued in accordance with paragraph (b) above.
See APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" for the
definition of certain terns 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
13
occurred and is continuing under the Indenture, the City shall not transfer any Net Transferable Income to the City's
General Fund.
"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; provided that, commencing with the Fiscal Year ended June 30, 2013, the
Net Transferable Income for any Fiscal Year shall not exceed 11.5% of the retail sales for such Fiscal Year less the
amount paid pursuant to clause (d) of the definition of Operation and Maintenance Expenses and less the amount, if
any, paid to the City as a Franchise Payment.
For the definition of "Net Revenues" and "Operation and Maintenance Expenses," see "— Pledge Effected
by the Indenture" above.
"Debt Service" means, for any period of time, the sum of (a) the interest payable during such period on all
Outstanding Parity Obligations, assuming that all Outstanding Serial Parity Obligations are retired as scheduled and
that all Outstanding Term Parity Obligations are redeemed or paid from Sinking Fund Installments as scheduled, (b)
that portion of the principal amount of all Outstanding Serial Parity Obligations maturing on each principal payment
date during such period, including the Final Compounded Amount of any Capital Appreciation Obligations 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).
Limitations on Remedies
The rights of the Owners of the 2011 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 2011 Bonds, and the
obligations incurred by the City, may become subject to the following: the Federal Bankruptcy Code and applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of
creditor's rights generally, now or hereafter in effect; equity principles which may limit the specific enforcement
under State law of certain remedies; the exercise by the United States of America of the powers delegated to it by
the Constitution; and the reasonable and necessary exercise, in appropriate situations, of the police powers inherent
in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate
public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or State government, if initiated,
could subject the Owners of the 2011 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.
RECENT EVENTS REGARDING THE CITY
Recent Convictions of Former City Officials
In the last twenty-four months, three of the City's former senior officials have been convicted of crimes
relating to City activities. Leonis Malbuug, the former mayor of the City for 50 years, was convicted of voter fraud
and conspiracy in December 2009 for falsely claiming to have established residency in the City and was ordered to
pay more than $500,000 in fines. Mr. Malburg resigned from his position as mayor of the City in July 2009.
Bruce Malkenhorst Sr., the former City Administrator of the City, plead guilty in May 2011 to charges of
misappropriating $60,000 in public funds and using the money for political contributions and various personal
expenses. Mr. Malkenhorst was sentenced to three years of probation and ordered to re -pay the City the $60,000
and to pay $10,000 in fines. Mr. Malkenhorst retired from his position as City Administrator in 2005.
Donal O'Callaghan, also a former City Administrator of the City as well as Director of the Light and Power
Department, plead guilty in July 2011 to felony conflict -of -interest charges relating to the hiring of his wife as a
clerical contractor. Mr. O'Callaghan was sentenced to 200 hours of community service and one year of probation.
Mr. O'Callaghan resigned from all his positions at the City in October 2010.
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Failed Legislation to Disincorporate City
In 2010, AB 46, an act to disincorpomte the City and make it part of the unincorporated territory of Los
Angeles County, was introduced into the State Assembly. AB 46 states it was motivated by a desire to eliminate
corrupt practices by City officials, including misuse of public funds and excessive salaries. See '— Recent
Convictions of Former City Officials" above. None of the persons accused of criminal activity continue as City
officials or employees and City salaries have been adjusted to a level the City believes more closely reflects salaries
for comparable positions in other California cities. A companion bill, AB 781 was also introduced which, among
other things, would have transferred the Electric System to a special district governed by the Board of Supervisors of
Los Angeles County. The enactment of AB 781 was dependent on the enactment of AB 46. The City took the
position that AB 46 violated the provisions of the California Constitution providing that a vote of the City electorate
was necessary to repeal a California city charter.
Both bills were opposed by residents and businesses within the City as well as labor unions representing
workers within the City. Both bills were passed by the State Assembly. In the Senate, Senator De Leon, who
represents the senatorial district in which the City is located and was an original sponsor of AB 46, developed a list
of reforms which the City could commit to undertake for Senator De Leon and other Senators to cease their support
for AB 46. See' — City Reform" below. The City Council agreed to the reforms and neither AB 46 nor AB 781 was
approved by the Senate. As a result, neither bill became law. The City Council placed before the electorate in
November 2011 a series of Charter amendments to implement the reform program all of which were approved by
the voters. The Charter amendments are now in effect and the City is in the process of implementing the reforms.
There can be no assurances that there will not be any additional attempts to disincorporate the City or to require
additional reforms in the future.
Audits and Investigations
The City has recently been and continues to be the subject of several investigations and audits by
overseeing public bodies, such as the Attorney General for the State of California and the Internal Revenue Service
(the "IRS"). The City believes all investigations by public bodies of its policies and practices have been completed.
The City plans to continue cooperating with the ongoing audits of its finances. The recent and/or ongoing
investigations and audits include:
Attorney General Investigation: On September 15, 2010, the Office of the Attorney General for the State of
California began an investigation of the compensation paid by the City to various individuals, including those who
may have acted in the capacity of officials, officers and/or employees of the City. The City believes it fully
cooperated with the Office of the Attorney General and [that this investigation has since ceased. — TO UPDATE]
CaIPERS Audit: On December 6, 2010, the California Public Employees' Retirement System ("CalPERS")
Office of Audit Services began an audit of the City's membership enrollment procedures, including how
compensation is reported to CaIPERS, to ensure that the City's practices and procedures are in compliance with
applicable State law and regulation. The City fully cooperated with the Ca1PERS, Office of Audit Services and
provided for review employment contracts, rules and regulations, salary and wage agreements, board minutes, salary
and benefit agreements, current employee roster listing of all CaIPERS employees, personnel files, payroll journals
and other personnel and payroll records, copies of audits and management letters and other requested documents.
The City believes CalPERS completed its review of the City's procedures and practices and the City is now waiting
for Ca1PERS to complete its audit report.
IRS Audit of 2009 Bonds: On August 23, 2011, the City published a material event notice regarding an
audit by the IRS of the 2009 Bonds. The notice stated in relevant part: "By letter dated August 10, 2011, the City
was notified by the Internal Revenue Service (the "IRS") that the [2009] Bonds have been selected for an
examination to determine compliance with Federal tax requirements. According to the IRS letter, the [2009] Bonds
were `selected for examination because of information we [i.e., the IRS] received from external sources or
developed internally that causes a concern that the debt issuance may fail one or more provisions of section 103,
141-150 of the Internal Revenue Code.['] The City believes that the [20091 Bonds complied with all applicable
provisions of the Internal Revenue Code and the City will cooperate with the IRS in its examination of the [20091
Bonds. The City is continuing to cooperate with the IRS in its examination of the [2009] Bonds."
15
The City continues to believe the 2009 Bonds are in compliance with all federal tax requirements and is
cooperating with the IRS in its examination. The City cannot predict when the IRS will complete its examination of
the 2009 Bonds.
Bureau of State Audits: A week after AB 46 was rejected by the State Senate, the State Legislature
approved an audit of the City to examine the City's finances and conduct over the last five to seven years as well as
the City's ongoing reforms. See "— City Reform" below. The Bureau of State Audits indicated that the audit will,
among other things (i) review and evaluate certain of the laws, rules and regulations of the City and its Light and
Power Department; (ii) review the existing City Charter, including the ongoing reforms, to determine if it complies
with applicable laws and promotes sound operational business practices; (iii) describe the current governance
structure of the City and its Light and Power Department, including the roles, responsibilities and authority of
elected official, employees, contractors and consultants with key governance or operational roles; (iv) in regards to
both the City and its Light and Power Department, examine the operational structure, review the current
compensation for high level staff, elected officials and consultants, identify and trend the major revenue sources and
expenditures, review contract bidding, approval and monitoring policies and procedures, and review the most recent
five-year period and select and review a sample of contracts from such period, including professional services
contracts; (v) identify the number and value of bonds issued by the City for the most recent seven-year period and
determine, among other things, the purpose of each bond issue, whether bond proceeds were used appropriately and
if the bonds were well-defined and properly approved, and the status of debt service and its impact on the City's
finances and operations; (vi) in regards to the City's Light and Power Department, review the services provided in
the last five years, and identify the number and value of bonds issued for the most recent five-year period and to
determine, among other things, the purpose of each bond issue, whether bond proceeds were used appropriately and
if the bonds were Well-defined and properly approved, and the status of debt service and its impact on the finances
and operations of the City's Light and Power Department; and (vii) review and assess any other issues that are
significant to the operations and finances of the City and its Light and Power Department. The City is fully
cooperating with the Bureau of State Audits and expects a report from the Bureau of State Audits in or about April,
2012.
The City cannot predict at this time what effects, if any, the investigation and audits described above will
have on the Electric System or on the 2011 Bonds. The City also cannot provide any assurances that the ongoing
audits, or any future audits or investigations, will not result in any allegations or identifications of impropriety.
City Reform
In connection with the proposed legislation and review of the City discussed above, the City has taken steps
to reform certain policies and practices of the City that have been raised as a matter of concern by the legislatures,
the Attorney General for the State and other such reviewing bodies, and to further improve and make more
transparent the City's policies and practices in general. In addition to already adjusting City salaries to more closely
reflect salaries for comparable positions in other California cities and creating the Housing Commission to manage
City -owned residences (see "— Housing Commission" below), other reform measures, which were approved by City
voters in two different elections in November 2011, include the following:
Councilmember Term Limits: An amendment to the City Charter limiting City councilmembers to two five-
year terms. Terms of office that began before the enactment of the measures would not count towards the two term
limit.
Prevailing Wages: An amendment to the City Charter to require that the City comply with prevailing wage
laws for public work projects. Although the City has supported and complied with State law requiring the payment
of prevailing wages for public works projects, recent litigation has raised questions about whether the State's
prevailing wages provisions apply to charter cities, like the City.
At -Will Employment: An amendment to the City Charter to remove the requirement that City employees be
employed "at -will," which meant that the employer was free to terminate individuals for any reason. The "at -will"
Charter provision prevented the City from adopting alternative employment arrangements such as civil service rules,
which often provide employees with rights to greater job security.
16
City Administrator Terms: An amendment to the City Charter to remove limitations on the ability of the
City Council to remove the City Administrator or to change his or her compensation, including written notice and
public hearing requirements.
Housing Commission: An amendment to the City Charter requiring the City to maintain its recently -
created Housing Commission to provide oversight for the day-to-day management, leasing and maintenance of City -
owned housing. The Housing Commission was originally created in May 2011, and is comprised of a seven -person
commission consisting of both City officials and non -City officials. When the Housing Commission was created, it
was subject to modification or dissolution by City Council vote. With the adoption of this amendment, the City is
now required to maintain the Housing Commission to carry out its current duties.
Independent Reform Monitor: An amendment to the City Charter requiring the City to hire an Independent
Reform Monitor for four years to review City policies and recommend governance reform measures. The
Independent Reform Monitor would have the power to conduct audits of all City operations and budgets, would
have the power to review proposed service contracts, and would be required to report annually to the State
Legislature on the progress of the City's reform efforts. [John Van de Kamp, a former California Attorney General,
is currently serving as the Independent Reform Monitor. — TO UPDATE]
Councilmember Appointments: An amendment to the City Charter to prohibit the City Council from
appointing a councilmember under any circumstances. Formerly, the City Council was permitted to fill
councilmember seats by appointment when there was a vacancy or if less than two people were nominated for an
open position. The approved Charter amendment would require that each councilmember seat be filled through an
election.
Councilmember Compensation: An amendment to the City Charter to prohibit City councilmembers from
increasing their compensation in excess of cost -of -living adjustments under any circumstances.
Light and Power Funds: An amendment to the City Charter to remove a requirement added to the Charter
in August, 2010 that funds from the City's Light and Power be used only to support the City's Light and Power
enterprise. This amendment would not remove any other restrictions on transfers out of the City's Light and Power
fund, including those that are contained in the Indenture. See "SECURITY AND SOURCES OF PAYMENT —
Transfers to General Fund."
Competitive Bidding Process: An amendment to the City Charter to require that the City establish an open
and competitive bidding process for City service contracts by ordinance.
The City believes that these various reform measures will, among other things, impose additional checks
and balances upon the City's officials, officers and employees and provide additional oversight and transparency on
the City's conduct and practices. The City expects that these reform measures will improve and enhance the City's
policies moving forward and address the concerns raised by the State Legislature and reviewing bodies discussed
above.
Future Events
The City cannot provide assurances that there will not be any future attempts to disincorporate the City,
that there will not be any more reviews and audits of the City or that there will not be pressure for additional City
reform. Should any future disincorporation attempts be successful, or should any ongoing or future audits or
investigations result in the identification or allegation of any impropriety, or should the City be required to
implement additional reform of its practices and procedures, the City cannot predict what effects, if any, such events
would have on the City, its Electric System and the 2011 Bonds.
17
ELECTRIC SYSTEM OBLIGATIONS
General
In addition to the 2008 Bonds, the 2009 Bonds and the 2011 Bonds, and the Operation and Maintenance
Expenses of the Electric System, including short-term and long-term power agreements, if any, 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 "THE ELECTRIC SYSTEM — Power Supply Resources — SCPPA Palo Verde Nuclear
Generating Station Interest," [the City has a [4.941% entitlement interest ([11.6] MWs) in the Southern California
Public Power Authority's ("SCPPA") ownership interest in the Palo Verde Nuclear Generating Station ("PVNGS").
— TO UPDATE] 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, pursuant to which 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 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, 2011, SCPPA had $79,440,000 principal amount of bonds outstanding for PVNGS. The
City's share of PVNGS costs under the PVNGS Contract for Fiscal Year ended June 30, 2011 was $3,470,345.
Gas Supply Agreements
Pursuant to the Natural Gas Purchase Agreement, dated as of June 1, 2006 (the "Supply Agreement"),
between the City and the Vernon Natural Gas Financing Authority (the "Authority"), the City has acquired a supply
of prepaid natural gas (the "Gas Supply"). The Gas Supply remaining to be delivered consists of _million
British thermal units ("MMBtus") of gas for Fiscal Year 2012 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 bonds of the Authority
(the "Authority Bonds"), which Authority Bonds were redeemed with proceeds of the 2009 Bonds and other
available funds.
With the redemption of the Authority Bonds, the Supply Agreement, including the City's obligation to
make certain payments pursuant to the Supply Agreement, was terminated. The Purchase Agreement and the receipt
of the Gas Supply under the Purchase Agreement were assigned by the Authority to the City, and the Supplier and
the City are now in privy of contract relating to the delivery of the Gas Supply under the Purchase 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
Tolling Agreement to receive the output of the MGS. As a result of such sale, the City entered into a contract (the
"Sale Contract") for the sale to the Sacramento Municipal Utility District of an amount of gas equal to the gas
remaining to be delivered under the Purchase Agreement less gas to be delivered to City retail gas customers. 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 with the City having an
independent obligation to deliver gas to the Sacramento Municipal Utility District.
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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 to the City. 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, in addition to making
ongoing payments of debt service on the 2009 Bonds. [While such requirement would cause the City to raise
electric rates more than the rates included in the projections under "ELECTRIC SYSTEM FINANCIAL
INFORMATION — 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. — TO
UPDATE]
Interest Rate Swap Transactions
Swap Transactions. In connection with the City's Electric System Revenue Bonds, 2004 Series A, 2004
Series B and 2004 Taxable Series D, all of which are now retired, the City initially entered into three interest rate
swap transactions with Morgan Stanley Capital Services Inc. ("Morgan Stanley"). The interest rate swap transaction
in connection with the City's Electric System Revenue Bonds, 2004 Taxable Series D was terminated in Fiscal Year
2010. In September of 2011, Morgan Stanley transferred its rights and obligations under the interest rate swap
transaction in connection with the City's Electric System Revenue Bonds, 2004 Series B to Deutsche Bank AG (the
"Deutsche Bank Swap Transaction"). To evidence such transfer, the City and Deutsche Bank AG ("Deutsche
Bank") entered into a novation confirmation which incorporates, by reference, the terms and conditions of the ISDA
Master Agreement, Schedule and Collateral Support Annex of the original interest rate swap transaction with
Morgan Stanley in connection with the City's Electric System Revenue Bonds, 2004 Series B, with certain
modifications including an option by Deutsche Bank to terminate the Deutsch Bank Swap Transaction in 2016.
Morgan Stanley did not transfer its rights and obligations under the interest rate swap transaction in connection with
the City's Electric System Revenue Bonds, 2004 Series A (the "Morgan Stanley Swap Transaction" and, together
with the Deutsche Bank Swap Transaction, the "Swap Transactions").
As of November 1, 2011, the Morgan Stanley Swap Transaction had an aggregate notional amount of
$90,150,000 and the Deutsche Bank Swap Transaction had an aggregate notional amount of $83,575,000, for a total
aggregate notional amount of $173,725,000. The terms of the Swap Transactions are described in Note 7 in the
Annual Financial Report for the Fiscal Year ended June 30, 2011 attached hereto as APPENDIX A. Net payments
due from the City under the outstanding 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.
Swap Termination. Each Swap Transaction is subject to termination at the option of the counterparty
(Morgan Stanley or Deutsche Bank) upon the occurrence of standard events of default and termination events set
forth in the respective ISDA Master Agreement, where the City is the defaulting or affected party. Each Swap
Transaction includes 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 Deutsche Bank Swap
Transaction also includes an option by Deutsche Bank to terminate the Deutsche Bank Swap Transaction in 2016.
Upon any such termination, the Swap Transaction is marked to market with the resulting market value being payable
by Morgan Stanley or Deutsche Bank, as applicable, or by the City depending on market conditions at the time of
termination. As of September 30, 2011, the Morgan Stanley Swap Transaction had a termination amount of
$29,321,954 payable by the City to Morgan Stanley, and the Deutsche Bank Swap Transaction had a termination
amount of $18,670,738 payable by the City to Deutsche Bank. Such termination values depend on market
conditions and are volatile and can fluctuate significantly within short periods of time. At any time the negative
market value of the City's position in a Swap Transaction exceeds $20,000, the City is required to post collateral to
the respective swap counterparty. In the case that Morgan Stanley's or Deutsch Bank's credit quality falls below
BBB from S&P or Baa2 from Moody's, the downgraded swap counterparty would be required to fully collateralize
the negative market value of the counterparty's position in the Swap Transaction with U.S. government securities,
which collateral would be posted with a third -party custodian.
The City may terminate either Swap Transaction by exercising its option to terminate the Swap
Transaction. If at the time of such termination, the City's position in the Swap Transaction has a negative market
19
value, the City would be liable to the swap counterparty for an amount equal to such negative market value. The
City expects to terminate the Swap Transactions if the termination amount payable by the City upon such
termination reaches an acceptable amount. The City will determine such acceptable termination amount for each
Swap Transaction based on the trend of interest rates and other factors it deems appropriate.
[The City has available Electric System funds and nonessential assets which the City believes would
provide the City sufficient funds to satisfy any anticipated termination amounts for the Swap Transactions. — TO
UPDATE] 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 Swap Transactions should such termination
payments become due, which termination amount the City cannot predict due to its dependency on the market and
its volatile nature. In addition, any such termination payment could materially, adversely affect the liquidity
position of the Electric System.
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, 2011, the Electric System served 1,893 customers (based on the number of meters),
supplied approximately 1,137.5 million kWhs of electric energy and had a peak demand of approximately 194.6
megawatts ("MWs"). See "ELECTRIC SYSTEM FINANCIAL INFORMATION — 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 1,200 companies doing business in
the City employing more than 50,000 persons. The City is almost exclusively industrial, with an industrial space
occupancy rate of over 96% as of 1, 2011. The City had an estimated resident population of
approximately [110] as of 1, 2011.
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
approximately [1.5] 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 with close proximity to Interstate Highway 5 and State Highways 10 and 105. 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
Before 2005, 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. Due to changes in the California electric industry such as the now -abandoned deregulation of the
California electric energy markets, unprecedented volatility of energy prices in 2000-2001 and the blackouts and
power interruptions due to inadequate supplies of electric energy, the City determined in the early 2000's that it was
in the best interests of its mostly industrial customers to establish a significant generation resource connected
Pill
directly to the City's distribution system. The City developed the Malburg Generating Station, 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 the City since such date. See ' — Power Supply Resources — Malburg Generating Station —Operation of
Facility to Date."
Since the City had pursued an economic development program focusing on the acquisition of
land within the City and the assembly of parcels which would be consistent with the requirements of prospective
industrial customers. In addition, the City sought to continue providing superior municipal services to support both
existing and new industrial residents, such as fire and police services, community health services and infrastructure
improvements. As part of the economic development program, the City also studied options to optimize the benefits
of the existing Electric System resources and alternatives in serving projected Electric System requirements in light
of the current state of, and anticipated developments in, the California electric markets.
After reviewing its portfolio of Electric System resources and the available alternatives in serving customer
load, 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 also 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 opportunity 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 economic benefits and burdens of the City's interest in the FIoover Uprating Project (described below) on the
terms set forth in the Hoover Contract for Differences, dated as of April 10, 2008 (the "FIoover 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 "TANC Agreement"), dated
September 28, 2007, between the City and the Transmission Agency of Northern California ("TANC"), the City
sold TANC 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 and increase the
Electric System's cash reserves. A portion of the proceeds of the Electric System assets were used to fund a portion
of the debt service reserve requirement for the Authority Bonds of the Vernon Natural Gas Financing Authority
relating to a supply of prepaid natural gas for the City. Such Authority Bonds were refunded with the proceeds of
the 2009 Bonds. See "ELECTRIC SYSTEM OBLIGATIONS — Gas Supply Agreements." Approximately $39.5
million of the proceeds of the Electric System assets allocated to reserves were applied to payments due under the
PPTA during the first four years of the contract.
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After the completion of the transmission facility sales described above, the City no longer receives
Transmission Revenue Requirements relating to such assets. The City continues to receive revenues associated with
existing transmission service contracts with Edison and the Department of Water and Power of the City of Los
Angeles ("LADWP").
As more folly 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 facilities, metering, power
purchasing, scheduling, billing and settlements. The Director of Light and Power reports to the City Administrator.
City Officials
The current members of the City Council are as follows
[Hilario Gonzales, Mayor, was first appointed to the City Council in 1974 and was appointed as Mayor in
2009. Mr. Gonzales has been a resident of the City since 1952. — TO UPDATE]
William J. Davis, Mayor Pro Tempore, 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. Mr. Maisano is a
businessman who has lived in the City for the past [seven] years.
Daniel D. Newmire, Council Member, was appointed to the City Council in 2009. Mr. Newmire was a
firefighter and paramedic for ten years, rising to the level of Captain, and has lived in the City for the past four
years.
Mark C. Whitworth, Fire Chief and City Administrator, was appointed as interim City Administrator in
July, 2010. Mr. Whitworth currently serves as the City's Fire Chief and has been employed by the City of Vernon's
.Class 1 rated Fire Department for over 22 years. He began his career as a firefighter in June 1989, was promoted to
Captain in March 1995, Battalion Chief in July 2000, and Fire Chief in June 2005. Mr. Whitworth was officially
named City Administrator in September, 2010. Mr. Whitworth holds a Bachelor of Science degree from Whittier
College and a degree in Fire Technology from Rio Hondo College.
Light and Power Executive Management
The following are brief resumes of the senior Light and Power Department managemem personnel who are
responsible for Electric System operations.
Carlos Fandino serves as the City's Director of Light and Power, as well as the Transmission and
Distribution Manager of the Light and Power Department. Mr. Fandino provides overall direction, structure, control
and reporting of the Electric System. Mr. Fandino has over 22 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
22
resources. Mr. Fandino holds a Bachelor of Science Degree in Business Management from the University of
Woodbury, where he graduated magna cum laude.
Abraham Alemu is the Electric Resources Planning and Development Manager of the Light and Power
Department. Mr. Alemu has over 18 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.
Ali Nourmohamadian is the Engineering Manager of the Light and Power Department. [CITY TO
PROVIDE BIO OF MR. NOURMOHAMADIAN]
Eric T. Fresch, a former City Administrator and City Attorney, provides consulting services to the City in
connection with various Light and Power Department matters.
Power Supply Resources
General
The Electric System's current power supply resources consist of. (i) the PPTA for the MGS; (ii) the
PVNGS Contract, a long-term power purchase contract with the Southern California Public Power Authority with
respect to a portion of SCPPA's interest in the Palo Verde Nuclear Generating Station; (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; and (iv) two 5.75 MW simple cycle gas turbine generating units (the
"H. Gonzales Generating Station") at Station A used for reserve purposes. 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 PVNGS Contract with SCPPA, the CES and the H. Gonzales Generating Station are
collectively referred to as the "Committed Resources" For the Fiscal Year ended June 30, 2011, the Committed
Resources provided approximately 66.31% 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 contracts to satisfy the
remaining 33.69% load requirements of Electric System customers. During the Fiscal Year ended June 30, 2011,
the City used energy purchased through short-term contracts rather than energy from the MGS when such short-term
energy was available at a lower cost.
The power supply resources of the Electric System used to satisfy the load requirements of the Electric
System's customers for the past five Fiscal Years are described in the following table.
23
CITY OF VERNON
ELECTRIC SYSTEM
RESOURCES USED TO SATISFY CITY'S LOAD REQUIREMENT m
Fiscal Year Ended June 30
2007 2008 2009
2010
2011
Short -Term Contracts (2)
Actual Energy (3)
0 183,084 0
95,802
399,072
Percentage of Total Energy
0.00% 14.26% 0.00%
8.10%
33.69a1')
Long -Term Contracts (4)
Actual Energy (3)
243,860 245,600 250,694
206,885
0
Percentage of Total Energy
19.44% 19.13% 20.84%
17.50%
0.00%
SCPPA Palo Verde
Actual Energy(')
81,260 77,017 88,800
87,389
92,630
Percentage of Total Energy
6.48% 6.00% 7.38%
7.39%
7.82%
Hoover Uprating
Actual Energy (3)
24,732 24,061 23,318
21,534
23,576
Percentage of Total Energy
1.97% 1.87% 1.94%
1.82%
1.99%
MGS/PPTA (6)
Actual Energy (3)
904,839 754,108 839,879
770,371
669,028
Percentage of Total Energy
72.12% 58.74% 69.82%
65.17%
56.47%
City -Owned Generation (6)
Actual Energy (3)
0 0 168
167
346
Percentage of Total Energy
0.00% 0.00% 0.01 %
0.01%
0.03%
City's Load Requirement
Actual Energy (3)
1,254,691 1,283,870 1,202,859
1,182,148
1,184,652
Percentage of Total Energy
100.00% 100.00% 100.00%
100.00%
100.00%
Source: City of Vernon
(D Totals may not add due to rounding.
(r) Term of less than one year.
t3) Megawatt hours("MWhs").
(4) Term of one year or longer.
tb) As discussed above in the caption"—
Implementation of Resource Optimization Plan," the City has sold the MGS and
entered into along term contract with
the purchaser for 100% of the output from the Station.
See "THE 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 ojFacility
to Date" below.
(6) Includes resources from the H. Gonzales Generating Station.
(r) Increase in short-term contracts were
due to lower utilization of power from MGS due to lower power prices
in the market
and the expiration of the long-term contract with American Electric Power.
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 ending in 2023. The term can be extended by Bicent for an additional
five years. The City dispatches the MGS and is 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.
24
The City is to pay a fixed amount (subject to escalation) for each megawatt hour of electricity produced by
MGS. In addition, a change in the heat rate of MGS 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.
The City will be responsible for supplying the MGS with natural gas. [Because interest on the Authority
Bonds was tax-exempt, 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
natural gas to the Sacramento Municipal Utility District, in an amount equal to a portion of the Gas Supply
remaining to be delivered. The contract provides for 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. In 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 UPDATE]
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.
Except as agreed to by the City, scheduled outages are limited to three hundred thirty-six hours in any
contract year. 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. See "— Operation of
Facility to Date" below.
The PPTA provides that, in connection with the MGS, Bicent shall comply with all legal, regulatory or
industry standards applicable to owners, operators and the ownership and/or operation of generating facilities within
the State, including the North American Electric Reliability Council mandatory reliability standards. The PPTA also
provides that Bicent shall be responsible for all costs and charges relating to such compliance except that the City is
responsible for any fee for greenhouse gas ("GHG"), including emission credits, attributable to the operation of the
MGS and effective after April 10, 2008. See "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY"
for more information on such standards.
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
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 covenant or obligation (other than those constituting a separate event of default) within
25
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: unless otherwise excused under the
PPTA, failure of MGS to maintain 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
termination plus 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 for a 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. — TO UPDATE] The cost of repairing the MGS equipment and the cost of replacement power were
covered by warranties and the City's insurance policies. In the Fiscal Year ended June 30, 201I, the MGS provided
669,374 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 electrical rating 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 for a 40-year life beginning in [1988]
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 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 ajoint 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" PVNGS 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, 2011, PVNGS
provided 92,630 MWhs of energy to the Electric System. See "ELECTRIC SYSTEM OBLIGATIONS — Power
Sales Contract with SCPPA for PVNGS" for a discussion of the City's cost in connection with SCPPA for the Fiscal
Year ended June 30, 2011.
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" finding 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 was in NRC's
26
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.
Preliminary work in support of the NBC'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. On March 24, 2009, the NRC announced that it is removing
PVNGS Unit 3 from Column 4 and subsequently returned PVNGS Unit 3 to the "licensee response column" of the
NRC's Action Matrix ("Column 1"). Since that time, the NRC has determined that PVNGS has made sufficient
performance improvements, and it lowered its level of inspection oversight.
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 improvements. — TO UPDATE]
Construction and Maintenance. The cooling towers at the station have deteriorated to the point where they
must be replaced in the future; however it has been determined that replacement can be deferred until after 2020,
and the current towers can be. maintained at an annual cost of $_ million to the City. A design analysis of new
cooling tower technology is currently being performed to determine the options for future replacement.
PVNGS has completed the installation of a Rapid Refueling Package in all three units at a cost of $_
million for the City to improve the effectiveness during fuel loading and deloading and to help to reduce the
refueling outage duration.
PVNGS's cooling water reservoirs and evaporation ponds show significant deterioration with leaks that
could allow liquid discharge in violation of PVNGS's aquifer protection permit and thereby impact the continuous
operation of the station. A new water reservoir was put into service in 2007 at a cost of $_ million for the City.
The old reservoir was relined at a cost of $_ million for the City. As a zero discharge facility, all waste water
after recycling through the cooling towers is released to the evaporation ponds. The liners of the ponds have
developed leaks after more than 20 years of service, and now require replacement. The cost of relining the two
evaporation ponds is estimated at $_ million for the City. Since the existing evaporation ponds have almost
reached their full capacity, a new evaporation pond was added at a cost of $_million for the City.
Safety Improvements. PVNGS recently opened a joint Emergency Operating Facility/Joint Information
Center at a cost of $_ million for the City at a required safe distance from the station to allow emergency response
and coordination with public agencies in case of unusual events at the plant site.
Following NRC guidelines required to improve security in immediate areas surrounding the reactor
buildings, PVNGS enlarged the protected area with inclusion of an outage support facility, a new. warehouse, a
minor vehicle maintenance facility and a fuel depot to reduce vehicular traffic in and out of the protected area. The
estimated cost for these facilities is approximately $_ million for the City.
In response to the earthquake and tsunami that impacted the Fukushima Dai-ichi nuclear power plant in
Japan on March 11, 2011, the nuclear industry and regulators have been working to understand the events that
damaged the reactors and used fuel storage pools and whether any changes might be necessary at nuclear plants in
27
the United States. It is too early to predict whether the information gathered from the damaged plant will ultimately
result in changes to the operation of nuclear generating plants in the United States and the costs associated therewith,
but the NRC may impose additional requirements on the current fleet of U.S. nuclear power plants.
As part of its response to the Fukushima Dai-ichi accident, the NRC conducted special inspections of
nuclear power plants in the United States. On April 29, 2011, the NRC conducted such a special inspection at
PVNGS. The focus of the inspection was on the licensee's capability to mitigate conditions that result from beyond
design basis events, station electrical blackout and internal and external flooding events and to perform walkdowns
and inspections of equipment important to mitigate fire and flood events during and after an earthquake. The results
of the inspection are reported in a letter from the NRC dated May 13, 2011. The NRC's Reactor Oversight Process
will further evaluate any issues identified during the inspection and will determine, in a separate report, whether
there are regulatory findings or violations, but no response to the May 13, 2011 letter is required. Although the
NRC is still evaluating the inspection results, no material concerns have been identified relating to PVNGS nor has
the evaluation resulted in new regulatory requirements affecting PVNGS.
The NRC also formed a task force to perform a systematic and methodical review of its regulatory
requirements, programs, processes and implementation in light of what has been learned to date from the Fukushima
Dai-ichi accident to determine whether any changes should be made to further ensure protection of public health and
safety. On July 13, 2011, the task force released its first report. The task force report recommends that the NRC
pursue both short-term and long-term actions to improve its safety regulations and oversight. With respect to the
short-term actions, the report recommends that the NRC require nuclear plants to reevaluate and update protections
against earthquake, fire and flooding risks, ensure backup electric power to operate emergency cooling for reactors
and spent fuel pools in the event of a station blackout, strengthen the Reactor Oversight Process, strengthen onsite
emergency response capabilities and implement reliable hardened vent designs in boiling water reactor facilities
with Mark I and Mark Ix reactor model containments. The long-term recommendations include evaluating potential
enhancement to the capability to prevent or mitigate earthquake -induced fires or flooding, identifying additional
information about hydrogen control and mitigation inside containment buildings as it becomes available from
further study of the Fukushima Dai-ichi,incident and pursuing additional emergency preparedness issues. The task
force's recommended strategy includes several rulemaking activities to establish new requirements. The task force
recognizes that rulemakings typically take several years to complete and recommends that interim actions are taken
while the rulemaking activities are conducted. [The NRC met with the task force on July 19, 2011, and the
chairman of the NRC plans to hold a series of public sessions on the task force proposals and bring them to vote
before the NRC by October 2, 2011. — ORRICK TO UPDATE] [The City does not know whether there will be any
changes in the regulations, programs and processes of the NRC as a result of the recommendations of the task force.
— TO UPDATE]
The events in Japan have also created broader economic uncertainties that may affect future operating
costs. The political climate, public pressure or other forces may make it more difficult or expensive to continue to
operate, construct or improve nuclear power generation facilities. Internationally, some governments are changing
their positions on nuclear power. For example, operations have been suspended at several existing nuclear power
facilities in Japan and Germany, as such countries have committed to the elimination of its use of nuclear power
altogether by 2022. Legislation has been introduced in the United States Congress that would require an overhaul of
NRC safety regulations. [The City cannot predict whether this or any similar legislation may be enacted, and if
enacted, the impact of any changes resulting from the NRC review on the operation and costs of PVNGS. These
broader economic uncertainties could adversely affect the demand for nuclear power, and the City currently does not
know their impact on its business. — TO UPDATE]
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 2008 estimate, 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. —TO
UPDATE]
28
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 SCPPA) 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 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. As of June 30, 2011, 89 casks, each
containing 24 spent fuel assemblies, have been put into storage in the independent 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. Any waste not stored at disposal sites in Utah is stored on -site. If
it is ever required, the on -site storage facility can be expanded from its current size to accommodate additional
waste. APS estimates that the storage facility could be expanded to allow for additional storage of low-level waste
until the end of operation of PVNGS.
Hoover Uprating Project
General. 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. Modem 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, and 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. — TO UPDATE] The City is
responsible for its share of the operating costs of the facility.
Drought Conditions. Due to prolonged drought conditions resulting in a low lake level that is currently
more than 100 feet below its peak, [the City's capacity entitlement at the Hoover Plant was reduced to an annual
average of approximately [18] MWs (calculated based on 1.1% of [1,676] MWs annual average output capability). —
TO UPDATE]
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. 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 mitigate operational scenarios that would negatively affect the Hoover
Plant customers and the other parties.
Hoover Contract for Differences. At the time of 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. For 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
29
CES are subtracted. If the resulting Monthly Swap Payment is a positive number, the City is to pay this amount to
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.
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 event requiring 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 had one fixed -price contract with American Electric Power for the
purchase of 25 MW of on -peak power. The contract expired in 2010. The City currently has no long-term power
contracts.
Short -Term 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 -tern 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
H. 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.
30
Renewable Energy Resources
In accordance with the California Renewable Energy Resources Act, enacted in 2011 as SBX 1-2 ("SBX 1-
2"), the City is required to develop and implement a renewable energy resources plan which provides that an
average of 20% of the Electric System's retail sales must be procured from eligible renewable energy resources by
December 31, 2013 and that 33% of the Electric System's retail sales must be procured from eligible renewable
energy resources by December 31, 2020. The City must make reasonable progress each year as specified in SBX 1-
2. See "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY — California Climate Change Policy
Developments — California Renewable Electric Standard." Although none of the City's current portfolio of Electric
System resources is from eligible renewable energy resources, the City [is in the process of developing and
implementing a renewable energy resources plan to comply with the requirements of SBX 1-2. — TO UPDATE]
The City currently has several options to satisfy the requirements of SBX 1-2.
Wind Farms. 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
Florida Power and Light Company. The City intended to make such portion of the property available to a public or
private entity which would develop such property as a wind farm. [In [February 2010], the City then sold
approximately 18,000 acres of this land to NextEra (FPL) for $[40] million and maintained certain transmission
rights and easements on the land. — TO UPDATE]
[The City expects to sell the remaining portion of the Tehachapi land to a public or private entity which
would develop such property as a wind faun. Concurrently with such sale and development, the City expects to
enter into a renewable power purchase agreement with such entity to satisfy the SBX 1-2 requirements. — TO
UPDATE] Preliminary statistics estimate that the [entire] Tehachapi land is capable of supporting 250-600 MW of
wind -powered electric generation. While the City does not anticipate using its own funds to develop any of such
renewable energy resources on the Tehachapi property, the City does anticipate that some renewable energy
resources will be developed on the Tehachapi property enabling the City 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 also has an option to purchase an additional approximately 5,000 acre parcel adjoining the
Tehachapi 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 a solar -powered electric generating facility. — TO UPDATE]
Bio-Gas. The City is currently evaluating the use of MGS as a bio-gas facility as another option to satisfy
the SBX 1-2 requirements and is currently in negotiations with a counterparty for such implementation of bio-gas at
MGS. Such use of MGS as a bio-gas facility would potentially make MGS the City's primary renewable resource to
satisfy the SBX 1-2 requirements. Implementation of this change to bio-gas at MGS is projected to be a cost
effective option for adding renewable energy resources to the City's current Electric System portfolio.
Renewable Energy Credits. The City may also purchase renewable energy credits and renewable energy as
a means to satisfy the SBX 1-2 requirements. Any additional costs from purchasing renewable energy credits or
renewable energy will be absorbed through renewable energy pass -through charges.
Renewable Pass -Through Charge. As the City plans to add renewable energy resources to its portfolio, it
has implemented a renewable pass -through charge to its Electric System customers, meaning that the costs of
renewable energy resources in excess of non-renewable market power will be included in the customers' bills as a
renewable pass -through charge. See "ELECTRIC SYSTEM FINANCIAL INFORMATION — Projected Operating
Results and Debt Service Coverage" for a projection of such renewable pass -through charges.
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
requirements.
31
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 15% are underground). The Electric System has eight active primary substations, three of which are
dedicated customer substations and five are regular distribution substations. [The City is implementing a multi -year
Electric Distribution System Master Plan to replace older facilities and to upgrade the distribution system. — TO
UPDATE] See "THE ELECTRIC SYSTEM — Capital Requirements."
[The City currently operates and maintains the Electric System facilities located within the City, except that
Petrelli Electric Inc. currently maintains the City's electric distribution system under contract with the City. — TO
UPDATE]
Developments Affecting the Power Supply
The City relied on short-term (less than one year) power purchase contracts to provide the approximately
33.69% of energy delivered by the Electric System in the Fiscal Year ended June 30, 2011. 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 includes the following new features, among others, which were not part of
CAISO's previous real-time only market tariff
(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 California Public Utilities
Commission's ("CPUC") resource adequacy requirements to ensure that there are adequate energy resources in
critical areas.
32
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 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 acquire 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.
[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. —TO UPDATE]
Resource Mix
SB-1368 (Chapter 598, Statutes of 2006) provides for a restriction on the negotiation of contracts for
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.
For further discussion of environmental legislation and regulations, including SB-1368, see "FACTORS
AFFECTING THE ELECTRIC UTILITY INDUSTRY."
Capital Requirements
In 2006, an Electric Distribution Master Plan (the "Distribution Master Plan") was developed for the
Electric System which included a five-year capital improvement program for the Electric System's distribution and
interconnection facilities. The Distribution Master Plan categorized projects generally into safety, capacity,
reliability,. operability and street improvements with most of the improvement projects designed for the maintenance
and upgrading of facilities to serve existing load and the balance (primarily additional substation -related
improvements) to serve new load. The 2006 Distribution Master Plan was updated in 2010 to provide for capital
improvements in the Fiscal Years 2011 through 2015. The updated Distribution Master Plan identified capital
improvements for the period for maintenance and upgrading of facilities and new facilities to serve new customers.
The maintenance and upgrading capital improvements consist primarily of upgrading from 7kV to 16kV service
facilities, substation facility replacement and upgrades, pole replacements, undergrounding of facilities and street
improvements. Since the 2010 update of the Distribution Master Plan, the City has developed a capital
improvement program for the Fiscal Years 2012 through 2020. The program calls for approximately $66 million of
capital improvements in Fiscal Years 2012-2016 and approximately $41 million in capital improvements in Fiscal
Years 2017 through 2020 using the same categories of improvements used in the Distribution Master Plan.
The City plans to apply approximately $37.8 million of proceeds of the 2011 Bonds to the capital
improvements for maintenance and upgrading of existing distribution and interconnection facilities with the balance
of the capital improvement program funded from Electric System revenues. The City expects the costs of additional
substations and related facilities to serve new customers. The City may, however, issue additional Bonds under the
Indenture or otherwise finance all or a portion of such capital costs. The following table lists the expected annual
capital requirements for the Electric System to be paid from Electric System Revenues for the five Fiscal Years
ending June 30, 2012 through 2016: [PROJECTIONS SUBJECT TO CHANGE]
33
Al
Capital Requirements from
Fiscal Year Electric System Revenues
Ending June 30 (in thousands)
2012
$ 3,500
2013
3,500
2014
4,500
2015
5,000
2016
11,850
Total
$ 28,350
Source: City of Vemon
Largest Customers
The Electric System's ten largest customers (by electricity usage) for the Fiscal Year ended June 30, 2011
accounted for approximately 36.54% of the Electric System's retail energy sales for such period, and the Electric
System's 15 largest customers accounted for approximately 44.15% of the Electric System's retail energy sales for
such period. No single customer accounted for more than approximately 8.09% of the Electric System's retail
energy sales during such period. The table below sets forth such ten largest customers (by electricity usage) for the
Fiscal Year ended June 30, 2011.
CITY OF VERNON
ELECTRIC SYSTEM
TEN LARGEST CUSTOMERS
For Fiscal Year Ended June 30, 2011
In Vernon
Business Name
Since
Type of Business
Matheson Tri-Gas
2006
Air Separation Plant
Owens Illinois Inc.
1944
Glass Containers
Clougherty Packing Co. (Hormel Foods)
1944
Food Processing
Rehrig Pacific Co.
1973
Plastic Products
Overbill Farms, Inc.
1991
Food Processing
Exide Techonologies
1964
Environmental Recycling
PWP Industries
2001
Plastic Products
Service Packing (United Food Group)
1974
Food Processing
PABCO Paper Products Co.
1957
Paper Products
Preferred Freezer Services Inc.
2001
Cold Storage
Source: City of Vernon
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.
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 ' — Rate Regulation" herein. The Electric
34
System provides no free service. The retail rates include a 3% surcharge for payments in lieu of tax and franchise
payments ("Franchise Payments") 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 ten times and an
additional rate increase has been approved by the City Council as indicated in the table below.
CITY OF VERNON
ELECTRIC SYSTEM
PERCENTAGE CHANGE IN
ELECTRIC RATES
Average Percent
Effective Date
Increase in Rate
January 1,20120)
8.00%
July 1, 2011
8.00
January 1, 2010
4.70
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
(1) Approved.
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 for the purchase of a supply of prepaid natural gas (see "ELECTRIC
SYSTEM OBLIGATIONS — Gas Supply Agreement"). In addition, the City has established the Fuel Cost
Adjustment Billing Factor (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. — TO UPDATE]
[Renewable Energy Cost Adjustment Billing Factor
To provide for the payment of additional costs associated with satisfying the renewal energy portfolio
standards for the Electric System, the City has approved the Renewable Energy Cost Adjustment Billing Factor (the
"RECAF"). The RECAF will go into effect on and will be added to all retail customer bills based on
electrical consumption. The RECAF will add an amount to each retail bill to recover the excess of the cost the City
pays for renewable energy (or substitutes therefor satisfying the City's obligations to provide energy from renewable
resources such as renewable energy credits) over the cost of energy from non-renewable resources. — TO UPDATE]
35
Average Price
The table below sets forth the average billing price per Idlowatt-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,
2007
2008
2009
2010
2011
Residential
5.57
5.72
6.11
6.36
6.75
Small Industrial
8.89
9.09
9.81
9.96
10.35
Large Industrial
7.92
8.03
8.58
8.84
9.14
Other
10.30
10.51
11.30
11.92
12.64
Weighted Average
8.21
8.35
8.96
9.21
9.55
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.
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. The City has implemented the FCABF and the RECAF. See "—
Electric Rates — Fuel Cost Adjustment Billing Facto?' and' — Electric Rates — Renewable Energy Cost Adjustment
Billing Factor." As described above, the City's Electric System Revenues come primarily from its small industrial
customers (approximately 34% for the Fiscal Year ended June 30, 2011) and large industrial customers
(approximately 65% for the Fiscal Year ended June 30, 2011).
01
COMPARISON OF SELECTED MONTHLY ELECTRIC BILLS
Medium Commercial
LADWP to ............................
Edison..................................
Riverside ..............................
Anaheim ..............................
Pasadena ...............................
Burbank ................................
Glendale ..............................
Vernon (Z)..............................
250,000 kWh/350 kW
50,000 kWh/
$ 27,293
$ 7,088
30,848
8,681
34,830
7,641
26,652
6,547
30,810
7,061
30,606
9,637
27,062
6,883
20,467
6,118
Source: Southern California Public Power Authority; except information relating to the City of Vernon which
is from the City of Vernon
(') Excludes utility user's taxes.
(z) Bills reflect Franchise Payments;. does not reflect public benefits surcharges.
Large Commercial / Industrial (June 2011)
7,000,000 kWh/10,000 kW
2,000,000 kWh/
LADWP (')............................
$ 743,844
$ 253,878
Edison ..................................
705,995
332,859
Riverside ..............................
N/A
220,486
Anaheim ..:...........................
N/A
225,059
Pasadena ...............................
833,036
259,056
Burbank ................................
N/A
261,324
Glendale ..............................
734,938
236,156
Vernon(Z)..............................
544,422
183,791
Source: Southern California Public Power Authority; except information relating to the City of Vernon which is
from the City of Vernon
t�) Excludes utility user's taxes.
(zt Bills reflect Franchise Payments; does not reflect public benefits surcharges.
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 five Fiscal Years.
- TO UPDATE]
CITY OF VERNON
ELECTRIC SYSTEM
UNCOLLECTIBLE ACCOUNTS
Fiscal Year Uncollectible
Ended June 30 Revenues
2007 $70,774
2008 79,246
2009
2010
2011
Source: City of Vernon
Percent of
Gross Billings
0.068%
0.073
37
Employee Relations
As of June 30, 2011, [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. — TO UPDATE]
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, an agent multiple -employer
retirement system that acts as a common investment and administrative agent for participating public entities within
the State of California.
The State -required City employee salary contributions of 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 and employees' total contribution to Ca1PERS for the year ended June 30, 2011 was $5,794,058
and $1,864,275, respectively. City contribution rates as a percentage of covered payroll were 13.475% for
miscellaneous plan members and 25.372% for safety plan members in Fiscal Year 2011. The City's contribution
was made in accordance with actuarially determined requirements. The most recent actuarial valuation performed
as of June 30, 2008, 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 in the Annual Financial Report for
the Fiscal Year ended June 30, 2011, included in APPENDIX A.
[In Fiscal Year 2009, the City Council approved a post -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 qualified
employees' medical and dental insurance premiums and claims from age 60 to 65. Funding of the plan is on a pay-
as-you-go basis. As of June 30, 2011, approximately _ employees (— active employees and retired
employees) were eligible to receive benefits. Amounts paid for premiums for the Fiscal Year ended June 30, 2011
totaled $ . See Note _ in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included
in APPENDIX A. —TO UPDATE]
Insurance
The City is exposed to various risks of loss related to natural disasters, damage or destruction of assets,
errors or omissions, injuries to employees, torts, theft and other risk factors. The City has obtained various
insurance policies that provide coverage for "Special Form Perils" against direct physical loss or damage, including
flood, to all real and personal property of the City. The policy limits for perils other than flood and equipment
machinery breakdown are $100 million per occurrence with deductibles of up to $100,000 per occurrence. The
flood portion of the policies has a limit of $25 million per occurrence with a 5% deductible. The equipment
machinery breakdown portion of the policies has a limit of $50 million per occurrence. Due to increasing premiums
and limitations on available coverage, the City eliminated earthquake insurance coverage and reduced flood
insurance coverage. If premiums and limitations continue to increase, the City may eliminate or further reduce 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, and insurance coverage for certain crimes with a policy limit
of $1 million and a deductible of $25,000.
Deductibles and amounts in excess of policy limits are self -insured. [There have been no settlements
exceeding insurance coverage for each of the Fiscal Years 2007 through 2011. — TO UPDATE] See Note 8 in the
Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A.
38
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
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, 2011, see Note 2 in the Annual Financial Report for the Fiscal Year
ended June 30, 2011, included in APPENDIX A.
As of June 30, 2011, the City's Light and Power Department had invested its funds in the investments
below.
CITY OF VERNON
INVESTMENTS OF LIGHT AND POWER DEPARTMENT (1)
As of June 30, 2011
Investment Type
Amount
Federal Home Loan
$ 9,140,388
Federal National Mortgage Association
4,473,987
Local Agency Investment Fund
536,296
Money Market Mutual Funds
30,087,886
United States Treasury Notes
33,352,291
$ 77,590,848
Source: City of Vernon.
(o Includes all funds attributable to the Light and Power Department in the Annual Financial Report for the
Fiscal Year ended June 30, 2011, included in APPENDIX A.
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. 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. The City no longer carries earthquake insurance.
at
ELECTRIC SYSTEM FINANCIAL INFORMATION
Retail Energy Sales
The number of customers (based on meters), retail kWh sales and -revenues derived from retail sales, by
classification of service, and peak demand during the five Fiscal Years ended June 30, 2007 through 2011, 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 approximately 65% and small industrial customers (monthly demand
of 500 KW or less) comprising approximately 34% of the total revenues from retail sales for the Fiscal Year ended
June 30, 2011.
CITY OF VERNON
ELECTRIC SYSTEM
CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND
Fiscal Years Ended June 30
2007
2008
2009
2010
2011
Number of Customers:
Residential
28
25
28
28
28
Small Industrial
1,150
1,174
1,115
1,134
1,147
Large Industrial
707
676
652
632
621
Other
81
84
98
96
97
Total Customers (q
9
--J�259
Kilowatt -Hour Retail Sales (in
Millions):
Residential
0.1
0.1
0.2
0.2
0.2
Small Industrial
331.1
344.4
336.9
349.0
353.2
Large Industrial
842.3
876.1
810.4
774.2
773.7
Other
11.7
11.4
11.1
10.6
10.4
Total kWh Retail Sales
85,2
�2}2
ISg,St ._L
134.0
1.1375
Revenues from Retail Sale of Energy
($000's):
Residential
$ 8
$ 7
$ 10 $
12
$ 12
Small Industrial
29,427
31,322
33,054
34,773
36,574
Large Industrial
66,709
70,356
69,521
68,415
70,701
Other
1,205
1,198
1,252
1,266
1,314
Total Revenues from Retail Sale
of Energy (2)
349
Peak Retail Demand (MWs)
206.3
206.0
203.7
196.6
194.G
Source: City of Vernon, derived from audited
financial statements.
t�l Some businesses have more than one meter. The City
considers each meter to be a customer.
t�1 Excludes 2.85% AB 1890 public benefit surcharge pursuant to Section
385 of the California Public Utilities Code.
Summary of Operating Results
A summary of historical revenue, expenses, and debt service coverage for the City's Electric System for the
five Fiscal Years ended June 30, 2007 through 2011 is shown in the following table. This summary was prepared by
the City from information derived from its audited annual financial statements for the five Fiscal Years ended
June 30, 2007 through 2011. 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 statements for the Electric System. In
40.
accordance with the Indenture, depreciation and amortization and other non -cash items and Franchise Payments are
not included in Operation and Maintenance Expenses.
CITY OF VERNON
ELECTRIC SYSTEM
HISTORICAL REVENUE, EXPENSES and DEBT SERVICE COVERAGE
UNDER INDENTURE P)(z)
Fiscal Year Ended June 30
2007
2008
2009
2010
2011
Operating Revenues:
ElectricSales— Retail
$ 97,349,384
$102,883,428
$103,837,374
$104,464,945
$108,600,606
Fuel Cost Adjustment
0
0
5,574,405
4,778,639
1,215,647
Transmission revenue
requirement
10,485,050
8,333,814
617,416
1,314,640
1,358,755
Investment lnwme(3)
6,359,925
4,152,465
1,371,959
1,410,991
1,637,826
Non -Recurring Income
(Loss)(')
631,983
(252,000)
(43,556)
40,000,000
Net Asset Sale Proceeds(s)
0
53,635,951
0
0
Withdrawal/Deposit from/to
Stabilization Funds)
0
0
6,500,000
(40,000,000)
20,000,000
Otheri')
3,543,849
3,350,465
3,327,980
3,802,214
4,065,372 ,
Total Operating Revenues
$118,370,191
$172,104,123
$121,185,578
$115,771,428
$136,878,346
Operation and Maintenance
Expenses:
Fuel Costs (0
$ 12,977,927
$ 10,218,036
$ 7,083,346
$ 277,892
$ (1,292,543)
Gas Supply A reement(9)
33,859,098
43,556,858
48,576,912
3,826,231
0
Energy Costsm)
16,698,326
24,400,528
32,725,577
30,711,920
37,964,830
City allocated administrative
costs
31,428,341
38,456,200
21,889,894
22,534,600
23,491,719
Total Operating Expenses
$94,963,692
$116,631,622
$110,275,729
$ 57,350,642
$ 60,164,007
Net Revenues Available for
Debt Service
$ 23,406,499
$ 55,472,501
$ 10,909,849
$ 58,420,785
$ 76,714,199
Electric Revenue Bond Debt
Service (")
$ 15,069,639
$ 14,289,738
$ 6,976,580
$ 30,801,362
$ 55,716,775
Debt Service Coverage Ratio
1.553x
3.882x
1.564x
1.897x
1.377x
Remaining Cash After Debt
Service
$ 8,336,860
$ 41,182,763
$ 3,933,269
$ 27,619,424
$ 20,997,654
Source: City of Vernon.
(D Totals may not add due to rounding.
(2) Excludes depreciation and amortization, and other non -cash items.
(3) Does not include unrealized gain (loss) on investments or increase (decrease) in fair market value of investments. Investment
income relating to the Authority is reflected in Supply Agreement.
(') 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, 2010, represents proceeds from the sale of renewable wind land.
(s) For the Fiscal Year ended June 30, 2008, represents net proceeds from the sale of certain generation and transmission assets after
repayment of the Authority Bonds, $39,500,000 reserve for PPTA capacity payments through 2011, and transaction costs.
(6) The City has implemented the FCABF to provide for a pass -through to customers of increased costs due to fuel. For Fiscal Year
ended June 30, 2009, represents deposits to the Expense Stabilization Fund primarily to offset the reduction in projected retail
and wholesale energy sales.
(�) Includes 2.85% AB 1890 public benefit surcharges pursuant to Section 385 of the California Public Utilities Code.
(s) Does not include costs associated with natural gas purchased under the Supply Agreement.
41
ls) When the Authority Bonds were redeemed with proceeds from the 2009 Bonds, the Supply Agreement was terminated.
1101 Represents net energy purchases and wholesale sales, capacity and ancillary service costs (including the PPTA and Hoover
Contract for Differences in the Fiscal Years ended June 30, 2008 through 2011). Excludes $11,250,000, $9,000,000,
$12,000,000 and $7,000,000 paid from the proceeds of the sale of MGS during the Fiscal Years ended June 30, 2008 through
2011.
l� q For the Fiscal Year ended June 30, 2008, does not include 2008 Bonds or principal paid on the Authority Bonds which was paid
with proceeds from the generation and transmission asset sale. For the Fiscal Year ended June 30, 200% amounts include the
2008 Bonds aqd certain interest rate swap payments. For the Fiscal Years ended June 30, 2010 and 2011, amounts include the
2008 Bonds, the 2009 Bonds and certain interest rate swap payments.
Management's Discussion of Operating Results
For the management's discussion of operating results, see the Annual Financial Report for the Fiscal Year
ended June 30, 2011 and the Annual Financial Report for the Fiscal Year ended June 30, 2010, included in
APPENDIX A.
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, 2012 through June 30,
2017. 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.
Certain assumptions have been made by the City in the development of the forecasts. Among the
assumptions made by the City are the following: [TO UPDATE]
1. Economic activity by businesses within the City will continue, and the demand for electricity will
continue, consistent with historic levels.
2. Fuel Cost Adjustment includes fuel costs and embedded energy costs of the City in excess of
$7.50, including certain costs associated with the Gas Supply Purchase Agreement.
3. Electric service rates reflect 8.00% rate increase on July 1,2011 and approved rate increases of
8.00% on January 1, 2012 and [I 1.5%] on July 1, 2012 and projected rate increases of [3%] beginning July 1, 2013
and each July 1 thereafter.
4. Renewable power costs in excess of market power will be included in customers' bill as a
Renewable Energy Cost Adjustment Billing Factor.
5. Renewable power serves 20-30% over projection period at $110-115 MWh.
6. City allocated administrative costs are projected to increase 1.50%per year beginning in the Fiscal
Year ending June 30, 2013.
7. Fuel Costs are net of sales of gas sold under the Sale Contract. See "ELECTRIC SYSTEM
OBLIGATIONS — Gas Supply Agreement."
8. Fuel cost forecast based upon NYMEX forward pricing for SoCal Border as of 20 .
Energy Costs based upon fuel cost adjusted for market heat rate.
42
9. The Deutsche Bank Swap Transaction is expected to be terminated during the Fiscal Year ending
June 30, 2017.
10. Transfers to the City's general fund are limited to 11.50% of retail sales (net of Franchise
Payments of 3.00% and City allocated administrative costs).
11. Investment Income assumed at 1.25% in the Fiscal Year ending June 30, 2012, 1.50% in the Fiscal
Year ending June 30, 2013 and projected to increase by 0.25% in 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]
43
CITY OF VERNON
ELECTRIC SYSTEM
PROJECTED REVENUE, EXPENSES and DEBT SERVICE COVERAGE
UNDER INDENTURE M
Fiscal Year Ending June 30,
- 2012
2013 2014 2015
2016
2017
Revenues:
Electric Sales — Retail $
$ $ $
$
$
Fuel Cost Adjustment
Transmission revenue requirement
Other
Public Goods Charge
Renewable Pass -Through
Withdrawal/Deposit from/to Stabilization
Fund
Investment Income
Total Revenues $
$ $ $
$
$
Rate Increases (July 1) %
% % %
%
Operation and Maintenance Expenses:
Fuel costs $
$ $ $
$
$
Non -Renewable Energy costs
Renewable Energy costs
Administration
CASIO/Transmission costs
Total Operating Expenses $
$ $ $
$
$
Net Revenues Available for Debt Service $
$ $ $
$
$
Payments for Swap Transactions $
$ $ $
$
$
2008 Bonds Debt Service
2009 Bonds Debt Service
2011 Series A Bonds Debt Service
2011 Series B Bonds Debt Service
Total Debt Service $
$ $ $
$
$
Debt Service Coverage Ratio (3)
Net Revenues Remaining After Debt $
$ $ $
$
$
Service
Source: City of Vernon
1'1 Totals may not add due to rounding.
(2) Net Revenues divided by Total Bond Debt Service.
Assumes no Bonds other than the 2008 Bonds, the 2009 Bonds
and the 2011
Bonds are outstanding during the projection period.
[TO UPDATE FOOTNOTES]
44
FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY
While the City generates only a small amount of electricity from its own resources, the matters described
below may have a significant impact on the cost of electricity the City purchases to satisfy its customers' load
requirements.
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 Electric System facility (or any facility providing the Electric System
with power or energy through a power purchase contract) 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 which
may adversely affect the Electric System's costs in serving customer load.
There is concern by the public, the scientific community, President Obama's Administration 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 affect the electric utility industry. There has also been an increase in the level of
environmental enforcement by the United States Environmental Protection Agency (the "EPA") and state and local
authorities. Increased environmental regulations under the provisions of the federal Clean Air Act have created
certain barriers to new facility development and modification of existing facilities. The additional costs, including
time, human resources, uncertainty and delay, and the risk of fines and penalties for noncompliance, 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 following factors affecting the Electric System and the electric utility industry should be considered
when evaluating the City and the Electric System and considering an investment in the 2011 Bonds. The City
cannot predict at this time whether any additional legislation or rules will be enacted which will affect its 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. See "ELECTRIC SYSTEM OBLIGATIONS," "THE ELECTRIC SYSTEM," "ELECTRIC
SYSTEM FINANCIAL INFORMATION" and the Annual Financial Report for the Fiscal Year ended June 30,
2011, included as APPENDIX A hereto, for additional information relating to the City and the Electric System.
California Climate Change Policy Developments
A number of bills affecting the electric utility industry and the general energy market in California have
been enacted by the California Legislature in recent years. 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 renewable resource portfolio standards. Arnold Schwarzenegger, the former
Governor of the State signed a number of Executive Orders that also sought to reduce GHG emissions and
encourage or mandate generation of electricity from renewable resources. Pursuant to such actions, state regulatory
agencies such as the California Air Resources Board ("CARB") and the California Energy Commission, are pursuing
a number of regulatory programs designed to reduce GHG emissions and encourage or mandate renewable energy
generation. The following is a summary of certain of these measures.
California Global Warming Solutions Act of 2006 ("AB32'). In September 2006, the State adopted AB32,
the California Global Warming Solutions Act of 2006, which requires CARB to develop regulations to reduce
California's GHG emissions to 1990 levels by 2020. AB32 designated CARB as the State agency responsible for
monitoring and regulating GHG emission sources in California for purposes of reducing GHG emissions. It also
requires CARB to consult with other State agencies having jurisdiction over energy related GHG emission sources
such as the CEC and the California Public Utilities Commission (collectively, the "Commissions").
45
AB32 required CARB to prepare and adopt a Scoping Plan for achieving the maximum technologically
feasible and cost-effective GHG emission reductions by 2020. On December 11, 2008, CARB adopted the Climate
Change Scoping Plan, which will serve as the roadmap for developing the regulations to implement AB32. The
Scoping Plan identifies and recommends a combination of direct emission reduction measures and market -based
mechanisms including a GHG emissions cap -and -trade program. In adopting the Scoping Plan, CARB directed staff
to work with the Commissions and other agencies to ensure that California's energy demands are met and to avoid
disproportionate geographic impacts on energy rates. CARB also made a commitment that revenue from the
auctions of allowances in a GHG emissions cap and trade program should be used to further the policy objectives of
California's climate change program.
AB32 required CARB to adopt regulations to implement the AB32 program by January 1, 2011, that will
become effective on January 1, 2012. On December 16, 2010, CARB adopted a GHG emissions cap -and -trade
regulation, which is subject to a number of modifications and further considerations outlined in the adopting
resolution, Resolution 10-42 (the "California Cap -and -Trade Regulation"). The Cap -and -Trade Regulation caps
GHG emissions for 2012 at 165.8 million metric tons of carbon dioxide equivalent ("CO2e") for a subset of the
relevant GHG sources. That cap increases to a peak of 394.5 million metric tons of CO2e in 2015 when the program
is fully implemented, and will then decline to 334.2 million by 2020 through reductions in emissions.
[The Cap -and -Trade Regulation is not in final form, and CARB directed its staff to work to resolve several
issues identified in Resolution 10-42 prior to the targeted effective date of January 1, 2012. — ORRICK TO
UPDATE] For example, CARB must hold one or more workshops on proposed modifications to the regulatory
language regarding the allocation of allowances, make a finding as to whether the regulation would result in one or
more significant adverse environmental effects, determine whether there are feasible alternatives or mitigation
measures that could reduce such significant adverse environmental effects, and review issues regarding the
compliance offset program, impacts from including emissions from imported electricity in the program, potential
investment of allowance value, and other important issues. The modified regulatory language will be subject to a
15-day public comment period. CARB is required to consider any written comments submitted during the period
and to make any additional modifications as may be appropriate in light of those comments. CARB announced that
it will take these additional steps in the first half of 2011, which it began to do prior to the recent ruling issued in the
litigation discussed below. Resolution 10-42 requires a report on progress being made on implementing the
California Cap -and -Trade Regulation by July 31, 2011.
As described above, CARB has not decided yet how to distribute, or allocate, emissions allowances to
electric utilities and generators such as the Electric System. Appendix 1 to Resolution 10-42 identifies the policy
objectives for the electric utility allowance allocation plan as including: (1) reflect expected ratepayer "cost burden"
associated with the cap -and -trade program, (2) incorporate the expected benefits of energy efficiency investments,
and (3) recognize early action by incorporating the use of State -defined eligible renewable energy from 2007-2011.
The Scoping Plan and the California Cap -and -Trade Regulation are subject to litigation and have been
enjoined, which may impact the timing and substance of the regulations ultimately adopted by CARB to implement
the AB32 program. Several environmental organizations filed a lawsuit challenging CARB's implementation of the
Scoping Plan, including the California Cap -and -Trade Regulation, for failure to satisfy the environmental review
process required under the California Environmental Quality Act ("CEQA"). On March 18, 2011, the Superior
Court of California in San Francisco County ruled that CARB had not conducted an adequate environmental review
before it approved the Scoping Plan. The ruling sets aside CARB's certification of its environmental review of the
Scoping Plan and enjoins any further implementation of the Scoping Plan until CARB conducts an environmental
review that meets CEQA standards. [CARB has indicated it intends to appeal the ruling. — ORRICK TO UPDATE]
If upheld, the ruling will require CARB to perform more thorough analyses of alternatives to the market -based
emissions reduction programs, such as a carbon tax or direct regulation of GHG emitters, in order to achieve the
GHG emission reduction goals set forth in AB32. It is unknown whether the California Cap -and -Trade Regulation
will be adopted and effective by the AB32 deadline of January 1, 2012. The City will continue to closely monitor
the developments in this litigation and any further regulatory developments, if CARD is allowed to proceed while its
appeal is pending. The City will also continue to evaluate in detail the impact of the California Cap -and -Trade
Regulation on the City's Electric System in the event the program is ultimately finalized. It is possible that the City
will incur significant costs to comply with the California Cap -and -Trade Regulation or other regulations and
requirements imposed under AB32 authority.
46
California Renewable Electric Standard. In 2002, SB 1078 established the California Renewable Portfolio
Standard policy ("RPS Policy") which required retail sellers of electricity regulated by the CPUC to procure 20% of
retail sales from renewable energy by 2017. The RPS Policy encouraged, but did not require, local publicly owned
electric utilities, such as the Electric System, to meet the same goal. The RPS Policy is implemented by the
Commissions. In 2006, SB107 modified the RPS Policy by requiring retail sellers of electricity regulated by the
CPUC to procure 20% of retail sales from renewable energy by 2010 instead of the original 2017. In November
2008, then Governor Schwarzenegger issued Executive Order 5-14-08, which established a renewable energy target
for retail sellers of electricity to achieve 33% renewable energy by 2020. On December 11, 2008, CARB approved
the Climate Change Scoping Plan, which includes a GHG emission reduction measure to implement the goals of
Executive Order S-14-08 and achieve a 33% renewable energy target by 2020.
On September 15, 2009, Governor Schwarzenegger issued Executive Order 5-21-09, which directed CARB
to develop under its AB32 authority a regulation that would require, among others, publicly owned utilities to
achieve the 33% renewable energy target by 2020. On September 23, 2010, CARB adopted by regulation the
Renewable Electricity Standard policy ("RES Policy"), which requires electricity providers, including all California
publicly owned utilities such as the Electric System, to achieve a renewable energy target of 33% by 2020. The
RES Policy sets forth compliance intervals under which the regulated entities, including the City, must meet the
following progressive interim renewable energy targets: 20% from 2012 through 2014, 24% from 2015 through
2017, 28% from 2018 through 2019, and 33% from 2020 and annually thereafter. In the adopting resolution for the
RES Policy, CARB indicated that it proposes to modify the regulation so that the initial compliance interval will not
be an enforceable renewable requirement but will instead be used to monitor progress towards meeting the
renewable goals and incentivize over compliance for use in meeting future compliance intervals. CARB also stated
that the RES Policy builds upon and does not supersede any obligations that apply to retail sellers of electricity
under the existing RPS Policy.
The adopting resolution for the RES Policy also states that CARB will consider amendments to the RES
Policy if the CPUC approves the use of tradable renewable energy credits ("TRECs") as an additional compliance
tool for the RPS Policy. On January 14, 2011, the CPUC issued Decision 11-01-025 under Rulemaking 06-02-012,
which authorizes the use of TRECs as a compliance tool for the RPS Policy. Under Decision 11-01-025, retail
sellers of electricity subject to the RPS Policy can buy, sell and trade renewable energy credits separately from their
underlying energy and use those TRECs for compliance with the RPS Policy; however, a temporary cap ending in
December 2013 was imposed on retail sellers subject to the RPS Policy that limits the amount of TRECs such sellers
can use to satisfy their annual procurement compliance to no more than 25%. The CPUC stated in Decision 11-01-
025 that it intends to work with CARB and the CEC to coordinate their roles and harmonize the RES Policy and the
RPS Policy with respect to renewable energy programs in California.
On April 12, 2011, Governor Brown signed into law the California Renewable Energy Resources Act, or
SBX 1-2. The new law directs the governing board of each local publicly owned electric utility, such as the Electric
System, to develop and implement a renewable energy resources procurement plan. SBX 1-2 establishes
procurement targets for three compliance periods to be implemented by the procurement plan. The first compliance
period is from January 1, 2011 to December 31, 2013, during which an average of 20% of the utility's retail sales
must be procured from eligible renewable energy resources. During the second compliance period, from January 1,
2014 to December 31, 2016, the utility must make reasonable progress each year to ensure it achieves 25% of retail
sales from eligible renewable energy resources by December 31, 2016. Similarly, during the third compliance
period, from January 1, 2017 to December 31, 2020, reasonable progress each year must be made to ensure the
utility's retail sales achieve 33% from eligible renewable energy resources by December 31, 2020. SBX 1-2
establishes that CARB will have enforcement authority over local publicly owned utilities and may impose penalties
for noncompliance with its requirements. SBX 1-2 directs the CEC to design and implement an accounting system
to verify compliance with its standards, establish a system to track and verify renewable energy credits, and to
certify the eligibility of renewable energy credits. SBX 1-2 also establishes criteria for renewable energy credits.
For example, renewable energy credits cannot be created for electricity generated pursuant to any electricity
purchase contract with a retail seller or a local publicly owned electric utility executed before January 1, 2005,
unless the contract contains explicit terms and conditions specifying the ownership or disposition of those credits.
SBX 1-2 also addresses the issue of the extent to which a renewable energy facility must be located in California or
deliver power to California and how those factors affect the creation and use of renewable energy credits associated
with energy generated at a particular facility. [SBX 1-2 establishes requirements on this issue that differ from the
47
CPUC approach discussed above and the City is analyzing the impact of the new requirements on the Electric
System. The City is also analyzing the overall impact of SBX 1-2 on the Electric System. —TO UPDATE]
Also, Executive Order S-3-05, which was issued by Governor Schwarzenegger in 2005, established the
following statewide greenhouse gas reduction targets: (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 5-3-05
also called for the California Environmental Protection Agency to lead a multi -agency effort to examine the impacts
of climate change on California and develop strategies and mitigation plans to achieve the targets. Furthermore, in
2006, Executive Order 5-06-06 was signed and directed 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.
See "THE ELECTRIC SYSTEM — Power Supply Resources — Renewable Energy Resources" for a
description of the City's existing renewable energy projects and the City's plan to satisfy the RES Policy and the
RPS Policy.
Renewable Energy Policy Development. Executive Order S-21-09 also provides that CARB may delegate
policy development and implementation to the Commissions, that CARB is to consult with the CAISO and other
balancing authorities on impacts on reliability, renewable integration requirements and interactions with wholesale
power markets in carrying out the provisions of Executive Order S-21-09, and that CARB is to establish the highest
priority for those resources with the least environmental costs and impacts on public health that can be developed
most quickly and that support reliable, efficient and cost-effective electricity'system operations including resources
and facilities located throughout the western states.
SB 1389 (Bowen, Chapter 568, Statutes of 2002) requires that the CEC prepare a biennial integrated energy
policy report that contains an integrated assessment of major energy trends and related issues facing California and
provide policy recommendations to conserve resources, protect the environment, ensure reliable, secure and diverse
energy supplies, enhance the State's economy and protect public health and safety. In its 2009 Integrated Energy
Policy Report, adopted in December 2009, the CEC identifies recommendations for State-wide policies on energy
and environmental matters. Among those policy recommendations, the following may have a material effect on the
City and its Electric System: (i) continue the efforts to codify and implement the RPS Policy standard of 33% by
2020, as identified in Executive Orders 5-14-08 and 5-21-09 and adopted by CARB as a regulation under AB32 on
September 23, 2010, in order to help reduce GHG emissions; (ii) increase support for the development of combined
heat and power facilities as energy efficiency resources; and (iii) support of the State's policy to phase out the use of
once -through -cooling water processes at power plants.
In December 2010, the CEC released the Committee Final 2010 Integrated Energy Policy Report Update
(the "IEPR Update"), which indicates that solar -thermal projects, wind, and solar photovoltaic projects, among other
renewables, may be utilized to achieve the 33% RPS Policy standard by 2020. The CEC adopted the IEPR Update
on January 12, 2011. [The CEC has begun the scoping and preparation process for the 2011 Integrated Energy
Policy Report, which is scheduled to be finalized and adopted in December 2011. — ORRICK TO UPDATE]
GHG Emissions Performance Standard and Financial Commitment Limits. In September 2006, SB 1368
(Chapter 598, Statutes of 2006) was signed into law. In the case of publicly owned utilities such as the Electric
System, SB 1368 required the CEC to adopt a GHG emissions performance standard ("EPS") for generating
facilities. Accordingly, in August 2007, the CEC adopted regulations setting the EPS at 1,100 pounds per MWh.
SB 1368 also prohibits publicly owned utilities from making any "long-term financial commitment" in
connection with "baseload generation" that does not satisfy the EPS. Generally, a "long term financial
commitment" is any new or renewed power purchase agreement with a term of five years or more, the purchase of
an interest in a new power plant or any investment, other than routine maintenance, in an existing power plant that
extends the life of the plant by more than five years or results in an increase in its rated capacity. `Baseload
generation" means a power plant that is intended to operate at an annualized capacity factor of 60 percent or more.
The impact of the continued commitment and prioritization for reducing the electric utility industry's GHG
emissions cannot be fully ascertained at this time because the total cost to the City of any reduction of GHG
emissions, whether calculated in dollars or the value of emissions allowances under the adopted California cap-and-
48
trade program, are unknown. Additionally, the effect of potential federal legislation (discussed below), which could
limit or prevent the development of a statewide cap -and -trade program, is also unknown.
Energy Efficiency Initiatives
Energy Efficiency. [The City has a commitment to energy efficiency and continues to pursue cost-effective
means of reducing or avoiding the need to generate electricity (particularly during peak periods). — TO UPDATE]
These activities defer the need to acquire costly new generating facilities, improve the value of electric service to
customers and increase the Electric System's overall load factor, thereby reducing or avoiding negative
environmental impacts from power generation. Moreover, State laws enacted in 2005 and 2006 require local
publicly owned electric utilities in procuring energy, to first acquire all available energy efficiency and demand
reduction resources that are cost effective, reliable and feasible, and to provide annual reports to customers and to
the CEC describing its investment in energy efficiency and demand reduction programs. Assembly Bill 2021, which
became a law in 2007, requires the Investor Owned Utilities and publicly owned utilities to identify energy
efficiency potential and establish annual efficiency targets so that the State can meet the goal of reducing total
forecasted electricity consumption by 10% over the next 10 years. [The City is currently on track to meet these
requirements. — TO UPDATE]
Under Senate Bill 1 ("SB 1") publicly owned utilities are required to establish programs supporting the
stated goal of the legislation to install 3,000 MW of photovoltaic energy in California, and 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 are required to decrease at a minimum average rate of 7% per year. Publicly owned utilities also have to
meet certain reporting requirements regarding the installed capacity, number of installed systems, number of
applicants and awarded incentives. [The City [has/has not] established a solar incentive program pursuant to SB 1. —
TO UPDATE]
The City offers numerous programs and services for residential, commercial and industrial customers to
encourage the installation and use of energy efficient measures and equipment such as: [TO UPDATE]
The City is creating a climate action plan, which will provide guidance to the City on how to take
advantage of opportunities to reduce emissions of gases linked to climate change, which is expected to have the
additional benefit of reducing traditional criteria pollutants; and
• The City has commissioned a study to create a Green Industrial Development Plan, the goal of
which is to establish a series of programs to enhance environmental sustainability and support economic vitality,
while protecting the health of the residents and workers in the City and its surrounding communities.
[Since _, the City has spent approximately $_ million on its energy efficiency programs, and
these programs have reduced long-term peak period demand and consumption by approximately _ MWs and _
GWh of energy savings. The City budgeted approximately $_ million for Fiscal Year 20 to renew and expand
its commitment to energy efficiency, and spent approximately $_ million during Fiscal Year 20 for such
purposes. — TO UPDATE]
Environmental and Regulatory Factors
General. Numerous environmental laws and regulations affect the Electric System's facilities and
operations. [The City monitors its compliance with laws and regulations and reviews its remediation obligations on
an ongoing basis. — TO UPDATE] The following topics highlight some of the major environmental compliance
issues affecting the Electric System:
Air Quality — Nitrogen Oxide (NOx) Emissions. The Malburg Generating Station facilities are subject to
the Regional Clean Air Incentives Market ("RECLAIM") NOx regulations adopted by the South Coast Air Quality
Management District ("SCAQMD"). In accordance with these regulations, SCAQMD established annual NOx
Cis
allocations for stationary source facilities based on historical emissions. These allocations are in the form of
RECLAIM trading credits ("RTCs"). Facilities that exceed their allocated RTCs must reconcile those emissions by
purchasing RTCs from the RECLAIM market. [Bicent has a program of installing emission controls at the MGS and
purchasing RTCs, as necessary, to meet the emission requirements with respect to the MGS. — TO UPDATE] [TO
DISCUSS COMPLIANCE BY CITY -OWNED GENERATION GENERATING FACULTIES.]
In May 2001, SCAQMD adopted amendments to RECLAIM to address a significant shortage of RTCs and
to stabilize RTC prices. Under these amendments existing power plants were bifurcated from the rest of the
RECLAIM market and were required to install Best Available Retrofit Control Technology ("BARCT ). [As
required under SCAQMD rules, the MGS [and the City -owned generating facilities] met BARCT requirements. —
TO UPDATE] As of January 1, 2007, power producers were allowed to reenter the RECLAIM market. As a result
of the installation of NOx control equipment at the MGS, there are sufficient RTCs to allow for normal operations of
the MGS. See also "— Air Quality —Federal Actions on Greenhouse Gases" and "—Air Quality —National Ambient
Air Quality Standards."
Air Quality — State Actions on Greenhouse Gas Emissions. See ". California Climate Change Policy
Developments" above.
Air Quality — Federal Actions on Greenhouse Gases.
Regulatory Actions Under the Clean Air Act. The EPA has taken steps to regulate GHG emissions under
existing law. On April 2, 2007, the U.S. Supreme Court issued a decision in Massachusetts v. EPA holding that the
EPA has the authority to regulate GHG emissions under the federal Clean Air Act. Air pollutants, including GHGs,
which are regulated by actually controlling emissions under any Clean Air Act program must be taken into account
when considering permits issued under other programs, such as the Prevention of Significant Deterioration ("PSD")
Permit Program or the Title V Permit Program. A PSD permit is required before commencement of construction of
new major stationary sources or major modifications of such sources and contains requirements including but not
limited to the application of best available control technologies ("BACT"). Title V permits must be applied for
within one year a source becomes subject to the program. Title V permits are operating permits for major sources
that consolidate all Clean Air Act requirements (arising, for example, under the Acid Rain, New Source
Performance Standards, National Emission Standards for Hazardous Air Pollutants, and/or PSD programs) into a
single document, provide for review of the documents by the EPA, state agencies and the public, and contain
monitoring, reporting and certification requirements.
On May 13, 2010, the EPA issued a final rule for determining the applicability of the PSD and Title V
programs to GHG emissions from major stationary sources. The rule, known as the "Tailoring Rule," establishes
criteria for identifying facilities required to obtain PSD permits and the emissions thresholds at which permitting and
other regulatory requirements apply. The applicability threshold levels established by this rule include both a mass -
based calculation and a metric known as the carbon dioxide equivalent, or CO2e, which incorporates the global
warming potential for each of the six individual gases that comprise the collective GHG defined by EPA. The
Tailoring Rule sets forth two initial steps for phasing in the GHG permitting requirements.
The first step became effective on January 2, 2011, and requires sources subject to PSD and/or Title V
permits due to their non-GHG emissions (such as fossil -fuel based electric generating facilities for their NOx, SO2
and other emissions) to address GHG emissions in new permit applications or renewals. Construction or
modification of major sources will become subject to PSD requirements for their GHG emissions if the construction
or modification results in a net increase in the overall mass of GHG emissions exceeding 75,000 tons per year
("tpy") on a CO2e basis. New and modified major sources required to obtain a PSD permit would be required to
conduct a BACT review for their GHG emissions. On November 10, 2010, the EPA issued guidance on the
technologies or operations that would constitute BACT for GHGs. The guidance indicates that most of the initial
permitting decisions will focus on improved energy efficiency and that the EPA intends to issue additional guidance
in 2011. [The City will need to comply with these requirements if it repowers its aging City -owned power plants.
The time, cost and engineering necessary for compliance with the Tailoring Rule will be included in the overall
project schedule. — TO UPDATE]
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With respect to Title V requirements under the first step of the Tailoring Rule, effective January 2, 2011,
sources required to have Title V permits for non-GHG pollutants will be required to address GHGs as part of their
Title V permitting. When any source applies for, renews, or revises a Title V permit, Clean Air Act requirements
for monitoring, recordkeeping and reporting will be included in the renewed permit. This part of the rule does not
create any new emissions controls or limitations for GHGs; it only creates the requirement for these sources to
monitor, record and report their GHG emissions. In the Tailoring Rule, the EPA notes that the existing requirements
created by the October 30, 2009 the EPA final rule for mandatory monitoring and annual reporting of GHGs from
various categories of facilities including electric generating facilities will generally be sufficient to satisfy these new
Title V requirements. The GHG monitoring and reporting rule requires facilities to have begun data collection on
January 1, 2010. [On March 18, 2011, EPA issued a final rule extending the deadline to submit the fast annual
reports from March 31, 2011 to September 30, 2011. — ORRICK TO UPDATE] [The City -owned generating
facilities are subject to the GHG monitoring and reporting rule, so compliance with the new Title V permitting
requirements is not expected to be material. — TO UPDATE] The second step of the Tailoring Rule is effective July
1, 2011, and is applicable to new facilities or modifications to existing facilities that exceed certain GHG emission
thresholds, even if the facility is not subject to PSD for non-GHG emissions. The second phase requirements would
apply to any new, major sources the City constructs, as well as to any major modifications of existing facilities,
depending on their levels of emissions of both GHG and non-GHG pollutants.
In addition to the PSD permit program, EPA is also in the process of developing a GHG regulatory
program under the New Source Performance Standards ("NSPS") provisions of the Clean Air Act. On December
23, 2010, the EPA announced a timetable for issuing NSPS and emissions guidelines for GHG emissions from fossil
fuel power plants. [By July 26, 2011, the EPA will issue a rule proposing GHG performance standards for new and
modified electric generating units ("EGUs") and a role proposing GHG emissions guidelines from existing EGUs.
Final rules are due by May 26, 2012.—.ORRICK TO UPDATE] [Until the proposed NSPS and emissions
guidelines for GHG emissions have been issued, the City cannot assess the potential impact of these future standards
on the City. — TO UPDATE]
Proposed Legislation. In addition to the EPA's recent regulatory actions moving towards federal
regulation of GHG emissions, the United States Congress has recently considered several energy and climate
change -related pieces of legislation that propose, among other things, a cap -and -trade system to regulate and reduce
the emission of carbon dioxide and other GHGs and a federal renewable energy portfolio standard. One such bill,
H.R. 2454, known as the American Clean Energy and Security Act of 2009 ("ACES"), was passed by the House of
Representatives on June 26, 2009. The l i lth Congress ended without a vote by the entire Senate on an economy -
wide cap -and -trade program. The 112th Congress may consider new GHG proposals and it is possible that
Congress will agree to set limits on GHG emissions for the electric utility sector. The impact that federal GHG cap -
and -trade legislation will have on the electric utility industry and business depends largely on the specific provisions
of the legislation that ultimately become law. Some of the important decisions to be made in crafting cap -and -trade
legislation include the timing and magnitude of the emissions cap, the extent to which emissions allowances are
either allocated or auctioned to the highest bidder, the extent to which emissions may be offset by other actions,
whether there will be a cap on the price of emissions allowances and the allocation of proceeds from the auction of
allowances. Other areas of consideration for inclusion in such legislation include, but are not limited to, the
development and deployment of alternative fuels, renewable energy resources, and energy conservation measures.
The timeline and impact of climate change legislation cannot be accurately assessed at this time, but it is expected
that any such federal action will have a significant impact on fossil -fueled generation facilities.
Air Quality — Litigation on Greenhouse Gases. Regulation of GHGs is being litigated in courts throughout
the United States. In particular, there are pending cases alleging that GHG emissions from electric generation are
causing a public nuisance and should be abated by electric generation facilities. The City cannot currently predict
how GHG emissions issues will arise in connection with pending or future permit proceedings or whether litigation
based on climate change issues will adversely affect the City's Electric System and its capital improvement plans.
Air Quality — Regional Haze. On June 15, 2005, the EPA issued the Clean Air Visibility Rule, amending
its 1999 regional hazard rule, which had established timelines for states to improve visibility in national parks and
wilderness areas throughout the United States. Under the amended rule, certain types of older sources may be
required to install BART. Some of the effects of the amended rule could be requirements for newer and cleaner
technologies and additional controls for particulate matter, SO2 and NOx emissions from utility sources. The states
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were to develop their regional haze implementation plans by December 2007, identifying the facilities that will have
to reduce emissions and then set BART emissions limits for those facilities. However, on January 15, 2009, the
EPA published a notice finding that 37 states, ttre District of Columbia and the Virgin Islands failed to submit all or
a portion of their regional haze implementation plans. EPA's notice initiates a two year period during which each
jurisdiction must submit a haze implementation plan or become subject to a Federal Implementation Plan issued by
the EPA that would set basic program requirements. California, Arizona and Nevada are all states listed as having
failed to submit a portion or any of the regional haze SIP requirements.
Air Quality — Section 114(a) New Source Review Information Request. The Clean Air Act prohibits
physical changes (other than routine maintenance, repair and replacement) or changes in method of operations that
result or could result in increased emissions without first applying for and receiving the required permits under the
Clean Air Act. Such permits would generally require the installation of additional pollution control equipment. The
EPA recently announced plans to actively pursue New Source Review enforcement actions against electric utilities
for making such changes to their coal fired power plants in violation of the Clean Air Act.
Under Section 114 of the Clean Air Act, the EPA has the authority to request from any person who owns or
operates an emission source, information and records about operation, maintenance, emissions, and other data
relating to such source for the purpose of developing regulatory programs, determining if a violation occurred (such
as the failure to undergo new source review), or carrying out other statutory responsibilities. If such violations are
found to have occurred, the EPA or other enforcement authorities could require the installation of new pollution
control equipment in addition to modifications that have already been completed or planned and could require the
payment of fines and penalties.
[TO INCLUDE DISCUSSION OF EPA ACTIONS RELATING TO THE ELECTRIC SYSTEM, IF ANY]
Air Quality — National Ambient Air Quality Standards. The Clean Air Act requires that the EPA establish
National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. When a NAAQS has been
established, each state must identify areas in its state that do not meet the EPA standard (known as "non -attainment
areas") and develop regulatory measures in its state implementation plan to reduce or control the emissions of that
air pollutant in order to meet the standard and become an "attainment area."
When an area is designated as non -attainment, stricter restrictions on the emissions of that air pollutant are
imposed, and it can be more difficult and costly to obtain permits for new major sources or major modifications to
existing sources. Existing sources in non -attainment areas are subject to reasonably available control technology
("RACT") set forth in the SIP revisions that are required when an area is designated as non -attainment. The EPA is
in the process of developing stricter NAAQS for SO2, NOx, particulate matter and ozone, [each of which may
impact the Electric System. — TO UPDATE]
On January 7, 2010, the EPA released a draft rule proposing stricter NAAQS for ground -level ozone, the
main component of smog. [The EPA plans to complete the ozone standards mlemaking by July 29, 2011. —
ORRICK TO UPDATE] [The City has not conducted an assessment of the impact of the proposed rule, so the effect
of the proposed stricter ozone standards is unknown at this time. — TO UPDATE]
On June 22, 2010, the EPA published a final rule setting a stricter primary NAAQS for S02. The new
level is a one -hour standard set at 75 parts per billion (ppb). This new standard replaces the former 24-how standard
of 140 ppb and annual average of 30 ppb. The EPA intends to designate areas that do not meet the new primary
standard by June 2012. [The City cannot assess the potential impact of this new standard until the nonattainment
areas are designated by the EPA. — TO UPDATE]
With respect to nitrogen dioxide ("NOT') emissions, on January 22, 2010, the EPA strengthened the
health -based NAAQS. The EPA set a new 1-hour NO2 standard at the level of 100 parts per billion. The EPA's
NAAQS for NO2 is designed to protect against exposure to the entire group of nitrogen oxides. The EPA expects to
designate areas that do not meet the new standard by January 2012. [The City cannot assess the potential impact of
this new standard until the nonattamment areas are designated by the EPA. — TO UPDATE]
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On November 13, 2009, the EPA published a final rule designating areas that violate or contribute to
violations of the PM 2.5 NAAQS. The Los Angeles South Coast Air Basin was designated as a nonattainment area.
These designations start a three-year process in which local and state officials develop and implement a plan to
reduce PM 2.5 pollution to levels that are in compliance with federal standards.
Solar Power. In August 2006, Governor Schwarzenegger signed Senate Bill 1, the California Solar
Initiative ("SB-1") into law. SB-1 requires the development of a solar photovoltaic program for California,
including both investor and publicly owned utilities, and the establishment of eligibility criteria in collaboration with
the CEC for the funding of solar energy systems receiving ratepayer funded incentives. The City has [TO LIST
ACTIVITY UNDER SB-1, IF ANY]. [SB-1 caps the City's expenditures at approximately $_ million under this
program. — TO UPDATE]
Superfund. The federal Comprehensive Environmental Responsibility, Compensation and Liability Act
("CERCLA") of 1980, as amended, as well as California statutes, impose strict liability for cleanup costs upon those
who generate or dispose of hazardous substances and hazardous wastes. The City's past disposal practices with its
Electric System may result in CERCLA liability as previously approved disposal methods or sites become
candidates for Superfund classification. In addition, under these statutes, the City may be held liable for cleanup
activities on property that it owns and operates, even if the conditions requiring cleanup existed before the City's
occupancy of a site. As a result, the City may incur substantial, but presently unknown, costs as a participant in the
cleanup of sites contaminated with hazardous substances or wastes.
Resource Conservation and Recovery Act ("RCRA ). In 2000, the EPA issued a regulatory determination
that coal combustion waste disposed in landfills and surface impoundments is a regulated solid waste that is exempt
from hazardous waste regulations. After issuing the regulatory determination, the EPA collected new information
and conducted additional analyses in support of developing related regulations and made this information available
for public comment in August 2007. Due to the failure of the coal ash impoundment at a coal-fired power plant
facility in Tennessee that occurred in December 2008, the EPA is now considering all regulatory options for coal
combustion waste regulation, including regulation as a hazardous waste under Subtitle C of RCRA and imposing
surface impoundment integrity requirements.
On June 21, 2010, the EPA published a proposed rule describing the two possible regulatory options it is
considering under RCRA for the disposal of coal ash generated from the combustion of coal by electric utilities and
independent power producers. Under either option, the EPA would regulate the construction of impoundments and
landfills, and seek to ensure both the physical and environmental integrity of disposal facilities.
Under the first proposed regulatory option, the EPA would list coal ash destined for disposal in landfills or
surface impoundments as "special wastes" subject to regulation under Subtitle C of RCRA. Subtitle C regulations
set forth the EPA's hazardous waste regulatory program, which regulates the generation, handling, transport and
disposal of wastes. The proposed rule would create a new category of waste under Subtitle C, so that coal ash
would not be classified as a hazardous waste, but would be subject to many of the regulatory requirements
applicable to such wastes. Under this option, coal ash would be subject to technical and permitting requirements
from the point of generation to final disposal. Generators, transporters, and treatment, storage and disposal facilities
would be subject to federal requirements and permits. The EPA is considering various options for reducing the risks
of environmental releases from coal combustion waste disposal facilities, including liners, groundwater monitoring,
fugitive dust controls, financial assurance, corrective action, closure of units, and post -closure care, all following the
approach applied to hazardous wastes. This first option also proposes requirements for dam safety and stability for
surface impoundments, land disposal restrictions, treatment standards for coal ash, and a prohibition on the disposal
of treated coal ash below the natural water table. The first option would not apply to certain narrowly -defined
beneficial reuses of coal ash. The first option proposes more extensive and stringent requirements than the second
option discussed below and would result in significantly higher compliance costs as compared to the second option.
Under the second proposed regulatory option, the EPA would regulate the disposal of coal ash under
Subtitle D of RCRA, the regulatory program for non -hazardous solid wastes. Under this option, the EPA is
considering issuing national minimum criteria to ensure the safe disposal of coal ash, which would subject disposal
units to location standards, liner requirements, groundwater monitoring and corrective action standards for releases,
closure and post -closure care requirements, and requirements to address the stability of surface impoundments, all in
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substantial parallel to the requirements imposed upon municipal landfills. Existing surface impoundments would
not have to close or install composite liners and could continue to operate for their useful life. The second option
would not regulate the generation, storage, or treatment of coal ash prior to disposal, and no federal permits would
be required.
The proposed rule also states that the EPA is considering listing coal ash as a hazardous substance under
CERCLA, and includes proposals for alternative methods to adjust the statutory reportable quantity for coal ash.
The extension of CERCLA to coal ash could significantly increase potential liability for cleanup of past and future
coal ash disposal.
The EPA has not decided which regulatory approach it will take with respect to the management and
disposal of coal ash. If the EPA chooses to regulate coal combustion waste as a hazardous waste, the City may incur
significant additional costs in the cost of purchase power. The City cannot predict the potential scope or impact of
any such regulations at this time. The EPA stated in its fall 2010 regulatory agenda that the date of final action on
these proposed rules has not been determined yet.
Electric and Magnetic Fields. A number of studies have been conducted regarding the potential long-term
health effects resulting from exposure to electric and magnetic fields created by high voltage transmission and
distribution equipment. Additional studies are being conducted to determine the relationship between electric and
magnetic fields 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 electric and magnetic fields concerns may have on electric utilities,
including the Electric System.
For additional information regarding environmental matters pertaining to the City and its Electric System,
see "THE ELECTRIC SYSTEM — Power Sunnly Rrcourcea "
Developments in the California Energy Market
In the late 1990s, California restructured its electricity market so that regulated retail suppliers were
required to purchase their customers' supply needs through a centralized, wholesale market. In the centralized
market, an administrator collected sellers' price bids and purchasers' estimates of demand. The administrator then
determined the price for the most costly unit that was needed to meet demand, and all transactions occurred at that
price. The wholesale market was structured as a "spot" market in which prices were set and purchases were made
on a short-term basis shortly before supply was needed. California also capped the price at which regulated retail
suppliers could sell electricity to their customers. During portions of 2000 and 2001, wholesale market prices in
California became highly volatile and, for sustained periods, significantly exceeded the capped retail prices.
Demand did not decline to reflect high wholesale prices because retail price were capped. This situation resulted in
the deterioration of the creditworthiness of two large, retail suppliers, Pacific Gas & Electric Company ("PG&E")
and Southern California Edison Company, and PG&E eventually declared bankruptcy. Certain other marketers,
power suppliers and power plant developers experienced downgrades of their credit ratings. PG&E 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.
The volatility in wholesale prices that California experienced in 2000 and 2001 was due to a number of
factors, including flaws in the structure of the wholesale market and unlawful manipulation of the wholesale market.
As discussed below, the wholesale market in California has since been redesigned, and Congress has established
mechanics for policing wholesale markets.
Volatility in electricity prices in California may nevertheless return due to a variety of factors that affect 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 emission legislation and regulations, fuel costs and availability, weather effects on customer demand,
transmission congestion, the strength of the economy in California and surrounding states and levels of hydroelectric
generation within the region (including the Pacific Northwest). Volatility in electricity prices may contribute to
greater volatility in the Electric System's Light and Power Fund from the sale (and purchase) of electric energy and,
therefore, could materially affect the financial condition of the Electric System. To mitigate price volatility and the
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City's exposure on the spot market, the City undertakes resource planning activities and plans for its resource needs.
Of particular note, the City has power supply contracts and other arrangements relating to its system supply of
power that are of specified durations. See "THE ELECTRIC SYSTEM — Power Supply Resources."
Future Regulation of the Electric Utility Industry
The electric utility industry is highly regulated and is also regularly subject to reform. The most recent
reforms and proposals are aimed at reducing emissions of greenhouse gases from combustion of fossil fuels and
reducing impacts from using ocean water for power plant cooling. The City is unable to predict future reforms to
the electric utility industry or the impact on the City of recent reforms and proposals. In particular, the City is
unable to predict the outcome of proposals on greenhouse gasses and the associated impact on the operations and
finances of the City and its Electric System or the electric utility industry.
Energy Policy Act of 1992
The Energy Policy Act of 1992 ("EPAct 1992") made fundamental changes in 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, 16 U.S.C. § 791a et seq. The purpose of these changes, in part, was to bring about increased
competition among wholesale suppliers. As amended, sections 211, 212 and 213 authorize the FERC to compel a
transmission provider to provide transmission service upon application by an electricity supplier. FERC's authority
includes the authority to compel the enlargement of transmission capacity as necessary to provide the service. The
service must be provided at rates, charges, terms and conditions that are set by FERC. Electric utilities that are
owned by municipalities or other public agencies are "transmitting utilities" that may be subject to an order under
sections 211, 212 and 213. EPAct 1992 prohibits FERC from requiring "retail wheeling" under which a retail
customer that was located in one utility's service area could obtain electricity from another source. [The City has
disposed of all of its transmission resources but an order by FERC to another party to provide transmission might
adversely affect the costs of the Electric System in having purchased power delivered to the City. — TO UPDATE]
Energy Policy Act of 2005
The Energy Policy Act of 2005 ("EPAct 2005") addresses a wide array of matters that could affect the
entire electric utility industry, including the Electric System.
EPAct 2005 authorizes FERC to compel "open access" to the transmission systems of certain utilities that
are not generally regulated by FERC, including publicly owned utilities if the utility sells more than four million
megawatt hours of electricity per year. This category currently does not include the Electric System. Under open
access, a transmission provider must allow all customers to use the system under standardized rates, terms and
conditions of service (there is no need for a customer to apply to FERC as under the EPAct 1992). FERC may
compel open access in this context unless the order would violate a private activity bond rule for purposes of section
141 of the Internal Revenue Code. To date, FERC has not established generic rules that would require unregulated
utilities to provide open access. Rather, FERC has chosen to take a case -by -case approach. Under EPAct 2005,
FERC may not require publicly owned utilities such as the Electric System to join regional transmission
organizations ("RTOs"), in which participating utilities allow an independent entity to oversee operation of the
utilities' transmission facilities. FERC has stated, however, that FERC expects such utilities to participate in
regional processes for transmission planning and that FERC will pursue associated complaints against such utilities
on a case -by -case basis. All electricity purchased from services outside the City are delivered to the City through
the transmission system administered by CAISO. See "THE ELECTRIC SYSTEM — City Plan to Optimize
Resource Utilization."
EPAct 2005 also provides for criminal penalties for manipulative energy trading practices.
EPAct 2005 repealed the Public Utility Holding Company Act of 1935, which prohibited certain mergers
and consolidations involving electric utilities. EPAct 2005 gives FERC and state regulators access to books and
records within holding companies that include regulated public utilities. In addition, FERC may oversee inter -
affiliate transactions within such holding company systems. These provisions of EPAct 2005 are referred to as
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"PUHCA 2005." PUHCA 2005 does not apply to the Electric System but generally accommodates more
combinations of assets within the electric utility industry.
EPAct 2005 requires the creation of national and regional electric reliability organizations to establish and
enforce, under FERC's supervision, mandatory standards for the reliable operation of the bulk power system. The
standards are designed to increase system reliability and to minimize blackouts. FERC has designated the North
American Electric Reliability Corporation ("NERC") as the national electric reliability organization. FERC has
designated the Western Electricity Coordinating Council ("WECC") as the regional reliability organization for
utilities in the West, including the Electric System. Failure to comply with NERC and WECC standards exposes a
utility such as the Electric System to significant fines and penalties. NERC and WECC may audit the Electric
System's compliance with the reliability standards and, as indicated above, impose fines and penalties on the City
for non-compliance.
Under EPAct 2005, California investor -owned utilities were required to offer, to each of their classes of
customers, a time -based rate schedule that would enable customers to manage their energy use through advanced
metering and communications technology.
EPAct 2005 authorizes FERC to compel the siting of certain transmission lines if FERC determines that a
state has unreasonably withheld approval.
EPAct 2005 promotes increased imports of liquefied natural gas and includes incentives to support the
development of renewable energy technologies. EPAct 2005 also extends for 20 years the Price -Anderson Act,
which provides certain protection from liability for nuclear power issues and provides incentives for the construction
of new nuclear plants.
The City is unable to determine at this time the full long-term impact that EPAct 2005 will have on the
operations and finances of the Electric System or on the electric utility industry in general.
Currently Proposed Federal Legislation
Numerous bills were considered by the I I Ith Congress (2009-10) concerning United States energy policies
and various environmental matters. Issues that were raised by these bills include implementation of energy
efficiency and renewable energy standards, addressing transmission planning, siting and cost allocation to support
the construction of renewable energy facilities, cyber-security legislation that would allow FERC to issue interim
measures to protect critical electric infrastructure, cap -and -trade program to reduce GHG emissions, and renewable
energy incentives that could provide grants and credits to publicly owned utilities to invest in renewable energy
infrastructure. It is possible that the 112th Congress (2011-12) will pass legislation addressing similar issues.
The City is unable to predict at this time whether any of these or other legislative proposals will be enacted
into law and, if so, the impact they may have on the operations and finances of the Electric System or on the electric
utility industry in general.
The Hoover Plant has been a contracted power resource to the City and the existing contract is set to expire
in 2017. See "THE ELECTRIC SYSTEM — Power Supply Resources — Hoover Upraring Project." [The City has
been working with other stakeholders and legislators to pass the legislation that will to assure the City its existing
power capacity allocation and extension of the contract for an additional _ years. — TO UPDATE] [Hearings were
held about The Hoover Power Allocation Act of 2011 (the "Hoover Act"), in the Natural Resources Subcommittee
on Water and Power of the U.S. House of Representatives on May 12, 2011 and in the Committee on Energy and
Natural Resources Subcommittee on Water and Power in the Senate on May 19, 2011. — ORRICK TO UPDATE]
The California Desert Protection Act of 2011 was introduced by Senator Dianne Feinstein to the U.S.
Senate on January 26, 2011. The bill proposes to designate several desert areas, including the Mojave Trails, as new
national monuments in order to limit development in the designated areas. The limitations on development could
include solar and other renewable energy projects. The bill is currently before the Senate Committee on Energy and
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Natural Resources and is in the early stages of development. The City is therefore unable to assess the potential
impact of this bill on the City's renewable energy development goals.
Impact of Developments on the City
While the City generates only a small amount of electricity from its own resources, the matters described
above may have a significant impact on the cost of electricity the City purchases to satisfy its customers' load
requirements. 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, transmission congestion, 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 and, therefore, could materially affect the financial condition of the Electric System.
[The City relies on short-term power supply contracts and other arrangements to provide over [40%] of the
electricity required to satisfy customer load. — TO UPDATE] The City undertakes resource planning activities and
plans for its resource needs in order to mitigate against such price volatility and its spot market rate exposure. See
"THE ELECTRIC SYSTEM — Power Supply Resources" herein.
Other General Factors
The electric utility industry in general has been, or in the future may be, affected by a number of other
factors whichcould impact the financial condition and competitiveness of many electric utilities, including the
Electric System, and the level of utilization of generating and transmission facilities. In addition to the factors
discussed herein, such factors include, among others:
Effects of compliance with rapidly changing environmental, safety, licensing, regulatory
and legislative requirements;
Changes resulting from conservation and demand -side management programs on the
timing and use of electric energy;
Effects on the integration and reliability of the power supply from the increased usage of
renewables;
Changes resulting from a national energy policy;
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 competitive transmitting of less expensive electricity from
much greater distances over an interconnected system) and new methods of, and new
facilities for, producing low-cost electricity;
The repeal of certain federal statutes that would have the effect of increasing the
competitiveness of many investor -owned utilities;
Increased competition from independent power producers and marketers, brokers and
federal power marketing agencies;
"Self -generation" or "distributed generation" (such as microturbines, solar technology
and fuel cells) by industrial and commercial customers and others;
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Issues relating to the ability to issue tax-exempt obligations, including 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;
Effects of inflation on the operating and maintenance costs of an electric utility and its
facilities;
Changes from projected future load requirements;
Increases in costs and uncertain availability of capital;
• Shifts in the availability and relative costs of different fuels (including the cost of natural
gas);
• 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;
Inadequate risk management procedures and practices with respect to, among other
things, the purchase and sale of energy and transmission capacity;
• Other legislative changes, voter initiatives, referenda and statewide propositions;
• Effects of changes in the economy, population and demand of customers in the Electric
System's service area;
Effects of possible manipulation of the electric markets; and
Natural disasters or other physical calamities, including but not limited to, earthquakes.
See "THE ELECTRIC SYSTEM — Seismic Activity" herein.
Any of these factors (as well as other factors) could have an adverse effect on the financial condition of any
given electric utility, including the Electric System, and likely will affect individual utilities in different ways.
CONSTITUTIONAL LIMITATIONS ON TAXES
Articles XIIIC and XIIID of the State Constitution
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 in Bighorn -Desert View Water Agency v. Verjil, 39 Cal.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 Cal.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)
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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 2011 Bonds by virtue of the
"impairment of contracts clause" of the United States and California Constitutions.
Future Initiatives
Articles XIIIC and XIIID of California's state constitution provided limits on the ability of governmental
agencies to increase certain fees and charges. Such articles were adopted pursuant to measures qualified for the
ballot pursuant to California's constitutional initiative process. While Articles XIIIC and XIIID do not affect the
Electric System's rates and charges, from time to time other initiative measures could be adopted by California
voters. The adoption of any such initiatives might place limitations on the ability of the City and its Electric System
to increase revenues.
LITIGATION
There is no controversy or litigation of any nature now pending or threatened restraining or enjoining the
issuance of the 2011 Bonds or in any way contesting or affecting the validity of the 2011 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, would materially adversely affect the Electric System, the financial condition
of the City or the sources of payment for the 2011 Bonds. A number of lawsuits and claims are filed and pending
against the City that arise in the normal course of operations. None of these lawsuits are expected to materially
adversely affect the Electric System, the financial condition of the City or the sources of payment for the 2011
Bonds.
TAX MATTERS
2011 Series A Bonds
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 2011 Series A Bonds is
excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel is of the
further opinion that interest on the 2011 Series A Bonds is not a specific preference item for purposes of the federal
individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in
adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel is also of
the opinion that interest on the 2011 Series A Bonds is exempt from State of California personal income taxes. A
complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix D hereto.
To the extent the issue price of any maturity of the 2011 Series A Bonds is less than the amount to be paid
at maturity of such 2011 Series A Bonds (excluding amounts stated to be interest and payable at least annually over
the term of such 2011 Series A 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 2011 Series A Bonds
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 2011 Series A Bonds is the first price at which a
substantial amount of such maturity of the 2011 Series A 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 2011 Series A Bonds accrues daily over the term to
maturity of such 2011 Series A 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 2011 Series A Bonds to determine taxable gain or loss upon disposition (including sale,
redemption, or payment on mature ) of such 2011 Series A Bonds. Beneficial Owners of the 2011 Series A Bonds
should consult their own tax advis is with respect to the tax consequences of ownership of 2011 Series A Bonds
with original issue discount, including the treatment of Beneficial Owners who do not purchase such 2011 Series A
M
Bonds in the original offering to the public at the first price at which a substantial amount of such 2011 Series A
Bonds is sold to the public.
2011 Series A Bonds purchased, whether at original issuance or otherwise, for an amount higher than their
principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Bonds") will be treated
as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of
bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax
purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner's basis in a Premium
Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner.
Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of
amortizable bond premium in their particular circumstances.
The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross
income for federal income tax purposes of interest on obligations such as the 2011 Series A Bonds. The City has
made certain representations and covenanted to comply with certain restrictions, conditions and requirements
designed to ensure that interest on the 2011 Series A 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 2011 Series A Bonds
being included in gross income for federal income tax purposes, possibly from the date of original issuance of the
2011 Series A 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 2011 Series A Bonds may adversely affect the value of, or the tax status of interest
on, the 2011 Series A Bonds. 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 2011 Series A 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 2011 Series A Bonds may otherwise affect a Beneficial
Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depend upon the
particular tax status of the Beneficial Owner or the Beneficial Owner's other items of income or deduction. Bond
Counsel expresses no opinion regarding any such other tax consequences.
Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions
may cause interest on the 2011 Series A 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. As one example, the Obama Administration recently announced a
legislative proposal which, for tax years beginning on or after January 1, 2013, generally would limit the exclusion
from gross income of interest on obligations like the 2011 Series A Bonds to some extent for taxpayers who are
individuals and whose income is subject to higher marginal income tax rates. Other proposals have been made that
could significantly reduce the benefit of, or otherwise affect, the exclusion from gross income of interest on
obligations like the 2011 Series A Bonds. The introduction or enactment of any such legislative proposals,
clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or
marketability of, the 2011 Series A Bonds. Prospective purchasers of the 2011 Series A Bonds should consult their
own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and
regarding the impact of future 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 2011 Series
A Bonds for federal income tax purposes. It is not binding on the 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 Bonds ends with the issuance of the 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 2011 Series A 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 2011 Series A 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 2011 Series A Bonds,
and may cause the City or the Beneficial Owners to incur significant expense.
2011 Series B Bonds
The following discussion summarizes certain U.S. federal tax considerations generally applicable to
holders of the 2011 Series B Bonds that acquire their 2011 Series B Bonds in the initial offering. The discussion
below is based on laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are
subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or
are expected to be sought from the IRS with respect to any of the U.S. federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion
does not deal with all U.S. federal income tax consequences applicable to any given investor, nor does it address the
U.S. federal income tax considerations applicable to categories of investors some of which may be subject to special
taxing rules (regardless of whether or not such persons constitute U.S. Holders), such as certain U.S. expatriates,
banks, REITs, RICs, insurance companies, tax-exempt organizations, dealers or traders in securities or currencies,
partnerships, S corporations, estates and trusts, investors that hold their 2011 Series B Bonds as part of a hedge,
straddle or an integrated or conversion transaction, or investors whose "functional currency" is not the U.S. dollar.
Furthermore, it does not address (i) alternative minimum tax consequences or (ii) the indirect effects on persons who
hold equity interests in a holder. In addition, this summary generally is limited to investors that acquire their 2011
Series B Bonds pursuant to this offering for the issue price that is applicable to such 2011 Series B Bonds (i.e., the
price at which a substantial amount of the 2011 Series B Bonds are sold to the public) and who will hold their 2011
Series B Bonds as "capital assets" within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986,
as amended (the "Code").
As used herein, "U.S. Holder" means a beneficial owner of a 2011 Series B Bond that for U.S. federal
income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as
a corporation created or organized in or under the laws of the United States or any state thereof (including the
District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its
source or a trust where a court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons (as defined in the Code) have the authority to
control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations
to be treated as a domestic trust). As used herein, "Non-U.S. Holder" generally means a beneficial owner of a 2011
Series B Bond (other than a partnership) that is not a U.S. Holder. If a partnership holds 2011 Series B Bonds, the
tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner
and upon the activities of the partnership. Partnerships holding 2011 Series B Bonds, and partners in such
partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the 2011
Series B Bonds (including their status as U.S. Holders or Non-U.S. Holders).
For U.S. Holders
In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court
decisions and assuming compliance with certain covenants, interest on the 2011 Series B Bonds is exempt from
.State of California personal income taxes. Interest on the 2011 Series B Bonds is not excluded from gross income
for federal income tax purposes under Section 103 of the Code. Bond Counsel expresses no opinion regarding any
other tax consequences related to the ownership or disposition of, or accrual or receipt of interest on, the 2011 Series
B Bonds.
The 2011 Series B Bonds are not expected to be treated as issued with original issue discount ("OID") for
U.S. federal income tax purposes because the stated redemption price at maturity of the 2011 Series B Bonds is not
expected to exceed their issue price, or because any such excess is expected to only be a de minimis amount (as
determined for tax purposes).
;i
Prospective investors that are not individuals or regular C corporations who are U.S. persons purchasing the
2011 Series B Bonds for investment should consult their own tax advisors as to any tax consequences to them from
the purchase, ownership and disposition of the 2011 Series B Bonds.
Disposition of the Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange,
redemption, defeasance, retirement (including pursuant to an offer by the City) or other disposition of a 2011 Series
B Bond, will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a
2011 Series B Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair
market value of property received (except to the extent attributable to accrued but unpaid interest on the 2011 Series
B Bond which will be taxed in the manner described above) and (ii) the U.S. Holder's adjusted tax basis in the 2011
Series B Bond (generally, the purchase price paid by the U.S. Holder for the 2011 Series B Bond. Any such gain or
loss generally will be capital gain or loss. In the case of a noncorporate U.S. Holder of the 2011 Series B Bonds, the
maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum
marginal U.S. federal income tax rate applicable to ordinary income if such U.S. holder's holding period for the
2011 Series B Bonds exceeds one year. The deductibility of capital losses is subject to limitations.
For Non-U.S. Holders
Interest. Subject to the discussion below under the heading "Information Reporting and Backup
Withholding," payments of principal of, and interest on, any 2011 Series B Bond to a Non-U.S. Holder, other than
(1) a controlled foreign corporation, as such term is defined in the Code, which is related to the City through stock
ownership and (2) a bank which acquires such 2011 Series B Bond in consideration of an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of business, will not be subject to any U.S.
withholding tax provided that the beneficial owner of the 2011 Series.B Bond provides a certification completed in
compliance with applicable statutory and regulatory requirements, which requirements are discussed below under
the heading "Information Reporting and Backup Withholding," or an exemption is otherwise established.
Disposition of the Bonds. Subject to the discussion below under the heading "Information Reporting and
Backup Withholding," any gain realized by a Non-U.S. Holder upon the sale, exchange, redemption, retirement
(including pursuant to an offer by the City) or other disposition of a 2011 Series B Bond generally will not be
subject to U.S. federal income tax, unless (i) such gain is effectively connected with the conduct by such Non-U.S.
Holder of a trade or business within the United States; or (ii) in the case of any gain realized by an individual Non-
U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale,
exchange, redemption, retirement (including pursuant to an offer by the City) or other disposition and certain other
conditions are met.
U.S. Federal Estate Tax. A 2011 Series B Bond that is held by an individual who at the time of death is not
a citizen or resident of the United States will not be subject to U.S. federal estate tax as a result of such individual's
death, provided that at the time of such individual's death, payments of interest with respect to such 2011 Series B
Bond would not have been effectively connected with the conduct by such individual of a trade or business within
the United States.
Information Reporting and Backup Withholding. U.S. information reporting and "backup withholding"
requirements apply to certain payments of principal of, and interest on the 2011 Series B Bonds, and to proceeds of
the sale, exchange, redemption, retirement (including pursuant to an offer by the City) or other disposition of a 2011
Series B Bond, to certain noncorporate holders of 2011 Series B Bonds that are United States persons. Under
current U.S. Treasury Regulations, payments of principal and interest on any 2011 Series B Bonds to a holder that is
not a United States person will not be subject to any backup withholding tax requirements if the beneficial owner of
the 2011 Series B Bond or a financial institution holding the 2011 Series B Bond on behalf of the beneficial owner
in the ordinary course of its trade or business provides an appropriate certification to the payor and the payor does
not have actual knowledge that the certification is false. If a beneficial owner provides the certification, the
certification must give the name and address of such owner, state that such owner is not a United States person, or,
in the case of an individual, that such owner is neither a citizen nor a resident of the United States, and the owner
must sign Ore certificate under penalties of perjury. If a financial institution, other than a financial institution that is
a qualified intermediary, provides the certification, the certification must state that the financial institution has
received from the beneficial owner the certification set forth in the preceding sentence, set forth the information
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contained in such certification, and include a copy of such certification, and an authorized representative of the
financial institution must sign the certificate under penalties of perjury. A financial institution generally will not be
required to furnish to the IRS the names of the beneficial owners of the 2011 Series B Bonds that are not United
States persons and copies of such owners' certifications where the financial institution is a qualified intermediary
that has entered into a withholding agreement with the IRS pursuant to applicable U.S. Treasury Regulations.
In the case of payments to a foreign partnership, foreign simple trust or foreign grantor trust, other than
payments to a foreign partnership, foreign simple trust or foreign grantor trust that qualifies as a withholding foreign
partnership or a withholding foreign trust within the meaning of applicable U.S. Treasury Regulations and payments
to a foreign partnership, foreign simple trust or foreign grantor trust that are effectively connected with the conduct
of a trade or business within the United States, the partners of the foreign partnership, the beneficiaries of the foreign
simple trust or the persons treated as the owners of the foreign grantor trust, as the case may be, will be required to
provide the certification discussed above in order to establish an exemption from withholding and backup
withholding tax requirements. The current backup withholding tax rate is 28% (subject to future adjustment).
In addition, if the foreign office of a foreign "broker," as defined in applicable U.S. Treasury Regulations
pays the proceeds of the sale of a Bond to the seller of the 2011 Series B Bond, backup withholding and information
reporting requirements will not apply to such payment provided that such broker derives less than 50% of its gross
income for certain specified periods from the conduct of a trade or business within the United States, is not a
controlled foreign corporation, as such term is defined in the Code, and is not a foreign partnership (1) one or more
of the partners of which, at any time during its tax year, are U.S. persons (as defined in U.S. Treasury Regulations
Section 1.1441-1(c)(2)) who, in the aggregate hold more than 50% of the income or capital interest in the
partnership or (2) which, at any time during its tax year, is engaged in the conduct of a trade or business within the
United States. Moreover, the payment by a foreign office of other brokers of the proceeds of the sale of a 2011
Series B Bond, will not be subject to backup withholding unless the payer has actual knowledge that the payee is a
U.S. person. Principal and interest so paid by the U.S. office of a custodian, nominee or agent, or the payment by
the U.S. office of a broker of the proceeds of a sale of a 2011 Series B Bond, is subject to backup withholding
requirements unless the beneficial owner provides the nominee, custodian, agent or broker with an appropriate
certification as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption.
Circular 230
Under 31 C.F.R. part 10, the regulations governing practice before the IRS (Circular 230), the City and
their tax advisors are (or may be) required to inform prospective investors that:
• Any advice contained herein is not intended or written to be used, and cannot be used, by any
taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer;
• Any such advice is written to support the promotion or marketing of the 2011 Series B Bonds and
the transactions described herein; and
Each taxpayer should seek advice based on the taxpayer's particular circumstances from an
independent tax advisor.
APPROVAL OF LEGALITY
The issuance of the 2011 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 office of the City Attorney and for the Underwriter 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 2011 Bonds the
ratings of "_" and "_," respectively. The ratings reflect only the respective views of the rating agencies and any
63
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 2011 Bonds.
UNDERWRITING
E.J. De La Rosa & Co., Inc., as underwriter (the "Underwriter") has agreed, subject to certain conditions, to
purchase the 2011 Bonds at a price of $ (representing the $ aggregate principal amount of
the 2011 Bonds [less/plus] $ net original issue [premium/discount] and less $ Underwriter's
discount). The purchase contract provides that the Underwriter will purchase all the 2011 Bonds if any are
purchased. The 2011 Bonds may be offered and sold by the Underwriter 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 Underwriter.
VERIFICATION REPORT
Upon delivery of the 2011 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 and the other moneys in
the Escrow Fund to pay, when due, the principal and interest on the Refunded 2009 Bonds. See "PLAN OF
FINANCE" herein.
FINANCIAL STATEMENTS
The audited financial statements of the Electric System, as of June 30, 2011 and June 30, 2010, 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 of the Electric System for the Fiscal Years
ended June 30, 2011 and June 30, 2010 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.
CONTINUING DISCLOSURE
The City has covenanted for the benefit of the holders and beneficial owners of the 2011 Bonds to provide
certain financial information and operating data relating to the City and the Electric System by not later than 180
days following the end of the City's Fiscal Year (which Fiscal Year ends on June 30), commencing with the Annual
Report for Fiscal Year 2012, and to provide notices of the occurrence of certain enumerated events. The Annual
Reports will be filed by the City with the Municipal Securities Rulemaking Board through its Electronic Municipal
Market Access system ("EMMA") for the purpose of Securities and Exchange Commission Rule 15c2-12(b)(5) (the
"Rule"). The notices of material events will also be filed by the City with EMMA. The specific nature of the
information to be made available and to be contained in the notices of material events is set forth in APPENDIX E —
"FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto. These covenants have been made in order to
assist the Underwriter in complying with the Rule.
For the last five years the City has complied in all material aspects with its filing obligations pursuant to
undertakings entered into pursuant to the Rule.
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MISCELLANEOUS
The covenants and agreements of the City for the benefit of the Owners of the 2011 Bonds are set forth in
the Indenture, and reference is made to the Indenture for a statement of the rights of the Owners of the 2011 Bonds
and the covenants and obligations of the City. All references to the 2011 Bonds are qualified in their entirety to the
definitive form thereof and the information with respect thereto included in the Indenture.
This Official Statement is not a contract with the Owners of any of the 2011 Bonds.
Any statements in this Official Statement involving matters of opinion and all estimates, whether or not
expressly so stated, are intended as such and not as representations of facts and are not to be construed as
representations that they will be realized.
The execution and delivery of this Official Statement has been duly authorized by the City.
CITY OF VERNON, CALIFORNIA
0
[Mayor]
65
APPENDIX A
AUDITED FINANCIAL STATEMENTS OF THE ELECTRIC SYSTEM
FOR THE FISCAL YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2010
A-1
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 summary 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. The applicable Accreted Value
at any date shall be the amount set forth in the Accreted Value Table as of such date, if such date is a compounding
date, and if not, shall be determined by straight-line interpolation with reference to such Accreted Value Table.
"Accreted Value Table" means, with respect to Capital Appreciation Obligations, the table denominated as
such in, and to which reference is made in, the Issuing Instrument authorizing the issuance of such Capital
Appreciation Obligations.
"Additional Bonds" means Bonds issued in accordance with the terms and conditions of the Indenture for
the purposes set forth in the Indenture.
"Additional Parity Obligations" means Parity Obligations, including Additional Bonds, issued for the
purposes set forth in the Indenture and satisfying the conditions set forth in the Indenture.
"Adjusted Debt Service" means, for any period of time, the Debt Service for such period minus the sum of
the amount of such Debt Service with respect to Outstanding Parity Obligations to be paid during such period from
the proceeds of Parity Obligations, 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.
o[aI
"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 may be applied only to the payment of
such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity
date or dates thereof or the redemption date or dates specified in the irrevocable instructions referred to in clause (b)
above, as appropriate, and (d) as to which the principal of and interest on the bonds and obligations of the character
described in clause (i) of the definition of Defeasance Securities which have been deposited in such fund, along with
any cash on deposit in such fund, have been verified by an Accountant's Certificate as being sufficient to pay
principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or
dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in clause (b)
above, as applicable.
"Applicable Parity Obligations" means, with respect to a certificate to be delivered in connection with
Additional Parity Obligations pursuant to the Indenture and as of the date of such certificate, all of the Parity
Obligations Outstanding on such date plus the Additional Parity Obligations proposed to be issued.
"Authorized Denominations" means, with respect to Bonds of any Series, the denomination or
denominations designated as such in the Supplemental Indenture authorizing such Bonds.
"Authorized City Representative" means the City Administrator of the City, and any other officer of the
City duly authorized to act as an Authorized City Representative for purposes of the Indenture by the City Council
or written authorization of the City Administrator of the City.
"Balloon Indebtedness" means, with respect to any Series of Obligations twenty-five percent (25%) or
more of the principal of which matures on the same date or within a 12-month period (with Sinking Fund
Installments on Term Obligations deemed to be payments of matured principal), that portion of such Series of
Obligations which matures on such date or within such 12-month period. For purposes of this definition, the
principal amount maturing on any date shall be reduced by the amount of such indebtedness which is required, by
the documents governing such indebtedness, to be amortized by prepayment or redemption prior to its stated
maturity date.
"Beneficial Owner" means, with respect any Book -Entry Bond, the beneficial owner of such Bond as
determined in accordance with the applicable rules of the Securities Depository for such Book -Entry Bonds.
"Bond" 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
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are Capital Appreciation Obligations and Serial Obligations, (c) that portion of the principal amount of all
Outstanding Bonds which are Term Obligations required to be redeemed or paid from Sinking Fund Installments
during such period (together with the redemption premiums, if any, thereon).
"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.
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"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 "As" 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 thud party custodian acceptable to the City; (iii) that the City shall 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 Capital Improvement or Capital Asset described in this definition;
(i) 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, installation 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; 0) 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 in part, 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 in 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
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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 Providee, 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, a stand-by purchase agreement,
revolving credit agreement or other credit arrangement pursuant to which a Credit Provider provides credit and/or
liquidity support with respect to the payment of interest, principal, Redemption Price or Purchase Price of any Parity
Obligations but shall not include a Reserve Financial Guaranty.
"Debt Service Adjustments and Assumptions" means, for purposes of determining Aggregate Adjusted
Annual Debt 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 tern 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
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 constitute Tax -Exempt Variable Rate
Indebtedness (except to the extent paragraph (g) applies), the interest rate on such Parity Obligations for any period
as to which such interest rate has not been established shall be assumed to be the ten year historical average of the
SIFMA Index ending with the week preceding the date of calculation; (d) if any Outstanding Parity Obligations
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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 of 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, the interest rate on such Outstanding Parity Obligations for each Fiscal Year or portion thereof during
which payments are to be exchanged by the parties under such Qualified Swap Agreement shall be determined for
purposes of calculating 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
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 in writing to the Trustee; provided, however that in determining Bond Debt Service with respect to any
Bonds that constitute Variable Rate Indebtedness, the interest rate on such Bonds for any period as to which such
interest rate has not been established shall be assumed to be (i) with respect to Bonds which are Tax -Exempt, the ten
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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) the commencement by
such person of a voluntary case under the Federal Bankruptcy Code or any other applicable federal or state
bankruptcy, insolvency or similar laws; (b) failure by such Person to timely controvert the filing of a petition with a
court having jurisdiction over such Person to commence an involuntary case against such person under the Federal
Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or similar laws; (c) such Person
shall admit in writing its inability to pay its debts generally as they become due; (d) a receiver, trustee, custodian or
liquidator of such Person or such Person's assets shall be appointed in any proceeding brought against the Person or
such Person's assets; (e) assignment of assets by such person for the benefit of its creditors; or (f) the entry by such
Person into an agreement of composition with its creditors.
"Favorable Opinion of Bond Counsel" means, with respect to any action requiring such an opinion, an
Opinion of Bond Counsel to the effect that such action shall not, in and of itself, adversely affect the Tax -Exempt
status of interest on the Bonds or such portion thereof as shall be specified in the provisions of the Indenture or the
Supplemental Indenture requiring such an opinion.
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"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 in the Indenture.
"Final Compounded Amount" means the Accreted Value of any Capital Appreciation Obligation on its
maturity date.
"First Supplemental Indenture" means the First Supplemental Indenture of Trust, dated as of 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 £um 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
"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.
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"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 0£ the City (codified as Section 2.65 of the City Administrative Code) and shall include any successor or
replacement fund established by the City for the collection of revenues and the payment of expenses of the Electric
System.
"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.
"Nominee" means the nominee of the Securities Depository for the Book -Entry Bonds in whose name such
Bonds are to be registered. The initial Nominee shall be Cede & Co., as the nominee of DTC.
"One Month USD LIBOR Rate" means the British Banker's Association average of interbank offered rates
in the London market for United States dollar deposits for a one month period as reported in the Wall Street Journal
or, if not reported in such newspaper, as reported in such other source as may be selected by the City.
"Opinion of Bond Counsel" means a written opinion signed by Bond Counsel.
"Outstanding" when used as of any particular time with respect to Obligations, means, except as otherwise
provided in the Indenture, all Obligations theretofore or thereupon being issued or incurred by the City, except (a)
Obligations theretofore cancelled or surrendered for cancellation; (b) Obligations paid or deemed to be paid within
the meaning of any defeasance provisions of the Issuing Instrument pursuant such Obligations were issued; 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.
"Parity Obligations" means Bonds 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.
IM,
"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 ("GNMN')
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 Co oration "FHLMC"
Participation Certificates
Senior debt obligations
(iii) Federal National Mortgage Association ("FNMA")
Mortgage -backed securities and senior debt obligations (excluded are stripped
mortgage securities which are valued greater than par on the portion of unpaid
principal)
(iv) Student Loan Marketing Association
Senior debt obligations
am
(v) Resolution Funding Corporation obligation (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 System
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-l" 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.
0) Federal funds or bankers acceptances with a maximum tern 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-l" or "A" or better by S&P.
(k) Repurchase Agreements for 30 days or less must satisfy the following criteria.
Repurchase Agreements which exceed 30 days must be acceptable to each Credit Provider whose 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.
(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
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(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 at current market 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 security firm under the repurchase agreement
plus accrued interest. If the value of securities held
as collateral falls below the required percentage of
the value of the cash transferred, then additional cash
and/or acceptable securities must be transferred.
(iii) Legal Opinion An opinion of counsel selected by the City, which may be the
City Attorney or other counsel retained by the City, to the effect that the
repurchase agreement meets guidelines under state law for legal investment of
public funds must be received by the City or the Trustee.
(1) Any state administered pool investment fund in which the City is statutorily permitted or
required to invest will be deemed a permitted investment, including, but not limited to the Local Agency Investment
Fund in the treasury of the State.
(m) Advance Refunded Municipal Securities.
"Person" means an individual, corporation, firm, association, partnership, trust or other legal entity or
group of entities, including a governmental entity or any agency or political subdivision thereof.
"Principal Account' means the account by that name in the Debt Service Fund established pursuant to the
Indenture.
"Principal Office" means, with respect to: (i) the Trustee, the principal office of such Trustee in Los
Angeles, California; and (ii) a Paying Agent or a Credit Provider, the office designated as such in writing by such
party to the Trustee, 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.
"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 have been expected to accomplish the desired result consistent with cost-effectiveness, reliability,
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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 an Interest Payment Date for a Series of Bonds, the date or dates
specified as such in the Supplemental Indenture authorizing such Series of Bonds.
"Redemption 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.
"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.
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"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 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.
"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 Master 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 a book -entry system for the
registration of ownership interests of Participants in securities and which is acting as security depository for Book -
Entry Bonds.
"Serial Obligations" means Obligations for which no Sinking Fund Installments are established.
"Serial 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.
"Standard & Poor's" means Standard & Poor's Rating Services and any successor entity rating Parity
Obligations at the request of the City.
"State" means the State of California.
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"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 or 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 subsequent date.
THEINDENTURE
Authorization of Bonds
The Indenture provides certain terms and conditions upon which Bonds of the City to be designated as
"City of Vernon Electric System Revenue Bonds" may be issued from time to time as authorized by Supplemental
Indentures. The aggregate principal amount of Bonds which may be executed, authenticated and delivered under the
Indenture is not limited except as may be provided therein or as may be limited by law.
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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 Agent other
than the Trustee shall signify its acceptance of the duties and obligations imposed upon it by the Indenture by
executing and delivering to the City and to the Trustee a written acceptance thereof. The Principal Offices of the
Paying Agents are designated as the respective offices or agencies of the City for the payment of the principal and
any applicable Redemption Price of the Bonds.
General Provisions for Issuance of Bonds
All (but not less than all) the Bonds of each Series shall be executed by the City for issuance under the
Indenture and delivered to the Trustee and thereupon shall be authenticated by the Trustee and by it delivered to the
City or upon its order, but only upon the receipt by the Trustee of the following items (upon which the Trustee may
conclusively rely in determining whether the conditions precedent for the issuance and authentication of such Series
of Bonds have been satisfied):
(1) 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 Denominations of, and the manner of numbering and lettering, the Bonds of such Series;
(xi) the Redemption Price or Prices, if any, and, subject to the applicable provision of the Indenture, the
redemption terms for the Bonds of such Series; (xii) the Sinking Fund Installments, if any, for the Bonds of
such Series which constitute Tenn 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 Price of such Bonds, (B) the
terms and conditions, including Purchase Price, for the exercise by the Owners or Beneficial Owners of
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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 Bond Counsel in determining whether the conditions precedent for the issuance and authentication of
such Series of Refunding Bonds have been satisfied.
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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 "As" 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 last paragraph under this heading, the City may, at any time and from time to time,
enter into Credit Support Agreements or otherwise become obligated for Credit Provider Reimbursement
Obligations with respect to Parity Obligations.
The City may, at any time and from time to time, issue any Additional Parity Obligations, provided the City
obtains or provides 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 by an Independent Certified Public Accountant but may utilize and rely upon the books and records
of the City or any financial statements prepared by the City which have not been subject to audit by an Independent
Certified Public Accountant if audited financial statements for the particular Calculation Period selected by the City
are not available.
Conditions of Issuance of 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
thereof). 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
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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 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, 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 shalt not be considered a declaration of
amounts due and payable before expressed maturity even if declared due and payable because of the
occurrence of an event of default.
(3) If any default with respect to any Outstanding Parity Obligation shall have occurred and
be continuing (under circumstances when the provisions of (1) above shall not be applicable), the owners of
all Outstanding Parity Obligations shall be entitled to receive payment in full 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 (5) below, any payment from the Net Revenues and amounts in the Light and Power Fund
with respect to the Subordinate Obligations.
(4) No Bond owner 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
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
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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 Account not less than forty-five (45) days prior to the
due date for any Sinking Fund Installment for such Bonds, such deposit shall satisfy (to the extent of 100% of the
principal amount of such Bonds) any obligation of the City to make a payment to the Trustee pursuant to the
Indenture, with respect to such Sinking Fund Installments. Any Bond so deposited with the Trustee shall be
cancelled and shall no longer be deemed to be Outstanding for any purpose. Upon making the deposit with the
Trustee of Bonds which are Term Obligations as provided in the Indenture, the City may specify the dates and
amounts of Sinking Fund Installments for such Bonds as to which the City's obligations to make a payment to the
Trustee pursuant to the Indenture shall be satisfied.
(d) Except as described below: (i) amounts deposited in the Interest Account shall remain therein until
expended for the payment of interest on the Bonds; (ii) amounts deposited in the Principal Account shall remain
therein until expended for the payment of principal of the Bonds; and (iii) amounts deposited in the Sinking Fund
Account shall remain therein until expended for the redemption or payment at maturity from Sinking Fund
Installments of Bonds which are Term Obligations.
(e) The. Trustee shall apply amounts in the Interest Account to the payment when due of interest on the
Outstanding Bonds. The Trustee shall apply amounts in the Principal Account to the payment when due of principal
of the Outstanding Bonds. The Trustee shall apply amounts in the Sinking Fund Account to the redemption (or
payment at maturity) of the Bonds which are Term Obligations.
In the event one or more Paying Agents have been appointed for the Bonds, moneys may be transferred by
the Trustee to such Paying Agents from the appropriate account in the Debt Service Fund for deposit into a special
trust account to ensure the payment when due of the principal of, Redemption Price, if any, and interest on the
Bonds. In the event that any principal of, Redemption Price or interest on, any Bond has been paid 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 terns 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 Fund. 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.
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
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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), 0) and (m) of the defmition 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 oflnvestments. 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 above 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
and unconditional but which shall be special obligations of the City as provided in the Indenture.
Collection of Rates and Charges. The City shall have in effect at all times rules and regulations requiring
each consumer or customer located on any premises connected with the Electric System to pay the rates and charges
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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 thereoi). 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 Section 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 last day 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
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
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by the City Council as adjusted for an inflation factor equal to ten percent for 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 a self-insurance program so long as such self-insurance is maintained in the amounts and
manner as is, in the opinion of an accredited actuary, actuarially sound. All policies of insurance required to be
maintained under the Indenture shall provide that the Trustee shall be given thirty (30) days' written notice of any
intended cancellation thereof or reduction of coverage provided thereby.
Payment of Taxes and Compliance with Governmental Regulations. The City shall pay and discharge all
taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Electric
System or any part thereof when the same shall become due. The City shall duly observe and conform with all 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 action would adversely affect the Tax-exempt status of interest on any Bond under Section
103 of the Code. Without limiting the generality of the foregoing, the City shall comply with the requirements of
the Tax Certificate, if any, delivered in connection with the issuance of each Series of Bonds.
In the event that at any time the City is of the opinion that, in order to comply with its obligations under
paragraph (a) 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
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
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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 the 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 permitting such Credit Provider to act for and on behalf of the Owners of
such Additional Bonds or Refunding Bonds for any or all purposes of the Indenture except that no such Credit
Provider shall be authorized to extend the fixed maturity of any Bond, or reduce the principal amount thereof, or
reduce the amount of any Sinking Fund Installment therefor, or extend the due date of any such Sinking Fund
Installment, or reduce the rate of interest on any Bond or extend the time of payment of interest thereon, without the
consent of the Owner of each Bond so affected; or except as otherwise provided with respect to a Bond constituting
Tender Indebtedness in the Supplemental Indenture authorizing such Bond and subject to the satisfaction of the
conditions of paragraph (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 the City and the Trustee may
enter into with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a
Credit Support Agreement but without the consent of any Owners of Bonds (but with the consent of any affected
Fiduciary), so long as such modification, amendment or supplement shall not materially, adversely affect the
interests of the Owners of the Outstanding Bonds, including without limitation, for any one or more of the following
purposes:
I��
(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 Bonds 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 on which such Bonds are subject to mandatory tender for purchase pursuant to the
Indenture or (ii) the applicable notice described in the Indenture is given to Owners of such Bonds at least thirty (30)
days before the effective date of such Supplemental Indenture, and on or before such effective date, the Owners of
such Bonds have the right to demand purchase of such Bonds pursuant to the Indenture.
(e) If the Supplemental Indenture authorizing the issuance of a Series of Bonds provides that a Credit
Provider for all or any portion of the Bonds of such Series shall have the right to consent to Supplemental Indentures
which require the consent of the Owners of the Bonds of such Series pursuant to the Indenture, then for the purposes
of sending notice of any proposed Supplemental Indenture and for determining whether the Owners of the requisite
percentage of Bonds have consented to such Supplemental Indenture, but subject to the provisions of paragraph (b)
above, references to the Owners of such Bonds shall be deemed to be to the applicable Credit Provider.
(f) For purposes of the foregoing, it shall not be necessary that consents of the Owners of any particular
percentage of Outstanding Bonds of any affected Series be obtained but it shall be sufficient for such purposes if the
consent of the Owners of a majority in aggregate principal amount of the combination of affected Outstanding
Bonds shall be obtained.
(g) Notwithstanding anything to the contrary contained in the Indenture, if authorized by the Supplemental
Indenture authorizing the issuance of a Bond constituting Tender Indebtedness, any premium due on the redemption
of such Bond and the date or dates when such Bond is subject to redemption may be modified or amended as
provided in such Supplemental Indenture if either: (i) the effective date of such modification or amendment is a date
on which such Bond is subject to mandatory tender for purchase pursuant to such Supplemental Indenture; or (ii)
notice of such modification or amendment has been mailed to the Owner of such Bond at the address set forth in the
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Bond Register at least thirty (30) days before the effective date of such modification or amendment and on or before
such effective date, the Owner of such Bond has the right to demand purchase of such Bond pursuant to such
Supplemental Indenture.
Upon the City and the Trustee entering into any Supplemental Indenture pursuant to the Indenture, the
Indenture shall be deemed to be modified, amended or supplemented in accordance therewith, and the respective
rights, duties and obligations under the Indenture of the City, the Fiduciaries and all Owners of Outstanding Bonds
shall thereafter be determined, exercised and enforced subject in all respects to such modification, amendment and
supplement, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the
terms and conditions of the Indenture for any and all purposes.
For purposes of modifications, amendments and supplements to the Indenture, Bonds owned or held by or
for the account of the City, or any funds of the City, shall not be deemed Outstanding for the purpose of consent or
other action or any calculation of Outstanding Bonds provided for in the Indenture, and the City shall not be entitled
with respect to such Bonds to give any consent or take any other action provided for in the Indenture as an Owner of
Bonds. At the time of any consent or other action taken under the Indenture, the City shall furnish the Trustee a
certificate of an Authorized City Representative upon which the Trustee may rely, describing all Bonds so to be
excluded.
Defeasance
Bonds (or portions of Bonds) for the payment or redemption of which moneys shall have been set aside and
shall be held in trust by an Escrow Agent 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) in case said
Bond (or portion thereof) is to be redeemed on any date prior to maturity, the City shall have given the Trustee
irrevocable instructions to give notice of redemption of such Bond (or portion thereof) on said date as provided in
the Indenture, (2) there shall have been deposited with an Escrow Agent either moneys in an amount which shall be
sufficient, or Defeasance Securities, the principal of and the interest on which when due shall provide moneys
which, together with the moneys, if any, held by such Escrow Agent for such purpose, shall be sufficient, in each
case as evidenced by an Accountant's Certificate, to pay when due the principal amount of, and any redemption
premiums on, said Bond (or portion thereof) and interest due and to become due on said Bond (or portion thereof)
on and prior to the redemption date, 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
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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 pursuant to the Indenture less than all of the full principal amount of a Bond,
the City shall execute and the Trustee shall authenticate and deliver, upon the surrender of such Bond, without
charge to the Owner of such Bond, a new Bond or Bonds for the principal amount of the Bond so surrendered which
is deemed paid pursuant to the Indenture and another new Bond or Bonds for the balance of the principal amount of
the Bond so surrendered, in each case of like Series, maturity and other terms, and in any of the Authorized
Denominations.
Upon the deposit with an Escrow Agent, in trust, at or before maturity or the applicable redemption date, of
money or Defeasance Securities in the necessary amount to pay or redeem Outstanding Bonds (or portions thereof),
and to pay the interest thereto to such maturity or redemption date, as applicable, (provided that, if such Bonds are to
be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the
Indenture or provision satisfactory to the Trustee shall have been made for giving such notice), all liability of the
City in respect of such Bonds shall cease, terminate and be completely discharged, except that the City shall remain
liable for such payment but only from, and the Bondowners shall thereafter be entitled only to payment (without
interest accrued thereon after such redemption date or maturity date, as applicable) out of, the money and
Defeasance Securities deposited with the Escrow Agent as aforesaid for their payment, subject, however, to the
provisions of the Indenture relating to transfers to the City's general fund and bonds deemed paid; provided that no
Bond which constitutes Tender Indebtedness shall be deemed to be paid within the meaning of the Indenture unless
the Purchase Price of such Bond, if tendered for purchase in accordance with the Indenture, could be paid when due
from such moneys or Defeasance Securities (as evidenced by an.Accountant's Certificate) or a Credit Support
Instrument is provided in connection with such Purchase Price.
Events of Default; Remedies
Events of Default. Each of the following shall constitute an Event of Default under the Indenture: (i) if
default shall be made in the payment of the principal or Redemption Price of or Sinking Fund Installment for, or
interest on, any Outstanding Bond, when and as the same shall become due and payable, whether on an Interest
Payment Date, at maturity, by call for redemption, or otherwise; (ii) if default shall be made by the City in the
performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture or in
the Outstanding Bonds contained, and such default shall continue for a period of 120 days after written notice
thereof to the City by the Trustee or to the City and to the Trustee by the Owners of not less than 10% in principal
amount of the Bonds Outstanding; provided, however, if such default is such that it can be corrected by the City but
not within the applicable period specified above, it shall not constitute an Event of Default if corrective action is
instituted by the City within thirty (30) days of the City's receipt of the notice of the default required by this
paragraph and diligently pursued until the default is 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 with respect to any Parity Obligation.
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Application of Revenues and Other Moneys A,/ler 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 amount of 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 the respective 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
Obligations have been issued.
(c) In the event that on 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.
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(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 a Supplemental Indenture or a 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 an Event of Default, the Trustee may, with the consent of each Credit Provider whose
consent is required by a Supplemental Indenture or a Credit Support Agreement, and shall, at the direction of the
Owners of a majority in principal amount of Outstanding Bonds (other than Bonds owned by or on behalf of the
City) by written notice to the City, declare the principal of the Outstanding Bonds 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 Indenture, or in aid of the execution of any power granted in the Indenture or any remedy granted
under applicable provisions of the laws of the State of California, or for an accounting by the City as if the City were
the trustee of an express trust, or in the enforcement of any other legal or equitable right as the Trustee, being
advised by counsel, shall deem most effectual to enforce any of its 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.
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(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 in writing by the Owners of a majority in principal amount of the Bonds then Outstanding and furnished
with reasonable security and indemnity, shall be under no obligation to, institute and maintain such suits and
proceedings as it may be advised shall be necessary or expedient to prevent any impairment of the security under the
Indenture by any acts which may be unlawful or in violation of the Indenture, and such suits and proceedings as the
Trustee may be advised shall be necessary or expedient to preserve or protect its interests and the interests of the
Owners of the Bonds.
(e) If the Trustee or any Owner or Owners of Outstanding Bonds have instituted any proceeding to enforce
any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or
has been determined adversely to the Trustee or to such Owner or Owners, then and in every such case the City, the
Trustee and the Owners shall, subject to any determination in such proceeding, be restored severally and
respectively to their former positions under the Indenture, and thereafter all rights and remedies of the Trustee and
the Owners shall continue as though no such proceeding had been instituted.
Restriction on Owner's Action. (a) Except as otherwise provided in paragraph (b) below, no Owner of any
Bond shall have any right to institute any suit, action or proceeding at law or in equity for the enforcement of any
provision of the Indenture or the execution of any trust under the Indenture or for any remedy 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
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power and remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time
to time and as often as may be deemed expedient by the Trustee or by the Owners of the Bonds.
(b) The Owners of not less than sixty percent in principal amount of the Bonds at the time Outstanding, or
their attomeys-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 person identified 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 isnoCredit 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 or permit 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.
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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.
Unclaimed Moneys
Anything in the Indenture or any Supplemental Indenture to the contrary notwithstanding, any moneys held
by the Trustee, an Escrow Agent or any Paying Agent in trust for the payment and discharge of any of the Bonds
which remain unclaimed for two years after the date when such Bonds have become due and payable, either at their
stated maturity dates, tender for purchase or by call for redemption, if such moneys were held by the Trustee, an
Escrow Agent or a Paying Agent at such date, or for two years after the date of deposit of such moneys if deposited
with the Trustee, an Escrow Agent or a Paying Agent after the date when such Bonds or the Purchase Price thereof
became due and payable,.shall 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.
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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, conformation 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 information provided by DTC.
The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the 2011
Bonds. The 2011 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 each series of 2011 Bonds, each in the aggregate
principal amount of such issue and will be deposited with DTC.
DTC, the world's largest securities depository, is a limited -purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a `blearing corporation" within the meaning of the New York Uniform Commercial Code,
and a `blearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds and provides asset servicing for over 3.5 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").
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 the 2011 Bonds under the DTC system must be made by or through Direct Participants, which
will receive a credit for the 2011 Bonds on DTC's records. The ownership interest of each actual purchaser of each
2011 Series 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 and Indirect Participant through which the Beneficial Owner entered
into the transaction. Transfers of ownership interests in the 2011 Bonds are to be accomplished by entries made on
the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in the 2011 Bonds, except in the event that use of the
book -entry system for the 2011 Bonds is discontinued.
To facilitate subsequent transfers, all 2011 Bonds deposited by Direct Participants with DTC are registered
in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized
representative of DTC. The deposit of 2011 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 2011 Bonds; DTC's records reflect only the identity of the Direct Participants to whose
accounts such securities 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.
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Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to
Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Beneficial Owners of 2011 Bonds may wish to take certain steps to augment the transmission to them of notices of
significant events with respect to the 2011 Bonds, such as redemptions, tenders, defaults and proposed amendments
to the 2011 Bond documents. For example, Beneficial Owners of 2011 Bonds may wish to ascertain that the
nominee holding the 2011 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 the notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the 2011 Bonds within an issue are being
redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to
be redeemed.
Neither DTC nor Cede & Co: (nor such other DTC nominee) will consent or vote with respect to the 2011
Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures,
DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the 2011 Bonds are credited
on the record date (identified in a listing attached to the Omnibus Proxy).
Redemption proceeds, distributions and dividend payments on the 2011 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, nor its nominee, the Trustee, or the City, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions
and dividend 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 shall be responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with respect to the 2011 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, 2011 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, 2011 Bond certificates will be printed and delivered to DTC.
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APPENDIX D
PROPOSED FORM OF OPINION OF BOND COUNSEL
Upon delivery of the 2011 Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, proposes
to render its final opinion in connection with the 2011 Bonds in substantially the following form:
[TO COME]
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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 2011 Bonds in substantially the following form:
This Continuing Disclosure Agreement (this "Disclosure Agreement") dated as of December I, 2011, is
executed and delivered by 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") and 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"), in connection with the issuance by the City
of its Electric System Revenue Bonds, 2011 Series A (the "2011 Series A Bonds") and its Electric System Revenue
Bonds, 2011 Taxable Series B (the "2011 Series B Bonds" and, together with the 2011 Series A Bonds, the "2011
Bonds").
WITNESSETH:
WHEREAS, the City has issued $ aggregate principal amount of its 2011 Series A Bonds and
$ aggregate principal amount of its 2011 Series B Bonds pursuant to an Indenture of Trust, dated as of
September 1, 2008, as heretofore supplemented and as amended and supplemented by a Third Supplemental
Indenture of Trust, dated as of December 1, 2011 (as amended and supplemented, the "Indenture"), each between
the City and the Trustee;
NOW THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the
parties hereto agree as follows:
SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and
delivered by the City and the Trustee for the benefit of the Owners (defined below) and Beneficial Owners (defined
below) of the 2011 Bonds and in order to assist the Participating Underwriter (defined below) in complying with the
Rule (defined below).
SECTION 2. 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" shall mean any Annual Report provided by the City pursuant to, and as described in,
Sections 3 and 4 of this Disclosure Agreement.
"Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote or
consent with respect to, or to dispose of ownership of, any 2011 Bonds (including persons holding 2011 Bonds
through nominees, depositories or other intermediaries), or (b) is treated as the owner of any 2011 Bonds for federal
income tax purposes.
"Disclosure Representative" shall mean 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" shall mean The Bank of New York Mellon Trust Company, N.A., acting in its
capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the City
and which has filed with the Trustee a written acceptance of such designation.
"Listed Events" shall mean any of the events listed in subsections (a) and (b) of Section 5 of this Disclosure
Agreement.
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"MSRB" shall mean the Municipal Securities Rulemaking Board or any other entity designated or
authorized by the SEC to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the SEC,
filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the
MSRB, currently located at http://emma.msrb.org.
"Official Statement" shall mean the Official Statement, dated , 2011, relating to the 2011
Bonds.
"Owner" shall mean, with respect to a 2011 Bond, the registered owner of such 2011 Bond as set forth in
the bond register maintained by the Trustee pursuant to the Indenture.
"Participating Underwriter" shall mean any of the original underwriter of the 2011 Bonds required to
comply with the Rule in connection with offering of the 2011 Bonds.
"Responsible Officer" shall mean an officer of the Trustee at the corporate front office of the Trustee with
regular responsibility for the administration of matters related to the Indenture.
"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as the same may be amended from time to time.
"State" shall mean the State of California.
SECTION 3. Provision of Annual Reports.
(a) The City shall, or, upon written direction, shall cause the Dissemination Agent to, not later than
180 days after the end of each Fiscal Year of the City (which Fiscal Year ends on June 30), commencing with the
report for the 2011-12 Fiscal Year, provide to the MSRB an Annual Report which is consistent with the
requirements of Section 4 of this Disclosure Agreement. The Annual Report may cross-reference other information
as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the City's
Electric System 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 they are not available by that date. If the City's Fiscal Year changes, it
shall give notice of such change in a filing with the MSRB. The Annual Report shall be submitted on a standard
form in use by industry participants or other appropriate form and shall identify the 2011 Bonds by name and CUSIP
number.
(b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) of this
Section, the City shall provide the Annual Report to the Dissemination Agent and the Trustee (if the Trustee is not
the Dissemination Agent). If by such date the Trustee has not received a copy of the Annual Report, the Trustee
shall contact the City and the Dissemination Agent to determine if the City is in compliance with the first sentence
of this subsection (b).
(c) If the Trustee is unable to verify that an Annual Report has been provided to the MSRB by the
date required in subsection (a) of this Section, the Trustee shall, in a timely manner, send or cause to be sent to the
MSRB a notice in substantially the form attached as Exhibit A.
(d) The Dissemination Agent shall file a report with the City and the Trustee (if the Trustee is not the
Dissemination Agent) certifying that the Annual Report has been provided pursuant to this Disclosure Agreement
and stating the date it was provided.
SECTION 4. Content of Annual Reports. The City's Annual Report shall contain or include by
reference the following:
(a) The audited financial statements of the City's Electric System for the prior fiscal year, including a
statement of net assets, a statement of revenues, expenses and changes in net assets, and a statement of cash flows
prepared on the accrual basis of accounting, all of which shall be prepared in accordance with generally accepted
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accounting principles as promulgated from time to time by the Government Accounting Standards Board. [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 3 hereof, the Annual Report shall contain unaudited financial statements in a
format similar to the financial statements required for the fiscal year being audited, 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 RESOURCES USED TO SATISFY
CITY'S LOAD REQUIREMENT";
(ii) "CITY OF VERNON ELECTRIC SYSTEM AVERAGE BILLING PRICE (CENTS
PER KILOWATT-HOUR)';
(iii) "CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES,
REVENUES AND DEMAND"; and
(iv) "CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES
AND DEBT SERVICE COVERAGE UNDER INDENTURE".
Any or all of the items listed above may be set forth in one or a set of documents or may be included by
specific reference to other documents, including official statements of debt issues with respect to which the City is
an `obligated person" (as defined by the Rule), which have been made available to the public on the MSRB's
website. The City shall clearly identify each such other document so included by reference.
SECTION 5. Reaortine of Sienificant Events.
(a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the
occurrence of any of the following events with respect to the 2011 Bonds not later than ten business days after the
occurrence of the event:
(i) Principal and interest payment delinquencies;
(ii) Unscheduled draws on debt service reserves reflecting financial difficulties;
(iii) Unscheduled draws on credit enhancements reflecting financial difficulties;
(iv) Substitution of credit or liquidity providers, or their failure to perform;
(v) Issuance by the Internal Revenue Service of proposed or final determination of taxability
or of a Notice of Proposed Issue (IRS Form 5701 TEB);
(vi) Tender offers;
(vii) Defeasances;
(viii) Rating changes; or
(ix) Bankruptcy, insolvency, receivership or similar event of the obligated person.
Note: for the purposes of the event identified in subparagraph (ix) above, the event is considered to occur
when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an
obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or
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federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the
assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing
governmental body and officials or officers in possession but subject to the supervision and orders of a
court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement
or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all
of the assets or business of the obligated person.
(b) The City shall give, or cause to be given, notice of the occurrence of any of the following events
with respect to the 2011 Bonds, if material, not later than ten business days after the occurrence of the event:
(i) Unless described in subparagraph 5(a)(v), adverse tax opinions or other material notices
or determinations by the Internal Revenue Service with respect to the tax status of the
2011 Bonds or other material events affecting the tax status of the 2011 Bonds;
(ii) Modifications to rights of Owners or Beneficial Owners;
(iii) Optional, unscheduled or contingent 2011 Bond calls;
(iv) Release, substitution, or sale of property securing repayment of the 2011 Bonds;
(v) Non-payment related defaults;
(vi) The consummation of a merger, consolidation, or acquisition involving an obligated
person or the sale of all or substantially all of the assets of the "obligated person," other
than in the ordinary course of business, the entry into a definitive agreement to undertake
such an action or the termination of a definitive agreement relating to any such actions,
other than pursuant to its terms; or
(vii) Appointment of a successor or additional trustee or the change of name of a trustee.
(c) The Trustee shall, as soon as reasonably practicable, upon a Responsible Officer's obtaining actual
knowledge of the occurrence of any of the Listed Events contact the Disclosure Representative, inform such person
of the event, and request that the City promptly notify the Trustee in writing whether or not to report the event
pursuant to subsection (e) of this Section. The Trustee shall have no duty to determine the materiality of any such
Listed Events. For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of such Listed
Events shall mean actual knowledge by a Responsible Officer.
(d) Whenever the City obtains knowledge of the occurrence of a Listed Event described in subsection
(b) of this Section, the City shall determine if such event would be material under applicable federal securities laws.
(e) If the City learns of the occurrence of a Listed Event described in subsection (a) of this Section, or
determines that knowledge of a Listed Event described in subsection (b) of this Section would be material under
applicable federal securities laws, the City shall within ten business days of occurrence file a notice of such
occurrence with the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections
(a)(vii) or (b)(iii) of this Section need not be given under this subsection (e) any earlier than the notice (if any) of the
underlying event is given to Owners of affected 2011 Bonds pursuant to the Indenture.
SECTION 6. Format for Flings with MSRB. Any report or filing with the MSRB pursuant to this
Disclosure Agreement must be submitted in electronic format, accompanied by such identifying information as is
prescribed by the MSRB.
SECTION 7. Termination of Reporting Obligation. The City's and the Trustee's obligations under this
Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the
2011 Bonds.
SECTION 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination
Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such
Dissemination Agent, with or without appointing a successor Dissemination Agent; provided the Trustee shall
receive written notice of such appointment, engagement and discharge at the time thereof. The Dissemination Agent
shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this
Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, the City shall be the
Dissemination Agent. The Dissemination Agent may resign by providing thirty days written notice to the City and
the Trustee.
SECTION 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement,
the City, the Dissemination Agent and the Trustee may amend this Disclosure Agreement (and the Trustee and the
Dissemination Agent shall agree to any amendment so requested by the City provided, neither the Trustee nor the
Dissemination Agent shall be obligated to enter into any such amendment that modifies or increases its duties or
obligations hereunder) and any provision of this Disclosure Agreement may be waived, provided that the following
conditions are satisfied:
(a) If the amendment or waiver relates to the provisions of subsection (a) of Section 3 hereof, Section
4 hereof or subsection (a) of Section 5 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 2011 Bonds, or the type of business conducted;
(b) The undertaking herein, as amended or taking into account such waiver, would, in the opinion of
nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original
issuance of the 2011 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any
change in circumstances; and
(c) The amendment or waiver either (i) is approved by the Owners of the 2011 Bonds in the same
manner as provided in the Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in
the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or Beneficial
Owners of the 2011 Bonds.
In the event of any amendment or waiver of a provision of this Disclosure Agreement, the City shall describe such
amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the
amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the
presentation) of financial information or operating data being presented by the City. In addition, if the amendment
relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall
be given in a filing with the MSRB, and (ii) the Annual Report for the year in which the change is made should
present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements
as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting
principles.
SECTION 10. 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 required to be filed pursuant to this Disclosure Agreement, in addition to that which is required by
Us Disclosure Agreement. If the City chooses to include any information in any Annual Report or notice in
addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under
this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a
Listed Event or any other event required to be reported.
SECTION 11. Default. In the event of a failure of the City or the Trustee to comply with any provision
of this Disclosure Agreement, the Trustee shall at the written request of any Participating Underwriter or the Owners
of at least 25% of the aggregate principal amount of the Outstanding 2011 Bonds, and upon provision of
indemnification satisfactory to the Trustee, or any Owner or Beneficial Owner of the 2011 Bonds may, take such
actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to
cause the City or the Trustee, as the case may be, to comply with its obligations under this Disclosure Agreement. A
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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 or the Trustee to comply with this
Disclosure Agreement shall be an action to compel performance.
SECTION 12. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of
the Master Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were
(solely for this purpose) contained in the Indenture and the Trustee and Dissemination Agent shall be entitled to the
protections and limitations from liability afforded the Trustee thereunder. The Dissemination Agent and Trustee
shall have only such duties as are specifically set forth in this Disclosure Agreement, and the City agrees to
indemnify and save the Dissemination Agent and Trustee, their officers, directors, employees and agents, harmless
against any loss, expense and liabilities which they 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, costs and expenses (including attorneys fees) due to the Dissemination
Agent's or Trustee's respective fraud, violation of law, whether willful or negligent, negligence or willful
misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in
accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made
or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent and
the Trustee shall have no duty or obligation to review any information provided to them hereunder and shall not be
deemed to be acting in any fiduciary capacity for the City, the Owners or any other party. The Dissemination Agent
shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any
report not provided to it by the City in a timely manner and in a form suitable for filing. The obligations of the City
under this Section shall survive resignation or removal of the Dissemination Agent and payment of the 2011 Bonds.
SECTION 13. Notices. Any notices or communications to or among any of the parties to this Disclosure
Agreement may be given as follows:
To the City: City of Vernon
4305 Santa Fe Avenue
Vernon, California 90058
Attention: City Administrator
To the Trustee and Dissemination The Bank of New York Mellon Trust
Agent: Company, N.A.
700 South Flower Street, Suite 500
Los Angeles, California 90017
Attention: Corporate Trust Department
Any person may, by written notice to the other persons listed above, designate a different address or telephone
number(s) to which subsequent notices or communications should be sent.
SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the
Trustee, the Dissemination Agent, the Participating Underwriter and Owners and Beneficial Owners from time to
time of the 2011 Bonds, and shall create no rights in any other person or entity.
SECTION 15. Governing Law. This Disclosure Agreement shall be interpreted, governed by and
construed for all purposes in accordance with the laws of the State for contracts executed and to be performed in the
State.
SECTION 16. 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.
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IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first
above written.
laltllY*16
City Clerk
APPROVED AS TO FORM:
By:
Chief Deputy City Attorney
CITY OF VERNON
Name:
Title:
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustee
By:
Authorized Signatory
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EXHIBIT A
NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT
Name of Issuer: City of Vernon
Name of Bond Issue: City of Vernon Electric System Revenue Bonds, 2011 Series A
and City of Vernon Electric System Revenue Bonds, 2011 Taxable Series B
Date of Issuance: 2011
NOTICE IS HEREBY GIVEN that the City of Vernon (the "City") has not provided an Annual Report
with respect to the above -named Bonds as required by 6.02 of the Third Supplemental Indenture of Trust, dated as
of December 1, 2011, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the
"Trustee"), amending and supplementing the Master Indenture of Trust between the City and the Trustee, dated as of
September 1, 2008, and by Section 3 of the Continuing Disclosure Agreement, dated as of December 1, 2011,
between the City and the Trustee. [The City anticipates that the Annual Report will be filed by .]
Dated:
cc: City of Vernon
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustee, on behalf of the City of
Vernon
M
Exhibit c
[Preliminary Official Statement Attached]
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EXHIBIT D
Exhibit D
[Escrow Agreement Attached]
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DRAFT
November 9, 2011
CITY OF VERNON
and
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,
as Trustee
ESCROW AGREEMENT
Dated as of December 1, 2011
Relating to
City of Vernon
Electric System Revenue Bonds
2009 Series A maturing August 1, 2012
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of December 1, 2011, by and
between the CITY OF VERNON, a municipal corporation and chartered city of the State of
California (the "City") and THE BANK OF NEW YORK MELLON TRUST COMPANY,
N.A., a national banking association organized and existing under and by virtue of the laws of the
United States of America, in its capacity as successor trustee (the "Trustee") under the Indenture
(capitalized terms used herein shall have the meanings given such terms pursuant to Section 1
hereof),
WITNESSETH:
WHEREAS, pursuant to the Indenture, the City authorized and issued its Electric
System Revenue Bonds, 2009 Series A, maturing on August 1, 2012 which remain outstanding in
the aggregate principal amount of $28,680,000; and
WHEREAS, for the purpose of providing for the payment of the Refunded Bonds
in accordance with Article IX of the Master Indenture, the City has caused a portion of the
proceeds of the 2011 Bonds [and the City has caused certain funds held under the Indenture] to
be deposited into the Escrow Fund as provided in Section 2 hereof; and
WHEREAS, the Trustee is to apply amounts in the Escrow Fund to the purchase
of the Initial Escrow Securities; and
WHEREAS, the Initial Escrow Securities will mature at such times and in such
amounts as to provide cash in the Escrow Fund which, together with the other available cash held
by the Trustee in the Escrow Fund, has been certified in the Verification Report to be sufficient
to pay the Escrow Requirements;
NOW, THEREFORE, the City and the Trustee hereby agree as follows:
Section 1. Definitions. Capitalized terms used in this Escrow Agreement and not
otherwise defined herein shall have the meanings given such terms in the Indenture of Trust,
dated as of September 1, 2008, between the City and The Bank of New York Mellon Trust
Company, N.A., as successor Trustee. The following shall have the meanings set forth below for
all purposes of this Escrow Agreement.
"2009 Series A Bonds" means the City of Vernon Electric System Revenue
Bonds, 2009 Series A.
"2011 Bonds" means the City of Vernon Electric System Revenue Bonds, 2011
Taxable Series B.
"City" means the City of Vernon, California.
"Escrow Fund" means the City of Vernon 2011 Electric System Revenue Bonds
Escrow Fund established pursuant to Section 2 hereof.
"Escrow Securities" means, to the extent they are legal investments for funds of
the City under the laws of the State of California, non -callable direct obligations of the United
States of America.
"Escrow Requirements" means the moneys required to: (i) pay the principal of the
Refunded Bonds on August 1, 2012; (ii) pay the accrued interest on the Refunded Bonds due on
February 1, 2012 and August 1, 2012.
hereto.
"Indenture" means the Master Indenture, as amended and supplemented.
"Initial Escrow Securities" means the Escrow Securities listed in Schedule A
"Refunded Bonds" means the 2009 Series A Bonds maturing on August 1, 2012.
"Remaining Escrow Requirements" means, as of any date, the Escrow
Requirements coming due on and after such date.
"Verification Agent" means Grant Thornton LLP, certified public accountants.
"Verification Report" means the verification report, dated December _, 2011,
prepared by the Verification Agent in connection with the deposit of certain of the 2011 Bond
proceeds and other funds in the Escrow Fund.
Section 2. Establishment, Funding and Maintenance of Escrow Fund.
(a) The Trustee agrees to establish a separate irrevocable fund designated as
the City of Vernon 2011 Electric System Revenue Bonds Escrow Fund. The Trustee shall
maintain the Escrow Fund until the termination of this Escrow Agreement pursuant to Section 9
hereof and hold the Escrow Securities and moneys therein at all times as a special and separate
trust fund wholly segregated from all other securities, investments or moneys on deposit with or
otherwise held by the Trustee.
(b) There has been deposited with the Trustee the sum of $ , which is
derived from the proceeds of the 2011 Bonds, [and $ from the Debt Service Fund] for a
total of $ , which amount is to be deposited in the Escrow Fund and invested and
disbursed in accordance with this Escrow Agreement. [The City hereby instructs the Trustee to
transfer $ in the Debt Service Fund to the Escrow Fund.]
(c) All Escrow Securities and moneys in the Escrow Fund are hereby
irrevocably transferred to the Trustee on behalf of the owners of the Refunded Bonds to secure
the payment of the Escrow Requirements when due in accordance with this Escrow Agreement.
(d) The City acknowledges that it has no right, title or interest in or to any
money, Escrow Securities, or other property held in the Escrow Fund, notwithstanding any
provision of the hndenture or any other document or agreement relating to the Refunded Bonds to
the contrary. Under no circumstances shall any such money, securities, or other property be paid
-2-
or delivered to or for the order of the City, except that nothing herein shall preclude or limit the
transfer of amounts in accordance with Section 5 hereof.
Section 3. Investments of Moneys in the Escrow Fund.
(a) On the date hereof, $ of the money on deposit in the Escrow
Fund is to be invested in the Initial Escrow Securities. The Trustee acknowledges and agrees that
it has received the amount set forth in Section 2(b) above and hereby agrees to use $ of
such moneys to purchase on the date hereof the Initial Escrow Securities from the vendor and at
the prices set forth in Schedule A hereto, and, subject to the provisions of Section 4 below, to
hold the remaining balance of such deposit in the amount of $ uninvested as cash. The
City and the Trustee shall each take all remaining necessary action to have the Initial Escrow
Securities issued and registered in the name of the Trustee, for the account of the Escrow Fund.
(b) The Trustee shall not be liable or responsible for any loss resulting from
any investment made pursuant to this Escrow Agreement and in full compliance with the
provisions hereof.
(c) The Trustee acknowledges receipt of the Verification Report, in
satisfaction of the requirements of clause (ii) of subsection (b) of Section 9.02 of the Master
Indenture, and the Trustee may conclusively rely upon the conclusions of the Verification Report
to the effect that the Initial Escrow Securities mature in such amounts and at such times as shall
be necessary and sufficient, together with other moneys in the Escrow Fund, to pay the Escrow
Requirements when due.
(d) The Trustee shall hold all Escrow Securities in the Escrow Fund, and the
money received from time to time as principal and interest thereon or otherwise with respect
thereto, in trust to be applied as provided in this Escrow Agreement and shall collect the
principal of and interest on such Escrow Securities, and all amounts payable with respect thereto,
promptly as such amounts become due.
Section 4. Provision for the Payment of the Refunded Bonds. The City hereby
elects to discharge and provide for the payment of the Refunded Bonds in accordance with
Article IX of the Master Indenture as provided in this Escrow Agreement. The City hereby
requests and irrevocably instructs the Trustee, and the Trustee hereby agrees, to apply the moneys
in the Escrow Fund to the payment of the Escrow Requirements when due. The City hereby
requests and irrevocably instructs the Trustee to: (i) pay the principal of the Refunded Bonds on
August 1, 2012; and (ii) pay on February 1, 2012 and August 1, 2012 the interest payable on the
Refunded Bonds on such date. The City hereby further requests and irrevocably instructs the
Trustee to give notice of the deposit of funds pursuant to Section 9.02 of the Master Indenture
with respect to the Refunded Bonds in accordance with Section 9.02 of the Master Indenture. The
Trustee acknowledges that this Escrow Agreement constitutes irrevocable instructions to apply
the amounts received in connection with the Escrow Securities credited to the Escrow Fund, and
any other amounts in the Escrow Fund, to the payment of principal of and interest on the
Refunded Bonds as set forth in the Escrow Requirements.
-3-
Section 5. Reinvestment and Transfer of Funds. Any cash received from principal
or interest payments on the Escrow Securities which shall be required at any time to pay the
Remaining Escrow Requirements shall, at the written request of an Authorized City
Representative, be reinvested in Escrow Securities maturing at times and in amounts which,
together with the other funds to be available in the Escrow Fund to pay the Remaining Escrow
Requirements, shall be sufficient to pay when due the Remaining Escrow Requirements, as
evidenced by an Accountant's Certificate.
Any money remaining in the Escrow Fund after the payment of all Escrow
Requirements shall be transferred to the Interest Account in the Debt Service Fund.
Section 6. Fees and Costs.
(a) The Trustee's annual fees and costs for acting as Trustee under this
Escrow Agreement are to be agreed upon by the Trustee and the City and paid by the City. The
annual fees and costs of the Trustee for any other duties to be carried out by it under the
Indenture shall continue as previously agreed upon between the Trustee and the City.
(b) The Trustee shall also be entitled to additional reasonable fees and
reimbursements for costs incurred, to be paid by the City, including but not limited to legal and
accountants' services, in connection with any litigation not arising from the Trustee's negligence
or willful misconduct which may at any time be instituted involving this Escrow Agreement.
(c) The fees of and the costs incurred by the Trustee shall in no event be
deducted or payable from or constitute a lien against the Escrow Fund, any Escrow Securities
credited to the Escrow Fund or any moneys in the Escrow Fund, including without limitation the
Initial Escrow Securities and any proceeds thereof.
Section 7. Indemnification. The City hereby assumes liability for and hereby agrees
(whether or not any of the transactions contemplated hereby are consummated) to indemnify,
protect, save and hold harmless the Trustee and its respective successors, assigns, agents and
servants from and against any and all liabilities, obligations, losses, damages, penalties, claims,
actions, suits, costs, expenses and disbursements (including legal fees and disbursements) of
whatsoever kind and nature which may be imposed on, incurred by, or asserted against, at any
time, the Trustee (whether or not also indemnified against by any other person under any other
agreement or instrument) and in any way relating to or arising out of the execution and delivery
of this Escrow Agreement, the establishment of the Escrow Fund, the retention of the moneys
therein and any payment, transfer or other application of moneys or securities by the Trustee in
accordance with the provisions of this Escrow Agreement, or as may arise by reason of any act,
omission or error of the Trustee made in good faith in the conduct of its duties; provided,
however, that the City shall not be required to indemnify the Trustee against its own negligence
or willful misconduct. The indemnities contained in this Section shall survive the termination of
this Escrow Agreement or the resignation or removal of the Trustee.
Section 8. Resignation of Trustee; Replacement of Trustee. The Bank of New
York Mellon Trust Company, N.A. has entered into this Escrow Agreement in its capacity as
me
Trustee under the Indenture and shall remain a party to this Escrow Agreement until a successor
trustee is appointed Trustee under the Indenture. If a successor trustee is appointed as Trustee
under the Indenture, such successor shall automatically and without the necessity of any further
act by the City, The Bank of New York Mellon Trust Company, N.A. or the successor trustee be
deemed a party to this Escrow Agreement in its capacity as Trustee under the Indenture. In that
event The Bank of New York Mellon Trust Company, N.A. shall transfer to such successor
trustee all Escrow Securities and moneys then held by The Bank of New York Mellon Trust
Company, N.A. hereunder.
Section 9. Termination. This Escrow Agreement shall terminate when all moneys
are transferred from the Escrow Fund as provided herein.
Section 10. Rights, Duties and Obligations of Trustee. Subject to the provisions of
Sections 3 and 5 hereof, moneys held by the Trustee hereunder are to be held and applied for the
payment of the Escrow Requirements when due in accordance with the terms hereof. The rights,
duties and obligations of the Trustee shall, except as otherwise expressly provided herein, be
governed by the applicable provisions of the Indenture which by this reference are hereby
incorporated into this Escrow Agreement as if set forth in full herein.
Section 11. Severability. If any section, paragraph, sentence, clause or provision of
this Escrow Agreement shall for any reason be held to be invalid or unenforceable, the invalidity
or unenforceability of such section, paragraph, sentence, clause or provision shall not affect any
of the remaining provisions of this Escrow Agreement. Notice of the invalidity or
unenforceability of any such section, paragraph, section, clause or provision shall be given to the
Insurer. The provisions of this Escrow Agreement shall be unalterable, subject to the provisions
of Section 12 hereof.
Section 12. Amendment. The parties hereto may, without the consent or notice to the
Owners of the Refunded Bonds, enter into such agreements supplemental to this Escrow
Agreement as shall not adversely affect the rights of such Owners hereunder the following
purposes:
(a) to cure any ambiguity or formal defect or omission in this Escrow
Agreement; or
(b) to grant or confer upon the Trustee for the benefit of the Owners of the
Refunded Bonds any additional rights, remedies, powers or authority that may lawfully be
granted to or conferred upon the Trustee.
The Trustee shall enter into such agreements only upon receipt by the Trustee of,
and shall be entitled to rely conclusively upon, an Opinion of Bond Counsel to the effect that any
such agreement complies with this Section 12.
Section 13. . Execution of Counterparts. This Escrow Agreement may be executed in
any number of counterparts, each of which shall for all purposes be deemed to be an original and
all of which shall together constitute but one and the same instrument.
-5-
Section 14. Notices. All notices, certificates or other communications hereunder shall
be sufficiently given and shall be deemed given (i) if hand delivered or delivered by courier,
when delivered to the appropriate notice address, or (ii) if mailed by first class mail, postage
prepaid, six business days after deposit in the United States mail addressed to the appropriate
notice address. The parties listed below may, by notice given hereunder, designate any further or
different addresses to which subsequent notices, certificates or other communications shall be
sent. Any notice required or permitted hereunder shall be directed to the following notice
address:
As to the City of Vernon
City: 4305 South Santa Fe Avenue
Vernon, California 90058
Attention: City Administrator
As to the The Bank of New York Mellon Trust Company, N.A.
Trustee: 700 South Flower Street, Suite 500
Los Angeles, California 90017-4104
Attention: Corporate Trust
Re: City of Vernon
2011 Escrow Fund
Section 15. Governing Law; Venue. This Escrow Agreement shall be construed in
accordance with and governed by the constitution and the laws of the State of California
applicable to contracts made and performed in the State. This Escrow Agreement shall be
enforceable in the State, and any action arising out of this Escrow Agreement shall be filed and
maintained in the Los Angeles County Superior Court, Los Angeles, California, unless the City
waives this requirement.
Section 16. Immunities and Liabilities of Trustee.
(a) The Trustee undertakes to perform only such duties as are expressly and
specifically set forth in this Escrow Agreement and no implied duties or obligations shall be read
into this Escrow Agreement against Trustee.
(b) The Trustee shall not have any liability hereunder except to the extent of
its own negligence or willful misconduct. In no event shall the Trustee be liable for any special
indirect or consequential damages. The Trustee shall have no duty or responsibility under this
Escrow Agreement in the case of any default in the performance of the covenants or agreements
of any other party contained in the Indenture; provided that, notwithstanding any such default, the
Trustee shall apply the moneys in the Escrow Fund to the Escrow Requirements when due as
provided in this Escrow Agreement. The Trustee is not required to resolve conflicting demands
to money or property in its possession under this Escrow Agreement.
(c) The Trustee may consult with counsel of its own choice (which may be
counsel to the City), and the written opinion of such counsel shall be full and complete
10
authorization to take or suffer in good faith any action hereunder in accordance with such opinion
of counsel.
(d) The Trustee shall not be responsible for any of the recitals or
representations contained herein or in the Indenture, other than recitals or representations
specifically made by the Trustee.
(e) The Trustee may become the owner of, or acquire any interest in, any of
the Refunded Bonds or any bonds or other securities of the City with the same rights that it
would have if it were not the Trustee and may engage or be interested in any financial or other
transaction with the City.
(f) The Trustee shall not be liable for the accuracy of any calculations
provided as to the sufficiency of the moneys or securities deposited with it to pay the Escrow
Requirements when due.
(g) The Trustee shall not be liable for any action or omission of the City under
this Escrow Agreement or the Indenture.
(h) Whenever in the administration of this Escrow Agreement the Trustee
shall deem it necessary or desirable that a matter be proved or established prior to taking or
suffering any action hereunder, such matter (unless other evidence in respect thereof be herein
specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the
Trustee, be deemed to be conclusively proved and established by a certificate of any authorized
representative of the City, and such certificate shall, in the absence of negligence or willful
misconduct on the part of the Trustee, be full warrant to the Trustee for any action taken or
suffered by it under the provisions of this Escrow Agreement upon the faith thereof.
(i) The Trustee may conclusively rely as to the truth and accuracy of the
statements and correctness of the opinions and the calculations provided to it in connection with
this Escrow Agreement and shall be protected in acting, or refraining from acting, upon any
written notice, instruction, request, certificate, document or opinion furnished to the Trustee in
connection with this Escrow Agreement and reasonably believed by the Trustee to have been
signed or presented by the proper party, and it need not investigate any fact or matter stated in
such notice, instruction, request, certificate or opinion.
0) The liability of the Trustee to make the payments required by Section 4
and Section 5 shall be limited to the moneys and Escrow Securities in the Escrow Fund.
(k) No provision of this Escrow Agreement shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the performance or
exercise of any of its duties hereunder, or in the exercise of its rights or powers.
-7-
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement
to be signed in their respective names by their duly authorized officers, all as of the day and year
first above written.
CITY OF VERNON
Name:
Title:
ATTEST:
Lo
City Clerk
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustee
Authorized Officer
OHS WEST:261383851.2
Schedule A
Initial Escrow Securities
Investments to be purchased on December 2011
Type of Maturity Interest
Security Date Paz Amount Rate
[US Treasury $ %
SLGS*
US Treasury
SLGS*
Purchase Price Vendor
* United States Treasury Obligation State and Local Government Series
US Treasury
US Treasury]
CITY CLERK'S OFFICE
INTEROFFICE MEMORANDUM
DATE: November 17, 2011
TO: Rory Burnett, Finance Director/City Treasurer
Carlos Fandino, Director of Light & Power
Mark Whitworth, City Administrator/�FiireChief
FROM: Willard Yamaguchi, City Clerk � �(
RE: Resolution No. 2011-185 — A Resolution of the City Council of the City of Vernon
Authorizing and Approving the Issuance of Electric System Revenue Bonds; Approving
the Supplemental Indenture of Trust Pursuant to Which Such Bonds are to be Issued;
Approving a Disclosure Document, a Contract of Purchase, a Continuing Disclosure
Agreement and Other Documents in Connection with Such Bonds; and Authorizing
Certain Other Matters Relating Thereto
Transmitted herewith is a copy of Resolution No. 2011-185 referenced above, which was approved by
the City Council of the City of Vernon on November 15, 2011.
Thank you.
WY:dj
Attachment
c: Resolution No.2011-185
Agreement File No. 11-126
RECEIVED
NOV 10 2011
CITY CLERK'S OFFICE STAFF REPORT
LIGHT & POWER
DATE: November 9, 2011
TO: Honorable Mayor and City Council
FROM: Carlos Fandino Jr., Director of Light & PowefI
RE: City of Vernon Electric System Revenue Bonds; 2011 Series
PURPOSE:
NOV 10 2011
CITY ADMINISTRATION
A resolution of the City Council of the City of Vernon authorizing and approving the
issuance of Electric System Revenue Bonds; approving the Supplemental Indenture of
Trust pursuant to which such bonds are to be issued; approving a Disclosure document,
a Contract of Purchase, a Continuing Disclosure Agreement and other documents in
connection with such bonds; and authorizing certain other matters relating thereto.
RECOMMENDATION:
It is recommended that this item be placed on the agenda for consideration and
approval at the November 15, 2011 council meeting.
CRF:ah
Attachments
BLX Group LLC
777 S. Figueroa St., Suite 3200
Los Angeles, CA 90017
p. 213 612 2200 f. 213 612 2499
Final Bond Pricing
Report & Evaluation
$72,740,000
City of Vernon, California
Electric System Revenue Bonds,
Series 2012
$37,640,000 Series A Tax -Exempt
$35,100,000 Series B Taxable
January 19, 2012
BLX®
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
TABLE OF CONTENTS
Issue Summary & Final Pricing
Pricing Review & Evaluation
APPENDICES
Appendix A — Comparable Transactions
Appendix B — Allotment & Bond Distribution Analysis
Appendix C — Municipal Market News
Appendix D — Final Bond Pricing Schedules
Page 3
Pages 4-7
Pages 8-33
BLX / Regional ezperdse / National resources / Proven solutions Page 2
BLX®
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
ISSUE SUMMARY & FINAL PRICING
City of Vernon Electric System Revenue Bonds
Sole Manager: De La Rosa & Co.
Total Issue Size: $72,740,000
SERIES 2012 A
TAX-EXEMPT
$37,640,000
Pricing Date: 01/10/2012
Delivery Dale: 01/19/2012
First Coupon: 08/01/2012
Dated Date: 01/19/2012
Rating: Moody's Baal, S&P: A -
Optional Redemption: 08/01/22 @100
8/1/2030 924397CL4
4,645,000
5.000%
5.000%
+211
8/1/2033 924397CM2
4,155,000
5.125%
5.180%
+199
8/1/2041 924397CNO
28,840,000
5.500%
5.400%
+195
SERIES 2012 B
TAXABLE
$36,100,000
Pricing Date: 01/10/2012
Delivery Date: 0111912012
First Coupon: 08/01/2012
Dated Date: 01/1912012
Rating: Moody's Baal, S&P: A -
Optional Redemption: 08/01/22 @100
Spread to
Date CUSIPS
Maturity
Coupons
8/1/2022 924397CP5
6,165,000
6.250%
6.570%
+460
8/1/2023 924397CQ3
6,565,000
6.250%
6.670%
+470
8/1/2024 924397CR1
6,990,000
6.250%
6.770%
+480
8/1/2025 924397CS9
7,440,000
6.375%
6.870%
+490
8/1/2026 924397CT7
7,940,000
6.500%
6.970%
+500
BLX / Regional expertise / National resources / Proven solutions
Page 3
BLX® ADVISORS / ASSET MANAGEMENT / COMPLIANCE
PRICING REVIEW & EVALUATION
BLX Group LLC ("BLX"), in its capacity as Financial Advisor to City of Vernon (the "City"), prepared for the pricing
call by identifying and analyzing recent comparable offerings and by consulting industry underwriting desks and
information sources on (1) general market conditions and (2) the levels, couponing structures, and call features
that would best serve an issuer's interest in the current market.
The primary market for municipal bonds varies considerably for securities with varying characteristics, including
the size of the offering and investors' familiarity with the issuer (both of which affect secondary market liquidity),
the credit quality (including for insured transactions, the issuer's underlying rating and the credit structure of the
financing), tax status (taxable and tax-exempt) and the coupon structure (e.g., premium coupon bonds priced to a
call versus those sold with coupons) close to their yields (i.e., "par-ish" bonds). BLX's pricing perspective
endeavors to account for all of these variables, and comparisons to several different issues is helpful in that
regard.
BLX is acting as an independent Financial Advisor to the City on this transaction. Our firm is not engaged in the
business of underwriting, trading or distribution of securities.
Pre-Pricina Call Mondav January 9. 2012 at 1:00 pm BLX Group & De La Rosa & Co.
De La Rosa & Co. ("DLR"), the underwriter, distributed on late Friday their preliminary ideas for rates, prices and
structure of the City's new issue bonds. The structure proposed for the Series A bonds is two term bonds in 2031
and 2041. The Series B bonds will be serial maturities 2022 through 2026. BLX has had internal discussions and
will suggest to DLR to create serial maturities and/or another term maturity on the Series A bonds as the City can
take advantage of the steep yield curve of at least 40 basis points ("bps") over these years. This structure would
have positive impact on the City's cost of capital or True Interest Cost ("TIC").
Series A Bonds Tax -Exempt
For the call DLR distributed an update of their price and structure ideas which now includes 3 term maturities on
the Series A bonds. This structure is more in tune with BLX structure ideas. The underwriter reviews the current
municipal market and shares that it is "a very positive environment" for the City to issue bonds, with low supply
and strong demand for municipal bonds. There has been a substantial amount of premarketing by DLR, including
participation from the City and BLX on calls with institutional investors. DLR is focusing primarily on marketing the
bonds to institutional investors and a more limited approach to retail investors. They feel institutional investors are
the most important investor group for this sale of the bonds. DLR has received strong indications of interest for
the 2041 maturity and less interest for the 2030 and 2033 maturities.
The underwriter has been buying the City's outstanding 2009 Series A bonds in 2021 from institutional investors
who want to reduce their exposure to the City's credit. On December 22, 2011 these bonds were trading at
5.024% or a spread to the Municipal Market Data ("MMD") AAA benchmark of +311 bps. They bought bonds from
an American Century bond fund on January 6t" at 4.60% or +294 to MMD and showed a 4.40% bid +274 today to
another holder of these bonds who chose not to sell the bonds. These trades are reported by the Municipal
Securities Rulemaking Board through trade data on the Electronic Municipal Market Access ("EMMA") online
platform. DLR points this out as an indicator of the improving secondary market (and spread to MMD) for the
City's bonds, relative to their proposed new issue rates and spreads.
BLX & DLR are in agreement that there have not been many comparable new issues sold in the last two months
to Vernon. Many similarly rated issues have been insured by Assured Guaranty providing a higher insured rating
than the City's ratings. So drawing comparisons to recent secondary market trades of the City's bonds is a helpful
indicator for the pricing of the 2012 series.
BLX / Regional expertise / National resources / Proven solutions Page 4
BLXO
DLR proposed pricing:
2030 5.000% coupon to yield 5.19% +230(bps)
2033 5.125% coupon to yield 5.38% +219
2041 5.500% coupon to yield 5.50% +206
Series B Bonds Taxable
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
The underwriter anticipates good interest from arbitrage accounts on these taxable bonds. The bonds will trade
more like tax-exempt municipal bonds and less like corporate bonds or other taxable securities, because the
smaller size of this series ($35,340,000). Large taxable deals (100+ million) have to seek out a larger pool of
investors. This smaller sized deal enables the underwriter to market the bonds with a traditional 10 year call at par
with a "make whole call" during years 1 through 10 .The high "original issue discount" pricing is intended to attract
the anticipated arbitrage investors and does not negatively impact the City's pricing.
DLR proposed pricing:
2022 6.250% coupon to yield 6.628% +470 to 10 year treasury
2023 6.250% coupon to yield 6.728% +480 to 10 year treasury
2024 6.250% coupon to yield 6.828% +490 to 10 year treasury
2025 6.375% coupon to yield 6.928% +500 to 10 year treasury
2026 6.500% coupon to yield 7.028% +510 to 10 year treasury
Pre Pricina Call Monday January 9. 2012 at 1:40pm BLX Group, De La Rosa & City of Vernon
DLR reiterates "this is an exceptional time to come to market'. There is $4 billion in new issue supply this week,
but this supply is manageable and will be met with the current heavy investor demand described a as a "grab
Pest". A $240 million Orange County CA taxable pension obligation issue is the only large new issue on the CA
calendar.
The clean IRS audit provided to the City, an improved municipal market and delaying the issue to January will
help the City achieve better rates than originally contemplated. DLR estimates the City will save 50 bps by selling
now instead of back in December. The underwriter expects a good number of institutional investors to place
orders for bonds. This anticipation of orders is the result of the City's (and other participants) efforts to answer
investors' questions and general informational investor calls. The underwriter expects the pricing in series tax-
exempt bonds to be at tighter spreads to MMD than where secondary bond trading activity has taken place at
+274.
There was conversation on the Series B taxable bond call feature, make whole call versus 10 year par call.
Taxable bonds traditionally have a make whole call which doesn't provide the City with as much future flexibility
as the traditional 10 year par call. DLR offers to utilize the 10 year par call, at no premium penalty to the City. If
this was a large taxable issue ($100+ million) with a 10 year par call most likely there would be a premium penalty
reflected in the pricing. The taxable bonds should see interest from arbitrage accounts and some investment
managers.
The pricing ideas are the same as the earlier 1:00 pm call. DLR will run an order period tomorrow morning from
6:15 am to 7:45 am and have,a conference call with the City and BLX at 8:15 am to review order period and to
present a final pricing for verbal award.
BLX / Regional expertise l National resourms / Proven solutions Page 5
BLX®
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
Pricina Call Tuesday January 10, 2012 at 8:15 am BLX Group. De La Rosa & City of Vernon
The underwriter reports that the sale has "gone very well". DLR released pricing this morning for the order period
at lower yields than were discussed yesterday at 1:40pm, based on the improved market and investor anticipated
interest.
Series A Bonds- Order Period Release
2030 5.000% coupon to yield 5.10% +220(bps)
2033 5.125% coupon to yield 5.28% +209
2041 5.500% coupon to yield 5.40% +196
Series A Bonds -Final Pr000sed Rates
The bonds are 3 to 5 times oversubscribed (2030-3x 2033- 3x, 2041-5x) at the above rates. DLR believes some
investor orders in 2041 were "padded" in an effort for those investors to get more bonds allotted to them). Based
on the oversubscription DLR will lower the rates 10bps in all maturities. Resulting in final pricing to be presented
to the City:
2030 5.000% coupon to yield 5.00% +210(bps)
2033 5.125% coupon to yield 5.18% +199
2041 5.500% coupon to yield 5.30% +186
Buyers of these bonds included Massachusetts Financial, Putnam, Franklin, Waddell & Reed, Invesco,
Rochester, and Susquehanna. It is encouraging for the City that some of these institutions are first time buyers of
the City's bonds (Rochester, Massachusetts Financial and Waddell & Reed).
As presented in Appendix A this pricing compares favorably to West Contra Costa Healthcare District rated NR/A-
priced 12-16-11 were the spread to MMD was +240 to +263 in these maturity ranges. Also this pricing is favorable
to City of San Mateo Special Tax Bonds non -rated priced 1-5-12 at +256 to +275. The pricing is not quite as
favorable to CA Statewide Communities Development Authority (University of CA, Irvine Apts) at +177 to +185 or
CA Municipal Finance Authority (Emerson College) Baal/BBB+ at +168 to +171. These two issuers have not had
to endure the recent negative events and negative scrutiny that the City has faced.
Series B Bonds Order Period Release
2022 6.250% coupon to yield 6.628% +470 to 10 year treasury
2023 6.250% coupon to yield 6.728% +480 to 10 year treasury
2024 6.250% coupon to yield 6.828% +490 to 10 year treasury
2025 6.375% coupon to yield 6.928% +600 to 10 year treasury
2026 6.500% coupon to yield 7.028%+510 to 10 year treasury
All maturities except 2024 were oversubscribed 2x and 2024 was subscribed for 1x. The buyers include Watermill
(who bought the bulk of the 2011 RDA bonds), PFB and an investment manager on the 2022 and 2023 bonds.
There were very few comparable transactions (size, rating, maturity schedule etc) in CA the last few months to
compare the pricing. The County of Sacramento Pension obligation bonds (see Appendix A) were insured by
Assured Guaranty.in the. maturities similar to the City's, but the spreads were not significant tighter at +465 to
+470 to treasury 10 year than the City's of +470 and +480.
BLX / Regional expertise / National resources / Proven solutions Page 6
BLXO
Series B Bonds -Final Proposed Rates
2022 6.250% coupon to yield 6.570% +460 to 10 year treasury
2023 6.250% coupon to yield 6.670% +470 to 10 year treasury
2024 6.250% coupon to yield 6.770% +480 to 10 year treasury
2025 6.375% coupon to yield 6.870%+490 to 10 year treasury
2026 6.500% coupon to yield 6.970%+500 to 10 year treasury
ADVISORS / ASSET MANAGEMENT / COMPLIANCE.
BLX recommended that the City accept the proposed rates on both Series A & B bonds based on the limited
comparable transactions in the market and the investor orders received. BLX is of the opinion that the final rates
and resulting combined All -in TIC of 6.102804% for the transaction presented by DLR are fair and reasonable,
based on the current market conditions and demand for the City's bonds. The City accepted the rates presented
by DLR, and made the verbal award. The anticipated closing of the transaction is January 19, 2012.
/ Regional expertise / National resources / Proven solutions Page 7
BLXO
Sale Dale
Par
Issuer
Type
Rating
Underwriter
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
APPENDIX A - OTHER COMPARABLE TRANSACTIONS
TAX-EXEMPT ISSUES
Series A Tax -Exempt
Baal/A-
De La Rosa
rn Yield
Spread.-
5.000% 5.0000% +211
5.125% 5.180% +199
5.500% 5.400% +196
January 5 2012
$al 800 000
Tax -Exempt
Non Rated
Stone & Youngberg
Coupon
Yield
Spreadto
MMD
2.750%
2.800%
+238
3.125%
3.200%
+260
3.375%
3.450%
+265
3.750%
3.750%
+288
4.000%
4.000%
+297
4.125%
4.250%
+301
4.375%
4.500%
+306
4.500%
4.650%
+298
4.750%
4.850%
+298
5.000%
5.050%
+300
5.125%
5.200%
+296
5.250%
5.350%
+292
5.375%
5.500%
+291
5.500%
5.600%
+289
5.875%
5.950%
+275
6.000%
6.100%
+256
Tax -Exempt
NR/A-
Piper Jaffray
Yield
3.000%
1.500%
+114
3.000%
2.000%
+142
3.000%
2.500%
+165
3.000%
3.000%
+207
3.250%
3.500%
+245
3.500%
3.750%
+250
3.750%
4.000%
+252
4.000%
4.250%
+251
4.250%
4.500%
+257
5.000% 5.250% +250
6.0000/. 5.750% +240
5.750% 6.000% +242
6.250% 6.250% +263
BLX / Regional experirse l National resources / Proven solutions Page 8
BLX®
Sale Date
Par
Issuer
Type
Rating
Underwriter
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
APPENDIX A - OTHER COMPARABLE TRANSACTIONS
TAX-EXEMPT ISSUES
Series A Tax -Exempt
Baal/A-
De La Rosa
m Yield
5.000% 5.00001. +211
5.125% 5.180% +199
1 5.500% 5.400% +196
December IS 2011
$94 10 000
Tex -Exempt
Baa2/1JR
Barclays
Coupon
Yield
Spread to
MMD
3.000%
1.100%
A-93
4.000%
1.750%
+139
4.000%
2.250%
+167
4.000%
2.650"/0
+180
4.000%
2.900%
+197
5.000%
3.100%
+204
5.000%
3.350%
+209
5.000%
3.550%
+206
5.000010
3.800%
+205
5.000%
4.100%
+216
5.125%
5.125%
+185
5.375%
5.375%
+177
December 1 2011
$54,085.000
i-
Tax-Exempt
Baal/BBB+
Barclays
Coupon
Yield
Spread to
MMD
5.000%
5.110%
+188
5.750%
5.380%
+171
6.000%
5.540%
+168
BLX / Regional expertise / National resources / Proven solutions Page 9
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BLXDADVISORS / ASSET MANAGEMENT / COMPLIANCE
APPENDIX C - MUNICIPAL MARKET NEWS
January 6, 2012- Thomson Reuters- by Randy Smolik- Close: Munis Are Still A Hot Commodity
Even as the muni market waited for the release of Dec payrolls, the long serial range was continuing to
firm. When pundits questioned the holiday effect of payrolls, buyers surfaced on treasuries, sparking a
muni bond grab around the 15-year range. Eventually these stronger markets spread to other maturity
ranges. Late calendar spreads continued to narrow.
Munis remained a hot commodity, at
waited for the 8:30 ET Dec payroll
analysts looked deeper into the Dec
related to the packaging and deliveri
could have played a major part in t
treasuries would reverse course. And,
grab. By early afternoon, muni deal
least for the longer serials and beyond. Even as the secondary
release, there were signs of the 15-year range firming. When
payroll jump of 200K and saw a sizeable component of jobs
ng from internet holiday orders. Temporary holiday employment
he payroll jump. After trading to new yield highs on the week,
when they did, the long range of muni serials turned into a bond
ers simply pulled offerings as bidders stepped 4-6bps through
yesterday levels.
The long serial buying sparked interest shorter and longer on the curve. The dollar bond sector, which
saw modest drift on some active dollar bond quotes early in the session, would find a bond grab of
sorts as well. One notable trade was $10min+ (Aal/AA+) Washington GO (c 21) 5s of 6/2041 at 3.86%
(+33bps).
We would also note that calendar spreads would narrow as early as five years with the largest
contractions coming in the longest maturities shown on the MMD Early -Mid -Late curves.
The current AAA MMD curve would be unchanged 2013-2017, bumped 1bp 2018-2021, bumped 2bps
2022-2023umped 4bps 2024, bumped 5-6bps 2025-2031 and bumped 4bps thereafter.
One special note, Moody's downgraded Illinois GO's from Al to A2(stable). Illinois competitive loans
total $800min next week ($525min tax-exempt and $275min taxable), a sizeable portion of an
estimated $3.9b1n in muni supply scheduled.
As a backdrop, treasury had an impressive reversal as foreign buying surfaced following the weakness
caused by the stronger than expected Dec payroll data. The buying caught shorts off guard especially
hedge fund asset allocators who had been leaning on treasuries since the New Year began.
When the MMD curve was set, the tsy 10yr was last at 1.96% versus 1.99% yesterday. The tsy bond
was last at 3.01 % versus 3.05% yesterday. The Dow was last at 12369, down 46pts.
SLx / Regional expertise l National resources / Proven solutions Page 14
BL,XO ADVISORS / ASSET MANAGEMENT / COMPLIANCE
January 6, 2012- Thomson Reuters- By Randy Smolik & Domenic Vonella-
Weekly Outlook & Primary Preview for 1/9/2012
The first full week of 2012 is expected to see just under $46 in total muni supply. While this should not
be a major hurdle, it certainly represents a significant increase from the holiday period as issuers begin
to jump at the attractive financing rates and market stability. Meanwhile, demand from bond funds is
expected to remain relatively stable as customers shed riskier assets ahead of a potential European
showdown and other geopolitical events. While supply is still manageable there is still some concern
that falling relative value ratios could deter some of the professional support this sector has seen over
recent weeks. Pressure from professional outfits might especially become a concern later in the month
if the supply outlook increases and/or treasuries are unable to hold its recent range. But expectations
for continued global economic drag are likely to keep any major selloff in check.
Next week, we expect roughly $3.913 in muni bond supply, from just under $600mm last week with
issuers looking to take advantage of the recent drop in financing rates. Leading the calendar While the
selection of ultra0high grade names are thin, lower tiered credits are looking to take advantage of
recent spread tightening with names like $800mm IL GO selling competitively this Wednesday and
(Aa2) $181mm NC GO Aid Antic (BofAML) slated. A good chunk of the major issuance for next week
will come in the form of taxable munis, which is entering the market alongside the seasonal corporate
bond market rush to start the year. (Aa2/A+) $240mm Orange Co, CA Pension (MStanley) and
$150mm Nashua, NH GO (JPM) will price. In the competitive arena, $275mm out of the $800mm IL GO
will sell as Taxable GO debt.
Over the past week (w/e 1/4), weekly reporting bond funds according to Lipper saw roughly $523mm of
inflows from $361mm the prior week. We maintain that preference for exposure to clean municipal
credits should continue to help muni bond funds with European bailouts on the horizon in addition to the
Straits of Hormuz showdown. As mentioned last week, munis can offer investors a higher spot on the
risk/return spectrum versus most other low risk sectors, also highlighted by a recent investment outlook
from one major buyer.
The hot trading zone has been around the 150year range of the curve. On Thursday (1/5) the 150year
AAA spot was 2.71% . 2.77% was an all time yield low made in late September of 2011. The 150year
spot had rallied from 3.52% yield highs of early July, 75bps. The 15 year yield faded to 3.17% from
2.77% by early October of 2011. The 2.71% yield of 1/5/2012 was a 62% measured move target of
75bps from the 3.17% yield high. A 75% target is at 2.60% and a 100% target is at 2.42%. The
150year spot ratio to treasuries bottomed at 105% in late October 2011. It was at 107% on 1/5. The
current annual average was 103.7%.
As a backdrop, the treasury market has shown caution as soon as the auction calendar was announced
for this coming week. $66b1n of 3s, 10s and 30s will sell starting with $32b1n 3yr notes on Tuesday
(1/10). The stronger US economic data of the past week has caused domestic accounts to sell
treasuries ahead of this supply. Yet, as we found after the treasury market fade on December payrolls,
Europe is a buyer as the sovereign debt problems.
BLX / Regional expertise / National resources / Proven solutions Page 15
BLX0
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
January 10, 2012- Thomson Reuters- Dan Berger -
Municipally Speaking: Munis Outperform Tsys As Curve Flattens
Yesterday buyers continued to extend in munis causing strong gains roughly 15 years and longer. The
10/30 slope declined to +162bps last night. At the end of 2011 this slope was +172bps. The buying
extended into a broader array of names, providing more evidence of credit spread tightening as buyers
hunt for yield. But, as negotiated product hits the market, will this demand slow? One does wonder as
the negotiated calendar gets geared up for the year if the insatiable demand for secondary bonds could
wane slightly.
The 10-year range and shorter has lagged the longer serial and dollar bond area since the start of the
year. In yesterday's muni trading, although the 10-year range and shorter was caught up in some of the
buying enthusiasm today, gains seemed limited to about 1-2bps on average. MMD's AAA curve was
unchanged 2013, bumped 1-2bps in 2014-2017, unchanged in 2018-2020, bumped 1-2bps in 2021-
2022, bumped 3bps in 2023-2024 and bumped 5-6bps thereafter.
The treasury rally that offered some buying impetus in the morning fizzled by the afternoon. The tsy
10yr had rallied to 1.91%, at one point, yet by the time the MMD curve was set, this benchmark note
faded by to 1.96%, unchanged from Friday. The tsy bond had rallied to 2.97% but faded back to 3.02%,
slightly weaker than the Friday 3.01% level. Munis outperformed treasuries as the 10yr muni/tsy ratio
closed lower at 93.4% while it also decreased for 30yrs at 114.2%. As we predicted, the muni market
should easily went dropped below the 93.7% level reached for the 10yr muni/tsy ratio in early August
2011 (well before new issue volume) picked up rapidly. We continue to feel that this week's calendar is
manageable and that this level is sustainable as we will witness higher new issue volume that should
be outweighed by January reinvestments estimated at $20bin.
Today will see plenty of mostly second -tier economic data releases. The most important is probably the
weekly chain store sales readings, the ICSC/GS Chain Store Sales Index at 7:45 ET. For the first fiscal
week of the New Year, which ended January 7, 2012, this index fell by 5.4%. This was the largest
week -over -week decline on record (since September 1989). On a y/y basis, retail sales also slowed to
2.8%. The Redbook Same Store Sales Index will be released at 8:55 ET. Now that the post -holiday
shopping spurt is trailing off, we can begin getting a better reading on the underlying sales trend.
At 7:30 ET this morning, the December NFIB Small Business Optimism Index saw a fourth consecutive
month of improvement. The National Federation of Independent Business said its Small Business
I Optimism Index rose 1.8 points to 93.8. Eight of the index's 10 components were either improved or
flat. About half the gain was due to reduced concern about business conditions six months into the
future, the NFIB said. At 10:00 ET, we will receive the IBD/TIPP Economic Optimism Index, November
Job Openings and Labor Turnover Survey, and November wholesale trade. Optimism looks to be
recovering apace, while wholesale trade probably rose modestly, and won't significantly affect Q4 GDP
expectations.
The Fed speakers could all be interesting. FRB San Francisco's Williams (voter/dove) will speak at
10:30 ET before the Clark County Economic Forecast Breakfast. FRB Cleveland's Pianalto (voter/dove)
will discuss labor markets in Wooster, Ohio at 11:10 ET. Finally, FRB Kansas City's George (non-voter)
will discuss the economic outlook at 1:00 ET. None of the three are particularly prolific speakers, and
this time we will hear George's thoughts.
expertise / National resources / Proven solutions Page 16
BLX® ADVISORS / ASSET MANAGEMENT / COMPLIANCE
The Fed will purchase approximately $1.25bin in Treasury securities in the 6-29yr range at 10:15 ET.
Treasury will auction $30b1n 4-week and $25bin 52-webills at 11:30 ET, followed by an auction of
$32bin 3yr notes at 1:00 ET.
January 10, 2012-Thomson Reuters- by Randy Smolik- Close: Not Enough Primary Pipeline To
Slow Long Muni Rally
Muni participants were simply in the mindset to keep involved in the longer serial sector until the music
stops. A drought of long 5% coupon bonds from the primary was helping the rally as well. Primary
issuance in general may not become substantial until February. Trading 10 years and shorter was
mostly steady. Treasuries continued to range trade. Lack of direction from treasuries stalled shorter
muni markets but was ignored by the longer muni markets. This was not the first time we have found a
sector of munis on a one-way street. Buyers refused to relent in the longer serial and dollar -bond
markets. Participants wanted to stay involved until the music stops. What was going to stop the long
end from rallying further?
Some surmise the bidding of competitive issues will create a drought of 5%-coupon structured high -
grades out long as underwriters structured deals with 4% couponing or less to obtain the lowest net
interest costs. So far that has been the case even with today's (Aa1/AAA) $238min Florida DOT loan
(7/2012-2041) bought by BOAML. The longest 5% coupon structure was in 2024, 5s at 2.44% (+23bps
to implied). So the potential scarcity of 5% coupon structure out long could be driving the rally.
Some believe that primary supply in general may stay sluggish until February. Certainly the holiday
shortened week next week could discourage supply but even in the last full week of January supply
may be very manageable.
The day started with mixed trading although the 15-20 year range was showing firmer trading out of the
chute with (Aaa) Baltimore Co, MD in the 2026-2029 range trading 2bps through the curve among other
names trading a little firmer. But, in the afternoon it was clear that the biggest winning names were New
York agency bonds like (Aa1/AAA) NYC TFA or (AAA) UDC PITS trading around +20bp spreads versus
around +30bp spreads over the past week.
Roughly 10 years and shorter, trading aspirations seemed muted. In this short/intermediate range, 5%
coupon structure seemed always in abundance. Comparability of high-grade yields to treasury yields
was not as encouraging as looking out toward the 30-year range where MMD AAA spreads to the tsy
bond were in excess of +35bps. With the treasury market simply range trading over the past few
sessions, lack of direction from taxables seemed meaningful in the short/intermediate range. In the long
range of munis, the treasury market chop simply did not register.
The current MMD curve was unchanged in 2013-2014, bumped 2-3bps in 2015-2016, unchanged to
1 by bumps in the 2017-2023 range and bumped 3bps in 2024 and 5bps thereafter.
As a backdrop, stocks were buoyant all day which limited the performance in treasuries. Treasuries had
drifted 3-4bps at the start of the session but managed to pare those losses by the time the MMD curve
was set. The tsy 10yr was last at 1.97% versus 1.96% yesterday. The tsy bond was last at 3.03%, flat
to Monday. The Dow was last at 12472, up 79pts.
l Regional expertise / National resources / Proven solutions Page 17
BL, A O ADVISORS / ASSET MANAGEMENT / COMPLIANCE
January 13, 2012- The Bond Buyer- Keeley Webster- Deal Spotlight: Troubled Vernon, CA
Issues With Ease. California City's Deal is Oversubscribed
LOS ANGELES — Selling $74.3 million of electric system revenue bonds for Vernon, the scandal -
ridden California city that narrowly avoided being disincorporated last year, would seem to be an uphill
battle. But De La Rosa & Co, the underwriter selected to market the bonds, found it to be remarkably
easy.
On Tuesday, De La Rosa priced the debt, shutting down sales in less than an hour after the bonds —
with ratings split between high triple-B and low single -A — were oversubscribed. Benjamin Stern, a
principal in the investment bank's Los Angeles office, said the bank did not anticipate the level of
interest the bonds would receive when it first began pre -marketing efforts in mid -December. "The
investors were able to wade through the noise and take a look at the underlying credit and make a
decision to purchase the bonds," Stern said. "When we started the process last year, I didn't have high
expectations that this many investors would look at the credit, but I felt they had good credit."
The bonds are a risky investment from an individual investor's point of view, because the city of Vernon
lacks a population and residential tax base, said Michael Pietronico, chief executive of Miller Tabak
Asset Management in New York. "The city is only 5.2 square miles and it is mostly industrial,"
Pietronico said. "It makes for a risky investment since industry can change quickly. Residential tends to
be more stable." The industrial city is home to 1,200 businesses but just 112 residents.
The bonds are split into two series. Series A, $39.5 million of new -money tax-exempt bonds, will be
used to pay for improvements to the city's electric system. The taxable $34.8 million Series B bonds will
refund 2009 bonds that mature later this year. The response received enabled the underwriter to lower
the yield by 10 basis points to 5.4% on the 30-year tax-exempt bonds at close, Stern said. "I'm sure
they had a lot of people lined up before the sale. The bonds are attractively priced," said a San
Francisco bond trader, who declined to be identified. "The market is strong and new issuance supply is
thin for January." The market for the Vernon bonds is institutional investors, who are always searching
for high yields, according to Pietronico."Institutional investors tend to be more sophisticated and can
track investments like this better than individual investors can," he said.
The preliminary offering statement contains an in-depth explanation of the controversies that have
rocked the city. Over the past two years, three of Vernon's former senior officials have been convicted
of crimes relating to city activities — the mayor for voter fraud and conspiracy, the city administrator for
misappropriation of funds, and the director of light and power on a felony conflict -of -interest charge
related to the hiring of his wife as a contractor. None are currently employed by the city, and salaries of
Vernon officials have been adjusted to levels comparable to other California cities.
State legislators introduced a bill in December 2010 that would have disincorporated the city after years
of complaints from neighboring communities about corruption and pollution from Vernon's power
generating station. Concerned about potential job losses in the city that employs 50,000 people, Sen.
Kevin De Leon, D-Los Angeles, one of the disincorporation bill's original co-authors, agreed to work
with Vernon to defeat the bill if officials agreed to a series of reforms. Among the changes was an
agreement that the city spend an amount equivalent to what neighboring cities spend annually on parks
and recreation by creating a community benefits program to create parks in the city. The amount
agreed to was $60 million. Vernon officials are considering a bond issue to pay for the parks fund, but
BLX / Regional expertise / National resources / Proven solutions- Page 1S
BLAO ADVISORS / ASSET MANAGEMENT / COMPLIANCE
city spokesman Fred MacFarlane said money from this week's electric revenue bond offering will not be
used for that purpose.
The disincorporation bill was defeated in September. Simultaneously, De Leon recommended a series
of reforms to improve oversight and transparency that were approved by Vernon voters in two separate
referendums held in November. The measures approved by voters included a requirement that officials
fill vacancies on the City Council through a special election rather than by appointment. Other voter -
approved changes to the city charter included requiring competitive bidding on contracts, retaining an
independent reform monitor for four more years, and maintaining a housing commission. While de
Leon's office is pleased with the progress being made by the city, the senator has assigned one of his
deputies to meet with Vernon officials on a weekly basis to make sure the city adheres to the
agreements made, said Greg Hayes, a de Leon spokesman.
The Internal Revenue Service closed an audit of the tax-exempt status of Vernon's electric revenue
bonds on Dec. 22, finding favorably for the city, which continues to be the subject of two other audits.
The California Public Employees' Retirement System is conducting an examination of retirement
benefits paid to public officials that is expected to be released in mid -February. A joint legislative audit
will be released in April.
The benefits paid to Bruce Malkenhorst Sr., a former Vernon city manager convicted on charges of
misappropriating funds, are considered to be among the state's most excessive, Hayes said. He
collects a $500,000 annual pension. De Leon is working on a bill that would prevent former city officials
convicted of embezzlement from receiving pensions, Hayes said. The IRS notified Vernon that it
closed its audit of $360.75 million of electric system revenue bonds issued by the city in May 2009
without changes to their tax-exempt status. The audits were disclosed in event notices the issuers filed
with the Municipal Securities Rulemaking Board's online EMMA system. "The close of the IRS audit
with a 'no change' determination was not unexpected," city administrator Mark Whitworth said in a
statement released in late December. "In fact, it was anticipated from the start of the Treasury
Department's examination. Vernon fully cooperated with the IRS auditors, confident that our bond
financial dealings have been legal and appropriate." The IRS ruling was clearly helpful in selling the
bonds, even though it was related to a different bond issue, Stern said. "It cleared up some of the
questions," he added. "It definitely helped the process, although taxability was never in question on the
new bonds."
Another hurdle the bonds had to clear was the mixed ratings received from Standard & Poor's and
Moody's Investors Service. S&P affirmed its A -minus on the city's electric revenue debt on Nov. 23 with
a stable outlook. But Moody's downgraded Vernon's electricity enterprise on Dec. 6 to Baal from A,
mainly due to declining revenues, while also giving the credit a stable outlook. "This downgrade is due
to financial operations, which just deteriorated independently of the other issues," said Moody's Kevork
Khrimian in an interview shortly after the bond downgrade. The defeat and aftermath of AB 46, which
would have disincorporated Vernon, had minimal affect on the rating, according to Khrimian.The
Moody's downgrade reflects weaker -than -expected operating results for 2011 and analysts' expectation
that similar results are likely to persist at least through 2014, he said. The Vernon utility's demand for
power is stagnant and has fallen significantly short of projections, the Moody's report noted.
BLX / Regional expertise / National resources / Proven solutions Page 19
BLXO
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
MUNICIPAL BOND MARKET ACTIVITY & SUPPLY INDICATORS
Selected New Issues Sellina The Week Of 01/912012
Amount Issuer Lead Underwriter Rating
$197,000,000
State of OH
$178,000,000
Jacksonville FL Electric
$229,000,000
Orange County CA Pension -Taxable
$108,000,000
VA Port Authority
$150,000,000
Nashua NH- Taxable
$101,000,000
GA Muni Electric
$179,540,000
North Carolina
$107,000,000
PA Economic Development
PNC
Aal/AA+/AA+
Bank of America
Aa2/AA-/AA-
Morgan Stanley
Aa2/A+
Morgan Stanley
Aal/AA+/AA+
J. P. Morgan
Aal/AAA
J. P. Morgan
Al/A/A+
Bank of America
Aa/AA/AA
Citigroup
Aa3/AA-
1 Regional expertise l National resources / Proven solutions Page 20
BLX®
ADVISORS / ASSET MANAGEMENT / COMPLIANCE
BOND BUYER 30 DAY VISIBLE SUPPLY
Source: Thomson Reuters
30-Dav Visible Supply Tvae Issuer: Issues $5 million+
Source: Thomson Reuter
BLX / Regional expertise / National resources / Proven solutions
Page 21
APPENDIX D- FINAL BOND PRICING SCHEDULES
'INFORMATION PROVIDED BY DLR
SOURCES AND USES OF FUNDS
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/102012)
(Taxable Escrow Sufficiency Verified by Grant Thomton)
Dated Date 01/192012
Delivery Date 01/192012
2012 Series A
Sources: (Tax -Exempt) 2012 Series B
(Taxable) Total
Bond Proceeds:
Par Amount 37,640,000.00 35,100,000.00 72,740,000.00
NetPremium/OID 199,159.15 (1,331,653.55) (1,132,494.40)
37,839,159.15 33,768,346.45 71,607,505.60
2012 Series A 2012 Series B
Uses: (Tax -Exempt) (Taxable) Total
Project Fund Deposits:
Project Fund 35,000,000.00 3,000,000.00 38,000,000.00
Refunding Escrow Deposits:
Cash Deposit 688,400.49 688,400.49
SLGS Purchases 29,362,142.00 29,362,142.00
30,050,542.49 30,050,542A9
Other Fund Deposits:
Capitalized Interest Thru 2/1/13 2,099,106.88 2,099,106.88
Delivery Date Expenses:
Cost of Issuance 473,010.55 433,679.45 906,690.00
Underwriter's Discount 263,828.74 281,286.82 545,115.56
736,839.29 714,966.27 1,451,805.56
Other Uses of Funds:
Additional Proceeds 3,212.98 2,837.69 6,050.67
37,839,159.15 33,768,346.45 71,607,505.60
BLX I Regional expertise I National resources I Proven solutions Page 22
BOND SUMMARY STATISTICS
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/102012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Dated Date O1/192012
Delivery Date O1/192012
Last Maturity 08/012041
Arbitrage Yield
6.792106%
Trite Interest Cost (TIC)
5.994151%
Net Interest Cost (NIC)
5.836360%
All -In TIC
6.102804%
Average Coupon
5.716479%
Average Life (years)
19.238
Duration of Issue (years)
11.181
Par Amount
72,740,000.00
Bond Proceeds
71,607,505.60
Total Interest
79,996,394.63
Net Interest
81,674,004.59
Total Debt Service
152,736,394.63
Maximum Annual Debt Service
10,230,231.28
Average Annual Debt Service
5,171,661.22
Underwriter's Fees (per $1000)
Average Takedown
Other Fee
7.494027
Total Underwriter's Discount 7.494027
Bid Price 97.693690
Par
Average
Average
Value
Coupon
Life
Bond Component
Price
Taxable Serial Bonds
35,100,000.00
96.206
6.343%
12.659
Tax -Exempt 2030 Term Bond
4,645,000.00
100.000
5.000%
17.096
'Tax-Exempt2033 Term Bond
4,155,000.00
99.289
5.125%
20.567
Tax-Exempt2041 Term Bond
28,840,000.00
100.793
5.500%
27.399
ParValue
+ Accrued Interest
+Premium (Discount)
- Underwriter's Discount
- Cost of issuance Expense
- Other Amounts
Target Value
Target Date
Yield
72,740,000.00 19.238
72,740,000.00
(1,132,494.40)
(545,115.56)
71,062,390.04
O1/192012
5.984151%
All -In
TIC
72,740,000.00
(1,132,494.40)
(545,115.56)
(906,690.00)
70,155,700.04
O1/192012
6.102804%
Arbitrage
Yield
35,100,000.00
(1,331,653.55)
33,768,346.45
O1/192012
6.792106%
BLX / Regional expertise / National resources / Proven solutions Page 23
Bond Pricing
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Bond Maturity
Yield to Call Call Premium
Component Date
Amount
Rate
Yield
Price
Maturity Date Price (-Discount)
Taxable Serial Bonds:
8/l/2022
6,165,000.00
6.250%
6.570%
97.591
(148,514.85)
8/l2023
6,565,000.00
6.250%
6.670%
96.654
(219,664.90)
8/I/2024
6,990,000.00
6.250%
6.770%
95.650
(304,065.00)
8/l2025
, 7,440,000.00
6.375%
6.870%
95.679
(321,482.40)
8/l2026
7,940,000,00
6.500%
6.970%
95.744
(337,926.40)
35,100,000.00
(1,331,653.55)
Tax -Exempt 2030 Term Bond:
8/l2027
1,075,000.00
5.000%
5.000%
100.000
8/l2028
1,130,000.00
5.000%
5.000%
100.000
8/l2029
1,190,000.00
5.000%
5.000%
100.000
8/12030
1,250,000.00
5.000%
5.000%
100.000
4,645,000.00
Tax -Exempt 2033 Term Bond:
8/l/2031
1,315,000.00
5.125%
5.180%
99.289
(9,349.65)
8/l2032
1,385,000.00
5.125%
5.180%
99.289
(9,847.35)
8/12033
1,455,000.00
5.125%
5.180%
99.289
(1034505)
4,155,000.00
(29,542.05)
Tax -Exempt 2041 Term Bond:
8/12034
1,535,000.00
5.5000/.
5.400%
100.793
C
5.446%
8/12022
100.000
12,172.55
8/l2035
1,625,000.00
5.5000/.
5.400%
100.793
C
5.446%
8/l/2022
100.000
12,886.25
8/l2036
1,715,000.00
5.500%
5.400%
100.793
C
5.446%
8/12022
100.000
13,599.95
8/12037
1,810,000.00
5.500%
5.400%
100.793
C
5.446%
8/12022
100.000
14,353.30
8/l2038
1,915,000.00
5.500%
5.400%
100.793
C
5.446%
8/12022
100.000
15, 185.95
8/l2039
6,380,000.00
5.500%
5.400%
100.793
C
5.4460/.
8/l2022
100.000
50,593.40
8/12040
6,740,000.00
5.500%
5.400%
100.793
C
5.4460/.
8/l2022
100.000
53,448.20
8/1/2041
7,120000.00
5.500%
5.400%
100.793
C
5446%
8/l2022
100000
5646160
72,740,000.00 (1 132 494 40)
BLX I Regional expertise I National resources I Proven solutions Page 24
Bond Pricing
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Dated Date
Delivery Date
First Coupon
Par Amount
Original Issue Discount
Production
Underwriter's Discount
Purchase Price
Accrued Interest
Net Proceeds
1/19/2012
1/19/2012
8/1/2012
72,740,000.00
(1,132,494.40)
71,607,505.60 98.443093%
(545,115.56) (0.749403)
71,062,390.04 97.693690%
71,062,390.04
Regional expertise / National resources / Proven solutions Page 25
BOND DEBT SERVICE BREAKDOWN
City of Vernon
Period
Ending
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/102012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
2012 Series A 2012 Series B
(Tax -Exempt) (Taxable)
Total
06/302013
2,099,106.88
2,296,996.68
4,396,103.56
06/302014
2,031,393.76
2,222,900.02
4,254,293.78
06/302015
2,031,393.76
2,222,900.02
4,254,293.78
06/302016
2,031,393.76
2,222,900.02
4,254,293.78
06/302017
2,031,393.76
2,222,900.02
4,254,293.78
06/302018
2,031,393.76
2,222,900.02
4,254,293.78
06/302019
2,031,393.76
2,222,900.02
4,254,293.78
06/302020
2,031,393.76
2,222,900.02
4,254,293.78
06/302021
2,031,393.76
2,222,900.02
4,254,293.78
06/302022
2,031,393.76
2,222,900.02
4,254,293.78
06/302023
2,031,393.76
8,195,243.77
10,226,637.53
06/302024
2,031,393.76
8,197,431.27
10,228,825.03
06/302025
2,031,393.76
8,198,837.52
10,230,231.28
06/302026
2,031,393.76
8,193,250.01
10,224,643.77
06/302027
2,031,393.76
8,198,050.00
10,229,443.76
06/302028
3,079,518.76
3,079,518.76
06/302029
3,079,393.76
3,079,393.76
06/302030
3,081,393.76
3,081,393.76
06/302031
3,080,393.76
3,080,393.76
06/302032
3,080,446.88
3,080,446.88
06/302033
3,081,259.38
3,081,259.38
06/302034
3,078,494.38
3,078,484.38
06/302035
3,078,987.50
3,078,987.50
06/302036
3,082,087.50
3,082,087.50
06/302037
3,080,237.50
3,080,237.50
06/302038
3,078,300.00
3,078,300.00
06/30/2039
3,080,862.50
3,080,862.50
06/302040
7,317,750.00
7,317,750.00
06/302041
7,316,950.00
7,316,950.00
06/302042
7,315,800.00
7,315,800.00
89,450,485.20
63,285,909.43
152,736,394.63
BLX / Regional expertise / National resources / Proven solutions Page 26
COST OF ISSUANCE
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/102012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Cost of Issuance $/1000 Amount
Bond Counsel (Orrick)
4.60544
335,000.00
Trustee
0.06186
4,500.00
Printer
0.04812
3,500.00
Rating Fee (Moody's)
0.58771
42,750.00
Rating Fee (Standard & Poor's)
0.37119
27,000.00
Underwriter's Counsel
0.61864
45,000.00
Contingency
0.13748
10,000.00
Financial Advisor (BLX Group)
6.00000
436,440.00
Verification Agent (Grant Thornton)
0.03437
2,500.00
12.46481
906,690.00
BLX / Regional exper[ise / National resources / Proven solutions Page 27
UNDERWRITER'S DISCOUNT
City of Vernon
Electric System Revenue Bonds, Series 2012
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Underwriter's Discount $/1000
Amount
NetRoadshow
0.10311
7,500.00
Takedown
7.23254
526,095.00
CDIAC
0.08249
6,000.00
CUSIP
0.01375
1,000.00
DTC
0.01375
1,000.00
Day Loan
0.02778
2,020.56
Out of Pocket
0.02062
1,500.00
7.49403
545,115.56
BLX / Regional expertise / National resources / Proven solutions Page
SOURCES AND USES OF FUNDS
City of Vernon
2012 Series A (Tax -Exempt)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Dated Date O1/19/2012
Delivery Date O1/192012
Sources:
Bond Proceeds:
Par Amount
37,640,000.00
m NetPterum
199,159.15
37,839,159.15
Uses:
Project Fund Deposits:
Project Fund
35,000,000.00
Other Fund Deposits:
f Capitalized Interest Thor 2/1/13
l
2,099,106.88
Delivery Date Expenses:
Cost of Issuance
473,010.55
Underwriter's Discount
263,828.74
736,839.29
(( Other Uses ofFunds:
Additional Proceeds
11
3,212.98
37,839,159.15
BLX / Regional expertise / National resources / Proven solutions Page 29
BOND SUMMARY STATISTICS
City of Vernon
2012 Series A (Tax -Exempt)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thomton)
Dated Date
O1/192012
Delivery Date
O1/192012
Last Maturity
OS/012041
Arbitrage Yield
5.373363%
True Interest Cost (TIC)
5.424741%
Net Interest Cost (NIC)
5.431642%
All -In TIC
5.518187%
Average Coupon
5.424871%
Average Life (years)
25.373
Duration of Issue (years)
13,965
Par Amount
37,640,000.00
Bond Proceeds
37,839,159.15
Total Interest
51,810,485.20
Net Interest
51,875,154.79
Total Debt Service
89,450,485.20
Maximum Annual Debt Service
7,317,750.00
Average Annual Debt Service
3,028,797.47
Underwriter's Fees (per $1000)
Average Takedown
Other Fee
7.009265
Total Underwriter's Discount 7.009265
Bid Price 99.828189
Bond Component
Par
Value
Price
Average
Coupon
Average
Life
Tax -Exempt 2030 Term Bond
4,645,000.00
100.000
5.000%
17.096
Tax-Exempt2033 Term Bond
4,155,000.00
99.289
5.125%
20.567
Tax -Exempt 2041 Term Bond
28,840,000.00
100.793
5.500%
27.399
37,640,000.00
25.373
Par Value
+Accrued Interest
+ Premium (Discount)
- Underwriter's Discount
- Cost of Issuance Expense
- Other Amounts
Target Value
Target Date
Yield
37,640,000.00
199,159.15
(263,828.74)
37,575,330.41
O1/192012
5.424741%
All -In
TIC
37,640,000.00
199,159.15
(263,828.74)
(473,010.55)
37,102,319.86
01/192012
5.518187%
Arbitrage
Yield
37,640,000.00
199,159.15
37,839,159.15
O1/192012
5.373363%
BLX / Regional expertise / National resources / Proven solutions Page 30
SOURCES AND USES OF FUNDS
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Dated Date O1/192012
Delivery Date O1/192012
Sources:
Bond Proceeds:
Par Amount 35,100,000.00
Original Issue Discount (1,331,653.55)
33,768,346.45
Uses:
Project Fund Deposits:
Project Fund 3,000,000.00
Refunding Escrow Deposits:
Cash Deposit 688,400.49
SLGS Purchases 29,362,142.00
30,050,542A9
Delivery Date Expenses:
Cost of Issuance 433,679A5
Underwriter's Discount 281,286.82
714,966.27
Other Uses of Funds:
Additional Proceeds 2,837.69
33,768,346A5
BLX / Regional expertise / National resources / Proven solutions Page 31
BOND SUMMARY STATISTICS
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by
Grant Thornton)
Dated Date
O1/19/2012
Delivery Date
O1/192012
Last Maturity
08/012026
Arbitrage Yield
6.792106%
True Interest Cost (TIC)
6.890754%
Net Interest Cost (NIC)
6.706242%
All -In TIC
7.045002%
Average Coupon
6.343249%
Average Life (years)
12.659
Duration of Issue (years)
8.760
Par Amount
35,100,000.00
Bond Proceeds
33,768,346.45
Total Interest
28,185,909.43
Net Interest
29,798,849.80
Total Debt Service
63,285,909.43
Maximum Annual Debt Service
8,198,837.52
Average Annual Debt Service
4,354,535.05
Underwriter's Fees (per $1000)
Average Takedown
Other Fee
8.013870
Total Underwriter's Discount 8.013870
Bid Price 95.404728
All -In
Arbitrage
TIC
TIC
Yield
Par Value
35,100,000.00
35,100,000.00
35,100,000.00
+Accrued Interest
+ Premium (Discount)
(1,331,653.55)
(1,331,653.55)
(1,331,653.55)
-Underwriter'sDiscount
(281,286.82)
(281,286.82)
- Cost of Issuance Expense
(433,679.45)
- Other Amounts
Target Value
33,487,059.63
33,053,380.18
33,768,346A5
Target Date
01/192012
01/192012
01/192012
Yield
6.890754%
7.045002%
6.792106o/a
BLX / Regional expertise / National resources / Proven solutions Page 32
BOND PRICING
City of Vex -non
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Maturity Premium
Bond Component Date (-Discount)
Amount
Rate
Yield
Price
Taxable Serial Bonds:
08/0W022
6,165,000.00
6.250%
6.570%
97.591
(148,514.85)
08/01IM3
6,565,000.00
6.250%
6.670%
96.654
(219,664.90)
08/O1/2024
6,990,000.00
6.250%
6.770%
95.650
(304,065.00)
08/OW025
7,440,000.00
6.375%
6.870%
95.679
(321,482.40)
08/01/2026
7,940,000.00
6.500%
6.970%
95.744
(337,926.40)
35,100,000.00 (1,331,653.55)
Dated Date
Delivery Date
First Coupon
Par Amount
Original Issue Discount
Production
Underwriter's Discount
Purchase Price
Accrued Interest
Net Proceeds
O1/19/2012
O1/19/2012
08/01/2012
35,100,000.00
(1,331,653.55)
33,768,346.45 96.206115%
(281,286.82) (0.801387%)
33,487,059.63 95.404728%
33,487,059.63
BLX I Regional expertise I National resources I Proven solutions Page 33
Cash Flow Verification Report
City of Vernon, California
January 19, 2012
Contents
Letter
Exhibit A Schedule of Sources and Uses of Funds
Exhibit B Escrow Account Cash Flow
Exhibit B-1 Cash Receipt From the SLGS
Exhibit B-2 Debt Service Payments on the Refunded Bonds
Appendix I Applicable schedules provided by De La Rosa & Co.
0 GrantThornton
®�
Audit • Tax • Advisory
Grant Thornton LLP
200 S 6th Street, Suite 500
Minneapolis,
554021459
Report of Independent Certified Public Accountants
®
T 612.332.0001
On Applying Agreed -Upon Procedures F612.332.8361
w ,GrantThorntonxom
o]
City of Vernon
4305 South Santa Fe Avenue
�f
Vernon, California
Orrick, Herrington & Sutcliffe LLP
777 South Figueroa Street, Suite 3200
®�
Los Angeles, California
BLX Group LLC
777 South Figueroa Street, Suite 3200
Los Angeles, California
The Bank of New York Mellon
be
La Rosa & Co. Trust Company, N.A.
456 Montgomery Street, 19th Floor 700 South Flower Street, Suite 500
San Francisco, California Los Angeles, California
$35,100,000
City of Vernon
Electric System Revenue Bonds
2012 Taxable Series B
Dated January 19, 2012
We have performed the procedures described in this report, which were agreed to by the City
of Vernon, California (the "City' and De La Rosa & Co. (the "Underwriter), to verify the
mathematical accuracy of certain computations contained in the schedules attached in
Appendix I provided by the Underwriter. The Underwriter is responsible for these schedules.
These procedures were performed solely to assist you in the issuance of the above -captioned
bond issue (the "2012 Series B Bonds' for the purpose, in part, of rcfunding a portion of the
City's outstanding Electric System Revenue Bonds, 2009 Series A (the "Refunded Bonds') as
summarized on the next page. This engagement was performed in accordance with Statements
on Standards for Attestation Engagements established by the American Institute of Certified
Public Accountants. The sufficiency of these procedures is solely the responsibility of the
addressees of this report who are the specified parties. Consequently, we make no
representation regarding the sufficiency of the procedures described in this report either for the
purpose for which this report has been requested or for any other purpose.
Grant Thornton LLP
U.S. member firm of Gran Thomtnn Inlemalional Ltd
N
Page 2
Principal Principal Maturities Redemption Redemption
Series Issued Dated _ Refunded Refunded Date Price
2009A $419,400,000 May 13, 2009 $28,680,000 8-1-12 N/A N/A
VERIFICATION OF ESCROW ACCOUNT CASH FLOW SUFFICIENCY
The Underwriter provided us with schedules (Appendix I) summarizing the future escrow
account cash receipt and disbursements. These schedules indicate that there will be sufficient
cash available in the escrow account to pay the principal and interest on the Refunded Bonds
assuming the Refunded Bonds will be paid on their originally scheduled maturity date.
The attached Exhibit A (Schedule of Sources and Uses of Funds) was compiled based upon
information provided by the Underwriter.
As part of our engagement to recalculate the schedules attached as Appendix I we prepared
schedules attached hereto as Exhibits B through B-2 independently calculating the future
®
escrow account cash receipt and disbursements and compared the information used in our
calculations to the information listed below contained in applicable pages of the following
®
documents:
®
Subscription confirmation, dated January 10, 2012, and Schedule of U.S. Treasury
Securities provided by the Underwriter used to acquire certain United States Treasury
Securities - State and Local Government Series (the "SLGS") insofar as the SLGS are
described as to the principal amount, interest rate, maturity date and issuance date; and
®
• Official Statement for the Refunded Bonds provided by the Underwriter insofar as the
•
Refunded Bonds are described as to the maturity and interest payment dates, principal
®
amounts and interest rates.
In addition, we compared the interest rate for the maturity of the SLGS, as shown on the
Schedule of U.S. Treasury Securities, with the maximum allowable interest rates shown on the
Department of Treasury, Bureau of Public Debt, SLGS Table for use on January 10, 2012 and
found that the interest rate was equal to the maximum allowable interest rate for that maturity.
Our procedures, as summarized in Exhibits B through B-2, prove the mathematical accuracy of
the schedules provided by the Underwriter summarizing the future escrow account cash receipt
and disbursements. The schedules provided by the Underwriter and those prepared by us
reflect that the anticipated receipt from the SLGS, together with an initial cash deposit of
$688,400.49 to be deposited into the escrow account on January 19, 2012, will be sufficient to
pay, when due, the principal and interest related to the Refunded Bonds assuming the
Refunded Bonds will be paid on their originally scheduled maturity date.
®
We were not engaged to, and did not, perform an examination or a review in accordance with
®
Statements on Standards for Attestation Engagements established by the American Institute of
Certified Public Accountants, the objective of which would be the expression of an
®
examination opinion or limited assurance on the items referred to above. Accordingly we do
not express such an opinion or limited assurance. Had we performed additional procedures,
other matters might have come to our attention that would have been reported to you.
B
Page 3
This report is intended solely for the information and use of those to whom this letter is
addressed and is not intended to be and should not be used by anyone other than these
specified parties.
Minneapolis, Minnesota
January 19, 2012
Exhibit A
City of Vernon, California
SCHEDULE OF SOURCES AND USES OF FUNDS
January 19, 2012
SOURCES:
Principal amount of the Bonds $35,100,000.00
Net original issue discount (1,331,653.55)
$33,768,346.45
USES:
Purchase price of the SLGS $29,362,142.00
Beginning cash deposit to the escrow account 688,400.49
Deposit to the Project Fund 3,000,000.00
Costs of issuance 433,679.45
Underwriter's discount 281.286.82
Contingency 2,837.69
$33,768,346.45
�i i
Exhibit B
®
City of Vernon, California
ESCROW ACCOUNT CASH FLOW
�!
Debt service
®i
Cash receipt payments on
from SLGS Refunded Bonds
Cash
Dates
(Exhibit B-1) (Exhibit B-2)
balance
Cash deposit on
January 19, 2012
$688,400.49
02-01-12.
$688,400.00
0.49
08-01-12
$29,368,399.51 29,368,400.00
0.00
$29,368,399.51 $30,056,800.00
oil
MI
IF
IF
19
�I
Exhibit B-1
City of Vernon, California
CASH, RECEIPT FROM THE SLGS
Receipt
Interest
Cash receipt
date
Principal
rate Interest
from SLGS
08-01-12
$29,362,142
0.040% $6,257.51
$29,368,399.51
City of Vernon, California
DEBT SERVICE PAYMENTS ON THE REFUNDED BONDS
Interest
Date Principal rate
Interest
02-01-12
$688,400.00
08-01-12 $28,680,000 (1)
688,400.00
$28,680,000
$1,376,800.00
Exhibit B-2
Debt service
oavments
$688,400.00
29,368,400.00
$30,056,800.00
(1) Actual maturity dates, principal amounts and interest rates are as follows:
Maturity
Principal
Interest
date
amount
rate
08-01-12
$3,170,000
3.500%
08-01-12
965,000
4.000%
08-01-12
24,545,000
5.000%
$28,680,000
APPENDIX I
Applicable schedules provided by
De La Rosa & Co.
SOURCES AND USES OF FUNDS
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thomson)
Dated Date O1/19/2012
Delivery Date O1/19/2012
Sources:
Bond Proceeds
Par Amount
35,100,000.00
Original Issue Discount
(1,331,653.55)
33,768,346.45
Uses:
Project Fund Deposits:
Project Fund
3,000,000.00
Refunding Escrow Deposits:
Cash Deposit
688,400.49
SLGS Purchases
29,362,142.00
30,050,542.49
Delivery Date Expenses:
Cost of Issuance
433,679.45
Underwriter's Discount
281,286.82
714,966.27
Other Uses of Funds:
Additional Proceeds
2,837.69
33,768,346.45
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 25
ESCROW SUFFICIENCY
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified. by Grant Thomson)
Escrow
Net Escrow Excess
Excess
Date
Requirement
Receipts Receipts
Balance
01/19/2012
688,400.49 688,400.49
688,400.49
02/O112012
688,400.00
(688,400.00)
0.49
O8/01/2012
29,368,400.00
29,368,399.51 (0.49)
30,056,800.00
30,056,800.00 0.00
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 36
ESCROW CASH FLOW
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
'
Present Value
Net Escrow
to 01/19/2012
Date Principal interest Receipts
Q 0.0399588%
08/01/2012 29,362,142.00 6,257.51 29,368,399.51
29,362,142.00
29,362,142.00 6,257.51 29,368,399.51
29,362,142.00
Escrow Cost Summ
Purchase date
Purchase cost of securities
Target for yield calculation
O1/19/2012
29,362,142.00
29,362,142.00
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 35
ESCROW COST
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Type of Maturity Par Total
Security Date Amount Rate Cost
SLGS O8/01/2012 29,362,142.00 0.040% 29,362,142.00
29,362,142.00 29,362,142.00
Purchase Cost of Cash Total
Date Securities Deposit Escrow Cost Yield
O1/19/2012 29,362,142.00 688,400.49 30,050,542.49 0.039959%
29,362,142.00 688,400.49 30,050,542.49
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 34
ESCROW DESCRIPTIONS
City of Vernon
'
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Type of
Type of Maturity First Int Par Max
Security
SLGS Date Pool Date Amount Rate Rate
Jan 19, 2012:
SLGS
Certificate 08/O1/2012 08/O1/2012 - 29,362,142.00 0.040% 0.040%
29,362,142.00
SLGSSummary
SLGS Rates File IOJANI2
Total Certificates of Indebtedness 29,362,142.00
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 33
ESCROW REQUIREMENTS
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thomton)
Period
Ending Principal Interest
Total
02/O1/2012 688,400.00
688,400.00
O8/01/2012 28,680,000.00 688,400.00
29,368,400.00
28,680,000.00 1,376,800.00
30,056,800.00
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 32
SUMMARY OF BONDS REFUNDED
City of Vernon
2012 Series B (Taxable)
Final Pricing Scale (1/10/2012)
(Taxable Escrow Sufficiency Verified by Grant Thornton)
Maturity Interest Par Call Call
Bond Date Rate Amount Date Price
Electric System Revenue Bonds, 2009 Series A, 2009:
SERIAL 08/01/2012 3.500% 3,170,000.00
08/01/2012 4.000% 965,000,00 _
08/01/2012 5.000% 24,545,000.00
28,680,000.00
Jan 10, 2012 9:32 am Prepared by De La Rosa & Co. (Finance 6.022 vemon:2012) Page 27