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HomeMy WebLinkAbout2008-05-14 " I ORANGE COUNTY SANITATION DISTRICT May 9, 2008 phone: (714)962-2411 NOTICE OF SPECIAL MEETING feel [7141962U355 ww..u.edssm re.111 Qadd1s.: BOARD OF DIRECTORS P.O. Box 8127 reuntah Velley.CA ORANGE COUNTY SANITATION DISTRICT 992E-B127 street address: 10844 Blis Avenue `°aM9270a 7o a WEDNESDAY, MAY 14, 2008 - 5:00 P.M. Member Agenci es DISTRICT'S ADMINISTRATIVE OFFICES c1ne. 10844 Ellis Avenue Fountain Valley, California 92708 Anaheim Brae Buena Park Lyprass Fountain Way F Udrten A Special Meeting of the Board of Directors of the Orange County Sanitation Garden Sr.. Handngton Bach District will be held at the above location, time and date. Irvine Le Habra La Palma Las Alamitos Newport Beach Orange Pe seinen.Ana erk oft Board Beef Beech S enton rusdd Villa Palk Perk lbrbs Linda Steering Committee -Wednesday, May 28, 2008 at 5:30 p.m. County of orange Regular Board Meeting -Wednesday, May 28, 2008 at 6:30 p.m. Operations Committee -Thursday, June 12, 2008 at 5:00 p.m. 9a.1t.,y ol.trlet. Administration Committee -Thursday,June 12, 2008 at 6:00 p.m. Ceara Mesa Midway Gty Water ol..rl.t. Irvne Ranch To maintain worldclees leedershW in wasceweter and water resource menegarnam AGENDA BOARD OF DIRECTORS ORANGE COUNTY SANITATION DISTRICT DISTRICT'S ADMINISTRATIVE OFFICES 10844 ELLIS AVENUE FOUNTAIN VALLEY, CA 92708 SPECIAL MEETING May 14, 2008 —5:00 P.M. 1. Invocation and Pledge of Allegiance 2. Roll Call 3. Public Comments 5. The Chair, General Manager and General Counsel may present verbal reports on miscellaneous matters of general interest to the Directors. These reports are for information only and require no action by the Directors. CONSENTCALENDAR 6. No items to be considered. NON-CONSENT CALENDAR 7. Adopt Resolution No. OCSD08-05, a Resolution of the Board of Directors of the Orange County Sanitation District Authorizing the Execution and Delivery by the District of an Installment Purchase Agreement, a Trust Agreement, and a Continuing Disclosure Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Refunding Series 2008A, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $85,000,000, Authorizing the Distribution of an Official Notice Inviting Bids and an Official Statement in Connection with the Offering and Sale of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions. 8. Recess by Board of Directors, Orange County Sanitation District 9. Call to Order, Board of Directors, Orange County Sanitation District Financing Corporation: a. Roll Call b. Report of the Director of Finance 05/14/08 Page 2 d. Adopt Resolution No. FC-06, a Resolution of the Board of Directors of the Orange County Sanitation District Finance Corporation Authorizing the Execution and Delivery by the Corporation of an Installment Purchase Agreement, a Trust Agreement, and a Continuing Disclosure Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Refunding Series 2008A, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $85,000,000, Authorizing the Distribution of an Official Notice Inviting Bids and an Official Statement in Connection with the Offering and Sale of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions. 10. Adjourn, Board of Directors, Orange County Sanitation District Financing Corporation. 11. Reconvene, Board of Directors, Orange County Sanitation District 12. Closed Session CLOSED SESSION: During the course of conducting the business set forth on this agenda as a regular meeting of the Board, the Chair may convene the Board in closed session to consider matters of pending real estate negotiations, pending or potential litigation, or personnel matters, pursuant to Government Code Sections 54956.8. 54956.9, 54957 or 54957.6, as noted. Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) employment actions or negotiations with employee representatives; or which are exempt from public disclosure under the California Public Records Act, may be reviewed by the Board during a permitted closed session and are not available for public inspection. At such time as the Board takes final action on any of these subjects, the minutes will reflect all required disclosures of information. a. Convene in closed session, if necessary b. Reconvene in regular session C. Consideration of action, if any, on matters considered in closed session 13. Other business and communications or supplemental agenda items, If any. 14. Adjournment-The next Board of Directors regular meeting is scheduled for May 28, 2008, at 6:30 p.m. 05/14/08 Page 3 Agenda Posfina: In accordance with the requirements of California Government Code Section 54954.2,this agenda has been posted in the main lobby of the District's Administrative offices not leas than 72 hours prior to the meeting date and time above. All written materials relating to each agenda item are available for public inspection in the office of the Clerk of the Board. Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Board for discussion and/or action,it will be done in compliance with Section 54954.2(b)as an emergency Item or because there is a need to take immediate action,which need came to the attention of the Board subsequent to the posting of agenda,or as set forth on a supplemental agenda posted in the manner as above,not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Board of Directors on specific agenda items or matters of general interest. As determined by the Chair,speakers may be defamed until the specific item is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Board of Directors except as authorized by Section 54954.2(b). If you wish to speak, please complete a Speakers Forth(located at the table outside of the Board Room)and give it to the Clark of the Board. Consent Calendar:All matters placed on the Consent Calendar are considered as not requiring discussion or further explanation and unless any particular item is requested to be removed from the Consent Calendar by a Director,staff member or member of the public in attendance,there will be no separate discussion of these items. All items on the Consent Calendar will be enacted by one action approving all motions,and casting a unanimous ballot for resolutions included on the consent calendar. All items removed from the Consent Calendar shall be considered in the regular order of business. Members of the public who wish to remove an item from the Consent Calendar shall, upon recognition by the Chair, state their name,address and designate by number the item to be removed from the Consent Calendar. The Chair will determine if any items are to be deleted from the Consent Calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee or Board meeting held within five(5)days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adioummenl: This meeting may be adjourned to a later time and items of business from this agenda may be considered at the later meeting by Order of Adjournment and Notice in accordance with Government Code Section 54955(posted within 24 hours). Accommodations for the Disabled: The Board of Directors Meeting Room is wheelchair accessible. If you require any special disability related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at(714)593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. ....... ........................................--........................................... ................................................. ........................-....-.-....---.... NOTICE TO DIRECTORS: To place items on the agenda for the Regular Meeting of the Board of Directors, items shall be submitted to the Clerk of the Board no later than the close of business 14 days j preceding the Board meeting. The Clerk of the Board shall include on the agenda all items submitted by Directors, the General Manager and General Counsel and all formal communications. General Manager James D.Ruth (714)593-7110 iruth� cs od.cam Assistant General Manager Bob Ghirelli (714)593-7400 rohirellitMomd.wm Clerk of the Board Penny Kyle (714)593-7130 pkvleGpocsd.wm Director of Engineering Jim Herberg (714)593-7020 iherbergOocsd.wm Director of Fin.8 Admin Services Lorenzo Tyner (714)593-7550 Itvner0oced.com Director of Operations 3 Nick Arhonles (714)593-7210 narhomesfi)ocsd.00 Maintenance Director of Technical Services Ed Tortes (714)593-7080 etorresaocsd.com I General Counsel Brad Hogin.......................................(714)415:1006.,-., o cos -I w. .--.............--.....-._, H:WepNgenda\Board Agandas\2008 Board Agendos\051408 agende.special.dom BOARD OF DIRECTORS Meeting Date To6d.01Dlr. 05/14/0a AGENDA REPORT Item Itemrvumber Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: CERTIFICATES OF PARTICIPATION (COPS), REFUNDING SERIES 2008A GENERAL MANAGER'S RECOMMENDATION Adopt Resolution No. OCSD08-05, a Resolution of the Board of Directors of the Orange County Sanitation District Authorizing the Execution and Delivery by the District of an Installment Purchase Agreement, a Trust Agreement, and a Continuing Disclosure Agreement In connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Refunding Series 2008A, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $85,000,000, Authorizing the Distribution of an Official Notice Inviting Bids and an Official Statement in Connection with the Offering and Sale of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions. SUMMARY As a result of the financial problems of the District's bond Insurer on the District's COP Refunding Series 1992 debt issue, the District's remarketing agent is having difficulty in remarketing this variable rate debt on a weekly basis. It's critical that the District take action to remove these difficulties In order to avoid additional Interest expense throughout the remaining five-year life of this issue totaling $6.4 million. This special meeting was necessary to avoid $300,000 to$400,000 in additional interest costs that would occur as a result of delaying action until the regularly scheduled board meeting. The District's$160.6 million COP Refunding Synthetic Fixed Rate debt was issued in 1992 as weekly variable rate debt and simultaneously converted by the District to fixed rate debt through a swap agreement with American International Group, Inc. (AIG). This agreement requires the District to pay AIG a 5.55 percent fixed rate on the outstanding debt while AIG paid the going variable market rate. The District's underlying insurer on this debt issue, Ambac Financial Group, Inc. (Ambac), is currently experiencing financial problems due to difficulties stemming from the subprime housing crisis and, as result, the remarketing agent, UBS, is having difficulty remarketing the COP Series 1992 on a weekly basis. In addition, UBS, an investment bank headquartered in Switzerland, announced last week that they were exiting the U.S. public finance market. UBS remarketing support for the COP Series 1992 is, at best, questionable, given the lack of interest from investors and complicated by the announced departure of UBS from the public finance market. Fmm No.DW-102 Agenda Report-Beard Revised: 1VNMB Page 1 Options Available to the District 1. Do Nothing The District has enjoyed present value savings of$6.5 million since 1992 as a result of entering Into the swap agreement over issuing plain fixed rate debt. However, if the District was to take no action at this time, there is a high probability that UBS may be unable to successfully remarket these COPS to investors. If this were to occur, unsold cops would be sent back to the liquidity facility bank(the bank that supports the underlying par value of the bonds until they are sold to a new buyer or redeemed), Lloyds Bank. This action would trigger an alternative interest rate as defined within the swap agreement that more than doubles the District's existing 5.5 percent negotiated fixed rate with AIG. Based on current market conditions,this higher interest rate would result in a present value cost to the District to final maturity in 2013 of 36.4 million which negates almost all the original realized savings to date from the swap. 2. Refund COP Series 1092 as a New Refunding COP Synthetic Fixed Rate Debt Issue In doing so,we would be Issuing this debt under the District's credit rating without outside insurance as we did with the COP Series 2006 Variable Rate Debt issue, thereby eliminating the underlying insurer problems with Ambac. In the current market, investors have no issues with purchasing the District's unenhanced (without bond insurance)variable rate debt due to the District's double-A credit ratings bated by a bank liquidity facility. This structure would also be amend the AIG swap agreement from the COP Series 1992 to the new refunding issue without Incurring any termination fees. (AIG would be entitled to a termination fee as high as$6.4 million if the District were to terminate the swap. This structure was put Into place back in 1992 to offset some of the risk exposure to AIG should interests rate become favorable to them. In a rising Interest rate environment, AIG would lose money as a result of the swap; in a declining interest rate environment, AIG makes money as a result of the swap. The termination fee structure is to ensure that AIG is not penalized due to the risk they have undertaken by the issuer refunding the debt in a low interest rate environment.) Total estimated cost that would be incurred under this alternative would be: Cost of Issuance $ 545,000 Underwriter Costs 360,000 Additional 25 basis paints In Liquidity fees to Lloyds to maturity(current market Rates) 495,000 Additional interest expense in the paying off of the 1992 debt Issue for one month 770,000 Total Estimated Cost g2.tt Additional concerns with this option. Farm Ne,M-102 Agenda R,.d—Board Revised: 1WO6106 Page 2 v 1. The District would be exposed to bank facility provider credit risk and renewal risk In three years and continue to retain some level of put risk based on unforeseeable future market disruptions. 2. Negotiations could be Involved and time consuming with AIG, Lloyds, and the remarketing agent successor to UBS. 3. Cost of issuance cannot be funded from bond proceeds(must be funded from District available reserves). 3. Refund COP Series 1992 as New Refunding COP Fixed Rate Debt Refunding the debt at a fixed rate would require the termination of the AIG swap agreement that has a current market value of approximately$6.4 million that would be owed by the District, although it is possible a lower termination fee will be negotiated. However, since current fixed rate refunding borrowing costs are approximate 3 percent, the present value in interest rate savings over the remaining five-year life will offset much of the termination fee. Total estimated cost that would be incurred under this alternative would be: Cost of Issuance $ 400,000 Estimated Swap termination Fee 6,400,000 Present Value Debt Service Savings (4,700,000) Total Estimated Cost $2.100.000 Additional benefits with refunding with fixed rates: 1. The District can fund all costs with new bond Issue (no out-of-pocket costs). 2. Fixed rate refunding will require less negotiations with third parties. 3. Obtaining ratings from bond rating agencies will be simpler and faster. 4. Once the debt is issued, there will be no further outside risks to the District. Staff is recommending Option 3, the refunding of the COP Series 1992 Synthetic Fixed Rate Debt Issue as a standalone fixed rate debt issue that will preserve the majority of the original expected swap savings, has less risk associated with it, and can be completed sooner than Option 2. This refunding financing will be structured as new fixed rate Certificates of Participation that is to be sold in a competitive sale. Staff and consultants will make a brief presentation and provide an overview of the draft documents and the financing schedule at the Board meeting. Farm No.DW-1M Agend,ftW-8o Ravin: 1MMS Page 3 PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION The $85 million that is borrowed will be repaid with interest over the next 6 years. The total interest cost Is expected to approximate 3.0% (or less than approximately$8 million). The Board of Directors and the Financing Corporation will each be required to adopt separate Resolutions to complete this borrowing. Drafts of these two Resolutions are attached for review. A Financing Corporation is required by the structure of the COPs and was formed in April 2000, solely to satisfy this need. The Board of Directors of the Corporation is the same as the Board of Directors of the District and the Corporation meets after an adjournment of the OCSD Board. The OCSD Resolution authorizes the execution and delivery of certain legal documents and the execution and delivery of Certificates of Participation evidencing principal in an aggregate amount of not to exceed $85,000,000 all as spelled out in the title as follows: "A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT AUTHORIZING THE EXECUTION AND DELIVERY BY THE DISTRICT OF AN INSTALLMENT PURCHASE AGREEMENT, A TRUST AGREEMENT,AND A CONTINUING DISCLOSURE AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2008A, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED$85,000,000, APPROVING A NOTICE OF INTENTION TO SELL, AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL NOTICE INVITING BIDS AND AN OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF SUCH CERTIFICATES, AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS." The Resolution of the Corporation is somewhat shorter and simpler. It authorizes three actions that are similarly enumerated in the title as follows: "A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION AUTHORIZING THE EXECUTION AND DELIVERY BY THE CORPORATION OF AN INSTALLMENT PURCHASE AGREEMENT AND A TRUST AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2008A; AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT-TO-EXCEED $85,000,000 AND; AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES AND RELATED ACTIONS." Fora No.M-102 Agenda Repon-Board Revise: 1900N6 Page 4 Following is a chart listing the remaining steps to be completed for the issuance of the COP Series 2008A debt issuance: D Board approval of legal and disclosure documents D Publish Notice of Intention to Sell May D Receive Ratings from Bond Rating Agencies D Competitive Pricing D Closing Redemption Notice ATTACHMENTS N/A JDR:LT:MW Fq WM-102 And.Rep."—eperd Revised: 1DO6106 Page 5 ROLL CALL BOARD OF DIRECTORS ORANGE COUNTY SANITATION DISTRICT MEETING DATE & TIME: 05/14/08 (liftQ (lido (SHANKS) ........................ANTOS ......................... (QUIRK) ...........................BANKHEAD................... ✓ ✓ (AYER)..............................CRANDALL................... ✓ (JONES)............................DALTON....................... v y ✓ ✓ (PALMER).........................DAVERT...................... (CAVECCHE)....................DUMITRU ................... (GOMEZ) ..........................ESPIN07A................... 1T� OL, — L0. a. (OOTEN)...........................FERRYMAN................... �G ✓ (REESE)............................FRESCHI .............. ..... — ✓ (HARDY) ..........................HANSEN ...................... — ✓ v (NARAIN) ..........................LUEBBEN..................... v v v (DOW)...............................MARSHALL.................. 0- (REINHART) .....................MILLER ......................... (GARCIA)..........................MOORE........................ ✓ ✓ (KRIPPNER) .....................NEUGEBAUER.............. ✓ (NGUYEN) ........................NORBY....................... ✓ ✓ (DRISCOLL)......................PARKER....................... v v (CADENA) ........................SHAWVER.................. ✓ v (CHOI)...............................SHEA.......................... y (KRING) ............................SIDHU.......................... a, 0 . a — (BENAVIDES)...................TINAJERO.................... cz — LL, — A— cL (AGUIRRE) .......................UNDERHILL ................. v v ✓ (CHAROEN)......................WALDMAN.................... (DAIGLE) ..........................WEBB .......................... a-- — a v- (ANDERSON) ...................WINDER ...................... v v v STAFF: Arhontes ✓ 1Z 7�z n m Colson Ghirelli ✓ 5/ Herberg Kovac ✓ Kyle Ruth Torres Tyner ✓ OTHERS: ' Ho in ✓ 04/23/08 H:Wept\edmin\8S0lRECT0R\Directors Roll Call.doc Y 8xN _ W U b b a E p N NE M May 12, 2008 Penny Kyle l2 copies no label) Clerk of the Board TO: Bm itation District FROM: Lon nistrative Services SUBJECT: Spr _ ._... ..— 1, oupplemental Documents This package includes the following documents which supplement Item No. 7 of the Special Meeting Agenda of May 14, 2008: 1. Trust Agreement 2. Installment Purchase Agreement 3. Offich*Notice Inviting Bids 4. Notice of Intention to Sell 5. Continuing Disclosure Agreement 6. Preliminary Official Statement 7. Escrow Agreement 8. Resolution No. FC-04 9. Resolution 08-XX LT:Ic H:Wepfiasd12Y01CRANENDMINISTRATION COMMITTEEADMIN 2008VMYSOD081208.docx CSDOC P.O.Box 8127 Fountain Vaney,C 92720-0127 (714)902-2411 Fulbright& Jaworski L.L.P. Draft-5/12/08 TRUST AGREEMENT by and among U.S. BANK NATIONAL ASSOCIATION, as Trustee, ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION and ORANGE COUNTY SANITATION DISTRICT Dated as of May 1, 2008 Relating to $[PAR] Orange County Sanitation District Refunding Certificates of Participation Series 2008A 80198094.3 i TABLE OF CONTENTS Page ARTICLE I DEFINITIONS;EQUAL SECURITY Section 1.01. Definitions........................................................................................................2 Section 1.02. Definitions in Installment Purchase Agreement..............................................9 Section 1.03. Equal Security..................................................................................................9 ARTICLE 11 TERMS AND CONDITIONS OF CERTIFICATES Section 2.01. Preparation and Delivery of Certificates..........................................................9 Section 2.02. Denomination,Medium and Dating of Certificates....................................... 10 Section 2.03. Payment Dates of Certificates;Interest Computation.................................... 10 Section 2.04. Form of Certificates....................................................................................... 11 Section 2.05. Execution of Certificates and Replacement Certificates............................... l l Section 2.06. Transfer and Payment of Certificates;Exchange of Certificates................... I I Section 2.07. Certificate Registration Books....................................................................... I I Section2.08. Temporary Certificates.................................................................................. l l Section 2.09. Certificates Mutilated,Lost,Destroyed or Stolen......................................... 12 Section2.10. Book-Entry System........................................................................................ 12 ARTICLE III PROCEEDS OF CERTIFICATES Section 3.01. Delivery of Certificates.................................................................................. 15 Section 3.02. Deposit of Proceeds of Certificates................................................................ 15 Section3.03. Costs of Issuance Fund.................................................................................. 15 Section3.04. Reserved......................................................................................................... 15 ARTICLE IV NO PREPAYMENT OF CERTIFICATES Section4.01. Prepayment.................................................................................................... 15 ARTICLE V ASSIGNMENT AND PLEDGE;FUNDS AND ACCOUNTS Section 5.01. Assignment and Pledge.................................................................................. 16 Section5.02. Installment Payment Fund............................................................................. 16 Section 5.03. Reserve Fund................................................................................................. 17 Section5.04. Rebate Fund................................................................................................... 19 Section5.05. Investment of Moneys.................................................................................... 19 ARTICLE VI COVENANTS Section 6.01. Compliance with Trust Agreement................................................................20 Section 6.02. Compliance with Installment Purchase Agreement.......................................20 Section 6.03. Compliance with Master Agreement.............................................................20 90198094.3 i TABLE OF CONTENTS (continued) Page Section6.04. Observance of Laws and Regulations............................................................20 Section6.05. Other Liens.....................................................................................................20 Section 6.06. Prosecution and Defense of Suits..................................................................20 Section 6.07. Accounting Records and Statements.............................................................20 Section6.08. Tax Covenants...............................................................................................21 Section6.09. Continuing Disclosure...................................................................................24 Section6.10. Further Assurances.........................................................................................24 ARTICLE VII DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01. Action upon Event of Default........................................................................25 Section 7.02. Other Remedies of the Trustee......................................................................25 Section7.03. Non-Waiver....................................................................................................25 Section7.04. Remedies Not Exclusive................................................................................26 Section 7.05. Application of Amounts After Default..........................................................26 Section 7.06. Trustee May Enforce Claims Without Possession of Certificates.................27 Section7.07. Limitation on Suits.........................................................................................27 Section 7.08. No Liability by the Corporation to the Owner...............................................27 Section 7.09. No Liability by the District to the Owners.....................................................27 Section 7.10. No Liability of the Trustee to the Owners.....................................................27 ARTICLE Vlll THE TRUSTEE Section8.01. Employment of the Trustee;Duties...............................................................28 Section 8.02. Removal and Resignation of the Trustee.......................................................28 Section 8.03. Compensation and Indemnification of the Trustee........................................29 Section8.04. Protection of the Trustee................................................................................30 ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT Section 9.01. Amendment or Supplement........................................................................... 31 Section 9.02. Disqualified Certificates................................................................................ 32 Section 9.03. Endorsement or Replacement of Certificates After Amendment or Supplement .................................................................................................... 32 Section 9.04. Amendment by Mutual Consent.................................................................... 32 ARTICLE X DEFEASANCE Section 10.01. Discharge of Certificates and Trust Agreement............................................. 33 Section10.02. Unclaimed Moneys........................................................................................ 34 ARTICLE XI MISCELLANEOUS Section 11.01. Benefits of Trust Agreement..........................................................................34 801980%.3 ii TABLE OF CONTENTS (continued) Page Section 11.02. Successor Deemed Included in all References to Predecessor......................34 Section 11.03. Execution of Documents by Owners.............................................................35 Section 11.04. Waiver of Personal Liability..........................................................................35 Section 11.05. Acquisition of Certificates by District...........................................................35 Section 11.06. Content of Certificates...................................................................................35 Section 11.07. Funds and Accounts.......................................................................................36 Section 11.08. Article and Section Headings, Gender and References.................................36 Section 11.09. Partial Invalidity.............................................................................................36 Section11.10. California Law...............................................................................................37 Section11.11. Notices...........................................................................................................37 Section 11.12. Effective Date................................................................................................37 Section 11.13. Execution in Counterparts..............................................................................37 EXHIBIT A-FORM OF CERTIFICATE 80198 j iii 1 TRUST AGREEMENT THIS TRUST AGREEMENT (this "Trust Agreement), dated as of May 1, 2008, by and among U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, as Trustee (the "Trustee"), the ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California (the "Corporation"), and the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the"District"). WITNESSETH: WHEREAS, to refinance the acquisition, construction and installation of certain improvements to the wastewater system (the "Prior Project") of certain predecessor county sanitation districts of the District, to wit, County Sanitation District Nos. 1, 2, 3, 5, 6, 7 and 11 (collectively, the "Predecessor Districts"), the Predecessor Districts purchased the Prior Project by agreeing to make installment payments (the "Prior Installment Payments' pursuant to the Amendatory Agreement for Acquisition and Construction, dated as of October 1, 1992, by and among the Predecessor Districts; WHEREAS, to provide the funds necessary to refinance the Prior Project, the Predecessor Districts caused the execution and delivery of the Refunding Certificates of Participation, Series 1992 (the "Prior Certificates"), evidencing direct, undivided fractional interests in the Prior Installment Payments; WHEREAS, the District desires to refinance all of the Prior Project by prepaying all of the remaining principal components of the Prior Installment Payments, and the interest components thereof to the date of prepayment, thereby causing all of the Prior Certificates to be prepaid; WHEREAS, to provide the funds necessary to prepay the Prior Installment Payments to be so prepaid, the District and the Corporation desire that the Corporation purchase the Prior Project from the District and the District sell the Prior Project to the Corporation, and that the District then purchase the Prior Project from the Corporation and the Corporation sell the Prior Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to this Installment Purchase Agreement the Corporation and the District have agreed to finance such prepayment by executing and delivering Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the"Certificates"); [ADD SWAP SETTLEMENT OR TERMINATION PAYMENT AS APPLICABLE] WHEREAS, pursuant to the Master Agreement for District Obligations, dated as of August 1,2000, by and between the District and the Corporation,the District has established and declared the conditions and terms upon which obligations such as this Installment Purchase Agreement, and the Installment Payments, and the interest thereon, are to be incurred and secured; 801980 3 WHEREAS, the Corporation proposes to assign without recourse certain of its rights , under and pursuant to this Installment Purchase Agreement to the Trustee; and WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Trust Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and deliver this Trust Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS; EQUAL SECURITY Section 1.01. Definitions. Except as provided in Section 1.02 hereof or unless the context otherwise requires, the terms defined in this Section shall for all purposes hereof and of any amendment hereof or supplement hereto and of the Certificates and of any certificate, opinion, request or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein: "Authorized Corporation Representative" means the President,the Vice President, the Treasurer and the Secretary of the Corporation,and any other Person authorized by the President of the Corporation to act on behalf of the Corporation under or with respect to this Trust Agreement. "Authorized Denominations"means$5,000 and integral multiples thereof. "Authorized District Representative" means the General Manager of the District, the Director of Finance and Administrative Services of the District,the Controller of the District and any other Person authorized by the Director of Finance and Administrative Services of the District to act on behalf of the District under or with respect to this Trust Agreement. "Beneficial Owners" means those individuals, partnerships, corporations or other entities for which the Participants have caused the Depository to hold Book-Entry Certificates. "Book-Entry Certificates" means the Certificates registered in the name of the nominee of DTC,or any successor securities depository for the Certificates,as the Owner thereof pursuant to the terms and provisions of Section 2.10 hereof. "Business Day" means a day other than (a) Saturday or Sunday, (b)a day on which banking institutions in the city in which the Principal Office is located are authorized or required by law to be closed, and (c)a day on which the New York Stock Exchange is authorized or obligated by law or executive order to be closed. $0198094.3 2 "Cede & Co." means Cede & Co., the nominee of DTC, and any successor nominee of DTC with respect to the Certificates. "Certificate Year" means each twelve-month period beginning on August 2 in each year and extending to the next succeeding August 1, both dates inclusive, except that the first Certificate Year shall begin on the Closing Date and end on August 1,2009. "Certificates" means the Orange County Sanitation District Refunding Certificates of Participation,Series 2008A, executed and delivered by the Trustee pursuant hereto. "Closing Date"means May_, 2008. "Code"means the Internal Revenue Code of 1986. "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of the date hereof, by and between the District and the Trustee, as originally executed and as it may from time to time be amended in accordance with the terms thereof. "Corporation" means the Orange County Sanitation District Financing Corporation, a nonprofit public benefit corporation organized and existing under the laws of the State. "Costs of Issuance" means all the costs of executing and delivering the Certificates, including, but not limited to, all printing and document preparation expenses in connection with this Trust Agreement,the Installment Purchase Agreement, the Certificates and any preliminary official statement and final official statement pertaining to the Certificates, rating agency fees, market study fees, legal fees and expenses of counsel with respect to the execution and delivery of the Certificates, the initial fees and expenses of the Trustee and its counsel and other fees and expenses incurred in connection with the execution and delivery of the Certificates, to the extent such fees and expenses are approved by the District. "Costs of Issuance Fund" means the fund by that name established in accordance with Section 3.03 hereof. "Depository" means the securities depository acting as Depository pursuant to Section 2.10 hereof. "District" means the Orange County Sanitation District, a county sanitation district organized and existing under the laws of the State, and any successor thereto. "DTC"means The Depository Trust Company,New York,New York and its successors. "Escrow Agent" means U.S. Bank National Association, a national banking association, duly organized and existing under and by virtue of the laws of the United States of America, its successors and assigns. "Escrow Agreement" means the Escrow Agreement, dated as of May I, 2008, by and between the District and the Escrow Agent, providing for the defeasance and refunding of the Refunded Certificates. 801980N.3 3 "Escrow Fund" means the Escrow Fund established and held by the Escrow Agent pursuant to the Escrow Agreement. "Event of Default" shall have the meaning set forth in Section 6.01 of the Installment Purchase Agreement. "Government Obligations" means any of the following which are noncallable by the issuer thereof except to the extent not permitted by the laws of the State as an investment for the moneys to be invested therein at the time of investment: (i) (a)direct general obligations of the United States of America, (b) obligations the payment of the principal of and interest on which are unconditionally guaranteed as to the full and timely payment by the United States of America, or (c)any fund or other pooling arrangement whose assets consist exclusively of the obligations listed in clause(a) or (b) of this clause(i) and which is rated at least "P-l" by Moody's; provided that, such obligations shall not include unit investment trusts or mutual fund obligations; (ii) advance refunded tax-exempt obligations secured by the obligations specified in clause(i) which tax-exempt obligations are rated "Aaa" by Moody's and "AAA"by S&P as a result of such obligations being secured by said obligations; (iii) bonds, debentures or notes issued by any of the following federal agencies: Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association; provided that such bonds, debentures or notes shall be the senior obligations of such agencies (including participation certificates) and rated"Aaa"by Moody's and"AAA"by S&P; and (iv) bonds,debentures or notes issued by any Federal agency hereafter created by an act of Congress, the payment of the principal of and interest on which are unconditionally guaranteed by the United States of America as to the full and timely payment; provided, that, such obligations shall not include unit investment trusts or mutual fund obligations. "Installment Payment Fund" means the fund by that name established in accordance with Section 5.02 hereof. "Installment Payments" means the Installment Payments required to be made by the District pursuant to Section 3.02 of the Installment Purchase Agreement. "Installment Purchase Agreement" means the Installment Purchase Agreement, dated as of the date hereof, by and between the District and the Corporation, as originally executed and as it may from time to time be amended in accordance with the provisions thereof "Interest Account" means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. 801980 3 4 "Interest Payment Date" means February 1 and August I of each year, commencing August 1,2008. "Letter of Representations" means the letter of the District delivered to and accepted by the Depository on or prior to the delivery of the Certificates as Book-Entry Certificates setting forth the basis on which the Depository serves as depository for such Book-Entry Certificates, as originally executed or as it maybe supplemented or revised or replaced by a letter to a substitute Depository. "Master Agreement" means the Master Agreement for District Obligations, dated as of August 1, 2000, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance with the terms thereof "Moody's" means Moody's Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, except that if such corporation shall no longer perform the function of a securities rating agency for any reason, the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District. "Nominee" means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to Section 2.11 hereof. "Opinion of Counsel" means a written opinion of Fulbright& Jaworski L.L.P. or any other counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the District and reasonably satisfactory to and approved by the Trustee. "Outstanding,"when used as of any particular time with reference to Certificates, means (subject to the provisions of Section 9.02 hereof) all Certificates except (a) Certificates previously canceled by the Trustee or delivered to the Trustee for cancellation, (b) Certificates paid or deemed to have been paid within the meaning of Section 10.01 hereof, and (c)Certificates in lieu of or in substitution for which other Certificates shall have been executed and delivered by the Trustee pursuant to Section 2.09 hereof. "Owner" means any Person who shall be the registered owner of any Outstanding Certificate as indicated in the registration books of the Trustee required to be maintained pursuant to Section 2.07 hereof "Participants" means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Book-Entry Certificates as securities depository. "Participating Underwriter" has the meaning ascribed thereto in the Continuing Disclosure Agreement. "Permitted Investments"means any of the following, except to the extent not permitted by the laws of the State as an investment for the moneys to be invested therein at the time of investment: (1) Government Obligations; 80198M.J 5 (2) Bonds, debentures, notes, participation certificates or other evidences of indebtedness issued, or the principal of and interest on which are unconditionally guaranteed, by the Federal Intermediate Credit Bank, the Federal Home Loan Bank System, the Government National Mortgage Association or any other agency or instrumentality of or corporation wholly owned by the United States of America when such obligations are backed by the full faith and credit of the United States for the full and timely payment of principal and interest; (3) Obligations of any state of the United States or any political subdivision thereof, which at the time of investment are rated "Aa3" or higher by Moody's and "AA-" or higher by S&P;or which are rated by Moody's"VMIGI"or better and by S&P "A-1+" or better with respect to commercial paper, or "VMIGI" and "SP-1", respectively,with respect to municipal notes; (4) Bank time deposits evidenced by certificates of deposit, deposit accounts, and bankers' acceptances, issued by any bank, trust company or national banking association insured by the Federal Deposit Insurance Corporation(including the Trustee); provided that (a) such bank, trust company or national banking association be rated "Aa3" or better by Moody's and "AA-" or better by S&P; and (b)the aggregate of such bank time deposits and bankers' acceptances issued by any bank, trust company or banking association does not exceed at any one time 10% of the aggregate of the capital stock, surplus and undivided profits of such bank, trust company or banking association and that such capital stock, surplus and undivided profits shall not be less$15,000,000; (5) Repurchase agreements with any bank, trust company or national banking association insured by the Federal Deposit Insurance Corporation (including the Trustee), with subsidiaries (of a parent company), provided the obligations of the subsidiary under the agreement are unconditionally guaranteed by the parent, or with any government bond dealer recognized as a primary dealer by the Federal Reserve Bank of New York, which agreements are fully and continuously secured by a valid and perfected first priority security interest in obligations described in paragraph (1) or(2) of this definition, provided that either such bank, trust company or national banking association which (or senior debt or claims paying ability of the financial entity's guarantor) is rated, at the time of investment, "Aa3" or better by Moody's and"AA-"or better by S&P; (6) Repurchase agreements with maturities of not more than one year entered into with financial institutions such as banks or trust companies organized under state law or national banks or banking associations(including the Trustee), insurance companies or government bond dealers reporting to, trading with, and recognized as a primary dealer by, the Federal Reserve Bank of New York and a member of the Securities Investor Protection Corporation or with a dealer or parent holding company that is rated, at the time of investment, or whose long-term debt obligations(or senior debt or claims paying ability of the financial entity's guarantor) are rated, at the time of investment, "Aa3" or better by Moody's and"AA-"or better by S&P,provided such repurchase agreements are in writing, secured by obligations described in paragraphs(1) and (2) of this definition having a fair market value, exclusive of accrued interest, at least equal to the amount 90198094.3 6 invested in the repurchase agreements and in which the Trustee has a perfected first lien in,and retains possession of,such obligations free from all third party claims; (7) Investment agreements, forward purchase agreements and reserve fund put agreements with any corporation, including banking or financial institutions, or agreements entered into with subsidiaries(of a parent company), provided the obligations of the subsidiary under the agreement are unconditionally guaranteed by the parent, the corporate debt of which (or senior debt or claims paying ability of the financial entity's guarantor) is rated, at the time of investment, "Aa3" or better by Moody's and "AA-" or better by S&P; (8) Guaranteed investment contracts or similar funding agreements issued by insurance companies, provided that either the long term corporate debt of such insurance company,at the time of investment, is rated, at the time of investment,"Aa3"or better by Moody's and "AA-" or better by S&P or which agreements are fully and continuously secured by a valid and perfected first priority security interest in obligations described in paragraph(I) or (2) of this definition, or that the following conditions are met: (a)the market value of the collateral is maintained at levels acceptable to Moody's and S&P, (b)the Trustee or a third party acting solely as agent for the Trustee has possession of the collateral, (c)the Trustee has a perfected first priority security interest in the collateral, (d)the collateral is free and clear of third-party liens, and (e)failure to maintain the requisite collateral level will require the Trustee to liquidate collateral; (9) Corporate commercial paper rated "P-1"or better by Moody's and "A-I+" or better by S&P at the time of investment; (10) Taxable government money market portfolios restricted to obligations the payment of principal and interest with respect to which is guaranteed by the United States of America or repurchase agreements secured by such obligations, and which are rated "AAAm" or "AAAm-G" by S&P and "P-1" by Moody's (including funds for which the Trustee or an affiliate provides investment advice or similar services); (11) Deposits with the Local Agency Investment Fund of the State, as may otherwise be permitted by law; and (12) Shares in the Franklin Adjustable U.S. Government Securities Fund or any other similar fund having at least $1,000,000,000 in assets and invested solely in securities directly guaranteed by the U.S. government or its agencies and rated "AAAf' by S&P or a comparable rating by Moody's. "Person" means an individual, corporation, limited liability company, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Principal Account" means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. 80198M.3 7 "Principal Once" means the Trustee's principal corporate trust office in Los Angeles, California. "Principal Payment Date" means a date on which an Installment Payment evidenced by the Certificates becomes due and payable. "Project"has the meaning ascribed thereto in the recitals hereto. "Rebate Fund" means the fund by that name established in accordance with Section 5.04 hereof. "Rebate Requirement"has the meaning ascribed thereto in the Tax Certificate. "Record Date" means,with respect to the interest payable on any Interest Payment Date, the 15th day of the calendar month immediately preceding such Interest Payment Date, whether or not such day is a Business Day. "Refunded Certificates" means the District's Refunding Certificates of Participation, 1992 Series,maturing in the years 2008 through 2013, inclusive. "Reserve Facility" means any line of credit, letter of credit, insurance policy, surety bond or other funding instrument issued by an entity the long-term unsecured obligations of which are rated "Aa3"or better by Moody's and "AA-"or better by S&P and deposited with the Trustee pursuant to Section 5.03 hereof. "Reserve Fund" means the fund by that name established in accordance with Section 5.03 hereof. "Reserve Requirement" means, as of any date of calculation, an amount equal to the least of(a) 10% of the original aggregate amount of principal evidenced by the Certificates (or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%, then 10% of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest thereon,coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments,and the interest thereon, coming due in each Certificate Year. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, except that if such entity shall no longer perform the functions of a securities rating agency for any reason, the tern "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District. "State" means the State of California. "Tax Certificate" means the Tax Certificate executed by the District at the time of execution and delivery of the Certificates relating to the requirements of section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof. 80198M.3 8 "Trust Agreement" means this Trust Agreement, dated as of May 1, 2008, by and among the Trustee,the Corporation and the District, as originally executed and delivered and as it may from time to time be amended or supplemented in accordance with the provisions hereof. "Trustee" means U.S. Bank National Association, a national banking association duly organized and existing under the laws of the United States of America, or any other bank or trust company which may at any time be substituted in its place as provided in Section 10.02 hereof. "Written Certificate"and"Written Request' mean (a)with respect to the Corporation, a written certificate or written request, respectively, signed in the name of the Corporation by an Authorized Corporation Representative, and (b)with respect to the District, a written certificate or written request, respectively, signed in the name of the District by an Authorized District Representative. Any such certificate or request may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. Section 1.02. Definitions in Installment Purchase Agreement. Except as otherwise herein defined and unless the context otherwise requires, the terms defined in the Installment Purchase Agreement shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein have the meanings defined therein, such definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. With respect to any defined term which is given a different meaning under this Trust Agreement than under the Installment Purchase Agreement, as used herein it shall have the meaning given herein. Section 1.03. Equal Security. In consideration of the acceptance of the Certificates by the Owners, this Trust Agreement shall be deemed to be and shall constitute a contract between the Trustee and the Owners to secure the full and final payment of the interest and principal evidenced by the Certificates which may be executed and delivered hereunder, subject to each of the agreements, conditions, covenants and terms contained herein; and all agreements, conditions, covenants and terms contained herein required to be observed or performed by or on behalf of the Trustee shall be for the equal and proportionate benefit, protection and security of all Owners without distinction, preference or priority as to security or otherwise of any Certificates over any other Certificates by reason of the number or date thereof or the time of execution or delivery thereof or for any cause whatsoever, except as expressly provided herein or therein. ARTICLE 11 TERMS AND CONDITIONS OF CERTIFICATES Section 2.01. Preparation and Delivery of Certificates. The Trustee is hereby authorized,upon the Written Request of the District,to execute and deliver the Certificates in the aggregate principal amount of $[PAR], evidencing the aggregate principal amount of the Installment Payments and each evidencing a direct, fractional undivided interest in the Installment Payments, and the interest thereon. The Installment Payments evidenced by each Certificate shall constitute the principal evidenced thereby and the interest on such Installment 80198M.3 9 Payments shall constitute the interest evidenced thereby. The Certificates shall be numbered, with or without prefixes,as directed by the Trustee. Section 2.02. Denomination. Medium and Dating of Certificates. The Certificates shall be designated "Orange County Sanitation District Refunding Certificates of Participation, Series 2008A" shall be prepared in the form of fully registered Certificates, without coupons, in Authorized Denominations and shall be payable in lawful money of the United States of America. The Certificates shall be dated as of the Closing Date. Each Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after a Record Date and on or prior to the following Interest Payment Date, in which case such Certificate shall evidence interest from such Interest Payment Date, or unless such date of execution shall be on or prior to July 15, 2008, in which case such Certificate shall represent interest from the Closing Date. Notwithstanding, the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default, each Certificate shall evidence interest from the last Interest Payment Date to which such interest has been paid in full or duly provided for. Section 2.03. Payment Dates of Certificates: Interest Computation. (a)Method and Place of Payment. The principal evidenced by the Certificates shall become due and payable on August 1 of the years, in the amounts, and shall evidence interest seeming at the rates per annum set forth below: Principal Payment Date Principal Interest (August 1) Component Rate 2008 $ % 2009 2010 2011 2012 2013 Except as otherwise provided in the Letter of Representations, payments of interest evidenced by the Certificates shall be made to the Owners thereof(as determined at the close of business on the Record Date next preceding the related Interest Payment Date) by check or draft of the Trustee mailed to the address of each such Owner as it appears on the registration books maintained by the Trustee pursuant to Section 2.07 hereof, or to such other address as may be furnished in writing to the Trustee by each such Owner. Except as otherwise provided in the Letter of Representations, payment of principal evidenced by the Certificates, on their stated Principal Payment Dates, shall be made only upon presentation and surrender of the Certificates at the Principal Office. (b) Computation of Interest. The interest evidenced by the Certificates shall be payable on each Interest Payment Date to and including their respective Principal Payment Dates, and shall represent the sum of the interest on the Installment Payments coming due on the 90198094.3 10 Interest Payment Dates in each year. The principal evidenced by the Certificates shall be payable on their respective Principal Payment Dates in each year and shall represent the Installment Payments coming due on the Principal Payment Dates in each year. Interest evidenced by the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Section 2.04. Form of Certificates. The Certificates shall be in substantially the form of Exhibit A hereto, with necessary or appropriate insertions, omissions and variations as permitted or required hereby. Section 2.05. Execution of Certificates and Reolacemeot Certificates. The Certificates shall be executed by the Trustee by the manual signature of an authorized signatory of the Trustee. The Trustee shall deliver replacement Certificates in the manner and as contemplated by this Article. Such replacement Certificates shall be executed as herein provided and shall be in Authorized Denominations. Section 2.06. Transfer and Payment of Certificates: Exchange of Certificates. Each Certificate is transferable by the Owner thereof, in person or by his attorney duly authorized in writing, at the Principal Office, on the registration books maintained by the Trustee pursuant to the provisions of Section 2.07 hereof, upon surrender of such Certificate for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. The Trustee may treat the Owner of any Certificate as the absolute owner of such Certificate for all purposes, whether or not the principal or interest evidenced by such Certificate shall be overdue, and the Trustee shall not be affected by any knowledge or notice to the contrary; and payment of the interest and principal evidenced by such Certificate shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by such Certificate to the extent of the sum or sums so paid. Whenever any Certificate shall be surrendered for transfer, the Trustee shall execute and deliver a new Certificate or Certificates evidencing principal in the same aggregate amount and having the same stated Principal Payment Date. The Trustee shall require the payment by any Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer. Each Certificate may be exchanged at the Principal Office for Certificates evidencing principal in a like aggregate principal amount having the same stated Principal Payment Date in such Authorized Denominations as the Owner thereof may request. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. Section 2.07. Certificate Registration Books. The Trustee shall keep at its Principal Office sufficient books for the registration and transfer of the Certificates, which books shall be available for inspection and copying by the District at reasonable hours and under reasonable conditions; and upon presentation for such purpose the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer the Certificates on such books as hereinabove provided. 8019M.3 ]] Section 2.08. Temporary Certificates. The Certificates may be initially delivered in temporary form exchangeable for definitive Certificates when ready for delivery, which temporary Certificates shall be printed, lithographed or typewritten, shall be of such denominations as may be determined by the Trustee, shall be in fully registered form and shall contain such reference to any of the provisions hereof as may be appropriate. Every temporary Certificate shall be executed and delivered by the Trustee upon the same conditions and terms and in substantially the same manner as definitive Certificates. If the Trustee executes and delivers temporary Certificates, it shall prepare and execute definitive Certificates without delay, and thereupon the temporary Certificates may be surrendered at the Principal Office in exchange for such definitive Certificates, and until so exchanged such temporary Certificates shall be entitled to the same benefits hereunder as definitive Certificates executed and delivered hereunder. Section 2.09. Certificates Mutilated, Lost, Destroyed or Stolen. If any Certificate shall become mutilated, the Trustee, at the expense of the Owner thereof, shall execute and deliver a new Certificate evidencing a like principal amount and having the same stated Principal Payment Date and number in exchange and substitution for the Certificate so mutilated, but only upon surrender to the Trustee of the Certificate so mutilated. Every mutilated Certificate so surrendered to the Trustee shall be canceled by it. If any Certificate shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee, and if such evidence is satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Owner thereof, shall execute and deliver a new Certificate evidencing a like principal amount and having the same stated Principal Payment Date, numbered as the Trustee shall determine, in lieu of and in substitution for the Certificate so lost, destroyed or stolen. The Trustee may require payment of a sum not exceeding the actual cost of preparing each new Certificate executed and delivered by it under this Section and of the expenses which may be incurred by it under this Section. Any Certificate executed and delivered under the provisions of this Section in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally and proportionately entitled to the benefits hereof with all other Certificates executed and delivered hereunder, and the Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the amount of Certificates which may be executed and delivered hereunder or for the purpose of determining any percentage of Certificates Outstanding hereunder, but both the original and replacement Certificate shall be treated as one and the same. Notwithstanding any other provision of this Section, in lieu of executing and delivering a new Certificate for a Certificate which has been lost, destroyed or stolen and which evidences principal that is then payable,the Trustee may make payment of such Certificate to the Owner thereof if so instructed by the District. Section 2.10. Book-Entry System. (a)The Certificates shall be initially executed and delivered as Book-Entry Certificates, and the Certificates for each stated Principal Payment Date shall be in the form of a separate single fully registered Certificate (which may be typewritten). Upon initial execution and delivery, the ownership of each Certificate shall be registered in the registration books maintained by the Trustee in the name of the Nominee, as nominee of the Depository. 80198099.1 12 Payment of principal or interest evidenced by any Book-Entry Certificate registered in the name of the Nominee shall be made on the applicable Interest Payment Date by wire transfer of New York clearing house or equivalent next day funds or by wire transfer of same day funds to the account of the Nominee. Such payments shall be made to the Nominee at the address which is, on the Record Date, shown for the Nominee in the registration books maintained by the Trustee. (b) With respect to Book-Entry Certificates, the District, the Corporation and the Trustee shall have no responsibility or obligation to any Participant or to any Person on behalf of which such a Participant holds an interest in such Book-Entry Certificates. Without limiting the immediately preceding sentence, the District, the Corporation and the Trustee shall have no responsibility or obligation with respect to (i)the accuracy of the records of the Depository, the Nominee or any Participant with respect to any ownership interest in Book-Entry Certificates, (ii)the delivery to any Participant or any other Person, other than an Owner as shown in the registration books maintained by the Trustee, of any notice with respect to Book-Entry Certificates, (iii)the selection by the Depository and its Participants of the beneficial interests in Book-Entry Certificates to be prepaid in the event Certificates are prepaid in part, (iv)the payment to any Participant or any other Person,other than an Owner as shown in the registration books maintained by the Trustee, of any amount with respect to principal, premium, if any, or interest evidenced by Book-Entry Certificates, or(v)any consent given or other action taken by the Depository as Owner. (c) The District,the Corporation and the Trustee may treat and consider the Person in whose name each Book-Entry Certificate is registered in the registration books maintained by the Trustee as the absolute Owner of such Book-Entry Certificate for the purpose of payment of principal and interest evidenced by such Certificate, for the purpose of selecting any Certificates, or portions thereof, to be prepaid, for the purpose of giving notices of matters with respect to such Certificate, for the purpose of registering transfers with respect to such Certificate, for the purpose of obtaining any consent or other action to be taken by Owners and for all other purposes whatsoever, and the District, the Corporation and the Trustee shall not be affected by any notice to the contrary. (d) Reserved. (e) The Trustee shall pay all principal, premium, if any,and interest evidenced by the Certificates to the respective Owner, as shown in the registration books maintained by the Trustee, or his respective attorney duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the obligations with respect to payment of principal, premium, if any, and interest evidenced by the Certificates to the extent of the sum or sums so paid. No Person other than an Owner,as shown in the registration books maintained by the Trustee, shall receive a Certificate evidencing principal, premium, if any, and interest evidenced by the Certificates. Upon delivery by the Depository to the Owners, the Trustee and the District of written notice to the effect that the Depository has determined to substitute a new nominee in place of the Nominee, and subject to the provisions herein with respect to Record Dates,the word Nominee in this Trust Agreement shall refer to such nominee of the Depository. 80198094.3 13 (t) In order to qualify the Book-Entry Certificates for the Depository's book-entry system,the District shall execute and deliver to the Depository a Letter of Representations. The execution and delivery of a Letter of Representations shall not in any way impose upon the Corporation, the District or the Trustee any obligation whatsoever with respect to Persons having, interests in such Book-Entry Certificates other than the Owners, as shown on the registration books maintained by the Trustee. Such Letter of Representations may provide the time, form, content and manner of transmission, of notices to the Depository. In addition to the execution and delivery of a Letter of Representations by the District,the District,the Corporation and the Trustee shall take such other actions, not inconsistent with this Trust Agreement, as are reasonably necessary to qualify Book-Entry Certificates for the Depository's book-entry program. (g) In the event the District determines that it is in the best interests of the Beneficial Owners that they be able to obtain certificated Certificates and that such Certificates should therefore be made available and notifies the Depository and the Trustee of such determination, the Depository will notify the Participants of the availability through the Depository of certificated Certificates. In such event, the Trustee shall transfer and exchange certificated Certificates as requested by the Depository and any other Owners in appropriate amounts. In the event(i)the Depository determines not to continue to act as securities depository for Book-Entry Certificates, or (ii)the Depository shall no longer so act and gives notice to the Trustee of such determination, then the District shall discontinue the Book-Entry system with the Depository. If the District determines to replace the Depository with another qualified securities depository,the District shall prepare or direct the preparation of a new single, separate, fully registered Certificate for each stated Principal Payment Date of such Book-Entry Certificates,registered in the name of such successor or substitute qualified securities depository or its nominee. If the District fails to identify another qualified securities depository to replace the Depository,then the Certificates shall no longer be restricted to being registered in the registration books maintained by the Trustee in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging such Certificates shall designate, in accordance with the provisions of Sections 2.06 and 2.09 hereof. Whenever the Depository requests the District to do so, the District will cooperate with the Depository in taking appropriate action after reasonable notice (i)to make available one or more separate certificates evidencing the Book-Entry Certificates to any Participant having Book-Entry Certificates credited to its account with the Depository, and (ii)to arrange for another securities depository to maintain custody of certificates evidencing the Book-Entry Certificates. (h) Notwithstanding any other provision of this Trust Agreement to the contrary, if DTC is the sole Owner of the Certificates, so long as any Book-Entry Certificate is registered in the name of the Nominee, all payments of principal, premium, if any, and interest evidenced by such Certificate and all notices with respect to such Certificate shall be made and given, respectively, as provided in the Letter of Representations or as otherwise instructed by the Depository. (i) In connection with any notice or other communication to be provided to Owners pursuant to the Trust Agreement by the District, the Corporation or the Trustee, with respect to any consent or other action to be taken by Owners, the Trustee shall establish a record date for such consent or other action and give the Depository notice of such record date not less than 15 80198M.3 14 calendar days in advance of such record date to the extent possible. Notice to the Depository shall be given only when OTC is the sole Owner of the Certificates. ARTICLE III PROCEEDS OF CERTIFICATES Section 3.01. Delivery of Certificates. The Trustee is hereby authorized to execute the Certificates and deliver the Certificates to the original purchaser thereof upon receipt of a Written Request of the District and upon receipt of the proceeds of sale thereof. Section 3.02. Deposit of Proceeds of Certificates. The net proceeds received by the Trustee from the sale of the Certificates in the amount of$ shall be deposited by the Trustee as follows: (a) the Trustee shall deposit in the Costs of Issuance Fund the amount of (b) the Trustee shall deposit in the Reserve Fund the amount of $ , which is equal to the initial Reserve Requirement; (c) the Trustee shall transfer to the Escrow Agent for deposit in the Escrow Fund the amount of$ ; and (d) the Trustee shall transfer to AIG Financial Products Corp. the amount of $ . representing the settlement amount owed in connection with the termination of the interest rate swap agreement relating to the Refunded Certificates. Section 3.03. Costs of Issuance Fund. The Trustee shall establish and maintain a separate special fund to be held by the Trustee known as the Costs of Issuance Fond. There shall be deposited in the Costs of Issuance Fund on the Closing Date the amount required to be deposited therein pursuant to Section 3.02 hereof. The Trustee shall disburse moneys from the Costs of Issuance Fund on such dates and in such amounts as are necessary to pay Costs of Issuance, in each case upon the Written Request of the District stating the Person to whom payment is to be made,the amount to be paid, the purpose for which the obligation was incurred and that such payment is a proper charge against the Costs of Issuance Fund. On the date that is six months after the Closing Date, the Trustee shall transfer any amounts then remaining in the Costs of Issuance Fund to the Installment Payment Fund. Upon such transfer, the Costs of Issuance Fund shall be closed. Section 3.04. Reserved. ao198094.3 15 ARTICLE IV NO PREPAYMENT OF CERTIFICATES Section 4.01. Prepayment. The Certificates are not subject to prepayment prior to their stated Principal Payment Dates. ARTICLE V ASSIGNMENT AND PLEDGE; FUNDS AND ACCOUNTS Section 5.01. Assignment and Pledge. The Corporation hereby transfers, conveys and assigns to the Trustee, for the benefit of the Owners, all of the Corporation's rights, title and interest in and to the Installment Purchase Agreement (excepting its rights to indemnification thereunder), including the right to receive Installment Payments, and the interest thereon, from the District and the right to exercise any remedies provided therein in the event of a default by the District thereunder. The Trustee hereby accepts said transfer, conveyance and assignment, solely in its capacity as Trustee, for the benefit of the Owners, subject to the provisions of this Trust Agreement. All Installment Payments, and the interest thereon, shall be paid directly by the District to the Trustee, and if received by the Corporation at any time shall be deposited by the Corporation with the Trustee immediately upon the receipt thereof. In order to secure the respective rights of the Owners to the payments required to be made thereto as provided herein, the Corporation and the District hereby irrevocably pledge to the Trustee, for the benefit of the Owners, all of their right, title and interest, if any, in and to all amounts on deposit from time to time in the funds and accounts established hereunder (other than the Rebate Fund). This pledge shall constitute a first lien on the amounts on deposit in such funds and accounts. Section 5.02. Installment Payment Fund. (a)The Trustee shall establish and maintain the Installment Payment Fund until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which the Certificates are no longer Outstanding. The Trustee shall deposit in the Installment Payment Fund all Installment Payments, and the interest thereon, paid by the District and received by the Trustee. The moneys in the Installment Payment Fund shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. (b) The Trustee shall transfer the amounts on deposit in the Installment Payment Fond, at the times and in the manner hereinafter provided, to the following respective accounts within the Installment Payment Fund, each of which the Trustee hereby agrees to establish and maintain until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which the Certificates are no longer Outstanding. The moneys in each of such accounts shall be held in must by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. 80198M 3 16 (i) Interest Account. The Trustee, on each Interest Payment Date, shall deposit in the Interest Account that amount of moneys representing the interest on the Installment Payments coming due on such Interest Payment Date. Moneys in the Interest Account shall be used by the Trustee for the purpose of paying the interest evidenced by the Certificates when due and payable. (ii) Principal Account. The Trustee, on each Principal Payment Date, shall deposit in the Principal Account that amount of moneys representing the Installment Payments coming due on such Principal Payment Date. Moneys in the Principal Account shall be used by the Trustee for the purpose of paying the principal or Mandatory Sinking Account Payments evidenced by the Certificates when due and payable. Section 5.03. Reserve Fund. (a)The Trustee shall establish and maintain the Reserve Fund until all required Installment Payments,and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which no Certificates are Outstanding. The moneys in the Reserve Fund, and any Reserve Facility, shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. There shall be deposited in the Reserve Fund on the Closing Date the amount required to be deposited therein pursuant to Section 3.02 hereof (b) The District may substitute a Reserve Facility for all or a part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement. Moneys for which a Reserve Facility has been substituted as provided herein shall be transferred, at the election of the District, to the Installment Payment Fund, or upon receipt of an Opinion of Counsel to the effect that such transfer, in and of itself, will not adversely affect the exclusion of interest evidenced by the Certificates from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the District,as directed in a Written Request of the District. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund. (c) If, on any Interest Payment Date,the amount on deposit in the Interest Account is insufficient to pay the interest evidenced by the Certificates on such Interest Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Interest Account an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Interest Account. If, on any Principal Payment Date, the amount on deposit in the Principal Account is insufficient to pay the principal evidenced by the Certificates on such Principal Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Principal Account an amount sufficient to make up such deficiency. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, the Trustee shall make a claim for payment under soreso 4.3 17 such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fund, will be sufficient to make said deposit in the Principal Account. Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for the final payment of principal and interest evidenced by the Certificates. (d) Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility, the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement,drawings thereunder, and repayment of expenses with respect thereto, shall be made on a pro rasa basis (calculated by reference to the policy limits available thereunder). (e) In the event of any transfer from the Reserve Fund or the making of any claim under any Reserve Facility, the Trustee shall, within five days thereafter, provide written notice to the District of the amount and the date of such transfer or claim. (f) The Trustee shall, from amounts received from the District pursuant to Section 3.03 of the Installment Purchase Agreement, deposit in the Reserve Fund an amount of money which, together with the amount already on deposit therein and the amounts available under all Reserve Facilities,will be equal to the Reserve Requirement. No deposit need be made in the Reserve Fund so long as there shall be on deposit therein a sum equal to the amount which, together with the amounts available under all Reserve Facilities, is at least the Reserve Requirement. The Trustee shall promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. (g) If, as a result of the scheduled payment of principal or interest evidenced by the Certificates, the Reserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of such reduction to the Installment Payment Fund. (h) On any date on which Certificates are defeased in accordance with Article X hereof, the Trustee shall, if so directed in a Written Request of the District, transfer any moneys in the Reserve Fund in excess of the Reserve Requirement resulting from such defeasance to the entity or fund so specified in such Written Request of the District, to be applied to such defeasance. Section 5.04. Rebate Fund. (a)In addition to the other funds and accounts created pursuant hereto, the Trustee shall establish and maintain the Rebate Fund. The District shall deliver to the Trustee for deposit in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Tax Certificate. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement, for payment to the United States of America upon the Written Request of the e01980N.3 18 District. Notwithstanding defeasance of the Certificates pursuant to Article X hereof or anything to the contrary contained herein, all amounts required to be deposited into or on deposit in the Rebate Fund shall be governed exclusively by this Section and by the Tax Certificate (which is incorporated herein by reference). The Trustee shall be deemed conclusively to have complied with such provisions if it follows the written directions of the District, and shall have no liability or responsibility to enforce compliance by the District with the terms of the Tax Certificate. The Trustee may conclusively rely upon the District's determinations, calculations and certifications required by the Tax Certificate. The Trustee shall have no responsibility to independently make any calculation or determination or to review the District's calculations. (b) Any funds remaining in the Rebate Fund after payment in full of all of the principal and interest evidenced by the Certificates and after payment of any amounts described in this Section,shall be withdrawn by the Trustee and remitted to the District. Section 5.05. Investment of Moneys. Except as otherwise provided herein, all moneys in any of the funds or accounts established pursuant to this Trust Agreement shall be invested by the Trustee solely in Permitted Investments, as directed by the District pursuant to a Written Request of the District at least two Business Days prior to the making of such investment. Moneys in all funds and accounts held by the Trustee shall be invested in Permitted Investments maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in this Trust Agreement; provided, however, that Permitted Investments in which moneys in the Reserve Fund are so invested shall mature no later than the final Principal Payment Date of the Certificates. Absent timely written direction from the District, the Trustee shall invest any funds held by it in Permitted Investments described in clause(10) of the definition thereof. Permitted Investments that are registerable securities shall be registered in the name of the Trustee. All interest,profits and other income received from the investment of moneys in any fund or account established pursuant to this Trust Agreement (other than the Reserve Fund) shall be retained therein. All interest, profits and other income received from the investment of moneys in the Reserve Fund shall be deposited in the Installment Payment Fund; provided, however, that,notwithstanding the foregoing,any such transfer shall be made only if and to the extent that, after such transfer, the amount on deposit in the Reserve Fund is at least equal to the Reserve Requirement. Permitted Investments acquired as an investment of moneys in any fund or account established under this Trust Agreement shall be credited to such fund or account. For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued by the Trustee at the market value thereof, such valuation to be performed not less frequently than semiannually on or before each January 15 and July 15. The Trustee may act as principal or agent in the making or disposing of any investment. The Trustee shall sell or present for redemption any Permitted Investment whenever it shall be necessary to provide moneys to meet any required payment,transfer, withdrawal or disbursement from the fund or account to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting from any investment made or sold pursuant to 80198M 3 19 this Section. For purposes of investment, the Trustee may commingle moneys in any of the funds and accounts established hereunder. The Trustee is hereby authorized, in making or disposing of any investment permitted by this Section, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether or not such affiliate is acting as an agent of the Trustee or for any third Person or dealing as principal for its own account. ARTICLE VI COVENANTS Section 6.01. Compliance with Trust Agreement. The Trustee will not execute or deliver any Certificates in any manner other than in accordance with the provisions hereof, and the Corporation and the District will not suffer or permit any default by them to occur hereunder, but will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms hereof required to be complied with, kept,observed and performed by them. Section 6.02. Compliance with Installment Purchase Agreement. The Corporation and the District will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Installment Purchase Agreement required to be complied with, kept, observed and performed by them and, together with the Trustee, will enforce the Installment Purchase Agreement against the other party thereto in accordance with its terms. Section 6.03. Compliance with Master Agreement. The Corporation and the District will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Master Agreement required to be complied with, kept, observed and performed by them and,together with the Trustee,will enforce the Master Agreement against the other party thereto in accordance with its terms. Section 6.04. Observance of Laws and Regulations. The Corporation and the District will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States of America or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by them, including their right to exist and carry on their respective businesses,to the end that such franchises, rights and privileges shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired. Section 6.05. Other Liens. None of the Trustee, the Corporation or the District shall create or suffer to be created any pledge of or lien on the amounts on deposit in any of the funds or accounts created hereunder, other than the pledge and lien hereof. Section 6.06. Prosecution and Defense of Suits. The District will defend against every action, suit or other proceeding at any time brought against the Trustee or any Owner upon any claim arising out of the receipt, deposit or disbursement of any of the Installment Payments, or the interest thereon, or involving the rights of the Trustee or any Owner hereunder; provided, 80198094.3 20 however, that the Trustee or any Owner at its or his election may appear in and defend any such action, suit or other proceeding. Section 6.07. Accounting Records and Statements. The Trustee will keep proper accounting records in which complete and correct entries shall be made of all transactions relating to the receipt, deposit and disbursement of the Installment Payments, and the interest thereon, and such accounting records shall be available for inspection by the Corporation and the District at reasonable hours and under reasonable conditions. The Trustee shall not be obligated to provide an accounting for any fund or account that (a) has a balance of$0.00 and (b)has not had any activity since the last reporting date. The Trustee will, upon written request, make copies of the foregoing available to any Owner(at the expense of such Owner). Section 6.08. Tax Covenants. [TO BE REVISED) (a) Special Definitions. When used in this Section,the following terms shall have the following meanings: "Code"means the Internal Revenue Code of 1986. "Computation Date" has the meaning set forth in section 1.148-1(b) of the Tax Regulations. "Gross Proceeds" means any Proceeds and any replacement proceeds as defined in section 1.148-1(c)of the Tax Regulations,of the Certificates. "Investment"has the meaning set forth in section 1.148-1(b) of the Tax Regulations. "Nonpurpose Investment"means any investment property, as defined in section 148(b) of the Code, in which Gross Proceeds of the Certificates are invested and that is not acquired to carry out the governmental purposes of that series of Certificates. "Proceeds," with respect to an issue of governmental obligations, has the meaning set forth in has the meaning set forth in section 1.148-1(b)of the Tax Regulations(referring to sales, investment and transferred proceeds). "Rebate Amount"has the meaning set forth in section 1.148-1(b) of the Tax Regulations. `Special Counser' means Fulbright & Jaworski L.L.P. or any other firm of nationally recognized standing in the field of municipal finance selected by the District. "Tax Regulations" means the United States Treasury Regulations promulgated pursuant to sections 103 and 141 through 150 of the Code. "Yield" of any Investment has the meaning set forth in section 1.148-5 of the Tax Regulations; and of any issue of governmental obligations has the meaning set forth in section 1.148-4 of the Tax Regulations. 01980943 21 (b) Not to Cause Interest to Become Taxable. The District covenants that it shall not use, and shall not permit the use of, and shall not omit to use Gross Proceeds or any other amounts(or any property the acquisition,construction or improvement of which is to be financed directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the interest with respect to any Certificate to fail to be excluded pursuant to section 103(a) of the Code from the gross income of the owner thereof for federal income tax purposes. Without limiting the generality of the foregoing, unless and until the Trustee receives a written opinion of Special Counsel to the effect that failure to comply with such covenant will not adversely affect such exclusion of the interest with respect to any Certificate from the gross income of the owner thereof for federal income tax purposes,the District shall comply with each of the specific covenants in this Section. (c) Private Use and Private Payments. Except as would not cause any Certificate to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations, the District shall take all actions necessary to assure that the District at all times prior to the final cancellation of the last of the Certificates to be retired: (i) exclusively owns, operates,possesses and provides any services necessary to allow and maintain each function of every property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with Gross Proceeds of the Certificates and not use or permit the use of such Gross Proceeds (including through any contractual arrangement with terms different than those applicable to the general public) or any property acquired,constructed or improved with such Gross Proceeds in any activity carried on by any person or entity (including the United States or any agency, department and instrumentality thereof) other than a state or local government, unless such use is solely as a member of the general public;and (ii) does not directly or indirectly impose or accept any charge or other payment by or for the benefit of any person or entity (other than a state or local government) who is treated as using any Gross Proceeds of the Certificates or any property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with such Gross Proceeds. (d) No Private Loan. Except as would not cause any Certificate to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations and rulings thereunder, the District shall not use or permit the use of Gross Proceeds of the Certificates to make or finance loans to any person or entity other than a state or local government. For purposes of the foregoing covenant, such Gross Proceeds are considered to be "loaned" to a person or entity if: (i) property acquired,constructed or improved with such Gross Proceeds is sold or leased to such person or entity in a transaction that creates a debt for federal income tax purposes; (ii) capacity in or service from such property is committed to such person or entity under a take-or-pay, output or similar contract or arrangement; or(iii) indirect benefits of such Gross Proceeds, or burdens and benefits of ownership of any property acquired, constructed or improved with such Gross Proceeds, are otherwise transferred in a transaction that is the economic equivalent of a loan. 80198094.3 22 (e) Not to Invest at Higher Yield. Except as would not cause the Certificates to become "arbitrage bonds" within the meaning of section 148 of the Code and the Tax Regulations and rulings thereunder,the District shall not (and shall not permit any person to), at any time prior to the final cancellation of the last Certificate to be retired, directly or indirectly invest Gross Proceeds in any Investment, if as a result of such investment the Yield of any Investment acquired with Gross Proceeds, whether then held or previously disposed of, would materially exceed the Yield of the Certificates within the meaning of said section 148. (0 Not Federally Guaranteed. Except to the extent permitted by section 149(b)of the Code and the Tax Regulations and rulings thereunder, the District shall not take or omit to take (and shall not permit any person to take or omit to take) any action that would cause any Certificate to be"federally guaranteed'within the meaning of section 149(b) of the Code and the Tax Regulations and rulings thereunder. (g) Information Report. The District shall timely file any information required by section 149(e) of the Code with respect to Certificates with the Secretary of the Treasury on Form 8038-G or such other form and in such place as the Secretary may prescribe. (h) Rebate of Arbitrage Profits. Except to the extent otherwise provided in section 148(f)of the Code and the Tax Regulations: (i) The District shall account for all Gross Proceeds (including all receipts, expenditures and investments thereof) on its books of account separately and apart from all other funds (and receipts, expenditures and investments thereof) and shall retain all records of accounting for at least six years after the day on which the last Certificate is discharged. However,to the extent permitted by law, the District may commingle Gross Proceeds of Certificates with its other monies, provided that it separately accounts for each receipt and expenditure of Gross Proceeds and the obligations acquired therewith. (ii) Not less frequently than each Computation Date (and so long as amounts remain on deposit in the f-1 Fund, not less frequently than annually), the District shall calculate the Rebate Amount in accordance with rules set forth in section 148(f) of the Code and the Tax Regulations and rulings thereunder. The District shall maintain a copy of the calculation with its official transcript of proceedings relating to the execution and delivery of the Certificates until six years after the final Computation Date. (iii) In order to assure the excludability pursuant to section 103(a) of the Code of the interest with respect to the Certificates from the gross income of the owners thereof for federal income tax purposes, within 60 days of each Computation Date the District shall pay to the United States the amount that when added to the future value of previous rebate payments made for the Certificates equals (i) in the case of the Final Computation Date as defined in section 1.148-3(e)(2) of the Tax Regulations, one hundred percent (100%)of the Rebate Amount on such date; and(ii) in the case of any other Computation Date,ninety percent (90%)of the Rebate Amount on such date. In all cases, such rebate payments shall be made by the District at the times and in the amounts as are or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder, and shall be accompanied by Forth 8038-T or such other forms and information as is or 88198asa.7 23 may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder for execution and filing by the District. (i) Not to Divert Arbitrage Profits. Except to the extent permitted by section 148 of the Code and the Tax Regulations and rulings thereunder, the District shall not and shall not permit any person to,at any time prior to the final cancellation of the last of the Certificates to be retired, enter into any transaction that reduces the amount required to be paid to the United States pursuant to paragraph (H)of this Section because such transaction results in a smaller profit or a larger loss than would have resulted if the transaction had been at arm's length and had the Yield on the Certificates not been relevant to either party. (j) Certificates Not Hedge Bonds. (i) The District represents that none of the Certificates is or will become a "hedge bond"within the meaning of section 149(g)of the Code. (ii) Without limitation of paragraph (i) above: (A)the District will not execute and deliver the Certificates unless as of the date of execution and delivery of the Certificates the District reasonably expects that at least 85% of the spendable proceeds of the Certificates will be expended within the three-year period commencing on such date of execution and delivery, and (B) no more than 50% of the proceeds of the Certificates will be invested in Nonpurpose Investments having a substantially guaranteed yield for a period of four years or more. (k) Elections. The District hereby directs and authorizes any Authorized Representative to make elections permitted or required pursuant to the provisions of the Code or the Tax Regulations, as such Authorized Representative (after consultation with Special Counsel) deems necessary or appropriate in connection with the Certificates, in the Tax Certificate or similar or other appropriate certificate, form or document. (1) Tax Certificate. The District agrees to execute and deliver in connection with the execution and delivery of the Certificates a Tar Certificate as to Arbitrage and the Provisions of Sections 141-I50 of the Internal Revenue Code of 1986, or similar document containing additional representations and covenants pertaining to the exclusion of interest with respect to the Certificates from the gross income of the owners thereof for federal income tax purposes (the "Tax Certificate"),which representations and covenants are incorporated as though expressly set forth herein. Section 6.09. Continuing Disclosure. Each of the District and the Trustee will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it. Notwithstanding any other provision of this Trust Agreement, failure of the District or the Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; provided, however, the Trustee may (and, at the request of any Participating Underwriter or the Owners of at least 25% aggregate principal amount of Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall) or any Owner or Beneficial Owner of Certificates may take such actions as may be necessary and appropriate to compel performance,including seeking mandate or specific performance by court order. $0198094.3 24 Section 6.10. Further Assurances. The District will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to carry out the purposes and intentions of this Trust Agreement and for preserving and protecting the rights and interests of the Owners. ARTICLE VII DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01. Action anon Event of Default. An Event of Default under the Installment Purchase Agreement shall constitute an Event of Default hereunder and an Event of Default under the Master Agreement shall constitute an Event of Default hereunder. The Trustee may give notice, as assignee of the Corporation, of an Event of Default under the Installment Purchase Agreement to the District, and shall do so if directed to do so by the Owners of not less than 5% of the aggregate principal evidenced by Certificates then Outstanding. In each and every case during the continuance of an Event of Default, the Trustee may and, at the direction of the Owners of not less than a majority of the aggregate principal evidenced by Certificates then Outstanding, shall, upon notice in writing to the District and the Corporation (a) exercise any of the remedies granted to the Corporation under the Installment Purchase Agreement, (b) exercise any of the remedies granted to the Trustee under the Master Agreement, and (c)take whatever action at law or in equity may appear necessary or desirable to enforce its rights pursuant to this Trust Agreement, the Installment Purchase Agreement or the Master Agreement or to protect and enforce any of the rights vested in the Trustee or the Owners by this Trust Agreement, the Certificates, the Installment Purchase Agreement or the Master Agreement, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement or for the enforcement of any other legal or equitable right, including any one or more of the remedies set forth in Section 9.02 hereof. Section 7.02. Other Remedies of the Trustee. Subject to the provisions of Section 7.01 hereof,the Trustee shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the Corporation or the District or any member, director, officer or employee thereof, and to compel the Corporation or the District or any such member, director, officer or employee to perform or carry out its or his or her duties under law and the agreements and covenants required to be performed by it or him or her contained herein; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee;or (c) by suit in equity upon the happening of any Event of Default hereunder to require the Corporation and the District to account as the trustee of an express trust. Section 7.03. Non-Waiver. A waiver of any default or breach of duty or contract by the Trustee or the Owners shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No 801990W.3 25 delay or omission by the Trustee or the Owners to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee or the Owners by law or by this Article may be enforced and exercised from time to time and as often the Trustee shall deem expedient. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or any Owner, then subject to any adverse determination, the Trustee, such Owner, the Corporation and the District shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought ortaken. Section 7.04. Remedies Not Exclusive. Subject to the provisions of Section 7.01 hereof, no remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy. Section 7.05. Application of Amounts After Default. All damages or other payments received by the Trustee for the enforcement of any rights and powers of the Trustee under this Article shall be deposited into the Installment Payment Fund and as soon as practicable thereafter applied: (a) to the payment of all amounts due the Trustee under Section 8.03 hereof; (b) unless the unpaid Installment Payments, and the interest thereon, shall have become, and shall remain, immediately due and payable pursuant to the Master Agreement: (i) to the payment of all amounts then due for interest evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected (other than Certificates which have become payable prior to such Event of Default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of interest evidenced by such Certificates due and payable; and (ii) to the payment of all amounts then due for principal evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected (other than Certificates which have become payable prior to such Event of Default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of principal evidenced by such Certificates due and payable. (c) if the unpaid Installment Payments, and the interest thereon, shall have become, and shall remain, immediately due and payable pursuant to the Master Agreement, to the 90199W3 26 payment of all amounts then due for principal and interest evidenced by the Certificates and, if the amount available therefor shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, or of any Certificate over any other Certificate, to the persons entitled thereto without any discrimination or preference. Section 7.06. Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Trust Agreement or the Certificates may be prosecuted and enforced by the Trustee without the possession of any of the Certificates or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, he for the ratable benefit of the Owners of the Certificates in respect of which such judgment has been recovered. Section 7.07. Limitation on Suits. No Owner shall have any right to institute any proceeding,judicial or otherwise,with respect to this Trust Agreement, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a)such Owner shall have previously given written notice to the Trustee of a continuing Event of Default hereunder, (b)the Owners of not less than a majority of the aggregate principal evidenced by Certificates then Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder, (c) such Owner or Owners shall have afforded to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request, (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such proceedings,and(e)no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Owners of a majority of the aggregate principal evidenced by Certificates then Outstanding; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Trust Agreement to affect, disturb or prejudice the rights of any other Owner of Certificates, or to obtain or seek to obtain priority or preference over any other Owner or to enforce any right under this Trust Agreement, except in the manner herein provided and for the equal and ratable benefit of all the Owners of Certificates. Section 7.08. No Liability by the Corporation to the Owner. Except as expressly provided herein, the Corporation shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the District, or with respect to the performance by the District of the other agreements and covenants required to be performed by it contained in the Installment Purchase Agreement, the Master Agreement or herein,or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 7.09. No Liability by the District to the Owners. Except for the payment when due of the Installment Payments, and the interest thereon, and the performance of the other agreements and covenants required to be performed by it contained in the Installment Purchase Agreement,the Master Agreement or herein,the District shall not have any obligation or liability 80198094.3 27 to the Owners with respect to this Trust Agreement or the preparation, execution, delivery or transfer of the Certificates or the disbursement of the Installment Payments, and the interest thereon, by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 7.10. No Liability of the Trustee to the Owners. Except as expressly provided herein, the Trustee shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the District, or with respect to the performance by the Corporation or the District of the other agreements and covenants required to be performed by them, respectively contained in the Installment Purchase Agreement or herein. ARTICLE VIII THE TRUSTEE Section 8.01. Employment of the Trustee: Duties. The Corporation and the District hereby appoint and employ the Trustee to receive, deposit and disburse the Installment Payments, and the interest thereon, to prepare, execute, deliver and transfer the Certificates and to perform the other functions contained herein, all in the manner provided herein and subject to the conditions and terms hereof. By executing and delivering this Trust Agreement, the Trustee accepts the appointment and employment hereinabove referred to and accepts the rights and obligations of the Trustee provided herein, subject to the conditions and terms hereof. Other than when an Event of Default hereunder has occurred and is continuing, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Trust Agreement, and no implied covenants or obligations shall be read into this Trust Agreement against the Trustee. In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. Section 8.02. Removal and Resignation of the Trustee. The Corporation and the District may, by an instrument in writing, remove the Trustee initially a party hereto and any successor thereto unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee initially a party hereto and any successor thereto if at any time (a) requested to do so by an instrument or concurrent instruments in writing signed by the Owners of a majority of the aggregate principal evidenced by the Certificates at the time Outstanding (or their attorneys duly authorized in writing), or (b)the Trustee shall cease to be eligible in accordance with the following sentence, and shall appoint a successor Trustee. The Trustee shall be a bank having trust powers or a trust company in good standing in or incorporated under the laws of the United States or any state thereof, having (or if such bank or trust company is a member of a bank holding company system, its parent bank holding company shall have) a combined capital and surplus of at least $75,000,000, and be subject to supervision or examination by federal or state banking authorities. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of this Section the combined capital 80198M.3 28 and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee may at any time resign by giving written notice of such resignation to the Corporation and the District and by giving notice, by first class mail, postage prepaid, of such resignation to the Owners at their addresses appearing on the registration books maintained by the Trustee. Upon receiving such notice of resignation, the Corporation and the District shall promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event the District and the Corporation do not appoint a successor Trustee within 30 days following receipt of such notice of resignation, the resigning Trustee may, at the expense of the District, petition the appropriate court having jurisdiction to appoint a successor Trustee. Any resignation or removal of a Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee. Any successor Trustee appointed under this Trust Agreement shall signify its acceptance of such appointment by executing and delivering to the District and the Corporation and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee,with like effect as if originally named Trustee herein;but,nevertheless,at the written request of the District or of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any properly held by it under this Trust Agreement and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Any corporation, association or agency into which the Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion,sale, merger,consolidation or transfer to which it is a party, provided that such entity meets the combined capital and surplus requirements of this Section, ipso facto, shall be and become successor trustee under this Trust Agreement and vested with all the trusts, powers, discretion, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 8.03. Compensation and Indemnification of the Trustee. The District shall from time to time, subject to any written agreement then in effect with the Trustee, pay the Trustee reasonable compensation for all its services rendered hereunder and reimburse the Trustee for all its reasonable advances and expenditures (which shall not include "overhead expenses" except as such expenses are included as a component of the Trustee's stated annual fees or disclosed transaction fees) hereunder, including but not limited to advances to and reasonable fees and reasonable expenses of accountants, agents, appraisers, consultants or other experts, and counsel not directly employed by the Trustee but an attorney or firm of attorneys retained by the Trustee, employed by it in the exercise and performance of its rights and obligations hereunder; provided, however, that the Trustee shall not have any lien for such $0198094.3 29 compensation or reimbursement against any moneys held by it in any of the funds or accounts established hereunder. The Trustee may take whatever legal actions are lawfully available to it directly against the Corporation or the District. Except as otherwise expressly provided herein, no provision of this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers hereunder. The District, to the extent permitted by law, agrees to indemnify and save the Trustee, its directors, officers, employees and agents harmless against any liabilities which it may incur in the exercise and performance of its powers and duties hereunder, including but not limited to costs and expenses incurred in defending against any claim or liability, which are not due to its negligence or willful misconduct. Section 8.04. Protection of the Trustee. The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, waiver or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions hereof, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Owners of the Certificates pursuant to this Trust Agreement, unless such Owners shall have offered to the Trustee security or indemnity, reasonably satisfactory to the Trustee, against the reasonable costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Trustee may consult with counsel, who may be counsel to the Corporation or the District, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect to any action taken or suffered by it hereunder in good faith in accordance therewith. The Trustee shall not be responsible for the sufficiency of the Certificates or the Installment Purchase Agreement, or of the assignment made to it hereunder, or for statements made in the preliminary or final official statement relating to the Certificates. The Trustee shall not be required to take notice or be deemed to have notice of any default or Event of Default hereunder, except failure of any of the payments to be made to the Trustee required to be made hereunder or under the Installment Purchase Agreement, unless the Trustee shall be specifically notified in writing of such default or Event of Default by the District, the Corporation or the Owners of not less than 5% of the aggregate principal evidenced by the Certificates then Outstanding. Whenever in the administration of its rights and obligations hereunder the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter(unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Written Certificate of 80198094.3 30 the District or a Written Certificate of the Corporation, and such certificate shall be full wan-ant to the Trustee for any action taken or suffered under the provisions hereof upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it deems reasonable. The Trustee may buy, sell, own, hold and deal in any of the Certificates and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party hereto. The Trustee,either as principal or agent,may also engage in or be interested in any financial or other transaction with the Corporation or the District, and may act as agent, depository or trustee for any committee or body of Owners or of owners of obligations of the Corporation or the District as freely as if it were not the Trustee hereunder. The Trustee may, to the extent reasonably necessary, execute any of the trusts or powers hereof and perform any rights and obligations required of it hereunder by or through agents, attorneys or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its rights and obligations hereunder, and the Trustee shall not be answerable for the negligence or misconduct of any such agent, attorney or receiver selected by it with reasonable care;provided, however,that in the event of any negligence or misconduct of any such attorney, agent or receiver, the Trustee shall diligently pursue all remedies of the Trustee against such agent, attorney or receiver. The Trustee shall not be liable for any error of judgment made by it in good faith unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. The Trustee shall not be answerable for the exercise of any trusts or powers hereunder or for anything whatsoever in connection with the funds established hereunder, except only for its own willful misconduct,negligence or breach of an obligation hereunder. The Trustee may, on behalf of the Owners, intervene in any judicial proceeding to which the Corporation or the District is a party and which, in the opinion of the Trustee and its counsel, affects the Certificates or the security therefor, and shall do so if requested in writing by the Owners of at least 5% of the aggregate principal evidenced by Certificates then Outstanding, provided the Trustee shall have no duty to take such action unless it has been indemnified to its reasonable satisfaction against all risk or liability arising from such action. ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT Section 9.01. Amendment or Suoolement. (a)This Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee hereunder may be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding when the prior written consents of the Owners of a majority of the aggregate principal evidenced by the Certificates then Outstanding, exclusive of Certificates disqualified as provided in Section 9.02 hereof, are filed with the Trustee. No such amendment or supplement shall (i)extend the stated Principal Payment Date of any Certificate or reduce the rate of interest evidenced thereby or extend the time of payment of such interest or reduce the amount of principal evidenced thereby, (ii)reduce the percentage of Owners whose consent is required for 80198M.3 31 the execution of any amendment hereof or supplement hereto without the prior written consent of the Owners of all Certificates then Outstanding. (iii)modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee, or (iv)amend this Section without the prior written consent of the Owners of all Certificates then Outstanding. (b) This Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee hereunder may also be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding upon execution, without the written consents of any Owners,but only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements,conditions, covenants and terms required by the Corporation or the District to be observed or performed herein other agreements, conditions, covenants and terms thereafter to be observed or performed by the Corporation or the District, or to surrender any right or power reserved herein to or conferred herein on the Corporation or the District; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting,curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the Corporation or the District may deem desirable or necessary and not inconsistent herewith; (iii) to make such additions,deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates;or (iv) for any other reason, provided such amendment or supplement does not adversely affect the rights or interests of the Owners. Section 9.02. Disqualified Certificates. Certificates owned or held by or for the account of the District (but excluding Certificates held in any pension or retirement fund of the District) shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Certificates provided in this Article, and shall not be entitled to consent to or take any other action provided in this Article, and the Trustee may adopt appropriate regulations to require each Owner, before his consent provided for herein shall be deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in this Section. Section 9.03. Endorsement or Replacement of Certificates After Amendment or Supplement. After the effective date of any action taken as hereinabove provided in this Article, the Trustee may determine that the Certificates may bear a notation by endorsement in faun approved by the Trustee as to such action, and in that case upon demand of the Owner of any Outstanding Certificate and presentation of such Certificate for such purpose at the Principal Office a suitable notation as to such action shall be made on such Certificate. If the Trustee shall receive an Opinion of Counsel advising that new Certificates modified to conform to such action are necessary, modified Certificates shall be prepared, and in that case upon demand of the Owner of any Outstanding Certificates such new Certificates shall be exchanged at the Principal 801980943 32 Office without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates. Section 9.04. Amendment by Mutual Consent. The provisions of this Article shall not prevent any Owner from accepting any amendment as to the particular Certificates owned by such Owner,provided that due notation thereof is made on such Certificates. ARTICLE X DEFEASANCE Section 10.01. Discharge of Certificates and Trust Agreement (a) If the Trustee shall pay or cause to be paid or there shall otherwise be paid(i)to the Owners of all Outstanding Certificates the interest and principal evidenced thereby at the times and in the manner stipulated herein and therein, and (ii)all other amounts due hereunder and under the Installment Purchase Agreement, then such Owners shall cease to be entitled to the pledge of and lien on the amounts on deposit in the funds and accounts established hereunder, as provided herein, and all agreements and covenants of the Corporation, the District, and the Trustee to such Owners hereunder shall thereupon cease, terminate and become void and shall be discharged and satisfied. (b) Any Outstanding Certificate shall be deemed to have been paid within the meaning and with the effect expressed in this Section when the whole amount of the principal, premium, if any, and interest evidenced by such Certificate shall have been paid or when (i) [Reserved), (ii)there shall be on deposit with the Trustee, moneys, or Government Obligations, or any combination thereof,the principal of and the interest on which when due, and without any reinvestment thereof, will provide moneys which shall be sufficient to pay when due the principal, premium, if any,and interest evidenced by such Certificate and due and to become due on or prior to its stated Principal Payment Date,and(iii)if the stated Principal Payment Date of such Certificate will not occur, and said Certificate is not to be prepaid, within the next succeeding 60 days, the District shall have given the Trustee irrevocable instructions to give notice, as soon as practicable to the Owner of such Certificate,stating that the deposit of moneys or Government Obligations required by clause(ii) of this subsection has been made with the Trustee and that such Certificate, or portion thereof, is deemed to have been paid in accordance with this Section and stating such Principal Payment Date upon which moneys are to be available for the payment of the principal, premium, if any, and interest evidenced by said Certificate,or portion thereof. Neither the moneys nor the Government Obligations deposited with the Trustee pursuant to this Section nor principal or interest payments on any such Government Obligations shall be withdrawn or used for any purpose other than, and shall be held in trust for and pledged to, the payment of the principal, premium, if any, and interest evidenced by said Certificate, or portions thereof. If payment of less than all of the Certificates is to be provided for in the manner and with the effect expressed in this Section, the Trustee or the District, as applicable, shall select such Certificates, or portions thereof in the principal amounts designated to the Trustee by the District. 90198094.3 33 (c) After the payment of all the interest and principal evidenced by all Outstanding Certificates and all other amounts due hereunder and under the Installment Purchase Agreement as provided in this Section, the Trustee shall execute and deliver to the Corporation and the District all such instruments as may be necessary or desirable to evidence the discharge and satisfaction of this Trust Agreement, the Trustee shall pay over or deliver to the District all moneys or securities held by it pursuant hereto which are not required for the payment of the interest and principal evidenced by such Certificates and all other amounts due hereunder and under the Installment Purchase Agreement. (d) Prior to any defeasance becoming effective under this Article, the District shall cause to be delivered (i)an executed copy of a report, addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and the District, of a nationally recognized certified public accountant, or firm of such accountants, verifying that the Government Obligations and cash, if any, satisfy the requirements of clause(ii) of subsection(b) of this Section (a "Verification'), (ii)a copy of the escrow deposit agreement entered into in connection with such defeasance, which escrow deposit agreement shall provide that no substitution of Government Obligations shall be permitted except with other Government Obligations and upon delivery of a new Verification and no reinvestment of Government Obligations shall be permitted except as contemplated by the original Verification or upon delivery of a new Verification, and (iii)a copy of an Opinion of Counsel, dated the date of such defeasance and addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and the District, to the effect that such Certificates have been paid within the meaning and with the effect expressed in this Trust Agreement, all agreements and covenants of the Corporation, the District and the Trustee to the Owners of such Certificates under this Trust Agreement have ceased,terminated and become void and have been discharged and satisfied. Section 10.02. Unclaimed Moneys. Any moneys held by the Trustee in trust for the payment and discharge of the interest or principal evidenced by any of the Certificates which remain unclaimed for two years after the date when such interest or principal evidenced by such Certificates have become payable, if such moneys were held by the Trustee at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee after the date when the interest and principal evidenced by such Certificates have become payable, shall be repaid by the Trustee to the District as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the District for the payment of the interest and principal evidenced by such Certificates. ARTICLE XI MISCELLANEOUS Section 11.01. Benefits of Trust Agreement. Nothing contained herein, expressed or implied, is intended to give to any Person other than the Corporation, the District, the Trustee and the Owners any claim, remedy or right under or pursuant hereto, and any agreement, condition, covenant or term required herein to be observed or performed by or on behalf of the Corporation or the District shall be for the sole and exclusive benefit of the Trustee and the Owners. 801980943 34 (e) Not to Invest at Higher Yield. Except as would not cause the Certificates to become "arbitrage bonds" within the meaning of section 148 of the Code and the Tax Regulations and rulings thereunder, the District shall not (and shall not permit any person to), at any time prior to the final cancellation of the last Certificate to be retired, directly or indirectly invest Gross Proceeds in any Investment, if as a result of such investment the Yield of any Investment acquired with Gross Proceeds, whether then held or previously disposed of, would materially exceed the Yield of the Certificates within the meaning of said section 148. (0 Not Federally Guaranteed. Except to the extent permitted by section 149(b)of the Code and the Tax Regulations and rulings thereunder, the District shall not take or omit to take (and shall not permit any person to take or omit to take) any action that would cause any Certificate to be"federally guaranteed" within the meaning of section 149(b)of the Code and the Tax Regulations and rulings thereunder. (g) Information Report. The District shall timely file any information required by section 149(e) of the Code with respect to Certificates with the Secretary of the Treasury on Form 8038-G or such other form and in such place as the Secretary may prescribe. (h) Rebate of Arbitrage Profits. Except to the extent otherwise provided in section 148(f)of the Code and the Tax Regulations: (i) The District shall account for all Gross Proceeds (including all receipts, expenditures and investments thereof) on its books of account separately and apart from all other funds (and receipts, expenditures and investments thereof) and shall retain all records of accounting for at least six years after the day on which the last Certificate is discharged. However,to the extent permitted by law, the District may commingle Gross Proceeds of Certificates with its other monies, provided that it separately accounts for each receipt and expenditure of Gross Proceeds and the obligations acquired therewith. (ii) Not less frequently than each Computation Date (and so long as amounts remain on deposit in the I-1 Fund, not less frequently than annually), the District shall calculate the Rebate Amount in accordance with rules set forth in section 148(f) of the Code and the Tax Regulations and rulings thereunder. The District shall maintain a copy of the calculation with its official transcript of proceedings relating to the execution and delivery of the Certificates until six years after the final Computation Date. (iii) In order to assure the excludability pursuant to section 103(a) of the Code of the interest with respect to the Certificates from the gross income of the owners thereof for federal income tax purposes, within 60 days of each Computation Date the District shall pay to the United States the amount that when added to the future value of previous rebate payments made for the Certificates equals (i) in the case of the Final Computation Date as defined in section 1.148-3(e)(2) of the Tax Regulations, one hundred percent (100%)of the Rebate Amount on such date; and (ii) in the case of any other Computation Date, ninety percent (90%) of the Rebate Amount on such date. In all cases, such rebate payments shall be made by the District at the times and in the amounts as are or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder, and shall be accompanied by Form 8038-T or such other forms and information as is or 801"094.3 23 may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder for execution and filing by the District. (i) Not to Divert Arbitrage Profits. Except to the extent permitted by section 148 of the Code and the Tax Regulations and rulings thereunder, the District shall not and shall not permit any person to, at any time prior to the final cancellation of the last of the Certificates to be retired, enter into any transaction that reduces the amount required to be paid to the United States pursuant to paragraph (H) of this Section because such transaction results in a smaller profit or a larger loss than would have resulted if the transaction had been at arm's length and had the Yield on the Certificates not been relevant to either party. (j) Certificates Not Hedge Bonds. (i) The District represents that none of the Certificates is or will become a "hedge bond"within the meaning of section 149(g)of the Code. (ii) Without limitation of paragraph (i) above: (A) the District will not execute and deliver the Certificates unless as of the date of execution and delivery of the Certificates the District reasonably expects that at least 85%of the spendable proceeds of the Certificates will be expended within the three-year period commencing on such date of execution and delivery, and (B) no more than 50% of the proceeds of the Certificates will be invested in Nonpurpose Investments having a substantially guaranteed yield for a period of four years or more. (k) Elections. The District hereby directs and authorizes any Authorized Representative to make elections permitted or required pursuant to the provisions of the Code or the Tax Regulations, as such Authorized Representative (after consultation with Special Counsel) deems necessary or appropriate in connection with the Certificates, in the Tax Certificate or similar or other appropriate certificate, form or document. (1) Tax Certificate. The District agrees to execute and deliver in connection with the execution and delivery of the Certificates a Tax Certificate as to Arbitrage and the Provisions of Sections 141-150 of the Internal Revenue Code of 1986, or similar document containing additional representations and covenants pertaining to the exclusion of interest with respect to the Certificates from the gross income of the owners thereof for federal income tax purposes (the "Tax Certificate"),which representations and covenants are incorporated as though expressly set forth herein. Section 6.09. Continuing Disclosure. Each of the District and the Trustee will comply with and carry out all of the provisions of the Continuing Disclosure Agreement applicable to it. Notwithstanding any other provision of this Trust Agreement, failure of the District or the Trustee to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; provided, however, the Trustee may (and, at the request of any Participating Underwriter or the Owners of at least 25% aggregate principal amount of Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall) or any Owner or Beneficial Owner of Certificates may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. 80199094.3 24 Section 6.10. Further Assurances. The District will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to carry out the purposes and intentions of this Trust Agreement and for preserving and protecting the rights and interests of the Owners. ARTICLE VII DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01. Action upon Event of Default. An Event of Default under the Installment Purchase Agreement shall constitute an Event of Default hereunder and an Event of Default under the Master Agreement shall constitute an Event of Default hereunder. The Trustee may give notice, as assignee of the Corporation, of an Event of Default under the Installment Purchase Agreement to the District, and shall do so if directed to do so by the Owners of not less than 5% of the aggregate principal evidenced by Certificates then Outstanding. In each and every case during the continuance of an Event of Default, the Trustee may and, at the direction of the Owners of not less than a majority of the aggregate principal evidenced by Certificates then Outstanding, shall, upon notice in writing to the District and the Corporation (a) exercise any of the remedies granted to the Corporation under the Installment Purchase Agreement, (b) exercise any of the remedies granted to the Trustee under the Master Agreement, and (c)take whatever action at law or in equity may appear necessary or desirable to enforce its rights pursuant to this Trust Agreement, the Installment Purchase Agreement or the Master Agreement or to protect and enforce any of the rights vested in the Trustee or the Owners by this Trust Agreement, the Certificates, the Installment Purchase Agreement or the Master Agreement, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement or for the enforcement of any other legal or equitable right, including any one or more of the remedies set forth in Section 9.02 hereof. Section 7.02. Other Remedies of the Trustee. Subject to the provisions of Section 7.01 hereof, the Trustee shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the Corporation or the District or any member, director, officer or employee thereof, and to compel the Corporation or the District or any such member, director, officer or employee to perform or carry out its or his or her duties under law and the agreements and covenants required to be performed by it or him or her contained herein; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee; or (c) by suit in equity upon the happening of any Event of Default hereunder to require the Corporation and the District to account as the trustee of an express trust. Section 7.03. Non-Waiver. A waiver of any default or breach of duty or contract by the Trustee or the Owners shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No 80198094.3 25 delay or omission by the Trustee or the Owners to exercise any right or remedy seeming upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee or the Owners by law or by this Article may be enforced and exercised from time to time and as often the Trustee shall deem expedient. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or any Owner, then subject to any adverse determination, the Trustee, such Owner,the Corporation and the District shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought ortaken. Section 7.04. Remedies Not Exclusive. Subject to the provisions of Section 7.01 hereof, no remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy. Section 7.05. Anrlication of Amounts After Default. All damages or other payments received by the Trustee for the enforcement of any rights and powers of the Trustee under this Article shall be deposited into the Installment Payment Fund and as soon as practicable thereafter applied: (a) to the payment of all amounts due the Trustee under Section 8.03 hereof; (b) unless the unpaid Installment Payments, and the interest thereon, shall have become,and shall remain, immediately due and payable pursuant to the Master Agreement: (i) to the payment of all amounts then due for interest evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected (other than Certificates which have become payable prior to such Event of Default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of interest evidenced by such Certificates due and payable; and (ii) to the payment of all amounts then due for principal evidenced by the Certificates, in respect of which, or for the benefit of which, money has been collected (other than Certificates which have become payable prior to such Event of Default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of principal evidenced by such Certificates due and payable. (c) if the unpaid Installment Payments, and the interest thereon, shall have become, and shall remain, immediately due and payable pursuant to the Master Agreement, to the 80198M.3 26 payment of all amounts then due for principal and interest evidenced by the Certificates and, if the amount available therefor shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest,or of any Certificate over any other Certificate, to the persons entitled thereto without any discrimination or preference. Section 7.06. Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Trust Agreement or the Certificates may be prosecuted and enforced by the Trustee without the possession of any of the Certificates or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Owners of the Certificates in respect of which such judgment has been recovered. Section 7.07. Limitation on Suits. No Owner shall have any right to institute any proceeding,judicial or otherwise,with respect to this Trust Agreement, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a)such Owner shall have previously given written notice to the Trustee of a continuing Event of Default hereunder,(b)the Owners of not less than a majority of the aggregate principal evidenced by Certificates then Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder, (c) such Owner or Owners shall have afforded to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request, (d)the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such proceedings,and(e)no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Owners of a majority of the aggregate principal evidenced by Certificates then Outstanding; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Trust Agreement to affect, disturb or prejudice the rights of any other Owner of Certificates, or to obtain or seek to obtain priority or preference over any other Owner or to enforce any right under this Trust Agreement, except in the manner herein provided and for the equal and ratable benefit of all the Owners of Certificates. Section 7.08. No Liability by the Corporation to the Owner. Except as expressly provided herein, the Corporation shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the District,or with respect to the performance by the District of the other agreements and covenants required to be performed by it contained in the Installment Purchase Agreement, the Master Agreement or herein,or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 7.09. No Liability by the District to the Owners. Except for the payment when due of the Installment Payments, and the interest thereon, and the performance of the other agreements and covenants required to be performed by it contained in the Installment Purchase Agreement,the Master Agreement or herein,the District shall not have any obligation or liability 80198094.3 27 to the Owners with respect to this Trust Agreement or the preparation, execution, delivery or transfer of the Certificates or the disbursement of the Installment Payments, and the interest thereon, by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 7.10. No Liability of the Trustee to the Owners. Except as expressly provided herein, the Trustee shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments, and the interest thereon, by the District, or with respect to the performance by the Corporation or the District of the other agreements and covenants required to be performed by them, respectively contained in the Installment Purchase Agreement or herein. ARTICLE MI THE TRUSTEE Section 8.01. Employment of the Trustee: Duties. The Corporation and the District hereby appoint and employ the Trustee to receive, deposit and disburse the Installment Payments, and the interest thereon, to prepare, execute, deliver and transfer the Certificates and to perform the other functions contained herein, all in the manner provided herein and subject to the conditions and terms hereof. By executing and delivering this Trust Agreement, the Trustee accepts the appointment and employment hereinabove referred to and accepts the rights and obligations of the Trustee provided herein, subject to the conditions and terms hereof. Other than when an Event of Default hereunder has occurred and is continuing,the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Trust Agreement, and no implied covenants or obligations shall be read into this Trust Agreement against the Trustee. In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. Section 8.02. Removal and Resignation of the Trustee. The Corporation and the District may, by an instrument in writing, remove the Trustee initially a party hereto and any successor thereto unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee initially a party hereto and any successor thereto if at any time (a)requested to do so by an instrument or concurrent instruments in writing signed by the Owners of a majority of the aggregate principal evidenced by the Certificates at the time Outstanding (or their attorneys duly authorized in writing), or (b)the Trustee shall cease to be eligible in accordance with the following sentence, and shall appoint a successor Trustee. The Trustee shall be a bank having trust powers or a trust company in good standing in or incorporated under the laws of the United States or any state thereof, having (or if such bank or trust company is a member of a bank holding company system, its parent bank holding company shall have) a combined capital and surplus of at least$75,000,000, and be subject to supervision or examination by federal or state banking authorities. If such bank or trust company publishes a report of condition at least annually,pursuant to law or to the requirements of any supervising or examining authority above referred to,then for the purposes of this Section the combined capital 80198094.3 28 and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee may at any time resign by giving written notice of such resignation to the Corporation and the District and by giving notice, by first class mail, postage prepaid, of such resignation to the Owners at their addresses appearing on the registration books maintained by the Trustee. Upon receiving such notice of resignation, the Corporation and the District shall promptly appoint a successor Trustee by an instrument in writing; provided, however,that in the event the District and the Corporation do not appoint a successor Trustee within 30 days following receipt of such notice of resignation, the resigning Trustee may, at the expense of the District, petition the appropriate court having jurisdiction to appoint a successor Trustee. Any resignation or removal of a Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee. Any successor Trustee appointed under this Trust Agreement shall signify its acceptance of such appointment by executing and delivering to the District and the Corporation and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee,with like effect as if originally named Trustee herein;but,nevertheless,at the written request of the District or of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under this Trust Agreement and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Any corporation, association or agency into which the Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion,sale, merger, consolidation or transfer to which it is a party, provided that such entity meets the combined capital and surplus requirements of this Section, ipso facto, shall be and become successor trustee under this Trust Agreement and vested with all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 8.03. Compensation and Indemnification of the Trustee. The District shall from time to time, subject to any written agreement then in effect with the Trustee, pay the Trustee reasonable compensation for all its services rendered hereunder and reimburse the Trustee for all its reasonable advances and expenditures (which shall not include "overhead expenses" except as such expenses are included as a component of the Trustee's stated annual fees or disclosed transaction fees) hereunder, including but not limited to advances to and reasonable fees and reasonable expenses of accountants, agents, appraisers, consultants or other experts, and counsel not directly employed by the Trustee but an attorney or firm of attorneys retained by the Trustee, employed by it in the exercise and performance of its rights and obligations hereunder; provided, however, that the Trustee shall not have any lien for such 80198M.3 29 compensation or reimbursement against any moneys held by it in any of the funds or accounts established hereunder. The Trustee may take whatever legal actions are lawfully available to it directly against the Corporation or the District. Except as otherwise expressly provided herein, no provision of this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers hereunder. The District, to the extent permitted by law, agrees to indemnify and save the Trustee, its directors, officers, employees and agents harmless against any liabilities which it may incur in the exercise and performance of its powers and duties hereunder, including but not limited to costs and expenses incurred in defending against any claim or liability, which are not due to its negligence or willful misconduct. Section 8.04. Protection of the Trustee. The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, waiver or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions hereof, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Owners of the Certificates pursuant to this Trust Agreement, unless such Owners shall have offered to the Trustee security or indemnity, reasonably satisfactory to the Trustee, against the reasonable costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Trustee may consult with counsel, who may be counsel to the Corporation or the District, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect to any action taken or suffered by it hereunder in good faith in accordance therewith. The Trustee shall not be responsible for the sufficiency of the Certificates or the Installment Purchase Agreement, or of the assignment made to it hereunder, or for statements made in the preliminary or final official statement relating to the Certificates. The Trustee shall not be required to take notice or be deemed to have notice of any default or Event of Default hereunder, except failure of any of the payments to be made to the Trustee required to be made hereunder or under the Installment Purchase Agreement, unless the Trustee shall be specifically notified in writing of such default or Event of Default by the District, the Corporation or the Owners of not less than 5% of the aggregate principal evidenced by the Certificates then Outstanding. Whenever in the administration of its rights and obligations hereunder the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter(unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Written Certificate of 80199094.3 30 the District or a Written Certificate of the Corporation, and such certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions hereof upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it deems reasonable. The Trustee may buy, sell, own, hold and deal in any of the Certificates and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party hereto. The Trustee,either as principal or agent, may also engage in or be interested in any financial or other transaction with the Corporation or the District, and may act as agent, depository or trustee for any committee or body of Owners or of owners of obligations of the Corporation or the District as freely as if it were not the Trustee hereunder. The Trustee may, to the extent reasonably necessary, execute any of the trusts or powers hereof and perform any rights and obligations required of it hereunder by or through agents, attorneys or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its rights and obligations hereunder, and the Trustee shall not be answerable for the negligence or misconduct of any such agent, attorney or receiver selected by it with reasonable care; provided, however, that in the event of any negligence or misconduct of any such attorney, agent or receiver, the Trustee shall diligently pursue all remedies of the Trustee against such agent, attorney or receiver. The Trustee shall not be liable for any error of judgment made by it in good faith unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. The Trustee shall not be answerable for the exercise of any trusts or powers hereunder or for anything whatsoever in connection with the funds established hereunder, except only for its own willful misconduct,negligence or breach of an obligation hereunder. The Trustee may, on behalf of the Owners, intervene in any judicial proceeding to which the Corporation or the District is a party and which, in the opinion of the Trustee and its counsel, affects the Certificates or the security therefor, and shall do so if requested in writing by the Owners of at least 5% of the aggregate principal evidenced by Certificates then Outstanding, provided the Trustee shall have no duty to take such action unless it has been indemnified to its reasonable satisfaction against all risk or liability arising from such action. ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT Section 9.01. Amendment or Suoolement. (a) This Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee hereunder may be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding when the prior written consents of the Owners of a majority of the aggregate principal evidenced by the Certificates then Outstanding, exclusive of Certificates disqualified as provided in Section 9.02 hereof, are filed with the Trustee. No such amendment or supplement shall (i)extend the stated Principal Payment Date of any Certificate or reduce the rate of interest evidenced thereby or extend the time of payment of such interest or reduce the amount of principal evidenced thereby, (ii)reduce the percentage of Owners whose consent is required for 80198094.3 31 the execution of any amendment hereof or supplement hereto without the prior written consent of the Owners of all Certificates then Outstanding, (iii)modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee, or (iv)amend this Section without the prior written consent of the Owners of all Certificates then Outstanding. (b) This Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee hereunder may also be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding upon execution, without the written consents of any Owners, but only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the Corporation or the District to be observed or performed herein other agreements, conditions, covenants and terms thereafter to be observed or performed by the Corporation or the District, or to surrender any right or power reserved herein to or conferred herein on the Corporation or the District; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the Corporation or the District may deem desirable or necessary and not inconsistent herewith; (iii) to make such additions,deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates;or (iv) for any other reason, provided such amendment or supplement does not adversely affect the rights or interests of the Owners. Section 9.02. Disqualified Certificates. Certificates owned or held by or for the account of the District (but excluding Certificates held in any pension or retirement fund of the District) shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Certificates provided in this Article, and shall not be entitled to consent to or take any other action provided in this Article, and the Trustee may adopt appropriate regulations to require each Owner, before his consent provided for herein shall be deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in this Section. Section 9.03. Endorsement or Replacement of Certificates After Amendment or Supplement. After the effective date of any action taken as hereinabove provided in this Article, the Trustee may determine that the Certificates may bear a notation by endorsement in faun approved by the Trustee as to such action, and in that case upon demand of the Owner of any Outstanding Certificate and presentation of such Certificate for such purpose at the Principal Office a suitable notation as to such action shall be made on such Certificate. If the Trustee shall receive an Opinion of Counsel advising that new Certificates modified to conform to such action are necessary, modified Certificates shall be prepared, and in that case upon demand of the Owner of any Outstanding Certificates such new Certificates shall be exchanged at the Principal 80198(&1.3 32 Office without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates. Section 9.04. Amendment by Mutual Consent. The provisions of this Article shall not prevent any Owner from accepting any amendment as to the particular Certificates owned by such Owner,provided that due notation thereof is made on such Certificates. ARTICLE X DEFEASANCE Section 10.01. Discharge of Certificates and Trust Agreement. (a) If the Trustee shall pay or cause to be paid or there shall otherwise be paid(i)to the Owners of all Outstanding Certificates the interest and principal evidenced thereby at the times and in the manner stipulated herein and therein, and (ii)all other amounts due hereunder and under the Installment Purchase Agreement,then such Owners shall cease to be entitled to the pledge of and lien on the amounts on deposit in the funds and accounts established hereunder, as provided herein, and all agreements and covenants of the Corporation, the District, and the Trustee to such Owners hereunder shall thereupon cease, terminate and become void and shall be discharged and satisfied. (b) Any Outstanding Certificate shall be deemed to have been paid within the meaning and with the effect expressed in this Section when the whole amount of the principal, premium, if any, and interest evidenced by such Certificate shall have been paid or when (i) [Reserved], (ii)there shall be on deposit with the Trustee, moneys, or Government Obligations, or any combination thereof,the principal of and the interest on which when due, and without any reinvestment thereof, will provide moneys which shall be sufficient to pay when due the principal,premium, if any,and interest evidenced by such Certificate and due and to become due on or prior to its stated Principal Payment Date, and(iii)if the stated Principal Payment Date of such Certificate will not occur, and said Certificate is not to be prepaid, within the next succeeding 60 days, the District shall have given the Trustee irrevocable instructions to give notice, as soon as practicable to the Owner of such Certificate,stating that the deposit of moneys or Government Obligations required by clause(ii) of this subsection has been made with the Trustee and that such Certificate, or portion thereof, is deemed to have been paid in accordance with this Section and stating such Principal Payment Date upon which moneys are to be available for the payment of the principal, premium, if any, and interest evidenced by said Certificate, or portion thereof. Neither the moneys nor the Government Obligations deposited with the Trustee pursuant to this Section nor principal or interest payments on any such Government Obligations shall be withdrawn or used for any purpose other than, and shall be held in trust for and pledged to, the payment of the principal, premium, if any, and interest evidenced by said Certificate, or portions thereof. If payment of less than all of the Certificates is to be provided for in the manner and with the effect expressed in this Section, the Trustee or the District, as applicable, shall select such Certificates, or portions thereof in the principal amounts designated to the Trustee by the District. 90198094.3 33 (c) After the payment of all the interest and principal evidenced by all Outstanding Certificates and all other amounts due hereunder and under the Installment Purchase Agreement as provided in this Section, the Trustee shall execute and deliver to the Corporation and the District all such instruments as may be necessary or desirable to evidence the discharge and satisfaction of this Trust Agreement, the Trustee shall pay over or deliver to the District all moneys or securities held by it pursuant hereto which are not required for the payment of the interest and principal evidenced by such Certificates and all other amounts due hereunder and under the Installment Purchase Agreement. (d) Prior to any defeasance becoming effective under this Article, the District shall cause to be delivered (i) an executed copy of a report, addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and the District, of a nationally recognized certified public accountant, or firm of such accountants, verifying that the Government Obligations and cash, if any, satisfy the requirements of clause(ii) of subsection(b) of this Section (a "Verification'), (ii)a copy of the escrow deposit agreement entered into in connection with such defeasance, which escrow deposit agreement shall provide that no substitution of Government Obligations shall be permitted except with other Government Obligations and upon delivery of a new Verification and no reinvestment of Government Obligations shall be permitted except as contemplated by the original Verification or upon delivery of a new Verification, and (iii) a copy of an Opinion of Counsel, dated the date of such defeasance and addressed to the Trustee and the District, in form and in substance acceptable to the Trustee and the District, to the effect that such Certificates have been paid within the meaning and with the effect expressed in this Trust Agreement, all agreements and covenants of the Corporation, the District and the Trustee to the Owners of such Certificates under this Trust Agreement have ceased,terminated and become void and have been discharged and satisfied. Section 10.02. Unclaimed Moneys. Any moneys held by the Trustee in trust for the payment and discharge of the interest or principal evidenced by any of the Certificates which remain unclaimed for two years after the date when such interest or principal evidenced by such Certificates have become payable, if such moneys were held by the Trustee at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee after the date when the interest and principal evidenced by such Certificates have become payable, shall be repaid by the Trustee to the District as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the District for the payment of the interest and principal evidenced by such Certificates. ARTICLE XI MISCELLANEOUS Section 11.01. Benefits of Trust Agreement. Nothing contained herein, expressed or implied, is intended to give to any Person other than the Corporation, the District, the Trustee and the Owners any claim, remedy or right under or pursuant hereto, and any agreement, condition, covenant or term required herein to be observed or performed by or on behalf of the Corporation or the District shall be for the sole and exclusive benefit of the Trustee and the Owners. 80198M.3 34 Section 11.02. Successor Deemed Included in all References to Predecessor. Whenever the Corporation, the District or the Trustee, or any officer thereof, is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the Corporation, the District or the Trustee, or such officer, and all agreements, conditions, covenants and terms required hereby to be observed or performed by or on behalf of the Corporation, the District or the Trustee, or any officer thereof, shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 11.03. Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required herein to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact and date of the execution by any Owner or his attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state or territory in which he purports to act that the Person signing such declaration, request or other instrument or writing acknowledged to him the execution thereof,or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer, or by such other proof as the Trustee may accept which it may deem sufficient. The ownership of any Certificates and the amount, payment date, number and date of owning the same may be proved by the registration books maintained by the Trustee pursuant to the provisions of Section 2.07 hereof. Any declaration, request or other instrument in writing of the Owner of any Certificate shall bind all future Owners of such Certificate with respect to anything done or suffered to be done by the Corporation,the District or the Trustee in good faith and in accordance therewith. Section 11.04. Waiver of Personal Liability. Notwithstanding anything contained herein to the contrary, no member, officer or employee of the District or the Corporation shall be individually or personally liable for the payment of any moneys, including without limitation,the interest or principal evidenced by the Certificates, but nothing contained herein shall relieve any member, officer or employee of the District or the Corporation from the performance of any official duty provided by any applicable provisions of law, by the Installment Purchase Agreement or hereby. Section 11.05. Acquisition of Certificates by District. All Certificates acquired by the District, whether by purchase or gift or otherwise, shall be surrendered to the Trustee for cancellation. Section 11.06. Content of Certificates. Every Written Certificate of the District and every Written Certificate of the Corporation with respect to compliance with any agreement, condition,covenant or tern contained herein shall include(a)a statement that the Person making or giving such certificate has read such agreement, condition, covenant or term and the definitions herein relating thereto, (b)a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based, 80198094.3 35 (c)a statement that, in the opinion of the signer, the signer has made or caused to be made such examination or investigation as is necessary to enable the signer to express an informed opinion as to whether or not such agreement, condition, covenant or term has been complied with, and (d) a statement as to whether, in the opinion of the signer, such agreement, condition, covenant or teem has been complied with. Any Written Certificate of the District and any Written Certificate of the Corporation may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, unless the Person making or giving such certificate knows that the Opinion of Counsel with respect to the matters upon which each Person's certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of Counsel may be based, insofar as it relates to factual matters, upon information which is in the possession of the District or the Corporation upon a representation by an officer or officers of the District or the Corporation, as the case may be, unless the counsel executing such Opinion of Counsel knows that the representation with respect to the matters upon which such counsel's opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Section 11.07. Funds and Accounts. Any fund or account required to be established and maintained herein by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purposes of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund, but all such records with respect to all such funds and accounts shall at all times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the Certificates and the rights of the Owners. The Trustee may establish such funds and accounts as it deems necessary to perform its obligations hereunder. Trustee may commingle any of the moneys held by it hereunder for investment purposes only; provided, however, that the Trustee shall account separately for the moneys in each fund or account established pursuant to this Trust Agreement. Section 11.08. Article and Section Headings. Gender and References. The singular form of any word used herein, including the terms defined in Section 1.01 hereof, shall include the plural, and vice versa, unless the context otherwise requires. The use herein of a pronoun of any gender shall include correlative words of the other genders. The headings or titles of the several Articles and Sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof. All references herein to "Articles," "Sections," subsections or clauses are to the corresponding Articles, Sections, subsections or clauses hereof, and the words "hereby," "herein," "hereof," "hereto," "herewith," "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section, subsection or clause thereof. Section 11.09. Partial Invalidity. If any one or more of the agreements, conditions, covenants or terms required herein to be observed or performed by or on the part of the Corporation, the District or the Trustee shall be contrary to law, then such agreement or agreements, such condition or conditions, such covenant or covenants or such term or terms shall 80198094.3 36 be null and void to the extent contrary to law and shall be deemed separable from the remaining agreements, conditions, covenants and terms hereof and shall in no way affect the validity hereof or of the Certificates,and the Owners shall retain all the benefit, protection and security afforded to them under any applicable provisions of law. The Corporation, the District and the Trustee hereby declare that they would have executed this Trust Agreement,and each and every Article, Section, paragraph, subsection, sentence, clause and phrase hereof and would have authorized the execution and delivery of the Certificates pursuant hereto irrespective of the fact that any one or more Articles, Sections, paragraphs, subsections, sentences, clauses or phrases hereof or the application thereof to any Person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 11.10. California Law. This Trust Agreement shall be governed by and construed in accordance with the laws of the State. Section 11.11. Notices. Any written notice, statement, demand, consent, approval, authorization, offer, designation, request or other communication to be given hereunder shall be given to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time, namely: If to the District: Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708 Attention: Director of Finance and Administrative Services If to the Corporation: Orange County Sanitation District Financing Corporation c/o Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708 Attention: Treasurer If to the Trustee: U.S. Bank National Association Attention: Each such notice, statement, demand,consent,approval, authorization,offer, designation, request or other communication hereunder shall be deemed delivered to the party to whom it is addressed (a) if personally served or delivered, upon delivery, (b) if given by electronic communication, whether by telex, telegram or telecopier, upon the sender's receipt of an appropriate answerback or other written acknowledgment, (c) if given by registered or certified mail, return receipt requested, deposited with the United States mail postage prepaid, 72 hours after such notice is deposited with the United States mail, (d)if given by overnight courier, with courier charges prepaid, 24 hours after delivery to said overnight courier, or (e) if given by any other means, upon delivery at the address specified in this Section. Section 11.12. Effective Date. This Trust Agreement shall become effective upon its execution and delivery. 801998 3 37 Section 11.13. Execution in Counterparts. This Trust Agreement may be simultaneously executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. 801990943 38 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be executed by their respective officers thereunto duly authorized, all as of the day and year first written above. U.S. BANK NATIONAL ASSOCIATION, as Trustee By: Authorized Officer ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION By: Treasurer ORANGE COUNTY SANITATION DISTRICT By: Chair of the Board of Directors (S E A L) Attest: By: Secretary of the Board of Directors 80198094.3 39 EXHIBIT A FORM OF CERTIFICATE No. R— ***$*** Unless this Certificate is presented by an authorized representative of The Depository Trust Company to the Trustee for registration of transfer, exchange or payment, and any Certificate executed and delivered is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede& Co.,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. ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATE OF PARTICIPATION SERIES 2008A PRINCIPAL PAYMENT DATE INTEREST RATE DATED DATE CUSH, ,2008 REGISTERED OWNER: Cede&Co. PRINCIPAL AMOUNT: DOLLARS THIS IS TO CERTIFY that the Registered Owner of this Certificate of Participation (this "Certificate"), as identified above, is the owner of a direct, fractional undivided interest in certain installment payments (`'Installment Payments"), and the interest thereon, payable under and pursuant to the Installment Purchase Agreement, dated as of May 1, 2008 (the "Installment Purchase Agreement"), by and between the Orange County Sanitation District(the "District"), a county sanitation district organized and existing under the laws of the State of California, and the Orange County Sanitation District Financing Corporation (the"Corporation'), a nonprofit public benefit corporation organized and existing under the laws of the State of California. Certain of the rights of the Corporation under the Installment Purchase Agreement, including the right to receive the Installment Payments, and the interest thereon,have been assigned without recourse by the Corporation to U.S. Bank National Association, a national banking association duly organized and existing under the laws of the United States of America,as trustee(the "Trustee') under the Trust Agreement, dated as of May 1,2008(the"frost Agreement'),by and among the Trustee, the District and the Corporation. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement. The District has executed and delivered the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement'), by and between the District and the Corporation, pursuant to which the District establishes and declares the conditions and terms 80199 9.3 A-1 upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon, will be incurred and secured. This Certificate is one of the duly authorized Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates") evidence principal in the aggregate amount of$[PAR], executed pursuant to the terms of the Trust Agreement. The Certificates evidence direct, fractional undivided interests in the Installment Payments, and the interest thereon, payable under the Installment Purchase Agreement. The Certificates are executed and delivered to refinance certain improvements to the wastewater collection,treatment and disposal facilities of the District(the"Wastewater System"),to finance a reserve fund for the Certificates,to pay the costs of issuance incurred in connection therewith and to pay certain other related costs. The Installment Payments, and the interest thereon,are to be paid by the District pursuant to the Installment Purchase Agreement in consideration for the purchase of certain improvements to the Wastewater System and for the other agreements and obligations undertaken by the Corporation under the Installment Purchase Agreement and the Trust Agreement. The income and revenue received by the District from the operation of the Wastewater System remaining after the payment of maintenance and operation or ownership costs of the Wastewater System (as more fully described in the Installment Purchase Agreement, the "Net Revenues") are, pursuant to the Master Agreement, pledged to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations (as such terms are defined in the Master Agreement). The Installment Purchase Agreement constitutes a Senior Obligation and, as such, shall be subject to the provisions of the Master Agreement,and shall be afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The Installment Purchase Agreement is payable on a parity with the other existing Senior Obligation. The District may at any time incur Senior Obligations in addition to existing Senior Obligations and the Installment Purchase Agreement payable from Net Revenues as provided in the Master Agreement on a parity with all other Senior Obligations theretofore incurred, but only subject to the conditions and upon compliance with the procedures set forth in the Master Agreement. The District is not required to advance any moneys derived from any source of income other than Net Revenues and the other funds provided in the Installment Purchase Agreement for the payment of the Installment Payments, and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement, or for the performance of any agreements or covenants required to be performed by it contained therein. The obligation of the District to pay the Installment Payments, and the interest thereon,and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, solely from such Net Revenues and other funds provided for therein, and does not constitute a debt of the District or of the State of California, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. 80198094.3 A-2 Reference is hereby made to the Master Agreement,the Installment Purchase Agreement and to the Trust Agreement and any and all amendments thereof and supplements thereto for a description of the terms under which the District's obligation to pay the Installment Payments, and the interest thereon, is incurred, the Certificates are executed and delivered, the provisions with regard to the nature and extent of the Net Revenues, and the rights of the Owners of the Certificates. All of the terms of the Master Agreement, the Installment Purchase Agreement and the Trust Agreement are hereby incorporated herein. The Trust Agreement constitutes a contract among the District, the Corporation and the Trustee for the benefit of the Owners of the Certificates, to all the provisions of which the Owner of this Certificate, by acceptance hereof, agrees and consents. The Registered Owner of this Certificate is entitled to receive, subject to the terms of the Trust Agreement on the Principal Payment Date set forth above, upon presentation and surrender of this Certificate at the principal corporate trust office of the Trustee in Los Angeles, California (the "Principal Office"),the Principal Amount specified above, evidencing the Owner's interest in the Installment Payments coming due on the Principal Payment Date, and to receive on February I and August 1 of each year, commencing on August 1, 2008 (the "Interest Payment Dates'), interest accrued thereon at the Interest Rate specified above,computed on the basis of a 360-day year consisting of twelve 30-day months, until said Principal Amount is paid in full, evidencing the Registered Owner's interest in the interest evidenced by the Installment Payments coming due on each of said dates. This Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after the 15th day of the month next preceding an Interest Payment Date,whether or not such day is a business day (each such date, a "Record Date"), and on or prior to the following Interest Payment Date, in which case this Certificate shall evidence interest from such Interest Payment Date,or unless such date of execution shall be on or prior to the first Record Date,in which case this Certificate shall evidence interest from the Dated Date specified above. Notwithstanding the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default,this Certificate shall evidence interest from the last Interest Payment Date to which interest has been paid in full or duly provided for. Payments of interest evidenced by the Certificates shall be made to the Owners thereof (as determined at the close of business on the Record Date next preceding the related Interest Payment Date) by check or draft of the Trustee mailed to the address of each such Owner as it appears on the registration books maintained by the Trustee pursuant to the Trust Agreement,or to such other address as may be furnished in writing to the Trustee by such Owner. Payment of principal evidenced by the Certificates, on their stated principal payment dates, shall be made only upon presentation and surrender of the Certificates at the Principal Office. All such amounts are payable in lawful money of the United States of America. The Certificates are authorized to be executed and delivered in the form of fully registered certificates in denominations of$5,000 or any integral multiple thereof("Authorized Denominations"). 80198094.3 A-3 This Certificate may be transferred or exchanged by the Registered Owner hereof, in person or by his attorney duly authorized in writing, at the Principal Office, but only in the manner, subject to the limitations and upon payment of the charges provided in the Trust Agreement. The Trustee may treat the Registered Owner hereof as the absolute owner hereof for all purposes, whether or not the principal or interest evidenced by this Certificate shall be overdue, and the Trustee shall not be affected by any knowledge or notice to the contrary; and payment of the principal and interest evidenced by this Certificate shall be made only to such Registered Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by this Certificate to the extent of the sum or sums so paid. The Certificates are not subject to prepayment prior to their stated Principal Payment Dates. To the extent and in the manner permitted by the terms of the Trust Agreement,the Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee under the Trust Agreement may be amended or supplemented at any time by an amendment or supplement thereto which shall become binding when the prior written consents of the Owners of a majority of the aggregate principal evidenced by the Certificates then outstanding, exclusive of Certificates disqualified as provided under the Trust Agreement, are filed with the Trustee. No such supplement or amendment shall (a)extend the stated Principal Payment Date of any Certificate or reduce the rate of interest evidenced thereby or extend the time of payment of such interest or reduce the amount of principal evidenced thereby, (b) reduce the percentage of Owners whose consent is required for the execution of any amendment of or supplement to the Trust Agreement without the prior written consent of the Owners of all Certificates then outstanding, (c)modify any of the rights or obligations of the Trustee without the prior written consent of the Trustee, or (d)amend the amendment provisions of the Trust Agreement without the prior written consent of the Owners of all Certificates then outstanding. To the extent and in the manner permitted by the terms of the Trust Agreement,the Trust Agreement and the rights and obligations of the Corporation, the District, the Owners and the Trustee under the Trust Agreement may also be amended or supplemented at any time by an amendment or supplement thereto which shall become binding upon execution, without the written consents of any Owners, but only to the extent permitted by law and only (a)to add to the agreements, conditions, covenants and terms required by the Corporation or the District to be observed or performed under the Trust Agreement other agreements, conditions, covenants and terms thereafter to be observed or performed by the Corporation or the District, or to surrender any right or power reserved therein to or conferred therein on the Corporation or the District,and which in either case shall not adversely affect the rights or interests of the Owners, (b)to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Trust Agreement or in regard to questions arising thereunder which the Corporation or the District may deem desirable or necessary and not inconsistent therewith, (c)to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates, or (d)for any other reason, provided such amendment or supplement does not adversely affect the rights or interests of the Owners. 801980W.3 A-4 THE DISTRICT HAS CERTIFIED that all acts, conditions and things required by the statutes of the State of California and by the Tmst Agreement to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Certificate do exist, have happened and have been performed in regular and due time, form and manner as required by law, and that the Trustee is duly authorized to execute and deliver this Certificate. B0198094.3 A-5 IN WITNESS WHEREOF, this Certificate has been executed by the manual signature of an authorized signatory of the Trustee as of the date set forth below. Date: , 2008 U.S. BANK NATIONAL ASSOCIATION, as Trustee By: Authorized Officer 8019SM4.3 A-6 i i ASSIGNMENT For value received, the undersigned do(es) hereby sell, assign and transfer unto the within-mentioned Certificate and hereby irrevocably constitute(s) and appoint(s) attorney,to transfer the same on the books of the Trustee with full power of substitution in the premises. Dated: Note: The signature(s)on this Assignment must correspond with the name(s)as written on the face of the within registered Certificate in every particular, without alteration or enlargement or any change whatsoever. Tax I.D. M Signature Guaranteed: Note: Si®mmre(s)must be guaranteed by an eligible Note: The signatures)on this Assignment must correspond gumnntor. with the retests)as written on the face ofthe within Certificate in every particular without altemaon or enlargement or any choose whatsoever. 80199M.7 A-7 �.. Fulbright&Jaworski L.L.P. Draft-5/12/08 $ INSTALLMENT PURCHASE AGREEMENT by and between ORANGE COUNTY SANITATION DISTRICT and ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION Dated as of May 1,2008 Relating to $[PAR] Orange County Sanitation District Refunding Certificates of Participation Series2008A 8019832]1 < TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.................................................................................................2 Section 1.01. Definitions............................................................................................2 Section 1.02. Definitions in Master Agreement and Trust Agreement......................3 ARTICLE II PURCHASE OF PROJECT BY,AND SALE THEREOF TO, THE CORPORATION; PAYMENT........................................................................4 Section 2.01. Acquisition,Construction and Installation of the Project....................4 Section2.02. Payment................................................................................................4 ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE DISTRICT; INSTALLMENT PAYMENTS...................................................4 Section 3.01. Purchase and Sale of Project................................................................4 Section3.02. Installment Payments...........................................................................4 Section3.03. Reserve Fund Payments.......................................................................5 Section 3.04. Obligation Absolute.............................................................................5 Section3.05. Nature of Agreement............................................................................6 ARTICLE IV NO PREPAYMENT OF INSTALLMENT PAYMENTS; DISCHARGE...................................................................................................6 Section 4.01. No Prepayment of Installment Payments.............................................6 Section 4.02. Discharge of Obligations.....................................................................6 ARTICLE V COVENANTS.................................................................................................6 Section 5.01. Compliance with Master Agreement...................................................6 Section 5.02. Compliance with Installment Purchase Agreement.............................6 Section 5.03. Protection of Security and Rights........................................................7 Section 5.04. Indemnification of Corporation........................................................... 7 Section5.05. Further Assurances............................................................................... 7 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION.............................................................................................7 Section6.01. Events of Default................................................................................. 7 Section 6.02. Remedies on Default............................................................................8 Section6.03. Non-Waiver..........................................................................................8 Section 6.04. Remedies Not Exclusive......................................................................8 ARTICLE VII AMENDMENTS...................................................................I.........................9 Section7.01. Amendments........................................................................................9 ARTICLE Vlll MISCELLANEOUS...................................................................................... 10 Section 8.01. Liability of District Limited............................................................... 10 Section 8.02. Limitation of Rights........................................................................... 10 Section8.03. Assignment........................................................................................ 10 Section8.04. Notices............................................................................................... 10 80199327.2 -1- TABLE OF CONTENTS t (continued) Page Section 8.05. Successor Is Deemed Included in all References to Predecessor...... I 1 Section 8.06. Waiver of Personal Liability.............................................................. 11 Section 8.07. Article and Section Headings,Gender and References..................... 11 Section 8.08. Partial Invalidity................................................................................. 11 Section 8.09. Law Governing.................................................................................. 12 Section 8.10. Execution in Counterparts.................................................................. 12 EXHIBIT A DESCRIPTION OF PROJECT........................................................A-1 80198327.2 -Il- INSTALLMENT PURCHASE AGREEMENT THIS INSTALLMENT PURCHASE AGREEMENT (this "Installment Purchase Agreement'), dated as of May 1, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District'), and the ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California(the"Corporation"). WITNESSETH: WHEREAS, to refinance the acquisition, construction and installation of certain improvements to the wastewater system (the "Prior Project') of certain predecessor county sanitation districts of the District, to wit, County Sanitation District Nos. 1, 2, 3, 5, 6, 7 and 11 (collectively, the "Predecessor Districts"), the Predecessor Districts purchased the Prior Project by agreeing to make installment payments (the `Prior Installment Payments") pursuant to the Amendatory Agreement for Acquisition and Construction, dated as of October 1, 1992, by and among the Predecessor Districts; WHEREAS, to provide the funds necessary to refinance the Prior Project, the Predecessor Districts caused the execution and delivery of the Refunding Certificates of Participation, Series 1992 (the "Prior Certificates"), evidencing direct, undivided fractional interests in the Prior Installment Payments; WHEREAS, the District desires to refinance all of the Prior Project by prepaying all of the remaining principal components of the Prior Installment Payments, and the interest components thereof to the date of prepayment,thereby causing all of the Prior Certificates to be prepaid; WHEREAS, to provide the funds necessary to prepay the Prior Installment Payments to be so prepaid, the District and the Orange County Sanitation District Financing Corporation (the "Corporation") desire that the Corporation purchase the Prior Project from the District and the District sell the Prior Project to the Corporation, and that the District then purchase the Prior Project from the Corporation and the Corporation sell the Prior Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to this Installment Purchase Agreement the Corporation and the District have agreed to finance such prepayment by executing and delivering Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the"Certificates"); WHEREAS, pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000, by and between the District and the Corporation,the District has established and declared the conditions and terms upon which obligations such as this Installment Purchase Agreement, and the Installment Payments, and the interest thereon, are to be incurred and secured; 80198327.2 1 WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to this Installment Purchase Agreement to U.S. Bank National Association, as trustee (the"Trustee"); WHEREAS, in consideration of such assignment and the execution and delivery of the Trust Agreement, dated as of the date hereof, by and among the Trustee, the Corporation and the District, the Trustee has agreed to execute and deliver the Certificates, evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon, payable hereunder; WHEREAS, a portion of the Certificates will be used to prepay certain of the Prior Installment Payments; and WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Installment Purchase Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Installment Purchase Agreement; NOW, THEREFORE, in consideration of the covenants and provisions herein set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. Except as provided in Section 1.02 hereof or unless the context otherwise requires, the terms defined in this Section shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein: "Business Day" means a day other than (a) Saturday or Sunday, (b) a day on which banking institutions in the city in which the Principal Office is located are authorized or required by law to be closed, and (c) a day on which the New York Stock Exchange is authorized or obligated by law or executive order to be closed. "Certificates" means the Orange County Sanitation District Refunding Certificates of Participation, Series 2008A,executed and delivered under and pursuant to the Trust Agreement. "Closing Date" means May_,2008. "Corporation" means the Orange County Sanitation District Financing Corporation, a nonprofit public benefit corporation organized and existing under the laws of the State, and any successor thereto. 80198327.2 2 Q, "District" means the Orange County Sanitation District, a county sanitation district organized and existing under and by virtue of the laws of the State, and any successor thereto. "Event of Default"means an event described in Section 6.01 hereof. "Installment Payments" means the Installment Payments required to be made by the District pursuant to Section 3.02 hereof. "Installment Payment Date"means each August 1, commencing 1,200. "Installment Purchase Agreement" means this Installment Purchase Agreement, dated as of May 1, 2008, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance with the teens hereof. "Interest Payment Date" means February 1 and August 1 of each year, commencing August 1,2008. "Master Agreement" means the Master Agreement for District Obligations, dated as of August 1,2000, by and between the District and the Corporation,as originally executed and as it may from time to time be amended or supplemented in accordance with the terms thereof. "Person" means an individual, corporation, limited liability company, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Principal Office" means the Trustee's principal corporate trust office in Los Angeles, California. "Project"means the improvements to the Wastewater System, as described in Exhibit A hereto. "Trust Agreement" means the Trost Agreement, dated as of May 1, 2008, by and among the Trustee, the Corporation and the District, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. "Trustee" means U.S. Bank National Association, a national banking association duly organized and existing under the laws of the United States of America, or any other bank or trust company which may at any time be substituted in its place as provided in the Trost Agreement. Section 1.02. Definitions in Master Agreement and Trust Agreement Except as otherwise herein defined and unless the context otberwise requires, the terms defined in the Master Agreement or the Trust Agreement shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein have the meanings defined therein, such definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. With respect to any defined term which is given a different meaning under this Installment Purchase Agreement than under the Master Agreement or the Trust Agreement,as used herein it shall have the meaning given herein. 80198327.2 3 .o ARTICLE 11 PURCHASE OF PROJECT BY,AND SALE THEREOF TO, THE CORPORATION; PAYMENT Section 2.01. Acquisition, Construction and Installation of the Project. The District represents and warrants that it is the sole and exclusive owner of the Project. The Corporation hereby purchases from the District,and the District hereby sells to the Corporation, the Project in accordance with the provisions of this Installment Purchase Agreement. All right, title and interest in the Project shall immediately vest in the Corporation on the Closing Date without further action on the part of the Corporation or the District. Section 2.02. Payment. On the Closing Date, the Corporation shall pay to the District, as the purchase price of the Project, the amount of$[PAR],which amount shall be paid from the proceeds of the Certificates. ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE DISTRICT; INSTALLMENT PAYMENTS Section 3.01. Purchase and Sale of Project. The District hereby purchases from the Corporation, and the Corporation hereby sells to the District, the Project in accordance with the provisions of this Installment Purchase Agreement. All right, title and interest in and to the Project shall immediately vest in the District on the Closing Date without further action on the part of the District or the Corporation. Section 3.02. Installment Payments. The District shall pay to the Corporation, solely from Net Revenues and from no other sources, the purchase price of the Project in Installment Payments, with interest thereon, as provided herein. The Installment Payments shall be in the aggregate principal amount of$[PAR], and shall be payable on the Business Day immediately preceding each of the Installment Payment Dates in the principal amounts and shall accrue interest at the rates per annum set forth in the following schedule: 80199327.2 4 9 Installment Payment Date (August 1)_ Installment Payment Interest Rate 2008 $ % 2009 2010 2011 2012 2013 The Installment Payments shall accrue interest from the Closing Date, at the rates set forth above, payable on the Interest Payment Dates in each year. Such interest shall accrue on the basis of a 360-day year consisting of twelve 30-day months. Each Installment Payment, and each payment of interest thereon, shall be deposited with the Trustee, as assignee of the Corporation, no later than the Business Day next preceding the Installment Payment Date or Interest Payment Date on which such Installment Payment or payment of interest is due, in lawful money of the United States of America, in immediately available funds. If and to the extent that, on any such date, there are amounts on deposit in the Installment Payment Fund established under the Trust Agreement, or in any of the accounts therein, which amounts are not being held for the payment of specific Certificates, such amounts shall be credited against the Installment Payment,or payment of interest thereon,as applicable, due on such date. Section 3.03. Reserve Fund Payments. The District shall maintain or cause to be maintained in the Reserve Fund established under the Trust Agreement an amount equal to the Reserve Requirement;provided, however, that any replenishment thereof shall be payable solely from Net Revenues. On or before the last Business Day of each month, commencing on or before the last Business Day of each month during which an event occurs that causes the amount on deposit in the Reserve Fund to be reduced below, or further below, the Reserve Requirement, the District shall transfer, from Net Revenues, to the Trustee for deposit in the Reserve Fund, 1/12 of the amount of such reduction, except that no such transfer to the Trustee and deposit in the Reserve Fund need be made if the amount available and contained therein is at least equal to the Reserve Requirement. Section 3.04. Obligation Absolute. The obligation of the District to make the Installment Payments,and payments of interest thereon, and other payments required to be made by it under this Article, solely from Net Revenues, is absolute and unconditional, and until such time as the Installment Payments, payments of interest thereon, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to Article IV),the District shall not discontinue or suspend any Installment Payments, or payments of interest thereon, or other payments required to be made by it hereunder when due, whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments, payments of interest thereon, and other payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. 80199327.2 5 ; r Section 3.05. Nature of Agreement. This Installment Purchase Agreement constitutes a Senior Obligation and, as such, shall be subject to the provisions of the Master Agreement and shall be afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. ARTICLE IV NO PREPAYMENT OF INSTALLMENT PAYMENTS; DISCHARGE Section 4.01. No Prepayment of Installment Payments. (a) Installment Payments shall not be subject to prepayment prior to their respective Installment Payment Dates. Section 4.02. Discharge of Obligations. If all Installment Payments, and the interest thereon, shall be paid as and when due in accordance with the terms hereof, or prepaid in accordance with Section 4.01 hereof, and if all Certificates shall be fully paid, or provision therefor made in accordance with Article X of the Trust Agreement, and the Trust Agreement shall be discharged by its terms, then all agreements, covenants and other obligations of the District hereunder shall thereupon cease, terminate and become void and be discharged and satisfied. ARTICLE V COVENANTS Section 5.01. Compliance with Master Agreement. The District will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Master Agreement required to be observed and performed by it and will not cause, suffer or permit any default to occur thereunder. Section 5.02. Compliance with Installment Purchase Agreement. The District will punctually pay the Installment Payments, and interest thereon, and other payments required to be made by it hereunder in strict conformity with the terms hereof, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained herein required to be observed and performed by it, will not cause, suffer or permit any default to occur hereunder and will not terminate this Installment Purchase Agreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State or any political subdivision of either or any failure of the Corporation to observe or perform any agreement, condition, covenant or term contained herein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected herewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Corporation or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. 80199327.2 6 v Section 5.03. Protection of Security and Rights. The District will preserve and protect the security hereof and the rights of the Trustee, as assignee of the Corporation, to the Installment Payments, and interest thereon, and other payments required to be made by the District hereunder and will warrant and defend such rights against all claims and demands of all Persons. Section 5.04. Indemnification of Corporation. To the extent permitted by law, the District hereby agrees to indemnify and hold the Corporation and its members and officers harmless against any and all liabilities which might arise out of or are related to the Project, this Installment Purchase Agreement or the Certificates, and the District further agrees to defend the Corporation and its members and officers in any action arising out of or related to the Project, this Installment Purchase Agreement or the Certificates. Section 5.05. Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance hereof and for the better assuring and confirming onto the Corporation, or unto the Trustee, as assignee of the Corporation, the rights and benefits provided herein to the Corporation, or to the Trustee, as assignee of the Corporation. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION Section 6.01. Events of Default. The following shall be Events of Default under this Installment Purchase Agreement, and "Event of Default' shall mean any one or more of the following events: (a) if default shall be made by the District in the due and punctual payment of or on account of any Senior Obligation as the same shall become due and payable; (b) if default shall be made by the District in the performance of any of the agreements or covenants required herein, in the Trust Agreement or in the Master Agreement to be performed by it (other than as specified in (a) above), and such default shall have continued for a period of 30 days after the District shall have been given notice in writing of such default by the Corporation or the Trustee;provided, however,that the party or parties giving such notice may agree in writing to a reasonable extension of such period prior to the expiration of such 30 day period and, provided further, that if the District shall proceed to take curative action which, if begun and prosecuted with due diligence, cannot be completed within such a period of 30 days, then such period shall be increased without such written extension to such extent as shall be necessary to enable the District to diligently complete such curative action and such default shall not become an Event of Default for so long as shall be necessary to diligently complete such curative action;or (c) if the District shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or 801983273 7 9 without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the District or of the whole or any substantial part of its property. Section 6.02. Remedies on Default. Upon the occurrence of an Event of Default, the Trustee, as assignee of the Corporation, shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District and to compel the District to perform and carry out its duties under applicable law and the agreements and covenants required to be performed herein; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee,as assignee of the Corporation; (c) by suit in equity require the District to account as the trustee of an express trust; and to have a receiver or receivers appointed for the Wastewater System and of the issues, earnings, income, products and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer. Section 6.03. Non-Waiver. Nothing in this Article or in any other provision hereof shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the Installment Payments, and the interest thereon,to the Trustee,as assignee of the Corporation, at the respective due dates from the Net Revenues and the other funds herein committed for such payment, or shall affect or impair the right of the Trustee, as assignee of the Corporation, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied herein. A waiver of any default or breach of duty or contract by the Trustee, as assignee of the Corporation, shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee,as assignee of the Corporation,to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee, as assignee of the Corporation, by applicable law or by this Article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee,as assignee of the Corporation. If any action,proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Trustee, as assignee of the Corporation, the District and the Trustee, as assignee of the Corporation, shall be restored to their former positions, rights and remedies as if such action,proceeding or suit had not been brought or taken. Section 6.04. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee, as assignee of the Corporation, is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given 90198327.2 8 hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by law. ARTICLE VII AMENDMENTS Section 7.01. Amendments. (a) This Installment Purchase Agreement and the rights and obligations of the District, the Corporation and the Trustee, as assignee of the Corporation, may be amended or modified from time to time and at any time by a written amendment hereto executed by the District, the Corporation and the Trustee, as assignee of the Corporation, with the written consent of the Owners of a majority of the aggregate principal evidenced by Certificates then Outstanding. No such amendment shall (i) extend the payment date of any Installment Payment or reduce the amount of any Installment Payment, or the interest rate applicable thereto,without the prior written consent of the Owner of each affected Certificate, or (ii) reduce the percentage of Owners of the Certificates whose consent is required to effect any such amendment or modification, without the prior written consent of the Owners of all Certificates then Outstanding. (b) This Installment Purchase Agreement and the rights and obligations of the District, the Corporation and the Trustee, as assignee of the Corporation, may be amended or modified from time to time and at any time by a written amendment hereto executed by the District, the Corporation and the Trustee, as assignee of the Corporation, without the written consents of any Owners of the Certificates, but only to the extent permitted by law and only for any one or more of the following purposes: (i) to add to the agreements, conditions, covenants and terms required by the District, the Corporation or the Trustee, as assignee of the Corporation, to be observed or performed herein other agreements, conditions, covenants and terms thereafter to be observed or performed by the District,the Corporation or the Trustee,as assignee of the Corporation, or to surrender any right or power reserved herein to or conferred herein on the District,the Corporation or the Trustee,as assignee of the Corporation; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the District,the Corporation or the Trustee, as assignee of the Corporation, may deem desirable or necessary and not inconsistent herewith; (iii) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of interest on the Installment Payments;and (iv) to make such other changes herein or modifications hereto as the District, the Corporation or the Trustee, as assignee of the Corporation, may deem desirable or necessary,and which shall not materially adversely affect the interests of the Owners of the Certificates. 80198327.2 9 e ARTICLE VIII MISCELLANEOUS Section 8.01. Liability of District Limited. Notwithstanding anything contained herein to the contrary, the District shall not be required to advance any moneys derived from any source of income other than Net Revenues and the other funds provided herein for the payment of the Installment Payments, and the interest thereon, and other payments required to be made by it hereunder, or for the performance of any agreements or covenants required to be performed by it contained herein. The District may, however, but in no event shall be obligated to, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose. The obligation of the District to pay the Installment Payments, and the interest thereon, and other payments required to be made by it hereunder is a special obligation of the District payable, in the manner provided herein, solely from Net Revenues and other funds provided for herein, and does not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District or the State, or any political subdivision thereof, is pledged to the payment of the Installment Payments, or the interest thereon, or other payments required to be made hereunder. Section 8.02. Limitation of Rights. Nothing in this Installment Purchase Agreement expressed or implied is intended or shall be construed to give to any Person other than the District, the Corporation and the Trustee, as assignee of the Corporation, any legal or equitable right, remedy or claim under or in respect of this Installment Purchase Agreement or any covenant, condition or provision therein or herein contained, and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the District, the Corporation and the Trustee,as assignee of the Corporation. Section 8.03. Assienment. The District and the Corporation hereby acknowledge the transfer,conveyance and assignment by the Corporation to the Trustee of all of the Corporation's rights, title and interest in and to this Installment Purchase Agreement (excepting its rights to indemnification hereunder), including the right to receive Installment Payments, and the interest thereon,from the District,pursuant to the Trust Agreement. Section 8.04. Notices. Any written notice, statement, demand, consent, approval, authorization, offer, designation, request or other communication to be given hereunder shall be given to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time,namely: If to the District: Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708 Attention: Director of Finance and Administrative Services If to the Corporation: Orange County Sanitation District Financing Corporation c/o Orange County Sanitation District 80IM3272 10 10844 Ellis Avenue Fountain Valley,California 92708 Attention:Treasurer If to the Trustee: U.S. Bank National Association Attention: Each such notice,statement, demand,consent,approval, authorization, offer,designation, request or other communication hereunder shall be deemed delivered to the party to whom it is addressed (a) if personally served or delivered, upon delivery, (b) if given by electronic communication, whether by telex, telegram or telecopier, upon the sender's receipt of an appropriate answerback or other written acknowledgment, (c) if given by registered or certified mail, return receipt requested, deposited with the United States mail postage prepaid, 72 hours after such notice is deposited with the United States mail, (d) if given by overnight courier, with courier charges prepaid, 24 hours after delivery to said overnight courier, or (e) if given by any other means, upon delivery at the address specified in this Section. Section 8.05. Successor Is Deemed Included in all References to Predecessor. Whenever the District or the Corporation is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Corporation, and all agreements and covenants required hereby to be performed by or on behalf of the District or the Corporation shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 8.06. Waiver of Personal Liability. No official, officer or employee of the District shall be individually or personally liable for the payment of the Installment Payments,or the interest thereon,or other payments required to be made by the District hereunder, but nothing contained herein shall relieve any official, officer or employee of the District from the performance of any official duly provided by any applicable provisions of law or hereby. Section 8.07. Article and Section Headings. Gender and References. The headings or titles of the several Articles and Sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof,and words of any gender shall be deemed and construed to include all genders. All references herein to "Articles," "Sections" and other subsections or clauses are to the corresponding articles, sections, subsections or clauses hereof; and the words"hereby,"`herein," "hereof.. "hereto," "herewith" and other words of similar import refer to this Installment Purchase Agreement as a whole and not to any particular Article, Section, subdivision or clause hereof. Section 8.08. Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the District or the Corporation shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants and portions thereof and shall in no way affect the validity hereof. 80198327.2 11 9 Section 8.09. Law Governing. This Installment Purchase Agreement shall be construed and governed in accordance with the laws of the State. Section 8.10. Execution in Counterparts. This Installment Purchase Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. 80198327.2 12 C IN WITNESS WHEREOF, the parties hereto have executed this Installment Purchase Agreement by their officers thereunto duly authorized as of the day and year first written above. ORANGE COUNTY SANITATION DISTRICT By: Chair of the Board of Directors (SEAL) Attest: By: Secretary of the Board of Directors ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION By: Treasurer 90199327.2 13 1 , EXH@IT A DESCRIPTION OF PROJECT 80198327.2 A-1 .i Fulbright&Jaworski L.L,P. Draft-5/12/08 OFFICIAL NOTICE INVITING BIDS $80,255,000- ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION SERIES 2008A (Book-Entry-Only) NOTICE IS HEREBY GIVEN that bids will be received by the Orange County Sanitation District (the "District) for the purchase of$80,255,000* original principal amount of Orange County Sanitation District Refunding Certificates of Participation,Series 2008A(the"Certificates"). Bids for less than all of the Certificates will not be accepted.The bids will be received in the form,at the place,and up to the time specified below(unless postponed as described herein): Date: Thursday,May 22,2008 10:00 a.m.,New York Time Place: Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,CA 92708-7018 Electronic Bids: As an accommodation to bidders,electronic proposals may be submitted to Ipero LLC; at www.newissuehome.i-deal.com and the Parity bid delivery system (the "Electronic Service"). The Electronic Service will act as agent of the bidder and not of the District in connection with the submission of bids and the District assumes no responsibility or liability for bids submitted through the Electronic Service. See "Information Regarding Electronic Proposals"herein. No Facsimile Bids: No bids will be accepted by facsimile. Terms of the Certificates The Preliminary Official Statement for the Certificates, May 16, 2008, including the cover page and all appendices thereto (the "Preliminary Official Statement"), provides certain information conceming the sale and delivery of $80,255,000* aggregate principal amount of the Certificates evidencing direct, undivided fractional interests in the Installment Payments (the "Installment Payments"), and the interest thereon, payable by the District pursuant to the Installment Purchase Agreement,dated as of May 1,2008(the`Installment Purchase Agreement'),by and between the District and the Orange County Sanitation District Financing Corporation (the"Corporation'). Each bidder must have obtained and reviewed the Preliminary Official Statement prior to bidding for the Certificates. This Official Notice Inviting Bids contains certain information for quick reference only, is not a summary of the issue and governs only the terms of the sale of,bidding for and closing procedures with respect to the Certificates.Bidders must read the entire Preliminary Official Statement to obtain information essential to making an informed investment decision. Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement'), by and between the District and the Corporation, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon,will be incurred and secured. Installment Payments Preliminary,subject to change. B i under the Installment Purchase Agreement are payable solely from Net Revenues, as provided in the Master Agreement and the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District(the"Wastewater System")remaining after payment of Maintenance and Operation Costs. The Issue The proceeds from the sale of the Certificates will be used to: (i)prepay all or a portion of certain outstanding certificates of participation of the District, (ii) at the discretion of the District, finance any settlement amount or termination payment relating to any certificates of participation prepaid by the District (iii)fund a reserve fund for the Certificates and (iv) pay costs of execution and delivery of the Certificates.The Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of May 1, 2008 (the "Trust Agreement"), by and among the District, the Corporation and U.S. Bank National Association,as trustee (the"Trustee"). Capitalized terms not defined herein shall have the same definitions as used in the Trust Agreement or the Master Agreement. Authorization On May 14, 2008, the District and the Corporation authorized the execution and delivery of the Installment Purchase Agreement and the Trust Agreement in connection with the execution and delivery of the Certificates. Outstanding Senior Obligations The District has outstanding Senior Obligations, evidenced by seven series of certificates of participation and two interest rate swaps, payable on a parity with the Installment Payments under the Installment Purchase Agreement. The two swap agreements were executed by the predecessor special districts to the District in connection with the execution and delivery of certain outstanding Senior Certificates.The payments under these swaps are payable on a parity with the Installment Payments under the Installment Purchase Agreement and other Senior Obligations, as provided in the Master Agreement. The term "Existing Senior Obligations" as used in the Preliminary Official Statement refers to the 1992 Agreement for Acquisition and Construction, the 1992 Swap, the 1993 Agreement for Acquisition and Construction, the 1993 Swap, the 2000 Installment Purchase Agreement, the 2003 Installment Purchase Agreement, the 2006 Installment Purchase Agreement, 2007 Series A Installment Purchase Agreement and the 2007 Series B Installment Purchase Agreement. Security and Source of Payments The Certificates evidence direct, undivided fractional interests in the Installment Payments, and the interest thereon, paid by the District pursuant to the Installment Purchase Agreement. The obligation of the District to pay the Installment Payments and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided under the Installment Purchase Agreement, solely from Net Revenues and other funds as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs,all as further provided in the Master Agreement. The District's obligation to make Installment Payments from Net Revenues is on a parity with the District's obligation to make payments with respect to its other outstanding obligations described as Senior Obligations and all Reimbursement Obligations with respect to Senior Obligations, as provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and is 80198354.3 2 ;w subject to the provisions of the Master Agreement and is afforded all of the advantages,benefits, interests and security for Senior Obligations pursuant to the Master Agreement. Pursuant to the Master Agreement, the District pledges all Net Revenues to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations,and the Net Revenues will not be used for any other purpose while any of the Senior Obligations or Reimbursement Obligations with respect to Senior Obligations remain unpaid; provided, however, that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Master Agreement. This pledge constitutes a first lien on the Net Revenues for the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. The term Senior Obligations, generally means all revenue bonds or notes(including bond anticipation notes and commercial paper)of the District authorized, executed, issued and delivered under and pursuant to applicable law,the Installment Purchase Agreement and all other contracts (including financial contracts) or leases of the District authorized and executed by the District under and pursuant to applicable law, the installment, lease or other payments under which are, in accordance with the provisions of the Master Agreement,payable from Net Revenues on a parity with the payments under the Master Agreement. The District may at any time incur Subordinate Obligations; provided, however, that prior to incurring such Subordinate Obligations,the District will have determined that the incurrence thereof will not materially adversely affect the District's ability to comply with the requirements of the Master Agreement. The District may at any time incur Reimbursement Obligations with respect to Subordinate Obligations. For a description of the District's outstanding Senior Obligations and Subordinate Obligations, we "FINANCIAL OBLIGATIONS — Existing Indebtedness" in the Preliminary Official Statement. The District may, in connection with the incurrence of Subordinate Obligations, pledge Net Revenues to the payment of Subordinate Obligations and Reimbursement Obligations with respect to Subordinate Obligations; provided, however, that such pledge, and any lien created thereby, shall be junior and subordinate to the pledge of, and lien on,Net Revenues for the payment of Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. Pursuant to the Master Agreement, the District is required,to the extent permitted by law,to fix, prescribe and collect fees and charges for the services and facilities of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125%of Debt Service on Senior Obligations for such Fiscal Year and (b)Net Operating Revenues equal to 1000% of Debt Service on all Obligations for such Fiscal Year.The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to mcet the requirements of the Master Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES— Rate Covenant" in the Preliminary Official Statement. The Trust Agreement provides for the funding of the Reserve Fund in an amount equal to the "Reserve Requirement,"which is defined as an amount,as of any date of calculation,equal to the least of (a) 10% of the original aggregate amount of principal evidenced by the Certificates(or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%,than 10"/u of the issue price of the Certificates), (b) the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Year. Amounts in the Reserve Fund may be used to pay principal of and interest evidenced by the Certificates to the extent that amounts in the Principal Account and Interest Account are insufficient therefore. A portion of the 80199354.3 3 w, proceeds of the Certificates and, at the District's option, certain other available monies of the District, in an amount equal to the Reserve Requirement will be deposited into the Reserve Fund. Additional Obligations In addition to the Existing Senior Obligations, the District may at any time incur Obligations payable on a parity or on a subordinate basis to the payment by the District of the Installment Payments upon satisfaction of conditions provided in the Master Agreement. See `SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES—Limitations on Issuance of Additional Obligations"in the Preliminary Official Statement. Book-Entry-Only The Certificates will be executed and delivered in the form of fully registered certificates payable in lawful money of the United States of America.The Certificates will be initially delivered only in book- entry form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Certificates will not receive physical certificates representing their ownership interests in the Certificates purchased. The Certificates will be delivered in Authorized Denominations of $5,000 and any integral multiple thereof. Payments of principal and interest evidenced by the Certificates are payable directly to DTC by the Trustee. Upon receipt of payments of such principal and interest, DTC will in turn distribute such payments to the beneficial owners of the Certificates. So long as the Certificates are in the DTC book- entry system,the interest,principal and prepayment premiums, if any, due with respect to the Certificates will be payable by the Trustee,or its agent,to DTC or its nominee. Principal and Interest Payments The Certificates will be dated as of the date of initial delivery and will evidence interest from that date (computed on the basis of a 360-day year of twelve 30-day months). Interest evidenced by the Certificates is payable semiannually on February 1 and August I of each year,commencing on August 1, 2008.Payment of principal and prepayment premium, if any, evidenced by the Certificates will be paid in lawful money of the United States of America upon presentation and surrender thereof at the Principal Office of the Trustee. Principal Amortization The Certificates will be executed and delivered in the approximate aggregate original principal amount of$80,255,000' and will be subject to principal amortization through serial maturities on August 1 in the years 2008 though 2013 in the amounts set forth in the Official Bid Form. No Prepayment The Certificates are not subject to prepayment prior to maturity. Interest Rates,Reoffering Prices,and Premium or Discount Bids Bidders must bid to purchase all and not part of the Certificates and must submit their bids on the Official Bid Form. Bidders must specify a rate of interest for each maturity of the Certificates. The rates Preliminary,subject to change. 80198354.3 4 v of interest must be expressed in multiples of one-eighth (Is)or one-twentieth (Vm)of one percent (1%), and no interest rate can exceed 4% per annum. All Certificates of the same maturity must evidence interest at the same rate. The successful bidder will,within 30 minutes after being notified of the award of the Certificates, advise the District of the initial bona fide public reoffering prices of each maturity of the Certificates on the date of award. The successful bidder will also be required, prior to delivery of the Certificates, to furnish to the District a certificate("Bidder's Certificate")acceptable to Special Counsel and taking into account any post bid adjustment of the principal amount of any of the maturities of the Certificates,which states with respect to each maturity of the Certificates that such successful bidder either(A)has purchased the applicable maturity of the Certificates for its own account and not with a view to distribution or resale and not in the capacity of a bond house,broker or other intermediary and the price at which such purchase was made,or(B)(1)has made a bona fide public offering to the public of each applicable maturity of the Certificates at the prices indicated in the information supplied on the date of the award,and(2)an amount at least equal to 10 percent of each such maturity of the Certificates was sold to the public at the prices indicated on the date of the award, with the exception of those maturities, if any, identified in such Bidder's Certificate,as to which such certificate shall explain the reasons why at least 10 percent of each such maturity was not sold to the public at the price indicated for each such maturity on the date of the award. For the purposes of the information submitted on the date of the award and the Bidder's Certificate, the"public"does not include bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers.In making such representations, the successful bidder must reflect the anticipated existence, if any, of a "derivative product" (e.g., a tender option) offered or to be offered by the bidder or its affiliate in connection with the initial sale of any of the Certificates. The successful bidder may also be asked by Special Counsel to clarify any discrepancies between the Bidder's Certificate and publicly available information relating to trades of the Certificates and to explain the failure to sell at least 100/9 of each maturity to the public at the prices indicated on the date of the award. Bidders may bid to purchase Certificates from the District at a discount or with a premium; however, no bid will be considered if the bid is to purchase Certificates at an aggregate price less than 99% or more than 103% of the aggregate principal amount of the Certificates. No bid will be accepted which contemplates the waiver of any interest or other concession by the bidder as substitute for payment in full of the purchase price. Bids which do not conform to the terms of this section may be rejected. See "Right to Reject Bids,Waive Irregularities"below. Adjustment of Principal Amounts After Receipt of Bids The principal amounts of the Certificates set forth in the Official Bid Form reflect estimates of the District as to the likely interest rates of the winning bid and the premium or discount contained in the winning bid. After selecting the winning bid the amortization schedule for the Certificates may be adjusted in $5,000 increments if the District elects to do so, to reflect the actual interest rates and any discount or premium in the winning bid to properly fund the prepayment escrow and any swap settlement or termination amount and to accommodate certain other requirements or preferences of the District. Such adjustments will not change any Certificate in any year by more than 10%. The dollar amount bid for the Certificates by the winning bidder will be adjusted to reflect any such adjustment in the applicable amortization schedule. Any such adjustment will change the total (but not the per Certificate) dollar amount of purchaser's discount and original issue discount or premium,if any,provided in such bid. Any such adjustment will be communicated to the winning bidder within 24 hours after receipt of such bid by the District. Changes in the amortization schedule made as described in this paragraph will not affect the determination of the winning bidder or give the winning bidder any right to reject the Certificates. 80198354.3 5 r Insurance The successful bidder may purchase municipal bond insurance,if available,for some or all of the Certificates. However, the delivery of the Certificates shall not be conditioned upon the issuance of any such insurance. The District makes no representation as to whether the Certificates qualify for insurance. Payment of any insurance premium and satisfaction of any conditions to the issuance of a municipal bond insurance policy, including payment for any legal opinion to be delivered to any insurer, shall be the sole responsibility of the bidder. In particular, the District, at its option, may not enter into any additional agreements with respect to the provision of any such insurance. FAILURE OF THE INSURANCE PROVIDER TO ISSUE ITS POLICY SHALL NOT JUSTIFY FAILURE OR REFUSAL BY THE SUCCESSFUL BIDDER TO ACCEPT DELIVERY OF, OR PAY FOR, THE CERTIFICATES. Each successful bidder must provide the District with the municipal bond insurance commitment, if any, including the amount of the policy premium, and information with respect to the municipal bond insurance policy and insurance provider for the inclusion in the final Official Statement within one business days following the award of the bid by the District.The successful bidder will be required,prior to the delivery of the Certificates, to famish to the District a certificate acceptable to Special Counsel, Fulbright&Jaworski L.L.P.,stating that,in its opinion,the amount of the premium paid for the municipal bond insurance policy is not in excess of the present value of the expected interest savings as a result of such policy. Form of Bid BIDS FOR LESS THAN ALL OF THE CERTIFICATES WILL NOT BE ACCEPTED. Each bid must be on the Official Bid Form. All electronic proposals shall be deemed to incorporate the provisions of the Official Bid Form and must be unconditional and irrevocable. Except for proposals submitted in accordance with the following paragraph, each bid must be accompanied by the applicable bid check or Surety Bond described under the caption "Bid Check" below. In addition, each bidder is requested to supply an estimate of the true interest cost resulting from its bid, computed as prescribed below under the caption"Award Delivery and Payment,"which shall be considered as informative only and not binding on either the bidder or the District. Each bid must be in accordance with the terms and conditions set forth in this Official Notice Inviting Bids. The District will make its best efforts to accommodate the electronic bids;however,the District, the Financial Advisor(Public Resources Advisory Group)and Special Counsel assume no responsibility for any error contained in any electronic bid, or for the failure of any electronic bid to be transmitted or received at the official time for receipt of such bids. The official time for receipt of bids will be determined by the District at the place of the bid opening, and the District shall not be required to accept the time kept by Electronic Service as the official time. The District assumes no responsibility for informing any bidder prior to the deadline that its bid is incomplete,or not received If multiple timely bids are received from a single bidder the District shall accept the best of such bids and each bidder agrees that by submitting any bid to be bound by its best bid. Information Regarding Electronic Proposals Electronic proposals must be submitted through the Electronic Service. If any provision of this Official Notice Inviting Bids conflicts with information provided by the Electronic Service, this Official Notice Inviting Bids shall control. The District is not responsible for the proper operation of, and shall have no liability for any delays or interruptions of or any damages caused by the Electronic Service. The District is using the Electronic Service as a communication mechanism and not as the District's agent to conduct electronic bidding for the Certificates. The District is not bound by any advice of or 80198354.3 6 4 determination by the Electronic Service to the effect that any particular bid complies with the terms of this Official Notice Inviting Bids. All costs and expenses incurred by prospective bidders in connection with their submission of bids through the Electronic Service are the sole responsibility of such bidders and the District is not responsible for any such costs or expenses. Further information about the Electronic Service, including any fee charged, may be obtained from Ipero LLC, 1359 Broadway, Second Floor, New York, NY 10018 (212-849-5021). The District assumes no responsibility or liability for bids submitted through the Electronic Service. The District shall be entitled to assume that any bid submitted through the Electronic Service has been made by a duly authorized agent of the bidder. Bid Check Each bidder must provide with its bid a certified or cashier's check payable in same day or next day funds drawn on a responsible bank having an office in Orange County, California equal to $850,000.00 ("Bid Check Amount") payable to the order of"Orange County Sanitation District," or a financial surety bond ("Surely Bond") in the amount of the Bid Check Amount issued by an insurance company rated AAA by Standard & Poor's and licensed to issue such a bond in the State of California, naming the District as the beneficiary and identifying the bidder whose deposit is guaranteed by the Surety Bond. If the successful bidder has provided a Surety Bond, such bidder shall wire transfer to the District the amount of the Bid Check Amount in immediately available federal funds not later than 3:00 p.m. (New York Time) on the business day next succeeding the day of acceptance of the proposal which amount shall be deposited in an escrow fund or account or a similar fund and applied to the purchase price of the Certificates. If the District has not received such federal funds wire transfer by the time stated the District may draw upon the Surety Bond to satisfy the successful bidder's deposit requirements.The check accompanying any accepted proposal shall be cashed and deposited in an escrow fund or account or a similar fund and applied to the purchase price of the Certificates at the time of delivery of the Certificates. If after the award of the Certificates,the successful bidder fails to complete the purchase on the terms stated in its proposal,unless such failure of performance shall be caused by any act or omission of the District,any amount received from such bidder by the District,whether by paid check or pursuant to the Surety Bond procedure set forth above, shall be retained by the District as stipulated liquidated damages.Any check accompanying an unaccepted proposal will be returned promptly.No interest will be paid upon the deposit made by any bidder. Official Statement The District has approved a Preliminary Official Statement for the Certificates, dated the date of this Official Notice Inviting Bids, which the District has "deemed feral" for purposes of Rule 15c2.12 promulgated by the Securities and Exchange Commission, as amended(the "Rule"), although subject to revision,amendment and completion in conformity with the Rule.The District will provide the successful bidder such reasonable number of printed copies of the feral Official Statement w such bidder may reasonably request no later than seven business days after the day the Certificates are awarded.Up to 250 copies of the final Official Statement will be famished without cost to the successful bidder and further copies, if desired, will be made available at the successful bidder's expense. The successful bidder shall file the final Official Statement with a nationally recognized municipal securities information repository on a timely basis. The successful bidder shall, by accepting the award agree at all times to comply with the provisions of the Rule and with all applicable rules of the Municipal Securities Rulemaking Board. Award,Delivery and Payment If satisfactory bids are received, the Certificates will be awarded to the highest responsible bidder not later than 24 hours after the time established for the receipt of bids. The highest bidder shall be the bidder submitting the best price for the Certificates,which best price shall be that resulting in the lowest 80399354.3 7 9 G true interest cost with respect to the Certificates.The true interest cost shall be computed by doubling the semi-annual interest rate (compounded semi-annually) necessary to discount the debt service payments from their respective payment dates to the date of the Certificates and to the price bid. If two or more bidders have bid the same true interest cost,the award shall be made at the sole discretion of the District. Delivery of the Certificates is expected to omur on or about May 29, 2008. The Certificates will be delivered through the facilities of DTC,New York,New York. The successful bidder shall pay for the Certificates on the date of delivery in Los Angeles, California in immediately available federal funds. Any expenses of providing federal funds shall be home by the purchaser. Payment on the delivery date shall be made in amount equal to the price bid for the Certificates less the amount of the good-faith deposit. Right to Reject Bids,Waive Irregularities The District reserves the right to reject any and all bids and to the extent permitted by law to waive any irregularity or informality in any bid. CUSIP Numbers It is anticipated that CUSIP numbers will be printed on the Certificates, but the District will assume no obligation for the assignment or printing of such numbers on the Certificates or for the correctness of such numbers,and neither the failure to print such numbers on any Certificate nor any error with respect thereto shall constitute cause for a failure or refusal by the purchasers thereof to accept delivery of and make payment for the Certificates.The cost for the assignment of CUSIP numbers to the Certificates will be the responsibility of the successful bidder. California Debt and Investment Advisory Commission The successful bidder will be required to pay all fees due to the California Debt and Investment Advisory Commission ("CDIAC") under California law. CDIAC will invoice the successful bidder after the delivery of the Certificates. Legal Opinions The District will furnish to the successful bidder at the closing of the Certificates, the legal opinion of Special Counsel to the effect that,in the opinion of Special Counsel, based upon an analysis of existing laws, regulations,rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes, and that in the further opinion of Special Counsel the interest component of each Installment Payment and the allocable portion thereof distributable in respect of each Certificate is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel will express no opinion regarding any other tax consequences related to the ownership or disposition of,or the accrual or receipt of interest on,the Certificates. 80198354.3 8 'd Change in Tax Exempt Status At any time before the Certificates are tendered for delivery,the successful bidder may disaffirm and withdraw its proposal if the interest on the same type and character as that evidenced by the Certificates(as determined by Special Counsel) shall be declared to be includable in gross income under federal income tax laws, either by a ruling of the Internal Revenue Service or by a final decision of any federal court, or shall be declared taxable by the terms of any federsl income tax law enacted subsequent to the date of this Official Notice Inviting Bids. Closing Documents The District will furnish to the successful bidder at the time of delivery of the Certificates: (1)a certificate certifying (i) that as of and at the time of delivery of the Certificates,there is no action, suit, proceeding or investigation, pending or, to the best knowledge of the District, threatened against or affecting the District, (A)which affects or seeks to prohibit, restrain or enjoin the execution and delivery of the Certificates or the Trust Agreement, (B)in any way contesting the validity of the Certificates, the Installation Purchase Agreement or the Trust Agreement or the powers of the District to enter into or perform its obligations under such documents to which it is a party or the existence of the District, or (C)wherein an unfavorable decision, oiling or finding would materially and adversely affect the District, or the validity or enforceability of the Certificates, the Installation Purchase Agreement or the Trust Agreement or the ability of the District to perform its obligations under such documents to which it is a party, (ii)that the Preliminary Official Statement did not on the date of sale of the Certificates and the Official Statement does not on the date of delivery contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made,not misleading, and(2)a receipt of the District showing that the purchase price of the Certificates has been received by the District. Continuing Disclosure To assist the successful bidder in complying with the Rule,the District will undertake, pursuant to the Continuing Disclosure Agreement, to provide certain annual financial information, and notices of the occurrence of certain events, if material. A description of the Continuing Disclosure Agreement is ad forth in the Preliminary Official Statement and will be set forth in the final Official Statement. Additional Information Electronic copies of the Trust Agreement, the Installment Purchase Agreement, the Master Agreement, this Official Notice Inviting Bids, the Official Bid Form, and the Preliminary Official Statement will be famished to any potential bidder upon request made to the District's Financial Advisor at: Public Resources Advisory Group, 11845 West Olympic Boulevard, Suite 640, Los Angeles, CA 90064,310-477-8487, via e-mail at Ichoi@pmgla.com. Right to Modify or Amend The District reserves the right to modify or amend this Official Notice Inviting Bids, including but not limited to the right to adjust and change the principal amount of the Certificates being offered; provided,however, that such notifications or amendments shall be made not later than May 21, 2008, by 3:00 p.m.,New York Time and communicated through Thomson Municipal Market Monitor(available at http://www.tm3.com) and by facsimile transmission to any qualified bidder timely requesting such notice. Bidders are required to bid upon the Certificates as so modified. 80199354.3 9 Cancellation or Postponement The District reserves the right to cancel or postpone, from time to time,the date established for the receipt of bids for any reason at any time. Any such postponement will be announced by Thomson Municipal Market Monitor. If any date fixed for the receipt of bids and the sale of the Certificates is postponed, any alternative sale date (either a Tuesday, Wednesday or Thursday) will be announced via Thomson Municipal Market Monitor at least 48 hours prior to such alternative sale date and will be provided by facsimile transmission to any qualified bidder timely requesting such notice. On any such alternative sale date,any bidder may submit a sealed bid for the purchase of the Certificates in conformity in all respects with the provisions of this Official Notice Inviting Bids except for the date of sale and except for the changes announced by Thomson Municipal Market Monitor at the time the sale date and time are announced. Dated:May 16,2008 90198354.3 10 6 1 OFFICIAL BID FORM S80,255,000- ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION SERIES 2008A May_, 2008 Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,CA 92708-7018 Attn: Lorenzo Tyner Ladies and Gentlemen: We hereby offer to purchase all of the $80,255,000• aggregate principal amount of the Orange County Sanitation District, Refunding Certificates of Participation Series 2008A (the "Certificates"), more particularly described in your Official Notice Inviting Bids dated May 16, 2008, which is incorporated herein by reference, and made a part thereof, at a purchase price of$ (which purchase price is not less than 99% or more than 103% of the aggregate principal amount of the Certificates).This offer is for Certificates evidencing interest at the rates and in the form of serial maturities as set forth in the table on the following page. The bid is subject to acceptance not later than 24 hours after the expiration of the time established for the final receipt of bids. Our calculation of the true interest cost, which is considered to be informative only and not a part of the bid,is %. (PLEASE CHECK ONE OF THE FOLLOWING TWO PARAGRAPHS) [ ] There is enclosed herewith a certified check or cashier's check for $850,000 drawn on a responsible bank having an office in Orange County, California payable in same day or next day funds to the order of the Orange County Sanitation District(the"District'). [ ] A surety bond has been provided to the District in the amount of $850,000 issued by an insurance company rated AAA by Standard & Poor's and licensed to issue such a bond in the State of California, naming the District as beneficiary and identifying the bidder whose deposit is guaranteed by the surety bond. We have noted that payment of the purchase price is to be made in immediately available Federal Funds at the time of delivery of the Certificates. If we are the successful bidder,we will(1)within one hour after being notified of the award of the Certificates, advise the District of the initial public offering prices of the Certificates, (2) prior to delivery of the Certificates, furnish a certificate, acceptable to Special Counsel, Fulbright& 3aworski L.L.P., as to the "issue price" of the Certificates within the meaning of Section 1273 of the Internal Revenue Code of 1986; and (3) if municipal bond insurance has been purchased for some or all of the Certificates, prior to delivery of the Certificates furnish a certificate, Preliminary,subject to change. i acceptable to said Special Counsel, as to the present value of the expected interest savings as a result of such insurance. Maturity Principal Interest August 1 Amount Rate 2008 $16,080,000 2009 15,800,000 2010 16,315,000 2011 5,395,000 2012 7,060,000 2013 19,605,000 Total $80,255,000 We represent that we have full and complete authority to submit this bid on behalf of our bidding syndicate and the undersigned will serve as the lead manager for the group if the Certificates are awarded pursuant to this bid. We certify (or declare) under penalty of perjury under the laws of the State of California that this proposal is genuine, and not a sham or collusive, nor made in the interest of or on behalf of any person not herein named, and that the bidder has not directly or indirectly induced or solicited any other bidder to put in a sham bid or any other person, firm or corporation to refrain from bidding,and that the bidder has not in any manner sought by collusion to secure for himself an advantage over any other bidder. Respectfully Submitted, Account Manager: By: Address(for Return of Unsuccessful Bid Check): City: State: Telephone: Following(or attached)is a list of the members of our account on whose behalf this bid is made. Preliminary,subject to change. 80199354.3 2 Fulbright& Jaworski L.L.P. Draft-5/12/08 NOTICE OF INTENTION TO SELL $80,255,000* Orange County Sanitation District Refunding Certificates of Participation Series 2008A NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District") intends to receive sealed bids and electronic bids until 10:00 a.m.,New York time,on Thursday, May 22,2008, through the use of an electronic bidding service offered by (Pero LLC; at www.newissuehome.i- deal.com and the Parity bid delivery service, for the purchase of all of the above-captioned Refunding Certificates of Participation (the"Certificates") dated as of the date of initial delivery, and maturing on such dates as described in the related Official Notice Inviting Bids (the "Notice"). No bids will be accepted by facsimile. Bids for less than all of the Certificates will not be accepted. The District reserves the right to postpone the date established for the receipt of bids as more fully described under the paragraph"Cancellation or Postponement" in the Notice. NOTICE IS HEREBY FURTHER GIVEN that electronic copies of the Notice and the Preliminary Official Statement issued in connection with the sale of the Certificates may be obtained from the District's financial advisor, Public Resources Advisory Group, 11845 West Olympic Blvd., Suite 640, Los Angeles, California 90064, 310-477-8487, via e-mail: Ichoi(a)oraela.com. Orange County Sanitation District Dated: May_, 2008 Preliminary,subject to change. 80198346.3 Fulbright& Jaworski L.L.P. Draft-5/12/08 CONTINUING DISCLOSURE AGREEMENT by and between ORANGE COUNTY SANITATION DISTRICT and DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent Dated as of May 1, 2008 Relating to $[PAR] Orange County Sanitation District Refunding Certificates of Participation Series2008A 80198333.2 v CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), dated as of May 1,2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District"), and DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent (the "Dissemination Agent"). WITNESSETH: WHEREAS, the District has caused to be executed and delivered Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates"), evidencing principal in the aggregate amount of$[PAR],pursuant to a Trust Agreement,dated as of the date hereof(the "Trust Agreement"), by and among U.S. Bank National Association, as trustee (the "Trustee"), the Orange County Sanitation District Financing Corporation (the "Corporation")and the District;and WHEREAS, this Disclosure Agreement is being executed and delivered by the District and the Dissemination Agent for the benefit of the owners and beneficial owners of the Certificates and in order to assist the underwriters of the Certificates in complying with the Rule (as defined herein); NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement or, if not defined therein, in the Master Agreement, dated as of August 1, 2000, by and between the District and the Corporation. In addition,the following capitalized terms shall have the following meanings: "Annual Report" means any Annual Report provided by the District pursuant to, and as described in, Sections 2 and 3 hereof. "Annual Report Date" means the date in each year that is eight months after the end of the District's fiscal year,which date, as of the date of this Disclosure Certificate, is March 1. "Disclosure Representative" means the Director of Finance of the District, or such other officer or employee of the District as the District shall designate in writing to the Trustee from time to time. "Dissemination Agent" means an entity selected and retained by the District, or any successor thereto selected by the District. The initial Dissemination Agent shall be Digital Assurance Certification LLC. "Listed Events" means any of the events listed in subsection(a)of Section 4 hereof. 80199333.2 "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. As of the date hereof, the National Repositories approved by the Securities and Exchange Commission are identified at http://www.sec.gov/info/municipal/nrmsir.htm. "Official Statement"means the Official Statement, dated May_, 2008, relating to the Certificates. "Participating Underwriter" means any of the original underwriters of the Certificates required to comply with the Rule in connection with the offering of the Certificates. "Repository"means each National Repository and each State Repository. "Rule" means Rule 15c2-12 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 Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository. Section 2. Provision of Annual Reports. (a)The District shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing with the report for the 2008-2009 Fiscal Year, provide to each Repository an Annual Report which is consistent with the requirements of Section 3 hereof. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof;provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under subsection(f)of Section 4 hereof. (b) Not later than 15 business days prior to the date specified in subsection(a) of this Section for the providing of the Annual Report to the Repositories, the District shall provide the Annual Report to 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 District and the Dissemination Agent to determine if the District is in compliance with the first sentence of this subsection (b). (c) If the Dissemination Agent is unable to confirm that an Annual Report has been provided to Repositories by the date required in subsection (a) of this Section, the Dissemination Agent shall send a notice to the Municipal Securities Rulemaking Board and each State Repository,if any, in substantially the form attached as Exhibit A. 80198333.2 2 (d) The Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any;and (ii) file a report with the District and(if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Section 3. Content of Annual Reports. The District's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to subsection(a) of Section 2 hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) The following information with respect to the Certificates: (i) The principal evidenced by the Certificates Outstanding as of the January 1 next preceding the Annual Report Date and the principal amount of other Senior Obligations outstanding as of the January 1 next preceding the Annual Report Date. (ii) The balance in the Reserve Fund, and a statement of the Reserve Requirement, as of the January I next preceding the Annual Report Date. (c) A summary report showing in reasonable detail Revenues, Operating Revenues, Maintenance and Operation Costs, Net Revenues, Net Operating Revenues and debt service with respect to the Senior Obligations for the fiscal year ended the June 30 next preceding the Annual Report Date. (d) An update, for the fiscal year ended the June 30 next preceding the Annual Report Date, of the information contained in the Official Statement in Table Nos. 2, 4, 6 (only with respect to information on 6 under the headings Fiscal Year and Sewer Service Charge), 8 (not to include projections), 9, 10, 11, 12, 13, 14 and 16. (e) In addition to any of the information expressly required to be provided under subsections(a), (b), (c) and (d) of this Section, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made,not misleading. 80198333.2 3 Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference. Section 4. Reporting of Significant Events. (a)Pursuant to the provisions of this Section, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the security. (7) Modifications to rights of security holders. (8) Contingent or unscheduled Certificate calls. (9) Defeasances. (10) Release, substitution, or sale of property securing repayment of the securities. (II) Rating changes. (b) The District shall, within one business day of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the District promptly notify the Trustee in writing whether or not to report the event pursuant to subsection(f)of this Section. (c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Trustee pursuant to subsection (b) of this Section or otherwise, the District shall as soon as possible determine if such event would be material under applicable Federal securities law. 80198333.2 4 (d) If the District has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly notify the Trustee in writing. Such notice shall instruct the Trustee to report the occurrence pursuant to subsection (f) of this Section. (e) If in response to a request under subsection (b) of this Section,the District determines that the Listed Event would not be material under applicable Federal securities law, the District shall so notify the Trustee in writing and instruct the Trustee not to report the occurrence pursuant to subsection (f)of this Section. (f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each Repository. Notwithstanding the foregoing, notice of Listed Events described in paragraphs(8) and (9) of subsection(a) of this Section need not be given under this subsection any earlier than the notice(if any) of the underlying event is given to holders of affected Certificates pursuant to the Trust Agreement. Section 5. Electronic Filing. Submission of Annual Reports and notices of Listed Events to DisclosureUSA.org or another "Central Post Office" designated and accepted by the Securities and Exchange Commission shall constitute compliance with the requirement of filing such reports and notices with each Repository hereunder, and the District may satisfy its obligations hereunder to file any notice, document or information with a Repository by filing the same with any dissemination agent or conduit, including DisclosureUSA.org or another"Central Post Office" or similar entity, assuming or charged with responsibility for accepting notices, documents or information for transmission to such Repository, to the extent permitted by the Securities and Exchange Commission or Securities and Exchange Commission staff or required by the Securities and Exchange Commission. For this purpose, permission shall be deemed to have been granted by the Securities and Exchange Commission staff if and to the extent the agent or conduit has received an interpretive letter, which has not been revoked, from the Securities and Exchange Commission staff to the effect that using the agent or conduit to transmit information to the Repository will be treated for purposes of the Rule as if such information were transmitted directly to the Repository. Section 6. Termination of Reporting Obligation. The District's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the District shall give notice of such termination in the same manner as for a Listed Event under subsection (f) of Section 4 hereof. Section 7. Dissemination Agent. The District may, from time to time, appoint or engage another 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. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent; provided it shall receive written notice of such designation at the time of such designation. 801983312 5 Section 8. Amendment Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the District), 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 2 hereof, Section 3 hereof or subsection(a) of Section 4 hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Certificates,or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances;and (c) the proposed amendment or waiver (i) is approved by holders of the Certificates in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders, or (ii)does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of holders. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements,the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the District to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories. Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the District shall 801983331 6 have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 10. Default. In the event of a failure of the District or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the written direction of any Participating Underwriter or the holders of at least 25% of the aggregate amount of principal evidenced by Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall), or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District,Trustee or the Dissemination Agent,as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the District, the Trustee or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 11. Duties. Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Trust Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Trust Agreement. Neither the Trustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report or notice of Listed Event. The Dissemination Agent shall receive reasonable compensation for its services provided under this Disclosure Agreement. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Trustee, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Certificates,and shall create no rights in any other person or entity. Section 13. 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. 80198333.2 7 IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. ORANGE COUNTY SANITATION DISTRICT By: Lorenzo Tyner Director of Finance and Administrative Services DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent By: Authorized Representative Acknowledged and Accepted: U.S.BANK NATIONAL ASSOCIATION, as Trustee By: Authorized Officer 801993331 8 EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Orange County Sanitation District Name of Issue: Orange County Sanitation District Refunding Certificates of Participation, Series 2008A Date of Issuance: , 2008 NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District') has not provided an Annual Report with respect to the above-named Certificates as required by Section 6.09 of the Trust Agreement, dated as of May 1, 2008, by and among U.S. Bank National Association, as Trustee, the Orange County Sanitation District Financing Corporation and the District. [The District anticipates that the Annual Report will be filed by Dated: ORANGE COUNTY SANITATION DISTRICT By: cc: Trustee Dissemination Agent 80198333.2 A-I EXIIIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Orange County Sanitation District Name of Issue: Orange County Sanitation District Refunding Certificates of Participation, Series 2008A Date of Issuance: , 2008 NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"Distrien has not provided an Annual Report with respect to the above-named Certificates as required by Section 6.09 of the Trust Agreement, dated as of May 1, 2008, by and among U.S. Bank National Association, as Trustee, the Orange County Sanitation District Financing Corporation and the District. [The District anticipates that the Annual Report will be filed by Dated: ORANGE COUNTY SANITATION DISTRICT By: cc: Trustee Dissemination Agent 801983332 A-1 „$ DRAFT OF Is 5 05/12/08 PRELIMINARY OFFICIAL STATEMENT DATED MAY 16,2008 S NEW ISSUE—BOOK—ENTRY—ONLY Ratings: .5` Moody's: ” ra E.g S&P: a 1; Fitch: 5 (See'RATINGS'herelm) In the opinion of Fulbright& Jaworshi L.L.P., Los Angeles, California, Special Cormsel, under existing law, the Interest c5 Component of each Installment Payment, and the allocoble portion thereof distributable in respect of any Certificate. a exempt c from personal income taxes of the State of California and, assuming compliance with the tar covenants described herein, the 8.� Interest Component of each Installment Payment and the allocable portion thenuif distributable in respect of any Certificate, a y „ excluded pursuant to section 103(a) of the Internal Revem ur Code of 1986 (the "Code')from the gross income of the owners g thereoffor federal income tax piapmes and is not an item of tax preference under section 57(a) of the Code for purposes ofthe 2.8 federal alternative minimum tax. See "TAX MATTERS"herein. e9 o a ]District Logo] $80,255,011 W ]DAC Logo] ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION,SERIES 2008A a� S Dated: Date of Delivery Due: August 1,as shown below gm 5 The Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates") evidence E c direct, fincrional undivided interests of the Owners thereof in the installment payments (the "Installment Paymems"), and the a_ interest thereon, to be made by the Orange County Sanitation District (the "District") pursuant to the Installment Purchase cmg Agreement, dated as of May 1, 2008 (the "Installment Purchase Agreement"I by and between the District and the Orange _ § County Sanitation District Financing Corporation (the "Corporation"). Pursuant to the Master Agreement for District B Obligations,dated as of August 1,2000(the"Master Agreement"),by and between the District and the Corporation,the District has established conditions and terms upon which obligations such as the Installment Payments and the interest thereon,will be §& S incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues E (as more fully described in the Master Agreement, the "Net Revenues') as provided in the Installment Purchase Agreement, j e a consisting loca tion of all income and revenue received by the District from the operation or ownership of the Wastewater g `o System of the District (the "Wastewater System") remaining after payment of Maintenance and Operation Costs, as further S described in "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" herein. The Installment Purchase g Agreement provides that the obligation of the District to pay the Installment Payments, and payments of interest thereon, and s certain other payments required to be made in accordance with the Installment Purchase Agreement,solely from Net Revenues, e § is absolute and unconditional. See"SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein. Lyg The proceeds of the Certificates, together with other available moneys, will be used to (i)refund all of the District's -5 outstanding Refunding Certificates of Participation, 1992 Series(the"Refunded Certificates")and pay a settlement amount to s0 the provider of an interest rate swap agreement relating to the Refunded Certificates,(ii)fund a reserve fund for the Certificates ar" and(iii)pay the costs incurred in connection with the execution and delivery of the Certificates. See "REFUNDING PLAN" a ` € herein. a a € P Interest evidenced by the Certificates will be payable semiannually on February 1 and August 1 of each year,commencing on S a August 1, 2008. See"THE CERTIFICATES"herein The Certificates will be initially delivered only in book-entry form and will be registered in the time of Cede&Co.,as nominee of The Depository Trust Company,New York,New York("DTC"), 8 which will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry s S form only. Purchasers of Certificates will not receive physical certificates representing then ownership interests in the 3 Certificates purchased. The Certificates will be delivered in denominations of$5,000 and any integral multiple thereof. 5,a 9 Payments of principal and interest evidenced by the Certificates are payable directly to DTC by U.S.Bank National Association, € e- as trustee(the"Trustee"). Upon receipt of payments of such principal and interest,DTC will in turn distribute such payments to 11.8 o the beneficial owners of the Certificates. See APPENDIX E—"BOOK-ENTRY SYSTEM"herein. as yes o 0 a 5 e o Prelimin g ary;subject to change. So 90198915.1 s THE OBLIGATION OF THE DISTRICT TO PAY THE INSTALLMENT PAYMENTS, AND THE INTEREST THEREON, AND OTHER PAYMENTS REQUIRED TO BE MADE BY IT TINDER THE INSTALLMENT PURCHASE I AGREEMENT IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE, IN THE MANNER PROVIDED IN THE INSTALLMENT PURCHASE AGREEMENT, SOLELY FROM NET REVENUES AND OTHER FUNDS PROVIDED FOR IN THE INSTALLMENT PURCHASE AGREEMENT,AND DOES NOT CONSTITUTE A DEBT OF THE DISTRICT OR OF THE STATE OF CALIFORNIA, OR OF ANY POLITICAL SUBDIVISION THEREOF, IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA. OR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE INSTALLMENT PAYMENTS, OR THE INTEREST THEREON, OR OTHER PAYMENTS REQUIRED TO BE MADE UNDER THE INSTALLMENT PURCHASE AGREEMENT. SEE "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"HEREIN. This cover page contains information intended for quick reference only. It is not a summary of this issue. Investors must reed the entire Official Statement to obtain information essential to making an informed investment decision. The Certificates me offered when, ar and if memaed and delivered and received by as the Initial Purchaser,subject to the approval of Fulbright&Jaworski L.L.P.,Los Angeles, California,Special Coensel to the District, and certain other milittons. Certain legal matters will be parsed upon for the District and the Corporation by Woodntf,Sp wWln &Stuart, a Professional Corporation, Costa Mesa, Cal farnia. Public Resources Advisory Group, Los Angeles, Cal feria, has served ar financial advisor to the District in connection with the esecutton and delivay of the Certficates. his anticipated that the Certificates in definitive form will be availablefor delivery to DTC in New York,Nnv York on or about May 28,2008. BIDS FOR THE PURCHASE OF THE CERTIFICATES WILL BE RECEIVED BY THE DISTRICT UNTIL 11:30 A.M.NEW YORK TINE ON MAY 22,2008 UNLESS POSTPONED OR CANCELLED AS SET FORTH IN THE OFFICIAL NOTICE INVITING BIDS Dated: May_,2007 80198915.1 MATURITY SCHEDULE $80,255,000' Orange County Sanitation District Refunding Certificates of Participation,Series 2008A Maturity Principal Interest Price or CUSM (August 1 Amount Rate Yield 68f 428P1 2008 $ % % 2009 2010 2011 2012 2013 Preliminary;subject to change. f CUSIP® A registered trademark of the American Bankers Association.Copyright® 1999-2007 Standard &Pom's, a Division of The McGraw-Hill Companies, Inc.All rights reserved. CUSEM numbers herein are provided by Standard&Peer's CUSIP Service Bureau and are for convenience of reference only.The District does not assume any responsibility for the accuracy of such numbers. 80198915.1 20,989s., 1 ORANGE COUNTY SANITATION DISTRICT Board of Directors James Ferryman(Chair)—Costa Mesa Sanitary District Doug Davert(Vice Chair)— Tustin Harry Sidhu—Anaheim Don Webb—Newport Beach Roy Moore—Brea Jon Dumitru—Orange Patsy Marshall—Buena Park Constance Underhill—Placentia Phil Luebben—Cypress Sal Tinajero—Santa Ana Larry Crandall—Fountain Valley Charles Antos—Seal Beach Don Bankhead—Fullerton David Shawver—Stanton Bill Dalton—Garden Grove Rich Freschi— Villa Park Cathy Omen—Huntington Beach Jim Winder-Yorba Linda Steven Choi—Irvine Joy L.Neugebauer—Midway City Sanitary District Steve Anderson—La Habra Darryl Miller—Irvine Ranch Water District Mark Waldman—La Palma Chris Norby—Member of the Orange County Ken Parker—Los Alamitos Board of Supervisors Executive Management of the District James D. Ruth,General Manager Robert P. Ghirelli, PhD.,Assistant General Manager Lorenzo Tyner,Director of Finance and Administrative Services James Herberg, Director of Engineering Ed Torres,Director of Technical Services Nick Arhontes, Director of Operations &Maintenance Special Services Special Counsel and Disclosure Counsel Fulbright&Jaworski L.L.P. Los Angeles,California District General Counsel Bradley R. Hogan Woodruff, Spradlin& Smart,a Professional Corporation Costa Mesa,California Financial Advisor Public Resources Advisory Group Los Angeles,California Trustee and Escrow Agent U.S. Bank National Association Los Angeles,California Verification Agent [to come] 80198915.1 This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor , shall there be any sale of the Certificates by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information set forth herein has been provided by the District and other sources that are believed by the District to be reliable. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement. If given or made, such other information or representations must not be relied upon as having been authorized by the District,the Corporation or the Initial Purchaser in connection with any reoffering. This Official Statement is not to be construed as a contract with the purchasers of the Certificates. Statements contained in this Official Statement which involve estimates,projections, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or the Corporation since the date hereof. This Official Statement is submitted with respect to the sale of the Certificates referred to herein and may not be reproduced or used, in whole or in part,for any other purpose,unless authorized in writing by the District. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. Preparation of this Official Statement and its distribution have been duly authorized and approved by the District and the Corporation. In connection with the offering of the Certificates, the Initial Purchaser in connection with any reoffering may over-allot or effect transactions which stabilize or maintain the market price of the Certificates at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced may be discontinued at any time. The Initial Purchaser in connection with any reoffering may offer and sell the Certificates to certain dealers,institutional investors and others at prices lower than the public offering prices stated on the cover page hereof and such public offering prices may be changed from time to time by the Initial Purchaser. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as "Plan,""expect,""estimate,""budget'or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results,performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. 80198915.1 TABLE OF CONTENTS EM INTRODUCTION......................................................................................................................... I General............................................................................................................................... I TheDistrict........................................................................................................................2 Security and Sources of Payment for the Certificates.......................................................2 ContinuingDisclosure.......................................................................................................3 Miscellaneous....................................................................................................................3 REFUNDINGPLAN.....................................................................................................................4 SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES..........................................5 THECERTIFICATES...................................................................................................................5 General...............................................................................................................................5 NoOptional or Mandatory Prepayment.............................................................................6 SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES...............................6 Installment Payments.........................................................................................................6 NetRevenues.....................................................................................................................7 RateStabilization Account................................................................................................8 Allocationof Revenues......................................................................................................8 RateCovenant....................................................................................................................9 ReserveFund................................................................................................................... 10 Limitations on Issuance of Additional Obligations......................................................... 11 Insurance.......................................................................................................................... 13 Allocation of Installment Payments................................................................................. 13 THEDISTRICT........................................................................................................................... 14 Background...................................................................................................................... 14 Organizationand Administration..................................................................................... 15 Services............................................................................................................................ 16 ServiceArea..................................................................................................................... 17 Employees........................................................................................................................ 18 RetirementPlan................................................................................................................ 19 Other Post-Employment Benefits....................................................................................20 RiskManagement............................................................................................................21 ExistingFacilities.............................................................................................................21 Permits, Licenses and Other Regulations........................................................................23 CapitalImprovement Program.........................................................................................24 Groundwater Replenishment System...............................................................................27 Preferred Level of Treatment...........................................................................................27 BiosolidsManagement.....................................................................................................28 Urban Runoff...................................................................................................................29 IntegratedEmergency Response Program.......................................................................30 DISTRICTREVENUES..............................................................................................................31 SewerService Charges....................................................................................................31 AdditionalRevenues........................................................................................................33 80198915.1 1 TABLE OF CONTENTS (continued) Page Wastewater Treatment History........................................................................................35 Customers........................................................................................................................35 AssessedValuation..........................................................................................................37 Tax Levies and Delinquencies.........................................................................................38 BudgetaryProcess............................................................................................................39 Reserves...........................................................................................................................40 Summary of Operating Data............................................................................................41 ProjectedOperating Data.................................................................................................42 Management's Discussion and Analysis of Operating Data............................................43 Investment of District Funds............................................................................................45 FINANCIALOBLIGATIONS....................................................................................................45 ExistingIndebtedness......................................................................................................45 Variable Rate and Swap Obligations...............................................................................46 AnticipatedFinancings....................................................................................................48 Direct and Overlapping Bonded Debt..............................................................................48 THE CORPORATION................................................................................................................50 LIMITATIONS ON TAXES AND REVENUES........................................................................51 Article XIIIA of the California Constitution...................................................................51 Legislation Implementing Article XIIIA.........................................................................51 Article XIIIB of the California Constitution....................................................................52 PropositionIA.................................................................................................................53 Proposition62..................................................................................................................53 Article XIIIC and Article XIIID of the California Constitution......................................53 Other Initiative Measures.................................................................................................56 LEGALMATTERS.....................................................................................................................56 FINANCIALADVISOR.............................................................................................................56 ABSENCEOF LITIGATION..................................................................................................... 56 FINANCIALSTATEMENTS.....................................................................................................56 TAXMATTERS..........................................................................................................................57 CONTINUINGDISCLOSURE...................................................................................................59 VERIFICATION OF MATHEMATICAL COMPUTATIONS..................................................60 RATINGS....................................................................................................................................60 PURCHASEAND REOFFERING.............................................................................................60 MISCELLANEOUS....................................................................................................................60 90199915.1 ii TABLE OF CONTENTS (continued) Page APPENDIX A — COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE.ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE30,2007...................................................................................................A-1 APPENDIX B — THE COUNTY OF ORANGE—ECONOMIC AND DEMOGRAPHIC INFORMATION................................................................................................B-1 APPENDIX C — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS....................................C-1 APPENDIX D — FORM OF CONTINUING DISCLOSURE AGREEMENT.............................D-1 APPENDIX E — BOOK-ENTRY SYSTEM.................................................................................E-1 APPENDIX F — FORM OF APPROVING OPINION OF SPECIAL COUNSEL......................F-1 80198915.1 iii OFFICIAL STATEMENT $80,255,0W ORANGE COUNTY SANITATION DISTRICT REFUNDING CERTIFICATES OF PARTICIPATION,SERIES 2008A INTRODUCTION This introduction contains only a brief summary of certain of the terms of the Certificates being offered and a briefdescription ofthe Official Statement. All statements contained in this introduction are qualified in their entirely by reference to the entire Oficial Statement. References to, and summaries of, provisions of the Constitution and laws of the Sate of California (the "State') and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions. All capitalized terms used in this Official Statement and not otherwise defined herein have the meanings set forth in the Trust Agreement, the Installment Purchase Agreement and the Master Agreement (each, as hereinafter defined). See APPENDIX C— "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Definitions"herein. General This Official Statement, including the cover page, inside cover and all appendices hereto, provides certain information concerning the sale and delivery of $80,255,000* aggregate principal amount of the Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates") evidencing direct, fractions] undivided interests in the Installment Payments (the "Installment Payments") and the interest thereon, to be made by the Orange County Sanitation District (the "District") pursuant to the Installment Purchase Agreement, dated as of May 1, 2008 (the "Installment Purchase Agreement"),to be entered into by and between the District and the Orange County Sanitation District Financing Corporation (the "Corporation"). Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000(the "Master Agreement"), by and between the District and the Corporation, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon, will be incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues (as defined hereinafter) as provided in the Installment Purchase Agreement,consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District(the"Wastewater System")remaining after payment of Maintenance and Operation Costs, as further described in "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein. The Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of May 1, 2008 (the "Crust Agreement"), by and among the District, the Corporation and U.S. Bank National Association, as trustee(the"Trustee"). Proceeds from the sale of the Certificates, together with other available moneys,will be used to(i)refund all of the District's outstanding Refunding Certificates of Participation, 1992 Series(the"Refunded Certificates")and pay a settlement amount to the provider of an interest rate swap agreement relating to the Refunded Certificates, (ii)fund a reserve fund for the Preliminary;subject to change. 80198915.1 i Certificates and (iii)pay the costs incurred in connection with the execution and delivery of the Certificates. See"REFUNDING PLAN"herein. The Certificates will be executed and delivered in the form of fully registered certificates, dated as of the date of initial delivery thereof and will mature on August i in each year as set forth on the inside cover page hereof. Interest evidenced by the Certificates will be payable semiannually on February 1 and August 1 of each year, commencing on August 1, 2008. See "THE CERTIFICATES" herein. The Certificates will be initially delivered only in book-entry, form and will be registered in the time of Cede &Co.,as nominee of The Depository Trust Company,New York, New York("DTC"),which will act as securities depository for the Certificates. The Certificates will be delivered in denominations of$5,000 and any integral multiple thereof. So long as the Certificates are in the DTC book-entry system, the interest, principal, purchase price and prepayment premiums, if any, due with respect to the Certificates will be payable by the Trustee, or its agent, to DTC or its nominee. DTC, in arm, will make payments pursuant to its procedures as described under APPENDIX E—"BOOK—ENTRY SYSTEM"herein. The District The District is a public agency responsible for regional wastewater collection, treatment and disposal. The District is the sixth largest wastewater discharger in the United States. The District provides service to an area with a population of approximately 2.5 million people in the northern and central portion of the County of Orange (the "County"), in a service area of approximately 479 square miles, treating 229 million gallons per day ("mg/d") of wastewater in Fiscal Year 2006-07. See "THE DISTRICT,""DISTRICT REVENUES"and"FINANCIAL OBLIGATIONS"herein. Security and Sources of Payment for the Certificates The Certificates evidence direct, fractional undivided interests in the Installment Payments, and the interest thereon,paid by the District pursuant to the Installment Purchase Agreement The obligation of the District to pay the Installment Payments and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable,in the manner provided under the Installment Purchase Agreement, solely from Net Revenues, and other funds as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs,all as further provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such,is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District has Senior Obligations Outstanding evidenced by seven series of certificates of participation and two related interest rate swap agreements, payable on a parity with the Installment Payments under the Installment Purchase Agreement. The two interest rate swap agreements were executed by the predecessor special districts in connection with the execution and delivery of certain Outstanding Senior Certificates. The payments under these swap agreements are payable on a parity with the Installment Payments under the Installment Purchase Agreement and other Senior Obligations, as provided in the Master Agreement. See"FINANCIAL OBLIGATIONS—Existing Indebtedness"herein and APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement" attached hereto. The term "Existing Senior Obligations" as used in this Official Statement refers to the 1992 Agreement for Acquisition and Construction, the 1992 Swap, the 1993 Agreement for Acquisition and Construction, the 1993 Swap, the 2000 Installment Purchase Agreement the 2003 Installment Purchase Agreement, the 2006 installment Purchase Agreement, the 2007A Installment Purchase Agreement and the 2007B Installment Purchase Agreement, and the term"Senior Obligations"as used in 80199915.1 2 • this Official Statement refers to the Existing Senior Obligations and any additional Senior Obligations, such as the Installment Purchase Agreement, that may be made payable on a parity basis to the Installment Payments as provided in the Master Agreement. The District will terminate the 1992 Agreement for Acquisition and Construction and the 1992 Swap in connection with its refunding of the Refunded Certificates. See "REFUNDING PLAN' and "SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES." Senior Obligations, together with any Subordinate Obligations payable on a subordinate basis to the Installment Payments executed and delivered as provided in the Master Agreement,are referred to collectively as the"Obligations." Pursuant to the Master Agreement,the District will,to the extent permitted by law, fix,prescribe and collect fees and charges for the services and facilities of the Wastewater System which will be at least sufficient to yield during each Fiscal Year (a)Net Revenues equal to 125% of Debt Service on Senior Obligations for such Fiscal Year and (b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary,but shall not reduce the fees and charges than in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. See "SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES—Rate Covenant"herein. The obligation of the District to pay the Installment Payments and the interest thereon,and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable,in the manner provided in the Installment Purchase Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement,and does not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District or the State or any political subdivision thereof, is pledged to the payment of the Installment Payments, or the interest thereon, or other payments required to be made under the Installment Purchase Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. See"SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES"herein. Continuing Disclosure The District has covenanted for the benefit of holders and beneficial owners of the Certificates (a)to provide certain financial information and operating data (the "Annual Repoli') relating to the District and the property in the District not later than eight months after the end of the District's Fiscal Year(which currently would be March 1), commencing with the report for the 2007-08 Fiscal Year, and (b)to provide notices of the occurrence of certain enumerated events, if material. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth in the Continuing Disclosure Agreement. See "CONTINUING DISCLOSURE" herein and APPENDIX D — "FORM OF CONTINUING DISCLOSURE AGREEMENT." Miscellaneous The descriptions herein of the Trust Agreement, the Master Agreement,the Installment Purchase Agreement and any other agreements relating to the Certificates are qualified in their entirety by reference to such documents. Copies of the documents are on file and available for inspection at the corporate trust office of the Trustee at U.S. Bank National Association, 633 West 5th Street, 24th Floor, Los Angeles, CA 90071,Attention: 80198915.1 3 REFUNDING PLAN A portion of the net proceeds from the sale of the Certificates, together with other available moneys, will be used to prepay all of the prior installment payments (the "Refunded Installment Payments") to be made by the District pursuant to the Amendatory Agreement for Acquisition and Construction, dated as of October 1, 1992 (the "1992 Agreement") which was executed in connection with the execution and delivery of the Refunding Certificates of Participation, 1992 Series (the "1992 Certificates") evidencing $160,600,000 original aggregate principal amount, of which $77,340,000 in aggregate principal amount remains outstanding(the"Refunded Certificates"). Pursuant to the terms of the Trust Agreement, dated as of October 1, 1992 (the "Prior Trust Agreement"),pursuant to which such 1992 Certificates were executed and delivered,the refunding of the Refrmded Certificates will be effected by depositing a portion of the proceeds of the Certificates,together with other available moneys, in an escrow fund(the"Escrow Fond")to be created and established under the Escrow Agreement, dated as of May 1, 2008, by and between the District and U.S. Bank National Association, as escrow agent. Such proceeds and other moneys deposited by the District in the Escrow Fond will be used to purchase Government Obligations,the principal of and interest on which when due, together with uninvested proceeds,will be sufficient to provide for the payment of the interest component of the Refunded Installment Payments through and including July 1,2008(the"Prepayment Date")and to provide the prepayment of the principal component of the Refunded Installment Payments on the Prepayment Date at a prepayment price (the `Prepayment Price")equal to the principal amount thereof, without premium. hi accordance with the Prior Trust Agreement, the Refunded Installment Payments will be applied to the payment of interest with respect to the outstanding Refunded Certificates through and including the Prepayment Date and to the prepayment of the principal of the outstanding Refunded Certificates on the Prepayment Date at the Prepayment Price. See "VERIFICATION OF MATHEMATICAL COMPUTATIONS." The maturing principal of and the investment income to be derived from the Government Obligations in the Escrow Fund will be held in trust solely for the Refunded Certificates and will not be available to pay the principal and interest evidenced by the Certificates or any obligations other than the Refunded Certificates. Another portion of the net proceeds from the sale of the Certificates will be used to pay the settlement amount payable by the District arising from the termination of an interest rate swap agreement with AIG Financial Products Corp, relating to the Refunded Certificates. See"SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES." 80199915.1 4 ' SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES The estimated sources and uses of funds with respect to the delivery of the Certificates are presented below. Sources Certificate Proceeds $ Original Issue Premium Total Sources $ Uses Escrow Fund $ Swap Settlement Amount Reserve Fund Initial Purchaser's Discount Costs of Issuance(" Total Uses $ Costs include, among other things, fees of rating agencies, initial fees of the Trustee and Special Comsat fees and expenses. THE CERTIFICATES General The Certificates will be prepared in the form of fully registered certificates in denominations of $5,000 and any integral multiple thereof. The Certificates will be dated as of the date of initial delivery thereof and will mature on August l in each year as set forth on the inside cover page hereof. Interest evidenced by the Certificates will be payable semiannually on February 1 and August I of each year, commencing on August I, 2008. See "THE CERTIFICATES" herein. The Certificates will be initially delivered only in book-entry form and will be registered in the time of Cede&Co.,as nominee of The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Certificates will not receive physical certificates representing their ownership interests in the Certificates purchased. The interest evidenced by the Certificates shall be payable on each Interest Payment Date to and including their respective Principal Payment Dates or prepayment prior thereto, and shall represent the sum of the interest on the Installment Payments coming due on the Interest Payment Dates in each year. The principal evidenced by the Certificates shall be payable on their respective Principal Payment Dates in each year and shall represent the Installment Payments coming due on the Principal Payment Dates in each year. Each Certificate shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after a Record Date and on or prior to the following Interest Payment Date,in which case such Certificate shall evidence interest from such Interest Payment Date, or unless such date of execution shall be on or prior to July 15, 2008, in which case such Certificate shall represent interest from its date of initial delivery. Notwithstanding, the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Certificates shall be in default,each Certificate shall evidence interest from the last Interest Payment Date 80198913.1 5 to which such interest has been paid in full or duly provided for. Interest evidenced by the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30-day months. See APPENDIX C —"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Trust Agreement." Payments of principal and interest evidenced by the Certificates are payable directly to DTC by U.S. Bank National Association,as trustee. Upon receipt of payments of such principal and interest,DTC will in turn distribute such payments to the beneficial owners of the Certificates. So long as the Certificates am in the DTC book-entry system, the interest, principal, purchase price and prepayment premiums,if any,due with respect to the Certificates will be payable by the Trustee, or its agent,to DTC or its nominee. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E- "BOOK-ENTRY SYSTEM" herein. So long as the Certificates are in the DTC book- entry system,the interest,principal and prepayment premiums, if any, due with respect to the Certificates will be payable by the Trustee, or its agent, to DTC or its nominee. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E-"BOOK-ENTRY SYSTEM"herein. No Optional or Mandatory Prepayment The Certificates are not subject to optional or mandatory prepayment prior to their stated Principal Payment Dates. SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES Installment Payments Pursuant to the Installment Purchase Agreement,the Project will be acquired by the District from the Corporation. The District has covenanted to, subject to any rights of prepayment under the Installment Purchase Agreement, pay to the Corporation, solely from Net Revenues and from no other sources,the Purchase Price in Installment Payments, with interest thereon, as provided in the Installment Purchase Agreement. Pursuant to the Master Agreement, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payments and the interest thereon payable under the Installment Purchase Agreement,will be incurred and secured. The obligation of the District to make the Installment Payments, and payments of interest thereon,and other payments required to be made by it under the Installment Purchase Agreement, solely from Net Revenues,is absolute and unconditional,and until such time as the Installment Payments, payments of interest thereon, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the District has covenanted that it will not discontinue or suspend any Installment Payments when due,whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments, payments of interest thereon, and other payments shall not be subject to reduction whether offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement or any cause whatsoever. The District's obligation to make Installment Payments from Net Revenues is on a parity with the District's obligation to make payments with respect to its Outstanding Senior Obligations. See'-Net Revenues"below. Pursuant to the Trust Agreement,the Corporation has assigned to the Trustee for the benefit of the Owners of the Certificates substantially all of its rights,title and interest in the Installment Purchase Agreement, including its right to receive Installment Payments and the interest thereon. The District has Senior Obligations Outstanding evidenced by six series of certificates of participation and two related interest rate swap agreements, payable on a parity with the Installment Payments under the Installment Purchase Agreement. The two interest rate swap agreements were 90198915.1 6 executed by the predecessor special districts in connection with the execution and delivery of certain Outstanding Senior Certificates. The payments under these swap agreements are payable on a parity with the Installment Payments under the Installment Purchase Agreement and other Senior Obligations, as provided in the Master Agreement. See"FINANCIAL OBLIGATIONS—Existing Indebtedness"herein and APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement" attached hereto. The obligation of the District to pay the Installment Payments,and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement and Master Agreement, is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement, and does not constitute a debt of the District,the State or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District,the State or any political subdivision thereof, is pledged to the payment of the Installment Payments, or the interest thereon, or other payments required to be made under the Installment Purchase Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. See"SECURITY AND SOURCES OF PAYMENT FOR TBE CERTIFICATES"herein. Net Revenues The District is obligated to make Installment Payments solely from Net Revenues as provided in the Master Agreement, which consist of Revenues remaining after payment of costs paid by the District for maintaining and operating the Wastewater System ("Maintenance and Operation Costs"). Revenues are defined in the Master Agreement to mean, for any period, all income and revenue received by the District during such period from the operation or ownership of the Wastewater System, determined in accordance with generally accepted accounting principles, including all fees and charges received during such period for the services of the Wastewater System, investment income received during such period (but only to the extent that such investment income is generally available to pay costs with respect to the Wastewater System, including Maintenance and Operation Costs), Net Proceeds of business interruption insurance received during such period,ad valorem taxes received during such period,payments under the Agreement Acquiring Ownership Interests, Assigning Rights and Establishing Obligations, entered into on February 13, 1986, and amendment No. I thereto dated December 10, 1986, by and between predecessor County Sanitation District No. 14 of Orange County and the Wine Rench Water District(the "IRWD Agreement") received during such period and all other money received during such period howsoever derived by the District from the operation or ownership of the Wastewater System or arising from the Wastewater System (including any standby or availability charges), but excluding (a)Capital Facilities Capacity Charges, (b)payments received under Financial Contracts,and(c)refundable deposits made to establish credit and advances or contributions in aid of construction (which, for purposes of the Master Agreement, shall not include payments under the IRWD Agreement); provided, however, that (i)Revenues shall be increased by the amounts, if any, transferred during such period from the Rate Stabilisation Account to the Revenue Account and shall be decreased by the amounts, if any, transferred during such period from the Revenue Account to the Rate Stabilisation Account,and(ii)Revenues shall include Capital Facilities Capacity Charges collected during such period to the extent that such Capital Facilities Capacity Charges could be properly expended on a Capital Facilities Capacity Charge Eligible Project for which the proceeds of Subject Obligations were used or are available to be used. See "DISTRICT REVENUES—Additional Revenues"herein. The District's obligation to make the Installment Payments from its Net Revenues is on a parity with the District's obligation to make payments with respect to its other outstanding obligations described 80199915.1 as Senior Obligations and all Reimbursement Obligations with respect to Senior Obligations,as provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages,benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. Pursuant to the Master Agreement, the District pledges all Net Revenues to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations,and the Net Revenues will not be used for any other purpose while any of the Senior Obligations or Reimbursement Obligations with respect to Senior Obligations remain unpaid; provided however, that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Master Agreement. This pledge constitutes a first lien on the Net Revenues for the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. The term Senior Obligations, generally means all revenue bonds or notes(including bond anticipation notes and commercial paper)of the District authorized,executed,issued and delivered under and pursuant to applicable law,the Installment Purchase Agreement and all other contracts (including financial contracts) or leases of the District authorized and executed by the District under and pursuant to applicable law, the installment, lease or other payments under which are,in accordance with the provisions of the Master Agreement,payable from Net Revenues on a parity with the payments under the Master Agreement. The District may at any time incur Subordinate Obligations payable on a subordinate basis to the Installment Payments executed and delivered as provided in the Master Agreement; provided,however, that prior to incurring such Subordinate Obligations,the District will have determined that the incurrence thereof will not materially adversely affect the District's ability to comply with the requirements of the Master Agreement. The District may at any time incur Reimbursement Obligations with respect to Subordinate Obligations. For a description of the District's Outstanding Senior Obligations and Subordinate Obligations, see "FINANCIAL OBLIGATIONS — Existing Indebtedness" herein. There are currently no Subordinate Obligations or Reimbursement Obligations with respect to Subordinate Obligations outstanding. The District may, in connection with the incurrence of Subordinate Obligations, pledge Net Revenues to the payment of Subordinate Obligations and Reimbursement Obligations with respect to Subordinate Obligations; provided, however, that such pledge, and any lien created thereby, shall be junior and subordinate to the pledge of, and lien on,Net Revenues for the payment of Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. Rate Stabilization Account To avoid fluctuations in its fees and charges of the Wastewater System, from time to time the District may deposit in the Rate Stabilization Account from Net Revenues such amounts as the District deems necessary or appropriate. From time to time, the District may also transfer moneys from the Rate Stabilization Account to the Revenue Account to be used by the District,first to pay all Maintenance and Operations Costs as and when the same shall be due and payable. In addition, any such amount transferred from the Rate Stabilization Account to the Revenue Account by the District is included as Revenues for any period, but such transferred amount is excluded from determining Operating Revenues for any period. Revenues will be decreased by the amounts,if any,transferred from the Revenue Account to the Rate Stabilization Account. There are presently no funds in the Rate Stabilization Account. Allocation of Revenues To carry out and effectuate the pledge of Net Revenues under the Master Agreement as described above, the District agrees and covenants that all Operating Revenues received by the District will be deposited when and as received in the Revenue Account. Additionally, amounts may,from time to time $0199915.1 8 f as the District deems necessary or appropriate, be transferred from the Rate Stabilization Account and deposited in the Revenue Account, as described above under "— Rate Stabilization Account" The District will pay from the Revenue Account all Maintenance and Operations Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operations Costs, the payment of which is not immediately required)as and when the same shall be due and payable. After having paid, or having made provisions for the payment of, Maintenance and Operations Costs, the District shall set aside and deposit or transfer,as the case may be,from the Revenue Account such amounts at such times as provided in the Master Agreement in the following order of priority: (1) Senior Obligation Payment Account; (2) Senior Obligation Reserve Funds; (3) Subordinate Obligation Payment Account; (4) Subordinate Obligation Reserve Funds;and (5) Rate Stabilization Account. Amounts required or permitted to be deposited or transferred as described in items 2, 3, 4 and 5 above, shall not be so deposited or transferred unless the District shall have determined that there will be sufficient Net Revenues available to make the required deposits or transfers on the dates on which such deposits or transfers are required to be made as described above. So long w the District has determined that Net Revenues will be sufficient to make all of the deposits or transfers required to be made pursuant to items 1, 2, 3, 4 and 5 above, on the dates on which such deposits or transfers are required to be made, Net Revenues on deposit in the Revenue Account may from time to time be used for any purpose for which the District funds may be legally applied. For additional information, we APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement." Rate Covenant Pursuant to the Master Agreement,the District will,to the extent permitted by law, fix,prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125%of Debt Service on Senior Obligations for such Fiscal Year and (b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but will not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. In addition, the District has covenanted in the Master Agreement to prepare and adopt an annual budget for the Wastewater System for each Fiscal Year. Such budget will set forth in reasonable detail the Revenues anticipated to be derived in such Fiscal Year and the expenditures anticipated to be paid or provided for therefrom in such Fiscal Year, including, without limitation,the amounts required to pay or provide for the payment of the Obligations during such Fiscal Year, the amounts required to pay or Provide for the payment of Maintenance and Operations Costs during such Fiscal Year and the amounts required to pay or provide for the payment of all other claims or obligations required to be paid from Revenues in such Fiscal Year, and will show that Revenues and Net Revenues will be at least sufficient to satisfy the requirements of the Master Agreement. On or before September I of each Fiscal Year, the District will file with the Trustee a copy of the adopted budget for such Fiscal Year. See APPENDIX C 80198915.1 9 — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement' for additional information. Reserve Fund The Trust Agreement provides for the funding of the Reserve Fund in an amount equal to the "Reserve Requirement,"which is defined as an amount,as of any date of calculation,equal to the least of (a) 10%of the original aggregate amount of principal evidenced by the Certificates(or if the amount of original issue discount or premium applicable to the Certificates exceeds 2%,then 10%of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest thereon, coming due in any one Certificate Year, and (c) 125% of the average amount of remaining Installment Payments, and the interest thereon, coming due in each Certificate Year. Amounts in the Reserve Fund may be used to pay principal and interest evidenced by the Certificates to the extent that amounts in the Principal Account and interest Account are insufficient therefor. The Trustee shall establish and maintain the Reserve Fund until all required Installment Payments,and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the first date upon which no Certificates are Outstanding. The Reserve Fund will be funded with a portion of the net proceeds of the Certificate in the amount of S ,which amount is sufficient to satisfy the Reserve Requirement. See"SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES." The District may substitute a Reserve Facility for all or a part of the moneys on deposit in the Reserve Fund by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under such Reserve Facility and any previously substituted Reserve Facilities, shall be at least equal to the Reserve Requirement. Moneys for which a Reserve Facility has been substituted as provided in the Trust Agreement shall be transferred, at the election of the District, to the Installment Payment Fund, or upon receipt of an Opinion of Counsel to the effect that such transfer, in and of itself, will not adversely affect the exclusion of interest evidenced by the Certificates from gross income for federal income tax purposes, to a special account to be held by the Trustee and applied to the payment of capital costs of the District,as directed in a Written Request of the District. Any amounts paid pursuant to any Reserve Facility shall be deposited in the Reserve Fund. If a Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement,the Trustee shall make a claim for payment under such Reserve Facility, in accordance with the provisions thereof, in an amount which, together with other available moneys in the Reserve Fond, will be sufficient to make said deposit in the Interest Account or Principal Account. The moneys in the Reserve Fond, and any Reserve Facility, shall be held in trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses authorized in the Trust Agreement. Moneys,if any, on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for the final payment of principal and interest evidenced by the Certificates. Amounts on deposit in the Reserve Fund which were not derived from payments under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve Requirement shall be used and withdrawn by the Trustee prior to using and withdrawing any amounts derived from payments under any such Reserve Facility. In order to accomplish such use and withdrawal of such amounts not derived from payments under any such Reserve Facility, the Trustee shall, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Reserve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder,and repayment of expanses with respect thereto, shall be made on a pro-rata basis(calculated by reference to the policy limits available thereunder). 80198915.1 10 The Trustee shall, from amounts received from the District pursuant to the Installment Purchase Agreement, deposit in the Reserve Fund an amount of money which,together with the amount already on deposit therein and the amounts available under all Reserve Facilities, will be equal to the Reserve Requirement. No deposit need be made in the Reserve Fund so long as there shall be on deposit therein a sum equal to the amount which, together with the amounts available under all Reserve Facilities, is at least the Reserve Requirement. The Trustee shall promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. If, as a result of the scheduled payment of principal or interest evidenced by the Certificates, the Reserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of such reduction to the Installment Payment Fond. See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Trust Agreement." Limitations on Issuance of Additional Obligations Senior Obligations. The District may at any time incur Senior Obligations in addition to the Existing Senior Obligations payable from Net Revenues as provided in the Master Agreement on a parity with all other Senior Obligations theretofore incurred but only subject to the following conditions under the Master Agreement: (1) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing under the Master Agreement;and (2) Subject to the provisions of the Master Agreement,the District will have received either one of the following: (i) A Written Certificate of the District certifying that, for a 12 consecutive calendar month period during the 24 consecutive calendar month period ending in the calendar month prior to the incurrence of such Senior Obligations (which 12 consecutive calendar month period will be specified in such certificate or certificates): (A) Net Revenues,as shown by the books of the District,will have amounted to at least 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations,and (B) Net Operating Revenues,as shown by the books of the District,will have amounted to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing,Net Revenues and Net Operating Revenues may be adjusted for(x)any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred, but which, during all or any part of such 12 consecutive calendar month period, were not in effect, (y)customers added to the Wastewater System subsequent to such 12 consecutive calendar month period but prior to the date such Senior Obligations are incurred, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences 80198915.1 11 or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations;or (ii) A certificate or certificates from one or more Consultants which, when taken together, project that, for each of the two Fiscal Years next succeeding the incurrence of such Senior Obligations: (A) Net Revenues will amount to at least 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations,and (B) Net Operating Revenues will amount to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing,Net Revenues and Net Operating Revenues may be adjusted for(z)any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred or will go into effect prior to the end of such two Fiscal Year period,(y)customers expected to be added to the Wastewater System prior to the and of such two Fiscal Year period, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations. For purposes of preparing the certificate or certificates described above,the Consultant may rely upon financial statements prepared by the District that have not been subject to audit by an independent certified public accountant if audited financial statements for the period are not available. See, also "FINANCIAL OBLIGATIONS — Existing Indebtedness" herein. The provisions described above in paragraph (2)need not be complied with if the Senior Obligations being incurred are Short-Term Obligations excluded from the calculation of Assumed Debt Service pursuant to clause(F)of the definition thereof See APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Defmitions"herein. The determination of Net Revenues for use in the calculation described above is more fully described in APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement—Senior Obligations" attached hereto. The provisions described in paragraph(2) above need not be complied with for such portion of such Senior Obligations incurred for the purpose of providing £ands to refund or refinance such Obligations if(i)a portion(which may be alp of the Senior Obligations are incurred for the purpose of providing funds to refund or refinance any Obligations, (ii)upon such refunding or refinancing, debt service on such refunded or refinanced Obligations, or debt service on bonds,notes or other obligations of an entity other than the District,the debt service on which is payable from Obligation Payments for such Obligations(the"Related Bonds"),will no longer be included in the calculation of Assumed Debt Service either because such Obligations, or the Related Bonds of such Obligations,will have been paid in full or because such debt service is disregarded pursuant to clause(L) of the definition of Assumed Debt Service, and (iii)Assumed Debt Service in each Fiscal Year for the portion of such Senior Obligations incurred for the purpose of providing funds to refund or refinance such Obligations is less than or equal to 105% of Assumed Debt Service in such Fiscal Year for such 80198915.1 12 Obligations being refunded or refinanced (assuming for such purposes that debt service on such refunded or refinanced Obligations, or debt service on the Related Bonds of such Obligations, is not disregarded pursuant to clause (L) of the definition of Assumed Debt Service). See APPENDIX C— "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement' attached hereto for additional information. The District may at my time incur Reimbursement Obligations with respect to Senior Obligations. Subordinate Obligations. The District may at any time incur Subordinate Obligations upon satisfaction of the conditions provided in the Master Agreement. See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement'herein for a description of such conditions. Insurance The District will procure and maintain or cause to be procured and maintained casualty insurance on the Wastewater System with responsible insurers,or provide self insurance(which may be provided in the forth of risk-sharing pools), in such amounts and against such risks (including accident to or destruction of the Wastewater System) as are usually covered in connection with facilities similar to the Wastewater System. The District will procure and maintain such other insurance which it will deem advisable or necessary to protect its interests and the interests of the Corporation. See "THE DISTRICT —Risk Management' and APPENDIX C— "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS— Master Agreement'herein. Allocation of Installment Payments Table 1 below sets forth the scheduled Installment Payments with respect to the Certificates. Also set forth are the payments due on Outstanding Senior Obligations. 80198915.1 13 i Table 1 Estimated Installment Payments of the District Fiscal Installment Payments Outstanding Senior Year Relating to Certificates Oblization PavmeMa Ending ne30 Principal Interest Principal Interest('1 Total 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2029 2029 2030 2031 2032 2033 2034 2035 2036 2037 Total Ass�annum interest rate of 3.75%for all un-hedged variable rate obligations and actual swap rates for swapped variable rate obligations. See "FINANCIAL OBLIGATIONS — Existing Indebtedness" and APPENDIX A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED TUNE 30,2007"herein. THE DISTRICT Background The Orange County Sanitation District is a public agency responsible for regional wastewater collection, treatment and disposal. The District is the sixth largest wastewater discharger in the United States. The District provides service to an area with a population of approximately 2.5 million people in the northern and central portion of the County by treating 229 mg/d of wastewater in Fiscal Year 2006-07. 80198915.1 14 The District serves approximately 81% of the County population in approximately 479 square miles, or 59%of the County. The service area which comprises the District was originally formed in 1954 pursuant to the County Sanitation District Act, as amended, Section 4700 at seq. of the Health and Safety Code of the State. The District's service area originally consisted of seven independent special districts in the County which were each responsible for matters relating to their individual districts. These special districts were jointly responsible for the treatment and disposal facilities which they each used. The seven independent districts were successors to the Joint Outfall Sewer Organization, which was formed in 1923 among the Cities of Anaheim, Santa Ana, Fullerton,and Orange, and the sanitary districts of Placentia, Buena Park, La Habra, and Garden Grove. The Joint Outfall Sewer Organization constructed a treatment plant and outfall in the early 1920's to serve its members. It was reorganized in 1947 and 1948 into seven county sanitation districts - District Nos. 1, 2, 3, 5, 6, 7 and 11. These prior districts were formed based on engineers' analyses of the gravity flows in the service area. District No. 13 was formed in 1985 and District No. 14 was added in 1986. These districts were co-participants in a Joint Agreement which provided for thejoint construction,ownership,and operation of the prior districts'joint facilities. In April 1998, at the request of the District's Board of Directors (the "Board of Directors'), the Board of Supervisors of the County of Orange (the "County Board") passed Resolution No. 98-140 approving the consolidation of the than existing nine special districts into a new, single sanitation district, to be known as the Orange County Sanitation District This action was designed to simplify govemance structures, reduce the size of the Board of Directors, ease administrative processes, streamline decision- making and consolidate accounting and auditing processes. The consolidation was effective on July 1, 1998. Pursuant to the Resolution and Government Code Section 57500, the prior districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to the District' and the District assumed all obligations of the prior districts which were several and not joint including, without limitation, them obligations to repay the than outstanding certificates of participation. See "FINANCIAL OBLIGATIONS—Existing Indebtedness"herein. The boundaries of the nine predecessor special districts were initially used by the District to delineate separate revenue areas (the "Revenue Areas") for budgeting and accounting purposes and in order to facilitate the imposition of fees and charges imposed by the District. See"DISTRICT REVENUES—Sewer Service Charges"herein. The District is managed by the Board of Directors,whose members are appointed by twenty-five member cities and agencies which are serviced by the District. The District is responsible for construction and maintenance of a major portion of the wastewater collection, treatment and disposal facilities within its boundaries. Revenue Area No. 7 is responsible for approximately 152 miles of local sewers in its service area, whereas local sanitary districts, water districts and cities are responsible for local sewers in the remainder of the District's service area. Organization and Administration The District is independent of and overlaps other political jurisdictions. There sure: many governmental entities,including the County,that operate within the District's jurisdiction. These entities are exclusively responsible fm the administration of their own fiscal affairs,and the District is not entitled to operating surpluses of,or responsible for operating deficits of,any of the other entities. The twenty-five member Board of Directors is comprised of representatives from twenty-one cities, unincorporated areas of the County and three special districts,including mayors of cities,members of city councils, directors of independent special districts and one member from the County Board. 90198915.1 15 Several board committees, made up of members of the Board of Directors, consider topics for action by the Board of Directors and make recommendations to the Board of Directors. The Chair and the Vice Chair of the Board of Directors are elected every year by a majority of the Board of Directors,and serve at the pleasure of the majority of the Board of Directors. The District has a general manager, general counsel, administrative and operating staff, with offices located at Reclamation Plant No. 1 in Fountain Valley, California. The District currently employs an administrative and operating staff of over 600 under the direction of its General Manager, James D. Ruth. James D. Ruth is the District's General Manager, and has served in that capacity since December 2005. Prior to that time, from January 2003 to October 2004, Mr. Ruth served as Chief Executive Officer for the County of Orange. Mr. Ruth had previously provided 22 years of service to the city of Anaheim as parks and recreation director, deputy city manager, assistant city manager and chief executive officer, a post he held for I 1 years. Robert P. Ghirelli, Ph.D. is the District's Assistant General Manager, and has served in that capacity since July 2006. Mr. Ghirelli previously served as Director of Technical Services for the District since his joining the District in 1998. Prior to joining the District,Mr. Ghirelli served for just over a year as managing principal of the Los Angeles office of a national environmental consulting firm, served 20 years in supervisory positions with the State and Regional Water Boards,with 13 years Executive Officer of the California Regional Water Quality Control Board,Los AngelesNentura Region. Lorenzo Tyner is the District's Director of Finance and Administrative Services. In September 2005, Mr. Tyner joined the District with nearly 15 years of public finance and budgeting experience,most recently serving as the Los Angeles Unified School District Budget Director and Deputy Chief Financial Officer. Mr. Tyner previously worked in large government organizations including the City of Los Angeles and the Los Angeles County Metropolitan Transportation Authority and private sector companies IBM Global Services and Northrop. James Herberg, P.E. is the District's Director of Engineering, and has served in that capacity since November 2006. Prior to becoming Director of Engineering, he was the District's Director of Operations and Maintenance. Mr. Herberg has over twenty years of experience in water and wastewater including project management, construction management, design, strategic planning, and operations & maintenance. Ed Torres is the District's Director of Technical Services for the District. He has served in this position since November 2006. Prior to joining the District in 1991, Mr. Tortes served in a professional capacity for the California State University System and TRW Electronics and Defense Sector. Mr.Torres has twenty-four years of public and private sector experience in protecting public health and the environment. Nick Arhontes, P.E. is the District's Director of Operations and Maintenance and has served the District since 1988. Mr. Arhontes has over 30 years of experience managing various engineered systems in the private and public sectors regionally,nationally,and internationally. Services The District owns and operates regional wastewater collection, treatment, and disposal facilities for the metropolitan area in the northern and central portion of the County. The District receives 80198915.1 16 wastewater from the collection systems of the cities, sanitary districts and unincorporated areas of the County located within the District. See"THE DISTRICT—Service Areas"herein. Generally, local agency systems collect wastewater from residential and industrial customers and convey the wastewater to District trunk sewer pipelines for conveyance to the District's wastewater treatment plants. The District's staff is responsible for operating and maintaining the District's infrastructure, although some operations are provided by external contractors. Currently, the District has established supply contracts for all chemicals necessary to the operation and maintenance of the facilities of the District. The District has sufficient standby systems in the event of equipment failures or system outages. Service Area The map on the first page of this Official Statement shows the District's boundaries and selected cities located within the District. District boundaries were originally established in 1947 and 1948 based on drainage basins. As the existing cities have grown and new areas have incorporated,city limits have come to overlap District boundaries. The District currently serves an approximately 471 square-mile area including 23 of the County's 33 cities and unincorporated areas of the County. The District serves a population of approximately 2.5 million residents and owns sanitary sewerage facilities with a replacement value of approximately$5.56 billion. 90198915.1 17 Table 2 below sets forth the estimated populations of cities and unincorporated areas served by the District as of June 30,2007. Table 2 Estimated Populations of Cities and Unincorporated Areas Served by the Orange County Sanitation District As of June 30,2007 Citv Population Anaheim 345,560 Brea 39,870 Buena Park 82,450 Costa Mesa 113,810 Cypress 49,280 Fountain Valley 57,740 Fullerton 137,370 Garden Grove 172,780 Huntington Beach 202,250 Wine 202,080 La Habra 62,480 La Palma 16,160 Los Alamitos 12,150 Newport Beach 84,220 Orange 138,640 Placentia 51,600 Santa Ana 353,430 Seal Beach 25,960 Stanton 38,980 Tustin 70,350 Villa Park 6,250 Westminster 92,870 Yorba Linda 67,900 Cities Subtotal(') 2,424,180 Unincorporated Areas(" 81,000 Total 2,505,180 Sources:— State Celifomin Department of Finance,Demographic Research Unit and (t)Orange County Sanitation District. Employees As of June 30,2007,the District had 634 full-time equivalent C FTE")staff positions. Most of the employees who occupy these positions are represented by recognized employee organizations, which include the following:the Orange County Employees Association ("OCEA"), the International Union of Operating Engineers-Local 501 ("Local 501"), the Supervisor Group, and the Professional Group. As of October 1, 2007,the District had 591 represented and non-represented employees. Total represented employees as of October 1,2007 numbered 535,as follows: 99 were represented by the OCEA, 196 were represented by Local 501 and 240 were represented by the Supervisor and Professional Groups. New agreements with each of these employee organizations took effect on July 1,2007. The OCEA and Local 80199915.1 18 501 agreements are in effect through June 30, 2011; the Supervisor and Professional Group agreements are in effect through June 30,2010. The OCEA has represented administrative/clerical,technical services and engineering employees since 1979. Local 501 has represented operations and maintenance employees since October 1985. The Supervisor and professional Groups have represented supervisory and professional employees since 1991. The District has historically enjoyed a good working relationship with the employee organizations and has experienced no work stoppages by represented personnel in the past. For a description of the Orange County Employee's Retirement System, in which the District participates, and the District's deferred compensation plan, see "Retirement Plan" below and Note 7 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007, set forth in Appendix A. Retirement Plan The District participates in the Orange County Employee's Retirement System ("OCERS"), a cost-sharing multiple-employer, defined benefit pension plan which is governed and administered by a nine-member Board of Retirement. OCERS was established in 1945 under the provisions of the County Employees Retirement Lew of 1937,and provides members with retirement,death,disability,and cost of- living benefits. All District full-time employees participate in OCERS. The amount of the retirement allowance is based upon the member's age at retirement, the member's "final compensation" as defined in Section 31462 of the Retirement Law of 1937, the total years of service under OCERS, and the employee's classification as a Tier 1 or Tier 11 member. As of July 1, 2006, the formula to calculate retirement benefits was enhanced to 2.5%at age 55,or employees retiring at age 55 or older receive 2.5% of thew average salary for every year of service. Average salary is the highest consecutive 12 months of compensation for Tier 1 employees and the highest consecutive 36 months of compensation divided by three for Tier II employees. Benefits fully vest under the OCERS retirement plan on reaching five years of service. Employees who retire at or after age 50 with ten or more years of service are entitled to an annual retirement allowance. OCERS also provides death and disability benefits. As a condition of participation under the provisions of the County Employees Retirement Law of 1937, members are required to contribute a percentage of their annual compensation to OCERS. The District is required to make periodic contributions to OCERS in amounts that are estimated to remain a constant percentage of covered employees' compensation such that, when combined with covered employees' contributions,will fully provide for all covered employees' benefits by the time they retire. A current comparison of OCERS costs for Fiscal Years 2002-03 through 2006.07 and projected costs for Fiscal Years 2007-08 through 2008-09 is shown in the following table. 80199915.1 19 Table 3 Orange County Sanitation District Comparison of OCERS Costs for Fiscal Years 2002-03 through 2NS-09 Fiscal Year Rate"' Cost•') 2002-03 5.50% $ 1,943,056 2003-04 9.15 3,668,650 2004-05 12.37 5,524,673 2005-06 15.21 7,416,556 2006-07 19.78 9,848,854 2007-08t31 20.87 11,724,637 2008-09tr1 21.34 12,275,695 Regm uved contribution as a percent of covered payroll. Includes amortization of Unfunded Accrued Actuarial Liability. rr1 Amounts represents employer contributions made by the District. tr1 Projected. For Fiscal Years 2002-03 through 2005-06, the District's required contribution was equal to the contribution that the District actually made. As noted,the required contribution set forth above includes amortiration of Unfunded Accrued Actuarial Liability ("UAAL:'). For the fiscal year ended June 30, 2007, total payroll costs of employees covered by OCERS was $49,788,835. As of the December 31, 2006 valuation,OCERS has an aggregate UAAL ratio of 73.8%,for a total UAAL of$2.29 billion. For more information regarding OCERS and the District's retirement plan as of Jane 30, 2007, we Note 7 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007 set forth in Appendix A. The Comprehensive Annual Financial Reports of the Orange County Employees Retirement System are available on the OCERS website at http:Ilw .omrs.org. The information on such website is not incorporated herein by such reference or otherwise. Other Post-Employment Benefits The Governmental Accounting Standards Board ("GASB') in April 2004 issued Statement No. 43, which requires state and local governmental employers to determine, on an actuarial basis, the total liability of post-employment benefits other than pension benefits (known as other post-employment benefits or "OPEB"), including healthcare and life insurance expenses and related liabilities, and an annual required contribution to fund such liabilities. In June 2004, GASB issued Statement No. 45, which requires state and local governmental employers to fund the actuarially determined annual required contribution ("ARC") for its OPEB or record the entire amount of the unfunded liability of its OPEB in its financial statements. The District was required to implement GASB Statement No. 43 by June 30, 2007,and is required to implement GASB Statement No.45 by June 30,2008. The District's OPEB program currently includes medical and prescription drug benefits and a program of cash payments, known as Additional Retiree Benefit Account ("ARBA") benefits. Benefits vest upon retirement after qualifying public service of 10 years. Most of the District's retirees under the age of 65 am covered under the same medical and prescription drug plans as active employees of the District,but an additional retiree-only fee for service plan called"Blue Card"is also available. 90198915.1 20 According to the District's actuary, Demsey Filliger Associates (the "Actuary"), the unfunded OPEB liability as of July 1, 2007 is approximately$17.4 million. The ARC is$1,763,605 for fiscal year 2007-08. Calculation of the ARC is based on the present value of benefits accruing in the current year,a 30-year amortization of the unfunded OPEB liability and an assumed rate of return on investments in the retiree fund of 5%per arum. The Actuary has proposed various methods of funding the District's future OPEB liability and the District is presently considering such proposed alternatives. The District does not believe that its OPEB liability will have a material impact on its operational results. Risk Management As of the date hereof, the District has in force basic all risk property and casualty insurance, including theft, fire, flood, terrorism and boiler and machinery losses to the Wastewater System. The District is self-insured for portions of workers' compensation,property damage and general liability. The self-insurance portion of workers' compensation is $500,000 per person per occurrence with outside excess insurance coverage to $300 million. The self-insured portion for property damage covering fire and other disasters is $25,000 per occurrence with outside excess insurance coverage to $1 billion. The self-insured portion for property damage covering flood is$100,000 per occurrence with outside excess insurance coverage to$300 million. The District is self-insured for all property damage from the perils of earthquakes. See "DISTRICT REVENUES — Reserves." The District also maintains outside comprehensive boiler and machinery insurance, including business interruption insurance, with a $100 million limit with deductibles ranging from $25,000 to $350,000. The District is substantially self- insured for general liability coverage with a $250,000 self-insured deductible, but has excess general liability coverage to $25 million. During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against the District are processed by outside insurance administrators. The District believes that there are no unrecorded claims as of October 1,2007 that would materially affect the financial position of the District. For more information regarding the District's insurance cevemge as of June 30,2007, see Note I to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007 set forth in Appendix A. Existing Facilities The District's Wastewater System presently consists of two wastewater treatment plants, an influent metering and diversion structure, 16 pump stations, various interplant pipelines and connections, and the ocean outfell facilities. The District's Wastewater System includes approximately 584 miles of sewers within 12 trunk sewer systems, 152 miles of local sewers located within Revenue Area No. 7,two treatment plants, two discharge outfalls and two emergency weir outlets. The existing treatment plants have a rated primary treatment capacity of 366 million gallons per day,including standby capacity. Treatment Plant No. 1 ("Plant No. 1")is located in the City of Fountain Valley,about four miles from the coast, adjacent to the Santa Ana River. Secondary treatment capabilities are provided by a trickling filter plant and a conventional air activated sludge plant. Up to 15 million gallons per day ("mg/d") of secondary treated effluent is conveyed to an Orange County Water District (the "OCWD") Plant for tertiary treatment prior to ground water recharge. 80199915.1 21 Treatment Plant No. 2("Plant No. 2")is located in the City of Huntington Beach, 1,500 feet from the ocean,at the mouth of the Santa Ana River. Secondary treatment capabilities are provided by a pure oxygen activated sludge plant. The District employs several phases in the treatment of wastewater. The first phase,preliminary treatment,removes debris such as eggshells, send and biodegradable items. See also"Preferred Level of Treatment" and "Biosolids Management" below. In the next phase, primary treatment, wastewater is pumped to large settling basins. The liquids are separated from the remaining solids which settle or float as the wastewater passes through large settling basins called clarifiers. The settled solids are sent to solids treatment facilities. Approximately half of the primary treated wastewater flows into the ocean outfall pumping station where it is blended with secondary treated wastewater before being discharged into the ocean. The other half is sent to secondary treatment for further processing. During secondary treatment, the wastewater is placed in aeration basins to which naturally occurring bacteria are added to remove most of the remaining dissolved and suspended microscopic organic solids. The treated wastewater from both plants is mixed together at Plant No. 2, where it is then pumped through the ocean outfall pipe that extends five miles offshore. Table 4 below sets forth the treatment plants' approximate current and future treatment capacities. Table 4 Wastewater System Treatment Capacities (MG/D) 2006-07 Existing Primary Total Planned Actual Treatment Existing Secondary Secondary Flows Canacity Treatment Capacity Capacity1n Plant No. 1 90 198 110 170 Plant No. 2 139 168 90 150 Aggregate Treatment 229 366 200 320 Plant Facilities The D� istrices"Planned Total Capacity" is based on the Strategic Plan for planned capacity by 2020, which estimated the District's requirements to meet future expected primary and secondary capacity demands. The District has the capability to divert a portion of the influent flow from Plant No. 1 to Plant No.2 through interplant connections. A portion of the flow destined for Plant No.2 can also be diverted to Plant No. 1. The treated wastewater from Plant No. 1 flows by gravity to the outfall system through interconnecting lines. The combined Plant No. 1 and Plant No. 2 effluent is then pumped through a 120-inch diameter ocean outfall which is approximately five miles long. The last mile of the outfall pipe is a diffuser that dilutes the wastewater with seawater in a ratio of 148 parts seawater to one pan treated wastewater at an average depth of 185 feet. The 120-inch outfall has a capacity of 480 million gallons per day at high tide. A smaller 78-inch diameter outfall that terminates at a shallower depth is still maintained, although it is reserved for use in emergencies. This smaller outfall is estimated to have a capacity of approximately 230 million gallons a day. There is an interplant gas pipeline between Plant No. 1 and Plant No.2 which allows digester gas(which is used as fuel for many of the facilities' engines) from one plant to be used at the other to balance the supply and demand, which results in efficient gas utilisation. 80198915.1 22 Permits,Licenses and Other Regulations The Wastewater System is subject to regulations imposed by the 1972 Clean Water Act, Public Law 92-500 (the "Clean Water Act"), the California Environmental Quality Act of 1970, as amended ("CEQA") and the Federal Clean Air Act. The regulatory requirements are administered by the United States Environmental Protection Agency(the"EPA")and the California Regional Water Quality Control Board("RWQCB"). Regulations of these agencies deal primarily with the quality of effluent which may be discharged from the treatment plants and the nature of waste material discharged into the collection system. The Clean Water Act directs the EPA to monitor and to regulate the discharge of pollution into navigable waterways and to enforce the requirements that all wastewater treatment plants in the nation provide full secondary treatment for sewage. In 1977, Congress amended the Clean Water Act to allow waivers of secondary treatment standards for certain ocean dischargers if they can demonstrate, to the satisfaction of the EPA, that significant adverse environmental impacts would not occur. The District currently has all applicable permits and licenses necessary to operate its facilities. The District has discharged treated wastewater into the Pacific Ocean under a permit issued by the EPA and the RWQCB. The discharge permit included a waiver under the 301(h) provisions of the Clean Water Act, allowing for less than full secondary treatment based on an ocean discharge of sufficient depth, distance and dilution. The permit was initially issued in 1985 and was the first modified Section 301(h) permit issued to a major wastewater treatment facility. The District's permit, which included the Section 301(h)waiver of secondary treatment requirements,was issued on May 6, 1998 and expired on June 8,2003. In July 2002, the Board of Directors approved a change from the existing level of treatment, a blend of 50 percent advanced primary and 50 percent secondary treated wastewater, to full secondary treatment standards. See "Preferred Level of Treatment" and "Urban Runoff' below. As a result, the District established a policy to subject all wastewater discharges into the ocean to secondary treatment standards. See "Preferred Level of Treatment" below. To implement this policy, District staff was directed to immediately proceed with the planning,design,and implementation of treatment methods with the expressed purposes of eliminating the need for the permit wavier received under Section 301(h). Following determination by the Board of Directors in July 2002 to implement full secondary standards, staff prepared the Secondary Treatment National Pollutant Discharge Elimination System ("NPDES") Permit Application that was required to be submitted to the regional office of the EPA and the RWQCB in December2002. The NPDES Permit is separate and apart from the permit waiver received under Section 301(h), and once awarded would negate any necessary waiver. Achieving secondary treatment standards will take approximately 6 years to complete, with completion expected in December 2012. But ocean discharge permits are issued for 5 years, and the EPA has no authority to waive the discharge limits requirements or grant a longer permit(except per Sec. 301(h)). The alternative was to voluntarily seek a consent decree concurrently with the issuance of the new ocean discharge permit. This negotiated consent decree(the"Consent Decree")approves the schedule and decrees that no penalties will be imposed for discharges that exceed the secondary treatment limits during the period of construction. The Consent Decree was signed by the District, EPA, and the RWQCB and filed with the U.S. District Court on November 15, 2004. The District is in compliance with the decree and has successfully completed three of the seven milestones within the specified time deadline required by the decree. The South Coast Air Quality Management District ("AQMD") is the regional governmental agency charged with implementing the Federal Clam Air Act. AQMD permits me required before a sewage treatment improvement project can be constructed. Such permits are project specific and contain construction process requirements, required equipment and standards for predicted air quality. After 80199915.1 23 construction is completed,the AQMD issues an operation permit. These permits are also project specific and contain air quality standards and other appropriate operational guidelines. Most of the District's facilities are enclosed in order to trap emissions,which are cleaned by air scrubbers that remove odors. In addition,the District has implemented an air quality risk reduction program which includes a twenty-year Plan to improve treatment plant operations and reduce industrial toxic pollutants. The District currently has all necessary AQMD permits to operate the Wastewater System. Capital Improvement Program The Master Plan. The District's 1989 master plan consisted of a 30-year plan of action for managing wastewater activities to the year 2020, entitled "2020 Vision, Action Plan for Wastewater Management and Environmental Protection 1990-2020"(the"Master Plan"). The Master Plan integrated research facilities planning, environmental analysis, toxic control, water conservation and reclamation, sludge reuse, other wastewater programs and financial planning into a single unified approach. In connection with the preparation of the Master Plan,an in-depth land use study was performed,resulting in the creation of a uniform land use classification system and a map of the District's service area. Land use designations and unit flow factors were used to project wastewater flows in the District's trunk sewers for then present conditions, through the year 2020. These flows were included in a computer model of the District's Wastewater System which identified future sewer capacity improvements. A thirty-year capital improvement program was developed to implement the required sewer capacity improvements. This land use study included the collection and compilation of the latest available land use plans,reports,maps and studies from the cities within the District and the County, and interviews with the planning directors or key staff within the District. Land use planning within the District's service area is the responsibility of the County for unincorporated areas and cities for areas within thew boundaries. The California Coastal Commission has some land use authority within the District's coastal areas. The Strategic Plan. In October 1999,the District updated the Master Plan with a strategic plan (the "Strategic Plan"). The Strategic Plan updated the planning process set forth in the Master Plan through the year 2020 and defined the District's goals, responsibilities, and requirements over the then following twenty years, including projections through the assumed "build-out" of the District's service area to the year 2050. In addition to updating the population and flow assumptions, the Strategic Plan provided for an operations and financial plan, including a review of the collection,treatment and disposal facilities, and the District's ocean outfalls. Studies on a preferred level of wastewater treatment and in- sourcing of the ocean monitoring program were prepared and incorporated in the Strategic Plan. Water and air regulatory agencies require that all wastewater facilities be designed to meet the needs of anticipated growth and provide a reasonable reserve capacity. With the adoption of the Strategic Plan,the District's planning process met these requirements by shifting its approach for the development of master plans from a"size and build"approach to a broad-based multi-agency cooperative evaluation process. Many of the assumptions used to develop the Strategic Plan, such as inflation, the projected service population, the level of building activity, and the volume of wastewater treated, were quite different from what was assumed ten years earlier under the Master Plan. Critical factors such as population growth, new construction, the volume of wastewater delivered to the plants and viable water conservation and reclamation programs were reevaluated. interim Strategic Plan. In June 2002, an Interim Strategic Plan Update (the "Interim Strategic Plan")was completed to further update and revise many of the assumptions used to develop the District's previous planning documents,including population and land-use projections,the level of building activity in the District's service area and the volume of wastewater to be treated. The Interim Strategic Plan also provides for an operations and financial plan including a review of the District's collection,treatment and 80198915.1 24 disposal facilities,and a study of the District's ocean outfall system. In addition,potential changes in the regulatory climate for the beneficial reuse of bicsolids were also considered. On July 17, 2002, the Board of Directors approved Resolution No. OCSD-14, "Establishing the Policy for Level of Treatment of Wastewater Discharged into the Ocean." This resolution established the District's policy to treat all wastewater discharges into the ocean to secondary treatment standards thereby providing for continued public safety,marine ecosystem protection, and water reclamation opportunities. To implement this policy, the District staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the agency to meet Clean Water Act secondary treatment standards. The District currently estimates that it will take 5 years (through December 2012) and additional capital improvement costs of$539 million to mach secondary treatment discharge standards. In the interim, the District will operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspended solid discharges below currently allowed limits. The current 50 percent secondary portion will increase incrementally as operations change and new facilities are constructed and placed in service. See "Preferred Level of Treatment"below. The District's planning process for development of the Interim Strategic Plan incorporated an analysis of population growth, dry weather and peak wet weather flows and the maximum use of existing facilities. The population of the District's service area was projected to grow to 2.7 million by the year 2020. Average flow rates at both treatment plants were projected to increase to 278 million gallons a day by 2020(134 million gallons a day of treatment at Plant No. 1 and 144 million gallons a day at Plant No. 2),up 15%from the Fiscal Year 2005-06 flow. In combination with the Interim Strategic Plan, the District developed its current Capital Improvement Program ("CIP"). The District expects to meet future demands on the Wastewater System through the CIP. This program has been developed to satisfy anticipated regulatory requirements, increased population, additional treatment requirements, conservation, energy and other resource savings considerations, odor control improvements, and air quality protection needs. Through 2020,the District's CIP is scheduled to accomplish: • Major rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping, and solids handling facilities at both treatment plants; • Replace and rehabilitate 16 of the District's outlying pumping stations, and 44 trunk sewer improvement projects; • Fund cooperative projects to help cities upgrade their sewer systems; • Disinfect the District's ocean discharge to reduce bacterial levels below State bathing standards; • Reclaim 70 millions of gallons per day of the District's effluent,or nearly one-third of the total daily flow(Groundwater Replenishment System);and • Achieve full secondary treatment standards. CIP Validation Study. In preparation of each year's Budget,the District conducts an Annual CIP Validation Study to ensure that the scopes of the projects were necessary, and that the cost estimates were accurate. As a result of the completion of the CIP Validation Study and the Secondary Treatment Peer Review in Match 2007, a revised CIP was further developed to meet secondary treatment standards as 8019a915.1 25 quickly as possible while providing for increased flows and rehabilitation and refurbishment of existing facilities. As identified within the Interim Strategic Plan, and verified through the CIP Validation Study and Secondary Treatment Review,$538 million of additional capital improvements over the next 5 years (through December 2012)are needed to reach full secondary standards. The CIP Validation Study resulted in a revised CIP consisting of 107 large capital projects managed by the Engineering Department through 2020-21 at a total cost of$2.3 billion, approximately $750 million of which has been spent to date. The bulk of construction is scheduled during the next ten years, with average annual expenditures of nearly $300 million projected over the next five years. Implementation of full secondary treatment standards is scheduled to be completed on or before December 31, 2012. A summary of total estimated capital costs for the CIP for Fiscal Years 2007-08 through 2020.21 is set forth in Table 5 below. Table 5 Estimated Capital Costs Fiscal Years 2007-08 through 2020-21to Protect cost Collection System Capacity $ 169,005,450 Collection System Repair,Rehabilitation, Replacement 192,087,530 Treatment Plant Capacity 18,329,380 Additional Secondary Treatment 489,817,580 Groundwater Replenishment System,Phase 1 15,793,000 Improved Treatment 110,905,800 Treatment Plant Repair,Rehabilitation,Replacement 505,453,550 Support Facilities 105,791.810 Total Validated Capital Improvement Program $.LW .134,100 All com sts ere estimated as of March 23,2007 and are derived from the CIP Validation Study. Source: Orange County Sanitation District. Of the Fiscal Year 2007-08 proposed CIP cash flow outlay of $302.7 million, the largest cash outlay within the plant facilities is$54.3 million for the new trickling filters at Treatment Plant No. 2 with a total project cost of$221.2 million. The Headworks replacement at Treatment Plant No. 2 requires $53.4 million in Fiscal Year 2007-08,with a total project cost of$257.8 million. Another$36.6 million is required for the replacement of the interplant pumping station on Ellis Avenue to be located at Reclamation Plant No. 1,with a total project cost of$78.5 million. Of the Fiscal Year 2008-09 proposed CIP cash flow budget of$356.0 million, the largest budgeted expenditure within the plant facilities is $71.8 million for the new secondary treatment facility 2 at Reclamation Plant No. 1. The new trickling filters at Treatment Plant No. 2 are expected to require $54.1 million in Fiscal Year 2008-09. Another $39.3 million is being proposed for the Headworks replacement at Treatment Plant No. 2. The largest project in the collection system, in the Fiscal Year 2007-08 CIP, is $8.5 million for the Bushard Trunk Sewer project,which was completed in July 2007. For Fiscal Year 2008-09,the three largest projects include $10.8 million for Gisler-Redhill North Trunk Improvements, $15.2 million for replacement of the Bitter Point Pump Station, and$20.5 million for the Newport Trunk Sewer and Force Mains project. The total budgets for these three projects are $16.1 million, $34.1 million and $24.4 million,respectively. 80198915.1 26 Board ojDirecror's Sewer Service Cimrges Review. In April 2007,the Board of Directors began consideration of increased sanitary sewer service charges for all single family and multi-family residential units and most commercial and industrial properties. Any increases in sanitary sewer charges are subject to approval by ordinance adopted by a 2/3 vote of the Board of Directors after a noticed public hearing in compliance with all laws. See "LIMITATION ON TAXES AND REVENUES — Article XIIIC and Article XBID of the California Constitution" herein. District staff expects sewer service charges to increase as a result the Board of Director's review. However, specific increases have not yet been adopted and there can be no assurance that any particular service charge considered during the review process will be adopted by the Board of Directors. Groundwater Replenishment System The District has taken a mufti-jurisdictional approach to planning for capital facilities because many of the methods for reducing or managing flows involve other jurisdictions. One such project is the Groundwater Replenishment System ("GWRS"). In March 2001,the District entered into an agreement with the OCWD to design and construct Phase 1 of the GWRS. The cost of this project is to be paid equally(50 percent shares) by each agency. The GWRS is ajoint effort by the two agencies to provide reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. The GWRS is planned for three phases, Phase 1 will produce approximately 72,000 acre-feet per year of recycled water by June 2007, Phase 2 will increase the total capacity to 112,000 acre-feet by the year 2010, and Phase 3 will increase the total capacity to 145,600 acre-feet by the year 2020. Following the completion of Phase 1,the extent of the District's commitment to date,the GWRS will have the capacity to divert up to 100 million gallons per day of flow from the District's ocean discharge. Costs for Phases 2 and 3 have yet to be approved and programmed. As of June 30, 2007, the total estimated cost of GWRS Phase I was $492.2 million. Of this amount, up to $90.0 million may be reimbursed through grants from the U.S. Environmental Protection Agency, the U.S. Bureau of Reclamation, the State Water Resources Control Board, and others. The District's estimated share is $246.1 million. Costs incurred by the District through June 30, 2007 total $186.4 million. As noted above,Phase I of the GWRS is nearing completion and the GWRS will require a cash outlay of$15.6 million in Fiscal Year 2007-08. Preferred Level of Treatment In July 2002, the Board of Directors approved a change from the existing level of treatment, a blend of 50 percent advanced primary and 50 percent secondary treated wastewater, to full secondary treatment standards. The reasoning behind the decision to move to full secondary standards included(1) the possibility (no matter how remote) that bacteria from the ocean outfall may at times reach the shoreline, (2) upgraded treatment will aid additional water reclamation with the Orange County Water District,(3)and the public clearly stated preference for upgrading wastewater treatment at the time. In an effort to eliminate most bacteria from being released from the ocean outfall, in 2002 the District began to use chlorine bleach to disinfect the effluent and then apply sodium bisulfate to remove any remaining chlorine prior to releasing the treated wastewater to the ocean. In order to protect the animal life living in the ocean, the District continues to take measures to limit the chlorine residual to a very low level-essentially non-detectable. This mode of disinfection is anticipated to occur for the short- term, possibly two or three years, while the District studies, designs and constructs permanent facilities, and considers alternate disinfection technologies. Beginning in Fiscal Year 2006-07, the addition of disinfection treatment required an annual outlay of$7 million in additional chemicals within the joint operating budget of the District. 80198915.1 27 Following determination by the Board of Directors in July 2002 to implement full secondary standards, staff prepared the Secondary Treatment NPDES Permit Application that was required to be submitted to the regional office of Environmental Protection Agency ("EPA") and the RWQCB in December 2002. An NPDES permit has been issued to the District and the District is currently operating under the Consent Decree. See"THE DISTRICT—Permits,Licenses and Othm Regulations." The District estimates that it will take approximately six years and require additional capital improvement costs of approximately $649 million to add additional secondary treatment capacity to the Wastewater System,with completion expected in December 2012. In addition, based upon the District's most recent projections, upon completion of facilities necessary to meet secondary treatment standards, operating costs will increase by approximately $7.2 million annually. In the interim, the District will operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspend solid discharges below those currently allowed limits. Each year, the current 50 percent secondary portion will increase incrementally as operations change and new facilities are constructed and placed in service over the coming years. Biosolids Management The District produces approximately 650 tons of digested and dewetered(Class B) biosolids per day. By 2020,the Distrid's biosolids production is projected to increase by 20 percent,to 285,000 tons annually. The District relies on the following technologies and locations for the management of its biosolids: land application of Class B biosolids in Arizona, land application of chemically-stabilized Class A biosolids in Kent County, composting to Class A biosolids in Riverside County, Kern County and La Paz County,Arizona,and landfrlling of Class B biosolids in Yuma County,Arizona. Counties throughout California and Arizona have developed, or are in the process of developing, ordinances that severely restrict or ban the land application of Class B biosolids. In June 2006, Kern County voters approved an anti-sludge initiative that bens the land application of both Class B and Class A biosolids. It has become clear that certain land application options currently available to the District are anticipated to be eliminated in the new future due to these developments. The District, as well as most of California's wastewater agencies, is working to develop sustainable products and management locations for its biosolids. The dynamic regulatory issues, land application ordinances and bans, and public perception challenges have prompted the District, with the help of CH2MHill, to develop a Long-Range Boosolids Management Plan ("LUMP"). This LRBMP was approved by the Board in December 2003. The goal of the LRBMP was to develop a sustainable, reliable, and economical program for long-range biosolids management providing environmentally sound practices that meet the stringent federal, state, and local regulatory requirements. The LRBMP recommendations included new in-plant technologies to reduce the volume of biosolids, explore the production of Class A biosolids products, and move into the energy and fuel production and compost markets. As a result of the LRBMP recommendations,the existing Synagro biosolids management contract was amended in April 2004 to have 250 tons per day of the District's Class B biosolids composted at Synagro's South Kern Industrial Center("SKIC")facility, and was scheduled to open in December 2007. This composting facility is now in operation and receiving the full allocation of contracted biosolids In May 2006,the District entered into a contract with EnerTech Environmental, Inc.to convert 225 tons of biosolids per day to a renewable fuel at EnerTech's proposed facility in Rialto,California. The EnerTech solution is a relatively new,patented heat treatment process that increases the ability to dewater biosolids in order to maximize the efficiency of the production of fuel. By decreasing the moisture content of biosolids prior to drying, a smaller dryer is needed, thus reducing capital and energy consumption. The 8019s915.1 28 fuel product will be recycled and reused, under agreements with area cement kilns and other fuel users. Residual ash from the fuel combustion becomes part of the cement product,resulting in no residual waste product liability. The EnerTech facility is expected to come on-line in late 2008. Also in April 2005,the Board of Directors approved the amendment of the existing memorandum of understanding ("MOU") with South Orange County Wastewater Authority ("SOCWA") for preliminary facility design, permitting, and community relations activities for the development of a composting facility at the Prima Deshecha Landfill in South Orange County. For the past two years under the previous existing MOU, SOC WA and the District have been working with the Orange County Integrated Waste Management Department's Biosolids Committee to site an enclosed biosolids and green waste composting facility at the Prima Deshecha Landfill in South Orange County. The proposed"South Orange County Composting Facility" would take in approximately 100 to 110 tons of Class B biosolids daily from the District and SOC WA and,combined with like amounts of wood chips and yard trimmings, produce approximately 65 to 75 tons of compost per day. The MOU reflects a 50-50 participation commitment and ownership in the facility between SOCWA and the District, and consent to initiate and fund the tasks for the initial planning,permitting and concept design of the project. This project is still in the development process. As a result of the transition to biosolids-based compost and energy products the cost to the District for biosolids management has increased. The Fiscal Year 2005-06 management budget for biosolids was $9.7 million. The Fiscal Year 2006-07 management budget for biosolids was $12.8 million. The actual cost of biosolids management in Fiscal Year 2005-06 and Fiscal Year 2006-07 was $10.4 million and $11.7 million, respectively. The Fiscal Year 2007-08 biosolids management budget is currently estimated to be$14.3 million. Urban Runoff For a two-month period during the summer of 1999, eight miles of beaches in Huntington Beach were closed by the OCHCA due to excessive levels of bacteria in the water. A three-month interagency source investigation did not identify a definitive source of the contamination, but determined that the District was not at fault. Although the initial "signature" of the pollution strongly suggested sewage contamination, the investigation concluded that none of the District's facilities caused the excessive bacteria levels and that there was no adverse impact on the capacity of the Wastewater System. In June 2002, the District's charter was amended by an act of the State Legislature to include permissive language authorizing the diversion and management of dry weather urban runoff Flows. This charter change will allow the District, in its discretion, to acquire, construct, operate, maintain, and furnish facilities for the diversion of urban nmoff from drainage courses within the District,the treatment of the urban runoff,the return of the water to the drainage courses,or the beneficial use of the water. As noted above, in July 2002, the Board of Directors approved the implementation of full secondary standards. The District is currently discharging treated wastewater into the Pacific Ocean under a permit issued by the EPA and the RWQCB on May 6, 1998 and currently under an administrative grant of permission until the EPA/RWQCB issue a new permit to replace it. Following determination by the Board of Directors in July 2002 to implement full secondary standards, staff prepared the Secondary Treatment NPDES Permit Application that was required to be submitted to the regional office of the EPA and the RWQCB. See"THE DISTRICT—Permits,Licenses and Other Regulations." 80198915.1 29 Integrated Emergency Response Program In recognition of the potential damage which could occur in the event of a major earthquake, flood, or other disaster, the District has implemented an Integrated Emergency Response Program (the "IERP") in 1979. The IERP is a two-volume plan which contains policies, plans and procedures preparing for, and responding to, emergencies. The District also analyzed disaster preparedness issues and policies within the Master Plan, and within a 1994 document titled Fault Rupture Hazard Investigation-Wastewater Treatment Plant No. 2. According to the Master Plan, earthquakes are considered to be the most potentially devastating natural disaster events which confront the District. The disaster preparedness plan included in the Master Plan reviewed two possible major earthquake scenarios: an 8.3 Richter magnitude ("M") earthquake on the southern San Andreas fault system and an M 7.0 earthquake 7.0 Newport-Inglewood fault zone,which includes Plant No. 2. An M 8.3 earthquake on the southern San Andreas fault,while on the whole more destructive than the M 7.0 Newport-Inglewood fault even, would probably result in less damage to the District's service area due to the distance of the fault from most of the service area. However,the 1989 Master Plan stated that damage from such a major earthquake on the San Andreas £soft would be extensive. Also, the Master Plan indicated that an M 7.0 earthquake on the Newport-Inglewood fault within five miles of the District's sewerage facilities could cause major destruction to those facilities. The disaster preparedness plan in the Master Plan indicated that it would not be economically feasible to upgrade all of the existing sanitary sewerage facilities to survive an earthquake of this magnitude along the Newport-Inglewood fault. The IERP outlines the policies and employee actions to be taken before, during and after an earthquake,earthquake response guidelines and damage assessment procedures. The Master Plan analyzed the vulnerability of the sanitary sewerage facilities and operations of the District and planned a risk reduction program wherein the vulnerability of many of the District's sanitary sewerage facilities to an earthquake could be reduced by recommended retrofit construction measures. The Master Plan also recommended that designs of existing major structures which were constructed prior to development of current seismic design standards be reviewed and the structures strengthened, if necessary. Since the 1989 Master Plan and the 1994 Report, the District has completed retrofitting where deemed appropriate. Pursuant to the Master Plan, all recent and future projects have been, and will be, designed to the same high earthquake code standards as set for other essential services, such as hospitals and fire stations. Many of the older buildings analyzed in the Master Plan have been replaced by structures built after 1989. The Army Corps of Engineers' "All-River Plan" has mitigated any future flooding of the Santa Ana River system and potential threats to the District's Wastewater System. Also, both Plant No. 1 and Plant No.2 are surrounded by three-foot to six-foot high walls,built to federal standards. The disaster preparedness plan in the Strategic Plan investigates the damage potential posed by coastal flooding, tsunamis(large ocean waves generated by seismic activity) and windstorms. However, based on available information, the District does not believe that any of such events would have a material adverse impact on the Wastewater System. The Strategic Plan also makes recommendations regarding fire protection of the Wastewater System and most of the structures at Plant No. 1 and Plant No. 2 are constructed of fire-resistant materials. The ARP describes the procedures needed to respond to a possible disaster. For more information regarding emergency response policies, the disaster preparedness plan described in the Strategic Plan and the IERP can be reviewed at the District's office. 80198915.1 30 DISTRICT REVENUES Sewer Service Charges General. The District has the power to establish fees and charges for services of the Wastewater System. Such fees and charges are established by the District's Board of Directors and are not subject to review or approval by any other agencies. In Fiscal Year 1997-98, a Rate Advisory Committee (the"RAC") was established comprised of representatives from industrial, commercial and residential users. The goal of the RAC was to examine the then current rate structure and, if needed, develop recommendations for change. The RAC analyzed the District's rate structure to determine whether its then current sewer service user fees (now known as "Sewer Service Charges") were equitable among residences and industry. This review resulted in a proposal to expand the number of non-residential user categories from one to twenty-three and to provide for gradual rate increases in seven of the nine Revenue Areas. The increase in the number of categories provided a more equitable fee structure and also provided for future reductions in single-family residential Sewer Service Charges. The Sewer Service Charges for those categories were based on the average flow and strength of wastewater discharged for each property type. Annually, the Board of Directors adopts an ordinance establishing the annual sanitary sewer service charges. These ordinances are adopted by a two-thirds vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with Proposition 218. See "LIMITATIONS ON TAXES AND REVENUES - Article XIIIC and Article XIIID of the California Constitution." In May 2002,the Board of Directors adopted District Ordinance No. OCSD 18 (the"2002 Ordinance") which was effective on July 1, 2002. The 2002 Ordinance included a single family residential ("SFR") rate increase, the underlying basis for all sanitary sewer service charges including sanitary sewer rates for multi-family residential units as well as most commercial and industrial properties, of $7.50 per year, or 9.4%, to $87.50 per year. In June 2003, the Board of Directors authorized a Proposition 218 notice on proposed"not to exceed"rate increases for each year over the next five years. Each year thereafter,the Board of Directors has ratified the next year's actual rate. Table 6 below sets forth the annual ordinance adoptions following the last Proposition 218 notice and presents a five-year comparison of the Sewer Service Charge rate for single-family residences. Table 6 Annual Sewer Service Charges Single Family Residence Rate Five Year Rate Schedule Fiscal Years 2003-04 through 2007-08 Effective Sewer Service Percent Fiscal Year Ordinance No. Date Char¢e Increase 2003-04 OCSD-20 7/l/03 $100.00 14.3% 2004-05 OCSD-20 7/l/04 115.00 15.0 2005-06 OCSD-26 7/l/05 151.00 31.3 2006-07 OCSD-30B 7/I/06 165.80 9.8 2007-08 OCSD-32 7/l/07 182.00 9.8 Source: Orange County Sanitation District. 90198913.1 31 On February 27, 2008, the Board of Directors approved increases in its sanitary sewer service charges for all single family and multi-family residential units as well as most commercial and industrial properties. The Board increased the single family residential rate, which is the basis for all of the District's sewer service charges, by 10.5% for Fiscal Year 2008-09, 100/0 for Fiscal Year 2009-10, 10% for Fiscal Year 2010-11,9.8%for Fiscal Year 2011-12 and 9.8%for Fiscal Year 2012.13. Assuming an average annual rate increase of 10%,the projected SFR rate of$293.00 in five years would remain below the current average annual sewer rate of$370.00 per year according to a 2007 survey of 725 agencies encompassing all 58 counties in California conducted by the State Water Resources Control Board. This increase was necessary to meet the District's cash flow needs due to the addition of disinfection treatment and other operating requirements.As discussed under the caption"TILE DISTRICT — Capital Improvement Program," the CIP Validation Study in the Spring of 2005 and further in March 2007 developed a capital improvement program to meet secondary treatment standards as quickly as possible while providing for increased flows and rehabilitation and refurbishment of existing facilities. As projected out to Fiscal Year 2020-21 the cash flow needs of the CIP total approximately$2.3 billion, approximately$750 million of which has been spent to date.The bulk of construction is scheduled during the next ten years, with average annual expenditures of nearly $300 million projected over the next five years. The District collects Sewer Service Charges from property owners through the semi-annual property tax bill distributed by the County throughout the District, except in Revenue Area No. 14. Pursuant to the IRWD Agreement, the District receives payments from the Wine Ranch Water District (the "IRWD") which directly collects fees from customers through a monthly billing procedure in Revenue Area No. 14. The District has covenanted in the Master Agreement to fix, prescribe and collect fees and charges to satisfy certain coverage requirements as further described under "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES—Rate Covenant"herein. Residential Sewer Service Charges. Pursuant to the 2002 Ordinance, the District established residential Sewer Service Charges upon a rational basis between the fees charged each customer and the services and facilities provided to each customer of the District. In accordance with the 2002 Ordinance and the noticed public hearing held at that time which considered increases in the amount of the annual charges by approximately 20%par year for each of the then following five years, in May 2005,the Board of Directors adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 single family residential rate 31%, from $115.00 to $151.00 for such year for all ratepayers, except those located in Revenue Area 14. In May 2006, the Board of Directors adopted Ordinance No. OCSD-30B increasing the Fiscal Year 2006-07 single family residential rate 9.8%, from $151.00 to $165.80 for such year, except those located in Revenue Area 14. The average total of fees and charges for Revenue Area No. 14 are $70.80 per year per single-family residential unit and are levied and collected directly by the IRWD on a monthly basis. The IRWD subsequently pays fees to the District on a quarterly basis pursuant to the IRWD Agreement. This increase was necessary in order to meet the District's cash flow needs. Table 7 below sets forth total average annual Sewer Service Charge for single-family residences within the District,together with comparable total average annual charges for wastewater service within thejurlsdictions of certain other cities and districts within the State as of July 1,2007. 90198915.1 32 Table 7 Comparison of Total Sewer Service Charges For Single-Family Residences As of July 1, 2007 Average Dry Annual Weather Sewer Property Flow Service Treatment Collection Tax Eati (mald)131 Chore e 1) Levelr'113I Resuonsibili Income(') City of San Diego I80 $460 2 Yes No City of Los Angeles 447 345 4 Yes No East Bay MUD 80 238 4 No Yes Sacramento 155 222 3 No Yes Orange County 250 182 2 No Yes Sanitation District Los Angeles County 513 108 4 No Yes So=w Inf6 mation obtained from respective entities listed. 1�1 Treatment Level Categories: "9"-Primary treatment. "2"-Advanced primary or primary with some secondary treatment. "3"-Secondary treatment. "4"-Advanced secondary or secondary with some tertiary treatment. n1 "5"-Tertiary treatment. Source: 2006-07 Wastewater User Charge Survey Report by the California State Water Resources Control Board. Industrial Sewer Service Charges. The District charges industrial Sewer Service Charges to customers discharging high-strength or high-volume wastes into the sewer systems. Customers subject to industrial Sewer Service Charges are billed directly by the District. The fee charged to each customer is based on the customer's sewage volume, the concentration of suspended solids and biochemical oxygen demand. Pursuant to the 2002 Ordinance, rates for each component factor were revised for certain industrial users in order to be consistent with the rates charged to residential users. Total industrial Sewer Service Charges in Fiscal Year 2006-07 were approximately $13 million. Industrial Sewer Service Charges are applied to both the operating and capital funds. Additional Revenues The District has several sources of additional revenue, including property taxes,Capital Facilities Capacity Charges,capacity rights,permit and inspection fees and interest earnings. Property Tazes. The District receives approximately 2.5%of the one percent County ad valorem property tax levy, based on the allocation procedure under State law. Property tax revenues were$41.1 million in Fiscal Year 2001-02, $44.6 million in Fiscal Year 2002-03, $46.9 million in Fiscal Year 2003- 04, $35.8 million in Fiscal Year 2004-05, $40.0 million in Fiscal Year 2005-06 and $55.6 million in Fiscal Year 2006-07. The $11.2 million decrease in property tax revenues from Fiscal Year 2003-04 to Fiscal Year 2004-05 is reflective of the State of California's then current fiscal crisis and the implementation of the first year of a two-year 40%9 secured property tax shift away from independent special districts. During the 2004-05 State Budget process, the State Legislature and the Governor enacted Senate Bill 1096 and Assembly Bill 2115, effectively shifting an additional $1.3 billion in local property tax revenues from counties, cities, special districts and redevelopment agencies to schools and community colleges. This shift was effective fm Fiscal Year 2004-05 and Fiscal Year 2005-06, resulting in a 40%secured property loss for the District. See "LIMITATIONS ON TAXES AND REVENUES- 80198915.1 33 Proposition IA." This 40% reduction for Fiscal Year 2004-05 was somewhat offset by the continuing uptum in the real estate market. Total assessed valuations increased over the 2004-05 Fiscal Year by 10.3%, and the full value of these increases was received on all non-secured property tax distributions. The District expects to receive property tax revenues in its full allotment (no State property tax shift) of $58.9 million in Fiscal Year 2007-08. Current projections indicate that property tax revenues received by the District are expected to increase by approximately 6.0OA in fiscal year 2007-08 and then 5%each year thereafter. The apportionment of the ad valorem tax is pursuant to a revenue program adopted by the District in April 1979 to comply with the EPA, the RWQCB, legal and contractual requirements and Board of Directors policy. Capital Facilities Capacity Charges. Capital Facilities Capacity Charges (formerly known as connection fees) are one-time fees with two components, paid at the time property is developed and connected to the Wastewater System. The fees are imposed by the District pursuant to Section 5471 of the Califomia Health and Safety Code and are levied to pay a portion of the District's capital costs and for access to capacity in the Wastewater System. Currently, the District has Capital Facilities Capacity Charges of $4.517 per residential unit (three-bedroom); however, under the current industrial use ordinance, additional Capital Facilities Capacity Charges can be imposed on industrial users who place larger than average demand on the Wastewater System. Member cities and sanitary districts collect Capital Facilities Capacity Charges for the District when building permits are issued. Capital Facilities Capacity Charges are reviewed annually to reflect the changes in the value of the Wastewater System to which a new customer is connecting. On December 15, 1999, the Board of Directors approved District Ordinance No. OCSD 99-11 (the"1999 Ordinance")which established a comprehensive Capital Facilities Capacity Charge. The 1999 Ordinance, effective as of January 1, 2000, renamed connection fees as Capital Facilities Capacity Charges and provided a more equitable schedule of fees among industrial, commercial and residential users. Pursuant to the 1999 Ordinance,Capital Facilities Capacity Charges were revised for high demand industrial users in five incremental increases from 1999 through 2001. Pursuant to an agreement with the IRWD, the IRWD is not required to pay Capital Facilities Capacity Charges and in exchange,the IRWD provides funding to the District for the construction costs of certain wastewater collection,transmission, treatment and disposal facilities to be used by the IRWD and is obligated to make certain payments to the District for certain services arising from the Wastewater System(including any standby or availability charges). Sale ojCapacily. The District has entered into agreements with the Santa Ana Watershed Project Authority ("SAWPA") whereby wastewater from Upper Santa Ana River Basin dischargers can be transported through the District's Santa Ana River Interceptor to the District's wastewater treatment facilities. This program was developed in the early 1970's.The agreements establish control mechanisms regarding the quality of wastes deposited into the Wastewater System. At the present time, SAWPA has purchased and paid for 30 million gallons a day of capacity rights in the District's Santa Ana River Interceptor and 13 million gallons a day of capacity in the District's wastewater treatment plants. Additional treatment plant capacity can be purchased in increments at the District's current replacement cost. The Santa Ana River Interceptor Line ("SARI') was built in the Chino Basin Preserve Area in order to remove dairy farm wastes and accommodate future when development. Salts in the washwater generated from the cleaning of cows and milking equipment were leaching into the groundwater in the Chino Basin and the SARI was built to divert the washwater from this area. However, due to the nature of the Chino Basin Preserve,the development of any infrastructure in the area to accommodate the SARI was limited. The current SARI multi-phase project is designed to connect several dairies to the SARI. 90198915.1 34 Future expansions of this project could include connecting other dairies and other waste streams with the SARI line. See"THE DISTRICT—Capital Improvement Program"herein. Wastewater Treatment History The average yearly influent flow to the District has remained relatively stable for the preceding five years. The wastewater flow for Fiscal Year 2004-05 was 243 mg/d, for Fiscal Year 2005-06 was 235 mg/d and for Fiscal Year 2006-07 was 229 mg/d. The highest flow rate experienced was during El Nino storm periods. Peak flows of 500 mg/d were recorded in December 1997 and February 1998. Them were no sewer failures or overflows during these events. Customers The historical number of customers served by the District for the Fiscal Years 2002-03 through 2006-07 and the projected number of customers served by the District for the Fiscal Years 2007-08 through 2011-12, identified in Equivalent Dwelling Units ("EDUs"), are set forth in Table 8 below. As discussed below, sewer service charges are based on the expected amount of wastewater flow for a single family dwelling. This base amount is considered the"equivalent dwelling unit." The EDU's set forth in Tables 8 and 9 below equate to total Sewer Service Charge levies. Table 8 Historical and Projected Equivalent Dwelling Units Fiscal Years 2002-03 through 2011-12 Historical Projected Fiscal Year EDUs Fiscal Year QUstt1 2002-03 897,757 2007-08 911,033 2003-04trt 884,169 2008-09 914,677 2004-05") 893,501 2009-10 918,336 2005-06 910,469 2010-11 922,009 2006-07 907,986 2011-12 925,697 EDU� growth during the projection period is estimated at approximately 0.4%per mum. With respect to this Fiscal Year,presentation in the Statistical Section of the Comprehensive Annual Financial Report set forth in Appendix A include EDU's which equate to total Sewer Service Charge collections. Source: Orange County Sanitation District. 80198915.1 35 Table 9 below shows the number of residential and commercial customers and industrial customers and the approximate percentages of Sewer Service Charge revenues derived from the combined residential and commercial use and industrial use for the last five fiscal years. Table 9 Number of Accounts and Revenues by Customer Class for the Fiscal Years 2002-03 through 2006-07 ($in Millions) Residential/Commercial Industrial Numberof Percentage Percentage Equivalent of Sewer of Sewer Single- Service Number of Service Family Total Charge Customer Total Charge Fiscal Year Dwellings Revenue Revenues Accounts Revenue Revenues 2002-03 897,757 $77.0 92% 603 $6.3 8% 2003-04111 860,156 86.0 92 530 7.5 8 2004.05111 860,634 99.0 90 568 10.5 10 2005-06 872,859 132.0 92 557 12.2 8 2006-07 867,035 143.8 91 531 13.4 9 With Fiscal Years. presentation in the Statistical Sectionof the Comprehensive Annual Financial Report set forth in Appendix A include EDU's which equate to total Sewer Service Charge collections rather than levies. Source:Orange County Sanitation District. The ten largest principal sewer service customers of the District for the Fiscal Year ended June 30, 2007 are shown in Table 10 below. These principal sewer service customers paid a total of $6,817,325.08 for wastewater service from the District. Table 10 Largest Principal Sewer Service Customers of the District for the Fiscal Year Ended June 30,2007 Percentage of Total Sewer Service Sewer Service User Charges Charee Revenues Kimberly-Clark Worldwide, Inc. $1,114,919.81 0.66% Alstyle Apparel—A&G Inc. 1,049,362.16 0.63 Stremicks Heritage Foods,LLC 974,473.67 0.58 MPC Foods, Inc. 921,316.91 0.58 Disneyland Resort 791,746.84 0.47 Disneyland Resort-DCA 567,484.57 0.34 House Foods America Corp. 410,058.85 0.24 Pepsi-Cola Bottling Group 374,306.33 0.22 Seven-Up Bottling Company 335,177.79 0.20 Ameripec Inc. 278,478.15 0.17 TOTAL $6,817,325.08 4.09% Source: Orange County Sanitation District. 80198915.1 36 Assessed Valuation The assessed valuation of property in the County is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Due to changes in assessment required under State Constitution Article XIIIA, the County assessment roll no longer purports to be proportional to market value. See "LIMITATIONS ON TAXES AND REVENUES" herein. Generally, property can be reappraised to market value only upon a change in ownership or completion of new construction. The assessed value of property that has not incurred a change of ownership or new construction must be adjusted annually to reflect inflation at a rate not to exceed 2% per year based on the State consumer price index. In the event of declining property value caused by substantial damage, destruction, economic or other factors, the assessed value must be reduced temporarily to reflect market value. For the definition of full cash value and more information on property tax limitations and adjustments,see"LIMITATIONS ON TAXES AND REVENUES"herein. The County Assessor determines and emolls a value for each parcel of taxable real property in the County every year. The value review may result in a reduction in value. Taxpayers in the County also my appeal the determination of the County Assessor with respect to the assessed value of their property. Table I I below shows a five-year history of assessed valuations in the District since Fiscal Year 2003-04. Table 11 Assessed Valuations of Property in the District Fiscal Years 2003-04 through 2007-M (S in Billions) Fiscal Year Value %Change 2003-04 201.4 6.660/0 2004-05 219.3 8.85 2005-06 241.8 10.30 2006-07 270.7 11.93 2007-08 [ 1 [ 1 Source: County of(range Auditor-Controller. Prior to 2006, the housing market in Southern California experienced significant price appreciation and accelerated demand. Over the past five years, many homebuyers financed the purchase of their new homes using non-conventional loans. Such loans were made with little or no down payment and with adjustable interest rates that are subject to being reset at higher rates on a specified date or upon the occurrence of specified conditions. In addition,many of these loans allow the borrower to pay interest only for an initial period,in some cases up to 10 years. Starting in 2006, housing developers, appraisers and real estate consultants began to report weakening of prices for single-family homes. There has been tightening of underwriting criteria for mortgage loans such that most lenders now require down payments,stricter verification,higher income to loan ratios, higher credit ratios or some combination of such factors. These factors have contributed to a decrease in home sales as prospective purchasers are unable to qualify for loans. Declining home sales in some areas of Southern California have resulted in a decrease in home prices. As home values decline, 90198915.1 37 homebuyers may not be able to obtain replacement financing because the outstanding loan balances exceed the value of their homes. Under certain circumstances,the County may reduce the assessed value of a property as a result of a decrease in the market value of such property. Tax Levies and Delinquencies Property taxes are based on assessed valuation which is determined as described under "DISTRICT REVENUES-Assessed Valuation"herein. In accordance with the California Revenue and Taxation Code,the County tax collector collects secured tax levies for each Fiscal Year. Property taxes on the secured roll are due in two installments, on November I and February 1. The District currently participates in the County's Teeter Plan under which the District receives annually 100% of the secured property tax levies and Sewer Service Charges to which it otherwise is entitled, regardless of whether the County has actually collected the levies. This alternative method provides for funding each taxing entity included in the Teeter Plan with its total secured property taxes during the year the taxes are levied, including any amount uncollected at fiscal year end. Under this plan,the District's general fund receives the full amount of secured property taxes levied each year on its behalf and, for so long as such plan remains in effect, the participating entities, such as the District, no longer experience delinquent taxes. The County's general fund is the designated recipient of future collections of penalties and interest on all delinquent taxes collected on behalf of participants in this alternative method of apportionment. In recent years, the County has experienced delinquencies of Sewer Service Charges in the District of approximately 2%. Unpaid taxes become delinquent after December 10 and April 10, respectively,and a ten percent penalty attaches to any delinquent payment. hi addition, property on the secured roll with respect to which taxes are delinquent is declared taxdefaulted on or about June 30. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus costs and redemption penalty of one and one-half percent per month to the time of redemption. If taxes are unpaid for a period of five years or more,the tax-defaulted property is subject to sale by the County Treasurer-Tax Collector. Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A ten percent penalty attaches to delinquent taxes on property on the unsecured roll and an additional penalty of one and one-half percent per month begins to aceme on November 1. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3)filing a certificate of delinquency for recordation in the County Recorder's office in order to obtain a lien on certain property of the taxpayer; and(4)seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer. Table 12 below shows a five-year history of the District's ad valorem total property tax and Sewer Service Charge levies. Pursuant to the Teeter Plan described above, which provides for the Comity's financing of annual delinquencies, information with respect to outstanding delinquencies in prim years collected in current fiscal years and the percent of delinquencies to the total tax and Sewer Service Charge levies. 80198915.1 38 Table 12 Total Property Tax and Sewer Service Charge Levies in the District for Fiscal Years 2002-03 through 2006-07 (In Thousands) Total Tax and Sewer Fiscal Year Service Charge Levy 2002-03 $122,210 2003-04 134,132 2004-05 152,745 2005-06 191,290 2006-07 209,206 Source: Orange County Auditor-Controller's Office. Budgetary Process The District's operating fund budget relies on revenues from property taxes and Sewer Service Charges, both of which are collected on the property tax bill. See "DISTRICT REVENUES — Sewer Service Charges" and"—Additional Revenues" The District receives tax revenues from the County in eight allocations, with the largest receipts in December and April. The District operates on a Fiscal Year beginning each July 1. The operating fund budgets include funds to cover the dry period of each tax year, i.e., the period from the beginning of the Fiscal Year until the first taxes are received. The dry-period requirement is budgeted at one-half of the annual operating fund budgeted expenditures. The District uses the accrual method of accounting in its budgets. The District has conformed to its budgets for the last five fiscal years and is conforming to its budget for the current fiscal year. The District's annual budget preparation process begins in January of each year and concludes in June upon its adoption. The General Manager reviews the final operating budgets and then distributes them to the Directors and District Committees for consideration. The Board of Directors then adopts the proposed momd budgets,with any revisions,in Jane of each year. Budgetary control is exercised at the individual Department level and administrative policies provide guidelines on budget transfers and the authorization necessary to implement transfers. A budget adjustment is a transfer which does not change the total appropriated amount and does not require Board of Directors action. Approval may be granted by the General Manager or the Department Head in certain circumstances. Department Heads have the discretion to reapportion funds between certain line items within a division but may not exceed total appropriated amounts for each department. They may also transfer staff across divisional lines. The General Manager and Board of Directors must approve additional capital outlay items. A budget amendment is an adjustment to the total appropriated amount which was not included in the original budget. These supplemental appropriations require formal action by the Board of Directors. Prior year reserves or fund balances may be appropriated to fund items not previously included in the adopted budget. Reserves or fund balances exceeding minimam amounts required by fiscal policies may be appropriated if it is determined to be in the best interest of the District. Directors may also appropriate reserves in case of emergencies or unusual circumstances. 90198915.1 39 Reserves The District has an established reserve policy with eight separate categories for its reserve funds. The following table sets forth actual reserves at June 30, 2006 and June 30, 2007, and projected reserves at June 30, 2008, for each fund. Reserve levels are calculated in accordance with the District's reserve policy. Table 13 Actual and Projected Reserves June 30,2006 through 2008 (In Millions) June 30,2006 June 30,200 Juue 30.200>310 Cash Flow Requirements Reserve— Operating Expenses $113 $132 $84 Certificates of Participation Payments — — 65 Operating Contingencies Reserve -- - -- Capital Improvement Program Reserve 189 51 86 Catastrophe and Self Insurance 57 57 57 Capital Replacement and Refurbishment 52 53 54 Debt Service Required Reserves 79 79 108 Rate Stabilization Reserve _ Total $490 $372 $454 Project7lf— Source: Omnge County Sanitation District. The Cash Flow Requirements Reserve was established to fund operation, maintenance and certificates of participation debt service expenses for the first half of the fiscal year,prior to the receipt of the first installment of the property tax allocation and sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve is established as the sum of an amount equal to six months operations and maintenance expense and the total of certificates of participation debt service expenses due in the subsequent fiscal year. The Operating Contingencies Reserve was established to provide for non-recurring expenditures that were not anticipated when the annual budget and Sewer Service Charges were adopted. [The level of this reserve is equal to 10% of the District's annual operating budget.] [UPDATE]. The Capital Improvement Program Reserve was established to fund annual increments of the Capital Improvement Program with a target level at one-half of the average annual Capital improvement Program through the year 2020. Levels higher and lower than the target can be expected while the long-term financing and capital improvement programs are being finalized. The Catastrophic Loss,or Self-Insurance Reserve is established for property damage including fire,flood and earthquake, general liability and workers' compensation. The level of reserve in this fund is maintained at a level to fund the District's non-reimbursed costs which are estimated to be $57 million.The Capital Replacement and Refurbishment Reserve was established to provide 30% of the funding to replace or refurbish the current collection,treatment and disposal facilities. The current replacement value of these facilities is estimated to be approximately $5.56 billion. The initial reserve level for this fund was established at $50 million and is augmented by interest earnings and a portion of the annual Sewer Service Charges. Debt Service Required Reserves(or Obligation Reserve Fonds as defined in the Master Agreement)are controlled by a trustee pursuant to the provisions of certificates of participation issues and am not available for the general needs of the District. The Rate Stabilization Reserve accumulates all available funds which exceed the targets for all other reserves. The Rate Stabilization Reserve is a separate fund from the Rate Stabilization Account established under the Trust Agreement. These funds 80198915.1 40 are applied to future years' needs and must be maintained at specified levels. There is currently no established target for this reserve and, because the reserves of all other£ands have not been exceeded,the reserve level for this reserve fund is zero for Fiscal Years 2005-06 through 2007-08. See APPENDIX A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2007"herein. Summary of Operating Data Set forth in Table 14 below is a summary of historic operating results for the District for Fiscal Years 2002-03 through 2006-07. The District's CEP cash Flow budget for Fiscal Year 2007-08 is$302.7 million, an increase of$36.6 million from the prior year total, for the financing of joint works treatment and disposal system improvement projects, and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan and in the CIP Validation Study. The information presented in the summary should be read in conjunction with the financial statements and notes. See APPENDIX A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,200T'herein. 80198915.1 41 Table 14 Summary of Historical District Revenues and Expenses and Other Financial Information For Fiscal Years 2002-03 Through 20064)7 ($ In Millions) 2002-03 2003-04 2004-05 2005-06 2006-07 Revenues: Sewer Service ChargesO $77.0 $86.0 $ 99.0 $ 132.0 $143.8 Industrial Sewer Service Charges 6.3 7.5 10.5 12.2 13.4 Revenue Area No. 14 Fees 3.2 5.8 6.9 5.3 5.2 Ad Valorem Taxes 44.6 46.9 35.8 40.0 60.6 Interest Earnings 25.9 6.8 15.1 10.4 22.2 Capital Facilities Capacity Charges 10.1 9.0 9.8 15.6 31.3 ("CFCC") Other Revenues 3.4 4 00 6.1 9.2 8.3 Total Revenues $170.5 $166.0 $183.2 $224.7 $284.8 Operations and Maintenance Expenses(�1 $79.7 $95.4 $101.8 $105.6 $112.2 Net Revenues(') S 90 s S0,_ 581.4 Sl 19A It= Debt Service $22.4 $L4.1 _$_37.9 $ 3z slu Coverage Ratios(') Lfift 1$1$ 1-Spx 4 QS CIP Outlay $I]2.9 $14U M28 9 $260.8 $� Ending Reserves(') $3 M $51U $407.0 MU (r) et o re rues,r any,to commercte users. (2) Excludes depreciation and amortization expenses. Calculated in accordance with the Master Agreement(Net Revenues less CFCC divided by Debt Service). u) Excludes debt service reserves in accordance with the District's reserve policy. Source: Orange County Sanitation District. Projected Operating Data Set forth in Table 15 below are projected operating results for the District for Fiscal Years 2007- 08 through 2011-12. These projections assume the number of projects and scheduled build out set forth in the CIP Validation Study,and projected increased sewer service rates of approximately ten percent per year over this five-year period. Principal expenditure components of these projections are the Interim Strategic Plan and CIP Validation Study, which identified 107 large capital projects managed by the Engineering Department through 2020 at a total cost of$2.3 billion, and currently projected to include nearly$1.5 billion in the next five years. The District's CIP cash flow budget for Fiscal Year 2007-08 is $302.7 million, an increase of$36.6 million from the prior year total. This CIP budget finances joint works treatment and disposal system improvement projects,and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan and in the CIP Validation Study. The preparation of such projections was based upon certain assumptions and certain forecasts with respect to conditions that may occur in the future. While the District believes that these assumptions and forecasts are reasonable for the purposes of the projected selected operating data, it makes no representations that they will in fact occur. To the extent that actual future conditions differ from those assumed herein,the data will vary. 90198915.1 42 Table 15 Summary of Projected District Revenues and Expenses and Other Financial Information for Fiscal Years 2007-08 through 2011-12 ($In Millions) 2007-08 2008A9 2009-10 2010-11 2011-12 Revenues: Residential&Commercial Sewer Service Charges $164.6 $182.5 $201.6 $222.7 $245.5 Industrial Sewer Service Charges 18.2 20.1 22.3 24.6 27.1 Revenue Area No. 14 Fees 23.5 22.6 18.8 19.2 18.5 Ad Valorem Taxes 58.9 61.8 64.9 68.2 71.6 Interest Earnings 16.3 17.9 18.2 19.4 20.5 Capital Facilities Capacity Charges 11.5 12.1 12.8 13.5 14.2 Other Revenues 9.0 5.8 6.2 5.9 5.6 Total Revenues $302.0 $322.8 $344.8 $373.5 $403.0 Operations and Maintenance Expenses 134.7 147.7 159.3 171.9 187.1 Net Revenues 0l $155.8 $163.0 $172.7 $188.1 $201.7 Debt Proceeds $300.0 $235.0 $175.0 $130.0 $100.0 Debt Service $ 65.3 $ 74.3 $ 87.1 $ 96.5 $103.4 CIP Outlays $302.7 $353.1 $236.9 $202.6 $179.5 Ending Reserves(2) $355.3 $317.0 $336.3 $355.3 $376.3 Coverage Ratios O1 2.39x 2.19x 1.98x 1.95x 1.95x pt Cal�cordance with the Trust Agreement. Excludes debt service reserves in accordance with the District's reserve policy. lrr Calculated in accordance with the Moter Agreement(Net Revenues less CFCC divided by Debt Service). Assumptions: (a) Annual growth in equivalent dwelling units is projected to increase 0.4%over the next five years. (b) The Residential and Commereial Sewer Service Charge and the Industrial Sewer Service Charges are forecasts are based on the total projected equivalent dwelling units, the actual 9.8% increase for 2007-08, and the proposed rate increases of 10.5%, 10.0°%, 10.0%, and 9.8% far the following four years,respectively. (c) The Capital Facility Capacity Charge forecast is based on the total projected equivalent dwelling units along with a 5.05/6project annual increase in the rate. (d) Revenue Area No. 14 fees are derived based on the projected contribution of sewage flows to the District from the Irvine Ranch Water District. (a) Ad valorem tax revenues am projected to increase at 5.0%per year. (D Interest earnings are projected as 4.0%of average annual cash balances. (g) Operating and Maintenance Expenses are projected to increase 7.0%per year. (h) Annual CIP Outlays is based on the cash flow projections developed from the CIP Validation Sandy. Source: (range County Sanitation District. Management's Discussion and Analysis of Operating Data The District's Fiscal Year 2007-08 total operating and capital improvement budget is $513.2 million, a 12.5% increase over the prior year budget of$456.3 million. The District's Fiscal Yew 2007- 08 budget includes$302.7 million in capital improvement outlays as the District moves towards reaching secondary treatment standards by the target date of December 31, 2012, as specified by the Board of 80199915.1 43 Directors'July 2002 resolution and in keeping with the terms and conditions of its ocean discharge permit and related Consent Decree. The Fiscal Year 2007-08 operations budget for the collection, treatment, and disposal of wastewater is $142.6 million, an $11.3 million, or 8.6% increase from the prior year budget of$131.3 million. This increase is primarily attributable to the proposed increase in personnel costs due mostly to the current capital improvement program, totaling $2.1 billion over the next 10 years. Personnel costs were increased $5.5 million, or 7.40/6. Although staffing was approved at 634 full time equivalents, a reduction of ten from the prior year, actual personnel costs will increase by $4.0 million as a result of recently approved collective bargaining agreement impacts, including medical and other benefit cost increases. The other significant increase in personnel cost is the$700,000,or 5.7%,increase in retirement premiums. This increase reflects revised actuarial assumptions, low interest eamings in prior years, es well as the enhanced retirement benefit program effective July 1, 2005. The contractual services budget increased$4.1 million, or 23%. The major component of this category is biosolids removal and transport costs. Contracts have been executed with firms for agricultural reuse of residual solids. Due to the average removal rate per ton increasing from $46 to $53, biosolids removal increased $1.6 million, or 12.1%from the prior year. The utility budget increased $1.1 million,or 12.5%primarily as a result in the increase in consumption of electricity compounded by increases in rates charged by utility providers. Electricity is the largest utility cost incurred by the District and is used to run the plant processes. The Fiscal Year 2007-08 budget reflects an increase in imported electricity because new government regulations on air emission limits has forced a reduction in electrical power production at the District's central generation facilities, a process that converts methane gas into electricity. The Fiscal Year 2007-08 CIP cash flow budget was approved at$302.7 million,a 13.7%increase from the prior year budget of$266.1 million. In preparation of the Fiscal Year 2006.07 and 2007-08 budgets, the Board of Directors established a CIP Oversight Committee to review the CIP program and staffs annual validation effort of the CIP to ensure that the scope of the projects was appropriate and that the cost estimates were accurate, and to gain an understanding of the impact from the CIP to the current rate structure. The Fiscal Year 2007-08 CIP includes 79 large capital projects and 27 special projects with a projected 14-year cash outlay of$1.62 billion. Over this time period,the CIP will accomplish: • Rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping, and solids handling facilities at both treatment plants; • Replacement and rehabilitation of nine of the District's outlying pumping stations, and rehabilitation and upgrade of 29 trunk sewer improvement projects; • Optimization of the production of"power"and"biosolids"at each of the treatment plants; • Reclamation of 70 million gallons per day of the District's effluent,or nearly one-third of the total daily flow through the Groundwater Replenishment System;and • Achieve secondary treatment standards by December 2012. Based on the results of the CB'Oversight Committee, the Board of Directors adopted Ordinance No.OCSD-32 increasing the sanitary sewer service charges by approximately 9.8%for Fiscal Year 2007- 08. This action increased the single family residence user rate, the basis for all sewer user fee rates, from $165.80 to $182.00. The review completed by the CIP Oversight Committee in Fiscal Year 2006-07 reaffirmed the need for further rate increases in future years. Annual increases are ordered to be subject to reaffirmation by the affirmative vote of two-thirds of the members of the Board of Directors prior to 80198915.1 44 implementation of any such charge for each fiscal year. See"DISTRICT REVENUES— Sewer Service Charges." Investment of District Funds State statutes authorize the District to invest in obligations of the United States Government,state and local governmental agencies, negotiable certificates of deposits, bankers acceptances, oommemial papa, reverse repurchase agreements and a variety of other investment instruments which are allowable under California Government Code Section 53600 et seq. All District funds, except for Obligation Reserve Funds controlled by a bank trustee pursuant to the provisions of Existing Senior Obligations, are managed by an external money manager, Pacific Investment Management Company ("PIMCO"). Mellon Trust ("Mellon Trust") serves m the District's independent custodian bank for its investment program. Callan Associates ("Callan") serves as the District's independent advisor. At June 30, 2007, the District's externally managed fund consisted of short-teml investment portfolio of$87,568,000 with an average maturity of 72 days, and a long-term investment portfolio of $173,811,000 with average maturities of 2.5 years. Investments consist of United States government securities, corporate bonds and commercial paper. The District's portfolio contains no [structured investment vehicles(SIVs)or]reverse purchase agreements. Deposits in banks are maintained in financial institutions which provide deposit protection on the bank balance from the Federal Deposit Insurance Corporation. The California Government Code requires State banks and savings and loans to secure local government deposits by pledging government securities equal to 110% of the deposits or by pledging first trust deed mortgage notes equal to 150°/a of the deposits. The District's Investment Policy requires that the District invest public funds in a manner which ensures the safety and preservation of capital while meeting reasonable anticipated operating expenditure needs, achieving a reasonable rate of term and conforming to all state and local statutes governing the investment of public funds. The primary objectives, in order of the District's investment activities are safety,liquidity and return on investments. For more information regarding the District's investment portfolio as of June 30,2007, see Note 2 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007 set forth in Appendix A. FINANCIAL OBLIGATIONS Existing Indebtedness Currently the District has Senior Obligations Outstanding payable on a parity with the Installment Payments under the Installment Purchase Agreement.The table below describes the District's outstanding certificates of participation as of May 1, 2008. The payment obligations in connection with each of these obligations, together with the 1992 Swap and the 1993 Swap described below, constitutes a Senior Obligation, subject to the provisions of the Master Agreement and shall be afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District has no outstanding general obligation bonds. 80199915.1 45 e Table 16 Outstanding Certificates of Participation Debt As of May 1,2008 Original Principal Issue Outstanding Final Amount Date Balance Maturity 1992 Certiftcatesrri $160,600,000 12/03/92 $ 77,340,000 8/1/13 1993 Certificates 46,000,000 9/02193 26,900,000 8/1/16 2000 Certificates 218,600,000 8/13/00 196,600,000 8/1/30 2003 Certificates 280,000,000 8/26103 191,500,000 2/1/33 2006 Certificates 200,000,000 3108/06 196,600,000 2/1/36 2007A Certificates 95,180,000 5/22/07 95,180,000 2/1/30 2007E Certificates 300,000,000 12/20/07 300.000.000 2/1/37 Total Long-Term Debt $1,084,120,000 To be roPonded with the proceeds of the Certificates. See"REFUNDING PLAN." In connection with the execution and delivery of the above-referenced outstanding certificates of participation, the district entered into certain installment purchase agreements, or equivalent documents providing for the payment of installment payments or similar payments. Variable Rate and Swap Obligations In December 1992, the District caused the execution and delivery of certain certificates of participation which were subsequently designated as the County Sanitation Districts Refunding Certificates of Participation, 1992 Series (the "1992 Certificates") in the original aggregate principal amount of $160,600,000, of which $77,340,000 remains outstanding. The District entered into an Amendatory Agreement for Acquisition and Construction (the "1992 Agreement for Acquisition and Construction"), a Standby Certificate Purchase Agreement (including as thereafter amended and substituted, the "1992 Standby Agreement") in order to provide for payment of the purchase price of tendered and unremarketed 1992 Certificates, and an interest Rate Swap Agreement (as amended the "1992 Swap'l with AIO Financial Products Corp. The District intends to refund all of the outstanding 1992 Certificates with proceeds of the Certificates. See"REFUNDING PLAN." In September 1993, the District caused the execution and delivery of certain certificates of participation which were subsequently designated as the County Sanitation Districts Refunding Certificates of Participation, 1993 Series(the"1993 Certificates"). The District entered into an agreement for acquisition and construction (the "1993 Agreement for Acquisition and Construction"), a Reimbursement Agreement (including as thereafter amended and substituted, the "1993 Reimbursement Agreement") in order to provide for payment of the purchase price of tendered and unremarketed 1993 Certificates, and an interest rate swap agreement, as amended (the "1993 Swap")with Societe Generale, New York Branch. In August 2000,the District caused the execution and delivery of the Orange County Sanitation District Refunding Certificates of Participation, Series 2000-A (the "2000-A Certificates") and the Orange County Sanitation District Refunding Certificates of Participation, Series 2000-B (the "2000-B Certificates"and,together with the 2000-A Certificates,the"2000 Certificates") in the original aggregate principal amount of$218,600,000, of which $196,600,000 remains outstanding. In connection with the execution and delivery of the 2000 Certificates, the District entered into an installment purchase agreement(the"2000 Installment Purchase Agreement")and a Standby Agreement,dated as of August 1, 80198915.1 46 2000 (the "2000 Standby Agreement"), by and among the District,the Trustee and Dexia Credit Local, acting through its New York Agency. In March 2006, the District caused the execution and delivery of the Orange County Sanitation Refunding Certificates of Participation, 2006 Series (the "2006 Certificates") in the original aggregate principal amount of$200,000,000, of which $196,600,000 remains outstanding. In connection with the execution and delivery of the 2006 Certificates, the District and the Corporation entered into an installment purchase agreement (the "2006 Installment Purchase Agreement") and the District entered into a Standby Certificate Purchase Agreement, dated as of March 1, 2006 (the "2006 Standby Agreement"), with DEPFA Bank plc,acting through its New York Branch,to provide for payment of the purchase price of tendered and unremarketed 2006 Certificates. The 1992 Standby Agreement, the 1993 Reimbursement Agreement, and the 2000 Standby Agreement and the 2006 Standby Agreement each constitutes a Credit Facility Agreement and a Credit Facility under the Master Indenture. The obligation of the District to repay amounts drawn on or paid under these agreements,to pay interest on such amounts and to pay any other amounts in connection with such draw or payment constitutes a Reimbursement Obligation,each with respect to a Senior Obligation. The District entered into separate interest rate swap agreements in connection with the 1992 Certificates and the 1993 Certificates. The objective of the interest rate swaps is to lower the District's borrowing costs when compared against fixed-rate bonds at the time of issuance. The swaps effectively change the District's variable interest rate to a synthetic fixed rate of 5.55%on the 19,92 Certificates and to a synthetic fixed rate of 4.56% on the 1993 Certificates. By their terms,the District receives payments that are calculated by reference to a floating interest rate and makes payments that are calculated by reference to a fixed interest rate. In its annual financial report, the interest rate swap agreements are accounted for as a hedge by the District, and the associated interest rate differential to be paid or received is charged to interest expense as interest rates change. See Note 5 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2007 set forth in Appendix A. Under the 1992 Swap,the District receives a variable interest rate equal to the interest paid to the holders of the 1992 Certificates which is based on a tax exempt daily interest rate as determined by the remarketing agent on an initial notional amount of$160,600,000. The notional value of the swap declines in tandem with the principal amount evidenced by the 1992 Certificates. The 1992 Swap matures on August 1, 2013. Because interest rates have declined since execution of the 1992 Swap,the swap had an estimated negative fair value of $5.11 million as of June 30, 2007. In connection with the District's refunding of the 1992 Certificates,the District will terminate the 1992 Swap and pay a settlement amount to AIG Financial Products Corp. See "REFUNDING PLAN" and "SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES." Under the 1993 Swap, the District receives a variable interest rate equal to the interest paid to the holders of the 1993 Certificates which is based on a tax exempt daily interest rate as determined by the remarketing agent on an initial notional amount of$46,000,000. The notional value of the 1993 Swap declines in tandem with the principal amount evidenced by the 1993 Certificates.The 1993 Swap matures on August 1, 2016. Because interest rates have declined since execution of the 1993 Swap,the swap had an estimated negative fair value of$1.57 million as of June 30,2007. The interest rate swap agreements entail risk to the District. The emmunparty may fail or be unable to perform, interest rates may vary from assumptions and the District may be required to make significant payments in the event of an early termination of an interest rate swap. The District or the counterparty may terminate a swap if the other party fails to perform under the terms of the contract. In 80199915.1 47 the event of termination due to default,the defaulting party will pay to the non-defaulting party the excess (if any) of the sum of the settlement amount and the unpaid amounts owed less the unpaid amounts due from the non-defaulting party. Each swap may be terminated by the District if the counterparty's credit quality rating falls below"AA"by Standard& Pom's or"A0 by Moody's Investors Service. If a swap is terminated, the related series of certificates of participation would no longer carry a synthetic interest rate. The District believes that if any such an event were to occur, it would not have a material adverse impact on its financial position. As of June 30, 2007, the District was not exposed to credit risk associated with such swaps because each swap had a negative fair value. However, should interest rates change, and the fair value of the swap become positive,the District would be exposed to credit risk in the amount of the map's fair value. Neither swap will expose the District to basis risk because the variable-rate interest paid to the certificate holders is equal to the variable-rate interest earned on the notional amount of the swap. Net payments under the terms of the interest rate swap agreements constitute Senior Obligations under the Master Agreement and are on a parity with the District's payment obligations with respect to the Certificates. Likewise, termination payments under the interest rate swap agreements would be payable on a parity with the District's payment obligations with respect to the Certificates. For more information regarding the District's interest rate swaps as of June 30,2007, see Notes 4 and 5 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007 set forth in Appendix A. Anticipated Financings From time to time the District expects to deliver other obligations to finance and refinance portions of the CIP. N Fiscal Year 2008-09 the District expects to incur Additional Senior Obligations in an aggregate principal amount of approximately$235 million. Direct and Overlapping Bonded Debt The Table 17 below presents the aggregate direct and overlapping bonded debt of the District as of June 30,2007. 80199915.1 48 Table 17 Direct and Overlapping Bonded Debt of the District as of June 30,2007 ORANGE COUNTY SANITATION DISTRICT 2006.07 Assessed Valuation(Land&Improvements Only): $238,965,565,239(after deducting$31,727,578,239 Redevelopment Incremental Valuation) OVERLAPPING TAX AND ASSESSMENT DEBT(Based on redevelopment adjusted all property assessed valuation of$244,881,211,608): Tma1 Debt District's Share of 6/30/07 %Awlicable ul Debt 6/30/07 Orange County Teeter Plan Obligations $123,725,000 71.936% $ 99.940,954 The Metropolitan Water District of Southcm California 359.115,000 15.058 54.075,537 Coast Community College District 353203,967 99.517 351.497,892 North Orange County Joint Community College District 238.124.001 96.861 230,649289 Rancho Santiago Community College District 324,638,495 99.245 318.941,099 Brea-Olinda and Laguna Beach Unified School Districts 60.694,029 97.821&12.557 29,111312 Newport Mesa Unified School District 172.188,480 100. 172,188,480 Placentia-Yorba Linda Unified School District 92289.003 98.718 91,105,858 Saddleback Valley Unified School District 149,760,000 11.432 17,120,363 Santa Ana Unified School District 130.951207 100. 130,951207 Tustin Unified School District Scbool Facilities Improvement District No.2002-1 24A81293 99.871 23,N9,415 Anaheim Unity High School District 126.153,955 100. 126.158.955 Fullerton Joint Union High School District 62,432,910 90.192 36354,596 Huntingtco Beach Union High School District 203,873,794 98.979 201,792243 School Districts 242,015,559 97.529-100. 241273,049 City of Anaheim 5.700.000 99.135 5.650,695 Wine Ranch Water District Improvement Districts 189,932,460 Various 199,997216 Rossamor Community Services District Special Tax Obligations 670,000 100. 670,000 Bonita Canyon Community Facilities District No.98-1 43,153,000 100. 43,155,000 Wine Unified School District Community Facilities Districts 271.130.000 99.998-100. 271.128265 Tustin Unified School District Community Facilities District No.88-1 and 97-1 159.822.675 100. 159.822,675 Omoge County Community Facilities District No.87-4 63,414-W 99.971 63395.954 Other Community Facilities Districts 348350,oD0 Various 348U49982 Orange County Assessment Districts 113.2732% 100. 113,273296 City of Irvine 1915 Am Bonds(Estimate) 939,199,169 I00. 938,189,169 City of Tustin 1915 Act Bonds 55,962400 I00. 55,862A00 Other 1915 Act bonds 21,534.000 100. 21-534A00 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $4244,788,681 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Food Obligations $597.550,000 71.896% $ 429,554,793 Orange County Pension Obligations 89,893,078 71.886 64,620,538 Orange County Board of Education Certificates of Participation 19,720,000 71.886 14.175,919 Orange County Transit District Authority 1235,000 71.896 897,792 South Orange Comfy Community College District Certificates of Participation 36,910,000 35.123 12-00,399 Brea-Olinda Unified School District Certificates of Participation 30,710,000 97.921 30,040,829 Orange Unified School District Certificates of Participation 51,490,000 96.914 49,839,947 Placcam-Yorba Linda Unified School District Certificates of Participation 86.910,315 98.718 85,697,407 Sears Ana Unified School District Certificates of Participation 66,856251 100. 66.956251 Other Unified School District Certificates of Participation 40255254 Various 39.967.949 Union High School District Certificates of Participation 94,955,000 Various 82.445,164 School District Certificates of Participation 62305,000 Various 62.000.832 City of Anaheim General Food Obligations 696,064312 99.135 690,043.554 City of Costa Mesa General Fund Obligations 49,590.000 100. 48,590,000 (Table 17 continued on next page.) 80198915f 49 (Continued from previous page.) City of Fullerton General Fund Obligations 30.142,730 100. 30.142.730 City of Huntington Beach General Food and Judgment Obligations 80.669.678 99.982 80,655.158 City of Irvine General Fund Obligations 30.945.000 100. 30.945.000 City of Santa Ana General Fund Obligations 121.725236 100. 121,725236 Other City General Fund Obligations 180.534,977 Various 152336.708 Orange County Sanitation District Certificates of t'amcipation 117.705.000 100. 117,705.000 on Irvine Ranch Water District Certificates ofPanicipation 41,600,000 99.526 37,242,816 Municipal Water District ofOrenge County Water Facilities Corporation 20,800,000 66.493 13.930.544 Yorba Linda County Water District Certificates of Participation 10.070,000 97,751 9.943.526 Orange County Fire Authority 13.570,000 49.906 6,772.2 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $2278,883.636 Less: Orange Cowry Transit District Authority(80%self-supporting) 710,234 City of Anaheim self-supporting obligations 409.384,622 Other City self-supporting obligations 8,404,628 MWDOC Water Facilities Corporation(100%self-supporting) 13,830,544 TOTAL NET OVERLAPPING GENERAL FUND DEBT $1.946.553.608 GROSS COMBINED TOTAL DEBT $6.523,672,317t3I NET COMBINED TOTAL DEBT $6,091.342289 "'Percentage ofoverlapping agency's redevelopment adjusted all property assessed valuation($244.881,211,608)located within boundaries ofthe district. tat Excludes wastewater revenue certificates ofparticipation. r'I Excludes tan and revenue anticipation notes,enterprise revenue,mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to: Total Overlapping Tax Goss Combined Net Combined and Assessment Debt Total Debt Total Debt Land and Improvement Assessed Valuation 1.57% 2.73% 2.55% All Property Assessed Valuation N/A 2.66% 2.49% STATE SCIIOOL BUILDING ID REPAYABLE AS OF 7: $0 Source: California Municipal Statistics THE CORPORATION The Corporation was organized June 19, 2000 as a nonprofit public benefit corporation pursuant to the Nonprofit Public Corporation law of the State. The Corporation's purpose is to render assistance to the District in its acquisition of equipment, real property and improvements on behalf of the District. Under its articles of incorporation,the Corporation has all powers conferred upon nonprofit public benefit corporations by the laws of the State,provided that it will not engage in any activity other than that which is necessary or convenient for,or incidental to the purposes for which it was formed. The Corporation is a separate legal entity from the District. It is governed by a twenty-five member Board of Directors. The Corporation has no employees. All staff work is performed by employees of the District. The members of the Corporation's Board of Directors are the Board of Directors of the District. The District's Director of Finance and Administrative Services and other District employees are available to provide staffsupport to the Corporation. 801989MI 50 The Corporation has not entered into any material financing arrangements other than those referred to in this Official Statement. Further information concerning the Corporation may be obtained from the Orange County Sanitation District office at 10844 Ellis Avenue, Fountain Valley, California, 92708-7018. LIMITATIONS ON TAXES AND REVENUES Article XIIIA of the California Constitution On June 6, 1978, California voters approved Proposition 13 ("Proposition 13"), which added Article XIIIA to the State Constitution ("Article XIIIA"). Article XIIIA, as amended, limits the amount of any ad valorem tax on real property to one percent of the full cash value thereof,except that additional ad valorem taxes may be levied to pay debt service on (i)indebtedness approved by the voters prior to July 1, 1978,(ii)(as a result of an amendment to Article XIIIA approved by State voters on June 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-third of the voters on such indebtedness, and (iii)bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Article XIIIA defines fall cash value to mean "the county assessor's valuation of real property as shown on the 1975-76 tax bill under "full cash value," or thereafter, the appraised value of real property when purchased newly constructed, or a change in ownership has occurred after the 1975 assessment." The full cash value may be adjusted m rually to reflect inflation at a rate not to exceed 20/4 per year or to reflect a reduction in the consumer price index or comparable data for the area under the taxing jurisdiction, or reduced in the event of declining property values caused by substantial damage, destruction, or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding my other law,local agencies may not levy my ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. Legislation Implementing Article XIIIA Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law,local agencies are no longer permitted to levy directly my property tax(except to pay voter-approved indebtedness). The one percent property tax is automatically levied by the County and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989. Increases of assessed valuation resulting from reappraisals of properly due to new construction, change in ownership or from the two percent annual adjustment are allocated among the various jurisdictions in the`4axing area"based upon their respective"situs." Any such allocation made to a local agency continues as part of its allocation in future years. Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values on tax rolls at the assessed value of 25%of market value which was expressed as$4 per$100 assessed value. All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate is expressed as $1 per$100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of market value(unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. 80198915.1 51 Article XIIIB of the California Constitution An initiative to amend the State Constitution entitled"Limitation of Government Appropriations" was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution ("Article XIIIB"). Under Article XIIIB,the State and each local governmental entity has an annual"appropriations limit" and is not permitted to spend certain moneys that are called "appropriations subject to limitation" (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriations of moneys that are excluded from the definition of"appropriations subject to limitation," including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terns, the appropriations limit is to be based on certain 1978-79 expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities' revenues in any year exceed the amounts permitted to be spent,the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes," which consist of tax revenues, state subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed"the cost reasonably home by such entity in providing the regulation, product or service,"but `proceeds of taxes"excludes tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees, and certain other non- tax funds. Not included in the Article XIIIB limit are appropriations for the debt service costs of bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government and appropriations for qualified capital outlay projects. The appropriations limit may also be exceeded in certain cases of emergency. The appropriations limit for the District in each year is based on the District's limit for the prior year, adjusted annually for changes in the cost of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of govemment. The change in the cost of living is,at the District's option, either(1)the percentage change in State per capita personal income, or (2) the percentage change in the local assessment roll on nonresidential property. Either test is likely to be greater than the change in the cost of living index, which was used prior to Proposition 111. Change in population is to be measured either within the jurisdiction of the District or the County as a whole. As amended by Proposition 1 11, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received by a District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. As originally enacted in 1979,the District's appropriations limit was based on 1978-79 authorizations to expend proceeds of taxes and was adjusted annually to reflect changes in cost of living and population (using different definitions, which were modified by Proposition 111). Starting with Fiscal Year 1990-91,the District's appropriations limit was recalculated by taking the actual Fiscal Year 1986-87 limit, and applying the annual adjustments as if Proposition I I I had been in effect. The District does not anticipate that any such appropriations limitations will impair its ability to make Installment Payments as required by the Installment Purchase Agreement. 80198913.1 52 Proposition IA Proposition IA("Proposition IA"), proposed by the Legislature in connection with the 2004-05 Budget Act and approved by the voters in November 2004, restricts State authority to reduce major local tax revenues such as the tax shifts permitted to take place in Fiscal Yews 2004-05 and 2005-06. Proposition IA provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1 A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year,as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local govenunents within a county must be approved by two-thirds of both houses of the Legislature. Proposition IA provides,however, that beginning in Fiscal Year 2008A9, the State may shift to schools and community colleges up to 8%of local government property tax revenues,which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two thirds of both houses and certain other conditions are met. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition IA also provides that if the State reduces the vehicle license fee ("VLF") rate currently in effect, 0.65% of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition IA requires the State, beginning July 1, 2005, to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Proposition 62 On November 4, 1986, California voters adopted Proposition 62, a statutory initiative which amended the California Government Code by the addition of Sections 53720-53730. Proposition 62 requires that(i)any local tax for general governmental purposes(a"general tax")must be approved by a majority vote of the electorate; (ii)any local tax for specific purposes (a"special tax")must be approved by a two-thirds vote of the electorate; (iii)any general tax must be proposed for a vote by two-thirds of the legislative body; and(iv)proceeds of any tax imposed in violation of the vote requirements must be deducted from the local agency's property tax allocation. Provisions applying Proposition 62 retroactively from its effective date to 1985 are unlikely to be of any continuing importance; certain other restrictions were already contained in the Constitution. Most of the provisions of Proposition 62 were affirmed by the 1995 California Supreme Court decision in Santa Clara County Local Transportation Authority v. Guardino,which invalidated a special sales tax for transportation purposes because fewer than two-thirds of the voters voting on the measure had approved the tax. The District has not imposed any taxes subject to the provisions of Proposition 62 and believes that it will not impair its ability to make its Installment Payments as required by the Installment Purchase Agreement. The requirements of Proposition 62 have generally been superseded by the enactment of Article XIIIC of the Constitution(Proposition 218)in 1996. Article X111C and Article X111D of the California Constitution Proposition 218, a State ballot initiative known as the "Right to Vote on Taxes Act," was approved by the voters on November 5, 1996. The initiative added Articles XIIIC and XIIID to the 8098915.1 53 California Constitution,creating additional requirements for the imposition by most local governments of "geneml taxes, "special taxes,""assessments,'"fees;'and"charges." Proposition 218 became effective, pursuant to its terms, as of November 6, 1996, although compliance with some of its provisions was deferred until July I, 1997, and certain of its provisions purport to apply to any tax imposed for general govenunental purposes(i.e.,"general taxes")imposed,extended or increased on or after January 1, 1995 and prim to November 6, 1996. Article XIIID imposes substantive and procedural requirements on the imposition, extension or increase of any"fee"m"charge" subject to its provisions. A "fee"or"charge" subject to Article XIIID includes any levy, other than an ad valorem tax,special tax or assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership. Article XIIID prohibits, among other things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee or charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee or charge by a majority of owners of the parcels upon which the fee or charge is to be imposed. Except for fees and charges fm water, sewer and refuse collection services, the approval of a majority of the property owners subject to the fee or charge,or at the option of the agency,by a two-thirds vote of the electorate residing in the affected area,is required within 45 days following the public hearing on any such proposed new or increased fee or charge. The California Supreme Court decisions in Richmond v. Shasta Community Services District, 32 Cal. 4th 409 (2004) ("Richmond'), and Bighorn- Desert View Water Agency v. Yerjd,, 39 Cal. 4' 205 (2006) ("Bighorn') have clarified some of the uncertainty surrounding the applicability of Section 6 of Article XIIID to service fees and charges. In Richmond, the Shasta Community Services District charged a water connection fee, which included a capacity charge for capital improvements to the water system and a fire suppression charge. The Court held that both the capacity charge and the fire suppression charge were not subject to Article XIIID because a water connection fee is not a property-related fee or charge because it results from the property owner's voluntary decision to apply for the connection. In both Richmond and Bighorn, however, the Court stated that a fee for ongoing water service through an existing connection is imposed "as an incident of property ownership" within the meaning of Article XIIID, rejecting, in Bighorn, the water agency's argument that consumption-based water charges are not imposed "as an incident of property ownership"but as a result of the voluntary decisions of customers as to how much water to use. Article XIIID also provides that"standby charges"are considered"assessments"and must follow the procedures required for "assessments" under Article XIIID and imposes several procedural requirements for the imposition of any assessment, which may include (1) various notice requirements, including the requirement to mail a ballot to owners of the affected property; (2) the substitution of a property owner ballot procedure for the traditional written protest procedure,and providing that"majority protest" exists when ballots (weighted according to proportional financial obligation) submitted in opposition exceed ballots in favor of the assessments; and (3) the requirement that the levying entity "separate the general benefits from the special benefits conferred on a parcel"of land. Article XIIID also precludes standby charges for services that are not immediately available to the parcel being charged. Article XIIID provides that all existing, new or increased assessments are to comply with its provisions beginning July 1, 1997. Existing assessments imposed on or before November 5, 1996, and "imposed exclusively to finance the capital costs or maintenance and operations expenses for [among other things] water" are exempted from some of the provisions of Article XIIID applicable to assessments. Article XIIIC extends the people's initiative power to reduce or repeal existing local taxes, assessments,fees and charges. This extension of the initiative power is not limited by the terms of Article XIIIC to fees, taxes, assessment fees and charges imposed after November 6, 1996 and absent other authority could result in retroactive reduction in any existing taxes, assessments, fees or charges. In 80198915.1 54 Bighom, the Court concluded that under Article XIIIC local voters by initiative may reduce a public agency's water rates and delivery charges. The Court noted, however, that it was not holding that the authorized initiative power is free of all limitations, stating that it was not determining whether the electorate's initiative power is subject to the public agency's statutory obligation to set water service charges at a level that will "pay the operating expenses of the agency, . . . provide for repairs and depreciation of works,provide a reasonable surplus for improvements,extensions,and enlargements,pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due." The District implemented a five-year plan beginning in Fiscal Year 2002-03 which included a rate increase of$7.50 per year,or 9.4%, for all ratepayers to $87.50 per year. In May 2003,the Board of Directors approved consideration of a 15%rate increase a year,for each year,over the then following five years, upon 2/3 vote of the Board of Directors after conducting a noticed public hearing in compliance with Article XIIID. This level of increase was considered necessary to provide needed capital improvements,to cover additional treatment and disinfection costs,and to minimize rate increases over an extended period of time. On July 2, 2003, the Board of Directors adopted Ordinance No. OCSD-20 increasing sanitary sewer service charges for all single family and multi-family residential units as well as most commercial and industrial properties. The Ordinance was adopted by a 2/3 vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with all laws. The Ordinance increases the amount of the annual charges by approximately 15%per year for each of the following five years, commencing with Fiscal Year 2003.04, thereby raising the single family residence user rate from the then current$87.50 to $100.00, $115.00, $132.00,$152.00,and$175.00 annually. The Ordinance discounted by 5%the annual increases which were the subject of the required protest hearings on the fee increase as described above. After the completion of the CIP Validation Study for Fiscal Year 2005-06 that increased its ten year CIP cash flow projects to $2.2 billion, or an average of$220 million per year, the Board of Directors adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 single family residential rate 31%,from $115 to$151 for such year. In May 2006,the Board of Directors adopted Ordinance No. OCSD-30B increasing the Fiscal Year 2006-07 single family residential rate 9.8%, from$151.00 to $165.80 for such year, except those located in Revenue Area 14. These increases represented the increase permitted under the protest hearings on the fee increase which was held in 2003. In April 2007, the Board of Directors began consideration of increased sanitary sewer service charges for all single family and multi-family residential units and most commercial and industrial properties. Any such increases are subject to approval by ordinance adopted by a 2/3 vote of the Board of Directors after conducting a noticed public hearing in compliance with all laws. See "DISTRICT REVENUES—Sewer Service Charges"and'—Capital Improvement Program"herein. Pursuant to the Master Agreement, the District will,to the extent permitted by law, fix,prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year(a)Net Revenues equal to 125% of Debt Service on Senior Obligations for such Fiscal Year, and (b)Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but will not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. In the event that service charges are determined to be subject to Article XIIID,and proposed increased service charges cannot be imposed as a result of a majority protest, such circumstances may adversely effect the ability of the District to generate revenues in the amounts required by the Master Agreement, and to make Installment payments as provided in the Installment Purchase Agreement. No assurance may be given that Articles XIIIC and XIIID will not have a material adverse impact on Net Revenues. 80198915.1 55 Other Initiative Measures Articles XIIIA, XIIIB, XIIIC and XIIID were adopted pursuant to California's constitutional initiative process. From time to time other initiative measures could be adopted by California voters, placing additional limitations on the ability of the District to increase revenues. LEGAL MATTERS The validity of the Certificates and certain other legal matter; are subject to the approving opinion of Fulbright& Jaworski L.L.P., Los Angeles, California, Special Counsel to the District. A complete copy of the proposed form of Special Counsel opinion is attached as Appendix F hereto. Special Counsel, in its capacity as Special Counsel to the District, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Costa Mesa, California, and for the District by Fulbright& Jaworski L.L.P. as Disclosure Counsel to the District. FINANCIAL ADVISOR The District has retained Public Resources Advisory Group as financial advisor (the "Financial Advisor") in connection with the execution and delivery of the Certificates. The Financial Advisor has not been engaged nor have they undertaken,to audit,authenticate or otherwise verify the information set forth in the Official Statement, or any other related information available to the District, with respect to accuracy and completeness of disclosure of such information. The Financial Advisor has reviewed this Official Statement but makes no guaranty, warranty or other representation respecting accuracy and completeness of the information contained in this Official Statement. ABSENCE OF LITIGATION There is no action,suit,proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the best knowledge of the District, threatened against the District affecting the existence of the District or the titles of its directors or officers to their offices or seeking to restrain or to enjoin the sale or delivery of the Certificates,the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the validity or enforceability of the Certificates,the Trust Agreement, the Master Agreement,the Installment Purchase Agreement or any action of the District contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement, or contesting the powers of the District or its authority with respect to the Certificates or any action of the District contemplated by any of said documents,nor,to the knowledge of the District is there any basis therefor. There is no action,suit,proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body pending or, to the best knowledge of the District, threatened against the District contesting or affecting the ability of the District to collect amounts from which Installment Payments are payable, or which would have a material adverse effect on the District's ability to make Installment Payments. FINANCIAL STATEMENTS The basic financial statements of the District included in Appendix A to this Official Statement have been audited by Mayer Hoffman McCann P.C., independent certified public accountants. In January 2006 Mayer Hoffman McCann P.C. merged the District's former auditors, Conrad and 80198915.1 56 Associates, L.L.P., into its national practice. See APPENDDC A — "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2007" herein. The District has received the Government Finance Officer's Association Certificate of Achievement for"Excellence in Financial Reporting"for 13 consecutive years The audited financial statements, including the footnotes thereto, should be reviewed in their entirety. Mayer Hoffman McCann P.C. has consented to the inclusion of its report as Appendix A but has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by Mayer Hoffman McCann P.C. with respect to any event subsequent to its report dated October 25,2007. TAX MATTERS The Internal Revenue Code of 1986 (the"Code"), imposes certain requirements that must be met subsequent to the issuance and delivery of the Certificates for the interest component of each Installment Payment (the `Interest Component"), and the allocable portion thereof distributable in respect of each Certificate (the "Certificate Interest Distribution"), to be and remain excluded from the gross income of the owner of such Certificate for federal income tax purposes. Noncompliance with such requirements could cause such amounts to be included in gross income for federal income tax purposes retroactive to the date of delivery of the Installment Purchase Agreement and the Certificates. The District and the Corporation have covenanted in the Installment Purchase Agreement and in the Trust Agreement to maintain the exclusion pursuant to section 103(a) of the Code of the Interest Component from the gross income of the District and its assigns, and of the Certifrcateholders, respectively, for federal income tax purposes. Upon the delivery of the Certificates, Fu(bright & Jaworski L.L.P., Los Angeles, California, Special Counsel, will deliver its opinion that, under existing law, and assuming compliance with the aforementioned covenants,the Interest Component allocable to and the Certificate Interest Distributions in respect of a Certificate are excluded pursuant to section 103(a) of the Code from the gross income of the owner of the Certificate for federal income tax purposes; inasmuch as the Installment Purchase Agreement is not a"specified private activity bond"within the meaning of section 57(a)(5)of the Code, neither the Interest Component nor any Certificate Interest Distribution is an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. It is noted that the Interest Component allocable to and Certificate Interest Distributions in respect of a Certificate owned by a corporation for federal income tax purposes may affect the computation of the alternative minimum taxable income, upon which the alternative minimum tax is imposed to the extent that such amounts are taken into account in determining the adjusted earnings of that corporation (75 percent of the excess(if any)of such adjusted current earnings over the alternative minimum taxable income being an adjustment to the alternative minimum taxable income (determined without regard to the adjustment or to the alternative tax net operating loss deduction)). Further, on that same day Special Counsel will render its opinion, based solely on the foregoing, and upon existing provisions of the laws of California, that such Interest Component and Certificate Interest Distributions are exempt from personal income taxes of the State of California. To the extent that a purchaser of a Certificate acquires that Certificate at a price that exceeds the aggregate amount of scheduled distributions(other than distributions of qualified stated interest within the meaning of section 1.1273-1 of the Treasury Regulations) to be made on the Certificate (determined, in the use of a prepayable Certificate, under the assumption described below) (the "Stated Redemption Price at Maturity"), such excess will constitute "bond premium" under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a tax-exempt obligation must be amortized on a constant yield, economic accrual, basis; the amount of $0198915.1 57 premium so amortized will reduce the owner's basis in such obligation for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. In the case of a purchase of a Certificate that is subject to prepayment, the determination whether there is amortizable bond premium,and the computation of the accrual of that premium, must be made under the assumption that the Certificate will be prepaid on the permitted date that would minimize the purchaser's yield on the Certificate (or that the Certificate will not be prepaid prior to the stated maturity date in respect of that Certificate if that would minimize the purchaser's yield). The rate and timing of the amortization of the bond premium and the coresponding basis reduction may result in an owner realizing a taxable gain when a Certificate owned by such owner is sold or disposed of for an amount equal to or in some circumstances even less than the original cost of the Certificate to the owner. The excess, if any, of the Stated Redemption Price at Maturity of a Certificate of a maturity over the initial offering price to the public of the Certificates of that stated maturity set forth on the inside cover page of this Official Statement is"original issue discount" Such original issue discount acoming in respect of a Certificate is treated for federal income tax and California personal income tax purposes as additional interest in respect of that Certificate and is excluded from the gross income of the owner thereof for federal income tax purposes and exempt from the California personal income tax. Original issue discount accruing in respect of any Certificate purchased at such initial offering price and pursuant to such initial offering will accrue on a semiannual basis over the term to the stated maturity date in respect of the Certificate on the basis of a constant yield method and,within each semiannual period,will accrue on a ratable daily basis. The amount of original issue discount in respect of such a Certificate accruing during each period is added to the adjusted basis of such Certificate to determine taxable gain upon disposition (including upon sale, prepayment or payment on maturity) of such Certificate. The Code includes certain provisions relating to the accrual of original issue discount in the case of a purchaser of a Certificate who purchases that Certificate other than at the initial offering price and pursuant to the initial offering of that Certificate. Any person considering purchasing a Certificate at a price that includes bond premium should consult his or her own tax advisors with respect to the amortization and treatment of such bond premium, including,but not limited to,the calculation of gain or loss upon the sale,prepayment or other disposition of the Certificate. Any person considering purchasing a Certificate of a maturity in respect of which there is original issue discount should consult his or her own in advisors with respect to the tax consequences of ownership of such Certificate, including the treatment of a purchaser who does not purchase in the original offering and at the original offering price of that Certificate,the allowance of a deduction for any loss on a sale or other disposition, and the treatment of accrued original issue discount in respect of such Certificate under federal individual and corporate alternative minimum taxes. Special Counsel has not undertaken to advise in the future whether any events after the date of delivery of the Installment Purchase Agreement and the Certificates may affect the tax status of the Interest Component and Certificate Interest Distributions. No assurance can be given that future legislation, or amendments to statutes of the State of California or of the United States, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of such amounts from personal income taxes of the State of California or of the exclusion of such amounts from the gross income of the owners of Certificates for Federal income tax purposes. Furthermore, Special Counsel will express no opinion as to any federal, state, or local tax law consequences with respect to the Installment Purchase Agreement, Certificates, himmst Component, or Certificate Interest Distributions, if any action is taken with respect to the Installment Purchase Agreement, the Certificates, or the proceeds thereof, or the Trust Agreement permitted or predicated upon the advice or approval of counsel if such advice or approval is given by counsel other than Fulbright&Jaworski L.L.P. 80198915.1 58 Although Special Counsel is of the opinion that Interest Component and Certificate Interest Distributions in respect of a Certificate are exempt from state personal income taxation and excluded from the gross income of the owner thereof for federal income tax purposes, an owner's federal, state or local tax liability may be otherwise affected by the ownership or disposition of the Certificate. The nature and extent of these other tax consequences will depend upon the owner's other items of income or deduction. Without limiting the generality of the foregoing,prospective purchasers of Certificates should be aware that: (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Certificates or, in the case of financial institution, that portion of an owner's interest expense allocated to the Certificates; (ii)with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b)(5)(Bxi) reduces the deduction for loss reserves by 15 percent of the sum of certain items, including Interest Component and Certificate Interest Distributions in respect of Certificates owned by such companies;(iii)Interest Component and Certificate Interest Distributions accrued in respect of Certificates owned by certain foreign corporations doing business in the United States for federal income tax purposes could be subject to a branch profits tax imposed by section 884 of the Code; (iv) passive investment income, including Interest Component and Certificate Interest Distributions accrued in respect of Certificates,accruing to a Subchapter S corporation that at the close of a taxable year has Subchapter C earnings and profits may be subject to federal income taxation under section 1375 of the Code if greater than 25% of the gross receipts of such Subchapter S corporation in passive investment income;(v)section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, Installments Interest and Certificate Interest Distributions accrued in respect of Certificates owned by such recipients for federal income tux purposes; and (A) under section 32(i) of the Code, receipt of investment income, including Interest Component and Certificate Interest Distributions accrued in respect of Certificates, may disqualify the owner thereof from obtaining the earned income credit. Special Counsel has expressed no opinion regarding any such other tax consequences. Special Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the District and the Corporation described above. No ruling has been sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the opinion of Special Counsel, and Special Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Certificates is commenced, under current procedures the Service is likely to treat the District as the "taxpayer," and the Owners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest with respect to the Certificates,the District may have different or conflicting interest from the Owners. Further,the disclosure of the initiation of an audit may adversely affect the market price of the Certificates, regardless of the final disposition of the audit. The proposed form of opinion of Special Counsel is attached hereto as Appendix F. CONTINUING DISCLOSURE The District has covenanted for the benefit of holders and beneficial owners of the Certificates (a)to provide certain financial information and operating data (the "Annual Report") relating to the District and the properly in the District not later than eight months after the end of the District's Fiscal Year(which currently would be March 1),commencing with the report for the 2007.08 Fiscal Yea, and (b)to provide notices of the occurrence of certain enumerated events,if material. The Annual Report will be filed by the Trustee on behalf of the District, with each Nationally Recognized Municipal Securities Information Repository and with each State Repository, if any. The notices of material events will be filed by the Trustee on behalf of the District with the Municipal Securities Rulemaking Board and with each State Repository,if any. The specific nature of the information to be contained in the Annual Report 80199915.1 59 or the notices of material events is set forth in the Continuing Disclosure Agreement. See APPENDIX D — "FORM OF CONTINUING DISCLOSURE AGREEMENT." These covenants have been made in order to assist the Initial Purchaser in complying with S.E.C. Rule 15c2-12 (the"Rule"). The District has not failed to comply in all material respects with any previous undertaking with respect to the Rule to provide annual reports or notices of material events. VERIFICATION OF MATHEMATICAL COMPUTATIONS , certified public accountants (the "Verification Agent"), will deliver a report stating that the firm has verified the accuracy of mathematical computations concerning (a)the adequacy of the maturing principal amounts of and interest earned on the Government Obligations initially deposited in the Escrow Fund to provide for the payment of the interest due on each of the Refmnded Certificates to and including the Prepayment Date, and to pay on the Prepayment Date the principal or redemption price thereof, and (b) the computations of yield on the Certificates and of investments in the Escrow Fund. The report of the Verification Agent will include the statement that the scope of its engagement was limited to verifying the mathematical accuracy of the computations contained in such schedules provided to it and that the Verification Agent has no obligation to update its report because of events occurring,or data or information coming to its attention, subject to the date of its report. RATINGS The Certificates will be rated " " by Moody's Investors Service ("Moody's"), "_" by Di Standard & Poor's Ratings Services, a vision of The McGraw-Hill Companies, Inc. ("S&P"), and "_"by Fitch Ratings("Fitch"). Such ratings reflect only the views of the rating agencies, and do not constitute a recommendation to buy, sell or hold the Certificates. Explanation of the significance of such ratings may be obtained only from the respective organizations at: Standard&. Poor's Ratings Group,55 Water Street, New York, New York 10041; Moody's Investors Service, 7 World Trade Center, 250 Greenwich Street, New York, New York 10007; and Fitch Ratings, One State Street Plaza, New York, New York 10004. There is no assurance that any such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the respective rating agencies,if in the judgment of any such rating agency circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Certificates. PURCHASE AND REOFFERING (the"Initial Purchaser")has purchased the Certificates from the District at a competitive sale for a purchase price of$ (representing the aggregate principal amount of the Certificates, plus an original issue premium of $ , and less an Initial Purchaser's discount of$ ). The public offering prices may be changed from time to time by the Initial Purchaser. The Initial Purchaser may offer and sell Certificates to certain dealers and others at prices lower than the offering prices shown on the inside cover page hereof. MISCELLANEOUS Included herein are brief summaries of certain documents and reports, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. 80199915.1 60 This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Certificates. The execution and delivery of this Official Statement has been duly authorized by the District ORANGE COUNTY SANITATION DISTRICT By: Chair of the Board of Directors $0198915.1 61 APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2007 8019"15.1 A-1 APPENDIX B THE COUNTY OF ORANGE-ECONOMIC AND DEMOGRAPHIC INFORMATION 80198915.1 B-] APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS 90198915.1 C-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT(this"Disclosure Agreement"), dated as of May 1, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the "District"), and DIGITAL ASSURANCE CERTIFICATION LLC,as Dissemination Agent(the"Dissemination Agent"). WITNESSETH: WHEREAS, the District has caused to be executed and delivered Orange County Sanitation District Refunding Certificates of Participation, Series 2008A(the"Certificates"), evidencing principal in the aggregate amount of$80,255,000, pursuant to a Trust Agreement, dated as of the date hereof(the "Trust Agreement"), by and among U.S. Bank National Association, as trustee (the "Trustee"), the Orange County Sanitation District Financing Corporation(the"Corporation")and the District;and WHEREAS, this Disclosure Agreement is being executed and delivered by the District and the Dissemination Agent for the benefit of the owners and beneficial owners of the Certificates and in order to assist the underwriters of the Certificates in complying with the Rule(as defined herein); NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained,the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Trust Agreement or, if not defined therein, in the Master Agreement, dated as of August 1, 2000, by and between the District and the Corporation. In addition, the following capitalized terms shall have the following meanings: "Annual Report" means any Annual Report provided by the District pursuant to, and as described in,Sections 2 and 3 hereof. "Annual Report Date" means the date in each year that is eight months after the end of the District's fiscal year,which date,as of the date of this Disclosure Certificate,is March 1. "Disclosure Representative" means the Director of Finance of the District,or such other officer or employee of the District as the District shall designate in writing to the Dissemination Agent and the Trustee from time to time. "Dissemination Agent" means an entity selected and retained by the District, or any successor thereto selected by the District. The initial Dissemination Agent shall be Digital Assurance Certification LLC. "Listed Events"means any of the events listed in subsection(a)of Section 4 hereof. "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. As of the date hereof, the National Repositories approved by the Securities and Exchange Commission are identified at http://www.sec.gov/info/municipal/nrmsir.htm. 80198915.1 D-I "Official Statement" means the Official Statement, dated May_, 2008, relating to the Certificates. "Participating Underwriter"means any of the original underwriters of the Certificates required to comply with the Rule in connection with the offering of the Certificates. "Repository"means each National Repository and each State Repository. "Rule" means Rule ISc2-12 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 Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized by the Securities and Exchange Commission. As of the date of this Disclosure Agreement,there is no State Repository. Section 2. Provision of Annual Reports. (a) The District shall, or shall cause the Dissemination Agent to,not later than the Annual Report Date,commencing with the report for the 2007- 08 Fiscal Year,provide to each Repository an Annual Report which is consistent with the requirements of Section 3 hereof. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report,and later than the date required above for the filing of the Annual Report if not available by that date. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under subsection(t)of Section 4 hereof. (b) Not later than 15 business days prior to the date specified in subsection(a)of this Section for the providing of the Annual Report to the Repositories,the District shall provide the Annual Report to the Dissemination Agent and the Trustee. If by such date, the Dissemination Agent has not received a copy of the Annual Report,the Dissemination Agent shall contact the District to determine if the District is in compliance with the first sentence of this subsection(b). (c) If the Dissemination Agent is unable to confirm that an Annual Report has been provided to Repositories by the date required in subsection(a)of this Section,the Dissemination Agent shall send a notice to the Municipal Securities Rulemaking Board and each State Repository, if any, in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the time and address of each National Repository and each State Repository,if any; and (ii) file a report with the District and(if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Section 3. Content of Annual Reports. The District's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental 80198915.1 D-2 Accounting Standards Board. If the District's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to subsection(a)of Section 2 hereof,the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) The following information with respect to the Certificates: (i) The principal evidenced by the Certificates Outstanding as of the January I next preceding the Annual Report Date and the principal amount of other Senior Obligations outstanding as of the January 1 next preceding the Annual Report Date. (ii) The balance in the Reserve Fund, and a statement of the Reserve Requirement, as of the January 1 next preceding the Annual Report Date. (c) A summary report showing in reasonable detail Revenues, Operating Revenues, Maintenance and Operation Costs,Net Revenues, Net Operating Revenues and debt service with respect to the Senior Obligations for the fiscal year ended the June 30 next preceding the Annual Report Date. (d) An update, for the fiscal year ended the June 30 next preceding the Annual Report Date, of the information contained in the Official Statement in Table Nos. 2, 4, 6 (only with respect to information on 6 under the headings Fiscal Year and Sewer Service Charge), 8 (not to include projections),9, 10, 11, 12, 13, 14 and 16. (e) In addition to any of the information expressly required to be provided under subsections (a), (b), (c) and (d) of this Section, the District shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made,not misleading. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference. Section 4. Reoortlne of Significant Events. (a)Pursuant to the provisions of this Section, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers,or their failure to perform. 80198915.1 D-3 (6) Adverse tax opinions or events affecting the tax-exempt status of the security. (7) Modifications to rights of security holders. (8) Contingent or unscheduled Certificate calls. (9) Defeasances. (10) Release, substitution, or sale of property securing repayment of the securities. (11) Rating changes. (b) The District shall, within one business day of obtaining actual knowledge of the occurrence of any of the Listed Events,contact the Disclosure Representative, inform such person of the event, and request that the District promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection(f)of this Section. (c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Dissemination Agent pursuant to subsection (b) of this Section or otherwise, the District shall as soon as possible determine if such event would be material under applicable Federal securities law. (d) If the District has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection(f)of this Section. (e) If in response to a request under subsection (b) of this Section, the District determines that the Listed Event would not be material under applicable Federal securities law, the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection(f)of this Section. (f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each Repository. Notwithstanding the foregoing, notice of Listed Events described in paragraphs(8)and(9)of subsection (a) of this Section need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Certificates pursuant to the Trust Agreement. Section 5. Electronic Filing. Submission of Annual Reports and notices of Listed Events to DisclosureUSA.org or another "Central Post Office" designated and accepted by the Securities and Exchange Commission shall constitute compliance with the requirement of filing such reports and notices with each Repository hereunder, and the District may satisfy its obligations hereunder to file any notice, document or information with a Repository by filing the same with any dissemination agent or conduit, including DisclosureUSA.org or another"Central Post Office"or similar entity, assuming or charged with responsibility for accepting notices,documents or information for transmission to such Repository,to the extent permitted by the Securities and Exchange Commission or Securities and Exchange Commission staff or required by the Securities and Exchange Commission. For this purpose, permission shall be deemed to have been granted by the Securities and Exchange Commission staff if and to the extent the 90198915.1 D-4 agent or conduit has received an interpretive letter, which has not been revoked, from the Securities and Exchange Commission staff to the effect that using the agent or conduit to transmit information to the Repository will be treated for purposes of the Rule as if such information were transmitted directly to the Repository. Section 6. Termination of Reporting Obligation. The District's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates,the District shall give notice of such termination in the same manner as for a Listed Event under subsection If) of Section 4 hereof. Section 7. Dissemination Agent. The District may, from time to time, appoint or engage another 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. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent; provided it shall receive written notice of such designation at the time of such designation. Section S. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement the District and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the District), 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 2 hereof, Section 3 hereof or subsection(a)of Section 4 hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Certificates,or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments or interpretations of the Rule,as well as any change in circumstances;and (c) the proposed amendment or waiver(i) is approved by holders of the Certificates in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders, or(ii)does not, in the opinion of the Trustee and nationally recognized bond counsel, materially impair the interests of holders. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information,in order to provide information to investors to enable them to evaluate the ability of the District to meet its 80198915.1 D-5 obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories. Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event,in addition to that which is required by this Disclosure Agreement. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the District shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 10. Default In the event of a failure of the District or the Dissemination Agent to comply with any provision of this Disclosure Agreement,the Trustee may(and,at the written direction of any Participating Underwriter or the holders of at least 25% of the aggregate amount of principal evidenced by Outstanding Certificates and upon being indemnified to its reasonable satisfaction, shall),or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District, Trustee or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Trust Agreement,and the sole remedy under this Disclosure Agreement in the event of any failure of the District, the Trustee or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 11. Duties. Immunities and Liabilities of Trustee and Dissemination Agent. Article Vlll of the Trust Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Trust Agreement. Neither the Trustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report or notice of Listed Event. The Dissemination Agent shall receive reasonable compensation for its services provided under this Disclosure Agreement. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent)shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents,harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Trustee, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Certificates,and shall create no rights in any other person or entity. Section 13. 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. 80199915.1 D-6 IN WITNESS WHEREOF,the parties hereto have executed this Disclosure Agreement as of the date first above written. ORANGE COUNTY SANITATION DISTRICT By: Lorenzo Tyner Director of Finance and Administrative Services DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent By: Authorized Representative Acknowledged and Accepted: U.S. BANK NATIONAL ASSOCIATION, as Trustee By: Authorized Officer 80198915.1 D-] EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKINC BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Orange County Sanitation District Name of Issue: Orange County Sanitation District Refunding Certificates of Participation, Series 2008A Date of Issuance: May_,2008 NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District")has not provided an Annual Report with respect to the above-named Certificates as required by Section 6.09 of the Trust Agreement,dated as of May I,2008,by and among U.S.Bank National Association,as Trustee, the Orange County Sanitation District Financing Corporation and the District. [The District anticipates that the Annual Report will be filed by j Dated: ORANGE COUNTY SANITATION DISTRICT By: cc: Trustee Dissemination Agent 801989131 D-A-I APPENDIX E BOOK-ENTRY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Certificates,payment of principal and interest evidenced by the Certificates to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Certificates, and other Certificate-related transactions by and between DTC, Participants and Beneficial Owners, is based on information furnished by DTC which the District and the Corporation each believes to be reliable, but the District and the Corporation take no responsibility for the completeness or accuracy thereof. The Depository Trust Company—Book-Entry System The Depository Trust Company("DTC" New York,NY,will act as securities depository for the securities (the "Certificates"). The Certificates 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 Certificate will be issued for the Certificates in the aggregate principal amount of such issue,and will be deposited with DTC. DTC 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 `blearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million 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 Cleating Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S.and non-U.S. securities brokers and dealers,banks,trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. The information on such websites is not incorporated herein by such reference or otherwise. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("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 Certificates 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 90198915.1 E-I ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates 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 Certificates with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Certificates, such as prepayments,tenders,defaults,and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates 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. Prepayment notices shall be sent to DTC. If leas than all of the Certificates within an issue are being prepaid, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid. Neither DTC nor Cede&Co.(nor such other DTC nominee)will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District 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 Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Prepayment proceeds, distributions, and dividend payments on the Certificates 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 District 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, not its nominee, the Trustee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment 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 District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such 80199915.1 B-2 circumstances,in the event that a successor securities depository is not obtained,Certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. Discontinuance of DTC Services In the event(i)DTC determines not to continue to act as securities depository for the Certificates, (ii)DTC shall no longer act and give notice to the Trustee of such determination or (III)the District determines that it is in the best interest of the Beneficial Owners that they be able to obtain Certificates and delivers a written certificate to the Trustee to that effect, DTC services will be discontinued. If the District determines to replace DTC with another qualified securities depository, the District shall prepare or direct the preparation of a new single, separate, fully registered Certificate for each of the maturities of the Certificates,registered in the name of such successor or substitute qualified securities depository or its nominee. If the District fails to identify another qualified securities depository to replace DTC then the Certificates shall no longer be restricted to being registered in the certificate registration books in the name of Cede&Co.,but shall be registered in such names as are requested in a certificate of the District, in accordance with the Trust Agreement. All Certificates may be presented for transfer by the Owner thereof, in person or by his attorney duly authorized in writing, at the Principal Office of the Trustee, on the books required to be kept by the Trustee pursuant to the provisions of the Trust Indenture, upon surrender of such Certifications for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. The Trustee may treat the Owner of any Certificate as the absolute owner of such Certificate for all purposes, whether or not such Certificate shall be overdue, and the Trustee shall not be affected by any knowledge or notice to the contrary; and payment of the interest and principal evidenced by such Certificate shall be made only to such Owner, which payments shall be valid and effectual to satisfy and discharge the liability evidenced by such Certificate to the extent of the sum or sums so paid. Whenever any Certificates shall be surrendered for transfer, the Trustee shall execute and deliver new Certificates representing the same principal amount in Authorized Denominations. The Trustee shall require the payment of any Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer. Certificates may be presented for exchange at the Principal Office of the Trustee for a like aggregate principal amount of Certificates of other Authorized Denominations. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The Trustee shall not be required to transfer or exchange any Certificate during the period in which the Trustee is selecting Certificates for prepayment, nor shall the Trustee be required to transfer or exchange any Certificate or portion thereof selected for prepayment from and after the date of mailing the notice of prepayment thereof. 80199915.1 E-3 APPENDIX F FORM OF APPROVING OPINION OF SPECIAL COUNSEL Upon the execution and delivery of the Certificates, Fulbright di Jaworski L.L.P., Los Angeles, California, Special Counsel to the District will render its final approving opinion with respect to the Certificates in substantially the followingform: [Date of Delivery] Orange County Sanitation District 10844 Ellis Avenue Fountain Valley,California 92708-7018 Orange County Sanitation District Refunding Certificates of Participation Series 2008A Ladies and Gentleman: We have acted as Special Counsel in connection with the $ aggregate principal amount of Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates") which evidence direct, fractions] undivided interests of the Owners thereof in the installment payments (the "Installment Payments"), and the interest thereon, to be made by the Orange County Sanitation District (the "District")pursuant to the Installment Purchase Agreement, dated as of May 1,2008(the"Installment Purchase Agreement"),by and between the District and the Orange County Sanitation District Financing Corporation (the "Corporation"). Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement"), by and between the District and the Corporation,the District has established conditions and terms upon which obligations such in;the Installment Payments and the interest thereon,will be incurred and secured. Installment Payments under the Installment Purchase Agreement are payable solely from Net Revenues as provided in the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District (the "Wastewater System") remaining after payment of Maintenance and Operation Costs. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Installment Purchase Agreement. The Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of May 1, 2008 (the "Trust Agreement"), by and among the District, the Corporation and U.S. Bank National Association, as trustee(the"Trustee"). Proceeds from the sale of the Certificates,together with other available moneys, will be used to (i)refund the District's Refunding Certificates of Participation, 1992 Series(the"Refunded Certificates")and pay a settlement amount to the provider of an interest rate swap agreement relating to the Refimded Certificates, (ii)fund a reserve fund for the Certificates and (iii)pay the costs incurred in connection with the execution and delivery of the Certificates. 80198915.1 F-I As Special Counsel,we have examined copies certified to us as being true and complete copies of the Master Agreement,the Trust Agreement and the Installment Purchase Agreement and the proceedings of the District in connection with the execution and delivery of the Certificates. We have also examined such certificates of officers of the District, the Corporation and others as we have considered necessary for the purposes of this opinion. Based upon the foregoing,we are of the opinion that: 1. The Master Agreement, the Installment Purchase Agreement and the Trust Agreement have each been duly and validly authorized, executed and delivered by the District and, assuming the Master Agreement, the Installment Purchase Agreement and the Trust Agreement each constitutes the legally valid and binding obligation of the other parties thereto, enforceable against such parties in accordance with its respective terms, each constitutes the legally valid and binding obligation of the District,enforceable against the District in accordance with its respective terms. 2. The obligation of the District to pay the Installment Payments, and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement lawfully available therefor. 3. Assuming due authorization, execution and delivery of the Trust Agreement and the Certificates by the Trustee,the Certificates are entitled to the benefits of the Trust Agreement. 4. The Internal Revenue Code of 1986 (the"Code")imposes certain requirements that must be met subsequent to the execution and delivery of the Certificates for the component of each Installment Payment designated as interest in the Installment Purchase Agreement (the "Payment Interest"), and the allocable portion thereof distributable in respect of each Certificate (the "Certificate Interest Distribution"),to be and remain excluded from the gross income of the owner thereof for federal income tax purposes. Noncompliance with such requirements could cause such amounts to be included in gross income of such owner for federal income tax purposes retroactive to the date of delivery of the Certificates. The Corporation and the District have each covenanted in the Trust Agreement, and the District has covenanted in the Installment Purchase Agreement, to maintain the exclusion pursuant to section 103(a)of the Code of the Payment Interest from the gross income of the owner thereof for federal income tax purposes. In our opinion, under existing law, and assuming compliance with the aforementioned covenant, the Payment Interest allocable to and the Certificate Interest Distributions in respect of a Certificate are excluded pursuant to section 103(a) of the Code from the gross income of the owner thereof for federal income tax purposes; inasmuch as the Installment Purchase Agreement is not a"specified private activity bond"within the meaning of section 57(a)(5)of the Code,neither the Payment Interest nor any Certificate Interest Distribution is an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. It is noted that the accrual of Payment Interest allocable to and Certificate Interest Distributions in respect of a Certificate owned by a corporation may affect the computation of income, upon which the alternative minimum tax is imposed, to the extent that such amounts are taken into account in determining the adjusted eamings of that corporation(75 percent of the excess (if any) of such adjusted current earnings over the alternative minimum taxable income being an adjustment to the alternative minimum taxable income(determined without regard to the adjustment or to the alternative tax net operating loss deduction)). Further, based solely on the foregoing, and upon existing provisions of the California Revenue and Tax Code, we are of the opinion that Payment Interest 80198915.1 F-2 allocable to and the Certificate Interest Distributions in respect of a Certificate are not subject to taxation under the California personal income tax. We have not undertaken to advise in the future whether any events after the date of delivery of the Installment Purchase Agreement may affect the tax status of the Payment Interest or Certificate Interest Distributions. No assurance can be given that future legislation, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exclusion of such amounts from the gross income of the owner of Certificates for federal income tax purposes. Furthermore, we express no opinion as to any federal, state,or local tax low consequences with respect to the Installment Purchase Agreement, Certificates, Payment Interest, or Certificate Interest Distributions, if any action is taken with respect to the Installment Purchase Agreement, the Master Agreement, the Trust Agreement, the Certificates,or the proceeds thereof,permitted or predicated upon the advice or approval of counsel if such advice or approval is given by counsel other than us. Except as stated in the preceding three paragraphs, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the Installment Purchase Agreement or Certificates. We have not been requested to express, and do not express, any view as to the compliance by any person with federal and state securities laws. With the exception of the opinions expressed above, we have not been requested to express and do not express, any opinion as to any matter affected by any taxing or other law of the State of California, The rights of the owners of the Certificates and the enforceability of the Certificates, the Master Agreement, the Trust Agreement and the Installment Purchase Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases. The enforceability of the Certificates, the Master Agreement, the Trust Agreement and the Installment Purchase Agreement is subject to the effect of general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, to the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and to the limitations on legal remedies against governmental entities in California. No opinion is expressed herein on the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Certificates. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. Respectfully submitted, 80198915.1 F-3 APPENDIX B THE COUNTY OF ORANGE-ECONOMIC AND DEMOGRAPHIC INFORMATION The County is bordered on the north by Los Angeles County,on the east by Riverside County,on the southeast by San Diego County and on the west and southwest by the Pacific Ocean. Approximately 42 miles of ocean shoreline provide beaches. marinas and other recreational areas for use by residents and visitors. The climate in the County is mild with an average annual rainfall of 13 inches. Population The County is the third most populous county in the State and the sixth most populous in the nation. During the period 1999 through 2008, the population of the County increased by approximately _ o, compared to_%for the State and %for the United States(reflects growth from 1999 through 2007,the most recent period for which United States population data is available). TABLE B-1 COUNTY OF ORANGE,STATE OF CALIFORNIA AND UNITED STATES POPULATION GROWTH State of United States Year Oranee Countvlrl Californian) of Americaol 1999 2,776,100 33,417,000 272,690,813 2000 2,863,706 34,098,740 282,216,592 2001 2,918,791 34,784,382 285,226,284 2002 2,963,394 35,392,960 288,125,973 2003 3,005,043 35,990,107 290,796,023 2004 3,037,949 36,522,026 293,638,158 2005 3,062,275 36,981,931 296,507,061 2006 3,083,894 37,444,385 299,398,484 2007 3,098,121 37,662,518 2008 [ ] ( ) Sao) As of Jmmry I of each year. ut As of July l of each year. nr 2008 population data has not been released for the United States of America as of the date of this Official Statement. Source: Orange County and State of Caffornia Statistics-Calilm nia State Department of Finance, Demographic Research Unit; United States Statistics-Population Estimates Program, Population Division, US Census Bureau. Public Schools(Elementary and Secondary) Public instruction in the County is provided by twelve elementary school districts, three high school districts and twelve unified (combined elementary and high school) districts. For the 2007-08 academic year, the largest district, the Santa Ana Unified School District, projects student enrollment of 53,693 (excluding charter schools). Public school enrollment for the academic calendar years 2002-03 through 2006-07 is presented in Table B-2. 70166678.2 B-1 TABLE B-2 COUNTY OF ORANGE PUBLIC SCHOOL ENROLLMENT 2002-03 2003-04 2004-05 2005-06 2006-07 Grade Level K-8 361,184 360,996 354,841 350,096 340,566 9-12 150921 154468 158 903903 160 018018 163389 Total Enrollment 512.IQ5 515,4 513.744 510.149 503.955 Source. California Department of Educarion,Educational Demographics Unit. Colleges and Universities The County has a number of top-rated, college-level educational institutions, including the University of California at Irvine and California State University at Fullerton, several private colleges, universities and law schools and four community college districts. Employment The following table summarizes the historical numbers of workers in the County over the period 2003 through 2007 by industry. TABLE B-3 COUNTY OF ORANGE INDUSTRY EMPLOYMENT AND LABOR FORCE-ANNUAL AVERAGE 2003 2004 2005 2006 2007 Farts 7,200 6,700 5,300 5,400 Natural Resources and Mining 500 600 700 600 Construction 83,700 92,200 99,300 107,000 Manufacturing 183,900 183,500 182,700 183,400 Wholesale Trade 83,200 82,400 83,000 82,900 Retail Trade 152,800 153,200 157,100 159,500 Transportation Warehousing Utilities 29,000 29,200 28,800 28,400 Information 35,200 33,800 32.800 31,700 Financial Activities 122,200 132,300 138,200 139,000 Professional and Business Services 252,600 254,900 267,000 274,800 Educational and Health Services 126,300 151,000 133,300 138,900 Leisure and Hospitality 158,600 162,900 164,400 169,500 Other Services 46.700 47,400 49,200 47,900 Government 154.200 153 400 155,300 156.500 Total All Industries(l) 1,438,103 1,512,900 1.541,800 1.527,506 Data may not add due to rounding. Source: Calliamia Employmenr Development Department. 70166678.2 B-2 Major Employers The following table lists the major employers in the County for 2007. TABLE B-4 COUNTY OF ORANGE MAJOR EMPLOYERS 2007 Employer Name Number of Employees Walt Disney Company 20,250 University of California,Irvine 16,374 Boeing Company 11,242 St. Joseph Health System 9,482 YOM! Brands Inc. 7,000 AT&T Inc. 6,116 California State University,Fullerton 5,337 Hope Depot Inc. 5,200 Memorial Health Services Inc. 4,961 Supervalu hie. 4,819 Source: Orange County Businers Journal 2007 Book of Lists. Labor Force,Employment and Unemployment Table B-5 summarizes the labor force, employment and unemployment figures over the period 2003 through 2007 for the County and the State. TABLE B-5 COUNTY OF ORANGE AND STATE OF CALIFORNIA LABOR FORCE,EMPLOYMENT AND UNEMPLOYMENT YEARLY AVERAGE Unemployment Year and Area Labor Force Employment Unemployment Rate 2003 Orange County 1,557,400 1,482,400 75,000 4.8% California 17,403,900 16,212,200 1,191,300 6.8 2004 Orange County 1,580,800 1,512,800 68,000 4.3 California 17,499,600 16,407,900 1,091,700 6.2 2005 Orange County 1,602,200 1,541,800 60,400 3.8 California 17,695,600 16,746,900 948,700 5.4 2006 Orange County 1,623,600 1,568,300 55,300 3.4 California 17,901,900 17,029,300 872,600 4.9 2007 Orange County California Source: Califomia Bmploymmt D"elopmmt Depamnmt. 701666782 B-3 Personal Income and other Demographic Information Table B-6 summarizes the persona] income, per capita persona] income, median family income, public school enrollment and unemployment rate for the County of Orange. TABLE B-6 COUNTY OF ORANGE DEMOGRAPHIC INFORMATION') Per Total Personal Capita Median Public Fiscal Income Personal Family"' School(1) Unemployment Year (In thousands) Income Income Enrollment Rate 1997-98 $ 90,579,927(') $ 34,639 $ 61,812 458,000 2.9% 1998.99 96,288,099(2) 34,686 63,478 471,000 2.6 1999-00 106,003,904(2) 37,484 69,310 483,000 2.9 2000.01 109,010,27801 37,851 70,577 494,000 3.0 2001-02 111,750,294(2) 38,010 72.998 503,000 4.1 2002-03 117,722,500"1 39,517 73,572 512,000 4.0 2003-04 125,670,1000) 41,654 70,9W 517,000 3.6 2004-05 133,031,800(7) 43,660 73,545 514,000 3.9 2005-06 141,169,400f1 45,954 76,443 510,114 3.7 2006-07 $[148,916,000]() 48,068 [78,950] 503,955 3.9 The—Orange County Sanitation District services 471 square miles or 59%of the total 799 square miles that make up the boundaries of the County of Orange. O Bureau of Economic Analysis,U.S.Department of Commerce (3) Anderson Center for Economic Research,Chapman University. (4) California Department of Education,Educational Demographics Unit. (3) State of California,Employment Development Department as of June 30 of each fiscal year. 70166678.2 B-4 Taxable Sales Table B-7 summarizes the annual volume of taxable transactions in the County from 2002 to 2006. TABLE B-7 COUNTY OF ORANGE TAXABLE TRANSACTIONS (in Thommads) Type of Business 2002 2003 2004 2005 2006 Apparel stores group $ 1,508,011 $ 1,697,120 $ 1,881,882 $2.062,892 $ General merchandise group 4,618,932 4,855,674 5.205,075 5,467,357 Specialty stores group 4,837,212 5,085,612 5,700,317 6,028,089 Food stores group 1,551,611 1,574,528 1,563,145 1,716,228 Eating and drinking groups 3,884,388 4,149,117 4.475,791 4,798,676 Household group 1,722,573 1,995,255 2,135,876 2.269,650 Building material group 2,275,964 2,480,249 2,950,592 3,000,096 Automotive group 8,482,604 9,651,049 10,585,091 11,283,156 All other retail stores group 765,523 809,093 944,184 1,046,700 Retail Stores Totals 29,646,818 32,297,697 35,441,953 37,672,934 Business&Personal Services 2,615,150 2.6999250 2,819,934 2,938,129 All Other Outlets 12607188 12,530.119 13,420,172 14.452.253 TOTAL ALL OUTLETS $44,869,156 $47,517,066 $51,682,059 $55,063,246 $ Source: Calijomia Siate Board ojEgan7¢ation. Housing Characteristics The total number of housing units in the County was estimated by the California State Department of Finance to be as of January 1, 2007. This compares to 1,024,692 reported by the Department of Finance in January 2006. According to California Association of Realtors,the median resale price of single-family dwelling units in Orange County was $ in [April 2008] competed with$747,258 in April of 2007. Building Permits The total valuation of building permits issued in the County reached$ billion in 2007,which represents about a %increase relative to 2003. Table B-8 provides a summary of residential building permit valuations and the number of new dwelling units authorized in the County during the period 2003 through 2007. 70166678.2 B-5 TABLE B-8 COUNTY OF ORANGE BUILDING PERMIT ACTIVITY 2003 through 2007 (In Thousands) 2003 2004 2005 Z0006 22007 Valuation: Residential $2,076,977 $2,243,645 $2,100,436 $2,336,324 Non-Residential 1.005.547 1,132,946 1,494,755 2,397,248 Total $3,082,525 $3.376,491 $3,595,191 $4,733,572 New Housing Units: Single Family 5,565 4,395 4,058 3,121 Multiple Family IZ4§ 4.927 3 148 5.219 Total 9,311 9,322 7,206 8,340 Source: Construction Industry Research Board. Water Supply Maintaining the County's water supply is the responsibility of the Orange County Water District ("OCWD"), manager of the County's groundwater basin, and the Municipal Water District of Orange County("M WDOC'),the County's largest manager of imported water. More than 60%of the County's water is from local groundwater sources; the rest is imported. The County's natural underground reservoir is sufficient to carry it through temporary shortfall periods, but local supplies alone cannot sustain the present population. Recreation and Tourism The County is a tourist center in Southern California because of the broad spectrum of amusement parks and leisure, recreational and entertainment activities that it offers. These tourist attractions are complimented by the year-round mild climate. Along the County's Pacific Coast shoreline are five state beaches and parks, five municipal beaches and five County beaches. There are two small-craft docking facilities in Newport Harbor,a third located at Sunset Beach and a fourth at Dana Point. Other major recreational and amusement facilities include Disneyland, Disney's California Adventure,Knott's Berry Farm and the Spanish Mission of San Juan Capistrano. Also located within the County are the Anaheim Convention Center, Edison International Field of Anaheim, Honda Center, Orange County Performing Arts Center, Verizon Wireless Amphitheater and the Art Colony at Laguna Beach with its annual art festival. The Anaheim Convention Center is located adjacent to Disneyland. It is situated on 53 acres and is one of the largest convention centers on the West Coast. Table B-9 summarizes the number of conventions held in the County,as well as attendance for the period 1998 through 2007. 70166678.2 B-6 TABLE B-9 COUNTY OF ORANGE CONVENTION ACTIVITY Year Conventions Attendance 1998* 450 750,698 1999* 473 767,689 2000 470 858,593 2001 489 959,000 2002 547 1,008,171 2003 590 1,093,787 2004 666 1,211,476 2005 619 1,113,224 2006 633 1,125,895 2007 [ 1 1 1 Source: Anaheim/Orange County Visitor and Convention Bureau, 2007. • A portion of the decrease in 1998 and 1999 from attendance and expenditure levels of prior yam is attributable to the effects of the construction of Disney's California Adventure theme park and related infrastructure projects. Transportation The County is situated in the most heavily populated area in Califomia and has access to excellent roads, rail, air and sea transportation. The Santa Ana Freeway (Interstate 5) provides direct access to downtown Los Angeles and connects with the San Diego Freeway(Interstate 405) southeast of the City of Santa Ana,providing a direct link with San Diego. The Garden Grove Freeway(State 22)and the Riverside Freeway(State 91)provide east-west transportation, linking the San Diego Freeway, Santa Ana Freeway and the Newport Freeway (State 55). The Newport Freeway provides access to certain beach communities. Drivers in the County have access to two toll road systems of the Transportation Corridor Agencies. The San Joaquin Toll Road (73) runs from Costa Mesa to San Juan Capistrano connecting to the 405 and 5 interstate freeways. The Eastern and Foothill Toll Roads(241, 261 and 133)connect the County to the 91 freeway in the north and the 5 freeway, City of Irvine other South County cities,as well as Laguna Canyon Road The Transportation Corridor Agencies are planning to extend 241 to connect to the 5 freeway,new San Clemente. Rail freight service is provided by the Burlington Northern Santa Fe Railway and the Union Pacific Railroad Company. Amtrak provides passenger service to San Diego to the south, Riverside and San Bernardino Counties to the east, and Los Angeles and Santa Barbara to the north. Metro Link provides passenger service to San Bernardino and Riverside counties to the east,the City of Oceanside to the south and Los Angeles County to the north. Bus service is provided by Greyhound Bus Lines. The Orange County Transportation Authority provides bus service between most cities in the County. Most interstate common carrier truck lines operating in California serve the County. The John Wayne Airport, owned and operated by the County, is the only commercial service airport in the County. It is approximately thirty-five miles south of Los Angeles, between the cities of Coast Mesa, Wine, Newport Beach and Santa Ana. Major airlines, including Alaska, Aloha, America West, American, Continental, Delta, Frontier, Northwest, Southwest and United fly from the airport to major cities throughout the country. In 2004,approximately 9.2 million passengers were served. 70166678.2 B-7 i� In 1993, the Defense Base Realignment and Closure Commission directed the closure of Marine Corps Air Station (MCAS) El Toro ("El Toro" or "the base") effective July 1999. The County was designated the Local Redevelopment Authority("LRA")for development of a Community Reuse Plan to guide future development of the former MCAS El Toro. In 1994, Orange County voters narrowly approved Measure A which zoned the property for use as an international airport. This touched off a multi-year legal and political battle that ended when 58%of Orange County voters approved Measure W, the Orange County Central Park and Nature Preserve Initiative, on March 5, 2002. Measure W repeals Measure A and amends the County General Plan to prohibit aviation uses and limit future development for the unincorporated portion of El Toro to park, open space, nature preserve and education and compatible was. The day after Measure W was approved, the Department of the Navy issued a press release stating that disposal of the former Base would be accomplished by means of a public auction. The City of Wine responded by developing the Great Park Plan for El Toro. The City of Irvine was approved by the Local Agency formation Commission("LAFCO")to annex to the City the property that comprises the former MCAS El Toro. In light of the passage of Measure W,the County has discontinued all work related to the planning or development of a commercial airport at El Toro. Natural Disasters; Seismic Activity Natural disasters, including floods, fires and earthquakes, have been experienced in the County. Seismic records spanning the past half century and historic records dating from the 1700s through the early 1900s;indicate that the County is a seismically active area. The State Office of Emergency Services indicates that significant tremors are likely to occur in several fault zones during the next 50 to 100 years, including a tremor of 7.0 on the Richter scale within the Newport-Inglewood fault system. The chance of a Richter 7.0 earthquake occurring is estimated to be I to 2% in any year. For this reason, local building codes require that structures be designed to withstand the expected accelerations for the area without collapsing or suffering severe structural damage. Maps published by the State Department of Conservation indicate that portions of the County may be subject to the risk of earthquake-induced landslides or liquefaction. 70166679.2 B-8 1 Fulbright&Jawerski L.L.P. Draft-5/12/08 ESCROW AGREEMENT by and between ORANGE COUNTY SANITATION DISTRICT and U.S. BANK NATIONAL ASSOCIATION, AS ESCROW AGENT Dated as of May 1, 2008 County Sanitation District Nos. 1, 2, 3, 5, 6, 7 and 11 Refunding Certificates of Participation Series 1992 ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Escrow Agreement"), dated as of May 1, 2008, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of the State of California (the"District"),and U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America,as escrow agent(the"Escrow Agent"). WITNESSETH: WHEREAS, to refinance the acquisition, construction and installation of certain improvements to the wastewater system (the "Prior Project") of certain predecessor county sanitation districts of the District, to wit, County Sanitation District Nos. 1, 2, 3, 5, 6, 7 and 11 (collectively, the "Predecessor Districts"), the Predecessor Districts purchased the Prior Project by agreeing to make installment payments (the "Prior Installment Payments") pursuant to the Amendatory Agreement for Acquisition and Construction, dated as of October 1, 1992, by and among the Predecessor Districts; WHEREAS, to provide the funds necessary to refinance the Prior Project, the Predecessor Districts caused the execution and delivery of the Refunding Certificates of Participation, Series 1992 (the "Prior Certificates"), evidencing direct, undivided fractional interests in the Prior Installment Payments pursuant to a Trust Agreement,dated as of October 1, 1992 (the "Prior Trust Agreement") among the Predecessor Districts and U.S. Bank National Association (the "Prior Trustee"),as successor trustee to State Street Bank and Trust Company; WHEREAS, the District desires to refinance all of the Prior Project by prepaying all of the remaining principal components of the Prior Installment Payments (the "Refunded Installment Payments"), and the interest components thereof to the date of prepayment, thereby causing all of the Prior Certificates to be prepaid; WHEREAS, to provide the funds necessary to prepay the Prior Installment Payments to be so prepaid, the District and the Orange County Sanitation District Financing Corporation (the "Corporation") desire that the Corporation purchase the Prior Project from the District and the District sell the Prior Project to the Corporation, and that the District then purchase the Prior Project from the Corporation and the Corporation sell the Prior Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to an Installment Purchase Agreement by and between the District and the Corporation (the "Installment Purchase Agreement"); WHEREAS, to provide the funds necessary to prepay the Refunded Installment Payments, the District has caused to be executed and delivered the Orange County Sanitation District Refunding Certificates of Participation, Series 2008A (the "Certificates"), evidencing principal in the aggregate amount of$[PAR], pursuant to the Trust Agreement, dated as of the date hereof(the "Trust Agreement"), by and among U.S. Bank National Association, as trustee (the "Trustee"),the Corporation and the District; 90198279.2 i WHEREAS, the District has determined to apply a portion of the proceeds of the Certificates to prepay all of the outstanding Refunded Installment Payments on July 1, 2008 (the "Prepayment Date") at a prepayment price equal to the principal amount thereof, without premium(the"Prepayment Price"); and WHEREAS, in accordance with the Prior Trust Agreement, the Refunded Installment Payments, and the interest thereon, will be applied to the payment of the Prior Certificates evidencing interests therein (the "Refunded Certificates") on the Prepayment Date at the Prepayment Price; NOW THEREFORE, in consideration of the premises and of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: Section 1. Definitions. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Prior Trust Agreement. Section 2. The Escrow Fund. (a) There is hereby established a fund (the "Escrow Fund") to be held as an irrevocably pledged escrow by the Escrow Agent, which the Escrow Agent shall keep separate and apart from all other funds of the District and the Escrow Agent and to be applied solely as provided in this Escrow Agreement. Pending application as provided in this Escrow Agreement, amounts on deposit in the Escrow Fund are hereby pledged solely to the payment of the principal and interest evidenced by the Refunded Certificates to and including the Prepayment Date and the payment of the Prepayment Price on the Prepayment Date, which amounts shall be held in trust by the Escrow Agent for the Owners of the Refunded Certificates. (b) [The Prior Trustee is hereby instructed to liquidate any investments held in the Reserve Fund established under the Prior Trust Agreement.] As reflected in the report of the nationally recognized firth of independent certified public accountants delivered in connection herewith, upon the execution and delivery of the Certificates, there shall be deposited in the Escrow Fund $ received from the proceeds of the sale of the Certificates and [$ from the Reserve Fund established under the Prior Trust Agreement,] for a total of$ (c) Upon the deposit of moneys pursuant to Section 2(b) hereof, the moneys on deposit in the Escrow Fund will be at least equal to an amount sufficient to purchase the aggregate principal amount of the Government Obligations set forth in Exhibit A hereto (the "Exhibit A Securities"), which principal, together with all interest due or to become due on such Exhibit A Securities, and any uninvested cash held by the Escrow Agent in the Escrow Fund, will be sufficient to make the payments required by Section 4 hereof. Section 3. Use and Investment of Moneys. (a) The Escrow Agent hereby acknowledges deposit of the moneys described in Section 2(b) hereof and agrees to invest $ of such moneys in the Exhibit A Securities The balance of the moneys described in Section 2 in the amount of$ hereof shall be held uninvested in the Escrow Fund. (b) All Government Obligations purchased pursuant to this Escrow Agreement shall be deposited in and held for the credit of the Escrow Fund. Except as provided in this Section 3 80198279.2 2 t e hereof, no moneys or Government Obligations deposited with the Escrow Agent pursuant to this Escrow Agreement nor principal of, or interest payments or other investment income on, any such Government Obligations shall be withdrawn or used for any purpose other than, and shall be held in trust for,the payment of the Refunded Certificates as provided in Section 4 hereof. (c) The Owners of the Refunded Certificates shall have a first and exclusive lien on the moneys and Government Obligations in the Escrow Fund until such moneys and Government Obligations are used and applied as provided in this Escrow Agreement. (d) The Escrow Agent shall not be held liable for investment losses resulting from compliance with the provisions of this Escrow Agreement. Section 4. Payment of Refunded Certificates. From the maturing principal of the Government Obligations held in the Escrow Fund and the investment income and other earnings thereon and any uninvested money then held in the Escrow Fund, the Escrow Agent shall apply such amounts on the Prepayment Date in accordance herewith. To the extent that the amount on deposit in the Escrow Fund on the Prepayment Date is in excess of the amount necessary to make the required payments with respect to the Refunded Certificates, as shown in the then applicable escrow verification of the nationally recognized firm of independent certified public accountants, such excess shall be transferred to the Trustee for deposit in the Installment Payment Account established under the Trust Agreement. Section 5. Irrevocable Instructions to Mail Notices. The District hereby designates the Refunded Certificates evidencing Refunded Installment Payments due on and after August I, 2008 for prepayment on the Prepayment Date and hereby irrevocably instructs the Prior Trustee, to give, in accordance with the provisions of the Prior Trust Agreement, notice of prepayment of such Refunded Certificates. Section 6. Performance of Duties, Acknowledgement with Respect to Irrevocable Instructions. The Escrow Agent hereby agrees to perform the duties set forth herein and agrees that the irrevocable instructions to the Prior Trustee herein provided are in a form satisfactory to it. Section 7. Escrow Agent's Authority to Make Investments. The Escrow Agent shall have no power or duty to invest any funds held under this Escrow Agreement except as provided herein. The Escrow Agent shall have no power or duty to transfer or otherwise dispose of the moneys held hereunder except as provided herein. Section 8. Indemni . To the extent permitted by law, the District hereby assumes liability for, and hereby agrees to indemnify, protect, save and keep harmless the Escrow Agent and its respective successors, assigns, agents, employees and servants, from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including reasonable legal fees, expenses and disbursements) of whatsoever kind and nature which may be imposed on, incurred by, or asserted against, the Escrow Agent at any time in any way relating to or arising out of the execution, delivery and performance of this Escrow Agreement,the establishment hereunder of the Escrow Fund,the acceptance of the funds and securities deposited therein, the purchase of any securities to be purchased pursuant thereto, 80198279.2 3 1 P the retention of such securities or the proceeds thereof and any payment, transfer or other application of moneys or securities by the Escrow Agent in accordance with the provisions of this Escrow Agreement; provided, however, that the District shall not be required to indemnify the Escrow Agent against the Escrow Agent's own negligence or willful misconduct or the negligence or willful misconduct of the Escrow Agent's respective successors, assigns, agents and employees or the material breach by the Escrow Agent of the terms of this Escrow Agreement. In no event shall the District or the Escrow Agent be liable to any person by reason of the transactions contemplated hereby other than to each other as set forth in this Section. The indemnities contained in this Section shall survive the termination of this Escrow Agreement. Section 9. Responsibilities of Escrow Agent. The Escrow Agent makes no representation as to the sufficiency of the securities to be purchased pursuant hereto and any uninvested moneys to accomplish the prepayment of the Refunded Certificates pursuant to the Prior Trust Agreement or to the validity of this Escrow Agreement as to the District and, except as otherwise provided herein, the Escrow Agent shall incur no liability in respect thereof. The Escrow Agent shall not be liable in connection with the performance of its duties under this Escrow Agreement except for its own negligence, willful misconduct or default, and the duties and obligations of the Escrow Agent shall be determined by the express provisions of this Escrow Agreement. The Escrow Agent may consult with counsel, who may or may not be counsel to the District, and in reliance upon the written opinion of such counsel shall have full and complete authorization and protection in respect of any action taken, suffered or omitted by it in good faith in accordance therewith. Whenever the Escrow Agent shall deem it necessary or desirable that a matter be proved or established prior to taking, suffering, or omitting any action under this Escrow Agreement, such matter (except the matters set forth herein as specifically requiring a certificate of a nationally recognized firth of independent certified public accountants or an opinion of counsel of recognized standing in the field of law relating to municipal bonds) may be deemed to be conclusively established by a written certification of the District. Whenever the Escrow Agent shall deem it necessary or desirable that a matter specifically requiring a certificate of a nationally recognized firm of independent certified public accountants or an opinion of counsel of recognized standing in the field of law relating to municipal bonds be proved or established prior to taking, suffering, or omitting any such action, such matter may be established only by a certificate signed by a nationally recognized firm of certified public accountants or such opinion of counsel of recognized standing in the field of law relating to municipal bonds. The Escrow Agent undertakes to perform only such duties as are expressly set forth in this Agreement and no implied duties, covenants or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent may resign by giving written notice to the District,and upon receipt of such notice the District shall promptly appoint a successor Escrow Agent. If the District does not appoint a successor Escrow Agent within thirty days of receipt of such notice, the resigning Escrow Agent may petition a court of competent jurisdiction for the appointment of a successor Escrow Agent, which court may thereupon, upon such notice as it shall deem proper, appoint a successor Escrow Agent. Upon acceptance of appointment by a successor Escrow Agent, the resigning Escrow Agent shall transfer all amounts held by it in the Escrow Fund to such successor Escrow Agent and be discharged of any further obligation or responsibility hereunder. 80198279.2 4 Section 10. Amendments. The District and the Escrow Agent may (but only with the consent of the Owners of all of the Refunded Certificates) amend this Escrow Agreement or enter into agreements supplemental to this Escrow Agreement. Section 11. Term. This Escrow Agreement shall commence upon its execution and delivery and shall terminate on the date upon which the Refunded Certificates have been paid in accordance with this Escrow Agreement. Section 12. Compensation. The District shall from time to time pay or cause to be paid to the Escrow Agent the agreed upon compensation for its services to be rendered hereunder, and reimburse the Escrow Agent for all of its reasonable advances in the exercise and performance of its duties hereunder; provided, however, that under no circumstances shall the Escrow Agent be entitled to any lien whatsoever on any moneys or obligations in the Escrow Fund for the payment of fees and expenses for services rendered or expenses incurred by the Escrow Agent under this Escrow Agreement or otherwise. Section 13. Severability. If any one or more of the covenants or agreements provided in this Escrow Agreement on the part of the District or the Escrow Agent to be performed should be determined by a court of competent jurisdiction to be contrary to law, such covenants or agreements shall be null and void and shall be deemed separate from the remaining covenants and agreements herein contained and shall in no way affect the validity of the remaining provisions of this Escrow Agreement. Section 14. Counterparts. This Escrow Agreement may be executed in several counterparts, all or any of which shall be regarded for all purposes as an original but all of which shall constitute and be but one and the same instrument. Section 15. Governing Law. This Escrow Agreement shall be construed under the laws of the State of California. 80198279.2 5 f 1 IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as of the date first above written. U.S. BANK NATIONAL ASSOCIATION, AS ESCROW AGENT By: Authorized Officer UNION BANK OF CALIFORNIA,N.A., AS PRIOR TRUSTEE By: Authorized Officer ORANGE COUNTY SANITATION DISTRICT By: Chairman of the Board of Directors 80198279.2 6 y EXIMIT A UNITED STATES TREASURY SECURITIES Maturity Par Interest Type Date Amount Rate Price $ $ 80198279.2 A-i i Notice of Defeasance County Sanitation District Nos. 1,2, 3, 5, 6, 7 and I I Refunding Certificates of Participation Series 1992 CUSIP Nos. to come NOTICE IS HEREBY GIVEN that on May 29, 2008, moneys have been irrevocably set aside in an escrow fund held by U.S. Bank National Association, as escrow agent and prior trustee (the "Prior Trustee"), under the Trust Agreement, dated as of October 1, 1992 (the "Prior Trust Agreement') among County Sanitation District Nos. 1, 2, 3, 5, 6, 7 and 11 and the Prior Trustee, which the District has determined, when added to the investment eamings therefrom, shall be sufficient to pay the principal and interest, without premium (the "Prepayment Price") on the above-referenced certificates of participation (the "Refunded Certificates") on July 1, 2008 (the "Prepayment Date"). Such moneys have been invested in obligations the payment of which the full faith and credit of the United States of America is pledged and the principal of and interest on which when paid will provide moneys sufficient to the Prepayment Price with respect to the Refunded Certificates the Prepayment Date. In accordance with the Section 8.01 of the Trust Agreement the Certificates listed above are deemed to have been paid and the obligations of the Corporation and the District under such Trust Agreement have been released. Dated: June 1, 2008 By: U.S. Bank National Association, as Trustee on behalf of the Orange County Sanitation District Nance "The District and Trustee shall not be responsible for the use of the CUSIP numbers selected, nor is any representation made as to their cormcmess indicated in the notice or as printed on any certificate. They are included solely for the convenience of the Securityholders. 80198279.2 �w RESOLUTION NO. OCSD 08- A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT AUTHORIZING THE EXECUTION AND DELIVERY BY THE DISTRICT OF AN INSTALLMENT PURCHASE AGREEMENT, A TRUST AGREEMENT, AND A CONTINUING DISCLOSURE AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2008A, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $85,000,000, APPROVING A NOTICE OF INTENTION TO SELL, AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL NOTICE INVITING BIDS AND AN OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF SUCH CERTIFICATES, AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS WHEREAS, the Orange County Sanitation District (the 'District") desires to finance the acquisition, construction and installation of certain improvements to its wastewater system (the "Project'); WHEREAS, in order to finance the Project, the District desires to purchase the Project from the Orange County Sanitation District Financing Corporation (the "Corporation"), and the Corporation desires to sell the Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to the Installment Purchase Agreement, dated as of December 1, 2007 (the "Installment Purchase Agreement"), by and between the District and the Corporation; WHEREAS, the Corporation intends to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to Union Bank of California, N.A., as trustee (the "Trustee"), pursuant to a Trust Agreement among the Trustee, the Corporation and the District (such Trust Agreement, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Trust Agreement'); WHEREAS, in consideration of such assignment and the execution and entering into of the Trust Agreement, the Trustee intends to execute and deliver Orange County Sanitation District Certificates of Participation, in one or more series (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon; WHEREAS, the District desires to provide for the public sale of the Certificates; WHEREAS, a form of the Notice of Intention to Sell to be published in connection with the public offering and sale of the Certificates has been prepared (such Notice of Intention to Sell, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Notice of Intention to Sell"); 57VI8.1 m P WHEREAS, a form of the Official Notice Inviting Bids to be distributed in connection with the public offering and sale of the Certificates has been prepared (such Official Notice Inviting Bids, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Notice Inviting Bids"); WHEREAS, a form of the Preliminary Official Statement to be distributed in connection with the public offering of the Certificates has been prepared (such Preliminary Official Statement in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Preliminary Official Statement'); WHEREAS, Rule 15c2-12 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended ('Rule 15c2-12"), requires that the underwriter thereof must have reasonably determined that the District has undertaken in a written agreement or contract for the benefit of the holders of the Certificates to provide disclosure of certain financial information and certain material events on an ongoing basis; WHEREAS, to cause such requirement to be satisfied, the District desires to enter into a Continuing Disclosure Agreement with the Trustee (such Continuing Disclosure Agreement in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Continuing Disclosure Agreement"); WHEREAS, there have been prepared and submitted to this meeting forms of: (a) the Installment Purchase Agreement; (b) the Trust Agreement; (c) the Notice of Intention to Sell; (d) the Notice Inviting Bids; (e) the Preliminary Official Statement; and (f) the Continuing Disclosure Agreement; WHEREAS, all acts, conditions and things required by the Constitution and laws of the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the financing authorized hereby do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the District is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such financing for the purpose, in the manner and upon the terms herein provided; 2 576'_181 NOW, THEREFORE, the Board of Directors of the District DOES HEREBY RESOLVE, DETERMINE AND ORDER: Section 1. All of the recitals herein contained are true and correct and the Board of Directors of the District (the "Board") so finds. Section 2. The Installment Purchase Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby approved. The Chair of the Board, and such other member of the Board as the Chair may designate, the General Manager of the District, the Director of Finance and Administrative Services of the District, and such other officer of the District as the Director of Finance and Administrative Services may designate (the "Authorized Officers") are, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver the Installment Purchase Agreement in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Installment Purchase Agreement by such Authorized Officer; provided, however, that such changes, insertions and omissions shall not result in an aggregate principal amount of Installment Payments in excess of $85,000,000, shall not result in a true interest cost for the Installment Payments in excess of 6% and shall not result in a final Installment Payment later than February 1, 2037. Section 3. The Trust Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver the Trust Agreement in the form presented to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Trust Agreement by such Authorized Officer. Section 4. The execution and delivery of Certificates evidencing principal in an aggregate amount of not to exceed $85,000,000, payable in the years and in the amounts, and evidencing principal of and interest on the Installment Payments as specified in the Trust Agreement as finally executed, are hereby authorized and approved. Section 5. The form of Notice of Intention to Sell, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, with such changes, insertions and omissions therein as may be approved by an Authorized Officer, is hereby approved, and the use of the Notice of Intention to Sell in connection with the offering and sale of the Certificates is hereby approved. The Authorized Officers are each hereby authorized and directed, for and in the name and on behalf of the District, to cause the Notice of Intention to Sell to be published once in The Bond Buyer (or in such other financial publication generally circulated throughout the State of California or reasonably expected to be disseminated among prospective bidders for the Certificates as an Authorized Officer shall approve as being in the best interests of the 3 5]6318.1 District) at least five days prior to the date set for the opening of bids in the Notice Inviting Bids, with such changes, insertions and omissions therein as an Authorized Officer may require or approve, such requirement or approval to be conclusively evidenced by such publishing of the Notice of Intention to Sell. Section 6. The Notice Inviting Bids, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, with such changes, insertions and omissions therein as may be approved by an Authorized Officer, be and the same is hereby approved, and the use of the Notice Inviting Bids in connection with the offering and sale of the Certificates is hereby authorized and approved. The terms and conditions of the offering and sale of the Certificates shall be as specified in the Notice Inviting Bids. Bids for the purchase of the Certificates shall be received at the time and place set forth in the Notice Inviting Bids. The Authorized Officers are each hereby authorized and directed, for and in the name and on behalf of the District, to accept the bid for the Certificates with the lowest true interest cost, or to reject all bids therefor, in accordance with the terms of the Notice Inviting Bids. Section 7. The Preliminary Official Statement, in substantially the form presented to this meeting and made a part hereof as though set forth in full herein, with such changes, insertions and omissions therein as may be approved by an Authorized Officer, is hereby approved, and the use of the Preliminary Official Statement in connection with the offering and sale of the Certificates is hereby authorized and approved. The Authorized Officers are each hereby authorized to certify on behalf of the District that the Preliminary Official Statement is deemed final as of its date, within the meaning of Rule 15c2-12 (except for the omission of certain information permitted by Rule 15c2-12 to be omitted). The Authorized Officers are each hereby authorized and directed to furnish, or cause to be furnished, to prospective bidders for the Certificates a reasonable number of copies of the Preliminary Official Statement. Section 8. The preparation and delivery of a final Official Statement (the "Official Statement'), and its use in connection with the offering and sale of the Certificates, be and the same is hereby authorized and approved. The Official Statement shall be in substantially the form of the Preliminary Official Statement, with such changes, insertions and omissions as may be approved by an Authorized Officer, such approval to be conclusively evidenced by the execution and delivery thereof. The Authorized Officers are, and each of them is, hereby authorized and directed to execute the final Official Statement and any amendment or supplement thereto, for and in the name of the District. Section 9. The Continuing Disclosure Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver the Continuing Disclosure Agreement in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Continuing Disclosure Agreement by such Authorized Officer. 4 576219 1 Section 10. The Authorized Officers are, and each of them hereby is, authorized and directed 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 proper for carrying out the execution and delivery of the Certificates and the transactions contemplated by the notices, agreements and documents referenced in this Resolution. Section 11. All actions heretofore taken by the officers and employees of the District with respect to the execution, delivery and sale of the Certificates, or in connection with or related to any of the agreements or documents referenced in this Resolution, are hereby approved, confirmed and ratified. Section 12. This Resolution shall take effect immediately upon its adoption. PASSED AND ADOPTED at a regular meeting held on May 28, 2008. Chair ATTEST: Clerk of the Board APPROVED: General Counsel, Orange County Sanitation District 5 D6218.1 I� STATE OF CALIFORNIA ) ss COUNTY OF ORANGE ) I, Penny M. Kyle, Clerk of the Board of Directors of the Orange County Sanitation District, do hereby certify that the foregoing Resolution No. OCSD 08-— was passed and adopted at a regular meeting of said Board on the 281" day of May 2008, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this 28" day of May 2008. Clerk of the Board of Directors Orange County Sanitation District ll5119.1 r� RESOLUTION NO. FC- A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION AUTHORIZING THE EXECUTION AND DELIVERY BY THE CORPORATION OF AN INSTALLMENT PURCHASE AGREEMENT AND A TRUST AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2008A, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $85,000,000 AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS. WHEREAS, the Orange County Sanitation District (the "District") desires to finance the acquisition, construction and installation of certain improvements to its wastewater system (the "Project"); WHEREAS, in order to finance the Project, the District desires to purchase the Project from the Orange County Sanitation District Financing Corporation (the "Corporation"), and the Corporation desires to sell the Project to the District, for the installment payments (the "Installment Payments") to be made by the District pursuant to the Installment Purchase Agreement, dated as of December 1, 2007 (the "Installment Purchase Agreement"), by and between the District and the Corporation; WHEREAS, the Corporation intends to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to Union Bank of California, N.A., as trustee (the "Trustee"), pursuant to a Trust Agreement among the Trustee, the Corporation and the District (such Trust Agreement, in the form presented to this meeting, with such changes, insertions and omissions as are made pursuant to this Resolution, being referred to herein as the "Trust Agreement"); WHEREAS, in consideration of such assignment and the execution and entering into of the Trust Agreement, the Trustee intends to execute and deliver Orange County Sanitation District Certificates of Participation, in one or more series (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon; WHEREAS, there have been prepared and submitted to this meeting forms of: (a) the Installment Purchase Agreement; and (b) the Trust Agreement; 9Q14.1 WHEREAS, all ads, conditions and things required by the Constitution and laws of the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the actions authorized hereby do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the Corporation is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such actions for the purpose, in the manner and upon the terms herein provided; NOW, THEREFORE, the Board of Directors of the Corporation DOES HEREBY RESOLVE, DETERMINE AND ORDER: Section 1. All of the recitals herein contained are true and correct and the Board of Directors of the Corporation (the "Board") so finds. Section 2. The Installment Purchase Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth herein, be and the same is hereby approved. The President of the Corporation, the Vice-President of the Corporation, the Treasurer of the Corporation and the Secretary of the Corporation, and such other officer of the Corporation as the President may designate (the "Authorized Officers") are, and each of them is, hereby authorized and directed, for and in the name of the Corporation, to execute and deliver the Installment Purchase Agreement in the form submitted to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Installment Purchase Agreement by such Authorized Officer; provided, however, that such changes, insertions and omissions shall not result in an aggregate principal amount of Installment Payments in excess of $85,000,000, shall not result in a true interest cost for the Installment Payments in excess of 6% and shall not result in a final Installment Payment later than February 1, 2037. Section 3. The Trust Agreement, in substantially the form submitted to this meeting and made a part hereof as though set forth in full herein, be and the same is hereby approved. The Authorized Officers are, and each of them is, hereby authorized and directed, for and in the name of the Corporation, to execute and deliver the Trust Agreement in the form presented to this meeting, with such changes, insertions and omissions as the Authorized Officer executing the same may require or approve, such requirement or approval to be conclusively evidenced by the execution of the Trust Agreement by such Authorized Officer. Section 4. The execution and delivery of Certificates evidencing principal in an aggregate amount of not to exceed $85,000,000, payable in the years and in the amounts, and evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon, as specified in the Trust Agreement as finally executed, are hereby authorized and approved. 2 576124.1 Section S. The officers and agents of the Corporation are, and each of them hereby is, authorized and directed 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 proper for carrying out the execution and delivery of the Certificates and the transactions contemplated by the agreements or documents referenced in this Resolution. Section 6. All actions heretofore taken by the officers and agents of the Corporation with respect to the execution, delivery and sale of the Certificates, or in connection with or related to any of the agreements or documents referenced in this Resolution, are hereby approved, confirmed and ratified. Section 7. This Resolution shall take effect immediately upon its adoption. PASSED AND ADOPTED at a meeting held on May 28, 2008. President, Orange County Sanitation District Financing Corporation ATTEST: Clerk of the Board Orange County Sanitation District Financing Corporation APPROVED: General Counsel, Orange County Sanitation District Financing Corporation 3 576IIJ.1 STATE OF CALIFORNIA ) ss COUNTY OF ORANGE ) I, Penny M. Kyle, Clerk of the Board of Directors of the Orange County Sanitation District Financing Corporation, do hereby certify that the foregoing Resolution No. FC- , was passed and adopted at a regular meeting of said Board on the 28" day of May 2008, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District Financing Corporation this 28'" day of May 2008. Clerk of the Board of Directors Orange County Sanitation District nan,i SIAIE OF CALIFORNIA) ) SS. COUNTY OF ORANGE ) Pursuant to California Government Code Section 54954.2, 1 hereby certify that the Notice and Agenda for the Special Board Meeting of Orange County Sanitation District, to be held on May 14, 2008, was duly posted for public inspection in the main lobby of the Districts' offices on May 9, 2008. IN WITNESS WHEREOF, I have hereunto set my hand this 8th day of May, 2008. jh Penny M. K&, Clerk of the Board Orange County Sanitation District