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HomeMy WebLinkAbout2007-11 ADM THE CLEIRK OF THE BOARD MINUTES OF THE REGULAR MEETING O� BE COUNTY SANRATION DISTRICT THE ADMINISTRATION COMMITTEE NOV 28 1007 Orange County Sanitation District n Wednesday, November 14, 2007, at 5:00 P.M. BY: �Y A meeting of the Administration Committee of the Orange County Sanitation District was held on November 14, 2007, at 5:00 p.m., in the Sanitation District's Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli,Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services Steven Choi Mike White, Controller Catherine Driscoll (Alt) Jeff Reed, Human Resources& Employee Relations Jon Dumitru Manager Rich Freschi Lille Kovac, Committee Secretary Darryl Miller Bob Bell Joy Neugebauer Rich Castillon Chris Norby Norbert Gaia Sal Tinajero Bob Geggie Jim Winder Paul Loehr Jim Ferryman, Board Chair Juanita Skillman Doug Davert, Board Vice Chair Simon Watson DIRECTORS ABSENT: OTHERS PRESENT: Bill Dalton Brad Hogin, General Counsel Ed Soong Public Resources Advisory Group Jennifer Christian Mayer Hoffman McCann and Stephen Parker, Mayer Hoffman McCann Toby Weissert, Carollo Engineers (3) APPOINTMENT OF CHAIR PRO TEM No appointment was necessary. (4) PUBLIC COMMENTS There were no public comments. (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. Minutes of the Administration Committee November 14, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services,did not give a report. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, briefly reported the agreement with the Orange County Water District regarding the GWRS will be reviewed in detail and revised, if necessary, prior to operating at full capacity. Mr. Hogin also informed the Committee members that agreements with SAW PA re SARI Line will also be reviewed and updated, if necessary. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the October 10, 2007 meeting of the Administration Committee. Director Driscoll abstained. b. ADM07-52 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to 1)Approve Change Order No. 2 to Purchase Order No. 55952-OS, a sole-source agreement, issued to Louis Allen Worldwide for management and leadership training services,adding four one-year renewal periods effective January 1, 2008 through December 31, 2008, authorizing $28,800 for this period, and $24,000 for all subsequent renewal periods,for a total amount not to exceed $253,815; and, 2)Approve a 5% per year cost escalation. END OF CONSENT CALENDAR (10) ACTION ITEMS a. ADM07-53 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to receive and file: 1)Comprehensive Annual Financial Report for the year ended June 30, 2007, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; 2) Report on Compliance and Internal Control for the year ended June 30, 2007; and 3) Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. Minutes of the Administration Committee November 14, 2007 Page 3 b. ADM07-54 Director Miller indicated his concern of seeing only one option to issue the certificates of participation proposed with a fixed rate, but no information for issuance with a variable rate and its applicable inferences. A workshop was proposed to be held to review debt policies. A substitute motion was made to bring this item back to the Administration Committee with further information; however, due to critical timing of the budgeting process,this would cause a delay of three months for COP issuance. It was then proposed that the following item be sent to the Board of Directors for consideration along with the requested additional information,with no recommendation from the committee: 1)Adopt Resolution No. OCSD-_,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 2007B,Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $300,000,000,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; and, 2)The Orange County Sanitation District Financing Corporation approves the documents supporting and authorizing the Certificates of Participation, Series 2007B in an amount not to exceed $300 million. c. ADM07-55 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to: 1)Approve a sole source purchase order to IBM Corporation for the purchase of IBM Maximo Enterprise Asset Management software for replacement of the Computerized Maintenance Management System, for a total amount of$592,932; and, 2)Approve a 5% contingency($29,647). d. ADM0756 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to: 1)Authorize a renewal to the Master Contract with Xerox, Inc., for an additional five-year period, December 1, 2007 through November 30,2012,for a total amount not to exceed $233,000 per year, and color copies at$.09 per impression;and, 2)Authorize a maximum 10%contingency($23,300)per year. e. ADM0757 MOVED, SECONDED AND DULY CARRIED:Approve a sole source Consultant Services Agreement with Carollo Engineers to complete a sewer rate study in an amount not to exceed $156,508. Minutes of the Administration Committee November 14, 2007 Page 4 f. ADM07-58 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve an extension of the Additional Retiree Benefit Account agreement with Orange County Employees Retirement System, extending the contract for a period of up to 90 days. (11) INFORMATIONAL ITEMS a. ADM07-59 Labor Relations Program Update Jeff Reed, Manager of Human Resources and Employee Relations, and Paul Loehr, Employee Relations Supervisor, briefly updated the committee members on the progress in implementing the Memorandum of Understanding provisions as ratified by the Board of Directors. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(1). There was no closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for December 12, 2007, at 5 p.m. (16)ADJOURNMENT The Chair declared the meeting adjourned at 6:30 p.m. Submitted by: 6-u-a 1110 Kovac Committee Secretary STATE OF CALIFORNIA) ) SS. COUNTY OF ORANGE ) Pursuant to California Government Code Section 54954.2, 1 hereby certify that the Notice and Agenda for the Administration Committee Meeting of Orange County Sanitation District to be held on November 14, 2007, was duly posted for public inspection in the main lobby of the Districts'offices on November 7, 2007. IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of November 2007. Lilia Kovac, Committee Secretary Orange County Sanitation District HADEPTWGENDAV DMIN COMMITTEEMENDA CEITIFICATION.DOC ice;, ORANGE COUNTY SANITATION DISTRICT November 7, 2007 U141862 2411 ease (1141 Mli(MF: � tlIYYIN.mtl.Mn m.nll . 111 a: N., 8m 0121 ru"ncUV7201 2? NOTICE OF MEETING � ❑E:%ZL+8121 acme add.: m844 eFa Awn„i ADMINISTRATION COMMITTEE FvkJrT all Valley.CA IM7118 7118 Finance, Human Resources and Information Technology Minutiae Iganeies titles ORANGE COUNTY SANITATION DISTRICT Anandun S. are "" Iia'*Boa WEDNESDAY, NOVEMBER 14, 2007 - 5:00 P.M. I.wrrlbm FUllsrHn alt.'a U '" n ,„1ne DISTRICT'S ADMINISTRATIVE OFFICES Hunhnlgwl 8aeub evens 10844 ELLIS AVENUE is P:ilme Hah"' FOUNTAIN VALLEY, CALIFORNIA 92708 a hr" All sa;h wvdw.ocso.corvt Nelgac, dl"r:0 _ a la "w !'inans t. 4 A ala 2?rxltaanr:h .slenhsl A regular meeting of the Administration Committee of the Orange rO Villa PA PeM County Sanitation District will be held at the above location, date Bnbd I dd and time. �Oacnty al Dnnsa Waite" Districts ,,Vd M. mw's' C111 Water Districts Irwnu Hmmh To maintain ,crld-cleas leadership in wastewater end water resource management. T ! M b IME I�` L ADMINISTRATION COMMITTEE MEETING DATES L Meeting Date Board Meeting Dates I November 14, 2007 November 28, 2007 i1 December 12, 2007 'December 19, 2007 L January 2008 — Dark January 23, 2008 , February 13, 2008 February 27, 2008 L. March 12, 2008 March 26, 2008 April 9, 2008 April 23, 2008 L May 14, 2008 May 28, 2008 I, Junell, 2008 June 25, 2008 July 9, 2008 July 23, 2008 -- AUGUST DARK August 27, 2008 L September 10, 2008 September 17, 2008 I October 1, 2008 October 22, 2008 L f. *Meetings being held the third Wednesday of the month. L L I L I II 'UI L r r ROLL CALL ADMINISTRATION COMMITTEE Finance, Human Resources and Information Technology Meeting Date: November 14, 2007 Time: 5:00 p.m. r Adjourn: COMMITTEE MEMBERS (14) r Mark Waldman Chair Phil Luebben Ice Chair Steven Choi Bill Dalton Jon Dumibu Rich Freschi Darryl Miller Joy Neu ebauer Chris Norb Ken Parker r Sal Tinajero Jim Winder James M. Ferryman Board Chair Doug Davert Board Vice Chair OTHERS Brad H in, General Counsel r STAFF Jim Ruth, General Manager Bob Ghirelli,Assistant General Manager Nick Arhontes, Director of Operations & Maint. r Jim Herberg, Director of Engineering Ed Torres, Director of Technical Services Lorenzo Tyner, Director of Finance and Administrative Services Lilia Kovac, Committee Secretary s Jeff Reed, Human Resources and Employee Relations Manager Mike White, Controller r r WWWttagendaVdmin Commfttw\l101102.Roll Call.dm w AGENDA REGULAR MEETING OF THE ADMINISTRATION COMMITTEE J ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, NOVEMBER 14, 2007, AT 5:00 P.M. .r ADMINISTRATIVE OFFICE J 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com (1) PLEDGE OF ALLEGIANCE w (2) DECLARATION OF QUORUM J (3) APPOINTMENT OF CHAIR PRO TEM, IF NECESSARY J (4) PUBLIC COMMENTS (5) REPORT OF COMMITTEE CHAIR (6) REPORT OF GENERAL MANAGER .. (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES (8) REPORT OF GENERAL COUNSEL (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not r specifically removed from same, as follows: a. Approve minutes of the October 10, 2007 meeting of the Administration Committee. ..f Y� Book Page I November 14, 2007 Page 2 b. ADM07-52 Recommend to the Board of Directors to 1)Approve Change Order No. 2 to Purchase Order No. 55952-OS, a sole-source agreement, issued to Louis Allen Worldwide for management and leadership training services, adding four one-year renewal periods effective January 1, 2008 through Li December 31, 2008, authorizing $28,800 for this period, and $24,000 for all subsequent renewal periods,for a total amount not to exceed $253,815; and, I 2)Approve a 5% per year cost escalation. (Book Page 8) 1� END OF CONSENT CALENDAR C. Consideration of items deleted from Consent Calendar, if any. 4 (10) ACTION ITEMS a. ADM07-53 Recommend to the Board of Directors to receive and file: 1) Comprehensive Annual Financial Report for the year ended June 30, 2007, prepared by staff iJ and audited by Mayer Hoffman McCann, Certified Public Accountants; 2) Report on Compliance and Internal Control for the year ended June 30, I i 2007; and Li 3) Independent Accountants' Report on Agreed-Upon Procedures Applied to ( j Appropriations Limit Worksheets. (Book Page 10) �J b. ADM07-54 Recommend that the Board of Directors to: 1)Adopt Resolution No. OCSD - I � a Resolution of the Board of Directors of the Orange County Sanitation u District Authorizing the Execution and Delivery by the District of an Installment Purchase Agreement, a Trust Agreement, and a Continuing -I Disclosure Agreement in connection with the execution and delivery of L Orange County Sanitation District Certificates of Participation, Series 2007B, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $300,000,000, Authorizing the Distribution of an Official Notice Inviting Bids and an Official y Statement in Connection with the Offering and Sale of such Certificates and Authorizing the Execution of Necessary Documents and Related Actions; U and, 2)The Orange County Sanitation District Financing Corporation approves the documents supporting and authorizing the Certificates of Participation, Series 2007E in an amount not to exceed $300 million. (Book Page 16) C. ADM07-55 Recommend to the Board of Directors to: 1)Approve a sole source 4 purchase order to IBM Corporation for the purchase of IBM Maximo Enterprise Asset Management software for replacement of the Computerized Maintenance Management System, for a total amount of$592,932; and, L 2)Approve a 5% contingency($29,647). (Book Page 220) u Book Page 2 November 14, 2007 Page 3 d. ADM07-56 Recommend to the Board of Directors to: 1)Authorize a renewal to the Master Contract with Xerox, Inc., for an additional five-year period, December 1, 2007 through November 30, 2012, for a total amount not to exceed $233,000 per year, and color copies at$.09 per impression; and, 2)Authorize a maximum 10%contingency($23,300) per year. (Book Page 222) r e. ADM07-57 Approve a sole source Consultant Services Agreement with Carollo Engineers to complete a sewer rate study in an amount not to exceed r $156,508. (Book Page 223) f. ADM07-58 Recommend to the Board of Directors to approve an extension of the r Additional Retiree Benefit Account agreement with Orange County Employees Retirement System, extending the contract for a period of up to 90 days. (Book Page 226) r (11) INFORMATIONAL ITEMS a. ADM07-59 Labor Relations Program Update (Book Page 229) (12) CLOSED SESSION d I During the coulee of conducting tha business set foM on this agenda as a regular meeting of the Commidee, i the Chair may convene the Committee in dosed session to consider matters of pending real estate negotiations, ( pending or potential litgation,or personnel matters, pursuant to Government Code Sections 54956.8,54956.9, Mai 54957 or 54957.6,as noted. i Reportsrelating to (a) purchase and sale of real property; (b) matters of pending or potential litigation;employee ee actions or negotiations with employee representatives; or which are exempt Rom public disclosure r I under the California Public Records Act, may be reviewed by the Committee during a permitted dosed session and are not available for public inspection. At such time as final actions are taken by the Committee on any of these Ro l the ecls, minutes will reflect ell required disclosures-of information. a. Convene in closed session. b. Reconvene in regular session. c. Consideration of action, if any, on matters considered in closed session. �+ (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY r (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT .J (15) FUTURE MEETING DATES r The next regular Administration Committee meeting is scheduled for December 12, 2007, at 5 P.M. (16) ADJOURNMENT r Book Page 3 November 14, 2007 Page 4 Agenda Posting: 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 less 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. I l Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for I� discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency item or because j there is a need to take immediate action, which need came to the attention of the Committee subsequent to the u 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. i' Public Comments: Any member of the public may address the Administration Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be deferred 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 u the Committee except as authorized by Section 54954.2(b). I Consent Calendar: Al matters placed on the consent calendar are considered as not requiring discussion or further L explanation,and unless a particular item is requested to be removed from the consent calendar by a Director of staff member,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. ILr'i All items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. i Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held u within five(5)days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adjournment: 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 u 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 Committee Members: For any questions on the agenda or to place any items on the agenda, Committee members should contact the Committee Chair or Clerk of the Board ten days in advance of the Committee meeting. Committee Chair: Mark Waldman (714)827-1969 Committee Secretary: Dlia Kovac (714)593-7124 IkovacCdrocsd.com L General Manager: Jim Ruth (714)593.7110 innhfdocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 rghirellifdocsd.00m Director of Finance and Lorenzo Tyner (714)593-7550 kvnenaaZocsd.com Administrative Services Human Resources and Employee Jeff Reed (714)593-7144 ireedrctocsd.corn Relations Manager Lrl H:1dep0agendalAdmin Committee\l 107103.111407 Administration Agenda.dx L L Book Page 4 r MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, October 10, 2007, at 6:00 P.M. r A meeting of the Administration Committee of the Orange County Sanitation District was held on October 10, 2007. at 5:00 p.m., in the Sanitation District's Administrative Office. r (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli,Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services '+ Steven Choi Mike White, Controller Bill Dalton Like Kovac, Committee Secretary Jon Dumitru Norbert Gaia Rich Freschi Bob Gaggle Darryl Miller Randy Kleinman Joy Neugebauer Jeff Reed r Chris Norby Ken Parker OTHERS PRESENT: Sal Tinajero Brad Hogin, General Counsel Jim Winder Shirish Patel, Lance, Soil & Lunghard Jim Ferryman, Board Chair Bryan Gruber, Lance, Sol] & Lunghard Doug Davert, Board Vice Chair ` DIRECTORS ABSENT: r (3) APPOINTMENT OF CHAIR PRO TEM r No appointment was necessary. (4) PUBLIC COMMENTS r There were no public comments. r (6) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. r (6) REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. r r r Book Page 5 Minutes of the Administration Committee L October 10,2007 Page 2 V (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. (8) REPORT OF GENERAL COUNSEL , , Brad Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMSr, Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the September 12, 2007 meeting of the Administration Committee. L END OF CONSENT CALENDAR W (10) ACTION ITEMS a. ADM07-49 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve a Professional Services Agreement with Aon Risk Services Inc., for an Owner Controlled Insurance Program Broker/Administrator(OCIP), Specification No. CS-2007-347BD, in an amount not to exceed 0.3955%of total construction value(minimum of $150,000/yr.), for a one-year period, with four additional one-year renewal options. (11) INFORMATIONAL ITEMS a. ADM07-50 Internal Audit Report—Groundwater Replenishment System Construction Agreement with the Orange County Water District. Mr. Shirish Patel and Mr. Bryan Gruber of Lance, Soil and Longhard, 6a reported the results of their audit as directed by Subcommittee Directors Waldman, Parker and Luebben. Documentation was found to be in an overall reasonable order indicating OCSD had paid its agreed-upon share J of costs. Expenses included within the audited billings were found to have been substantiated by supporting documentation. One proposed recommendation directed at the Sanitation District was included in the auditor's report to minimize inaccuracies. I.d L J L Book Page 6 r Minutes of the Administration Committee October 10, 2007 Page 3 r b. ADM07-51 Additional Retiree Benefit Account(ARBA) Update Human Resources and Employee Relations Manager, Jeff Reed, informed the Administration Committee members that AB 1124 had just been signed by the governor, and may be considered in how the r Sanitation District chooses to administer its retiree health insurance benefit. It was noted that the agreement with OCERS to administer ARBA will be expiring in December 2007. A detailed report will be provided at r the November Administration Committee meeting. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957fb1(1). r There was no closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR r ACTION AND STAFF REPORT There were none. r (15) FUTURE MEETING DATES r The next regular Administration Committee meeting is scheduled for November 14, 2007, at 5 p.m. r (16)ADJOURNMENT The Chair declared the meeting adjourned at 5:30 p.m. r Submitted by: /J) Ulia Kovac r Committee Secretary H:WepMgendaMmin CommiUee11UW1101007 Admin Minules.doc r Book Page 7 r ADMINISTRATION COMMITTEE " De- T.I=,. 11/14/2007 I]/28/07 AGENDA REPORT [Am�w7� Item Num6e Orange County Sanitation District ,r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance &Administrative Services r SUBJECT: PROFESSION OF MANAGEMENT TRAINING -AGREEMENT CHANGE ORDER NO. 2 r GENERAL MANAGER'S RECOMMENDATION r 1. Approve Change Order No. 2 to Purchase Order No. 55952-OS, a sole-source agreement, issued to Louis Allen Worldwide for management and leadership training services, adding four one-year renewal periods effective January 1, 2008 through December 31, 2008, authorizing $28,800 for this period, and $24,000 for all subsequent renewal periods, for a total amount not to exceed $253,815; and, r 2. Approve a 5% per year cost escalation. r SUMMARY The General Manager requests an increase in the contract with Louis Allen Worldwide .. for OCSD's Profession of Management (POM) training program. The continuation of the Profession of Management training program will ensure sustainment of OCSD's management principles and competencies that the initial training sessions have instilled in the agency. Additionally, it ensures consistency and continuity at all levels of management. The additional funding provides continued POM training for the next four years. The contract is renewable annually. r PRIOR COMMITTEE/BOARD ACTIONS February 14, 2007— Management and Leadership Training Change Order No. 1 requesting an additional program funding of$106,765 to amend the contract to $153,015 total. ADDITIONAL INFORMATION Louis Allen Worldwide is an industry leader in customized management development programs. Since 1964, Louis Allen has served over 5000 organizations in a variety of industries, including government agencies. r r Form No,owrvia no�.w:owrm� Page 1 r Book Page 8 When the General Manager originally sought to model OCSD's program after the City of Anaheim's successful management training, OCSD selected Louis Allen based on the j l outstanding program the vendor had developed and implemented for Anaheim. I i During 2006, OCSD's EMT and Managers participated in Louis Allen's Profession of I i Management program, and OCSD's Supervisors participated in the program during L I 2007. This completed the initial training for all of management. The additional program funding provides the requisite skills to ensure a common knowledge base across OCSD management, providing initial information for the organization's future leaders and refresher training for current management. The estimated minimum annual cost is $9,600 for two (2) classes and the maximum I.i annual cost is $24,000 for five (5) classes. Training will be allocated based on participant need. The order of participation priority is: 1) new management; 2) development of future leaders. The proposed sustainment and refresher training will provide a minimum of 32 training seats annually. The anticipated minimum and maximum four-year costs for the program is as follows: Anticipated Program Costs Minimum Maximum Item $4,800 $ 4,8W Course Development one-time cost,year one on $9,6W $24 000 Recurring Annual Costs tiro classes vs.five classes u $14,400 $28,800 First-Year Program Costs _ $10,800 $25,200 Average Annual Program Costs $43,200 $100,800 Total Four-Year Program Costs V Procuring Louis Allen Worldwide's services will ensure that OCSD continues to implement a high-quality customized management training program that meets the needs of the organization. This request complies with authority levels of the Sanitation District's Delegation of �I Authority. This Rem has not been budgeted. JDR:LT:JR:RS u L L� L' Fom NO.O IM3 ry,y�gpy� • age2 L Book Page 9 ADMINISTRATION COMMITTEE " 07 Tu ad.aoo-. - roe 11/2e107 AGENDA REPORT 1mn Dan Number no"o7-si Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: ORANGE COUNTY SANITATION DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) FOR THE YEAR ENDED JUNE 30, 2007 GENERAL MANAGER'S RECOMMENDATION Receive and file the: (1) Sanitation District's Comprehensive Annual Financial Report for the year ended June 30, 2007, prepared by staff and audited by Mayer Hoffman McCann, Certified Public Accountants; r (2) Report on Compliance and Internal Control for the year ended June 30, 2007; and r (3) Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets SUMMARY The Sanitation District's independent auditors, Mayer Hoffman McCann P.C. (MHM), have completed their examination of the Sanitation District's financial statements for the year ended June 30, 2007, and have issued an unqualified opinion. Each year, the Administration Committee reviews the results of the audit and the corresponding Auditors report to the Committee. During the audit performed by MHM, no matters involving the internal control over financial reporting and its operations that the auditors consider to be material weakness were noted. Jennifer Christian, Partner, will attend the meeting to respond to any questions of Directors. This year, staff has again prepared the Comprehensive Annual Financial Report that includes the audited financial statements. For the last thirteen years, the Sanitation " District has earned the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA). This year's report will again be submitted to GFOA for their review in anticipation of another award. r r Form NO.WF1023 Ror,eotl'.OY012] Page 1 r Book Page 10 u The Comprehensive Annual Financial Report, including the Auditor's opinion letter, the Auditor's Report to the Committee, the Auditor's Report on Compliance and Internal Control Over Financial Reporting, the Auditor's Appropriations Limit Report, and the Auditor's Single Audit Report are attached. ATTACHMENTS 1. Comprehensive Annual Financial Report for the year ended June 30, 2007. u (Separately bound document.) 2. Report on Compliance and Internal Control Over Financial Reporting. 3. Independent Accountants' Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. IU IU U rLI U L u u J Form a4 aM IM RsiWl:OY91M Page 2 Book Page 11 U Mayer Hoff tnan McCann P.C. r An nccaenacnr CP.;:,, Conrad Government Services Division 23Gi 'wool; Cncp Se.to 27E r 949-_:_-2C2_ o 94g 2c3.5-2_ Board of Directors Orange County Sanitation District Fountain Valley,CA In planning and performing our audit of the financial statements of the Orange County Sanitation r District ("District") as of and for the year ended June 30, 2007, in accordance with auditing standards generally accepted in the United States of America, we considered Orange County Sanitation District's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly,we do not express an opinion on the effectiveness of the District's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. Although no significant deficiencies or material weaknesses were identified, we observed other deficiencies in internal controls that were not deemed to be significant deficiencies as discussed below. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the District's financial statements that is more than inconsequential will not be prevented or detected by the District's internal control. We observed the following matters, which were not deemed to be significant deficiencies in internal control,and offer these comments and suggestions. (1) Purchase Orders and Invoice Approvals During our test of cash disbursements transactions, we noted that for those employees that were granted purchase requisition approvals up to $2.000 could request and approve a purchase requisition and also approve the invoice without a second authorization. While the Purchasing Department does review and approve every purchase order, the Purchasing Department would not always have enough knowledge of departmental activities to detect fraudulent overcharges or unnecessary purchases. Strong internal controls require two knowledgeable individuals to be involved in every transaction. Recommendation We recommend that the District evaluate the possibility of modifying the purchasing and approval system to not allow the same individual who initiates a purchase request to also approve the vendor invoice without a second departmental approval. Book Page 12 Orange County Sanitation District Page 2 r L Q) Petty Cash The District's petty cash policy allows for reimbursements up to$100. During our audit, L we noted that periodically petty cash is used to reimburse transactions over$100 with the approval of the Controller. Recommendation L We recommend that the petty cash policy be modified to reflect the actual practice of the District. The policy should address the Controller's authority to approve reimbursements over$100 and specify a maximum amount that the Controller can approve. 1. (3) System User Access LJ During our review of computer system access controls, we investigated user access for terminated employees. The District's policy is to change a terminated employee's password and disable the account immediately upon termination. After the employees' mr department is sure there is no pertinent data remaining in the account, the District personnel delete the account. Our review of terminated employees detected that the passwords had been changed;however, user accounts had not been deleted for six former employees who had been terminated for over three months. We were informed that the policy had not been adhered to in a timely manner due to employee turnover in the responsible department. L Recommendation To prevent unauthorized access, we recommend that terminated employees' accounts be L disabled immediately upon termination. This communication is intended solely for the information and use of management, Board of Directors and others within the organization, and is not intended to be and should not be used by L anyone other than these specified parties. /Zyo A PL4 Irvine.California October 25,2007 V i L L L i V Book Page 13 Mayer Hoffman McCann P.G. In InciiNna6nt CPA Firm Conrad Government Services Division 2301 Dupont Drive.6uac 200 ovine.California 92612 r 949474 2020 ph 949 263-5520 h ..mhrn-pc.corn Board of Directors Orange County Sanitation District _ Fountain Valley. California _ Independent Accountants' Repon on Aueed-Upon Procedures Anplicd to Annropriations Limit Worksheets We have applied the procedures enumerated below to the appropriations limit worksheets prepared by the Orange County Sanitation District for the year ended June 30, 2007. These _ procedures, which were agreed to by the Orange County Sanitation District and the League of California Cities (as presented in the League publication entitled Article A IIB Appropriations Limitation Uniform Guidelines) were performed solely to assist the Orange County Sanitation r District in meeting the requirements of Section 1.5 of Article XIIIB of the California Constitution. This engagement to apply agreed-upon procedures was performed in accordance with standards r established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the r purpose for which this report has been requested or for any other purpose. The procedures performed and the results of those procedures were as follows: 1. We obtained the worksheets refered to above and compared the limit and annual adjustment factors included in those worksheets to the limit and annual adjustment r factors that were adopted by resolution of the Board of Directors. We also compared the population and inflation options included in the aforementioned worksheets to those that were selected by a recorded vote. Results: No exceptions were noted as a result of our procedures. r 2. We recalculated the mathematical computations reflected in the District worksheets. Results: No exceptions were noted as a result of our procedures. r r Book Page 14 oard of Directors �. Orange County Sanitation District Page Two r 3. We compared the current year information used to determine the current year limit and found that it agreed to worksheets prepared by the District and to information provided by the State Department of Finance. Results: No exceptions were noted as a result of our procedures. 4. We compared the amount of the prior year appropriations limit presented in the worksheets to the amount adopted by the Board of Directors for the prior yew. Results: No exceptions were noted as a result of our procedures. We were not engaged to, and did not, perform an audit, the objective of which would be the expression of an opinion on the worksheets referred to above. Accordingly, we do not express such an opinion. Had we performed additional procedures,other maners might have come to our _ attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriation limit for the base year, as defined by the League publication entitled Article X//IB Appropriations Limitation Uniform Guidelines. This report is intended solely for the information and use of the specified users listed above and is not intended to be and should not be used by anyone other than these specified parties. _ Irvine, California October 25, 2007 r Book Page IS ADMINISTRATION COMMITTEE A-tin0D T�O"tB d wt t/407Vo 'AD0mAGENDA REPORT ADM754 Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services r SUBJECT: CERTIFICATES OF PARTICIPATION (COPS), SERIES 2007E r GENERAL MANAGER'S RECOMMENDATION (1) Adopt Resolution No. OCSD , 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 r Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2007B,Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to r Exceed $300,000,000, 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. r (2) The Orange County Sanitation District Financing Corporation approve the documents supporting and authorizing the Certificates of Participation, Series 2007E in an amount r not to exceed $300 million. SUMMARY `r The Administration Committee and the Board of Directors have previously authorized the execution and delivery of$300 million of new Certificates of Participation and approved the financing team consisting of an independent financial advisor, Public Resources Advisory Group, and bond and disclosure counsel, Fulbright&Jaworski. Woodruff, Spradlin & Smart, the District's General Counsel, has also been assisting staff. �+ The purpose of the financing is to provide a portion of the funding required for the capital improvement program of FY 2006-07 and FY 2007-08. None of the proceeds will be used for operations and maintenance needs. This financing is included in the 2007-08 approved budget. .r The financing is structured as new fixed rate Certificates of Participation that is to be sold in a competitive sale. The draft documents will be presented to the Board and the OCSD Financing Corporation on November 28, 2007, for final approval. Staff and consultants will make a brief presentation and provide an overview of the draft documents and the financing schedule at the Administration Committee meeting. A current Financing Schedule is attached. r r r Form No.ow-toz.a RvvMc:M1M7 Page 1 r Book Page 16 L PRIOR COMMITTEE/BOARD ACTIONS June 27, 2007: Approved Resolution declaring District's intent to reimburse ourselves for capital outlays from a future long-tens financing. September 12, 2007: Approved a Consulting Services Agreement with Fulbright&Jaworski, L.L.P to provide bond counsel services. September 26, 2007: Directed staff to initiate procedures to issue up to $300 million in new L fixed-rate Certificates of Participation (COP)debt. L ADDITIONAL INFORMATION The Consultant Services Agreements with PRAG and Orrick total a not-to-exceed amount of L $185,000, excluding expenses. This is approximately 0.062% of the COP issue. These and other costs, such as printing the Official Statement, underwriters' discount, rating agency fees j I and trustee's fees will be paid from the proceeds of the borrowing. The$300 million that is borrowed will be repaid with interest over the next 30 years. The total j; interest cost is expected to be less than 5.00% (or less than approximately$286 million). Some of the interest cost will be offset by interest earnings while the funds are waiting to be used. The Board of Directors and the Financing Corporation will each be required to adopt separate L 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 V OCSD Board. The OCSD Resolution authorizes the execution and delivery of certain legal documents and the L execution and delivery of Certificates of Participation evidencing principal in an aggregate amount of not to exceed $300,000,000 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 L A CONTINUING DISCLOSURE AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2007B,AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED$300,000,000,APPROVING A NOTICE OF INTENTION TO SELL, AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL NOTICE INVITING BIDS AND AN OFFICIAL I STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF SUCH U CERTIFICATES, AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND RELATED ACTIONS.' j The Resolution of the Corporation is somewhat shorter and simpler. It authorizes three actions 1, that are similarly enumerated in the title as follows: L Fomt No.W iw3 Reulrt OYO1M Page 2 ' Book Page 17 L "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 r ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2007B; AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT-TO-EXCEED $300,000,000 AND; AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES AND RELATED ACTIONS." r Following is a chart listing the remaining steps to be completed for the issuance of the COP Series 2007E debt issuance: ➢ Finalize debt service and cash flow modeling November y Board approval of legal and disclosure documents r D Marketing and Sale of the COPS through a Competitive Sale Process December D Execute$300 million Fixed-Rate COP issue D Investment of Bond Proceeds ,r D Debt Administration _ ATTACHMENTS 1. District Resolution 2. Corporation Resolution 3. Draft Trust Agreement 4. Draft Installment Purchase Agreement 5. Draft Continuing Disclosure Agreement �+ 8. Draft Preliminary Official Statement 7. Draft Official Notice Inviting Bids 8. Draft Notice of Intention to Sell r JDR:LT:MW r F..No..1033 amhaE:Mlw Page 3 r Book Page 18 RESOLUTION NO. OCSD 07- 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 2007B, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $300,000,000, 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 r 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 r Purchase Agreement"), by and between the District and the Corporation; WHEREAS, the Corporation intends to assign without recourse certain of its d- 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; r 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"); Book Page 19 V 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 r 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 6' events on an ongoing basis; WHEREAS, to cause such requirement to be satisfied, the District desires to r 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: Yr (a) the Installment Purchase Agreement; (b) the Trust Agreement; (c) the Notice of Intention to Sell; .y (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; w 2 V Book Page 20 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 $300,000,000, 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 $300,000,000, 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 r 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 r 3 Book Page 21 I LA I 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. V 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 y 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 y 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. u 4 r Book Page 22 rl ,. 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 r carrying out the execution and delivery of the Certificates and the transactions contemplated by the notices, agreements and documents referenced in this Resolution. .r 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. r PASSED AND ADOPTED at a regular meeting held on November 28, 2007. Chair r ATTEST: Clerk of the Board r APPROVED: r General Counsel, Orange County Sanitation District r r r r r 5 r Book Page 23 y STATE OF CALIFORNIA ) ss COUNTY OF ORANGE ) L 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 07- was passed and adopted at a regular meeting of said Board on the 281" day of November 2007, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: `r IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this 28t' day of November 2007. 6� Clerk of the Board of Directors r Orange County Sanitation District it Y. L,1 V 6. Book Page 24 .. 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 2007B, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $300,000,000 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 .r 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 Is 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; .. Book Page 25 fd 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 actions authorized hereby L 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 $300,000,000, 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 L 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 66 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 IL 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 $300,000,000, 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. V ii u 2 u Book Page 26 Section 6. 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 November 28, 2007. President, Orange County Sanitation District Financing Corporation ATTEST: s, Clerk of the Board Orange County Sanitation District Financing Corporation APPROVED: General Counsel, Orange County Sanitation District Financing Corporation 3 r Book Page 27 STATE OF CALIFORNIA ) �' ss COUNTY OF ORANGE ) I 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 28r" day of November 2007, by the following vote, to wit: AYES: NOES: ABSTENTIONS: tw ABSENT: 11, I� IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District Financing Corporation this 281" day of L November 2007. I r Clerk of the Board of Directors r Orange County Sanitation District L II. 1�{ 6,1 1� II Y„1 L V Book Page 28 Fulbright& Jaworski L.L.P.—Draft 11/2/07 r r TRUST AGREEMENT r by and among r r UNION BANK OF CALIFORNIA,N.A., as Trustee, L ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r r and r ORANGE COUNTY SANITATION DISTRICT r Dated as of December 1, 2007 r Relating to $300,000,000 r Orange County Sanitation District Certificates of Participation Series 2007B r r r 11-2 Trust Ag .Ld. Book Page 29 Fulbright&Jaworski L.L.P.—Draft 11/2/07 r r r TRUST AGREEMENT r by and among r d UNION BANK OF CALIFORNIA,N.A., as Trustee, r ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r .. and .a ORANGE COUNTY SANITATION DISTRICT r Dated as of December I, 2007 Relating to $300,000,000 r Orange County Sanitation District Certificates of Participation Series 2007B r r r 11-2 True Agr..td. Book Page 29 r TABLE OF CONTENTS r Page ARTICLE I DEFINITIONS;EQUAL SECURITY r Section 1.01. Definitions........................................................................................................ 1 Section I.02. Definitions in Installment Purchase Agreement..............................................9 Section 1.03. Equal Security..................................................................................................9 r ARTICLE 11 TERMS AND CONDITIONS OF CERTIFICATES r Section 2.01. Preparation and Delivery of Certificates........................................................ 10 Section 2.02. Denomination,Medium and Dating of Certificates....................................... 10 Section 2.03. Payment Dates of Certificates; Interest Computation.................................... 10 r ........................................................................................................................ I Section 2.04. Form of Certificates....................................................................................... 12 Section 2.05. Execution of Certificates and Replacement Certificates............................... 12 r Section 2.06. Transfer and Payment of Certificates;Exchange of Certificates................... 12 Section2.07. Certificate Registration Books....................................................................... 13 Section2.08. Temporary Certificates.................................................................................. 13 �+ Section 2.09. Certificates Mutilated, Lost,Destroyed or Stolen......................................... 13 Section2.10. Book-Entry System........................................................................................ 14 r ARTICLE III PROCEEDS OF CERTIFICATES Section 3.01. Delivery of Certificates.................................................................................. 16 r Section 3.02. Deposit of Proceeds of Certificates................................................................ 16 Section 3.03. Costs of Issuance Fund.................................................................................. 16 Section 3.04. Use of Moneys in the Acquisition Fund........................................................ 16 r ARTICLE N PREPAYMENT OF CERTIFICATES rSection 4.01. Optional Prepayment..................................................................................... 17 Section 4.02. Mandatory Sinking Account Prepayment...................................................... 18 Section 4.03. Selection of Certificates for Optional Prepayment........................................ 19 Section4.04. Notice of Prepayment.................................................................................... 19 Section 4.05. Partial Prepayment of Certificates.................................................................20 Section 4.06. Effect of Prepayment.....................................................................................20 r ARTICLE V ASSIGNMENT AND PLEDGE;FUNDS AND ACCOUNTS Section5.01. Assignment and Pledge..................................................................................20 Section5.02. Installment Payment Fund.............................................................................21 Section5.03. Reserve Fund.................................................................................................22 Section5.04. Rebate Fund...................................................................................................23 Section5.05. Investment of Moneys....................................................................................24 r i ti Book Page 30 V TABLE OF CONTENTS (continued) L4 PSP y ARTICLE VI COVENANTS Section 6.01. Compliance with Trust Agreement....................................................._.........25 Section 6.02. Compliance with Installment Purchase Agreement.......................................25 Section 6.03. Compliance with Master Agreement.............................................................25 . Section 6.04. Observance of Laws and Regulations............................................................25 I" Section6.05. Other Liens.....................................................................................................25 Section6.06. Prosecution and Defense of Suits..................................................................25 Section 6.07. Accounting Records and Statements.............................................................25 Section6.08. Tax Covenants...............................................................................................26 Section 6.09. Continuing Disclosure...................................................................................29 y Section6.10. Further Assurances.........................................................................................29 ARTICLE VII i , DEFAULT AND LIMITATIONS OF LIABILITY W Section 7.01. Action upon Event of Default........................................................................30 Section 7.02. Other Remedies of the Trustee......................................................................30 Section7.03. Non-Waiver....................................................................................................30 Section7.04. Remedies Not Exclusive................................................................................31 Section 7.05. Application of Amounts After Default..............................................._.........31 Section 7.06. Trustee May Enforce Claims Without Possession of Certificates.................32 Section7.07. Limitation on Suits.........................................................................................32 - Section 7.08. No Liability by the Corporation to the Owner...............................................32 r Section 7.09. No Liability by the District to the Owners.....................................................32 Section 7.10. No Liability of the Trustee to the Owners.....................................................32 ARTICLE Vlll L THE TRUSTEE Section 8.01. Employment of the Trustee; Duties...............................................................33 L Section 8.02. Removal and Resignation of the Trustee.......................................................33 Section 8.03. Compensation and Indemnification of the Trustee........................................34 Section 8.04. Protection of the Trustee................................................................................35 Ir ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT I Section9.01. Amendment or Supplement...........................................................................36 N Section 9.02. Disqualified Certificates................................................................................37 I Section 9.03. Endorsement or Replacement of Certificates After Amendment or L Supplement....................................................................................................37 Section 9.04. Amendment by Mutual Consent....................................................................37 ; Ld I Lr ii Book Page 31 r TABLE OF CONTENTS ,r (continued) page r ARTICLE X DEFEASANCE r Section 10.01. Discharge of Certificates and Trust Agreement.............................................38 Section10.02. Unclaimed Moneys........................................................................................39 ARTICLE XI MISCELLANEOUS Section 11.01. Benefits of Trust Agreement..........................................................................39 r Section 11.02. Successor Deemed Included in all References to Predecessor......................40 Section 11.03. Execution of Documents by Owners.............................................................40 Section 11.04. Waiver of Personal Liability..........................................................................40 r Section 11.05. Acquisition of Certificates by District...........................................................40 Section11.06. Content of Certificates...................................................................................40 Section11.07. Funds and Accounts.......................................................................................41 Section 11.08. Article and Section Headings,Gender and References.................................41 Section11.09. Partial Invalidity.............................................................................................41 Section11.10. California Law...............................................................................................42 r Section 11.11. Notices...........................................................................................................42 Section11.12. Effective Date................................................................................................42 Section 11.13. Execution in Counterparts..............................................................................43 r r r r r r III r Book Page 32 TRUST AGREEMENT THIS TRUST AGREEMENT (this "Trust Agreement'), dated as of December 1, 2007, by and among UNION BANK OF CALIFORNIA, N.A., 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, 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 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; r WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to the Trustee; WHEREAS, in consideration of such assignment and the execution and delivery of this Trust Agreement, the Trustee has agreed to execute and deliver Orange County Sanitation District Certificates of Participation, Series 2007B (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments,and the interest thereon; 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: r ARTICLE 1 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, r 11.2 TUU Ape .L, r Book Page 33 ICI 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: Ld "Acquisition Costs" means all costs of acquiring, constructing and installing the Project, including but not limited to: v (a) all costs which the Corporation or the District shall be required to pay to a _ manufacturer,vendor or contractor or any other Person under the terms of any contract or contracts for the construction,acquisition or installation of the Project; u (b) obligations of the Corporation or the District incurred for labor and I materials (including obligations payable to the Corporation or the District for actual 6+ out-of-pocket expenses of the Corporation or the District) in connection with the construction, acquisition or installation of the Project, including reimbursement to the Corporation or the District for all advances and payments made in connection with the 6d Project prior to or after delivery of the Certificates; (c) the costs of performance or other bonds and any and all types of insurance V that may be necessary or appropriate to have in effect during the course of construction, _ acquisition and installation of the Project; (d) all costs of engineering, architectural and other consulting services, including the actual out-of-pocket costs of the Corporation or the District for test borings, surveys, estimates, plans and specifications and preliminary investigations therefor, of development fees and sales commissions, and for supervising the construction, acquisition and installation of the Project, as well as for the performance of all other duties required by or consequent to the proper construction,acquisition and installation of the Project;and (e) any sums required to reimburse the Corporation or the District for �+ advances made by the Corporation or the District for any of the above items or for any other costs incurred and for work done by the Corporation or the District which the Corporation or the District determine are properly chargeable to the construction, 6+ acquisition or installation of the Project. I "Acquisition Fund" means the fund by that name established in accordance with u Section 3.04 hereof. "Authorized Corporation Representative" means the President,the Vice President, the �y 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 i Agreement. �+ "Authorized Denominations"means$5,000 and integral multiples thereof. Yy "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 u i-z T"m ngr«mm�as 2 - Book Page 34 r .r 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. r "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. r "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 r 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. "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 February 2 in each year and extending to the next succeeding February 1, both dates inclusive, except that the first Certificate Year shall begin on the Closing Date and end on February 1,2008. r "Certificates" means the Orange County Sanitation District Certificates of Participation, Series 2007B,executed and delivered by the Trustee pursuant hereto. "Closing Date" means December_,2007. "Code"means the Internal Revenue Code of 1986. r "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 r r r-2 Tun Ap..t E 3 r Book Page 35 "Depository" means the securities depository acting as Depository pursuant to U 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. �+ "Event of Default" shall have the meaning set forth in Section 6.01 of the Installment Purchase Agreement. u "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, �W (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 l.. listed in clause(a) or (b) of this clause(i) and which is rated at least"P-1" by Moody's; _ provided that, such obligations shall not include unit investment trusts or mutual fund obligations; V (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 it "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 La rated"Aaa"by Moody's and"AAA"by S&P;and (iv) bonds, debentures or notes issued by any Federal agency hereafter created lr 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 touts or .e mutual fund obligations. "Installment Payment Fund" means the fund by that name established in accordance �y 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 V 11-2T=Ape mlduc 4 tr Book Page 36 r "Interest Account" means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. "Interest Payment Date" means February 1 and August 1 of each year, commencing February 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. "Mandatory Sinking Account Payment" means the amount required to be deposited by the District in the Principal Account for the prepayment of Term Certificates pursuant to Section 4.02 hereof. r "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 ,r may from time to time be amended or supplemented in accordance with the terns 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 tern "Moody's" shall be deemed to refer to any other nationally recognized securities rating ,r 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 ,& 3aworski 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 r 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. 11-2 Tmn AVe wtdw 5 Book Page 37 V "Participating Underwriter" has the meaning ascribed thereto in the Continuing 'r Disclosure Agreement. I- "Permitted Investments" means any of the following, except to the extent not permitted L by the laws of the State as an investment for the moneys to be invested therein at the time of investment: (1) Government Obligations; _ . (2) Bonds, debentures, notes, participation certificates or other evidences of u 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 61 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 V (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 6+ "AA-"or higher by S&P; or which are rated by Moody's "VMIGI"or better and by S&P "A-I+" or better with respect to commercial paper, or "VMIGI" and "SP-1", respectively,with respect to municipal notes; L (4) Bank time deposits evidenced by certificates of deposit, deposit accounts, and bankers' acceptances, issued by any bank, trust company or national banking W association insured by the Federal Deposit Insurance Corporation(including the Tmstce); _ 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 W 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 r 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 govenunent 6• 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, V 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 Ly 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 L 11.2 T� Ageanmtd. 6 6r Book Page 38 r r 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 r 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 r 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 invested in the repurchase agreements and in which the Trustee has a perfected first lien r 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; r (8) Guaranteed investment contracts or similar funding agreements issued by insurance companies, provided that either the long term corporate debt of such insurance r 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 we fully and continuously secured by a valid and perfected first priority security interest in obligations described in r paragraph (1) 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 r' 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; r (9) Corporate commercial paper rated"P-l"or better by Moody's and"A-1+" or better by S&P at the time of investment; r (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 r of America or repurchase agreements secured by such obligations, and which are rated "AAAm" or "AAAm-G" by S&P and "P-l" by Moody's (including funds for which the Trustee or an affiliate provides investment advice or similar services); r (11) Deposits with the Local Agency Investment Fund of the State, as may otherwise be permitted by law; and r (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 r securities directly guaranteed by the U.S. government or its agencies and rated "AAAP' by S&P or a comparable rating by Moody's. r 11.2 T",.,Agmmmt. o 7 Book Page 39 "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. i Lr "Prepayment Account"means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. Ir "Principal Account" means the account by that name within the Installment Payment Fund established in accordance with Section 5.02 hereof. Ld "Principal Office" means the Trustee's principal corporate trust office in Los Angeles, California. Ir "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 y Section 5.04 hereof. "Rebate Requirement"has the meaning ascribed thereto in the Tax Certificate. v "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 V or not such day is a Business Day. "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. W "Reserve Fund" means the fund by that name established in accordance with Section 5.03 hereof. L.� "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 tens "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District. V 11.2 Trua Ag .t. oc S r Book Page 40 r r "State'means the State of California. "Tax Certificate" means the Tax Certificate executed by the District at the time of r 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. r "Term Certificates"means Certificates payable at or before their specified maturity date or dates from Mandatory Sinking Account Payments established for that purpose and calculated ,., to retire such Certificates on or before their specified maturity date or dates. "Trust Agreement" means this Trust Agreement, dated as of December 1, 2007, by and „y 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 Union Bank of California, N.A., 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. r "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. r, 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 r 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 r 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. r 11.2 Tuu Agr mmcdm 9 Book Page 41 6r ARTICLE II TERMS AND CONDITIONS OF CERTIFICATES L.I 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$300,000,000, 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 Payments shall constitute the interest evidenced thereby. The Certificates shall be numbered, _ with or without prefixes, as directed by the Trustee. Ir Section 2.02. Denomination. Medium and Dating of Certificates. The Certificates _ shall be designated "Orange County Sanitation District Certificates of Participation, Series 200711" 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. L. 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 6' 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 January 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, subject to prior prepayment, on February 1 of the years, in the amounts, and shall evidence interest accruing at the rates per annum set forth below: L+ L V L V y I7-2 bust Aff..E. oc 10 v Book Page 42 r Principal Payment Date Principal Interest (February 1) Component Rate 2009 $ % r 2010 20I1 2012 r 2013 2014 2015 r 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 r 2031 2032 2033 2034 2035 _ 2036 Except as otherwise provided in the Letter of Representations, payments of interest r 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 and prepayment premium, if any, evidenced by the Certificates, on their stated Principal Payment Dates or on prepayment in whole or in pan prior thereto, shall be made only upon presentation and surrender of the Certificates at the Principal Office. r (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 r 11-2 TY Aff m®Ldoc 11 r Book Page 43 V 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. Interest evidenced by the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30-day months. r 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 Replacement 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. 'r 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 u 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 LW 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 6" 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. The Trustee shall not be required to transfer or exchange any Certificate during the period commencing on the date five days before the date of selection of Certificates for prepayment and 6" ending on the date of mailing notice of such 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. ~' 11.2 Trm Ag .Ld. 12 Book Page 44 .r Section 2.07. Certificate Reeistration 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. r 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 r 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 Tmstee 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 r 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. 11.2 Tw Area td. 13 r Book Page 45 y 1 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 1" registration books maintained by the Trustee in the name of the Nominee, as nominee of the Depository. r 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 W 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. 6W (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 6' 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 61 Certificates, including any notice of prepayment, (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 LW 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. v (c) The District,the Corporation and the Trustee may treat and consider the Person in V 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, prepayment premium, if any, and interest evidenced by such Certificate, for the L purpose of selecting any Certificates,or portions thereof,to be prepaid,for the purpose of giving notices of prepayment and other 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 In the event of aprepayment of all or a portion of a Certificate,the Depository, tr O P po ry, in its discretion,(i)may request the Trustee to execute and deliver a new Certificate, or(ii) if DTC - is the sole Owner of such Certificate, shall make an appropriate notation on the Certificate w indicating the date and amounts of the reduction in principal evidenced thereby resulting from such prepayment, except in the case of final payment, in which case such Certificate must be - presented to the Trustee prior to payment. 6o �i-z-rNa Agewrnidac 14 �r Book Page 46 r r (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 r 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. r (f) 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 r 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. r (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 r 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 r 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 r 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. r 11-2TrotA®eement M 15 r Book Page 47 L (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, 6W respectively, as provided in the Letter of Representations or as otherwise instructed by the Depository. V (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 calendar days in advance of such record date to the extent possible. Notice to the Depository shall be given only when DTC is the sole Owner of the Certificates. ARTICLE III it 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. u 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: 6W (a) the Trustee shall deposit in the Costs of issuance Fund the amount of$ , u (b) the Trustee shall deposit in the Reserve Fund the amount of$ , which is equal to the initial Reserve Requirement;and (c) the Trustee shall deposit in the Acquisition Fund the amount of$ Section 3.03. Costs of Issuance Fund. The Trustee shall establish and maintain a V separate special fund to be held by the Trustee known as the Costs of Issuance Fund. 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 u 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 v 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 V Issuance Fund shall be closed. Section 3.04. Use of Moneys in the Acquisition Fund. The Trustee shall establish and maintain a separate special fund to be known as the Acquisition Fund. All moneys in the L 11.2 Trap Ag..Ldn 16 LJ Book Page 48 r r Acquisition Fund shall be held by the Trustee in trust and applied by the Trustee, as provided in this Section,to the payment of Acquisition Costs. . Before any payment is made from the Acquisition Fund by the Trustee,the District shall cause to be filed with the Trustee a Written Request of the District showing with respect to each payment to be made: r (a) the item number of the payment; (b) the name of the Person to whom payment is due; (c) the amount to be paid;and r (d) the purpose for which the obligation to be paid was incurred. Each such Written Request shall also state, and shall be sufficient evidence to the Trustee, (a) that obligations in the stated amounts have been incurred by the District or the Corporation, and(b)that each item thereof is a proper charge against the Acquisition Fund and is r an Acquisition Cost properly allocable to the Project. Each such Written Request shall further specify in reasonable detail the nature of the obligation to be paid. Upon receipt of each such Written Request,the Trustee shall pay the amount set forth in such Written Request as directed by the terns thereof. The Trustee need not make any such payment if it has received written notice of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of, any of the moneys to be so paid, which has not been released or will not be released simultaneously with such payment, unless a payment bond has been posted with the Trustee in the full amount of such lien or claim. r Upon the filing with the Trustee of a Written Certificate of the District(i) stating that the Project has been completed and that all costs of the Project have been paid or are not required to be paid from the Acquisition Fund, or (ii) stating that the Project has been substantially completed and that all remaining costs of the Project have been determined and specifying the amount to be retained therefor, the Trustee shall transfer and apply the amount, if any, remaining r in the Acquisition Fund (less any such retention) to the Installment Payment Fund. Upon such transfer and the release of any retained funds,the Acquisition Fund shall be closed. r ARTICLE IV PREPAYMENT OF CERTIFICATES Section 4.01. Optional Prepayment. The Certificates are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after February 1, 20_, in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to Section 4.01 of the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the r principal evidenced by the Certificates to be prepaid,plus accrued interest evidenced thereby to the date fixed for prepayment,without premium. r 11-2 Tutu Ag .t.dm 17 r Book Page 49 6, Section 4.02. Mandatory Sinking Account Prepayment. The Term Certificates 1" maturing on February 1, 20_are subject to prepayment prior to their stated maturity, in part,by lot, on any February 1 on and after February 1, 20_, at the principal amount thereof, plus I accrued interest to the date fixed for prepayment, without premium, from Mandatory Sinking L Account Payments deposited in the Principal Account. The Term Certificates maturing on February 1, 20_ shall be prepaid (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the amounts and upon the dates set forth below: u Lr W Li I W W V L W L V L 11-2 T"AWer MAN 18 i U Book Page 50 .. Term Certificates Maturing February 1, Mandatory Sinking Account Mandatory Payment Dates Sinking Account (February 1) Payments Section 4.03. Selection of Certificates for Optional Preoavment. Whenever less than all the Outstanding Certificates are to be prepaid on any one date pursuant to Section 4.01 hereof, the Trustee shall select the Certificates to be prepaid among Certificates with different Principal Payment Dates as directed in a Written Request of the District. Whenever less than all the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one date pursuant hereto, the Trustee shall select the Certificates with such Principal Payment Date to be prepaid by lot in any manner that the Trustee deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of the numbers of the Certificates so selected for prepayment on such date. For purposes of such selection, any Certificate may be prepaid in part in Authorized Denominations. Section 4.04. Notice of Prepayment. When prepayment of Certificates is authorized pursuant to Section 4.01 or 4.02 hereof, the Trustee shall give notice, at the expense of the District, of the prepayment of the Certificates. The notice of prepayment shall specify (a)the Certificates or designated portions thereof(in the case of prepayment of the Certificates in part but not in whole) which arc to be prepaid, (b)the date of prepayment, (c)the place or places where the prepayment will be made, including the name and address of any paying agent,(d)the prepayment price, (e)the CUSIP numbers assigned to the Certificates to be prepaid, (f)the numbers of the Certificates to be prepaid in whole or in part and, in the case of any Certificate to be prepaid in part only, the principal evidenced by such Certificate to be prepaid, and (g)the interest rate and stated Principal Payment Date of each Certificate to be prepaid in whole or in r part. Such notice of prepayment shall further state that on the specified date there shall become due and payable upon each Certificate or portion thereof being prepaid the prepayment price and that from and after such date interest evidenced thereby shall cease to accrue and be payable. With respect to any notice of prepayment of Certificates pursuant to Section 4.01 hereof, unless at the time such notice is given the Certificates to be prepaid shall be deemed to have been paid within the meaning of Section 10.01 hereof, such notice shall state that such prepayment is r conditional upon receipt by the Trustee, on or prior to the date fixed for such prepayment, of moneys sufficient to pay for the prepayment price of the Certificates to be prepaid, and that if such moneys shall not have been so received said notice shall be of no force and effect and the District shall not be required to prepay such Certificates. If a notice of prepayment of Certificates contains such a condition and such moneys are not so received, the prepayment of Certificates as described in the conditional notice of prepayment shall not be made and the Trustee shall, within a reasonable time after the date on which such prepayment was to occur, give notice to the persons and in the manner in which the notice of prepayment was given, that such moneys were not so received and that there shall be no prepayment of Certificates pursuant to such notice of prepayment. 11.2 Tn Awe MA. 19 r Book Page 51 L. The Trustee shall, at least 30 but not more than 60 days prior to any prepayment date, W give notice of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, postage prepaid, at their addresses appearing on the registration books maintained by the Trustee as of the close of business on the day before such notice of L prepayment is given. The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Certificates or the cessation of interest evidenced thereby on the date fixed for prepayment. A certificate by the Trustee that notice of prepayment has been given to Owners as herein provided shall be conclusive as against all parties, and no Owner whose Certificate is called for V prepayment may object thereto or object to the cessation of interest evidenced thereby on the fixed prepayment date by any claim or showing that said Owner failed to actually receive such V notice of prepayment. Section 4.05. Partial Prepayment of Certificates. Upon surrender of any Certificate prepaid in part only, the Trustee shall execute and deliver to the Owner thereof a new Certificate V or Certificates evidencing the unprepaid principal with respect to the Certificate surrendered. Section 4.06. Effect of Prepayment. If notice of prepayment has been duly given as W aforesaid and moneys for the payment of the prepayment price of the Certificates to be prepaid are held by the Trustee, then on the prepayment date designated in such notice, the Certificates so called for prepayment shall become payable at the prepayment price specified in such notice; and from and after the date so designated, interest evidenced by the Certificates so called for prepayment shall cease to accrue, such Certificates shall cease to be entitled to any benefit or security hereunder and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof. The Trustee shall,upon surrender for payment of any of the Certificates to be prepaid, pay such Certificates at the prepayment price thereof, and such moneys shall be pledged to such payment. All Certificates prepaid pursuant to the provisions of this Article shall be canceled by the Trustee and shall not be redelivered. ARTICLE V Lr ASSIGNMENT AND PLEDGE; FUNDS AND ACCOUNTS V 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, W solely in its capacity as Tmstee, 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 L 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. I V I I-2 Tmt Agamw d. 20 W Book Page 52 r to 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 tight,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, r 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. r (b) The Trustee shall transfer the amounts on deposit in the Installment Payment Fund, 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 trust by the Trustee for the benefit of the Owners and shall be used and disbursed only for the purposes and uses herein authorized. r (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. r (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. r (iii) Prepayment Account. The Trustee, on the prepayment date specified in the Written Request of the District filed with the Trustee at the time that any prepaid r Installment Payment is paid to the Trustee pursuant to the Installment Purchase Agreement, shall deposit in the Prepayment Account that amount of moneys representing such prepaid Installment Payment, the accrued interest thereon to the prepayment date and any premium payable with respect thereto. The Trustee shall deposit in the Prepayment Account any other amounts made available by the District that the District, pursuant to a Written Request of the District, instructs the Trustee to apply to the prepayment of Certificates pursuant to Section 4.01 hereof. Moneys in the Prepayment Account shall be used by the Trustee for the purpose of paying the interest, premium, if 11-2 Tun Agttmmt m 21 Book Page 53 any, and principal evidenced by the Certificates to be prepaid pursuant to Section 4.01 �+ hereof Section 5.03. Reserve Fund. (a)The Trustee shall establish and maintain the Reserve v 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 W 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 v 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 V 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 v the Reserve Fund. (c) If, on any Interest Payment Date,the amount on deposit in the Interest Account is Lr 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 v 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 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 61 under any Reserve Facility credited to the Reserve Fund to satisfy a portion of the Reserve u 11-2 Trurt AgeanmLdoc 22 Book Page 54 r ,r 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, r 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 rara basis (calculated by reference to the policy limits available thereunder). r (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. r (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 r 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, r 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 r 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 District. Notwithstanding defeasance of the Certificates pursuant to Article X hereof or anything r 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. 0 I I-2 Trust Agammtd. 23 r Book Page 55 L (b) Any funds remaining in the Rebate Fund after payment in full of all of the L 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. v 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 r+ 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 6w 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. 6 ' 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 6' 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, u after such transfer, the amount on deposit in the Reserve Fund is at least equal to the Reserve Requirement. L+ 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 L 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. u 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 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 L or dealing as principal for its own account. u 11-2 Tit AU td« 24 L Book Page 56 r ARTICLE VI COVENANTS r 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 r 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. r Section 6.02. Compliance with Installment Purchase Agreement. The Corporation and the District will faithfully comply with, keep, observe and perform all the agreements, r 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 r terns. 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 r 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 r 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 d 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. r 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 r the interest thereon, or involving the rights of the Trustee or any Owner hereunder; provided, however, that the Trustee or any Owner at its or his election may appear in and defend any such action,suit or other proceeding. r 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 11-2TmtAg tdx 25 Book Page 57 V 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. L+ (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 6w 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. y "Nonpurpose Inestment"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 W carry out the governmental purposes of that series of Certificates. "Proceeds," with respect to an issue of governmental obligations, has the meaning set v 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. y "Special Counsel" means Fulbright & Jaworski L.L.P. or any other firm of nationally recognized standing in the field of municipal finance selected by the District. 4 "Tax Regulations" means the United States Treasury Regulations promulgated pursuant to sections 103 and 141 through 150 of the Code. 6' "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. (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 w 11-2 T�As Mtmm 26 W Book Page 58 r r 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. r (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 r 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 r 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 r (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. r (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 r 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 r 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. (e) Not to Invest at Higher Yield. Except as would not cause the Certificates to r 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. 11-3 T u Again.[ 27 Book Page 59 IL (f) Not Federally Guaranteed. Except to the extent permitted by section 149(b)of the L 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 V 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. u (h) Rebate of Arbitrage Profits. Except to the extent otherwise provided in section 148(f)of the Code and the Tax Regulations: u (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 V remain on deposit in the Acquisition 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 v 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. V (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(ex2) 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 i may be required by section 148(t) 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 L i -z r"wn��mraoc 28 Book Page 60 r 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 r "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. r (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. r (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 Cade 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 r "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 r 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 r 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. r 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 r 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. 11-2 Tm Agc I.doc 29 r Book Page 61 V ARTICLE VU DEFAULT AND LEMTATIONS OF LIABILITY V 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: v (a) by mandamus or other action or proceeding or suit at law or in equity to enforce L 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 w impair any rights or remedies on any such subsequent default or breach of duty or contract. No 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 6W 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. I u t -z Tact� �aa 30 Book Page 62 L' r 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 r former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. ,. 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 r 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 r 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, r (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: r (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 r (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 r due and payable;and (ii) to the payment of all amounts then due for principal evidenced by the r 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 r priority of any kind,according to the amounts of principal evidenced by such Certificates due and payable. r (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 payment of all amounts then due for principal and interest evidenced by the Certificates and, if a 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 r of interest, or of any Certificate over any other Certificate, to the persons entitled thereto without any discrimination or preference. r 11-2 T=Ag..t.d. 31 r Book Page 63 V Section 7.06. Trustee May Enforce Claims Without Possession of Certifreates. A11 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 v 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 L 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 L 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 v 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. L 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 L. 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 L. Agreement,the Master Agreement or herein,the District shall not have any obligation or liability 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 u 11.2 Tn Age . da 32 Book Page 64 r r 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 r 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 r 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 r 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 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 r 11-2TyrAgrm mr.duc 33 r Book Page 65 V 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 u 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 V 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 6. 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 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 jr in the performance of any of its duties hereunder or in the exercise of any of its rights or powers hereunder. L 11-2 Ttust Agrtenrnt.d. 34 Book Page 66 r r 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. r 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 r 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 r 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 r hereunder in good faith in accordance therewith. The Trustee shall not be responsible for the sufficiency of the Certificates or the 'r 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. r 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 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, r 11-2 True AU mt.dm 35 r Book Page 67 u 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 L 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 L 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. V ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO TRUST AGREEMENT Section 9.01. Amendment or Supplement. (a)This Trust Agreement and the rights L 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 L 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 or change the prepayment terns and provisions or the provisions regarding delivery of notice of prepayment without the prior written consent of the Owner of L each Certificate so affected, (ii)reduce the percentage of Owners whose consent is required for 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 Ir 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. I (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 Le 11-2 hum Agmnmtdm 36 V Book Page 68 r 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, r 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; r (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 r to questions arising hereunder which the Corporation or the District may deem desirable or necessary and not inconsistent herewith; r (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 r (iv) for any other reason, provided such amendment or supplement does not adversely affect the rights or interests of the Owners. r 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 r 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. r 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 r 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 r 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 r Owner of any Outstanding Certificates such new Certificates shall be exchanged at the Principal Office without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates. r 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. i i-a rrmr nu«mmcaoc 37 Book Page 69 is N ARTICLE X DEFEASANCE L 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)in case said Certificate or portion thereof has been selected for prepayment in accordance with Section 4.02 hereof prior to its stated Principal Payment Date,the District shall have given to the Trustee irrevocable instructions to give,in accordance with the provisions of Section 4.03 hereof, notice of prepayment of such Certificate,or portion thereof,(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 V by such Certificate and due and to become due on or prior to the prepayment date or its stated Principal Payment Date, as the case may be, and (iii)in the event the stated Principal Payment Date of such Certificate will not occur, and said Certificate is not to be prepaid, within the next ! u succeeding 60 days, the District shall have given the Trustee irrevocable instructions to give notice, as soon as practicable in the same manner as a notice of prepayment given pursuant to Section 4.03 hereof,to the Owner of such Certificate,or portion thereof, stating that the deposit L of moneys or Government Obligations required by clause(ii) of this subsection has been made with the Trustee and that said Certificate, or portion thereof, is deemed to have been paid in accordance with this Section and stating such Principal Payment Date or prepayment date upon L 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 L 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 L such Certificates,or portions thereof, in the manner specified in Section 4.02 hereof for selection for prepayment of less than all of the Certificates, in the principal amounts designated to the Trustee by the District L L 11-2TNa,r Wtd. 38 Yd Book Page 70 s (c) After the payment of all the interest, prepayment premium, if any, 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, prepayment premium, if any, and principal evidenced by such Certificates and all other amounts due hereunder and under the Installment Purchase Agreement. r (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 r 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 Govemment 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 r 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 r Owners. 11-2 Tm:t Arledn.Wm 39 Book Page 71 W Section 11.02. Successor Deemed Included in a0 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 v 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 Ld 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 W 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 r deem sufficient. The ownership of any Certificates and the amount, payment date, number and date of W� owning the same may be proved by the registration books maintained by the Trustee pursuant to the provisions of Section 2.07 hereof. U 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 V 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. L Section 11.05. Acauisition of Certificates by District. All Certificates acquired by the - District, whether by purchase ar 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 term contained herein shall include(a)a statement that the Person making or giving such certificate has read such agreement, condition, covenant or tern 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, L 11-2 T=Aire mrncdoc 40 v Book Page 72 r (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 r (d)a statement as to whether, in the opinion of the signer, such agreement, condition, covenant or teem has been complied with. r 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 r 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. ..e 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. r 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 Headinas, Gender and References. The singular r 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 r 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. r 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 tern or terms shall I1-27rU Age wtdm 41 Book Page 73 i u 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 69 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: Union Bank of California,N.A. io 120 South San Pedro Street, Suite 400 Los Angeles, California 90012 1, Attention: Corporate Trust Department 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. I Section 11.12. Effective Date. This Trust Agreement shall become effective upon its u execution and delivery. L 11-2 TWt AW..t.d. 42 LW Book Page 74 r 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. w r r r r r rl r r r r 11-2 T� Ap to 43 r Book Page 75 Y., 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. w UNION BANK OF CALIFORNIA,N.A., as Trustee By: r Authorized Officer ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION By: Treasurer L ORANGE COUNTY SANITATION DISTRICT W By: Chair of the Board of Directors W (SEAL) L Attest: 60 By: Secretary of the Board of Directors L L I I-2 T, Ag�wt.eoc 44 V Book Page 76 EXMBIT A FORM OF CERTIFICATE r 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 CERTIFICATE OF PARTICIPATION SERIES 2007B d PRINCIPAL PAYMENT DATE INTEREST RATE DATED DATE CUSIP December ,2007 REGISTERED OWNER: Cede&Co. PRINCIPAL AMOUNT: DOLLARS THIS IS TO CERTIFY that the Registered Owner of this Certificate of Participation (this "Certifrcate'�, 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 December 1, 2007 (the "Installment Purchase Agreement"), by and between the Orange County Sanitation District (the "District'j, 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 Union Bank of California, N.A., a national banking association duly organized and existing under the laws of the United States of America, as trustee (the "Trustee's under the Trust Agreement, dated as of December 1, 2007 (the "Trust 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. r 11-2 Tuu Age�aw,iEac A-I Book Page 77 The District has executed and delivered the Master Agreement for District Obligations, r' 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 upon which obligations such as the Installment Purchase Agreement, and the Installment 1W Payments and the interest thereon,will be incurred and secured. This Certificate is one of the duly authorized Orange County Sanitation District Certificates of Participation, Series 2007B (the "Certificates") evidence principal in the aggregate amount of$ , 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 a Certificates,to pay the costs of issuance incurred in connection therewith and to pay certain other related costs. r 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 4 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 'u 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 4 u-z Tn AgRt0a9Ldoc A-2 u Book Page 78 r r the State of California, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. .. 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, r 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 r 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, r agrees and consents. The Registered Owner of this Certificate is entitled to receive, subject to the terms of the .. Trust Agreement and any right of prepayment as provided herein or therein, 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 I of each year, commencing on February 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 r' 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. .a 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 and prepayment premium, if any,evidenced by the Certificates,on their stated principal payment dates or on prepayment in whole or in part prior thereto, 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. r 1 1-2 Trua[Ageemartdoc A-3 Book Page 79 V 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"). W 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 shall not be required to transfer or exchange any Certificate during the period commencing on the date five days before the date of selection of Certificates for prepayment and ending on the date of mailing of notice of such prepayment, nor shall the Trustee be required to transfer or exchange any Certificate or portion thereof selected for prepayment from and after the 6' date of mailing the notice of prepayment thereof. 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 with stated Principal Payment Dates prior to February 1, 20_ are not _ subject to optional prepayment prior to their stated Principal Payment Dates. The Certificates with stated Principal Payment Dates on or after February 1, 20_ are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after February 1, _ 20_, in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid by the District pursuant to the Installment Purchase Agreement or v from any other available funds, any such prepayment to be at a price equal to the principal evidenced by the Certificates to be prepaid, plus accrued interest evidenced thereby to the date fixed for prepayment,without premium. The Term Certificates maturing on February 1, 20_ are subject to prepayment prior to their stated maturity, in part, by lot, on any February I on and after February 1, 20_, at the principal amoum thereof, plus accrued interest to the date fixed for prepayment, without premium, from Mandatory Sinking Account Payments deposited in the Principal Account. The Tenn Certificates maturing on February 1, 20_shall be prepaid(or paid at maturity, as the case ~' may be) by application of Mandatory Sinking Account Payments in the amounts and upon the dates set forth below: L V V V 11-2 T=Agrce .W. A-4 V Book Page 80 r �r Term Certificates Maturing February 1, Mandatory Sinking Account Mandatory r Payment Dates Sinking Account (February 1) Payments r $ As provided in the Trust Agreement, at least 30 but not more than 60 days prior to any prepayment date, notice of prepayment shall be given to the respective Owners of Certificates designated for prepayment by first class mail, postage prepaid, at their addresses appearing on the registration books maintained the Trustee as of the close of business on the day before such r notice of prepayment is given. The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of 'r such Certificates or the cessation of interest evidenced thereby on the date fixed for prepayment. If this Certificate is selected for prepayment, notice of prepayment has been duly given as provided in the Trust Agreement and moneys for the payment of the prepayment price are held by the Trustee, then on the prepayment date designated in such notice, this Certificate shall become payable at the prepayment price specified in such notice; and from and after the date so r' designated, the interest evidenced hereby shall cease to accrue, this Certificate shall cease to be entitled to any benefit or security under the Trust Agreement and the Registered Owner hereof shall have no rights in respect hereof except to receive payment of such prepayment price, and such moneys shall be pledged to such prepayment. The Trustee shall, upon surrender for payment of this Certificate to be prepaid, pay this Certificate at the prepayment price so designated in the Trust Agreement. 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 or change the prepayment terms and provisions or the provisions regarding delivery of notice of prepayment without the prior written consent of the Owner of each Certificate so affected, r (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 r 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 r outstanding. r 11-2 T=Ag.Ldoc A-5 Book Page 81 I V To the extent and in the manner permitted by the terms of the Trust Agreement,the Trust W 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 I�r+ 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 v 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 I 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. THE DISTRICT HAS CERTIFIED that all acts, conditions and things required by the V statutes of the State of California and by the Trust 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. L y W y W L V' I IQ Tms1 ABmnmtdoe A-6 y Book Page 82 r 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. r Date: UNION BANK OF CALIFORNIA,N.A., as Trustee r By: Authorized Officer ti r r r r r r r 11-2 Trust Ageemwtdoc A-7 r Book Page 83 ASSIGNMTNT For value received, the undersigned doles) hereby sell, assign and transfer onto 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: V 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. W Tax I.D. #: ly Signature Guaranteed: _ Note: Signature(s)must be guarao[eed by an eligible Note: The signature(s)on this Assignment must correspond guamotor. with the name(s)as written on the face of the within Certificate in every pmricular without alteration or enlargement or my change whatsoever. Q IV u V V y i� I u 11.2 That Agreennnt.doc A-8 i V Book Page 84 Fulbright&Jaworski L.L.P.—Dra0: 11/2/07 r INSTALLMENT PURCHASE AGREEMENT by and between r ORANGE COUNTY SANITATION DISTRICT r and M ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r Dated as of December 1, 2007 Relating to •+ $300,000,000 Orange County Sanitation District r Certificates of Participation Series2007B r r 11-2 hkgA tPuchw A®am ,A. Book Page 85 L TABLE OF CONTENTS Ir Page Li ARTICLE I DEFINITIONS.................................................................................................2 Section1.01. Definitions............................................................................................2 Section 1.02. Definitions in Master Agreement and Trust Agreement......................3 u ARTICLE II PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE -- CORPORATION; PAYMENT OF PURCHASE PRICE...............................3 L Section 2.01. Purchase of Project by,and Sale Thereof to,the Corporation.............3 _ Section 2.02. Payment of Purchase Price...................................................................3 i ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE V DISTRICT;INSTALLMENT PAYMENTS...................................................4 I ' Section 3.01. Purchase and Sale of Project................................................................4 u Section 3.02. Installment Payments...........................................................................4 Section 3.03. Reserve Fund Payments.......................................................................6 Section 3.04. Obligation Absolute.............................................................................6 Section3.05. Nature of Agreement............................................................................6 . ARTICLE IV PREPAYMENT OF INSTALLMENT PAYMENTS; DISCHARGE............6 Section 4.01. Prepayment of Installment Payments...................................................6 _. Section4.02. Notice...................................................................................................7 I Section4.03. Discharge of Obligations.....................................................................7 U ARTICLE V COVENANTS.................................................................................................7 Section 5.01. Compliance with Master Agreement...................................................7 LJ Section 5.02. Compliance with Installment Purchase Agreement.............................7 Section 5.03. Protection of Security and Rights........................................................8 Section 5.04. Indemnification of Corporation...........................................................8 LJ Section5.05. Further Assurances...............................................................................8 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES OF THE 1 Y,I CORPORATION.............................................................................................8 Section6.01. Events of Default.................................................................................9 Section6.02. Remedies on Default.............................».............................................9 4° Section6.03. Non-Waiver..........................................................................................9 _ Section6.04. Remedies Not Exclusive.................................................................... 10 ARTICLE VII AMENDMENTS..............................................................._.......................... 10 Ir Section7.01. Amendments...................................................................................... 10 4 ARTICLEVIII MISCELLANEOUS...................................................................................... 11 Section 8.01. Liability of District Limited............................................................... 11 L Section 8.02. Limitation of Rights........................................................................... 11 Section8.03. Assignment........................................................................................ I I _ Section8.04. Notices............................................................................................... I I 11.2 lmta wt Purchm Agr m .d. _i_ L Book Page 86 r TABLE OF CONTENTS r, (continued) Page Section 8.05. Successor Is Deemed Included in all References to Predecessor...... 12 Section 8.06. Waiver of Personal Liability.............................................................. 12 Section 8.07. Article and Section Headings, Gender and References..................... 12 r Section 8.08. Partial Invalidity................................................................................. 13 Section 8.09. Law Governing.................................................................................. 13 r Section 8.10. Execution in Counterparts.................................................................. 13 EXHIBIT A DESCRIPTION OF PROJECT........................................................A-1 r r r r r r r r r r r 11-2lnslellmrnl Pw .:e Ag .I.d. _jj_ r Book Page 87 i W INSTALLMENT PURCHASE AGREEMENT i w THIS INSTALLMENT PURCHASE AGREEMENT (this "Installment Purchase Agreement"), dated as of December 1, 2007, is by and between the ORANGE COUNTY SANITATION DISTRICT, a county sanitation district organized and existing under the laws of �I 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: u WHEREAS, the District desires to finance the acquisition, construction and installation of certain improvements to its wastewater system(the"Project"); V WHEREAS, in order to finance the Project, the District desires to purchase the Project from 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 Sri Installment Purchase Agreement, dated as of December 1, 2007 (the `Installment Purchase Agreement', by and between the District and the Corporation; i.t 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; V WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to this Installment Purchase Agreement to Union Bank of California,N.A., as trustee(the"Trustee"); V 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 V District, the Trustee has agreed to execute and deliver Orange County Sanitation District Certificates of Participation, Series 2007B (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon,payable hereunder; 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 L� 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; 1� NOW, THEREFORE, in consideration of the covenants and provisions herein set forth and for other valuable consideration the receipt and sufficiency of which is hereby i. acknowledged,the parties hereto do hereby agree as follows: W 11-2 Wlallment Purrheu A®eCmCnLdac �I Book Page 88 ARTICLE 1 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: r "Acquisition Fund" means the fund by that name established in accordance with the Trust Agreement. r "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. „r "Certificates" means the Orange County Sanitation District Certificates of Participation, Series 2007B,executed and delivered under and pursuant to the Trust Agreement. "Closing Date"means December_,2007. "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. "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 February 1,commencing February 1,2009. "Installment Purchase Agreement' means this Installment Purchase Agreement, dated as of December 1, 2007, 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 February 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. r 11-2 InSIWI rn1 P.Chm A� .td. 2 r Book Page 89 1 V "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. Yd "Project" means the improvements to the Wastewater System to be acquired, constructed and installed pursuant to this Installment Purchase Agreement, as described in Exhibit A hereto. �+ "Trust Agreement" means the Trust Agreement, dated as of December 1, 2007, 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 Union Bank of California, N.A., a national banking association duly r 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 Trust Agreement. 6+ Section 1.02. Definitions in Master Agreement and Trust Agreement. Except as otherwise herein defined and unless the context otherwise 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. L+ ARTICLE 11 i PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE CORPORATION; v PAYMENT OF PURCHASE PRICE Section 2.01. Acquisition. Construction and Installation of the Project. The u Corporation hereby agrees to cause the Project to be acquired, constructed and installed by the District, as agent of the Corporation. The District shall enter into contracts and provide for, as agent of the Corporation, the complete acquisition, constmction and installation of the Project. The District hereby agrees that it will cause the acquisition, construction and installation of the Project to be diligently performed. It is hereby expressly understood and agreed that, except to the extent of proceeds of the Certificates which are deposited in the Acquisition Fund, the Corporation shall be under no liability of any kind or character whatsoever for the payment of any Acquisition Costs. In the event the proceeds of the Certificates deposited in the Acquisition Fund are insufficient to complete the acquisition, construction and installation of the Project,the District shall cause to be applied from and to the extent of other available District funds, an _ amount equal to that necessary to complete the acquisition, construction and installation of the 1 v Project. i W II-2 Inaellmmt Ru wA®mnmt. 3 V Book Page 90 r r Section 2.02. Changes to the Proiect. The District may make any changes in the composition and description of the Project or any component thereof whenever the District deems such changes to be necessary and appropriate; provided, however, that no such change r shall impair the ability of the District to make the Installment Payments or cause to be included in the Project any property not constituting property useful in the performance of the District's powers, projects and purposes. Any such change shall be implemented by the District's filing �+ with the Corporation and the Trustee a description of such change and, upon such filing, the description of the Project contained in Exhibit A shall be deemed to have been modified in accordance therewith. No such change shall constitute an amendment, change, modification or r alteration of this Installment Purchase Agreement. Section 2.03. Payment of Purchase Price. On the Closing Date, the Corporation shall d+ pay to the District, as the purchase price of the Project, the amount of $300,000,000, which amount shall be paid from the proceeds of the Certificates. r ARTICLE III PURCHASE OF PROJECT BY,AND SALE THEREOF TO,THE DISTRICT; r 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 r part of the District or the Corporation. Section 3.02. Installment Payments. The District shall, subject to any rights of r prepayment provided in Article IV hereof,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$300,000,000, 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: r r r r r 11-2 his10.1 ft hue Ag .[.d. 4 r Book Page 91 L I Installment Payment Date (February 1) Installment Payment Interest Rate i 2009 $ % 2010 2011 `+ 2012 2013 2014 2015 2016 2017 2018 2019 2020 `+ 2021 2022 2023 v 2024 2025 V 2026 2027 2028 V 2029 2030 2031 6d 2032 2033 2034 L 2035 2036 V 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 ba� 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 w 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 j Installment Payment,or payment of interest thereon,as applicable,due on such date. u i v 11.2 kaaammt P rchm Agtaennatt.doc 5 L✓ Book Page 92 r .. 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 r 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 r 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. 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 r PREPAYMENT OF INSTALLMENT PAYMENTS; DISCHARGE — Section 4.01. Prepayment of Installment Payments. (a)Installment Payments shall be subject to prepayment prior to their respective Installment Payment Dates, at the option of, and in the amounts directed by, the District, from any source of available funds, in whole or in part r (in an amount equal to $5,000 or an integral multiple thereof)on any date on or after February 1, 20_, at the principal amount thereof and accrued interest thereon to the date fixed for prepayment, without premium. r (b) The District may prepay, from any source of available funds, all or any portion of the Installment Payments by depositing with the Trustee moneys or securities as provided, and subject to the tems and conditions set forth, in Article X of the Trust Agreement sufficient to pay such Installment Payments, and the interest thereon, when due or to pay such Installment Payments, and the interest thereon, through a specified date on which the District has a right to prepay such Installment Payments pursuant to subsection(a) of this Section, and to prepay such II-2 lnsldlmrnl Po, WAa Mt.d 6 Book Page 93 u I Installment Payments on such prepayment date, at a prepayment price determined in accordance with subsection(a)of this Section. (c) If less than all of the Installment Payments are prepaid pursuant to this Section W then,as of the date of such prepayment pursuant to subsection(a)of this Section, or the date of a deposit pursuant to subsection (b) of this Section, the schedule of Installment Payments shall be recalculated in order to take such prepayment into account. (d) Prepayments of Installment Payments made pursuant to this Section shall be applied to the prepayment of Certificates as provided in Section 4.01 of the Trust Agreement. Section 4.02. Notice. The District shall give written notice to the Trustee specifying the date on which the prepayment will be made prior to making any prepayment pursuant to this u Article, which date shall be not less than 45 nor more than 60 days from the date such notice is given to the Trustee,unless such time period shall be waived by the Trustee. 6W Section 4.03. 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 V 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 u 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 6, 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 L 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, i L+ 11-2 histamt PurcbM Ai; m Lda Book Page 94 r r 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. r Section 5.03. Protection of Security and Riahts. The District will preserve and protect the security hereof and the rights of the Trustee, as assignee of the Corporation, to the r 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. r 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 r 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 unto the Corporation, or unto the Trustee, as assignee of the Corporation, the r rights and benefits provided herein to the Corporation, or to the Trustee, as assignee of the Corporation. r ARTICLE VI EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION r 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 r 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 r 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, r 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 r shall not become an Event of Default for so long as shall be necessary to diligently complete such curative action; or r 11-2 Installment Pmehne Aarmmmtdm g Book Page 95 V 1 (c) if the District shall file a petition or answer seeking arrangement or reorganization 61 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 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; V (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 V 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 61 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 j remedies as if such action,proceeding or suit had not been brought or taken. u 11-2 N9911 1 P 6M AgnmMtd. 9 Book Page 96 r 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 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. r 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 Tmstee, 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 r (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 r 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 r 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; r (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 r r 11-2 lamallmm,Palau AVl ,.E 10 Book Page 97 i V i (iv) to make such other changes herein or modifications hereto as the District, V 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. u 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 6' 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, 61 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 6' 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. Assignment. The District and the Corporation hereby acknowledge the transfer, conveyance and assignment by the Corporation to the Trustee of all of the Corporation's 1i 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: 164 V 11-2ingalh tPurtlutt/�ml.dw II U Book Page 98 r r If to the District: Orange County Sanitation District 10844 Ellis Avenue Fountain Valley, California 92708 Attention: Director of Finance and Administrative Services r If to the Corporation: Orange County Sanitation District Financing Corporation c/o Orange County Sanitation District r 10844 Ellis Avenue Fountain Valley,California 92708 Attention: Treasurer r If to the Trustee: Union Bank of California,N.A. 120 South San Pedro Street, Suite 400 Los Angeles, California 90012 .. Attention: Corporate Trust Department 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. r 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. r 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 r 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 duty provided by any applicable provisions of law or hereby. r 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 a+ 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 r hereof. r 11.2l Wl.mt Porch.Asre..t.d. 12 Book Page 99 t✓ Section 8.08. Partial Invalidity. If any one or more of the agreements or covenants or L' 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 L' remaining agreements and covenants and portions thereof and shall in no way affect the validity hereof. Yd Section 8.09. Law Governing. This Installment Purchase Agreement shall be construed and governed in accordance with the laws of the State. lr 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. u tr v lr 6 V 6+ v u V I II-2 lnstM..tT d Agee .W. 13 L Book Page 100 r 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. r ORANGE COUNTY SANITATION DISTRICT r By: Chair of the Board of Directors r (SEAL) r Attest r By: Secretary of the Board of Directors r ORANGE COUNTY SANITATION DISTRICT FINANCING CORPORATION r By: Treasurer r r r r r r r 11-2 kM91.tP ,h.e Ag .Ld. 14 r Book Page 101 r EXHIBIT A DESCRIPTION OF PROJECT The Project is consists of the acquisition, construction and installation of certain improvements to the Wastewater System, including the acquisition, construction and installation r of improvements to the District's collection system, two wastewater treatment plants, and Ocean Outfall systems,including the following Project components: Magnolia Trunk Sewer Trickling Filters at Plant 2 r Ellis Avenue Pump Station Sludge Digester at Plant 1 Rocky Point Pump Station Sludge Dewatering at Plant 1 and 2 r Bitter Point Pump Station Rehabilitation of Solids Storage Bitter Point Force Main Rehabilitation Silos C& D at Plant 2 Euclid Relief Improvements- Headworks at Plant 2 Digester Rehabilitation at Plant 2 r Primary Treatment System Rehabilitation at Plant 2 Cable Tray Improvements at Plant 1 and 2 New Secondary Treatment System at Plant 1 Rehabilitation of Odor Control Facilities r r r r 11-21nvallmmlPwLl�cce A�eaomLdoc A-1 Book Page 102 Fulbright& Jawonki L.L.P.—Draft 1112/07 r r r r CONTINUING DISCLOSURE AGREEMENT r by and between r r ORANGE COUNTY SANITATION DISTRICT and r UNION BANK OF CALIFORNIA, N.A., as Trustee Dated as of December 1, 2007 Relating to $300,000,000 r Orange County Sanitation District Certificates of Participation Series 2007B r r 11.2 Coetin gD.I.As..,.d. Book Page 103 r r CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), dated as of December 1, 2007, 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 Certificates of Participation, Series 2007B (the "Certificates"), evidencing principal in the aggregate amount of$300,000,000, pursuant to a Trust Agreement, dated as of the date hereof (the "Trust Agreement"), by and among Union Bank of California, N.A., 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: r 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: r "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. r "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. r "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 r Assurance Certification LLC. "Listed Events"means any of the events listed in subsection (a)of Section 4 hereof. r "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. As of the date hereof, the National r I I-2 Continuing Disclosure Agreement m r Book Page 104 i v Repositories approved by the Securities and Exchange Commission are identified at v http://www.sec.gov/info/municipal/nrmsir.htm. "Official Statement" means the Official Statement, dated , 2007, relating to V 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. L. "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. r. 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 u 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 sr 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 L the District and the Dissemination Agent to determine if the District is in compliance with the first sentence of this subsection(b). L (c) If the Trustee is unable to confirm that an Annual Report has been provided to Repositories by the date required in subsection(a)of this Section,the Trustee shall send a notice to the Municipal Securities Rulemaking Board and each State L Repository, if any, in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: iy (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State L. Repository, if any; and L 11-2 ConlinuinB D.1l ASW.Mt. a 2 W Book Page 105 r r (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 r all the Repositories to which it was provided. Section 3. Content of Annual Reports. The District's Annual Report shall contain ev or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally r 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 r 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 r manner as the Annual Report when they become available. (b) The following information with respect to the Certificates: r (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 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 r 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. r (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 r 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. ,r 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. II-2 CmUmg Disclosure AUce ntdoc 3 r Book Page 106 L+ Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this 6' 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: 4i (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. L. (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. y (7) Modifications to rights of security holders. �r (S) Contingent or unscheduled Certificate calls. (9) Defeasances. L (10) Release, substitution, or sale of property securing repayment of the securities. I (11) Rating changes. — (b) The District shall, within one business day of obtaining actual knowledge 6' 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 I in writing whether or not to report the event pursuant to subsection(0 of this Section. (c) Whenever the District obtains knowledge of the occurrence of a Listed L 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. (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 L' 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 I I-2 Cwwmg End..Agamwld. 4 u Book Page 107 r a 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. r 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 r 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, r 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. r 11-2 Cmtinmg Dlscb A®ernin,.doc 5 Book Page 108 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 6W 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. u 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 L. 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 11-1 Cmu =g Diwlo AU Mt.d 6 Y.1 Book Page 109 r r 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. r 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 r 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 r 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 r 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. r 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. r r II-2 Cwlinuing Disclmm Agree i.dm r Book Page 110 1 ; V li IN WITNESS WHEREOF,the parties hereto have executed this Disclosure Agreement 6' as of the date first above written. , ORANGE COUNTY SANITATION DISTRICT L L Br• Chair of the Board of Directors Y+ DIGITAL ASSURANCE CERTIFICATION LLC, L as Dissemination Agent L Bj V Authorized Representative V L L L L I : 6, L 11.2 Cmtming Msdw=Agrm mt.dm 8 1 V Book Page I I I r r EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE r TO FILE ANNUAL REPORT Name of Issuer: Orange County Sanitation District r Name of Issue: Orange County Sanitation District r Certificates of Participation, Series 2007B Date of Issuance: ,2007 r 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 December 1, 2007, by and among Union Bank r' of California,N.A., 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 r By: d cc: Trustee r Dissemination Agent r 4 r r 11-2 Continuing Dlxlosure Agramm.Am A-1 r Book Page 112 Fulbright&Jaworsld L.L.P.—Draft 1112107 PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER_,2007 NEW ISSUE—BOOK—ENTRY—ONLY Ratings: Moody's: " y Standard&Pcu r's:� Fitch: (See-RATINGS'heierm) !n the opinion o Fulbrtght&Jmvwski L.L.P. Special Course{ under exrsling Imv, the/nleres!Component ojeach Insfal/menf r Payment, oral(he al at portion!hereof dlstrtbumble In respect of any CerR mate, is exempt from personal income razes oI the Slate of Calijwnla oral, assuming compliance svilh Me lax covenants deswib herein, the Inreresf Component ojeach Instal mart Payment, and the allocable portion thereof distrfb the in respect of arty Cerinc�ate is excluded pursnan!fo section /03(a) of fhe lnlernal Revenue Code oj1986 from the ggrrass income of the owner ojsnch Certillcafe for federal income faz purposes and!s nun an item oflax preference jw purpos.0 s afibsj,dera!dsrratr ive minimum lax. See 'TAX ERE"herein. $300,000,000* [District Logo( ORANGE COUNTY SANITATION DISTRICT (DAC Logo) CERTIFICATES OF PARTICIPATION,SERIES 2007B r Dated: Date of Delivery Due: February 1,as shown below The Orange Courtly Sanitation District Certificates of Participation, Series 2007B(the"Certificates" evidence direct,fractional undivided interests of the Owners thereof in the installment payments(the "Installment Payments"), an the interest thereon, to be made by the Oren a County Sanitation District (the "Distract") p"suant to the Installment Purchase Agreement, dated as of December 1, 2007 the "Installment Purchase Agreement"), by and between the District and the Orange County Sanitation District Financing Corporation (the "Corporation"). Pursuant ro the Mast"Agreement for District Obligations, dated as of August 1, 2000 (the "Mast"Agreement"), by and between the District and the Corporation, the District M1as established conditions and terns upon which obligations such as the Installment Payments and the interest thereon, will be incurred and secured. Installment Payments w under the humllmenI Purchase Agreement are payable solely from Net Revenues(as more fully described in the Master Agreement, the"Net Revenues")as provided m 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 Pa ant of Maintenance and Operetia. Costs, as fimher described in "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" herein. The Insmllment Purchase Agreement provides that me obligation of the District to payy the Installment Payments, end payments of interest thereon, and cerlam other payments required to be made in accordance witM1 the Installment PmcM1aze Agreement,solely Crom Net Revenues, is absolute and unconditional. See"SECURITY AND SOURCES OF PAYMENT" herein. The proceeds of the Certificates, together with other available morays, will be used to (I)finance certain improvements to the Wastewater System,(ii)fund a reserve fund for the Certificates,and(iii)pay the costs incurred in connection with the execution and delivery of the Certificates. See"PLAN OF FINANCE"herein. Interest evidenced byy the Certificates will be payable semiannually on February I and August I of each year, commencing on February 1,2008. See"TIC CERTIFICATES"herein. The Certificates will be initially delivered only in book-entry form and will be registered in the name of Cede&Co.,es nominee of The Depository Trust Company,New York,New York("DTC"),which will act as securities dryryository for the Certificates. Individual purchases of the Certificates will be made in book-entry form only. Purchasers of Card icates will not receive physical certificates representing their ownership interests in the Certificates purchased. The Certificates will be delivered in denominations of$5,000 and any inter] multiple thereof. Payments of princippal and interest evidenced by the Certificates are payable directly to OTC by Union Bank olifornia,N.A.,as trustee(the"Trustee"). Upon receipt of ayments of such principal and interest,DTC will in turn distribute such payments to the beneficial owners of the Corti cores. See APPENDIX E—"BOOK-ENTRY SYSTEM"herein. The Certificates are subject to prepayment prior to maturity,as described herein. See"TIDE CERTIFICATES"herein. THE OBLIGATION OF THE DISTRICT TO PAY THE INSTALLMENT PAYMENTS,AND THE INTEREST THEREON, _ AND OTHER PAYMENTS RE UIRED TO BE MADE BY IT TINDER THE INSTALLMENT PURCHASE AGREEMENT IS A SPECIAL OBLIGATION OF T DISTRICT PAYABLE,IN THE MANNER PROVIDED IN THE INSTALLMENT PURCHASE AGREEMENT, SOLELY FROM NET REVENUES AND OTHER FUNDS PROVIDED FOR IN THE INSTALLMENT r 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 fun quick reference onlyy. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to making an iMormed investment decision. The Certificates are offered when, as and if executed and delivered and received by the Initial Purchweq subject to the approval by Fulbright&Jmvorski L.L.P., Los Angeles, Cah�'jjarnia, Special Counsel to the District, and certain other conditions. Certain legal matters will be passed upon for the District and fhe Corporation by Woodruff, Spradlin&Smart, a Professional Corporation, Costa Mesa, Calijorn a. Public Resources AdvisoryGroup, Los Angeles, California has served as financial advisor to the District in connection with the execution and delivery of the CeniJicafes. It is anticipated that the Cerillicates in defnilive form will be available jw delivery to DTC in New York,New York an or abort December 2007. BIDS FOR THE PURCHASE OF THE CERTIFICATES WILL BE RECEIVED BY THE DISTRICT UNTIL 9:00 A.M.PACIFIC TIME ON DECEMBER 11,2007 UNLESS POSTPONED OR CANCELLED AS SET FORTH IN THE OFFICIAL NOTICE INVITING BIDS. Dated: December_,2007 ' Preliminary;subject to change. r 11.2 Baal Stalementd. Book Page 113 i L. MATURITY SCHEDULE $300,000,000 Orange County Sanitation District u Certificates of Participation,Series 2007B $ Serial Certificates Maturity Principal Interest Price or CUSIPt (Februarys Amount Rate Yield 68( 428P) Lr y VI V Term Certificates due February 1,20_Priced to Yield: %CUSIPt: b W i4+ Ir y L 61 Preliminary;subject to change. t CUSIP® A registered trademark of the American Bankers Association. Copyright® 1999-2007 Standard&Poor's. a Division of The McGrew-Hill Companies, Inc. All rights reserved. CUSIP(& data herein is provided by Standard & Poor's CUSS Service Bureau and are for convenience of reference only.The District does not assume any responsibility for the accuracy of such numbers. I I-20aldal statemenl.4w LJ Book Page 114 L� J , s VAAPI :1 J J J J J J W �J J J 11-20ffiddSWUW.Ld� Book Page 1 l5 ORANGE COUNTY SANITATION DISTRICT Board of Directors u James Ferryman(Chair)—Costa Mesa Sanitary District Doug Davert(Vice Chair)—Tustin r Harry Sidhu—Anaheim Don Webb—Newport Beach _ Roy Moore—Brea Jon Dumitm—Orange Patsy Marshall—Buena Park Constance Underhill—Placentia Phil Luebben—Cypress Sal Tinajem—Santa Ana _ Larry Crandall—Fountain Valley Charles Antos—Seal Beach Don Bankhead—Fullerton David Shawver—Stanton N Bill Dalton—Garden Grove Rich Freschi— Villa Park Cathy Green—Huntington Beach Jim Winder—Yorba Linda Steven Choi—Irvine Joy L.Neugebauer—Midway City Sanitary District y 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 y Executive Management of the District V James D.Ruth,General Manager Robert P. Ghirelli, PhD.,Assistant General Manager Lorenzo Tyner, Director of Finance and Administrative Services Lr James Herberg,Director of Engineering Ed Torres,Director of Technical Services Nick Arhontes,Director of Operations&Maintenance V Special Services Special Counsel and Disclosure Counsel Fulbright&Jaworski L.L.P. Los Angeles,California _ District General Counsel b Bradley R. Hogin Woodruff, Spradlin& Smart,a Professional Corporation - Costa Mesa,California 4 Financial Advisor Public Resources Advisory Group Los Angeles, California r Trustee Union Bank of California,N.A. Los Angeles,California r i 11-2 acid SWNe td y Book Page 116 r r 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 my 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 r 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. `r 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. r 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 v 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. W 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. .r r r r r 11-2 Official Staume t.d. Book Page 117 TABLE OF CONTENTS r Psee INTRODUCTION........................................................................................................................................I General............................................................................................................................................I TheDistrict......................................................................................................................................2 Security and Sources of Payment for the Certificates.....................................................................2 r Continuing Disclosure.....................................................................................................................3 Miscellaneous..................................................................................................................................3 PLANOF FINANCE...................................................................................................................................4 SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES........................................................4 THE CERTIFICATES.................................................................................................................................5 General............................................................................................................................................5 PrepaymentProvisions....................................................................................................................5 ,a SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES.............................................7 InstallmentPayments......................................................................................................................7 NetRevenues..................................................................................................................................8 d+ Rate Stabilization Account..............................................................................................................9 Allocation of Revenues.................................................................................................................10 RateCovenant...............................................................................................................................10 r Reserve Fund.................................................................................................................................I I Limitations on Issuance of Additional Obligations.......................................................................12 Insurance.......................................................................................................................................14 .. Allocation of Installment Payments..............................................................................................15 THEDISTRICT.........................................................................................................................................16 Background...................................................................................................................................16 Organization and Administration..................................................................................................17 Services.........................................................................................................................................18 ServiceArea..................................................................................................................................18 Employees.....................................................................................................................................19 Retirement Plan.............................................................................................................................20 Post-Employment Benefits............................................................................................................21 �+ Risk Management..........................................................................................................................21 ExistingFacilities..........................................................................................................................22 Permits, Licenses and Other Regulations......................................................................................23 .. Capital Improvement Program......................................................................................................24 Groundwater Replenishment System............................................................................................27 PreferredLevel of Treatment........................................................................................................28 BiosolidsManagement..................................................................................................................29 UrbanRunoff................................................................................................................................30 Integrated Emergency Response Program....................................................................................30 rDISTRICT REVENUES............................................................................................................................31 SewerService Charges..................................................................................................................31 AdditionalRevenues.....................................................................................................................34 Wastewater Treatment History Customers......................................................................................................................................36 11-2 Offidd sml Ldm -i- Book Page I IS L TABLE OF CONTENTS (continued) 6d Pree AssessedValuation...................................................»..................................................................38 L TaxLevies and Delinquencies......................................................................................................39 BudgetaryProcess........................................................................»...............................................40 Reserves.......................................................................................................................................Al Summaryof Operating Data.........................................................................................................42 ProjectedOperating Data..............................................................................................................42 -. Management's Discussion and Analysis of Operating Data.........................................................44 I Investment of District Fonds.........................................................................................................45 L FINANCIAL OBLIGATIONS...................................................................................................................46 .. ExistingIndebtedness....................................................................................................................46 iw Variable Rate and Swap Obligations.............................................................................................46 AnticipatedFinancings.................................................................................................................AS Direct and Overlapping Bonded Debt...........................................................................................48 THECORPORATION.............................................................................»................................................50 LIMITATIONS ON TAXES AND REVENUES..................»..................................................................51 V Article XHIA of the California Constitution...................»............................................................51 Legislation Implementing Article XIHA.......................................................................................51 . Article XIIIB of the California Constitution.................................................................................51 L PropositionIA...............................................................................................................................52 Proposition62...............................................................................................................................53 .. Article XIBC and Article XIIID of the California Constitution....................................................53 L OtherInitiative Measures............................................................»...........»...................................55 LEGALMATTERS.........................................................................»......».._.........................................56 FINANCIALADVISOR...............................................................»...........................................................56 r ABSENCE OF LITIGATION.........................».......................................»................................................56 FINANCIAL STATEMENTS..............».................................................».»............................................56 TAXMATTERS..................................................................................................................................57 CONTINUING DISCLOSURE.................................................................................................................59 RATINGS...................................................................................................................................................60 V PURCHASE AND REOFFERING..........................................................................................................60 MISCELLANEOUS................................................................................._»...................».......................60 L b L. i V I, Ys 11-2 01fidd a�doc L Boric Page 119 r TABLE OF CONTENTS r Pace APPENDIX A — COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2007....................................................................................................................A-1 APPENDIX B — THE COUNTY OF ORANGE—ECONOMIC AND r DEMOGRAPHIC INFORMATION..................................................................B-1 APPENDIX C — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS....................................C-1 APPENDIX D — FORM OF CONTINUING DISCLOSURE AGREEMENT.............................D-1 r APPENDIX E — BOOK-ENTRY SYSTEM.................................................................................E-1 APPENDIX F — FORM OF APPROVING OPINION OF SPECIAL COUNSEL .....................F-1 r r r r r r r 11-2O idtl Sl t.doc -1- r Book Page 120 r OFFICIAL STATEMENT $300,000,000 ^, ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION,SERIES 2007B INTRODUCTION r This introduction contains only a brief summary of certain of the terms of the Certificates being offered and a briefdeacription ofthe Official Statement. All statements contained in this introduction are r qualified in their entirety by reference to the entire Official Statement. References to, and summaries of, provisions of the Constitution and laws of the State of California (the "State') and arty documents referred to herein do not purport to be complete and such references are quaked in their entirety by r 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 ,y OF PRINCIPAL LEGAL DOCUMENTS—Deftnittons"herein. General This Official Statement, including the cover page, inside cover and all appendices hereto, provides certain information concerning the sale and delivery of $300,000,000 aggregate principal amount of the Orange County Sanitation District Certificates of Participation, Series 2007B (the "Certificates') evidencing direct, fractional 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 December 1, 2007 (the r "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 r 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 v 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 r December 1,2007(the`Trust Agreement'), by and among the District,the Corporation and Union Bank of California, N.A., as trustee (the `Trustee"). Proceeds from the sale of the Certificates, together with other available moneys, will be used to (i)finance certain improvements to the Wastewater System r (ii)fund a reserve fund for the Certificates, and (III)pay the costs incurred in connection with the execution and delivery of the Certificates. See"PLAN OF FINANCE"herein. ,r 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 February 1 in each year as set forth on the cover page hereof Interest evidenced by the Certificates will be payable semiannually on February 1 and August 1 of each year, commencing on February 1, 2008. See "THE CERTIFICATES" herein. The r 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 r 11-2 Official Slvemeni.doc r Book Page 121 securities depository for the Certificates. The Certificates will be delivered in denominations of$5,000 W 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 turn, will make payments pursuant to its procedures as described under APPENDIX E—"BOOK—ENTRY SYSTEM"herein. The District ICI 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 V 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 L 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 Ir 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 L, 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 Wd 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 'i 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 six series of certificates of U 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 y and APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreemenf' 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 and the 2007A Installment Purchase - Agreement, and the term "Senior Obligations" as used in this Official Statement refers to the Existing Senior Obligations and any additional Senior Obligations, such as the Installment Purchase Agreement W which may be made payable on a parity basis to the Installment Payments as provided in the Master .. Agreement. 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 V 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 L 11-2 Omeitd State tdw 2 Book Page 122 .,, 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 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. 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 rr 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 he made under the Installment Purchase Agreement. The Installment Purchase r 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. ti 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 property in the District not later than eight(8)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." r 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 entirely 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 Union Bank of California, N.A., 120 South San Pedro Street, Suite 400, Los Angeles,California 90012,Attention: Corporate Trust. w r r r 11.2 Official Sulemmldoe 3 r Book Page 123 L PLAN OF FINANCE L Proceeds from the sale of the Certificates will be used to(i) finance the acquisition,construction II and installation of certain improvements to the Wastewater System (the "Project"), (ii) fund a reserve y fund for the Certificates,and(iii)pay the costs incurred in connection with the execution and delivery of the Certificates. In particular, the Project is expected to include the acquisition, construction and installation of improvements to the District's collection system, two wastewater treatment plants, and Ocean Outfall systems including the following Project components: Magnolia Trunk Sewer Trickling Filters at Plant 2 y Ellis Avenue Pump Station Sludge Digester at Plant I Rocky Point Pump Station Sludge Dewatermg at Plant I and 2 . . Bitter Point Pump Station Rehabilitation of Solids Storage I Bitter Point Force L Main Rehabilitation Silos C&D at Plant 2 Euclid Relief Improvements-Headworks at Plant 2 Digester Rehabilitation at Plant 2 Primary Treatment System Rehabilitation at Plant 2 Cable Tray Improvements at Plant 1 and 2 New Secondary Treatment System at Plant I Rehabilitation of Odor Control Facilities L From time to time the District undertakes capital projects that are subsequently delayed, redesigned or deferred for various reasons and no assurance can be given that a Project component I.r summarized above or designated in the District's current Capital Improvement Program will be completed in accordance with its original schedule or that any component Project will be completed as currently planned. See"THE DISTRICT—Capital Improvement Plan"herein. V 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 v Certificate Proceeds $ Net Original Issue Premium/Discourd ar Total Sources $ i Uses y Project Fund $ _. Reserve Fund Initial Purchaser's Discount ~ Costs of Issuanceu. - Total Uses $ Costs of Issuance include, among other things, fees of rating agencies, initial fees of the Trustee and Special Counsel fees. v V L 11-2 01116w s�u.d« 4 . V Book Page 124 r THE CERTIFICATES General r 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 February 1 in each year as set forth on the cover page hereof. Interest evidenced by the Certificates will be payable semiannually on February I and August I of each year, commencing on February 1,2008. See"THE CERTIFICATES"herein. 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 r 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 r the Certificates purchased. The interest evidenced by the Certificates shall be payable on each Interest Payment Date to and r 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 r 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 r interest from such Interest Payment Date, or unless such date of execution shall be on or prior to January 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 Trustec, 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. 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 r —"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Trust Agreement" Payments of principal and interest evidenced by the Certificates are payable directly to DTC by r Union Bank of California,N.A.,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 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 r 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 nomince. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E—"BOOK-ENTRY SYSTEM"herein. r Prepayment Provisions Optional Prepayment. The Certificates are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after February 1, 20179 in whole or in part, in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price r Preliminary,subject to change. 11-2 ORida1 Sma ...aloe 5 r Book Page 125 W equal to the principal evidenced by the Certificates to be prepaid,plus accrued interest evidenced thereby W to the date fixed for prepayment. Mandatory Sinking Account Prepayment. The Term Certificates maturing on February 1, 20_ W are subject to prepayment prior to their stated maturity, in part, by lot, on any February I on and after Febmary 1, 20_, at the principal amount thereof, plus accrued interest to the date fixed for prepayment, without premium, from Mandatory Sinking Account Payments deposited in the Principal Account. The y Tenn Certificates maturing on February 1,20 shall be prepaid(or paid at maturity,as the case may be) by application of Mandatory Sinking Account Payments in the amounts and upon the dates set forth below: W Term Certificates Maturing February 1, Mandatory W Sinking Account Mandatory Payment Dates Sinking Account -- (February 1) Payments V i Selection of Certificates for Prepayment Whenever less than all the Outstanding Certificates are W to be prepaid on any one date pursuant to provisions of the Trust Agreement with respect to optional prepayment of Certificates, the Trustee shall select the Certificates to be prepaid among Certificates with different Principal Payment Dates as directed in a Written Request of the District. Whenever less than all 166 the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one date in accordance with the Trust Agreement,the Trustee shall select the Certificates with such Principal - Payment Date to be prepaid by lot in any manner that the Trustee deems fain and appropriate, which u decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of the numbers of the Certificates so selected for prepayment on such date. For - purposes of such selection,any Certificate may be prepaid in part in Authorized Denominations. Notice of prepayment Wben prepayment of Certificates is authorized pursuant to the Trust Agreement, the Trustee shall give notice, at the expense of the District, of the prepayment of the Certificates. The notice of prepayment shall specify(a)the Certificates or designated portions thereof(in kw the case of prepayment of the Certificates in part but not in whole)which are to be prepaid,(b)the date of prepayment, (c)the place or places where the prepayment will be made, including the time and address of any paying agent, (d)the prepayment price, (a)the CUSBr numbers assigned to the Certificates to be �r prepaid, (f)the numbers of the Certificates to be prepaid in whole or in part and, in the case of any Certificate to be prepaid in part only,the principal evidenced by such Certificate to be prepaid,and(g)the interest rate and stated Principal Payment Date of each Certificate to be prepaid in whole or in part Such y notice of prepayment shall further state that on the specified date there shall become due and payable upon each Certificate or portion thereof being prepaid the prepayment price and that from and after such -- date interest evidenced thereby shall cease to accrue and be payable. With respect to any notice of I� optional prepayment of Certificates, unless at the time such notice is given the Certificates to be prepaid shall be deemed to have been paid within the meaning of the Trust Agreement,such notice shall state that such prepayment is conditional upon receipt by the Trustee, on or prior to the date fixed for such Lr prepayment, of moneys sufficient to pay for the prepayment price of the Certificates to be prepaid and that if such moneys shall not have been so received said notice shall be of no force and effect and the District shall not be required to prepay such Certificates. In the event a notice of prepayment of W 11.2 Offidal StatanaitAm 6 W Book Page 126 r Certificates contains such a condition and such moneys are not so received,the prepayment of Certificates as described in the conditional notice of prepayment shall not be made and the Trustee shall, within a reasonable time after the date on which such prepayment was to occur, give notice to the persons and in r the manner in which the notice of prepayment was given,that such moneys were not so received and that there shall be no prepayment of Certificates pursuant to such notice of prepayment. The Trustee shall,at least 30 but not more than 60 days prior to any prepayment date,give notice of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, postage prepaid at their addresses appearing on the registration books maintained by the Trustee as of the close of business on the day before such notice of prepayment is given. r The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Certificates or the cessation of interest evidenced thereby on the date fixed for prepayment. EJfed ojPrepaymenL If notice of prepayment has been duly given as aforesaid and moneys for the payment of the prepayment price of the Certificates to be prepaid are held by the Trustee,then on the prepayment date designated in such notice, the Certificates so called for prepayment shall become payable at the prepayment price specified in such notice; and from and after the date so designated, r interest evidenced by the Certificates so called for prepayment shall cease to accrue, such Certificates shall cease to be entitled to any benefit or security hereunder and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof The Trustee shall, upon surrender for payment of any of the Certificates to be prepaid pay such Certificates at the prepayment price thereof,and such moneys shall be pledged to such payment. a All Certificates prepaid pursuant to the provisions of the Trust Agreement shall be canceled by the Trustee and shall not be redelivered. 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 r 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 r 11-2 Official Sutemmr.doc 7 Book Page 127 L Revenues is on a parity with the District's obligation to make payments with respect to its Outstanding V Swim 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 W 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 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 y 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 APPENDDC 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 �y 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 Ir 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 u 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. Net Revenues Yd 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 L. 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. 1 thereto dated December 10, 1986, by and between V predecessor County Sanitation District No. 14 of Orange County and the Irvine Ranch 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 V 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 Lt Master Agreement, shall not include payments under the IR WD Agreement); provided, however, that (i)Revenues shall be increased by the amounts, if any, transferred during such period from the Rate V t r-2 omam Smm.doc 8 Book Page 128 Stabilization 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 Stabilization 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 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 we 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. s 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, r• 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 ,r 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 ,r 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 r r 1-z oaav srn.mr.d. 9 Book Page 129 L 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. , Lr 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 - 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 L 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; t" (4) Subordinate Obligation Reserve Funds;and Ir (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 as 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, see APPENDIX C — u "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Master Agreement." Rate Covenant L' 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 L 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 y 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. V L t I-2 o9'idd Stmarx L&C 10 L Book Page I30 ., 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 m 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 1 of each Fiscal Year, the District will file with the Trustee a copy of the adopted budget for such Fiscal Year. See APPENDIX C — "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS — Master Agreement" for additional information. r Reserve Food 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 100/6 of the issue price of the Certificates), (b)the maximum amount of remaining Installment Payments, and the interest r 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 Fond until all required Installment Payments, and the interest thereon, are paid in full pursuant to the Installment Purchase Agreement and until the fast date upon which no e Certificates are Outstanding. The Reserve Fond 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. Sea"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 Fond by depositing such Reserve Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fond 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 Fond, 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 Fond. r 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 or Principal Account. The moneys in the Reserve Fund and any Reserve Facility, shall be held in bust 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 Fond shall be withdrawn and applied by the Trustea for the final payment of principal and interest evidenced by the Certificates. I1-2 Offinal SWIe id 11 Book Page 131 u Amounts on deposit in the Reserve Fund which were not derived from payments under any v 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 u 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 Food to satisfy a portion of the Reserve Requirement, drawings thereunder, and repayment of expenses with respect thereto, shall be made on a pro-rate basis(calculated by reference to the policy limits available thereunder). The Trustee shall, from amounts received from the District pursuant to the Installment Purchase y Agreement,deposit in the Reserve Fond 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 6' 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. V 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 See APPENDIX C—"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS—Trust Agreement." i Limitations on Issuance of Additional Obligations bw 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 W with all other Senior Obligations theretofore incurred but only subject to the following conditions under the Master Agreement: r (1) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing — under the Master Agreement;and V (2) Subject to the provisions of the Master Agreement, the District will have received either one of the following: L (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 V 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 6+ 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 V (B) Net Operating Revenues,as shown by the books of the District,will have amounted to at least l00°/u of Maximum Annual Deli Service on all V Obligations to be outstanding immediately after the incurrence of such Senior Obligations. u 11-2 Ovid d Suna mtdw 12 L Book Page 132 r r 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 r 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 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 r (ill 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 r 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 r 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 or will go into effect prior to the end of such two Fiscal Yew period,(y)customers expected to be added to the Wastewater System prior to the end of such two Fiscal Year period, and (z) the estimated change in available Net Revenues and Net Operating Revenues r 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 procceds 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. r 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 r Short-Term Obligations excluded from the calculation of Assumed Debt Service pursuant to clause(H)of the definition thereof. See APPENDIX C - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Definitions"herein. r 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 r 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 funds to refund or refinance such Obligations if(i)a portion(which may be all)of the Senior Obligations r 11-2 Official St m.,.do, 13 r Book Page 133 IL are incurred for the purpose of providing funds to refund or refinance any Obligations, (ii)upon such L 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 I from rom 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 L 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 Obligations being refunded or refinanced(assuming for such purposes that debt service on such refunded or refinanced Obligations, or debt service on the Relined 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 any time incur Reimbursement Obligations with respect to Senior Obligations. �+ Subordtnare Obfigations. The District may at any time incur Subordinate Obligations upon satisfaction of the conditions provided in the Master Agreement. Sea APPENDIX C—"SUMMARY OF V PRINCIPAL LEGAL DOCUMENTS—Master Agreement"herein for a description of such conditions. Insurance u 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 form 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. w L L; Lr Lr Lr L t t-z oaa.t S�t.a 14 L Book Page 134 r r Allocation of Installment Payments Table I below sets forth the Installment Payments, together with the estimated interest thereon, r assuming no optional prepayments ea described under "THE CERTIFICATES — Prepayment Provisions"herein. Also set forth are the payments due on Outstanding Senior Obligations. Table I r Estimated Installment Payments of the District Final Year Installment Payments Outstanding Senior r Ending Relating to Certificates Oblieation Psvments Jug Principe] Intsi�3Principal Interealrrl Total 2008t'r $ 1.525.000 $17.045,829.83 2009 15,250,000 33,569,862.20 r 2010 16,310,000 3$737,964.90 2011 17,270,000 31,827,050.85 2012 17,810,000 30,862,339.25 r 2013 18,695.000 30,028,736.00 2014 33,775,000 28,798,645.70 2015 20,545,000 27,580,443.30 2016 21,355,000 26,745,154.90 2017 26,865,000 25,662,697.30 2018 23,375,000 24,633,864.10 2019 24,285,000 23,728,695.50 r 2020 25,295,000 22,803,505.50 2021 30,800,000 21,791,955.50 2022 22,700,000 21,328,209.92 2023 27,370,000 20,236,414.23 2024 29,680,000 19,018,621.14 2025 30.115,000 17,699,073.57 2026 31,570,000 16,355,513.60 r 2027 33,150,000 14,930,403.27 2028 34,665,000 13,539,578.84 2029 36,280.000 12,057,945.43 2030 38,750,000 10,538,170.23 r 2031 41,940,000 8,900,126.47 2032 41,990,000 7,066,545.09 2033 71,500,000 5,136,913.78 r 2034 16,590,000 1,754,656.12 2035 17.403,000 1,122,618.15 2036 18.260,000 459.531.16 2037 Total $784.120,000 $547,960.965.93 O1 Assumes a per annum interest rate of 3.75%for all un-hedged variable rate obligations and actual swap rates for r swapped variable rate obligations. See"FINANCIAL OBLIGATIONS—Existing Indebtedness"and APPENDD(A—"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2007"herein. rxr Excludes payments due on or before December 1,2007. r r r 11-2 Official Slalenmtdoc 15 r Book Page 135 IV THE DISTRICT L Background V 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. The District serves approximately 81% of the County population in approximately 479 square miles, or 59%of the County. v The service area which comprises the District was originally formed in 1954 pursuant to the County Sanitation District Act, as amended, Section 4700 et seq. of the Health and Safety Code of the i State. The District's service area originally consisted of seven independent special districts in the County 6' 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 Organisation, which was formed in 1923 among they`. Cities of Anaheim, Santa Ana, Fullerton, and Orange, and the sanitary districts of Placentia, Buena Park, La Habra, and Garden Grove. The Joint Omfall Sewer Organisation 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 Lr sanitation districts - District Nos. 1, 2, 3, 5, 6, 7 and 11. These prior districts were formed based on engineers analyses of the gravity Bows 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 v provided for the joint 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 then 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 governance 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. YI 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, their obligations to repay the then 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 y 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. - 1 The District is managed by the Board of Directors,whose members are appointed by twenty-five 6a 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 r 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. V L 11-2 Mcial St Ir LdM 16 Ir Book Page 136 r r Organization and Administration The District is independent of and overlaps other political jurisdictions. There are many r governmental entities, including the County,that operate within the District's jurisdiction. These entities are exclusively responsible for 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. r 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 we elected every year by a majority of the Board of Directors, and serve r 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 1 I years. r Robert P. ChireRi, Ph.D. is the District's Assistant General Manager, and has served in that capacity since July 2006. Mr.Ghinelli 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 r 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. r 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 r 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. r Ed Tones 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. Torres 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. r 11.2 Official Staementdoc 17 r Book Page 137 V Nick Arhonres, 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. v Services The District owns and operates regional wastewater collection,treatment, and disposal facilities r for the metropolitan area in the northern and central portion of the County. The District receives 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. L 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. W The District's staff is responsible for operating and maintaining the District's infrastructure, although some operations are provided by external contractors. u 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 1�1 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 M 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 valise of approximately S5.56 billion. V y V V V 11-2 OM.W Stal.m Ld 18 y Book Page 138 costs through Fiscal Year 2008-09 is shown in the following table. Table 3 Orange County Sanitation District Comparison of OCERS Costs for Fiscal Years 2002-03 through 2008-09 Fiscal Year Rater" 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 9,849,854 2007-080) 20.87 11,724,637 2008-09"' 21.34 12,275,695 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 it Population Anaheim 345,560 Brea 39,870 Buena Park 82,450 Costa Mew 113,810 Cypress 49,280 Fountain Valley 57,740 Fullerton 137,370 Garden Grove 172,780 Huntington Beach 202,250 Irvine 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..l 1,424,180 Unincorporated Areas(2) 81,000 Total 1,505,180 Sources of Califomia Department of Finance,Demographic Research Unit and RI Orange County Sanitation District. Employees r As of June 30,2007,the District had 634 full-time equivalent("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 501 agreements are in effect through June 30, 2011; the Supervisor and Professional Group agreements are in effect through Jane 30,2010. The OCEA has represented administrative/clerical,technical services r and engineering employees since 1979. Local 501 has represented operations and maintenance employees since October 1985. The Supervisor and Professional Groups have represented supervisory ar 11-2 Offidal Stat..rdce 19 Book Page 139 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 than distributes them to the Directors and District Committees for consideration. The Bound of Directors than adopts the _ proposed annual budgets,with any revisions,in June 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 minimum 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. 11-2 oradd Statemenl.dm 40 Book Page 160 11-2 omdd StammettAm 38 Book Page 158 t l-2 0mdd statemmtd« 36 Book Page 156 1✓ L IL w 11-2 Oddd Strre mldm 20 Book Page 140 u r r Table 2 below sets forth the estimated populations of cities and unincorporated areas served by the District as of June 30,2007. r Table 2 Estimated Populations of Cities and Unincorporated Areas Served by the Orange County Sanitation District r As of June 30,2007 Citv populadou Anaheim 345,560 Brea 39,870 Buena Park 82,450 Costa Mesa 113,810 r Cypress 49,280 Fountain Valley 57,740 Fullerton 137,370 Garden Grove 172,780 Huntington Beach 202,250 Irvine 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 ,r Stanton 38,980 Tustin 70,350 Villa Park 6,250 Westminster 92,870 r Yorba Linda 67,900 Cities Subtotal"' 2,424,180 Unincorporated Areas") 81,000 r Total 2,505,180 Sources State Department of Finance,Demographic Research Unit and al Orange County Sanitation Dishict. r Employees r As of June 30,2007,the District had 634 full-time equivalent("71713')staff positions.Most of the employees who occupy these positions are represented by recognized employee organisations, 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 r represented by Local 501 and 240 were represented by the Supervisor and Professional Croups. New agreements with each of these employee organizations took effect on July 1, 2007. The OCEA and Local 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 r and engineering employees since 1979. Local 501 has represented operations and maintenance employees since October 1985. The Supervisor and Professional Groups have represented supervisory r 11-2 06dd stdemmtd. 19 Book Page 139 L and professional employees since 1991. The District has historically enjoyed a good working relationship L with the employee organisations and has experienced no work stoppages by represented personnel in the past. L 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 V 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 L nine-member Board of Retirement. OCERS was established in 1945 under the provisions of the County Employees Retirement Law of 1937,and provides members with retirement,death,disability,and cost of- living benefits. V All District full-time employees participate in OCERS. Employees who retire at or after age 50 with ten or more years of service are entitled to an annual retirement allowance. The amount of the retirement allowance is based upon the member's age at retirement, the member's "final compensation" t,,, 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 I 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% V of their average salary for every year of service. Average salary is the highest consecutive 12 months of compensation for Tier I employees and the highest consecutive 36 months of compensation divided by three for Tier 11 employees. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. v As a condition of participation under the provisions of the County Employees Retirement Law of j 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. L L L L V L L 11-2 OrfidW Sutemmi.dm 20 L Book Page 140 r A current comparison of OCERS costs for Fiscal Years 2002-03 through 2006-07 and projected costs through Fiscal Year 2008-09 is shown in the following table. r Table 3 Orange County Sanitation District Comparison of OCERS Costs for Fiscal Years 2002-03 through 2008-09 Fiscal Year Rater.. Caat<rr 2002-03 5.50^A S 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 9,948,954 2007-08ur 20.87 11,724,637 2008-On 21.34 12,275,695 Requnr ved "con uUtrrb' 'con untrtb on as a percent of covered payroll. Includes amonimdon of Unfunded Accrued Actuarial Liability. or Amounts represents employer contributions nude by the District. or 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 r amortization of Unfunded Accrued Actuarial Liability ("UAAL"). For the fiscal year ended June 30, 2007, total payroll costs of employees covered by OCERS was S49,788,835. As of the December 31, 2006 valuation,OCERS has an aggregate UAAL ratio of 73.8%,for a total UAAL of$2.29 billion. r For more information regarding OCERS and the District's retirement plan as of June 30, 2007, see 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:llrvwtv.ocers.org. The information on such website is not incorporated herein by such reference or otherwise. r Post-Employment Benefits On June 21,2004,the Govenuoental Accounting Standards Board("GASB")approved Statement No. 45 (GASB 45), accounting standards for other(than pensions) postemployment benefits("OPEB"). GASB 45 effective dates are phased in, similar to GASB's Statement No. 34 which was implemented in ,r recent years.The first effective Fiscal Year for the District is Fiscal Year 2007-08.The District's actuary, Demsey Filliger Associates (the "Actuary"), bas prepared a valuation of the District's OPEB liability. According to the Actuary, the District's unfunded OPEB Liability is approximately $17,300,000. The r District does not believe that its OPEB liability will have a material impact on its District's operational results. [further detail to come] Risk Management r 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 S300 million. The self-insured portion for property damage covering fire t t-2 Official amrmmtdw 21 Book Page 141 L and other disasters is$25,000 per occurrence with outside excess insurance coverage to $1 billion. The L 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 I earthquakes. See "DISTRICT REVENUES — Reserves." The District also maintains outside L 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 L liability coverage to$25 million. During the past three fiscal years there have been no settlements in excess of covered amounts Ir 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. L For more information regarding the District's insurance coverage as of June 30,2007, see Note 1 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30,2007 set forth in Appendix A. 6d Existing Facilities 1 LY 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 outfall 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 L 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. l ("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 r ("mgld") of secondary treated effluent is conveyed to an Orange County Water District (the "OCWD") plant for tertiary treatment prior to ground water recharge. Yd 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. V The District employs several phases in the treatment of wastewater. The first phase,preliminary treatment, removes debris such as eggshells, sand 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 L' 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 u 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 than pumped through the ocean outfall pipe that _ extends five miles offshore. LW L 11.2OfSad S1atcmwLdm 22 L Book Page 142 r Table 4 below sets forth the treatment plants' approximate current and future treatment capacities. Table 4 e,. Wastewater System Treatment Capacities (MG/D) 2006-07 Existing Primary Total Planned Actual Treatment Existing Secondary Seconder Flows Capacity Treatment Capacity Capacity Plant No. 1 90 198 110 170 Plant No.2 139 168 90 150 Aggregate Treatment 229 366 200 320 Plant Facilities Y�I The D� istrict's "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 Plat No. 2 can also be diverted to Plant No. I. 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 organ 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 part treated r 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 r utilization. Permits,Licenses and Other Regulations 'O 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 err 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 r 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 11-20mcial amemmrdM 23 Book Page 143 L included the Section 301(h)waiver of secondary treatment requirements,was issued on May 6, 1998 and expired on June 8,2003. i In July 2002, the Board of Directors approved a change from the existing level of treatment, a L 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 L, 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). V 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 December 2002. 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 y 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 Ir U.S. District Court on November 15,2004. The South Coast Air Quality Management District ("AQMD") is the regional governmental agency charged with implementing the Federal Clean Air Act. AQMD permits are required before a 6" 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 construction is completed,the AQMD issues an operation permit. These permits are also project specific 6o 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 W Plan to improve treatment plant operations and reduce industrial toxic pollutants. The District currently has all necessary AQMD permits to operate the Wastewater System. L Capital Improvement Program Tire Master Plan. The District's 1989 master plan consisted of a 30-year plan of action for L managing wastewater activities to the yew 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, L 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 I designations and unit flow factors were used to project wastewater flows in the District's trunk sewers for L than 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 L 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 W 11-2 oaa.i St®r.mt.a.r 24 L Book Page 144 r r 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 their boundaries. The California Coastal Commission has some land use authority within the District's coastal areas. r 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 r 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 r 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"sim and build"approach to a broad-based,multi-agency cooperative evaluation process. r 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 r 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 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 biosolids were also considered. On July 17, 2002, the Board of Directors approved Resolution No. OCSD-14, "Establishing the r 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, r 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$538 million to reach 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 curen0y allowed limits. The current 50 percent secondary portion will increase incrementally as r 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 r 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 150%from the Fiscal Year 2005-06 flow. 11-20®aa srarmaaA« 25 Book Page 145 i In combination with the Interim Strategic Plan, the District developed its cuntmt Capital Improvement Program("CIP"). The District expects to meet future demands on the Wastewater System through the CEP. 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: �1 • Major rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping,and solids handling facilities at both treatment plants; u • 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; 6' • Reclaim 70 millions of gallons per day of the District's effluent,or nearly one-third of the L total daily flow(Groundwater Replenishment System);and • Achieve full secondary treatment standards. L UP Validation Study. In preparation of each year's Budget,the District conducts an Annual Cflr Validation Study to ensure that the scopes of the projects were necessary,and that the cost estimates were L accurate. As a result of the completion of the CIP Validation Study and the Secondary Treatment Peer Review in March 2007, a revised CIP was further developed to meet secondary treatment standards as 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 CB' Validation Study L 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. I The CIP Validation Study resulted in a revised CIP consisting of 107 large capital projects W 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 L 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. L L L L ll 1.4 t t-z Omdd awrrmea.dm 26 L Book Page 146 r r Table 5 Estimated Capital Costs Fiscal Years 2007-08 through 2020-21ra r Project Cost Collection System Capacity $ 169,005,450 r Collection System Repair,Rehabilitation,Replacement 192,087,530 Treatment Plant Capacity 18,329,380 Additional Secondary Treatment 489,917,590 Groundwater Replenishment System, Phase 1 15,793,000 r Improved Treatment 110,905,800 Treatment Plant Repair,Rehabilitation,Replacement 505,453,550 Support Facilities 105,791,810 r Total Validated Capital Improvement Program $1.607.184.100 All�tunated as of March 23,2007 and are derived from the CIP Validation Study. Source: Orange County Sanitation District. r 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 r 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 200". 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 r 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. Board ojDirector's Sewer Service Charges Review. In April 2007,the Board of Directors began r 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 XIIID 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 a+ 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. r Groundwater Replenishment System The District has taken a multi-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 r Groundwater Replenishment System ("G WRS"). 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 t 1-2 OtHdd Snteaantdoe 27 Book Page 147 equally(50 percent shares)by each agency. The GWRS is a joint 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 I 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 W acre-feet by the year 20I0, 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 y 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 1 was $492.2 million. Of this amount, up to $%.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 L $186.4 million. As noted above,Phase 1 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 �w 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 L. 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 r" 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. 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 L. under the Consent Decree. See"THE DISTRICT—Pemr%Licenses and Other Regulations." The District estimates that it will take approximately 6 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 v 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 L constructed and placed in service over the coming years. L 11-2 Official Srer M.dx 28 L Book Page 148 r Biosolids Management The District produces approximately 650 tons of digested and dewatered(Class B) biosolids per r day. By 2020, the District's biosolids production is projected to increase by 20%, 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 Kern County, composting to Class A biosolids in Riverside County, Kern County r and La Paz County,Arizona,and landfilling of Class B biosolids in Yount 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 then bans 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 r are anticipated to be eliminated in the near 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. r The dynamic regulatory issues, land application ordinances and bans, and public perception challenges have prompted the District, with the help of C112MHill, to develop a Long-Range Biosolids Management Plan("LRBMP"). This LRBMP was approved by the Board in December 2003. The goal r 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 r the volume of biosolids, explore the production of Class A biosolids products,and move into the energy and fuel production end compost markets. r 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 Km Industrial Center ("SKIC") facility, which is currently scheduled to open in r December 2007. In May 2006,the District entered into a contract with FmrTech Environmental, Inc. to convert 225 tons of biosolids per day to a renewable fuel at EnerTech's proposed facility in Rialto, California. The EncrTech solution is a relatively new,patented heat treatment process that increases the ,r 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 fuel product will be recycled and reused, under agreements with area cement kilns end other fuel users. Residual ash from the fuel combustion becomes part of the cement product, r 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 r composting facility at the Prima Deshecha Landfill in South Orange County. For the past two years under the previous existing MOU, SOCWA 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 I10 tons of Class B biosolids daily from the District and SOCWA and combined with like amounts of wood clips and yard trimmings, r 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 11-2 Omatl s�doo 29 Book Page 149 i r fund the tasks for the initial planning,permitting and concept design of the project. This project is still in Ir the development process.As a result of the transition to biosolids-based compost and energy products the cost to the L District for biosolids management is expected to increase by about $3 million per year starting in Fiscal Year 2006-07. The Fiscal Year 2005-06 budget for biosolids management was S9.7 million. The Fiscal Year 2006-07 budget for biosolids management is $12.8 million. 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 them was no adverse impact on the capacity of the Wastewater System. r 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 y charter change will allow the District, in its discretion, to acquire, construct, operate, maintain, and furnish facilities for the diversion of urban runoff 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. L 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 L grant of permission until the EPAIRWQCB 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 j Treatment NPDES Permit Application that was required to be submitted to the regional office of the EPA L+ and the RWQCB. See"THE DISTRICT—Permits,Licenses and Other Regulations." i Integrated Emergency Response Program Iw 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 L 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 Li 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 southem San Andreas fault,while on the whole more L✓ 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 fault would be u 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. L 11-2 ORcid Stu mUm 30 L. Book Page 150 r 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 FERP outlines the policies and employee actions to be taken before, r 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 r 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 r structures built after 1989. The Army Corps of Engineers' "All-River Plan" has mitigated any future flooding of the Santa r Ana River system and potential threats to the District's Wastewater System. Also, both Plant No. I 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 ,r materials. The IERP 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. r DISTRICT REVENUES Sewer Service Charges r 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 r 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 r "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. 11.2Ofine1 Su Ld 31 Book Page 151 1 1a1 Annually, the Board of Directors adopts an ordinance establishing the annual sanitary sewer L 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 II "LIMITATIONS ON TAXES AND REVENUES - Article XIIIC and Article XIlm of the California W 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 4 and presents a five-year comparison of the Sewer Service Charge rate for single-family residences. Table 6 Annual Sewer Service Charges V Single Family Residence Rate Five Year Rate Schedule Fiscal Years 2003-04 through 2007-08 Effective Sewer Service Percent Fiscal Year Ordinance No. Date Charee Inc roas 2003-04 OCSD-20 711/03 $100.00 14.3% L 2004-05 OCSD-20 7/l/04 115.00 15.0 2005-06 OCSD-26 7/l/05 151.00 31.3 V 2006-07 OCSD-30B 7/1/06 165.80 9.8 2007-08 OCSD-32 7/l/07 182.00 9.8 Source: Orange County Sanitation District. In November 2007, the Board of Directors began considering increases in its sanitary sewer service charges for all single family and multi-family residential units as well as most commercial and L industrial properties. As currently contemplated, this schedule would increase the amount of the annual charges by amounts ranging from 9a/a to 12%per year for each of the following five years, commencing with Fiscal Year 200849. Such increases are subject to approval by ordinance adopted by a two-thirds L vote of the Board of Directors after conducting a noticed public hearing in compliance with Proposition 218.There is no guaranty that any proposed service charge will be approved. Assuming an average annual rate increase of 10°/a,the projected SFR rate of$293.00 in five years L 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 L Control Road. 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"TI-Ili DISTRICT L — 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 2020-2I 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 J J 11.2 Official sAtrnwa.es 32 L Book Page 152 r r 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 Irvine Ranch Water District (the "IRWD") which directly collects fees from customers through a monthly billing procedure in 'r 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 farther described under "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES—Rate Covenant"herein. r Residendai Sever 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%per 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 r 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 $165.90 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. r 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 r the jurisdictions of certain other cities and districts within the State as of July 1,2007. r r r r r r 11-2(MaA atammiAm 33 Book Page 153 v Table 7 V' Comparison of Total Sewer Service Charges For Single-Family Residences As of July 1,2007 Ir Average Dry Annual Weather Sewer Property Flow Service Treatment Collection Tax Entity (ingffi '1 Chareet9LSvelar 411 Resmonsibilill t') Ineomeal San Diego I80 $460 2 Yes No L Los Angeles(City) 447 345 4 Yes No East Bay MUD 80 238 4 No Yes L Sacramento 155 222 3 No Yes Orange County 250 182 2 No Yes L. Sanitation District Los Angeles County 513 108 4 No Yes I Sow urce: Information obtained from respective entities listed. tr1 Treatment Level Categories: "1"—Primary treatment. "2"—Advanced primary or primary with some secondary treatrnent. V "3"—Secondary treatment. "4"—Advanced secondary or secondary with some tertiary treatment. (3) "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 I" Service Charges in Fiscal Year 2006-07 were approximately $13 million. Industrial Sewer Service Charges are applied to both the operating and capital funds. V 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 Taxes. The District receives approximately 2.5%of the one percent County ad valorem 6. 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 Li 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% secured property tax shift away from independent special districts. During the 2004-05 State Budget process, the State Legislature and the Governor 1r 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 i V 11-2Offidma1aaae t.dac 34 Book Page 154 L•1 r community colleges. This shift was effective for 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— proposition 1A." This 40% reduction for Fiscal Year 2004-05 was somewhat offset by the continuing r upturn 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 r $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 6.00/6 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 r 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 'unposed by the District pursuant to Section 5471 of the California 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 r 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. r 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 r 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 r 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 ,r 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 r System(including any standby or availability charges). Sale of Capacity. 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 r 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 r cost. The Santa Ana River Interceptor Line ("SARI") was built in the Chino Basin Preserve Area in r order to remove dairy farm wastes and accommodate future urban 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 net= 11-2Omci°i st°lmr°rdm 35 Book Page 155 I ' V II of the Chino Basin Preserve,the development of any infrastructure in the area to accommodate the SARI V was limited. The current SARI multi-phase project is designed to connect several dairies to the SARI. Future expansions of this project could include connecting other dairies and other waste streams with the i SARI line. See"THE DISTRICT—Capital Improvement Program"herein. L Wastewater Treatmeat History r The average yearly influent Flow to the District has remained relatively stable for the preceding five years. The wastewater Flow for Fiscal Year 20D4-05 was 243 mgtd,for Fiscal Year 2005-06 was 235 mgtd and for Fiscal Year 2006-07 was 229 mgld. 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 v no sewer failures or overflows during these events. Customers V 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 L through 2011-IZ 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 L. 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 I Historical Projected Lr Fiscal Year EDUs Fiscal Year EDUs0) 2002-03 997,757 2007-08 911,033 I 2003-04t'r 894,169 2008-09 914,677 L 2004-051'1 893,501 2009-10 91M36 2005-06 910,469 2010-11 922,009 �+ 2006-07 907,996 2011-12 925,697 EDT' U g the projection period is estimated at approximately 0.4%per annum. y t't 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: Osage County Sanitation District. Ir LW I L+ 11.2 Omdel Ste..t, o 36 Book Page 156 L r 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. r Table 9 Number of Accounts and Revenues by Customer Class r for the Fiscal Years 2002-03 through 2006-07 ($in Millions) ResidentiaVCommercial Industrial Number of Percentage Percentage Equivalent of Sewer of Sewer Single- Service Number of Service Family Total Charge Customer Total Charge Fiscal Year Dwellines Reveoos Reveoues Accounts Revenue Revenues r 2002-03 897,757 $77.0 92a/e 603 $6.3 8% 2003-04tt1 960,156 86.0 92 530 7.5 8 2004-05t11 960,634 99.0 90 568 10.5 10 2005-06 M859 132.0 92 557 12.2 8 2006-07 967,035 143.8 91 531 13.4 9 With to such Fiscal Years, presentation in the Statistical Section of the Comprehensive Annual r 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. r 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. r 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 r User Charges Charge 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 791,746.94 0.47 r Disneyland Resort-DCA 567,494.57 0.34 House Foods America Corp. 410,058.85 0.24 Pepsi-Cola Bottling Croup 374,306.33 0.22 r Seven-Up Bottling Company 335,177.79 0.20 Ameripec Inc. 279,478.15 0.17 TOTAL $6,817,325.08 4.09% r Some: Orange County Sanitation District. r 11-2 0filog StatementAm 37 r Book Page 157 L Assessed Valuation L The assessed valuation of property in the County is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalisation. Due to changes in LI assessment required under State Constitution Article XIIIA, the County assessment roll no longer purports to be proportional to market value. See "LD4TTATIONS ON TAXES AND REVENUES" herein. Generally, property can be reappraised to market value only upon a change in ownership or jr completion of new construction. The assessed value of property that has not incurred a change of ownership or new construction must be adjusted annually to reflect inflation at a rate not to exceed 2% � � per year based on the State consumer price index. In the event of declining property value caused by Li substantial damage, destruction, economic or other factors, the assessed value must be reduced temporarily to reflect market value. For the definition of full cash value and more information on property tax limitations and adjustments,see"LIMITATIONS ON TAXES AND REVENUES"herein. L The County Assessor determines and enrolls a value for each parcel of taxable real property in the County every year. The value review may result in a reduction in value. Taxpayers in the County also may appeal the determination of the County Assessor with respect to the assessed value of their property. L Table 11 below shows a five-year history of assessed valuations in the District since Fiscal Year 4 2002-03. Table 11 1 Assessed Valuations of Property in the District L Fiscal Years 2002-03 through 2006-07 ($in Millions) _ LFiscal Year Value %Chaoee 2002-03 $188.9 8.91% 2003.04 201.4 6.66 1 2004-05 219.3 8.85 60 2005-06 241.8 10.30 2006-07 270.7 11.93 1 Source: County of Orange AuditorController. In recent years the Southem California housing market experienced significant price appreciation L. with accelerating demand. One factor contributing to such demand in Southern California over these years was the increasing use of creative financing options for individual home buyers, including adjustable rate mortgages. Adjustable rate mortgages take various forms, but commonly have low initial interest rates, which have risen significantly in this year. As interest rates begin to rise and adjustable rates are reset and result in higher interest rates, homeowners who financed the purchase of thew homes with an adjustable rate mortgage can expect their monthly mortgage payments to increase. In addition, as interest rates have risen on new loans and adjustable rates are reset on existing loans, there has been a r decrease in home sale prices, resulting in recent homebuyers having loan balances in excess of the value of their homes. In the past year, a number of public home builders with significant operations in the Southem California housing market have reported in SEC filings slowing demand,significant increases in sales cancellation rates and increasing inventory build-ups(including increasing investor/speculator resale inventory)amid rising interest rates.[further revisions to come] L 1 61 11-20Rnd Sure .t.d. 38 Book Page 158 L r r 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 1 and February 1. The District currently participates in the County's Teeter Plan under which the District receives annually 1000/c 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 and. 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. �r 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 r approximately 2%. Unpaid taxes become delinquent after December 10 and April 10,respectively, and a ten percent penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax-defaulted 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 I lien date and become delinquent, r 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 accrue on November 1. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action r 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 `r Sewer Service Charge levies. Pursuant to the Teeter Plan described above, which provides for the County's financing of annual delinquencies, information with respect to outstanding delinquencies in prior years collected in current fiscal years and the percent of delinquencies to the total tax and Sewer Service Charge levies. r r r 1 t-2 ardd SM aA.d. 39 r Book Page 159 IL L Table 12 Total Property Tax and Sewer Service Charge Levies in the District for Fiscal Years 2002-03 through 2006-07(In Thousands) L Total Tax and Sewer Fiscal Year Service Charee Lew 2002-03 $122,210 2003-04 134,132 2004-05 152,745 v 2005-06 191,290 2006-07 209,206 Source: Change County Auditor-Controller's Office. L Budgetary Process V 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 L 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 fast 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 L 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 annual budgets,with any revisions,in June of each year. Budgetary control is exercised at the individual Department level and administrative policies L provide guidelines on budget transfers and the authorisation 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 L 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. L Prior year reserves or fund balances may be appropriated to fund items not previously included in the adopted budget. Reserves or fund balances exceeding minimum 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 L reserves in case of emergencies or unusual circumstances. L I ' V 11-20laddSm .dw 40 L Book Page 160 r Reserves The District has an established reserve policy with eight separate categories for its reserve funds. r 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. Increases to the Capital Improvement Program Reserve and Debt Service Required Reserves are attributable principally to the funding of projected CIP cash flow and the Reserve Fund for the Certificates. Reserve levels are calculated in accordance with the District's reserve policy. r Table 13 Actual and Projected Reserves June 30,2006 through 2008 (In Millions) r June 30,2006 June 30,2007 June 30.2008rrr Cash Flow Requirements Reserve Operating Expenses $113 $132 $84 Certificate of Participation Payments — -- 65 Operating Contingencies Reserve — -- -- Capital Improvement Program Reserve 189 51 86 r 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 Proj� r Source: Orange 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 Contingency 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 ten percent of the District's annual r operating budget. The Capital Improvement 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 ReplacementlRenewal Reserve was established to provide thirty percent 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 Funds as defined in the Master Agreement)are controlled by a trustee pursuant to the provisions of certificates of participation issues and we 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 are applied to future years' r I I-2 OBdal SratmimLCoc 41 r Book Page 161 i.W needs and must be maintained at specified levels. Throe is currently no established target for this reserve L and because the reserves of all other funds have not been exceeded,the reserve level for this reserve fund is zem for Fiscal Years 2005-05 through 2006-07. 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 Sett 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 CIP cash flow budget for Fiscal Year 2007-08 is $302.7 L million, an increase of$36.6 million from the prior year total, for the financing of joint works treatment and disposal system improvement projects,and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan and in the CIP L Validation Study. The information presented in the summary should be read in conjunction with the financial statements and notes. See APPENDIX A - "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED L JUKE 30,2007"herein. Table 14 Summary of Historical District Revenues and Expenses V and Other Financial Information For Fiscal Years 2002-03 Through 2006-07 1 ($In Millions) Lr 2002-03 2003-04 2004-05 2005-06 2006-07 Revenues: Sewer Service Charges01 $ 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 V Interest Earnings 25.9 6.8 15.1 10.4 221 Capital Facilities Capacity Charges 10.1 9.0 9.8 15.6 31.3 Other Revenues 3.4 4.0 6.1 9.2 8.3 L Total Revenues $170.5 $166.0 $183.2 $224.7 $284.8 Operations and Maintenance M Revenuescrl S 90.8 $70.6 Sal, 5119.1 L Expenses"" $79.7 $95.4 $101.8 $105.6 $112.2 I N um Debt Service i-W $3a-I O�Z $32 W.9 Coverage Ratioses• 4Ax 3.m 2.151 L20 4.051 L CIP Outlay SUM $149.5 $187.9 $260.8 5287.5 Ending Reserves(4) $344.4 $518.0HIM) Mau snu � - 1-1 Net of rebates,rf any,to commercial users. W o. Excludes depreciation and amortization expenses. o. Calculated in accordance with the Master Agreement. - a. Excludes debt service reserves in accordance with the District's reserve policy. j Source: Orange County Sanitation District Lr Projected Operating Data L 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 11-2�,cie1 Sm. t.doc 42 L Book Page 162 r r in the CIP Validation Study, projected increased sewer service rates for Fiscal Years 2007-08 and 2008- 09 at 9.8%. Principal expenditure components of these projections are the Interim Strategic Plan and CB' Validation Study, whicb identified 107 large capital projects managed by the Engineering Department through 2020 at a total coat 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$36.6 million from the prior year total. This CIP budget finances joint works treatment and r disposal system improvement projects, and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan and in the CIP Validation Study. The preparation of such projections was based upon certain assumptions and certain forecasts with respect to conditions that may occur in the future. While the District believes that these assumptions and forecasts are reasonable for the purposes of the projected selected operating data, it makes no representations that they will in fact occur. To the extent that actual future conditions differ from those assumed herein,the data will vary. r Table 15 Summary of Projected District Revenues and Expenses r and Other Financial Information for Fiscal Years 200748 through 2011-12 ($In Millions) r 2007-08 2008-09 2009-10 2010-11 2011-12 Revenues: r Residential&Commercial Sewer Service Charges $164.6 $181.6 S205.8 $233.3 $264.5 Industrial Sewer Service ,r Charges 18.2 20.1 22.7 25.8 29.2 Revenue Area No. 14 Fees 23.5 22.7 18.9 19.3 18.6 Ad Valorem Taxes 58.9 61.8 64.9 682 71.6 Interest Earnings 16.3 18.2 18.9 202 21.4 Capital Facilities Capacity Charges 11.5 12.1 12.8 13.5 14.2 Other Revenues 9.0 5.7 62 5.9 5.7 r Total Revenues 302.0 322.2 3502 386.2 425.2 Operations and Maintenance Expenses 134.7 150.4 161.5 174.1 189.2 Net Revenues(1) $155.8 $159.7 $175.9 $198.6 $221.8 r Debt Proceeds $300.0 $270.0 $190.0 $140.0 $100.0 Debt Service $ 65.3 $ 85.9 $102.9 $114.9 $123.2 CIP Outlays $302.7 $353.1 $236.9 $202.6 $179.5 r Ending Reserves(2) $463.1 S463.3 $499.7 $530.8 $558.4 Coverage Ratios(1) 2.39x 1.96x 1.71x 1.73x 1.80x r Ca m m accordance with the Master Agreement. Excludes debt service reserves in accordance with the District's reserve policy. Source: Orange County Sanitation District. I 1-2 Odinat Star t Aw 43 Book Page 163 L Management's Discussion and Analysis of Operating Data L 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 Year 2007- V 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 Directors'July 2002 resolution and in keeping with the terns and conditions of its ocean discharge permit r 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 8.6a/• increase from the prior year budget of$131.3 v 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 7.4%. Although staffing was approved at 634 full time equivalents, a v 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 V premiums. This increase reflects revised actuarial assumptions, low interest earnings in prior years, as 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 bimmlids removal and transport u 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 L 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 ram the plant processes. The L Fiscal Year 2007-08 budget reflects an increase in imported electricity because new goverment 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 CH)cash flow budget was approved at$302.7 million,a 13.7%increase L 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$1.62 billion. Over this time period,the CIP will accomplish: L • Rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping,and solids handling facilities at both treatment plants; W • Replacement and rehabilitation of nine of the District's outlying pumping stations, and rehabilitation and upgrade of 29 trunk sewer improvement projects; • Optimization of the production of"power"and"biosolids"at each of the treatment plants; • Reclamation of 70 million gallons per day of the District's effluent,or nearly one-third of the 6. total daily flow through the Groundwater Replenishment System;and • Achieve secondary treatment standards by December 2012. u L 11-20ffiaal$rae LdW 44 1 Book Page 164 IL1'. r r Based on the results of the CIP 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 r $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 r implementation of any such charge for each fiscal year. See"DISTRICT REVENUES— Sewer Service Charges." Investment of District Funds r 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, commercial r paper, reverse repurchase agreements and a variety of other investment instruments which are allowable under California Government Code Section 53600 at seq. r 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("PBNCO"). Mellon Trust ("Mellon Trust") serves as the District's r 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-term 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 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% of the r 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 return 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. r 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 r Ended June 30,2007 set forth in Appendix A. FINANCIAL OBLIGATIONS r 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 November 1, 2007. The payment obligations in connection with each of 11.2 Omdtl Srmanaa.Aoc 45 Book Page 165 i V these obligations,together with the 1992 Swap and the 1993 Swap described below, constitutes a Senior V 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. W Table 16 Outstanding Certificates of Participation Debt As of November 1,2007 Principal lean Outstanding Final v Amount Date Balance Maturi 1992 Certificates $ 160,600,000 12/03/92 $77,340,000 8/1113 L 1993 Certificates 46,000,000 9/02/93 26,900,000 8/1/16 Series 2000 Certificates 218,600,000 8/13/00 196,600,000 8/1/30 Series 2003 Certificates 280,000,000 9/26/03 191,500,000 2/1/33 j Series 2006 Certificates 200,000,000 3/08M6 196,600,000 2/1/36 L+ Series 2007A Certificates 95,180,000 5/22107 95,180.000 2/l/30 _ Total Long-Term Debt $794,120,000 u N 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. Y,1 Variable Rate and Swap Obligations In December 1992, the District caused the execution and delivery of certain certificates of L participation which were subsequently designated as the Orange County Sanitation Refunding Certificates of Participation, 1992 Series (the "1992 Certificates"). The District entered into an agreement for I acquisition and construction (the "1992 Agreement for Acquisition and Construction"), a Standby Ld Certificate Purchase Agreement (including as thereafter amended and substituted, the "1992 Standby Agreement") in order to provide fen payment of the purchase price of tendered and unremarketed 1992 . Certificates, and an Interest Rate Swap Agreement, as amended (the "1992 Swap") with AIG Financial y Products Corp. In September 1993, the District caused the execution and delivery of certain certificates of L participation which were subsequently designated as the Orange County Sanitation 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 I Branch. Ld In March 2006, the District caused the execution and delivery of certain certificates of participation designated as the Orange County Sanitation Refunding Certificates of Participation, 2006 L Series (the "2006 Certificates') evidencing $200,000,000 original aggregate principal amount. 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 L District entered into a Standby Certificate Purchase Agreement, dated as of March 1, 2006 (the "2006 L ttoasevS m Lda 46 W Book Page 166 r r Standby Agreement"),with DEPFA Bank plc, acting through its New York Branch in order to provide for payment of the purchase price of tendered and unremarketed 2006 Certificates. r 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 drew 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 r 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 1992 Certificates and r 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 ,r 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 r 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$10.92 million as of June 30,2005. Under the 1993 Swap,the District receives a variable interest rate equal to the interest paid to the r 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 r 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$3.43 million as of June 30,2005. The interest rate swap agreements entail risk to the District. The counterparty 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 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 r quality rating falls below"AA-"by Standard& Poor's or"Aa3 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 swap's fair 11.2 Official Smremem.doc 47 r Book Page 167 L value. Neither swap will expose the District to basis risk because the variable-rate interest paid to the L 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 L 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. y 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 L Year Ended June 30,2007 set forth in Appendix A. Anticipated Financings L From time to time the District expects to deliver other obligations to finance and refinance portions of the CB'. In Fiscal Year 200"9 the District expects to incur Additional Senior Obligations,in addition to the Certificates,evidencing principal in an aggregate amount of approximately$270 million. V Direct and Overlapping Bonded Debt V The Table 17 below presents the aggregate direct and overlapping bonded debt of the District as of June 30,2007. L L. w Ir W L L L L t t-z om�s nrma i.eo 48 L Book Page 169 r r 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 r Redevelopment Incremental Valuation) OVERLAPPING TAX AND ASSESSMENT DEBT(Based on redevelopment adjusted all property assessed valuation of$244,981.211.608); Total Debt District's Share of 6/300/ 7 %Aoolicable" Debt6/30/07 Orange County Teeter Plan Obligations $123,725,000 71.986% $ 98.940,954 The Metropolitan Water District ofSouthem California 359,115.000 15.058 54.075,537 Coast Community College District 353203.867 99.517 351,497.892 North Orange County Joint Community College District 239,124.001 %.861 230,649289 Rancho Santiago Community College District 324,633,495 98245 318,941A89 Brea-Olinda and Laguna Beach Unified School Districts 60A%.029 97.921&12557 29,111312 Nexport Mesa Unified School District 172,188.480 100. 172,188.480 Placentia-Yorba Linda Unified School District 92289.003 98.718 91.105.959 Saddleback Valley Unified School District 149.760.000 11.432 17,120,563 r Santa Ana Unified School District 130951207 100. 130.951,207 Tustin Unified School District School Facilities Improvement District No.2002-1 24AE1293 98.971 23.809,415 Anaheim Union High School District 126.158935 100. 126.13&955 r Fullerton Joint Union High School District 62.492.910 90.192 56354386 Huntington Beach Union High School District 203,873.794 98979 201,792,243 School Districts 242.015,559 97329.100. 241273,049 City of Anaheim 5.700,000 99.135 5.650.695 r Irvine Ranch Water District Improvement Districts 199,932.460 Various 199,887216 Roessner Community Services District Special Tax Obligations 670.000 100. 670.000 Bonita Canyon Community Facilities District No.98-1 43,155.000 too. 43,155.000 Irvine Unified School District Community Facilities Districts 271,130.000 99.998400. 271,128265 r Tustin Unified School District Community Facilities District No.88-1 and 97.1 159,822b75 100. 159,122A75 Orange County Community Facilities District No.874 63,414344 99971 63,395.954 Other Community Facilities Districts 348330AM Various 34l249912 r Orange CountyAssussmem Districts 113.2732% 100. I I32732% City of hvine 1915 As Bonds(Estimate) 938,189.169 100. $38,189.169 City of Tustin 1915 Act Bonds 55,962,000 100. 55,862.000 Other 1915 Ad bonds 21334,000 100. 21,534A00 r TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $4244,781.681 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations SM.530,000 71.886% $ 429,554,793 r Orange County Pension Obligations 99.293.079 71.886 64.620,539 Orange County Board of Education Certificates of Participation 19.720A00 71.886 14,175.919 Orange County Transit District Authority 1235.000 71.886 887,792 South Orange County Community College District Certificates of Participation 36,910,000 35.123 12963.999 r Brea-Olinds Unified School District Certificates of Participation 30,710.000 97.921 30,040.829 Orange Unified School Dishict Certificates of Participation 51.480.000 96.814 49,839,947 Placentia-Yorba Linda Unified School District Certificates of Participation 96.910315 98.719 95.697.407 Santa Ana Unified Scbool District Certificates of Participation 66.856251 100. 66.83625I Other Unified School District Certificates of Participation 40.253254 Various 39,967.949 Union High School District Certificates of Participation 84955.000 Various 82,445.164 School District Certificates of Participation 62305.000 Various 62,000.932 City of Anaheim General Food Obligations 6%,064.512 99.133 690,043,534 City of Costa Mesa General Food Obligations 483%.000 100. 48390.000 City of Fullerton General Fond Obligations 30,142,730 100. 30,142.730 City of Huntington Bach General Food and Judgment Obligations $0.669.678 99.982 90.655.159 I I-2 Omcin Stare notdoc 49 r Book Page 169 L City of Irvine General Fund Obligations 30945.000 100. 30.945,000 V City of Santa Ana General Fund Obligations 121.725236 100. 121,725,236 Other City General Fund Obligations 180,534,977 Various 152236.709 Orange Comfy Sanitation District Certificates of Participation 117.705.000 100. 117,705.000 in y Irvine Ranch Water District Certificates of Participation 41.600,000 89.526 37242.816 Municipal Water District of Ormge County Water Facilities Corporation 20,800.000 66,193 13.830.544 Yorba Linda County Water District Certificates of Participation I0A70,000 97.751 9,943,526 Orange Comfy Fire Authority 13.570,000 49.906 6.772.244 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT S2.278,883,636 W Less: Orange Comfy Transit District Authority(80%self-supporting) 710.7U City ofAmbeim self-supporting obligations 409.384,622 Other City self-supporting obligations 8,404,628 MWDOC Water Facilities Corporation(100%self-supporting) 13.830.5M TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,946.553,608 GROSS COMBINED TOTAL DEBT $6,523,672,317 1n NET COMBINED TOTAL DEBT $6.091,342289 trr Percentage ofoverlapping agencys redevelopment adjusted all property assessed valuation($244,88121 IAA)located within boundaries of the district. In Excludes wastewater revenue certificates of participation. t33 Excludes tax and revenue anticipation nines,enterprise revenue,mortgage revenue and tar allocation bonds and non-bonded capital lease obligations. Ratios to: Total Overlapping Tax Gross Combined Net Combined law 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% 2.491% 1.4 STATEH BUILDING Am REPAYABLE AS OF 0 7: SO Source:California Municipal Statistics L 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 j 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 staff support to the Corporation. L 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 Comfy Sanitation District office at IOW Ellis Avenue, Fountain Valley, California, W 92709-7018. I L, L 11-200icial So mmtdoe 50 L Book Page 170 r 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 X1W). Article XIIIA, as amended, limits the amount of any of 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 I, 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 r facilities, approved by 55% of the voters of the district, ban only if certain accountability measures are included in the proposition. Article XIIIA defines full 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 ,r 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 annually to reflect inflation at a rate not to exceed 2%per year or to reflect a reduction in the consumer price index or comparable data for r 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 any other law,local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described " above. Legislation Implementing Article XIIIA r 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 any property tax(except r 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. r Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the two percent annual adjustment are allocated among the various jurisdictions in the taxing area"based upon their respective"situs." Any such allocation made to a local agency continues as part of its allocation in furore years. Beginning in the 1981-82 fiscal year, assessors in the State no longer record property values on r 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 r is shown at 100°/a of market value (unless noted differently) and all tax rates reflect the $1 per$100 of taxable value. ,r 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 XIIB,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" r 11.2 Offici°1 Srarnrea dw 51 r Book Page 171 I L. (consisting of tax revenues, state subventions and certainother funds) inan amount higher than the L 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 1 authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, 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 many year exceed the amounts permitted to be spent,the excess would have to be returned by revising tax rates or foe schedules over the subsequent two years. subject to limitation" are authorizations to d ' roceeds of tax "Appropriations 1 spen `p es," 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. L 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 r 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 government. 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 coat of living index, Lr 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 111, the appropriations limit is tested over consecutive two-year fr 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 rallect changes in coat 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 r Proposition II 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. v Proposition IA L Proposition lA("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 1 tax revenues such as the tax shifts permitted to take place in Fiscal Years 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 YI 11-2 Offival alat..LA 52 V Book Page 172 r .. to certain exceptions. Proposition I 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 governments within a county must be approved by two-thirds of both houses of the Legislature. Proposition IA provides, however,that beginning in Fiscal Year 2008.09, the State may shift to r 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. r 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 ,r 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. r 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)my 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 r 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 r retroactively from its effective date to 1985 are unlikely to be of any continuing importance;certain other restrictions were already contained in the Constitution. r 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. r Article XIIIC and Article XIIID of the California Constitution r 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 California Constitution,creating additional requirements for the imposition by most local governments of "general 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 1, 1997, and certain of its provisions purport to apply to any tax imposed for general governmental purposes(i.e., "general taxes") imposed, extended or increased on or after January I, 1995 and prior to November 6, 1996. r 11-2 OffieW Surrnml.doe 53 Book Page 173 i Article XIIID imposes substantive and procedural requirements on the imposition, extension or b increase of any"fee" or"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 b things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee in charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee ar charge by a majority of owners of the parcels upon which the fee or charge is to be imposed Except for fees and charges for 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 in 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. Verjil, 39 Cal. 4's 205 (2006) (-Bighorn") have clarified some of the L 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 6W 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 r 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 X))ID and imposes several procedural requirements for the imposition of an assessment, which may include 1 various notice requirements, req po � Y t, Y � ( ) teq . 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. 6d Article XBID provides that all existing, new or increased assessments are to comply with its L 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. V 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 Bighorn, 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 L+ depreciation of works,provide a reasonable surplus for improvements,extensions,and enlargements,pay L 11-2 0muam Sraemaadoc 54 I : L. Book Page 174 r 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 r 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"/a 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 ,r 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. Other Initiative Measures Articles XIBA, XBIB, XIIIC and XIIID were adopted pursuant to California's constitutional ,r 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. 11-2 Official SWMm Aft 55 r Book Page 175 V I LEGAL MATTERS The validity of the Certificates and certain other legal matters are subject to the approving I I opinion of Fulbright& Jaworski L.L.P., Los Angeles, Ca ifomia, Special Counsel to the District. A iJ 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 faimess of this Official Statement Certain legal matters will be passed upon y fm 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 i The District has retained Public Resources Advisory Group m 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, many other related information available to the District, with respect to u accuracy and completeness of disclosure of such information. The Financial Advisor has reviewed this Official Statement but makes no guaranty, wartsm y 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 6' 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. V 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, L 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. V FINANCIAL STATEMENTS i 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 HofSinan McCann P.C. merged the District's former auditors, Conrad and Associates, L.L.P., into its national practice. See APPENDDf A — "COMPREHENSIVE ANNUAL L FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2007" herein. The report issued fen the year ended June 30, 2007, received the Government Finance Officer's Association Certificate of Achievement for "Excellence in Financial Reporting" for the 13th consecutive year. The audited financial statements, including the footnotes thereto, should be reviewed in them entirety. Mayer Hoffman McCann P.C. has consented to the L rr-z 0add Srmenaa.duc 56 L Book Page 176 r 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 fsimess 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,as amended(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'j,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 r retroactive to the date of delivery of the Installment Purchase Agreement and the Certificates. The District and the Corporation have covenanted in the Instalment 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 Certificateholders, respectively, for federal income tax purposes. Upon the delivery of the Certificates, Fulbright & Jaworski L.L.P., Los Angeles, California, Special Counsel, will deliver its opinion that, under existing law, and assurning 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 r 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 cument earrings 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 case 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 r 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 r 11-2 Official Sutem®tdoc 57 Book Page 177 Certificate if that would minimize the purchaser's yield). The rate and timing of the amortization of the V bond premium and the corresponding 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 coat 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 V, cover page of this Official Statement is"original issue discount". Such original issue discount accruing 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 'v 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 L 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. L Any person considering purchasing a Certificate at a price that includes bond premium should consult his or her own tax advisers 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 tax 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. 1i 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 r 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, Interest 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. v Although Special Counsel is of the opinion that Interest Component and Certificate Interest j Distributions in respect of a Certificate are exempt from state personal income taxation and excluded Ir 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 W 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 V 11-2 om�al sratmml d« 58 1 V Book Page 178 r 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)(5XBxi) 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 r 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 r 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 tax purposes; and (vi) 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 taxsltempt 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 r 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. r CONTINUING DISCLOSURE r 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 property in the District not later than eight(8)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 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 or the notices of material events is ad 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-I2(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. r 11-2 Oeititl Sma°mr.dac 59 Book Page 179 u RATINGS The Certificates will be rated "_" by Moody's Investors Service ("Moody's!% "_" by Standard & Poor s Ratings Services, a Division of The McGraw-Hill Companies, Inc. ("S&P"), and `+ —by Fitch Ratings. 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 'y Street,New York,New York 10041;Moody's Investors Service,99 Church Street,New York New York 10017; 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 y 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 t.+ at a competitive sale for a purchase price of S (representing the aggregate principal amount of the Certificates, plus a net original issue premium of S , and less an Initial Purchaser's discount of$ J. The public offering prices may be changed from time to time by the Initial L: 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 r 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. i This Official Statement is not to be construed as a contract or agreement between the District and the V purchasers or Owners of any of the Certificates. The execution and delivery of this Official Statement has been duly authorized by the District. y ORANGE COUNTY SANITATION DISTRICT 1�1 By. , . Chair of the Board of Directors I d LI 1. y 11-2 Olfiaal Stetemmt A 60 V Book Page ISO r APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY r SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30,2007 r r r r r r r r r r r r r n-z Oaad S,etemmt.dm A-1 Book Page 181 r 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 r 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 1998 through 2007, the population of the County increased by approximately ,r 13.71%, compared to 14.61% for the State and 10.7we for the United States(reflects growth from 1998 through 2006,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 Orange county", California") of ARS64M 1998 2,724,500 32,862,000 270,248,003 1999 2,776,100 33,417,000 272,690,813 2000 2,863,706 34,098,740 282,216,592 2001 2,919,791 34,794,382 285,226,284 .. 2002 Z9639394 35,392,960 298,125,973 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 37,444,385 299,399 484 2007 3,099,121 37,667,518 n/at'1 as of�each year. ter as ofluly l ofeach year. (3) 2007 population data had Trot been released for the United States of America as of the date of this Official Statement r Source: Orange County and State of California Statistics -California State Department of Finance, Demographic Research Unit United States Statistics—Population Estimates Program,Population Division,U.S.Ceams 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. 11-20tfiaal SW Ldoc B-1 Book Page 182 b TABLE B-2 1^' 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 9-12 150.921 154468 158 903 160 018 163.389 Total Enrollment 51�1-05 515.41�3 7.44 aGL14 503,255 - Source: California Department ofFducution, Fducational 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. r Employment The following table summarizes the historical numbers of workers in the County over the period V 2001 through 2006 by industry. TABLE B-3 COUNTY OF ORANGE INDUSTRY EMPLOYMENT AND LABOR FORCE-ANNUAL AVERAGE 2201 2002 20,03 2004 2005 20 r Farm 7,100 7,300 7,200 6,700 5,300 5,400 Natural Resources and Mining 600 600 500 600 700 600 ' Comtmction 80.700 79,200 83,700 92,200 99,300 107,000 Manufacturing 208,500 190,800 193,900 183,500 182,700 183,400 Wholesale Trade 83,900 82,400 83,200 82,400 83,000 82,900 _ Retail Trade 150,100 151,400 152,800 153,200 157,100 159.500 Transportation,Warehousing Utilities 30,400 28,700 29,000 29,200 28,800 28,400 4 Information 40,200 36,800 35,200 33,900 32,800 31,700 Financial Activities 105,900 110,200 122,200 132,300 138,200 139,000 Professional and Business Services 248,400 248,900 252,600 254,900 267,000 274,800 Educational and Health Services 114,600 118,400 126,300 151,000 133,300 138,900 V Leisure and Hospitality 154,300 155,400 158.600 162,900 164,400 169,500 _ Other Services 45,200 45,900 46,700 47,400 48,200 47,900 Government 150.900 155,100 154.20 15�_400 155.3 156.500 V Total All Industries(l) L420,800 1,411,000 1.438.103 1,512,800 1,541,800 1,527,506 I)eta�y not add due to rounding. Source: California Employment Development Department. r V 11-2 Ot6tld SamnenAm B-2 W Book Page 183 r r Major Employers TABLE B-4 r COUNTY OF ORANGE MAJOR EMPLOYERS Employer Name Number of Employees r Walt Disney Company 20,250 University of California,Irvine 16,374 Boeing Company 11,242 St. Joseph Health System 9,482 YUM! 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 Inc. 4,819 Source: Orange County Businew Journal 2007 Book of Luis. r Labor Force,Employment and Unemployment Table B-5 summarizes the labor force, employment and unemployment figures over the period r 2002 through 2006 for the County and the State. TABLE B-5 r COUNTY OF ORANGE AND STATE OF CALIFORNIA LABOR FORCE,EMPLOYMENT AND UNEMPLOYMENT YEARLY AVERAGE Unemployment Year and Area Labor Force Employment Unemployment Rate r 2002 Orange County 1,531,300 1,454,500 76,800 5.0% California 17,330,700 16,168,200 1,162,500 6.7 r 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 y 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 r California 17,901,900 17,029,300 872,600 4.9 Source: California Emplovmenl Development Department. r 11-2 Oadm snac a undo B-3 Book Page 184 Y.r I Personal Income and other Demographic Information Table B-6 summarizes the personal income, per capita personal income, median family income, public school enrollment and unemployment rate for the County of Orange. TABLE B-6 COUNTY OF ORANGE L DEMOGRAPHIC INFORMATION01 Per � Total Personal Capita Median Public V Fiscal Income Personal FamOyo) School") Unemployment Year (In thousands) Income Income Enrollment Rare(" L 1997-98 $ 90,579,9271" $ 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 69.310 493,000 2.9 L 2000-01 109,010,278u) 37,851 70.577 494,000 3.0 2001-02 111,750,294u) 38,010 72,998 503,000 4.1 1 2002,03 117,722,500s3) 39,517 73,572 51Z000 4.0 L 2003-04 125,670.1001" 41,654 70,900 517,000 3.6 2004-05 133,031,800(3) 43,660 73.545 514,000 3.9 2005-06 141,169,400(r) 45,954 76,443 510,114 3.7 bw 2006-07 $148.916,000u6) 48,068 78.950) 503,955 3.9 _ The Ormge County Sanitation District services 471 square miles or 591%of the total 799 square miles Out make L.t Ir4 the boundaries of the County of Orange. s2 Data Source:Bureau of Economic Analysis,U.S.Department of Commerce (')Data Source:Anderson Center for Economic Research,Chapman University. (4)Data Source:California Department of F-ducation,Educational Demographics Unit 1')Data Source: Store of California,Employment Development Department as of June 30 of each fiscal year. ts)Forecasted number. i Taxable Sales Table B-7 summarizes the annual volume of taxable transactions from 2001 to 2005. L L Vr f✓ 1 L 11-2 Olds Stat=mtdm B4 LA Book Page 185 TABLE B-7 COUNTY OF ORANGE TAXABLE TRANSACTIONS (In Thousands) Type of Business 2001 2002 2003 2004 2005 Apparel stores group $ 1,446.572 $ 1,508,011 $ 1,697,120 $ 1,881,882 $2.062.892 General merchandise group 4,432,881 4,618,932 4,855,674 5,205,075 5,467,357 Specialty stores group 4,999,099 4,837,212 5,085,612 5,700.317 6,028,099 Food stores group 1,534,244 1,551,611 1,574,528 1.563,145 1,716,228 r Eating and drinking groups 3,749,604 3.894,398 4,149,117 4,475,791 4,798,676 Household group 1,501,595 1,722,573 1,985.255 2,135,876 2,269,650 Building material group 2,157,1% 2,275,964 2,480,249 Z9509592 3,000,086 Automotive group 7,957,760 8,482,604 9,651,049 10,585,091 11,293.156 All other retail stores group 739,760 765.523 809,093 944,184 1,046,700 Retail Stores Totals 28518,701 29,646.818 32,287,697 35,441,953 37,672,934 Business&Personal Services 2.673,666 2,615.150 2,699,250 2,819,934 2,938,129 All Other Outlets 13,402,947 12,607,188 12,530,119 13,420,172 144. 52283 TOTAL ALL OUTLETS $44,595,314 $44,969,156 $47,517,066 $51,682,059 $55,063,246 Source: California Stare Board oJEqualisation. Housing Characteristics The total number of housing units in the County was estimated by the California State Department of Finance to be 1,024,692 as of January 1, 2006. This compares to 1,013,942 reported by .. the Department of Finance in January 2005. According to California Association of Realtors,the median resale price of single-family dwelling units in Orange County was$704,150 in May 2005. .. Building Permits The total valuation of building permits issued in the County reached $4.7 billion in 2006, which represents about a 25% increase relative to 2002. 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 2002 through 2006. r r I I-2 mdi smt.t a« B-5 Book Page 186 y TABLE B-8 6' COUNTY OF ORANGE BUILDING PERMIT ACTIVITY 2002 through 2006 Ir (In Thousands) 2002 2003 2004 2005 2006 Valuation: Residential $2,328,119 $2,076,977 $2,243,645 $2,100,436 $2,336,324 Non-Residential 1-208.626 1,005,547 L132.846 1,494,755 2,397,248 V Total $3,536,746 $3.082.525 $3,376,491 $3,595,191 $4,733,572 New Housing Units: Single Family 6,423 5,565 4,395 4,058 3,121 Multiple Family 5 597 3.746 4 927 3�48 5.219 Total 12,020 9.311 9,322 7,206 8,340 Source: Construction lndustry 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 sauces; 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 r 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. Yr 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, r Orange County Performing Arts Center, Verizon Wireless Amphitheater and the Art Colony at Laguna Beach with its annual art festival. i r 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 1997 through 2006. ti i 6. 11.2 O9'idd Stetmiaa.E B-6 Book Page 187 r r TABLE B-9 COUNTY OF ORANGE CONVENTION ACTIVITY r Year Conventions Atttadaraoe 1997 431 979,259 r 1998• 450 750,698 1999' 473 767,689 2000 470 85M93 2001 489 959,000 r 2002 547 1,009,171 2003 590 1,093,797 2004 666 1,211,476 2005 619 1,113,224 r 2006 633 1,125,995 Source: Anaheim/Ore tge County Visitor and Convewian Buremc 2006. r ' A portion of the decrease in 1998 and 1999 from attendance and expenditure levels of prior years is attributable to the effects of the construction of Disney's California Adventure theme park and related infrastructure projects. Transportation r� The County is situated in the most heavily populated area in California 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 r 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. r Drivers in the County have access to two toll road systems of the Transportation Condor Agencies. The San Joaquin Toll Road(73)runs from Costa Mesa to San Joan Capistrano connecting to r 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 r the 5 freeway near San Clemente. Rail freight service is provided by the Burlington Northern Santa Fe Railway and the Union r 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, Irvine, Newport Beach and Santa Ana. Major airlines, including Alaska, Aloha, America r 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. I1-2 Mast Stnenmtd. B-7 Book Page 188 L I : In 1993,the Defense Base Realignment and Closure Commission directed the closure of Marine W 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 L 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 V, 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 uses. The day after Measure W was approved, the Department of the Navy issued a press L release stating that disposal of the former Base would be accomplished by means of a public auction. The City of Irvine 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 L related to the planning or development of a commercial airport at EI Toro. Natural Disasters;Seismic Activity/Fares �+ 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 y 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 1 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. L 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. V V L 6' L i lr L t t-2 Oteda Srav .O. B-8 L Book Page 189 y APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS r r `.I u� ..1 r r r r r r r r 11-30fficial 5tmementdac C-I Book Page 190 r APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT r THIS CONTINUING DISCLOSURE AGREEMENT(this"Disclosure Agreement"),dated as of December 1, 2007, 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"). r WITNESSETH: WHEREAS, the District has caused to be executed and delivered Orange County Sanitation r District Certificates of Participation, Series 2007E (the "Certificates"), evidencing principal in the aggregate amount of$ ,pursuant to a Trust Agreement,dated as of the date hereof(the`"Trust Agreement"), by and among Union Bank of California, N.A., as trustee (the 'Trustee"), the Orange r County Sanitation District Financing Corporation(the"Corpormion")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 r 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: r "Annual Report" means any Annual Report provided by the District pursuant to, and as described in,Sections 2 and 3 hereof. r "Annual Report Date" means the date in each year that is eight months after the and of the District's fiscal year,which date,as of the date of this Disclosure Certificate,is March 1. r "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. r "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/mmicipall r sir.htm. r -Official Statement" means the Official Statement, dated , 2007, relating to the Certificates. r 11-2(M6dtl Snaemmtduc D-I Book Page 191 LW "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. it "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 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(f)of Section 4 hereof. (b) Not later than 15 business days prim 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). V (c) If the Trustee is unable to confirm that an Annual Report has been provided to Repositories by the date required in subsection (a) of this Section, the Trustee shall send a notice to the irl Municipal Securities Rulemaking Board and each State Repository, if any, in substantially the form attached as Exhibit A. Lr (d) The Dissemination Agent shall: (i) determine each year prim 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) i the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure 60 Agreement, stating the date it was provided and listing all the Repositories to which it was provided. L: 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 governments] 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 i ar 11.2 Official Stet mWAoc D-2 Book Page 192 r Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. r (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 r 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, r 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. r (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 r projections),9, 10, 11, 12, 13, 14 and 16. (a) 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 r necessary to make the specifically required statements, in the light of the circumstances under which they are made,not misleading. r 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 r 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. Reoortine 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: r (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. r+ (5) Substitution of credit or liquidity providers,or their failure to perform. r (6) Adverse tax opinions or events affecting the tax-exempt status of the security. U-a OfflaW St. mr.dm D-3 r Book Page 193 L (7) Modifications to rights of security holders. (8) Contingent or unscheduled Certificate calls. I . (9) Defeasances. L (10) Release, substitution, or sale of property securing repayment of the L securities. (11) Rating changes. V (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 I event, and request that the District promptly notify the Trustee in writing whether or not to report the V event pursuant to subsection(f)of this Section. i (c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether i. 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. (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 V 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 Filine. Submission of Annual Reports and notices of Listed Events L 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, W including DisclownsUSA.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 L r r-a Omrld swre,aMLd« D-4 L Book Page 194 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 r 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 r 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 mutative form, the reasons for the amendment s 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. 11.2 Official SWr duc D-5 r Book Page 195 Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed V 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 L, 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 L 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),in L any holder or beneficial owner of the Certificates may, take such actions as my be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District, Trustee or the Dissemination Agent, w 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. it Section 11. Duties. Immunities and Liabilities of Trustee and Dissemination Anent. Article VBI of the Trust Agreement is hereby made applicable to this Disclosure Agreement as if this V 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 W 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 1r District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. V 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. w 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 bur one and the same instrument. y v W 11-2 Offidal Simrnieit.0oc D-6 l W Book Page 196 IN WITNESS WHEREOF,the parties hereto have executed this Disclosure Agreement as of the date first above written. r ORANGE COUNTY SANITATION DISTRICT r By. Chair of the Board of Directors r DIGITAL ASSURANCE CERTIFICATION LLC, as Dissemination Agent r By: Authorized Representative r r r r r 11-20mcial Stele L&x D-7 r Book Page 197 n. EXHIBIT A r NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Orange County Sanitation District r Name of Issue: Orange County Sanitation District Certificates of Participation, Series 2007B Date of Issuance: ,2007 NOTICE IS HEREBY GNEN 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 December 1, 2007, by and among Union Bank of California, N.A., 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 r By: cc: Trustee r Dissemination Agent r r r r r r I I-201fidw swla .Ll A-I r Book Page 198 r r APPENDIX E BOOK-ENTRY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Certhcates,payment of principal and interest evidenced by the Certificates to Participants or Berrefrctal Owners, confirmation and transfer of bernefncial ownership interests in the r 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 r accuracy thereof The Depository Trost Company—Book-Entry System r 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 nominec) or such other name ss may be requested by an authorized representative of DTC. One fiilly-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 "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 r 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 r Corporation ("DTCC"). DTCC, in tun, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation(NSCC,FICC,and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, barks, 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 wwwAtc.org. The information on such websites is not r 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 r r r-2 Official Summmtdac E-1 Book Page 199 IL Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting L on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. L 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 y requested by an authorized representative of DTC. The deposit of Certificates with DTC and thew 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 V 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. L 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 L 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, r, 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. r Prepayment notices shall be sent to DTC. If less than all of the Certificates within an issue are I� being prepaid m 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 w the Certificates unless authorized by a Direct Participant in accordance with DTC's 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 L whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). V 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 cortesponding detail L 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 L DTC, nor 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 u 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, y tr t 1-2 Official Saranaa.dcc E-2 L. Book Page 200 r r DTC may discontinue providing its services as securities depository with respect to the Certificates many time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Certificates are required r 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 conceming DTC and DTC's book-entry system has been obtained �r from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. r Discontinuance of DTC Services In the event(i)DTC determines not to continue to act as securities depository for the Certificates, r (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 Trost Agreement. r 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 Tmstee 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 �r new Certificates representing the same principal amount in Authorized Denominations. The Trustee shall require the payment of any Owner requesting such transfer of any in or other governmental charge required to be paid with respect to such transfer. Certificates may be presented for exchange at the r 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. r 11.2 official swemmt doe E-3 r Book Page 201 r r APPENDIX F FORM OF APPROVING OPINION OF SPECIAL COUNSEL r Upon the execution and delivery of the Certicates, Fulbright& Jaworsti 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 followtngJbrm: [Date of Delivery] r Orange County Sanitation District IOW Buis Avenue r Fountain Valley,California 92709 Ytl Orange County Sanitation District Certificates of Participation Series 2007B r Ladies and Gentlemen: r We have acted as Special Counsel in connection with the$ aggregate principal amount of Orange County Sanitation District Certificates of Participation, Series 2007B(the"Certificates")which ,r evidence direct, fiactional 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 December 1, 2007 (the r "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 as 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 'r 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. r The Certificates are to be execmed and delivered pursuant to a Trust Agreement, dated as of December 1,2007(the"Trust Agreement"), by and among the District,the Corporation and Union Bank of California, N.A., as trustee (the "Trustee"). Proceeds from the sale of the Certificates, together with other available moneys, will be used to (i) finance certain improvements to the Wastewater System, (ii) fund a reserve fund for the Certificates, and(iii)pay the costs incurred in connection with the execution r and delivery of the Certificates. r r r-2 Omad SmmrmLdoc F-1 Book Page 202 V 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 their respective terms, each constitutes the legally valid and binding obligation of the District,enforceable against the District in accordance with their respective terms. 6" 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 r 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, r 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. r 4. The Internal Revenue Code of 1996(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. r In out 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 4 income tax purposes;inasmuch as the Installment Purchase Agreement is not a"specified private activity, bond"within the meaning of section 57(ax5)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 i 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, based solely on the foregoing, and upon L existing provisions of the California Revenue and Tax Code, we are of the opinion that Payment Interest 11-2 OIEtlel Srmemmt F-2 L Book Page 203 r allocable to and the Certificate Interest Distributions in respect of a Certificate are not subject to taxation under the California personal income tax. r 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 fdure 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 law consequences with respect to the Installment Purchase Agreement, Certificates, Payment Interest, or Certificate Interest Distributions, if my 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. r 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 r 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, r 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, r 11.2 otmaa St.in.mtd.« F-3 Book Page 204 Fulbright & Jaworski L.L.P.—DnfY 11/2/07 OFFICIAL NOTICE INVITING BIDS $300,000,000 ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION SERIES 2007B (Book-Entry-Only) NOTICE IS HEREBY GIVEN that bids will be received by the Orange County Sanitation District (the "District") for the purchase of$300,000,000 original principal amount of Orange County Sanitation District Certificates of Participation, Series 2007B(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 r specified below(unless postponed as described herein): Date: Tuesday,December 11,2007 11:30 a.m.,New York Time Place: Orange County Sanitation District I OW Ellis Avenue r Fountain Valley,CA 92708-7018 Electronic Bids: As an accommodation to bidders, electronic proposals may be submitted through the ideal LLC bid service (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. r Terms of the Certificates The Preliminary Official Statement for the Certificates, dated_, 2007, including the cover r page and all appendices thereto (the "Preliminary Official Statement"), provides certain information concerning the sale and delivery of $300,000,000 aggregate principal amount of the Certificates evidencing direct, undivided fractional interests in the Installment Payments (the "Installment r Payments"), and the interest thereon, payable 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 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 terns 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 the making of 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 r 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 11-2 Off nel No=Inviting Bi&d% Book Page 205 i V revenue received by the District from the operation or ownership of the Wastewater System of the L District(the"Wastewater System")remaining after payment of Maintenance and Operation Costs. I The Issue V The proceeds from the sale of the Certificates will be used to: (i)finance the acquisition, construction and installation of certain improvements to the Wastewater System, (ii)fund a reserve fund for the Certificates and(iii)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 December 1, 2007 (the "Trust Agreement"), by and among the District, the Corporation and Union Bank of California, N.A., as trustee (the"Trustee"). Capitalized terms not defined herein shall have the same definitions as used in the Trust r Agreement or the Master Agreement. Authorization L On November 28, 2007,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 v delivery of the Certificates. Outstanding Senior Obligations !6d The District has outstanding Senior Obligations, evidenced by six series of certificates of participation and two interest rate swaps, payable on a parity with the Installment Payments under the w, 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. v 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 and the 2007 Series A Installment Purchase Agreement. U 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 6. 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. r 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 it 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 subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests 'y 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 L 11-201fia9J Notice Nvitina Bid&dw 2 W Book Page 206 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 fast 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 inct rmuce 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" in the Preliminary Official a 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 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 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°/a,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 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 proceeds of the Certificates in an amount equal to the Reserve Agreement will be deposited into the Reserve Fund. r 11.201ficlel Nfi® aids.dac 3 Book Page 207 u Additional Obligations V 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 r. 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 thew ownership interests in the Certificates purchased. The Certificates will be delivered in denominations of S5,000 and any integral multiple thereof. Payments u 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, 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. Principal and Interest Payments w 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 _ February 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 W the Principal Office of the Trustee. With respect to Book-Entry Certificates, the District, the Corporation and the Trustee shall have Ir 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) nr 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 arty 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, including any notice of prepayment, (iii) the selection by the 6. Depository and its Participants of the beneficial interests in Book-Entry Certificates to be prepaid in the event Certificates are prepaid in part, IN)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. u Lr L 11-2 Official Notice lnviiina aidi.doc 4 � 6d Book Page 208 r Principal Amortization The Certificates will be executed and delivered in the approximate aggregate original principal amount of$300,000,000 and will be subject to principal amortization either through serial maturities or sinking fund redemptions or a combination thereof on February I in the yews 200_though 20_in the amounts set forth in the Official Bid Form. r Serial Maturities and/or Term Maturities Bidders may provide that all the Certificates be executed and delivered as serial maturities or may '+ provide that any two or more consecutive annual principal amounts of a series be combined into one or more term maturities.Each term bond shall bear the same rate of interest. r Mandatory Sinking Account Prepayment If the successful bidder designates principal amounts to be combined into one or more term maturities,each such term maturity shall be subject to mandatory sinking account payments commencing on February 1 of the first year which has been combined to form such term maturities and continuing on February 1 in each year thereafter until the stated maturity date of that term maturity, provided that no tern maturity maturing on or after February 1,2018 may have sinking fund payments prior to February 1, 2017. The prepayment price will be equal to the principal amount for such year set forth in the Official Bid Fonn, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. The amount of each such prepayment shall be reduced in the event and to the extent that Installment Payments payable on the corresponding Installment Payment Date are prepaid pursuant to provisions of the Installment Purchase Agreement governing optional prepayment. r Optional Prepayment The Certificates with stated Principal Payment Dates prior to February 1, 2018 are not subject to optional prepayment prior to their stated Principal Payment Dates. The Certificates with stated Principal Payment Dates on or after February 1, 2018 are subject to optional prepayment prior to their stated Principal Payment Dates, on any date on or after Febraary 1, 2017, in whole or in part, in Authorized r Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the principal evidenced by the Certificates to be prepaid,plus accrued interest evidenced thereby _ to the date fixed for prepayment,without premium. Selection of Certificates for Prepayment r Whenever less than all the Outstanding Certificates are to be prepaid on any one date pursuant to provisions of the Trust Agreement with respect to optional prepayment of Certificates, the Trustee shall select the Certificates to be prepaid among Certificates with different Principal Payment Dates as directed in a Written Request of the District. Whenever less than all the Outstanding Certificates with the same stated Principal Payment Date are to be prepaid on any one date pursuant to the Trust Agreement, the Trustee shall select the Certificates with such Principal Payment Date to be prepaid by lot in any manner that the Trustee deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of the numbers of the Certificates so selected for prepayment on such date. r 11-2 Md.]Nonce Inviting Bids.d. 5 Book Page 209 Y Notice of Redemption The Trustee shall,at least 30 but not more than 60 days prior to any prepayment date,give notice of prepayment to the respective Owners of Certificates designated for prepayment by first-class mail, ' postage prepaid,at their addresses appearing on the registration books maintained by the Trustee as of the Y close of business on the day before such notice of prepayment is given. The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment Y of such Certificates or the cessation of interest evidenced thereby on the date fixed for prepayment. Interest Rates,Reoffering Prices,and Premium or Discount Bids Y Bidders must bid to purchase all and not part of the Certificates and must submit their bids on the Official Bid Form. Bidders most specify a rate of interest for each maturity of the Certificates. The rates of interest must be expressed in multiples of one-eighth (t/s) or one-twentieth ('/2a)of one percent (M), and no interest rate can exceed 6% per antrum. All Certificates of the same maturity must evidence interest at the same rate. For each Certificate maturing from February 1, 2018 through 2037, inclusive, bidders may bid reoffering prices of no less than 9M of par on any maturity. lad 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 41 the date of award The successful bidder will also be required, prior to delivery of the Certificates, to - f nnish 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 W 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 organisations 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 v failure to sell at least 10%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 mom than 1040% 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 twos of this section may be rejected. See "Right to Reject Bids; Waive Irregularities"below. 1„1 tr 11-20Bdal Notice Inviting Bids.dac 6 W Book Page 210 d Insurance The successful bidder may purchase municipal bond insurance,if available, for some or all of the r 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 my 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 two 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 fumish 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. r 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 r 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 r 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 Cmoup)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 r determined by the District at the piece 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 r 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 r 11-2 Offidtl N m Mdnng Brdadw 7 Book Page 211 determination by the Electronic Service to the effect that any particular bid complies with the terms of b 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 i and the District is not responsible for any such costs or expenses.Further information about the Electronic L+ Service, including any fee charged, may be obtained from ideal LLC, 1359 Broadway, Second Floor, New York, NY 10015 (212-949-5021). 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 V 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 L $3,000,000.00(`Bid Check Amount") payable to the order of"Orange County Sanitation District," or a financial surely bond ("Surety 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 w+ 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 v 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 I 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. If the aggregate principal amount of the Certificates is adjusted as described under the caption"Adjustment of Principal Amounts After Receipts of Bids,"the successful j bidder will not be required to deposit an additional bid check or Surety Bond and will not be entitled to the return of any portion of the bid check or Surety Bond previously delivered except as described in this _ paragraph. Wd official Statement The District has approved a Preliminary Official Statement for the Certificates, dated the date of 6 i this Official Notice Inviting Bids, which the District has "deemed final" 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 fetal Official Statement as 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 furnished without cost to the successful bidder and further copies, if desired,will be made available at the successful bidder's expense. The suceessful bidder shall v 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. L II-20ffitial Nw.In vfina Bi&d. S L Book Page 212 .. 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 true interest cost with respect to the Certificates.The true interest cost shall be computed by doubling the r 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. For the purpose of calculating the true interest cost, the principal amount of Certificates scheduled for mandatory sinking account prepayment as part of a term maturity shall be treated as a serial maturity in each year. 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 occur on or about December_,2007.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. ,r 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. r 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 ,r 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. r Legal Opinions The District will famish 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 r 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 .r 11-20mcial Notice lnviliny Bids.doc 9 r Book Page 213 ;r 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. V Change in Tax Exempt Status a. 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 y federal court, or shall be declared taxable by the terms of any federal income tax law enacted subsequent to the date of this Official Notice Inviting Bids. 4 Closing Documents _ The District will furnish to the successful bidder at the time of delivery of the Certificates: (1)a �Lr 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,ruling 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 where statement of a material fact or omit _ to state a material fact necessary to make the statements contained therein, in 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. I Continuing Disclosure L 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 r the occurrence of certain events,if material. A description of the Continuing Disclosure Agreement is set forth in the Preliminary Official Statement and will be set forth in the final Official Statement - Additional Information W 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, 11945 West Olympic Boulevard, Suite 640, Los Angeles, CA 90064,310477-8487,via e-mail at Ichoi@pmgla.com. Fr Right to Modify or Amend — Id 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; - Ld 11-2 Ofilaal Noun Wwfig aicKdoc 10 V Book Page 214 r provided, however, that such notifications or amendments shall be made not later than December 10, 2007, by 3:00 p.m., New York Time and communicated through Thomson Municipal Market Monitor (available at http://www.tm3.wm)and by facsimile transmission to any qualified bidder timely requesting van such notice. Bidders are required to bid upon the Certificates as so modified. 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 r 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:November 12,2007 van an, r r r r r r an, 11-2 Official Notice Inviting Bidf.doo Il r Book Page 215 W W OFFICIAL BID FORM $300,000,000 n+ ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION SERIES 2007B ,2007 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 $300,000,000 aggregate principal amount of the Orange County r+ Sanitation District, Certificates of Participation Series 2007B (the "Certificates"), more particularly described in your Official Notice Inviting Bids dated November 12,2007,which is incorporated herein by reference, and made a part thereof,at a purchase price of$ (which purchase price is not less it than 990/u or more than 104% 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 or term maturities with mandatory sinking account prepayments as set forth in the table on the following page. u Of the principal maturities set forth in the table on the following page, for those years,if any,which have been combined into a term maturity or term maturities,the principal amounts shown in the table shall be the mandatory sinking account prepayments in such years except that the amount shown in the year of the tern maturity date shall mature in such year. The bid is subject to acceptance not later than 24 hours after the expiration of the time established for the final receipt of bids. i✓ Our calculation of the true interest cost, which is considered to be informative only and not a part of the _ bid,is_%. y (PLEASE CHECK ONE OF THE FOLLOWING TWO PARAGRAPHS) [ ] There is enclosed herewith a certified check or cashier's check for $3,000,000 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 $3,000,000 issued by an w insurance company rated AAA by Standard & Poor's and licensed to issue such a bond in the State of _ Califomia, naming the District as beneficiary and identifying the bidder whose deposit is guaranteed by the surety bond. V We have noted that payment of the purchase price is to be made in immediately available Federal Fonds at the time of delivery of the Certificates. If we ate 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& Jaworski L.L.P., as to the "issue price" of the Certificates within the meaning of V 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, 11.2 OrficW Natia kvi gBids.dw Book Page 216 y r acceptable to said Special Counsel, as to the present value of the expected interest savings as a result of such insurance. ^ Maturity Principal Interest Serial Sinking February I Amount* Rate Maturiri Account Payment (Check One Colmmq2 [2008] 2009 2010 2011 2012 2013 2014 2015 2016 ^ 2017 2019 2019 ^ 2020 2021 2022 �+ 2023 2024 2025 .+ 2026 2027 2028 ,. 2029 2030 2031 r„ 2032 2033 2034 2035 2036 2037 ^ 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 pedury 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 r r Preliminary,subject to change. ^ 11-2 Ofride N°m Inviting Bids.dm Book Page 217 bidding,and that the bidder has not in any manner sought by collusion to secure for himself an advantage over any other bidder. V Respectfully Submitted, Account Manager: By: r Address(for Return of Unsuccessful Bid Check): - City: State: Telephone: Ls Following(or attached)is a list of the members of our account on whose behalf this bid is made. r w W W V r W W V N Ye 11-2 Oaiatl NO=lnwting Bi&.dm i r Book Page 218 Fulbright& Jaworski L.L.P.—Draft 11/2/07 r NOTICE OF INTENTION TO SELL $300,000,000 Orange County Sanitation District s Certificates of Participation Series 2007B .a NOTICE IS HEREBY GIVEN that the Orange County Sanitation District(the"District") intends to receive sealed bids and electronic bids until 11:30 p.m.,New York time,on Tuesday, December 11,2007, through the use of an electronic bidding service offered by i-deal LLC bid service, for the purchase of all of the above-captioned 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 s. 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: Ichoi0mraela.com. Orange County Sanitation District Dated: , 2007 r r si ,r 11-2 Notice of Intwtim to ae IAM a Book Page 219 ADMINISTRATION COMMITTEE Mcetln9 Date To ad.of Dlr. 11/14/07 11/281W AGENDA REPORT AADDM07555 1°"n" "� Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Nick Arhontes, Director of Operations and Maintenance Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: SOFTWARE PROCUREMENT, REPLACEMENT OF COMPUTERIZED MAINTENANCE MANAGEMENT SYSTEM (CMMS) r GENERAL MANAGER'S RECOMMENDATION 1. Approve a sole source purchase order to IBM Corporation for purchase of IBM Maximo Enterprise Asset Management software for replacement of the '+ Computerized Maintenance Management System (CMMS), for a total amount of $592,932; and, `+ 2. Approve a 5% contingency ($29,647). SUMMARY The O&M department is tasked with providing infrastructure management services to allow OCSD's collection, treatment and reuse facilities to meet our various permit and statute requirements. Tens of thousands of assets are managed and continued use of an effective CMMS is required. . The current CMMS (RJN Grqup's CASSWORKS) installed in 1992 has reached the end of its useful life at OCSD. Furthermore, the software provides minimal r support related to hazardous energy and other safety issues. The software tool does not support OCSD's reliability initiatives and provides no support or integration with WonderWare Process Data Historian (SCADA) or the geo-spatial information system (GIS), and minimal integration with the Financial Information System (FIS). .r . Staff recommends the replacement of the existing CMMS application with Maximo. The selection of Maximo is based on two years of research into CMMS applications by staff. . The Maximo product has been in production since 1968 and was integrated into IBM Corporation's product line in 2006. The useful lifetime of the Maximo product .. is expected to be at least 20 years as yearly software licensing/maintenance covers future upgrades. .+ . Maximo provides seamless integration of information from our financial system, process data historian (SCADA), and GIS systems. FOTI No.M^1102-2 PwbeO a9'OtA) H wopxammwamm Cam Ml 1110noe.07sscnws Page 1 Book Page 220 • In collaboration with OCSD staff on system needs, the Orange County Water District (OCWD) independently selected Maximo for supporting the GWRS L; project's CMMS needs. • Staff recommends a sole source purchase agreement because Maximo is the only L, CMMS tool supported by the Electronic Operations & Maintenance Manual software application. This recommendation is for software procurement only as the implementation services for this product will be competitively bid. u • IBM has offered to discount the GSA pricing by 25% if procurement is made prior I to December 31, 2007. i PRIOR COMMITTEE/BOARD ACTIONS N/A ADDITIONAL INFORMATION L' CMMS use by other agencies: I inl AGENCY CMMS SOFTWARE TOOL COMMENTS Inland Empire (IEUA) MP2 Possibly moving to Lj SAP installation City of LA Bureau of Sanitation EMPAC King County Department of Mainsaver ' Natural Resources Sacramento Regional County IBM/Maximo I ' Sanitation District SRCSD W Sanitation Districts of Los Synergen/SPL Angeles County LACSD East Bay MUD IBM/Maximo y City of San Diego EMPAC Product de-supported, considering move to IBM/Maximo LI City of Portland Bureau of Synergen/SPL in Treatment Environmental Services Plant ' Hansen in Collections System U Orange County Water District IBM/Maximo New installation, (OCWD-GWRS) installed JDEdwards financials stem I DC Water& Sewer IBM/Maximo LJ San Onofre Nuclear IBM/Maximo Asset hierarchy and ; Generating Station (SONGS) maintenance strategy similar to OCSD LJ San Diego County Water IBM/Maximo Authority JDR:LT:RC 1 ' Li Foam No.W iw-2 Re„W W,O1M ke.w��vw„a,c «�>>oras mss aw+,smo Paget V Book Page 221 ADMINISTRATION COMMITTEE meeUMDate To Bd.or Dir. 10/14/07 11/28/07 AGENDA REPORT ADM0 Bem Numhe Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: RENEWAL OF THE EXISTING XEROX MANAGED SERVICES CONTRACT GENERAL MANAGER'S RECOMMENDATION 1. Authorize a renewal to the Master Contract with Xerox, Inc., for an additional five- year period, December 1, 2007 through November 30, 2012, for a total amount not ^ to exceed $233,000 per year, and color copies at $.09 per impression. 2. Authorize a maximum 10% contingency ($23,300) per year. SUMMARY " OCSD entered into a five year managed services agreement with Xerox in July of 2004. The current agreement includes the lease of seven workgroup printer/copier units, the equipment lease and personnel to operate the copy center, and the personnel to operate the mail room. Two Xerox personnel are assigned to OCSD's account for 80 hours per week. Xerox has offered the opportunity to renew the Xerox Managed _ Services contract with no additional cost if implemented prior to January 2008. PRIOR COMMITTEE/BOARD ACTIONS N/A ^ ADDITIONAL INFORMATION . The existing workgroup printer/copier units will be replaced with upgraded machines that include color scanning/printing and optical character recognition (OCR) software. . Price per color impression will be reduced from $0.135 to $0.09 per copy. Color is .. used predominantly for larger projects such as annual reports, newsletters and budget material or for special projects such as Fats/Oils/Grease or the Sewer Atlas. . Provide one-time scanning service to electronically store documents r . Renewing this contract at this time will lock in labor and equipment cost and utilizes the latest technology in printing. r JDR:LT:RC .. Forth No.oVi103-2 PmmE@'➢1�1) Page 1 Book Page 222 r ADMINISTRATION COMMITTEE Meaing Date To Bd.ofMr. 11/14/07 .. AGENDA REPORT Them M07n Re"""n6e Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services r SUBJECT: SEWER RATE STUDY r GENERAL MANAGER'S RECOMMENDATION Approve a sole source Consultant Services Agreement with Carollo Engineers to complete a sewer rate study in an amount not to exceed $156,508. r SUMMARY r It has been the practice of the Sanitation District to perform a rate study on 1) the cost components for BOD, TSS, and Flows for the purpose of billing high strength industrial dischargers (permittees)their fair and equitable share of collection, treatment and " disposal costs; and, 2) in determining the proper capital facilities capacity charge for billing new users connection fee charges to cover the cost of additional capacity requirements. The last time a rate study was completed for the District was in July 2006, and previous .. to that was in 2002 and in 1999. It has been the practice of the Sanitation District to complete a rate study following the completion of a strategic plan update. A strategic plan update is the review of the OCSD collection, treatment and disposal systems to determine a comprehensive strategic approach to manage wastewater flows through the year 2020, and in a way that protects the public health and is technically feasible, enviornmentally responsible, and economical. r However, there are four drivers that staff believes necessitate a rate study at this time: r e Adoption of a Local Sewer Service Fee e Including the Cost Impacts of strategic initiatives e 5-Year Proposition 218 notification `+ . Development of a Uniform "Net Cost of Service' Rate Methodology NMI PRIOR COMMITTEEIBOARD ACTIONS J N/A Vol Fann No.M-1m A,.n R.M-B W Page t Book Page 223 ADDITIONAL INFORMATION The goals of a sewer service rate study are as follows: V • Verify the appropriateness of the allocation of costs for operating, maintaining, I,j refurbishing, and replacing facilities to serve existing wastewater dischargers. • Verify the appropriateness of the allocation of costs for expanding and building L new facilities necessary to provide additional wastewater treatment capacity. I • Verify that the cost of providing the service and the allocation among fee payers is LJ adequately based on appropriate cost of service principles and applicable legal standards. I ; • Verify that the appropriate allocation of costs between and among pollutants U (BOD, SS and Flow), including the basis for allocation of non-assignable costs. I r • Verify that the appropriate amount of charges and the allocation of those charges L+ among fee payers, for the added costs of providing (i)full secondary treatment and (ii) the ground water replenishment system. •+ As previously stated above, it has been the practice of the Sanitation District to U complete a rate study following the completion of a strategic plan update. A strategic plan update is the review of the OCSD collection, treatment and disposal systems to determine a comprehensive strategic approach to manage wastewater flows through the year 2020, and in a way that protects the public health and is technically feasible, enviommentally responsible and economical. However, staff believes that the four — following drivers necessitate that a rate study be completed at this time: 1. Adoption of a Local Sewer Service Fee -The District provides regional sewage collection, treatment, and disposal services to approximately 550,000 customers L located in central and northwest Orange County and collects fees for these services through a special assessment on the Orange County property tax bill. In addition, the District also maintains, repairs, and replaces the local sewers for approximately 17,000 of the above 550,000 at no additional fee. All customers other than these 17,000 are also paying a local sewer service fee to their local — city or special district. A sewer rate study needs to be completed for these 17,000 customers as their local sewer service is currently being subsidized by all 550,000 customers. Lj 2. Including the Cost Impacts of strategic initiatives - Currently the Board is considering increasing the levels of service for managing air toxins, odor control, and biosolids. The finanical impacts resulting from the outcome of any initiatives approved should be addressed in an updated sewer rate study. L L Farts No.M-IM Agenda Ropod—Road Page 2 U Book Page 224 3. 5-Year Proposition 218 Notice-The District's last California Proposition 218 Notice notifying rate payers of potential sewer rate increases over the past five- years has now expired. A new 5-year Proposition 218 Notice is now under consideration by the Board and the development of these new proposed rates over the next five years should be aided by an updated sewer rate study. 4. Development of a Uniform "Net Cost of Service" Rate Methodology -The District currently bills all sewer customers, other than high strength dischargers, under the net cost of service rate methodology in that the total costs of the District are reduced by all revenues, including property taxes and interest income, in developing the sewer service fee billing rates. The sewer rates of high strength dischargers, or permittees, are developed gross of property tax revenues and are provided dollar for dollar credits for actual property taxes paid directly to the District. A recent independent sewer rate validation study recommended that a uniform "net cost of service" rate methodolgy be developed and applied to all rate payers. The ultimate goal is to develop and implement a "net cost of service" rate structure for high industrial dischargers (permittees) that is fair and equitable to all rate payers without over taxing any one permittee in the first year of implementation. r Staff is requesting to complete a sole source agreement with Carollo Engineers, the firm that was contracted to perform the rate studies in 2006, 2002, and in 1999, because the timing to complete the study and incorporate the results into the Sanitation District's rate ordinance does not allow for the opportunity to complete a competitive bid procurement process. Carollo Engineers is very familiar with District operations and staff has been very satisfied with the quality of work performed by Carollo and in the timeliness in completing studies Funding for this study is available within the FY 2007-08 budget. .. JDR:LT:MW r Form No.DW-102 Aga aReM—Board Page 3 Book Page 225 ADMINISTRATION COMMITTEE Meetlng Date To Bd.or Dlr. 11/14/07 1112W AGENDA REPORT IOemNumber Item Number ADM07-58 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance & Administrative Services SUBJECT: CHANGES TO ADMINISTRATION OF OCSD SUPPLEMENTAL RETIREMENT BENEFITS CALLED ADDITIONAL RETIREE BENEFIT ACCOUNT (ARBA) THROUGH THE ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM (OCERS) GENERAL MANAGER'S RECOMMENDATION r Approve an extension of the Additional Retiree Benefit Account (ARBA) agreement with Orange County Employees Retirement System (OCERS), extending the contract for a period of up to 90 days. `r SUMMARY On October 8, 2007, Governor Schwarzenegger, approved AB1124, which allows for �+ the contribution of funds through Post-Employment Benefits Trust Accounts. OCERS has established trust accounts through Barclays Global Investors, N.A. (BGI) for various Plan Sponsors, including the Orange County Fire Authority and the County of Orange, to fund retiree medical benefits. These agencies are participating at a cost of approximately $1,000 to $2,000 per month, and it is likely that the Orange County Transportation Authority will implement a similar trust in the near future. r Plan Sponsors can now use trusts like the RMPT to fund post employment benefits, such as OCSD's ARBA benefit. Pre-existing law limited the types of benefits that could be held in a trust to only medical premiums. In an effort to maintain competitive medical premiums, OCSD has not required retirees to remain on District group insurance policies. Therefore, it is not currently mandatory that the ARBA benefit be used for the intended purpose of offsetting the cost of medical premiums. Prior to the approval of AB1124, OCSD would have had to direct approximately 75 `r retirees to adopt an OCSD group medical plan in order to continue the administration of the ARBA benefit with OCERS. This was not considered a viable alternative because of the impact it would have on overall plan premium costs. As such, OCSD planned to self-administer the ARBA benefit, which was reported to the Administration Committee in October 2007. However, AB1124 broadened the use of funds to include other supplemental benefits, which allows OCSD to establish an RMPT account to hold the ARBA funds and continue administration through OCERS. u .r Form No.ow-io23 �:Mlw Page 1 r Book Page 226 The type of trust the Plan Sponsor may use depends on the method by which the post- employment benefit is administered. If the benefit is used strictly for medical premiums, j a 401(h) trust may be used, and the funds may be co-mingled with the retirement plan U funds and receive returns on the entire portfolio. However, since OCSD's ARBA benefit is not restricted to medical premiums, an Internal Revenue Code (IRC) Section 115 trust j must be established. U The ARBA agreement currently ends December 31, 2007. The purpose of the I extension is to allow staff an opportunity to review and analyze options for establishing L a Retiree Medical Plan Trust (RMPT); whereby ARBA benefits would continue to be _ administered by OCERS. OCERS has agreed to extend the existing ARBA agreement I for a period of up to 90 days to allow OCSD time to establish the proposed trust U agreement. I Based on the analyses, staff will submit a report and proposed trust agreement to the L OCSD Board of Directors in January 2008 for review and approval. If the agreement is approved, it would be submitted to the OCERS Retirement Board for final approval in February 2008. Subject to Board approval, OCSD would draft a trust agreement to establish the RMPT account through BGI for OCERS to hold and administer the RMPT benefits. The benefit would continue to be administered by OCERS so the transition would be seamless to _ retirees. OCSD would be required to pay an administrative fee estimated to be $1,000 to $2,000 per month. The in-house reporting requirements and monthly tasks L associated with the administration of ARBA are estimated to cost $920 per month. — Currently, the ARBA benefit is added to the retirees' pension checks and taxed L accordingly. However, if administration were moved in-house, retirees would receive two separate checks and would be required to account separately for the taxes — associated with the ARBA benefit. To ensure a seamless transition, staff recommends administration of the benefit to continue with OCERS. PRIOR COMMITTEE/BOARD ACTIONS October 10, 2007: An update on the status of the ARBA agreement and administration L was provided to the OCSD Board of Directors. The Board was notified of the signing of AB1124 on Monday, October 8, 2007, which would likely change the direction OCSD would choose to administer the benefit in the near future. May 24, 2006: The second amended ARBA agreement was approved by OCSD's Board of Directors. L May 10, 2006: An amended agreement for the ARBA benefit was presented to the FAHR Committee to address depleting ARBA benefit funds. In addition, a timeline for L addressing intermediate and long term issues with retiree plan benefits was discussed. _ L L Forth No.DWim] pmlW'.=1W Page 2 Book Page 227 ADDITIONAL INFORMATION ARBA was established in 1996 with the Orange County Employees Retirement System (OCERS) to provide retirees with a medical premium offset of$10 per month for every year of service with the Orange County Sanitation District (OCSD), up to a maximum of $250 per month. ARBA was funded through OCERS' Unallocated Fund Balance (UFB) which contained excess earnings of the system. Due to the diminishing returns in recent years, there are no longer excess earnings available for use by the Plan Sponsors. In December 2002, the ARBA agreement was amended and a reserve account, the Retiree Medical Benefit Reserve (RMBR), was established. RMBR contained three years of projected ARBA payments as a safeguard for agencies to evaluate funding of future payments. OCSD began using RMBR to fund ARBA payments in July 2003. The ARBA agreement was amended on May 24, 2006 to extend the termination date to December 31, 2007. Since the ARBA benefit is a vested right, OCSD has a legal obligation to continue funding retiree medical benefits to retirees. Currently, ARBA benefits are added to retiree pension checks for the purpose of medical premiums; however, they can be used at the discretion of the retirees and are considered taxable income. OCSD currently has a total of 187 retirees and 32 survivors on the OCERS pension payroll. Of the 219 individuals, 113 are receiving ARBA benefits, of which 38 are enrolled in OCSD group medical plans. Moreover, 45 individuals are receiving OCSD-paid medical insurance and will become eligible for ARBA upon the expiration of their OCSD-paid medical insurance. OCSD-paid medical insurance provides for 2.5 months of paid medical insurance premium for every year of service with OCSD. The 2.5 month benefit is more costly to OCSD and was frozen to include only employees hired prior to July 1, 1988, of which only 116 of the 584 active employees remain on OCSD payroll. Once the 2.5 month benefit expires, the retirees are moved to ARBA, which lowers the overall cost of retiree medical insurance. r JDR:LT:JR:PL r r r rwm rm.wr�aza neu.a awim� Page 3 Book Page 228 r ADMINISTRATION COMMITTEE Vir/13 od02 TO Bd OrO F. Il/14/D07 i AGENDA REPORT IADM�9' Iwm wombs Orange County Sanitation District r FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance &Administrative Services SUBJECT: OCSD LABOR RELATIONS PROGRAM UPDATE GENERAL MANAGER'S RECOMMENDATION Informational Item SUMMARY r All of the Memoranda of Understanding (MOUs) for the six (6) bargaining units that represent Sanitation District employees were ratified by the Board of Directors in May 2007, and became effective on July 1, 2007. Contract implementation and ., administration efforts are ongoing. Those efforts include updating the OCSD Board of Directors Personnel Policies Manual, providing MOU training to management staff, implementing the Development Pay Program, redesigning the Performance .. Management Program, reestablishing the Labor Management Committee, and establishing Substance Abuse Policy and Health Insurance Advisory Subcommittees. r Relevant sections of the OCSD Board of Directors Personnel Policies Manual have been updated to reflect changes associated with the MOU provisions that took effect in July 2007. Additional sections will be updated to reflect the changes associated with the MOU provisions that take effect in July 2008. The Human Resources Division is also in the process of performing an audit of the manual, which will be an ongoing effort over the remainder of the 20/20 fiscal year. MOU training was provided to OCSD management in July and August 2007. Training workshops will be provided in November 2007 and January 2008 to focus on the Development Pay Program. Additional training sessions will be provided pertaining to the Performance Management Program, once efforts to redesign the program are completed. 4 The Development Pay Program was established to augment the pay for performance system through the meet and confer process. It replaces the previous Gatekeeper Factor. The Development Pay Program was implemented in July 2007 for employees in three (3) of the six (6) bargaining units. In July 2008, the program will be extended to employees in all six (6) bargaining units. Negotiations are currently underway regarding the Performance Management Program. The program is being redesigned to support current MOU provisions, specifically Article 13 (Salary Adjustments and Compensation). In the meantime, employee performance .. Fo,m No.owtma aewma:MIM7 Page 1 r Book Page 229 evaluations are being administered in accordance with the existing Performance Management Program guidelines. The Labor Management Committee (LMC) has resumed its efforts and meetings are U being held on a monthly basis to address non-negotiable work rule issues. Through the LMC, a Substance Abuse Policy Subcommittee has been established, in accordance Li with Article 45 (Substance Abuse Policy) of the current MOUs. This subcommittee will propose revisions to the Substance Abuse Policy. These efforts coincide with the Article 45 reopener that will occur in January 2008. A Health Insurance Advisory L Subcommittee was also formed through the LMC to provide recommendations regarding health insurance cost containment options. The efforts of this subcommittee align with the Article 20 (Insurance) reopener that will also occur in January 2008. PRIOR COMMITTEE/BOARD ACTIONS L • December 14, 2005— FAHR Committee, Closed Session Labor Relations Program Overview L • March 1, 2006— FAHR Committee, Labor Relations Program Update/Compensation Program Overview • April 12, 2006 — FAHR Committee, Labor Relations Program Update/Benefits L Program Overview • May 10, 2006— FAHR Committee, Additional Retiree Benefit Account (ARBA) I--; • May 18, 2006—Joint Special Meeting of FAHR & Steering Committees, Closed Session Benefits Workshop • June 8, 2006—Joint Special Meeting of FAHR & Steering Committees, Benefits Workshop and Closed Session • July 12, 2006 - FAHR Committee, Actuarial Evaluation of ARBA and Closed Session • September 13, 2006—FAHR Committee, Retirement and Benefits Program Review • October 11, 2006— FAHR Committee, Retirement and Benefits Program Review (Bartel Report) L • October 26, 2006—Joint Special Meeting of FAHR & Steering Committees, Retirement and Benefits Program Review, Workshop and Closed Session (Bartel) u • November 8, 2006— FAHR Committee, Closed Session • December 13, 2006— FAHR Committee, Closed Session • January 3, 2007 —Special meeting Finance &Administration Committee, Closed LJ Session • January 24, 2007— Steering Committee, Closed Session ` • February 14, 2007—Finance &Administration, Closed Session U • February 28, 2007 — Steering Committee, Closed Session • March 14, 2007—Administration Committee, Closed Session • March 28, 2007—Steering Committee, Closed Session • April 11, 2007—Administration Committee, Benefits Program Renewal Costs and Closed Session • April 25, 2007—Steering Committee, Closed Session L • May 23, 2007—Steering Committee, Closed Session • May 23, 2007— Board of Directors, Closed Session j Fam No.DWion Pakea;ONOW LI Page 2 Book Page 230 u ADDITIONAL INFORMATION OCSD Board of Directors Personnel Policies The current MOU provisions include various changes that affect organizational policies and procedures. The OCSD Board of Directors Personnel Policies Manual has been updated to reflect those changes (e.g., designated smoking areas, definition of family member for leaves of absences, allocated holidays). Revisions were implemented in July and October 2007 that coincide with the MOU provisions that took effect on July 1, 2007. Additional revisions to the manual will be implemented next fiscal year to coincide with MOU provisions that take effect in July 2008 (e.g., applicability of extraordinary services compensation). The Human Resources (HR) Division is also in the process of performing an audit of the OCSD Board of Directors Personnel Policies Manual. Examples of the goals of this project are to ensure that OCSD expectations are clearly described in each policy and there is continued alignment with employment legislation. Additionally, the manual will be reorganized in a way that is more user-friendly through formatting changes and policy consolidations, where possible. These efforts will continue through fiscal year 07/08. The associated policy manual revisions will be presented to the Board of Directors on a regular basis throughout this period. MOU Training Supervisors, managers and executive management staff were provided with MOU training in July and August 2007, subsequent to MOU ratification by the Board of Directors. The training was two (2) hours in duration and included an overview of the OCSD Labor Relations Program, a review of the new MOU provisions, a summary comparison of MOU changes among bargaining units, and question/answer periods. At the time the MOU training was provided, aspects of the Development Pay Program were being negotiated and the proposed Performance Management Program was being reviewed by the bargaining units. As such, the MOU training only briefly addressed these topics. Negotiation efforts pertaining to the Development Pay Program concluded in September _ 2007. In November 2007 and January 2008, follow-up training will be provided to management staff, which will focus on the Development Pay Program and associated request process. This schedule coincides with program implementation for the various bargaining units. Bargaining efforts are currently underway to finalize the Performance Management Program. Upon conclusion, training workshops will be provided to management staff, which will focus on the new program and associated processes. Additional informal training will occur through management meetings to focus on the MOU provisions that take effect in July 2008. Development Pay Program The Development Pay Program was established in accordance with the provisions of Article 13 (Salary Adjustments and Compensation) of the current MOUs. Employees — FOM NO 1023 aeneea--.0301N7 Page 3 Book Page 231 V may receive Development Pay for obtaining job-related educational degrees, certificates and/or licenses. The program is based on employee job performance and is intended to promote organizational growth and development by encouraging employees to increase V job knowledge, skills, and abilities. The Development Pay Program was implemented in July 2007 for Orange County �+ Employees Association (OCEA) employees. There are 99 employees in the OCEA bargaining units and approximately 50% of those employees are receiving Development Pay (approximately$25K per year). In July 2008, implementation will be extended to " employees in the Local 501, Supervisor and Professional Group bargaining units. There are 436 employees in these bargaining units. U Employees in an initial probationary status, on a general leave-of-absence or a Performance Improvement Plan (PIP) are ineligible for Development Pay. Employees L must demonstrate a proficient level of performance and maintain that level of performance to receive and continue to be eligible for Development Pay compensation. If an employee's performance warrants the implementation of a PIP, any Development Pay compensation that the employee is receiving will be suspended until the PIP is successfully completed. Performance Management Program As stipulated in Article 13 (Salary Adjustments and Compensation) of the current MOUs, the Performance Management Program shall be redesigned to include new Ir rating categories and exclude the Gatekeeper Factor. A revised program, which incorporated those elements and included related guidelines and forms, was distributed to the Business Agents in June 2007 for review. In August 2007, the Business Agents L requested to meet with OCSD as a coalition to discuss the Performance Management Program. This request was denied and the OCSD requested separate meetings with each Business Agent. Notification letters were provided to the Business Agents in U September 2007. The OCSD began meeting with the Business Agents separately in October 2007 and efforts are currently underway to finalize the Performance Management Program. In the meantime, the OCSD is utilizing the current Performance Management Program to administer employee performance reviews. The Performance Management Program guidelines consist of eight (8) pages, which outline performance criteria (ratings, attribute categories and goals), the performance appraisal process, the Performance Improvement Plan (PIP) process, and appeal procedures. The items that are being discussed with the Business Agents include r transitioning employees from the old to the new system, interpersonal performance criteria, exempt vs. non-exempt performance attributes, and the appeal process. r Labor Management Committee The Labor Management Committee (LMC) was initially established approximately ten (10) years ago as a forum for employee and management representatives to discuss work rule issues. The LMC was reestablished in March 2006 and meetings were held on a monthly basis. Those meetings resulted in changes to streamline the OCSD performance appraisal process, which included modifying the approval method and it implementing an abbreviated midyear performance appraisal form. u Form No.0W102 Fevpeo:0N01M Page 4 4 Book Page 232 While negotiation efforts were underway for the current MOUs (approximately November 2006 through June 2007), the LMC was suspended. The LMC was reestablished in July 2007. The LMC continues to meet on a monthly basis. Recent efforts have culminated in the establishment of two (2) subcommittees: the Substance Abuse Policy Subcommittee and the Health Insurance Advisory Subcommittee. Substance Abuse Policy Subcommittee In accordance with Article 45 (Substance Abuse Policy) of the current MOUs, a Substance Abuse Policy Subcommittee was established in August 2007 through the LMC. The subcommittee is comprised of bargaining unit representatives. The purpose of the subcommittee is to review and make recommendations on revisions to the organization's Substance Abuse Policy. Subcommittee meetings have focused on specific issues that include reasonable suspicion, post accident testing, blood alcohol level and prescription drug use. The efforts of the subcommittee coincide with the reopener that is stipulated in Article 45. The reopener will take place in January 2008, to focus on changes to the OCSD Substance Abuse Policy. Health Insurance Advisory Subcommittee A Health Insurance Advisory Subcommittee has also been established through the LMC. This subcommittee is comprised of representatives from various employee groups. The purpose of the subcommittee is to provide the LMC with recommendations and options regarding health insurance such as alternative plan designs to reduce premium costs. The subcommittee began meeting in October 2007 and will continue to meet on a biweekly basis. These efforts r coincide with the associated reopener that is stipulated in Article 20 (Insurance) of the bargaining unit MOUs. The reopener will take place in January 2008 to address cost containment insurance options. r r JDR:LT:JR:PL:DM r r r r r FM Na ovatma Fa1wa.mro,ro? Page 5 r Book Page 233 L i N L L Lei i , 4 V L L u ORANGE COUNTY SANITATION DISTRICT (714) 962-2411 y www.ocsd.com i � Mailing Address: P.O. Box 8127 Fountain Valley, California V 92728-8127 Street Address: U 10844 Ellis Avenue Fountain Valley, California L 92708-7018 L V ONE MILESTONE r s r r COMPREHENSIVE ANNUAL OPPRVV SANIIq�rOq FINANCIAL REPORT for the Fiscal Year Ended June 30, 2007 THE ORANGE COUNTY SANITATION DISTRICT, CALIFORNIA fCI�C ENV\PP? ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2007 Prepared By: Administrative Services Department Financial Management Division Michael D. White, CPA — Controller u u u u u u u L (THIS PAGE LEFT INTENTIONALLY BLANK) L� W L u u u u u u r ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30,2007 EM INTRODUCTORY SECTION: .r Letter of Transmittal..................................................................................................................... i GFOA Certificate of Achievement................................................................................................ viii Boardof Directors........................................................................................................................ ix _ Organization Chart....................................................................................................................... x Mapof Service Area..................................................................................................................... xi FINANCIAL SECTION: r Independent Auditors' Report....................................................................................................... 1 Management's Discussion and Analysis—Required Supplementary Information....................... 3-8 Basic Financial Statements: Statementof Net Assets...................................................................................................... 10 .+ Statement of Revenues, Expenses,and Changes In Net Assets...................................... 11 Statementof Cash Flows.................................................................................................... 12 Notes to Basic Financial Statements................................................................................... 13-32 Supplementary Information: rSchedule of Net Assets....................................................................................................... 34 Schedule of Revenues, Expenses,and Changes in Net Assets ........................................ 35 Scheduleof Cash Flows...................................................................................................... 36 r STATISTICAL SECTION: Net Assets by Component—Last Seven Fiscal Years................................................................. 38 Revenues and Gross Capital Contributions by Source—Last Ten Fkml Years......................... 39 '. Expenses by Type—Last Ten Fiscal Years................................................................................. 40 Change in Net Assets—Last Seven Fiscal Years........................................................................ 41 Cash and Investment Reserve Balances—Last Ten Fiscal Years.............................................. 42 Sewer Service Fees—Last Eight Fiscal Years& Next Fiscal Year............................................. 43 Number of Accounts and Revenues by Customer Class—Last Ten Fiscal Years...................... 44 Principal Sewer Service Customers—Current Fiscal Year and Nine Years Ago......................... 45 Ratio of Annual Debt Service to Total Expenses—Last Ten Fiscal Years.................................. 46 Debt Coverage Rados—Last Nine Fiscal Years.......................................................................... 47 Computation of Direct and Overlapping Debt—Current Fiscal Year........................................... 48 Ratios of Outstanding Debt—Last Ten Fiscal Years................................................................... 49 Comparison of the Volume of Wastewater Treated—Last Ten Fiscal Years.............................. 50 Authorized Full-time Equivalents by Function—Last Ten Fiscal Years......................._...._......- 51 Biosolids Produced—Last Ten Fiscal Years................................................................................ 52 Capital Asset Statistics—Last Ten Fiscal Years.......................................................................... 53 Demographic Statistics—Last Ten Fiscal Years......................................................................... 54 Estimated Populations Served by Orange County Sanitation District—Current Fiscal Year....... 55 Major Orange County Employers................................................................................................. 56 .. Operating Statistics...................................................................................................................... 57 OTHER DATA&TRENDS: Cash and Investment Portfolio—Current Fiscal Year.................................................................. 60 Property Tax Rates—Direct and Overlapping Governments—Last Ten Fiscal Years................ 61 Assessed and Estimated Actual Value of Taxable Property—Last Ten Fiscal Years................. 62 Property Tax and User Fee Levies and Collections—Last Ten Fiscal Years.............................. 63 Property Value and Construction—Last Ten Fiscal Years.......................................................... 64 �+ Insurance in Force—Next Fiscal Year ........................................................................................ 65 u u u L u L (TMIB PAGE LEFT WMNTMtMUY BLAM 9 'I I u u u u L u u u u L i OCSD Introductory Section S 0 a c 0 0 Q cn 0 ORANGE COUNTY SANITATION DISTRICT October 25, 2007 Phanin 0141962-241411 The Board of Directors of the into Orange County Sanitation District, (714)962J)356 Orange County, California _ w.�w.aedwm Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation mein.,Wd.u: District, Orange County, California for the fiscal year ended June 30, 2007. This report includes the P0. Box 8127 y.,nran veuey ce financial position and activity of individual revenue areas, as described within the Governmental Structure 92728 8127 below, as of June 30, 2007 and was prepared by the Financial Management Division of the Sanitation sire t.dm..s: District's Administrative Services Department. M44 Elie Avenue suntan valley.rA Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, 92708-7018 including all disclosures, rests with the Sanitation District. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly Member the financial position and results of operations of the Sanitation District. All disclosures necessary to Agencies enable the reader to gain an understanding of the agency's financial activities have been included. • Cities Included within the accompanying financial statements are all of the organizations, activities, and functions controlled by the Sanitation District's Board of Directors in accordance with the Governmental Accounting area ana Standards Board Statement Number 14, 'The Financial Reporting Entity. For the purpose of this area B.Berw evaluation, control was determined by the Board's responsibility for: (1) adoption of the budget and user cypress charges, (2) taxing authority, and (3) establishment of policies. The reporting entity and its services are �a,te" Dailey described in further detail in Note 1 of the financial statements. Fmiarmn Garcia, Grove "unungton Beach An audit of the books, financial records and transactions of the Sanitation District is conducted annually by l the independent certified public accountants. The Sanitation District selected the accounting firm of Mayer �a Habra Hoffman McCann P.C. to perform the audit for the year ended June 30, 2007. The auditors' report on the Los Alamitos Sanitation District's basic financial statements and supplementary information is located on page 1 within nlewpaa Beach the financial section of this report. This report renders an unqualified opinion on the Sanitation District's oranga basic financial statements for the year ended June 30, 2007, a Baan rw a Ana Seal east, Management's discussion and analysis (MDBA) immediately follows the independent auditor's report and Anton provides a narrative introduction, overview, and analysis of the basic financial statements. The MDBA Teach Vote Ban: complements this letter of transmittal and should be read in conjunction with it. Varna bmd at, or Dr..,. GOVERNMENTAL STRUCTURE 9enitary Districts The Orange County Sanitation District encompasses the Northern section of Orange County. The Sanitation District provides wastewater treatment for an area of the County covering 471 square miles and trim Maaa serving a population of approximately 2.5 million, or 81 percent of the County's population. The Sanitation Midway Ot, District was originally incorporated in 1954 as nine separate public corporations, or districts. In April of Y.ter Districts 1998, at the Sanitation District's request, the Board of Supervisors of the County of Orange passed lrnne na,cn Resolution No. 98-140 ordering the consolidation of these nine County Sanitation Districts into a new, single sanitation district, to be known as the Orange County Sanitation District,effective July 1, 1998. This action was recommended to the Board by the Local Agency Formation Commission in order to simplify governance structures, reduce the size of the Board, ease administrative processes, streamline decision- making and consolidate accounting and auditing processes. The boundaries of the nine previous districts had remained intact for the purpose of collecting sewer user fees at the previously established rate schedules, and were referred to as nine individual revenue areas through June 30, 2000. Effective July 1, i To maintain wondclass leadership,, wastewater old water resource management U 2003, all Revenue Areas, except Revenue Area 14, consolidated user fee rates and all enterprise fund accounting and budgeting activities and are now known as the Consolidated Revenue Area. The Sanitation District is managed by an administrative organization composed of directors appointed by u the agencies or cities which are serviced by the Sanitation District. Each of the two remaining Revenue Areas, the Consolidated Revenue Area and Revenue Area 14, has its own budget and is responsible for the construction and maintenance of its own collection system. All Revenue Areas,except Revenue Area 14 and the portion of the Consolidated Revenue Area previously known as Revenue Area 13, receive their own share of the one-percent ad valorem property tax levy. In addition, all Revenue Areas except Revenue Area 14, collect user fees from property owners. Revenue Area 14 receives all of its revenues from service charges to the Irvine Ranch Water District. The purpose of the Sanitation District's wastewater management program is to protect the public's health, preserve the beneficial uses of the coastal waters, and maintain air quality. The objectives of operating the treatment plants are to process and dispose of the treated wastewater and the separated solids in accordance with Federal, state,and local laws including the Environmental Protection Agency. I 1 The Sanitation District sewerage system includes approximately 581 miles of sewers that convey u wastewater generated within the Sanitation District's boundaries to the Sanitation District's two wastewater treatment plants, Reclamation Plant No. 1 located in the City of Fountain Valley, and Treatment Plant No. I1 2 located in the City of Huntington Beach. u Plants No. 1 and No. 2 have primary treatment capacities, including standby, of 204 million gallons per ' f day (mgd) and 168 mgd, respectively. Approximately 75 percent of the advanced primary effluent also IL,11 receives secondary treatment. Both plants are master-planned for a future primary and secondary treatment capacity of 235 mgd for a combined total of 470 mgd by the year 2070. Outflows of treated wastewater from the two plants are combined and discharged to the ocean off the U Huntington Beach coast through an ouffall pipe that is 120 inches in diameter and 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 part treated wastewater at an average depth of 185 feet. ECONOMIC CONDITIONS AND OUTLOOK ' I In June 2007. the Anderson Center for Economic Research at Chapman University forecasted payroll job u growth in Orange County of 1.2 percent in 2007, or the creation of 18,500 jabs, and 1.1 percent growth in 2008. or the creation of 16,700 additional new jobs. This projection is a decline from the actual job growth of 2.0 percent and 2.3 percent in 2006 and 2005, respectively. Most of this deGine is being attributed to LLL...III the slow down in home sales and meltdown of the subprime mortgage industry. Over the first five months of 2007, 3,440 layoffs occurred by mortgage companies who are either going through bankruptcy or I I reducing their work force to survive. However, the unemployment rate for Orange County increased to 3.9 u percent in FY 2006-07 from the 3.7 percent in the prior year. Total taxable sales is forecasted to increase 5.1 percent in 2007 and 4.5 percent in 2008 while personal income is forecasted to increase over the same time period 5.6 percent and 5.1 percent, respectively. Reflective of the national slowdown in housing starts, residential building permits increased 10.3 percent, or $216.5 million in 2006 but is now forecasted to decrease 11.3 percent, or $262.0 million in 2007. f Somewhat offsetting this decline, non-residential building permits increased 60.6 percent, or $905.8 u million in 2006. but with only a forecasted increase of 11.9 percent, or $206.7 million in 2007, and 1.2 percent, or$32.4 million in 2008. According to Chapman University, the drop in permit valuation will place downward pressure on the formation of construction jobs that is projected to remain flat in 2007, with a modest decline of one-half percent in 2008. Iu' ii A sharp decline in speculative home purchases and a change in the expectations about the future direction of home prices coupled with tighter mortgage underwriting standards and a sharp decline in availability of subprime mortgage loans are reducing the demand for home sales. The latter affects first- time homebuyers particularly hard who,faced with a very low housing affordability rate, will not be qualified to purchase homes below or at the median price. As a result, Chapman University is forecasting a continuing decline in housing price,from increases of 27.4 percent, 10.8 percent. and 2.7 percent in 2004, �. 2006, and 2006, respectively, to forecasted declines of 4.1 percent in 2007 and 4.7 percent in 2008. MAJOR INITIATIVES A New Ocean Discharge Permit ` The Sanitation Dishict's Board of Directors decided in July 2002 to voluntarily give up its modified ocean discharge permit, issued under section 301(h) of the Federal Clean Water Act, which allowed the Sanitation District to discharge a higher level of Suspended Solids and Biochemical Oxygen Demand than otherwise required by the Act if adequate environmental and public health protection was demonstrated. To obtain a renewal of its ocean discharge permit without the modification(often referred to as a"waiver"), the Sanitation District is undertaking a massive capital improvement program ("CIP")of building new, and rehabilitating existing, facilities in order for the Sanitation District to operate its facilities in a manner that will allow it to achieve secondary treatment standards as defined by the Act. ` Construction of the capital improvements necessary to achieving secondary treatment standards will take until December 31, 2012. Permits are issued for five (5) years duration, and the U.S. Environmental Protection Agency (EPA) has m authority to waive the discharge limits requirements or grant a longer permit (except per Sec. 301(h)). In November 2004, a consent decree was signed by EPA and filed with the U.S. District Court that approved the construction schedule and decrees that no penalties will be imposed for discharges that exceed the secondary treatment limits during the period of construction. Seven milestones towards achieving secondary treatment standards were identified within the consent decree along with due dates. The Distract is in compliance with the decree and has successfully completed three of these milestones within the time permitted, as follows: . On March 15, 2006-Completion of the new$44.4 million"Trickling Filter Facility"at Plant No. 1. . On November 15, 2006 - Completion of the design and advertising for construction of the "New ` Activated Sludge System'at Plant No. 1. . On January 15, 2007-Completion of the design and advertising for construction of"Trickling Filters at Plant No. 2". Groundwater Replenishment System ` The Sanitation District and the Orange County Water District (OCWD) are currently developing the Groundwater Replenishment (GWR) System project that will be the largest water reclamation project in the nation. GWR System is a joint effort by the two agencies to initially provide 72,000 acre-feet per year of reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. iii V The GWR System will have the capacity to divert up to 100 million gallons of water a day from the Sanitation District's ocean discharge during peak winter storms, which will allow the Sanitation District to defer construction of an additional ocean outfall at an estimated cost of$170 million. L The Sanitation District and OCWD have agreed to match the funding for this project. The Sanitation District alone has budgeted $246.1 million through FY 2007-08. Through FY 2006-07, $186.4 million of this amount has been incurred and the project is expected to be completed in FY 2007-08. Federal and �+ State Grants of$45 million will offset part of the Sanitation District's costs. Biosolids Procram v The Sanitation District produces approximately 240,000 tons of digested and dewatered (Class B) biosolids annually at a current disposal cost of $14.3 million. By 2020, the Sanitation District's biosolids production is projected to increase by 15 percent, to 272,000 tons annually. The Sanitation District currenty 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 Kern County, composting to Class A biosolids in Riverside County, Kern County and La Paz County, Arizona, and landfilling of Class B biosolids in Yuma County and Mancopa 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 (Measure E)that bans the land application of both Class B and Class A biosolids. Even though a federal court ruled that Measure E was illegal thus enabling the Sanitation District to continue to land apply Class A biosolids in Kern County, the long-term sustainability, of land application in Kern County is uncertain. The Sanitation 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 to develop a Long-Range Biosolids Management Plan ('LRBMP"). 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 r 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, which became operational in December 2007. In May 2006, the Sanitation 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 fuel product will be recycled and reused, under agreements with area cement kilns and other fuel users. iw 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. j Ir With the Synagm and EnerTech contracts in place, the Sanitation District has entered into long-term, sustainable agreements for approximately two-thirds of its biosolids capacity. The Sanitation District is exploring other long-term sustainable management options for the remaining one-third its capacity. Options being considered include gasification, heat drying and deep well injection. The City of Los Angeles is evaluating deep well injection at its Terminal Island treatment plant under a demonstration permit with the US EPA. In October 2007, the Sanitation District amended its contract with Tule L ry L Ranch✓Magan Farms to include a management option to transport a portion of its biosolids to Terminal Island for processing through deep well injection. The Sanitation District will continue to utilize land .. application of Class A biosolids in Kern County and Class B biosolids in Arizona while exploring these more sustainable, long-term energy options for our biosolids. SERVICE EFFORTS AND ACCOMPLISHMENTS In March 2007, the Construction Management Association of America, Southern California Chapter, named the Sanitation District's Trickling Filter Facility and Plant No. 1 as the Project of the Year for construction projects under$50 million. The criteria for consideration of this award is based on scope and complexity of the proposed project, construction management principles used, team effort involved, and whether the project will be considered a success. The $33 million trickling filter facility has been in operation for a year and is part of the secondary treatment process that uses organisms grown on plastic media to eat dissolved biodegradable organics (fats, sugars, and proteins), converting them into settle- able sludge. On June 22, 2007, the Sanitation District received a 2007 Protos Award from the Orange County chapter of the Public Relations Society of America (PRSA) for an article published in the January 2007 issue of Pollution Engineering on the Groundwater Replenishment (GWR) System. The GWR System is a joint project of the Orange County Water District and Orange County Sanitation District that takes highly treated sewer water currently released into the ocean and purifies it using the same technologies that purify baby food, fruit juices, medicines and bottled water. The GWR System will create a new supply of near-disfilled quality water, totaling 70 million gallons per day. The new water will be used to expand the already existing seawater intrusion barrier along the coast and to augment groundwater supplies for 2.3 million north and central Orange County residents. ACCOUNTING AND BUDGETARY CONTROLS The Sanitation District's accounting records are maintained on the accrual basis. In developing and evaluating the Sanitation District's accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2) the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the evaluation of costs and benefits requires estimates and judgments by management. We believe that the Sanitation District's internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. Each year the Sanitation District's Board of Directors adopts an annual operating plan. A joint works budget is first prepared that identifies the specific capital projects and operating activities to be undertaken by the Sanitation District during the year. The budgetary level of control, the level at which expenses cannot exceed budget, is exercised at the individual district, or fund level. The Sanitation District has adopted a Uniform Purchasing Policy that identifies the agreed upon purchasing standards. CASH MANAGEMENT The Sanitation District's investment portfolio, except for the Sanitation District's debt service reserves, investments with the State Local Agency Investment Fund, and overnight repurchase agreements of idle rash within the Sanitation District's general bank account, are managed by an outside money manager, Pacific Investment Management Company(PIMCO), who performs the daily investment activities, and by Mellon Trust, who serves as the Sanitation District's independent custodian bank. This externally managed portfolio consists of a short term investment pool of $87,568,000 at June 30. 2007 that has v u Y„I average maturities out to 72 days, and a long-term investment pool of $173,811,000 that has average maturities out to 2.5 years. Investments of this externally managed investment portfolio consist of U.S. Government securities, corporate bonds, commercial paper, and money market mutual funds. L+ Investments of the Sanitation District's debt service reserves totaling $84.7 million consist of bank investment contracts of $60.7 million and U.S. Government securities and open-ended mutual funds of $23.9 million. The Bank Investment Contracts are with AIG ($15.6 million, of which $12.4 million is maturing in 2013 and the remaining $3.2 million maturing in 2016), Bayerische Landesbank Girozentrale �+ ($17.3 million maturing in 2016), MBIA Inc. ($18.3 million maturing in 2036), and FSA Capital Management Services LLC($9.5 million maturing in 2030). Investment income includes changes in the fair value of investments. Increases or decreases in fair value y during the current year do not necessarily represent trends that will continue; nor is it always expected that such amounts will be realized, especially in the instance of temporary changes in the fair value of investments. v Investment earnings for the year were$22,244,000, an increase of$11,818,000 from the prior fiscal year total of $10.426,000. This increase in investment and interest income Is attributable to higher yields earned on investments, as investments earnings yielded 5.5 percent, a increase from the prior year earnings rate of 2.4 percent. The increase in the yields earned on Investments can also be partially attributed to the change in unrealized gains and losses from year-to-year. As of June 30, 2007, the Sanitation District went from an unrealized loss on investments of $870,000 at June 30, 2006 to an y unrealized gain of$16,000, or a total increase in market value on investments of$886,000. However, the Sanitation District's investment policy is structured conservatively towards liquidity to avoid having to sell investments at a loss and having unrealized losses actually becoming realized losses. As of June 30, 2007, the Sanitation District's designated net assets totaled $372 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District's reserve policy: W Designated For Cash Flow Contingency $132 million Designated For Self-Insurance 57 million Designated For Capital Improvements 104 million Designated For Debt Service Requirements 79 million Total Designated Net Assets $372 million U RISK MANAGEMENT For the year ended June 30, 2007, the Sanitation District was self-insured for a portion of workers' compensation and property damage. The self-insured portion for workers' compensation was $500,000 per person per occurrence with outside excess insurance coverage to $200 million. The self-insured portion for property damage covering fire, and other perils other than flood and earthquake was $25,000 Lr per occurrence with outside excess insurance coverage to $1.0 billion. The self-insured portion for property damage covering flood was $100,000 per occurrence with outside excess insurance coverage to $300 million. The Sanitation District was self-insured for all property damage from the perils of i earthquakes. The Sanitation District also maintained outside comprehensive boiler and machinery V insurance with a $100 million per occurrence combined limit with deductibles ranging from $25.000 to $350,000. The Sanitation District was insured for general liability up to $25 million per occurrence with a selfinsured portion of$250,000, Lr Sanitation District management believes that there are no outstanding claims as of June 30, 2007 that would materially affect the financial position of the Sanitation District. Lr L vi L CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING s The Government Finance Officers' Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Orange County Sanitation District for the Sanitation District's comprehensive annual financial report for the year ended June 30, 2006. This was the thirteenth consecutive year that the Sanitation District has received this award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program requirements and we are submitting it to GFOA to determine its eligibility for another certificate. ACKNOWLEDGMENTS This report could not have been accomplished without the dedicated services of the Financial Management Division staff, and I would like to especially express my appreciation to those who assisted in its preparation. I would also like to thank the Sanitation District's Board of Directors, the General Manager, and the Director of Finance and Administrative Services for their interest and support in conducting the financial operations of the Sanitation District in a responsible and progressive manner. Respectfully submitted, Michael D.White, CPA Controller vii by V V Certificate of Achievement for Excellence in Financial Reporting " Prt W to Orange County Sanitation District California 6w For ils Comprche wAnnual Fi mnual Report for tea FiaW Yeer E d d r June 30,2006 ACerd6uaarA<Eienmmtkr Fiee0mamF W RRenmBmiae+mW byge0ombmuFi eOff Aabcvtim MWe uww Snm+emi Canada b gona®em win nad pb0e arybya rA�t - •)>a>m w'bme mryRLmnce®J fmvsul rtpmn(CAFRa)er8ieve de 6ig6eai v umduN m gowNnml aecawdeg .JIG V 4� P esident Ea uw Dlaaor 61 V y V Vlll ,. ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2007 AGENCY ACTIVE DIRECTOR ALTERNATE DIRECTOR Cities: Anaheim Harry Sidhu Lucille Kring Brea Roy Moore Ron Garcia Buena Park Patsy Marshall Jim Dow Cypress Phil Luebben Prakash Narain Fountain Valley Larry Crandall Gus Ayer _ Fullerton Don Bankhead Sharon Quirk Garden Grove Bill Dalton Mark Rosen Huntington Beach Cathy Green Don Hansen Irvine Steven Choi Sukhee Kang La Habra Steve Anderson Tom Beamish La Palma Mark Waldman Ralph Rodriguez Los Alamitos Ken Parker Catherine Driscoll Newport Beach Don Webb Leslie Daigle Orange Jon Dumitru Carolyn Cavecche Placentia Constance Underhill Joseph Aguirre Santa Ana Sal Tnajero David Benavides Seal Beach Charles Antos Gordon Shanks Stanton David Shawver David Cadena r Tustin Doug Davert Jim Palmer Villa Park Richard A. Frescht Brad Reese Yorba Linda Jim Winder John Anderson r Sanitary/Water Districts: Costa Mesa Sanitary District James M. Ferryman Robert Ooten Midway City Sanitary District Joy L. Neugebauer Allan P. Krippner Irvine Ranch Water District Darryl Miller Douglas Reinhart County Areas: Member of the Board of Supervisors Chris Norby Janet Nguyen r Ik r ORANGE COUNTY SANITATION DISTRICT r Organizational Chart As of June 30, 2007 Ytl Sp�lA6 pRLIM6 1�1 Go" V NNKNSI m mce 1� GDMK .tllp6@eQk hWuN mJ wg WNWA&IR SaMS ba111f8 nH IlM11FIlVYL BWRD � iFLNa:M aIL mAemAa asmvm RB IS r SEIMCES 3� 5H14NE ��� YlMBtlIR a�(dS Af6Ma5fMiK4 .�SGM11M MYBIM11fA V PUWIC fAMR�9N N60NM11NIN PBWC14 081P.11ME6 PWOWG AgtlES Hali6 WnEE WIY1E®1! AGLIAI05l aKiA6aNi mAV10166 ARRAS tlMNI@lMR YY WA6 RMYOIfib k 7 PUXr10.� W1a6N3 bOCFAV mR OPaNiAl6 5�ffi V MY/ISBT WH0R410AY B. V I cmv 11NIn¢3 MIIW SOIIBZ NIiAlICl111 m3M1NN6 f/NINOL NC3}W01'.Y, gRlp®t6 a1� fd9VYIlY,b t�IYARR LLWBIMCE L.1 SUPPCAf 9WOrt MOMMGANG aBIW/ta V &MTpsk% IAGIOBIfM1011 SYSTM V X L+ ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2007 L�W(�IEeCW HIr y LA C NIIE IINTY •1� 9 HABRA BREA ♦ �F��.°° r° YORBA PLACENTIA 11NOA m .�` FULLERTON 9� �`� B E _ 8� sO,• PALMA EI M CYPRESS �Ih �l OVILLA o LOS PAR. STANTON ORANGE , ALAMITOS GARDEN GROVE CH STMINSTER ° SANTA A ® J, ANA G• UNTA/N TUSTIN HUNTINGTOM1pm,a anon BEACH 10"t �OSTA MESA IRVINE 1""' cso 4 Treatmen N ,ant No.Y a PORT -BEACH, °�0 rrowm.�.�n—awra+To sa..Mn dlaliwe Rpel'm (IOIr,Ibmeler.5 mE:Wrg) — ODSD Service Area Boundary A OCSD Pump Station(16 total) oiscuiMER. Mar WPmaaW aonpeewdr sam:ann oland.mi nur a mm�A,m Iw P+pltierl rewus..rvalgn wM.No le+dol aw..xy •a,nree m,me m:n warily snvm nweoa aoa mama:name aoi x used m mra�wwemaM.aiues.eeaxr�m a awe. _ runorr.m maa.u..a rroaue gym.,.,sawr+rs���wlwr�snoe vwv,4niw ov Tnwr�a;aarars ui Nrw�re nevwea. sOURU .0 .Gs oau.Th—&omen:1o. REN5E0 01192007 xi u u u u u (THIS PAGE LEFT INTENTIONALLY BLANK) 1U y u c� u u u r r r r CSD O Financial Section �1 �r r r __� d A I !31 iL n e�! O 3 {� L �I 4 r Mayer Hoffman McCann P.C. An Independent CPA Firm Conrad Government Services Division 2301 Dupont Drive, Suite 200 Irvine,California 92612 949-474-2020 ph 949-263.5520 fx www.mhm-pc.com Board of Directors Orange County Sanitation District Fountain Valley, California .. Independent Auditors' Reoort We have audited the accompanying basic financial statements of the Orange County Sanitation District ("District"), as of and for the year ended June 30, 2007, as listed in the table of contents. These financial statements are the responsibility of the management of the District. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year partial comparative information has been derived from the financial statements of the District for the year ended June 30, 2006 and, in our report dated August 31, 2006, we expressed an unqualified opinion on those financial statements We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the r Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District, as of June 30, 2007, and the changes in financial position and cash Flows of the District for the year then ended in conformity with accounting principles generally accepted in the United States of America. r The information identified in the accompanying table of contents as management's discussion and analysis is not a required part of the basic financial statements, but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However,we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District's basic financial statements. The introductory section, supplementary information, statistical tables and other data and trends are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section, statistical tables and other data and trends have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. In accordance with Govemment Auditing Standards, we have also issued a report dated October 25, 2007 on our consideration of the Orange County Sanitation District's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial r reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. / Irvine, California October 25, 2007 r 1 u u u u u u u u (THIS PAGE INTENTIONALLY LEFT BLANK) I i u U IuI u u u u u u 2 i Management Discussion and Analysis June 30, 2007 This section of the financial statements of the Orange County Sanitation District (Sanitation District) is management's narrative overview and analysis of the financial activities of the Sanitation District for the fiscal year ended June 30, 2007. The information presented here is to be considered in conjunction with ^' additional information provided within the letter of transmittal located in the Introductory Section of this report. Financial Highlights • As of June 30, 2007, the assets of the Sanitation District exceeded its liabilities by $1,189.7 million (net assets). Of this amount, $299.4 million (unrestricted net assets) may be used to meet the Sanitation District's ongoing obligations to citizens and creditors. • The Sanitation District's total net assets increased $100.6 million, or 9.2 percent over the prior year. •� • Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $232.0 million,or 17.0 percent over the prior year. • Net Assets invested in capital assets, net of related debt increased$222.4 million,or 33.5 percent. • Unrestricted Net Assets decreased$122.7 million, or 29.1 percent from the prior year. Overview of the Basic Financial Statements The Sanitation District operates as a utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of accounting. As an enterprise fund, the Sanitation District's basic financial statements comprise two wmponents: financial statements and •r notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. In accordance with Governmental Accounting Standards Board (GASB) Statement No. 34, the Sanitation District's financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, and a statement of cash flows. The statement of net assets includes all of the Sanitation District's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Sanitation District creditors (liabilities). It also provides the basis for computing the rate of return, evaluating the capital structure of the Sanitation District, and assessing the liquidity and financial flexibility of the Sanitation District. r The statement of revenues, expenses, and changes in net assets accounts for the current years revenues and expenses. This statement measures the success of the Sanitation District's operations over the past year and can be used to determine the Sanitation District's creditworthiness. It also highlights the Sanitation District's dependency on properly tax revenues in supplementing user fees and other charges for recovering total costs. The final required financial statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations and investments during the reporting period. Net Assets As previously stated, net assets increased $100,6 million, or 9.2 percent to $1,189.7 million in FY 2006- r 07 over the prior year. In comparison, net assets increased $47.8 million, or 4.6 percent, to $1,089.1 million in FY 2005-06 over FY 2004-05. 3 r (Dollars in thousands) w Percentage June 30, June 30, Increase Increase 2007 2006 (Decrease) (Decrease) Assets Current and other assets $ 444,222 S 588,834 $ (144,612) -24.6% Capital assets, net 1,595,454 1,363,462 231,992 17.0 Total assets 2,039,676 1,952,296 87,380 4.5% Liabilities r Long-term debt outstanding 773,395 795,717 (22,322) -2.8 Other liabilities 76,544 67,479 9,065 13.4% Total liabilities 849,939 863,196 (13,257) .1.5% r Net assets: Investment in capital assets, net of related debt 886,463 664,060 222,403 33.5% Restricted 3,904 3,003 901 30.0% Unrestricted 299,370 422,036 (122,666) -29.1% Total net assets $ 1,189,737 $ 1,089,099 $ 100,638 9.2% r Current and other assets decreased$144.6 million,or 24.6 percent, due primarily to the funding of$292.5 million in capital improvements. This decrease was somewhat offset by net cash provided by operations of$82.6 million and net non-operating revenues of$88.4 million. Capital assets, net increased $232.0 million, or 17.0 percent, due primarily to the $216.9 million net additions to construction in progress during the year. These additions included within the capital 10 improvement program includes construction of the Groundwater Replenishment System (GWRS), a 50:50 joint cost sharing effort between the Orange County Sanitation District and the Orange County Water District that will initially provide 72,000 acre-feet per year of reclaimed water for replenishment of the r Orange County Groundwater Basin and to augment the seawater intrusion barrier at a total project cost of $492.2 million. The Sanitation District incurred $35.5 million in construction during FY 2006-07 for this project bringing the Sanitation District total project cost-to-date to $186.4 million of its $246.1 share of total project cost with a projected completion dale in FY 2007-08. Another major project underway is the Headworks Improvements at Plant No. 2. This project is the replacement of the existing headworks due to failing gates and the ineffectiveness of the bar screens and r grit chambers that are allowing grit screenings to pass through into the downstream processes causing increased operating costs. This project is to include an influent diversion and metering structure, bar screens influent pump station, vortex grit chambers primary influent splitter and metering structure, ferric chloride feed facilities, headworks and trunk line odor control facilities, screenings handling building including Huycor washer/compactors, grit handling building, an electrical building that includes standby power. In FY 2006-07, $87.7 million of the estimated $257.8 million was incurred bringing the total cost- Iodate to$149.7 million with completion expected in FY 2010-11. r The Replacement of the Ellis Avenue Pump Station at Plant No. 1 is another ongoing construction project. This project is the construction of a new pump station, 604nch gravity sewer, and 48-inch force- main to replace the existing Ellis Avenue Pump Station. The existing station, used to divert now from upstream of Plant No. 2 to Plant No. 1, is rated for only 10 mgd, receiving flow only from the Magnolia Trunk. This new pump station is to be rated for 50 mgd and will receive flows from the Magnolia, Knott and Miller-Holder trunk sewers. In addition, this project will construct a new 84-inch interplant pipeline to supplement the existing 78-inch interplant pipeline in Ellis Avenue. The Sanitation District incurred $18.4 million in construction costs on this project during FY 2006-07 for total project outlay to date of $22.9 million. The total projected cost is$79.3 million with completion expected in FY 2008-09. r 4 r r r See page 7 for the Schedule of Capital Assets and a listing of the other major capital additions for FY 2006-07. r Net assets invested in capital assets, net of related debt increased $222.4 million, or 33.5 percent over the prior year primarily as a result of the$232.0 million increase in the net capital assets. ,r Unrestricted net assets decreased $122.7 million, or 29.1 percent over the prior year, primarily due to the partial funding of the $222.4 million increase in net capital assets with beginning unrestricted available resources. Changes in Net Assets Net assets increased$100.6 million in FY 2006-07, a 9.2 percent increase over the prior year. r (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2007 2006 (Decrease) (Decrease) r Revenues: Operating revenues Service Charges $ 167,790 $ 164,291 $ 13,499 8.7% Permit and inspection fees 1,866 874 992 113.5% Total operating revenues 169,656 155,165 14,491 9.3% Non-operating revenues Property taxes 60,565 39.958 20,607 51.6% 'r Investment and interest income 22,244 10,426 11,818 113.4% Capital facilitites capacity charges 31,278 15,632 15,646 100.1% Other 1,068 3,477 (2,409) -69.3% r Total non-operating revenues 115,155 69,493 45,662 65.7% Total revenues 284,811 224,658 60,153 26.8% ,r Expenses: Operating expense other than depreciation and amortization 112,155 105,632 6,523 6.2% Depreciation and amortization 64,239 60,733 3,506 5.8% r Non-operating expense 26,708 27,799 (1,091) -3.9% Total expenses 203,102 194,164 8,938 4.6% Income before capital contributions 81,709 30,494 51,215 168.0% r Capital contributions (distributions), net 18,929 17,358 1,571 9.1% ,. Increase in net assets 100,638 47,862 52,786 110.3% Beginning net assets 1,089,099 1,041,247 47,852 4.6% Ending net assets $ 1,189,737 $ 1,089,099 100,638 9.2% r r 5 Sources of Revenue Functional Expenses June 30.2007 June 30.2007 21% t2% tt% 11% OCollections ❑Interest 8X ■Treatment 8 O User Fees Disposal ❑Taxes Levied 31% ❑Depreciation& ❑Other amortization 46% Olnlerest Expense 59X As previously stated, an enterprise fund is used to account for the operations of the Sanitation District, which is financed and operated in a manner similar to private business enterprises. This allows the Sanitation District to determine that the costs (expenses, including depreciation and amortization) of providing wastewater management services on a continuing basis are financed or recovered primarily through user charges. Sewer service user fees are evaluated annually based primarily on budget requirements for total operation, maintenance and capital expenditures for providing wastewater management services. Property tax revenues are dedicated for the payment of debt service. In FY 2006-07. operating revenues increased $14.5 million, or 9.3 percent over the prior year that is predominately reflective of the $13.5 million, or 8.7 percent increase in service charges. The increase in service charges is primarily due to the 9.8 percent increase in the average sewer user fee rate over the prior year. The $45.7 million, or 65.7 percent, increase in nonoperating revenues consists of a $15.6 million, or 100.1 percent increase in capital facilities capacity charges, a $20.6 million, or 51.6 percent increase in property tax revenues, and an $11.8 million, or 113.4 percent increase in investment and interest income. These increases are partially offset by a $2.4 million, or 69.3 percent decrease in other non-operating revenues. The increase in capital facilities capacity charges is reflective of the increase in nonresidential permit valuations in calendar year 2006 of 60.6 percent over the prior year. Property tax revenue increases are primarily the result of the reinstatement of the full property tax allocation to independent _ special districts. Due to the State's fiscal crisis in 2004, the State diverted away from independent special districts 40 percent of property tax revenues in FY 2004-05 and FY 2005-06. This shift was restored to independent special districts beginning in FY 2006-07. In addition, total assessed valuations increased over the prior year by 11.2 percent due to the upturn in the real estate market during this time period. The increase in investment and interest income is attributable to the higher yields earned on investments over the prior year that were somewhat offset by lower average cash and investment balances. Yields earned on investments increased from 2.4 percent in FY 2005-06 to 5.5 percent in FY 2006-07. However, cash balances declined during this same time period from $490 million to $372 million. The decrease in other non-operating revenues is reflective of the one-time $2.4 million grant reimbursement received in the prior year from the Federal Emergency Management Agency. Of the $6.5 million, or 6.2 percent, increase in operating expense before depreciation and amortization, operating salary and benefits, totaling $57.8 million, increased 8.6 percent over the prior year. These operating salary and benefit costs are part of the overall increase of $4.6 million when including the salaries and benefits capitalized within capital improvement program. Overall, total Sanitation District salaries and benefits were $71.6 million, a 6.9 percent increase over the prior year total of$67.0 million. This increase is mostly attributable to the$2.8 million,or 30.9 percent increase in the employer's share of retirement contributions as imposed by the Orange County Employee's Retirement System and a $1.2 million increase in regular salaries. or 3.0 percent, that is primarily driven by cost of living wage increases as staffing levels have remained relatively constant over the prior three years. 6 Contractual services operating cost was the only other notable line item increase over the prior year at $1.3 million, or 6.9 percent. This increase is attributable to the$1.3 million increase in biosolids removal. Although an increase over the prior year, this line item was expected to increase due to the increase unit r cost per ton for biosolid removal, and actually came in under estimated costs by$1.0 million. The 5.8 percent, or $3.5 million increase in depreciation and amortization expense is due to the recent completion of $68.2 million in construction project assets now being depreciated. Included in the list of construction projects placed into service in FY 2006-07 are the $10.7 million 14" St. Pump Station Rehabilitation, the $10.0 million 'A' Street Pump Station Rehabilitation, the $6.4 million Long-Term Monitoring Program, the $5.0 million Utilities Rehabilitation and Refurbishment Project, the $3.9 million Peak Flow Management Projects, the$3.7 million Sunflower Interceptor Manhole Rehabilitation, the $3.2 million Water Conservation Cooperative Projects, the $3.2 million Anaerobic Baffled Reactor Project, the $3.2 million Financial Information System Upgrade, the $2.5 million Big Canyon Renewal Project, the $1.4 million Laboratory Rehabilitation, and the $1.1 million Headworks Construction Trailers at Plant No. 2. Capital Assets At June 30, 2007, the Sanitation District had a net investment of $1.595 billion in capital assets. This amount represents a net increase (including additions and deletions) of $232.0 million, or 17.0 percent over the prior year. Schedule of Capital Assets (Net of Depreciation and Amortization) (Dollars in thousands) Percentage June 30, June 30, Increase Increase 2007 2006 (Decrease) (Decrease) Land $ 13,021 $ 13,021 $ - 0.0% Construction in Progress 803,680 586,713 216,967 37.0% Sewage collection facilities 301,458 276,194 25,264 9.1% Sewage treatment facilities 351,379 348,171 3,208 0.9% Effluent disposal facilities 52,324 54,725 (2,401) 4.4% Solids disposal facilities - - - 0.0% General and administrative facilities 73,592 84,638 (11.046) -13.1% Capital assets, net $ 1,595.454 1,363,462 $ 231,992 17.0% Major capital asset additions for the current fiscal year included the following: . $87.7 million-Headworks Replacement at Plant No. 2 . $35.5 million-Ground Water Replenishment System . $27.7 million-Bushard Trunk Sewer Rehabilitation . $19.2 million-Activated Sludge Facilities Rehabilitation at Plant No. 1 . $18.4 million-Replacement of Ellis Avenue Pump Station . $ 9.5 million-New Secondary Treatment Systems at Plant No. 2 . $ 8.0 million -Secondary Treatment Facilities Rehabilitation at Plant No. 2 . $ 6.7 million-Effluent Pump Station Annex . $ 6.2 million-North County Collections Yard More detailed information about the Sanitation District's capital assets is provided in Notes 1 and 3 of Notes to the Financial Statements. 7 61 r Debt Administration At June 30, 2007, the Sanitation District had $801.8 million outstanding in COP debt, a net decrease of r $6.8 million, or 0.8 percent from the prior year. This decrease is due to the $13.5 million in principal installment payments made by the District that was largely offset by the issuance of the $95.2 COP Refunding Series 2007A that refunded $88.5 million of the $280.0 million COP Series 2003, as no"new money"debt was issued. r The Sanitation District maintains an Aa3 from Moody's Investor Services, an AA/A-I from Standard and Poor's Corporation, and an AA from Fitch. The Sanitation District's long-range financing plan is designed u to maintain these high ratings. Over the next ten years, the Sanitation District is projecting an additional $2.1 billion in future treatment plant and collection system capital improvements. In accordance with the Sanitation District's long-tern debt fiscal policy, the Sanitation District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue. r In December 2007, the Sanitation District expects to issue $300 million of new COP fixed rate debt. A total of$1.2 billion in COP debt issuance is being proposed over the next seven years. These financings are needed early in the 20-year capital improvement program because the bulk of the construction is scheduled during the next ten years. For more detailed information on long-term debt activities, refer to Note 4 of the Notes to Basic Financial '•• Statements. r Economic Factors and Next Year's Budgets and Rates • The unemployment rate within the County of Orange is currently 3.9 percent, which is an increase from a rate of 3.7 percent a year ago. �+ • Inflation for Orange County in 2006 increased 4.3 percent based on the 2006 actual percentage change in the consumer price index according to the June 2007 Economic and Business Review report prepared by Chapman University. ` • The actual rate of return on investments increased from the 2.4 percent earnings rate in FY 20D5.06 to 5.5 percent for FY 2006-07. r All of these factors were considered in preparing the Sanitation District's budget update for FY 2007-08. The Sanitation District's user fee schedule was increased by 9.8 percent for FY 2007-08 over the prior ` year. The annual fee applicable to the Sanitation District's largest customer base, the single-family residential fee, increased by $16.20, from $165.80 to $182.00. These rate increases were necessary to finance the Sanitation District's cash Flow needs as capital improvement outlays alone are projected to be r $302.7 million in FY 2007-08, approximating the current years outlay, and are projected to total $2.1 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and provide for full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the Sanitation District's finances. r Questions concerning any of the Information provided in this report or requests for additional financial information should be addressed to the Financial Management Division, Orange County Sanitation District, P.O. Box 8127, Fountain Valley, CA 92728-8127. r, r 8 r ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS „a m 9 i ORANGE COUNTY SANITATION DISTRICT Statement of Net Assets June 30, 2007 (With Comparative Data for June 30, 2006) 2007 2008 �+ Current assets: Cash and cash equivalents $ 55,472,716 $ 65.989,448 Investments 231.710.077 318,430.977 Accounts receivable, net of allowance for uncollectibles 12.703.227 18,240.805 Accrued interest receivable 2,816.784 3,850,987 Due from other governmental agencies 6,332,508 8,371,250 Connection fees receivable 962,754 1,335,169 Property tax receivable 2,459,667 1.883.915 Inventories 4,634,811 4.561.139 Prepaid expenses and retirement 1.281,524 11,309,975 `+ Other current assets 23.961 Total current assets 318.573.057 433,997,628 r. Noncurrent assets: Restricted: Cash and cash equivalents 23,946,510 53,6W.177 V Investments 60,776,180 51,763,180 Accrued interest receivable 567,380 666,390 Unrestricted: Non-depreciable capital assets 816,701.436 599,734.815 r Depreciable capital assets, net of accumulated depreciation 778,762,792 763,727,093 Deferred charges 4,277,005 4,354,633 Excess purchase price over book value on acquired assets, net 6,167,111 6,824,820 y Other noncurrent assets, net 29,914,713 37,561.184 Total noncurrent assets 1.721.103,127 1,518,298,292 Total assets 2,039.676,184 1,952,295.918 6w Current liabilities: Accounts payable 18,966,641 21,743,791 Accrued expenses 15,084,007 8,444,239 Retentions payable 6,959,199 9,245,573 Interest payable 7,023,945 9,566,321 Current portion of long-term obligations 28,510,896 18,479,060 l" Total current liabilities 76,544,688 67.478,984 Noncurrent liabilities: Noncurrent portion of long-term obligations 773,394,732 795,717,487 Total liabilities 849,939,420 863,196,471 r Net assets: Invested in capital assets, net of related debt 886,462,575 664,060,499 Restricted for debt service 3,904,212 3,002,672 y Unrestricted 299,369,977 422,036,276 Total net assets $ 1,189,736,764 $ 1,089,099,447 u See Accompanying Notes to Basic Financial Statements. u 10 u ORANGE COUNTY SANITATION DISTRICT Statement of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2007 (With Comparative Data for the Year Ended June 30, 2006) 2007 2006 Operating revenues: Service charges $ 167.789,660 $ 154,291,040 Permit and inspection fees 1.866,411 874,383 r Total operating revenues 169,656,071 155,165.423 Operating expenses other than depreciation and amortization: Salaries and benefits 67,802.102 53,245,819 Utilities 8,072,262 7,563,227 Supplies, repairs and maintenance 21,050.912 21.173.367 Contractual services 20,389,454 19,073.353 Directors'fees 131.750 141,270 Meetings and training 1,124,852 890.357 Other 3.583.792 3,544,697 Total operating expenses other than depreciation and amortization 112.165,124 105,632,080 Operating income before depreciation and amortization 57,5110,947 49,633.343 Depreciation and amortization 64,238,714 60,732,836 Operating loss (6,737,767) (11,199,493) Nonoperefing revenues: Property taxes 60,565,308 39,958,325 Investment and interest income 22.243,554 10,426.117 Capital facilities capacity charges 31,277,647 15,631,439 Other 1,067,794 3,476,996 Total nonoperating revenues 115,154,303 69,492,877 Non-operating expenses: Interest 21,746.852 20,078.050 Capital grants to member agencies 2,127.154 3,399.627 Other 2,834,392 4,321.287 Total nonoperating expenses 26.708.398 27,798,964 Income before capital contributions 81.708,138 30,494,420 s, Capital contributions from other agencies 18,929.179 17,358,147 Change in net assets 100.637,317 47,852,557 Total net assets-beginning 1,089,099,447 1,041,246,880 Total net assets-ending $ 1,189,736,764 $ 1,089,099,447 See Accompanying Notes to Basic Financial Statements. 11 V ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flaws For the Year Ended June 30,2007 (With Comparative Data for the Year Ended June 30,2006) V 2007 2006 Cash fiows from operating activities: y Receipts from customers and users $ 183.133.292 $ 154,204,532 Payments to employees (69,691,912) (52,939,029) Payments to suppliers (40,809,378) (52,964.354) Net cash provided by opembons 82,632.002 48.301.149 Cash flows from noncapital financing activities: Proceeds from property taxes 59,989,556 39,725.891 Capital grants to member agencies (2,127,154) (3,399,627) y Net cash provided by noncapital financing activities 57,862,412 36,326,264 Cash flows from capital and related financing activities: Capital facilities capacity charges 31,650.062 15,804,050 Additions to property,plant and equipment (281,135,639) (280,789,059) Arbitrage payment (53,100) (918,800) Interest paid (35.250,887) (29.069.376) Principal payments on certificates of participation (101,965,0D0) (12,755,000) W Proceeds from certificates of participation issuance 89,818,D81 199,869,470 Certificates of participation issuance costs (319,698) (484,375) Proceeds from capital contributions 14,163,356 9,729,346 Net cash provided(used)by capital and related financing activities (283,092,826) (78.623,744) Cash flows from investing activities: Proceeds from the sale of investments 5,282,384,356 4,929,113,653 Purchases of investments (5,204,880,027) (4,898,529.313) ♦r Interest received 24,547,682 12,360,966 Net cash provided(used)by investing activities 102,372,011 42.946,306 Net increase(decrease)in cash and cash equivalents (40,228,400) 48,948,975 y Cash and cash equivalents,beginning of year 119,645,625 70,696,650 Cash and cash equivalents,end of year $ 79,419,225 It 119,845,625 Reconciliation of operating loss M net Hash provided by operating activities: Operating loss $ (6,737,767) $ (11,199.493) Adjustments to reconcile operating loss to net cash provided by operations: Depredation and amorlizabon 64.235,714 60,732,830 Bad debt expense (67,284) 45,389 Other non-operatng revenues and expenses 1,485,143 1.507,875 (Increase)/decease in operating assets: Accounts receivable 5.604,882 (7,124,857) Due from other governmental agencies 6.804,565 2,686,970 Inventories (284,670) (170.158) Prepaid and other assets 10.052,412 (10.725,305) V Increasel(decrease)in operatng liabilities: Accounts payable (2,777,150) 7,442,788 Accrued expenses 6,639,768 1,744.432 Retentions payable (2,286.374) 3.482,408 y Compensated absences 311,438 (51,368) Claims and judgments (354,655) (50,358) Net cash provided by operations $ 82,632.002 $ 48,301,149 Noncesh Activities: Unrealized gain(loss)on the fair value of investments $ 16.429 $ (870,177) Net disposal of assets with no cash effect (3,243.743) (2,366,888) Certificates of participation issuance cost-underwriter's fee (468,044) (140,530) Capital contributions from other agencies 4.765,823 7,628,801 See Accompanying Notes to Basic Financial Statements. 12 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 ., (1) Summary of Significant Accounting Policies Reporting Entity The Orange County Sanitation District(OCSD) is a public agency which owns and operates certain wastewater facilities in order to provide regional wastewater collection, treatment, and disposal services to approximately 2.5 million people in the northern and central portion of the County of Orange, California. OCSD is managed by an administrative organization comprised of directors appointed by the agencies and cities which are serviced by OCSD. OCSD's service area was originally formed in 1954 pursuant to the County Sanitation District Act and consisted of seven independent special districts. Two addifional districts were formed and additional service areas were added in 1985 and 1986. These special districts were jointly responsible for the treatment and disposal facilities which they each used. In April of 1998, the Board of Supervisors of Orange County passed Resolution 98-140 approving the consolidation of the existing nine special districts into a new, single sanitation district This action was taken in order to simplify the govemance structures, reduce the size of OCSD's Board of Directors, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. Pursuant to the Resolution and Government Code Section 57500, the predecessor special districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to OCSD, including all assets, liabilities, and equity. .. Effective July 1, 1998, the organization became known as the Orange County Sanitation District. The boundaries of one of the previous districts, now known as Revenue Area No. 14, have been maintained separately because their use of OCSD's collection, treatment, and disposal system is funded by the Irvine Ranch Water District The boundaries of the other eight districts have been consolidated and are collectively referred to as the Consolidated Revenue Area. OCSD utilizes joint operating and capital outlay accounts to pay joint treatment, disposal, and construction costs. These joint costs are allocated to each revenue area based on gallons of sewage flow. The supplemental schedules and statements show internal segregations and are not intended to represent separate funds for presentation as major or non-major funds in the basic financial statements. r The accompanying financial statements present OCSD and its blended component unit, the Orange County Sanitation District Financing Corporation. The Corporation is a legally separate entity although in substance it is considered to be part of OCSD's operations. OCSD is considered to be financially accountable for the Corporation which is governed by a board comprised enfirely of OCSD's board members. There is no requirement for separate financial statements of the Corporation; consequently, separate financial statements for the Corporation are not prepared. The Corporation had no financial activity during the fiscal year ended June 30, 2007, other than principal and interest payments on outstanding certificates of participation(see Note 4). OCSD is independent of and overlaps other formal political jurisdictions. There are many governmental entities, including the County of Orange, that operate within OCSD's jurisdiction; however, financial information for these entities is not included in the accompanying financial statements in accordance with the provisions of Governmental Accounting Standards Board (GASB) Statement 14. Measurement Focus and Basis of Accounting OCSD operates as an enterprise activity. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the Board of Directors is that the costs (expenses, including depreciation and amortization)of providing services 13 W ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements W For the Year Ended June 30, 2007 to the general public on a continuing basis be financed or recovered primarily through user charges. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting, whereby revenues are recognized when eamed and expenses are recognized when incurred, regardless of the timing of related cash flows. OCSD applies all GASS pronouncements currently in effect as well as Financial Accounting Standards Board Statements and Interpretations, Accounting Principal Board Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Operating Plans W Each year, OCSD staff prepares an annual operating plan which is adopted by the Board of Directors. The annual operating plan is used to serve as a basis for monitoring financial progress, estimating the levy and collection of taxes,and determining future service charge rates. During the year, these plans may be amended as circumstances or levels of operation dictate. •+ Cash Equivalents Investments with original maturities of three months or less are considered to be rash equivalents. W Investments All investments are stated at fair value (the value at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale). Changes in fair value that occur during the fiscal year are reported as part of investment and interest income. Investment and interest income includes interest earnings and realized and unrealized changes in fair value. Accounts Receivable Accounts receivable is shown net of the allowance for uncollecuble receivables which was .y $193,767 at June 30, 2007. Any unbilled sewer service receivables are recorded at year-end. Inventory Inventory is stated at cost, which approximates market,on a weighted-average basis. Capital Assets vd Outlays for property, plant, equipment, and construction in progress are recorded in the revenue area which will use the asset. Such outlays may be for individual revenue area assets or for a revenue area's share of joint assets. Capital assets of property, plant, and equipment are defined as assets with an initial, individual cost of more than$5.000 and an estimated useful life of at least three years. Such assets are recorded at cost, except for assets acquired by contribution, which are recorded at fair market value at the time received. Cost includes labor; materials; outside services; vehicle and equipment usage; allocated indirect charges such as engineering, purchasing, supervision and other fringe benefits; and certain administrative and general expenses. Net interest costs are capitalized on projects. ,.. During the fiscal year ended June 30, 2007, net interest costs of$10.03 million were capitalized. 14 u ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2007 .. Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method. OCSD generally follows the guidelines of estimated useful lives as recommended in the State of California Controllers Uniform System of Accounts for Waste Disposal Districts, which range from 3 to 75 years. The following are estimated useful lives for major classes of depreciable assets: Sewage collection facilities — 50 years, Sewage treatment facilities — 40 years, Sewage disposal facilities — 40 years, and General plant and administrative facilities—11.5 years. Amortization Amortization of the excess purchase price over the book value of assets acquired is provided using m the straight-line method over an estimated useful Irfe of 30 years. Discounts and defamed charges on the certificates of participation are amortized to interest expense over the respective terms of the installment obligations based on their effective interest rates(note 4). Restricted Assets Certain assets are classified as restricted because their use is limited by applicable debt covenants. Specifically, the assets are restricted for installment payments due on certificates of participation or are maintained by a trustee as a reserve requirement for the certificates of participation. When both restricted and unrestricted resources are available for use, it is OCSD's policy to use restricted resources first, then unrestricted resources as they are needed. Compensated Absences .. OCSD's employees, other than operations and maintenance personnel, are granted vacation and sick leave in varying amounts with maximum accumulations of 200 hours and 560 hours for vacation and sick days earned but unused, respectively. Operations and maintenance personnel �+ accrue between 80 and 220 personal leave hours per year depending on years of service. Personal leave can be accumulated up to a maximum of 400 hours. Vacation and sick leave benefits and personal days are recorded as an expense and liability when earned by eligible employees. In determining the estimated sick leave liability at June 30 of each year, OCSD assumes that all employees' accumulated sick leave balances will ultimately be paid out at 35 percent of the ending balance. The distribution between current and long-term portions of the liability is based on historical trends. Claims and Judgments OCSD records estimated losses, net of any insurance coverage under its self-insurance program when it is probable that a claim liability has been incurred and when the amount of the loss can be reasonably estimated. Claims payable includes an estimate for incurred but unreported claims. The distribution between current and long-term portions of the liability is based on historical trends. Property Taxes The County is permitted by State law (Proposition 13) to levy taxes at one percent of full market ^tl value (at time of purchase) and can increase the assessed value no more than two percent per year. OCSD receives a share of this basic levy, proportionate to what was received in the 1976 to 1978 period. Property taxes attach as an enforceable lien on property as of January 1. Taxes are levied an July 1 and are payable in two installments which become delinquent after December 10 and April 10. 15 L+ ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements L. For the Year Ended June 30,2007 The County bills and collects the property taxes and remits them to OCSD in installments during the year. Property tax revenues are recognized when levied to the extent that they are available to finance current operations. The Board of Directors has designated property tax revenue to be used for the annual debt service requirements prior to being used as funding for current operations. Capital Facilities Capacity Charges r Capital facilities capacity charges represent fees imposed at the time a structure is newly connected to the District's system, directly or indirectly, or an existing structure or category of use is increased. This charge is to pay for District facilities in existence at the time the charge is imposed or to pay for new facilities to be constructed that are of benefit to the property being charged. Capital Contributions Capital contributions consist of charges to certain special districts and agencies for their agreed- upon share of additions to capital assets. Operting and Non-oaeral mit Revenues and Expenses Operating revenues and expenses result from collecting, treating,and disposing of wastewater and inspection and permitting services. OCSD's operating revenues consist of charges to customers for the services provided. Operating expenses include the cost of providing these services, administrative expenses, and depreciation and amortization expenses. All revenues and expenses not meeting these definitions and which are not capital in nature are reported as non-operating revenues and expenses. ConsWcton Commitments OCSD has active construction projects to add additional capacity, improve treatment, or replacelrehabilitate existing assets. At June 30, 2007, the outstanding commitments with contractors totaled$414 million. Self-Insurance Plans w For the year ended June 30, 2007, OCSD was self-insured for portions of workers' compensation, property damage, and general liability. The selfynsurance portion of the workers' compensation exposure is the $500,000 deductible per occurrence below the outside excess insurance coverage to $20D million. The self-insurance portion of the property damage exposure covering fire and other perils is the $26,000 per occurrence deductible (for most perils) under the outside excess property insurance coverage to $1 billion. The self-insurance portion of the property damage exposure covering flood is the $100,000 par occurrence deductible with outside excess property insurance coverage to$300 million. OCSD is self4risured for virtually all property damage from the peril of earthquake. The seM-insurance portion of the boiler&machinery exposure is the deductible ranging from $25,000 to $350,000 under the outside excess boiler & machinery insurance v coverage to $100 million per occurrence combined limit The self4nsurance portion of the general liability exposure is the $250,000 per occurrence deductible ($500,000 for employment practices liability) under the outside excess liability coverage to $25 million per occurrence and aggregate. The self-insurance portion of the pollution liability exposure is the $100,000 per loss deductible under the outside pollution liability insurance coverage to $10 million. The significant changes in insurance coverage during the fiscal year ended June 30, 2007 are as follows: The excess insurance coverage for workers' compensation increased from $150 million to .. $200 million. W 16 u ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 • OCSD purchased pollution liability insurance with a $10 million limit of liability and a $100,000 per loss deductible. During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against OCSD are processed by outside insurance administrators. These claims are charged to claims expense based on amounts which will ultimately be paid. Claims incurred but not yet reported have been considered in determining the accrual for loss contingencies. OCSD management believes that there are no unrecorded claims as of June 30, 2007 that would materially affect the financial position of OCSD. Deferred Compensation Plan r OCSD offers its employees a deferred compensation plan established in accordance with Internal Revenue Code Section 457, The plan permits all employees of OCSD to defer a portion of their salary until future years. The amount deferred is not available to employees until termination, refinement, death or for unforeseeable emergency. The assets of the plan are held in trust for the exclusive benefit of the participants and their beneficiaries. Since the plan assets are administered by an outside party and are not subject to the claims of OCSD's general creditors, in accordance with GASB Statement 32, the plan's assets and liabilities are not included within OCSD's financial statements. �. (2) Cash and Invesbnents Cash and investments as of June 30, 2007 are classified within the accompanying Statement of Net Assets as follows: Statement of Net Assets: Current, Unrestricted: •+ Cash and cash equivalents $ 55,472,715 Investments 231,710077 Subtotal-current, unrestricted 287,182.792 Restricted: Cash and cash equivalents 23,946,510 Investments 60,776,180 Subtotal-restricted 84.722,690 Total cash and cash equivalents and investments $ 371 905,482 Cash and investments consist of the following as of June 30, 2007: Cash on hand $ 4.000 _ Deposits with financial institutions 3,984,549 Investments 283,194,243 Monies held by trustees: Investments $23.946,510 Investment contracts 60,776,180 Subtotal-monies held by trustees 84.722,690 Grand total cash and investments $ 371,905,482 17 L.I ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2007 Investments Authorized by the California Government Code and OCSD's Investment Policy The table below identifies the investment types that are authorized by the California Government Code and OCSD's investment policy. The table also identifies certain provisions of either the California Government Code or OCSD's investment policy (whichever is more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. A separate table addresses investments of debt proceeds that are held by trustees. Those r, investments are governed by the provisions of the debt agreements rather than the general provisions of the California Government Code or OCSD's investment policy. Authorized Maximum r by OCSD's Maximum Investment Investment Type-Authorized by the Investment Maximum Percentage in a Single California Government Code Policy? Maturity(1)(3) of Portfolio 11) Issuer(i) r Loral Agency Bonds Yes 5 years None None U.S.Treasury Obligations Yes 5 years None None California State Treasury Obligations Yes 5years None None U.S.Agency Securities Yes 5 years None None Banker's Acceptances Yes 180 days 409/6 30% Commercial Paper Yes 270 days/31 days 15%/25% 10% Negotiable Certificates of Deposit Yes 5 years 30% None r Repurchase Agreements Yes 1 year None None Reverse Repurchase Agreements Yes 90 days(h 5%(2) None Corporate Medium-Term Notes Yes 5 years 30% None Mutual Funds Yes N/A 15%(2) 10% Money Market Mutual Funds Yes N/A 15%(2) None Mortgage PassThrough Securities/CMO Yes 5 years 20% None r County Investment Pools Yes WA None None Local Agency Investment Fund(LAIF) Yes WA None None Notes (1)Reabictiom are in accordance with the Caldenda Government Code urdeas indicated olhervow. (2)The nistridion is in acomoince with OCSos Investment Policy whirA is more restncmae man Me Caliroma Govemment Code. (3)As akiwed by Celibmu Govemment Code Section Mi.in,Board of 13 ed"has adoplttl a policy of no mavmum maturity for imyxbnenla pwchased by OCSD's extemo money manager for it,longteml investment ponblio However,roe duration ofde bnglemi Nov em mffdio an mwr naceed Bo mordhs. ImesMenw purWsed for be Nedlmm pordolio are subject to the maturity restrictions wed in this table. ,r Investments Authorized by Debt Agreements The investment of debt proceeds held by trustees is governed by provisions of the debt " agreements, rather than the general provisions of the California Government Code on OCSD's investment policy. The table below identifies the investment types that are authorized for investments held by OCSD's trustees. The table also identifies certain provisions of these debt r agreements that address interest rate risk, credit risk, and concentration of credit risk. 64 18 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2007 r Maximum Maximum Investment Investment Type-Authorized by the Maximum Percentage in a Single California Government Code Maturity of Portfolio Issuer State and Local Agency Bonds 5 years None None U.S.Treasury Obligations 5 years None None U.S.Agency Securities 5 years None None Banker's Acceptances 180 days 40% 10% Commercial Paper 270 days/31 days 15%/30% 10% Negotiable Certificates of Deposit 5 years 30% 10% Repurchase Agreements 1 year None None Corporate Medium-Term Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% None Local Agency Investment Fund(LAIF) N/A None None Guaranteed Investment Contracts N/A None None r Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment has before maturity, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that OCSD manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary to provide the cash flow and liquidity needed for operations. OCSD monitors the interest rate risk inherent in its managed portfolio by measuring the modified duration of its portfolio. The duration of monies held for shorter term purposes is recommended by OCSD's Treasurer and is based on OCSD's cash flow requirements in meeting current operating and capital needs. The average duration of monies invested for shorter term purposes may never exceed 180 days. The duration of monies held for longer term purposes is recommended annually by OCSD's Treasurer and is based on OCSD's five-year cash flow forecast. The average duration may not exceed 120 percent nor be less than 80 percent of the recommended duration. The average duration of monies invested for longer term purposes may never exceed 60 months. There is no stated maturity for the Money Market Mutual Funds. .� Following is a table which summarizes OCSD's investments by purpose with the modified duration. r 19 rl ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 Modified Modified Duration Duration Investment Type Fair Value inyears) in months Short-Terre Portfolio: r U.S.Agency Securities $ 68,710.698 0.279 3.39 Commercial Paper 7,402,836 0.375 4.56 Corporate Medium-Tenn Notes 5,501,856 0.315 3.83 r Negotiable Certificates of Deposit 5,700,000 0.179 2.18 Money Market Mutual Funds 252,921 0.083 1.01 Short-term portfolio subtotal $ 87,568,321 0.283 3.44 r Long-Term Portfolio: U.S.Treasury Notes $ 34,541,690 1.658 20.17 GNMA 1,351,295 2.917 35.49 r U.S.Agency Securities 106,283,199 3.724 45.31 Commercial Paper 1,084,294 0.221 2.89 Corporate Medium-Tenn Notes 22.664.617 1.403 17.07 Money Market Mutual Funds 1,075,020 0.083 1.01 6w Mortgage Pass-Through Securities/CMO 6.810,424 1.300 15.82 Long-term portfolio subtotal $ 173,810.539 3.038 36.96 w OCSD monitors the interest rate risk inherent in its other investments using specific identification of the investments. Following is a table of these investments as of fiscal year end. Fair Value Maturities Investments held by fiscal agents: Money Market Mutual Funds: US Bank $ 66,099 WA r Fidelity Treasury Class III Fund 696 2,434,706 WA First American Treasury Obligation 1,177,276 WA Blackrock Institutional Funds 20,109,579 WA GS Financial Square Treasury Obligations 110,604 WA Blackrock Institutional T-Fund 48246 WA Guaranteed Investment Agreements: r AIG-1992 COP 12,417.000 August 1, 2013 AIG-1993 COP 3,220,000 July 14, 2016 Bayerische Landesbank Girozentrale-2000 COP 17,311.427 August 1, 2016 MBIA Inc. -2006 COP 18,309.753 February 1, 2036 FSA Capital Management Services LLC-2007A COP 9,518,000 January 30, 2030 Local Agency Investment Fund(LAIF) 21,815,383 176 day average Fair Value of Other Investments $ 106,538,073 Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations OCSD's investments(including investments held by trustees) include the following investments that are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above): r 20 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 • Mortgage-backed securities: These securities are subject to early payment in a period of declining interest rates. The resulting reduction in expected total rash Flows affects the fair value of these securities, making them highly sensitive to change in interest rates. At fiscal year end, the fair value of investments in mortgage-backed securities totaled$32,878,377. • U.S. Agency Securities with a step-up interest rate: At each call date, should the issuer not call the security, the coupon rate of the note increases by an amount specified at inception. r The call feature embedded within a step-up security muses the fair value of the instrument to be highly sensitive to interest rate changes. At fiscal year end, the fair value of investments with step interest rates totaled$6,016,850. r Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally r recognized statistical rating organization. The following table presents the minimum rating as required by the California Government Code, OCSD's investment policy, or debt agreements, and the actual rating as of year-end for each investment type: r r r r r r r r 21 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 Investment Type and the Lowest Rating Reported at Year End Fair Value Investments w8h no legal minimum rating& no required disclosure: U.S.Treasury Obligations $ 34,541.690 U.S.Agency Securities-GNMA 1.351,295 r Subtotal $ 35,892.985 Investments with no legal minimum rating: U.S.Agency Securities(other than GNMA): Rating of AAA(Filch) 50,347,375 Rating of AGY(Standard& Poor's) 124,646,522 Negotiable Certificates of Deposit: Not rated at fiscal year and 5,700,000 r Local Agency Investment Fund(LAIF). Not rated at fiscal year end 21.815.383 Investments wRh fiscal agents-Guaranteed Investment Contracts: r Not rated at fiscal year end 60 776.180 Subtotal 263,285,460 Investments with a legal minimum rating (or its equivalent) of A: Commercial Paper: Rating of A+(Fitch) 600,000 Rating of P-1 (Moody) 4.248.698 Not rated at fiscal year end 3.638,432 r� Corporate Medium-Tenn Notes: Rating of A+(Standard& Poors) 1,467,885 Rating of At (Moody) 3,202,180 r Rating of A2 (Moody) 3,102,778 Rating of AA(Standard &Pwes) 4,702.961 Rating of AA-(Standard& Pooes) Rating of AA-(Filch) 3,000,450 r Rating of AA+(Filch) 826,200 Rating of AA2(Moody) 600,186 Rating of AA3(Moody) 5,272,003 r Rating of AAA(Standard 8 Poor's) 3,302,964 Rating of BBB(Standard&Pwrs)' 901,260 Rating of BBB+(Standard& POOrs)' 1,787,616 Money Market Mutual Funds: r Rating of AAA(Standard&Poor-s) 1.327,941 Invested with fiscal agents: Rating of Aaa (Moody) 23,880,411 r Not rated at fiscal year end 66.099 Subtotal 61,928,064 Investments with a legal minimum rating(or its equivalent)of AA: Mortgage Pass-Through Securilies/CMO: Rating of AGY(Standard&Poor's) 4,255,430 Rating of UST(Standard&Poor's) 2,052,056 Not rated at fiscal year end 502.938 r Subtotal 6,810,424 Total $367,916,933 Investment cads in compliance Mm legal requirements at Vie 4me it cads pwcheaed. r v 22 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 Concentration of Credit Risk Limitations on the amount that OCSD is allowed to invest in any one issuer have been identified previously in the section, 'Investments Authorized by the California Government Code and OCSD's ., Investment Policy' and in the section, "Investments Authorized by Debt Agreements.' OCSD follows whichever guideline is the most restrictive. As of fiscal year end, OCSD has investments in the following types of securities, each of which represents more than 5 percent of OCSD's investments: • Federal Home Loan Bank(U.S. Agency Securities),totaling $56,922,751 • Federal Home Loan Mortgage Corporation(U.S. Agency Securities), totaling$40,600.133 • Federal National Mortgage Association (U.S.Agency Securities), totaling$56,593,117 Custodial Credit Risk Custodial credit risk for deposits is the risk that in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The California Govemment Code and OCSD's investment policy contain legal requirements that limit the exposure to custodial credit risk for deposits as follows: a financial institution must secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110%of the total amount deposited by the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150%of the secured public deposits. Custodial credit risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and OCSD's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments. As of June 30, 2007, OCSD's investments in the following investment types were held by the fiscal agent's safekeeping department of the broker-dealer(counterparty) used to buy the securities. Money market mutual funds $23,946,510 _ Guaranteed investment contracts 60,776,180 Total $84.722.890 Investment in State Investment Pool r OCSO is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of OCSD's investment in this pool is reported in the accompanying financial statements at amounts based upon OCSD's pro-rata share of the fair value provided by LAIF for the entire LAW portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAW's investment portfolio are mortgage-backed securities, other asset-backed securities, loans to certain state funds, securities with interest rates that vary according to changes in rates greater than a one-for-one basis, and structured notes. 23 L ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements u For the Year Ended June 30, 2007 (3) Capital Assets Capital asset activity for the year ended June 30,2007 is as follows: r Balance at Balance at June 30,2006 Additions Deletions June 30,2007 Capital assets not depreciated: Cost: r Land $ 13.021,480 $ 9,122 $ (9,122) $ 13,021.480 Construction in progress 586.713,335 287,519,848 (70,553,227) 803.679.956 Total nondepreciable assets 599,734,815 287,528,970 (70,562.349) 816.701,436 r Depreciable capital assets: Coat: Sewage collection facilities 466,245,986 37,725,316 (56,358) 503.914,944 •' Sewage treatment facilities 736,011,012 31,095,726 (2,235,793) 764,870,945 Effluent disposal facilities 97.014,820 271.366 (271,366) 97.014,820 Solids disposal facilities 3.074,494 8,609 (8,609) 3,074.494 General and administrative facilities 172,410,447 1.452.210 (644,072) 173,218,585 r Subtotal 1,474,756.759 70,553,227 (3,216,198) 1,542,093,788 Accumulated depredation: r Sewage collection facilities (190.051,890) (12,442,394) 37,085 (202,457,199) Sewage treatment facilities (387,640,166) (26,804,421) 1.152,525 (413,492,062) Effluent disposal facilities (42,290,487) (2,524,489) 124.297 (44,690,679) Solids disposal facilities (3,074,493) (8,571) 8,571 (3,074,493) General and administrative facilities (87,772,630) (12,271.118) 417.185 (99,626,563) Subtotal (711,029,666) 154,050,993) 1,739,663 (763,340.9% Net depreciable assets 763,727,093 16,502.234 (1,476.535) 778,752,792 r Net capital assets $ 1,363,461,908 $ 304.031,204 $ (72,038,BB4) $ 1,595,454,228 r (4) LonB-Tenn Liabili9es The following is a summary of the changes in long-term liabilities far the year ended June 30,2007: r Certificates Arbitrage Compensated Claims and of V Payable Absences Judgments Participation Totals Balance,July 1 $ 393,200 $ 5,574,380 $ 1,379,850 $ 808,570,000 $ 815,917.430 Additions (53.100) 5,763,782 (55.603) 95,180,000 100,835,079 Deletions - (5,452,344) (299,052) (101,965,000) (107.716.395) r Balance,June 30 340.100 5,885,818 1,025,195 801,785,000 809,036,113 Due within one year 307,900 5,272,516 340,480 22,590,000 28.510,896 Unamorized discount - - - 395,231 395,231 r Unamodized defected amount on refundings - - - 6.735.254 6.735,254 Long-term amount $ 32,200 $ 6 33,302 $ 684,715 $ 772,064,515 $ 773,394,732 r W 24 r ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 Arbitrage Payable The Tax Reform Act of 1986 (the Act) requires OCSD to calculate and remit rebatable arbitrage earnings to the Internal Revenue Service. Certain of OCSD's debt and interest earnings on the proceeds thereof are subject to the requirements of the Act OCSD's liability at June 30, 2007 is $32,200 for future years' remittances. Compensated Absences OCSD's policies related to compensated absences are described in Note 1. OCSD's liability at June 30, 2007 is$5,885,818 with an estimated $5,272,516 to be paid or used within the next fiscal year. Claims and Judgments Pavable OCSD is self-insured in a number of areas as described in Note 1. The following is a summary of the claims and judgments payable as of June 30,2007 and 2006: 2006-07 2005-06 Claims and judgments payable at July 1 $1,379,850 $1,430.208 Claims incurred during the fiscal year 222.771 117,561 Adjustments to the prior year (278,374) 43,580 Payments on claims during the fiscal year (299,052) 211,499 Claims and judgments payable at June 30 1.025.195 1,379,850 Less: current portion (340,480) 359,450 Total long-term claims and judgments payable $ 684,715 $1,020.400 .. Certificates of Participation OCSD issues certificates of participation in order to finance construction of the treatment facilities. Each certificate of participation represents a direct and proportionate interest in the semiannual interest payments. Installment payments for the issues are payable from any source of lawfully available funds of OCSD. Certificates of participation at June 30, 2007 are summarized as follows: Amount r 1992 refunding certificates of participation $ 85,505,000 1993 refunding certificates of participation 32,200.000 2000 refunding certificates of participation 197,400,000 r 2003 certificates of participation 191,500,000 2006 certificates of participation 200.000,000 2007A refunding certificates of participation 95,180,000 Total certificates of participation payable $801,785,000 r Outstanding Certificates of Participation December 1992 Reuundino Certificates of Participation On December 3, 1992, OCSD completed the sale of$160,600,000 of refunding certificates of participation. The certificates were issued to refund the remaining outstanding principal 25 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements L For the Year Ended June 30, 2007 balance of the 1986 certificates of participation and $38,350,000 of the outstanding principal balance of the 1990-92 Series B certificates of participation. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2007 was 3.39 percent. On October 1, 1992, OCSD and a brokerage company entered into an interest rate exchange swap agreement (Note 5). Annual principal payments are due on August 1, beginning August 1, 1993. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of $12,483,037 is held by the trustee, US Bank, and meets the reserve requirement.Additionally,AMBAC provides municipal bond insurance for the certificates. September 1993 Refunding Certificates of Participation On September 2, 1993, OCSD completed the sale of $46,000,000 of refunding certificates of participation. The certificates were issued to refund $39,740,000 of the outstanding principal balance of the 1990-92 Series B certificates of participation (see above). The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2007 was 3.53 percent. On September 1, 1993, OCSD and a brokerage company entered into an interest rate exchange swap agreement (Note 5). Annual principal payments are due on August 1, beginning August 1, 1995. v The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of $3,220,000 is held by the trustee,JPMorgan, and meets the reserve requirement. v August 2000 Refunding Certificates of Participation On August 31, 2000, OCSD completed the sale of $218,600,000 of refunding certificates of v participation. The certificates were issued to refund the remaining outstanding principal balance of the 1990-92 Series A, B, and C certificates of participation (see above) and to reimburse OCSD for improvements made to the wastewater system. The interest rate on the refunding certificates is adjusted by the remarketing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2007 was 3.48 percent. Annual principal payments are due on August 1, beginning August 1, 2001. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of $17,746,587 is held by US Bank, the trustee, and meets the reserve requirement. August 2003 Certificates of Participation u On August 26, 2003, OCSD completed the sale of$280,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the certificates is fixed and ranges from 5.00 percent to 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2021. 26 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of$20,107,236 is held by Union Bank, the trustee, and meets the reserve requirement. March 2006 Certificates of Participation On March 8, 2006, OCSD completed the sale of$200,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the refunding certificates is adjusted by the remarkefing agent daily based on market interest rates. The weighted average interest rate for the fiscal year ended June 30, 2007 was 3.48 percent Annual principal payments are due on February 1, beginning February 1,2022. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of $18,309,753 is held by Deutsche Bank, the trustee, and meets the reserve requirement. May 2007 Certificates of Participation On May 22, 2007, OCSD completed the sale of $95,180,000 of refunding certificates of participation. The certificates were issued to refund $88,500,000 of the outstanding principal balance of the 2003 Series certificates of participation (see above) . The interest rate on the refunding certificates is fixed and ranges from 4.00 percent to 4.5 percent. Annual principal payments are due on February 1, beginning February 1,2008. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2007 reserve of$9,519,244 is held by Union Bank, the trustee, and meets the reserve requirement. Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation as of June 30, 2007, are as follows: Estimated Year Interest Rate Ending Estimated Swaps, Net June 30, Principal Interest (See Note 5) Total 2008 $ 22,590.000 $ 32,534.573 $ 1.714,792 $ 56,839,365 'tl 2009 15,250.000 31,871,606 1,451,192 48,572,798 2010 16,310,000 31,278,661 1,165,281 48,753.942 2011 17.270,000 30,650,250 861.233 48,781,483 2012 17,810,000 29,997.782 744.992 48,552,774 2013-2017 121235,000 136,637,622 1,111,956 258,984,578 2018-2022 129,625,000 114,303,864 - 243.928,864 r 2023-2027 149.710,000 86.533,339 - 236,243,339 2028.2032 189.405,000 49.745,026 - 239.150,026 2033-2036 122.580.000 7,138,163 129,718,163 Total $801,785,000 1550,690,586 $ 7,049,446 $ 1,359,525,332 27 LA ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements y For the Year Ended June 30, 2007 V (5) Interest Rate Swaps on Certificates of Participation As indicated in Note 4, OCSD has entered into interest rate swap agreements in connection with the 1992 and the 1993 Refunding Certificates of Participation. Objective: The objective of the interest rate swaps is to lower OCSD's borrowing costs when compared against fixed-rate bonds at the time of issuance. The swaps effectively change OCSD's variable interest rate to a synthetic fixed rate of 5.55 percent on the 1992 Refunding Certificates of Participation and to a synthetic fixed rate of 4.56 percent on the 1993 Refunding Certificates of Participation. r 1992 Refunding Certificates of Participation Terms of the Swap: On October 1, 1992,OCSD and a brokerage company entered into an interest rate exchange swap agreement pursuant to which OCSD will pay a fixed interest rate of 5.55 percent. OCSD will receive a variable interest rate equal to the interest paid to the holders of the 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 of the associated debt. This interest rate swap agreement is accounted for as a hedge, and the associated interest rate differential to be paid or received is charged to interest expense as interest rates change. The 20-year swap agreement matures on August 1, 2013. r Fair Value: Because interest rates have declined since execution of the swap agreement, the swap had an estimated negative fair value of $5.11 million as of June 30, 2007. Because the 61 variable-rate certificates adjust to changing interest rates, the certificates do not have a corresponding fair value increase. The fair value was estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. Credit Risk As of June 30, 2007, OCSD was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change, and the fair value of the swap become positive, OCSD would be exposed to credit risk in the amount of the swaps fair value. The swap's counterparty, AIG Financial Products Corporation, was rated AA by Standard & Poofs and Aa2 by r, Moody's Investors Service as of June 30, 2007. To mitigate the potential for credit risk, if the counterparty's credit quality falls below AA- by Standard & Pcor's or Aa3 by Moody's Investors Service, the fair value of the swap(if the swap has a positive fair value)will be collateralized by the counterparty, as follows: 1) with bonds, debentures and other debt issued or guaranteed by the United States of America equaling 106 percent of the fair value, or 2) with securities issued by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association equaling 108 percent of the fair value, or 3) other securities to be agreed upon and in an amount to be agreed upon by OCSD, the counterparty, and the Swap Insurer. The collateral would be held by a third-party custodian. Basis Risk. The swap does not expose OCSD 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. Termination Risk. OCSD or the counterparty may terminate the swap if the other party fails to u perform under the terms of the contract. In the event of termination due to default, the defaulting V 28 u ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30,2007 party will pay to the non-defaulting parry 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. The swap may be terminated by OCSD if the counlerparty's credit quality rating falls below AA- by Standard & Poor's or Aa3 by Moody's Investors Service. If the swap is terminated, the variable- rate certificates of participation would no longer carry a synthetic interest rate. 1993 Refunding Certificates of Participation Terms of the Swap: On September 1, 1993, OCSD and a brokerage company entered into an interest rate exchange swap agreement pursuant to which OCSD will pay a fixed interest rate of 4.56 percent OCSD will receive a variable interest rate equal to the interest paid to the holders of ., the certificates which is based on a tax exempt daily interest rate as determined by the remarketing agent on an initial notional amount of 546,000,000. The notional value of the swap declines in tandem with the principal amount of the associated debt This interest rate swap agreement is accounted for as a hedge, and the associated interest rate differential to be paid or received is charged to interest expense as interest rates change. The 22-year swap agreement matures on August 1, 2016. Fair Value. Because interest rates have declined since execution of the swap agreement, the swap had an estimated negative fair value of $1.57 million as of June 30, 2007. Because the variable-rate certificates adjust to changing interest rates, the certificates do not have a corresponding fair value increase. The fair value was estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for .. hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. Credit Risk.., As of June 30, 2007, OCSD was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change, and the fair value of the swap become r positive, OCSD would be exposed to credit risk in the amount of the swap's fair value. The swap's counterparty, Societe Generale Bank, was rated AA by Standard & Poor's and Aal by Moody's Investors Service as of June 30, 2007. To mitigate the potential for credit risk, if the counterparty's credit quality falls below AA- by Standard & Poor's or Aa3 by Moody's Investors Service, the fair value of the swap (if the swap has a positive fair value)will be collateralized by the counterparty as follows: 1) with securities issued or guaranteed by the United States Government equaling 106 percent of the fair value, or 2) with securities issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Government National Mortgage Association equaling 108 percent of the fair value, or 3) other securities to be agreed upon and in an amount to be agreed upon by OCSD, the counterparty, and the Swap Insurer. The collateral would he held by a third-party custodian. r Basis Risk., The swap does not expose OCSD 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. Termination Risk: OCSD or the counterparty may terminate the swap if the other party fails to perform under the terms of the contract. In 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. The swap may be terminated by OCSD if the counterpartys credit quality rating falls below AA- by Standard & Poor's or Aa3 by Moody's Investors Service. If the swap is terminated, the variable- rate certificates of participation would no longer carry a synthetic interest rate. 29 Y,I ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements v✓ For the Year Ended June 30, 2007 (6) Net Assets The difference between assets and liabilities is reported as net assets. Net assets are classified as restricted, unrestricted, or invested in capital assets, net of related debt. Net assets at June 30, 2007 consisted of the following: June 30, 2007 Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation $ 1,595,454,228 Outstanding debt issued to acquire capital assets, net of: unamortized bond discount, �r deferred amount on refundings, and unspent proceeds (713,268,658) Unamortized deferred charges of debt issued to acquire capital assets 4,277,005 Subtotal 886,462,575 - Restricted by debt covenants for debt service on certificates of participation 3,904,212 Unrestricted 299,369,977 Total Net Assets $ 1,189,736,764 (7) Pension Plan y OCSD 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 Law of 1937, and provides members with retirement, death, disability, and cost-of-living benefits. OCERS issues a standalone comprehensive annual financial report which can be obtained from OCERS at 2223 Wellington Avenue, Santa Ana, California 92701. r Benefits All OCSD employees except for interns participate in OCERS. Employees who refire at or after r, age 50 with ten or more years of service are entitled to an annual retirement allowance. 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 I or Tier II member. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. Contributions .,a 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. Tier I and Ter II covered employees are required to contribute 9.76% - 14.20% and 9.34% - 1420%, respectively, of their annual compensation to OCERS. OCSD 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. For the fiscal years ended W June 30,2007, 2006, and 2005,the required contribution equaled the contribution actually made. 30 u r ORANGE COUNTY SANITATION DISTRICT r Notes to Basic Financial Statements For the Year Ended June 30, 2007 r The following table provides salary and contributions requirements for the current and two prior fiscal years. For the Fiscal Year Ending June 30,2007 June 30, 2008 June 30, 2005 Total Payroll Costs $ 53,175,199 $ 51,589,226 $49,332,630 Payroll Casts of Employees Covered by OCERS 49,788,835 48,761,087 44,669,861 . Contributions Requirements: Contributed by Employees 3,513.302 3,095,591 1,250,374 Contributed by the District on Behalf of Employees 1,732,296 1,717,959 1,998 310 Total Employee Required Contribution 5,245,598 4.813,650 3,246,684 District Required Contribution 9,848,854 7,416,556 5,524.673 Total Contribution $ 15,094,452 $ 12,230,108 $ 8771 357 Total Actual Contribution as a Percent of Required Contribution 100.00% 100.00% 100.00% Employee Required Contribution as a Percent of Covered Payroll 10.54% 9.87% 7.27% District Required Contribution as a Percent of r Covered Payroll 19.78% 15.21% 12.37% Total Contribution as a Percent of all Participating Entities'Contributions 5.51% 5.98% 4.78% r (8)Transactions with Irvine Ranch Water District—Revenue Area No. 14 ` Formation of Revenue Area No. 14 8 Excess Purchase Price Over Book Value of Acquired Assets On July 1, 1985, Revenue Area No. 14 was formed as an independent special district as a result of a negotiated agreement between OCSD and Irvine Ranch Water District (IRWD). At the time of Revenue Area 14's creation, OCSD consisted of eight independent special districts (see Note 1 — Reporting Entity). The eight existing districts sold a portion of the joint treatment facilities and land to the newly created district and recorded capacity rights revenue at the time of the sale. r In accordance with the negotiated agreement between OCSO and IRWD, IRWD paid OCSD $34,532,000 for an initial 15,000,000 gallons per day capacity in OCSD's joint treatment facilities r (with an ultimate collection capacity of 32,000,000 gallons per day)and for a pro-rats interest in real property(based on flow of 32,000,000 gallons per day). The book value of the assets acquired was determined to be $14,553,000 as of June 30, 1986; these assets were recorded at book value in Revenue Area 14. The excess of the purchase price over the assets' book value was$19,979.000 `+ and was recorded as an intangible asset in Revenue Area No. 14. The excess of the purchase price over the assets' book value is being amortized over the remainder of the useful lives of the original assets acquired. As of June 30, 2007, the unamoriized amount of the excess of purchase r price over the assets'book value was$6,167,111. 31 Yr ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2007 Annual Transactions YO IRWD entered into a separate agreement with Revenue Area No. 14 whereby IRWD agreed to annually fund payment of Revenue Area No. 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement,which contribution amounted to$18,929,179 in 2007. (9)Commitments ,.., Groundwater Replenishment System: In March 2001. OCSD entered into an agreement with the Orange County Water District, California, to design and construct Phase 1 of the "Groundwater Replenishment System'(GWRS). OCSD has no explicit, measurable equity interest in GWRS. No separate financial statements are prepared for GWRS. The cost of this project is to be paid equally (50 percent shares) by each agency. The GWRS is a joint 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 November 2007, Phase 2 will increase the total capacity to 112,000 acre-feet by the year 2017, and Phase 3 will increase the total capacity to 145,600 acre-feet per year by the year 2025. Following the completion of Phase 1, the GWRS will have the capacity to divert up to 100 million gallons per day of flow from OCSD's ocean discharge for peak flow storm relief. As of June 30, 2007, the total estimated cost of GWRS Phase 1 was $492.18 million. Of this amount, up to $92.50 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 r others. OCSD's estimated gross and net share is$246.09 million and$199.84 million, respectively. Costs incurred by OCSD through June 30,2007 total$186.41 million. Secondary Treatment: 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 OCSD's policy to treat all wastewater discharges into the ocean to secondary treatment standards thereby providing for continued public safety, marine ecosystem protection, r and water reclamation opportunities. To implement this policy, OCSD staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the agency to meet Federal Clean Water Act secondary treatment standards. r OCSD estimates that it will take a total of approximately eleven years and additional capital improvement costs of$271 million to reach secondary treatment discharge standards. Secondary treatment discharge standards are scheduled to be reached in 2013. In the interim, OCSD will r„ operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspended solid discharges below 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. 32 u ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 33 ORANGE COUNTY SANITATION DISTRICT 6d Schedule of Net Assets June 30,2007 With Comparative Totals for June 30,2006 )ul Revenue Consolidated Totals b Area No.14 Revenue Area Eliminations 2007 2006 Current assets: Cash and cash equivalents E - E MAT1.715 E - E 55.4M.715 E 65b '"Il Imesaner s - 231,710.077 - 231,T10.OT7 318.430,W7 Due from other Revenue Area - 8,006,925 (6,M,MS) - - r Accounts receivable,net of allowance for uncellecubles 116.161 12.587.M - 12703=7 18,240.805 Aoctued interest receivable 179,084 2.636,700 - 2.815.784 3,850,987 Due fram other gov¢mmental agendes 6,332,508 - 6,332.508 8,371,250 u Connection fees receivable - 962,754 - 962.754 1.335,169 Properly lax receivable 70.495 2.389.162 - 2.459.W 1.883,915 Inventones 310,521 4,524,290 - 4.634.011 4.551,139 i Prepaid expenses and retirement 81,5D3 1.M.021 - 1281,524 11,309,975 ay Other current assets 23,981 Total anent assets 7.090.272 317,489,710 (6.006,925) 318,573.057 433,991 Noncurrent assets: r Restricted: Cash and cash equivalents - 23.946,510 - 23.946,510 53.651 Imrestmerda - SO.M.180 - 80.778.180 51,]83.180 AcaueO interest receivable - 567,360 - 557,380 660.390 r Unres acted: Nondepredable capital assets 45,322,8T7 771,3MW9 - 918.701,436 599,734.815 Depreciable capital assets,net of accumulated depredation 41I.SI,453 M.161,339 - 776.752.792 763,727,093 r Deferred obarges 4,2T7,005 - 4277,005 4,354.633 Excess pwc base pace over book value an acquired assets,net 6.197.111 - - 0,187.111 8,824.620 Ogler neacurreni assets.net 1.629M5 28235.268 29.914.713 37,561.184 u Total norwrment assets 11011.710,111118 1.619.392.241 11.721.11130,1127 1,518211 Total assets 108,801.158 1,936,881,01 (8.006,925) 2.039.676.184 1,952,295,918 r Current Iuts pay Accounts payable 1,705.769 17,388.885 - 18.966,661 21.743,731 Accrued Rses 706.169 14,3T1,24B - 15.089,OW 8.4M,23B Duentether Revenue Area 8,417,162 (8.006.925) Interest pa payable 917,182 8,542,037 - 7.023.945 9245,573 Interest payable ],023,945 - 7,023,905 9.588,321 Current portion of lorg-teml obligations 356,987 25.153,909 28.510,896 18,479.060 r Total current lubifNes 8.111 9 73,985.824 (6,005,925) 76,544,668 67,478,961 Nbnourrent liabiABes: Noncurrent portion of r long-term obligations 82,SR M.312.178 773.391,732 795,717.487 Total liabilNes 8,888,343 847278,002 (6,006,025) 849,939A20 863,196,471 Net assets: r Invested in captal assets, net of related debt 93,914,330 792,W,245 - 881 684,060,499 Restricted for debt service - 3,904,212 - 3.904,212 3.002.BT1 r Unrestricted 6218.485 293,151.492 - 299.369,9T7 422,038278 Total net assets E tOD.132.815 E 1,089,603,949 S E 1,189736.]81 E 1.089,p99.4p r r 34 r ORANGE COUNTY SANITATION DISTRICT Schedule of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30,2007 With Comparative Totals for June 30, 20D6 Revenue Consolidated Totals Am No. 14 Revenue Area 2007 2006 Operating revenues: r Service charges $ 3,338,646 $ 164,451,014 $ 167,789,660 $ 154,291.040 Permit and inspection fees 28,628 1,839,783 1,866,411 874,383 Total operating revenues 3,385,274 166,290,797 169,656,071 165,165.423 Operating expenses other than depreciation and amortization: r Salaries and benefits 3.274,198 54.527.906 57,802.102 53,245,819 Ufittles 555.298 7,516,964 8.072,262 7,563,227 Supplies,repairs and maintenance 1,038,446 20,012.466 21,050,912 21,173,357 Contractual services 1,158,892 19,230,562 20.389,454 19,073,353 m Directors'fees 13,863 117,887 131.750 141,270 Meetings and training 71.779 1,053,073 1,124.852 890,357 Other 239,237 3.344.555 3,683,792 3.544,697 d' Total operating expenses other than depreciation and amortization 6,351,711 105,803A13 112.155,124 105,632,080 Operating income(loss)before depreciation and amortization (2,986,437) 60,487,384 57,500,947 49,533,343 Depredation and amortization 5,868,891 58,369,823 64,238,714 60,732,836 Operating loss (8,855,328) 2,117,561 (6,737,767) (11,199,493) Non-operating revenues: r Property taxes 1,699,378 58,865,930 60,565,308 39.958,325 Investment and interest income(loss) 106,350 22,138,174 22,243,554 10,426,117 Capital facilities rapacity charges - 31,277,647 31.277,647 15.631,439 Other 11,823 1,055,971 1,067,794 3,476,996 r Total non-operating revenues 1,816,681 113.337,722 115,154,3D3 69,492,877 Non-opemling expenses: Interest 32,672 21,714,180 21,746,852 20,078,050 Capital grants to member agencies - 2,127,154 2.127,154 3,399,627 Other 147.385 2,687,007 2,834,392 4,321,287 Total non-operating expenses 180,057 26,528,341 26,708,398 27,798,964 Income(loss)before r capital contributions (7,218.804) 88.926,942 81,708,138 30,494,420 Capital contributions from other agencies 18,929,179 18,929,179 17,358,147 Change in net assets 11,710,376 88,926.942 100.637.317 47.852,567 Total net assets-beginning 85,422,440 1,000,677,007 1,089,099,447 1,D41,246,8W Total net assets-ending $ 100,132,815 $ 1,089,603,949 $ 1.189.736.764 $ 1,089.099,447 35 r ORANGE COUNTY SANITATION DISTRICT r Schedule of Cash Flows For the Year Ended June 30,2007 With Comparative Totals for June 30.2006 r Revenue Consolidated Totals Area No.14 Revenue Area Enmkm s 2007 2006 Cash Bows from operating andus: La Recepls from customers eM users E 9.399,498 E (W.733,794 E - E (59.691,912 $ (64,204,029 Payments to empliers (3,295,993) (WA12A19) - (59A91,912) (52.939,029) Paym¢nis to suppliers (2298936) (38.510,440) - (O6.1109,378) (52,964A541 Net ash provided by operations =1,467 78A10A35 M=,002 48,WI,149 r Cash floss from none natal firencing adivbies: Proceeds from property taxes 1.682.45] 58A07,109 - 59,989,688 W,725,Wl Grenlstomemtlera9endes (2,127,154) (2,127,154) (3.39%627) r Net ash provided by nonaPital financing a¢Iivifies 1.682,07 58.179.955 - 57.862.412 36.326284 Cash flows from apital and related financing actiybea Capital lacunas capacity dlerges - 31,650,062 - 31,650,062 15,804,050 y Addhom to property.Plant and equipment (19,848.3p4) (288,782,066) 5,294,731 (281,1W.639) (2W,789,059) Disposal of property,plant,and equipment - 5294,731 (5299.T31) - - ArbOregepayment - (53,100) (53,100) (918.BW) Additions to other assets (109,000) - IN= - - Daposalofatherassels - 109.000 (109,000) -Interest paid MGM (35218,215) - (W,250,887) (29,a69,37m) Principal payments on renifiates of participation - (101,985,000) - (tO1,W5,OD0) (12,755,000) Pmaeds from certficatps of participation issuance - 89.818,081 - 89.818,081 199.859,470 Certificates of"Oficipalson Issuance costs - (319,698) - (319,698) (484,375) cow Proceeds from apred contributions 14,I63,358 14.10.356 9.729,346 Net man provided(used)by cartel and related financing activities (5,625.62m (277141IN19 7 1283.092,825) (78A23.14<) r Cash Bows from buranfling es Purchase from ft rear of irrym3m: renb - 5204.660.027 - 5,202,389,36 4.829,113,653 Pumhase caiNed sMenta - (5204,6WA27) - (5,204.6W,682 (4,896,529,313) Interest received 122.696 24,524.886 - 26,897,682 12,389,986 r Net ash provldas(used)by Investing acting. 122,695 102.249,315 102.m.011 42.945.308 Net increase(decrease)in ash and ash equivalents - (4022(l - (40=.400) 48,948.9/5 Cash and man equivalents,beginning of year 119.895,625 119.645.625 70,696,650 r Cash and an equivalents,end of year $ $ ]9,119225 E E 79.419225 $ 119.645 W5 Reconciliation of operating bass to net asn provided by operating actint es: r Operating loss $ (8,855,328) $ 2.117,561 $ - $ (6.737767) $ (11,190,493) Adjustments to recoricia,operating bass to net ash Provided by operafiami Depreciation and amorbation 5.868,891 58,3139,W3 - 64238,714 W,732,836 r Sad debt eglense 47 (67,331) - (67254) 45,389 Otherrromopero0n9 revenues and expanses 10.003 1,476,1140 - 1,488,143 1,5117,875 (Increase)1deareese in operating assets: Due from other Revenue Area - 7,206.509 (7,206,W9) r Araunls receivable 6.424,365 (819.483) - 5,809,862 (7,124.857) Due from other governmental agencies 6,804,565 - - 6.804,565 2.686,970 Inventories (74.423) (210,247) - (284,670) (170.168) Prepaid and other assets 498.531 9.565,881 - 10.052.412 (10,725,395) Inpease/(deaeaee)in operating fiarilities: r ACalmis payable (13.952) (2,763.190) - (2.M,1W) 7,442,786 Accruas expenses 373,688 6286,lm - 6.639,768 1,744,432 Due to other Revenue Area (7,206,509) - 7-lKlm - _ Retention payable (91.170) (2.195,204) - (2,286,374) 3.462,468 r Compensated absences 90,048 221,390 - 311,438 (51,366) Clslmsaasjudgmrmis f5,1891 (349,486) msi.e 5) (50.358) Net asn provided by op4vabOns $ 3,821,48T E 78.810.535 $ $ W.632,002 E 48.W1,149 r Nonash Activities: thaealiied gain(bass)On the lair value of inwiernents $ - $ 16.429 S - $ 16,429 $ (870.177) Net disposal of assets with no ash effect (169,936) (3A94807) - (3243,743) (2,366,BBB) Certifialas of participation issuance costaMerwrBers fee (488,044) - (688.044) (140,539) 6W Capital contributions from other agendas 4,765.823 - - 4,765,823 7.628.801 36 r r r r r r r rOCSD Statistical Section r r r �i �i U �i �`�-� L' y li �• U w d N C'f 4 rt O 3 1 ` u u ORANGE COUNTY SANITATION DISTRICT STATISTICAL SECTION r This part of the comprehensive annual financial report of the Orange County Sanitation District (OCSD) presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about OCSD's overall financial health. Contents Panes ri Financial Position and Trends These schedules contain current and trend Information to help the reader understand r OCSD's financial position and how OCSD's financial performance and well-being have changed overtime. 38-42 .. Revenue Capacity These schedules contain Information to help the reader assess OCSD's most r significant revenue source of sewer service fees. 43-45 Debt Capacity These schedules present Information to help the reader assess the affordability of OCSD's current levels of outstanding debt and OCSD's ability to issue additional debt in the future. All of OCSD's debt is recorded in a proprietary fund; consequently, 48-49 many of the schedules which are applicable to governmental funds are not presented. Operating Information These schedules contain data to help the reader understand how the information in OCSD's financial report relates to the services it provides and the activities it performs. 50-53 r Demographic and Economic Factors These schedules offer demographic information to help the reader understand the environment within which OCSD's financial activities take place. 54-57 .y r r 37 r ORANGE COUNTY SANITATION DISTRICT Net Assets by Component (Dollars in Thousands) Last Seven Fiscal Years(Note 1) $1,200,000 $1,000.000 $800.000 $600,000 $400,000 $200,000 so 2000-01 2001-02 2002-03 2003-04 200405 200548 200$-07 O Unrestricted ■Restricted for Debt Service 8 Capital p Acquisition O Invested In Capital Assets,Net of Related Debt 1 Invested in Restricted for Capital Assets, Debt Service Net of Related &Capital Fiscal Year Debt Acquisition Unrestricted Total Net Assets 2000-01 $463,935 $ 36,468 $446.558 $ 946,961 2001-02 501,997 36,070 435,906 973,973 2002-03 578,647 35,182 396,518 1,010,347 2003-04 418,267 88,519 517,346 1,024,132 2004-05 558,391 64,514 418,342 1,041,247 2005-06 664,060 3,003 422,036 1,089,099 2006-07 886,463 3,904 299,370 1,189,737 Note 1: Net Assets are calculated as a result of GASB 34, which was implemented in FY 2001-2, retrospective to 2000-01. Ten years data will eventually be presented as data is accumulated. Source:Orange County Sanitation District's Financial Management Division. 38 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $188 768 $165172 $141 576 $117.980 $94,354 $70.788 $47.192 $23.596 E0 ' 1997-98 1996-99 1999-00 2000-01 2001-02 2002-03 200304 200 0 2W5.06 2006-07 O Operating Revenue ■Non-Operating Revenue O Contributed Capital _ Capacity Operating Revenue NmOperating Revenue Rights& permit& Cap. Facilities Total Capital Fiscal Service Inspection Total property Capacity Non- Contrib- Year Charges Fees Operating Taxes Interest Charges other Operating utions 1997-98 $ 55.962 $ 329 $56,291 $ 31,287 $ 27,897 $ 11 251 $ 3,283 $ 73,718 $ - 1998-99 69.453 423 69,876 32.836 17,944 8,751 3,332 62,863 141 1999-00 81,241 396 81637 35,557 20,836 7.857 2,573 66,833 4.589 2000-01 72.566 688 73,254 38.411 39,868 7,332 1,835 87.446 1,271 2001-02 79,609 396 80,005 41,140 28,073 10,560 2,202 81,975 8,603 2002-03 88.640 524 89,164 44.591 25,889 10,146 706 81.332 3.166 2003-04 101,995 332 102.327 46,943 6.786 8.998 928 63,655 9.245 2004-05 120,917 498 121,415 35,764 15,118 9,814 1,051 61.747 9.536 2005-06 154.291 874 155.165 39.958 10,426 15.632 3,477 69,493 17.358 2006-07 167,790 1.866 169.656 60,565 22,243 31.278 1,068 115,154 18.929 Source:Orange County Sanitation Districts Financial Management Division. 39 r ORANGE COUNTY SANITATION DISTRICT Expenses by Type r (Dollars in Thousands) Last Ten Fiscal Years r 8180,000 $170,000 $160,000 1 $150,000 _ $140,000 $130,000 -- ._ $120,a00 $110,000 $100,000 $90.000 $e0,000 $70,000 $60 000 $50,000 L $40,000 $30,000 $20,000 -' $10,000 so 1997-98 199a-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 ■Operating Expense 0 Non Operating Expense Operating Non-Operating Fiscal Personnel Malnt& Depr& Total Interest Total Non- Year Services Utilities Other Amon Operating Expense Other(1) Operating 1997-98 $ 28.725 $ 3,328 $ 17,812 $ 35,841 $ 85,706 $ 19,232 $ 1,330 $ 20,562 1998-99 28,809 3,320 22,546 42,492 97,167 18,359 70 18,429 r 1999-00 33,581 3,621 22,213 36,383 95,798 18,151 23,073 41,224 2000-01 33,734 5,524 23,062 44,188 106,508 17,923 88 18,011 2001-02 35,629 4,967 27,967 48,990 115,553 14,406 7,609 22,015 r 2002-03 38,733 4,622 36.314 43,694 123,363 12,731 1.194 13,925 2003-04 48,711 5,408 41,284 46,118 141,521 15,524 4,396 19,920 2004-05 53,048 6,473 42,325 53,211 155,057 17,470 3,056 20,526 r 2005-06 53,246 7,563 44,823 60,733 166.365 20,078 7,721 27,799 2006-07 57,802 8,072 46,281 64,239 176,394 21,747 4,961 26,708 Notes (1) - For FY 1999-00, Other Non-Operating Expense includes $22,994,647 for the loss on investment in the Orange County Investment Pool. r Source Orange County Sanitation Districts Financial Management Division. 40 ORANGE COUNTY SANITATION DISTRICT Change in Net Assets (Dollars in Thousands) Last Seven Fiscal Years(Note 1) $1,200,000 $1,000,000 - - - $800,000 $600,000 $400,000 4 ` $200,000 $0 . 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Ending Net Assets by Fiscal Year Fiscal Total Total Change in Beginning Ending Year Revenues Expenses Net Assets Net Assets Net Assets 2000-01 $161,971 $ 133,543 $ 28,428 $ 918,533 $ 946,961 2001-02 164,580 137,568 27,012 946,961 973,973 2002-03 173,662 137.288 38,374 973,973 1,010,347 2003-04 175,226 161,441 13,755 1,010,347 1,024,132 2004-05 192,698 175,583 17,115 1,024,132 1,041,247 2005-06 242,016 194,164 47,852 1,041,247 1,089,099 2006-07 303,740 203,102 100.638 1,089,099 1,189,737 Note 1: Net Assets are calculated as a result of GASB 34,which was implemented in FY 2001-02, retrospective to 2000-01. Ten years information will eventually be presented as data is accumulated. Source:Orange County Sanitation Districts Financial Management Division. 41 ORANGE COUNTY SANITATION DISTRICT Cash and Investment Reserve Balances .. (Dollars in Millions) Last Ten Fiscal Years V Capital Debt Cash Flow Self- Improvement Service V Fiscal Year Contingency Insurance Program Requirements Total 1997-98 $ 63 $ 89 $ 188 $ 33 $ 373 1999-99 56 54 233 33 376 1999-00 60 57 284 32 433 200O-01 77 56 311 33 477 2001-02 70 57 303 35 466 2002-03 100 57 237 33 427 2003-04 71 57 390 88 606 2004-05 108 57 242 65 472 2005-06 92 57 257 84 490 `+ 2006-07 139 57 91 85 372 r Notes: The Cash Flow Contingency Reserve is to fund operations, 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. V The Self-Insurance Reserve is to provide requirements for property damage including fire,flood and earthquake,general liability and workers'compensation. u The Capital Improvement Program Reserve is 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. The Debt Service Required Reserves are monies held and controlled by a bustee pursuant to the provisions of certificates of participation issues,and the monies are not available for the general needs of the District. l.e r N Source: Orange County Sanitation Districts Financial Management Division. 42 u ORANGE COUNTY SANITATION DISTRICT Sewer Service Fees Single Family Residence Rate Last Eight Fiscal Years and Nexi Fiscal Year(Note 1) r Sewer service fees are comprised of three categories: residential customers, commercial customers, and industrial customers. Although the majority of sewer service fee revenues are from residential and commercial customers(see the schedule of Number of Accounts and Revenues by Customer Class), the fee r paid by each residential and commercial customer is less than the individual fees paid by industrial customers. The rates for commercial and industrial customers are derived from the base sewer service fee charged for a single-family residence and are based on the type of business and the strength and volume of waste that is discharged into the sewer system. Due to the complexity of the rate structure for commercial and industrial customers and since the rates are derivatives of the single-family residence rate, only the single-family residence rate is presented within the statistical section. Sewer Service Fiscal year Charge 1999-00 $ 81.02 r 2000-01 78.00 2001-02 80.00 2002-03 87.50 2003-04 100.00 r 2004-05 115.00 2005-06 151.00 2006-07 165.80 2007-08 182.00 Note 1: Prior to FY 1999/00, the District was comprised of nine separate Districts, and each District had its r own rate. Data on the Districts single rate will be compiled and will be added to this schedule until ten year's accumulated data is available. r Annual Sewer Service Fees Single Family Residence r 2W 160 $ 1l� Otl LL 1 is c 120 100 r LL b So co 40 r 20 0 199900 200601 2001-02 2002-03 200304 200 0 2005418 2 07 2007-09 r Fiscal Veer r Source: Orange County Sanitation Districts Financial Management Division. 43 r ORANGE COUNTY SANITATION DISTRICT Number of Accounts and Revenues by Customer Class r (Dollars in Millions) Last Ten Fiscal Years ResidentiaVCommercial Industrial r Number of Total Percentage Total Percentage Equivalent Sewer Svc. of Sewer Numberof Sewer Svc. of Sewer Single-Family Charge Service Charge Customer Charge Service Charge r Fiscal Year Dwellings Revenue Revenues Accounts Revenue Revenues 1997-98 851,770 $62.2 92% 678 $5.7 8% 1996-99 882,103 61.6 89% 678 7.8 11% 1999-00 919,072 72.0 89% 649 9.1 11% r 2000-01 883,603 64.5 91% 596 6.6 9% 2001-02 898,031 70.3 90% 573 7.5 10% 2002-03 897,757 77.0 92% 603 6.3 8% r 2003-04 860,156 86.0 92% 530 7.5 8% 2004-05 860,634 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% r $180,000,000 -- $160,000,000 r $140,000,000 L $120,OOD,000 $100,000,000 r $80,000,000 $60,000,000 - r $40,000,000 M r $20,000,000 $0 r 1997-88 1998-99 1939-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 200E-07 ■ResideneaVCommerdal Users ■Induslnal Users r r Source: Orange County Sanitation District's Financial Management Division. r 44 r r ORANGE COUNTY SANITATION DISTRICT r Principal Sewer Service Customers For the Current Fiscal Year and Nine Years Ago r Fiscal Year Ended 6130/07 Fiscal Year Ended 6130198 Industrial Industrial Permittee %to Total Permittee %to Total r Service Service Charge Service Service Charge User Charges Rank Revenue Charges Rank Revenue Kimberly-Clark Worldwide,Inc. $1,114.920 1 0.66% $401,126 1 0.67% r Alstyle Apparel-A&G Inc. 1,049,362 2 0.63% Stremicks Heritage Foods,LLC 974,474 3 0,58% MCP Foods, Inc. 921,317 4 0.55% $182,430 5 0.31% Disneyland Resort 791,747 5 0.47% 140.117 7 0.24% r Disneyland Resort—DCA 567,485 6 0.34% House Foods America Corp. 410,059 7 0.24% Pepsi-Cole Bottling Group 374,306 8 0.22% Seven-Up Bottling Company 335,178 9 0.209/6 Ameripec Inc. 278,478 10 0.17% Adohr Farms 357,647 2 0.60% r Rockwell Semiconductor 232,842 3 0.39% Favorite Foods 188,395 4 0.32% Marine Corps Air Staten 145,600 6 0.24% Sunder Brands 137,606 8 0.23% U.S.Dyeing&Finishing 134,466 9 0.23% AERA Energy 132,666 10 0.22% r $6,817,326 4.06% $2,052.895 3.45% r Although the majority of sewer service fee revenues are from residential and commercial customers(see the schedule of Number of Accounts and Revenues by Customer Class),the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. Consequently, this schedule shows the largest sewer service fee customers. r Source:Orange County Sanitation Districts Financial Management Division. r 45 r r ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses (Dollars in Thousands) Last Ten Fiscal Years yr 600% Yil 50.0% 40.0% 30.0% 20.0% 10.0% LI 0.0% 1997.99 1999.99 1999-00 200041 =142 2002L3 W03041 2004-05, 2005-06 uu;2WO.07 Ratio of Debt Total Service to Total Fiscal Principal Total Debt Operating Operating r Year 0) Interest Service(3) Expenses (2) Expenses 1997-98 $ 11,320 $ 20,008 $ 31,326 $ 49,865 62.83% 1996-99 12,120 18,475 30,595 54,675 55.96 r 1999-00 12,880 17,169 30,049 59,415 50.57 2000-01 13,790 16,690 30,480 62,320 48.91 2001-02 10,370 13,051 23,421 68,563 34.16 r 2002-03 11,025 11,433 22,458 79,669 28.19 2003-04 11,610 22,508 34,118 95,403 35.76 r 2004-05 12,040 25,871 37,911 101,846 37.22 2005-06 12,755 19,636 32,391 105,632 30.66 2006-07 13,465 21,438 34,903 112,155 31.12 r Notes (1)-Excludes principal reductions due to advanced refunding. r (2)-Excludes depreciation and amortization expense. (3)-All debt consists of certificates of participation. r r Source:Orange County Sanitation District's Financial Management Division. r 46 r ORANGE COUNTY SANITATION DISTRICT Debt Coverage Ratios (Dollars in Millions) Last Nine Fiscal Years(Note 1) The Orange County Sanitation District has no legal debt limits as imposed by Slate legislation. The District does have contractual covenants within the existing Certificates of Participation indenture agreements which require minimum coverage ratios of 1.25. The coverage ratio is calculated as the ratio of net annual revenues available for debt service payments to total annual debt service requirements. 4.50 4.D0 3.50 _ 3.00 2.50 2.00 1.50 1.00 _ OSO 1998-99 199MO 2000-01 2001-02 2002-03 201 2004-05 2005-08 2006-07 Fiscal Year Ending June 30, 1999 2D00 2001 2002 2003 2004 ZOOS 2006 2007 Operating&Non-operating Revenues: Service Charges,Net of Refunds $ 61.6 $ 72.0 $ 64.5 $ 70.3 $ 77.0 $ 86.0 $ 99.0 $ 132.0 It 143.8 Industrial Sewer Service Charges 7.8 9.1 6.6 7.5 6.3 7.5 10.6 12.2 13.4 Revenue Area No. 14 Fees 0.7 2.2 2.0 2.2 3.2 5.8 6.9 5.3 5.2 Ad Valorem Taxes 32.8 35.6 38.4 41.1 44.6 46.9 35.8 40.0 60.6 Interest Earnings 17.9 20.5 39.4 27.8 25.9 6.8 15.1 10.4 22.2 Capital Facilities Capacity Charges 9.5 7.9 7.3 10.6 10.1 9.0 9.8 15.6 31.3 Other Revenues 2.4 1.2 2.6 2.5 3.4 4.0 6.1 9.2 8.3 Total Revenues 132.7 148.6 160.7 162.0 170.5 166.0 183.2 224.7 284.8 Operating Expenses(2) 54.7 59.4 62.3 68.6 79.7 95.4 101.8 105.6 112.2 Net Revenues It 78.0 $ 89.1 $ 98.4 $ 93.4 $ 90.8 $ 70.6 $ 81.4 $ 119.1 $ 172.6 Debt Service Requirements Principal Payments 12.1 12.9 13.8 10.4 11.0 11.6 12.0 12.7 13.5 Interest Payments 18.5 17.2 16.7 13.0 11.4 22.5 26.9 19.6 21.4 Total Debt Service Requirements $ 30.6 $ 30.1 $ 30.5 $ 23.4 $ 22.4 $ 34.1 $ 37.9 $ 32.3 $ 34.9 Coverage Ratios(3) 2,24 2,70 2.99 3.54 3.60 1.81 1AS 3.20 4.05 Ending Reserves(4) $ 343.0 $ 401.0 $ 444.0 $ 430.0 $ 394.0 $ 518.0 $407.0 $ 406.0 $ 287.0 Notes (1)-Ten years data will eventually be presented as data is accumulated. (2)-Operating expenses exclude depreciation and amortization expenses. (3)-Calculated in accordance with the Debt Service Master Agreements. (4)-Ending reserve balances exclude monies in debt service funds. Source: Orange County Sanitation District's Financial Management Division. 47 Yd ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt June 30, 2007 y 200607AavniM Valuatiw(Lead&Impnrvenen[r OdY) f23f,965,565,Y39(after NdWinB f31 lr,5]8,2J9 tmerelapmmrbwememnl Valuations) O G A%AND FAT(Based m redwelvpvenadllmed Mlpmpwy as¢setl velmoon off2aa,881311,M0 Teel Debt Dho'n8'a Slure of %Avo-ubk uI DeMN 7 Yd Orwge County T.-Plan Obligntiann f123.M(0) 71.886% f 68,9095a MeboWliun Wner Di of8umhem CMifomia 3".]15AM 15.M 51.Ms" Caw Cumnmby College Disnin 353303A67 99517 351,/0,892 NoM Orange County loin[Commwiry College Diabict 238,IN,W1 9 wl 230,609.M R oS�Cor uoi Colkge Disain 32/,638,/95 983/s 318.wl" V Bow OliMa wd Log Bunch ll.& lSClwol Dis . W,bN.W9 w.ni&12" W,111312 Ne nMcnaUnited Shod) anot I72,INAW IW.o00 I7;IBS,Cw - Pl-6.Ywtn Li Unifidb lDisoin 92j89,o03 ".218 91,IMAN so&lehack Valley Unified Scholl Drsain 1I9,70AM IIA32 17,120,M3 Soma Ave United SelmolOmitl IW,9513W IW.WO 13o,951,NT y Turin Unified School Dubin S FaeiBti¢Impmv IDinnicl No.2W2-1 NABIX0 W.Pi 23,8Np15 Anaheim Union Nlgb School Distrwt IN,158955 IM.w0 126,15055 _ Fullermnlohn Union Hgh S lDiann 62.492.910 NAW w356,586 Hoongron Beach Union lbgh School Dvonm W3,8]3,M! 98M N1,2913/3 S hool Diaoic0 2/2,015,591 4/S29-IOD. N13'13,019 y CiryofAn h m 5300AW 0.135 5fwIIj 5 Wine Renck Winer Disoia lmpmvemont Disoine 10, ZtaI Verkua 10,889,216 R9 m9or Community Snvicea Di cI Special Tu Obligation 670,00 MID) 670AW - BoniuConmmCwmnuniryFwilide Di allo.98-1 13,ISS.= IM." /3,155,W0 Irvine UsedS ool Di a C000nuNry FwiHfio Dmvk T11,IWAW 0.998-1W. 2]1,128365 y Turin UNflad Scholl Disnin Community Feeilitin Dubin No.88-1 erd 97-1 1".922,675 1W.Wo 10,822,625 Om County Caouvunity Facilities Disain No.8]< 63,41/38/ WWI 63,395958 00c Cownwiry Fniliun Diwws 348350AW Vnivw 38830982 OrwBe CowryAsswanw[Dwncu 1133233w IW.W 113373396 - Ciryoflrvine1915AttBortle(Fsdnu¢) MV19.10 IWA00 W&J",10 y+ CiyofTueun1915Ad Bonds SS362,000 IMM 55,862pw p 1915 Au bomb 21,534.Wo MID) 21S360W TOTALOVERL INGTA ANDASSFSS DEBT f/TM.28B,681 DmecrwNDoyFnlwPPlNcf:FNFnn1.FUND DFJrr: y pmgc County GpmelFwd Odipuom f39'1350AW 21.886% B /29.SSa,rM Orange Cowry Pauioo Odiuntiau 0,03An JI.M 6C,Q5,919 Orange Cowry Bond orEd Au only Ms orPuticiptivn 19,T10AW 71.886 1/325919 -- OmngeC9unryTmnilDinnunhy hoary L335,W0 21.Bw g .") South am-Orwgecowry Covmnuiry ealepflliroictentiewtwofParticil®tiw 36.910AW W-M rz963M y Bna,Uni Unified School Dimi¢Cwf o i,anin 50,]I0,M 9].82I 49A39829 Orenee Uyofl,Stlwolni Cmifuetea ofPan fi. W.310,000 96819 MA77AM Plnamtit Unifi lM�de Gnif0d5 C U.min Cea iciiNrw titipwm wX6.215 W71MM 66x%.2o1 S Aun Unifi —]D Disoin Cenlfiwtwvfdfioadm w,855.2" IV 66,856351 Other Unif�School UnsaidC f..off9rtiOfi ran /0,255,2H Vnkm 0,w2,µ9 y Union High SclC tiaainof iciaofParticipation 62955,W0 Veins 8;b5,168 SGnol Diaoin Ce�wlFood W,,aiom 62365AW V.W.135 6J)0.832 Ciry ofAvaheimf(Fund Odippdons 696,061512 99.135 690,1M CCDiirryryw oog effCllcuo9nswu ryM nSe sunvmGewamnnl Fe olun FiviwdtO;da Oebel�i6gaB timwo tn ntieip.tion L AW IwW M, MAW M.142,T I , CiryofH mfiB Food u lutlw[ONigwm 8001M ".M 8%051% CryofWmGencFundOW,® om 295 AW IWW 29SAW mkomFuvdObliaw 12LTw IW0 121.�,236 Other Cry Gencal Find Oblgation 180,59n 123136,M IW 1NMD 1I2,25,W (2) Iinn Dm oflapw MA0 .= 37382816 MwinFa WOuo Dno(Ow mry Ww Fecitin iye.l Corporation 20,BWAW W.03 13.B2U,SN Ouu, Coo Cowry Woo-Uuhint Cudr�wtwofl'erticiwtion 10.0WAW 0.251 93/33N _ Orwge GROV5 eAwhariry IJ,sT6AW N.w6 &MA36 TOTAL GROBSOVCounV TpIGGENERALFUND DEBT 1.¢n: Orwgc County Tramit Diztrin Atvbniry(BO%aclf-supponir�g) �4)1p].lG V CiryorAreheim ulf pmtting obligation /W3M,622 O[hc Chy sclf-s�gpomn8 obligariom B4O00,628 - MWWC Water Ferilitiea Cmporetion(IWY.sIf-supporting) 13 SI tl3dm TOTAL NEFOVI]tIAPPWGI.RiIXAL FVND DEBT ,BI6,SS3,608 ' y 4ROS5 COMBDIEDTOTAL DFJ3T w923,672317 (3) NEf COMBB2EDtOTAL DEBT w.W1332389 (2) eacmuge ofovedappirtg egevrys mdevelopvmtedl�ssdall pr9peny ass¢sed vellutim(E2N,881311,606)lowrai wiMin boundnin oftbedimia. (3) SuhWu wnmwatn leywtm w,ti6waa 9rwraeip®tim. r I Euludn ux cod mwue wticipetnn vales,wterprne revwue,mortgage revwue wdtu dlmtipn bolls utl wmboMed wPiml lean odigatims. $aVglQ: Tml Ovnlvomve]'u ell A.ssesmmr Debt C.—=Cn^binMToWQott Not Comb's Toud OzM Laml d[ tpovmmt Aaw¢d Ve. I'M 2.73% 255Y. All Poprny Vauation N/A 266% 249% y D F f0 S ..Cdifooio Afwkiml Bufutica V 48 6e1 ORANGE COUNTY SANITATION DISTRICT Ratios of Outstanding Debt Last Ten Fiscal Years (5) Debt as a Total (3) Percentage Outstanding Median of Median (4) Debt Fiscal COP Family Family Population per Year Debt Income(1) Income Eadmete(2) Capita 1997-98 $ 386,240,000 $ 61.812 0.016% 2.340,000 $ 165.06 1998-99 374,135,000 63,478 0.017% 2,386,375 156.78 1999-00 361,256,000 69,310 0.019% 2,213,925 163.17 2000-01 386.370,000 70,577 0.018% 2,400,425 160.98 2001-02 376.000,000 72,998 0.019% 2,336,400 160.93 r 2002-03 364,975,000 73.572 0.020% 2,408,050 151.56 2003-04 633,365,000 70,900 0.011% 2,441,350 259.43 2004-05 621,325,000 73,545 0.012% 2,467.850 251.77 2005-06 808,570,000 76,443 0.009% 2,481.540 325.83 2006-07 801,785,000 78,950 (a) 0.010% 2,505,180 320.05 r Notes&Data Sources (1) -Data is for the entire County of Orange. (2)-Data is for the estimated population served by the Orange County Sanitation District (3)-Data Source: Center for Economic Research, Chapman University. (4)-Data Source: Demographic Research Unit, California Department of Finance. .. (5)-Data Source: Orange County Sanitation District. (6)-Forecasted number. 49 W ORANGE COUNTY SANITATION DISTRICT Comparison of the Volume of Wastewater Treated V With Revenues and Expenses Last Ten Fiscal Years Millions of W Gallons of Collection, Waste- Treatment water 8 Disposal Total Total Total Total W Treated Cost per Operating Non-Operating Operating Non-Operating Fiscal Per Million Costs Costs Revenues Revenues Year Day Gallons (In Thousands) (In Thousands) (In Thousands) (In Thousands) 1997-98 254 534.45 $ 85,706 $ 20,562 $ 56,291 $ 73,718 1998-99 241 580.06 97,167 18,429 69.876 62,863 1999-00 241 620.42 95,798 41,224 81,637 66,833 W 2000-01 248 847.48 108,506 18,011 73,254 87,448 2001-02 234 794.05 115,553 22,015 80,005 81.975 2002-03 239 880.25 123,383 13,925 89,164 81.332 W 2003-04 238 1.068.43 141.521 19,920 102,327 63,655 2004-05 243 1.095.79 165,057 20,526 121,415 61,747 2005-06 235 1,216.77 168.365 27,799 155,165 69,493 b 2008-07 229 1.268.38 178,394 26,708 1169,656 115,154 r An Interim Strategic Plan Update to the year 2020 was completed in September 2002 that projects wastewater treatment flours to increase to 284 millions of gallons per day(mgd)in 2010,to 302 mgd in 2015, and to 321 mgd in the year 2020. In order to manage the anticipated increase in wastewater flows,the District has identified a$2.4 billion capital expansion plan through 2020. Total expenses in FY 2006-07 increased$96.8 million,or 91.1 percent since FY 1997-98,primarily as a result of(1) r OCSD's decision beginning in FY 2002-03 to maximize existing secondary treatment facilities as OCSD moves from a 50/50 mix of primary and secondary effluent treatment to meeting secondary treatment standards by December 31, 2012,and (2)OCSD's decision to eliminate most bacteria from the ocean oulfall discharge by disinfecting the effluent beginning in FY 2002-03 at an additional cost in chemicals of$7 million annually. W Depreciation expense represents 29 percent of the increase as a result of the previous expansion in capital facilities and the financing associated with the expansion. Maintenance,chemicals,utilities,and other operating costs represent W another 34 percent of the increase, primarily due to the increase in the levels of treatment referred to above. In FY 2006-07,personnel expenses rose 8.6 percent over the prior year. This increase is mainly due to increases in health insurance and refirement premiums;the full-time equivalent positions authorized remained constant in FY 2006-07. - r As depicted from the chart above,actual wastewater treatment flows have consistently remained between 234 mgd and 244 mgd in the past,other than in FY 1997-98 which reached a high of 254 mgd and in FY 200401 which reached 246 mgd. Due to unusually dry weather conditions during the year, FY 20D6-07 had flows of only 229 mgd. W W Source: Orange County Sanitation District. W 50 W ORANGE COUNTY SANITATION DISTRICT r Authorized Full-time Equivalents by Function Last Ten Fiscal Years r 350 300 r 250 200 150 IAMM 100 r 50 r a 1998 1999 2000 2001 2002 2003 2004 2005 20M 2007 r O General Management ■Administrative Services OTechnical Services O Engineering ■Operations and Maintenance Fiscal Year Ending June 30, r 1998 1999 2000 2001 2002 2003 2004 2006 2006 2007 General Management 16 15 13 12 17 17 17 17 2 25 Administrative Services 83 81 87 88 97 107 116 123 145 102 r Technical Services 100 93 88 87 95 94 100 112 114 119 Engineering 72 67 75 73 104 79 80 95 99 98 Operations and Maintenance 289 286 255 250 261 272 285 282 284 300 r Total FTE's 560 542 518 510 574 569 598 629 644 644 Source: Orange County Sanitation District's Financial Management Division. 51 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced _ Last Ten Fiscal Years - ss,000 50,000 46000 40.000 35,000 30.00D M.000 20,000 01997-96 ■1998-99 01999-00 @2000-01 02001-02 ■2002-03 0200304 0200405 0200506 ■200607 Fiscal Year Tonnage 1997-98 42.645 1998-99 41.127 1999-00 42.831 2000-01 42.254 2001-02 42,505 2002-03 47,631 2003-04 50,519 2004-05 51,700 2005-06 49,554 2006-07 49,184 Source Orange County Sanitation District's Environmental Assessment Division. 52 r ORANGE COUNTY SANITATION DISTRICT Capital Asset Statistics Last Ten Fiscal Years r Mlles of Number Primary Secondary Trunk& 01 Treatment Treatment Fiscal Subtrunk Pump Capacity Capacity .. Year Sewers Stations (1) (1) 1997-98 650 22 276 156 1998-99 650 22 276 200 r 1999-00 650 20 276 200 2000-01 650 20 266 200 2001-02 650 20 276 200 2002-03 650 20 276 200 r 2003-04 650 20 276 170 2004-05 620 18 305 170 2005-06 584 16 366 200 2006-07 581 16 372 200 r Notes Ti)—capacity,-- is presented as million gallons treated per day. r r r r r r ve Source: Orange County Sanitation District r 53 r W ORANGE COUNTY SANITATION DISTRICT Demographic Statistics W Covering The Entire County of Orange(1) Last Ten Fiscal Years W Total (4) (5) (2) Personal Per Capita Median Public (s) W Fiscal Population Income Personal Family School Unemployment Year Estimates (In thousands) Income Income Enrollment Rate 1997-98 2,615,000 $ 90.579,927 (31 $ 34,639 $ 61,812 458.000 2.9% 199&99 2.776,000 96,288,099 (3) 34.686 63.478 471.000 2.6% 1999-00 2,828,000 106,003,904 (3) 37,484 69,310 483,000 2.9% 2000-01 2.880,000 109,010,278 (3) 37,851 70,577 494,000 3.0% W 2001-02 2,940,000 111,750,294 (3) 38,010 72,998 503,000 4.1% 2002-03 2,979,000 117,722,500 (4) 39,517 73,572 512.000 4.0% 2003-04 3.017,000 125.670,100 (4) 41.654 70.900 517,000 3.6% .. 2004-05 3,047,000 133,031,800 (4) 43,660 73.545 514,000 3.9% 2005-06 3,072,000 141,169,400 (4) 45.954 76.443 510,114 3.7% 2006-07 3,098,000 148,916,000 (4M7) 48.068 78,950 (7) 503,955 3.9% W Notes and Data Sources (1) - 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. (2) -Data Source: Demographic Research Unit, California Department of Finance. (3) -Data Source: Bureau of Economic Analysis, U.S. Department of Commerce W (4) -Data Source: Anderson Center for Economic Research, Chapman University. (5)- Data Source: California Department of Education, Educational Demographics Unit. (6) -Data Source: State of California, Employment Development Department as of June 30 of each fiscal year. W (7) - Forecasted number. v W/ Y� V 54 r r ORANGE COUNTY SANITATION DISTRICT Estimated Populations Served by the Orange County Sanitation District June 30, 2007 Population as of r January 1,2007 Anaheim 345,560 Brea 39,870 r Buena Park 82,450 Costa Mesa 113,810 Cypress 49,280 Fountain Valley 57,740 Fullerton 137,370 Garden Grove 172,780 r Huntington Beach 202,250 Irvine 202,080 La Habra 62,480 r La Palma 16,160 Los Alamitos 12,150 Newport Beach 84,220 .. Orange 138,640 Placentia 51,600 Santa Ana 353,430 ,r Seal Beach 25,960 Stanton 38,980 Tustin 70,350 ,r Villa Park 6,250 Westminister 92,870 Yorba Linda 67,900 r, Subtotal City it) 2,424,180 Estimated Population Served in Unincorporated Areas(2) 81,000 ,r 2,505,180 r Data Sources: (1) Demographic Research Unit, California Department of Finance. r (2)Orange County Sanitation District Financial Management Division. 56 ORANGE COUNTY SANITATION DISTRICT Major Orange County Employers (1) r u Number of Employees Employers 2005 2004 2003 2002 2001 r Watt Disney Co. 21,000 21,000 21,000 21,275 21,275 County of Orange 18,748 18,029 17.597 17.751 17,741 University of California,Irvine 15,500 15,500 15,500 14,981 14,981 r Boeing Co. 11,160 11,160 11.160 11,179 11,179 St.Joseph Health System 8,975 8,975 8,975 9,435 9,435 Albertson Inc. 8,700 8,700 8,700 9,500 9,500 r YUMI Brands Inc. 6,500 6,500 6,500 SBC Communications, Inc. 5.656 5,658 5,658 7,100 7,100 Target Corp. 5.436 5,436 5,436 4,878 4,878 r Tenet Healthcare Corp. 4,185 8,389 8,389 8,389 8,389 Bank of America Corp. 4.813 4,813 Total Employees 105,862 109,347 108,915 109,301 109,291 `� r r r Notes (1)-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. Available data is two years behind the r District's fiscal year-end and is currently only available for the past five years. As data is accumulated, this information will be provided for the current year and for the previous nine years. r r r r Source: County of Orange V $6 r ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30,2007 District Organization: The Orange County Sanitation District is one consolidated district made up of two revenue areas which service unincorporated county areas and twenty-three cities and related special districts, as follows: Consolidated Revenue Area ' County of Orange(unincorporated areas) Cities: Anaheim Huntington Beach Santa Ana Brea Irvine Seal Beach Buena Park La Habra Stanton Costa Mesa La Palma Tustin Cypress Los Alamitos Villa Park Fountain Valley Newport Beach Westminster Fullerton Orange Yorba Linda Garden Grove Placentia ' Special Districts: Midway City Sanitary District Costa Mesa Sanitary District r Revenue Area No. 14 County of Orange(unincorporated areas) Cities: Irvine Orange Tustin Special District: Irvine Ranch Water District Governing Body: 25-member Board of Directors Authorized Full-Time Equivalent Employees: 644 Operational Date: July 1, 1954 Authority: California Health &Safety Code Section 4700 at. seq. Services: Wastewater collection,treatment, and disposal r Service Area: 471 square miles Population Served: 2.5 million Total Miles of Sewers(including force mains): 581 miles Number of Pumping Stations: 16 Wastewater System Treatment Capacities(Million Gallons per Day) Existing Primary Existing Secondary Planned Secondary Actual Flows Treatment Capacity Treatment Capacity Capacity by 2020 r Plant 1 91 204 110 170 Plant 2 138 168 90 150 Total 20 r Source: Orange County Sanitation District's Financial Management Division. 57 � I (THIS PAGE MITEMIONALLY LEFT BLANIQ ' 1 ILd' IW L I� {4�1 IWI U L u 58 W OCSD Other Data & Trends Section ORANGE COUNTY SANITATION DISTRICT OTHER DATA&TRENDS Information within this section consists of other data and trends including additional annual disclosures as required by the Sanitation Districts Certificates of Participation debt covenants beyond what is allowed to be reported in the Statistical Section. r r r 59 ORANGE COUNTY SANITIATION DISTRICT Cash and Investment Portfolio as of June 30,2007 r Coal Market value Net Umeslmd Gil y Shares Par Base Bese %of Trial a. lmv umenl Poffidio: Cash and Cash Eauivxlems(U.S.Dollar)_ Pe mg Trades $ - S (39,46SAIl 8) $ (3%466.894.58) -15.10% $ - W Cemhcafes of Deyosil-Domestic 5.700.000.00 5,700,000.OD 5,70g000S0 2.16% - Commardal Paper-Discount 8,100.mm 7,887,13DS4 7,887,130.64 3.02% - Fed Hm Loan Snk-Less Than t Year 13,900,000.00 13,721ABB.00 13,721,486.80 5.25% - Federel Honm Loan Monga9e-Less Than 1 Yr 15,400,000.00 15,117,167A5 15,117,167.45 5.78% - v+ FNMA Issues-Less Than l Year 16,102,000.00 15,745AM.41 15,745,091.41 1 Mutual Funds 1,327JM1.32 1,327,901.32 1,327,941.32 0.51% - Olher U.S.Govemment Obligations 17,300AMiOU 17.178.84954 17,178,849.54 1 SUMolal 77M941.32 37,210,77258 37210,772.88 14.24% Fised Income Securities(U,S.Dollar): BanklN 3 Finance 25,750,000.00 25,731,794.90 25.738291.00 9.85% 6,496.10 Collateralized Mortgage Obligation 1,138,260.82 1,126,272.89 1,137,328.39 0."% 11.10350 v FHLMC Multiclass 2,786,658.44 2,748,547.65 2,757,852.96 1.06% 9,305.31 FHLMC Pools 20.213.71 19,721.00 20,397.33 0.01% 641 FNMA Pooh 24,352,721.59 24,689,615.34 23,713,037.09 9.07% (976,57825) FNMA Remic 601,288.81 587245.90 592,884.82 0.23% 5,638.92 yes GNMA Multi Family Poole 1,326,801l 1,323,5sSao 1,347,381.46 0.52% 23,81628 GNMASmgle Family Paals 3,832.43 4,1M.26 3.913-95 0.00% (10831) Ind I 800,000.00 800,240DD 600,1a6.00 02W (54.00) Pvr Placement,-Moire Than t Year 752.000.00 825,199.84 826.199.84 0.32% - V US.Agencies 9050,579.14 88,171.34126 88,777,096.99 332M 605,75T73 U.S.Governments 77,178,472.07 76AS7,728.24 77,051,740.91 29.48% 84.012.67 Wily-Electric 900,000.00 900AM.00 901,280.00 Du% 1,280.00 Utility-Telephone 700.000.00 700, MOD 700,546.00 0.27% 546.00 � Subtotal 226,6n,833.79 224.395.244.0 224,168,086.74 85.76% (228,157.74 Total Inver M Pomolio $ 304,503,775.11 261.BD7,017.06 261,378,859.32 100.00% $ (228.157.74) Demand Cash Aauulas 3,988,549.00 3,968,549.00 Lr Monies HeM With Fi.1 Agents 84,722,690.00 6 .M.690.00 Monies with the Loral Agency 1.1mir nt Furd 21,825,313A5 21,815,383.11 Total Gash and Investments $ 372,143,569.21 $ 371,905,481.43 v V 4 V V Source: Mellon Trust and the Orange County Sanitation Districts Financial Management D'Ivision. V Ind 60 v ORANGE COUNTY SANITATION DISTRICT Property Tax Rates-Direct and Overlapping Governments Last Ten Fiscal Years Tax Rate OCSD 1958 OCSD's r General Average Fiscal Basic Obligation Total Share of Year Levy Bonds Tax Rate Basic Levy _ 1997-98 1.00°A 0.01% 1.01% 2.80% 1998-99 1.00% 0.02% 1.02% 2.80% 1999-00 1.00% 0.00% 1.00% 2.80% 20OD-01 1.00% 0.00% 1.00% 2.80% 2001-02 1.000/0 0.00% 1.00% 2.80% 2002-03 1.00% 0.00% 1.00% 2.80% 2003-04 1.00% 0.00% 1.00% 2.80% r 20D4-05 1,00% 0.00% 1.00% 1.60% 2005-06 1.00% 0.00% 1.00% 1.60% 2006-07 1.00% 0.D0% 1.00% 2.80% r Notes In 1978, California voters passed Proposition 13 which set the property tax rate at a 1.00% fixed amount of assessed value. This 1.00% is shared by all taring agencies within which the subject property resides. In addition to the 1.00% fixed amount, property owners were charged taxes as a percentage of assessed property values for r the payment of OCSD general obligation bonds (which were paid in full in fiscal year 1998-99). r Source:County of Orange Auditor-Controllers Office. r r r 61 r ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years r snamomo sz000mmo r ssoa00000 s,m.000,aoo ssa.mo,000 ,wz.oe ,aea.ee�ewm moo.o, zoo,nz zaozm zmsa zro.os mice zawm ■Secured 01Jneecured Percent Change in Fiscal Assessed Year Secured Unsecured Total Value 1997-98 125,018,000 3,302,000 128.320,000 2.21% r 1998-99 131,295,000 3,394,000 134,689,000 4.96% 1999-00 142,126,000 3,507,000 145,633,000 8.13% 2000-01 155,544,000 3,778,000 159,322,000 9.40% r 2001-02 169,357,000 4,066,000 173,423,000 8.85% 2002-03 183,223,000 5,657,000 186,880,000 8.91% 2003-04 197,143.000 4,309,000 201,452,000 6.66% 2004-05 214,529,000 4,743,000 219,272,000 6.85% 2005-06 236,826,573 5,023,423 241,849,996 10.30% r 2006-07 264,241,033 6,452,111 270,693,144 11.93% In 1978,the voters of the State of California passed Proposition 13 which limited property taxes to a r total maximum rate of 1%based upon the assessed value of the property being taxed. Each year, the assessed value of property may be increased by an inflation factor which is limited to a maximum increase of 2%. With few exceptions, property is only reassessed at the time that it is sold to a new owner. At that point, the new assessed value in reassessed at the purchase price of the property r sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and k subject to the limitations described above. Consequently,the assessed and estimated values are the same. Source:Orange County Auditor-Controller's Office. w 62 r ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years 3250.000 6200.00D st50,000 5100.n(10 — 850 000 j L - � 1997-98 1999-99 199900 200001 20014)2 2002-09 200394 2l1(1105 200606 200607 ❑Total Tax and User Fee Levi, ®Total Tax and User Fee Collection Current Total Tax Y of Total Tax Tax and Percent of Delin- and User %of Total 01S Dellnquen- Fiscal and User ERAF III User Fee Levy quent Fee Collection Delinquen- dies to Tax Year Fee Levy Deduction Collection Collected! Collection Collection to Levy cies Levy 1997-98 $90.589 S - $ 90,078 99.44 6 81 $ 9 ,159 99.53 $ 510 0.56 1998-99 98,557 - 98,267 99.71 74 98,341 99.78 291 0.30 1999-00 107948 - 107,794 99.86 72 107,866 99.92 154 0.14 2000-01 105,890 - 105,646 99.77 94 105,740 99.86 245 0.23 _ 2001-02 112,419 - 112,087 99.70 83 112,170 99.78 332 0,30 2002-03 122,450 - 122.210 99.80 98 122.308 99.88 241 0.20 2003-04 134.389 - 134,132 99.81 94 134.226 99.88 257 0.19 2004-05 153,187 (16.198) 152.745 99.71 92 152,837 9977 442 0.29 2005-D6 191711 (16,198) 191290 99.78 122 191,412 99,84 421 0,22 2006-07 209,766 - 209,206 99,73 215 209.421 99.84 560 0.27 Source: Orange County Auditor-Controllers Office. 63 V ORANGE COUNTY SANITATION DISTRICT Property Value and Construction Covering The Entire County of Orange(i) (Dollars In Thousands) Last Ten Fiscal Years r Non- Assessed Residential Residential Property Value(2) Constr.(3) Construction(3) Total V Fiscal Calendar No.of Construction Year Value Year Value Units Value Value(3) 1997-98 $ 182,284,316 1998 $ 1,529,698 10,101 $ 1,864,084 $ 3,393,782 1998-99 192.625,739 1999 1,614,422 12,348 2,262,492 3,876,914 1999-00 209,136,472 2000 1,762,142 12,367 2,210,775 3,972,917 2000-01 228.548,301 2001 1.349,607 8,646 1,905,321 3,254,928 2001-02 248,966,581 2002 1,208,626 12,020 2,328,123 3,536,749 2002-03 269,684,864 2003 1,005,547 9,311 2,076,976 3,082,523 2003-04 287,923,828 2004 1,132,848 9,322 2,243,642 3,376,490 2004-05 311,802,395 2005 1,494,759 7,206 2,100,436 3,595,195 2005-06 342,576,859 2006 2.400.569 8,371 2,316,948 4,717.517 2006-07 381,007,391 2007 (4) 2,687,231 7,459 2,054,963 4.742,194 V Notes and Data Sources (1) - The Orange County Sanitation District services 471 square miles or 59% of the total 799 square it miles that make up the boundaries of the County of Orange. (2)-Data Source-Orange County Auditor-Controller's Office. V (3)-Data Source-'The Chapman University Economic 8 Business Review." (4)-Forecasted numbers. r r r r r r r r 64 r ORANGE COUNTY SANITATION DISTRICT _ Insurance in Force As of July 1,2007 r Type Insurer Deductible Limit All-Risk Property Fire and Other Perils Public Entity Property $25,000 per occurrence $1 billion/occurrence Insurance Program (Lexington and others) .. Flood Public Entity Property $100,000 per occurrence $300 million/occurrence Insurance Program r Earthquake Not Applicable Not Applicable Self-insured Boiler&Machine ry Public Entity Property $25,000 to $100 million/occurrence Insurance Program $350,000 (Lexington and others) r Employee Dishonesty/ Hartford Fire, National Union $2,500 $1 million/loss; Faithful Performance/ Fire,and Great American $4 million excess policy Errors&Ommissions Insurance Companies r Excess Everest National Insurance $250,000 $25 million/occumence General Liability Co. (first$10 million $500,000 for EPLI and annual aggregate layer); North American Specialty Ins. Co. ($15 million layer excess$10 million) r Travel&Accident Chubb Group of Insurance None Accidental Death& Companies Dismemberment: Class 1:Elected Officials; $500,000 per occurrence Class 2:Employees; 10 X annual salary,up to $500,000 per occurrence r Excess Workers' CSAC Excess Insurance $500.000 $300 million each accident, Compensation Authority Each Accident each employee Pollution CSAC Excess Insurance $100,000 $10,001),001)per loss Authority r r Source: Orange County Sanitation District's Risk Management Office. r 65 u u u U u U U U (THIS PAGE INTENTIONALLY LEFT BLANK) I j u u u u u u u u u 66 i ORANGE COUNTY SANITATION DISTRICT Financial Management Division 10844 Ellis Avenue Fountain Valley, California 92708-7018 (714) 962-2411 www.ocsd,com 6/30/07