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Resolution No. 2015-043RESOLUTION NO. 2.015-43 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF VERNON AUTHORIZING AND APPROVING THE ISSUANCE OF ELECTRIC SYSTEM REVENUE BONDS; APPROVING THE SUPPLEMENTAL INDENTURE OF TRUST PURSUANT TO WHICH SUCH BONDS ARE TO BE ISSUED; APPROVING A DISCLOSURE DOCUMENT, A CONTRACT OF PURCHASE, A CONTINUING DISCLOSURE AGREEMENT AND OTHER DOCUMENTS IN CONNECTION WITH SUCH BONDS; AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO WHEREAS, the City of Vernon (the "City") is a municipal corporation and a chartered city of the State of California organized and existing under its Charter and the Constitution of the State of California; and WHEREAS, the City is authorized pursuant to the provisions of its Charter and the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the City Code of the City of Vernon, to issue bonds, notes and other obligations payable from the Net Revenues of the Electric System (capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Indenture mentioned below) to finance the costs of any land, improvements, facilities, equipment and other property of any nature whatsoever which are used in -the Electric System and to refund such bonds, notes and other obligations; and WHEREAS, pursuant to an Indenture of Trust, dated as of September 1, 2008 (the "2008 Master Indenture," and, as amended and supplemented, the "Indenture"), entered into by the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), the City has provided the terms and conditions for the issuance and securing of its Electric System Revenue Bonds to finance the costs of Capital Improvements to the City's Electric System or to refund any outstanding Parity Obligations; and WHEREAS, the City desires to provide for the issuance of its Electric System Revenue Bonds, 2015 Taxable Series A (with such changes to such name as an Authorized Officer (as defined herein) may approve, the "2015 Series Bonds") to provide moneys to (a) refund a portion of the City's outstanding Electric System Revenue Bonds, 2009 Series A (the "Refunded 2009 Series A Bonds"), (b) finance Costs of certain Capital Improvements to the City's Electric System by reimbursing the Electric System for the prior payment of such Costs from the Light and Power Fund, (c) fund a deposit to the Debt Service Reserve Fund, and (d) pay costs of issuance of the 2015 Series Bonds; and WHEREAS, the 2015 Series Bonds are to be issued under and pursuant to the 2008 Master Indenture as supplemented by the Fourth Supplemental Indenture of Trust, to be entered into by the City and the Trustee (such Fourth Supplemental Indenture of Trust, in the form attached hereto as Exhibit A with such changes, insertions and deletions as are made pursuant to this Resolution being referred to herein as the "Fourth Supplemental Indenture"); and WHEREAS, the 2015 Series Bonds are to be payable from and secured by a pledge and assignment of the Trust Estate on a parity with all other Bonds issued and Outstanding under the Indenture; and WHEREAS, in connection with the refunding of the Refunded 2009 Series A Bonds there has been prepared an escrow agreement between the City and the Trustee (such escrow agreement in the form attached hereto as Exhibit B with such changes, insertions and deletions as are made pursuant to this Resolution, being referred to herein as the "Escrow Agreement"); and 2 WHEREAS, J.P. Morgan Securities LLC, as representative of itself and Citigroup Global Markets Inc., as underwriters (the "Underwriters"), has submitted a proposal to purchase the 2015 Series Bonds in the form of a Contract of Purchase (such Contract of Purchase, in the form attached hereto as Exhibit C with such changes, insertions and deletions as are made pursuant to this Resolution, being referred to herein as the "Purchase Contract"); and WHEREAS, in connection with the offering and sale of the 2015 Series Bonds there has been prepared a disclosure document in the form of a Preliminary Official Statement (such Preliminary Official Statement in the form attached hereto as Exhibit D with such changes, insertions and deletions as are made pursuant to this Resolution, being referred to herein as the "Preliminary Official Statement"); and WHEREAS, Rule 15c2-12 requires that, in order to be able to purchase or sell the 2015 Series Bonds, the Underwriters must have reasonably determined that an obligated person has undertaken in a written agreement or contract for the benefit of the owners of the 2015 Series Bonds to provide disclosure of certain financial information and operating data and certain material events on an ongoing basis; and WHEREAS, in order to cause such requirement of Rule 15c2-12 to be satisfied, the City desires to enter into a Continuing Disclosure Agreement with the Trustee (such Continuing Disclosure Agreement, in the form attached to the form of the Preliminary Official Statement attached hereto as Exhibit D, with such changes, insertions and deletions as are made pursuant to this Resolution, being referred to herein as the "Continuing Disclosure Agreement"); and WHEREAS, there have been submitted to this meeting drafts of the following: 3 (1) the Fourth Supplemental Indenture; (2) the Escrow Agreement; (3) the Purchase Contract; and (4) the Preliminary Official Statement, including the Continuing Disclosure Agreement; and WHEREAS, after having reviewed and considered the proposal of the Underwriters to purchase the 2015 Series Bonds on the terms and conditions contained in the Purchase Contract, this City Council now desires to authorize the issuance and sale of the 2015 Series Bonds, including the execution of such documents and the performance of such acts as may be necessary or desirable to effect such issuance and sale, and the other actions contemplated by this Resolution. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF VERNON, AS FOLLOWS: SECTION 1: The City Council of the City of Vernon hereby finds and determines that the above recitals are true and correct. SECTION 2: The Fourth Supplemental Indenture, in substantially the form attached hereto as Exhibit A, and made a part hereof as though set forth in full herein, be and the same is hereby approved. Each of the Mayor, the Mayor Pro Tem, the City Administrator, the Treasurer and the Finance Director (each an "Authorized Officer"), acting singly, is hereby authorized to execute and deliver the Fourth Supplemental Indenture, in the name of and on behalf of the City, in substantially the form attached hereto with such changes, insertions and deletions as may be approved by the Authorized Officer executing the Fourth Supplemental Indenture, said execution being conclusive evidence of such approval, and the City Clerk is hereby authorized to attest thereto. N SECTION 3: Subject to the limitations specified in this Resolution, the issuance of the 2015 Series Bonds on the terms and conditions set forth in the Fourth Supplemental Indenture is hereby authorized and approved. The aggregate principal amount of the 2015 Series Bonds shall not exceed one hundred forty million dollars ($140,000,000). The 2015 Series Bonds will be dated as provided in, will bear interest at the rates provided in, will mature on the date or dates provided in, will be issued in the form provided in, will have the Sinking Fund Installments specified in, will be subject to ,redemption as provided in, and will have such other terms as shall be provided in, the Fourth Supplemental Indenture as the same is completed as provided in this Resolution, provided that no 2015 Series Bond shall bear a stated rate of interest in excess of 6.0o per annum. SECTION 4: The Authorized Officer executing the Fourth Supplemental Indenture is hereby authorized, subject to the limitations set forth in Section 3 hereof and in this Section 4, to determine the following: (i) the maturity date or dates of the 2015 Series Bonds (but no 2015 Series Bond shall mature later than August 1, 2035); (ii) the principal amount of the 2015 Series Bonds maturing on each maturity date; (iii) the interest rate or rates for the 2015 Series Bonds maturing on each maturity date; (iv) the maturity or maturities, if any, of the 2015 Series Bonds to be redeemed or paid at maturity from Sinking Fund Installments ("Term 2015 Series Bonds"); (v) the Sinking Fund Installments for the Term 2015 Series Bonds; and (vi) the redemption provisions for the 2015 Series Bonds. SECTION 5: The net proceeds received on the sale of the 2015 Series Bonds shall be applied to such purposes as are set forth in 5 the recitals to this Resolution in the manner provided in the Fourth Supplemental Indenture. SECTION 6: The Purchase Contract, in substantially the form attached hereto as Exhibit C, and made a part hereof as though set forth in full herein, be and the same is hereby approved. Each of the Authorized Officers, acting singly, is hereby authorized to execute and deliver the Purchase Contract, in the name of and on behalf of the City, in substantially the form attached hereto with such changes, insertions and deletions as may be approved by the Authorized Officer executing said Purchase Contract and as are consistent with the determinations of the terms of the 2015 Series Bonds made pursuant to this Resolution, said execution being conclusive evidence of such approval. The Authorized Officer executing the Purchase Contract is hereby authorized to determine the purchase price to be paid for the 2015 Series Bonds under the Purchase Contract; provided, however, that (a) the aggregate Underwriters, discount (not including original issue discount which shall not exceed 7.0% of the aggregate principal amount of the 2015 Series Bonds) for the 2015 Series Bonds shall be not more than 0.5% of the aggregate principal amount of the 2015 Series Bonds, and (b) the calculation of the Make Whole Redemption Price for the Series 2015 Bonds shall not include a premium above the Treasury Rate that is greater than 100 basis points. The sale of the 2015 Series Bonds to the Underwriters on the terms and conditions contained in the Purchase Contract, as the same may be completed in accordance with the provisions of this Resolution, with such changes, insertions and deletions as are authorized hereby, is hereby approved and authorized. SECTION 7: The Preliminary Official Statement, in N substantially the form attached hereto as Exhibit D, and made a part hereof as though set forth in full herein, be and the same is hereby approved. Each of the Authorized Officers, acting singly, is hereby authorized to cause the Preliminary Official Statement to be delivered to the Underwriters, in substantially the form attached hereto as Exhibit D with such changes, insertions and deletions as may be approved by the Authorized Officer delivering the Preliminary Official Statement (including without limitation the insertion of the proposed terms of the 2015 Series Bonds), said delivery being conclusive evidence of such approval. The use of the Preliminary Official Statement in connection with the offering and sale of the 2015 Series Bonds by the Underwriters, including delivery of the Preliminary Official Statement in electronic form, is hereby authorized and approved. Each of the Authorized Officers, acting singly, is hereby authorized to determine that the Preliminary Official Statement is deemed final for purposes of Rule 15c2-12. The preparation and delivery to the Underwriters of a final Official Statement (the "Official Statement") relating to the 2015 Series Bonds, and its use by the Underwriters in connection with the offering and sale of the 2015 Series Bonds, including delivery of the Official Statement in electronic form, be and the same is hereby approved. The Official Statement shall be in substantially the form of the Preliminary Official Statement with such changes, insertions and deletions as may be approved by the Authorized Officer executing the Official Statement (including without limitation the insertion of the final terms of the 2015 Series Bonds), said execution being conclusive evidence of such approval. Each of the Authorized Officers, acting singly, is hereby authorized to execute the Official Statement, in the 7 name and on behalf of the City, and thereupon to cause the Official Statement to be delivered to the Underwriters. Each of the Authorized Officers, acting singly, is hereby authorized to approve and execute any amendment or supplement to the Official Statement contemplated by the Purchase Contract, in the name and on behalf of the City, and thereupon to cause such amendment or supplement, to be delivered to the Underwriters. SECTION 8: The Continuing Disclosure Agreement, in substantially the form attached to the form of the Preliminary Official Statement attached hereto as Exhibit D, be and the same is hereby approved. Each of the Authorized Officers, acting singly, is hereby authorized to execute and deliver the Continuing Disclosure Agreement, in the name, of and on behalf of the City, in substantially such form with such changes, insertions and deletions as may be approved by the Authorized Officer executing the same, said execution being conclusive evidence of such approval, and the City Clerk is hereby authorized to attest thereto. SECTION 9: The Escrow Agreement, in substantially the form attached hereto as Exhibit B, and made a part hereof as thought set forth in full herein, be and the same is hereby approved. Each of the Authorized Officers, acting singly, is hereby authorized to execute and deliver the Escrow Agreement, in the name of and on behalf of the City, in substantially the form attached hereto with such changes, insertions and deletions as may be approved by the Authorized Officer executing the same, said execution being conclusive evidence of such approval, and the City Clerk is hereby authorized to attest thereto. SECTION 10: The refunding of the Refunded 2009 Series A Bonds on the terms provided in the Escrow Agreement is hereby 8 authorized and approved. SECTION 11: The City Council hereby finds and determines that, in accordance with California Environmental Quality Act (Public Resources Code Section 21000 et seq.; herein referred to as "CEQA") and Title 14 of the California Code of Regulations (herein referred to as the "CEQA Guidelines"), the adoption of this Resolution by the City Council relates to the refinancing or funding of previously -approved projects and, therefore, is exempt from CEQA pursuant to CEQA Guidelines Sections 15060(c)(3), 15378(b)(4), and 15378(b)(5) because the activity approved by this Resolution relating to the refinancing or funding of previously -approved projects will not result in direct or indirect physical changes in the environment and, therefore, is not a "project," as defined in Section 15378 of the CEQA Guidelines. City staff is hereby directed to file with the Clerk of the County of Los Angeles a Notice of Exemption and Notice of Determination following adoption of this Resolution. SECTION 12: The Mayor, the Mayor Pro Tem, the City Administrator, the Treasurer, the Finance Director, the City Clerk, the City Attorney, the Director of Gas and Electric Department and any other proper official, officer or employee of the City, acting singly, be and each of them hereby is authorized to execute and deliver any and all documents and instruments and to do and cause to be done any and all acts and things necessary or convenient in carrying out the actions authorized by this Resolution and the transactions contemplated by the documents and instruments approved or authorized by this Resolution, including, without limitation, making any determinations or submission of any documents or reports which are required by any rule or regulation of any governmental entity in connection with the issuance 01 and sale of the 2015 Series Bonds and the authorization, execution, delivery and performance by the City of its obligations under the documents and instruments approved or authorized by this Resolution. SECTION 13: All actions heretofore taken by any committee of the City Council, or any official, officer, employee, representative or agent of the City, in connection with the issuance and sale of the 2015 Series Bonds or the authorization, execution, delivery, or performance of the City's obligations under the documents and instruments approved or authorized by this Resolution, and the other actions contemplated by this Resolution, are hereby ratified, approved and confirmed. 10 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) I Maria E . Ayala City Clerk /�L)QPULt 7 ri t-V C''1P of the City of Vernon, do hereby certify that the foregoing Resolution, being Resolution No. 2015-43, was duly passed, approved and adopted by the City Council of the City of Vernon at a regular meeting of the City Council duly held on Tuesday, June 16, 2015, and thereafter was duly signed by the Mayor or Mayor Pro-Tem of the City of Vernon. Executed this Kdday of June, 2015, at Vernon, California. (SEAL) `.Y Maria Ayala City Clerk / 12 EXHIBIT A Exhibit A [Fourth Supplemental Indenture Attached] OHSUSA:761725340.5 A-1 OH&S Draft of 6/9/15 FOURTH SUPPLEMENTAL INDENTURE OF TRUST between CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Dated as of July 1, 2015 Relating to City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A OHSUSA:761725342.6 TABLE OF CONTENTS Page ARTICLE I AUTHORITY AND DEFINITIONS...................................................................... 2 Section 1.01. Supplemental Indenture of Trust................................................................ 2 Section 1.02. Authority for the Fourth Supplemental Indenture of Trust ......................... 2 Section1.03. Definitions................................................................................................... 2 Section 1.04. Interpretation............................................................................................... 4 ARTICLE II THE 2015 SERIES BONDS................................................................................... 5 Section 2.01. Principal Amount and Designation; Conditions to Issuance ...................... 5 Section 2.02. Terms of the 2015 Series Bonds; Registration; Denominations; Payment of Principal and Interest............................................................... 5 Section 2.03. Terms of Redemption................................................................................. 6 Section 2.04. Application of Proceeds of 2015 Series Bonds ........................................... 7 ARTICLEIII FUNDS................................................................................................................... 8 Section 3.01. 2015 Costs of Issuance Fund...................................................................... 8 Section 3.02. 2015 Termination Payment Fund................................................................ 9 ARTICLE IV MISCELLANEOUS............................................................................................. 10 Section 4.01. Indenture to Remain in Effect................................................................... 10 Section 4.02. Continuing Disclosure.............................................................................. 10 Section 4.03. Notice to Rating Agencies........................................................................ 10 Section4.04. Notices...................................................................................................... 10 Section4.05. Counterparts.............................................................................................. 11 EXHIBIT A FORM OF 2015 Series Bonds............................................................................... A-1 OHSUSA:761725342.6 FOURTH SUPPLEMENTAL INDENTURE OF TRUST THIS FOURTH SUPPLEMENTAL INDENTURE OF TRUST, dated as of July 1, 2015, 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 (capitalized terms used herein shall have the meanings given such terms pursuant to Section 1.03) to, among other things, pay the Costs of Capital Improvements and to refund Outstanding Bonds; and WHEREAS, the Cost of the Capital Improvements under the Indenture includes all costs of acquiring such Capital Improvements permitted under the Bond Ordinance and includes reimbursing the City for such Costs paid by the City; 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 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 2015 Series Bonds in order to provide moneys to (a) refund the Refunded 2009 Series A Bonds, (b) finance Costs of Capital Improvements by reimbursing the Electric System for the prior payment of such Costs from the Light and Power Fund, (c) fund a deposit to the Debt Service Reserve Fund, and (d) pay costs of issuance of the 2015 Series Bonds; WHEREAS, the City has determined that all acts and things have been done and performed which are necessary to make the Indenture, as hereto amended and supplemented and as supplemented by this Fourth Supplemental Indenture, a valid and binding agreement for the security of the 2015 Series Bonds authenticated and delivered hereunder; NOW, THEREFORE, KNOW ALL PERSONS BY THESE PRESENTS, THIS FOURTH 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 2015 Series Bonds by the Owners thereof, and for other valuable consideration, the receipt whereof is hereby acknowledged, and in order to secure the payment of the principal of, Redemption Price, if any, and interest on the 2015 Series Bonds according to their tenor and effect, and the performance and observance by the City of all OHSUSA:761725342.6 the covenants and conditions in the Indenture and in the 2015 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 Fourth Supplemental Indenture is supplemental to the Master Indenture. Section 1.02. Authority for the Fourth Supplemental Indenture of Trust. This Fourth 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 Fourth Supplemental Indenture, all terms which are defined in Section 1.01 of the Master Indenture, as amended and supplemented to the date hereof, shall have the same meanings, respectively, in this Fourth Supplemental Indenture as such terms are given in the Master Indenture as so amended and supplemented. (b) Additional Definitions. The following terms shall, with respect to the 2015 Series Bonds and for all purposes hereof, have the meanings set forth below: "Authorized Denominations" means with respect to the 2015 Series Bonds $5,000 and any integral multiple thereof. "Comparable Treasury Issue" means, with respect to any redemption date for a particular 2015 Series 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 2015 Series 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 2015 Series Bond to be redeemed. "Comparable Treasury Price" means, with respect to any redemption date for a 2015 Series 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. "Fourth Supplemental Indenture" means this Fourth 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 an independent accounting firm, investment banking firm or financial advisor selected by the City to calculate, at the City's expense, the Make Whole Redemption Price. The initial Independent Investment Banker shall be JPMorgan Securities LLC. OHSUSA:761725342.6 2 "Interest Payment Date" means, with respect to the 2015 Series Bonds, each February 1 and August 1, commencing [February 1, 2016]. "Record Date" means, with respect to an Interest Payment Date for the 2015 Series Bonds, 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 JPMorgan Securities LLC, 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 2015 Series 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 $ aggregate principal amount of 2009 Series A Bonds maturing on August 1 in the years [2016 through 2021, inclusive] . "Sinking Fund Installment" means: [(i) with respect to the 2015 Series Bonds maturing on August 1, 20_, the amount required by Section 2.03(c) hereof to be paid by the City on any single date for the retirement of such 2015 Series Bonds; and (ii) with respect to the 2015 Series Bonds maturing on August 1, 20_, the amount required by Section 2.03(e) hereof to be paid by the City on any single date for the retirement of such 2015 Series Bonds]. "Treasury Rate" means, with respect to any redemption date for a 2015 Series 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. "2015 Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of July 1, 2015, between the City and the Trustee relating to the 2015 Series Bonds. "2015 Costs of Issuance Fund" means the 2015 Costs of Issuance Fund established pursuant to Section 3.01. 112015 Delivery Date" means July , 2015. "2015 Escrow Agreement" means the Escrow Agreement, dated as of July 1, 2015, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee for the Refunded 2009 Bonds. 112015 Escrow Fund" means the Escrow Fund established pursuant to the 2015 Escrow Agreement. OHSUSA:761725342.6 3 "2015 Make Whole Redemption Price" means, with respect to a 2015 Series Bond to be redeemed, in whole or is part, at the option of the City, 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 2015 Series Bond to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2015 Series Bond 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 2015 Series Bond being redeemed to the date fixed for redemption. "2015 Series Bonds" means the City's Electric System Revenue Bonds, 2015 Taxable Series A authorized by Article III hereof. "2015 Termination Payments" means the termination payments[, in the aggregate amount of $ ,] required to be paid by the City in connection with (a) the termination of the interest rate swap transaction between the City and Morgan Stanley Capital Services Inc., originally relating to the City's Electric System Revenue Bonds, 2004 Series A, and (b) the termination of the interest rate swap transaction between the City and Deutsche Bank AG, originally relating to the City's Electric System Revenue Bonds, 2004 Series B. "2015 Termination Payment Fund" means the 2015 Termination Payment Fund established pursuant to Section 3.02. Section 104. 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 2015 Series Bonds may be registered. (d) Unless otherwise indicated, references herein to Articles and Sections shall be to the Articles and Sections of this Fourth Supplemental Indenture. The words "herein," "hereof," "hereby," "hereunder" and other words of similar import refer to this Fourth Supplemental Indenture as a whole and not to any particular Article, Section or subdivision hereof. OHSUSA:761725342.6 4 ARTICLE II THE 2015 SERIES BONDS Section 2.01. Principal Amount and Designation; Conditions to Issuance. (a) Pursuant to the provisions of the Master Indenture and this Fourth 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 is hereby authorized in the aggregate principal amount of $ . Such Bonds shall be designated as, and shall be distinguished from the Bonds of all other Series by the title, "City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A." The 2015 Series 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 2015 Series Bond. (b) The 2015 Series Bonds are issued for the purpose of providing moneys to (i) refund the Refunded 2009 Series A Bonds, (ii) finance Costs of Capital Improvements by reimbursing the Electric System for the prior payment of such Costs from the Light and Power Fund, (iii) fund a deposit to the Debt Service Reserve Fund, and (iv) pay costs of issuance of the 2015 Series Bonds. (c) All (but not less than all) of the 2015 Series 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 anddeliveredto the City or upon its order but only upon receipt by the Trustee of the applicable items required pursuant to Sections 2.04 and 2.07 of the Master Indenture with respect to the 2015 Series Bonds. Section 2.02. Terms of the 2015 Series Bonds; Registration; Denominations; Payment of Principal and Interest. (a) The 2015 Series Bonds shall be issued as fully registered Bonds without coupons in Authorized Denominations. The 2015 Series Bonds shall be registered initially in the name of "Cede & Co.," as nominee of DTC, the initial Securities Depository for the 2015 Series Bonds, and shall be evidenced by one bond certificate in the total aggregate principal amount of the 2015 Series Bonds of each maturity. Registered ownership of the 2015 Series Bonds, or any portion thereof, may not thereafter be transferred except as set forth in Section 3.04 of the Master Indenture (b) The 2015 Series Bonds shall be dated the 2015 Delivery Date. OHSUSA:761725342.6 5 (c) The 2015 Series 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 Section 2.03. Terms of Redemption. (a) [The 2015 Series 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 2015 Make Whole Redemption Price of the 2015 Bonds to be redeemed.] (b) [The 2015 Series Bonds maturing on August 1, 20_ 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, 20_, at a Redemption Price equal to the principal amount of the 2015 Series Bonds to be redeemed, without premium.] (c) [The following shall be the Sinking Fund Installments for the 2015 Series Bonds maturing on August 1, 20_. Such installments shall be due on August 1 of each of the years set forth in the following table in the respective amounts set forth opposite such years in said table:] Sinking Fund Installment Due Sinking Fund Date (August 1) Installment * * Maturity (d) [The 2015 Series Bonds maturing on August 1, 20_ 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, 20_, at a Redemption Price equal to the principal amount of the 2015 Series Bonds to be redeemed, without premium.] OHSUSA:761725342.6 6 (e) [The following shall be the Sinking Fund Installments for the 2015 Series Bonds maturing on August 1, 20_. 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) * Maturity Sinking Fund Installment (f) The City shall provide the Trustee with revised sinking fund schedules in the event a credit for the Sinking Fund Installments for the 2015 Series Bonds is to apply as provided in Section 5.04(c) of the Master Indenture. Section 2.04. Application of Proceeds of 2015 Series Bonds. The proceeds of the sale of the 2015 Series Bonds (equal to the principal amount thereof, [plus/less] original issue [premium/discount] of $ , less underwriters' discount of $ ) shall be applied simultaneously with the delivery of the 2015 Series Bonds, as follows: (a) There shall be deposited in the Debt Service Reserve Fund the sum of $ ; (b) There shall be deposited in the 2015 Costs of Issuance Fund the sum of $ (c) There shall be deposited in the 2015 Escrow Fund the sum of $ ; and (d) The City represents and warrants that there has previously been expended from the Light and Power Fund an amount not less than $ which has not been financed or otherwise reimbursed for the Costs of Capital Improvements to transmission, distribution and renewable infrastructure of the Electric System for which the Light and Power Fund has not been reimbursed and which facilities have not otherwise been financed. The City further represents and warrants that such facilities have a book value to the Electric System of not less than such amount. The $ net proceeds of the 2015 Series Bonds not deposited in the Debt Service Reserve Fund, the 2015 Costs of Issuance Fund or the 2015 Escrow 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 transmission, distribution and renewable infrastructure of the Electric System. The City hereby directs that such reimbursement be applied by depositing in the 2015 Termination Payment Fund the sum of $ OHSUSA:761725342.6 7 ARTICLE III FUNDS Section 3.01. 2015 Costs of Issuance Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2015 Costs of Issuance Fund." Except as provided in subsections (c) and (e) of this Section, money deposited in the 2015 Costs of Issuance Fund shall be used to pay the Costs of Issuance with respect to the 2015 Series Bonds as provided in this Section. (b) The Trustee shall make payments from the 2015 Costs of Issuance Fund, except payments and withdrawals pursuant to subsection (c) or 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 2015 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 (i) the name of the Person to whom payment is due, (ii) the amount of such payment, and (iii) the particular item of the Costs of Issuance of the 2015 Series Bonds to be paid and that such payment in the stated amount is a proper charge against the 2015 Costs of Issuance Fund and that no part of such payment shall be applied to any item which has previously been paid from moneys in the 2015 Costs of Issuance Fund. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2015 Costs of Issuance Fund pursuant to this subsection (b) to the payment of the Costs of Issuance of the 2015 Series Bonds identified in the requisition relating to such moneys. Each such requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Upon receipt of each such requisition, signed by an Authorized City Representative, the Trustee shall pay the amount set forth therein as directed by the terms thereof. (c) Upon the receipt by the Trustee of a certificate of an Authorized City Representative requesting the Trustee to close the 2015 Costs of Issuance Fund, and after payment from the 2015 Costs of Issuance Fund of all amounts included in requisitions submitted by the City pursuant to subsection (b) of this Section, the Trustee shall transfer any moneys remaining in the 2015 Costs of Issuance Fund to the account in the Debt Service Fund specified by the City. Upon such transfer the Trustee shall close the 2015 Costs of Issuance Fund. (d) Moneys held in the 2015 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 Fund. Any investment earnings on moneys on deposit in the 2015 Costs of Issuance Fund shall be deposited in the 2015 Costs of Issuance Fund and be used in the same manner as other amounts on deposit in the 2015 Costs of Issuance Fund. OHSUSA:761725342.6 8 (e) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2015 Costs of Issuance Fund shall be applied to the payment of Bond debt service when due. Section 3.02. 2015 Termination Payment Fund. (a) The Trustee shall establish and maintain in trust a separate fund designated as the "2015 Termination Payment Fund." Except as provided in subsections (c) and (e) of this Section, money deposited in said fund shall be used to pay the 2015 Termination Payments as provided in this Section. (b) The Trustee shall make payments from the 2015 Termination Payment Fund, except payments and withdrawals pursuant to subsection (c) or 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 2015 Termination Payment 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 (i) the name of the Person to whom payment is due, (ii) the amount of such payment, and (iii) the particular item of the 2015 Termination Payments to be paid and that such payment in the stated amount is a proper charge against the 2015 Termination Payment Fund and that no part of such payment shall be applied to any item which has previously been paid from moneys in the 2015 Termination Payment Fund. The Trustee shall promptly issue its check to the City or to the Person identified in the requisition in the amount or amounts specified in each such requisition or, if requested pursuant to any such requisition, shall by wire transfer, interbank transfer or other method arrange to promptly make each payment required > by such requisition. The City shall apply, or cause to be applied, all such moneys received from the 2015 Termination Payment Fund pursuant to this subsection (b) to the payment of the 2015 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 2015 Termination Payment Fund, and after payment from the 2015 Termination Payment Fund of all amounts included in requisitions submitted by the City pursuant to subsection (b) of this Section, the Trustee shall transfer any moneys remaining in the 2015 Termination Payment Fund to the account in the Debt Service Fund specified by the City. Upon such transfer the Trustee shall close the 2015 Termination Payment Fund. (d) Moneys held in the 2015 Termination Payment 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 Fund. Any investment earnings on moneys on deposit in the 2015Termination Payment OHSUSA:761725342.6 9 Fund shall be deposited in the 2015 Termination Payment Fund and be used in the same manner as other amounts on deposit in the 2015 Termination Payment Fund. (e) Notwithstanding any of the other provisions of this Section, to the extent that other moneys are not available therefor, amounts in the 2015 Termination Payment Fund shall be applied to the payment of Bond debt service when due. ARTICLE IV MISCELLANEOUS Section 4.01. Indenture to Remain in Effect. Save and except as amended and supplemented by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and this Fourth Supplemental Indenture, the Master Indenture shall remain in full force and effect. Section 4.02. Continuing Disclosure. The City hereby covenants and agrees to comply with and carry out all the provisions of the 2015 Continuing Disclosure Agreement. Notwithstanding any other provision of the Indenture, failure of the City to comply with the 2015 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 2015 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 2015 Continuing Disclosure Agreement. Section 4.03. 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 first date no 2015 Series Bonds are Outstanding, (c) any material amendments to the Master Indenture or this Fourth Supplemental Indenture, (d) any acceleration of the 2015 Series Bonds pursuant to Section 10.04 of the Master Indenture, or (e) any redemption in whole of the 2015 Series Bonds. Section 4.04. 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 or a Rating Agency, 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 or, if by Electronic means of communication delivered to the appropriate email address provided pursuant to this Section, if any, on the date of receipt of such Electronic communication. The initial addresses for notices, counterparts and other communications hereunder are as follows: OHSUSA:761725342.6 10 If to the City: City of Vernon 4305 Santa Fe Avenue Vernon, CA 90058 Attention: City Administrator Email: mwhitworth@ci.vernon.ca.us 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 Email: 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/Fitch], to: Attn: Each of 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 to it 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. Section 4.05. Counterparts. This Fourth 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. OHSUSA:761725342.6 11 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 July, 2015. ATTEST: Maria E. Ayala, City Clerk APPROVED AS TO FORM: LOW City Attorney CITY OF VERNON LM [Mark C. Whitworth, City Administrator] THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Lo Authorized Officer OHSUSA:761725342.6 EXHIBIT A FORM OF 2015 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- Interest Rate CITY OF VERNON ELECTRIC SYSTEM REVENUE BOND, 2015 TAXABLE SERIES A Dated Date Maturity Date , 2015 August 1, REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: A 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. Except as otherwise provided in the Indenture with respect to Bonds held by a Securities Depository, 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 current Trustee is The Bank of New York Mellon Trust Company, N.A., and its OHSUSA:761725342.6 A-1 designated Principal Office is its principal corporate trust office in Los Angeles, California, or such other place as designated by the Trustee. Except as otherwise provided with respect to 2015 Series Bonds held by a Securities Depository, 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 2015 Series 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 2015 Series 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, 2015 Taxable Series A" (the "2015 Series Bonds"). The 2015 Series Bonds are issued pursuant to the Charter and the Bond Ordinance. The 2015 Series Bonds have been issued in the aggregate principal amount of $ . The 2015 Series 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 Fourth Supplemental Indenture of Trust, dated as of July 1, 2015 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 2015 Series Bonds, the limitations on such rights and remedies and the terms and conditions upon which Bonds are issued and may be issued thereunder. On the Dated Date of this Bond, there were $ aggregate principal amount of Bonds Outstanding under the Indenture in addition to the 2015 Series Bonds (and including any Outstanding Bonds to be refunded with proceeds of the 2015 Series 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. OHSUSA:761725342.6 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. Interest on the 2015 Series Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The term "Interest Payment Date" means, with respect to the 2015 Series Bonds, each February 1 and August 1, commencing [February 1, 2016]. The term "Record Date" means, with respect to an Interest Payment Date for the 2015 Series Bonds, the fifteenth day of the month preceding the month in which such Interest Payment Date falls. The 2015 Series 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 2015 Make Whole Redemption Price of the 2015 Bonds to be redeemed. [The 2015 Series Bonds maturing on August 1, 20_ are subject to mandatory redemption, in part, on any August 1 on and after August 1, 20_, at a Redemption Price equal to the principal amount of such 2015 Series Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2015 Series Bonds in the Indenture.] [The 2015 Series Bonds maturing on August 1, 20_ are subject to mandatory redemption, in part, on any August 1 on and after August 1, 20, at a Redemption Price equal to OHSUSA:761725342.6 A-3 the principal amount of such 2015 Series Bonds to be redeemed, without premium, from the Sinking Fund Installments established for such 2015 Series Bonds in the Indenture.] If less than all of the 2015 Series Bonds of a maturity are to be redeemed, the particular 2015 Series Bonds of such maturity to be redeemed shall be selected as provided in the Indenture. The 2015 Series 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 2015 Series 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 2015 Series 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 2015 Series Bonds of a maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2015 Series Bonds so to be redeemed, and, in the case of 2015 Series 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 2015 Series 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 2015 Series Bond to be redeemed in part only) and that from and after such date interest on such 2015 Series Bond (or the portion of such 2015 Series Bond to be redeemed) shall cease to accrue and be payable. In the event that funds required to pay the Redemption Price of 2015 Series 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 2015 Series 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 2015 Series 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 2015 Series Bonds. In the event a notice of redemption of 2015 Series Bonds contains such a condition and such moneys are not so received, the redemption of 2015 Series 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 2015 Series Bonds pursuant to the conditional notice of redemption. Receipt of notice of redemption shall not be a condition precedent to the redemption of 2015 Series Bonds and failure of any Owner of a 2015 Series 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 2015 Series 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 OHSUSA:761725342.6 A-4 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 percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment without the consent of the Owners of all of the Bonds then Outstanding, 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 2015 Series 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 2015 Series Bond, 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 2015 Series 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. OHSUSA:761725342.6 A-5 This Bond shall not be entitled to any benefit under the Indenture or be valid or become obligatory for any purpose until this Bond shall have been authenticated by the execution by the Trustee of the Trustee's Certificate of Authentication hereon. IN WITNESS WHEREOF, CITY OF VERNON has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its [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 Un [Mayor] ATTEST: City Clerk OHSUSA:761725342.6 A-6 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 2015 Series Bonds delivered pursuant to the within mentioned Indenture. Dated: , 2015 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee M. Authorized Signatory OHSUSA:761725342.6 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. 0HSUSA:761725342.6 A-8 EXHIBIT B Exhibit B [Escrow Agreement Attached] OHSUSA:761725340.5 B-1 OH&S Draft of 6/5/15 CITY OF VERNON and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee ESCROW AGREEMENT Dated as of July 1, 2015 Relating to City of Vernon Electric System Revenue Bonds 2009 Series A maturing August 1 in the years [2016 through 2021, inclusive] OHSUSA:761725343.4 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS.................................................................................................... 1 SECTION 2. ESTABLISHMENT, FUNDING AND MAINTENANCE OF ESCROW FUND.................................................................................................................. 2 SECTION 3. INVESTMENTS OF MONEYS IN THE ESCROW FUND .............................. 3 SECTION 4. PROVISION FOR THE PAYMENT OF THE REFUNDED 2009 SERIES A BONDS; IRREVOCABLE INSTRUCTIONS TO GIVE NOTICES............................................................................................................ 3 SECTION 5. REINVESTMENT AND TRANSFER OF FUNDS ........................................... 4 SECTION 6. FEES AND COSTS............................................................................................. 4 SECTION 7. INDEMNIFICATION......................................................................................... 5 SECTION 8. RESIGNATION OF TRUSTEE; REPLACEMENT OF TRUSTEE .................. 5 SECTION9. TERMINATION................................................................................................. 5 SECTION 10. RIGHTS, DUTIES AND OBLIGATIONS OF TRUSTEE ................................ 5 SECTION 11. SEVERABILITY................................................................................................ 5 SECTION 12. AMENDMENT................................................................................................... 6 SECTION 13. EXECUTION OF COUNTERPARTS................................................................ 6 SECTION14. NOTICES............................................................................................................ 6 SECTION 15. GOVERNING LAW; VENUE............................................................................ 6 SECTION 16. IMMUNITIES AND LIABILITIES OF TRUSTEE ........................................... 7 SCHEDULE A INITIAL ESCROW SECURITIES.................................................................. A-1 SCHEDULE B ESCROW REQUIREMENTS SCHEDULE .................................................... B-1 -1- ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of July 1, 2015, 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., a national banking association organized and existing under and by virtue of the laws of the United States of America, in its capacity as trustee (the "Trustee") under the Indenture (capitalized terms used herein shall have the meanings given such terms pursuant to Section 1 hereof), WITNESSETH: WHEREAS, pursuant to the Indenture, the City authorized and issued its Electric System Revenue Bonds, 2009 Series A, maturing on August 1 in the years [2016 through 2021, inclusive], which maturities remain outstanding in the aggregate principal -amount of $ ; and WHEREAS, for the purpose of providing for the payment of the Refunded 2009 Series A Bonds in accordance with Article IX of the Master Indenture, the City has caused a portion of the proceeds of the 2015 Series Bonds[, and other available funds,] to be deposited into the Escrow Fund as provided in Section 2 hereof; and WHEREAS, the Trustee is to apply amounts in the Escrow Fund to the purchase of the Initial Escrow Securities; and WHEREAS, the Initial Escrow Securities will mature at such times and in such amounts as to provide cash in the Escrow Fund which, together with the other available cash then held by the Trustee in the Escrow Fund, has been certified in the Verification Report to be sufficient to pay the Escrow Requirements when due; NOW, THEREFORE, the City and the Trustee hereby agree as follows: Section 1. Definitions. Capitalized terms used in this Escrow Agreement and not otherwise defined herein shall have the meanings given such terms in the Indenture of Trust, dated as of September 1, 2008, between the City and The Bank of New York Mellon Trust Company, N.A., as Trustee, as amended and supplemented. The following shall have the meanings set forth below for all purposes of this Escrow Agreement: "2009 Series A Bonds" means the City of Vernon Electric System Revenue Bonds, 2009 Series A. "2015 Series Bonds" means the City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A. "City" means the City of Vernon, California. "Escrow Fund" means the City of Vernon 2015 Electric System Revenue Bonds Escrow Fund established pursuant to Section 2 hereof. OHSUSA:761725343.4 -1- "Escrow Securities" means, to the extent they are legal investments for funds of the City under the laws of the State of California, non -callable direct obligations of the United States of America. "Escrow Requirements" means the moneys required to: (i) pay the principal of the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2016 through 2019, inclusive,] as such principal amounts become due; (ii) pay the Redemption Price of the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2020 and 2021] on the Redemption Date; and (iii) pay the accrued but unpaid interest on the Refunded 2009 Series A Bonds due on each Interest Payment Date for the Refunded 2009 Series A Bonds commencing on August 1, 2015 through the Redemption Date, all as further shown in Schedule B hereto. hereto. "Indenture" means the Master Indenture, as amended and supplemented. "Initial Escrow Securities" means the Escrow Securities listed in Schedule A "Redemption Date" means August 1, 2019. "Redemption Price" means the principal amount of the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2020 and 2021]. "Refunded 2009 Series A Bonds" means the 2009 Series A Bonds maturing on August 1 in the years [2016 through 2021, inclusive]. "Remaining Escrow Requirements" means, as of any date, the Escrow Requirements coming due on and after such date. "Verification Agent" means , certified public accountants. "Verification Report" means the verification report, dated , 2015, prepared by the Verification Agent in connection with the deposit of certain of the 2015 Series Bond proceeds and other funds in the Escrow Fund. Section 2. Establishment, Funding and Maintenance of Escrow Fund. (a) The Trustee agrees to establish a separate irrevocable fund designated as the City of Vernon 2015 Electric System Revenue Bonds Escrow Fund. The Trustee shall maintain the Escrow Fund until the termination of this Escrow Agreement pursuant to Section 9 hereof and hold the Escrow Securities and moneys therein at all times as a special and separate trust fund wholly segregated from all other securities, investments or moneys on deposit with or otherwise held by the Trustee. (b) There has been deposited with the Trustee the sum of $ , which is derived from the proceeds of the 2015 Series Bonds, which amount is to be deposited in the Escrow Fund and invested and disbursed in accordance with this Escrow Agreement. (c) [Other funds to be deposited in the Escrow Fund]. OHSUSA:761725343.4 -2- (d) All Escrow Securities and moneys in the Escrow Fund are hereby irrevocably transferred to the Trustee on behalf of the owners of the Refunded 2009 Series A Bonds to secure the payment of the Escrow Requirements when due in accordance with this Escrow Agreement. (e) The City acknowledges that it has no right, title or interest in or to any money, Escrow Securities, or other property held in the Escrow Fund, notwithstanding any provision of the Indenture or any other document or agreement relating to the Refunded 2009 Series A Bonds to the contrary. Under no circumstances shall any such money, securities, or other property be paid or delivered to or for the order of the City, except that nothing herein shall preclude or limit the transfer of amounts in accordance with Section 5 hereof. Section 3. Investments of Moneys in the Escrow Fund. (a) On the date hereof, $ of the money on deposit in the Escrow Fund is to be invested in the Initial Escrow Securities. The Trustee acknowledges and agrees that it has received the amount set forth in Section 2(b) [and Section 2(c)] above and hereby agrees to use $ of such moneys to purchase on the date hereof the Initial Escrow Securities from the vendor and at the prices set forth in Schedule A hereto, and, subject to the provisions of Section 4 below, to hold the remaining balance of such deposit in the amount of $ uninvested as cash. The City and the Trustee shall each take all remaining necessary action to have the Initial Escrow Securities issued and registered in the name of the Trustee, for the account of the Escrow Fund. (b) The Trustee shall not be liable or responsible for any loss resulting from any investment made pursuant to this Escrow Agreement and in full compliance with the provisions hereof. (c) The Trustee acknowledges receipt of the Verification Report, in satisfaction of the requirements of clause (ii) of subsection (b) of Section 9.02 of the Master Indenture with respect to an Accountant's Certificate, and the Trustee may conclusively rely upon the conclusions of the Verification Report to the effect that the Initial Escrow Securities mature in such amounts and at such times as shall be necessary and sufficient, together with other moneys in the Escrow Fund, to pay the Escrow Requirements when due. (d) The Trustee shall hold all Escrow Securities in the Escrow Fund, and the money received from time to time as principal and interest thereon or otherwise with respect thereto, in trust to be applied as provided in this Escrow Agreement and shall collect the principal of and interest on such Escrow Securities, and all amounts payable with respect thereto, promptly as such amounts become due. Section 4. Provision for the Payment of the Refunded 2009 Series A Bonds; Irrevocable Instructions to Give Notices. (a) The City hereby elects to discharge and provide for the payment of the Refunded 2009 Series A Bonds in accordance with Article IX of the Master Indenture as provided in this Escrow Agreement. The City hereby requests and irrevocably instructs the Trustee, and the Trustee hereby agrees, to apply the moneys in the Escrow Fund to the payment OHSUSA:761725343.4 -3- of the Escrow Requirements when due as follows: (i) pay the principal of the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2016 through 2019, inclusive,] as such principal amounts become due; (ii) pay the Redemption Price of the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2020 and 2021 ] on the Redemption Date; and (iii) pay the accrued but unpaid interest on the Refunded 2009 Series A Bonds due on each Interest Payment Date for the Refunded 2009 Series A Bonds commencing on August 1, 2015 through the Redemption Date. (b) The City hereby further requests and irrevocably instructs the Trustee to give notice of the deposit of funds hereunder pursuant to Section 9.02 of the Master Indenture with respect to the Refunded 2009 Series A Bonds in accordance with Section 9.02 of the Master Indenture. The Trustee is also instructed to provide notice of such deposit in accordance with the Continuing Disclosure Agreement relating to the 2009 Series A Bonds. (c) The City hereby irrevocably designates the Refunded 2009 Series A Bonds maturing on August 1 in each of the years [2020 and 2021 ] for redemption on the Redemption Date and hereby irrevocably instructs the Trustee to give notice of redemption of such Refunded 2009 Series A Bonds in accordance with Section 4.05 of the Master Indenture. (d) The Trustee acknowledges that this Escrow Agreement constitutes irrevocable instructions to apply the amounts received in connection with the Escrow Securities credited to the Escrow Fund, and any other amounts in the Escrow Fund, to the payment of principal or Redemption Price, as applicable, of and interest on the Refunded 2009 Series A Bonds as set forth in the Escrow Requirements. Section 5. Reinvestment and Transfer of Funds. Any cash received from principal or interest payments on the Escrow Securities which shall be required at any time to pay the Remaining Escrow Requirements shall, at the written request of an Authorized City Representative, be reinvested in Escrow Securities maturing at times and in amounts which, together with the other funds to be available in the Escrow Fund to pay the Remaining Escrow Requirements, shall be sufficient to pay when due the Remaining Escrow Requirements, as evidenced by an Accountant's Certificate. Any money remaining in the Escrow Fund after the payment of all Escrow Requirements shall be transferred to the Interest Account in the Debt Service Fund. Section 6. Fees and Costs. (a) The Trustee's annual fees and costs for acting as Trustee under this Escrow Agreement are to be agreed upon by the Trustee and the City and paid by the City. The annual fees and costs of the Trustee for any other duties to be carried out by it under the Indenture shall continue as previously agreed upon between the Trustee and the City. (b) The Trustee shall also be entitled to additional reasonable fees and reimbursements for costs incurred, to be paid by the City, including but not limited to legal and accountants' services, in connection with any litigation not arising from the Trustee's negligence or willful misconduct which may at any time be instituted involving this Escrow Agreement. OHSUSA:761725343.4 -4- (c) The fees of and the costs incurred by the Trustee shall in no event be deducted or payable from or constitute a lien against the Escrow Fund, any Escrow Securities credited to the Escrow Fund or any moneys in the Escrow Fund, including without limitation the Initial Escrow Securities and any proceeds thereof. Section 7. Indemnification. The City hereby assumes liability for and hereby agrees (whether or not any of the transactions contemplated hereby are consummated) to indemnify, protect, save and hold harmless the Trustee and its respective successors, assigns, agents and servants from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including legal fees and disbursements) of whatsoever kind and nature which may be imposed on, incurred by, or asserted against, at any time, the Trustee (whether or not also indemnified against by any other person under any other agreement or instrument) and in any way relating to or arising out of the execution and delivery of this Escrow Agreement, the establishment of the Escrow Fund, the retention of the moneys therein and any payment, transfer or other application of moneys or securities by the Trustee in accordance with the provisions of this Escrow Agreement, or as may arise by reason of any act, omission or error of the Trustee made in good faith in the conduct of its duties; provided, however, that the City shall not be required to indemnify the Trustee against its own negligence or willful misconduct. The indemnities contained in this Section shall survive the termination of this Escrow Agreement or the resignation or removal of the Trustee. Section 8. Resignation of Trustee; Replacement of Trustee. The Bank of New York Mellon Trust Company, N.A. has entered into this Escrow Agreement in its capacity as Trustee under the Indenture and shall remain a party to this Escrow Agreement until a successor trustee is appointed Trustee under the Indenture. - If a successor trustee is appointed as Trustee under the Indenture, such successor shall automatically and without the necessity of any further act by the City, The Bank of New York Mellon Trust Company, N.A. or the successor trustee be deemed a party to this Escrow Agreement in its capacity as Trustee under the Indenture. In that event The Bank of New York Mellon Trust Company, N.A. shall transfer to such successor trustee all Escrow Securities and moneys then held by The Bank of New York Mellon Trust Company, N.A. hereunder. Section 9. Termination. This Escrow Agreement shall terminate when all moneys are transferred from the Escrow Fund as provided herein. Section 10. Rights, Duties and Obligations of Trustee. Subject to the provisions of Sections 3 and 5 hereof, moneys held by the Trustee hereunder are to be held and applied for the payment of the Escrow Requirements when due in accordance with the terms hereof. The rights, duties and obligations of the Trustee shall, except as otherwise expressly provided herein, be governed by the applicable provisions of the Indenture which by this reference are hereby incorporated into this Escrow Agreement as if set forth in full herein. Section 11. Severability. If any section, paragraph, sentence, clause or provision of this Escrow Agreement shall for any reason be held to be invalid or unenforceable, the invalidity or unenforceability of such section, paragraph, sentence, clause or provision shall not affect any of the remaining provisions of this Escrow Agreement. The provisions of this Escrow Agreement shall be unalterable, subject to the provisions of Section 12 hereof. OHSUSA:761725343.4 -5- Section 12. Amendment. The parties hereto may, without the consent or notice to the Owners of the Refunded 2009 Series A Bonds, enter into such agreements supplemental to this Escrow Agreement as shall not adversely affect the rights of such Owners hereunder for any of the following purposes: (a) to cure any ambiguity or formal defect or omission in this Escrow Agreement; or (b) to grant or confer upon the Trustee for the benefit of the Owners of the Refunded 2009 Series A Bonds any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Trustee. The Trustee shall enter into such agreements only upon receipt by the Trustee of, and shall be entitled to rely conclusively upon, an Opinion of Bond Counsel to the effect that any such agreement complies with this Section. Section 13. Execution of Counterparts. This Escrow Agreement may be executed in any number of counterparts, each of which shall for all purposes be deemed to be an original and all of which shall together constitute but one and the same instrument. Section 14. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given (i) if hand delivered, delivered by courier or by Electronic means of communication, when delivered to the appropriate notice address, or (ii) if mailed by first class mail, postage prepaid, six business days after deposit in the United States mail: addressed ;to the.appropriate notice address. The parties listed below may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Any notice required or permitted hereunder shall be directed to the following notice address: As to the City: City of Vernon 4305 South Santa Fe Avenue Vernon, California 90058 Attention: City Administrator Email: mwhitworth@ci.vemon.ca.us As to the Trustee: The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, California 90017-4104 Attention: Corporate Trust Re: City of Vernon 2015 Escrow Fund Email: Section 15. Governing Law; Venue. This Escrow Agreement shall be construed in accordance with and governed by the constitution and the laws of the State of California applicable to contracts made and performed in the State. This Escrow Agreement shall be enforceable in the State, and any action arising out of this Escrow Agreement shall be filed and OHSUSA:761725343.4 -6- maintained in the Los Angeles County Superior Court, Los Angeles, California, unless the City waives this requirement. Section 16. Immunities and Liabilities of Trustee. (a) The Trustee undertakes to perform only such duties as are expressly and specifically set forth in this Escrow Agreement and no implied duties or obligations shall be read into this Escrow Agreement against Trustee. (b) The Trustee shall not have any liability hereunder except to the extent of its own negligence or willful misconduct. In no event shall the Trustee be liable for any special indirect or consequential damages. The Trustee shall have no duty or responsibility under this Escrow Agreement in the case of any default in the performance of the covenants or agreements of any other party contained in the Indenture; provided that, notwithstanding any such default, the Trustee shall apply the moneys in the Escrow Fund to the Escrow Requirements when due as provided in this Escrow Agreement. The Trustee is not required to resolve conflicting demands to money or property in its possession under this Escrow Agreement. (c) The Trustee may consult with counsel of its own choice (which may be counsel to the City), and the written opinion of such counsel shall be full and complete authorization to take or suffer in good faith any action hereunder in accordance with such opinion of counsel. (d) The Trustee shall not be responsible for any of the recitals or representations contained herein or in the Indenture, other than recitals or representations specifically made by the Trustee. (e) The Trustee may become the owner of, or acquire any interest in, any of the Refunded 2009 Series A Bonds or any bonds or other securities of the City with the same rights that it would have if it were not the Trustee and may engage or be interested in any financial or other transaction with the City. (f) The Trustee shall not be liable for the accuracy of any calculations provided as to the sufficiency of the moneys or securities deposited with it to pay the Escrow Requirements when due. (g) The Trustee shall not be liable for any action or omission of the City under this Escrow Agreement or the Indenture. (h) Whenever in the administration of this Escrow Agreement the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by a certificate of any authorized representative of the City, and such certificate shall, in the absence of negligence or willful misconduct on the part of the Trustee, be full warrant to the Trustee for any action taken or suffered by it under the provisions of this Escrow Agreement upon the faith thereof. OHSUSA:761725343.4 -7 (i) The Trustee may conclusively rely as to the truth and accuracy of the statements and correctness of the opinions and the calculations provided to it in connection with this Escrow Agreement and shall be protected in acting, or refraining from acting, upon any written notice, instruction, request, certificate, document or opinion furnished to the Trustee in connection with this Escrow Agreement and reasonably believed by the Trustee to have been signed or presented by the proper party, and it need not investigate any fact or matter stated in such notice, instruction, request, certificate or opinion. 0) The liability of the Trustee to make the payments required by Section 4 and Section 5 shall be limited to the moneys and Escrow Securities in the Escrow Fund. (k) No provision of this Escrow Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance or exercise of any of its duties hereunder, or in the exercise of its rights or powers. (1) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees. (m) The Trustee agrees to accept and act upon instructions or directions pursuant to this Escrow Agreement 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 incumbency certificate may be amended and replaced by the City. If the City elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar Electronic method), the Trustee's reasonable 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 but excluding the risk of the Trustee's negligence or willful misconduct. OHSUSA:761725343.4 -8- IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be signed in their respective names by their duly authorized officers, all as of the day and year first above written. CITY OF VERNON [Mark Whitworth, City Administrator] ATTEST: wo Maria E. Ayala, City Clerk APPROVED AS TO FORM: am City Attorney THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Authorized Officer OHSUSA:761725343.4 -9- Schedule A Initial Escrow Securities Investments to be purchased on , 2015: Type of Interest Security Maturity Date Par Amount Rate Purchase Price Vendor OHSUSA:761725343.4 A-1 Schedule B Escrow Requirements Schedule Payment Date Payment Amount OHSUSA:761725343.4 B-1 EXHIBIT C Exhibit C [Purchase Contract Attached] OHSUSA:761725340.5 C-1 Norton Rose Fulbright US LLP — Draft of 6109115 $[PAR AMOUNT] CITY OF VERNON Electric System Revenue Bonds 2015 Taxable Series A CONTRACT OF PURCHASE City of Vernon 4305 Santa Fe Avenue Vernon, California 90058 Ladies and Gentlemen: 2015 The undersigned, J.P. Morgan Securities LLC, as representative (the "Representative") of itself and Citigroup Global Markets Inc., as underwriters (collectively, the "Underwriters"), hereby offers to enter into this Contract of Purchase (this "Purchase Contract") with you, the City of Vernon ("the City"). This offer is made subject to acceptance by the City prior to 11:59 P.M., California time, on the date hereof, and if not so accepted, this offer will be subject to withdrawal by the Underwriters upon notice delivered to the City at any time prior to acceptance by the City. Upon acceptance by the execution hereof, this Purchase Contract shall be in full force and effect in accordance with its terms and shall be binding upon the City and the Underwriters. All capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed thereto in the Official Statement (as defined herein). The Representative has been duly authorized, pursuant to an agreement among underwriters, to execute this Purchase Contract, to act hereunder on behalf of the Underwriters and to take all actions and to waive any condition or requirement required or permitted to be taken or waived hereunder by the Representative or the Underwriters. The Underwriters shall not designate any other representative except upon the approval of the City (which approval shall not be unreasonably withheld). Purchase, Sale and Delivery of the Bonds. (a) Subject to the terms and conditions, and in reliance upon the representations, warranties and agreements, set forth herein, the Underwriters hereby jointly and severally agree to purchase, and the City agrees to sell and deliver to the Underwriters, all (but not less than all) of the $ City of Vernon Electric System Revenue Bonds 2015 Taxable Series A (the "Bonds"). The Bonds shall be dated the date of delivery thereof, shall mature on such dates and shall bear interest at such rates, and shall be subject to redemption, all set forth in Schedule I attached hereto. Interest on the Bonds shall be payable semiannually on February 1 and August 1 of each year, commencing , 20_. The purchase price for the Bonds shall be $ (consisting of the $ aggregate principal amount of the Bonds [plus] [less] $ of [net] original issue [premium] [discount], less $ of Underwriters' discount). (b) The Bonds are to be issued pursuant to Article XI of the Vernon City Code and an Indenture of Trust, dated as September 1, 2008 (as amended and supplemented, the "Indenture"), by and between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), including as supplemented by the Fourth Supplemental Indenture of Trust, dated as of , Error! Unknown document property name. 2015, providing for the issuance of the Bonds, substantially in the form previously submitted to the Representative, with only such changes therein as shall be mutually agreed upon with only such changes therein as shall be agreed upon by the City and the Representative. Proceeds of the Bonds will be used to (i) refund a portion of the City's Outstanding Electric System Revenue Bonds, 2009 Series A (the "Refunded Bonds"), (ii) finance the costs of certain capital improvements to the City's Electric System by reimbursing the City for such costs, (iii) fund a deposit to the Debt Service Reserve Fund, and (iv) pay costs of issuing the Bonds. The City will undertake, pursuant to a Continuing Disclosure Agreement, dated as of 1, 2015 (the "Continuing Disclosure Agreement"), by and between the City and the Trustee, to provide certain annual financial information and notices of the occurrence of certain events. A form of the Continuing Disclosure Agreement is set forth in the Preliminary Official Statement (defined below) and will also be set forth in the Official Statement (defined below). In connection with the refunding of the Refunded Bonds, the City will enter into an Escrow Agreement, dated as of 1, 2015 (the "Escrow Agreement"), by and between the City and The Bank of New York Mellon Trust Company, N.A., as escrow agent (the "Escrow Agent"). The Indenture, the Continuing Disclosure Agreement, the Escrow Agreement and this Purchase Contract are hereinafter referred to collectively as the "Legal Documents." (c) The Underwriters agree to make a bona fide public offering of all of the Bonds at the initial offering prices (or yields) set forth in the Official Statement; provided, that the Bonds may be offered and sold to certain dealers, unit investment trusts and money market funds at prices lower (or yields higher) than such public offering prices (or yields), and the Underwriters may effect transactions that stabilize or maintain the market price of the Bonds. Subsequent to the initial public offering, the Underwriters reserve the right to change the public offering prices (or yields) as they deem necessary in connection with the marketing of the Bonds. (d) At 8:00 A.M., California time, on , 2015, or at such other time or on such earlier or later business day as shall have been mutually agreed upon by the City and the Representative (the "Closing Date"), the City will deliver to the Underwriters at the offices of Orrick, Herrington & Sutcliffe LLP, Los Angeles, California ("Bond Counsel"), the closing documents hereinafter mentioned. The Bonds, registered to Cede & Co. and in definitive form, will be made available to the Underwriters one business day prior to the Closing Date at the offices of Bond Counsel, or at such other place as may be designated by the Representative and shall be subsequently delivered on the Closing Date to The Depository Trust Company ("DTC") or to the Trustee for DTC. It is anticipated that CUSIP identification numbers will be printed on the Bonds, but neither the failure to print such number on any of the Bonds nor any error with respect thereto shall constitute cause for a failure or refusal by the Underwriters to accept delivery of and pay for the Bonds in accordance with the terms of this Purchase Contract. Upon release of the Bonds, the Underwriters will pay the purchase price of the Bonds as set forth in this Section 1, in immediately available funds to the order of the City. The releases and payments referenced in this Section 1 are herein called the "Closing." 2. Use and Preparation of Official Statement. The City hereby ratifies, confirms and approves of the distribution and use by the Underwriters prior to the date hereof of the preliminary official statement dated , 2015, relating to the Bonds (including all appendices thereto, the "Preliminary Official Statement") and the making available of the Preliminary Official Statement to investors prior to the date hereof. The City has deemed the Preliminary Official Statement final as of the date thereof for purposes of Rule 15c2-12 promulgated under the Securities Exchange Act of 1934 ("Rule Error! Unknown document property name. 2 15c2-12"), except for information permitted to be omitted therefrom in accordance with paragraph (b)(1) of Rule 15c2-12. The City hereby acknowledges that the Preliminary Official Statement has been made available to investors in electronic form. The City hereby agrees to deliver or cause to be delivered to the Underwriters, within seven (7) business days of the date hereof, copies of the final Official Statement relating to the Bonds, dated the date hereof, in the form of the Preliminary Official Statement, with such changes thereto, as may be approved by the Representative (including the appendices thereto and any amendments or supplements as have been approved by the City and the Representative, the "Official Statement"), in sufficient quantity to enable the Underwriters to comply with the rules of the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. The City hereby approves of the distribution and use by the Underwriters of the Official Statement in connection with the offer and sale of the Bonds. At the time of or prior to the Closing Date, the Representative shall file a copy of the Official Statement in printed or electronic form with, and as permitted by, the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access System. The Representative shall advise the City of the date of such filing. 3. Representations, Warranties and Agreements of the City. The City represents, warrants and agrees with the Underwriters as follows: (a) The City is, and will be on the Closing Date, duly existing as a chartered city organized under the laws of the State of California (the "State"), and has full legal right, power and authority to cause the Bonds to be authenticated and delivered, to execute and deliver the Legal Documents and to perform its obligations contained herein and therein in accordance with the Act and other applicable laws, and, assuming the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal Documents will constitute the legal, valid and binding obligations of the City enforceable in accordance with their respective terms; (b) By all necessary official action of the City prior to or concurrently with the acceptance hereof, the City has duly approved the distribution of the Preliminary Official Statement and the execution, delivery and distribution of the Official Statement, and has duly authorized and approved the execution and delivery of, and the performance by the City of the obligations on its part contained in, the Legal Documents and the consummation by it of all other transactions contemplated by the Legal Documents; (c) The City is not in breach of or default in any material respect under any applicable constitutional provision, law or administrative regulation to which it is subject or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the City is a party or to which the City or any of its property or assets is otherwise subject, and no event has occurred and is continuing which with the passage of time or the giving of notice, or both, would constitute such a material default or event of default under any such instrument; and the issuance of the Bonds and the execution and delivery of the Official Statement and the Legal Documents and compliance with the provisions on the City's part contained in the Legal Documents, will not in any material respect conflict with or constitute a breach of or default under any law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the City is a party or is otherwise subject, nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the properties or assets of the City under the terms of any such law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, except as provided in the Indenture or the Escrow Agreement; Error! Unknown document property name. 3 (d) There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or, to the best knowledge of the City threatened, against the City in any material respect affecting the existence of the City or the titles of its officers to their respective offices or affecting or seeking to prohibit, restrain or enjoin the issuance, sale or delivery of the Bonds or contesting or affecting, as to the City; the validity or enforceability of the Bonds or the Legal Documents or the collection of Net Revenues of the Electric System or other amounts pledged or to be pledged to pay the principal of, premium, if any, and interest on the Bonds or contesting the powers of the City or its authority to enter into, adopt or perform its obligations under any of the foregoing, or contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement, or any amendment or supplement thereto, wherein an unfavorable decision, ruling or finding would likely to result in a material adverse change in the business, properties, assets or financial condition of the Electric System or materially adversely affect the validity or enforceability of the Legal Documents; (e) All authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization by, or which would constitute a condition precedent to or the absence of which would materially adversely affect the due performance by, the City of its obligations in connection with the issuance of the Bonds under the Indenture have been duly obtained, except for such approvals, consents and orders as may be required under the Blue Sky or securities laws of any state in connection with the offering and sale of the Bonds; and, except as described in or contemplated by the Official Statement, all authorizations, approvals, licenses, permits, consents and orders of any governmental authority, board, agency or commission having jurisdiction of the matter which are required for the due authorization by, or which would constitute a condition precedent to or the absence of which would materially adversely affect the due performance by, the City of its obligations under the Legal Documents have been duly obtained; (f) The City will furnish such information, execute such instruments and take such other action in cooperation with the Underwriters as the Representative may reasonably request in order (i) to qualify the Bonds for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions of the United States as the Representative may designate and (ii) to determine the eligibility of the Bonds for investment under the laws of such states and other jurisdictions, and will use its best efforts to continue such qualification in effect so long as required for distribution of the Bonds; provided, however, that in no event shall the City be required to take any action which would subject it to service of process in any jurisdiction in which it is not now so subject; (g) As of its date and the date hereof, the Preliminary Official Statement (excluding information concerning DTC and the book -entry system as to which no representation is made) did not, except as to the information permitted to be omitted by Rule 15c2-12, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (h) As of the date thereof and at all times subsequent thereto to and including the date which is 25 days following the End of the Underwriting Period (as such term is hereinafter defined) for the Bonds, the Official Statement (excluding information concerning DTC and the book -entry system as to which no representation is made) did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (i) If between the date hereof and the date which is 25 days after the End of the Underwriting Period for the Bonds, an event occurs which might or would cause the information Error! Unknown document property name. 4 contained in the Official Statement, as then supplemented or amended, to contain an untrue statement of a material fact or to omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, the City will notify the Representative, and, if in the opinion of the City, the Representative or their respective counsel, such event requires the preparation and publication of a supplement or amendment to the Official Statement, the City will forthwith prepare and furnish to the Underwriters (at the expense of the City) a reasonable number of copies of an amendment of or supplement to the Official Statement (in form and substance satisfactory to the Representative) which will amend or supplement the Official Statement so that it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time the Official Statement is delivered to prospective purchasers, not misleading. For the purposes of this subsection, between the date hereof and the date which is 25 days after the End of the Underwriting Period for the Bonds, the City will furnish such information with respect to itself as the Representative may from time to time reasonably request; (j) If the information contained in the Official Statement is amended or supplemented pursuant to paragraph (i) of this Section 3, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto up to and including the date which is 25 days after the End of the Underwriting Period for the Bonds, the portions of the Official Statement so supplemented or amended (excluding information concerning DTC and the book -entry system as to which no representation is made) will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (k) As used herein and for the purposes of the foregoing, the term "End of the Underwriting Period" for the Bonds shall mean the earlier of (i) the Closing Date unless the City shall have been notified in writing by the Representative on or prior to the Closing Date that the End of the Underwriting Period for the Bonds has not occurred by the Closing Date under Rule 15c2-12, or (ii) the date on which the End of the Underwriting Period for the Bonds has occurred under Rule 15c2-12; provided, however, that the City may treat as the End of the Underwriting Period for the Bonds the date specified as such in a notice from the Representative stating the date which is the End of the Underwriting Period; (1) After the Closing Date, the City will not participate in the issuance of any amendment of or supplement to the Official Statement to which, after being furnished with a copy, the Representative shall reasonably object in writing; (m) The City will apply, or cause the application of, the proceeds of the Bonds in accordance with the Indenture and the Escrow Agreement; (n) Other than as described in the Official Statement, as of the time of acceptance hereof and as of the Closing Date the City does not and will not have outstanding any indebtedness which is secured by a lien on Electric System Revenues superior to or on a parity with the lien of the Bonds thereon; (o) Between the date hereof and the Closing Date, except as contemplated by the Official Statement, the City will not have incurred any material liabilities, direct or contingent, payable from Electric System Revenues or entered into any material transaction in connection with the Electric System in either case other than in the ordinary course of business, and there shall not have been any material adverse change in the financial condition or operations of the Electric System; Error! Unknown document property name. 5 (p) The Bonds, the Legal Documents and the other documents described in the Official Statement conform in all material respects to the descriptions thereof contained in the Official Statement, and the Bonds, when delivered as provided herein, will be validly issued and outstanding obligations of the City entitled to the benefits of the Indenture; (q) The financial statements of the Light and Power Enterprise of the City contained as Appendix A to the Official Statement do and will fairly present the financial position and results of operations of the Electric System as of the dates and for the periods therein set forth in accordance with the accounting principles described in Appendix A to the Official Statement applied consistently, and there has not been a material adverse change in the business, properties or financial condition of the City or the Electric System from that set forth in or contemplated by the Official Statement; (r) The City (i) has all necessary licenses and permits required to carry on and operate all of the facilities, equipment and other property comprising the Electric System the lack of which would materially adversely affect the operations or financial condition of the Electric System, and (ii) has not received any notice of an alleged violation and, to the best knowledge of the City, the City is not in violation of any zoning, land use or other similar law or regulation applicable to any of its property comprising the Electric System that would materially adversely affect its operations or financial condition; (s) Any certificate signed by an authorized officer of the City and delivered to the Underwriters shall be deemed a representation and warranty by the City to the Underwriters as to the statements made therein; and (t) Except as disclosed in the Official Statement, the City has not failed to comply in all material respects with the terms of any continuing disclosure obligation under Rule `15c2-12 within the past five years. 4. Conditions to the Obligations of the Underwriters. The Underwriters hereby enter into this Purchase Contract in reliance upon the representations and warranties of the City contained herein and the representations and warranties of the City to be contained in the documents and instruments to be delivered on or prior to the Closing Date and upon the performance by the City of its obligations both on and as of the date hereof and as of the Closing Date. Accordingly, the Underwriters' obligations under this Purchase Contract to purchase, to accept delivery of and to pay for the Bonds shall be subject, at the option of the Representative, to the accuracy in all material respects of the representations and warranties of the City contained herein as of the date hereof and as of the Closing Date, to the accuracy in all material respects of the statements of the officers and other officials of the City made in any certificate or other document furnished pursuant to the provisions hereof, to the performance by the City of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing Date, and also shall be subject to the following additional conditions: (a) The Underwriters shall receive, within seven (7) business days of the date hereof and, in any event, at least two (2) business days before Closing, copies of the Official Statement (including all information previously permitted to have been omitted by Rule 15c2-12 and any amendments or supplements as have been approved by the Representative), in such quantity as the Underwriters shall have requested pursuant to Section 2 hereof, (b) The representations and warranties of the City contained herein shall be true and correct on the date hereof and on the Closing Date, as if made on and at the Closing Date; Error! Unknown document property name. 6 (c) As of the Closing Date, the Legal Documents shall have been duly authorized, executed and delivered by the respective parties thereto, and the Official Statement shall have been duly authorized, executed and delivered by the City, all in substantially the forms heretofore submitted to the Representative, with only such changes as shall have been agreed to in writing by the Representative, and such Legal Documents shall be in full force and effect and shall not have been amended, modified or supplemented and the Official Statement shall not have been supplemented or amended, except in any such case as may have been agreed to by the Representative; and there shall be in full force and effect such resolution or resolutions of the City Council of the City as, in the opinion of Bond Counsel, shall be necessary or appropriate in connection with the transactions contemplated hereby; (d) If between the date hereof and the Closing Date, the market price or marketability, at the initial public offering prices set forth in the Official Statement, of the Bonds shall have been materially adversely affected, in the reasonable judgment of the Representative, by reason of any of the following, the Underwriters may terminate their obligation to accept delivery of and make any payment for the Bonds by delivery to the City of a written notice to such effect by the Representative: (1) legislation enacted, introduced in the Congress or recommended for passage by the President of the United States, or a decision rendered by a court of the United States, or an order, ruling, regulation (final, temporary or proposed) or official statement issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter shall have been made or issued to the effect that obligations of the general character of the Bonds, or the Bonds, including any or all underlying arrangements, are not exempt from registration under the Securities Act of 1933, as amended, or that the Indenture is not exempt from qualification under the Trust Indenture Act of 1939, as amended; (2) any of the following shall have occurred (i) the outbreak or escalation in military hostilities or declaration by the United States of a national or international emergency or war, (ii) the sovereign debt rating of the United States is downgraded by any major credit rating agency or a payment default occurs on United States Treasury Obligation, (iii) a default with respect to the debt obligations of, or the institution of proceedings under any federal bankruptcy laws by or against, any state of the United States or any city, county or political subdivision located in the United States having a population of over 500,000, or (iv) any other calamity or crisis the effect of any of which on the financial markets is such as to make it impracticable or inadvisable to proceed with the offering or delivery of the Bonds as contemplated hereby or by the Official Statement; (3) the declaration of a general banking moratorium by federal, New York or California authorities, or the general suspension of trading on any national securities exchange, or a major financial crisis or a material disruption in commercial banking or securities settlement or clearances services shall have occurred; (4) the imposition by the New York Stock Exchange or other national securities exchange, or any governmental authority having jurisdiction of the subject matter, of any material restrictions not now in force with respect to the Bonds or obligations of the general character of the Bonds or securities generally, or the material increase of any such restrictions now in force, including those relating to the extension of credit by, or the charge to the net capital requirements of, the Underwriters; (5) an order, decree or injunction of any court of competent jurisdiction, or order, ruling, regulation or official statement by the Securities and Exchange Commission, or any Error! Unknown document property name. 7 other governmental agency having jurisdiction of the subject matter, issued or made to the effect that the issuance, offering or sale of obligations of the general character of the Bonds, or the issuance, offering or sale of the Bonds, including any or all underlying obligations, as contemplated hereby or by the Official Statement, is or would be in violation of the federal securities laws as amended and then in effect; (6) except as disclosed in or contemplated by the Official Statement, any material adverse change in the business, properties, assets or financial condition of the Electric System of the City; (7) the suspension, withdrawal or downgrading of any rating of the Bonds or any other outstanding debt of the City's Electric System by any rating agency then rating such Bonds or other outstanding debt of the City's Electric System, or any official action by any rating agency then rating the Bonds to place the Bonds on "Credit Watch" for possible downgrade or on "Negative Outlook" after the date hereof (and provided that the Bonds were not on "Credit Watch" or "Negative Outlook" prior to the date hereof); or (8) an event shall occur or any information shall become known which makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and, in either such event, (a) the City refuses to permit the Official Statement to be supplemented to supply such statement or information or (b) the effect of the Official Statement as so supplemented is, in the reasonable judgment of the Representative, to materially adversely affect the marketability of the Bonds or the market price thereof. (e) At or prior to the Closing, the Underwriters shall receive the following documents, in each case satisfactory in form and substance to the Representative and Underwriters' Counsel: (1) the approving opinion of Bond Counsel, dated the Closing Date and addressed to the City, substantially in the form attached as Appendix D to the Official Statement; (2) a supplemental opinion of Bond Counsel, dated the Closing Date and addressed to the Underwriters, substantially in the form attached hereto as Exhibit A; (3) an opinion of the City Attorney or other counsel to the City acceptable to the Representative, dated the Closing Date and addressed to the Underwriters, substantially in the form attached hereto as Exhibit B; (4) an opinion of counsel to the Trustee, dated the Closing Date and addressed to the City and the Underwriters, to the effect that: (i) the Trustee is a national banking association duly organized and validly existing under the laws of the United States of America; (ii) the Trustee is duly eligible and qualified to act as Trustee under the Indenture and as Escrow Agent under the Escrow Agreement; (iii) the Trustee has all requisite power, authority and legal right to execute and deliver the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement and to perform its obligations under such documents; and (iv) the Trustee has duly executed and delivered the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement and assuming that such documents constitute the legal, valid and binding agreements of the other respective parties thereto, such documents are the legal, valid and binding agreements Error! Unknown document property name. of the Trustee, enforceable in accordance with their terms, except to the extent enforceability thereof may be subject to (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights and remedies heretofore or hereafter enacted, and (b) the application of equitable principles and the exercise of judicial discretion in appropriate cases; (5) an opinion of Norton Rose Fulbright US LLP, Underwriters' Counsel, dated the Closing Date and addressed to the Underwriters, to the effect that (i) the Bonds are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Indenture is exempt from qualification under the Trust Indenture Act of 1939, as amended; (ii) assuming the due authorization, execution and delivery of the Continuing Disclosure Agreement by the District and the Trustee and the enforceability thereof, the Continuing Disclosure Agreement is in a form which satisfies the requirements of section (b)(5)(i) of Rule 15c2-12 of the Securities Exchange Act of 1934, as amended; and (iii) on the basis of the information made available to such firm in the course of acting as counsel to the Underwriters (but without having undertaken to determine or verify independently, or assuming any responsibility for, the accuracy, completeness or fairness of any of the statements contained in the Preliminary Official Statement or the Official Statement), no facts have come to the attention of the personnel in such firm directly involved in rendering legal advice and assistance to the Underwriters in connection with the preparation of the Preliminary Official Statement and the Official Statement that cause them to believe that (a) the Preliminary Official Statement as of its date or as of the date of this Purchase Contract (excluding therefrom financial, demographic and statistical data; forecasts, projections, estimates, assumptions and expressions of opinions; statements relating to DTC, Cede & Co. and the operation of the book -entry system; statements relating to the treatment of the Bonds or the interest, discount or premium, if any, thereon or therefrom for tax purposes under the law of any jurisdiction; and the statements contained in the Preliminary Official Statement under the captions "TAX MATTERS," and in the Appendices to the Preliminary Official Statement; as to all of which they express no view) contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except for such information as is permitted to be excluded from the Preliminary Official Statement pursuant to Rule 15c2-12 of the Securities Exchange Act of 1934, as amended, including but not limited to information as to pricing, yields, interest rates, maturities, amortization, redemption provisions, debt service requirements, Underwriter's discount and CUSIP numbers or (b) the Official Statement as of its date or as of the Closing Date (excluding therefrom financial, demographic and statistical data; forecasts, projections, estimates, assumptions and expressions of opinions; statements relating to DTC, Cede & Co. and the operation of the book -entry system; statements relating to the treatment of the Bonds or the interest, discount or premium, if any, thereon or therefrom for tax purposes under the law of any jurisdiction; and the statements contained in the Official Statement under the captions "TAX MATTERS," and in the Appendices to the Official Statement; as to all of which they express no view) contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading; (6) A defeasance opinion of Bond Counsel, dated the Closing Date and addressed to the Trustee, to the effect that the Refunded Bonds have been deemed to have been paid and are no longer outstanding pursuant to the terms of the Indenture; (7) a certificate or certificates, dated the Closing Date, of the City executed by its City Administrator or other appropriate official, to the effect that (i) the representations and Error! Unknown document property name. 9 warranties of the City in this Purchase Contract are true and correct on and as of the Closing Date as if made on and as of the Closing Date, and the City has complied with and performed all of its covenants and agreements in this Purchase Contract on its part to be complied with and performed at or prior to the Closing; (ii) since June 30, 2014, except as referred to in or as contemplated by the Official Statement, with respect to its Electric System, the City has not incurred any financial liabilities, direct or contingent, or entered into any transactions and there has not been any adverse change in the condition, financial or physical, of the Electric System, in any case that would materially and adversely affect the ability of the City to meet its obligations under the Indenture; (iii) other than as described in the Official Statement, there is no action, suit, proceeding, inquiry or investigation pending or, to the best knowledge of such official, threatened (a) in any way questioning the corporate existence of the City or the titles of the officers of the City to their respective offices; (b) seeking to restrain or enjoin the delivery of the Bonds, or the collection of Net Revenues of the Electric System or other amounts pledged to pay the principal of, premium, if any, and interest on such Bonds or the pledge thereof, (c) in any way contesting or affecting the validity of the Bonds or the Legal Documents; (d) in any way contesting the powers of the City or any authority for the issuance and delivery of the Bonds and the performance of its obligations contained therein or the execution and delivery of the Legal Documents and the performance of its obligations contained therein, nor to the best knowledge of such official after reasonable investigation, is there any basis for any such action, suit, proceeding, inquiry or investigation, wherein an unfavorable decision, ruling or finding would make invalid or materially adversely affect the authorization, execution, delivery or performance by the City of the foregoing; (e) which would be likely to result in a material adverse change in the business, properties, assets or the financial condition of the Electric System or which would be likely to have a material adverse effect on the ability of the City to meet its obligations under the Indenture; or (f) asserting that the Official Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, which certificate shall be in form and substance acceptable to the Representative (but in lieu of such certificate, the Representative may in its sole discretion accept an opinion of Bond Counsel or Counsel to the City, acceptable to the Representative in form and substance, that in their opinion the issues raised in any such pending or threatened litigation are without substance or that the contentions of any plaintiffs therein are without merit); (8) A certificate, dated the Closing Date, signed by a duly authorized official of the Trustee, satisfactory in form and substance to the Representative, to the effect that: (i) the Trustee is a national banking association organized and existing under and by virtue of the laws of the United States of America, having the full power and being qualified to enter into and perform its duties under the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement; (ii) the Trustee is duly authorized to enter into the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement and to authenticate and deliver the Bonds to the Underwriters pursuant to the terms of the Indenture; (iii) the execution and delivery of the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement and compliance with the provisions on the Trustee's part contained therein, and the authentication and delivery of the Bonds will not conflict with or constitute a breach of or default under any law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Trustee is a party or is otherwise subject (except that no representation, warranty or agreement is made with respect to any federal or state securities or Blue Sky laws or regulations), nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the properties or assets held by the Trustee pursuant to the lien created by the Indenture under the terms of any such law, administrative regulation, Error! Unknown document property name. 10 judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, except as provided by the Indenture and the Escrow Agreement; and (iv) there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, served on, or, to the best knowledge of such officer, threatened against, the Trustee, affecting the existence of the Trustee or the titles of its officers to their respective offices, or in any way contesting or affecting the validity or enforceability of the Indenture or the Escrow Agreement against the Trustee, or contesting the power of the Trustee or its authority to enter into, adopt or perform its obligations under the Indenture or the Escrow Agreement, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Indenture or the Escrow Agreement against the Trustee or the authentication and delivery of the Bonds; (9) A certified copy of the general resolution of the Trustee authorizing the execution and delivery of the Indenture, the Escrow Agreement and the Continuing Disclosure Agreement; (10) The Official Statement and each supplement or amendment, if any, thereto, executed by the City; (11) Copies of each of the Legal Documents, each duly executed and delivered by the respective parties thereto; (12) certified copies of all proceedings relating to the authorization and issuance of the Bonds certified by the City Administrator or other appropriate official of the City; (13) a certificate of the City (or an Independent Engineer, as such term is defined in the Indenture) pursuant to Section 2.07(e) of the Indenture; (14) evidence that the ratings on the Bonds of " " from Standard and Poor's Ratings Services [and " " from as described in the Official Statement are in full force and effect as of the Closing Date; (15) the Blanket Issuer Letter of Representations of the City; (16) a copy of any Blue Sky Memorandum with respect to the Bonds, prepared by Counsel to the Underwriters; (17) A copy of the Notice of Final Sale required to be delivered to the California Debt and Investment Advisory Commission pursuant to Section 8855 of the California Government Code; (18) A report, dated the date of Closing Date, from , Verification Agent, stating that the firm has verified the mathematical accuracy of certain computations relating to the adequacy of the amounts deposited pursuant to the Escrow Agreement to pay interest on the Refunded Bonds as the same shall become due on and before the applicable maturity or redemption date for such Refunded Bonds and the principal or redemption price of the Refunded Bonds to be paid or redeemed on any such maturity or redemption date therefor; and (19) such additional certificates, instruments and other documents as the Representative or Bond Counsel may reasonably deem necessary to evidence the truth and Error! Unknown document property name. 11 accuracy as of the Closing Date of the City's representations and warranties contained in this Purchase Contract and the due performance or satisfaction by the City at or prior to such time of all agreements then to be performed and all conditions then to be satisfied by the City pursuant to this Purchase Contract. If the City shall be unable to satisfy the conditions to the obligations of the Underwriters to purchase, accept delivery of and pay for the Bonds contained in this Purchase Contract or if the obligations of the Underwriters to purchase, accept delivery of and pay for the Bonds shall be subject to termination by the Underwriters for any reason permitted by this Purchase Contract, this Purchase Contract and all obligations of the Underwriters hereunder may, at the option of the Underwriters, be terminated by the Representative at, or at any time prior to, the Closing Date by written notice to the City, and, upon any such termination, neither the Underwriters nor the City shall have any further obligations hereunder. 5. Expenses. (a) The Underwriters shall be under no obligation to pay, and the City shall pay, any expenses incident to the performance of the City's obligations hereunder including, but not limited to: (i) the cost of preparation, printing and distribution of the Legal Documents, the Preliminary Official Statement, the Official Statement and any supplements or amendments thereto, including a reasonable number of certified or conformed copies thereof, (ii) the cost of preparation and printing of the Bonds; (iii) the fees and disbursements of Orrick, Herrington & Sutcliffe LLP, Bond Counsel; (iv) the fees and disbursements of any engineers, accountants and other experts, consultants or advisors retained by the City; (v) fees for bond ratings (which include fees of rating agencies and travel expenses of the City); and (vi) all expenses incurred on behalf of City personnel with respect to the financing, including (a) air travel and hotel costs in connection with the pricing of the Bonds, any investor meetings, any rating agency trips and the Closing, (b) meals and transportation for City personnel during such trips, (c) expenses of City personnel related to attending working group meetings, such as parking, meals and transportation, and (d) any other miscellaneous costs related to the Closing. (b) The Underwriters shall pay: (i) the cost of preparation and printing of this Purchase Contract and the Preliminary Blue Sky Memorandum; (ii) all advertising expenses and Blue Sky filing fees in connection with the public offering of the Bonds; (iii) fees, if any, payable to the California Debt and Investment Advisory Commission, the Municipal Securities Rulemaking Board and DTC; and (iv) all other expenses (including travel and other out-of-pocket expenses) incurred by them in connection with the public offering of the Bonds and the transactions contemplated by this Purchase Contract not outlined in (a) above, including the fees and disbursements of Underwriters' Counsel. The City acknowledges and agrees that some or all of the expenses (including all normally occurring out-of-pocket expenses) to be paid by the Underwriters may be included as part of the expense component of the underwriters' discount or may be reimbursed to the Underwriters as out-of-pocket expenses. 6. Notices. Any notice or other communication to be given to the City under this Purchase Contract may be given by delivering the same in writing to: City of Vernon, 4305 Santa Fe Avenue, Vernon, California 90058, Attention: and any notice or other communication to be given to the Underwriters under this Purchase Contract may be given by delivering the same in writing to the Representative: J.P. Morgan Securities LLC, 560 Mission Street, San Francisco, CA 94105, Attention: 7. Survival of Representations and Warranties The City's representations, warranties and agreements contained in this Purchase Contract or made in any certificate delivered hereunder shall remain operative and in full force and effect, regardless of: (i) any investigations or statements made by or Error! Unknown document property name. 12 on behalf of the Underwriters; and (ii) delivery of and payment for the Bonds pursuant to this Purchase Contract. 8. No Fiduciary. The City acknowledges and agrees that (i) the purchase and sale of the Bonds pursuant to this Purchase Contract is an arm's-length commercial transaction between the City and the Underwriters in which each Underwriter is acting solely as a principal and is not acting as the agent, fiduciary, financial advisor or municipal advisor of the City, (ii) the Underwriters have not assumed an advisory or fiduciary responsibility in favor of the City with respect to the offering contemplated hereby or the discussions, undertakings and procedures leading thereto (irrespective of whether the Underwriters have provided other services or are currently providing other services to the City on other matters); (iii) the Underwriters have no obligation to the City with respect to the offering contemplated hereby except the obligations expressly set forth in this Purchase Contract; (iv) the Underwriters have financial and other interests that differ from those of the City; and (iv) the City has consulted with its own legal, accounting, tax, financial and other advisors to the extent it deemed appropriate. 9. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE CITY AND THE UNDERWRITERS HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY THE CITY OR THE UNDERWRITERS MAY HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION WITH THIS PURCHASE CONTRACT OR ANY TRANSACTIONS RELATED HERETO. 10. Governing Law. This Purchase Contract shall be construed in accordance with and governed by the Constitution and laws of the State of California applicable to contracts made and performed in the State. 11. Counterpart Si ang tures. This Purchase Contract may be executed in several counterparts, each of which shall be an original, and all of which shall constitute but one and the same instrument. [Remainder of page intentionally left blank.] Error! Unknown document property name. 13 12. Parties in Interest. This Purchase Contract, when accepted by the City in writing as heretofore specified, shall constitute the entire agreement between the City and the Underwriters in connection with the subject matter hereof and is made solely for the benefit of the City and the Underwriters (including any successor in business of the Underwriters). No other person shall acquire or have any right hereunder or by virtue hereof. Very truly yours, J.P. MORGAN SECURITIES LLC CITIGROUP GLOBAL MARKETS INC. By: J.P. MORGAN SECURITIES LLC, as Representative of the Underwriters Lo Accepted on , 2015 CITY OF VERNON ATTEST: In [Title] City Clerk Authorized Representative Error! Unknown document property name. 14 SCHEDULE 1 $[PAR AMOUNT] CITY OF VERNON Electric System Revenue Bonds 2015 Taxable Series A MATURITY SCHEDULE Maturity Date (August 1) Principal Amount Interest Rate Yield REDEMPTION PROVISIONS Optional Redemption. [The 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, 20_, in the principal amounts of such maturities as may be specified by the City, at a redemption price equal to the principal amount of Bonds to be redeemed, without premium, plus accrued, unpaid interest to the redemption date.] OR [The 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 2015 Make Whole Redemption Price (defined below) of the Bonds to be redeemed.] "2015 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 Bonds to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 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 Bonds being redeemed to the date fixed for redemption. {add definitions for Independent Investment Banker and Treasury Rate if applicable) Error! Unknown document property name. Sch. 1, Page 1 Mandatory Sinking Fund Redemption. [The Bonds maturing on August 1, 20_ are also subject to mandatory redemption in part prior to their stated maturity from sinking fund installments 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, at a redemption price equal to the principal amount of the Bonds to be redeemed, without premium:] Bonds maturing August 1, Sinking Fund Installment Due Date (August 1) r Maturity Sinking Fund Installment Error! Unknown document property name. Sch. 1, Page 2 EXHIBIT A [Letterhead of Orrick, Herrington & Sutcliffe LLP] [Closing Date] J.P. MORGAN SECURITIES LLC, as Representative of the Underwriters Los Angeles, California City of Vernon Electric System Revenue Bonds 2015 Taxable Series A (Supplemental Opinion) Ladies and Gentlemen: This letter is addressed to you, as representative of the underwriters, pursuant to Section 4(e)(2) of the Contract of Purchase, dated [Contract of Purchase Date], 2015 (the "Contract of Purchase"), between J.P. Morgan Securities LLC, on behalf of itself and as representative of the underwriters named therein (the "Underwriters"), and the City of Vernon, California (the "City"), providing for the purchase of $ aggregate principal amount of City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A (the "2015 Series Bonds"). The 2015 Series Bonds are being issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code, and an Indenture of Trust, dated as of September 1, 2008 (as amended and supplemented, the "Indenture"), between the City and The Bank of New York Mellon Trust Company, N.A. (the "Trustee"), including as supplemented by the Fourth Supplemental Indenture of Trust, dated as of 1, 2015, between the City and the Trustee. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture or, if not defined in the Indenture, in the Contract of Purchase. We have delivered our final legal opinion (the "Bond Opinion") as bond counsel to the City concerning the validity of the 2015 Series Bonds and certain other matters, dated the date hereof and addressed to the City. You may rely on such opinion as though the same were addressed to you. In connection with our role as bond counsel to the City, we have reviewed the Contract of Purchase, certain portions of a printed copy of the electronic version of the Preliminary Official Statement, dated and posted on , 2015 (the "Preliminary Official Statement"), relating to the 2015 Series Bonds and of the printed version of the Official Statement, dated [Contract of Purchase Date], 2015 (the "Official Statement"), relating to the 2015 Series Bonds, the Continuing Disclosure Agreement, the documents, certificates, opinions and matters mentioned in the second paragraph of our Bond Opinion, and such other documents, opinions and matters to the extent we deemed necessary to provide the opinions set forth in the numbered paragraphs below. The opinions and conclusions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions or conclusions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such Error! Unknown document property name. A-1 actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the third paragraph hereof. We have further assumed compliance with all covenants and agreements contained in such documents. In addition, we call attention to the fact that the rights and obligations under the 2015 Series Bonds, the Indenture, the Continuing Disclosure Agreement and the Contract of Purchase and their enforceability may be subject to bankruptcy, insolvency, reorganization, receivership, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against cities in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non -exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinions with respect to the state or quality of title to or interest in any assets described in or as subject to the lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such assets. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the 2015 Series Bonds and express no opinion relating thereto except as expressly set forth in numbered paragraph 2 below. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The 2015 Series Bonds are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Indenture is exempt from qualification pursuant to the Trust Indenture Act of 1939, as amended. 2. The statements contained in the Official Statement under the captions "INTRODUCTION," "THE 2015 BONDS," "SECURITY AND SOURCES OF PAYMENT," and "TAX MATTERS;" and in "APPENDIX B — SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE," "APPENDIX D — PROPOSED FORM OF OPINION OF BOND COUNSEL" and "APPENDIX E — FORM OF CONTINUING DISCLOSURE AGREEMENT," excluding any material that may be treated as included under such captions by cross-reference or reference to other documents or sources, insofar as such statements expressly summarize certain provisions of the Indenture, the Continuing Disclosure Agreement and the form and content of our Bond Opinion, are accurate in all material respects. 3. The Contract of Purchase and the Continuing Disclosure Agreement have each been duly executed and delivered by the City and each of the Contract of Purchase and the Continuing Disclosure Agreement is a valid and binding agreement of the City. No opinion regarding the adequacy of the Continuing Disclosure Agreement for purposes of S.E.C. Rule 15c2-12 may be inferred from this opinion. We are not passing upon and do not assume any responsibility for the accuracy (except as explicitly stated in numbered paragraph 2 above), completeness or fairness of any of the statements contained in the Preliminary Official Statement or in the Official Statement and make no representation that we have independently verified the accuracy, completeness or fairness of any such statements. We do not assume any responsibility for any electronic version of the Official Statement, and assume that any Error! Unknown document property name. A-2 such version is identical in all respects to the printed version. In our capacity as bond counsel to the City in connection with issuance of the 2015 Series Bonds, we participated in conferences with your representatives, your counsel, representatives of the City, certain consultants to the City, counsel to the City and others, during which conferences the contents of the Preliminary Official Statement or the Official Statement and related matters were discussed. Based on our participation in the above -referenced conferences (which did not extend beyond the date of the Official Statement), and in reliance thereon, on oral and written statements and representations of the City and others and on the records, documents, certificates, opinions and matters herein mentioned (as set forth above), subject to the limitations on our role as bond counsel to the City, we advise you as a matter of fact and not opinion that (a) as of [Contract of Purchase Date], 2015, no facts had come to the attention of the attorneys in our firm rendering legal services with respect to the Preliminary Official Statement which caused us to believe as of that date that the Preliminary Official Statement contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (b) as of the date of the Official Statement and as of the date hereof, no facts had come to the attention of the attorneys in our firm rendering legal services with respect to the Official Statement which caused us to believe as of the date of the Official Statement and as of the date hereof that the Official Statement [as supplemented] contained or contains any untrue statement of a material fact or omitted or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, we expressly exclude from the scope of this paragraph and express no view or opinion about (i) with respect to the Preliminary Official Statement, any difference in information contained therein compared to what is contained in the Official Statement, whether or not related to pricing or sale of the Series 2015 Bonds, and whether any such difference is material and should have been included in the Preliminary Official Statement, and (ii) with respect to both the Preliminary Official Statement and the Official Statement, any CUSIP numbers, financial, accounting, statistical, engineering, demographic or economic data or forecasts, numbers, charts, tables, graphs, estimates, projections, assumptions or expressions of opinion, any management analysis or discussion or any information about book -entry, The Depository Trust Company, ratings, Rating Agencies, the Underwriters, underwriting and the information contained in Appendices A and C, included or referred to therein or omitted therefrom. No responsibility is undertaken or view expressed with respect to any other disclosure document, materials or activity, or as to any information from another document or source referred to by or incorporated by reference in the Preliminary Official Statement or the Official Statement. This letter is furnished by us as bond counsel to the City. No attorney -client relationship has existed or exists between our firm and the Underwriters in connection with the 2015 Series Bonds or by virtue of this letter. We disclaim any obligation to update this letter. This letter is delivered to you as representative of the Underwriters of the 2015 Series Bonds and is solely for your benefit as such representative and is not to be used, circulated, quoted or otherwise referred to or relied upon for any other purpose or by any other person. This letter is not intended to, and may not, be relied upon by owners of the 2015 Series Bonds. Very truly yours, ORRICK, HERRINGTON & SUTCLIFFE LLP Error! Unknown document property name. A-3 EXHIBIT B FORM OF OPINION OF CITY ATTORNEY [Closing Date] J.P. MORGAN SECURITIES LLC, as Representative of the Underwriters Los Angeles, California Re: $ City of Vernon Electric System Revenue Bonds 2015 Taxable Series A Ladies and Gentlemen: I am the City Attorney of the City of Vernon (the "City") and as such I have served as counsel to the City in connection with the issuance of the City's $ Electric System Revenue Bonds, 2015 Taxable Series A (the "Bonds"). As such counsel, I have examined and am familiar with (i) those documents relating to the existence, organization and operation of the City; (ii) all necessary documentation of the City relating to the authorization, execution and delivery of (a) the Indenture of Trust, dated as September 1, 2008, by. and between the City and The Bank of New York Mellon Trust Company, N.A.,as trustee, as amended and supplemented, .including assupplemented by the Fourth Supplemental Indenture of Trust, dated as of , 2015, providing for the issuance of the Bonds (as so amended and supplemented, the "Indenture"), (b) the Escrow Agreement, dated as of , 2015, (the "Escrow Agreement") by and between the City and the Trustee, (c) the Continuing Disclosure Agreement, dated as of , 2015 (the "Continuing Disclosure Agreement"), between the City and the Trustee, as dissemination agent; and (d) the Contract of Purchase, dated , 2015 with respect to the Bonds (the "Purchase Contract"), between the City and J.P. Morgan Securities LLC, as Representative of itself and Citigroup Global Markets Inc., as underwriters (the "Underwriters"); and (iii) a Preliminary Official Statement of the City, dated 2015 (the "Preliminary Official Statement") and an Official Statement of the City, dated 2015 (the "Official Statement"), relating to the Bonds. The Indenture, the Escrow Agreement, the Continuing Disclosure Agreement and the Purchase Contract are collectively referred to herein as the "Legal Documents." I am of the opinion that: 1. The City is a chartered city, duly created, organized and existing under the Constitution and laws of the State of California and duly qualified to furnish electric service within said City. 2. The resolution of the City (the "Resolution") approving and authorizing the execution and delivery of Legal Documents and approving and authorizing the distribution of the Official Statement by the City was duly adopted at a meeting of the City Council of the City, which was called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout. Error! Unknown document property name. B-1 3. The City has the authority and right to execute, deliver and perform its obligations under the Legal Documents, and the City has complied in all material respects with the provisions of applicable law in all matters relating to the transactions contemplated by the Legal Documents. 4. The Official Statement and the Legal Documents have been duly authorized, executed and delivered by the City and, assuming that the Legal Documents constitute the legal, valid and binding agreements of the other respective parties thereto, the Legal Documents constitute the legal, valid and binding agreements of the City enforceable in accordance with their terms, subject to laws relating to bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and to the application of equitable principles if equitable remedies are sought and to limitations on legal remedies against municipal corporations in the State. 5. No approval, consent or authorization of any governmental or public agency, authority or person is required for the execution and delivery by the City of the Legal Documents or the performance by the City of its obligations thereunder or the execution and delivery, on the part of the City, of the Bonds. Under the laws of the State of California, the City has the authority to determine, fix, impose and collect rates and charges for electric service and is not presently subject to the regulatory jurisdiction of any state, regional or local governmental regulatory authority other than to the extent described in the Preliminary Official Statement and the Official Statement. 6. The execution and delivery of the Legal Documents by the City and compliance with the provisions thereof will not conflict with or constitute a breach of or default under any instrument relating to the organization, existence or operation of the City, or commitment, agreement or other instrument to which the City is a party or by which it or its property is bound or affected, or any ruling, regulation, ordinance, judgment, order or decree to which the City or any of its officers in their respective capacities as such are subject or any provision of the laws of the State of California relating to the City and its affairs. 7. There is no action, suit, proceeding, inquiry or investigation at law or in equity, or before any court, public board or body, pending or, to the best of my knowledge, threatened against or affecting the City or any entity affiliated with the City or any of its officers in their respective capacities as such (nor to the best of my knowledge, is there any basis therefor) that questions the powers of the City referred to in paragraph 3 above or in connection with the transactions contemplated by the Legal Documents, or the validity of the proceedings taken by the City in connection with the authorization, execution or delivery of the Legal Documents, or wherein any unfavorable decision, ruling or finding would adversely affect the transactions contemplated by the Legal Documents, or that, in any way, would adversely affect the validity or enforceability of the Legal Documents or, in any material respect, the ability of the City to perform its obligations under the Legal Documents. 8. Based upon my participation in the preparation of the Preliminary Official Statement and the Official Statement and without having undertaken to determine independently the accuracy, completeness or fairness of the statements contained in the Preliminary Official Statement or the Official Statement, nothing has come to my attention which would lead me to believe that (i) the Preliminary Official Statement (excluding therefrom the financial statements and the statistical data and the information concerning DTC and the book -entry system included therein, the information under the caption "UNDERWRITING" and the Appendices thereto, as to which no view is expressed) as of its date and as of , 2015, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. or (ii) the Official Statement (excluding therefrom the financial statements and the statistical data and the information concerning DTC and the book -entry system included therein, the information under the caption "UNDERWRITING" and the Appendices Error! Unknown document property name. B-2 thereto, as to which no view is expressed) as of its the date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto in the Purchase Contract. Respectfully submitted, Error! Unknown document property name. B-3 EXHIBIT D Exhibit D [Preliminary Official Statement Attached] OHSUSA:761725340.5 D-1 OH&S Draft of 6/9/15 PRELIMINARY OFFICIAL STATEMENT DATED 2015 'W ISSUE --FULL BOOK -ENTRY ONLY RATINGS: S&P: (See "RATINGS" herein) In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, based on an analysis of existing laws, y regulations, rulings and court decisions, and assuming; among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2015 Bonds is exempt from State of California personal income taxes. Bond Counsel observes that interest on the 2015 Bonds is not excluded from gross income for federal income tax purposes under Section 2 103 of the Internal Revenue Code of 1986. Bond Counsel expresses no opinion regarding any other tax consequences related to t the ownership or disposition of, or the amount, accrual or receipt of interest on, the 2015 Bonds. See "TAXMATTERS" herein. ,w o w $ [PAR AMOUNT] ;o CITY OF VERNON Electric System Revenue Bonds 2015 Taxable Series A ;o 2 Dated Date of Delivery Due: August 1, as shown on the Inside Cover rThis cover page contains certain information for general reference only. It is not intended to be a summary of the 2 This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth in APPENDIX B attached hereto. The City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A (the "2015 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, 55 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"), including as amended and supplemented by a Fourth Supplemental Indenture of Trust, dated as of July 1, 2015. �w The 2015 Bonds are being issued to provide funds to (i) refund a portion of the Outstanding Electric System Revenue a Bonds, 2009 Series A; (ii) finance the Costs of certain Capital Improvements to the City's Electric System by reimbursing the o Electric System for the prior payment of such Costs from the Light and Power Fund; (iii) fund a deposit to the Debt Service o Reserve Fund; and (iv) pay costs of issuance of the 2015 Bonds, all as further described herein. See "PLAN OF FINANCE" and 3 "ESTIMATED SOURCES AND USES OF FUNDS" herein. The 2015 Bonds will be issued in denominations of $5,000 or any integral multiple thereof, and will be issued in.fully R C registered form, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, . y c y ("DTC") under the book -entry only system maintained by DTC. While DTC is the securities depository for the 2015 Bonds, principal of, premium, if any, and interest on the 2015 Bonds will be payable by the Trustee to DTC, which is obligated in turn to o ° remit such payments to its DTC participants for subsequent disbursement to beneficial owners of the 2015 Bonds, as more fully described herein. See APPENDIX C —"Book-Entry Only System. The 2015 Bonds are subject to redemption prior to maturity, as described herein. 42 Interest on the 2015 Bonds will be payable on each February 1 and August 1, commencing [February 1, 2016]. w MATURITY SCHEDULE (See Inside Cover) The 2015 Bonds will be special obligations of the City. The principal and Redemption Price of and interest on the 2015 Bonds, as well all other Bonds (as defined herein) currently outstanding under the Indenture and any other Bonds that may be issued under the Indenture, are equally and ratably payable by the City solely from the Net Revenues of the City's Electric System, a 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 (as defined in the APPENDIX B, the "Trust Estate"). See "SECURITY AND SOURCES 12 :'. OF PAYMENT." fA 40, ' Preliminary; subject to change: The issuance of the 2015 Bonds does not directly, indirectly or contingently obligate the City to levy or pledge any form of taxation or to make any appropriation for their payment. The 2015 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 2015 Bonds. The 2015 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 2015 Bonds are offered, when, as and if issued and delivered to the Underwriters, subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the City by the office of the City Attorney and for the Underwriters by Norton Rose Fulbright US LLP, Los Angeles, California, as counsel to the Underwriters. It is expected that the 2015 Bonds will be available for delivery through the DTC's book -entry system on or about 2015. J.P. Morgan Dated: , 2015 Citigroup MATURITY SCHEDULE* $[PAR AMOUNT]* CITY OF VERNON Electric System Revenue Bonds 2015 Taxable Series A $ Serial 2015 Bonds Maturity Date Principal Interest (August 1) Amount Rate Yield CUSIP No.t $ % Term 2015 Bond due August 1, 20_ Yield: % CUSIP No.: t Preliminary; subject to change. CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2015 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIPO numbers are provided for convenience of reference only. None of the City, the Underwriters or their agents or counsel assume responsibility for the accuracy of such numbers. No dealer, broker, salesperson or other person has been authorized by the City or the Underwriters to give any information or to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by 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 2015 Bonds by any person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriters. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any implication that there has been no change in the affairs of the City since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THE OFFERING OF THE 2015 BONDS, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2015 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 2015 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. The 2015 Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption contained in such Act. The 2015 Bonds have not been registered or qualified under the securities laws of any state. CITY OF VERNON City Council W. Michael McCormick, Mayor William J. Davis, Mayor Pro Tem Luz A. Martinez, Councilmember Yvette Woodruff -Perez, Councilmember Melissa Ybarra, Councilmember City Officers Mark C. Whitworth, City Administrator Maria Ayala, City Clerk Hema Patel, City Attorney William Fox, Finance Director/City Treasurer Samuel Kevin Wilson, Director of Public Works, Water and Development Services Department Leonard Grossberg, Director of Health and Environmental Control Department Michael Wilson, Fire Chief Daniel Calleros, Chief of Police Teresa McAllister, Director of Human Resources Gas and Electric Department Executive Management Carlos Fandino, Director of Gas and Electric Department Abraham Alemu, Electric Resources Planning and Development Manager Ali Nourmohamadian, Utilities Engineering Manager SPECIAL SERVICES Orrick, Herrington & Sutcliffe LLP Los Angeles, California Bond Counsel Public Financial Management, Inc. Los Angeles, California Financial Advisor The Bank of New York Mellon Trust Company, N.A. Los Angeles, California Trustee Verification Agent TABLE OF CONTENTS Page INTRODUCTION............................................................................................................................................... I Purpose of Official Statement................................................................................................................ I Authority..................................................................:............................................................................. I Useof Proceeds...................................................................................................................................... I TheCity................................................................................................................................................. I TheElectric System............................................................................................................................... 2 Securityand Sources of Payment........................................................................................................... 2 DebtService Reserve Fund....................................................................................................................3 ContinuingDisclosure............................................................................................................................ 3 OtherMatters......................................................................................................................................... 3 PLANOF FINANCE.......................................................................................................................................... 3 ESTIMATED SOURCES AND USES OF FUNDS...........................................................................................4 DEBTSERVICE SCHEDULE........................................................................................................................... 5 THE2015 BONDS..............................................................................................................................................6 General.................................................................................................................................................. 6 Redemptionof 2015 Bonds....................................................................................................................6 SECURITY AND SOURCES OF PAYMENT...................................................................................................8 PledgeEffected by the Indenture........................................................................................................... 8 Deposit and Application of Revenues..................................................................................................10 Paymentsto Trustee for Bonds............................................................................................................10 RateCovenant...................................................................................................................................... I I Debt Service Reserve Fund..................................................................................................................12 ExpenseStabilization Fund..................................................................................................................12 Outstanding -Electric System Obligations............................................................................................13 Additional Parity Obligations..............................................................................................................13 Transfers to General Fund....................................................................................................................14 Limitationson Remedies.....................................................................................................................15 ELECTRIC SYSTEM OBLIGATIONS............................................................................................................15 MalburgGenerating Station.................................................................................................................15 Power Sales Contract with SCPPA for PVNGS..................................................................................16 GasSupply Agreements.......................................................................................................................16 Interest Rate Swap Transactions..........................................................................................................17 HooverUprating Project......................................................................................................................18 THEELECTRIC SYSTEM...............................................................................................................................18 General................................................................................................................................................18 TheCity and the Service Area.............................................................................................................18 City Plan to Optimize Resource Utilization.........................................................................................19 Implementation of Resource Optimization Plan..................................................................................19 Management......................................................................................................................................... 20 Prior Attempt to Disincorporate City; City Reform.............................................................................21 PowerSupply Resources......................................................................................................................22 Renewable Energy Resources.............................................................................................................. 29 Interconnection and Distribution Facilities.......................................................................................... 31 Developments Affecting the Power Supply.........................................................................................31 CapitalRequirements...........................................................................................................................32 LargestCustomers...............................................................................................................................33 ElectricRates....................................................................................................................................... 34 EmployeeRelations.............................................................................................................................36 Insurance.............................................................................................................................................. 38 SeismicActivity :.................................................... ...........: ..39 ................................................................ InvestmentPolicy and Controls........................................................................................................... 39 ELECTRIC SYSTEM FINANCIAL INFORMATION....................................................................................40 RetailEnergy Sales.............................................................................................................................. 40 Summaryof Operating Results............................................................................................................ 41 Management's Discussion of Operating Results................................................................................. 43 Projected Operating Results and Debt Service Coverage.................................................................... 43 UnrestrictedCash Balances ....................... :......................................................................................... 45 FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY................................................................46 Changing Laws and Requirements.......................................................................................................46 Impact of Developments on the City ...................................................................................................47 California Climate Change Policy Developments...............................................................................47 Environmental and Regulatory Factors................................................................................................ 50 EnergyRegulatory Factors................................................................................................................... 53 OtherGeneral Factors.......................................................................................................................... 55 CONSTITUTIONAL LIMITATIONS ON TAXES......................................................................................... 56 Articles XIIIC and XIIID of the State Constitution............................................................................. 56 FutureInitiatives.................................................................................................................................. 57 LITIGATION.................................................................................................................................................... 57 TAXMATTERS...............................................................................................................................................58 APPROVALOF LEGALITY........................................................................................................................... 60 RATINGS.......................................................................................................................................................... 60 UNDERWRITING............................................................................................................................................ 61 FINANCIALADVISOR...................................................................................................................................61 VERIFICATIONREPORT...............................................................................................................................61 FINANCIALSTATEMENTS...........................................................................................................................62 CONTINUINGDISCLOSURE ........... .............................................................................................................. 62 MISCELLANEOUS.......................................................................................................................................... 63 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE LIGHT AND POWER ENTERPRISE FOR THE FISCAL YEAR ENDED JUNE 30, 2014 AND FOR THE FISCAL YEAR ENDED JUNE 30, 2013....................................................................................A-1 APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE .......................................... B-1 APPENDIX C BOOK -ENTRY ONLY SYSTEM............................................................................................... C-1 APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL........................................................D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT....................................................... E-1 ii OFFICIAL STATEMENT $[PAR AMOUNT]` CITY OF VERNON Electric System Revenue Bonds 2015 Taxable Series A INTRODUCTION This Introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the 2015 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, 2015 Taxable Series A (the "2015 Bonds"). Authority The 2015 Bonds are being issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code, and an Indenture of Trust, dated as of 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"), including as amended and supplemented by the Fourth Supplemental Indenture of Trust, dated as of July 1, 2015. Use of Proceeds The 2015 Bonds are being issued to provide funds to (i) refund a portion of the Outstanding Electric System Revenue Bonds, 2009 Series A; (ii) finance the Costs of certain Capital Improvements to the City's Electric System by reimbursing the Electric System for the prior payment of such Costs from the Light and Power Fund, as further described herein; (iii) fund a deposit to the Debt Service Reserve Fund; and (iv) pay costs of issuance of the 2015 Bonds, all as further described herein. 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 approximately 1,800 companies doing business in the City employing more than 55,000 persons. The City is almost exclusively industrial, with an industrial space occupancy rate of over 96% as of June 30, 2014. The City had an estimated resident population of approximately 123 as of January 1, 2015 according to the California Department of Finance Demographic Research Unit. 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 41 sworn officers, as of June 8, 2015, to provide high level security and a quick response time and an environmental health department, which acts as a California Unified Program Agency ` Preliminary; subject to change. 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. By a resolution adopted on December 15, 2011, as clarified by a resolution adopted on January 3, 2012, the City Council merged the Gas Fund into the Light and Power Fund for accounting and financial reporting purposes. Such merger of such funds for such purpose does not affect the operations of the Gas and Electric Department nor alters the obligations of the Light and Power Fund to bondholders or other creditors. Prior to July 1, 2011, the Gas Fund and the Light and Power Fund were reported as separate enterprise funds. The audited financial statements of the Electric System are included in the Light and Power Enterprise Annual Financial Report, and such merged fund is referred to in the Light and Power Enterprise Annual Financial Report as the Light and Power Enterprise. See "FINANCIAL STATEMENTS" herein. The Electric System The City established its Gas and Electric 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, 2014, the Electric System provided approximately 1,131.5 million kilowatt hours (' Whs") of electricity to 1,889 customers, based on the number of meters. For the Fiscal Year ending June 30, 2015, the Electric System is projected to provide approximately 1,128.8 million kWhs of electricity to approximately 1,889 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 2015 Bonds are special obligations of the City. The principal and Redemption Price of and interest on the 2015 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 apledge of the Trust Estate. See "SECURITY AND SOURCES OF PAYMENT —Pledge Effected by the=Indenture." The issuance of the 2015 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 2015 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 2015 Bonds. The 2015 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 $ aggregate principal amount of Electric System Revenue Bonds, consisting of. $ aggregate principal amount of Electric System Revenue Bonds, 2008 Taxable Series A (the "2008 Bonds"), $ aggregate principal amount of Electric System Revenue Bonds, 2009 Series A (the "2009 Bonds"), which outstanding principal amount includes the $ ` aggregate principal amount of Refunded 2009 Bonds to be refunded with proceeds of the 2015 Bonds (see PLAN OF FINANCE" herein), $ aggregate principal amount of Electric System Revenue Bonds, 2012 Series A (the "2012 "Series A Bonds") and $ aggregate principal amount of Electric System Revenue Bonds, 2012 Taxable Series B (the "2012 Series B Bonds" and, together with the 2012 Series A Bonds, the "2012 Bonds"). The Indenture permits the issuance of Additional Bonds and Refunding Bonds in addition to the 2008 Bonds, the 2009 Bonds, the 2012 Bonds and the 2015 Bonds on the terms and conditions set forth in the Indenture. The 2008 Bonds, the 2009 Bonds, the 2012 Bonds, the 2015 Bonds and any such Additional Bonds and Refunding Bonds issued under the Indenture being referred to as the "Bonds." All Bonds are equally and ratably secured by the pledge of the Trust Estate under the Indenture. See "SECURITY AND SOURCES OF PAYMENT — Outstanding Electric System Obligations" and "— Additional Parity Obligations." 2 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 2015 Bonds. A portion of the proceeds of the 2015 Bonds will be deposited in the Debt Service Reserve Fund so that the amount on deposit therein is no less than the Debt Service Reserve Requirement as of the date of issuance of the 2015 Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS" and "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 2015 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 the annual audited financial statements for the Electric System, as well as certain operating and financial data relating to the Electric System, and notices of certain enumerated events. See "CONTINUING DISCLOSURE" 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 The proceeds of the 2015 Bonds will be applied to (i) refund the 2009 Bonds maturing on August 1 in the years [2016 through 2021],` inclusive (the "Refunded 2009 Bonds"); (ii) finance the Costs of certain Capital Improvements to the City's Electric System by reimbursing the Electric System for the prior payment of such Costs from the Light and Power Fund; (iii) fund a deposit to the Debt Service Reserve Fund; and (iv) pay costs of issuance of the 2015 Bonds, all as further described herein. Reimbursement for Capital Improvements. The portion of the net proceeds of the 2015 Bonds not applied to refund the Refunded 2009 Bonds, to pay the costs of issuance of the 2015 Bonds or to fund the Debt Service Reserve Fund (see "ESTIMATED SOURCES AND USES OF FUNDS") will be applied to finance the Costs of certain Capital Improvements to the City's Electric System. The Capital Improvements to be financed are transmission, distribution and renewable infrastructure of the Electric System. As the City has previously paid the Costs of these Capital Improvements from the Light and Power Fund, such net proceeds of the 2015 Bonds will be used to reimburse the City for such Costs. Such reimbursement amounts, together with other available funds of the City, are to be used to make the termination payments associated with terminating the City's two outstanding interest rate swap transactions: (a) the interest rate swap transaction with Morgan Stanley Capital Services Inc. ("Morgan Stanley") originally entered into in connection with the City's Electric System Revenue Bonds, 2004 Series A (the "2004A Bonds"), and (b) the interest rate swap transaction with to Deutsche Bank AG ("Deutsche Bank") originally entered into in connection with the City's Electric System Revenue Bonds, 2004 Series B (the "2004B Bonds"). The 2004A Bonds and the 2004B Bonds are no longer Outstanding. For more information about such interest rate swap transactions, see "ELECTRIC SYSTEM OBLIGATIONS — Interest Rate Swap Transactions" herein. ' Preliminary; subject to change. Refunding of Refunded 2009 Bonds. Certain of the proceeds of the 2015 Bonds will be deposited into an escrow fund (the "Escrow Fund") and used to purchase certain federal securities, the maturing principal of and interest on which, together with any amounts held as cash in the Escrow Fund, will be applied to the payment of (a) the accrued interest due on the Refunded 2009 Bonds on each Interest Payment Date commencing on August 1, 2015 through the date of maturity or redemption of such Refunded 2009 Bonds, (b) the principal of the Refunded 2009 Bonds maturing on August 1 in each of the years [2016 through 2019],x inclusive, as such principal amounts become due, and (c) the redemption price of the Refunded 2009 Bonds maturing on August 1 in each of the years [2020 and 2021]* on August 1, 2019 (the "Redemption Date"), such redemption price being equal to the principal amount of such Refunded 2009 Bonds, all in accordance with the Escrow Agreement, dated as of July 1, 2015 (the "Escrow Agreement"), by and between the City and The Bank of New York Mellon Trust Company, N.A., as trustee for the 2009 Bonds. Upon the deposit of such proceeds and the investment thereof 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, to reduce debt service payments from Net Revenues [for the Fiscal Years ending June 30, 2016 through June 30, 2022].1 The amounts on deposit in the Escrow Fund will not be available to pay debt service on the 2015 Bonds or any other Bonds other than the Refunded 2009 Bonds. The sufficiency of the maturing principal and interest payments on the investments in the Escrow Fund and the other moneys held in the Escrow Fund to pay, when due, the principal and redemption price of and interest on the Refunded 2009 Bonds will be verified by . See "VERIFICATION REPORT." ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds with respect to the 2015 Bonds as described under "PLAN OF FINANCE" are set forth below. "SOURCES: Principal Amount Original Issue Premium/(Discount) TOTAL SOURCES: USES: Reimbursement Costs of Capital Improvements Deposit to Escrow Fund (2) Deposit to Debt Service Reserve Fund Costs of Issuance (3) TOTAL USES: (1) Such reimbursement amounts, together with other available funds of the City in the amount of $ , are to be used to make the termination payments associated with terminating the City's two outstanding interest rate swap transactions. See "PLAN OF FINANCE." P To refund the Refunded 2009 Bonds. (3) Includes underwriters' discount, legal fees, fees of the Trustee, rating agency fees, financial and consulting fees, printing costs and other expenses in connection with the issuance of the 2015 Bonds. f Preliminary; subject to change. DEBT SERVICE SCHEDULE The following table shows the debt service schedule for the City's outstanding Bonds upon the issuance of the 2015 Bonds. Fiscal Year Debt Service on Ended Outstanding June 30, BondsM 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 TOTAL: (2) 2015 Bonds Principal Total Debt Interest Service G) Consisting of the 2008 Bonds, the 2009 Bonds (including the Refunded 2009 Bonds) and the 2012 Bonds. (2) Totals may not add due to rounding. 5 THE 2015 BONDS The following is a summary of certain provisions of the 2015 Bonds. Reference is made to the 2015 Bonds for the complete text thereof and to the Indenture for all of the provisions of the 2015 Bonds. The discussion herein is qualified by such references. See APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE." General The 2015 Bonds will be issued in the aggregate principal amount, will bear interest at the rates and will mature in the years and amounts all as set forth on the inside cover page of this Official Statement. The 2015 Bonds will be issued in denominations of $5,000 or any integral multiple thereof. The 2015 Bonds will be dated and shall bear interest from their date of original issuance. Interest on the 2015 Bonds will be payable on each February 1 and August 1, commencing [February 1, 2016]. The 2015 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 2015 Bonds are held in the book -entry system, DTC or its nominee will be the registered owner of the 2015 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 2015 Bonds are held in book - entry form through DTC, all payments with respect to principal of, premium, if any, and interest on each 2015 Bond will be made pursuant to DTC's rules and procedures. See APPENDIX C — "BOOK -ENTRY ONLY SYSTEM." Redemption of 2015 Bonds* Optional Redemption. The 2015 Bonds are also 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. with respect to a 2015 Bond to be redeemed, in .whole or in part, at the option of the City, 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 2015 Bond to be redeemed; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 2015 Bond 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 2015 Bond being redeemed to the date fixed for redemption. "Independent Investment Banker" means an independent accounting firm, investment banking firm or financial advisor selected by the City to calculate, at the City's expense, the Make Whole Redemption Price. The initial Independent Investment Banker shall be J.P. Morgan Securities LLC. "Treasury Rate" means, with respect to any redemption date for a 2015 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. "Comparable Treasury Issue" means, with respect to any redemption date for a particular 2015 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 2015 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 2015 Bond to be redeemed. "Comparable Treasury Price" means, with respect to any redemption date for a 2015 Bond, (1) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest ' Preliminary; subject to change 0 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. "Reference Treasury Dealer" means J.P. Morgan Securities LLC 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 2015 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. Mandatory Sinking Fund Redemption. The 2015 Bonds maturing on August 1, 20 are subject to mandatory redemption in part prior to their stated maturity date from mandatory sinking fund payments for such 2015 Bonds on each August 1 on and after August 1, 20, at a Redemption Price equal to the principal amount of the 2015 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 ust l Redeemed Maturity The principal amount of the 2015 Bonds maturing on August 1, 20_ to be redeemed in each year shown above will be reduced as directed by the City by any portion of the 2015 Bonds maturing on August 1, 20_ optionally redeemed prior to the mandatory sinking fund redemption dates shown above. Notice of Redemption. The Trustee is to give notice of the redemption of any 2015 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 2015 Bonds to be redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice shall specify the maturity date of the 2015 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 2015 Bonds of any like maturity are to be redeemed, the letters and numbers or other distinguishing marks of such 2015 Bonds to be redeemed, and, in the case of a 2015 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 2015 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 2015 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 2015 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 2015 Bonds. In the event a notice of redemption of 2015 Bonds contains such a condition and such moneys are not so received, the redemption of 2015 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 2015 Bonds pursuant to the conditional notice of redemption. Receipt of notice of redemption shall not be a condition precedent to the redemption of 2015 Bonds and failure of any Owner of a 2015 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 2015 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 2015 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 2015 Bonds to be redeemed is available on the redemption date, interest on the 2015 Bonds to be redeemed will cease to accrue, such 2015 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 2015 Bonds from the amounts so made available. Selection of 201 S Bonds to be Redeemed. The City shall select the principal amount of each maturity of the 2015 Bonds to be redeemed at the option of the City. Whenever less than all of the 2015 Bonds of a maturity are to be redeemed, the Trustee shall select at random the 2015 Bonds of such maturity to be redeemed from all 2015 Bonds of such maturity subject to redemption by lot in any manner which the Trustee in its sole discretion shall deem appropriate and fair. SECURITY AND SOURCES OF PAYMENT Pledge Effected by the Indenture The 2015 Bonds are special obligations of the City. The principal and Redemption Price of and interest on the 2015 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 2015 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 2015 Bonds and all other Bonds issued under the Indenture are equally and ratably secured by the pledge of the Trust Estate pursuant to the Indenture. The 2015 Bonds and all 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 has and, in the future, may issue or incur other 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 under the Indenture and there is currently outstanding $ aggregate principal amount of 2008 Bonds, $ aggregate principal amount of 2009 Bonds (including the Refunded 2009 Bonds), $ aggregate principal amount of 2012 Series A Bonds and $ aggregate principal amount of 2012 Series B Bonds. See "— Outstanding Electric System Obligations" and "ELECTRIC SYSTEM OBLIGATIONS" for more information about outstanding Parity Obligations and obligations payable as Operation and Maintenance Expenses. "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; 6) 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 benefitusesrequired 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. For a description of obligations payable as Operation and Maintenance Expenses, see "ELECTRIC SYSTEM OBLIGATIONS." "Operating Reserve" means, as of any date of calculation, an amount in the Light and Power Fund equal to the amount contained in the then current Budget for Operations and Maintenance Expenses for the four months next succeeding the month in which the date of calculation occurs. "Obligations" is defined in the Indenture to include (a) obligations with respect to borrowed money and includes bonds, notes or other evidences of indebtedness, installment purchase payments under any contract, and lease payments under any financing or capital lease (determined to be such in accordance with Generally Accepted Accounting Principles), which are payable from the Net Revenues and/or amounts in the Light and Power Fund; (b) obligations to replenish any debt service reserve fund with respect to obligations of the City described in (a) above; (c) obligations under a Public Finance Contract payable from the Net Revenues and/or amounts in the Light and Power Fund; and (d) Credit Provider Reimbursement Obligations. "Public Finance Contract" is defined in the Indenture to mean (i) any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, (ii) any contract to exchange cash flows or a series of payments, or (iii) any contract to hedge payment, currency, rate spread or similar exposure, including but not limited to interest, any interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract, any contract providing for payments based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, any contract to exchange cash flows or a series of payments, or any contract, including, without limitation, an interest rate floor or cap, or an option, put or call, to hedge payment, currency, rate, spread or similar exposure, between the City and a counterparty. For definitions of certain other terms used herein, see APPENDIX B — "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE — DEFINITIONS" herein. The issuance of the 2015 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 2015 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 2015 Bonds. The 2015 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 2015 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 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; 10 (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 the Business Day preceding each July 1, the City shall pay an amount for deposit in the Debt Service Reserve Fund, such that, after the deposit, the amount on deposit in such Fund shall be at least equal to the Debt Service Reserve Requirement, including the amount of any Reserve Financial Guaranties on deposit in the Debt Service Reserve Fund; and (h) in the event that on any date upon which the City is to make a payment pursuant to paragraph (g) above and the amount of Net Revenues and the amount in the Light and Power Fund available therefor in accordance with the Indenture is not sufficient to make such payment and any payment required to be made on such date with respect debt service reserves for other Parity Obligations, then the City, after making the payments required by paragraphs (a), (b), (c), (d), (e), and (f) above, shall apply the Net Revenues and amounts in the Light and Power Fund available therefor in accordance with the Indenture to the payments required by paragraph (g) above and such payments with respect to debt service reserves for Parity Obligations ratably (based on the respective amounts to be paid), without any discrimination or preferences. In the event that on any date all payments required to be made pursuant to the preceding paragraphs are not made in full from Net Revenues, then the City shall make up any deficiency from amounts in the Light and Power Fund after setting aside in the Light and Power Fund an amount equal to the Operating Reserve. In the event that on any date all payments required to be made pursuant to the preceding paragraphs (a) through (h) are not made in full, then no payment shall be made which has a priority lower than the delinquent payment until all delinquent payments with a higher priority have been made in full. Rate Covenant Pursuant to the Indenture, the City has covenanted, at all times, to fix, prescribe and collect rates and charges for the Electric Service of the Electric System during each Fiscal Year which shall be at least sufficient to yield: (a) Adjusted Revenues for such Fiscal Year at least equal to the sum of the following for such Fiscal Year: (i) Operation and Maintenance Expenses; (ii) Adjusted Debt Service, and (iii) all other payments required to be paid in such Fiscal Year to meet any other obligations of the City which are charges, liens or encumbrances upon or payable from the Revenues (including Net Revenues), including all amounts owed to a Credit Provider under the terms of its Credit Support Agreement and amounts owed to a Reserve Financial Guaranty Provider under the terms of its Reserve Financial Guaranty; and (b) Adjusted Revenues less Operation and Maintenance Expenses for such Fiscal Year equal to at least one hundred ten percent (110%) of Adjusted Debt Service for such Fiscal Year. "Adjusted Revenues" is defined in the Indenture to mean, for any period of time, the Revenues for such period less the amount of such Revenues which have been deposited in the Expense Stabilization Fund plus the amount of withdrawals during such period from the Expense Stabilization Fund. "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. 11 Debt Service Reserve Fund The Debt Service Reserve Fund is required to be maintained in an amount equal to the Debt Service Reserve Requirement. A portion of the proceeds of the 2015 Bonds will be deposited in the Debt Service Reserve Fund so that the amount on deposit therein is no less than the Debt Service Reserve Requirement as of the date of issuance of the 2015 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. "Debt Service Reserve Requirements" means, as of any date of calculation, an amount equal to the least of (a) 10% of the initial offering price to the public of the Bonds as determined under the Code, or (b) the greatest amount of debt service on the Outstanding Bonds 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 Outstanding Bond is due, or (c) 125% of the sum of the 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 issuance of any Bonds) and terminating with the last Fiscal Year in which any debt service on an Outstanding Bond 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 debt service with respect to any Bonds that constitute Variable Rate Bonds, the interest rate on such Bonds for any period as to which such interest rate has not been established shall be assumed to be (i) with respect to Bonds which are Tax -Exempt, the ten year historical average of the SIFMA Index ending with the week preceding the date of calculation, and (ii) with respect to Bonds which are not Tax -Exempt, the ten year historical average of the One Month USD LIBOR Rate ending with the month preceding the date the calculation is made or if the One Month USD LIBOR Rate is not available for such period, another similar rate or index selected by the City. 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 suchfund, concurrently with such Reserve Financial Guaranty or Guaranties. [There is currently no such Reserve Financial Guaranty in the Debt Service Reserve Fund.] "Reserve Financial Guaranty" is defined in the Indenture to mean a policy of municipal bond insurance or surety bond issued by a municipal bond insurer or a letter of credit issued by a bank or other institution if the obligations insured by such insurer or issued by such bank or other institution, as the case may be, have ratings at the time of issuance of such policy or surety bond or letter of credit in the highest rating category (without regard to qualifiers) by S&P and Moody's and, if rated by A.M. Best & Company, also in the highest rating category (without regard to qualifiers) by A.M. Best & Company. Expense Stabilization Fund Moneys may be deposited in the Expense Stabilization Fund held by the Trustee in such amounts, at such times and from such sources as shall be determined by the City in its sole discretion. Moneys on deposit in the Expense Stabilization Fund may be withdrawn by the City at any time no Event of Default exists under the Indenture and applied to any lawful purpose in connection with the Electric System, including without limitation, payment of Operation and Maintenance Expenses, payment of Debt Service on the Bonds or other Parity Obligations, payment of principal or premium or interest on Subordinate Obligations, payment of costs of Capital Improvements, payment of the costs of issuance of Parity Obligations or Subordinate Obligations. For any period of time, any amounts so withdrawn from the Expense Stabilization Fund are included in the calculation of Adjusted Revenues for such period of time. See "— Rate Covenant" above. 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 April 30, 2015, there was $7,869,881 on deposit in the Expense Stabilization Fund. See "— Expense Stabilization Fund" below. 12 Outstanding Electric System Obligations Upon the issuance of the 2015 Bonds, the 2008 Bonds, the 2009 Bonds, the 2012 Bonds, the 2015 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." The City plans to apply certain proceeds of the 2015 Bonds, together with other available funds, to pay the termination payments associated with the City's outstanding interest rate swap transactions (see "PLAN OF FINANCE" herein). 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 any 12 consecutive month period within the 18 consecutive months ending immediately prior to the issuance of such Additional Parity Obligations selected by the City in its sole discretion (the "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 AdjustedAnnual Debt- Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity. Obligations; and (ii) that the Net Revenues for such applicable Calculation Period shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding immediately after the issuance of the proposed Additional Parity Obligations; or (b) a certificate or certificates, prepared by the City or at the City's option by an Independent Engineer, showing: (i) that the projected Adjusted Net Revenues during each of the five complete Fiscal Years beginning with the first Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, from the proceeds of Parity Obligations or Subordinate Obligations, shall have amounted to at least 1.25 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during such Fiscal Years; and (ii) that the projected Net Revenues during each of the five complete Fiscal Years beginning with the first Fiscal Year following the issuance of such Parity Obligations in which interest thereon is not capitalized, in whole or in part, from the proceeds of Parity Obligations or Subordinate Obligations, shall have amounted to at least 1.00 times the Maximum Adjusted Annual Debt Service on all Parity Obligations to be Outstanding during such Fiscal Years. For purposes of preparing such certificate or certificates, the City and any Independent Engineer shall utilize and rely on financial statements prepared by the City which have been audited by an Independent Certified Public Accountant but may utilize and rely upon the books and records of the City or any unaudited financial statements prepared by the City if audited financial statements for the particular Calculation Period selected by the City are not available. The 2015 Bonds are authorized to be issued in accordance with paragraph [(a)] 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 13 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, 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 and the amount projected for the Fiscal Year ending June 30, 2015; 14 CITY OF VERNON ELECTRIC SYSTEM TRANSFERS TO GENERAL FUND For Fiscal Years Ended June 30, 2010-2015 Fiscal Year Ended Amount June 30 of Transfer (1) 2010 $ 8,600,038 2011 3,149,776 2012 9,147,090 2013 11,959,593 2014 11,921,548 2015(2) 14,089,933 Source: City of Vernon (1) Includes Franchise Payments; does not include City allocated administrative expenses constituting Operation and Maintenance Expenses. See the limitation regarding Net Transferable Income above. (2) Projected. See "CONSTITUTIONAL LIMITATIONS ON TAXES — Articles XIIIC and XIIID of the State Constitution" for a discussion on certain limitations, as well as a discussion of Proposition 26 and a recent case where the Court of Appeal of California, Third Appellate District, held that a municipal utility's recurring budget transfer from its electrical utility fund to its general fund constitutes a tax under Proposition 26 unless it can be shown that the transferred amount reflects the reasonable costs borne to provide electric services. [The City sets its rates and its budget with the expectation that certain transfers will be made to the City in accordance with the restrictions set forth in the Indenture. In the event transfers are further restricted, such further restriction would not have a material adverse effect on the financial position of the Electric System.] Limitations on Remedies The rights of the Owners of the 2015 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 2015 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 2015 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. ELECTRIC SYSTEM OBLIGATIONS In addition to the Outstanding Bonds, the City has entered into a number of transactions providing for payments from the Revenues (as Operation and Maintenance Expenses), including short-term power purchase agreements, 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) Malburg LLC, a Delaware limited liability company (`BCM") pursuant to which the City 15 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 (11.9 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, 2014, SCPPA had $47,460,000 principal amount of bonds outstanding for PVNGS and, as of March 31, 2015, SCPPA had $36,130,000 principal amount of bonds outstanding for PVNGS. The City's share of PVNGS costs under the PVNGS Contract for Fiscal Year ended June 30, 2014 was $4,706,397. 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 acquired a supply of prepaid natural gas (the "Gas Supply"). The Gas Supply remaining to be delivered consists of 5,960,000 million British thermal units ("MMBtus") of gas for Fiscal Year 2015 reducing in each Fiscal Year to 5,348,549 MMBtus in Fiscal Year 2021. The Gas Supply is to be delivered by Citigroup Energy Inc. (the "Supplier") pursuant to the Agreement for Purchase and Sale of Natural Gas; dated as of June 27, 2006, between the Authority and the Supplier (the "Purchase Agreement"). The Authority prepaid for the Gas Supply with the proceeds of bonds of the Authority (the "Authority Bonds"), which Authority Bonds were redeemed 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 MGS. As described under "THE ELECTRIC SYSTEM — City Plan to Optimize Resource Utilization" and "— Implementation of Resource Optimization Plan," the City has sold the MGS and entered into the PPTA 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 ("SMUD") 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. Such obligation of the City to deliver gas to SMUD is an independent obligation, and is not dependent on the delivery of gas under the Purchase Agreement. The Sale Contract fixes the price of gas sold to SMUD 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 obligated 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 order to fulfill its 16 obligations under the Sale Contract with SMUD, in addition to making ongoing payments of debt service on the 2009 Bonds. Satisfying such requirement may 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." Interest Rate Swap Transactions Swap Transactions. The City currently has two outstanding interest rate swap transactions, which the City plans to terminate with certain of the proceeds of the 2015 Bonds representing amounts reimbursed to the City for the costs of certain Capital Improvements to the Electric System, together with other available fund, as further discussed under "PLAN OF FINANCE" herein. Such interest rate swap transactions are further described below. 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. 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 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 originally 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 Deutsche Bank Swap Transaction in Fiscal Year 2017. Morgan Stanley did not transfer its rights and obligations under the interest rate swap transaction originally entered into 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 June 30, 2014, the MorganStanley Swap Transaction had a notional amount of°$90,150,000 and the Deutsche Bank Swap Transaction had a 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, 2014 attached hereto as APPENDIX A. Net payments due from the City under the outstanding Swap Transactions are payable from Net Revenues of the Electric System on a parity with the Bonds, while any termination payments are junior and subordinate to the payment of the Bonds. Swap Termination. Each Swap Transaction is subject to termination at the option of the counterparty (Morgan Stanley or Deutsche Bank) upon the occurrence of standard events of default and termination events set forth in the respective ISDA Master Agreement, where the City is the defaulting or affected party. Each Swap Transaction includes an additional termination event where the City is the affected party if Electric System revenue bonds fail to have a rating of at least BBB- from S&P or Baa3 from Moody's. 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 May 7, 2015, the Morgan Stanley Swap Transaction had a negative market value to the City of $24,609,260 (representing the amount that would be payable by the City to Morgan Stanley in the event of a termination of such swap), and the Deutsche Bank Swap Transaction had a negative market value to the City of $14,489,544 (representing the amount that would be payable by the City to Deutsche Bank in the event of a termination of such swap). 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 Baa2 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- or lower from S&P or Baa3 or lower from Moody's, or if such rating is withdrawn, 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 17 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 May 7, 2015, the City had posted $4,609,260 in collateral in connection with the Morgan Stanley Swap Transaction. The market value of the Swap Transactions are volatile and there can be no assurances that the City will not be required to post collateral with respect to the Deutsche Bank Swap Transaction, or that any collateral requirements will not increase. 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. 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 atStation -A (located at 4990 Seville Avenue, Vernon, California) ("Station A"). The City operates the Electric System through ,its Gas; and Electric 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 industrial customers. During the Fiscal Year ended June 30, 2014, the Electric System served 1,889 customers (based on the number of meters), supplied approximately 1,131.5 million kWhs of electric energy and had a peak demand of approximately 194 megawatts ("MWs"). For the Fiscal Year ending June 30, 2015, the Electric System is projected to provide approximately 1,128.8 million kWhs of electricity to approximately 1,889 customers (based on the number of meters). See "ELECTRIC SYSTEM FINANCIAL INFORMATION — Retail Energy Sales" below. The City and the 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 approximately 1,800 companies doing business in the City employing more than 55,000 persons. The City is almost exclusively industrial, with an industrial space occupancy rate of over 96% as of June 30, 2014. The City had an estimated resident population of approximately 123 as of January 1, 2015 according to the California Department of Finance Demographic Research Unit. 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 facilitates the delivery of raw materials to City businesses and the distribution of finished products in a cost effective and efficient manner. 18 From 2010 through 2011, certain legislation unsuccessfully attempted to disincorporate the City and make it part of the unincorporated territory of Los Angeles County, and to transfer the Electric System to a special district governed by the Board of Supervisors of Los Angeles County. See "— Prior Attempt to Disincorporate City; City Reform" herein. 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 and the blackouts and power interruptions due to inadequate supplies of electric energy in 2000-2001, 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 MGS, a 120 MW base load, 134 MW full load combined cycle electric generation plant located adjacent to 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 businesses in the City, 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 for serving projected Electric System requirements in light of the then current state of, and anticipated-Aevelopments in, the California electric markets. After reviewing its portfolio of Electric System resources and the available alternatives in serving customer load, the City determined to sell virtually all of its major transmission assets and rely on the California transmission system controlled by the California Independent System Operator Corporation ("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) Malburg LLC, a Delaware limited liability company. BCM has sold the capacity and the energy of the MGS to the City pursuant to the PPTA. 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 19 pursuant to a Purchase and Sale Agreement (the "Starwood Agreement"), dated as of December 13, 2007, between the City and Starwood Energy Infrastructure Fund, L.P. The proceeds from the sale of the Electric System assets described above were used to redeem all then outstanding Electric System revenue bonds, provide funds for economic development in the City and increase the Electric System's cash reserves. A portion of the proceeds of the 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 Gas and Electric Department, which is governed by the City Council. The terms of City Council members are staggered so that each City Council member serves a five year term and one City Council member is elected each year. The Gas and Electric Department is managed by the Director of Gas and Electric whose duties include overseeing the operation and maintenance of the Electric•System's -facilities, metering, power purchasing, scheduling,=billing and settlements. The Director of Gas and Electric =reports -to the City- Administrator. City Officials. The current members of the City Council are as follows: WW. Michael McCormick, Mayor, was first elected to the City Council in 1974 and has been a resident of the City since 1969. Mr. McCormick previously worked at the Safeway meat processing plant in the City for seven years prior to retiring after a 40-year career in the private sector. Current term expires in April 2016. William J. Davis, Mayor Pro Tempore, was first elected to the City Council in 1984, after originally being appointed to fill a vacant seat in 1981. Mr. Davis was born in Manila, Philippines and came to the United States in 1969. Mr. Davis worked at Southern California Edison Co. for 28 years prior to retiring in 1996. Current term expires in April 2018. Luz A. Martinez, Council Member, was elected to the City Council in 2012. Ms. Martinez was born in Mexico and came to the United States in 1965. Ms. Martinez worked 16-years in private industry as an administrative assistant. In 1987, Ms. Martinez was hired by the City as an administrative assistant in City Administrator's office and then transferred to the Vernon Fire Department. She worked over 23 years as Department Secretary to the Fire Chief. Current term expires in April 2019. Yvette Woodruff -Perez, Council Member, was elected to the City Council in April of 2015 to serve a full 5-year term. Her election to the City's five -member Council established the first -ever female council majority as well as the first -ever Latina majority in the City's nearly II0-year history. For over a decade, Councilwoman Woodruff -Perez has worked in higher education and public safety communications. Current term expires in April 2020. Melissa Ybarra, Council Member, was elected to the City Council in February 2015 to fill the unexpired term of her late father and former Council Member Honorable Michael A. Ybarra. Ms. Ybarra is the fourth 20 generation of Ybarra family members to serve on the City Council. Ms. Ybarra grew up in the City and has lived in the City her entire life. Current term expires in April 2017. Information about the City Administrator and the Finance Director/City Treasurer are presented below: Mark C. Whitworth, City Administrator, was appointed as interim City Administrator in July, 2010 and was officially named City Administrator in September, 2010. Mr. Whitworth previously served as the City's Fire Chief and was employed by the City of Vernon's Class 1 rated Fire Department for over 23 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 holds a Bachelor of Science degree from Whittier College and a degree in Fire Technology from Rio Hondo College. William Fox,. Finance Director/City Treasurer, has been with the City since December 2012. He has over 30 years of professional experience. He has previously served at the Las Vegas Valley Water District as Chief Financial Officer. He also served as Assistant General Manager, Financial Services for Glendale Water & Power in Glendale, California, and held various management positons of increasing responsibility at Southern California Edison. Mr. Fox is a Certified Public Accountant and has a MBA degree from California State Polytechnic University at Pomona. Gas and Electric Department Executive Management. The following are brief resumes of the senior Gas and Electric Department management personnel who are responsible for Electric System operations. Carlos Fandino serves as the Director of Gas and Electric Department. Mr. Fandino provides overall direction, structure, control and reporting of the Electric System. Mr. Fandino has over 25 years of experience in the Gas and Electric 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. Fandinoholds a Bachelor of Science Degree in =Business Management from Woodbury University, where.he;graduated-magna cum-laude. Abraham Alemu is the Electric Resources Planning and Development Manager of the Gas and Electric Department. Mr. Alemu has over 22 years of experience in the Gas and Electric 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 Utilities Engineering Manager of the Gas and Electric Department. Mr. Nourmohamadian has over 24 years of experience in the Gas and Electric 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. Prior Attempt to Disincorporate City; City Reform 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 alleged corrupt practices by City officials, including misuse of public funds and excessive salaries and concern with the close relationship between the City management and its relatively small number of residents. 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 21 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. Although both bills were passed by the State Assembly, the bills were not approved by the State Senate and neither bill became law. In connection with the State Senate's consideration of AB 46 and AB 781, the City Council agreed to a reform program proposed by the State Senator for the senatorial district in which the City is located. 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 and are now in effect, and City salaries have been adjusted to a level the City believes more closely reflects salaries for comparable positions in other California cities. One reform included the establishment of an Advisory Committee on Electrical Rates, which included representatives of businesses within the City, to advise the City with respect to changes in electric rates (see "ELECTRIC SYSTEM — Electric Rates — Business and Industry Commission"). 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 Gas and Electric Department. The City fully cooperated with the Bureau of State Audits and, in September 2014, the Bureau of State Audits concluded that although a few of the recommendations were still in progress, no further follow-up responses from the City were required. Although the City is not aware of any further attempt to disincorporate the City or any audits or investigations, the City cannot provide assurances that there will not be any future attempts to disincorporate the City or 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 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 or"the Bonds. Power Supply Resources General The Electric System's current power supply resources consist of. (i) the PPTA for the MGS; (ii) the PVNGS Contract, a long-term power purchase contract with the SCPPA with respect to a portion of SCPPA's interest in the PVNGS; (iii) the CES with Western with respect to the Hoover Uprating Project; and (iv) two 5.75 MW simple cycle gas turbine generating units (the "H. Gonzales Generating Station") at Station A used for reserve purposes. The City also owns the Johnson & Heinz Diesel Plant consisting of five diesel generator units installed in 1933. 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, 2014, the Committed Resources provided approximately 85.19% of the energy supplied by the Electric System to meet customer load. In addition to the Committed Resources, the City has entered into short-term contracts to satisfy the remaining 14.82% load requirements of Electric System customers. During the Fiscal Year ended June 30, 2014, 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 as and when necessary, the City may enter into long-term power purchase contracts (other than the Committed Resources) when the City determines it is economically advantageous in providing for its customers' requirements or in connection with satisfying renewable energy portfolio requirements. For the Fiscal Year ending June 30, 2015, the City projects that the Committed Resources will provide approximately 79% of the energy supplied by the Electric System in such Fiscal Year to meet customer load, and short-term contracts will provide approximately 21 % of the energy supplied by the Electric System in such Fiscal Year. 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. 22 CITY OF VERNON ELECTRIC SYSTEM RESOURCES USED TO SATISFY CITY'S LOAD REQUIREMENTO) Fiscal Year Ended June 30 2010 2011 2012 2013 2014 Short -Term Contracts (1) Actual Energy (3) 95,802 399,072 390,444 276,386 177,525 Percentage of Total Energy 8.10% 33.69%(7) 32.56%(7) 23.29% 14.82% Long -Term Contracts (1) Actual Energy (3) 206,885 0 0 0 0 Percentage of Total Energy 17.50% 0.00% 0.00% 0.00% 0.00% SCPPA Palo Verde Actual Energy (3) 87,389 92,630 91,859 92,746 90,542 Percentage of Total Energy 7.39% 7.82% 7.66% 7.82% 7.56% Hoover Uprating Actual Energy (3) 21,534 23,576 25,251 23,316 23,798 Percentage of Total Energy 1.82% 1.99% 2.11% 1.96% 1.99% MGS/PPTA (5) Actual Energy (3) 770,371 669,028 691,575 794,191 906,096 Percentage of Total Energy 65.17% 56.47% 57.67% 66.92% 75.63% City -Owned Generation (6) Actual Energy (3) 167 346 127 64 164 Percentage of Total Energy 0.01 % 0.03 % 0.01 % 0.01 % 0.01 % City's Load Requirement Actual Energy (3) 1,182,148 1,184,652 1,199,256 1,186,702 1,198,124 Percentage of Total Energy 100.00% 100.00% 100.00% 100.00% 100.00% Source: City of Vernon (1) Totals may not add due to rounding. P) Term of less than one year and spot market purchases. (3) Megawatt hours ("MWhs"). 0) Contracts, other than the contracts for the Committed Resources, with a term of one year or longer. (5) 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 — Malburg Generating Station — Power Purchase Tolling Agreement" below. 0) Includes resources from the H. Gonzales Generating Station. (7) Increase in short-term contracts was due to lower utilization of power from MGS due to lower power prices in the market and the expiration of a long-term contract in the prior Fiscal Year. Malburg Generating Station Power Purchase Tolling Agreement. Pursuant to the PPTA with Bicent (California) Malburg LLC, the City acquired all of the capacity and energy of the MGS for a fifteen year term ending in 2023. The term can be extended by 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 the MGS. In addition, a change in the heat rate of MGS from the standards specified in the PPTA trigger an 23 adjustment to the energy charge. If the heat rate improves, BCM will be entitled to additional payments from the City. If the heat rate deteriorates, the City will be entitled to payments from BCM. The City is and 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 in April 2008, the City has not used the Gas Supply as fuel for the MGS. Instead, from the City has 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. The City entered into a contract to sell natural gas to SMUD, 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. As noted above, the City has 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 in each contract year are limited to 336 hours (provided, however, that the facility may schedule a major overhaul every 20,000 equivalent operating hours, during which contract year scheduled outages shall not ,exceed 672 hours) and time required to perform Siemens recommended maintenance. Scheduled outages from June 1 .through October 31 of each year are limited and may only be scheduled with the consent of the City. BCM has covenanted in the PPTA to operate, inspect, maintain and repair the MGS in accordance with applicable law, required permits and good utility practices. See "— Operation of Facility to Date" below. The PPTA provides that, in connection with the MGS, 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") emissions, including the procurement of emission credits, attributable to the operation of the MGS and effective after April 10, 2008. See "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY" for more information on such standards. A party's obligation to perform pursuant to the PPTA, other than the obligation to make payments, are to be suspended when such performance is prevented by an event of force majeure. If the party cannot resume performance within six months due to the event of force majeure, the other party may terminate the PPTA with no payment obligation other than for accrued amounts. The PPTA limits the amount of BCM's debts secured by a security interest in, or mortgage on, the MGS. The City has a security interest in and mortgage on the MGS to secure [output] amounts owed to the City under the PPTA. The City's security interest and mortgage is subordinate to the security interest and mortgage granted by BCM to lenders in connection with its financing of the purchase of the MGS. Under the PPTA, BCM is to take the actions specified in the PPTA to establish and continue the City's security interest in, and mortgage on, the MGS. Events of default under the PPTA applicable to both parties are: a failure to make a payment due thereunder within ten days of notice; any materially false or misleading representation or warranty; unexcused failure to perform a material covenant or obligation (other than those constituting a separate event of default) within fifteen days of notice; a bankruptcy event (as defined in the PPTA); or a merger, transfer of assets or consolidation 24 occurs and the resulting surviving or transferee entity fails to assume obligations under the PPTA to the satisfaction of the other party. Events of default under the PPTA with respect to BCM are: unless otherwise excused under the PPTA, failure of MGS to maintain capacity at specified a level for a specified time; failure to provide required credit support; BCM sells, or enters into a contract to sell, capacity or energy of the MGS to an entity other than the City; or BCM assigns the PPTA in violation of its terms. Upon the occurrence of an event of default, the non -defaulting party can designate an early termination date for the PPTA with all events of default other than a failure to pay amounts due under the PPTA or a bankruptcy event requiring an opportunity to cure. If an early termination date for the PPTA is established, the defaulting party is to pay the other party its economic loss, if any, as a result of such termination plus costs. For a schedule of the expected payments to be payable by the City under the PPTA and the Hoover Contract for Differences (See "— Hoover Uprating Project — Hoover Contract for Differences" below), see the table in Note 10 under "Power Purchase Commitments" in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A, which table shows expected payment 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. 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 pursuant to the PPTA, for a term which ends in 2023 and may be extended by BCM for an additional five years. In the Fiscal Year ended June 30, 2014, the: MGS provided 906096 MWhs of energy.to'the City, and=for the Fiscal Year :ending June 30, 2015, the MGS is projected to provide approximately 815,035 MWhs of energy to the City. SCPPA Palo Verde Nuclear Generating Station Interest General. The PVNGS is located approximately 50 miles west of Phoenix, Arizona. PVNGS consists of three nuclear electric generating units (numbered 1, 2 and 3), with a net maximum capacity of 1,333 MWs (unit 1), 1,336 MWs (unit 2) and 1,334 MWs (unit 3) and a dependable capacity of 1,311 MWs (unit 1), 1,314 MWs (unit 2) and 1,312 MWs (unit 3). PVNGS's combined design capacity is 4,003 MWs and its combined dependable capacity is 3,937 MWs. Each PVNGS generating unit has been operating under 40-year Full -Power Operating Licenses granted by the Nuclear Regulatory Commission (the "NRC"). In April 2011, the NRC approved PVNGS's license renewal application, allowing the three units to extend operation for an additional 20 years until 2045, 2046 and 2047, respectively. The owners of PVNGS approved such extensions. Arizona Public Service Company ("APS") is the operating agent for PVNGS. SCPPA is a joint action agency in which the City participates. SCPPA has a 5.91% ownership interest 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 l l MWs of dependable capacity) and is obligated to pay 4.90% of SCPPA's costs associated with PVNGS, including operation and maintenance costs and debt service on SCPPA bonds issued for the project. Co -owners of PVNGS include APS; the Salt River Project Agricultural Improvement and Power District, a political subdivision of the state of Arizona, and the Salt River Valley Water Users' Association, a corporation (together, 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, 2014, PVNGS provided 90,542 MWhs of energy to the City. 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, 2014. As of April 30, 2015, for the Fiscal 25 Year ending June 30, 2015, PVNGS has provided 77,558 MWhs of energy to the City, and is projected to provide approximately 92,342 MWhs of energy for the entire Fiscal Year ending June 30, 2015. Nuclear Regulatory Commission. The NRC has broad authority under federal law to impose licensing and safety -related requirements for the operation of nuclear generation facilities. Events at nuclear facilities of other operators or impacting the industry generally may lead the NRC to impose additional requirements and regulations on existing and new facilities. As a result of the March 2011 earthquake and tsunami that caused significant damage to the Fukushima Daiichi Nuclear Power Plant in Japan, various industry organizations are working to analyze information from the Japan incident and develop action plans for U.S. nuclear power plants. Additionally, the NRC is performing its own independent review of the events at Fukushima Daiichi, including a review of the agency's processes and regulations in order to determine whether the agency should promulgate additional regulations and possibly make more fundamental changes to the NRC's system of regulation. On March 12, 2012, the NRC issued the first regulatory requirements for all 104 operating reactors located in the United States based on the task force evaluations. The NRC issued three orders that modify operating licenses by requiring the following safety enhancements: (1) mitigation strategies to respond to extreme natural events resulting in the loss of power at plants, (2) ensuring reliable hardened containment vents, and (3) enhancing spent fuel pool instrumentation. The orders require prompt implementation of the safety enhancements and to complete implementation within two refueling outages or by December 31, 2016, whichever comes first. The NRC also issued a request for information, requesting that each reactor operator reevaluate seismic and flooding hazards at its site using present-day methods and information, conduct walkdowns of its facilities to ensure protection against the hazards in its current design basis, and reevaluate emergency communications systems and staffing levels. On March 20, 2012, the NRC published an advanced notice of public rulemaking related to station blackout conditions. On April 18, 2012, the NRC published an advanced notice of public rulemaking related to strengthening and integrating onsite emergency response capabilities. On May 31, 2012, the NRC staff issued guidance with respect to assessing emergency preparedness communications and staffing and performing seismic and flooding walkdowns. On July 13, 2012, the NRC staff provided the Commission with a paper outlining its proposed actions on the remaining recommendations. On August 30, 2012, the NRC issued implementation guidance for each of the orders issued in March 2012. On January 4, 2013,-the NRC issued, guidance to enable U.S. nuclear powerplantoperators to perform the seismic and flooding hazard assessments, which was done at PVNGS in September 2014. The NRC has required PVNGS to increase the redundancy in its power supply to emergency cooling systems, reinforce its spent fuel pool, accelerate the transfer of spent fuel from the pool to the dry cask storage, and add pipelines and associated equipment necessary for supplying additional cooling water to the reactors. As of the date of this Official Statement, PVNGS has purchased additional diesel generators, pumps and fire trucks, and has also accelerated the movement of its spent fuel casks to the storage facility. In addition to these actions, PVNGS has allotted approximately $122 million (of which the City is responsible for approximately $350,000) for initiatives developed in response to the failure at the Fukushima power plant in Japan, which initiatives include, among other things, fuel building modifications, an emergency equipment storage facility, temporary power connections, seismic and flood hazards validation and corresponding mitigating strategies. Additional NRC-mandated requirements are anticipated, but the costs associated with these future projects are unknown at this time. In the event of noncompliance with its requirements, the NRC has the authority to impose monetary civil penalties or a progressively increased inspection regime that could ultimately result in the shut -down of a unit, or both, depending upon the NRC's assessment of the severity of the situation, until compliance is achieved. The increased costs resulting from penalties, a heightened level of scrutiny and implementation of plans to achieve compliance with NRC requirements may adversely affect the Electric System's financial condition, results of operations and cash flows. Construction and Maintenance. PVNGS capital projects during the next 10 years are expected to include a cyber security upgrade, a cooling tower life extension project, a generator excitation system upgrade, equipment replacement or upgrades such as reactor coolant pump motor replacements and generator stator rewinds, building upgrades and other miscellaneous projects. The City estimates that it will be responsible for approximately $3.5 million of the costs of such projects over this 10 year period. I Decommissioning Costs. 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 2014 estimate of decommissioning costs, which uses the extended license expiration date of 2047 and is the most recent estimate available, the City estimates that its share of the amount required for decommissioning PVNGS relating to the City's interest in PVNGS through SCPPA is fully funded. SCPPA's share is $142.4 million, of which the City's portion is $7 million. Under the current funding plan, the City estimates that its share of the decommissioning costs relating to the City's interest in PVNGS through SCPPA will be fully funded by accumulated interest earnings by the extended license expiration date of 2047, assuming 6.8% per annum in future investment returns and a 6% per annum cost escalation factor. No assurance or guarantee can be given that investment earnings will be sufficient to fully fund the City's share of decommissioning costs relating to the City's interest in PVNGS. 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 PVNGS 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 developed by the federal government becomes available, additional on -site spent fuel storage is required by using dry casks similar to those currently used at other nuclear plants. Since the spent fuel pools ran out of storage capacity, an independent spent fuel storage installation was built to provide additional spent fuel storage at the site while awaiting permanent disposal at a federally developed facility. The installation uses dry cask storage and was designed to accept all spent fuel generated by PVNGS during its lifetime. As of January 31, 2015, 124 casks, each containing 24 spent fuel assemblies, have been stored. If it is ever required, the on -site storage facility can be expanded from its current size to accommodate additional waste. APS estimates that the storage facility has sufficient storage capacity to store all low-level radioactive waste produced at PVNGS until the end of operation of PVNGS. Since the event at the Fukushima Daiichi 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; thu&reducing:the heat load inside the. spent fuel pools. In addition, -beginning in 2016, PVNGS is expected to use the newly designed casks that contain 36 spent fuel assemblies allowing the dry cask storage facility to accept more spent fuel. Storage costs are partially paid using funds received by APS pursuant to a settlement agreement with the United States government relating to nuclear waste disposal fees. 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. Modern insulation technology made it possible to "uprate" the nameplate capacity of the existing generators. The U.S. Bureau of Reclamation (the "Bureau of Reclamation") owns and operates the Hoover Dam facility and the Western Area Power Administration markets the power from the facility. The Hoover Power Plant consists of 17 generating units and two service generating units with a total installed capacity of approximately 2,074 MWs. Pursuant to the CES with Western, the City made an upfront payment for its share of the construction cost of the Hoover Uprating Project, and is entitled to approximately 22 MWs of capacity (calculated based on 1.1% of 1,951 MWs of total contingent capacity) and 28,000 MWhs of associated energy annually from the Hoover Uprating Project. The City is responsible for its share of the operating costs of the facility. Due to the enactment of H.R. 470, "Hoover Power Allocation Act of 2011," the City expects to be allocated such 22 MWs of total capacity through September 2067. Drought Conditions. Because of prolonged drought conditions that have resulted in record low lake levels, the City's capacity entitlement at the Hoover Plant has been reduced from time to time. Recent drought conditions have resulted in lower water levels and are expected to result in a material adverse effect on the Hoover Plant's capacity entitlement in the near future. According to its February 2015 24-month study, the Bureau of Reclamation forecasts relatively stable water levels and Hoover Plant capacity, with the lowest point forecasted to occur in November 2016, with a total Hoover Plant capacity of 930.2 MWs and a 6 1 % generating unit availability. 27 Environmental Considerations. The lower Colorado River has been included in a critical Habitat Designated Area. This 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. After the Biological Assessment was filed, 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, including the City. The City believes that any impact on future operations will be minor; however there is a possibility that major remediation actions could have a material impact on the Hoover Plant customers' available capacity from the Hoover Plant. [To further elaborate on energy/capacity issues]. The Hoover Plant customers, including the City, 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 negative effects on the Hoover Plant's energy production. Hoover Contract for Differences. At the time of the closing of the sale of the MGS (See "— Implementation of Resource Optimization Plan"), the City entered into the Hoover Contract for Differences with Bicent (California) Hoover LLC. The Hoover Contract for Differences generally provides for the City's swapping the economic benefits and burdens under the CES with Western 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 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 the expected payments to be payable by the City under the Hoover Contract for Differences and the PPTA, see the table in Note 10 under "Power Purchase Commitments" in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A, which table shows expected payment amounts net of the amortization of deferred gains. 28 Power Purchase Agreements Long -Term Power Contract. Other than the contracts for the Committed Resources described herein, the City currently has no other long-term power contracts with a term of one year or longer. 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-term power purchases. The cost of power under such contracts will vary depending on then existing market conditions, which can be affected by a number of factors. For the Fiscal Year ended June 30, 2014, such short-term power contracts accounted for a total of 177,525 MWhs of energy to the Electric System (approximately 14.82% of all energy to the Electric System). For the Fiscal Year ending June 30, 2015, short-term power contracts are projected to account for a total of 245,889 MWhs of energy to the Electric System (approximately 21% of all energy to the Electric System). 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 resource adequacy and bid into the ancillary services market. The City bids these units on a daily basis for dispatch by CAISO under the Market Redesign and Technology Upgrade ("MRTU") tariff amendment. Each of the units is 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 4.5 MWs. These units have 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 was required to develop and implement a renewable energy resources plan which provides that a specified average of the Electric System's retail sales must be procured from eligible renewable energy resources. More specifically: the first compliance period was from January 1, 2011 to December 31, 2013, during which an average of 20% of the Electric System's retail sales were required to be procured from eligible renewable energy resources. During the second compliance period, from January 1, 2014 to December 31, 2016, the Electric System must make reasonable progress each year to ensure it achieves 25% of retail sales from eligible renewable energy resources by December 31, 2016. During the third compliance period, from January 1, 2017 to December 31, 2020, with the adoption of the regulations to enforce SBX 1-2 identified herein (see "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY — California Climate Change Policy Developments — California Renewable Electric Standard" herein), the CEC is requiring the Electric System to procure eligible renewable energy resources with 27% of its 2017 retail sales, 29% of its 2018 retail sales, 31% of its 2019 retail sales, and 33% of its 2020 retail sales. The main provisions of the State's applicable requirements relating to renewable energy resources are currently contained in SBX 1-2 and the California Global Warming Solutions Act ("AB32"). See "FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY — California Climate Change Policy Developments." Various factors outside of the City's control significantly impacted the biomethane gas contracts that the City had in place. As a result, the City did not realize the specified target procurement for the first compliance period under SBX 1-2. The main factor was that on March 28, 2012, the CEC suspended the Renewable Portfolio Standard eligibility guidelines for certification of power plants generating electricity using biomethane gas. Effective April 30,. 2013, the CEC lifted the suspension of the eligibility of electric generating facilities using biomethane gas in the Renewable Portfolio Standard Program. Consequently, the MGS received certification in July 2013. During the 17-month period from the point of the CEC suspension through the plant certification in July 2013, the City's biomethane gas suppliers delivered only minimum quantities of biomethane gas due to the uncertainties surrounding the plant certification. The City expects to satisfy the second compliance period and plans to satisfy the third compliance period under SBX 1-2, as described above. 29 The City's renewable power resource portfolio, as well as certain potential options for additional renewal power resources in the future, is described below. Current Renewable Energy Resources. Contracts for Bio-Gas. To satisfy the initial SBX 1-2 requirements, the City contracted for a supply of pipeline quality biomethane gas (referred to herein as bio-gas) with Element Markets and Clean Energy as fuel for the MGS as an alternative to natural gas. Such use of bio-gas as fuel made MGS the City's primary renewable resource to satisfy the SBX 1-2 requirements with respect to the first compliance period, and would potentially serve as the primary renewable source to satisfy the subsequent compliance periods under SBX 1-2. Implementation of this change of fuel to bio-gas at MGS has been and is projected to be a cost effective option for adding renewable energy resources to the current Electric System portfolio. The initial contract year for such contract with Element Markets commenced on March 2, 2012. Based on two existing transaction confirmations for such contract, the City receives from Element Markets approximately 2,500 MMBtu of bio-gas (and/or bio-gas equivalent renewable energy) per day. The City currently has a 10 year contract with Element Markets, terminating in the year 2022. The City also has a contract for bio-gas with Clean Energy, the initial contract year for which commenced in August 1, 2013 and terminated on July 31, 2014, subsequent to which the City entered into a 10 year contract with Clean Energy, terminating in the year 2022. Based on an existing transaction confirmation for such contract, the City receives approximately 1,875 MMBtu of bio-gas (and/or bio-gas equivalent renewable energy) per day. Such contracts are expected to assist the City in satisfying the State's applicable requirements relating to renewable energy resources. Renewable Energy Credits. The City also purchases renewable energy credits as an option to satisfy the SBX 1-2 requirements. In the Fiscal Year ended June 30, 2014, the City purchased 34,000 MWhs of such energy credits and, for the Fiscal Year ending June 30, 2015, the City projects to purchase approximately 34,647 MWhs of such energy credits. Potentia[Renewable Energy Resources. Wind Farms. In September 2008, the City purchased approximately 30,000 acres of land in Tehachapi, California (referred to as the Jaw Bone Area), for approximately $42 million. A portion of such land adjoins two established wind -powered electric generating facilities, one of which is owned and operated by the LADWP and the other by Florida Power and Light Company. 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 currently continues to own and maintain two remaining sections called the East and West lands in the Jaw Bone Area. These two areas are on the east and west of the property sold to NextEra (FPL). These two areas comprise about 18,000 acres. The City continues to explore methods to monetize this Tehachapi land owned by the City with or without outside developers and/or investors. The City believes the asset potential in such land is significant enough to warrant continued ownership for the foreseeable future, and the City is not at this time soliciting any offers to sell or lease such land. While the City does not anticipate using its own funds to develop renewable energy resources on the Jaw Bone Area land owned by the City, the City does anticipate that some renewable energy resources will be developed in the future to enable the City to recover some or all of its investment in the Tehachapi property and providing power from renewable resources for the Electric System's renewable power resource portfolio. Renewable Power Purchase Agreements. The City Council has approved two power purchase agreements that could provide for additional renewable power resources: a power purchase agreement with Astoria II LLC (through SCPPA) and a power purchase agreement with the Sanitation Districts of Los Angeles County (also through SCPPA). Astoria II LLC ("Asotria") entered into a long-term power purchase agreement with SCPPA to build a Solar Photovoltaic facility that has a net capacity of approximately 175 MWs. This facilitiy, located in Kern County, is expected to be available for commercial operation by December 31, 2016 with SCPPA taking control of 75 MWs of the power produced. The City, in conjunction with five other municipal utilities from SCPPA, is participating in a power purchase agreement to purchase the energy from such facility for 20 years. The City 30 Council has approved a power purchase agreement (through SCPPA) with Astoria for its renewable energy that will entitle the Electric System to 20 MWs of capacity from January 2017 through December 2021, and 30 MWs for the remainder of the contract period to December 2036. SCPPA, on behalf of several California cities, including the City, entered into a power purchase agreement for 43 MWs of generating capacity relating to the Puente Hills Landfill Gas -to -Energy Project constructed by the Sanitation Districts of Los Angeles County. The commercial operation date is currently expected to be January 1, 2017, in which case the agreement would expire on December 31, 2030. The City Council has approved of the power purchase agreement with the County Sanitation District of Los Angeles County (through SCPPA) for its renewable energy that will entitle the City to 10 MW of capacity for the term of the contract. 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"), which is added to its Electric System customer bills. While the RECAF became effective with the bills for January, 2012, the City did not have any 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. 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 and five are regular distribution substations. The City is implementing a multi -year Electric Distribution System Master Plan to replace older facilities and to upgrade the distribution system. See "THE ELECTRIC SYSTEM — Capital Requirements." Developments Affecting the Power Supply The City relied on short-term (less than one year) power purchase contracts to provide approximately 14.82% of the energy delivered by the Electric System in the Fiscal Year ended June 30, 2014. 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 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 The CAISO filed with the Federal Energy Regulatory Commission ("FERC") its MRTU tariff amendment to implement a comprehensive overhaul of the electricity markets administered by the CAISO. The programs under the MRTU initiative were 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 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; 31 (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 initial MRTU tariff filed with FERC went into effect at that time. Power is scheduled on a nodal basis, rather than the previous zonal system. 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 requiring that LSEs under its jurisdiction acquire capacity sufficient to serve their forecast retail customer load plus a 15-17% reserve margin. The MRTU tariff incorporates the CPUC's resource adequacy requirements. The MRTU tariff imposes the CPUC's resource adequacy requirements on LSEs that are not CPUC jurisdictional entities, such as the City. The City currently has satisfied this reserve margin requirement with the PPTA for energy from the MGS, PVNGS, Hoover Plant and H. Gonzales Generating Station, 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 GHG 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 GHG 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 32 million is for Maintenance Improvements and approximately $35.7 million is for Additional Improvements. Of such amounts for Fiscal Years 2012-2016, approximately $57.2 million has been expended. The program also includes approximately $38.4 million in capital improvements in Fiscal Years 2017 through 2020 of which approximately $12.8 million is for Maintenance Improvements and $25.6 million is for Additional Improvements. The following table lists the expected annual capital requirements for the Electric System to be paid from amounts in the Light and Power Fund (not including proceeds of the 2012 Bonds) for the five Fiscal Years ending June 30, 2015 through 2020: Fiscal Year Capital Requirements from Ending June 30 Light and Power Fund 2015 2016 2017 2018 2019 2020 Total Source: City of Vernon Largest Customers $8,105,643 14,255,451 15,544,223 11,410,092 6,205,699 5,240,641 $60,761,749 The Electric System's ten largest customers (by electricity usage) for the Fiscal Year ended June 30, 2014 accounted for approximately 40.8% of the Electric System's retail energy sales for such period, and the Electric System's 15 largest customers accounted for approximately 47.2% of the Electric System's retail energy sales for such period. No single customer accounted for more than approximately 9.9% 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, 2014. CITY OF VERNON ELECTRIC SYSTEM TEN LARGEST CUSTOMERS For Fiscal Year Ended June 30, 2014 Business Name MATHESON TRI GAS OWENS ILLINOIS INC CLOUGHERTY PACKING REHRIG PACIFIC CO PABCO PAPER PRODUCTS CO CROWN POLY INC OVERHILL FARMS INC EXIDE TECHNOLOGIES DEBTOR IN POSSESSION 0) U S GROWERS COLD STORAGE INC PREFERRED FREEZER SERVICES INC Years In Vernon Type of Business 8 Chemical Processing 70 Container Packaging 70 Food Processing 41 Plastics 57 Building Materials 16 Plastics 23 Food Processing 50 Environmental Recycling 40 13 Cold Storage Cold Storage 0) Exide Technologies, the eighth largest customer during the Fiscal Year ended June 30, 2014, recently planned to phase out its operation in the City over the coming several years. Such customer accounts for an annual net load impact of approximately $250,000. Source: City of Vernon 33 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"). Customers are assessed a 2.85% public benefits surcharge under California Assembly Bill 1890 of 1996 ("AB 1890"). Prior to the addition of the AB 1890 public benefits surcharge in 1998, the rates had not been adjusted by the City Council since 1984. Over the last ten years (since January 1, 2005), the rates have been increased eleven times as indicated in the table below. CITY OF VERNON ELECTRIC SYSTEM PERCENTAGE CHANGE IN ELECTRIC RATES (LAST TEN YEARS) Average Percent Effective Date Increase in Rate July 1, 2014 5.00% July 1, 2013 2.00 January 1, 2013 7.80 July 1, 2012 7.80 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 Source: City of Vernon Additional rate increases have been approved by the City Council. Such rate increases and their effective dates are 3.5%, 3.0% and 2.5% to be effective on July 1 of 2015, 2016, and 2017, respectively. The projected operating results assume such rate increases as well as additional rate increases that have not been approved by City Council and require City Council approval will take effect. 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 by the Electric System. The authority of the City to impose and collect rates and charges for electric service by the Electric System 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 the Electric System's retail 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. 34 Business and Industry Commission In July 2014, the City established the Vernon Business and Industry Commission to advise, assist and make recommendations to the City regarding ways to make the City more attractive to employees, businesses and investors while appropriately considering the needs and concerns of the residential communities within and in close proximity to the City. The Business and Industry Commission represents the consolidation of two previously existing Ad Hoc Advisory Committees created and appointed by the City Council, one on Electric Rates and the other on Business Development. The Commission is comprised of seven members from the following categories who are appointed by the City Council: three City business representatives, two City real estate representatives, one employee of a business located in the City or who is a member of a labor union that represents workers at a business located in the City, and one current City Council Member. The Commission meets quarterly to provide input and make recommendations to the City on a number of matters relating to or impacting business and industrial development with the City, including electric rate adjustments. The input and recommendations provided by the Commission are not binding on the City. Fuel Cost Adjustment Billing Factor In response to then -existing volatility in the cost of natural gas since the disruption of the California energy markets, the City in 2006, entered into the Supply Agreement with the Authority for the purchase of a supply of prepaid natural gas to be supplied to the Authority from the Supplier under the Purchase Agreement, which Purchase Agreement has been assigned from the Authority to the City (see "ELECTRIC SYSTEM OBLIGATIONS — Gas Supply Agreement'). In addition, the City established 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 is added to all retail customer bills based on electrical consumption. The FCABF adds an amount to each retail bill to recover the excess over $7.50 per MMBtu the City pays for natural gas and the embedded cost of natural gas in power purchased by the City. 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 RECAF, which is calculated and payable on a monthly basis. The RECAF went into effect on January 1, 2012 and was added to all retail customer bills based on electrical consumption, although the City did not have any charges under the RECAF until 2013. The RECAF adds 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. 35 Average Price The table below sets forth the average billing price per kWh for 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, 2010 2011 2012 2013 2014 Residential 6.36 6.75 7.10 8.47 9.84 Small Industrial 9.96 10.35 11.39 13.30 14.33 Large Industrial 8.84 9.14 9.98 11.38 12.13 Other 11.92 12.64 13.78 11.49 17.02 Weighted Average 9.21 9.55 10.46 12.03 12.90 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 (in accordance with applicable law) until all fees, charges, penalties and the entire delinquent balance have been paid. 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 0.6% for each of the last five Fiscal Years. CITY OF VERNON ELECTRIC SYSTEM UNCOLLECTIBLE ACCOUNTS Fiscal Year Uncollectible Ended June 30 Revenues 2010 $193,715 2011 120,009 2012 100,000 2013 757,969 2014 388,221 Source: City of Vernon Employee Relations Percent of Gross Billings 0.183% 0.104 0.082 0.535 0.258 As of June 30, 2014, 37 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. [Five/Six] labor unions represent a portion of the City's employees: the Vernon Police Management Association, Vernon Fire Management Association, Vernon Firemen's Association, International Brotherhood of Electric Workers, and Teamsters. There have been no strikes or other work stoppages against the City within the last twenty years. 36 CaIPERS. 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 ("CalPERS"). CalPERS acts as a common investment and administrative agent for participating public entities within the State, including the City. CalPERS produces a comprehensive annual financial report and actuarial valuations that include financial statements and required supplementary information. Copies of the CalPERS comprehensive annual financial report and actuarial valuations may be obtained from Ca1PERS Financial Services Division. The information presented in these reports is not incorporated by reference in this Official Statement. 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. In prior years, employee contributions were subsidized by the City; however, effective April 8, 2010, contributions were made by the employees. 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 contributions to CalPERS fluctuate each year and include a normal cost component and a component equal to an amortized amount of the unfunded liability. The CalPERS Board of Administration has adjusted and may in the future further adjust certain assumptions used in the CalPERS actuarial valuation, which adjustments may increase the City's required contributions to CalPERS in future years. Accordingly, the City cannot provide any assurances that the City's required contributions to CalPERS in future years will not significantly increase (or otherwise vary) from any past or current projected levels of contributions to CalPERS. The City's and employees' total contribution to CalPERS for the year ended June 30, 2014 was $5,391,298 and $2,000,380, respectively, of which total amount the Electric System's and its employees' contributions were $609,506 and $295,869, respectively. The City has budgeted $6,536,809 for CalPERS contributions for the year ending June 30, 2015, of which total amount the Electric System's and its employees' contributions are budgeted to be $748,469 and $322,477, respectively. The City's contribution rates as a percentage of covered payroll were 16.456% for miscellaneous plan members (which includes employees assigned to the Electric System) and 28.602% for safety plan members in Fiscal Year 2014. 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, 2011, as of June 30, 2013, the City had funded 76.3% of its actuarial accrued liability with respect to its miscellaneous plan members, and 73.8% of its actuarial accrued liability with respect to its safety plan members. The following schedules present the City's funded status as of June 30, 2013 based on the actuarial assumptions consistent with the June 30, 2011 actuarial valuation: Miscellaneous Plan Schedule of Funding Progress (as of June 30, 2013) Unfunded Actuarial Accrued Actuarial Value Actuarial Accrued Annual Covered UAAL as a % of Liability (AAL) of Assets Liability (UAAL) Funded Ratio Payroll Covered Payroll (a) (b) (a) — (b) (b)/(a) (c) [(a) — (b) / (c)] $122,747,737 $93,664,038 $29,083,699 76.3% $10,761,348 270.3% Actuarial Accrued Actuarial Value Liability (AAL) of Assets (a) (b) $195,485,049 $144,294,074 Source: City of Vernon Safety Plan Schedule of Funding Progress (as of June 30, 2013) Unfunded Actuarial Accrued Annual Covered UAAL as a % of Liability (UAAL) Funded Ratio Payroll Covered Payroll (a) — (b) (b)/(a) (c) [(a) — (b) / (c)] $51,190,975 73.8% $12,146,524 421.4% 37 See Note 9 in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A, for more information. OPEB. In addition to the retirement benefits through Ca1PERS, the City provides other post -employment benefits ("OPEBs"). Beginning in Fiscal Year 2011-12, the City Council approved a single -employer post - employment benefit plan to employees who retire at age 50 or later with 20 years of continuous uninterrupted service up to the age of 65. Alternatively, employees who retire before the age of 50 with 20 years of continuous uninterrupted service will be permitted to pay their medical and dental premium cost and upon reaching the age of 50, the City will pay the premium for the medical and dental plans until they reach the age of 65. The City Council also approved of the provision of lifetime medical benefits to Police Management employees and their spouses, if such employee was employed as sworn safety personnel for minimum of 20 years and a minimum of 10 years of that service was with the City. In addition, the City Council approved a medical benefits plan to incentivize early retirement during Fiscal Year 2012-13, whereby the City authorized the payment of medical and dental insurance premiums for eligible retiring employees and their dependents with at least 10 years of service, plus 5% for each additional full year of service above the 10 years of services. The City Council also adopted a resolution that provided that retiree medical benefits which have not been a vested right for employees will continue to be non -vested for employees who continue to be employed by the City on or after July 1, 2013. The City's plan is considered a substantive OPEB plan and the City recognizes costs in accordance with GASB Statement No. 45. As of June 30, 2014, 331 employees (consisting of 250 active employees and 81 retired employees) participated in the City's OPEB plan. Based on a July 1, 2012 actuarial valuation, the City's actuarial accrued liability under such plan was $44,580,541. As no prefunding has been made, the City's unfunded actuarial accrued liability under such plan is the same amount. As of June 30, 2014, based on the July 1, 2012 actuarial valuation and the assumptions therein, the annual required contribution was $3,206,158 and the net OPEB obligation was $14,033,748. For more information concerning the City's OPEB plan, see Note 11 in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A. Insurance The City and the Electric System are 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 and 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. Subject to the requirements of the Indenture to maintain insurance on the Electric System, which are consistent with the insurance on comparable facilities, if premiums and limitations continue to increase, the City may eliminate or further reduce flood insurance coverage. The City has also obtained various insurance policies that provide general liability, automobile liability and employment benefits liability coverage with policy limits of $20 million per occurrence and in the annual aggregate, with a 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 last five Fiscal Years. See Note 8 in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A. 38 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 "Earthquake Forecast") was issued by the Working Group on California Earthquake Probabilities. Organizations sponsoring the Working Group on California Earthquake Probabilities include the U.S. Geological Survey, the California Geological Survey and the Southern California Earthquake Center. According to the Earthquake Forecast, the probability of a magnitude 6.7 or larger earthquake over the next 25 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 25 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. For the far northwestern part of the State, a major source of earthquakes is the offshore 750-mile-long Cascadia Subduction Zone, the southern part of which extends about 150 miles into the State. For the next 25 years there is a 10% probability of a magnitude 8 to 9 quake somewhere along that zone. 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 does not carry earthquake insurance. 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, 2014, see Note 2 in the Annual Financial Report for the Fiscal Year ended June 30, 2014, included in APPENDIX A. below. As of June 30, 2014, the City's Gas and Electric Department had invested its funds in the investments 9M CITY OF VERNON INVESTMENTS OF GAS AND ELECTRIC DEPARTMENT As of June 30, 2014 Investment Deposits with Financial Institutions Federal Home Loan Bank Federal National Mortgage Association Federal Home Loan Mortgage Corporation Local Agency Investment Fund Money Market Mutual Fund United States Treasury Notes Source: City of Vernon. Amount $ 7,969,576 2,265,085 7,345,965 6,104,157 540,884 72,733,547 30,556,908 $127,516,122 (1) Includes all funds (including restricted funds) attributable to the Gas and Electric Department in the Annual Financial Report for the Fiscal Year ended June 30, 2014, 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 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 are obligations of the Electric System and currently have negative market values. See "ELECTRIC SYSTEM OBLIGATIONS — Interest Rate Swap Transactions" herein. The City plans to use a portion of the proceeds of the 2015 Bonds, together with other available funds, to pay the termination payments with respect to such outstanding interest rate swap agreements. See "PLAN OF FINANCE" herein. 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, 2010 through 2014, 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 62.3% and small industrial customers (monthly demand of 500 KW or less) comprising approximately 36.4% of the total revenues from retail sales for the Fiscal Year ended June 30, 2014. 40 CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND Fiscal Years Ended June 30 2010 2011 2012 2013 2014 Number of Customers: Residential 28 28 28 28 28 Small Industrial 1,134 1,147 1,168 1,182 1,191 Large Industrial 632 621 600 591 573 Other 96 97 100 98 97 Total Customers (1) 1,890 1,893 1,896 1,899 1.889 Kilowatt -Hour Retail Sales (in Millions): Residential 0.2 0.2 0.2 0.2 0.2 Small Industrial 349.0 353.2 361.6 369.2 370.8 Large Industrial 774.2 773.7 778.4 757.6 749.6 Other 10.6 10.4 10.9 11.1 10.9 Total kWh Retail Sales 1,134.0 1.137.5 1,151.1 1,138.1 1,131.5 Revenues from Retail Sale of Energy ($000's): Residential $ 12 $ 12 $ 12 $ 14 $ 15 Small Industrial 34,773 36,574 41,196 49,116 53,123 Large Industrial 68,415 70,701 77,657 86,096 90,929 Other 1,266 1,314 1,502 1,714 1,862 Total Revenues from Retail Sale of Energy (2) 104 465 108 601 120 367 136 940 145 929 Peak Retail Demand (MWs) 196.6 194.6 193.2 191.7 194.0 Source: City of Vernon, derived from audited financial statements. G) Some businesses have more than one meter. The City considers each meter to be a customer. (2) Excludes 2.85% AB 1890 public benefit surcharge pursuant to Section 385 of the California Public Utilities Code and FCABF. 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, 2010 through 2014 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. 41 CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES and DEBT SERVICE COVERAGE UNDER INDENTURE (1)(2) Revenues: Electric Sales — Retail Fuel Cost Adjustment Transmission revenue Investment Income (3) Non -Recurring Income (Loss) 0) Renewable Pass -Through Withdrawal from/ (Deposit to) Stabilization Fund Other t5> Total Revenues Operation and Maintenance Expenses: Fuel 0) Energy t7> City Allocated Administrative Costs (1) Other M Total Operation and Maintenance Expenses Net Revenues Available for Debt Service Debt Service 01) Payments for Swap Transactions 00 2008 Bonds Debt Service 2009 Bonds Debt Service (12) 2012 Series A Bonds Debt Service 2012 Series B Bonds Debt Service Total Debt Service: Debt Service Coverage Ratio Net Revenues Remaining After Debt Service Source: City of Vernon. Fiscal Year Ended June 30 2010 2011 2012 2013 2014 $104,464,945 $108,600,606 $120,465,374 $138,210,750 $146,248,549 4,778,639 1,215,647 854,251 1,095,318 2,845,893 1,314,640 1,358,755 1,269,933 1,623,345 2,351,042 1,410,991 1,637,826 1,065,277 820,442 799,984 40,000,000 0 0 4,250,000 (1,093,922) 0 0 0 0 5,834,477 (40,000,000) 20,000,000 20,000,000 (7,068,805) 0 3,802,214 4,065,372 4,984,708 4,717,129 5,063,632 $115,771,428 $136,878,205 $148,639,543 $143,648,179 $162,049,656 $ 4,104,122 $ (1,292,543) $ 3,163,790 $ 3,466,789 $ 4,804,348 30,711,920 38,014,830 41,786,732 52,553,387 59,210,379 2,872,661 2,872,661 2,872,661 2,500,000 2,500,000 19,661,939 20,228,314 23,341,078 21,128,209 22,759,447 $ 57,350,642 $ 59,823,262 $ 71,164,261 $ 79,648,384 $ 89,274,175 $ 58,420,785 $ 77,054,943 $ 7,567,019 $ 5,700,420 3,720,560 3,975,755 19,513,783 46,040,600 0 0 $ 30,801,362 $ 55,716,775 $ 77,475,282 $ 63,999,795 $ 72,775,481 $ 5,790,199 $ 3,533,707 $ 2,760,190 3,975,405 3,973,575 3,975,080 45,355,950 16,674,700 46,040,638 0 0 2,031,394 0 2,296,997 2,222,900 $ 55,121,554 $ 26,478,979 $ 57,030,202 1.90x 1.38x 1.41x 2.42x 1.28x $ 27,619,424 $ 21,338,168 $ 22,353,728 $ 37,520,815 $ 15,745,280 1'1 Totals may not add due to rounding. (2) Excludes depreciation and amortization, and other non -cash items from Operation and Maintenance Expenses. (3) Does not include unrealized gain (loss) on investments or increase (decrease) in fair market value of investments. Investment income relating to the Authority is reflected in Fuel. 0) For the Fiscal Year ended June 30, 2010, represents proceeds from the sale of renewable wind land. For the Fiscal Year ended June 30, 2013, represents settlement with Citigroup. For the Fiscal Year ended June 30, 2014, represents a legal settlement. 0) Includes 2.85% AB 1890 public benefit surcharges pursuant to Section 385 of the California Public Utilities Code. (6) Includes costs associated with natural gas purchased under the Supply Agreement. 171 Represents net energy purchases and wholesale sales and capacity (including the PPTA and Hoover Contract for Differences in the Fiscal Years ended June 30, 2010 through 2014). Excludes $12,000,000 and $7,000,000 paid from the proceeds of the sale of MGS during the Fiscal Years ended June 30, 2010 and 2011. For the Fiscal Years ended June 30, 2013 and 2014, includes costs associated with renewable energy in the form of bio-gas. (8) Represents costs incurred by the City for City services benefitting the Electric System. - (9) Includes, among other things, transmission costs, grid management charges, ancillary services, FERC fees, maintenance service contracts and other Electric System administrative expenses. 001 Debt service for Parity Obligations, including net payments on interest rate swap transactions. 00 Swap transactions are planned to be terminated with certain proceeds of the 2015 Bonds and other available funds. See "PLAN OF FINANCE." 021 Certain maturities of the 2009 Bonds are expected to be refunded with certain proceeds of the 2015 Bonds. 42 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, 2014 and the Annual Financial Report for the Fiscal Year ended June 30, 2013, 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 (calculated in accordance with the Indenture) for each of the Fiscal Years ending June 30, 2015 through June 30, 2020. The projected operating results are based on the City's load forecasts, its estimated costs of power and other operating and non -operating expenses. Except for actual expenses to date for Fiscal Year ending June 30, 2015, the City has forecasted such other operating and non -operating expenses taking into consideration the Electric System's historical costs and trends, projected load growth and inflation. The summary below presents the calculation of net revenues and debt service coverage based upon the flow of funds required under the Indenture and not in accordance with the generally accepted accounting principles. In accordance with the Indenture, depreciation, 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:] [TO COME] 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. 43 CITY OF VERNON ELECTRIC SYSTEM PROJECTED REVENUE, EXPENSES and DEBT SERVICE COVERAGE UNDER INDENTURE a) Fiscal Year Ending June 30, 2015 2016 2017 2018 2019 2020 Revenues: Electric Sales — Retail $148,770,526 $153,503,719 $170,829,971 $176,882,672 $184,000,235 $194,009,691 Fuel Cost Adjustment 931,739 931,739 941,056 950,466 959,971 969,571 Transmission revenue 2,245,042 2,329,247 2,399,125 2,471,099 2,545,232 2,621,588 Investment Income 800,000 15,800,000 800,000 800,000 800,000 800,000 Withdrawal from/ (Deposit to) 4,100,000 0 0 0 0 0 Stabilization Fund Renewable Pass -Through 11,553,6110 13,800,085 12,148,451 12,376,089 12,609,188 12,847,899 Other(2) 5,41.9,109 5,507,953 5,643,997 5,813,791 6,012,918 6,269,952 Total Revenues $173,820,027 $191,872,743 $192,762,600 $199,294,116 $206,927,544 $217,518,702 Operation and Maintenance Expenses: Fuel $3,621,112 $941,013 $1,584,244 $2,246,771 $2,929,174 $3,632,050 Non -Renewable Energy 44,996,338 47,000,416 75,551,571 77,517,198 79,541,794 81,627,127 Renewable Energy 21,349,219 22,709,737 22,773,030 23,456,220 24,159,907 24,884,704 City Allocated Administrative Costs (3) 3,018,677 3,018,677 3,079,051 3,140,632 3,203,444 3,267,513 Other (4) 26,000,837 30,494,998 29,756,351 30,461,062 31,206,072 31,956,881 Total Operation and Maintenance $98,986,182 $104,164,842 $132,744,246 $136,821,883 $141,040,391 $145,368,275 Expenses Net Revenues Available for Debt Service $74,833,845 $87,707,901 $60,018,353 $62,472,233 $65,887,153 $72,150,426 Debt Service: (5) Payments for Swap Transactions $5,806,608 $0 $0 $0 $0 $0 2008 Bonds Debt Service 3,974,735 3,977,355 3,977,755 3,975,935 3,976,710 4,239,805 2009 Bonds Debt Service 46,043,956 42,404,644 21,338,194 36,207,075 35,969,309 33,400,266 2012 Series A Bonds Debt Service 2,031,394 2,031,394 2,031,394 2,031,394 2,031,394 2,031,394 2012 Series B Bonds Debt Service 2,222,900 2,222,900 2,222,900 2,222,900 2,222,900 2,222,900 2015 Bonds Debt Service 0 2,680,360 4,573,125 4,573,125 4,573,125 4,573,125 Total Debt Service $60,079,593 $53,316,653 $34,143,368 $49,010,429 $48,773,438 $46,467,490 Debt Service Coverage Ratio I6> 1.25x 1.65x 1.76x 1.27x 1.35x 1.55x Net Revenues Remaining After Debt $14 754 252 $34 391 248 $25 874 986 $13 461 804 $17113 715 $25 682 937 Service Source: City of Vernon (0 Totals may not add due to rounding. (2� Includes 2.85% AB 1890 public benefit surcharges pursuant to Section 385 of the California Public Utilities Code. (3) Represents costs anticipated to be incurred by the City for City services benefitting the Electric System. 0) Includes, among other things, transmission costs, grid management charges, ancillary services, FERC fees, maintenance service contracts and other Electric System administrative expenses. (5) Debt service for Parity Obligations, including net payments on interest rate swap transactions. Such swap transactions are expected to be terminated with certain of the proceeds of the 2015 Bonds, together with other available funds. See "PLAN OF FINANCE." (6) Net Revenues divided by Total Debt Service. [Assumes no Bonds, other than the 2008 Bonds, the 2009 Bonds, the 2012 Bonds and the 2015 Bonds are outstanding during the projection period, and assumes the refunding of the Refunded 2009 Bonds.] (') [to explain large increase from 2014] [subject to change] 44 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, 2010 through June 30, 2014 has been no less than $16.7 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 June 30, 2010 2011 2012 2013 2014 Unrestricted Cash Balances $67,966,574 50,848,937 21,991,4380) 19,279,266. 16,745,324 (1) Decrease from prior Fiscal Year primarily reflects transfer to the City's General Fund and debt service payments. 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"), and (ii) transfers to the City's General Fund, which transfers are assumed to be (and are limited to) 11.5% of retail sales, less Franchise Payments and less City allocated administrative costs included as Operation and Maintenance Expenses, the City projects the Electric System's unrestricted cash balances as of June 30 for each of the Fiscal Years ending June 30, 2015 through June 30, 2020 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 2015 $27,082,087 2016 67,599,9750) 2017 52,014,147 2018 43,769,168 2019 46,869,116 2020 48,202,115 (1) Projected increase from prior Fiscal Year primarily reflects the application of 2015 Bond proceeds and adopted rate increases. See "PLAN OF FINANCE." Source: City of Vernon [subject to change] 45 FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY While the City generates only a small amount of electricity from its own resources, the matters described below may have a significant impact on the cost of electricity the City purchases to satisfy its customers' load requirements. Electric utilities are subject to continuing environmental regulation. Federal, state and local standards and procedures which regulate the environmental impact of electric utilities are subject to change. These changes may arise from continuing legislative, regulatory and judicial action regarding such standards and procedures. Consequently, there is no assurance that any Electric System facility (or any facility providing the Electric System with power or energy through a power purchase contract) will remain subject to the regulations currently in effect, will always be in compliance with future regulations or will always be able to obtain all required operating permits. An inability to comply with environmental standards could result in additional capital expenditures to comply, reduced operating levels or the complete shutdown of individual electric generating units not in compliance which may adversely affect the Electric System's costs in serving customer load. There is concern by the public, the scientific community and the federal government 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 2015 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 Reports for the Fiscal Year ended June 30, 2014 and the Fiscal Year ended June 30, 2013, included as APPENDIX A hereto, for additional information relating to the City and the Electric System. Changing Laws and Requirements On both the state and federal levels, legislation is introduced frequently that would have the effect of further regulating environmental impacts relating to energy, including the generation of energy using conventional and unconventional technologies. Issues raised in recent legislative proposals have included implementation of energy efficiency and renewable energy standards, addressing transmission planning, siting and cost allocation to support the construction of renewable energy facilities, cyber-security legislation that would allow FERC to issue interim measures to protect critical electric infrastructure, a federal cap -and -trade program to reduce GHG emissions, and renewable energy incentives that could provide grants and credits to municipal utilities to invest in renewable energy infrastructure. It is possible that the 114th Congress (2015-16) will pass legislation addressing similar issues. The City is unable to predict at this time whether any of these or other legislative proposals will be enacted into law and, if so, the impact they may have on the operations and finances of the Electric System or on the electric utility industry in general. In addition to state and federal legislation, citizen initiatives in the State can lead and have led to substantial restrictions upon governmental agencies, both in terms of raising revenue and management of governmental entities generally. Articles XIIIC and XIIID of the State's constitution provided limits on the ability of governmental 46 agencies to increase certain fees and charges. Such articles were adopted pursuant to measures qualified for the ballot pursuant to the State's constitutional initiative process. While Articles XIIIC and XIIID do not affect the Electric System's rates and charges, from time to time other initiative measures could be adopted by State voters. The adoption of any such initiatives might place limitations on the ability of the Electric System to increase revenues. See also "CONSTITUTIONAL LIMITATIONS ON TAXES" herein. Impact of Developments on the City While the City generates only a small amount of electricity from its own resources, the matters described above may have a significant impact on the cost of electricity the City purchases to satisfy its customers' load requirements. The effect of these developments in the energy markets on the Electric System cannot be fully ascertained at this time. Also, volatility in energy prices in California may return due to a variety of factors which affect both the supply and demand for electric energy in the western United States. These factors include, but are not limited to, the adequacy of generation resources to meet peak demands, the availability and cost of renewable energy, the impact of GHG emission legislation and regulations, fuel costs and availability, weather effects on customer demand, transmission congestion, the strength of the economy in California and surrounding states and levels of hydroelectric generation within the region (including the Pacific Northwest). Price volatility for electric energy may contribute to greater volatility in the Electric System's Revenues from the sale (and purchase) of electric energy and, therefore, could materially affect the financial condition of the Electric System. The City relied on short-term power supply contracts and other arrangements to provide approximately 15% of the electricity required to satisfy customer load for Fiscal Year ended June 30, 2014. The City undertakes resource planning activities and plans for its resource needs in order to mitigate against such price volatility and its spot market rate exposure. See "THE ELECTRIC SYSTEM — Power Supply Resources" herein. California Climate Change Policy Developments State regulatory agencies such as the California Air Resources Board ("CARB") and the CEC 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 programs. See also "— Environmental and Regulatory Factors" below. California Global Warming Solutions Act of 2006. On September 27, 2006, then -Governor Schwarzenegger signed into law the California Global Warming Solutions Act of 2006 (the "Global Warming Solutions Act" or "AB 32"). This law requires a cut in GHG emissions from within the State by 2020 in order to reduce such emissions back to 1990 levels, which represents a reduction of approximately 25% statewide. The Global Warming Solutions Act also delegates rulemaking authority to California state agencies, including CARB, and authorized CARB to adopt "market -based approaches," such as cap -and -trade regulation. On October 20, 2011, CARB adopted Resolution 11-32 approving cap -and -trade regulations, which became effective on January 1, 2012 (the "Cap -and -Trade Regulations"). The Cap -and -Trade Regulations impose a "cap for cumulative GHG emissions from all of the regulated entities. The aggregate GHG emissions will intentionally be capped at levels below the levels of emissions required to sustain electricity and industrial production from sources producing GHG emissions at historical levels or at levels projected in the absence of the Cap -and -Trade Regulations. On April 29, 2015, Governor Brown issued an executive order (Executive Order B-30-15) to reduce GHG emissions to 40% below 1990 levels by 2030. According to Governor Brown, California is on track to meet or exceed the current target of reducing GHG emissions to 1990 levels by 2020, as established under the Global Warming Solutions Act. The new target is expected to make it possible to reach the ultimate goal of reducing GHG emissions to 80% below 1990 levels by 2050 previously established by Executive Order S-3-05. With respect to the electricity sector, the cap applies to aggregate emissions from generation within the State, and to emissions associated with electricity imported into the State. CARB issues a number of allowances each year equal to the number of metric tons of GHG emissions represented by the cap for such year. The Cap -and - Trade Regulations require electric utilities, including the Electric System, major industrial sources of GHG emissions and suppliers of transportation fuels (e.g. gasoline and diesel) to obtain and submit to CARB allowances 47 and/or offsets with respect to GHG emissions for each compliance period. The Electric System is a covered entity, and must submit allowances for its GHG emissions relating to its State generation activities, as well as for imported electricity from dedicated out-of-state resources. In addition, the Electric System may indirectly bear compliance costs for independent generators that must purchase allowances for their generation. Some covered entities, including the Electric System, are entitled to receive administrative allocations of allowances for some of their expected GHG emissions at no cost. Other entities (particularly investor -owned utilities) receive administrative allocations of allowances and must consign their allowances and subsequently bid for allowances at auctions conducted by CARB or purchase allowances or offsets in the open market. Entities that emit GHGs at levels above those for which they receive administrative allocations, if any, must purchase the additional allowances they require at the CARB auctions or from other covered entities with surplus allowances. CARB conducts auctions under the Cap -and -Trade Regulations on a quarterly basis. The City believes that participation in the auctions would adequately supplement the City's administrative allowances to authorize the City's generation and purchase of electricity should any future shortfalls occur. Future prices for GHG allowances under the Cap -and -Trade Regulations cannot be predicted with certainty but are expected to rise as the cap decreases. If adequate numbers of allowances cannot be obtained at auctions or in the market, regulated entities will need to implement strategies for ensuring reliable system operations while complying with limitations on GHG emissions imposed by the Cap -and -Trade Regulations, including increasing reliance upon lower GHG emitting resources. GHG Emissions Performance Standard and Financial Commitment Limits. In September 2006, SB 1368 (Chapter 598, Statutes of 2006) was signed into law. In the case of publicly owned electric utilities ("POUs") such as the Electric System, SB 1368 required the CEC to adopt a GHG emissions performance standard ("EPS") for generating facilities. Accordingly, in August 2007, the CEC adopted regulations setting the EPS at 1,100 pounds per MWh. The EPS applies to "covered procurements" entered into by POUs. SB 1368 also prohibits publicly owned utilities from making any "long-term financial commitment" in connection with "baseload generation" that does not satisfy the EPS. Generally, a "long term financial commitment" is any new or renewed power purchase agreement with a term of five years or more, the purchase of an interest in a new power plant or any investment, other than routine maintenance, in an existing power plant that extends the life of the plant by more than five years or results in an increase in its rated capacity. `Baseload generation" means a power plant that is intended to operate at an annualized capacity factor of 60% or more. On January 12, 2012, the CEC adopted an Order Instituting Rulemaking ("OIR") in response to a petition filed by two environmental organizations, which requested a rulemaking proceeding to review whether the practices of POUs meet the requirements of SB 1368 and the EPS. The OIR focused on the following four issues: whether to (i) establish a filing requirement for all POU investments in non-EPS compliant facilities regardless of whether the investment is a "covered procurement;" (ii) establish criteria for the term "covered procurement" and/or further define the terms "designed and intended to extend the life of one or more generating units by five years or more" and "routine maintenance;" (iii) make changes to the regulations pursuant to Public Utilities Code Section 8341(f), which requires the CEC and CARB to reevaluate the EPS when an enforceable GHG emissions limit applicable to POUs is established and in operation; and (iv) make any other changes to carry out the requirements of SB 1368. On March 19, 2014, the CEC issued its Final Conclusions with respect to the EPS proceeding. The CEC proposed to expand the public notice requirements so that a POU would have to post a notice of a public meeting at which its governing board would consider any expenditure over $2.5 million to meet environmental regulatory requirements at a non-EPS compliant baseload facility. The CEC also proposed to require each POU to file an annual notice identifying all investments over $2.5 million that it anticipates making during the subsequent 12 months on non-EPS compliant baseload facilities to comply with environmental regulatory requirements. This requirement would be waived for any POU that has entered into a binding agreement to divest within five years of all baseload facilities exceeding the EPS. The CEC did not propose the lower the EPS. A final regulatory package was unanimously adopted at the CEC's June 18, 2014 business meeting. The adopted regulations had limited changes to the proposed POU reporting requirements. CEC staff has also since confirmed that the $2.5 million 48 threshold applies to an individual investment by each utility — not the combined investment of all participants in a project. California Renewable Electric Standard. On April 12, 2011, Governor Brown signed into law the California Renewable Energy Resources Act, or SBX 1-2. The law directs the governing board of each local POU, such as the Electric System, to develop and implement a renewable energy resources procurement plan and an enforcement program to ensure that SBX 1-2 objectives are met, and SBX 1-2 codified the Renewable Portfolio Standard ("RPS") target for retail electricity sellers to serve 33% of their loads with eligible renewable energy resources by 2020 as provided in an executive order signed by Governor Brown in 2008. SBX 1-2 establishes procurement targets for three compliance periods to be implemented by the procurement plan. The first compliance period was from January 1, 2011 to December 31, 2013, during which an average of 20% of the utility's retail sales were required to be procured from eligible renewable energy resources. During the second compliance period, from January 1, 2014 to December 31, 2016, the utility must make reasonable progress each year to ensure it achieves 25% of retail sales from eligible renewable energy resources by December 31, 2016. During the third compliance period, from January 1, 2017 to December 31, 2020, with the adoption of the regulations to enforce SBX 1-2 identified below, the CEC is requiring the Electric System to procure eligible renewable energy resources with 27% of its 2017 retail sales, 29% of its 2018 retail sales, 31% of its 2019 retail sales, and 33% of its 2020 retail sales. SBX 1-2 establishes enforcement authority over local publicly owned utilities, such as the Electric System, and establishes penalties for noncompliance. SBX 1-2 directs the CEC to design and implement an accounting system to verify compliance with its standards, establish a system to track and verify renewable energy credits, and to certify the eligibility of renewable energy credits. SBX 1-2 also establishes criteria for renewable energy credits. For example, renewable energy credits cannot be created for electricity generated pursuant to any electricity purchase contract with a retail seller or a local POU executed before January 1, 2005, unless the contract contains explicit terms and conditions specifying the ownership or disposition of those credits. SBX 1-2 also addresses the issue of the extent to which a renewable energy facility must be located in the State or deliver power to the State and how those factors affect the creation and use of renewable energy credits associated with energy generated at a particular facility. SBX 1-2 establishes requirements on this issue that differ from the CPUC approach discussed above and the City is analyzing the impact of the new requirements on the Electric System In September 2012, Governor Brown signed into law AB 2196, which sets forth certain conditions related to the use of landfill gas, digester gas or other renewable fuels, and AB 1900, which establishes a system to begin to allow for the landfill gas pipeline injection within the State. The legislation grandfathered most existing contracts, including the City's bio-gas contracts (cross reference THE ELECTRIC SYSTEM — Current Renewable Energy Resources — Contracts for Bio Gas), and also limited new out of state bio-gas resources. The CEC adopted regulations to enforce SBX 1-2 on POUs that became effective in October 2013. Further, the CEC has revised its existing RPS Eligibility Guidebooks to incorporate the changes implemented by SBX 1-2, AB 2196 and AB 1900. These revisions are reflected in the CEC's revised Renewables Portfolio Standard Eligibility Guidebook, 7th Edition, which was released in November 2013. See "THE ELECTRIC SYSTEM — Power Supply Resources — Renewable Energy Resources" for a description of the City's existing renewable energy sources and the City's plan for additional renewable energy sources to satisfy SBX 1-2. Renewable Energy Policy Development. Executive Order 5-21-09 provides that CARB may delegate policy development and implementation to the CEC and the CPUC, that CARB is to consult with the CAISO and other balancing authorities on impacts on reliability, renewable integration, requirements and interactions with wholesale power markets in carrying out the provisions of Executive Order 5-21-09, and that CARB is to establish the highest priority for those resources with the least environmental costs and impacts on public health that can be developed most quickly and that support reliable, efficient and cost-effective electricity system operations including resources and facilities located throughout the western states. SB 1389 (Bowen, Chapter 568, Statutes of 2002) requires that the CEC prepare a biennial integrated energy policy report that contains an integrated assessment of major energy trends and related issues facing California and 49 provide policy recommendations to conserve resources, protect the environment, ensure reliable, secure and diverse energy supplies, enhance the State's economy and protect public health and safety. In February 2015, the CEC adopted the "Final 2014 Integrated Energy Policy Report Update" (the "2014 IEPR Update"). As part of the CEC's renewable strategic plan, the 2014 IEPR Update proposes recommendations for policies on energy and environmental matters. Among those policy recommendations, the following may have a material effect on the Electric System: (i) continue efforts to implement the RPS of 33%; and (ii) continue to support the development and implementation of an energy efficiency program in existing buildings. Introduced Climate Change Bills. On January 5, 2015, Governor Brown proposed three major climate change goals to be completed within the next 15 years: (a) increase from 33% to 50% California's electricity derived from renewables, (b) reduce current petroleum use in cars and trucks by up to 50%, and (c) increase by 50% the efficiency of existing buildings that make heating fuels cleaner. Recently, a number of bills were introduced in the State Legislature that, if adopted, would, among other things, implement the climate goals announced by Governor Brown. As expected, the proposed bills would increase the State's RPS from 33% to 50% (SB 350 and AB 645) and would require CARB to approve a statewide GHG emission limit to be achieved by 2050 that is equivalent to 80% below the 1990 level, as contemplated by Executive Order S-3-05 (see "— California Global Warming Solutions Act of 2006" above), and would authorize CARB to adopt interim GHG emission level targets to be achieved by 2030 and 2040 (SB 32). A bill (AB 21) has also been introduced that would require a statewide GHG emissions limit for 2080 to be established by 2018. Another bill (SB 180) would require State agencies to update the EPS and expand application to secondary generation sources. Environmental and Regulatory Factors General. Numerous environmental laws and regulations affect the Electric System's facilities and operations. The City monitors its compliance with laws and regulations and reviews its remediation obligations on an ongoing basis. The following topics highlight some of the major environmental compliance issues affecting the Electric System: Air Quality — Nitrogen Oxide (NOx) Emissions. The MGS facilities are subject to the Regional Clean Air Incentives Market ("RECLAIM") NOx regulations adopted by the South Coast Air Quality Management District ("SCAQMD"). In accordance with these regulations, SCAQMD established annual NOx allocations for stationary source facilities based on historical emissions. These allocations are in the form of RECLAIM trading credits ("RTCs"). Facilities that exceed their allocated RTCs must reconcile those. emissions by purchasing RTCs from the RECLAIM market. Bicent has a program of installing emission controls at the MGS and purchasing RTCs, as necessary, to meet the emission requirements with respect to the MGS. FAs a result of the installation of NOx control equipment and the repowering of existing units, the Electric System has sufficient RTCs to meet its native load requirements for normal operations under the current NOx RECLAIM regulation.] SCAQMD is proposing to amend its NOx RECLAIM regulation such that the universe of NOx allocations would be reduced by approximately 49%. SCAQMD has not determined if the reductions would be determined by facility or otherwise (e.g. by sector). It is not yet known what the impacts will be to the Electric System. See also "—Air Quality —Federal Actions on Greenhouse Gases" and "—Air Quality —National Ambient Air Quality Standards" below. Air Quality State Actions on Greenhouse Gas Emissions. See "— California Climate Change Policy Developments" above. Air Quality — Federal Actions on Greenhouse Gases. Regulatory Actions Under the Clean Air Act. The EPA has taken steps to regulate GHG emissions under existing law. On April 2, 2007, the U.S. Supreme Court issued a decision in Massachusetts v. EPA holding that the EPA has the authority to regulate GHG emissions under the federal Clean Air Act. Air pollutants, including GHGs, which are regulated by actually controlling emissions under any Clean Air Act program must be taken into account when considering permits issued under other programs, such as the Prevention of Significant Deterioration ("PSD") 50 Permit Program or the Title V Permit Program. A PSD permit is required before commencement of construction of new major stationary sources or major modifications of such sources and contains requirements including but not limited to the application of best available control technologies ("BACT"). Title V permits must be applied for within one year a source becomes subject to the program. Title V permits are operating permits for major sources that consolidate all Clean Air Act requirements (arising, for example, under the Acid Rain, New Source Performance Standards, National Emission Standards for Hazardous Air Pollutants, and/or PSD programs) into a single document and the permit process provides for review of the documents by the EPA, state agencies and the public. On May 13, 2010, the EPA issued a final rule for determining the applicability of the PSD and Title V programs to GHG emissions from major stationary sources. The rule, known as the "Tailoring Rule," establishes criteria for identifying facilities required to obtain PSD permits and the emissions thresholds at which permitting and other regulatory requirements apply. The applicability threshold levels established by this rule include both a mass - based calculation and a metric known as the carbon dioxide equivalent, or CO2e, which incorporates the global warming potential for each of the six individual gases that comprise the collective GHG defined by EPA. The Tailoring Rule requires sources subject to PSD and/or Title V permits to address GHG emissions in new permit applications or renewals. Construction or modification of major sources will become subject to PSD requirements for their GHG emissions if the construction or modification results in a net increase in the overall mass of GHG emissions exceeding a certain amount of tons per year ("tpy") on a CO2e basis. New and modified major sources required to obtain a PSD permit would be required to conduct a BACT review for their GHG emissions. On November 10, 2010, the EPA issued guidance on the technologies or operations that would constitute BACT for GHGs. The Electric System will need to comply with these requirements when it repowers its aging power plants. With respect to Title V requirements under the first step of the Tailoring Rule, effective January 2, 2011, sources required to have Title V permits for non-GHG pollutants were required to address GHGs as part of their Title V permitting. The second step of the Tailoring Rule became effective July 1, 2011, and is applicable to new facilities or modifications to existing facilities that exceed certain GHG emission thresholds, even if the facility is not subject to PSD for non-GHG emissions. The second phase requirements would apply to any new, major sources the City constructs, as well as to any major modifications of existing facilities, depending on their levels of emissions of both GHG and non-GHG pollutants. On July 12, 2012, the EPA's final rule for the third step in the Tailoring Rule was published. The final rule maintains the applicability thresholds for GHG-emitting sources at the current levels and includes two permitting streamlining approaches to improve the administration of the PSD and Title V permitting programs. The Electric System has existing Title V operating permits. Existing Title V operating permits will be required to be amended to incorporate any federal GHG applicable regulatory requirements (e.g. GHG BACT requirements) and associated monitoring, recordkeeping and reporting requirements when they are renewed. On June 23, 2014, the United States Supreme Court ruled on certain challenges to the Tailoring Rule in the case of Utility Air Regulatory Group v. Environmental Protection Agency, Case No. 12-1146. In the case, the Court held that (a) aspects of the Tailoring Rule involving certain thresholds triggering regulation are invalid and (b) regulation under the Clean Air Act based solely on GHG emissions is invalid. The Court approved regulation of GHG emissions under PSD permits and Title V for facilities constituting major sources for other pollutants under the Clean Air Act, including most electric generating facilities. In addition to the PSD permit program, EPA is also in the process of developing a GHG regulatory program under the New Source Performance Standards ("NSPS") provisions of the Clean Air Act. On December 23, 2010, the EPA entered a settlement agreement and agreed to issue NSPS and emissions guidelines for GHG emissions from new and modified fossil fuel fired electric generating units ("EGUs"). On April 13, 2012, the EPA published in the Federal Register its proposed rule for GHG NSPS for new EGUs. The EPA released the re -proposed standards on September 20, 2013 and proposes to set an emissions limit of 1,100 pounds of CO2 per MWh of electricity generated by new coal-fired EGUs, and an emission limit of either 1,000 or 1,100 lb/MWh (depending on size) for new natural gas -fired EGUs. Written comments related to the re- 51 proposed standards were due to the EPA in May 2014 and it is expected that the EPA will finalize the rule in summer 2015. The City cannot predict the outcome of this EPA rulemaking. On June 18, 2014, the Federal Register noticed the EPA's proposal to regulate CO2 emissions from existing power plants. The rule proposes enforceable state -by -state CO2 performance goals, expressed in pounds of CO2 per MWh. The State performance goals are based on a system -wide approach that includes improvements in heat rate at coal-fired generating units, increased utilization of natural gas combined cycle units in place of operating coal generating units, expanded renewable energy development and additional energy efficiency programs. The EPA expects its proposed rule to achieve a 30% nationwide reduction in power plant CO2 emissions (from 2005 levels) by 2030. It is expected that the EPA will finalize the rule in summer 2015. The City cannot predict how the final rule will impact the Electric System operations at this time. Air Quality — Mercury. The Clean Air Act provides for a comprehensive program for the control of hazardous air pollutants, including mercury. On February 16, 2012, EPA published the final rule to reduce emissions of toxic air pollutants from fossil -fuel -fired EGUs and to revise the NSPS for fossil -fuel -fired EGUs. The final rule, known as the Mercury and Air Toxics ("MATS") rule, requires coal-fired electric generation plants to achieve high removal rates of mercury, acid gases and other metals from air emissions. To achieve these standards, coal units with no pollution control equipment installed (uncontrolled coal units) will have to make capital investments and incur higher operating expenses. Coal units with existing controls that do not meet the required standards may need to upgrade existing controls or add new controls to comply. The MATS rule requires generating stations to comply with the new standards three years after the rule takes effect, with specific guidelines for an additional one or two years in limited cases. The rule took effect on April 16, 2012. On June 25, 2013, the EPA reopened the public comment period to solicit additional input on startup and shutdown provisions and notice of final action on those provisions was published in the Federal Register on November 19, 2014. On November 26, 2014, the U.S. Supreme Court agreed to hear a case challenging the MATS Rule on the question of whether the EPA unreasonably refused to consider costs in determining whether it is appropriate to regulate air toxins emitted by electric utilities. The U.S. Supreme Court heard oral arguments on March 25, 2015 and their ruling is expected by June 2015. Air Quality — National Ambient Air Quality Standards. The Clean Air Act requires that the EPA establish National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. When a NAAQS has been established, each state must identify areas in its state that do not meet the EPA standard for one or more air pollutants (known as "non -attainment areas") and develop regulatory measures in its state implementation plan to reduce or control the emissions of the air pollutants exceeding the applicable limits in order to meet the EPA NAAQS. When an area is designated as a non -attainment area for a pollutant, stricter restrictions on the emissions of the air pollutants exceeding the applicable standards are imposed, and it can be more difficult and costly to obtain permits for new major sources or major modifications to existing sources. The SCAQMD periodically prepares an overall plan, also known as an Air Quality Management Plan ("AQMP"), which include control measures to meet federal air quality standards and/or incorporate the latest technical planning information. SCAQMD is in the process of developing its AQMP for 2016, which is a regional and multi -agency effort. Superfund. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, as well as State statutes, impose strict liability for cleanup costs upon those who generate or dispose of hazardous substances and hazardous wastes. The City's past disposal practices with its Electric System may result in Superfund liability as previously approved disposal methods or sites become candidates for Superfund classification. In addition, under these statutes, the City may be held liable for cleanup activities on property that it 52 owns and operates, even if the conditions requiring cleanup existed before the City's occupancy of a site. As a result, the City may incur substantial, but presently unknown, costs as a participant in the cleanup of sites contaminated with hazardous substances or wastes. Electric and Magnetic Fields. A number of studies have been conducted regarding the potential long-term health effects resulting from exposure to electric and magnetic fields created by high voltage transmission and distribution equipment. Additional studies are being conducted to determine the relationship between electric and magnetic fields and certain adverse health effects, if any. At this time, it is not possible to predict the extent of the costs and other impacts, if any, which the electric and magnetic fields concerns may have on electric utilities, including the Electric System. For additional information regarding environmental matters pertaining to the City and its Electric System, see "THE ELECTRIC SYSTEM — Power Supply Resources." Energy Regulatory Factors Developments in the California Energy Market In the late 1990s, California restructured its electricity market so that regulated retail suppliers were required to purchase their customers' supply needs through a centralized, wholesale market. In the centralized market, an administrator collected sellers' price bids and purchasers' estimates of demand. The administrator then determined the price for the most costly unit that was needed to meet demand, and all transactions occurred at that price. The wholesale market was structured as a "spot" market in which prices were set and purchases were made on a short-term basis shortly before supply was needed. California also capped the price at which regulated retail suppliers could sell electricity to their customers. During portions of 2000 and 2001, wholesale market prices in California became highly volatile and, for sustained periods, significantly exceeded the capped retail prices. Demand did not decline in response to high wholesale prices because retail price were capped. This situation resulted in the deterioration of the creditworthiness of two large, retail suppliers, Pacific Gas & Electric Company ("PG&E") and Edison, and PG&E eventually declared bankruptcy. Certain other marketers, power suppliers and power plant developers experienced downgrades of their credit ratings. PG&E emerged from bankruptcy on April 12, 2004. The credit ratings of PG&E and Edison have improved since the dislocations of the California energy markets in 2000 and 2001. The volatility in wholesale prices that California experienced in 2000 and 2001 was due to a number of factors, including flaws in the structure of the wholesale market and unlawful manipulation of the wholesale market. As discussed below, the wholesale market in California has since been redesigned, and Congress has established mechanics for policing wholesale markets. Volatility in electricity prices in California may nevertheless return due to a variety of factors that affect the supply and demand for electric energy in the western United States. These factors include, but are not limited to, the adequacy of generation resources to meet peak demands, the availability and cost of renewable energy, the impact of GHG emission legislation and regulations, fuel costs and availability, weather effects on customer demand, transmission congestion, the strength of the economy in California and surrounding states and levels of hydroelectric generation within the region (including the Pacific Northwest). Volatility in electricity prices may contribute to greater volatility in the Electric System's Light and Power Fund from the sale (and purchase) of electric energy and, therefore, could materially affect the financial condition of the Electric System. To mitigate price volatility and the City's exposure on the spot market, the City undertakes resource planning activities and plans for its resource needs. Of particular note, the City has power supply contracts and other arrangements relating to its system supply of power that are of specified durations. See "THE ELECTRIC SYSTEM — Power Supply Resources." Future Regulation of the Electric Utility Industry The electric utility industry is highly regulated and is also regularly subject to reform. The most recent reforms and proposals are aimed at reducing emissions of GHG from combustion of fossil fuels and reducing impacts from using ocean water for power plant cooling. The City is unable to predict future reforms to the electric 53 utility industry or the impact on the Electric System of recent reforms and proposals. In particular, the City is unable to predict the outcome of proposals on GHG and the associated impact on the operations and finances of the Electric System or the electric utility industry. Energy Policy Act of 1992 The Energy Policy Act of 1992 ("EPAct 1992") made fundamental changes in federal regulation of the electric utility industry, particularly in the area of transmission access under sections 211, 212 and 213 of the Federal Power Act, 16 U.S.C. § 791a et seq. The purpose of these changes, in part, was to bring about increased competition among wholesale suppliers. As amended, sections 211, 212 and 213 authorize FERC to compel a transmission provider to provide transmission service upon application by an electricity supplier. FERC's authority includes the authority to compel the enlargement of transmission capacity as necessary to provide the service. The service must be provided at rates, charges, terms and conditions that are set by FERC. Electric utilities that are owned by municipalities or other public agencies are "transmitting utilities" that may be subject to an order under sections 211, 212 and 213. EPAct 1992 prohibits FERC from requiring "retail wheeling" under which a retail customer that was located in one utility's service area could obtain electricity from another source. The City has disposed of all of its transmission resources but an order by FERC to another party to provide transmission might adversely affect the costs of the Electric System in having purchased power delivered to the City. Energy Policy Act of 2005 The Energy Policy Act of 2005 ("EPAct 2005") addresses a wide array of matters that could affect the entire electric utility industry, including the Electric System. EPAct 2005 authorizes FERC to compel "open access" to the transmission systems of certain utilities that are not generally regulated by FERC, including publicly owned utilities if the utility sells more than four million megawatt hours of electricity per year. This category currently does not include the Electric System. Under open access, a transmission provider must allow all customers to use the system under standardized rates, terms and conditions of service (there is no need for a customer to apply to FERC as under the EPAct 1992). FERC may compel open access in this context unless the order would violate a private activity bond rule for purposes of section 141 of the Internal Revenue Code. To date, FERC has not established generic rules that would require unregulated utilities to provide open access. Rather, FERC has chosen to take a case -by -case approach. Under EPAct 2005, FERC may not require publicly owned utilities such as the Electric System to join regional transmission organizations ("RTOs"), in which participating utilities allow an independent entity to oversee operation of the utilities' transmission facilities. FERC has stated, however, that FERC expects such utilities to participate in regional processes for transmission planning and that FERC will pursue associated complaints against such utilities on a case -by -case basis. All electricity purchased from services outside the City are delivered to the City through the transmission system administered by CAISO. See "THE ELECTRIC SYSTEM — City Plan to Optimize Resource Utilization." EPAct 2005 also provides for criminal penalties for manipulative energy trading practices. EPAct 2005 repealed the Public Utility Holding Company Act of 1935, which prohibited certain mergers and consolidations involving electric utilities. EPAct 2005 gives FERC and state regulators access to books and records within holding companies that include regulated public utilities. In addition, FERC may oversee inter - affiliate transactions within such holding company systems. These provisions of EPAct 2005 are referred to as "PUHCA 2005." PUHCA 2005 does not apply to the Electric System. EPAct 2005 requires the creation of national and regional electric reliability organizations to establish and enforce, under FERC's supervision, mandatory standards for the reliable operation of the bulk power system. The standards are designed to increase system reliability and to minimize blackouts. FERC has designated the North American Electric Reliability Corporation ("NERC") as the national electric reliability organization. FERC has designated the Western Electricity Coordinating Council ("WECC") as the regional reliability organization for utilities in the West, including the Electric System. Failure to comply with NERC and WECC standards exposes a utility such as the Electric System to significant fines and penalties. NERC and WECC may audit the Electric 54 System's compliance with the reliability standards and, as indicated above, impose fines and penalties on the City for non-compliance. [to confirm City/Electric System has not been subject of such audit] Under EPAct 2005, California investor -owned utilities were required to offer, to each of their classes of customers, a time -based rate schedule that would enable customers to manage their energy use through advanced metering and communications technology. EPAct 2005 authorizes FERC to compel the siting of certain transmission lines if FERC determines that a state has unreasonably withheld approval. EPAct 2005 promotes increased imports of liquefied natural gas and includes incentives to support the development of renewable energy technologies. EPAct 2005 also extends for 20 years the Price -Anderson Act, which provides certain protection from liability for nuclear power issues and provides incentives for the construction of new nuclear plants. The City is unable to determine at this time the full long-term impact that EPAct 2005 will have on the operations and finances of the Electric System or on the electric utility industry in general. Other General Factors The electric utility industry in general has been, or in the future may be, affected by a number of other factors which could impact the financial condition and competitiveness of many electric utilities, including the Electric System, and the level of utilization of generating and transmission facilities. In addition to the factors discussed elsewhere herein, such factors include, among others: Effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements; Changes resulting from conservation and demand -side management programs on the timing and use of electric energy; Effects on the integration and reliability of the power supply from the increased usage of renewables; Changes resulting from a national energy policy; • Effects of competition from other electric utilities (including increased competition resulting from mergers, acquisitions and strategic alliances of competing electric and natural gas utilities and from competitive transmitting of less expensive electricity from much greater distances over an interconnected system) and new methods of, and new facilities for, producing low-cost electricity; The repeal of certain federal statutes that would have the effect of increasing the competitiveness of many investor -owned utilities; • Increased competition from independent power producers and marketers, brokers and federal power marketing agencies; • "Self -generation" or "distributed generation" (such as microturbines, fuel cells and solar installations) by industrial and commercial customers and others; • Issues relating to the ability to issue tax-exempt obligations, including restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission line service from transmission projects financed with outstanding tax- exempt obligations; 99 • Effects of inflation on the operating and maintenance costs of an electric utility and its facilities; • Changes from projected future load requirements; • Increases in costs and uncertain availability of capital; • Shifts in the availability and relative costs of different fuels (including the cost of natural gas); • Changes in the electric market structure for neighboring electric grids such as the new energy imbalance market operated by the Cal ISO; • Sudden and dramatic increases in the price of energy purchased on the open market that may occur in times of high peak demand in an area of the country experiencing such high peak demand, such as has occurred in California; • Inadequate risk management procedures and practices with respect to, among other things, the purchase and sale of energy and transmission capacity; • Other legislative changes, voter initiatives, referenda and statewide propositions; • Effects of changes in the economy, population and demand of customers in the Electric System's service area; • Effects of possible manipulation of the electric markets; and • Natural disasters or other physical calamities, including but not limited to, earthquakes. See "THE ELECTRIC SYSTEM — Seismic Activity" herein. Any of these factors (as well as other factors) could have an adverse effect on the financial condition of any given electric utility, including the Electric System, and likely will affect individual utilities in different ways. CONSTITUTIONAL LIMITATIONS ON TAXES Articles XIIIC and XIIID of the State Constitution Proposition 218, a State ballot initiative known as the "Right to Vote on Taxes Act," was approved by the voters of the State of California on November 5, 1996. Proposition 218 added Articles XIIIC ("Article XIIIC") and XIIID ("Article XIIID") to the State Constitution. Article XIIID creates additional requirements for the imposition by most local governments (including the City) of general taxes, special taxes, assessments and "property -related" fees and charges. Article XIIID creates additional requirements for the imposition by most local governments (including the City) of assessments and property -related fees. Property -related fees include many utility charges such as water rates but Article XIIID explicitly exempts fees for the provision of electric service from the provisions of such article. Nevertheless, Proposition 218 could indirectly affect some California municipally -owned electric utilities. For example, to the extent Proposition 218 reduces a city's general fund revenues, that city could seek to increase the transfers from its electric utility to its general fund. For information on the Indenture provisions limiting the City's authority to transfer moneys from the Light and Power Fund to its General Fund, see "SECURITY AND SOURCES OF PAYMENT — Transfers to General Fund" and discussion of Proposition 26 below. Article XIIIC expressly extends the people's initiative power to reduce or repeal previously -authorized local taxes, assessments, and fees and charges. The terms "fees and charges" are not defined in Article XIIIC, although the California Supreme Court held in Bighorn -Desert View Water Agency v. Verjil, 39 Cal Ath 205 (2006), that the initiative power described in Article XIIIC may apply to a broader category of fees and charges than the 56 property -related fees and charges governed by Article XIIID. Moreover, in the case of Bock v. City Council of Lompoc, 109 Cal.App.3d 52 (1980), the Court of Appeal determined that electric rates are subject to the initiative power. Thus, even electric service charges (which are expressly exempted from the provisions of Article XIIID) might be subject to the initiative provision of Article XIIIC, thereby subjecting such fees and charges imposed by the City to reduction by the electorate. The City believes that even if the electric rates of the City are subject to the initiative power, under Article XIIIC or otherwise, the electorate of the City would be precluded from reducing electric rates and charges in a manner adversely affecting the payment of the 2015 Bonds by virtue of the "impairment of contracts clause" of the United States and California Constitutions. Proposition 26 was approved by the voters of the State on November 2, 2010. Proposition 26 amended Articles XIIIA and XIIIC of the California Constitution to impose a two-thirds voter approval requirement for the imposition of certain fees and charges by the State. It also imposes a majority voter approval requirement on local governments with respect to fees and charges for general purposes, and a two-thirds voter approval requirement with respect to fees and charges for special purposes. The initiative, according to its supporters, is intended to prevent the circumvention of tax limitations imposed by the voters pursuant to Proportion 13, approved in 1978, and other measures, such as Proposition 218, through the use of non -tax fees and charges. Proposition 26 expressly excludes from its scope "a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product." The City believes that the initiative is not intended to and would not apply to Electric System rates so long as such rates do not exceed the reasonable costs to the City of providing electric service; however, the City is unable to predict how Proposition 26 will be interpreted by the courts to apply to the provision of utility services by local governments such as the electric service provided by the Electric System. In Citizens for Fair Reu Rates v. City of Redding, the Court of Appeal of California, Third Appellate District, held, in an opinion filed January 20, 2015 and modified February 19, 2015, that a municipal utility's recurring budget transfer from its electrical utility fund to its general fund, referred to therein as a payment in lieu of taxes, constitutes a tax under Proposition 26 unless it can be shown that the transferred amount reflects the reasonable costs borne by the City of Redding to provide electric services. On April 29, 2015, the California Supreme Court granted review of the decision of the Court of Appeal and, as a result, the decision of the Court of Appeal in Citizens for Fair Reu Rates v. City of Redding is no longer considered published and may not be cited or relied on as precedent in the courts of the State. [The City annual transfers certain amounts from the Light and Power Fund to the City's general fund (see "SECURITY AND SOURCES OF PAYMENT — Transfers to General Fund"), and sets its rates and its budget with the expectation that certain transfers will be made to the City in accordance with the restrictions set forth in the Indenture. In the event transfers are further restricted, such further restriction would not have a material adverse effect on the financial position of the Electric System.] Future Initiatives Articles XIIIC and XIIID provided limits on the ability of governmental agencies to increase certain fees and charges. Such articles were adopted pursuant to measures qualified for the ballot pursuant to California's constitutional initiative process. While the City believes Articles XIIIC and XIIID do not affect the Electric System's rates and charges so long as the rates do not exceed the reasonable costs to the City of providing the utility services, from time to time other initiative measures could be adopted by California voters. The adoption of any such initiatives might place limitations on the ability of the City and its Electric System to increase revenues. LITIGATION There is no controversy or litigation of any nature now pending or threatened restraining or enjoining the issuance of the 2015 Bonds or in any way contesting or affecting the validity of the 2015 Bonds or any proceedings of the City taken with respect to the issuance or sale thereof. In addition, there is no litigation pending against the City which, in the opinion of the City, would materially adversely affect the operations or financial condition of the Electric System or the sources of payment for the 2015 Bonds. A number of lawsuits and claims have been filed and are pending against the City that arise in the normal course of operations. None of these lawsuits are expected to materially adversely affect the operations or financial condition of the Electric System or the sources of payment for the 2015 Bonds. 57 TAX MATTERS The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the 2015 Bonds that acquire their 2015 Bonds in the initial offering. The discussion below is based upon laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or are expected to be sought from the IRS with respect to any of the U.S. federal tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion does not deal with U.S. tax consequences applicable to any given investor, nor does it address the U.S. tax considerations applicable to all categories of investors, some of which may be subject to special taxing rules (regardless of whether or not such investors constitute U.S. Holders), such as certain U.S. expatriates, banks, REITs, RICs, insurance companies, tax- exempt organizations, dealers or traders in securities or currencies, partnerships, S corporations, estates and trusts, investors that hold their 2015 Bonds as part of a hedge, straddle or an integrated or conversion transaction, or investors whose "functional currency" is not the U.S. dollar. Furthermore, it does not address (i) alternative minimum tax consequences, (ii) the net investment income tax imposed under Section 1411 of the Code, or (iii) the indirect effects on persons who hold equity interests in a holder. This summary also does not consider the taxation of the 2015 Bonds under state, local or non-U.S. tax laws. In addition, this summary generally is limited to U.S. tax considerations applicable to investors that acquire their 2015 Bonds pursuant to this offering for the issue price that is applicable to such 2015 Bonds (i.e., the price at which a substantial amount of the 2015 Bonds are sold to the public) and who will hold their 2015 Bonds as "capital assets" within the meaning of Section 1221 of the Code. As used herein, "U.S. Holder" means a beneficial owner of a 2015 Bond that for U.S. federal income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust). As used herein, "Non-U.S. Holder" generally means a beneficial owner of a 2015 Bond (other than a partnership) that is not a U.S. Holder. If a partnership holds 2015 Bonds, the tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Partnerships holding 2015 Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the 2015 Bonds (including their status as U.S. Holders or Non-U.S. Holders). Prospective investors should consult their own tax advisors in determining the U.S. federal, state, local or non-U.S. tax consequences to them from the purchase, ownership and disposition of the 2015 Bonds in light of their particular circumstances. For a description of certain California personal income tax matters, see the information set forth on the cover page of this Official Statement. U.S. Holders Interest. Interest on the 2015 Bonds generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder's method of accounting for U.S. federal income tax purposes. To the extent that the issue price of any maturity of the 2015 Bonds is less than the amount to be paid at maturity of such 2015 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such 2015 Bonds), the difference may constitute original issue discount ("OID"). U.S. Holders of 2015 Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods. 2015 Bonds purchased for an amount in excess of the principal amount payable at maturity (or, in some cases, at their earlier call date) will be treated as issued at a premium. A U.S. Holder of a 2015 Bond issued at a 58 premium may make an election, applicable to all debt securities purchased at a premium by such U.S. Holder, to amortize such premium, using a constant yield method over the term of such 2015 Bond. Sale or Other Taxable Disposition of the 2015 Bonds. Unless a non -recognition provision of the Code applies, the sale, exchange, redemption, retirement (including pursuant to an offer by the City or other disposition of a 2015 Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a 2015 Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the 2015 Bond, which will be taxed in the manner described above) and (ii) the U.S. Holder's adjusted U.S. federal income tax basis in the 2015 Bond (generally, the purchase price paid by the U.S. Holder for the 2015 Bond, decreased by any amortized premium, and increased by the amount of any OID previously included in income by such U.S. Holder with respect to such 2015 Bond). Any such gain or loss generally will be capital gain or loss. In the case of a non - corporate U.S. Holder of a 2015 Bond, the maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. holder's holding period for the 2015 Bond exceeds one year. The deductibility of capital losses is subject to limitations. Information Reporting and Backup Withholding. Payments on the 2015 Bonds generally will be subject to U.S. information reporting and possibly to "backup withholding." Under Section 3406 of the Code and applicable U.S. Treasury Regulations issued there under, a non -corporate U.S. Holder of a 2015 Bond may be subject to backup withholding at the current rate of 28% with respect to "reportable payments," which include interest paid on such 2015 Bond and the gross proceeds of a sale, exchange, redemption, retirement or other disposition of such 2015 Bond. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a U.S. taxpayer identification number ("TIN") to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a "notified payee underreporting" described in Section 3406(c) of the Code or (iv) the payee fails to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules may be refunded or credited against the U.S. Holder's federal income tax liability, if any, provided that the required information is timely furnished to the IRS. Certain U.S. holders (including among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. A holder's failure to comply with the backup withholding rules may result in the imposition of penalties by the IRS. Non-U.S. Holders Interest. Subject to the discussions below under the headings "Information Reporting and Backup Withholding" and "FATCA," payments of principal of, and interest on, any 2015 Bond to a Non-U.S. Holder, other than (1) a controlled foreign corporation, as such term is defined in the Code, which is related to the City through stock ownership and (2) a bank which acquires such 2015 Bond in consideration of an extension of credit made pursuant to a loan agreement entered into in the ordinary course of business, will not be subject to any U.S. federal withholding tax provided that the beneficial owner of such 2015 Bond provides a certification completed in compliance with applicable statutory and regulatory requirements, which requirements are discussed below under the heading "Information Reporting and Backup Withholding," or an exemption is otherwise established. Disposition of the 2015 Bonds. Subject to the discussions below under the headings "Information Reporting and Backup Withholding" and "FATCA," any gain realized by a Non-U.S. Holder upon the sale, exchange, redemption, retirement (including pursuant to an offer by the City) or other disposition of a 2015 Bond generally will not be subject to U.S. federal income tax, unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the United States; or (ii) in the case of any gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale, exchange, redemption, retirement (including pursuant to an offer by the City) or other disposition and certain other conditions are met. U.S. Federal Estate Tax. A 2015 Bond that is held by an individual who at the time of death is not a citizen or resident of the United States will not be subject to U.S. federal estate tax as a result of such individual's death, provided that, at the time of such individual's death, payments of interest with respect to such 2015 Bond would not have been effectively connected with the conduct by such individual of a trade or business within the United States. 59 Information Reporting and Backup Withholding. Subject to the discussion below under the heading "FATCA," under current U.S. Treasury Regulations, payments of principal and interest on any 2015 Bond to a holder that is not a United States person will not be subject to any backup withholding tax requirements if the beneficial owner of such 2015 Bond or a financial institution holding such 2015 Bond on behalf of the beneficial owner in the ordinary course of its trade or business provides an appropriate certification to the payor and the payor does not have actual knowledge that the certification is false. If a beneficial owner provides the certification, the certification must give the name and address of such owner, state that such owner is not a United States person, or, in the case of an individual, that such owner is neither a citizen nor a resident of the United States, and the owner must sign the certificate under penalties of perjury. The current backup withholding tax rate is 28%. FATCA—U.S. Holders and Non-U.S. Holders Sections 1471 through 1474 of the Code, impose a 30% withholding tax on certain types of payments made to foreign financial institutions, unless the foreign financial institution enters into an agreement with the U.S. Treasury to, among other things, undertake to identify accounts held by certain U.S. persons or U.S.-owned entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these and other reporting requirements, or unless the foreign financial institution is otherwise exempt from those requirements. In addition, FATCA imposes a 30% withholding tax on the same types of payments to a non -financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or the entity furnishes identifying information regarding each substantial U.S. owner. Failure to comply with the additional certification, information reporting and other specified requirements imposed under FATCA could result in the 30% withholding tax being imposed on payments of interest and principal under the 2015 Bonds and sales proceeds of 2015 Bonds held by or through a foreign entity. In general, withholding under FATCA currently applies to payments of U.S. source interest (including OID) and will apply to (i) gross proceeds from the sale, exchange or retirement of debt obligations paid after December 31, 2016 and (iii) certain "pass-thru" payments no earlier than January 1, 2017. Prospective investors should consult their own tax advisors regarding FATCA and its effect on them. The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal taxation that may be relevant to a particular holder of 2015 Bonds in light of the holder's particular circumstances and income tax situation. Prospective investors are urged to consult their own tax advisors as to any tax consequences to them from the purchase, ownership and disposition of 2015 Bonds, including the application and effect of state, local, non-U.S., and other tax laws. APPROVAL OF LEGALITY The issuance of the 2015 Bonds is subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City ("Bond Counsel"), substantially in the form set forth as APPENDIX D. Certain legal matters will be passed upon for the City by the office of the City Attorney and for the Underwriters by Norton Rose Fulbright US LLP, Los Angeles, California. Fees payable to Bond Counsel and Underwriters' Counsel are contingent on issuance of the 2015 Bonds. RATINGS [ and] Standard & Poor's Ratings Group have assigned the 2015 Bonds the ratings of "" [and respectively]. Each rating reflects only the respective views of the applicable rating agency and any explanation of the significance of such rating may be obtained only from such rating agency. There is no assurance that either rating will remain in effect for any given period of time or that a rating will not be revised downward or withdrawn entirely by the rating agency assigning such rating, if, in its judgment, circumstances so warrant. Such ratings are not a recommendation to buy, sell or hold 2015 Bonds, and may be subject to revisions or withdrawal at any time. Any downward revision or withdrawal of any rating may have an adverse effect on the market price of the 2015 Bonds. 11 UNDERWRITING J.P. Morgan Securities LLC, as representative of the underwriters listed on the front cover of this Official Statement (the "Underwriters") has agreed, subject to certain conditions, to purchase the 2015 Bonds at a price of $ (representing the $ aggregate principal amount of the 2015 Bonds [plus/less] $ [net] original issue [premium/discount] and less $ Underwriters' discount). The purchase contract provides that the Underwriters will purchase all the 2015 Bonds if any are purchased. The 2015 Bonds may be offered and sold by the Underwriters to certain dealers and others at prices lower than or yields higher than the public offering prices or yields stated on the inside cover page of this Official Statement, and such public offering prices or yields may be changed, from time to time, by the Underwriters. J.P. Morgan Securities LLC ("JPMS"), one of the Underwriters of the 2015 Bonds, has entered into negotiated dealer agreements (each, a "Dealer Agreement") with each of Charles Schwab & Co., Inc. ("CS&Co.") and LPL Financial LLC ("LPL") for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Dealer Agreement (if applicable to this transaction), each of CS&Co. and LPL will purchase 2015 Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any 2015 Bonds that such firm sells. Citigroup Global Markets Inc., one of the Underwriters of the 2015 Bonds, has entered into a retail distribution agreement with each of TMC Bonds L.L.C. ("TMC") and UBS Financial Services Inc. ("UBSFS"). Under these distribution agreements, Citigroup Global Markets Inc. may distribute municipal securities to retail investors through the financial advisor network of UBSFS and the electronic primary offering platform of TMC. As part of this arrangement, Citigroup Global Markets Inc. may compensate TMC (and TMC may compensate its electronic platform member firms) and UBSFS for their selling efforts with respect to the 2015 Bonds. The Underwriters and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The Underwriters and their affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the City, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at an time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City. FINANCIAL ADVISOR Public Financial Management, Inc. (the "Financial Advisor") has assisted the City with various matters relating to the planning, structuring and delivery of the 2015 Bonds. The Financial Advisor has not been engaged, nor has it undertaken, to make an independent verification or assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Financial Advisor is an independent financial advisory firm and is not engaged in the business of underwriting or distributing municipal securities or other public securities. VERIFICATION REPORT Upon delivery of the 2015 Bonds, . , independent certified public accountants, will deliver a report stating that the firm has verified the mathematical accuracy of certain computations relating to the adequacy of the maturing principal of and interest on the investments in the Escrow Fund and the other moneys in the Escrow Fund to pay, when due, the principal and redemption price of and interest on the Refunded 2009 Bonds. See "PLAN OF FINANCE" herein. 61 FINANCIAL STATEMENTS By a resolution adopted on December 15, 2011, as clarified by a resolution adopted on January 3, 2012, the City Council merged the Gas Fund into the Light and Power Fund for accounting and financial reporting purposes. Such merger of such funds for such purpose does not affect the operations of the Gas and Electric Department nor alters the obligations of the Light and Power Fund to bondholders or other creditors. Prior to July 1, 2011, the Gas Fund and the Light and Power Fund were reported as separate enterprise funds. The audited financial statements of the Electric System are included in the Light and Power Enterprise Annual Financial Report, and such merged fund is referred to in the Light and Power Enterprise Annual Financial Report as the Light and Power Enterprise. The audited financial statements of the Light and Power Enterprise for the Fiscal Year ended June 30, 2014 and for the Fiscal Year ended June 30, 2013, are included in APPENDIX A to this Official Statement. The financial statements have been audited by Vasquez & Company LLP, Los Angeles, California, independent accountants (the "Independent Accountants") as stated in their reports appearing in APPENDIX A. The City has not requested nor did the City obtain permission from the Independent Accountants to include the audited financial statements of the Light and Power Enterprise for the Fiscal Year ended June 30, 2014 and for the Fiscal Year ended June 30, 2013 as an appendix to this Official Statement. The Independent Accountants have not been engaged to perform and have not performed, since the dates of its reports included in the audited financial statements for the Fiscal Year ended June 30, 2014 and for the Fiscal Year ended June 30, 2013, respectively, any procedures on the financial statements addressed in such reports. The Independent Accountants also have not performed any procedures relating to this Official Statement. CONTINUING DISCLOSURE The City has covenanted for the benefit of the Owners and Beneficial Owners of the 2015 Bonds, pursuant to a Continuing Disclosure Agreement with the Trustee, to provide the MSRB through its EMMA System a copy of the Electric System's annual audited financial statements, as well as certain operating data and financial information relating to the Electric System (collectively, the "Annual Report"). Such audited financial statements are required to be prepared in accordance with generally accepted accounting principles. The City will provide to the MSRB through the EMMA System such Electric System information and its financial statements (unaudited, if audited financial statements are not available) within 180 days after the end of its Fiscal Year (which Fiscal Year ends on June 30), commencing with the Annual Report for Fiscal Year 2015 (which Annual Report is due December 27, 2015). If unaudited financial statements are provided, audited financial statements will be provided as soon as available. In addition, the City has agreed to give timely notice to the MSRB of the occurrence of certain enumerated events. These agreements have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the "Rule"). See APPENDIX E — "FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto. During the last five years, [the City did not timely file a portion of its annual reports for fiscal years 2011-12 and 2012-13 as required by its continuing disclosure undertakings.] 62 MISCELLANEOUS The covenants and agreements of the City for the benefit of the Owners of the 2015 Bonds are set forth in the Indenture, and reference is made to the Indenture for a statement of the rights of the Owners of the 2015 Bonds and the covenants and obligations of the City. All references to the 2015 Bonds are qualified in their entirety to the definitive form thereof and the information with respect thereto included in the Indenture. This Official Statement is not a contract with the Owners or Beneficial Owners of any of the 2015 Bonds. Any statements in this Official Statement involving matters of opinion and all estimates, whether or not expressly so stated, are intended as such and not as representations of facts and are not to be construed as representations that they will be realized. The execution and delivery of this Official Statement has been duly authorized by the City. CITY OF VERNON, CALIFORNIA In City Administrator 63 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE LIGHT AND POWER ENTERPRISE FOR THE FISCAL YEAR ENDED JUNE 30, 2014 AND FOR THE FISCAL YEAR ENDED DUNE 30, 2013 A-1 APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following is a brief summary of certain provisions of the Indenture not previously discussed in this Official Statement. Such summary is not intended to be definitive, and reference is made to the Indenture in its entirety for the complete terms thereof. Capitalized terms used in this summary which are not otherwise defined in this Official Statement have the meanings ascribed to such terms in the Indenture. [TO COME] IM APPENDIX C BOOK -ENTRY ONLY SYSTEM The information in this section concerning DTC and DTC's book -entry only system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, premium, if any, accreted value, if any, and interest on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the 2015 Bonds. The 2015 Bonds will be issued as fully -registered securities, registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully - registered bond certificate will be issued for each maturity of the 2015 Bonds, each in the aggregate principal amount of such issue and will be deposited with DTC. DTC, the world's largest securities depository, is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book - entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor's rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of the 2015 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2015 Bonds on DTC's records. The ownership interest of each actual purchaser of each 2015 Series Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2015 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2015 Bonds, except in the event that use of the book -entry system for the 2015 Bonds is discontinued. To facilitate subsequent transfers, all 2015 Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of 2015 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2015 Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. C-1 Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners, will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of 2015 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2015 Bonds, such as redemptions, tenders, defaults and proposed amendments to the 2015 Bond documents. For example, Beneficial Owners of 2015 Bonds may wish to ascertain that the nominee holding the 2015 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the 2015 Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the 2015 Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the 2015 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions and dividend payments on the 2015 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, nor its nominee, the Trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the 2015 Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2015 Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book -entry only transfers through DTC (or a successor securities depository). In that event, 2015 Bond certificates will be printed and delivered to DTC. C-2 APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL Upon delivery of the 2015 Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, proposes to render its final opinion in connection with the 2015 Bonds in substantially the following form: [Date of Delivery] City Council City of Vernon Vernon, California City of Vernon Electric System Revenue Bonds 2015 Taxable Series A (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the City of Vernon, California (the "City") in connection with the issuance of $ aggregate principal amount of City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A (the "2015 Series Bonds"). The 2015 Series Bonds have been issued pursuant to the City of Vernon Municipal Facilities Revenue Bond Law, constituting Article XI of the Vernon City Code (the "Bond Law") and an Indenture of Trust, dated as of September 1, 2008 (as amended and supplemented, the "Indenture"), between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), including as amended and supplemented by the Fourth Supplemental Indenture of Trust, dated as of July 1, 2015, between the City and the Trustee. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. In such connection, we have reviewed the Charter, the Bond Law, the Indenture, certificates of the City, the Trustee and others, opinions of counsel to the City, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The Indenture provides that the Bonds, including the 2015 Series Bonds, are special obligations of the City, secured by a pledge of, and payable solely from, the Trust Estate. The Indenture further provides that the Bonds, including the 2015 Series Bonds, are not secured by a legal or equitable pledge of, or lien or charge upon, any property of the City or any of its income or receipts except the pledge of the Trust Estate and that the pledge of Revenues and amounts in the Light and Power Fund pursuant to the Indenture shall be on a parity with any pledge thereof securing Parity Obligations. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof We have not undertaken to determine or to inform any person whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the 2015 Series Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. D-1 We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and certificates, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. We call attention to the fact that the rights and obligations under the 2015 Series Bonds and the Indenture and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against municipal corporations in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non -exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the assets described in or as subject to the lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any of such assets. Our services did not include financial or other non -legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the 2015 Series Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: The 2015 Series Bonds constitute the valid and binding special obligations of the City. 2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, including the 2015 Series Bonds, of the Trust Estate, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. 3. Interest on the 2015 Series Bonds is exempt from State of California personal income taxes. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the 2015 Series Bonds. Faithfully yours, D-2 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT The City of Vernon and the Bank of New York Mellon Trust Company, N.A. will enter into a Continuing Disclosure Agreement relating to the 2015 Bonds in substantially the following form: OHSUSA:761725341.4 E-1 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement, dated as of July 1, 2015, is executed and delivered by the City of Vernon (the "City"), a municipal corporation and chartered city organized and existing under and by virtue of the Constitution of the State of California and its Charter and The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under and by virtue of the laws of the United States of America, as Trustee, in connection with the issuance by the City of its Electric System Revenue Bonds, 2015 Taxable Series A. WITNESSETH: WHEREAS, the City has issued $ aggregate principal amount of its 2015 Series Bonds (capitalized terms used herein shall have the meanings given such terms pursuant to Section 2 hereof) pursuant to the Indenture; and WHEREAS, in connection with the issuance of the 2015 Series Bonds, the City desires to enter into this Disclosure Agreement to per the Participating Underwriters of the 2015 Series Bonds to comply with the Rule; NOW THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: Section 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the City and the Trustee for the benefit of the Owners and Beneficial Owners of the 2015 Series Bonds and in order to assist the Participating Underwriters in complying with the Rule. Section 2. Definitions. Unless otherwise defined in this Section, capitalized terms used in this Disclosure Agreement shall have the meanings given such terms in the Indenture (as defined below). The following capitalized terms shall have the following meanings: "Annual Report" shall mean any Annual Report to be provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. "Beneficial Owner" shall mean ,any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any 2015 Series Bonds (including persons holding 2015 Series Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any 2015 Series Bonds for federal income tax purposes. "Disclosure Representative" shall mean the [Finance Director] of the City, or such other officer or employee of the City as the City shall designate in writing to the Trustee from time to time. "Disclosure Agreement" shall mean this Continuing Disclosure Agreement, as amended and supplemented. OHSUSA:761725341.4 4 "Dissemination Agent" shall mean The Bank of New York Mellon Trust Company, N.A., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the City and which has filed with the Trustee a written acceptance of such designation. "Indenture" shall mean 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 Fourth Supplemental Indenture of Trust. "Listed Events" shall mean any of the events listed in subsections (a) and (b) of Section 5 of this Disclosure Agreement. "MSRB" shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the SEC to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the SEC, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org. "Official Statement" shall mean the Official Statement, dated , 2015, relating to the 2015 Series Bonds. "Participating Underwriters" shall mean any of the original underwriters of the 2015 Series Bonds required to comply with the Rule in connection with offering of the 2015 Series Bonds. "Responsible Officer" shall mean an officer of the Trustee at the corporate trust office of the Trustee with regular responsibility for the administration of matters related to the Indenture. "Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "State" shall mean the State of California. Section 3. Provision of Annual Reports. (a) The City shall, or, by written direction shall cause the Dissemination Agent to, not later than 180 days after the end of each Fiscal Year of the City (which Fiscal Year currently ends on June 30), commencing with the report for the 2014-15 Fiscal Year (which report for the 2014-15 Fiscal Year shall be due December 27, 2015), provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the City's Electric System may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the City's Fiscal Year changes, it shall give notice of such change in a filing with the OHSUSA:761725341.4 5 MSRB. The Annual Report shall be submitted on a standard form in use by industry participants or other appropriate form and shall identify the 2015 Series Bonds by name and CUSIP number. (b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) of this Section, the City shall provide the Annual Report to the Dissemination Agent (if the Trustee is not the Dissemination Agent) and the Trustee. If by such date the Trustee has not received a copy of the Annual Report, the Trustee shall contact the City and the Dissemination Agent (if the Trustee is not the Dissemination Agent) to determine if the City is in compliance with the first sentence of this subsection (b). (c) If the Trustee is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a) of this Section, the Trustee shall, in a timely manner, send or cause to be sent to the MSRB a notice in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall file a report with the City and the Trustee (if the Trustee is not the Dissemination Agent) certifying that the Annual Report has been provided pursuant to this Disclosure Agreement and stating the date it was provided. Section 4. Content of Annual Reports. The City's Annual Report shall contain or include by reference the following: (a) The audited financial statements of the City's Electric System for the prior fiscal year, including a statement of net assets, a statement of revenues, expenses and changes in net assets, and a statement of cash flows, all of which shall be prepared in accordance with generally accepted accounting principles as promulgated from time to time by the Government Accounting Standards Board applicable to the City's Electric System. Such financial statements may be included as part of the City's general purpose financial statements or the financial statements of the Gas and Electric Department. If the Electric System's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to subsection (a) of Section 3 hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements required for the fiscal year being audited, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) An update of the information contained in the tables with the following headings in the Official Statement for the most recently ended fiscal year: (i) "CITY OF VERNON ELECTRIC SYSTEM RESOURCES USED TO SATISFY CITY' S LOAD REQUIREMENT"; (ii) "CITY OF VERNON ELECTRIC SYSTEM AVERAGE BILLING PRICE (CENTS PER KILOWATT-HOUR)"; (iii) "CITY OF VERNON ELECTRIC SYSTEM CUSTOMERS, RETAIL SALES, REVENUES AND DEMAND"; and OHSUSA:761725341.4 6 (iv) "CITY OF VERNON ELECTRIC SYSTEM HISTORICAL REVENUE, EXPENSES AND DEBT SERVICE COVERAGE UNDER INDENTURE Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues with respect to which the City is an "obligated person" (as defined by the Rule), which have been made available to the public on the MSRB's website. The City shall clearly identify each such other document so included by reference. Section 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the 2015 Series Bonds not later than ten business days after the occurrence of the event: (i) Principal and interest payment delinquencies; (ii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iii) Unscheduled draws on credit enhancements reflecting financial difficulties; (iv) Substitution of credit or liquidity providers, or their failure to perform; (v) Adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); (vi) Tender offers; (vii) Defeasances; (viii) Rating changes; or (ix) Bankruptcy, insolvency, receivership or similar event of the obligated person. Note: for the purposes of the event identified in subparagraph (ix) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. OHSUSA:761725341.4 7 (b) The City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the 2015 Series Bonds, if material, not later than ten business days after the occurrence of the event: (i) Unless described in subparagraph 5(a)(v), other material notices or determinations by the Internal Revenue Service with respect to the tax status of the 2015 Series Bonds or other material events affecting the tax status of the 2015 Series Bonds; (ii) Modifications to rights of Owners or Beneficial Owners; (iii) Optional, unscheduled or contingent 2015 Series Bond calls; (iv) Release, substitution, or sale of property securing repayment of the 2015 Series Bonds; (v) Non-payment related defaults; (vi) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the "obligated person," other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; or (vii) Appointment of a successor or additional trustee or the change of name of a trustee. (c) The Trustee shall, as soon as reasonably practicable, upon a Responsible Officer's obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative and shall inform such person of the event in writing. The Trustee shall have no duty to determine the materiality of any such Listed Events. For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of such Listed Events shall mean actual knowledge by a Responsible Officer. (d) Whenever the City obtains knowledge of the occurrence of a Listed Event described in subsection (b) of this Section, the City shall determine if such event would be material under applicable federal securities laws. (e) If the City learns of the occurrence of a Listed Event described in subsection (a) of this Section, or determines that knowledge of a Listed Event described in subsection (b) of this Section would be material under applicable federal securities laws, the City shall within ten business days of occurrence file a notice of such occurrence with the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections (a)(vii) or (b)(iii) of this Section need not be given under this subsection (e) any earlier than the notice (if any) of the underlying event is given to Owners of affected 2015 Series Bonds pursuant to the Indenture. OHSUSA:761725341.4 Section 6. Format for Flings with MSRB. Any report or filing with the MSRB pursuant to this Disclosure Agreement must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Section 7. Termination of Reporting Obligation. The City's and the Trustee's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the 2015 Series Bonds. Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent; provided the Trustee shall receive written notice of such appointment, engagement and discharge at the time thereof. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, the City shall perform the duties of the Dissemination Agent. The Dissemination Agent may resign by providing thirty days written notice to the City and the Trustee. Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Trustee may amend this Disclosure Agreement (and the Trustee shall agree to any amendment so requested by the City provided, the Trustee shall not be obligated to enter into any such amendment that modifies or increases its duties or obligations hereunder) and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of subsection (a) of Section 3 hereof, Section 4 hereof or subsection (a) of Section 5 hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the 2015 Series Bonds, or the type of business conducted; (b) The undertaking herein, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the 2015 Series Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment or waiver either (i) is approved by the Owners of the 2015 Series Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or Beneficial Owners of the 2015 Series Bonds. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the City shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of OHSUSA:761725341.4 9 financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in a filing with the MSRB, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Section 10. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice required to be filed pursuant to this Disclosure Agreement, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in any Annual Report or notice in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event or any other event required to be reported. Section 11. Default. In the event of a failure of the City or the Trustee to comply with any provision of this Disclosure Agreement, the Trustee shall at the written request of any Participating Underwriter or the Owners of at least 25% of the aggregate principal amount of the Outstanding 2015 Series Bonds, and upon provision of indemnification satisfactory to the Trustee, or any Owner or Beneficial Owner of a 2015 Series Bond may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City or the Trustee, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the City or the Trustee to comply with this Disclosure Agreement shall be an action to compel performance. Section 12. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Master Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture and the Trustee and Dissemination Agent shall be entitled to the protections and limitations from liability afforded the Trustee thereunder. The Dissemination Agent and Trustee shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement, and the City agrees to indemnify and save the Dissemination Agent and Trustee, their officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities, costs and expenses (including attorneys fees) due to the Dissemination Agent's or Trustee's respective fraud, violation of law, whether willful or negligent, negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent and the Trustee shall have no duty or obligation to review any information provided to them hereunder, and shall not be deemed to be acting in any fiduciary capacity under this Disclosure Agreement for the City, the OHSUSA:761725341.4 10 Owners or any other party. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the City in a timely manner and in a form suitable for filing. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the 2015 Series Bonds. The City's payment obligations under this Disclosure Agreement shall be payable solely from the Light and Power Fund. Section 13. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows: To the City: City of Vernon 4305 Santa Fe Avenue Vernon, California 90058 Attention: City Administrator To the Trustee and The Bank of New York Mellon Trust Dissemination Agent: Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, California 90017 Attention: Corporate Trust Department Any person may, by written notice to the other persons listed above, designate a different address to which subsequent notices or communications should be sent. Section 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Trustee, the Dissemination Agent, the Participating Underwriters and Owners and Beneficial Owners from time to time of the 2015 Series Bonds, and shall create no rights in any other person or entity. Section 15. Governing Law. This Disclosure Agreement shall be interpreted, governed by and construed for all purposes in accordance with the laws of the State for contracts executed and to be performed in the State. Section 16. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. OHSUSA:761725341.4 I 1 IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. CITY OF VERNON [Mark C. Whitworth, City Administrator] ATTEST: IIn Maria E. Ayala, City Clerk APPROVED AS TO FORM: By: City Attorney THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Authorized Officer OHSUSA:761725341.4 12 EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Vernon Name of Bond Issue: City of Vernon Electric System Revenue Bonds, 2015 Taxable Series A Date of Issuance: 52015 NOTICE IS HEREBY GIVEN that the City of Vernon (the "City") has not provided an Annual Report with respect to the above -named Bonds as required by 4.02 of the Fourth Supplemental Indenture of Trust, dated as of July 1, 2015, between the City and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), amending and supplementing the Indenture of Trust between the City and the Trustee, dated as of September 1, 2008, and by Section 3 of the Continuing Disclosure Agreement, dated as of July 1, 2015, between the City and the Trustee. [The City anticipates that the Annual Report will be filed by •] Dated: cc: City of Vernon THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee, on behalf of the City of Vernon A-1