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Resolution No. 2011-185 (3)w L•XM\KGW MEMORANDUM TO: Interested Parties FROM: Darla J. Marsden, Senior Account Manager —Wheeling DATE:. February 3, 2012 ORRICK, HERRINGTON & SUTCLIFFE LLe GLOBAL OPERATIONS CENTER 2121 MAIN STREET WHEELING, WEST VIRGINIA 26003-2809 tel +1-304-231-2500 (0x +1-304-231-2501 W W W.ORRICK.COM RE: City of Vernon Electric System Revenue Bonds, 2012 Series A and 2012 Taxable Series B Orrick, Herrington & Sutcliffe LLP is proud to present the enclosed transcript of proceedings for the above -referenced financing. If there are any questions concerning the above, please call me at (304) 231-2643. cc.: Sean J. Baxter OHS West261417066.1 42797-2 $37,640,000 CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS 2012 SERIES A $35,100,000 CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS 2012 TAXABLE SERIES B CERTIFICATE REGARDING INDENTURE OF TRUST I, Willard G. Yamaguchi, City Clerk of the City of Vernon (the "City"), HEREBY CERTIFY that attached hereto are true, complete and correct copies of the Indenture of Trust, dated as of September 1, 2008, by and between the City and The Bank of New York Mellon Trust Company, N.A., as Trustee (the "Trustee"), the First Supplemental Indenture of Trust, dated as of September 1, 2008, by and between the City and the Trustee and the Second Supplemental Indenture of Trust, dated as of May 1, 2009, by and between the City and the Trustee (collectively, the "Indenture"), and that the Indenture has not been amended, modified, supplemented (except pursuant to the Third Supplemental Indenture of Trust, dated as of January 1, 2012 (the "Third Supplemental Indenture"), by and between the City and the Trustee), or rescinded, and the Indenture, as amended and supplemented by the Third Supplemental Indenture is in full force and effect as of the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 19th day of January, 2012. CITY OF VERNON M [SEAL] Of IS WesC261409670.2 INDENTURE OF TRUST by and between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Dated as of September 1, 2008 Relating to CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS OHS Wem260486430,6 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND AUTHORITY............................................................... 2 Section1.01 Definitions............................................................................................2 Section 1.02 Rules of Construction........................................................................ 26 Section 1.03 Authority for this Master Indenture ................................................... 26 ARTICLE lI AUTHORIZATION AND ISSUANCE OF BONDS .................................... 26 Section 2.01 Authorization of Bonds 26 ...................................................................... Section 2.02 Bonds Constitute Special Obligations ................................. .....27 Section 2.03 Indenture to Constitute Contract........................................................ 27 Section 2.04 General Provisions for Issuance of Bonds.........................................27 Section 2.05 Additional Bonds............................................................................... 29 Section 2.06 Refunding Bonds............................................................................... 29 Section 2.07 Conditions to Issuance of Parity Obligations ..................................... 30 Section 2.08 Conditions of Issuance of Subordinate Obligations ........................... 31 Section 2.09 Credit Provider Bonds........................................................................ 34 ARTICLE III GENERAL TERMS AND PROVISIONS OF BONDS ................................ 34 Section 3.01 Medium of Payment; Form and Date; Letters and Numbers ............. 34 Section3.02 Legends.............................................................................................. 35 Section 3.03 Execution and Authentication............................................................ 36 Section3.04 Book -Entry Bonds............................................................................. 36 Section 3.05 Transfers Outside Book -Entry Program ............................................ 38 Section3.06 Bo Register ..................................................................................... 38 Section 3.07 Int:hangeability of Bonds............................................................... 39 Section 3.08 Negotiability, Transfer and Registry .................................................. 39 Section 3.09 Regulations With Respect to Exchanges and Transfers .................... 39 Section 3.10 Bonds Mutilated, Destroyed, Stolen or Lost ...................................... 39 Section 3.11 Temporary Bonds.................................................................. Section 3.12 Cancellation and Destruction of Bonds ............................................. 40 ARTICLE IV REDEMPTION OF BONDS......................................................................... 40 Section 4.01 Privilege of Redemption and Redemption Price ................................ 40 Section 4.02 Redemption at the Direction of City .................................................. 41 Section 4.03 Redemption Otherwise Than at City's Direction...............................41 OHS West.26M6430.6 i TABLE OF CONTENTS (continued) Page Section 4.04 Selection of Bonds to be Redeemed .................................................. 41 Section 4.05 Notice of Redemption........................................................................ 42 Section4.06 Partial Redemption of Bonds.............................................................43 Section 4.07 Effect of Notice and Availability of Redemption Money..................43 ARTICLE V ESTABLISHMENT OF FUNDS AND APPLICATION THEREOF........:.. 44 Section 5.01 Pledge of Trust Estate........................................................................ 44 Section5.02 Funds 44 ........................................... ................... ....... I .......... .................. Section 5.03 Payments by City............................................................................... 45 Section 5.04 Debt Service Fund 46 .............................................................................. Section 5.05 Redemption Fund............................................................................... 47 Section 5.06 Debt Service Reserve Fund................................................................ 48 Section 5.07 Expense Stabilization Fund................................................................ 49 Section5.08 Rebate Fund....................................................................................... 50 Section5.09 Depositories....................................................................................... 50 Section5.10 Deposits.............................................................................................. 50 Section 5.11 Investment of Certain Funds.............................................................. 50 Section 5.12 Valuation and Sale of Investments.................................................... 51 ARTICLE VI COVENANTS AND OBLIGATIONS OF THE CITY ................................. 51 Section 6.01 Compliance with Indenture 52 ................................................................ Section 6.02 Rates for Electric Service................................................................... 52 Section 6.03 Collection of Rates and Charges........................................................ 52 Section 6.04 Deposit and Application of Revenues ................................................ 52 Section 6.05 Creation of Prior Liens on Trust Estate ............................................. 53 Section 6.06 Against Encumbrances....................................................................... 53 Section 6.07 Sale or Other Disposition of Property ................................................ 53 Section 6.08 Operation and Maintenance of the Electric System; Budgets ........... 53 Section 6.09 Insurance.......................:.................................................................... 54 Section 6.10 Accounting Records; Financial Statements and Other Reports......... 54 Section 6.11 Payment of Taxes and Compliance with Governmental Regulations........................................................................................ 55 Section 6.12 Tax Covenants................................................................................... 55 Section 6.13 Transfers to General Fund................................................................. 55 OHS Wak26M64306 ii TABLE OF CONTENTS (continued) Page ARTICLE VII AMENDMENTS TO INDENTURE............................................................. 56 Section 7.01 Amendments Permitted...................................................................... 56 Section 7.02 Effect of Supplemental Indenture...................................................... 59 Section T03 Bonds Owned by City ........................................................................ 59 Section 7.04 Notation on Bonds............................................................................. 59 ARTICLE VIII CONCERNING THE FIDUCIARIES........................................................... 60 Section 8.01 Trustee; Acceptance of Duties........................................................... 60 Section 8.02 Paying Agents; Appointment and Acceptance of Duties ................... 60 Section 8.03 Responsibilities of Fiduciaries...........................................................60 Section 8.04 Evidence on Which Fiduciaries May Act .......................................... 64 Section 8.05 Compensation.................................................................................... 64 Section 8.06 Certain Permitted Acts.......................................................................65 Section 8.07 Resignation of Trustee....................................................................... 65 Section 8.09 Removal of Trustee............................................................................ 65 Section 8.09 Appointment of Successor Trustee; Financial Qualifications of Successor Trustee...............................................................................65 Section 8.10 Transfer of Rights and Property to Successor Trustee ....................... 66 Section 8.11 Merger or Consolidation.................................................................... 67 Section 8:12 Adoption of Authentication............................................................... 67 Section 8.13 Resignation or Removal of Paying Agent and Appointment of Successor............................................................................................ 67 ARTICLE DC DEFEASANCE.............................................................................................. 68 Section 9.01 Payment of Bonds 68 .............................................................................. Section 9.02 Bonds Deemed Paid........................................................................... 68 Section 9.03 Defeasance of Portion of Bond.......................................................... 70 Section 9.04 Discharge of Liability on Bonds ........................................................ 70 ARTICLE X EVENTS OF DEFAULT; REMEDIES......................................................... 7l Section 10.01 Events of Default............................................................................... 71 Section 10.02 Accounting and Examination of Records After Default .................... 71 Section 10.03 Application of Revenues and Other Moneys After Default ............... 71 Section 10.04 Right to Accelerate Upon Default ...................................................... 73 Section 10.05 Appointment of Receiver................................................................... 73 OHS Weg:260496430.6 iii TABLE OF CONTENTS (continued) Page Section 10.06 Enforcement Proceedings.................................................................. 74 Section 10.07 Restriction on Owner's Action.......................................................... 75 Section 10.08 Remedies Not Exclusive.................................................................... 75 Section 10.09 Effect of Waiver and Other Circumstances ....................................... 76 Section 10.10 Notice of Default................................................................................ 76 ARTICLE XI MISCELLANEOUS......................................................................................76 Section 11.01 Execution of Documents and Proof of Ownership ............................ 76 Section11.02 Severability........................................................................................77 Section 11.03 General Authorization........................................................................ 77 Section 11.04 Moneys Held for Particular Bonds .................................................... 77 Section 11.05 Credit Providers................................................................................. 77 Section 11.06 Reserve Financial Guaranty Providers ............................................... 78 Section 11.07 No Recourse on Bonds....................................................................... 78 Section 11.08 Unclaimed Moneys............................................................................78 Section1I.09 Holidays.............................................................................................79 Section 11.10 Governing Law.................................................................................. 79 Section 11.11 Headings Not Binding ........................................................................ 79 Section 11.12 Preservation and Inspection of Documents ........................................ 79 Section 11.13 Parties Interested................................................................................ 79 OHS WOL26M6430.6 iv INDENTURE OF TRUST Relating to CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS THIS INDENTURE OF TRUST, dated as of September 1, 2008, is entered into by and between the City of Vernon, a municipal corporation and chartered city of the State of California and The Bank of New York Mellon Trust Company, N.A., a national banking association duty 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 (capitalized terms used in this Master Indenture shall have the meanings given such terms in Section 1.01) has been duly established and is duly existing as a chartered city under its Charter and the Constitution of the State; and WHEREAS, the City has established and operates the Electric System for supplying its inhabitants and businesses and industries within the City with electricity; and WHEREAS, the City is authorized under the Charter and the Bond Ordinance to issue bonds, notes and other obligations payable from the Net Revenues and amounts in the Light and Power Fund to finance the Costs of Capital Improvements and to refund any such bonds, notes or other obligations; and WHEREAS, the City has determined to provide for the issuance from time to time of Bonds, including Refunding Bonds, secured by a pledge of the Trust Estate and payable from the Net Revenues and amounts in the Light and Power Fund available for such payment in accordance with this Master Indenture, and with respect to particular Bonds, from such Credit Support Instrument or Instruments as may be provided for such Bonds pursuant to the Supplemental Indenture authorizing such Bonds; and WHEREAS, the City has determined that each Series of the Bonds should be issued on the terms and conditions set forth in this Master Indenture as supplemented by a Supplemental Indenture authorizing such Series of Bonds; and WHEREAS, the Bonds shall be secured by a pledge of the Revenues and amounts in the Light and Power Fund available for such payment in accordance with this Master Indenture on a parity with the pledge of the Revenues and amounts in the Light and Power Fund securing other Parity Obligations hereafter issued by the City in accordance with the Indenture; and OHS Wast260486430.6 WHEREAS, the City has determined all acts and things which are necessary in connection with the authorization, execution and delivery this Master Indenture have been done and performed in due time, form and manner; and WHEREAS, the Trustee has accepted the trust created and established by the Indenture and in evidence thereof has joined in the execution of this Master Indenture, NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS INDENTURE OF TRUST WITNESSETH: ARTICLE I AND AUTHORITY Section 1.01 Definitions. Unless the context otherwise requires, the following terms, for all purposes of this Master Indenture and, unless otherwise provided therein with respect to such Supplemental Indenture or any Series of Bonds authorized by such Supplemental Indenture, any Supplemental indenture, shall have the meanings set forth below: "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 ph= 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 die terms and conditions of this Master Indenture for the purposes set forth in Section 2.05. "Additional Parity Obligations" means Parity Obligations, including Additional Bonds, issued for the purposes set forth in Section 2.05 and satisfying the conditions set forth in Section 2.07. "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 act forth in a certificate of the City. OHS wealW&6430.6 2 "Adjusted Net Revenues" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to Section 2.07(e), 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 which have been approved by the City Council but which during all or any part of the applicable Calculation Period were not in effect, such allowance to be in an amount equal to seventy-five percent (75%) of the amount by which the Revenues for the applicable Calculation Period would have increased if such increase in rates and charges had been in effect for that portion of such Calculation Period during which such increase was not in effect. "Adjusted Revenues" means, for any period of time, the Revenues for such period less the amount of such Revenues which have been deposited in the Expense Stabilization Fund 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 "AW' by Moody's and "AAA" by S&P (provided, however, if the issue is only rated by S&P (i.e., there is no Moody's rating), then the pre - refunded bonds must have been pre -refunded with cash, direct U.S. or U.S. guaranteed obligations, or "AAA' rated pre -refunded municipals to satisfy this condition), (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 data or dates specified in the irrevocable instructions referred to in clause (b) above, as applicable. OHS wesr.260486430.6 "Aggregate Adjusted Annual Debt Service" shall mean for any Fiscal Year the aggregate amount of Adjusted Debt Service on all Outstanding Parity Obligations payable in such Fiscal Year. For purposes of calculating Aggregate Adjusted Annual Debt Service, the determination of Debt Service on the Outstanding Parity Obligations coming due in each Fiscal Year shall be subject to the Debt Service Adjustments and Assumptions. "Applicable Parity Obligations" weans, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to Section 2.07(e) 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 12month 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 Article 11 of this Master Indenture and a Supplemental Indenture. "Bond Counsel" means Orrick, Herrington & Sutcliffe LLP or another attorney or firm of attorneys of recognized national standing in the field of law relating to municipal securities and to exclusion of interest thereon from income for federal income tax purposes selected by the City. "Bond Debt Service" means, for any period of time, the sum of (a) the interest payable during such period on all Outstanding Bonds, assuming that all Outstanding Bonds which are Serial Obligations are retired as scheduled and that all Outstanding Bonds which are Term Obligations are redeemed or paid from Sinking Fund Installments as scheduled, (b) that portion of the principal amount of all Outstanding Bonds which are Serial Obligations maturing on each principal payment date during such period, including the Final Compounded Amount of any Bonds which are Capital Appreciation Obligations and Serial Obligations, (c) that portion of the OHS Wast26W6430.6 4 principal amount of all Outstanding Bonds which are Tenn 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, enacted as Ordinance No. 1004 of the City (codified as 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 Section 3.06. "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 Section 3.04. "Budget" means, as of any date, the budget for the Electric System prepared by the City pursuant to Section 6.08 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, (h) a Sunday, (iii) any day which shaft 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 (v) 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 Section 2.07(e), 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 OHS Wet 260064306 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. "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 counterpatty's (or, if applicable, the counterparty's guarantor's) ratings fall below "Aa" by Moody's or "AA" by S&P, or are suspended or withdrawn, the counterparty shall provide collateral in the form of cash or Defeasanoe Securities, or a combination thereof; (ii) that the collateral is to be held by the City or a third party custodian acceptable to the City; (di) 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: OHS Wes126048600.6 6 (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 this Master 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 described in this definition. (f) Training and testing costs which are properly allocable to the acquisition, placing in operation, or construction of a Capital Improvement. (g) All costs of insurance applicable to the period of the acquisition, construction, installation and placing the Capital Improvement in operation. (b) 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 portion 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 costa 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. OHS War.26M6430.6 7 (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. (n) To the extent chargeable to a capital account of the Electric System under Generally Accepted Accounting Principles, all other costs incurred by the City, properly allocable to the acquisition, construction, or installation of the Capital Improvement, or any portion thereof, or the placing of the Capital Improvement or any portion thereof in operation. "Costs of Issuance" means, to the extent permitted by the Bond Ordinance, all items of expense directly or indirectly payable by or reimbursable to the City and related to the original authorization, execution, sale and delivery of Parity Obligations, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, including disclosure documents and documents relating to the sale of such Parity Obligations, initial fees and charges (including counsel fees) of any fiscal agent, any paying agent and any Credit Provider, legal fees and charges, financial advisor fees and expenses, fees and expenses of other consultants and professionals, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Parity Obligations and any other cost, charge or fee in connection with the authorization, issuance, sale or original delivery of Parity Obligations. "Credit Provider" means any municipal bond insurance company, bank or other financial institution or organization which is performing in all material respects its obligations under any Credit Support Instrument for some or all of the Parity Obligations, "Credit Provider Bonds" means any Bonds paid as to principal, Redemption Price, Purchase Price and/or interest with funds provided under a Credit Support Instrument for so long as such Bonds are held by or for the account of, or are pledged to, the applicable Credit Provider or any assignee thereof in accordance with the applicable Credit Support Agreement. "Credit Provider Reimbursement Obligations" means obligations of the City to pay from the Net Revenues and amounts in the Light and Power Fund (other than the Operating Reserve) available for such payment in accordance with this Master Indenture 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, supplemental 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 OHS Wed26o466430.6 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" 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 refired 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). "Debt Service Adjustments and Assumptions" means, for purposes of detemrining 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 term of 40 years commencing on the date the calculation of Aggregate Adjusted Annual Debt Service or Maximum Adjusted Annual Debt Service is made; (b) if all or any portion or portions of the Parity Obligations constitute, or upon issuance 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 tern 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 tine ten year historical average of the SIFMA Index ending with the week preceding the date of calculation; (d) if any Outstanding Parity Obligations constitute Variable Rate Indebtedness which is not Tax -Exempt (except to the extent paragraph (g) applies), the Otis Wat26W6430.6 9 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 raft 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; (1) 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 not 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 (a) or (f), as applicable, if such Parity Obligations axe to constitute Variable Rate Indebtedness) and (2) the net amount (which may be a negative amount) to be paid OHS West 260486430 6 10 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 Section 5.02. "Debt Service Reserve Fund" means the City of Vernon Electric System Debt Service Reserve Fund established pursuant to Section 5.02. "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 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 ton 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 My 1, commencing July I, 2009. "Defeasance Securities" means any of the following securities, if and to the extent the same are at the time legal investments for finds of the City: (i) U.S. Treasury Certificates, Notes and Bonds (including State and local Government Series — (SLGs)); (ii) Direct obligations of the U.S. Treasury which have been stripped by the U.S. Treasury itself. Otis wwt:zeaseaso.e 11 (iii) Resolution Funding Corporation obligations ("REFCORP") (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); (iv) Obligations issued by the following agencies which are backed by the full faith and credit of the United States: a. U.S. Exnort-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership b. Farmers Home Administration (FmHA) C. Federal Fnnancine Bank d. General Services Administration Participation Certificates e. U.S. Maritime Administration Guaranteed Title XI financing E U.S. Department of Housing and Urban Develotnnent (HUD) Project Notes Local Authority Bonds New Communities Debentures — U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds — U.S. government guaranteed public housing notes and bonds (v) Advance Refunded Municipal Securities. "Depository" means any bank or trust company organized under the laws of any state of the United States (including the Trustee and its affiliates), or any national banking association which is willing and able to accept the office on reasonable and customary terms, authorized by law to act in accordance with the applicable provisions of the Indenture. "DTC" means The Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York or its successors and assigns. References in the Indenture to DTC shall include any Nominee of DTC in whose name any Bond is registered. "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 OHS Wat:260086430.6 12 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 Section 8,01. "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 mart 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 Article IX. "Expense Stabilization Fund" means the City of Vernon Electric System Expense Stabilization Fund established pursuant to Section 5.02. "Event of Bankruptcy" means any of the following with respect to any Person: (a) the commencement by such person of a voluntary can 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 this Master Indenture or the Supplemental Indenture requiring such an opinion. "Federal Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as the same may be amended and supplemented, and any successor statute. "Fiduciary" means the Trustee and any Paying Agent for Bonds appointed as provided in Section 8,02. "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 this Master Indenture and relating to the 2008 Series A Bonds. oKs wen:woasearo.e 13 "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, this 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 fnrn 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 "Information Services" means any of the following services which has been designated in a certificate of the City delivered to the Trustee: Financial Information, Inc.'s `'Daily Called Bond Service,' 30 Montgomery Street, loth Floor, Jersey City, New Jersey 07302, Attention: Editor, Kenny Information Services "Called Bond Service," 65 Broadway, 16th Floor, New York, New York 10006; Moody's Investors Service "Municipal and Government," 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; and Standard and Poor's "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York OHS Weac260486430.6 14 10004; or such other services providing information with respect to called bonds as the City may designate in a certificate of the City delivered to the Trustee. "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 Section 5.02. "Interest Payment Date" means, with respect to a Series of Bonds, each date on which interest on Bonds of such Series is scheduled to be paid as set forth in, or determined in accordance with, the Supplemental Indenture authorizing the issuance of such Series. "Issuing Instrument" means any, indenture, trust agreement or other instrument or agreement under which Obligations are issued "Light and Power Fund" means the Light and Power Department Fund established pursuant to Ordinance No. 450 of the City (codified as Section 2.65 of the City Administrative Code) and shall include any successor or replacement fund established by the City for the collection of revenues and the payment of expenses of the Electric System. "Master Indenture" means this Indenture of Trust, dated as of September 1, 2008 between the City and the Trustee, as the provisions hereof may be modified or amended from time to time in accordance with Article VII. "Maximum Adjusted Annual Debt Service" means, with respect to a certificate to be delivered in connection with Additional Parity Obligations pursuant to Section 2.07(e), 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 Payment" 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 amount payable by the counterparty under such Qualified Swap Agreement on such scheduled payment date. "Net Revenues" mean, for any period of time, the Revenues for such period less the Operation and Maintenance Expenses for such period. "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. OHS Weet:260466430.6 15 "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 Code & Co., as the nominee of DTC. "Obligations" means (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 any Public Finance Contract payable from the Net Revenues and/or amounts in the Light and Power Fund; and (d) Credit Provider Reimbursement Obligations. "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 Wail Street Journal or, if not reported in such newspaper, as reported in such other source as may be selected by the City. "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. "Operation and Maintenance Expenses" 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; (a) payments in -lieu of taxes to any public agency other than the City in connection with the Electric System; (1) all costs, expenses and charges of the City required to be paid by it to comply with the terms of any Issuing Instrument authorizing the issuance of Parity Obligations, such as compensation, reimbursement and indemnification of the trustee, remarketing agent, broker -dealer or auction agent 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 a 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 find established with respect to Parity Obligations to provide for any rebate to the United States required to maintain the Tax -Exempt status of interest on such Parity Obligations; G) any cost or expense paid by the City to comply with requirements of law OHS Wwt26W86430.6 16 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 Benefits uses required by Section 385 of the California Public Utilities Code; and (k) any other cost 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 the Franchise Payment, shall constitute an Operation and Maintenance Expense. "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 Article VII, all Obligations theretofore or thereupon being issued 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 available for such payment in accordance with this Master Indenture on a parity with the payment of the Bonds and which satisfy the applicable conditions of Section 2.07, including without limitation Credit Provider Reimbursement Obligations and, with respect to Qualified Swap Agreements, the Net Payments, but not the Termination Payments and other payments, due thereunder. "Participants" means, with respect to a Securities Depository for Book -Entry Bonds, those participants listed in such Securities Depository's book -entry system as having an interest in such Bonds. "Paying Agent" means, with respect to a Series of Bonds, the Trustee and any banking corporation, banking association or trust company designated as paying agent for such Series of Bonds pursuant to Section 8.01(b) or Section 8,02, and its successor or successors appointed in the manner provided in thte 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: OHS West 2604864306 17 (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) U.S. Export -Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership i (ii) Farmers Nome Administration ("FmHA") Certificates of beneficial ownership (nr) Federal EW=jxl¢ Bnnlr (iv) Federal Housing Administration Debentures ("FHA') (v) General Services A miniatratinn Participation certificates (vi) Government National Mortaaue Association ("(1NM V ) GNMA - guaranteed mortgage -backed bonds GNMA - guaranteed pass -through obligations (participation certificates) (vn) United States Man�me Administration Guaranteed Title XI financing (viii) United States Department Qf Hmiggand Urban Development Project Notes Local Authority Bonds New Communities Debentures - U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and 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 Svstem Senior debt obligations OHS we#I2W486430 6 is (ii) Federal Home Loan Mortgage Comoration ("FHLMC"or "Freddie Mac") Participation Certificates Senior debt obligations (iii) Federal National Mortgage Association ("FNMA" or "Fannie Mae) Mortgage -backed securities and senior debt obligations (iv) Student Loan Marketing Association ("SLMA" or "Sallie Mae") Senior debt obligations (v) Resolution Funding Corporation obligations (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-0," "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 herein contained. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks (including affiliates of the Trustee), savings and loan associations or mutual savings banks. The collateral must be held by a third party and the City or the Trustee must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by FDIC, including BIF and SAIR (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 "As" 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 - I" by Moody's and "A-1" or better by S&P. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies. OHS War26WO(A30.6 19 (j) Federal funds or bankers acceptances with a maximum term of one year of any bank (including those of the Trustee and its affiliates) which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "AV 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 (1) Primary dealers on the Federal Reserve reporting dealer list must be rated "A" or better by S&P and "A2" or better by Moody's, or (2) Banks must be rated "A" or better by S&P and "A2" or better by Moody's. (ii) The written repurchase agreements contract must include the following: (1) Securities which are acceptable for transfer are: (a) Securities described in subsection (a) or (b) of this definition, or (b) Securities of FNMA or FHLMC described in subsection (c) of this definition. (2) The collateral must be delivered to the City, the Trustee (if the 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 (i) The value of collateral in the case of securities described in subsections (a) or (b) of this definition must be equal to 104% of the amount of cash transferred by the City or the Trustee to the dealer bank or security firm under the repurchase agreement phis accrued interest. The value of collateral in the case of securities OHS west MU8643o.6 20 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) Lou! 9pinion. 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. 0) 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 Section 5.02. "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, safety, and expedition. It is recogriized 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 "Principal Office" means, with respect to: (i) the Trustee, the principal office of such Trustee in Los Angeles, California, or such other office of the Trustee designated thereby, and (ii) a Paying Agent or a Grant Provider, the office designated as such in writing by such patty 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. "Public Finance Contract" means (i) any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, (ii) any contract OHS Waak26M6430.6 21 to exchange cash flows or a series of payments, or (iii) any contract to hedge payment, cun=cy, 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. "Purchase Price" means: (i) with respect to Bonds of any Series, the purchase price set forth in 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 Instrument. "Qualified Swap Agreement" means a Public Finance Contract entered into by the City and satisfying the conditions of Section 2.07(a). "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 Section 5.02. "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 this Master Indenture and the Supplemental Indenture authorizing such Bonds, the redemption OHS wm:2604W3 .s 22 date set forth in notice of redemption of such Bonds given in accordance with the terns of the Indenture. "Redemption Fund" means the City of Vernon Electric System Redemption Fund established pursuant to Section 5.02 "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 this Master Indenture for the purposes, and satisfying the conditions of Section 2.06. "Refunding Parity Obligations" means Parity Obligations, including Refunding Bonds, issued for the purposes set forth in Section 2.06 and satisfying the conditions set forth in Section 2.09. "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. "Revenues" mean 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 enteral 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 and advances, (iii) contributions in aid of construction, and (iv) line extension fees. "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. OHS Wae2604864306 23 "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 Section 5.02. "Sinking Fund Instalhnent" 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 to be applied to the retirement of such Parity Obligations on and prior to the stated maturity date thereof. "Special Record Date" has the meaning set forth in Section 3.02(f). "Standard & Poor's" or "S&P" means Standard & Poor's Rating Services and any successor entity rating Parity Obligations at the request of the City. "State" means the State of California. "Subordinate Obligation" means any Obligation which is expressly made subordinate and junior in right of payment from the Net Revenues and amounts in the Light and Power Fund other than the Operating Reserve available for such payment in accordance with this Master Indenture to the payment of Parity Obligations and which complies with the provisions of Section 2.08. "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 Article VII, OHS West 26W64306 24 "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. "Trust Estate" means, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein (i) the Revenues (ii) all amounts on deposit in the Light and Power Fund, including the investments, if any, thereof; and all amounts on deposit in the in the Funds, other than the Rebate Fund, held by the Trustee under the Indenture, including the investments, if any, thereof. "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 Section 8.09. "2008 Series A Bonds" means the Bonds authorized by the First Supplemental 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 marling assets or liabilities of the Electric System to market. oEms weet!ADU 43o.G 25 "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. Section 1.02 Rules of Construction. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neutral genders. Except where the context otherwise requires, words importing the singular number shall include the plural number and vice versa, and words importing persons shall include corporations and associations, including districts, agencies and other public bodies, as well as natural persons. Unless otherwise indicated, references in this Master indenture to subsections, Sections and Articles are to such subsections, Sections and Articles of this Master Indenture. Unless the context requires otherwise, the terms "berein," "hereof," "hereunder" and any similar terms, as used in this Master Indenture, shall refer to this Master Indenture as a whole and not to any particular provisions of this Master Indenture. Defined terms shall include any variant of the terms set forth in this Article. The term "principal' when used with reference to a Capital Appreciation Obligation as of its maturity date shall refer to the Final Compounded Amount of such Capital Appreciation Obligation and as to any other date, the Accreted Value of such Capital Appreciation Obligation as of such date. The term "principal" when used with reference to a Parity Obligation which is a Qualified Swap Agreement shall refer to the Net Payments due under such Qualified Swap Agreement. The term "principal" when used with reference to a Parity Obligation which is a Credit Provider Reimbursement Obligation shall refer to the amount advanced by the Credit Provider to the extent not included in Parity Obligations as Credit Provider Bonds. The term `Issue" shall include issuance, creation, incurrence, entering into an agreement or any other act pursuant to which a party may become obligated with respect to an Obligation. The term "include" shall not be construed to be limited to the items or the type of items listed after such word, which items are by way of example and not limitation, but the term shall be construed as meaning "including without limitation." Section 1.03 Authority for this Master Indenture This Master Indenture is entered into by the City pursuant to the provisions of the Charter and the Bond Ordinance. ARTICLE II AUTHORIZATION AND ISSUANCE OF BONDS Section 2.01 Authorization of Bonds. (a) This Master 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 hereafter be provided in the Indenture or as may be limited by law. OHS Wwt2604864306 26 (b) The Bonds may be issued in one or more Series, and the designation thereof, in addition to the name "City of Vernon Electric System Revenue Bonds," shall include such further appropriate particular designation added to or incorporated in such title for the Bonds of any particular Series as the City may determine. Each Bond shall bear upon its face the designation so determined for the Series to which it belongs. Section 2.02 Bonds Constitute Special Obligations. The Bonds shall not constitute a charge against the general credit of the City but shall constitute and evidence special obligations of the City payable as to principal, Redemption Price, if any, and interest solely from the Net Revenues and the other finds pledged therefor and available for such payment in accordance with the Indenture and, with respect to any particular Bonds, from such other sources as shall be specified in the Supplemental Indenture authorizing the issuance of such Bonds. The Purchase Price for the Bonds of any Series which are Tender Indebtedness shall be payable from such sources, other than the Revenues and the other amounts in the Light and Power Fund, as are specified in the Supplemental Indenture authorizing the issuance of such Series. The provisions of this Section shall not preclude the payment, purchase or redemption of Bonds, at the election of the City, from any other legally available funds. The Bonds are not secured by a legal or equitable pledge of or Gen or charge upon, any property of the City or any of its income or receipts except the Trust Estate pledged therefor pursuant to this Master Indenture which pledge is subject to the provisions hereof permitting the application of the Trust Estate for the purposes and on the terms and conditions set forth herein. Neither the faith and credit nor the taxing power of the State of California, the City or any other public agency is pledged to the payment of the principal or Redemption Price of or the interest on the Banda. The issuance of the Bonds shall not directly, indirectly or contingently obligate the City Council of the City to levy or pledge any form of taxation or to make any appropriation for the payment of the Bonds_ The payment of the principal or Redemption Price of, or interest on, the Bonds does not constitute a debt, liability or obligation of the State of California or any public agency (other than the special obligation of the City as provided in the Indenture). Neither the members of the City Council of the City, nor any person executing a Bond, nor any officer or employee of the City shall be liable personally for the principal or Redemption Price of, or interest on, the Bonds or be subject to any personal liability or accountability by reason of the issuance of the Bonds or in respect of any undertakings by the City under the Indenture. The face of each Bond shall contain a legend to the effect set forth in this Section. Section 2.03 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. Section 2.04 General Provisions for Issuance of Bonds. (a) Ali (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 ORS Weu:26M6430.6 27 determining whether the conditions precedent for the issuance and authentication of such Series of Bonds have been satisfied): (1) An executed counterpart of this Master 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 2008 Series A Bonds, shall be one of the purposes specified in Section 2.05 or 2.06, (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; (vit') 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 the Bonds of such Series; (xi) the Redemption Price or Prices, if any, and, subject to Article IN, the redemption terms for the Bonds of such Series; (xii) the Sinking Fund Installments, if any, for the Bonds of such Series which constitute Term Obligations, provided that each Sinking Fund lnstalimcnt, if any, shall bill 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 such Bonds of the purchase, (C) any extension options granted with respect to such Bonds and (D) the terns 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 OHS WW260496430.6 29 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 fimds 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 this Master 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 obligations of the City; (3) With respect to any Additional Bonds other than the 2008 Series A Bonds, the Trustee shall have received the certificate referred to in Section 2.07(e); (4) With respect to any Refunding Bonds, the Trustee shall have received a copy of the Opinion of Bond Counsel required in Section 2.06(b); and (5) Such further documents, moneys and securities as are required by the applicable provisions of Section 2.05 or Section 2.06 or of the Supplemental Indenture authorizing the issuance of such Series of Bonds. (b) 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. Section 2.05 Additional Bonds. One or more Series of Additional Bonds may be issued, authenticated and delivered upon original issuance for the purpose of paying all or a portion of the Costs of any Capital Improvement. Additional Bonds may be issued in a principal amount sufficient to pay such Costs, including making of any deposits into the funds or accounts required by the provisions of the Indenture and providing amounts for Costs of Iasuance of such Additional Bonds. Section 2.06 Refunding Bonds. (a) 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 malang of any deposits into the funds and accounts required by the provisions of the Indenture. OHS wat26048&30.6 29 (b) 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 Section 2.04) of an Opinion of Bond Counsel to the effect that the Parity Obligations (or the portion thereon 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. (c) The proceeds, including accrued interest, of the Refunding Bonds of each Series shall be applied simultaneously with the delivery of such Bonds as provided in the Supplemental Indenture authorizing such Series of Refunding Bonds. Section 2.07 Conditions to Issuance of Parity Obligations. (a) Without regard to subsection (e) of this Section, 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; (h) 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. (b) The City may, at any time and from time to time, issue Refunding Parity Obligations provided that either: (i) the requirements set forth in subsection (e) of this Section are satisfied upon the issuance of such Refunding Parity Obligations and the application of the proceeds thereof,. or (ii) the City has provided to the Trustee a certificate showing 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. (c) Without regard to subsection (e) of this Section, the City may issue the 2008 Series A Bonds. (d) Without regard to subsection (e) of this Section; 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. OHS Wut:260"6430.6 30 (e) 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 (H) 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. Section 2.08 Conditions of Issuance of Subordinate Obligations. (a) The City may, at any time or from time to time, issue Subordinate Obligations without satisfying the requirements of Section 2.07 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 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, as may from time to time be available for such payment in accordance with this Master Indenture, 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. OAS Wast:260486430.6 31 (b) The Issuing hnstrument 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 M in cash of all principal, interest and all other payments due with respect to all such Parity Obligations before the owners of such Subordinate Obligation are entitled to receive any accelerated payment from Net Revenues and amounts in the Light and Power Fund with respect to such Subordinate Obligation. For purposes of this subdivision (2), a termination payment with respect to a Public Finance Contract which is not a Qualified Swap Agreement shall not be considered a declaration of amounts due and payable before expressed maturity even if declared due and payable because of the occurrence of an event of default. (3) If any 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 OHS WeaL-26M86430.6 32 amounts in the Light and Power Fund with respect to the Subordinate Obligations. (4) No Bondowner or owner of other Outstanding Parity Obligations shall be prejudiced in his right to enforce subordination of the Subordinate Obligations by any act or failure to act on the part of the City or the Trustee. (5) The Subordinate Obligations may provide that the provisions (1), (2), (3) and (4) above are solely for the purpose of defining the relative rights of the Owners of the Bonds and the owners of all other Outstanding Parity Obligations on the one hand, and the owners of Subordinate Obligations on the other hand, and that nothing therein shall impair, as between the City and the owners of the Subordinate Obligations, the obligation of the City, which may be unconditional and absolute, to pay to the owners of such Subordinate Obligations the principal thereof and premium, if any, and interest thereon in accordance with their terms, nor shall anything in the Indenture prevent the owners of the Subordinate Obligations from exercising all remedies otherwise permitted by applicable law, or under the Subordinate Obligations or the Issuing Instruments authorizing the Subordinate Obligations, upon default under such Subordinate Obligations or issuing Instruments, subject to the rights under (1), (2), (3) and (4) above of the Owners of Outstanding Bonds and the owners of other Outstanding Parity Obligations to receive payment from the Net Revenues and amounts in the Light and Power Fund otherwise payable or deliverable to the owners of the Subordinate Obligations; and the Subordinate Obligations may provide that, insofar as a trustee, fiscal agent or paying agent for such Subordinate Obligations is concerned, the foregoing provisions shall not prevent the application by such trustee, fiscal agent or paying agent of any moneys deposited with such trustee, fiscal agent or paying agent for the purpose of the payment of or on account of the principal (and premium, if any) and interest on such Subordinate Obligations if such trustee, fecal agent or paying agent did not have knowledge at the time of such application that such payment was prohibited by the foregoing provisions. (c) 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. OHS WML26NO6430.6 33 Section 2.09 Credit Provider Bonds. Subject only to Section 2.02, 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. ARTICLE III GENERAL TERMS AND PROVISIONS OF BONDS Section 3.01 Medium of Payment; Form and Date; Letters and Numbers. (a) Unless otherwise provided with respect to a Series of Bonds in the Supplemental Indenture authorizing such Series, the Bonds of each Series shall be payable, with respect to principal, Redemption Price, if any, Purchase Price, if any, and interest in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. (b) The Bonds shall be issued in the form of fully registered bonds without coupons in Authorized Denominations. (c) Each Bond shall be lettered and numbered as determined by the Trustee so as to be distinguished from every other Bond. (d) The Bonds of each Series shall be dated as provided in or determined pursuant to the Supplemental Indenture authorizing such Series. Unless otherwise provided with respect to a Series of Bonds in the Supplemental Indenture authorizing such Series, the Bonds of each Series shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (i) such Bonds are authenticated on an Interest Payment Date, in which event from such Interest Payment Date; and (ii) unless such Bonds are authenticated after a Record Date and before the next succeeding Interest Payment Date for such Bonds, in which event from such Interest Payment Date; provided, however, that if the date of authentication of a Bond shall be prior to the Record Date for the fast Interest Payment Date for such Bond, such Bond shall bear interest from its original dated date. Notwithstanding the foregoing, if the City shall default in the payment of interest, then the Bonds shall bear interest from the date to which interest has been paid or if no interest has been paid, from their original dated date. (e) Unless otherwise provided with respect to a Series of Bonds in the Supplemental Indenture authorizing such Series, the interest payable on Bonds shall be calculated on the basis of a 360-day year of twelve, thirty day months. (f) Except as otherwise provided in the Representation Letter with a Securities Depository for Book -Entry Bonds (or, with respect to a Series of Bonds in the Supplemental Indenture authorizing such Series), interest on each Bond shall be payable on each Interest Payment Date for such Bond and shall be paid by check of the Trustee mailed on such Interest Payment Date to the Owner of such Bond shown on the Bond Register as of the close of business on the Record Date immediately preceding such Interest Payment Date. Owners of at least $1,000,000 aggregate principal amount (or, with respect to a Series of the Bonds, such OHS Wmt 2604964306 34 other principal amount as may be specified in the Supplemental Indenture authorizing such Series), of Bonds of any Series may, at any time prior to a Record Date with respect to the payment of interest on such Bonds, give the Trustee written instructions for payment of such interest on each succeeding Interest Payment Date for such Bonds by wire transfer or by deposit to an account within the United States of America. Notwithstanding the foregoing, however, if the City shall default in the payment of interest due on Bonds on any Interest Payment Date, such interest shall cease to be payable to the persons in whose name such Bonds were registered in the Bond Register on the Record Date for such Interest Payment Date, and shall be payable, when and if paid by the City, to the persons in whose names such Bonds are registered at the close of business on the record date fixed therefor by the Trustee (each a "Special Record Date'), which shall not be more than 15 days and not less than 10 days prior to the date of the proposed payment. (g) Unless redeemed prior to such date, the principal of each Bond shall be payable on its maturity date and the Redemption Price of each Bond called for redemption prior to maturity, subject to the terms of Section 4.05(b), shall be payable on the applicable redemption date. Except as otherwise provided in the Representation Letter with a Securities Depository for Book -Entry Bonds, the principal and, if applicable, the Redemption Price of each Bond shall be payable only upon presentation and surrender of such Bond at the Principal Office of the Trustee or any other Paying Agent for such Bond for cancellation; provided that the Trustee may agree with the Owner of any Bond that such Owner may, in lieu of surrendering the same for a new Bond, endorse on such Bond a record of partial payment of the principal of such Bond in the form set forth below (which shall be typed or printed on such Bond): PAYMENTS ON ACCOUNT OF PRINCIPAL Principal Balance of Principal Signature Payment Date Amount Paid Amount Unpaid of Owner The Trustee shall maintain a record of each such partial payment made in accordance with the foregoing agreement and such record of the Trustee shall be conclusive. Such partial payment shall be valid upon payment of the amount thereof to the Owner of such Bond, and the City and the Trustee shall be fully released and discharged from all liability to the extent of such payment regardless of whether such endorsement shall or shall not have been made upon such Bond by the Owner thereof and regardless of any error or omission in such endorsement. Section 3.02 Legends. Bonds may contain or have endorsed thereon such provisions, specifications and descriptive words not inconsistent with the provisions of the Indenture as may be necessary or, desirable to comply with custom, the rules of any securities exchange, OHS Wat:26o W30.6 35 commission or brokerage agent, or otherwise, as may be determined by the City prior to the authentication and delivery thereof. Section 3.03 Execution and Authentication. (a) The Bonds shall be executed in the name of the City by the manual or facsimile signature of the Mayor or City Administrator of the City and its seal (or a facsimile thereof) shall be impressed, imprinted, engraved or otherwise reproduced thereon and attested by the facsimile or manual signature of the City Clerk of the City, or in such other manner as may be authorized by Supplemental Indenture or required by law. In case any one or more of the officers who shall have signed or sealed any of the Bonds shall cease to be such officer before the Bonds so signed and sealed shall have been authenticated and delivered by the Trustee, such Bonds may, nevertheless, be authenticated and delivered as provided in the Indenture, and may be issued as if the persons who signed or sealed such Bonds had not ceased to hold such offices. Any Bond may be signed and sealed on behalf of the City by such persons as at the time of the execution of such Bond shall be duly authorized or hold the proper office in City, although at the date home by such Bonds such persons may not have been so authorized or have held such office. (b) The Bonds of each Series shall bear thereon a certificate of authentication, in the form set forth in the Supplemental Indenture authorizing such Series, executed manually by the Trustee, including any Paying Agent appointed as agent for the Trustee pursuant to Section 8.01(b). Only such Bonds as shall bear thereon such certificate of authentication shall be entitled to any right or benefit under the Indenture and no Bond shall be valid or obligatory for any purpose until such certificate of authentication shall have been duly executed by the Trustee. Such certificate of the Trustee upon any Bond executed on behalf of the City shall be conclusive evidence that the Bond so authenticated has been duly authenticated and delivered under the Indenture and that the Owner thereof is entitled to the benefits of the Indenture. Section 3.04 Book -Entry Bonds. (a) Unless otherwise provided with respect to a Series of Bonds in the Supplemental Indenture authorizing such Series, the Bonds of each Series shall be issued as Book -Entry Bonds in fully registered form with no distribution of physical bonds made to the public. Except as otherwise provided in Section 3.05, the Book -Entry Bonds of each Series shall be registered in the name of the Securities Depository or its Nominee as directed by the Securities Depository. The payment of Book -Entry Bonds and the giving of notices shall be governed by the terms of the Representations Letter with the Securities Depository for the Book -Entry Bonds. DTC shall act as the initial Securities Depository for the Book -Entry Bonds and has designated Cede & Co. as its Nominee. DTC has represented to the City that it shall maintain a book -entry program in recording ownership interests in the Book -Entry Bonds of its Participants and the ownership interests of a Beneficial Owner of a Bond shall be recorded through book entries on the records of the Participants. (b) Bonds of each Series which are not Book -Entry Bonds shall be delivered to the Owners thereof as fWly registered Bonds in the form specified in the Supplemental oes wnt:20486430.e 36 Indenture authorizing the issuance of such Series of Bonds, with the ownership of such Bonds being recorded in the Bond Register. (c) In the event that the DTC or any successor Securities Depository ceases to act as Securities Depository for Bonds of a Series, then Bonds of such Series in certificated form shall be issued to the Owners in substantially the form of I the Bond delivered to the former Securities Depository or its Nominee with necessary changes to reflect non -book -entry status as shall be approved by the officers of the City executing such Bonds. The issuance of individual Bonds in certificated form shall be accomplished as provided in the Representation Letter. (d) With respect to Bonds registered in the Bond Register in the name of a Securities Depository or a Nominee, the City, the Trustee and each Paying Agent shall have no responsibility or obligation to any Participant or to any Beneficial Owner. Without limiting the immediately preceding sentence, none of the City, the Trustee or any Paying Agent shall have any responsibility or obligation with respect to (i) the accuracy of the records of a Securities Depository, its Nominee or any Participant as to any ownership interest in the Bonds, (ii) the delivery to any Participant, Beneficial Owner or any other person, other than an Owner as shown in the Bond Register, of any notice with respect to the Bonds, or (iii) the payment to any Participant, Beneficial Owner or any other person, other than an Owner as shown in the Bond Register, of any amount with respect to principal and Purchase Price of, premium, if any, or interest on the Bonds. The City, the Tuuetee and each Paying Agent may treat and consider the person in whose name each Bond is registered in the Bond Register as the absolute Owner of such Bond for the purpose of payment of principal and Purchase Price of, premium, if any, and interest on such Bond, for the purpose of registering transfers with respect to such Bond, and for all other purposes whatsoever. Norte of the City, the Trustee or any Paying Agent shall be affected by any notice to the contrary. All principal and Purchase Price of, premium, if any, and interest on the Bonds shall be paid only to or upon the order of the respective Owner, as shown in the Bond Register, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of principal and Purchase Price of, Redemption Price, if any, and interest on the Bonds to the extent of the sum or sums so paid, and none of the City, the Trustee or any Paying Agent shall be affected by any notice to the contrary. No person other than an Owner, as shown in the Bond Register, shall receive a Bond evidencing the obligation of the City to make payments of principal and Purchase Price of, Redemption Price, if any, and interest pursuant to the Indenture. (e) Upon delivery by a Securities Depository to the City of written notice to the effect that the Securities Depository has determined to substitute a new Nominee in place of its current Nominee, and subject to the provisions in the Indenture with respect to Record Dates, the word Nominee for purposes of the Indenture shall refer to such new Nominee of the Securities Depository, and upon receipt of such a notice the City shall promptly deliver a copy of the same to the Trustee. (f) Notwithstanding any other provision of the Indenture and so long as Book. Entry Bonds are registered in the name of a Nominee, the City and the Trustee shall cooperate with the Securities Depository in effecting payment of the principal of, Redemption Price, if OHS Wak260486430.6 37 any, and interest on such Book -Entry Bonds by arranging for payment in such manner as the Securities Depository may reasonably instruct in writing that fiords for such payments are properly identified and are made available on the date they are due, all in accordance with the Representation Letter, the provisions of which the Trustee may rely upon to implement the foregoing procedures. (g) A Securities Depository for the Book -Entry Bonds may resign upon giving 30 days written notice of such resignation to the City and the Trustee. The City may terminate the use of the book -entry system of a Securities Depository for Book -Entry Bonds upon giving 30 days written notice of such termination to the Securities Depository and the Trustee. Any such resignation or termination shall become effective upon the earlier of the appointment of a successor Securities Depository for Book -Entry Bonds by the City or the issuance of Bonds which are not Book -Entry Bonds pursuant to Section 3.05. Section 3.05 Transfers Outside Book -Entry Program. In the event that the resignation or removal of a Securities Depository has become effective pursuant to Section 3.04(g), then the City shall thereupon discontinue the current book -entry program for the Book - Entry Bonds with such Securities Depository. In such event, the City shall cause the Trustee to obtain from the former Securities Depository a list showing the interests of the Participants in the Book -Entry Bonds and shall cause such Book -Entry Bonds to be surrendered to the Trustee on or before the date any replacement Bonds are to be issued. Furthermore, in such event the City determines to use a substitute Securities Depository, the City shall so notify the Trustee and each Paying Agent for Book -Entry Bonds. K prior to the termination of the current Securities Depository's book -entry system for the Book -Entry Bonds, the City fails to identify another qualified Securities Depository to replace the current Securities Depository, that the Book -Entry Bonds shall no longer be required to be registered in the name of a Securities Depository or its Nominee and the City shall issue, and the Trustee shall authenticate, replacement Bonds in the appropriate amounts and in whatever name or names the Owners of the Book -Entry Bonds shall designate pursuant to the Representation Letter with the former Securities Depository. In the event the City detemrince that the Beneficial Owners of the Bonds shall be able to obtain physical Bonds through a Securities Depository, the City may notify the Participants identified by the Securities Depository as having an interest in the Bonds of the availability of such physical Bonds and the Trustee shall authenticate, transfer and exchange Bonds as required by the Securities Depository in the appropriate names and amounts, which shall be in Authorized Denominations, Section 3.06 Bond Register. The Trustee shall keep or cause to be kept, at its Principal Office, sufficient books for the registration and transfer of the Bonds of each Series which shall at all times be open to inspection during regular business hours by the City upon reasonable notice, and, upon presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred on said Bond Register, Bonds of each Series as provided in the Indenture. The City, the Trustee and each Paying Agent may rely on the address of the Owner of each Bond as it appears on the Bond Register for any and all purposes. It shall be the duty of the Owner of each Bond to give written notice to the Trustee of any change in the Owner's address so that the Bond Register may be revised accordingly. Otis war. W86430.6 38 Section 3.09 Interchangeability of Bonds. Upon surrender of a Bond at the Principal Office of the Trustee, together with a written instrument of transfer satisfactory to the Trustee and duly executed by the Owner or the Owner's attorney duly authorized in writing, may, at the option of the Owner thereof, and upon payment by such Owner of any charges which the Trustee may make as provided in Section 3.09, be exchanged for an equal aggregate principal amount of Bonds of the same Series, terms and maturity of any other Authorized Denominations. Section 3.08 Negotiability, Transfer and Registry. Each Bond shall be transferable only upon the Bond Register, upon surrender thereof, together with a written instrument of transfer satisfactory to the Trustee, duly executed by the Owner or the Owner's duly authorized attorney. Upon the transfer of any such Bond, the City shall execute and the Trustee shall authenticate, deliver and register in the Bond Register in the name of the transferee a new Bond or Bonds of the same aggregate principal amount, Series, terms and maturity as the surrendered Bond. Section 3.09 Regulations With Respect to Exchanges and Transfers. Subject to the toms of a Representation Letter with a Securities Depository for Book -Entry Bonds, in all cases in which the privilege of exchanging Bonds or transferring Bonds is exercised, the City shall execute and the Trustee shall authenticate and deliver Bonds in accordance with the provisions of the Indenture relating to such Bonds. All Bonds surrendered in any such exchanges or transfers shall forthwith be delivered to the Trustee and cancelled by the Trustee. Unless the Indenture relating to such. Bonds provides that such transfer or exchange shall be made without charge to the Owner, for every such exchange or transfer of Bonds, whether temporary or definitive, the City or the Trustee may make a charge sufficient to reimburse it for any tax, fee or other governmental charge required to be paid and any other cost incurred by the City or the Trustee with respect to such exchange or transfer. Section 3.10 Bonds Mutilated, Destroyed, Stolen or Lost. Subject to the terms of a Representation Letter with a Securities Depository for Book -Entry Bonds, if any Bond becomes mutilated or is lost, stolen or destroyed, the City may execute and the Trustee shall authenticate and deliver a new Bond of like data of Series, maturity, principal amount and terms as the Bond so mutilated, lost, stolen or destroyed; provided that (i) in the case of such mutilated Bond, such Bond is first surrendered to City or the Trustee, (ii) in the case of any such lost, stolen or destroyed Bond, there is first fiunished evidence of such loss, theft or destruction satisfactory to the Trustee together with indemnity satisfactory to the Trustee, (iii) all other reasonable requirements of the City and the Trustee are complied with, and (iv) expenses in connection with such transaction are paid by the Owner. Any Bond surrendered for exchange shall be cancelled. Any such new Bond issued pursuant to this Section in substitution for a Bond alleged to be destroyed, stolen or lost shall constitute original additional contractual obligations on the pact of the City, whether or not the Bond so alleged to be destroyed, stolen or lost be at any time enforceable by anyone, and shall be equally payable from the Net Revenues and the other funds pledged therefor and available under the Indenture on a parity with and entitled to equal and proportionate benefits with, all other Bonds. OHS West 260486430 6 39 Section 3.11 Temporary Bonds. (a) Subject to the terms of a Representation Letter with a Securities Depository for Book -Entry Bonds, until the definitive Bonds are prepared, the City may execute, in the same manner as is provided in Section 3.03, and upon the request of the City, the Trustee shall authenticate and deliver, in lieu of definitive Bonds, but subject to the same provisions, limitations and conditions as the definitive Bonds except as to the exchangeability for Bonds, one or more temporary Bonds substantially of the tenor of the definitive Bonds in lieu of which such temporary Bond or Bonds are issued, in Authorized Denominations, and with such omissions, insertions and variations as may be appropriate to temporary Bonds. The installments of interest payable on such temporary Bonds shall be payable in the same manner as interest is payable on the definitive Bonds in lieu of which such temporary Bonds were issued. The City, at its own expense, shall prepare and execute and, upon the surrender of such temporary Bonds for exchange and the cancellation of such surrendered temporary Bonds, the Trustee shall authenticate and, without charge to the Owner thereof, deliver in exchange therefor, definitive registered Bonds of the same aggregate Series, principal amount, terms, maturity and date of issue as the temporary Bonds surrendered Until so exchanged, the temporary Bonds of a Series shall in all respects be entitled to the same benefits and security as definitive Bonds authenticated and issued pursuant to the Indenture authorizing the issuance of such Series of Bonds. (b) Temporary Bonds authorized in more than one denomination, upon surrender thereof at the Principal Office of the Trustee, may at the option of the Owner thereof, and upon payment by such Owner of any charges which may be made as provided in Section 3.09 be exchanged for an equal aggregate principal amount of temporary Bonds of the same Series, maturity, and containing the same terms, of any of the Authorized Denominations as shall be requested by such Owner. (c) All temporary Bonds surrendered in exchange either for another temporary Bond or Bonds or for a definitive Bond or Bonds shall be forthwith cancelled by the Trustee. Section 3.12 Cancellation and Destruction of Bonds. All Bonds paid or redeemed, either at or before maturity, and all Bonds surrendered for transfer or exchange, shall be delivered to the Trustee when such payment, redemption or surrender is made, and such Bonds, together with all Bonds purchased by the Trustee, shall thereupon be promptly cancelled. Bonds so cancelled may at any time be destroyed by the Trustee, who shall execute a certificate of destruction in duplicate by the signature of one of its authorized offices describing the Bonds so destroyed, and one executed certificate shall be filed with the City and the other executed certificate shall be retained by the Trustee. ARTICLE IV REDEMPTION OF BONDS Section 4.01 Privilege of Redemption and Redemption Price. Bonda of each Series subject to redemption prior to maturity pursuant to the Supplemental Indenture authorizing such Series shall be redeemable, upon giving notice as provided in this Article IV, at such times and at OHS Wat2604 "30.6 40 such redemption prices as shall be specified in or pursuant to the Supplemental Indenture authorizing such Series and upon such terms as may be specified in this Article M Section 4.02 Redemption at the Direction of City. In the case of a redemption of Bonds of any Series at the option or direction of the City, the City shall give written notice to the Trustee of the exercise of its option to redeem Bonds or of its direction to otherwise cause the redemption of Bonds at its direction, and of the redemption date, principal amounts of the Bands of such Series and maturity to be redeemed (which Series, maturities and principal amounts shall be determined by the City in its sole discretion, subject to any limitations with respect thereto contained in the Supplemental Indenture authorizing such Series of Bonds and provided that, with respect to any Bond to be redeemed in part, the portion of such Bond which is not to be redeemed shall be in an Authorized Denomination). The City shall provide the Trustee with such notice forty-five (45) days prior to the redemption date or such shorter period as shall be acceptable to the Trustee. In the event notice of redemption shall have been given as in Section 4.05 provided, other than a conditional notice pursuant to Section 4.05(b), there shall be paid on or prior to the redemption date to the Trustee an amount in cash which, in addition to other moneys, if any, available therefor held by the Trustee, shall be sufficient to redeem on the applicable redemption date at the Redemption Price, all of the Bonds to be redeemed. Section 4.03 Redemption Otherwise Than at City's Direction, Whenever by the terms of the Indenture, the Trustee is required or authorized to redeem Bonds otherwise than at the option or direction of the City. and the Indenture does not expressly set forth the principal amount of Bonds of each Series and maturity so subject to redemption to be redeemed, the City may select the principal amounts of the Bonds of each Series and maturity to be redeemed (which Series, maturities and principal amounts to be redeemed shall be determined by the City in its sole discretion, subject to any limitations with respect thereto contained in the Indenture and provided that, with respect to any Bond to be redeemed in part, the portion of such Bond which is not to be redeemed shall be in an Authorized Denomination) and in the event the City does not notify the Trustee of such Series, maturities, and principal amounts, to be redeemed on or before the forty-fifth (45th) day preceding the redemption date, the Trustee shall, in its sole discretion, subject to any limitations with respect to the Series, maturity, or principal amount of Bonds to be redeemed contained in the Indenture, select the Series, maturities and principal amounts of Bonds to be redeemed, which selection shall be conclusive, give the notice of redemption and pay out of moneys available therefor the Redemption Price thereof to the Owners of the Bonds to be redeemed or to appropriate Paying Agents in accordance with the terms of this Article IV. Section 4.04 Selection of Bonds to be Redeemed. If less than all of the Outstanding Bonds, or less than all of the Outstanding Bonds of like Series and maturity, shall be called for prior redemption, except as otherwise provided with respect to Credit Provider Bonds in the Supplemental Indenture authorizing such Credit Provider Bonds or in the applicable Credit Support Agreement or except as otherwise provided with respect to Book -Entry Bonds in a Representation Letter, the particular Bonds or portions of Bonds to be redeemed shall, subject to any limitations with respect thereto contained in the Indenture, be selected at random by the Trustee in such manner as the Trustee in its discretion may deem fair and appropriate, provided, however, that the portion of any Bond of a denomination greater than the minimum Authorized Denomination for the Bonds of a Series shall be redeemed in part only in a principal amount OHS west 2WW30 6 41 such that the portion of such Bond which is not redeemed shall be in an Authorized Denomination for such Series and that, in selecting portions of Bonds of a Series for redemption, the Trustee shall treat each Bond of each Series as representing that number of Bonds of the minimum Authorized Denomination for such Series which is obtained by dividing the principal amount of such Bond by the minimum Authorized Denomination for the Bonds of such Series. Section 4.05 Notice of Redemption. (a) When the Trustee shall receive notice from the City of the exercise of its option to redeem Bonds or of its direction to otherwise cause the redemption of Bonds pursuant to Section 4.02, and when redemption of Bonds of a Series is authorized or required pursuant to Section 4.03, the Trustee shall give notice, in the name of the City, of the redemption of such 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 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 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 Bonds of any like Series and maturity are to be redeemed, the letters and numbers or other distinguishing marks of such Bonds so to be redeemed, and, in the case of Bonds to be redeemed in part only, such notice shall also specify the respective portions of the principal amount thereof to be redeemed. Such notice shall further state that, except as provided in subsection (b) of this Section, on such date there shall become due and payable upon each Bond to be redeemed the Redemption Price thereot; or the Redemption price of the specified portion of the principal amount thereof to be redeemed in the case of a Bond to be redeemed in part only, and that from and after such date interest on such Bond or the portion of such Bond to be redeemed shall cease to accrue and be payable. Receipt of such notice shall not be a condition precedent to the redemption of Bonds and failure of any Owner of a Bond to receive any such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of Bonds. Any defect in such notice given to the Owners of less than all of the Bonds to be redeemed shall not affect the validity of the proceedings for the redemption of the Bonds as to which the notice of redemption did not contain such defect. (b) In the event that funds required to pay the Redemption price of 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 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 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 Bonds. In the event a notice of redemption of Bonds contains such a condition and such moneys are not so received, the redemption of Bonds as described in the conditional notice of redemption shall not be Horde and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of Bonds pursuant to the conditional notice of redemption. OHS Wat260466430.6 42 (c) If upon the expiration of sixty (60) days succeeding any redemption date, any Bonds called for redemption shall not have been presented to the Trustee for payment, the Trustee shall no later than ninety (90) days following such redemption date, send written notice by first class mail to the Owner of each Bond not so presented. Failure to mail the notices required by this subsection to any Owner, or any defect in any notice so mailed, shall not affect the validity of the proceedings for redemption of any Bonds nor impose any liability on the Trustee. (d) In addition to the notice of redemption required pursuant to subsection (a) of this Section, if any Bonds are to be redeemed, then at the written request of an Authorized City Representative received at least forty-five (45) days before the redemption date, at least thirty (30) days before the redemption date, the Trustee shall also give redemption notice by (i) registered or certified mail, return receipt requested, postage prepaid, (ii) telephonically confirmed facsimile transmission or (iii) overnight delivery service, to one of the Information Services. Failure to give the notices described in this subsection or any defects therein, shall not in any manner affect the proceedings for redemption of any Bonds. (e) Neither the City nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Bonds or in any redemption notice or other notice with respect thereto, and any such redemption notice or other notice may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the City nor the Trustee shall be liable for any inaccuracy in such numbers. Section 4.06 Partial Redemption of Bonds. Upon surrender of any Bond to be redeemed in part only, the City shall execute, and the Trustee shall authenticate and deliver to the Owner of such Bond, at the expense of the City, a new Bond or Bonds of Authorized Denominations equal in aggregate principal amount to the unredeemed portion of the Bond surrendered, of the some Series, maturity and terms as the surrendered Bond. Section 4.07 Effect of Notice and Availability of Redemption Money. Subject to the provisions of Section 3.01(g), notice of redemption having been duly mailed to the Owners of the Bonds to be redeemed (in whole or in part), as provided in Section 4.05. and the amount necessary for the redemption having been made available for that purpose and being available therefor on the date fixed for such redemption; (a) the Bonds, or portions thereof, designated for redemption shall, on the date fixed for redemption, become due and payable at the applicable Redemption Price thereof, as provided in the Indenture, anything in such Indenture or in the Bonds to the contrary notwithstanding; (b) except as otherwise provided in a Representation Letter, upon presentation and surrender thereof at the Principal Office of the Trustee or another Paying Agent for such Bonds, the Bonds to be redeemed shall be redeemed at the applicable Redemption Price; OHS Wett260496430.6 43 (c) the Bonds or portions thereof so designated for redemption shall be deemed to be no longer Outstanding and such Bonds or portions thereof shall cease to bear further interest; and (d) after the date fixed for redemption no Owner of any of the Bonds or portions thereof so designated for redemption shall be entitled to any of the benefits of the Indenture, or to any other rights, except with respect to payment of the Redemption Price thereof from the amounts so made available. ARTICLE V ESTABLISHMENT OF FUNDS AND APPLICATION THEREOF Section 5.01 Pledge of Trust Estate. Subject to the application thereof on the terns and conditions provided in the Indenture, to secure the payment of all the Outstanding Bonds, including Credit Provider Bonds, and the interest payments becoming due thereon according to their tenor, purport and effect, and to secure the performance and observance of all of the covenants, agreements and conditions contained in the Outstanding Bonds, including Credit Provider Bonds, and the Indenture, the City hereby irrevocably grants a lien on and a security interest in, and pledges, the Trust Estate to the Trustee, for the benefit of the Owners of the Outstanding Bonds, including Credit Provider Bonds, which lien on, security interest in and pledge of the Revenues and amounts in the Light and Power Fund included in the Trust Estate shall be on a parity with any pledge of Revenues and amounts in the Light and Power Fund securing Parity Obligations, including Credit Support Agreements for Parity Obligations and Qualified Swap Agreements. This lien on and security interest in and pledge of the Trust Estate shall constitute a first pledge of and charge and lien upon the Trust Estate, shall immediately attach and be effective, binding, and enforceable against the City, its successors, purchasers of any of the Trust Estate, creditors, and all others asserting rights therein to the extent act forth in, and in accordance with, the Indenture, irrespective of whether those parties have notice of the lien on, security interest in and pledge of the Trust Estate and without the need for any physical delivery, recordation, Sling or Anther act. The grant of alien on and security interest in, and pledge o4 the Trust Estate pursuant to this Section is made pursuant to the Bond Ordinance and Chapter 5.5 of Division 6 of Title I (commencing with Section 5450) of the Government Code of the State. Section 5.02 Funds. 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, there are hereby established 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: (a) the City of Vernon Electric System Debt Service Fund, comprised of an Interest Account, a Principal Account and a Sinking Fund Account; (b) the City of Vernon Electric System Redemption Fund; (c) the City of Vernon Electric System Debt Service Reserve Fund; OHS Wer.260466430.6 44 (d) the City of Vernon Electric System Expense Stabilization Fund; and (e) the City of Vernon Electric System Rebate Fund. Section 5.03 Payments by City. During each Fiscal Year the City shall pay the Trustee, from the Net Revenues ofsuch 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 Sinldng Fund Installments due with respect to all Outstanding Bonds which are Tenn 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 Section 5.04(c); (d) at least one Business Day prior to each date fixed for the redemption of Outstanding Bonds (other than from Sinking Fund Installments or other than an optional redemption of Bonds as to which a conditional notice of redemption has been sent to the Owners pursuant to subsection (b) of Section 4.05), an amount equal to the Redemption Price of the Bonds to be redeemed; (e) on the date on which the principal of or interest on any Outstanding Bond becomes due and payable, other than as provided in (a) through (d) above, the City shall pay an amount in funds which are immediately available to the Trustee by 10:00 a.m. (Pacific Time) on the due date, equal to the principal of and interest on the Outstanding Bonds due on such date; (f) in the event that on any date upon which the City is to make a payment pursuant to subsections (a), (b), (c), (d), andlor (e) of this Section and the amount of Net Revenues and amounts in the Light and Power Fund available therefor in accordance with this Master 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 this Master Indenture to the payments OHS WM26MU4306 45 required by subsections (a), (b), (c), (d), and/or (c) of this Section 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: (i) an amount such that, after the deposit of such amount in the Debt Service Reserve Fund, the amount on deposit in such Fund shall be at least equal to the Debt Service Reserve Requirement, including the amount of any Reserve Financial Guaranties on deposit in the Debt Service Reserve Fund; (h) in the event that on any date upon which the City is to make a payment pursuant to subsection (g) of this Section and the amount of Net Revenues and amounts in the Light and Power Fund available therefor in accordance with this Master Indenture is not sufficient to make such payment and any payment required to be made on such date with respect debt service reserves for Parity Obligations, then the City, after making the payments required by subsections (a), (b), (c), (d), (e), and (f) of this Section, shall apply the Net Revenues and amounts in the Light and Power Fund available therefor in accordance with this Master Indenture to the payments required by subsection (g) of this Section 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; (i) in the event that on any date all payments required to be made by this Section 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 amount contained in the then current Budget for Operation and Maintenance Expenses for the next succeeding four months; and (i) in the event that on any date all payments required to be made by this Section are not made in full, 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. Section 5.04 Debt Service Fund. (a) From the moneys paid by the City pursuant to Section 5.03(a), (b) and (c), 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. OHS Wal26048"M 46 (b) From the moneys paid by the City pursuant to Section 5.03(e), the Trustee, upon receipt of such moneys, shall deposit the following amounts in the following specified accounts within the Debt Service Fund: (i) For deposit in the Interest Account, an amount equal to the interest on the Outstanding Bonds then payable; and (ii) 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 Section 5.03(c) 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 this subsection, 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 Section 5.03(c) shall be satisfied. (d) Except as hereafter in this subsection provided: (i) amounts deposited in the Interest Account shall retrain 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 ate 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 this Section, shall be paid to the applicable Credit Provider as a reimbursement of the amounts so paid. Section 5.05 Redemption Fund. From the moneys paid by the City pursuant to Section 5.03(d), the Trustee shall deposit in the Redemption Find an amount equal to the Redemption OHS WM2608"30.6 - 47 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 this Section, 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 this Section, 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. Section 5.06 Debt Service Reserve Fund,. (a) If on any date on which the principal or Redemption Price of, or interest on, Bonds is due, the amount in the applicable account in the Debt Service Fund available for such payment is less than the amount of the principal and Redemption Price of and interest on the Bonds due on such date, the Trustee shall apply amounts from the Debt Service Reserve Fund to the extent necessary to make good the deficiency. (b) Except as provided in subsection (e) of this Section, if on the last Business Day of any month the amount on deposit in any Debt Service Reserve Pund shall exceed the Debt Service Reserve Requirement, such excess shall be applied to the reimbursement of each drawing on a Reserve Financial Guaranty deposited in or credited to such Fund and to the payment of interest or other amounts due with respect to such a Reserve Financial Guaranty and any remaining moneys shall be deposited in the Interest Account. (c) Whenever the amount in the Debt Service Reserve Fund (excluding Reserve Financial Guaranties), together with the amount in the Debt Service Fund, is sufficient to pay in full all of the Outstanding Bonds in accordance with their terms (including principal or Redemption Price and interest thereon), the funds on deposit in the Debt Service Reserve Fund shall be transferred to the Debt Service Fund. (d) In the event of the retimding of one or more Bonds (or portions thereof), the Trustee shall, upon the written direction of an Authorized City Representative, withdraw from the Debt Service Reserve Fund any or all of the amounts on deposit therein (excluding Reserve Financial Guaranties) and deposit such amounts with itself as Trustee, or the Escrow Agent for the Bonds to be refunded, to be held for the payment of the principal or Redemption Price, if any, of, and interest on, the Bonds (or portions thereof) being refunded; provided that such withdrawal shall not be made unless (a) immediately thereafter the Bonds (or portions thereof) being refunded shall be deemed to have been paid pursuant to Section 9.02, and (b) the amount OHS WaL,26006430.6 48 remaining in the Debt Service Reserve Fund after such withdrawal (including the amount of any Reserve Financial Guaranties), taking into account any deposits to be made in the Debt Service Reserve Fund in connection with such refunding, shall not be less than the Debt Service Reserve Requirement. (e) In lieu of the deposits and transfers to the Debt Service Reserve Fund required by Section 5.03(g), the City may cause to be deposited in the Debt Service Reserve Fund a Reserve Financial Guaranty or Reserve Financial Guaranties in an amount equal to the difference between the Debt Service Reserve Requirement and the sums, if any, then on deposit in the Debt Service Reserve Fund or being deposited in such Fund concurrently with such Reserve Financial Guaranty or Guaranties. The Trustee shall draw upon or otherwise take such action as is necessary in accordance with the terns of the Reserve Financial Guaranties to receive payments with respect to the Reserve Financial Guaranties (including the giving of notice as required thereunder): (i) on any date on which moneys shall be required to be withdrawn from the Debt Service Reserve Fund and applied to the payment of principal or Redemption Price of, or interest on, any Bonds and such withdrawal cannot be met by amounts on deposit in the applicable accounts in the Debt Service Reserve Fund; (ii) on the first Business Day which is at least ten (1%days prior to the expiration date of each Reserve Financial Guaranty, in an amount equal to the deficiency which would exist in the Debt Service Reserve Fund if the Reserve Financial Guaranty expired, unless a substitute Reserve Financial Guaranty with an expiration date not earlier than 180 days after the expiration date of the expiring Reserve Financial Guaranty (or the earlier maturity of all then Outstanding Bonds) is acquired prior to such date or the City deposits funds in the Debt Service Reserve Fund on or before such date such that the amount in the Debt Service Reserve Fund on such date (without regard to such expiring Reserve Financial Guaranty) is at least equal to the Debt Service Reserve Requirement. If, upon the deposit of a Reserve Financial Guaranty into the Debt Service Reserve Fund pursuant to this subsection (e), there shall be any amount in the Debt Service Reserve Fund in excess of the Debt Service Reserve Requirement, such excess amount may be applied to the cost of acquiring such Reserve Financial Guaranty and, to the extent not so applied, shall be transferred to the Interest Account. Section 5.07 Expense Stabilization Fund. Moneys shall be deposited in the Expense Stabilization Fund in such amounts, at such times and from such sources as shall be determined by the City in its sole discretion. Moneys on deposit in the Expense Stabilization Fund may be withdrawn at any time no Event of Default exists upon the order of an Authorized City Representative and applied to any lawful purpose in connection with the Electric System, including without limitation, payment of Operation and Maintenance Expenses, payment of Debt Service on Parity Obligations, payment of principal, premium or interest on Subordinate Obligations, payment of Costs of Capital Improvements, payment of the Costs of Issuance of Parity Obligations or payment of the costs of issuance of Subordinate Obligations, provided, however, that if an Event of Default shall have occurred and is continuing, the Tnrstee shall transfer all moneys in the Expense Stabilization Fund first to the Interest Account the amount by which the accrued interest on the Outstanding Bonds is greater than the amount then on deposit in the Interest Account and second to the Principal Account, the balance of the amount then in the Expense Stabilization Fund. OHS west 260 U4306 49 Section 5.08 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. Section 5.09 Depositories. The Trustee shall hold all moneys deposited with it pursuant to the Indenture or may deposit such moneys with one or more Depositories in trust. All moneys deposited under the provisions of the Indenture with the Trustee or any Depository shall be held in trust and applied only in accordance with the provisions of the Indenture, and each of the Funds established by the Indenture shall be a trust fund for the purposes hereof. Section S.10 Deposits. (a) All moneys held by any Fiduciary under the Indenture may be placed on demand or time deposit, if and as directed by the City, provided that such deposits shall permit the moneys so held to be available for use at the time when reasonably expected to be needed. No Fiduciary shall be liable for any loss or depreciation in value resulting from any investment made pursuant to the Indenture. Any such deposit may be made in the commercial banking department of any Fiduciary or its affiliates which may honor checks and drafts on such deposit with the same force and effect as if it were not such Fiduciary. All moneys held by any Fiduciary, as such, may be deposited by such Fiduciary in its banking department on demand or, if and to the extent directed by the City and acceptable to such Fiduciary, on time deposit, provided that such moneys on deposit be available for use at the time when reasonably expected to be needed. Such Fiduciary shall allow and credit on such moneys such interest, if any, as it customarily allows upon similar funds of similar size and under similar condition or as required by law. (b) All moneys deposited with a Fiduciary shall be credited to the particular Fund to which such moneys belong. Section 5.11 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 dullest extent practicable in securities described in clauses (a) through (c) of the definition of "Permitted Investments" in Section 1.01 which mature not later than such times as shall be necessary to provide moneys when reasonably expected to be needed for payments to be made from such Funds. Moneys held in the Debt Service Reserve Fund shall be invested and reinvested by the Trustee to the fullest extent practicable in securities described in clauses (a), (b), (c), (g), 0) and (m) of the definition of "Permitted Investments" in Section 1.01 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 Expanse 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. In the absence of any such written investment directions, the Trustee shall, unless OHS We91WU6430.6 50 otherwise provided in this Section 5.11, invest such moneys in the money market funds described in clause (d) of the definition of "Permitted Investments." Interest or other income earned on any moneys or investments in 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. Section 5.12 Valuation and Sale of Investments. Obligations purchased as an investment of moneys in any Fund shall be deemed at all times to be a part of such Fund and any profit realized from the liquidation of such investment shall be credited to such Fund and any loss resulting from the liquidation of such investment shall be charged to the respective Fund. In computing the amount in the Debt Service Reserve Fund for any purpose , hereunder, 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 fends 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 ftom 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 hereunder, ARTICLE VI COVENANTS AND OBLIGATIONS OF THE CITY The City covenants with the Owners of the Outstanding Bonds and with each Credit Provider as set forth in this Article VI. Each of said covenants shall remain in full force and effect so long as any of the Bonds shall be Outstanding and unpaid, any Credit Support OHS West 260486430 6 51 Instrument remains outstanding, and any Credit Provider Reimbursement Obligations remain unpaid. Section 6.01 Compliance with Indenture. The City shall punctually pay the Bonds in strict confomtity 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 Section 2.02. Section 6.02 Rates for Electric Service. The City shall at all times fix, prescribe and collect rates and charges for the Electric Service of the Electric System during each Fiscal Year which shall be at least sufficient to yield: (a) Adjusted Revenues for such Fiscal Year at least equal to the sum of the following for such Fiscal Year: (i) Operation and Maintenance Expenses; (ii) Adjusted Debt Service, and (iii) all other payments required to be paid in such Fiscal Year to meet any other obligations of the City which are charges, liens or encumbrances upon or payable from the Revenues (including 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 (1101/9) of Adjusted Debt Service for such Fiscal Year. The City may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Adjusted Revenues and the Adjusted Net Revenues from such reduced rates and charges shall at all times be sufficient to meet the requirements of this Section. Section 6.03 Collection of Rates and C"es. The City shall have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the Electric System to pay the rates and charges applicable to the Electric Service provided to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The City shall not permit any part of the Electric System or any facility thereof to be used or taken advantage of &ee of charge by any corporation, firm or person, or by any public agency (including the United States of America, the State of California and any city, county, district, political subdivision, public corporation or agency of any thereof). Nothing in the Indenture shall prevent the City, in its sole and exclusive discretion, from permitting other parties from selling electricity to retail customers within the service area of the Electric System; provided, however, that permitting such sales shall not relieve the City of its obligations under the Indenture. Section 6.04 Deposit and Application of Revenues. The City shall deposit or cause to be deposited all Revenues into the Light and Power Fund upon receipt thereon The City shall apply Revenues for each Fiscal Year first to the payment of Operation and Maintenance Expenses then due and payable. The City shall apply the remaining Revenues to the payment of amounts required to be paid in Section 5.03 then due and payable, and with respect to Parity Obligations other than Bonds, pursuant to the Issuing Instrument for such 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 pursuant to the Issuing OHS Weet2W466430 6 52 hastruments for any Subordinate Obligations, the payment of Costs of Capital Improvements and, to the extent permitted by Section 6. i 3, to transfers to the CiWs General Fund. During each Fiscal Year, and subject to the provisions of Section 5.03, 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. Section 6.05 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 lndenum; or (4) 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 Indentum shall prevent the City from issuing Subordinate Obligations in accordance with Section 2.08. Section 6.06 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 fumished, 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 lint matures or becomes due, except that if the City desires to contest any such lion 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. Section 6.07 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 Section 6.02. Section 6.08 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. OHS Wwr2604W30.6 53 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 this Section 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 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. Section 6.09 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. Section 6.10 Accounting Records; Flnandal Statements and Other Reports. (a) The City shall keep appropriate accounting records m which complete and correct entries shall be made of all transactions relating to the Electric System, which records shall be available for inspection by the Trustee at reasonable hours and under reasonable conditions. (b) The City shall prepare and file with the Trustee annually within one hundred eighty (180) days after the close of each Fiscal Year (commencing with the Fiscal Year ending June 30, 2008): (i) financial statements of the City for such Fiscal Year prepared in accordance with Generally Accepted Accounting Principles, together with an Accountant's Report thereon; and (h) a detailed report as to all insurance policies maintained and self- insurance programs maintained by the City with respect to the Electric System as of the close of such Fiscal Year, including the names of the insurers which have issued the policies and the amounts thereof and the property or risks covered thereby. Offs west:260486430.6 54 Section 6.11 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. Section 6.12 Tax Covenants. (a) The City hereby 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 subsection (a) of this Section, 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 this Section, if the City shall provide to the Trustee an Opinion of Bond Counsel to the effect that any specified action required under this Section or a Tax Certificate is no longer required or that some further or different action is required to maintain the Tax-Bxempt 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 this Section and of the applicable Tax Certificate, and the covenants hereunder shall be deemed to be modified to that extent. (c) The covenants in this Section shall survive payment in full or discharge of the Bonds. Section 6.13 Transfers to General Fund. The City covenants that it shall not transfer Net Revenues for any Fiscal Year to the City's General Fund in an amount exceeding the Net Transferable Income for such Fiscal Year, which amount shall be determined at the end of such Fiscal Year. Notwithstanding the preceding sentence, so long as an Event of Default has occurred and is continuing, the City shall not transfer any Net Transferable Income to the City's General Fund. OHS Wut2604SU30.6 55 ARTICLE VII AMENDMENTS TO INDENTURE Section 7.01 Amendments Permitted. (a) Subject to the provisions of subsection (d) of this Section, the provisions of this Master 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 ruin Outstanding, and, with respect to Bonds which are Tender Indebtedness if the conditions of subsection (d) of this Section 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 for purposes of this Section. No such modification, amendment or supplement shall (1) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification, amendment or supplement without the consent of the Owners of all of the Bonds then Outstanding; (2) extend the fixed maturity of any Bond, or reduce the principal amount thereof, or reduce the amount of any Sinking Fund Installment therefor, or extend the due date of any such Sinking Fund Installment, or reduce the rate of interest on any Bond or extend the time of payment of interest thereon, without the consent of 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 of this Section, 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. OHS WaL260486430.6 56 Whenever, at any time after the date of the mailing of notice of the proposed entry into a Supplemental Indenture pursuant to this subsection, the City shall have received an instrument or instr unents in writing executed in accordance with Section 11.01 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) This Master 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 Article 11, 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 subsection (g) of this Section, reduce the Redemption Price due on the redemption of any Bond or change the date or datea when any Bond is subject to redemption. (c) This Master Indenture and any Supplemental Indenture and the rights and obligations of the City, the Fiduciaries and the Owners of the Outstanding Bonds may also be modified, amended or supplemented from time to time and at any time by a Supplemental Indenture or Supplemental Indentures, which the City and the Trustee may enter into with the consent of each Credit Provider whose consent is required by a Supplemental Indenture or a Credit Support Agreement but without the consent of any Owners of Bonds (but with the consent of any affected Fiduciary), so long as such modification, amendment or supplement shall not materially, adversely affect the interests of the Owners of the Outstanding Bonds, including without limitation, for any one or more of the following purposes: (i) to add to the covenants and agreements of the City contained in this Master Indenture or a Supplemental 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; OHS west•264666430.6 57 (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 this 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 this Master Indenture or a Supplemental Indenture, or in regard to matters or questions arising under this Master Indenture or a Supplemental Indenture, as the City may deem necessary or desirable; or (v) to modify, amend or supplement this Master 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 terns, conditions and provisions as may be permitted by said act or similar federal statute. (d) Notwithstanding anything to the contrary in this Section, the provisions of this Master 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 subsection (a) of this Section, 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 notice described in the third paragraph of subsection (a) of this Section 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 this Section, 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 subsection (b) of this Section, references to the Owners of such Bonds shall be deemed to be to the applicable Credit Provider. OHS Wat26M64306 58 (i) For purposes of this Section, 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 purposes of this Section 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 this Section, if authorized by the Supplemental Indenture authorizing the issuance of a Bond constituting Tender Indebtedness, any premium due on the redemption of such Bond and the date or dates when such Bond is subject to redemption may be modified or amended as provided in such Supplemental Indenture if either: (i) the effective date of such modification or amendment is a date on which such Bond is subject to mandatory tender for purchase pursuant to such Supplemental Indenture; or (ii) notice of such modification or amendment has been mailed to the Owner of such Bond at the address set forth in the Bond Register at least thirty (30) days before the effective date of such modification or amendment and on or before such effective date, the Owner of such Bond has the right to demand purchase of such Bond pursuant to such Supplemental Indenture. Section 7.02 Effect of Supplemental Indenture. Upon the City and the Trustee entering into any Supplemental Indenture pursuant to this Article, 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. Except for Supplemental Indentures requiring the consent of such Owner pursuant to Section 7.01(a), upon the City and the Trustee entering into any Supplemental Indenture pursuant to this Article, no Owner of any Bond shall have any right to object to the entry into such Supplemental Indenture by the City and the Trustee, or to object to any of the two and provisions contained therein or the operation thereof or in any manner to question the propriety of the entry into such Supplemental Indenture, or to enjoin or restrain the City or the Trustee from entering into the same or to oWoin or restrain the City or the Trustee firm taking any action pursuant to the provisions thereof whether or not such Owner gave his consent to such Supplemental Indenture. Section 7.03 Bonds Owned by City. For purposes of this Article, 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 this Article, and the City shall not be entitled with respect to such Bonds to give any consent or take any other action provided for in this Article as an Owner of Bonds. At the time of any consent or other action taken under this Article, 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. Section 7.04 Notation on Bonds. Bonds authenticated and delivered after the effective date of any Supplemental Indenture entered into by the City and the Trustee as in this Article provided may bear a notation by endorsement or otherwise in a foam approved by the City as to OHS WestMM6430.6 59 such action, and in that case upon demand of the Owner of any Bond Outstanding on such effective date and presentation of the Bond for the purpose at the Principal Office of the Trustee or upon any transfer or exchange of any Bond Outstanding on such effective date, suitable notation shall be made on such Bond or upon any Bond issued upon any such transfer or exchange by the Trustee as to any such action. ARTICLE VIII CONCERNING THE FIDUCIARIES Section &01 Trustee; Acceptance of Duties. 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 this Master 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. Section 8.02 Paying Agents; Appointment and Acceptance of Duties. (a) The City hereby 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 Section 8.13 as an additional Paying Agent for the Bonds of one or more Series. (b) 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. (c) 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. Section &03 Responsibilities of Fiduciaries. (a) Any recitals of fact in the Indenture and in the Bonds contained shall be taken as the statements of the City and no Fiduciary assumes any responsibility for the correctness of the same. No Fiduciary makes any representations as to the validity or sufficiency of the Indenture or of any Bonds issued thereunder or as to the security afforded by the Indenture, and no Fiduciary shall incur any liability in respect thereof. No Fiduciary shall be responsible for or have any liability with respect to the Electric System or any act or omission of the City with respect thereto. The Trustee shall, however, be responsible for its representation contained in its certificate of authentication on the Bonds. No Fiduciary shall be under any responsibility or duty with respect to the application of any moneys paid by such Fiduciary in accordance with the provisions of the Indenture. No Fiduciary shall be under any obligation or duty to perform any act which would involve it in expense or liability or to institute or defend any suit in respect thereof, or to advance any of its own moneys, unless properly indemnified. Subject to the provisions of subsection (b) of this Section, no Fiduciary shall be liable in OHS ww 260436430 6 60 connection with the performance of its duties under the Indenture except for its own negligence or willful misconduct. (b) The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in the Indenture. In case an Event of Default has occurred (which has not been cured) the Trustee shall exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Any provision of the Indenture relating to action taken or to be taken by the Trustee or to evidence upon which the Trustee may rely shall be subject to the provisions of this Section. Without limiting the generality of the foregoing- (1) the Trustee shall not be liable for any error of judgment made in good faith by any officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (2) the Trustee shall not be Iiable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of a Credit Provider or a Reserve Financial Guaranty Provider or the Owners of 25% in aggregate principal amount of the Outstanding Bonds relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under the Indenture; (3) no provision of the Indenture shall require the Trustee to expend or risk its own flmds or otherwise incur any financial liability in the performance of any of its duties under the Indenture, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; (4) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the Owners, a Credit Provider or a Reserve Financial Guaranty Provider pursuant to the Indenture (except for declaring an acceleration of the Bonds or requesting credit and/or liquidity support pursuant to a Credit Support Instrument), unless such Owners, such Credit Provider or such Reserve Financial Guaranty Provider shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and OHS weW26UVA30 6 61 liabilities which might be incurred by it in compliance with such request or direction; (5) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, coupon, facsimile transmission, electronic mail or other paper or document but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the City, personally or by agent or attorney; (6) the Trustee shall not be required to take notice of and shall not be deemed to have knowledge of any Event of Default (other than an Event of Default specified in subsections (i) or (ii) of Section 10.01) or any event which would, with the passage of time, the giving of notice, or both, constitute an Event of Default, unless the Trustee shall have been notified of such Event of Default or other event by the City, a Credit Provider or a Reserve Financial Guaranty Provider, or the Owners of 100/a in aggregate principal amount of Bonds Outstanding; (7) the Trustee shall not be responsible for any moneys or funds held by the City), or for monitoring the accounting and investment practices of the City, other than requiring the delivery of the Annual Budget and annual financial statements and reports pursuant to Section 6.10; and (8) The Trustee may perform its duties under the Indenture through agents and attorneys and the Trustee shall not be liable for the negligence or misconduct on the part of any agent or attorney appointed with due care by it under the Indenture if the City has a right to proceed directly against such agent or attorney for any such negligence or misconduct. (9) In no event shall the Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or OHS WtM:260496400.6 62 prohibit the providing of services contemplated by the Indenture. (10) The Trustee shall have no responsibility with respect to any information, statement, or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Bonds. (11) The Trustee agrees to accept and act.upon instructions or directions pursuant to this Indenture sent by unsecured e- mail, facsimile transmission or other similar unsecured electronic methods, provided, however, that, the Trustee shall have received an incumbency certificate listing persons designated to give such instructions or directions and containing specimen signatures of such designated persons, which such incumbency certificate shall be amended and replaced whenever a person is to be added or deleted from the listing. If the City elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee's understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for.any losses, costs or expenses arising directly or indirectly from the Trustee's reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The City agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk of interception and misuse by third parties. (12) Whenever in the administration of the trusts imposed upon it by this Indenture 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 be deemed to be conclusively proved and established by a certificate of the Authority, and such certificate shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of this Indenture in reliance upon such certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it may deem reasonable. OHS WM240486430.6 63 (13) The Trustee's rights to immunities and protection from liability hereunder and its rights to payment of its fees and expenses shall survive its resignation or removal and final payment or defeasance of the Bonds. All indemnifications and releases from liability granted herein to the Trustee shall extend to the directors. Officers, employees and agents of the Trustee. Whether or not therein expressly provided, every provision of the Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article. Section 8.04 Evidence on Which Fiduciaries May Act. (a) Each Fiduciary, upon receipt of any notice, resolution, request, requisition, consent, order, certificate, report, opinion, bond, or other paper or document furnished to it pursuant to any provision of the Indenture, shall examine such instrument to determine whether it conforms to the requirements, if any, of the Indenture and shall be protected in acting upon any such instrument believed by it to be genuine and to have been signed or presented by the proper party or parties. Each Fiduciary may consult with counsel, who may or may not be Bond Counsel or counsel to the City, and the opinion of such counsel shall be fall and complete authorization and protection in respect of any action taken or suffered by it under the Indenture in good faith and in accordance therewith. (b) Whenever any Fiduciary shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter (unless other evidence in respect thereof be therein specifically prescribed) may be deemed to be conclusively proved and established by a certificate of an Authorized City Representative, and such certificate shall be full warrant for any action taken or suffered in good faith under the provisions of the hndenture upon the faith thereof; but in its discretion the Fiduciary may in lieu thereof accept other evidence of such fact or matter or may require such further or additional evidence as to it may seem reasonable. (c) Except as otherwise expressly provided in the Indenture, any request, requisition, order, notice or other direction required or pemitted to be tarnished pursuant to any provision of the Indenture by the City to any Fiduciary shall be sufficiently executed in the name of the City by an Authorized City Representative. Section 8.05 Compensation. The City shall cause to be paid to each Fiduciary from time to time reasonable compensation for all services rendered under the Indenture, and also all reasonable expenses, charges, counsel fees and other disbursements, including those of its attorneys, agents, and employees, incurred in and about the performance of their powers and duties under the Indenture; provided, however, that so long as any Bonds remain Outstanding or any amounts due to a Credit Provider under a Credit Support Agreement or a Reserve Financial Guaranty Provider under a Reserve Financial Guaranty, no Fiduciary shall have a lien therefor on any and all funds at any time held by it under the Indenture. Subject to the provisions of Section 8.03, the City further agrees to indemnify and save each Fiduciary harmless against any OHS Weet:760486430.6 64 losses, expenses (including legal fees and expenses) and liabilities which it may incur arising out of or in the exercise and performance of its powers and duties under the Indenture or in any way arising out of the Electric System or the transactions contemplated by the Indenture, and which are not due to its negligence or willful misconduct. Section 8.06 Certain Permitted Acts. Any Fiduciary may become the Owner of any Bonds, with the same rights it would have if it were not a Fiduciary. To the extent permitted by taw, any Fiduciary may act as depositary for, and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee forted to protect the rights of the Owners of the Bonds or to effect or aid in any reorganization growing out of the enforcement of the Bonds or the Indenture, whether or not any such committee shall represent the Owners of a majority in principal amount of the Bonds then Outstanding. Section 8.07 Resignation of Trustee. The Trustee may at any time resign and be discharged of the duties and obligations created by the Indenture by giving not less than 60 days written notice to the City, each Credit Provider and each Reserve Financial Guaranty Provider, specifying the date when such resignation shall take effect; provided that no such resignation shall take effect until a successor shall have been appointed in accordance with Section 9.09. Section 8.08 Removal of Trustee. The Trustee may be removed (i) with the consent (to the extent required by a Supplemental Indenture) of each Credit Provider and each Reserve Financial Guaranty Provider, at any time when no Event of Default has occurred and is continuing and when no event has occurred which, with notice or the passage of time, would become an Event of Default which has not been cured, by an instrument in writing signed by an Authorized City Representative and filed with the Trustee or (ii) with the consent (to the extent required by a Supplemental Indenture) of each Credit Provider and each Reserve Financial Guaranty Provider, at any time by an instrument or concurrent instruments in writing, filed with the Trustee, and signed by the Owners of a majority in principal amount of the Bonds then Outstanding or their attomeys-in-fact duly authorized, excluding any Bonds hold by or for the account of the City or (iii) with the consent (to the extent required by a Supplemental Indenture,) of each Credit Provider and each Reserve Financial Guaranty Provider, at any time by an instrument in writing signed by an Authorized City Representative and filed with the Trustee, for any breach of its fiduciary duties under the Indenture; provided that no such removal shall be effective until 30 days have lapsed from the filing of such instrument with the Trustee and until a successor shall have been appointed in accordance with Section 8.09. Section 8.09 Appointment of Successor Trustee; Financial QualiReations of Successor Trustee. (a) In case at any time the Trustee shall resign or shall be removed or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee, or of its property shall be appointed, or if any public officer shall take charge or control of the Trustee or of its property or affairs, a successor may be appointed by the Owners of a majority in principal amount of the Bonds then Outstanding, excluding any Bonds held by or for the account of the City, with (to the extent required by a Supplemental Indenture) the consent of each Credit Provider and each Reserve Financial Guaranty Provider, by an instrmnent or concurrent instruments in writing signed and OHS wat.260486430.6 65 acknowledged by such Owners of the Bonds or by their attorneys -in -fact duly authorized and delivered to such successor Trustee, notification thereof being given to the City and the predecessor Trustee; provided, nevertheless, that unless a successor Trustee shall have been appointed by the Owners of the Bonds as aforesaid, the City, by a duly executed written instrument signed by an Authorized City Representative shall forthwith appoint a Trustee to replace such resigning Trustee or to fill such vacancy until a successor Trustee shall be appointed by the Owners of the Bonds as authorized in this Section. Any successor Trustee appointed by the City shall, immediately and without further act, be superseded by the Trustee appointed by the Owners of the Bonds. Any resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee. (b) If in a proper case no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Section within 45 days after the Trustee shall have given to the City written notice as provided in Section 8.07 or after a vacancy in the office of the Trustee shall have occurred by reason of its inability to act, removal, or for any other reason whatsoever, the Trustee (in the case of its resignation under Section 8.07) or the Owner of any Bond (in any case) may apply to any court of competent jurisdiction to appoint a successor Trustee. Said court may thereupon, after such notice, if any, as such court may deem proper, appoint a successor Trustee. (c) The Trustee appointed under the provisions of this Article or any successor to the Trustee shall be a bank or trust company organized under the laws of any state of the United States or national banking association, doing business and having its principal corporate trust office in New York, New York, or Chicago, Illinois, or Los Angeles, Califamia, or San Francisco, California, duly authorized to exercise trust powers and subject to examination by federal or state authority. Each successor Trustee shall have capital stock and surplus aggregating at least $50,000,000, or have all of its obligations under the Indenture guaranteed by a bank or trust company organized under the laws of the United States, or any state thereof, with a capital stock and surplus or net worth of $50,000,000, if there be such a bank or mist company or national bailing association willing and able to accept the office on reasonable and customary terms and authorized by law to perform all the duties imposed upon it by the Indenture. If such bank, national banking association, or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section the combined capital and surplus of such back, trust company, or national banking association shall be deemed to be its combined capital and surplus set forth in its most recent report of condition so published. Section &10 Transfer of Rights and Property to Successor Trustee. Any successor Trustee appointed under the Indenture shall execute, acknowledge and deliver to its predecessor Trustee and the City an instrument accepting such appointment, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become fully vested with all moneys, estates, properties, rights, power, duties and obligations of such predecessor, Trustee, with like effect as if originally named as Trustee; but the Trustee ceasing to act shall nevertheless, at the written request of the City, or of the successor Trustee, execute, acknowledge, deliver, file and record such instrument of conveyance and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor OHS West:26M"306 66 Trustee all the right, title and interest of the predecessor Trustee in and to any property held by it under the Indenture or covered by the pledge of the Indenture, and shall pay over, assign and deliver to the successor Trustee any money or other property subject to the trust and conditions in the Indenture set forth. Should any deed, conveyance or instrument in writing from the City be required by such successor Trustee for more fully and certainly vesting in and confirming to such successor Trustee any such lien, estates, rights, power and duties, any and all such deeds, conveyances and instruments in writing shall, on request, and so far as may be authorized by law, be executed, acknowledged and delivered by the City. Any such successor Trustee shall promptly notify the Paying Agents of its appointment as Trustee. Section &I I Merger or Consolidation. Any company into which a Fiduciary may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which any Fiduciary may sell or transfer all or substantially all of its corporate trust business, provided such company shall be a bank or trust company organized under the laws of any state of the United States or a national banking association, shall satisfy the applicable standards of a successor set forth in the Indenture, and shall be authorized by law to perform all the duties imposed upon it by the Indenture, shall be the successor to such Fiduciary without the execution or filing of any paper or the performance of any further act. Section 8.12 Adoption of Authentication. In case any of the Bonds contemplated to be issued under the Indenture shall have been authenticated but not delivered, any successor Trustee may adopt the certificate of authentication of any predecessor Trustee so authenticating such Bonds and deliver such Bonds so authenticated; and in case any of the said Bonds shall not have been authenticated, any successor Trustee may authenticate such Bonds in the name of the predecessor Trustee, or in the name of the successor Trustee, and in all such cases such certificate shall have the full force which it is anywhere in said Bonds or provided in the Indenture that the certificate of the Trustee shall have. Section 8.13 Resignation or Removal of Paying Agent and Appointment of Successor. (a) Any Paying Agent may at any time resign and be discharged of the duties and obligations created by the Indenture by giving at least 60 days written notice to the City, the Trustee, each Credit Provider, each Reserve Financial Guaranty Provider and the other Paying Agents. Any Paying Agent may be removed at any time by an instrument Sled with such Paying Agent and the Trustee and signed by an Authorized City Representative. Any successor Paying Agent shall be appointed by the City with the approval of the Trustee (and each Credit Provider and each Reserve Financial Guaranty Provider required by a Supplemental Indenture) and shall be a commercial bank or trust company organized under the laws of any state of the United States or a national banking association, having capital stock and surplus aggregating at least $25,000,000, and willing and able to accept the office on reasonable and customary terns and authorized by law to perform all the duties imposed upon it by the Indenture. If such bank, national banking association, or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section the combined capital and surplus of such bank, trust company, or OHS wese20486430.e 67 national banking association shall be deemed to be its combined capital and surplus set forth in its most recent report of condition so published. (b) In the event of the resignation or removal of any Paying Agent, such Paying Agent shall pay over, assign and deliver any moneys held by it as Paying Agent to its successor, or if there be no successor, to the Trustee. In the event that for any reason there shall be a vacancy in the office of any Paying Agent, the Trustee shall act as such Paying Agent. ARTICLE IX DEFEASANCE Section 9.01 Payment of Bonds. If the City shall pay, or cause to be paid, or there shall otherwise be paid, to the Owners of all Bonds the principal amount or any redemption premium, if applicable, of the Bonds, and interest due or to become due on the Bonds, at the times and in the manner stipulated therein and in the Indenture, together with all other sums payable by the City under the Indenture, including all fees and expenses of the Trustee, then and in that case, subject to the provisions of subsection (b) of this Section, the Indenture, and the pledge of and lien on the Trust Estate hereunder and all covenants, agreements and obligations of the City contained herein, shall cease and terminate and shall be completely discharged and satisfied and the City shall be released therefrom and the Trustee shall assign and transfer to or upon the order of the City all property (in excess of the amounts required for the foregoing) then held by the Trustee hereunder free and clear of any liens or encumbrances hereon pursuant to the Indenture and shall execute such documents as may be reasonably required by the City in this regard. (b) Notwithstanding the termination, satisfaction and discharge of the Indenture or the satisfaction discharge of this Indenture in respect of any Bonds, those provisions of the Indenture relating to the maturity of the Bonds, interest payments and dates thereof, tender and exchange provisions, exchange and transfer of Bonds, replacement of mutilated, destroyed, lost or stolen Bonds, the safekeeping and cancellation of Bonds, nonpresentment of Bonds, compliance by the City of the covenants contained in Section 6.12 hereof and the duties of the Trustee in connection with all of the foregoing, shall remain in effect and shall be binding upon the City, the Trustee and the Owners and the Trustee shall continue to be obligated to hold in trust any monies and investments then held by the Trustee for the payment of the principal or Redemption Price of, and interest on, the Bonds, to pay to the Owners, but only from the monies and investments so held by the Trustee, the principal or Redemption Price of, and interest on, the Bonds as and when such payment becomes due. Notwithstanding the satisfaction and discharge of the Indenture or the satisfaction discharge of the Indenture in respect of any Bonds, those provisions of this Indenture contained in Section 8.05 hereof relating to the compensation of the Trustee shall remain in effect and shall be binding upon the Trustee and the City. Section 9.02 Bonds Deemed Paid. 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 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 Section 9.01. 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 ORS weee26049WO.6 68 pursuant to this Section 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 Section 9.01 (except that the obligations under the Indenture set forth in Section 9.01(b) and the giving of the notices of the redemption of Bonds to be redeemed as provided in Article IV shaU 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 Article IV, (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 this Section 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 clause (3) of this Section 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 clause (3) of this Section 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 this Section end notify the Owner of such Bond that such Bond must be surrendered as provided in Section 9.03. The receipt of any notice required by this Section shall not be a condition precedent to any Bond being deemed paid in accordance with this Section 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 this Section. Neither Defeasance Securities nor moneys deposited with an Escrow Agent pursuant to this Section, nor principal or interest payments on any such Defeasance Securities, shall be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal amount of, and any redemption premiums on, said Bonds and the interest thereon; provided that any cash received from principal or interest payments on such Defeasance Securities deposited with an Escrow Agent, (A) to the extent such cash shall not be required at any time for such payment, as evidenced by an Accountant's Certificate, shall be paid over upon the written direction of an Authorized City Representative, including a transfer to the City free and clear of any trust, lien, pledge or assignment securing said Bonds, and (B) to the extent such cash shall be required for such payment at a later date, shall, to the extent practicable, at the written direction of an Authorized City Representative, be reinvested in Defeasance Securities maturing at times and in amounts, which together with the other funds to be available to the Escrow Agent for such purpose, shall be sufficient to pay when due the principal amount of, and any redemption premiums on, said Bonds and the interest to become due on said Bonds on and prior to such OHS West:260486430.6 69 redemption date, maturity date or other payment 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. Prior to the defeasance of any Bonds bearing interest at a variable rate becoming effective under this Section, the Trustee shall have received a Rating Confirmation from each Rating Agency. Section 9.03 Defessance of Portion of Bond. Subject to the provisions of Section 3.01(g), if there shall be deemed paid pursuant to Section 9.02 less than all of the fail 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 Section 9.02 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 terns, and in any of the Authorized Denominations. Section 9.04 Discharge of Liability on Bonds. 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 (as provided in Section 9.01 or Section 9.02, ds applicable) 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 shalt have been given as in Article IV provided 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 Sections 6.12 and 9.02; provided that no Bond which constitutes Tender Indebtedness shall be deemed to be paid within the meaning of the Indenture moess 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. OHS War:2604a6QU 70 ARTICLE X EVENTS OF DEFAULT; REMEDIES Section 10.01 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; (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. Section 10.02 Accounting and Examination of Records After Default. (a) The City covenants that if an Event of Default shall have happened and shall not have been remedied, the books of record and accounts of the City and all other records relating to the Electric System shall at all times be subject to the inspection and use of the Trustee and of its agents and attorneys. (b) The City covenants that if an Event of Default shall have happened and &ball not have been remedied, the City, upon demand of the Trustee, shall account, as if it were die trustee of an express trust, for all Revenues and other moneys, securities and funds pledged or held under the Indenture for such period as shall be stated in such demand. Section 10.03 Application of Revenues and Other Moneys After Default. (a) Notwithstanding anything to the contrary contained in the Indenture, including Article V of this Indenture, the City covenants that if an Event of Default shall happen and shall not have been remedied, the City, upon the demand of the Trustee, shall cause control of amounts in the Light and Power Fund to be transferred to the Trustee and shall cause to be paid over to the Tmstee by the first Business Day of each month, all Revenues received by the City with respect to the preceding month. oHS wan26049&30.e 71 (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 this Article, 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. Thud: 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 flmd for other Outstanding Parity Obligations shall equal the amount required to be on deposit in such debt service reserve timd under the applicable Issuing Instrument; provided that that in the event the amound 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 Erred for other Outstanding Parity Obligations ratably (based on the respective amounts to be paid), without any discrimination or preferences. OHS WM26P SWO.6 72 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 Inshument 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 M. (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 Trusted 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. Section 10.04 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. Section 10.05 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 OHS wen:26M6430.e 73 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 wafer. Section 10.06 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 (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 Gen 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. (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 famished with reasonable security and indemnity, shall be under no obligation to, institute and maintain such suits and proceedings as it may be advised shaft be necessary or expedient to prevent any impainnent 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 OHS west:260486430.6 74 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. Section 10.07 Restriction on Owner's Action. (a) Except as otherwise provided in paragraph (b) of this Section, 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 this Article, 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 Section 11.04. (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 this Master 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. Section 10.08 Remedies Not Exclusive. No remedy by the teens 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 this Master 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. OHS WU 260486430.6 75 Section 10.09 Effect of Waiver and Other Circumstances. (a) No delay or omission of the Trustee or any Owner of a Bond to exercise any right or power arising upon the happening of an Event of Default shall impair any right or power or shall be construed to be a waiver of any such Event of Default or be an acquiescence therein; and every power and remedy given by this Article to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may he deemed expedient by the Trustee or by the Owner; of the Bonds. (b) The Owners of not less than sixty percent in principal amount of the Bonds at the time Outstanding, or their attorneys -in -fact duly authorized, may on behalf of the Owners of all of the Bonds, waive any Event of Default and its consequences. No such waiver shall extend to any subsequent or Event of Default or impair any right consequent thereon unless the provisions of this subsection (b) have been satisfied with respect to such subsequent Event of Default. Section 10.10 Notice of Default. The Trustee shall, within thirty (30) days after obtaining knowledge theroof, 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. ARTICLE M MISCELLANEOUS Section 11.01 Execution of Documents and Proof of Ownership. Any request, direction, consent, or other instrument in writing required or permitted by the Indenture to be signed or executed by Owners of Bonds may be in any number of concurrent instruments of similar tenor, and may be signed or executed by such Owners in person or by their attorneys appointed by an instrument in writing for that purpose, or by any bank, trust company or other depository for such Bonds. Proof of the execution of any such instrument, or of any instrument appointing any such attorney, and of the ownership of Bonds shall be sufficient for any purpose of the Indenture (except as otherwise provided in the Indenture), if made in the following manner: (a) The fact and date of the execution by any Owner or his or her attorney of any such instrument and of any instrument appointing any such attorney, may be provided by a signature guarantee of any bank or trust company located within the United States of America. When any such instrument is executed by an officer of a corporation or association or a member of a partnership on behalf of such corporation, association or partnership, such signature guarantee shall also constitute sufficient proof of his authority. (b) As to any Bond, the Person in whose name the same shall be registered in the Bond Register shall be deemed and regarded as the absolute owner for all purposes. None of the City, the Trustee or any Paying Agent shall be affected by any notice to the contrary. OHS West 260486430 6 76 (c) Nothing contained in the Indenture shall be construed as limiting the City or the Trustee to such proof, it being intended that the City or the Trustee may accept any other evidence of the matters stated in this Section which the City or the Trustee may deem sufficient. Any request or consent of the Owner of any Bond shall bind every future Owner of the same Bond in respect to anything done or suffered to be done by the City or the Trustee in pursuance of such request or consent. Section 11.02 Severabi ity. If any covenant, agreement or provision, or any portion thereof, contained in the Indenture, or the application thereof to any Person or circumstance, is held to be unconstitutional, invalid or unenforceable, the remainder of the Indenture, and the application of any such covenant, agreement or provision, or portion thereof, to other Persons or circumstances, shall be deemed severable and shall not be affected thereby, and the Indenture and the Bonds shall remain valid, and the Owners of the Bonds shall retain all valid rights and benefits accorded to them under the Indenture, the Charter, and the Constitution and statutes of the State. Section 11.03 General Authorization, The Authorized City Representatives, each acting singly, are hereby respectively authorized to do and perform from time to time any and all acts and things consistent with the Indenture necessary or appropriate to carry the same into effect. Section 11.04 Moneys Held for Particular Bonds. Except as otherwise provided in the Supplemental Indenture authorizing a Series of Bonds, the amounts held by the Trustee, any Paying Agent or any Escrow Agent for the payment of principal, premium if any, Purchase Price or interest due on any date with respect to particular Bonds of such Series shall, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Owners of the Bonds entitled thereto. None of the City, the Trustee, any Paying Agent or any Escrow Agent shall be liable to any Owner for interest on amounts so held in trust. Section11.05 Credit Providers. (a)Except as limited by Section 7.01(b), 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 this Master 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 Iustrument relates in lieu of such Owners. (b) All provisions under this Master 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 htstminent 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 OHS Wev2&KW306 77 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 this Master Indenture, any 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. (c) All provisions in the Indenture relating to the rights of a Credit Provider shall be of no force and effect if there is no Credit Support Instrument in effect and all amounts owing to the Credit Provider under the Credit Support Agreement have been paid. Section 11.06 Reserve Financial Guaranty Providers. (a) All provisions under this Master 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 (u) 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 this Master 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 Provider. (b) 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 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. Section 11.07 No Recourse on Bonds. Neither the members of the City nor the officers or employees of the City shalt be individually liable on the Bonds or in respect of any undertakings by the City under this Master Indenture, any Supplemental Indenture or any Bond. Section 11.08 Unclaimed Moneys. Anything in this Master 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 Ours west 26648W06 78 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. Section 11.09 Holidays. If the date for making any payment or the last date for performance of any act or the exercising of any right, as provided in any Indenture, shall not be a Business Day, such payment may be made or act performed or right exercised on the next succeeding Business Day, with the same force and effect as if done on the nominal date provided in the Indenture, and, unless otherwise specifically provided in a Supplemental Indenture, no interest shall accrue for the period after such nominal date. Section 11.10 Governing Law. The Indenture and each Bond 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 11.11 Headings Not Binding. The headings in this Master indenture are for convenience only and in no way define, limit or describe the scope or intent of any provisions or sections of this Master Indenture. Section 11.12 Preservation and Inspection of Documents. All documents received by the Trustee, any Paying Agent or any Escrow Agent under the provisions of the Indenture shall be retained in its possession and shall be subject at all reasonable times to the inspection by the City, the Trustee, any Credit Provider and any Owner of an Outstanding Bond and their agents and their representatives, any of whom may make copies thereof. Section 11.13 Parties Interested. Nothing in the Indenture expressed or implied is intended or shall be construed to confer upon, or to give to, any Person, other than the City, the Trustee, each Paying Agent, each Escrow Agent, the Credit Providers, the Reserve Financial Guaranty Providers and the Owners of the Bonds, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation thereof; and all the covenants, stipulations, promises and agreements in the Indenture contained by the City shall be for the sole and exclusive benefit of the City, the Trustee, Each Paying Agent, each Escrow Agent, the Credit Providers, the Reserve Financial Guaranty Providers and the Owners of the Bonds. OHS West 26M4306 79 IN WITNESS WHEREOF, the City of Vernon has caused these presents to be signed in its name and on its behalf by its Mayor and attested by its City Clerk, and to evidence its acceptance of the trust hereby created, The Bank of New York Mellon Trust Company, N.A. has caused these presents to be signed in its name and on its behalf by an authorized officer, in each case all as of the date first above written. By: 9.�.csa�2.�lCw a. i . leonis C. Millburg, Nfayor A T: By: Manuela Giro i Clerk APPROVED AS TO FORM; By: ''E---- J ison, City Attorney THE BANK OF NEW YORK MEUON TRUST COMPANY, N.A., as Trustee Ull�vx000 ;r �. OHS Woo 1604864306 FIRST SUPPLEMENTAL INDENTURE OF TRUST between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Relating to City of Vernon Electric System Revenue Bonds, 2008 Taxable Series A Dated as of September 1, 2008 OHS Wat260486435.4 TABLE OF CONTENTS Page ARTICLE I AUTHORITY AND DEFINITIONS ................................................. :............. 2 Section 1.01. Supplemental Indenture of Trust......................................................... 2 Section 1.02. Authority for the First Supplemental Indenture of Trust ..................... 2 Section 1.03. Definitions............................................................................................ 2 Section 1.04. Interpretation........................................................................................5 ARTICLE II THE 2008 SERIES A BONDS........................................................................ 5 Section 2.01. Principal Amount and Designation; Conditions to Issuance ............... 5 Section 2.02. Terms of the 2008 Series A Bonds; Registration; Denominations; Payment of Principal and Interest ............................. 6 ARTICLE III REDEMPTION OF 2008 SERIES A BONDS ................................................ 6 Section 3.01. Terms of Redemption.......................................................................... 6 ARTICLE IV APPLICATION OF PROCEEDS.................................................................... 8 Section 4.01. Application of Proceeds of 2008 Series A Bonds ................................ 8 Section 4.02. 2008A Costs of Issuance Fund............................................................ 8 Section 4.03. 2008 Termination Payments Fund ....................................................... 9 Section 4.04. 2008 Conversion Costs Fund............................................................. 10 Section 4.05. 2008 Capital Improvements Fund ...................................................... I I ARTICLE V MISCELLANEOUS......................................................................................12 Section 5.01. Indenture to Remain in Effect............................................................12 Section5.02. Continuing Disclosure....................................................................... 13 Section 5.03. Notice to Rating Agencies.................................................................13 Section5.04. Notices...............................................................................................13 Section 5.05. Counterparts....................................................................................... 14 EXHIBIT A - FORM OF 2008 SERIES A BONDS................................................................. A-1 OHS WW26046435.4 _i. FIRST SUPPLEMENTAL INDENTURE OF TRUST THIS FIRST SUPPLEMENTAL INDENTURE OF TRUST, dated as of September 1, 2008, 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 hosts 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), including reimbursing the City for its payment of such Coats; 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 2008 Series A Bonds in order to provide moneys to finance the Costs of Capital Improvements by reimbursing the Electric System for amounts previously paid from the Light and Power Fund, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2008 Series A 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 First Supplemental Indenture, a valid and binding agreement for the security of the 2008 Series A Bonds authenticated and delivered hereunder, NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS FIRST 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 2008 Series A Bonds by the Owners thereof; and for other valuable consideration, the receipt whereof is hereby acknowledged, and in order to secure the payment of the principal of, Redemption Price, if any, and interest on the 2008 Series A Bonds according to their tenor and effect, and the performance and observance by the City of all the covenants and conditions in the Indenture and in the 2008 Series A Bonds contained on its part to be performed, it is agreed by and between the City and the Trustee as follows: OHS WWt:2604VA35A ARTICLE I Section 1.01. Supplemental Indenture of Trust. This First Supplemental Indenture is supplements) to the Master Indenture. Section 1.02. Autbority for the First Supplemental Indenture of Trust. This First Supplemental Indenture is entered into (a) pursuant to the Charter and Bond Ordinance and (b) in accordance with Article H and Article VII of the Master Indenture. Section 1.03. Definitions. (a) Except as otherwise defined by this First Supplemental indenture, all terms which are defined in Section 1.01 of the Master Indenture shall have the same meanings, respectively, in this First Supplemental Indenture as such terms are given in said Section 1.01 of the Master Indenture. (b) Additional Definitions. The following terms shall, with respect to the 2008 Series A Bonds and for all purposes hereof; have the meanings set forth below: "Authority" means the Vernon Natural Gas Financing Authority. "Authorized Denominations" means with respect to the 2008 Series A Bonds $5,000 and any integral multiple thereof. "Business Day" means any day of the year other than (a) a Saturday, (b) a Sunday, (c) any day which shall be in Los Angeles, California or New York, New York a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close, and (d) any day the city or cities in which the principal or other designated corporate office of the Trustee, is located are required or authorized to close. "Citibank Swap Agreement" means the ISDA Master Agreement, dated as of July 27, 2006, between the Authority and Citibank, N.A. New York, together with the Schedule to ISDA Master Agreement, the Credit Support Annex to the Schedule to ISDA Master Agreement and the Confirmation relating to the 2006 Bonds. "Comparable Treasury Issue" means, with respect to any redemption date for a particular 2008 Series A Bond, the US Treasury security or securities selected by the Independent Investment Banker which has an actual or interpolated maturity comparable to the remaining average life of the applicable 2008 Series A Bond to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to the remaining average life of the 2008 Series A Bond to be redeemed. "Comparable Treasury Price" means, with respect to any redemption date for a 2008 Sodas A Bond, (1) the average of the Reference Treasury Deal Quotations for such redemption date, after excluding the highest and lowest Reference Treasury Deal Quotations, or OHS waM6OU6435.4 -2- (2) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of September 1, 2008, between the City and the Trustee relating to the 2008 Series A Bonds. "Conversion Costs" means costs incurred by the City or the Authority in connection with the conversion of the 2006 Bonds to bonds bearing a fixed rate to maturity. "Delivery Date" means September 24, 2008. "First Supplemental Indenture" shall mean this First 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. "Independent Investment Banker" means that Reference Treasury Dealer appointed as such by the City. "Interest Payment Date" each January I and July 1 commencing January 1, 2009. "Make Whole Redemption Price" means a redemption price equal to the greater of (i) one hundred percent (100%) of the principal amount of the 2008 Series A Bonds to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2008 Series A Bonds to be redeemed (exclusive of interest accrued to the date fixed for redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 12.5 basis points), plus in each case, accrued and unpaid interest on the 2008 Series A Bonds being redeemed to the date fixed for redemption. "Morgan Stanley Swap Agreement" means the ISDA Master Agreement, dated as of July 2, 2004, between the City and Morgan Stanley Financial Services Inc., together with the Schedule to ISDA Master Agreement, the Credit Support Annex to the Schedule to ISDA Master Agreement and the Confirmations relating to the 2004 Bonds. "Principal Office" means, with respect to the Trustee, the designated corporate trust office of the Trustee in Los Angeles, which as of the date hereof is located at 700 South Flower Street, Suite 500, Los Angeles, CA 90017-4104, Attention: Corporate Trust Department, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. "Record Date" means, with respect to an Interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls, whether or not such day is a Business Day. "Reference Treasury Dealer" means RBC Capital Markets Corporation and its successor and three other firms, specified by the City from time to time, that are primary U.S. OHS waL26M6435.4 -3- Government securities dealers in the City of New York (each a "Primary Treasury Dealer"}; provided, however, that if any of them ceases to be a Primary Treasury Dealer, the City will substitute another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date for a particular 2008 Series A Bond, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the thud business day preceding such redemption date. "Sinking Fund histalhnent" means, with respect to the 2008 Series A Bonds maturing on July 1, 2018 the amount required by Section 3.01(c) hereof to be paid by the City on any single date for the retirement of such 2008 Series A Bonds and with respect to the 2008 Series A Bonds maturing on July 1, 2038 the.amount required by Section 3.01(e) hereof to be paid by the City on any single date for the retirement of such 2008 Series A Bonds. "Termination Payments" means: (i) the payments required to be made by the City in connection with the termination of the interest rate swap transactions entered into between the City and Morgan Stanley Financial Services Inc. in connection with the 2004 Bonds under the Morgan Stanley Swap Agreement; and (ii) the payments required to be made by the Authority in connection with the termination of the interest rate swap transactions entered into between the Authority and Citibank, N.A. New York. in connection with the 2006 Bonds under the Citibank Swap Agreement. "Treasury Rate" means, with respect to any redemption date for a particular 2008 Series A Bond, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated maturity of the Comparable Treasury Issue, assuming that the Comparable Treasury Issue is purchased on the redemption date for a price equal to the Comparable Treasury Price. "2004 Bonds" means the City's Electric System Revenue Bonds, 2004 Series A, the City's Electric System Revenue Bonds, 2004 Series B and the City's Electric System Revenue Bonds, 2004 Series D. "2006 Bonds" means the Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds, 2006 Series B and the Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds, 2006 Series C. "2008 Capital Improvements Fund" shall mean the 2008 Capital Improvements Fund established pursuant to Section 4.05 hereof. "2008 Conversion Costs Fund" shall mean the 2008 Series A Bonds Conversion Costs Fund established pursuant to Section 4.04 hereof. "2008A Costs of Issuance Fund" shall mean the 2008 Series A Bonds Costs of Issuance Fund established pursuant to Section 4.02 hereof. OHS Wect.20486435A -4- "2008 Series A Bonds" shall mean the City's Electric System Revenue Bonds, 2008 Taxable Series A Bonds authorized by Article II hereof. "2008 Termination Payments Fund" shall mean the 2008 Series A Bonds Termination Payments Fund established pursuant to Section 4.03 hereof. Section 1.04. Interpretation. (a) Unless the context otherwise indicates, defined terms shall include all variants thereof, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine or feminine gender is for convenience only and shall be deemed to mean and include the neuter, masculine. or feminine gender, as appropriate. (b) Headings of articles and sections herein and the table of contents hereof are solely for convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. (c) References herein to the Securities Depository shall include both the Securities Depository and any nominee of the Securities Depository in whose name the 200$ Series A Bonds may be registered. (d) Unless otherwise indicated, references herein to Articles and Sections shall be to the Articles and Sections of this First Supplemental Indenture. The words "herein," "hereof," "hereby," "hereunder" and other words of similar import refer to this First Supplemental Indenture as a whole and not to any particular Article, Section or subdivision hereof. ARTICLE II THE 2008 SERIES A BONDS Section 2.01. Principal Amount and Designation, Conditions to Issuance. (a) Pursuant to the provisions of the Master Indenture and this First 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 $43,765,000. 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, 2008 Taxable Series A Bonds." The 2008 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 2008 Series A Bond. (b) The 2008 Series A Bonds are issued for the purpose of providing moneys to finance the Costs of Capital Improvements by reimbursing the Electric System for amounts previously paid from the Light and Power Fund, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2008 Series A Bonds, OHS Wese26M86433.4 -5- (c) All (but not less than all) of the 2008 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 2008 Series A Bonds. Section 102. Terms of the 2008 Series A Bonds: Registration: Denominations: Payment of Principal and Interest (a) The 2008 Series A Bonds shall be issued as fully registered Bonds without coupons in Authorized Denominations. The 2008 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 2008 Series A Bonds of each maturity. Registered ownership of the 2008 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 2008 Series A Bonds shall be dated the Delivery Date. (c) The 2008 Series A Bonds shall mature on July 1 of the years, in the principal amounts, and shall bear interest at the rates, in each case as set forth below: MaturityDate (July 1) Principal Amount Interest Rate 2018 $ 3,265,000 7.400% 2038 40,500,000 8.590 ARTICLE III REDEMPTION OF 2008 SERIES A BONDS Section 3.01. Terms of Redemntion. (a) The 2008 Series A Bonds are subject to redemption prior to their stated maturity, at the option of the City and from any source of available funds, in whole or in part (in such amounts as may be specified by the City), on any date at a Redemption Price equal to the Make Whole Redemption Price, as calculated by an Independent Investment Banker, plus accrued but unpaid interest to the date fixed for redemption. (b) The 2008 Series A Bonds maturing on July 1, 201,8 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 July 1 on or after July 1, 2010, at a Redemption Price equal to the principal amount of the 2008 Series A Bonds to be redeemed, without premium. (c) The following shall be the Sinking Fund Installments for the 2008 Series A Bonds maturing on July 1, 2018. Such installments shall be due on July 1 of each of the years OHS Wat:26WS6435.4 - .6. 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 (July 1) Installment 2010 $ 265,000 2011 285,000 2012 305,000 2013 330,000 2014 355,000 2015 385,000 2016 415,000 2017 445,000 2018* 480,000 * Maturity (d) The 2008 Series A Bonds maturing on July 1, 2038 are also subject to mandatory redemption in part prior to their stated maturity from Sinlong Fund Installments established pursuant to subsection (e) of this Section on any July 1 on or after July 1, 2019, at a Redemption Price equal to the principal amount of the 2008 Series A Bonds to be redeemed, without premium (e) The following shall be the Sinking Fund installments for the 2008 Series A Bonds maturing on July 1, 2038, Such installments shall be due on July 1 of each of the years set forth in the following table in the respective amounts act forth opposite such years in said table: Sinking Fund Sinking Fund Installment Due Shrldng Fund Installment Due Sinking Fund Date (July 1) Installment Dttte (July 1) Installment 2019 $ 795,000 2029 $1,875,000 2020 865,000 2030 2,045,000 2021 945,000 2031 2,225,000 2022 1,025,000 2032 2,425,000 2023 1,120,000 2033 2,645,000 2024 1,220,000 2034 2,880,000 2025 1,330,000 2035 3,140,000 2026 1,450,000 2036 3,420,000 2027 1,580,000 2037 3,730,000 2028 1,720,000 2038* 4,065,000 * Maturity OHS West 26045435 4 -7- (f) The City shall provide the Trustee with revised sinking fund schedules in the event of partial redemption pursuant to this Section 3.01. ARTICLE IV APPLICATION OF PROCEEDS Section 4.01. Aanllcation of Proceeds of 2008 Series A Bonds. The proceeds of the sale of the 2008 Series A Bonds (equal to the principal amount thereof, less original issue discount of $4,146.55, less underwriter's discount of $346,559.42) shall be applied simultaneously with the delivery of the 2008 Series A Bonds, as follows: (a) There shall be deposited in the Debt Service Reserve Fund the sum of $4,240,768.25, representing the amount required so that the balance on deposit in such Fund shall equal the Debt Service Reserve Requirement calculated immediately after the authentication and delivery of the 2008 Series A Bonds; (b) There shall be deposited in the 2008A Costs of Issuance Find the sum of $500,000.00; (c) The City represents and warrants that there has previously been expended from the Light and Power Fund an amount not less than $38,673,525.78 which has not been financed or otherwise reimbursed for the Costs of Capital Improvements to distribution and interconnection facilities of the Electric System. The City farther represents and warrants that such facilities have a book value to the Electric System of not less than such amount. The $38,673,525.78 net proceeds of the 2008 Series A Bonds not deposited in the Debt Service Reserve Pond or the 2008A Costs of Issuance Fund are hereby deemed to be applied as a reimbursement to the Electric System for the previous payment of the Costs of such Capital Improvements to distribution and interconnection facilities of the Electric System. The City hereby directs that such reimbursement be applied as follows: (i) There shall be deposited in the 2008 Termination Payments Fund the sum of $36,806,436.44; and (ii) There shall be deposited in the 2008 Conversion Costs Fund the sum of $1,867,089.34. Section 4.02. 2008A Costs oflssua= Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2008 Series A Bonds Costs of Issuance Fund." Money deposited in said fund shall be used to pay Costs of Issuance with respect to the 2008 Series A Bonds as provided in this Section. (b) The Trustee shall make payments from the 2008A 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 teams and conditions set forth in this subsection. OHS Wat26M6435.4 -8- Before any such payment from the 2008A 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 2008A Costs of Issuance Fund and that no part of such payment shall be applied to any item which has previously been paid as a Costs of Issuance of the 2008 Series A Bonds. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2008A Costs of Issuance Fund to the payment of the Costs of Issuance of the 2008 Series A Bonds identified in the requisition relating to such moneys. Each such requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have 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 2008A Costs of Issuance Fund, and after payment from the 2008A Costs of Issuance Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.02(b) hereof, the Trustee shall transfer any moneys remaining in the 2008A Costs of Issuance Fund to the 2008 Capital Improvements Fund. Upon such transfer the Trustee shall close the 2008A Costa of Issuance Fund. (d) Moneys held in the 2008A Costs of Issuance Fund may, be invested and reinvested to the fullest extent practicable in Permitted Investments which mature not Iater than such times as shall be necessary to provide moneys when needed for payments to be made Prom the 2008A Costs of Issuance Fund. Any investment earnings on moneys on deposit in the 2008A Costs of Issuance Fund shall be deposited in the 2008A Costs of Issuance Fund and be used in the same manner as other amounts on deposit in the 2008A 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 the2008A Costs of Issuance Fund shall be applied to the payment of Bond debt service when due. Section 4.03. 2008 Termination Payments Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2008 Series A Bonds Termination Payments Fund." Money deposited in said fund shall be used to pay Termination Payments as provided in this Section. (b) The Trustee shall make payments from the 2008 Termination Payments 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 2008 Termination Payments Fund shall be made, OHS weat:26W 643s.4 -9- 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 2008 Termination Payments Fund and that no part of such payment shall be applied to any item which has previously been paid as a Termination Payment. 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 2008 Termination Payments Fund to the payment of the Termination Payments 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 2008 Termination Payments Fund, and after payment from the 2008 Termination Payments Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.03(b) hereof, the Trustee shall transfer any moneys remaining in the 2008 Termination Payments Fund to the 2008 Capital Improvements Fund. Upon such transfer the Trustee shall close the 2008 Termination Payments Fund. (d) Moneys held in the 2008 Termination Payments 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 2008 Termination Payments Fund. Any investment earnings on moneys on deposit in the 2008 Termination Payments Fund shall be deposited in the 2008 Termination Payments Fund and be used in the same manner as other amounts on deposit in the 2008 Termination Payments Fund (a) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2008 Termination Payments Fund shall be applied to the payment of Bond debt service when due. Section 4.04. 2008 Conversion Costs Fund (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2008 Series A Bonds Conversion Costs Fund." Money deposited in said fund shall be used to pay Conversion Costs as provided in this Section. (b) The Trustee shall make payments from the 2008 Conversion Costs 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 2008 Conversion Costs Fund shall be made, there shall be OHS Wwt26646435 4 -10- 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 2008 Conversion Costs Fund and that no part of such payment shall be applied to any item which has previously been paid as a Conversion Cost. 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 spy 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 2008 Conversion Costs Fund to the payment of the Conversion Costs 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 2008 Conversion Costs Fund, and after payment from the 2008 Conversion Costs Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.04(b) hereof, the Trustee shall transfer any moneys remaining in the 2008 Conversion Costs Fund to the 2008 Capital Improvements Fund Upon such transfer the Trustee shall close the 2008 Conversion Costs Fund (d) Moneys held in the 2008 Conversion Costs 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 fium the 2008 Conversion Costs Fund. Any investment earnings on moneys on deposit in the 2008 Conversion Costs Fund shall be deposited in the 2008 Conversion Costs Fund and be used in the same manner as other amounts on deposit in the 2008 Conversion Costs Fund. (e) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2008 Conversion Costs Fund shall be applied to the payment of Bond debt service when due. Section 4.05. 2008 Capital ImMvements Fpad. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2008 Capital Improvements Fund." Money deposited in said fund shall be used to pay the Costs of Capital Improvements as provided in this Section. There shall be deposited in the 2008 Capital Improvements Fund the amounts to be deposited therein pursuant to this First Supplemental Indenture and such other amounts as are delivered to the Trustee for deposit therein. (b) The Trustee shall make payments from the 2008 Capital Improvements Fund, except payments and withdrawals pursuant to subsection (e) of this Section, in the off War.26a4a643s,1 -11- 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 2008 Capital Improvements 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 2008 Capital Improvements Fund and that no part of such payment shall be applied to any item which has previously been paid as a Cost of a 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 2008 Capital Improvements Fund to the payment of the Costs of the Capital Improvements 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 tents tbereof. (c) Upon the receipt by the Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2008 Capital improvements Fund, and after payment from the 2008 Capital Improvements Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.05(b) hereof, the Trustee shall transfer any moneys remaining in the 2008 Capital Improvements Fund to such account or accounts in the Debt Service Fund as directed by an Authorized City Representative. Upon such transfer the Trustee shall close the 2008 Capital Improvements Fund. (d) Moneys held in the 2008 Capital Improvements 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 2008 Capital Improvements Fund. Any investment earnings on moneys on deposit in the 2008 Capital Improvements Fund shall be deposited in the 2008 Capital Improvements Fund and be used in the same manner as other amounts on deposit in the 2008 Capital Improvements Fund. (e) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2008 Capital Improvements Fund shall be applied to the payment of Bond debt service when due. ARTICLE V MISCELLANEOUS Section 5.01. Indenture to Remain in EffeM. Save and except as supplemented by this First Supplemental Indenture, the Master Indenture shall remain in full force and effect. OHS west 260486435 4 -12- Section 5.02. Condauine Diselosure The City hereby covenants and agrees to comply with and cant' out all the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Indenture, failure of the City to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default and the Trustee shall have no right to accelerate amounts due under the Indenture as a result thereof, provided, however, that the Trustee, upon receipt of indemnification reasonably satisfactory to it, and the Owners of not less than 25% in principal amount of the Outstanding 2008 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 5.03. 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 2008 Series A Bonds are Outstanding, (c) any material amendments to the Master Indenture or this First Supplemental Indenture, (d) any acceleration of the 2008 Series A Bonds pursuant to Section 10.04 of the Indenture, (g) any redemption in whole of the 2008 Series A Bonds. Section 5.04. Notices. Unless otherwise provided herein, all notices, certificates or other communications hereunder shall be deemed sufficiently given upon actual receipt thereof when received by the City, the Trustee, and the Rating Agencies, as the case may be, at the respective address provided pursuant to this Section or, if mailed by first class mail, postage prepaid, addressed to the appropriate address provided pursuant to this Section, six Business Days after deposit in the United States mail, the initial address for notices, counterparts and other communications hereunder is as follows: If to the City: City of Vernon 4305 Santa Fe Avenue Vernon, CA 90058 Attention: City Attorney If to the Trustee: The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, CA 90017 Attention: Corporate Trust Department If to S&P, to: Standard & Poor's Ratings Services 55 Water Street, 38th Floor New York, New York 10041 Attention: Municipal Structured Group If to Moody's, to: Moody's Investors Service, Inc. 7 World Trade Center at 250 Greenwich Street New York, NY 10007 Attn: Public Finance Municipal Structure Group OHS WeDt26M64354 -13- 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 givers 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 5.05. Counterparts. This First 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. [Remainder of Page Intentionally Left Blank] OHS Wet 26M6435 4 -14- IN WITNESS WHEREOF, City of Vernon has caused these presents to be signed in its name and on its behalf by its Mayor and attested by its City Clerk and to evidence its acceptance of the trusts hereby created, the Trustee has caused these presents to be signed in its name and on its behalf by one of its authorized officers, all as of the first day of September, 2008. C IVAC&Iid:iN90 By: uoG�VcG� Leonis C. Malburg, Mayor ATTEST: By Manuela Giron, Ci Clerk APPROVED AS TO FORM: THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Authorized"Officer OHS WMk26D486435 4 EXHIBIT A FORM OF 2008 SERIES A BONDS [bracketed language applies only to 2008 Series A Bonds to be registered in the name of CEDE & CO.] [UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC'), TO THE CITY OF VERNON OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] CITY OF VERNON ELECTRIC SYSTEM REVENUE BONDS, 2008 TAXABLE SERIES A No. R- $ Interest Rate Dated Date Maturity Date CUSIP No. September 24, 2008 Jnly 1, 20_ 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 terns used herein shall have the meanings given such term 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 fbr 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 corporate trust office of The Bank of New York Mellon Trust ous WM260996435.4 A-1 Company, N.A., in Los Angeles, California, as trustee under the Indenture (together with any successor trustee under the Indenture, 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 2008 Series A Bonds may, at any time prior to a Record Date, give the Trustee written instructions for payment of such interest on each succeeding Interest Payment Date for such 2008 Series A Bonds by wire transfer or by deposit to an account within the United States of America. This Bond is one of a duly authorized issue of bonds of the City designated as "City of Vernon, Electric System Revenue Bonds" (the "Bonds') and of a Series of the Bonds designated as "Electric System Revenue Bonds, 2008 Taxable Series A" (the "2008 Series A Bonds"). The 2008 Series A Bonds are issued pursuant to the Charter and the Bond Ordinance. The 2008 Series A Bonds have been issued in the aggregate principal amount of $43,765,000. The 2008 Series A Bonds are issued under, and, together with all other Bonds issued and outstanding thereunder, are equally and ratably secured by a pledge of the Trust Estate under, and entitled to the protection given by, the Indenture of Trust, dated as of September 1, 2008 between the City and the Trustee, as amended and supplemented by the First Supplemental Indenture of Trust, dated as of September 1, 2008 between the City and the Trustee (said Indenture of Trust, as so amended and 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 2008 Series A Bonds, the limitations on such rights and remedies and the terms and conditions upon which Bonds are issued and may be issued thereunder. 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 terns of the Indenture. This Bond is a special obligation of the City and the principal of, Redemption Price, if any, and interest on this Bond are payable solely from the Net Revenues, the amounts in 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 w+s wat:26M6495.4 A.2 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 themembers 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 2008 Series A Bonds were issued for the purpose of providing moneys to finance the Casts of Capital Improvements by reimbursing the Electric System for amounts previously paid from the Light and Power Fund, to fund the Debt Service Reserve Fund. and to pay the Costs of Issuance of the 2008 Series A Bonds. Interest on the 2008 Series A Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The term "Interest Payment Date" means each January 1 and July I, commencing January 1, 2009. The term "Record Date" means, with respect to an interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls. The 2008 Series A Bonds are subject to redemption at the option of the City from any source of available funds, in whole or in part (in such amounts as may be specified by the City), on any date at a Redemption Price equal to the Make Whole Redemption Price. The 2008 Series A Bonds maturing on July 1, 2018 are subject to mandatory redemption, in part, on any July 1 on and after July 1, 2010, at a Redemption Price equal to the principal amount of such 2008 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2008 Series A Bonds in the Indenture. The 2008 Series A Bonds maturing on July 1, 2038 are subject to mandatory redemption, in part, on any July 1 on and after July 1, 2019, at a Redemption Price equal to the principal amount of such 2008 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2008 Series A Bonds in the Indenture If less than all of the 2008 Series A Bonds of a maturity are to be redeemed, the particular 2008 Series A Bonds of such maturity to be redeemed shall be selected as provided in the Indenture. OHS Wat26048643S.4 A-3 The 2008 Series A Bonds are payable upon redemption upon surrender thereof at the Principal Office of the Trustee. The Trustee shall give notice, in the name of the City, of the redemption of 2008 Series A Bonds, which notice shall be mailed, by first class mail, postage prepaid, not more than sixty (60) nor less than thirty (30) days before the Redemption Date to the Owners of any 2008 Series A Bonds to be redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice shall specify the Series and maturity of the Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption shall be payable and, if less than all of the 2008 Series A Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2008 Series A Bonds so to be redeemed, and, in the case of 2008 Series A Bonds to be redeemed in part only, such notice shall also specify the respective portions of the principal amount thereof to be redeemed. Subject to the provisions of the next paragraph, such notice shall further state that on such redemption date there shall become due and payable upon each 2008 Series A Bond to be redeemed the Redemption Price thereof (or the Redemption Price of the specified portion of the principal amount thereof to be redeemed in the case of a 2008 Series A Bond to be redeemed in part only) and that from and after such date interest on such 2008 Series A Bond (or the portion of such 2008 Series A Bond to be redeemed) shall cease to accrue and be payable. In the event that funds required to pay the Redemption Price of 2008 Series A Bonds to be redeemed at the option of the City are not on deposit with the Trustee at the time the Trustee gives notice of redemption to the Owners of such 2008 Series A Bonds, such notice shall state that such redemption is conditional upon the receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys sufficient to pay the Redemption Price of the 2008 Series A Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the City shall not be required to redeem such 2008 Series A Bonds. In the event a notice of redemption of 2008 Series A Bonds contains such a condition and such moneys are not so received, the redemption of 2008 Series A Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of 2008 Series A Bonds pursuant to the conditional notice of redemption. Receipt of such notice of redemption shall not be a condition precedent to the redemption of 2008 Series A Bonds and failure of any Owner of a 2008 Series A Bond to receive any such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of 2008 Series A Bonds. To the extent and in the manner permitted by the terms of the Indenture, the provisions of the Indenture, or any indenture amendatory thereof or supplemental thereto, may be modified or amended by the City with, in certain cases, the written consent of the Owners of at least a majority in principal amount of the Bonds then Outstanding under the Indenture; and, in case less than all of the Bonds would be affected thereby, with such consent of the Owners of a majority in principal amount of the affected Outstanding Bonds; provided, however, that, if such modification or amendment will, by its terms, not take effect so long as any Bonds of any specified like Series and maturity remain Outstanding, the consent of the owners of such Bonds shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of OHS West260486435.4 A-4 the calculation of Outstanding Bonds for purposes of such consent. No such modification or amendment shall permit a change in the terms of any Sinking Fund installment or the terms of redemption or maturity of the principal of any Bond or of any installment of interest thereon or a reduction in the principal amount or Redemption Price thereof or in the rate of interest thereon without the consent of the Owner of such Bond, or shall reduce the percentages or otherwise affect the classes of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or shall change or modify any of the rights or obligations of the Trustee or of any Paying Agent without its written assent thereto. The Indenture may also be amended or supplemented without the necessity of the consent of the Owners of the 2008 Series A Bonds for any one or more of the purposes specified in the Indenture. . This Bond is transferable, as provided in the Indenture, only upon the Bond Register kept for that purpose at the Principal Office of the Trustee, by the registered Owner hereof, or by his duly authorized attorney, upon surrender of this Bond together with a written instrument of transfer satisfactory to the Trustee duly executed by the registered Owner or his duly authorized attorney. Thereupon and upon payment of the charges prescribed in the Indenture a new registered 2008 Series A Bond or 2008 Series A Bonds, without coupons, and for the same maturity and aggregate principal amount, shall be issued to the transferee in exchange therefor as provided in the indenture. The City, the Trustee and any Paying Agent may deem and treat the Person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving payment o4 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 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 that 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 Band 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 manna and that the 2008 Series A Bonds, together with all other indebtedness of the City, comply in all respects with the applicable laws of the State of California, including the City Charter and the Bond Ordinance. This Bond shall not be entitled to any benefit under the Indenture or be valid or become obligatory for any purpose until this Bond shall have been authenticated by the execution by the Trustee of the Trustee's Certificate of Authentication hereon. OHS WW26M6435A A-5 IN WITNESS WHEREOF, CITY OF VERNON has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Mayor and the seal (or a facsimile thereof) to be hereunto affixed, imprinted, engraved or otherwise reproduced and attested by the manual or facsimile signature of its City Clerk, as of the Dated Date specified above. [SEAL] CITY OF VERNON Ln Mayor ATTEST: City Clerk OHS WwrUM6435 4 A-6 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 2008 Series A Bonds delivered pursuant to the within mentioned Indenture. Dated: September24,2008 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Authorized Signatory 0H$ Wwt26M64354 A-7- ASSIGNMENT FOR VALUE RECEIVED the undersigned sells, assigns and transfers unto (Name, Address and Tax Identification or Social Security Number of Assignee) the within Bond of the City of Vernon and does hereby irrevocably constitute and appoint attorney to transfer the said Bond on the books kept for registration thereof with full power of substitution in the premises. Dated: 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. OHS WOU26M6435.4 A-8 SECOND SUPPLEMENTAL INDENTURE OF TRUST between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Dated as of May 1, 2009 Relating to City of Vernon Electric System Revenue Bonds, 2009 Series A OHS Wwt.260328941.4 TABLE OF CONTENTS Page ARTICLE I AUTHORITY AND DEFINITIONS............................................................... 2 Section 1.01. Supplemental Indenture of Trust......................................................... 2 Section 1.02. Authority for the Second Supplemental Indenture of Trust ................. 2 Section1.03. Definitions............................................................................................ 2 Section1.04. Interpretation........................................................................................ 4 ARTICLE II THE 2009 SERIES A BONDS........................................................................ 4 Section 2.01. Principal Amount and Designation; Conditions to Issuance ............... 4 Section 2.02. Terms of the 2009 Series A Bonds; Registration; Denominations; Payment of Principal and Interest ............................. 5 ARTICLE III REDEMPTION OF THE 2009 SERIES A BONDS ....................................... 6 Section 3.01. Terms of Redemption.......................................................................... 6 ARTICLE IV APPLICATION OF PROCEEDS.................................................................... 6 Section 4.01. Application of Proceeds of 2009 Series A Bonds ................................ 6 Section 4.02. 2009 Costs of Issuance Fund............................................................... 7 ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY ................................... 8 Section 5.01. Arbitrage Covenants............................................................................ 8 ARTICLE VI MISCELLANEOUS...................................................................................... 8 Section 6.01. Indenture to Remain in Effect.............................................................. 8 Section 6.02. Continuing Disclosure......................................................................... 9 Section 6.03. Notice to Rating Agencies................................................................... 9 Section6.04. Notices................................................................................................. 9 Section6.05. Counterparts....................................................................................... 10 EXHIBIT A FORM OF 2009 SERIES A BONDS.......................................................... A-1 OHS West:260529941.4 -1- SECOND SUPPLEMENTAL INDENTURE OF TRUST THIS SECOND SUPPLEMENTAL INDENTURE OF TRUST, dated as of May 1, 2009, is entered into by and between the City of Vernon (the "City"), a municipal corporation and chartered city of the State of California and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), a 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 WHEREAS, the Cost of a Capital Improvements under the Indenture includes all costs of acquiring such Capital Improvement permitted under the Bond Ordinance; and WHEREAS, under the Bond Ordinance the costs of a Capital Improvement includes refinancing any existing indebtedness relating to such Capital Improvement; and WHEREAS, the Master Indenture authorizes the City and the Trustee to enter into Supplemental Indentures to provide for the issuance of Bonds; and WHEREAS, pursuant to the Supply Agreement the City has acquired the Gas Supply as a Capital Improvement to the City's Electric System; and WHEREAS, as consideration for the transfer of the Gas Supply to the City under the Supply Agreement, the City is obligated to make payments to the Authority sufficient to pay the principal of and interest on the Authority Bonds; and WHEREAS, the City desires to issue its 2009 Series A Bonds in order to provide moneys to refinance all of the indebtedness of the City represented by its obligation to pay the principal of and interest on the Authority Bonds, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds; and WHEREAS, the refinancing of all of the indebtedness of the City represented by its obligation under the Supply Agreement to pay the principal of and interest on the Authority Bonds is to be accomplished by applying a portion of the proceeds of the 2009 Series A Bonds to the redemption of Authority Bonds; and WHEREAS, the City has determined that all acts and things have been done and performed which . are necessary to make the Indenture, as supplemented by this Second Supplemental Indenture, a valid and binding agreement for the security of the 2009 Series A Bonds authenticated and delivered hereunder, OHS Westd60528941.4 NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS SECOND SUPPLEMENTAL INDENTURE OF TRUST WITNESSETH: That, in consideration of the premises, the acceptance by the Trustee of the trusts hereby created and originally created by the Master Indenture, the mutual covenants herein contained and the purchase and acceptance of the 2009 Series A Bonds by the Owners thereof, and for other valuable consideration, the receipt whereof is hereby acknowledged, and in order to secure the payment of the principal of, Redemption Price, if any, and interest on the 2009 Series A Bonds according to their tenor and effect, and the performance and observance by the City of all the covenants and conditions in the Indenture and in the 2009 Series A Bonds contained on its part to be performed, it is agreed by and between the City and the Trustee as follows: ARTICLE I AUTHORITY AND DEFINITIONS Section 1.01. Supplemental Indenture of Trust This Second Supplemental Indenture is supplemental to the Master Indenture, Section 1.02. Authority for the Second cnnntPmPut 1 Indenture of Trust. This Second Supplemental Indenture is entered into (a) pursuant to the Charter and Bond Ordinance and (b) in accordance with Article 11 and Article VII of the Master Indenture. Section 1.03. Definitions. (a) Except as otherwise defined by this Second Supplemental Indenture, all terms which are defined in Section 1.01 of the Master Indenture shall have the same meanings, respectively, in this Second Supplemental Indenture as such terms are given in said Section 1.01 of the Master Indenture. (b) Additional Definitions. The following terms shall, with respect to the 2009 Series A Bonds and for all purposes hereof, have the meanings set forth below: "Authority" means the Vernon Natural Gas Financing Authority. "Authority Bonds" means the Vernon Natural Gas Financing Authority Variable Rate Revenue Bonds (Vernon Gas Project), 2006 Series A, 2006 Series B and 2006 Series C. "Authorized Denominations" means with respect to the 2009 Series A Bonds $5,000 and any integral multiple thereof. "Business Day" means any day of the year other than (a) a Saturday, (b) a Sunday, (c) any day which. shall be in Los Angeles, California or New York, New York a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close, and (d) any day the city or cities in which the principal or other designated corporate office of the Trustee, is located are required or authorized to close. 0148 We8L:260528941.4 -2- "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of May 1, 2009, between the City and the Trustee relating to the 2009 Series A Bonds. "Delivery Date" means May 13, 2009. "First Supplemental Indenture" shall mean the First Supplemental Indenture of Trust, supplementing the Master Indenture, dated as of September 1, 2008, between the City and the, Trustee. "Gas Supply" means the natural gas acquired by the City pursuant to the Supply Agreement. "Interest Payment Date" each February 1 and August 1 commencing August 1, 2009. "Principal Office" means, with respect to the Trustee, the principal corporate trust office of the Trustee in Los Angeles, which as of the date hereof is located at 700 South Flower Street, Suite 500, Los Angeles, CA 90017-4104, Attention: Corporate Trust Department, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. "Record Date" means, with respect to an Interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls, whether or not such day is a Business Day. "Second Supplemental Indenture" shall mean this Second Supplemental Indenture of Trust, supplementing the Master Indenture, as the same may be amended and supplemented in accordance with the provisions of the Master Indenture, "Sinking Fund Installment" means, with respect to the 2009 Series A Bonds maturing on August 1, 2021 the amount required by Section 3.01(c) hereof to be paid by the City on any single date for the retirement of such 2009 Series A Bonds. "Supply Agreement" means the Natural Gas Purchase Agreement, dated as of June 1, 2006, between the City and the Authority. "Tax Certificate" means the Tax Certificate executed by the City at the time of execution and delivery of the 2009 Series A Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. "2009 Costs of Issuance Fund" shall mean the 2009 Series A Bonds Costs of Issuance Fund established pursuant to Section 4.02. OHS wesr.260528941.4 -3- "2009 Escrow Agreement" shall mean the Escrow Agreement, dated as of May 1, 2009, between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee for the Authority Bonds. "2009 Escrow Fund" shall mean the Escrow Fund established pursuant to the Escrow Agreement. "2009 Series A Bonds" shall mean the City's Electric System Revenue Bonds, 2009 Series A Bonds authorized by Article II hereof. Section 1.04. Interpretation. (a) Unless the context otherwise indicates, defined terms shall include all variants thereof, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine or feminine gender is for convenience only and shall be deemed to mean and include the neuter, masculine or feminine gender, as appropriate. (b) Headings of articles and sections herein and the table of contents hereof are solely for convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. (c) References herein to the Securities Depository shall include both the Securities Depository and any nominee of the Securities Depository in whose name the 2009 Series A Bonds may be registered. (d) Unless otherwise indicated, references herein to Articles and Sections shall be to the Articles and Sections of this Second Supplemental Indenture. The words "herein," "hereof," "hereby," "hereunder" and other words of similar import refer to this Second Supplemental Indenture as a whole and not to any particular Article, Section or subdivision hereof, ARTICLE H THE 2009 SERIES A BONDS Section 2.01. Principal Amount and Desienation: Conditions to Issuance. (a) Pursuant to the provisions of the Master Indenture and this Second Supplemental Indenture and the provisions of the Charter and the Bond Ordinance, a Series of Bonds entitled to the benefit, protection and security of such provisions are hereby authorized in the aggregate principal amount of $419,400,000. Such Bonds shall be designated as, and shall be distinguished from the Bonds of all other Series by the title, "City of Vernon Electric System Revenue Bonds, 2009 Series A." The 2009 Series A Bonds shall be in substantially the form attached hereto as Exhibit A with such variations and omissions as are necessary to reflect the particular terms of each 2009 Series A Bond. (b) The 2009 Series A Bonds are issued for the purpose of providing moneys to refinance all of the indebtedness of the City represented by its obligation under the Supply OHS West:260528941.4 -4- Agreement to pay the principal of and interest on the Authority Bonds by applying a portion of the proceeds of the 2009 Series A Bonds to the redemption of Authority Bonds, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds. (c) All (but not less than all) of the 2009 Series A Bonds shall be executed by the City for issuance under the Indenture and delivered to the Trustee and thereupon shall be authenticated by the Trustee and delivered to the City or upon its order but only upon receipt by the Trustee of the applicable items required pursuant to Section 2.04 and Section 2.07 of the Master Indenture with respect to the 2009 Series A Bonds. Section 2.02. Terms of the 2009 Series A Bonds, Registration: Denominations; Payment of Principal and Interest (a) The 2009 Series A Bonds shall be issued as fully registered Bonds without coupons in Authorized Denominations. The 2009 Series A Bonds shall be registered initially in the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository, and shall be evidenced by one bond certificate in the total aggregate principal amount of the 2009 Series A Bonds of each maturity. Registered ownership of the 2009 Series A Bonds, or any portion thereof, may not thereafter be transferred except as set forth in Section 3.04 of the Master Indenture (b) The 2009 Series A Bonds shall be dated the Delivery Date. (c) The 2009 Series A Bonds shall mature on August I 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 2009 $ 5,000,000 2.500% 2010 13,460,000 3,000 2010 12,825,000 4.000 2011 4,910,000 3.000 2011 2,460,000 4.000 2011 20,000,000 5.000 2012 3,170,000 3.500 2012 965,000 4.000 2012 24,545,000 5.000 2013 2,300,000 4.000 2013 27,630,000 3.750 2014 4,775,000 4.250 2014 26,520,000 5.250 2015 5,285,000 4.500 2015 27,685,000 5.500 2021 237,870,000 5.125 OHS West:260528941.4 -5- ARTICLE III REDEMPTION OF THE 2009 SERIES A BONDS Section 3.01. Terms of Redemption. (a) The 2009 Series A Bonds maturing on and after August 1, 2020 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, 2019, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2009 Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. (b) The 2009 Series A Bonds maturing on August 1, 2021 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, 2016, at a Redemption Price equal to the principal amount of the 2009 Series A Bonds to be redeemed, without premium. (c) The following shall be the Sinking Fund Installments for the 2009 Series A Bonds maturing on August 1, 2021. 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 Date (August 1) 2016 2017 2018 2019 2020 2021* * Maturity Sinking Fund Installment $ 34,740,000 36,570,000 38,495,000 40,520,000 42,650,000 44,895,000 (d) The City shall provide the Trustee with revised sinking fund schedules in the event of partial redemption pursuant to this Section 3.01. ARTICLE IV APPLICATION OF PROCEEDS Section 4.01. Annlication of Proceeds of 2009 Series A Bonds. The proceeds of the sale of the 2009 Series A Bonds (equal to the principal amount thereof, less net original issue OHS Wmt:260528941.4 -6- discount of $1,178,092,90, less underwriters' discount of $2,968,181.50) shall be applied simultaneously with the delivery of the 2009 Series A Bonds, as follows: (a) There shall be deposited in the Debt Service Reserve Fund the sum of $41,822,190,71, representing the amount required so that the balance on deposit in such Fund shall equal the Debt Service Reserve Requirement calculated immediately after the authentication and delivery of the 2009 Series A Bonds; (b) There shall be deposited in the 2009 Costs of Issuance Fund the sum of $822,281.71; and (c) There shall be deposited in the 2009 Escrow Fund the sum of $372,609,253.18. The City shall transfer the sum of $198,849.38 to the Trustee for deposit in the 2009 costs of Issuance Fund. Section 4.02. 2009 Costs of Issuance Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2009 Series A Bonds Costs of Issuance Fund." Money deposited in said fund shall be used to pay Costs of Issuance with respect to the 2009 Series A Bonds as provided in this Section. (b) The Trustee shall make payments from the 2009 Costs of Issuance Fund, except payments and withdrawals pursuant to subsection (e) of this Section, in the amounts, at the times, in the manner and on the other terms and conditions set forth in this subsection. Before any such payment from the 2009 Costs of Issuance Fund shall be made, there shall be filed with the Trustee a requisition therefor, signed by an Authorized City Representative. Each such requisition shall state, in respect of the payment to be made (a) the name of the Person to whom payment is due, (b) the amount of such payment, and (c) the particular item of the cost to be paid and that such payment in the stated amount is a proper charge against the 2009 Costs of Issuance Fund and that no part of such payment shall be applied to any item which has previously been paid as a Costs of Issuance of the 2009 Series A Bonds. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2009 Costs of Issuance Fund to the payment of the Costs of Issuance of the 2009 Series A Bonds identified in the requisition relating to such moneys. Each such requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have 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 2009 Costs of Issuance Fund, and after OHS W"t:260528941.4 -7- payment from the 2009 Costs of Issuance Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.02(b) hereof, the Trustee shall transfer any moneys remaining in the 2009 Costs of Issuance Fund to the 2009 Capital Improvements Fund. Upon such transfer the Trustee shall close the 2009 Costs of Issuance Fund. (d) Moneys held in the 2009 Costs of Issuance Fund may, be invested and reinvested to the fullest extent practicable in Permitted Investments which mature not later than such times as shall be necessary to provide moneys when needed for payments to be made from the 2009 Costs of Issuance Fund. Any investment earnings on moneys on deposit in the 2009 Costs of Issuance Fund shall be deposited in the 2009 Costs of Issuance Fund and be used in the same manner as other amounts on deposit in the 2009 Costs of Issuance Fund. (e) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2009 Costs of Issuance Fund shall be applied to the payment of Bond debt service when due. ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY Section 5.01. Arbitrage Covenants. (a) The City covenants with all Persons who hold or at any time held Bonds that the City will not directly or indirectly use the proceeds of any of the Bonds or any other funds of the City or permit the use of the proceeds of any of the Bonds or any other funds of the City or take or omit to take any other action which will cause any of the Bonds to be "arbitrage bonds" or otherwise subject to federal income taxation by reason of Sections 103 and 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 Bonds, the City and the Trustee may conclusively rely on such opinion in complying with the requirements of this Section; and the covenants hereunder shall be deemed to be modified to that extent. ARTICLE VI MISCELLANEOUS Section 6.01. Indenture to Remain in Effect. Save and except as supplemented by the First Supplemental Indenture and this Second Supplemental Indenture, the Master Indenture shall remain in full force and effect. OHS West:260528941.4 -8- Section 6.02. Continuing Disclosure. The City hereby covenants and agrees to comply with and carry out all the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Indenture, failure of the City to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default and the Trustee shall have no right to accelerate amounts due under the Indenture as a result thereof; provided, however, that the Trustee, upon receipt of indemnification reasonably satisfactory to it, and the Owners of not less than 25% in principal amount of the Outstanding 2009 Series A Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations in this Section and the Continuing Disclosure Agreement. Section 6.03. Notice to Rating Agencies. The Trustee or the City, as appropriate, shall provide eacli Rating Agency with prompt written notice of (a) the appointment of any successor Trustee, (b) the date no 2009 Series A Bonds are Outstanding, (c) any material amendments to the Master Indenture or this Second Supplemental Indenture, (d) any acceleration of the 2009 Series A Bonds pursuant to Section 10.04 of the Indenture, (g) any redemption in whole of the 2009 Series A 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 Attorney If to the Trustee: The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, CA 90017 Attention: Corporate Trust Department If to S&P, to: Standard & Poor's Ratings Services 55 Water Street, 38th Floor New York, New York 10041 Attention: Municipal Structured Group If to Moody's, to: Moody's Investors Service, Inc. 7 World Trade Center at 250 Greenwich Street New York, NY 10007 Attn: Public Finance Municipal Structure Group OHS West:260528941A -9- 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. Countervarts. This Second 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. OHS Wut:260528941.4 -10- IN WITNESS WHEREOF, City of Vernon has caused these presents to be signed in its name and on its behalf by its Mayor and attested by its City Clerk and to evidence its acceptance of the trusts hereby created, the Trustee has caused these presents to be signed in its name and on its behalf by one of its authorized officers, all as of the first day of May, 2009, CITY OF VERNON By: N,tLIO A-44,44- Hilario Gonzales, Mayor ATTEST: By: Manuela Giro , it Clerk APPROVED AS TO FORM: By: b--'- J rison, City Attorney THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee OHS W"t:260528941.4 EXHIBIT A FORM OF 2009 SERIES A BONDS [bracketed language applies only to 2009 Series A Bonds to be registered in the name of CEDE & CO.] [UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE CITY OF VERNON OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &, CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] No. R- CITY OF VERNON ELECTRIC SYSTEM REVENUE BOND, 2009 SERIES A Interest Rate Dated Date Maturity Date CUSIP No. May 139 2009 August 1, 20_ 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. OHS West260528941.4 A -I 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 "Trustee"), The initial Trustee is The Bank of New York Mellon Trust Company, N.A., and its designated Principal Office is its principal corporate trust office in Los Angeles, California, or such other place as designated by the Trustee. Interest hereon is payable by check mailed on each Interest Payment Date to the Owner hereof as of the applicable Record Date at the address appearing on the Bond Register maintained by the Trustee; provided Owners of at least $1,000,000 aggregate principal amount of 2009 Series A Bonds may, at any time prior to a Record Date, give the Trustee written instructions for payment of such interest on each succeeding Interest Payment Date for such 2009 Series A Bonds by wire transfer or by deposit to an account within the United States of America. This Bond is one of a duly authorized issue of bonds of the City designated as "City of Vernon, Electric System Revenue Bonds" (the "Bonds") and of a Series of the Bonds designated as `Electric System Revenue Bonds, 2009 Series A" (the "2009 Series A Bonds"). The 2009 Series A Bonds are issued pursuant to the Charter and the Bond Ordinance. The 2009 Series A Bonds have been issued in the aggregate principal amount of $419,400,000. The 2009 Series A Bonds are issued under, and, together with all other Bonds issued and outstanding thereunder, are equally and ratably secured by a pledge of the Trust Estate under, and entitled to the protection given by, the Indenture of Trust, dated as of September 1, 2008 between the City and the Trustee, as amended and supplemented, including as supplemented by the Second Supplemental Indenture of Trust, dated as of May 1, 2009 between the City and the Trustee (said Indenture of Trust, as heretofore supplemented and as the same may be further amended and supplemented, is herein called the "Indenture"). As provided in the Indenture, Bonds of the City may be issued thereunder from time to time pursuant to Supplemental Indentures in one or more Series, in various principal amounts, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. The aggregate principal amount of Bonds which may be issued under the Indenture is not limited except as provided in the Indenture, and all Bonds issued and to be issued under the Indenture are and will be equally secured by the pledge and covenants made therein, except as otherwise expressly provided or permitted in the Indenture. Copies of the Indenture are on file at the City Hall of the City and at the Principal Office of the Trustee and reference is hereby made to the Indenture and to all amendments and supplements thereto for a description of the provisions, among others, with respect to the nature and extent of the security, the rights, duties and obligations of the City, the Trustee and the Owners of the Bonds and the terms upon which the Bonds are secured and payable under the Indenture, the rights and remedies of the Owners of the 2009 Series A Bonds, the limitations on such rights and remedies and the terms and conditions upon which Bonds are issued and may be issued thereunder. On the Dated Date of this Bond, there were $43,765,000 aggregate principal amount of Bonds outstanding under the Indenture in addition to the 2009 Series A Bonds. The Indenture provides that other Parity Obligations secured by a pledge of Revenues and amounts in the Light and Power Fund on a parity with the Bonds may be issued or incurred by the City on the terms set forth therein. By acceptance of this Bond, the Registered Owner accepts and agrees to the terns of the Indenture. OHS West:260528941.4 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 2009 Series A Bonds were issued for the purpose of providing moneys to finance a portion of the Costs of a Capital Improvement consisting of the refinancing of a indebtedness of the City relating to the Gas Supply, to fund the Debt Service Reserve Fund and to pay the Costs of Issuance of the 2009 Series A Bonds. Interest on the 2009 Series A Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The term "Interest Payment Date" means each February 1 and August 1, commencing August 1, 2009. The term "Record Date" means, with respect to an interest Payment Date, the fifteenth day of the month preceding the month in which such Interest Payment Date falls. The 2009 Series A Bonds maturing on and after August 1, 2020 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, 2019, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2009 Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. The 2009 Series A Bonds maturing on August 1, 2021 are subject to mandatory redemption, in part, on any August 1 on and after August 1, 2016, at a Redemption Price equal to the principal amount of such 2009 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2009 Series A Bonds in the Indenture. r OHS West:260528941.4 A-3 If less than all of the 2009 Series A Bonds of a maturity are to be redeemed, the particular 2009 Series A Bonds of such maturity to be redeemed shall be selected as provided in the Indenture. The 2009 Series A Bonds are payable upon redemption upon surrender thereof at the Principal Office of the Trustee. The Trustee shall give notice, in the name of the City, of the redemption of 2009 Series A Bonds, which notice shall be mailed, by first class mail, postage prepaid, not more than sixty (60) nor less than thirty (30) days before the redemption date to the Owners of any 2009 Series A Bonds to be redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice shall specify the Series and maturity of the Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption shall be payable and, if less than all of the 2009 Series A Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2009 Series A Bonds so to be redeemed, and, in the case of 2009 Series A Bonds to be redeemed in part only, such notice shall also specify the respective portions of the principal amount thereof to be redeemed. Subject to the provisions of the next paragraph, such notice shall further state that on such redemption date there shall become due and payable upon each 2009 Series A Bond to be redeemed the Redemption Price thereof (or the Redemption Price of the specified portion of the principal amount thereof to be redeemed in the case of a 2009 Series A Bond to be redeemed in part only) and that from and after such date interest on such 2009 Series A Bond (or the portion of such 2009 Series A Bond to be redeemed) shall cease to accrue and be payable. In the event that funds required to pay the Redemption Price of 2009 Series A Bonds to be redeemed at the option of the City are not on deposit with the Trustee at the time the Trustee gives notice of redemption to the Owners of such 2009 Series A Bonds, such notice shall state that such redemption is conditional upon the receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys sufficient to pay the Redemption Price of the 2009 Series A Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the City shall not be required to redeem such 2009 Series A Bonds. In the event a notice of redemption of 2009 Series A Bonds contains such a condition and such moneys are not so received, the redemption of 2009 Series A Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of 2009 Series A Bonds pursuant to the conditional notice of redemption. Receipt of such notice of redemption shall not be a condition precedent to the redemption of 2009 Series A Bonds and failure of any Owner of a 2009 Series A Bond to receive any such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of 2009 Series A Bonds. To the extent and in the manner permitted by the terms of the Indenture, the provisions of the Indenture, or any indenture amendatory thereof or supplemental thereto, may be modified or amended by the City with, in certain cases, the written consent of the Owners of at least a majority in principal amount of the Bonds then Outstanding under the Indenture; and, in case. less than all of the Bonds would be affected thereby, with such consent of the Owners of OHS west160528941.4 A-4 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 terns of redemption or maturity of the principal of any Bond or of any installment of interest thereon or a reduction in the principal amount or Redemption Price thereof or in the rate of interest thereon without the consent of the Owner of such Bond, or shall reduce the percentages or otherwise affect the classes of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or shall change or modify any of the rights or obligations of the Trustee or of any Paying Agent without its written assent thereto. The Indenture may also be amended or supplemented without the necessity of the consent of the Owners of the 2009 Series A Bonds for any one or more of the purposes specified in the Indenture. This Bond is transferable, as provided in the Indenture, only upon the Bond Register kept for that purpose at the Principal Office of the Trustee, by the registered Owner hereof, or by his duly authorized attomey, upon surrender of this Bond together with a written instrument of transfer satisfactory to the Trustee duly executed by the registered Owner or his duly authorized attorney. Thereupon and upon payment of the charges prescribed in the Indenture a new registered 2009 Series A Bond or 2009 Series A Bonds, without coupons, and for the same maturity and aggregate principal amount, shall be issued to the transferee in exchange therefor as provided in the Indenture. The City, the Trustee and any Paying Agent may deem and treat the Person in whose 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 or other proceedings with respect thereto, except as provided in the Indenture. In certain events, on the conditions, in the manner and with the effect set forth in the Indenture, the principal of all the Bonds issued under the Indenture and then Outstanding may become or may be declared due and payable before the stated maturity thereof, together with interest accrued thereon. It is hereby certified and recited that all conditions, acts and things required by law, including the City Charter and the Bond Ordinance, and the Indenture to exist, to have happened and to have been performed precedent to and in the issuance of this Bond, exist, have happened and have been performed in due time, form and manner and that the 2009 Series A Bonds, together with all other indebtedness of the City, comply in all respects with the applicable laws of the State of California, including the City Charter and the Bond Ordinance. This Bond shall not be entitled to any benefit under the Indenture or be valid or become obligatory for any purpose until this Bond shall have been authenticated by the execution by the Trustee of the Trustee's Certificate of Authentication hereon. OHS Wot260528941.4 A-S IN WITNESS WHEREOF, CITY OF VERNON has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Mayor and the seal (or a facsimile thereof) to be hereunto affixed, imprinted, engraved or otherwise reproduced and attested by the manual or facsimile signature of its City Clerk, as of the Dated Date specified above. [SEAL] CITY OF VERNON Mayor ATTEST: City Clerk OHS West:260528441A A-6 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 2009 Series A Bonds delivered pursuant to the within mentioned Indenture. Dated: May 13, 2009 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Authorized Signatory OHS West:260528941.4 A-% 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. OHS we8t260528941.4 A_g THIRD SUPPLEMENTAL INDENTURE OF TRUST between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Dated as of January 1, 2012 Relating to City of Vernon Electric System Revenue Bonds, 2012 Series A and 2012 Taxable Series B OHSWEST:261371195.4 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 Section 1.03. Definitions............................................................................................2 Section1.04. Interpretation........................................................................................ 5 ARTICLE 11 THE 2012 SERIES A BONDS........................................................................ 6 Section 2.01. Principal Amount and Designation; Conditions to Issuance ............... 6 Section 2.02. Terms of the 2012 Series A Bonds; Registration; Denominations; Payment of Principal and Interest ............................. 6 Section 2.03. Terms of Redemption.......................................................................... 7 Section 2.04. Application of Proceeds of 2012 Series A Bonds ................................ 8 ARTICLE III THE 2012 SERIES B BONDS........................................................................ 9 Section 3.01. Principal Amount and Designation; Conditions to Issuance ............... 9 Section 3.02. Terms of the 2012 Series B Bonds; Registration; Denominations; Payment of Principal and Interest ............................. 9 Section 3.03. Terms of Redemption........................................................................ 10 Section 3.04. Application of Proceeds of 2012 Series B Bonds .............................. 10 ARTICLE IV FUNDS.......................................................................................................... I I Section 4.01. 2012 Costs of Issuance Fund............................................................. 11 Section 4.02. 2012 Capital Improvement Fund ....................................................... 12 Section 4.03. 2012 Capitalized Interest Fund.......................................................... 14 ARTICLE V COVENANTS AND OBLIGATIONS OF THE CITY ................................. 15 Section 5.01. Arbitrage Covenants.......................................................................... 15 ARTICLE VI MISCELLANEOUS...................................................................................... 15 Section 6.01. Indenture to Remain in Effect............................................................ 15 Section 6.02. Continuing Disclosure....................................................................... 15 Section 6.03. Notice to Rating Agencies................................................................. 15 Section6.04. Notices............................................................................................... 16 Section 6.05. Counterparts....................................................................................... 16 EXHIBIT A FORM OF 2012 SERIES BONDS....................................................................... A-1 OHS WEST:261371195 4 THIRD SUPPLEMENTAL INDENTURE OF TRUST THIS THIRD SUPPLEMENTAL INDENTURE OF TRUST, dated as of January 1, 2012, 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 2012 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 2012 Project, including providing for capitalized interest on the 2012 Series A Bonds, and to pay the Costs of Issuance of the 2012 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 2012 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 2012 Project and to pay the Costs of Issuance of the 2012 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 2012 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 2012 Series Bonds by the Owners thereof, and OHSWEST:261371195.4 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 2012 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 2012 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 the difference between (i) 11.5% of the retail sales for such Fiscal Year and (ii) the sum of (A) the amount paid pursuant to clause (d) of the definition of Operation and Maintenance Expenses in such Fiscal Year plus (B) the amount, if any, paid to the City as a Franchise Payment in such Fiscal Year. (c) Additional Definitions. The following terms shall, with respect to the 2012 Series Bonds and for all purposes hereof, have the meanings set forth below: "Authorized Denominations" means with respect to the 2012 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 OHSWEST:261391195.4 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. "Comparable Treasury Issue" means, with respect to any redemption date for a particular 2012 Series B Bond, the US Treasury security or securities selected by the Independent Investment Banker which has an actual or interpolated maturity comparable to the remaining average life of the applicable 2012 Series B Bond to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to the remaining average life of the 2012 Series B Bond to be redeemed. "Comparable Treasury Price" means, with respect to any redemption date for a 2012 Series B Bond, (1) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest Reference Treasury Dealer Quotations, or (2) if the Independent Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of January 1, 2012, between the City and the Trustee relating to the 2012 Series Bonds. "Delivery Date" means January 19, 2012. "Independent Investment Banker" means an independent accounting firm, investment banking firm or financial advisor selected by the City at the City's expense to calculate the Make Whole Redemption Price. The initial Independent Investment Banker shall be E. J. De La Rosa & Co., Inc. "Interest Payment Date" each February I and August 1, commencing August 1, 2012. "Make Whole Redemption Price" means a redemption price, calculated by the Independent Investment Banker, equal to the greater of (i) one hundred percent (100%) of the principal amount of the 2012 Series B Bonds to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2012 Series B Bonds to be redeemed (exclusive of interest accrued to the date fixed for redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, plus in each case, accrued and unpaid interest on the 2012 Series B Bonds being redeemed to the date fixed for redemption. "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. "Reference Treasury Dealer" means E. J. De La Rosa & Co., Inc. and its successor and three other firms, specified by the City from time to time, that are primary U.S. Government securities dealers in the City of New York (each a "Primary Treasury Dealer"); provided, however, that if any of them ceases to be a Primary Treasury Dealer, the City will substitute another Primary Treasury Dealer. OHSWEST:261371195.4 "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date for a particular 2012 Series B Bond, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding such redemption date. "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 2012 Series A Bonds maturing on August 1, 2030, the amount required by Section 2.03(c) hereof to be paid by the City on any single date for the retirement of such 2012 Series A Bonds; (ii) with respect to the 2012 Series A Bonds maturing on August 1, 2033, the amount required by Section 2.03(e) hereof to be paid by the City on any single date for the retirement of such 2012 Series A Bonds; and (iii) with respect to the 2012 Series A Bonds maturing on August 1, 2041, the amount required by Section 2.03(g) hereof to be paid by the City on any single date for the retirement of such 2012 Series A Bonds. "Tax Certificate" means the Tax Certificate executed by the City at the time of execution and delivery of the 2012 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. "Treasury Rate" means, with respect to any redemption date for a particular 2012 Series B Bond, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated maturity of the Comparable Treasury Issue, assuming that the Comparable Treasury Issue is purchased on the redemption date for a price equal to the Comparable Treasury Price. 112012 Capital Improvement Fund" means the 2012 Capital Improvement Fund established pursuant to Section 4.02. "2012 Costs of Issuance Fund" means the 2012 Costs of Issuance Fund established pursuant to Section 4.01. "2012 Escrow Agreement" means the Escrow Agreement, dated as of January 1, 2012, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee for the Refunded 2009 Bonds. OHSWEST:261371195.4 "2012 Escrow Fund" means the Escrow Fund established pursuant to the 2012 Escrow Agreement. "2012 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. "2012 Series A Account" means the 2012 Series A Account within the 2012 Capital Improvement Fund established pursuant to Section 4.02. 112012 Series A Bonds" means the City's Electric System Revenue Bonds, 2012 Series A Bonds authorized by Article II hereof. "2012 Series A Costs Account" means the 2012 Series A Costs Account within the 2012 Costs of Issuance Fund established pursuant to Section 4.01. "2012 Series B Account" means the 2012 Series B Account within the 2012 Capital Improvement Fund established pursuant to Section 4.02. "2012 Series B Bonds" means the City's Electric System Revenue Bonds, 2012 Taxable Series B Bonds authorized by Article III hereof. f12012 Series B Costs Account" means the 2012 Series B Costs Account within the 2012 Costs of Issuance Fund established pursuant to Section 4.01. "2012 Series Bonds" means the 2012 Series A Bonds and the 2012 Series B Bonds. 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 and feminine genders, 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 2012 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," OHSWEST:261371195.4 "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. ARTICLE II THE 2012 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 $37,640,000. 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, 2012 Series A." The 2012 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 2012 Series A Bond. (b) The 2,012 Series A Bonds are issued for the purpose of providing moneys to pay a portion of the Costs of the 2012 Project, including providing for capitalized interest on the 2012 Series A Bonds, and to pay Costs of Issuance of the 2012 Series A Bonds. (c) All (but not less than all) of the 2012 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 2012 Series A Bonds. Section 2.02. Terms of the 2012 Series A Bonds; Registration; Denominations; Payment of Principal and Interest. (a) The 2012 Series A Bonds shall be issued as fully registered Bonds without coupons in Authorized Denominations. The 2012 Series A Bonds shall be registered initially in the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository for the 2012 Series A Bonds, and shall be evidenced by one bond certificate in the total aggregate principal amount of the 2012 Series A Bonds of each maturity. Registered ownership of the 2012 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 2012 Series A Bonds shall be dated the Delivery Date. OHSWEST261371195.4 6 (c) The 2012 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 2030 $4,645,000 5.000% 2033 4,155,000 5.125 2041 28,840,000 5.500 Section 2.03. Terms of Redemution. (a) The 2012 Series A Bonds 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, 2022, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2012 Series A Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. (b) The 2012 Series A Bonds maturing on August 1, 2030 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, 2027, at a Redemption Price equal to the principal amount of the 2012 Series A Bonds to be redeemed, without premium. (c) The following shall be the Sinking Fund Installments for the 2012 Series A Bonds maturing on August 1, 2030. 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 2027 $1,075,000 2028 1,130,000 2029 1,190,000 2030* 1,250,000 * Maturity (d) The 2012 Series A Bonds maturing on August 1, 2033 are also subject to mandatory redemption in part prior to their stated maturity from Sinking Fund Installments established pursuant to subsection (e) of this Section on any August 1 on or after August 1, 2031, at a Redemption Price equal to the principal amount of the 2012 Series A Bonds to be redeemed, without premium. OHSWEST:261371195.4 7 (e) The following shall be the Sinking Fund Installments for the 2012 Series A Bonds maturing on August 1, 2033. 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 2031 $1,315,000 2032 1,385,000 2033* 1,455,000 * Maturity (0 The 2012 Series A Bonds maturing on August 1, 2041 are also subject to mandatory redemption in part prior to their stated maturity from Sinking Fund Installments established pursuant to subsection (g) of this Section on any August 1 on or after August 1, 2034, at a Redemption Price equal to the principal amount of the 2012 Series A Bonds to be redeemed, without premium. (g) The following shall be the Sinking Fund Installments for the 2012 Series A Bonds maturing on August 1, 2041. 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: SinkingFund Installment Due Date (August 1) 2034 2035 2036 2037 2038 2039 2040 2041* * Maturity Sinking Fund Installment $1,535,000 1,625,000 1,715,000 1,810,000 1,915,000 6,380,000 6,740,000 7,120,000 (h) The City shall provide the Trustee with revised sinking fund schedules in the event a credit for the Sinking Fund Installments for the 2012 Series A Bonds is to apply as provided in Section 5.04(c) of the Master Indenture. Section 2.04. Application of Proceeds of 2012 Series A Bonds. As the .amount on deposit in the Debt Service Reserve Fund upon the issuance of the 2012 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 2012 Series Bonds. The proceeds of the sale of the 2012 Series A Bonds (equal to the principal amount thereof, plus OHSWEST:261371195.4 net original issue premium of $199,159.15, less underwriter's discount of $263,828.74) shall be applied simultaneously with the delivery of the 2012 Series A Bonds, as follows: (a) There shall be deposited in the 2012 Capitalized Interest Fund the sum of $2,099,106.88; (b) There shall be deposited in the 2012 Series A Costs Account within the 2012 Costs of Issuance Fund the sum of $476,223.53; and (c) There shall be deposited in the 2012 Series A Account within the 2012 Capital Improvement Fund the sum of $35,000,000. ARTICLE III THE 2012 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 $35,100,000. 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, 2012 Taxable Series B." The 2012 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 2012 Series B Bond. (b) The 2012 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 2012 Project and to pay Costs of Issuance of the 2012 Series B Bonds. (c) All (but not less than all) of the 2012 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 2012 Series B Bonds. Section 3.02. Terms of the 2012 Series B Bonds; Registration; Denominations; Payment of Principal and Interest. (a) The 2012 Series B Bonds shall be issued as fully registered Bonds without coupons in Authorized Denominations. The 2012 Series B Bonds shall be registered initially in the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository for the 2012 Series B Bonds, and shall be evidenced by one bond certificate in the total aggregate principal amount of the 2012 Series B Bonds of each maturity. Registered ownership of the 2012 Series B Bonds, or any portion thereof, may not thereafter be transferred except as set forth in Section 3.04 of the Master Indenture. OHSWEST261371195.4 9 (b) The 2012 Series B Bonds shall be dated the Delivery Date. (c) The 2012 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 Interest Rate 2022 $6,165,000 6.250% 2023 6,565,000 6.250 2024 6,990,000 6.250 2025 7,440,000 6.375 2026 7,940,000 6.500 Section 3.03. Terms of Redemntion. (a) The 2012 Series B Bonds maturing on or after August 1, 2023 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, 2022, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2012 Series B Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. (b) The 2012 Series B Bonds 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, at a Redemption Price equal to the Make Whole Redemption Price of the 2012 Series B Bonds to be redeemed. Section 3.04. Application of Proceeds of 2012 Series B Bonds. As the amount on deposit in the Debt Service Reserve Fund upon the issuance of the 2012 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 2012 Series Bonds. The proceeds of the sale of the 2012 Series B Bonds (equal to the principal amount thereof, less net original issue discount of $1,331,653.55, less underwriter's discount of $281,286.82) shall be applied simultaneously with the delivery of the 2012 Series B Bonds, as follows: (a) There shall be deposited in the 2012 Escrow Fund the sum of $30,050,542.49; (b) There shall be deposited in the 2012 Series B Costs Account within the 2012 Costs of Issuance Fund the sum of $436,517.14; and (c) There shall be deposited in the 2012 Series B Account within the 2012 Capital Improvement Fund the sum of $3,000,000.00. OHSWEST:261371195.4 10 ARTICLE IV FUNDS Section 4.01. 2012 Costs of Issuance Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2012 Costs of Issuance Fund." The Trustee shall establish within the 2012 Costs of Issuance Fund the "2012 Series A Costs Account' and the "2012 Series B Costs Account" Money deposited in the 2012 Series A Costs Account shall be used to pay the Costs of Issuance with respect to the 2012 Series A Bonds as provided in this Section. Money deposited in the 2012 Series B Costs Account shall be used to pay the Costs of Issuance with respect to the 2012 Series B Bonds as provided in this Section. (b) The Trustee shall make payments from the 2012 Series A Costs 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 2012 Series A Costs 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 (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 2012 Series A Costs Account 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 2012 Series A Bonds. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2012 Series A Costs Account to the payment of the Costs of Issuance of the 2012 Series A Bonds identified in the requisition relating to such moneys. Each such requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have 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 2012 Series B Costs 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 2012 Series B Costs 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 (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 2012 Series B Costs Account 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 2012 Series B 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 OHSWEST:261371195.4 I I 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 2012 Series B Costs Account to the payment of the Costs of Issuance of the 2012 Series B 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. (d) Upon the receipt by the Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2012 Costs of Issuance Fund (or any account therein), and after payment from the 2012 Costs of Issuance Fund of all amounts included in requisitions submitted by the City pursuant to Section 4.01(b) or Section 4.01(c) hereof, the Trustee shall transfer any moneys remaining in the 2012 Costs of Issuance Fund (or the applicable account therein) to the 2012 Series A Account within the 2012 Capital Improvement Fund. Upon such transfer the Trustee shall close the 2012 Costs of Issuance Fund (or the applicable account therein). (e) Moneys held in an account in the 2012 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 such account. Any investment earnings on moneys on deposit in an account in the 2012 Costs of Issuance Fund shall be deposited in such account and be used in the same manner as other amounts on deposit in such account. (f) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2012 Costs of Issuance Fund (or any account therein) shall be applied to the payment of Bond debt service when due. Section 4.02. 2012 Capital Improvement Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2012 Capital Improvement Fund." The Trustee shall establish within the 2012 Capital Improvement Fund the "2012 Series A Account" and the "2012 Series B Account." Money deposited in the 2012 Series A Account shall be used to pay a portion of the Costs of the 2012 Project as provided in subsection (b) of this Section; provided that any Costs paid from the Series A Account shall have been incurred no earlier than September 16, 2011. Money deposited in the 2012 Series B Account shall be used to pay a portion of the Costs of the 2012 Project as provided in subsection (c) of this Section. (b) The Trustee shall make payments from the 2012 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 2012 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 OHSWEST:261771195.4 12 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 2012 Project to be paid and that such payment in the stated amount is a proper charge against the 2012 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 2012 Project and that such Cost of the 2012 Project was incurred no earlier than September 16, 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 2012 Series A Account to the payment of the Cost of the 2012 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 2012 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 2012 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 paid or reimbursed and that such payment or reimbursement in the stated amount is a proper charge against the 2012 Series B Account and that no part of such payment or reimbursement 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 2012 Series B Account to the payment or 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. (d) Upon the receipt by the Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2012 Capital Improvement Fund (or any account therein), and after payment from the 2012 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 2012 Capital Improvement Fund (or the applicable account therein) to the account in the Debt Service Fund OHSWEST:261371195.4 13 specified by the City. Upon such transfer the Trustee shall close the 2012 Capital Improvement Fund (or the applicable account therein). (e) Moneys held in an account in the 2012 Capital Improvement 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 such account. Any investment earnings on moneys on deposit in an account in the 2012 Capital Improvement Fund shall be deposited in such account and be used in the same manner as other amounts on deposit in such account. (f) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2012 Capital Improvement Fund (or any account therein) shall be applied to the payment of Bond debt service when due. Section 4.03. 2012 Capitalized Interest Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2012 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 2012 Series A Bonds the Trustee shall transfer from the 2012 Capitalized Interest Fund to the Interest Account an amount equal to the interest due on the 2012 Series A Bonds on such Interest Payment Date (or all the moneys then on deposit in the 2012 Capitalized Interest Fund if less than such interest due on the 2012 Series A Bonds). (c) Upon the transfer of all amounts in the 2012 Capitalized Interest Fund, the Trustee shall close the 2012 Capitalized Interest Fund. (d) Moneys held in the 2012 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 2012 Capitalized Interest Fund. Any investment earnings on moneys on deposit in the 2012 Capitalized Interest Fund shall be deposited in the 2012 Capitalized Interest Fund and be used in the same manner as other amounts on deposit in the 2012 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 2012 Capitalized Interest Fund shall be applied to the payment of Bond debt service when due. OHSWEST:261371195.4 14 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 2012 Series A Bonds that the City will not directly or indirectly use the proceeds of any of the 2012 Series A Bonds or any other funds of the City or permit the use of the proceeds of any of the 2012 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 2012 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 2012 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 amended and supplemented by the First Supplemental Indenture, the Second 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 Indenture, failure of the City to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default and the Trustee shall have no right to accelerate amounts due under the Indenture as a result thereof; provided, however, that the Trustee, upon receipt of indemnification reasonably satisfactory to it, and the Owners of not less than 25% in principal amount of the Outstanding 2012 Series 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 2012 Series Bonds are Outstanding, (c) any material amendments to the Master Indenture or this Third Supplemental Indenture, (d) any acceleration of the 2012 Series OHSWEST:261371195.4 15 Bonds pursuant to Section 10.04 of the Master Indenture, (g) any redemption in whole of the 2012 Series A Bonds or the 2012 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 addresses for notices, counterparts and other communications hereunder are 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: Public Finance Department 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 a Rating Agency, 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. OHSWEST:261371195.4 16 IN WITNESS WHEREOF, the City of Vernon has caused these presents to be signed in its name and on its behalf by its City Administrator 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 January,2012. CITY OF VERNON By: :—I�a U24A- Mark C. Whitworth City Administrator ATTEST: 'ROVED AS TO FORM: In THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By. s Authorized Officer OIiSWEST:261371195 EXHIBIT A FORM OF 2012 SERIES BONDS 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- CITY OF VERNON ELECTRIC SYSTEM REVENUE BOND, 2012 [TAXABLE] SERIES [A] [B] Interest Rate Dated Date January _,2012 OWNER: CEDE & CO. PRINCIPAL AMOUNT: Maturity Date August 1, _ CUSIP No. THE 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 "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 OHSWEST:261371195.4 A -I 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 2012 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 2012 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, 2012 [Taxable]Series [A] [B]" (the "2012 Series [A] [B] Bonds"). The 2012 Series [A] [B] Bonds are issued pursuant to the Charter and the Bond Ordinance. The 2012 Series [A] [B] Bonds have been issued in the aggregate principal amount of $ . The 2012 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 amended and supplemented by the Third Supplemental Indenture of Trust, dated as of January 1, 2012 between the City and the Trustee (said Indenture of Trust, as heretofore amended and 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 2012 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. Simultaneously with the issuance of the 2012 Series [A] [B] Bonds, the City is issuing under the Indenture $ aggregate principal amount of its Electric System Revenue Bonds, 2012 [Taxable] Series [A] [B] Bonds (the "2012 Series [A] [B] Bonds"). On the Dated Date of this Bond, there were $375,280,000 aggregate principal amount of Bonds outstanding under the Indenture in addition to the 2012 Series A Bonds and the 2012 Series 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. OHSWEST:261371195.4 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 2012 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 2012 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 2012 Project] and to pay the Costs of Issuance of the 2012 Series [A] [B] Bonds. Interest on the 2012 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 August 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 2012 Series A Bonds 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, 2022, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2012 Series A Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. The 2012 Series A Bonds maturing on August 1, 2030 are subject to mandatory redemption, in part, on any August 1 on and after August 1, 2027, at a Redemption Price equal to OHSWEST:261371195.4 A-3 the principal amount of such 2012 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2012 Series A Bonds in the Indenture. The 2012 Series A Bonds maturing on August 1, 2033 are subject to mandatory redemption, in part, on any August 1 on and after August 1, 2031, at a Redemption Price equal to the principal amount of such 2012 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2012 Series A Bonds in the Indenture. The 2012 Series A Bonds maturing on August 1, 2041 are subject to mandatory redemption, in part, on any August 1 on and after August 1, 2034, at a Redemption Price equal to the principal amount of such 2012 Series A Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2012 Series A Bonds in the Indenture.] [The 2012 Series B Bonds maturing on or after August 1, 2023 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, 2022, in the principal amounts of such maturities as may be specified by the City, at a Redemption Price equal to the principal amount of 2012 Series B Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. The 2012 Series B Bonds 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, at a Redemption Price equal to the Make Whole Redemption Price of the 2012 Series B Bonds to be redeemed.] If less than all of the 2012 Series [A] [B] Bonds of a maturity are to be redeemed, the particular 2012 Series [A] [B] Bonds of such maturity to be redeemed shall be selected as provided in the Indenture. The 2012 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 2012 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 2012 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 2012 Series [A] [B] Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2012 Series [A] [B] Bonds so to be redeemed, and, in the case of 2012 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 2012 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 2012 Series [A] [B] Bond to be redeemed in part only) and that from and after such date interest on such 2012 Series [A] [B] Bond (or the portion of such 2012 Series [A] [B] Bond to be redeemed) shall cease to accrue and be payable. OHSWEST261371195.4 A-4 In the event that funds required to pay the Redemption Price of 2012 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 2012 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 2012 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 2012 Series [A] [B] Bonds. In the event a notice of redemption of 2012 Series [A] [B] Bonds contains such a condition and such moneys are not so received, the redemption of 2012 Series [A] [B] Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of 2012 Series [A] [B] Bonds pursuant to the conditional notice of redemption. Receipt of notice of redemption shall not be a condition precedent to the redemption of 2012 Series [A] [B] Bonds and failure of any Owner of a 2012 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 2012 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 2012 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 OHSWEST:261371195.4 A-$ Indenture a new registered 2012 Series [A] [B] Bond or 2012 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 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 2012 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. OHSWEST:261771195.4 A-6 IN WITNESS WHEREOF, CITY OF VERNON has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Mayor Pro Tempore 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] CITY OF VERNON M Mayor Pro Tempore ATTEST: City Clerk OHSWEST:261771195.4 A-7 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 2012 Series [A] [B] Bonds delivered pursuant to the within mentioned Indenture. Dated: January 19, 2012 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee LN Authorized Signatory OHSWEST:261371195.4 A-8 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. OHSWEST261371195.4 A-9 SUPPLEMENT TO PRELIMINARY OFFICIAL STATEMENT DATED DECEMBER 20, 2011 relating to the $39,530,000" $34,825,000" CITY OF VERNON CITY OF VERNON Electric System Revenue Bonds Electric System Revenue Bonds 2012 Series A 2012 Taxable Series B The Preliminary Official Statement dated December 20, 2011 for the above -referenced bonds (the "Preliminary Official Statement") is supplemented by this Supplement to Preliminary Official Statement (the "Supplement') to update the status of the audit of the City of Vernon Electric System Revenue Bonds, 2009 Series A (the "2009 Bonds") by the Internal Revenue Service (the "IRS") described under the caption "RECENT EVENTS REGARDING THE CITY — Audits and Investigations — IRS Audit of 2009 Bonds." On December 22, 2011, by letter dated December 14, 2011, the City was notified by the IRS that it has completed its examination of the 2009 Bonds. The IRS stated in the December 14, 2011 letter: "we [i.e. IRS] have made a determination to close the examination with no change to the position that interest received by the beneficial owners of the [2009] Bonds is excludable from gross income under section 103 of the Internal Revenue Code." The date of this Supplement is January 3, 2012. Preliminary; subject to change. PRELIMINARY OFFICIAL STATEMENT DATED DECEMBER 20, 2011 NEW ISSUE —FULL BOOK -ENTRY ONLY Ratings: Moody's: Baal S&P: A. (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 2012 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 2012 Series A Bonds is not a specific preference item for purposes of the federal individual oT corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in acUusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel is also of the opinion that interest on the 2012 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 of interest on, the 2012 Bonds. See "TAX MATTERS" herein. $39,530,000* CITY OF VERNON Electric System Revenue Bonds 2012 Series A Dated: Date of Delivery $34,825,000* CITY OF VERNON Electric System Revenue Bonds 2012 Taxable Series B Due: August 1, as shown on the Inside Cover This cover page contains certain intrormation 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 or an Wormed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth in APPENDIX B attached hereto. The City of Vernon Electric System Revenue Bonds, 2012 Series A (the "2012 Series A Bonds") and the City of Vernon Electric System Revenue Bonds, 2012 Taxable Series B (the "2012 Series B Bonds" and; together with the 2012 Series A Bonds, the "2012 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 January 1, 2012. The 2012 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; (it) to provide for capitalized interest on the 2012 Series A Bonds; and (iii) to pay costs of issuance of the 2012 Series A Bonds. The 2012 Series B Bonds are being issued to provide funds (i) to refund certain Bonds; (it) 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 2012 Series B Bonds. See "PLAN OF FINANCE" and "ESTIMATED SOURCES AND USES OF FUNDS" herein. The 2012 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 2012 Bonds, principal of, premium, if any, and interest on the 2012 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 2012 Bonds, as more frilly described herein. See APPENDIX C - "Book -Entry Only System." The 2012 Bonds are subject to optional and mandatory redemption prior to maturity, as described herein. Interest on the 2012 Bonds will be payable on each February 1 and August 1, commencing August 1, 2012. MATURITY SCHEDULE (See Inside Cover) The 2012 Bonds will be special obligations of the City. The principal and Redemption Price of and interest on the 2012 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 2012 Bonds does not directly, indirectly or contingently obligate the City to levy or pledge any fonn of taxation or to make any appropriation for their payment. The 2012 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 2012 Bonds. The 2012 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 2012 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 office of 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 2012 Bonds will be available for delivery through the DTC's book -entry system in New York, New York on or about January _, 2012. W DE LA RoSA& CO. g IIN V SS SM S NL SN N N[SS Dated: 2012 N Preliminary; subject to change. MATURITY SCHEDULE $39,530,000* CITY OF VERNON Electric System Revenue Bonds 2012 Series A $ Serial 2012 Series A Bonds Maturity Date Principal Interest (August 11 Amount Rate Yield CUSIP No. $ _% Term 2012 Series A Bond due August 1, Yield: % CUSIP No.: t % Term 2012 Series A Bond due August 1, _ Yield: % CUSIP No.: t $34,825,000* CITY OF VERNON Electric System Revenue Bonds 2012 Taxable Series B $ Serial 2012 Taxable Series B Bonds Maturity Date Principal Interest (August 1) Amount Rate Yield CUSIP No.r $ Term 2012 Taxable Series B Bond due August 1, Yield: % CUSIP No.: t * Preliminary; subject to change. 1 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 errorsr in this list of CUSIP numbers. 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 either 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 any 2012 Bonds by any person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriter. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any implication that there has been no change in the affairs of the City since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THE OFFERING OF THE 2012 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2012 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 2012 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," "ELECTRIC SYSTEM FINANCIAL INFORMATION — Unrestricted Cash Balances" and "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. CITY OF VERNON City Council 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 and Fire Chief 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 Samuel Kevin Wilson, Director of Community Services and Water Department Lewis Pozzebon, Director of Environmental Health Department Daniel Calleros, Interim Police Chief Martha Valenzuela, Director of Personnel Light and Power Department Executive Management Carlos Fandino, Director of Light and Power Department 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............................................................................................................................................... 1 Purposeof Official Statement................................................................................................................ 1 Authority................................................................................................................................................ 1 Useof Proceeds..................................................................................................................................... 1 TheCity ................................................................................................................................................. 1 TheElectric System............................................................................................................................... 2 Securityand Sources of Payment................................................:......................................................... 2 DebtService Reserve Fund................................................................................................................... 2 ContinuingDisclosure........................................................................................................................... 2 Recent Events Regarding the City ......................................................................................................... 3 OtherMatters......................................................................................................................................... 3 PLANOF FINANCE.......................................................................................................................................... 3 2012 Series A Bonds............................................................................................................................. 3 2012 Series B Bonds.............................................................................................................................. 3 ESTIMATED SOURCES AND USES OF FUNDS........................................................................................... 4 DEBT SERVICE SCHEDULE........................................................................................................................... 5 THE2012 BONDS.............................................................................................................................................. 6 General................................................................................................................................................. 6 Redemptionof 2012 Bonds................................................................................................................... 6 SECURITY AND SOURCES OF PAYMENT.................................................................................................. 9 Pledge Effected by the Indenture........................................................................................................... 9 Deposit and Application of Revenues................................................................................................. 10 Payments to Trustee for Bonds............................................................................................................ 1 I RateCovenant..................................................................................................................................... 12 Debt Service Reserve Fund................................................................................................................. 12 ExpenseStabilization Fund................................................................................................................. 13 Outstanding Electric System Obligations............................................................................................ 13 Additional Parity Obligations.............................................................................................................. 13 Transfersto General Fund................................................................................................................... 14 Limitationson Remedies..................................................................................................................... 15 RECENT EVENTS REGARDING THE CITY................................................................................................ 15 Recent Convictions and Guilty Pleas of Former City Officials........................................................... 15 Failed Legislation to Disincorporate City ............................................................................................ 16 I Audits and Investigations.................................................................................................................... 16 CityReform......................................................................................................................................... 17 FutureEvents....................................................................................................................................... 19 ELECTRIC SYSTEM OBLIGATIONS........................................................................................................... 19 General............................................................................................................................................... 19 MalburgGenerating Station................................................................................................................ 19 Power Sales Contract with SCPPA for PVNGS.................................................................................. 19 GasSupply Agreements...................................................................................................................... 19 Interest Rate Swap Transactions.......................................................................................................... 20 HooverUprating Project...................................................................................................................... 21 THEELECTRIC SYSTEM.............................................................................................................................. 22 General............................................................................................................................................... 22 ServiceArea........................................................................................................................................ 22 City Plan to Optimize Resource Utilization........................................................................................ 22 Implementation of Resource Optimization Plan.................................................................................. 23 Management........................................................................................................................................ 23 PowerSupply Resources..................................................................................................................... 25 Interconnection and Distribution Facilities.......................................................................................... 33 Developments Affecting the Power Supply......................................................................................... 34 CapitalRequirements.......................................................................................................................... 35 LargestCustomers............................................................................................................................... 36 ElectricRates....................................................................................................................................... 36 EmployeeRelations............................................................................................................................. 39 Insurance.............................................................................................................................................. 40 Investment Policy and Controls........................................................................................................... 40 SeismicActivity .................................................................................................................................. 41 ELECTRIC SYSTEM FINANCIAL INFORMATION.................................................................................... 41 RetailEnergy Sales.............................................................................................................................. 41 Summaryof Operating Results............................................................................................................ 42 Management's Discussion of Operating Results................................................................................. 44 Projected Operating Results and Debt Service Coverage.................................................................... 44 UnrestrictedCash Balances................................................................................................................. 47 FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY............................................................... 47 California Climate Change Policy Developments............................................................................... 48 EnergyEfficiency Initiatives............................................................................................................... 52 Environmental and Regulatory Factors............................................................................................... 52 ii Developments in the California Energy Market.................................................................................. 57 Future Regulation of the Electric Utility Industry ............................................................................... 58 EnergyPolicy Act of 1992.................................................................................................................. 58 EnergyPolicy Act of 2005.................................................................................................................. 58 Currently Proposed Federal Legislation.............................................................................................. 59 Impact of Developments on the City ................................................................................................... 59 OtherGeneral Factors.......................................................................................................................... 60 2012 Series A Bonds .................................................. 2012 Series B Bonds ................................................... Circular 230............................................... ......................................................... 62 ...... ................................ I.................. 64 .................................................................. 66 APPROVALOF LEGALITY........................................................................................................................... 67 RATINGS......................................................................................................................................................... 67 UNDERWRITING............................................................................................................................................ 67 VERIFICATIONREPORT, ........................................ ..................................................................................... 67 FINANCIALSTATEMENTS.......................................................................................................................... 67 CONTINUINGDISCLOSURE........................................................................................................................ 67 MISCELLANEOUS.......................................................................................................................................... 68 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE ELECTRIC SYSTEM FOR THE FISCAL YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2010.............................................. A -I APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ......................................... B-1 APPENDIX C BOOK -ENTRY ONLY SYSTEM............................................................................................... C-1 APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL........................................................ D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT ................ ........................................ E-1 iii OFFICIAL STATEMENT $39,530,000- $34,825,000 CITY OF VERNON CITY OF VERNON Electric System Revenue Bonds Electric System Revenue Bonds 2012 Series A 2012 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 2012 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 — DEFINITIONS" herein. Purpose of Official Statement The purpose of this Official Statement (which includes the cover page and the appendices attached hereto) is to provide information concerning the sale and delivery by the City of Vernon, California (the "City") of its Electric System Revenue Bonds, 2012 Series A (the "2012 Series A Bonds") and its Electric System Revenue Bonds, 2012 Taxable Series B (the "2012 Series B Bonds" and, together with the 2012 Series A Bonds, the "2012 Bonds"). Authority The 2012 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 January 1, 2012. Use of Proceeds The 2012 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 2012 Series A Bonds; and (iii) to pay costs of issuance of the 2012 Series A Bonds. The 2012 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 2012 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 October 1, 2011. The City had an estimated resident population of approximately 112 according to the 2010 United States Census. 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 49 sworn officers to provide high level security and a quick response time and Preliminary; subject to change. 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 (' Whs") 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 2012 Bonds are special obligations of the City. The principal and Redemption Price of and interest on the 2012 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 amounts in the Funds, other than the Rebate Fund, held by the Trustee under the Indenture (as defined in the APPENDIX B, the "Trust Estate") 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 2012 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 2012 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 2012 Bonds. The 2012 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 under the Indenture $43,215,000 aggregate principal amount of Electric System Revenue Bonds, 2008 Taxable Series A (the "2008 Bonds") 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 2012 Bonds (the 2008 Bonds, the 2009 Bonds, the 2012 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 2012 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 2012 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 and financial 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 a legislative 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, and the subject of an investigation by the Office of the Attorney General for the State of California. Although the disincorporation bill was not enacted and the City believes that such investigation has been terminated, the City and the Electric System are under ongoing audits, including an audit by the Internal Revenue Service (the "IRS") and the Bureau of State Audits. Additionally, the City is currently implementing various reform measures of its policies and practices and the City's progress in such reform is to be reported to the State Legislature periodically. 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 2012 Series A Bonds The proceeds of the 2012 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 2012 Project (as defined below), which Costs were incurred (or are to be incurred) on and after September 16, 2011; (ii) to provide for capitalized interest on the 2012 Series A Bonds through February 1, 2013; and (iii) to pay costs of issuance of the 2012 Series A Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS." The "2012 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. 2012 Series B Bonds The proceeds of the 2012 Series B 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 2012 Project; and (iii) to pay costs of issuance of the 2012 Series B Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS." Certain of the proceeds of the 2012 Bonds will be deposited into an escrow fund (the "Escrow Fund") and applied 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 January 1, 2012 (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 the application of such proceeds in accordance with the Escrow Agreement, the Refunded 2009 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 and, in particular, will reduce debt service payments from Net Revenues for the Fiscal Years ending June 30, 2012 and June 30, 2013. The sufficiency of the mattering 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 2012 Bonds as described under "PLAN OF FINANCE" are set forth below. SOURCES: Principal amount of 2012 Bonds Net Original Issue [Premium/Discount] TOTAL SOURCES: USES: Deposit to Escrow Fund to Costs of 2012 Project Capitalized Interest tal Costs of Issuance (3) TOTAL USES: 2012 Series A 2012 Series B Bonds Bonds Total 1e To pay principal and interest, when due, on the Refunded 2009 Bonds, m To provide for capitalized interest on the 2012 Series A Bonds through February 1, 2013. n Includes underwriter's discount, legal fees, fees of the Trustee, rating agency fees, financial and consulting fees, printing costs and other expenses in connection with the issuance of the respective Series of the 2012 Bonds. [Remainder of Page Intentionally Left Blank] DEBT SERVICE SCHEDULE The following table shows the debt service schedule for the City's outstanding Bonds prior to the issuance of the 2012 Bonds, and does not reflect the refunding of the Refunded 2009 Bonds. Fiscal Year Debt Service on Ended June 30, Outstanding Bonds(l) 2012 $ 50,019,755 2013 50,016,675 2014 50,015,718 2015 50,018,691 2016 50,018,443 2017 50,018,380 2018 50,019,241 2019 50,021,476 2020 50,284,811 2021 50,282,283 2022 50,286,203 2023 4,236,157 2024 4,239,029 2025 4,238,526 2026 4,239,004 2027 4,239,603 2028 4,239,464 2029 4,237,729 2030 4,238,324 2031 4,239,960 2032 4,236,563 2033 4,236,846 2034 4,239,089 2035 4,236,791 2036 4,238,232 2037 4,236,480 2038 4,239,387 2039 4,239,592 2040 0 2041 0 2042 0 2012 Series A Bonds 2012 Series B Bonds Principal Interest Principal Interest TOTAL: $623,052,447 of Consisting of the 2008 Bonds and the 2009 Bonds. This table does not reflect the refunding of the Refunded 2009 Bonds. 5 Total Debt Service THE 2012 BONDS The following is a summary of certain provisions of the 2012 Bonds. Reference is made to the 2012 Bonds for the complete text thereof and to the Indenture for all of the provisions of the 2012 Bonds. The discussion herein is qualified by such references. See APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE." General The 2012 Bonds of each Series 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 2012 Bonds.will be issued in denominations of $5,000 or any integral multiple thereof. The 2012 Bonds will be dated and shall bear interest from their date of original issuance. Interest on the 2012 Bonds will be payable on each February I and August 1, commencing August 1, 2012. The 2012 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 2012 Bonds are held in the book -entry system, DTC or its nominee will be the registered owner of the 2012 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 2012 Bonds are held in book -entry form through DTC, all payments with respect to principal of, premium, if any, and interest on each 2012 Bond will be made pursuant to DTC's rules and procedures. See APPENDIX C — "BOOK -ENTRY ONLY SYSTEM." Redemption of 2012 Bonds Optional Redemption. The 2012 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 2012 Series A Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date. The 2012 Series B Bonds 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, at a Redemption Price equal to the Make Whole Redemption Price. "Make Whole Redemption Price" means a redemption price equal to the greater of (i) one hundred percent (100%) of the principal amount of the 2012 Series B Bonds to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2012 Series B Bonds to be redeemed (exclusive of interest accrued to the date fixed for redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus _ basis points, plus in each case, accrued and unpaid interest on the 2012 Series B Bonds being redeemed to the date fixed for redemption. "Comparable Treasury Issue" means, with respect to any redemption date for a particular 2012 Series B Bond, the US Treasury security or securities selected by the Independent Investment Banker which has an actual or interpolated maturity comparable to the remaining average life of the applicable 2012 Series B Bond to be redeemed, and that would be utilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to the remaining average life of the 2012 Series B Bond to be redeemed. "Comparable Treasury Price" means, with respect to any redemption date for a 2012 Series B Bond, (1) the average of the Reference Treasury Deal Quotations for such redemption date, after excluding the highest and lowest Reference Treasury Deal Quotations, or (2) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Independent Investment Banker" means that Reference Treasury Dealer appointed as such by the City. Preliminary; subject to change. "Reference Treasury Dealer" means E. J. De La Rosa & Co., Inc. and its successor and three other firms, specified by the City from time to time, that are primary U.S. Government securities dealers in the City of New York (each a "Primary Treasury Dealer'); provided, however, that if any of them ceases to be a Primary Treasury Dealer, the City will substitute another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date for a particular 2012 Series B Bond, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding such redemption date. "Treasury Rate" means, with respect to any redemption date for a particular 2012 Series B Bond, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated maturity of the Comparable Treasury Issue, assuming that the Comparable Treasury Issue is purchased on the redemption date for a price equal to the Comparable Treasury Price. Mandatory Sinking Fund Redemption. The 2012 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 for such 2012 Series A Bonds on each August I on or after August 1, , at a Redemption Price equal to the principal amount of the 2012 Series A Bonds of such maturity to be redeemed, without premium, in the amounts and on the dates set forth below: Sinking Fund Principal Amount Redemption Date to be Au st 1 Redeemed Maturity The 2012 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 for such 2012 Series A Bonds on each August 1 on or after August 1, _, at a Redemption Price equal to the principal amount of the 2012 Series A Bonds of such maturity to be redeemed, without premium, in the amounts and on the dates set forth below: Sinking Fund Principal Amount Redemption Date to be (August I Redeemed Maturity The 2012 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 for such 2012 Series B Bonds on each August 1 on or after August 1, , at a Redemption Price equal to the principal amount of the 2012 Series B Bonds of such maturity to be redeemed, without premium, in the amounts and on the dates set forth below: Sinking Fund Principal Amount Redemption Date to be (August 1 Redeemed 1 Maturity Notice of Redemption. The Trustee is to give notice of the redemption of any 2012 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 2012 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 2012 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 2012 Bonds of any like Series and maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2012 Bonds to be redeemed, and, in the case of a 2012 Bond 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 2012 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 2012 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 2012 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 2012 Bonds. In the event a notice of redemption of 2012 Bonds contains such a condition and such moneys are not so received, the redemption of 2012 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 2012 Bonds pursuant to the conditional notice of redemption. Receipt of notice of redemption shall not be a condition precedent to the redemption of 2012 Bonds and failure of any Owner of a 2012 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 2012 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 2012 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. If the amount of the Redemption Price of the 2012 Bonds to be redeemed is available on the redemption date, interest on the 2012 Bonds to be redeemed will cease to accrue, such 2012 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 such 2012 Bonds. Selection of 2012 Bonds to be Redeemed. The City shall select the principal amount of each Series and maturity of the 2012 Bonds to be redeemed at the option of the City. Whenever less than all of the 2012 Bonds of a Series and maturity are to be redeemed, the Trustee shall select at random the 2012 Bonds of such Series and maturity to be redeemed from all 2012 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 2012 Bonds are special obligations of the City. The principal and Redemption Price of and interest on the 2012 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 2012 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 2012 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 2012 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 payablefrom 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 contact 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 — DEFINITIONS" herein. The issuance of the 2012 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 2012 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 2012 Bonds. The 2012 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 2012 Bonds or in respect of any undertakings by the City under the Indenture. Deposit and Application of Revenues Pursuant to the Indenture, the City is to deposit or cause to be deposited all Revenues into the Light and Power Fund upon receipt thereof. Without limiting the provisions of the Indenture regarding investment of certain funds, the City is to apply the Revenues for each Fiscal Year, as received, first to the payment of Operation and Maintenance Expenses 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 10 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 11 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. "Adjusted Debt Service" is defined in the Indenture to mean, for any period of time, the Debt Service with respect to Outstanding Parity Obligations for such period minus the sum of the amount of such Debt Service 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 is to be made to the Debt Service Reserve Fund from the proceeds of the 2012 Bonds as the amount on deposit in the Debt Service Reserve Fund is sufficient to satisfy the Debt Service Reserve Requirement upon the issuance of the 2012 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 for such payment. 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. 12 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, after taking into account a $20 million transfer from the Expense Stabilization Fund for Fiscal Year 2012, no amounts were on deposit in the Expense Stabilization Fund. Outstanding Electric System Obligations Upon the issuance of the 2012 Bonds, the 2008 Bonds, the 2009 Bonds, the 2012 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 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 first Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, from the proceeds of Parity Obligations or Subordinate Obligations, shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during such Fiscal Years. 13 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. The 2012 Bonds are authorized to be issued in accordance with paragraph (b) above. 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. See APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" for the definition of certain terms used above, including the definition of "Debt Service Adjustments and Assumptions," to be used for purposes of determining Aggregate Adjusted Annual Debt Service and Maximum Adjusted Annual Debt Service. Transfers to General Fund The City covenants in the Indenture not to transfer Net Revenues for any Fiscal Year to the City's General Fund, including the Franchise Payment, in an amount exceeding the Net Transferable Income for such Fiscal Year, which amount shall be determined at the end of such Fiscal Year; provided that so long as an Event of Default has occurred and is continuing under the Indenture, the City shall not transfer any Net Transferable Income to the City's General Fund. "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 the difference between (i) 11.5% of the retail sales for such Fiscal Year and (ii) the sum of (A) the amount paid pursuant to clause (d) of the definition of Operation and Maintenance Expenses in such Fiscal Year plus (B) the amount, if any, paid to the City as a Franchise Payment in such Fiscal Year. 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). The following table shows the amount of transfers from the Light and Power Fund to the City's General Fund for the last five Fiscal Years: 14 CITY OF VERNON ELECTRIC SYSTEM TRANSFERS TO GENERAL FUND For Fiscal Years Ended June 30, 2007-2011 Fiscal Year Ended Amount June 30 of Transfer I�l 2007 $ 3,147,704 2008 3,178,597 2009 3,112,387 2010 8,600,038 2011 3,149,776 Source: Cityof Vernon u) Includes Franchise Payments; does not include City allocated administrative expenses constituting Operation and Maintenance Expenses. Limitations on Remedies The rights of the Owners of the 2012 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 2012 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 2012 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 and Guilty Pleas 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 Malburg, the former mayor of the City for 50 years, was convicted in December 2009 on ten charges of, among other things, voter fraud and conspiracy for falsely claiming to have established residency in the City and was ordered to pay more than $500,000 in fines. Convictions on two of the ten charges were reversed on appeal, but the convictions on the other eight charges were upheld. 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 reimburse the City $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 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. None of Mr. Malburg, Mr. Malkenhorst Sr. or Mr. O'Callaghan continue to have roles with the City. 15 Failed Legislation to Disincorporste City In December 2010, California Assembly Bill 46 ("AB 46"), an act to disincorporate the City and make it part of the unincorporated territory of Los Angeles County, was introduced into the State Assembly. AB 46 stated it was motivated by, among other things, a desire to eliminate corrupt practices by City officials, including misuse of public funds and excessive salaries (see'— Recent Convictions and Guilty Pleas of Former City Officials" above) and concern with the close relationship between the City management and its relatively small number of residents and residences. A companion bill, California Assembly Bill 781 ("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 many of the 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 for the City to adopt. The City adopted the reforms suggested by Senator De Leon. 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 significant elements of the reform program. The Charter amendments were overwhelmingly passed by the voters. The Charter amendments are now in effect and the City is in the process of further implementing the reforms, and City salaries have been adjusted to a level the City believes more closely reflects salaries for comparable positions in other California cities. The City's progress in implementing such reforms is to be reported to the State Legislature on a periodic basis, There can be no assurances that there will not be any additional attempts in the State Legislature to disincorporate the City or to require additional reforms in the future. Audits and Investigations The City has recently been the subject of an investigation and audits by overseeing public bodies as described below, certain of which are continuing. The City believes it has fully cooperated with such investigation and audits, and the City plans to continue cooperating with the ongoing audits. The recent and/or ongoing investigation 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. While no final report has been released by the Attorney General's Office, the City believes the investigation has concluded. The City has not been advised of any action to be taken in connection with this investigation. Ca1PERS Audit: On December 6, 2010, the California Public Employees' Retirement System ("CaIPERS") 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 believes it has provided all documents requested by the CaIPERS Office of Audit Services, including employment contracts, rules and regulations, salary and wage agreements, board minutes, salary and benefit agreements, current employee roster listing of all City employees, personnel files, payroll journals and other personnel and payroll records, and copies of audits and management letters. The City believes CaIPERS completed its review of the City's procedures and practices and the City is now waiting for CaIPERS to complete its audit report. The City cannot predict the contents of the report and there can be no assurances that the report will not be critical of City practices. IRS Audit of 2009 Bonds: On August 23, 2011, the City published a material event notice regarding an audit by the Internal Revenue Service 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 16 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 [2009] Bonds complied with all applicable provisions of the Internal Revenue Code and the City will cooperate with the IRS in its examination of the [2009] Bonds. The City is continuing to cooperate with the IRS in its examination of the [2009] Bonds." 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: In September, 2011, a week after the State Senate vote on AB 46, the Joint Legislative Audit Committee of the State Legislature requested that the Bureau of State Audits undertake an audit of the City and its Light and Power Department. 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 believes it is fully cooperating with the Bureau of State Audits and expects a report from the Bureau of State Audits in April, 2012. There can be no assurances that the report will not be critical of City practices, including those practices with respect to the Electric System. Effects of Audits and Investigation. 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 2012 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 or otherwise negatively affect the ratings, marketability or market value of the 2012 Bonds. City Reform In connection with the proposed legislation and review of the City discussed above, the City has taken steps to reform certain City policies and practices that have been raised as a matter of concern by the State Legislature, the Attorney General for the State and other reviewing bodies, and to further improve and make more transparent the City's policies and practices in general. The City has adjusted City salaries to more closely reflect salaries for comparable positions in other California cities. The City has established a Housing Commission to manage City - owned residences (see "— Housing Commission" below) and the City expects to increase the number of residences in the City. The City also established an Advisory Committee on Electrical Rates, which includes representatives of businesses within the City, to advise the City with respect to changes in electric rates (see "ELECTRIC SYSTEM — Electric Rates — Advisory Committee"). In addition, in February 2011, the City appointed John Van de Kamp, a former California Attorney General, as an independent ethics advisor to the City. Mr. Van de Kamp now serves as the Independent Reform Monitor, as further discussed below. The City has also agreed to establish an Environmental and Community Benefit Fund in an amount yet to be determined which is to be applied to environmental and community recreational projects and facilities to benefit communities near the City. The Environmental and Community Benefit Fund is to be administered by a board which is yet to be established but 17 which is to include representation from such nearby communities. Other reform measures, which were approved by City voters in November 2011 as Charter amendments, include the following: Councilmember Term Limits: 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: Requiring the City to 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 not involving the City has raised questions about whether the State's prevailing wages provisions apply to charter cities, like the City. At -Will Employment: Removing 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 greaterjob security. City Administrator Terms: Removing 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: 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 one City official and six 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: 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 has 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. The City is in negotiation to continue its engagement of Mr. John Van de Kamp to serve as the Independent Reform Monitor, As Independent Reform Monitor, Mr. Van de Kamp will provide periodic reports to the State Legislature regarding the City's progress with its reforms. Councilmember Appointments: Prohibiting 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: Prohibiting City councilmembers from increasing their compensation in excess of cost -of -living adjustments under any circumstances. Light and Power Funds: Removing 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: Requiring that the City establish by ordinance an open and competitive bidding process for City service contracts. 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, 18 Future Events The City cannot assure that the above -described actions will satisfy all members of the State Legislature as to the actions they deem appropriate with respect to the City. The City also 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 reforms 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 2012 Bonds. The City believes that any repeal of its Charter through disincorporation would, however, require an affirmative vote of the electorate and would have to be carried out in a manner which does not violate the provisions of the United States and California Constitutions relating to the impairment of contracts. ELECTRIC SYSTEM OBLIGATIONS General In addition to the Outstanding Bonds, and the short-term power purchase agreements included in Operation and Maintenance Expenses, the City has entered into a number of transactions providing for payments from the Revenues or Net Revenues of the Electric System. The material transactions are described below. Malburg Generating Station As described under "THE ELECTRIC SYSTEM — Power Supply Resources — Malburg Generating Station," the City has entered into the Power Purchase Tolling Agreement, dated as of April 10, 2008 (the "PPTA"), with Bicent (California) Malbrug LLC, a Delaware limited liability company ('BCM") pursuant to which the City has purchased the output of the Malburg Generating Station (the "MGS'% a combined cycle generating plant located within the City. Payments under the PPTA are to be made as Operation and Maintenance Expenses. 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 4.90% entitlement interest (11.6 MWs) in the Southern California Public Power Authority's (`SCPPA") ownership interest in the Palo Verde Nuclear Generating Station ("PVNGS"). The City has entered into a power sales contract with SCPPA (the "PVNGS Contract"), which provides the City with its share of capacity and energy from PVNGS. Under the PVNGS Contract, the City is obligated to pay its share of SCPPA costs associated with PVNGS, including operation and maintenance costs and debt service on SCPPA bonds issued for the project. The City's payment obligations under the PVNGS Contract are on a "take -or -pay" basis, 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 5,971 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 19 (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 in 2009 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. 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. The Sale Contract fixes the price of gas sold to the Sacramento Municipal Utility District at an index price minus 25 cents per MMBtu, which the City estimates to result in a difference of approximately $1.2 million per Fiscal Year from the index price. 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. 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 amount of such increase would depend on the cost of gas which the City cannot predict. 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 Fiscal Year 2017. 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 December 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. 20 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. See "RATINGS" herein for the current ratings of the City's Electric System revenue bonds. The Deutsche Bank Swap Transaction also includes an option by Deutsche Bank to terminate the Deutsche Bank Swap Transaction in Fiscal Year 2017. 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 December 1, 2011, the Morgan Stanley Swap Transaction had a market value of $27,420,446 payable by the City to Morgan Stanley, and the Deutsche Bank Swap Transaction had a market value of $17,315,042 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 $20,000,000, the City is required to post collateral to the respective swap counterparty. In the case that the City's Electric System revenue bonds credit rating is downgraded to BBB from S&P or Baal from Moody's, the City is required to post collateral to the respective swap counterparty at any time the negative market value of the City's position in a Swap Transaction exceeds $10,000,000, and in the case that the City's Electric System revenue bonds credit rating is downgraded to BBB- from S&P or Baa3 from Moody's, the City is required to post collateral to the respective swap counterparty at any time the City's position in a Swap Transaction is of any negative market value. 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. As of December 1, 2011, the City was posting collateral on the Morgan Stanley Swap Transaction but not on the Deutsche Bank Swap Transaction. The market value of the Swap Transactions are volatile, and there can be no assurances collateral requirements with respect to the City will notincrease. The City has the option to terminate each Swap Transaction. If at the time of such termination, the City's position in the Swap Transaction has a negative market 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. 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. Hoover Uprating Project As described under "THE ELECTRIC SYSTEM — Power Supply Resources — Hoover Uprating Project — General," the City has entered into the Contract for Electric Service (the "CES") with the United States Department of Energy Western Area Power Administration ("Western") in connection with power from the hydroelectric power plant of the Hoover Dam. While the City has advanced its share of the construction funds required by the CES, the City remains liable for its share of the operation and maintenance expenses of the Hoover Plant. In addition, as described under "THE ELECTRIC SYSTEM — Power Supply Resources — Hoover Uprating Project — Hoover Contract for Differences," the City has entered into the Hoover Contract for Differences (the "Hoover Contract for Differences") with Bicent (California) Hoover LLC (`BCH") with respect to the economic burdens and benefits of the City's interest in the Hoover Uprating Project. Any payments due under the CES and the Hoover Contract for Differences are to be made as Operation and Maintenance Expenses. 21 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 October 1, 2011. The City had an estimated resident population of approximately 112 according to the 2010 United States Census. 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. Along the City's northern border are 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 heading for domestic and world markets. In addition, the City has excellent freeway access with Interstate Highway 710 adjacent to the City line and with close proximity to Interstate Highways 5, 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 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 2004, 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. 22 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 local 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 assigned its rights and obligations with respect to the MGS to its affiliate, Bicent (California) Malbtug LLC, a Delaware limited liability company. BCM has sold the capacity and the energy of the MGS to the City pursuant to the Power Purchase Tolling Agreement. See "— Power Supply Resources — Malburg Generating Station — Power Purchase Tolling Agreement." In addition, Bicent (California) Hoover LLC, a Delaware limited liability company and an affiliate of Bicent, has acquired the economic benefits and burdens of the City's interest in the Hoover Uprating Project (described below) on the terms set forth in the Hoover Contract for Differences 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 "Stanwood 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 sale of the Electric System assets were used to fund a portion of the debt service reserve requirement for the 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. 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 fully described below, the Electric System continues to include ownership interests or capacity rights in other electric facilities and the ownership of the interconnection and distribution system within the boundaries of the City. Management The Electric System is operated and maintained through the City's Light and Power Department, which is governed by the City Council. The Light and Power Department is managed by the Director of Light and Power whose duties include overseeing the operation and maintenance of the Electric System's facilities, metering, power purchasing, scheduling, billing and settlements. The Director of Light and Power reports to the City Administrator. 23 City Officials The current members of the City Council are as follows 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. The former Mayor, Hilario Gonzales, resigned as of December 1, 2011, and the City is currently in the process of selecting a new Mayor. 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 four 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 Prover Executive Management The following are brief resumes of the senior Light and Power Department management 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 City -owned electric generation 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 19 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. Mr. Nourmohamadian has over 21 years of experience in the Light and Power Department and is responsible for all aspects of electrical, gas and communications engineering and construction functions. Mr. Nourmohamadian holds a Bachelor of Science degree in Electrical Engineering from Marquette University, Milwaukee, Wisconsin. Mr. Nourmohamadian is a licensed Professional Engineer in the State of California and a member of the Institute of Electrical and Electronics Engineer. 24 Eric T. Fresch, a former City Administrator and former City Attorney, provides consulting services to the City in connection with various Light and Power Department matters. Mr. Fresch's salary as City Administrator was one of the salaries considered excessive in connection with the introduction of the legislation to disincorporate the City. See "RECENT EVENTS REGARDING THE CITY." The City has accepted Mr. Fresch's resignation from his role as consultant effective May, 2012. Power Supply Resources General The Electric System's current power supply resources consist of: (i) the Power Purchase Tolling Agreement for the Malburg Generating Station; (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 Service with the United States Department of Energy - Western Area Power Administration 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. While the City expects to continue utilizing short-term contracts to satisfy its load requirements not covered by its Committed Resources, the City may enter into long-term power purchase contracts when the City determines it is economically advantageous in providing for its customers' requirements or in connection with satisfying renewable energy portfolio requirements. 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. [Remainder of Page Intentionally Left Blank] 25 CITY OF VERNON ELECTRIC SYSTEM RESOURCES USED TO SATISFY CITY'S LOAD REQUIREMENT to 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% 33.69%(7) Long -Term Contracts (4) Actual Energyt3l 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 (3) 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 (s) 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 (a) Actual Energy (a) 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 - m Totals may not add due to rounding. ru Term of less than one year. m Megawatt hours ("Mwhs"). t0 Term of one year or longer. n) As discussed above in the caption "— Implementation of Resource Optimization Plan," the City has sold the MGS and entered into a long term contract with the purchaser for 100 % of the output from the MGS. See "THE ELECTRIC SYSTEM — Power Supply Resources — Malbwg 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. teI Includes resources from the H. Gonzales Generating Station. m 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 Power Purchase Tolling Agreement with Bicent (California) Malburg LLC, the City acquired all of the capacity and energy of the Malburg Generating Station for a fifteen year term ending in 2023. The term can be extended by BCM 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. 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 Er 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 MOS. 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 less gas to be delivered to retail customers of the City's gas department. See "ELECTRIC SYSTEM OBLIGATIONS — Gas Supply Agreements," 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 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 dispatch 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 and time required to perform Siemens recommended maintenance 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 offacility to Date" below. The PPTA provides that, in connection with the MGS, BCM 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 BCM 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 MOS. 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 MOS. 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 MOS. 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 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 27 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. For a schedule of expected payments under the PPTA and the Hoover Contract for Differences (See "— Hoover Uprating Project — Hoover Contract for Differences" below), see the table in Note 10 in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A, which table shows amounts net of the amortization of deferred gains. 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. 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, 2011, the MGS provided 669,028 MWhs of energy to the City. As described under "— Implementation of Resource Optimization Plan," the City has sold the MGS, 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. The Palo Verde Nuclear Generating Station 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 1,334 MWs (unit 3). PVNGS's combined dependable capacity is 3,937 MWs and its combined maximum capacity is 4,003 MWs. Each PVNGS generating unit operates under 40-year Full -Power Operating Licenses from the Nuclear Regulatory Commission (the "NRC") expiring in 2025, 2026 and 2027, respectively. In April of 2011, the NRC granted a 20-year license extension to the three units allowing them to operate until 2045, 2046 and 2047, respectively. The co -owners of PVNGS have not approved the extension of plant operations beyond 2027. Arizona Public Service Company ("APS") is the operating agent for PVNGS The Southern California Public Power Authority is a joint action agency in which the City participates. SCPPA has a 5.91% ownership share in the PVNGS. The City has a 4.90% generation entitlement interest in SCPPA's ownership share in PVNGS through the City's "take -or -pay" 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 PVNGS 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 i 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 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 NRC's enhanced inspection regime took place throughout the summer of 2007, On June 21, 2007, the NRC issued an initial confirmatory action letter confirming the commitments of APS regarding specific actions it is to take to improve PVNGS's performance. In 2007, a team of NRC inspectors performed on -site in-depth inspections of PVNGS's equipment and operations. 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'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. The NRC reviewed the adequacy of APS's improvement plan and issued a revised Confirmatory Action Letter ("CAL") 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 NBC's Action Matrix ("Column 1"), thus closing all issues raised by the CAL. 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 for 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. 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 to the City of approximately $43,000. 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 to the City of approximately $293,000 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 and an old reservoir was relined at a combined cost to the City of approximately $198,000. 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 to the City of relining the two evaporation ponds is estimated at $427,000. Since the existing evaporation ponds have almost reached their full capacity, a new evaporation pond was added at a cost to the City of approximately $194,000. Safety Improvements. PVNGS recently opened a joint Emergency Operating Facility/Joint Information Center at a cost to the City of approximately $40,000 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, the protected area of PVNGS was enlarged 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 to the City for these facilities is approximately $151,000. 29 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 spent fuel storage pools and whether any changes might be necessary at nuclear plants in the United States. The NRC conducted special stress test reviews of nuclear power plants in the United States, including 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. 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 aftermath of the Fukushima Dai-ichi incident prompted the United States nuclear industry to form a task force under the direction of PVNGS's Chief Nuclear Officer to take immediate actions in ensuring the reliability of all nuclear plants in the United States. PVNGS itself has established a task force to evaluate the plant's safety and emergency preparedness. An initial assessment of the plant systems, safety policies, and emergency procedures revealed significant differences between PVNGS and the Fukushima Dai-ichi nuclear power plant. PVNGS's low -seismic location, robust pressurized water reactor design, redundant safety features, ample effluent water supply, and multiple back-up power sources make a similar catastrophe in Arizona highly improbable. Despite the seemingly substantial advantages, PVNGS, in conjunction with other nuclear agencies, is continuously working to make sure that the plant is adequately prepared to meet beyond design basis events, respond to extended loss of power situations, and mitigate potential fire and flood events. While evaluations are still in progress, among the initial recommendations are plans to accelerate fuel removal from the spent fuel pools and possibly purchase a standby diesel generator as reinforcement to the existing back-up power sources. The events in Japan have also created broader economic uncertainties that may affect future operating costs. The City cannot predict 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 production cost of nuclear power, and may impact the capital investment requirement. Decommissioning Costs. Unless the owners of PVNGS approve an extension of plant operations beyond 2027 as permitted by the license extensions (see '— General' above), the PVNGS generating units will be decommissioned shortly after 2027. 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 commencing in 2027 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. 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 to 2027. 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. Since the event at the Fukushima Dai-ichi nuclear power plant, PVNGS embarked on a program to accelerate the transfer of spent fuel from the spent fuel pools to the dry cask storage facility, thus reducing the heat load inside the spent fuel pools. In addition, PVNGS will soon use the newly designed casks that contain 36 spent fuel assemblies allowing the dry cask storage facility to accept more spent fuel. 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 30 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 2027. 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 the Western Area Power Administration markets the power from the facility. Pursuant to the Contract for Electric Service 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. The City is responsible for its share of the operating costs of the facility. On December 20, 2011, President Obama signed into law The Hoover Power Allocation Act of 2011, which law extended the sale and delivery of power to the contracting participants, including the City, through 2067. 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 20 MWs (calculated based on 1.1% of 1,812 MWs annual average output capability). 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, together with certain other parties, have implemented 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. Hoover Contract for Differences. At the time of the closing of the sale of the Malburg Generating Station (See ' — Implementation of Resource Optimization Plan"), the City entered into the Hoover Contract for Differences with Bicent. (California) Hoover LLC. The Hoover Contract for Differences generally provides for the City's swapping the economic benefits and burdens under the Contract for Electric Service with the Western Area Power Administration 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 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 31 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. For a schedule of expected payments under the Hoover Contract for Differences and the PPTA, see the table in Note 10 in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A, which table shows amounts net of the amortization of deferred gains. 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 -tern 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. 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 are 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. The City currently has several options to satisfy the requirements of SBX 1-2 as discussed below. W 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 13,000 acres of this land to NextEra (FPL) for approximately $40 million and maintained certain transmission rights and easements on the land. 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 farm. 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. 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 remaining 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. Bio-Gas. As another option to satisfy the SBX 1-2 requirements, the City is currently evaluating the use of bio-gas as fuel for the Malburg Generating Station as an alternative to natural gas. The City is currently in negotiations for the acquisition of a supply of pipeline quality bio-gas for such implementation of bio-gas at MGS. Such use of bio-gas as fuel would potentially make MGS the City's primary renewable resource to satisfy the SBX 1-2 requirements. Implementation of this change of fuel 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. As there are no established markets for renewable energy credit or renewable energy, no assurances can be given as to the availability or cost to the City of renewable energy credits or renewable energy. Renewable Pass -Through Charge. As the City plans to add renewable energy resources to its portfolio, it has implemented a Renewable Energy Cost Adjustment Factor (the "RECAF") to be added to its Electric System customer bills. While the RECAF is effective with the bills for January, 2012, the City does not expect to have charges under the RECAF until 2013. The RECAF is to recover the costs of renewable energy resources in excess of non-renewable market power. See "— Electric Rates — Renewable Energy Cost Adjustment Factor" below. 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 the applicable renewable energy resource requirements. 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 66 kV power lines (of which approximately 5% are underground), and approximately 125 miles of 7 kV power lines (of which approximately 15% are underground). The Electric System has eight active primary substations, three of which are dedicated customer substations andfive 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. See "THE ELECTRIC SYSTEM — Capital Requirements." The City currently operates and maintains the Electric System facilities located within the City, except that Petrel]i Electric Inc. currently maintains the City's electric distribution system under contract with the City. 33 Developments Affecting the Power Supply The City relied on short-term (less than one year) power purchase contracts to provide approximately 33.69% of the 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 February9, 2006, the CAISO Sled 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 at that time. 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. 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. 34 The City currently has satisfied this reserve margin requirement with the Power Purchase Tolling Agreement for energy from the MGS, and the City believes it will continue to have sufficient power resources to satisfy the system capacity requirements as required by MRTU and AB-380. Resource Mix SB-1368 (Chapter 598, Statutes of 2006) provides for a restriction on the negotiation of contracts 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 more information on SB-1368, see "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY — California Climate Change Policy Developments — GHG Emissions Performance Standard and Financial Commitment Limits." For further discussion of other environmental legislation and regulations, 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 ("Maintenance Improvements") and the balance to serve new load ("Additional Improvements"). The 2006 Distribution Master Plan was updated in 2010 to provide for capital improvements in Fiscal Years 2011 through 2015. The updated Distribution Master Plan identified Maintenance Improvements consisting primarily of upgrading from 7 kV to 16 kV service facilities, substation facility replacements and upgrades, pole replacements, undergrounding of facilities and street improvements and Additional Improvements consisting of additional substation facilities. Since the 2010 update of the Distribution Master Plan, the City has developed a capital improvement program for Fiscal Years 2012 through 2020. The program includes approximately $66.2 million of capital improvements in Fiscal Years 2012-2016 of which approximately $30.5 million is for Maintenance Improvements and approximately $35.7 million is for Additional Improvements. The program also includes approximately $40.7 million in capital improvements in Fiscal Years 2017 through 2020 of which approximately $12.8 million is for Maintenance Improvements and $27.9 -million is for Additional Improvements. The City plans to apply approximately $37.8 million of proceeds of the 2012 Bonds to Maintenance Improvements included in the Distribution Master Plan with the balance of the capital improvement program funded by amounts in the Light and Power Fund. The City expects to construct and install Additional Improvements only as necessary to serve new customers which have established facilities in the City. The City expects the costs of all such Additional Improvements will be funded by amounts in the Light and Power Fund. The City may, however, issue additional Bonds under the Indenture or otherwise finance all or a portion of such Maintenance Improvements and Capital Improvements. [Remainder of Page Intentionally Left Blank] 35 The following table lists the expected annual capital requirements for the Electric System to be paid from amounts in the Light and Power Fund for the five Fiscal Years ending June 30, 2012 through 2016: Fiscal Year Ending June 30 2012 2013 2014 2015 2016 Total Source: City of Vernon Largest Customers Capital Requirements from Light and Power Fund (in thousands) $ 0 3,500 4,500 5,000 11,850 $ 24,850 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% 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. Business Name CITY OF VERNON ELECTRIC SYSTEM TEN LARGEST CUSTOMERS For Fiscal Year Ended June 30, 2011 In Vernon 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 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 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 California Assembly Bill 1890 of 1996 ("AB 1890"). 36 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, 2012(') 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 to Approved. The projected operating results assume further increases of rates which increases require City Council approval. See "ELECTRIC SYSTEM FINANCIAL INFORMATION — Projected Operating Results and Debt Service Coverage" herein. 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. Advisory Committee In April, 2011, the City established the Advisory Committee on Electrical Rates which is comprised of one member who is a City official and five members from local businesses who are not City officials. The Advisory Committee on Electrical Rates meets on a quarterly basis to provide input and recommendations to the City regarding electric rate increases. Such advice and recommendations are not binding on the City. 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, which is calculated and payable on a monthly basis. The FCABF went into effect on July 1, 2008 and will be added to all retail customer bills based on electrical consumption. The FCABF adds an amount to each retail 37 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. 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"), which is calculated and payable on a monthly basis. The RECAF will go into effect on January 1, 2012 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. Average Price The table below sets forth the average billing price per kilowatt-hour of the Electric System's various customer classes for the periods indicated. CITY OF VERNON ELECTRIC SYSTEM AVERAGE BILLING PRICE (CENTS PER KILOWATT-HOUR) Fiscal Year Ended June 30, 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. [Remainder of Page Intentionally Left Blank] 38 Uncollectible Accounts The City considers its write offs for uncollectible accounts to be low by electric utility industry standards for urban areas. The annual write offs for uncollectible accounts have been less than 0.2% for each of the last five Fiscal Years. CITY OF VERNON ELECTRIC SYSTEM UNCOLLECTIBLE ACCOUNTS Fiscal Year Ended June 30 Uncollectible Revenues Percent of Gross Billings 2007 $70,774 0.068% 2008 79,246 0.073 2009 109,194 0.109 2010 193,715 0.183 2011 120,009 0.104 Source: City of Vernon Employee Relations As of June 30, 2011, 46 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 personnel from the City's Finance Department and the office of the City Attorney. Two labor unions represent a portion of the City's employees: the Vernon Police Officer Benefit Association, consisting of all sworn police personnel below the rank of Lieutenant, and the Vernon Firefighter's Association, consisting of all non -clerical fire personnel below the rank of Battalion Chief. There have been no strikes or other work stoppages against the City within the last twenty years. Retirement benefits to City employees, including those assigned to the Electric System, are provided through the City's participation in the California Public Employees Retirement System, 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 (police and fire personnel) are paid by the employees through pre-tax payroll deductions. The City is required to contribute the remaining amounts necessary to fund the benefits for its members, using the actuarial basis adopted by the CalPERS Board of Administration. The City's and employees' total contribution to CalPERS for the year ended June 30, 2011 was $5,794,058 and $1,864,275, respectively, of which total amount the Electric System's and its employees' contributions were $499,547 and $297,561, 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 has contributed its annual pension cost payments with respect to all employees as required by CALPERS. Based on the assumptions from the actuarial valuation performed in June 30, 2008, as of June 30, 2010, the City had funded 83.6% of its actuarial accrued liability. See Note 9 in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A. For Fiscal Year 2011, the City Council approved a post -employment benefit plan for certain City employees with 20 years of service who retire at 60 or after 30 years or more of service to the City. None of the City employees assigned to the Electric System participate in the plan. For information concerning the plan, see Note 11 in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A. 39 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 property 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 $100,000 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 andlimitations 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 self -insured retention of $2 million. The City has a workmen's compensation insurance policy with a $50 million limit and a $1 million self -insured retention 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. See Note 8 in the Annual Financial Report for the Fiscal Year ended June 30, 2011, included in APPENDIX A. Investment Policy and Controls The City's Investment Policy sets forth the investment guidelines for all funds of the City, including amounts in the Light and Power Fund. In accordance with California law, the City has adopted an Investment Policy for the investment of City funds which are not currently needed for disbursement, The City Council annually 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. below. As of June 30, 2011, the City's Light and Power Department had invested its funds in the investments CITY OF VERNON INVESTMENTS OF LIGHT AND POWER DEPARTMENT ttl As of June 30, 2011 Investment Type Amount Deposits with Financial Institutions $ 29,133,101 Federal Home Loan Bank 9,140,388 Federal National Mortgage Association 4,473,987 Local Agency Investment Fund 536,296 Money Market Mutual Fund 30,087,886 United States Treasury Notes 33,352,291 $ 106,723,949 Source: City of Vernon. t'l 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. The City also adopted Guidelines for Utilization of Interest Rate Swaps & Other Derivative Products (the "Swap Policy"). According to the Swap Policy, the City is to maximize the benefits and minimize the risks it carries 40 by actively managing its interest rate swap program, including periodic monitoring of market conditions and possible early termination. A report providing the status of all interest rate swap agreements entered into by the City is to be prepared no less frequently than semi-annually (or on such other basis directed by the City Council). The City currently has two outstanding interest rate swap agreements, both of which currently have negative market values. See "ELECTRIC SYSTEM OBLIGATIONS — Interest Rate Swap Transactions" herein. 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 27 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 27 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 caries earthquake insurance. 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 each of 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. [Remainder of Page Intentionally Left Blank] 41 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 (0} 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 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) $__1T i42142 $102 i 1 9 $ 4 $_19 Peak Retail Demand (MWs) 206.3 2060.203.7 196.6 Source: City of Vernon, derived from audited financial statements. in Some businesses have more than one meter. The City considers each meter to be a customer. tzt 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 each of 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. 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 accordance with the Indenture, depreciation, amortization and other non -cash items are not included in Operation and Maintenance Expenses. [Remainder of Page Intentionally Left Blank] 42 CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES and DEBT SERVICE COVERAGE UNDER INDENTURE (t)(2) Revenues: Electric Sales — Retail Fuel Cost Adjustment Transmission revenue Investment Income (3) Non -Recurring Income (Loss) (4) Withdrawal from/ (Deposit to) Stabilization Fund Other (5) Total Revenues Operation and Maintenance Expenses: Fuel (s) Energy (7) City Allocated Administrative Costs (a) Other (9) Total Operation and Maintenance Expenses Net Revenues Available for Debt Service Electric Revenue Bond Debt Service (10) Debt Service Coverage Ratio Net Revenues Remaining After Debt Service Fiscal Year Ended June 30 2007 2008 2009 2010 2011 $ 97,349,384 $102,883,428 $103,837,374 $104,464,945 $108,600,606 0 0 5,574,405 4,778,639 1,215,647 10,485,050 8,333,814 617,416 1,314,640 1,358,755 6,359,925 4,152,465 1,371,959 1,410,991 1,637,826 631,983 53,383,951 (43,556) 40,000,000 0 0 0 6,500,000 (40,000,000) 20,000,000 3,543,849 3,350,465 3,327,980 3,802,214 4,065,372 $118,370,191 $172,104,123 $121,185,578 $115,771,428 $136,878,205 $ 46,837,025 $ 53,774,894 $ 55,660,258 $ 4,104,122 $ (1,292,543) 16,698,326 24,400,528 32,725,577 30,711,920 38,014,830 8,301,118 8,397,734 2,533,729 2,872,661 2,872,661 23,127,223 30,058,466 19,356,165 19,661,939 20,228,314 $94,963,692 $116,631,622 $110,275,729 $ 57,350,642 $ 59,823,262 $ 23,406,499 $ 55,472,501 $ 10,909,849 $ 58,420,785 $ 77,054,943 S 15,069,639 $ 14,289,738 $ 6,976,580 $ 30,801,362 $ 55,716,775 1.55x 3.88x 1.56x 1.90x 1.38x $ 8,336,860 $ 41,182,763 $ 3,933,269 $ 27,619,424 $ 21,338,168 Source: City of Vernon. in Totals may not add due to rounding. a) Excludes depreciation and amortization, and other non -cash items from Operation and Maintenance Expenses. m 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 Fuel. to For the Fiscal Year ended June 30, 2007, represents primarily net payments received by the City in connection with suspension of interest rate swaps, For the Fiscal Year ended June 30, 2008, represents 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. For the Fiscal Year ended June 30, 2010, represents proceeds from the sale of renewable wind land. n) Includes 2.85% AS 1890 public benefit surcharges pursuant to Section 385 of the California Public Utilities Code. tot Includes costs associated with natural gas purchased under the Supply Agreement, which consisted of debt service payments on the Authority Bonds treated as operation and maintenance expenses. When the Authority Bonds were redeemed with proceeds from the 2009 Bonds, payments on the 2009 Bonds were treated as debt service and not as operation and maintenance expenses. tn) Represents net energy purchases and wholesale sales and capacity (including the PPTA and Hoover Contract for Differences in the Fiscal Years ended June 30, 2008 through 2011). Excludes $I 1,250,000, $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. tq Represents costs incurred by the City for City services benefilting the Electric System. t9) Includes, among other things, transmission costs, grid management charges, ancillary services, FERC fees, maintenance service contracts and other Electric System administrative expenses. o°) Debt service for Parity Obligations, including net payments on interest rate swap transactions. 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. 43 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 each of 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 Indenuue, depreciation, amortization and other non -cash items 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: I. Economic activity by businesses within the City will continue, and the demand for electricity will continue, consistent with historic levels, with an assumed 1.5% increase in load on an annual basis for retail demand. 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 an 8.00% rate increase on July 1, 2011, an approved 8.00% rate increase on January 1, 2012 and projected rate increases of 11.5% on July 1, 2012 and 4.25% 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 20-33% of load over projection period at $90-120 per 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 and energy cost forecast based upon published forward pricing for natural gas and SP-15 energy as of November 7, 2011. 9. The Deutsche Bank Swap Transaction is expected to be terminated during the Fiscal Year ending June 30, 2017, which termination amount is expected to be paid from amounts in the Light and Power Fund. 10. 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. 11. Transfer of $20,000,000 out of the Expense Stabilization Fund during the Fiscal Year ending June 30, 2012, and no amounts will be deposited or withdrawn from the Expense Stabilization Fund thereafter. 44 12. No withdrawals from the Debt Service Reserve Fund, the balance of which is expected to remain at $46,062,959 throughout the forecasted time period. 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] 45 CITY OF VERNON ELECTRIC SYSTEM PROJECTED REVENUE, EXPENSES and DEBT SERVICE COVERAGE UNDER INDENTURE t't Fiscal Year Ending June 30, 2012 2013 2014 2015 2016 2017 Revenues: Electric Sales — Retail $ 123,234,620 $ 145,187,649 $ 153,628,496 $ 162,560,072 $ 172;010,909 $ 182,011,193 Fuel Cost Adjustment 0 442,298 747,971 1,198,731 1,104,013 1,461,211 Transmission revenue 1,400,256 1,660,488 1,685,396 1,710,677 1,736,337 1,762,382 Investment Income 1,332,154 1,852,239 2,431,919 2,906,290 3,098,043 3,194,197 Withdrawal from Stabilization Fund 20,000,000 0 0 0 0 0 Renewable Pass -Through 0 6,820,117 15,117,594 16,632,869 17,258,327 18,470,159 Other (2) 4,497,611 5,150,659 5,414,938 5,697,563 5,979,669 6,290,546 Total Revenues $ 150,464,640 $ 161,113,450 $ 179,026,314 $ 190,706,201 $ 201,187,297 $ 213,189,688 Operation and Maintenance Expenses: Fuel $ 6,871,981 $ 7,501,881 $ 8,217,385 $ 8,219,152 $ 8,608,757 $ 9,271,144 Non -Renewable Energy 40,339,517 39,093,918 36,523,291 36,623,281 37,141,422 53,589,849 Renewable Energy 0 10,395,918 23,893,266 27,851,121 30,364,037 34,039,789 City Allocated Administrative Costs O) 2,915,751 2,959,487 3,003,880 3,048,938 3,094,672 3,141,092 Other (4) 23,573,473 24,941,579 25,315,702 25,695,438 26,080,870 26,472,083 Total Operation and Maintenance Expenses $ 73,700,722 $ 84,892,784 $ 96,953,525 $ 101,437,930 $105,289,758 $ 126,513,957 Net Revenues Available for Debt Service $ 76,763,918 $ 76,220,666 $ 82,072,789 $ 89,268,271 $ 95,897,539 $ 86,675,731 Debt Service: (5) Payments for Swap Transactions $ 5,683,374 $ 4,951,592 $ 5,083,088 $ 4,255,147 $ 2,827,110 $ 2,192,779 2008 Bonds Debt Service 3,975,405 3,973,575 3,975,080 3,974,735 3,977,355 3,977,755 2009 Bonds Debt Service 45,355,950 16,674,700 46,040,638 46,043,956 46,041,088 46,040,625 2012 Series A Bonds Debt Service 0 0 2,339,794 2,339,794 2,339,794 2,339,794 2012 Series B Bonds Debt Service 0 2,534,852 2,407,775 2,407,775 2,407,775 2,407,775 Total Debt Service $ 55,014,729 $ 28,134,719 $ 59,846,375 $ 59,021,407 $ 57,593,121 $ 56,958,727 Debt Service Coverage Ratio tsl 1.40x 2.71x 1.37x 1.51x 1.66x 1.52x Net Revenues Remaining After Debt $ 21,749,189 $ 48,085,947 $ 22,226,414 $ 30,246,864 $ 78,704,416 $ 29,717,004 Service Source: City of Vernon (') Totals may not add due to rounding. nt Includes 2.85% AS 1890 public benefit surcharges pursuant to Section 385 of the California Public Utilities Code. t't Represents costs anticipated to be incurred by the City for City services benefitting the Electric System. 44t Includes, among other things, transmission costs, grid management charges, ancillary services, FERC fees, maintenance service contracts and other Electric System administrative expenses. 1e) Debt service for Parity Obligations, including net payments on interest rate swap transactions. t°t Net Revenues divided by Total Debt Service. Assumes no Bonds, other than the 2008 Bonds, the 2009 Bonds and the 2012 Bonds, and no swap transactions, other than Morgan Stanley Swap Transaction and the Deutsche Bank Swap Transaction, are outstanding during the projection period. 46 Unrestricted Cash Balances The Electric System's unrestricted cash balances as of June 30 for each of the previous five Fiscal Years ended June 30, 2007 through June 30, 2011 has been no less than $50.8 million. The Electric System's unrestricted cash balances as of June 30 for such previous five Fiscal Years were as follows: CITY OF VERNON ELECTRIC SYSTEM HISTORICAL UNRESTRICTED CASH BALANCES Unrestricted Cash June 30, Balances 2007 $ 121,965,690 2008 164,889,312 2009 58,826,346 2010 67,966,574 2011 50,848,937 Source: City of Vernon Based on the assumptions described under' — Projected Operating Results and Debt Service Coverage," (A) after payment of operation and maintenance expenses and debt service, as detailed above, and (B) after payment of (i) projected capital requirements (See "THE ELECTRIC SYSTEM — Capital Requirements"), (ii) transfers to the City's General Fund, which transfers are assumed to be (and are limited to) 11.50% of retail sales, less Franchise Payments and less City allocated administrative costs included as Operation and Maintenance Expenses, and (iii) for the Fiscal Year ended June 30, 2017, a projected termination payment of $13.9 million in connection with the Deutsche Bank Swap Transaction, the City projects the Electric System's unrestricted cash balances as of June 30 for each of the Fiscal Years ending June 30, 2012 through June 30, 2017 will be as reflected in the following table. The amount of unrestricted cash balances will depend on a variety of factors, and there can be no assurances that such unrestricted cash balances will be available in the amounts and at the times set forth in the following table. CITY OF VERNON ELECTRIC SYSTEM PROJECTED UNRESTRICTED CASH BALANCES Unrestricted Cash June 30, Balances 2012 $ 61,713,140 2013 92,561,995 2014 95,625,012 2015 105,226,406 2016 114,994,241 2017 101,801,051 Source: City of Vernon FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY While the City generates only a stnall 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 47 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 2012 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 CARE 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"). 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, CARE 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. 48 AB32 required CARE to adopt regulations to implement the AB32 program by January 1, 2011, that will become effective on January 1, 2012. On December 16, 2010, CARD adopted a GHG emissions cap -and -trade regulation, which was 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 as originally adopted was 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. For example, CARE held workshops on proposed modifications to the regulatory language regarding the allocation of allowances, made a finding as to whether the regulation would result in one or more significant adverse environmental effects, evaluated whether there are feasible alternatives or mitigation treasures that could reduce such significant adverse environmental effects, and reviewed 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 first round of modified regulatory language was issued on July 25, 2011 and was subject to a 15-day public comment period, which ended August 11, 2011. On August 24, 2011, CARB approved a new supplemental environmental assessment and reapproved its Scoping Plan. On September 12, 2011, CARB staff proposed additional modifications to the regulatory language. The public comment period for the second round of modifications ended September 27, 2011. CARB reported that, in order to meet the statutory deadline for a final regulation by January 1, 2012, the finalized regulation must be filed with the California Office of Administrative Law by October 28, 2011. On October 20, 2011, in Resolution 11-32, CARE adopted the California Cap -and -Trade Regulation, as modified (Sections 95800 to 96023 of Title 17 of the California Code of Regulations) (the "Adopted California Cap -and -Trade Regulation"), and directed CARE staff to submit the mlemaking package to the California Office of Administrative Law by October 28, 2011. The Scoping Plan and the California Cap -and -Trade Regulation are subject to litigation, which may impact the timing and substance of the regulations ultimately adopted by CARE 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 set aside CARB's certification of its environmental review of the Scoping Plan and enjoined any further implementation of the Scoping Plan until CARB conducts an environmental review that meets CEQA standards. CARE appealed the ruling and on June 24, 2011, the First District Court of Appeal issued an order that stayed the Superior Court's ruling against the AB32 program and allowed CARB to continue finalizing the plans for the cap -and -trade program. The environmental organizations filed a petition for review and a request for a stay of the Court of Appeal's order with the California Supreme Court. - On September 28, 2011, the California Supreme Court declined to immediately stop the implementation of the regulation, but did not decide the case on its merits. CARB performed an additional alternatives analysis in the supplemental environmental assessment it approved on August 24, 2011. On December 6, 2011, the Superior Court approved CARB's additional environmental analysis and ruled that CARB adequately justified its selection of the cap -and -trade program in its alternative analysis. This ruling lifted the March 18, 2011 Superior Court order that enjoined implementation of the Scoping Plan, including the cap -and -trade program. The environmental organization plaintiffs are still appealing other parts of the March 18, 2011 ruling before the First District Court of Appeal. It is unknown whether the Adopted California Cap -and -Trade Regulation will be effective by the AB32 deadline of January 2, 2012. The City plans to continue monitoring the developments in this litigation and any further regulatory developments. The City will also continue to evaluate in detail the impact of the Adopted California Cap -and -Trade Regulation on the City's Electric System in the event the program is ultimately finalized. It is possible that the Electric System will incur significant costs because of compliance with the Adopted California Cap -and -Trade Regulation or other regulations and requirements imposed under AB32 authority. 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 6]