$53, 195,000 padre dam municipal water district …cdiacdocs.sto.ca.gov/2017-1415.pdf ·...

NEW ISSUE - BOOK-ENTRY ONLY RATINGS: S&P Rating: "AA+" Fitch Rating "AA"

See " CONCLUDING INFORMATION - Ratings"

In the opinion of Best Best & Krieger LLP, San Diego, California, Special Counsel, subject, however to certain qualifications described in this Official Statement, under existing law, the portion of Installment Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, the portion of Installment Payments designated as and comprising interest and received by the owners of the Certificates is exempt from California personal income taxes. See "CONCLUDING INFORMATION - Tax Matters" in this Official Statement with respect to tax consequences of the Certificates.

Dated: Delivery Date

$53, 195,000 PADRE DAM MUNICIPAL WATER DISTRICT

Certificates of Participation (2017 Capital Improvement and Refunding Project), Series A

Due: October 1, as shown on the inside cover

Authority for Issuance. The above-captioned Certificates of Participation (2017 Capital Improvement and Refunding Project), Series A (the "Certificates") evidence and represent undivided proportionate interests in certain installment payments (the "Installment Payments") to be made by the Padre Dam Municipal Water District (the "District") pursuant to an Installment Purchase Agreement, dated as of June 1, 2017 (the "Installment Purchase Agreement"), between the District and the Padre Dam Public Facilities Corporation (the "Corporation"). The Corporation, for the benefit of the Owners of the Certificates, has assigned, among other things, its right to receive Installment Payments to The Bank of New York Mellon Trust Company, N.A., as trustee (the ''Trustee").

The Certificates are being executed and delivered by the Trustee pursuant to a Trust Agreement, dated as of June 1, 2017 (the "Trust Agreement"), among the Trustee, the Corporation and the District to (i) refinance outstanding installment payments due with respect to the District's $45,590,000 outstanding principal amount of Certificates of Participation (2009 Capital Improvement and Refunding Project), Series A, (ii) finance the acquisition, construction, installation and equipping of certain capital improvements to the District's Santee Lakes Recreation Preserve and (iii) pay costs of executing and delivering the Certificates. See ''THE FINA NCING PLA N."

Bond Terms; Book-Entry Only. The Certificates will be executed and delivered as fully registered certificates in book-entry form only, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ("OTC"). Purchasers will not receive certificates representing their interest in the Certificates.

The Certificates are being executed and delivered in denominations of $5,000 principal amount or integral multiples thereof. Interest will accrue from the date of delivery and is payable semiannually on April 1 and October 1 of each year, commencing October 1, 2017 (each, an "Interest Payment Date"). The principal and semiannual interest with respect to the Certificates will be payable by the Trustee to OTC for subsequent disbursement to OTC participants, so long as OTC or its nominee remains the registered owner of the Certificates.

Redemption. The Certificates are subject to prepayment prior to their scheduled maturity dates as described in this Official Statement. See ''THE CERTI Fl CATES - Prepayment of the Certificates".

Security. The payment of Installment Payments is secured by a pledge of the District Net Revenues, which is defined in the Trust Agreement as the sum of (a) the Water System Net Revenues, (b) the Sewer System Net Revenues, (c) the Preserve System Net Revenues and (d) the Property Tax Revenues. The District's pledge of District Net Revenues to the Installment Payments is on a parity with the District's pledge of District Net Revenues to pay interest and principal on the District's outstanding $7,225,000 original principal amount of Revenue Refunding Bonds, Series 2013A (the "2013 Bonds"). See "SECURITY FOR THE CERTIFICATES - Security for the Installment Payments" for additional information about the pledge of District Net Revenues, including the limited availability of Water System Net Revenues, Sewer System Net Revenues and Property Tax Revenues.

Parity Debt. In addition, the Installment Purchase Agreement authorizes the District to incur additional obligations secured by a pledge of District Net Revenues on a parity with the 2013 Bonds and the Installment Payments. See "SECURITY FOR THE CERTI Fl CATES - Prior Parity Debt; Limitations on Parity Debt and Superior Obligations.

This cover page contains information for general reference only, and is not a summary of the security or terms of this issue.

Investors must read the entire Official Statement, including the section entitled "RISK FACTORS," for a discussion of special factors which should be considered, in addition to the other matters set forth in this Official Statement, in considering the investment quality

of the Certificates. Capitalized terms used on this cover page and not otherwise defined shall have the meanings set forth in this

Official Statement.

MATURITY SCHEDULE See inside front cover

THE DISTRICT'S OBLIGATION TO MAKE INSTALLMENT PAYMENTS IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE SOLELY FROM DISTRICT NET REVENUE AND OTHER FUNDS PROVIDED FOR IN THE INSTALLMENT PURCHASE AGREEMENT ALTHOUGH DISTRICT NET REVENUES INCLUDES A D VALOREM PROPERTY TAXES ALLOCATED TO THE DISTRICT, THE DISTRICT HAS NOT AGREED TO LEVY ANY FORM OF TAXATION TO PAY THE INSTALLMENT PAYMENTS. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE DISTRICT TO MAKE INSTALLMENT PAYMENTS CONSTITUTES A DEBT OF THE DISTRICT OR OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION.

The Certificates were sold and awarded pursuant to a competitive bidding process held on June 1, 2017, as set forth in the Official Notice of Sale. The Certificates, will be offered when, as and if sold, executed and delivered, subject to the approval as to their legality by Best Best & Krieger LLP, San Diego, California, Special Counsel. Jones Hall, A Professional Law Corporation, is acting as Disclosure Counsel to the District. Certain legal matters will be passed upon for the Corporation and the District by Best Best & Krieger LLP, as general counsel to the District and the Corporation. It is anticipated that the Certificates in book-entry form, will be available for delivery to OTC on or about June 15, 2017.

Dated: June 1, 2017

MATURITY SCHEDULE



(Base cus1pt 695283)

Maturity Date Principal Interest (October 1) Amount Rate Yield Price cus1pt

---

2017 $2,210,000 5.000% 0.800% 101.231 CRO 2018 1,860,000 5.000 0.840 105.343 css

2019 1,955,000 5.000 0.930 109.216 CT6 2020 2,055,000 5.000 1.030 112.825 CU3 2021 2, 160,000 5.000 1.160 116.039 CV1 2022 1,610,000 5.000 1.290 118.925 CW9 2023 1,690,000 5.000 1.420 121.481 CX7 2024 1,775,000 5.000 1.560 123.628 CY5 2025 1,870,000 5.000 1.730 125.163 CZ2 2026 1,965,000 5.000 1.910 126.197 DA6 2027 2,065,000 5.000 2.170 125.979 DB4 2028 2, 170,000 5.000 2.190 125.769 c DC2 2029 2,280,000 5.000 2.290 124.724 c ODO 2030 2,385,000 4.000 2.550 113.052 c DES 2031 2,485,000 4.000 2.660 111.994 c DF5 2032 2,590,000 4.000 2.780 110.853 c DG3 2033 2,680,000 3.000 3.150 98.096 DH1 2034 2,760,000 3.000 3.210 97.226 DJ7 2035 2,840,000 3.050 3.260 97.120 DK4 2036 2,930,000 3.100 3.300 97.159 DL2 2037 3,015,000 3.125 3.329 97.004 OMO 2038 3, 120,000 3.250 3.390 97.885 DNS 2039 2,725,000 3.250 3.420 97.359 DP3

t Copyright 2017, American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, managed by Standard & Poor's Capital IQ, and are provided for convenience of reference only. Neither the City nor the Purchaser assumes any responsibility for the accuracy of these CUSIP data.

c: Priced to first optional redemption date of October 1, 2027, at par.

A No Scale

PADRE DAM MUNICIPAL WATER DISTRICT

BOUNDARIES

CA ON


Board of Directors

Doug Wilson, Division I Augie Scalzitti, Division II

William Pommering, Division Ill August Caires, Division IV James Peasley, Division V

District Management Team

Allen Carlisle, Chief Executive Officer/General Manager Karen Jassoy, Chief Financial Officer/Director of Finance

Paul Clarke, Director of Operations and Water Quality Lisa Sorce, Director of Human Resources

Laura Koval, Director of Park and Recreation Albert C. Lau, P.E., Director of Engineering and Planning

District Counsel

Best Best & Krieger LLP

San Diego, California

Special Counsel Best Best & Krieger LLP

San Diego, California

Municipal Advisor Fieldman Rolapp & Associates, Inc.

Irvine, California

Disclosure Counsel Jones Hall, A Professional Law Corporation

San Francisco, California

Trustee and Escrow Bank The Bank of New York Mellon Trust Company, N.A.

Los Angeles, California

Verification Agent Grant Thornton LLP

Minneapolis, Minnesota

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

No Offering May Be Made Except by this Official Statement. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations with respect to the Certificates other than as contained in this Official Statement, and if given or made, such other information or representation must not be relied upon as having been authorized.

No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation.

Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Certificates will, under any circumstances, create any implication that there has been no change in the affairs of the District or any other parties described in this Official Statement.

Use of this Official Statement. This Official Statement is submitted in connection with the sale of the Certificates referred to in this Official Statement and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not a contract with the purchasers of the Certificates.

Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness.

Document References and Summaries. All references to and summaries of the Installment Purchase Agreement, Trust Agreement or other documents contained in this Official Statement are subject to the provisions of those documents and do not purport to be complete statements of those documents.

Stabilization of and Changes to Offering Prices. The Purchaser may overallot or take other steps that stabilize or maintain the market price of the Certificates at a level above that which might otherwise prevail in the open market. If commenced, the Purchaser may discontinue such market stabilization at any time. The Purchaser may offer and sell the Certificates to certain dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page of this Official Statement, and those public offering prices may be changed from time to time by the Purchaser.

Certificates are Exempt from Securities Laws Registration. The delivery and sale of the Certificates have not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the issuance and sale of municipal securities provided under Section 3(a)(2) of the Securities Act of 1933 and Section 3(a)(12) of the Securities Exchange Act of 1934.

Estimates and Projections. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21 E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. 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 RES UL TS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE BOARD OF DIRECTORS OF THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.

Website. The District maintains a website. However, the information presented there is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Certificates.

TABLE OF CONTENTS

Page Page INTRODUCTION ......................................................... 1 Current Sewer Rates ............................................. 56 THE FINANCING PLAN .............................................. 5 Comparative Sewer Rates .................................... 58

General .................................................................... 5 Sewer System Connection Fees ........................... 59 The 2017 Project ..................................................... 5 Sewer System Regulatory Issues ......................... 60 Refinancing of the 2009 Installment Purchase THE PRESERVE ...................................................... 61

Agreement... ........................................................ 5 The Preserve System ............................................ 61 Verification of Mathematical Accuracy ..................... 7 Campground Inventory .......................................... 62 Estimated Sources and Uses of Funds ................... 7 Preserve Usage .................................................... 63 Debt Service Schedule ............................................ 8 PROPERTY TAX REVENUES .................................. 65

THE CERTIFICATES ................................................... 9 Definition of Property Tax Revenues .................... 65 General .................................................................... 9 Limited Use of Property Tax Revenues ................ 65 Book-Entry System ................................................ 11 Property Tax Limitations; Article XIIIA of the

SECURITY FOR THE CERTIFICATES ..................... 12 California Constitution ....................................... 65 General .................................................................. 12 Implementing Legislation ...................................... 66 Installment Payment Fund ..................................... 12 Property Tax Collection Procedures ..................... 67 Installment Payments ............................................ 12 Unitary Property .................................................... 68 Security for the Installment Payments ................... 12 Assessment Appeals ............................................. 68 Rate Stabilization Funds ........................................ 16 Historical Assessed Values and Property Tax Prior Parity Debt; Limitations on Parity Debt and Revenues .......................................................... 69

Superior Obligations .......................................... 17 Rate of Collections ................................................ 70 Subordinate Obligations ........................................ 19 HISTORICAL AND PROJECTED DEBT SERVICE Rate Covenants ..................................................... 19 COVERAGE .......................................................... 71 Installment Payments are Unconditional ............... 21 Statement of Revenues and Expenses ................. 71 Additional Covenants ............................................. 21 Historical District Net Revenues ............................ 72 Limited Obligation .................................................. 22 Historical Debt Service Coverage ......................... 73

THE DISTRICT .......................................................... 23 Projected Debt Service Coverage ......................... 74 Formation and Organization .................................. 23 RISK FACTORS ........................................................ 77 Management and Personnel ................................. 23 Demand and Usage .............................................. 77 Pass Through Ordinance and Energy Charges ..... 25 Expenses .............................................................. 77 Five Year Business Plan and Budget.. .................. 25 Property Taxes ...................................................... 77 Capital Improvement Plan ..................................... 26 Parity Debt ............................................................ 78 Employee Retirement System ............................... 28 Threat to Water Supply ......................................... 78 Other Post-Employment Benefits .......................... 33 Natural Disasters ................................................... 79 Investment Policy .................................................. 34 Articles XIIIC and XIIID of the California Permits and Licenses ............................................ 36 Constitution ....................................................... 80

THE WATER SYSTEM .............................................. 37 Limited Recourse on Default.. ............................... 83 Water System Description ..................................... 37 Limitations on Remedies Available; Bankruptcy ... 83 Source of Water ..................................................... 37 Limited Obligation ................................................. 83 Water Demand ..................................................... .41 Change in Law ...................................................... 83 Water and Sewer System Billing and Collections . .43 Loss of Tax Exemption .......................................... 84 Water System Customers ..................................... .44 CONTINUING DISCLOSURE ................................... 85 Current Water Rates ............................................. .46 CONCLUDING INFORMATION ................................ 85 Comparative Water Rates .................................... .48 Competitive Sale of Certificates ............................ 85 Water System Connection Fees ........................... .48 Legal Opinions ...................................................... 85 Water System Regulatory Issues .......................... 50 Tax Matters ........................................................... 86

THE SEWER SYSTEM .............................................. 52 Litigation ................................................................ 87 Sewer System Description .................................... 52 Financial Statements ............................................. 87 San Diego Metropolitan Sewerage System ........... 52 Ratings .................................................................. 88 Billings and Collections .......................................... 54 Municipal Advisor .................................................. 88 Sewer System Customers ..................................... 54 Miscellaneous ....................................................... 88

APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F

SUMMARY OF PRINCIPAL LEGAL DOCUMENTS GENERAL INFORMATION ABOUT THE CITY OF SANTEE AND SAN DIEGO COUNTY AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30. 2016 PROPOSED FORM OF FINAL OPINION FORM OF CONTINUING DISCLOSURE CERTIFICATE BOOK ENTRY PROVISIONS

OFFICIAL STATEMENT



The purpose of this Official Statement (which includes the cover page and the Appendices) is to provide information concerning the execution and delivery of the abovecaptioned Certificates of Participation (the "Certificates").

Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. Definitions of certain terms used in this Official Statement and not defined have the meanings set forth in the Trust Agreement described below.

INTRODUCTION

The Certificates. The Certificates are being executed and delivered pursuant to the provisions of a Trust Agreement, dated as of June 1, 2017 (the 'Trust Agreement"), among the Padre Dam Municipal Water District (the "District"), the Padre Dam Public Facilities Corporation (the "Corporation") and The Bank of New York Mellon Trust Company, N.A., as trustee (the ''Trustee").

Prepayment. The Certificates are subject to prepayment prior to their scheduled maturity dates as described in this Official Statement. See 'THE CERTIFICATES - Prepayment of the Certificates."

Security for the Certificates. The Certificates evidence undivided proportionate interests in certain installment payments (the "Installment Payments"), to be made by the District pursuant to an Installment Purchase Agreement, dated as of June 1, 2017 (the "Installment Purchase Agreement"), between the Corporation, as seller, and the District, as purchaser. The Corporation, for the benefit of the Owners of the Certificates, has assigned, among other things, its right to receive Installment Payments to the Trustee.

The payment of Installment Payments is secured by a pledge of the District Net Revenues, which is defined in the Trust Agreement as the sum of (a) the Water System Net Revenues, (b) the Sewer System Net Revenues, (c) the Preserve System Net Revenues and (d) the Property Tax Revenues (as such terms are defined in this Official Statement). The District's pledge of District Net Revenues to the Installment Payments is on a parity with the District's pledge of District Net Revenues to pay interest and principal on the District's outstanding $7,225,000 original principal amount of Revenue Refunding Bonds, Series 2013A (the "2013 Bonds"). However, because of limitations under Articles XIIIC and XIIID of the

California Constitution, the District's ability to use the components of District Net Revenues (i.e. Water System Net Revenues, Sewer System Net Revenues, Preserve System Net Revenues and Property Tax Revenues) is restricted as follows:

• Preserve Proportionate Share of the Certificates: approximately 14% of the debt service on the Certificates (the "Preserve Proportionate Share of the Certificates") is only payable from Preserve System Net Revenues. The Preserve Proportionate Share of the Certificates is a product of the fact that the

"new" money portion of the Certificates is anticipated to be used to finance improvements only to the Preserve System.

• Water Proportionate Share of the Certificates: approximately 86% of the debt service on the Certificates (the "Water Proportionate Share of the Certificates") is only payable from Water System Net Revenues and Property Tax Revenues. The Water Proportionate Share of the Certificates is a product of the fact that a portion of the proceeds of the 2009 Certificates were used to finance improvements to the Water System.

Additionally, although the District has pledged the District Net Revenues as security for its obligation to make the Installment Payments, the payment by the District of the Preserve Proportionate Share of the Certificates or the Water Proportionate Share of the Certificates as described below would constitute an interfund loan that would need to be repaid:

• Water System Net Revenues/Property Tax Revenues: the use of Water System Net Revenues or Property Tax Revenues to pay the Preserve Proportionate Share of the Certificates.

• Sewer System Net Revenues: the use of Sewer System Net Revenues to pay the Preserve Proportionate Share of the Certificates or the Water Proportionate Share of the Certificates.

See "SECURITY FOR THE CERTIFICATES - Security for the Installment Payments -Restrictions on Use of Certain District Net Revenues" and "RISK FACTORS - Property Taxes" and "- Articles XIIIC and XIIID of the California Constitution."

The District has covenanted to establish, maintain and collect certain rates and charges payable by customers of each of its Water System, Preserve System and Sewer System (as such terms are defined in this Official Statement) to ensure the availability of District Net Revenues to pay the Installment Payments. See"- Rate Covenant."

Purpose. The proceeds of the sale of the Certificates will be used to (i) refinance outstanding installment payments due with respect to $45,590,000 outstanding principal amount of Certificates of Participation (2009 Capital Improvement and Refunding Project), Series A of the District (the "2009 Certificates"), (ii) finance the acquisition, construction, installation and equipping of certain capital improvements to the District's Preserve System and (iii) pay costs of executing and delivering the Certificates. See 'THE FINANCING PLAN".

Rate Covenant. Pursuant to the Installment Purchase Agreement, the District has covenanted to establish, maintain and collect certain rates and charges payable by customers of the District's (i) system for storage, transmission, distribution and sale of water (the "Water

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System"), (ii) system for collection, transmission, treatment and disposition of wastewater and sewage (the "Sewer System") and (iii) the properties and assets, real and personal, tangible and intangible, of the District used or pertaining to the Santee Lakes Recreation Preserve (the "Preserve System") to ensure the availability of District Net Revenues to pay the Installment Payments. See "SECURITY FOR THE CERTIFICATES - Rate Covenants."

Prior Parity Debt. The District's pledge of District Net Revenues to the Installment Payments is on a parity with the District's pledge of District Net Revenues to its 2013 Bonds, issued pursuant to an Indenture of Trust dated May 1, 2013 (the "2013 Indenture"), between the District and The Bank of New York Mellon Trust Company, N.A., as trustee. As of the date of this Official Statement, the 2013 Bonds were outstanding in the aggregate principal amount of $2,730,000. The 2013 Bonds were issued to refinance then outstanding installment payments that secured the District's Certificates of Participation (2004 Santee Lakes Recreation Preserve Improvement Project) and two loans payable to the Water Resources Control Board of the State of California. See "SECURITY FOR THE CERTIFICATES - Security for the Installment Payments - Restrictions on Use of Certain District Net Revenues."

Under the 2013 Indenture, the 2013 Bonds are payable solely from and secured by a pledge of the District Net Revenues on a parity with the Certificates. However, because of limitations under the laws of the State of California previously described, currently approximately 38% of the debt service on the 2013 Bonds is payable from Preserve System Net Revenues (the "Preserve Proportionate Share of the 2013 Bonds"), approximately 21 % of the debt service on the 2013 Bonds is only payable from Sewer System Net Revenues (the "Sewer Proportionate Share of the 2013 Bonds") and 41% of the debt service on the 2013 Bonds is payable from the Water System Net Revenues (the "Water Proportionate Share of the 2013 Bonds"). Commencing in fiscal year 2017-18 and each fiscal year thereafter, the Preserve Proportionate Share of the 2013 Bonds will be 100% of the debt service on the 2013 Bonds.

See "SECURITY FOR THE CERTIFICATES - Prior Parity Debt; Limitations on Parity Debt and Superior Obligations" and "FINANCING PLAN - Debt Service Schedule" for information related to the 2013 Bonds.

Additional Parity Debt. The Installment Purchase Agreement provides that the District may incur additional obligations secured by a pledge of District Net Revenues on a parity basis with the Installment Payments only upon the satisfaction of certain conditions (such additional obligations, together with the 2013 Bonds, herein referred to as "Parity Debt"). See "SECURITY FOR THE CERTIFICATES - Prior Parity Debt; Limitations on Parity Debt and Superior Obligations."

Assignment. Pursuant to the Trust Agreement, the Corporation has transferred, conveyed and assigned to the Trustee, for the benefit of the Owners, substantially all of the Corporation's rights under the Installment Purchase Agreement, including the right to receive Installment Payments from the District and the right to exercise any remedies provided therein in the event of a default by the District thereunder.

Risk Factors. See "RISK FACTORS" in this Official Statement for a discussion of special factors that should be considered, in addition to the other matters set forth in this Official Statement, in considering the investment quality of the Certificates.

The District and the Corporation. The District is located in the County of San Diego, approximately 25 miles east of downtown San Diego and comprises approximately 85 square

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miles. Its service area includes the City of Santee and the unincorporated communities of Blossom Valley, Dehesa, Crest, Alpine, Harbison Canyon and Flinn Springs. See "APPENDIX B - GENERAL INFORMATION ABOUT THE CITY OF SANTEE AND SAN DIEGO COUNTY."

The Corporation is a nonprofit public benefit corporation organized and existing under the laws of the State of California for the purpose of assisting in the financing of capital improvements for the District.

Limited Obligations. THE DISTRICT'S OBLIGATION TO MAKE INSTALLMENT PAYMENTS IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE SOLELY FROM DISTRICT NET REVENUES AND OTHER FUNDS PROVIDED FOR IN THE INSTALLMENT PURCHASE AGREEMENT. AL THOUGH DISTRICT NET REVENUES INCLUDES AD VALOREM PROPERTY TAXES ALLOCATED TO THE DISTRICT, THE DISTRICT HAS NOT AGREED TO LEVY ANY FORM OF TAXATION TO PAY THE INSTALLMENT PAYMENTS. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE DISTRICT TO MAKE INSTALLMENT PAYMENTS CONSTITUTES A DEBT OF THE DISTRICT OR OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION.

Summaries Not Definitive. The summaries and references of documents, statutes, reports and other instruments referred to in this Official Statement do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report, or instrument. The capitalization of any word not conventionally capitalized, or otherwise defined in this Official Statement, indicates that such word is defined in a particular agreement or other document and, as used in this Official Statement, has the meaning given it in such agreement or document. See Appendix A for the definitions of certain terms used in this Official Statement and for a summary of certain provisions of the Trust Agreement and the Installment Purchase Agreement.

Copies of the documents described in this Official Statement are available from the District for a reasonable copying and mailing fee.

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THE FINANCING PLAN

General

The proceeds of the sale of the Certificates will be used to (i) finance the acquisition, construction, installation and equipping of the 2017 Project, (ii) refinance outstanding installment payments due with respect to the 2009 Certificates and (iii) pay costs of executing and delivering the Certificates.

The 2017 Project

The District plans to use proceeds of the Certificates to partially finance the following improvements to the Preserve System, which may include all or a portion of the following as well as other improvements not listed below (collectively, the "2017 Project"):

• Upgrades to the Preserve System's general store and registration area • Construction of outdoor dining areas • Remodeling of the Preserve System's administration building and offices

Refinancing of the 2009 Installment Purchase Agreement

2009 Installment Purchase Agreement. The District previously executed an Installment Purchase Agreement, dated as of September 1, 2009 (the "2009 Installment Purchase Agreement"), between the Corporation and the District, pursuant to which the District is obligated to make certain installment payments (the "2009 Installment Payments"). The 2009 Certificates were executed and delivered pursuant a Trust Agreement, dated as of September 1, 2009 (the "2009 Trust Agreement"), among the District, the Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee, and evidence undivided proportionate interests in the 2009 Installment Installments. The proceeds of the 2009 Certificates were used to (i) partially finance the acquisition, construction, installation and equipping of certain capital improvements to the Water System, (ii) refinance then outstanding installment payments of the District (the "1996 Installment Payments") which secured the District's Certificates of Participation (1996 Water Reclamation Phase I Expansion Project) (the "1996 Certificates"), (iii) fund a debt service reserve fund for the 2009 Certificates and (iv) pay costs of executing and delivering the 2009 Certificates. The 1996 Installment Payments were used to finance improvements to the District's recycled water system. As of March 31, 2017, the outstanding principal amount of the 2009 Certificates was $45,590,000.

Prepayment of the 2009 Installment Purchase Agreement. The District has elected to use a portion of the proceeds of the Certificates to refinance the 2009 Installment Purchase Agreement and all of the outstanding 2009 Certificates. The 2009 Certificates are subject to redemption on October 1, 2019 at a redemption price equal to the outstanding principal amount of the 2009 Certificates, plus accrued to the date fixed for redemption, without premium.

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The outstanding 2009 Certificates consist of the following:


Maturity Date (October 1)

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2034" 2039"

Principal Amount $ 1 ,71 5,000

1 ,780,000 1 ,835,000 1 ,91 5,000 2,385,000 1 ,380,000 1 ,455,000 1 ,525,000 1 ,605,000 1 ,690,000 1 ,780,000 1 ,875,000 1 ,975,000

1 1 ,600,000 15 ,075,000

CUSIP' (695283)

BY6 BZ3 CA7 CB5 CC3 CD1 CE9 CF6 CG4 CH2 CJ8 CK5 CL3 CM1 CN9

To refinance the 2009 Installment Purchase Agreement and the 2009 Certificates, the District, the Authority and The Bank of New York Mellon Trust Company, N.A., as escrow bank (the "Escrow Bank") will enter into an Escrow Deposit and Trust Agreement (the "Escrow Agreement") under which the Escrow Bank will establish an irrevocable escrow fund (the

"Escrow Fund") and deposit therein a portion of the proceeds of the Certificates and amounts currently held in the funds and accounts established for the 2009 Certificates.

The Escrow Bank will invest a portion of the funds on deposit in the Escrow Fund in government securities and will hold the remainder in cash, uninvested. From the moneys and government securities on deposit in the Escrow Fund, the Escrow Bank will transfer to The Bank of New York Mellon Trust Company, N.A., as trustee for the 2009 Certificates (in such capacity, the "2009 Trustee"), an amount required to pay the regularly scheduled debt service on the 2009 Certificates through and including October 1, 2019, and prepay the 2009 Certificates in full on October 1, 2019 at a prepayment price equal to 100% of the principal amount thereof, together with interest thereon, without premium, all as more particularly set forth in the Escrow Agreement.

Sufficiency of the deposits in the Escrow Fund for those purposes will be verified by Grant Thornton LLP, Minneapolis, Minnesota (the ''Verification Agent"). See "- Verification of Mathematical Accuracy" below.

The amounts held and invested by the Escrow Agent in the Escrow Fund are pledged solely to the payment of the 2009 Installment Payments and the 2009 Certificates. Neither the

Term 2009 Certificate. t Copyright 2017, American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, managed by Standard & Poor's Capital IQ, and are provided for convenience of reference only. Neither the District nor the Purchaser assumes any responsibility for the accuracy of these CUSIP data.

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funds deposited in the Escrow Fund nor the interest on the invested funds will be available for the payment of principal and interest with respect to the Certificates.

Verification of Mathematical Accuracy

The Verification Agent will deliver to the District, on or before the delivery date of the Certificates, its verification report indicating that it has verified, in accordance with the Statement on Standards for Consulting Services established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the adequacy of the cash and the maturing principal of and interest on the government securities deposited in the Escrow Fund, to pay, when due, the maturing principal of, interest on and related call premium requirements, if any, of the 2009 Certificates and (b) the mathematical computations of yield used by Bond Counsel to support its opinion that interest on the Certificates will be excluded from gross income for federal income tax purposes. Assuming the accuracy of the Verification Agent's computations, as a result of the deposit and application of funds as provided in the Escrow Fund, the obligations of the District under the 2009 Trust Agreement will be discharged.

The Verification Agent relied on the accuracy, completeness and reliability of all information provided to it by, and on all decisions and approvals of, the District. In addition, the Verification Agent has relied on any information provided to it by the District's retained advisors, consultants or legal counsel. The Verification Agent was not engaged to perform audit or attest services under AICPA auditing or attestation standards or to provide any form of attest report or opinion under such standards in conjunction with the issuance and delivery of the Certificates.

Estimated Sources and Uses of Funds

The proceeds to be received from the sale of the Certificates are expected to be applied as follows:

Sources:

Principal Amount of Certificates

Plus: Net Original Issue Premium

Plus: Funds relating to 2009 Certificates

Total Sources

Uses:

Acquisition and Construction Fund

Costs of Issuance l'I

Escrow Fund

Purchaser's Discount

Total Uses

Amount

$53, 1 95,000.00

5,018,078.50

4,51 3, 702.07

$62, 726, 780.57

$ 8,000,000.00

261 , 1 64.34

54,062,664. 1 0

402,952. 1 3

$62, 726, 780.57

(1) Includes fees of Special Counsel, Disclosure Counsel, Municipal Advisor and Trustee, and other costs of executing and delivering the Certificates.

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Debt Service Schedule

The table below shows the annual payments of principal and interest with respect to the Certificates and the 2013 Bonds, assuming no optional prepayment

As described above, approximately 14% of the Certificates constitutes the Preserve Proportionate Share of the Certificates and approximately 86% of the Certificates constitutes the Water Proportionate Share of the Certificates. As also described above, currently approximately 38% of the 2013 Bonds constitutes the Preserve Proportionate Share of the 2013 Bonds, approximately 21 % of the 2013 Bonds constitutes the Sewer Proportionate Share of the 2013 Bonds and approximately 41 % of the 2013 Bonds constitutes the Water Proportionate Share of the 2013 Bonds. Commencing in fiscal year 2017-18 and each fiscal year thereafter, the Preserve Proportionate Share of the 2013 Bonds will be 100% of the debt service on the 2013 Bonds.

2009 2013 Bonds Certificates

Fiscal Total Debt Total Debt Year Service Service

2017 $1,066,150,00 $3,160,406,00

2018 412,250,00

2019 408,725,00

2020 409,700,00

2021 405,050,00

2022 404,900,00

2023 408,875,00

2024 402,250,00

2025 404,875,00

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

TOTAL $4,322,775.00 $3, 160,406.00

Certificates Principal

$

2,210,000,00

1,860,000,00

1,955,000,00

2,055,000,00

2, 160,000,00

1,610,000,00

1,690,000,00

1, 775,000,00

1,870,000,00

1,965,000,00

2,065,000,00

2, 170,000,00

2,280,000,00

2,385,000,00

2,485,000,00

2,590,000,00

2,680,000,00

2, 760,000,00

2,840,000,00

2,930,000,00

3,015,000,00

3, 120,000,00

2, 725,000,00

$53, 195,000,00

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Certificates Certificates Total Debt Total Parity

Interest Service Debt Service

$ $ $4,226,556,00

1,697,676,77 3,907,676,77 4,319,926,77

2,049,481,26 3,909,481,26 4,318,206,26

1,954,106,26 3,909, 106,26 4,318,806,26

1,853,856,26 3,908,856,26 4,313,906,26

1,748,481.26 3,908,481.26 4,313,381.26

1,654,231.26 3,264,231.26 3,673, 106,26

1,571,731.26 3,261,731,26 3,663,981.26

1,485, 106,26 3,260, 106,26 3,664,981,26

1,393,981,26 3,263,981,26 3,263,981,26

1,298, 106,26 3,263, 106,26 3,263, 106,26

1, 197,356,26 3,262,356,26 3,262,356,26

1,091,481.26 3,261,481.26 3,261,481.26

980,231.26 3,260,231.26 3,260,231.26

875,531.26 3,260,531.26 3,260,531.26

778, 131.26 3,263, 131.26 3,263, 131.26

676,631.26 3,266,631.26 3,266,631.26

584,631.26 3,264,631.26 3,264,631.26

503,031.26 3,263,031.26 3,263,031.26

418,321.26 3,258,321.26 3,258,321.26

329,596,26 3,259,596,26 3,259,596,26

237,071.88 3,252,071,88 3,252,071.88

139,262,50 3,259,262,50 3,259,262,50

44,281.25 2,769,281,25 2,769,281,25

$24,562,316,34 $77,757,316,34 $85,240,497,34

THE CERTIFICATES

General

The Certificates will be dated as of the date of original delivery, will bear interest at the rates per annum and will mature on the dates and in the amounts set forth on the inside front cover. The Certificates will be executed and delivered in fully registered form without coupons. The Certificates are being executed and delivered in denominations of $5,000 principal amount or any integral multiple thereof. The Certificates, when executed and delivered, will be registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York ("DTC"). So long as OTC, or Cede & Co. as its nominee, is the registered owner of all Certificates, all payments with respect to the Certificates will be made directly to OTC, and disbursement of such payments to the OTC Participants (defined below) will be the responsibility of OTC, and disbursement of such payments to the Beneficial Owners (defined below) will be the responsibility of the OTC Participants, as more fully described in this Official Statement. See"- Book-Entry System" below.

Principal of and premium, if any, with respect to the Certificates is payable upon the surrender thereof at the corporate trust office of the Trustee in Los Angeles, California. Interest with respect to the Certificates will be paid by check of the Trustee mailed by first class mail, to the registered owners as of the fifteenth day of the month preceding the Interest Payment Date (the "Record Date").

Notwithstanding the foregoing, while the Certificates are held in the book-entry only system of OTC, all such payments of principal, interest and premium, if any, will be made to Cede & Co. as the registered owner of the Certificates, for subsequent disbursement to Participant and beneficial owners. See "APPENDIX F - BOOK ENTRY PROVISIONS."

While the Certificates are held in the book-entry only system of DTC, all notice and payments will be made to Cede & Co., as the registered owner of the Certificates.

Prepayment of the Certificates

Optional Prepayment. The Certificates maturing on or after October 1, 2028 are subject to redemption, at the option of the District, in whole or in part in integral multiples of $5,000 on any date on or after October 1, 2027, at a redemption price equal to the principal amount with respect thereto without premium, together with accrued interest to the date fixed for redemption, from any source of funds, including but not limited to, the prepayment of the principal components of the Installment Payments.

Mandatory Redemption from Net Proceeds of Insurance and Condemnation. The Certificates are subject to redemption on any date, in whole or in part, in integral multiples of $5,000 from the Net Proceeds of insurance or condemnation deposited in the Installment Payment Fund and credited as a Prepayment made by the District pursuant to the Installment Purchase Agreement, at a redemption price equal to the principal amount of the Certificates to be prepaid, together with accrued interest to the date fixed for redemption, without premium.

Selection of Certificates for Prepayment. Whenever provision is made for the redemption of Certificates and less than all outstanding Certificates are called for redemption, the Trustee will select Certificates for redemption, from the outstanding Certificates not previously called for redemption, such that, as nearly as practicable, as directed by the District

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in writing, approximately equal principal and interest payments prevail with respect to the Certificates in each fiscal year following such redemption. The Trustee shall select Certificates for redemption by lot within a maturity in any manner which the Trustee shall in its sole discretion deem appropriate. The Trustee shall promptly notify the District and the Corporation in writing of the Certificates so selected for redemption.

Notice of Redemption. When redemption is authorized or required as described above, the Trustee will give, at the expense of the District, notice of the redemption of the Certificates. Certificates that are the subject of an advance refunding and as provided in the following paragraph, notice of redemption will be given only if sufficient moneys to pay the redemption price of the Certificates to be redeemed are on deposit with the Trustee and available for such purpose on the date notice of redemption is given. Such notice will specify: (a) that the Certificates or a designated portion thereof (in the case of redemption of a Certificate in part but not in whole) are to be redeemed, (b) the date of redemption, and (c) the place or places where the redemption will be made. Such notice will further state that on the specified date there will become due and payable upon each Certificate to be redeemed, the principal and premium, if any, together with interest accrued to said date, and that from and after such date interest with respect thereto will cease to accrue and be payable.

Any notice of optional redemption may be conditional and if any condition stated in the notice of redemption is not satisfied on or prior to the proposed redemption date, the notice will have no force and effect and the District will not be required to prepay such Certificates and the redemption shall not be made and the Trustee will within a reasonable time thereafter give notice, to the persons and in the manner in which the notice of redemption was given, that such condition or conditions were not met and that the redemption was cancelled.

Redemption notices will be mailed by first class mail, postage prepaid, to the Owners of any Certificates designated for redemption at their addresses appearing on the Certificate registration books, at least 30 days but not more than 60 days prior to the redemption date, which notice will, in addition to setting forth the above information, set forth, in the case of each Certificate to be redeemed only in part, the portion of the principal thereof which is to be redeemed; provided, however, that neither failure to mail such notice nor any defect in any notice so mailed will affect the sufficiency of the proceedings for the redemption of such Certificates.

Effect of Notice of Prepayment. If notice is given as described above, and the moneys for the redemption (including accrued interest to the date of redemption) have been set aside in the Installment Payment Fund, the Certificates will become due and payable on the date of redemption, and, upon presentation and surrender thereof at the office of the Trustee specified in said notice, the Certificates will be paid in the unpaid principal amount with respect thereto or portion thereof, if only partially redeemed, plus interest accrued and unpaid to the redemption date and premium, if any.

If, on the date of redemption, moneys for the redemption of all the Certificates to be redeemed, together with accrued interest to such date of redemption, are held by the Trustee so as to be available therefore on such date of redemption, and, if notice of redemption has been given as described above, then, from and after the date of redemption, interest with respect to the Certificates will cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the redemption of Certificates will be held in trust for the account of the Owners of the Certificates to be redeemed.

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Partial Redemption. Upon surrender of any Certificate redeemed in part only, the Trustee will execute and deliver to the Owner thereof, at the expense of the District, a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Certificate surrendered, and of the same interest rate and the same maturity date. A partial redemption will be valid upon payment of the amount required to be paid to such Owner, and the District and the Trustee will be released and discharged from all liability to the extent of such payment, irrespective of whether an endorsement as to such partial redemption has or has not have been made upon the reverse of such Certificate by such Owner and irrespective of any error or omission in such endorsement.

Book-Entry System

OTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered Certificates registered in the name of Cede & Co. (DTC's partnership nominee). One fully-registered Certificate will be issued for each maturity of the Certificates, each in the aggregate principal amount of such maturity, and will be deposited with OTC. See

"APPENDIX F - BOOK ENTRY PROVISIONS."

The District and the Trustee cannot and do not give any assurances that OTC, OTC Participants or others will distribute payments of principal, interest or premium with respect to the Certificates paid to OTC or its nominee as the registered owner, or will distribute any prepayment notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The District and the Trustee are not responsible or liable for the failure of OTC or any OTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the Certificates or an error or delay relating thereto.

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SECURITY FOR THE CERTIFICATES

General

Each Certificate evidences and represents an undivided proportionate interest of the Owner thereof in the Installment Payments to be made by the District under the Installment Purchase Agreement. The Corporation, pursuant to the Trust Agreement, has transferred, conveyed and assigned to the Trustee, for the benefit of the Owners, substantially all of the Corporation's rights under the Installment Purchase Agreement, including the right to receive Installment Payments from the District and the right to exercise any remedies provided therein in the event of a default by the District thereunder.

Installment Payment Fund

The Trustee will establish a special fund designated as the "Installment Payment Fund." All moneys at any time paid to the Trustee by the District as Installment Payments or Prepayments will be deposited by the Trustee in the Installment Payment Fund, which will be held by the Trustee in trust for the benefit of the District and the Owners of the Certificates, and will be used and withdrawn by the Trustee solely for the purpose of paying the principal of and interest and redemption premiums, if any, with respect to the Certificates as the same becomes due and payable.

All payments on the Certificates will be made from the Installment Purchase Fund.

Installment Payments

The Installment Purchase Agreement requires the District to make semi-annual payments of Installment Payments on the 15th business day preceding each April 1 or October 1 of each year, commencing October 1, 2017 (each, an "Interest Payment Date"), and continuing thereafter during the term of the Certificates, in amounts as specified in the Installment Purchase Agreement. As a result of the assignment by the Corporation to the Trustee, the District will pay the Installment Payments directly to the Trustee.

Security for the Installment Payments

Pledge of District Net Revenues. The District agrees in the Installment Purchase Agreement that the payment of the Installment Payments is secured, equally and ratably and on a parity with, the Parity Debt by a pledge of and charge and lien upon the District Net Revenues. The payments of the Installment Payments are secured, equally and ratably and on a parity with, the Parity Debt, by a pledge of and charge and lien upon the District Net Revenues and, except as otherwise provided in the Installment Purchase Agreement, all of the District Net Revenues are pledged, charged, assigned, transferred and set over by the District to the Corporation and its assignee for the purpose of securing payment of the Installment Payments and the Parity Debt, and the District Net Revenues and any interest earned on the District Net Revenues constitute a trust fund for the security and payment of the Installment Payments and the Parity Debt.

The District covenants in the Installment Purchase Agreement that it will not encumber or create a lien on District Net Revenues that is superior to the pledge of the District Net Revenues created by the Installment Purchase Agreement.

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Definition of District Net Revenues. "District Net Revenues" is defined in the Trust Agreement to mean the sum of (a) the Water System Net Revenues, (b) the Sewer System Net Revenues, (c) the Preserve System Net Revenues and (d) the Property Tax Revenues.

"Preserve System" is defined in the Trust Agreement to mean all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the Santee Lakes Recreation Preserve (the "Preserve") operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equippings thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Preserve System.

"Preserve System Gross Revenues" is defined in the Trust Agreement to mean all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Preserve System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees, charges, or other moneys derived from campground use, parking, fishing, boating, facility use, general store, laundry and all other activities and services provided as part of the Preserve System and any other services and commodities sold, furnished or supplied through the Preserve System, (ii) any funds held from time to time in the Preserve System Rate Stabilization Fund or Preserve System Reserves established by the District in connection with the Preserve System, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees, charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Preserve System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Preserve System as permitted hereby; provided that the term "Preserve System Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

"Preserve System Net Revenues" is defined in the Trust Agreement to mean the Preserve System Gross Revenues less the Preserve System Operation and Maintenance Expenses.

"Preserve System Operations and Maintenance Expenses" is defined in the Trust Agreement to mean all expenses and costs of management, operation, maintenance and repair of the Preserve System, and all incidental costs, fees and expenses properly chargeable to the Preserve System (but excluding debt service or other similar payments on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

"Property Tax Revenues" is defined in the Trust Agreement to mean all property tax revenues as defined in Revenue and Taxation Code Section 95 required to be allocated to the District. See "PROPERTY TAX REVENUES" below.

"Sewer System" is defined in the Trust Agreement to mean all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the collection, transmission, treatment and disposition of wastewater and sewage operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equipping thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Sewer System.

1 3

"Sewer System Gross Revenues" is defined in the Trust Agreement to mean all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Sewer System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees (including Sewer System Connection Fees), charges, or other moneys derived from the furnishing and supplying of sewer services from the facilities of the Sewer System and any other facilities and commodities sold, furnished or supplied through the facilities of the Sewer System, (ii) any funds held from time to time in the Sewer Rate Stabilization Fund or Sewer System Capital Replacement Fund established by the District, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees (including Sewer System Connection Fees), charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Sewer System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Sewer System as permitted hereby; provided that the term "Sewer System Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

"Sewer System Net Revenues" is defined in the Trust Agreement to mean the Sewer System Gross Revenues less the Sewer System Operation and Maintenance Expenses.

"Sewer System Operation and Maintenance Expenses" is defined in the Trust Agreement to mean all expenses and costs of management, operation, maintenance and repair of the Sewer System, and all incidental costs, fees and expenses properly chargeable to the Sewer System (but excluding debt service or other similar payments on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

"Water System" is defined in the Trust Agreement to mean all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the production, treatment, storage, transmission, distribution and sale of water, including treated and reclaimed water, operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equipping thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Water System.

"Water System Gross Revenue" is defined in the Trust Agreement to mean all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees (including Water System Connection Fees), charges, or other moneys derived from the furnishing and supplying of water services and the sale, furnishing and supplying of water, including reclaimed water, from the facilities of the Water System and any other facilities and commodities sold, furnished or supplied through the facilities of the Water System, (ii) any funds held from time to time in the Water Rate Stabilization Fund or Water System Capital Replacement Fund established by the District, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees (including Water System Connection Fees), charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Water System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted hereby; provided that the term "Water Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

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"Water System Net Revenues" is defined in the Trust Agreement to mean the Water System Gross Revenues less the Water System Operation and Maintenance Expenses.

"Water System Operation and Maintenance Expenses" is defined in the Trust Agreement to mean all expenses and costs of management, operation, maintenance and repair of the Water System, and all incidental costs, fees and expenses properly chargeable to the Water System (but excluding debt service or other similar payments on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

Restrictions on Use of Certain District Net Revenues. Although the District has pledged the District Net Revenues as security for its obligation to make the Installment Payments, and although this pledge of the District Net Revenues is on a parity with a pledge to the 2013 Bonds, the following restrictions on the use of the components of District Net Revenues for the payment of debt service under Articles XIIIC and XIIID of the California Constitution should be considered by investors with respect to such pledge:

(i) Under the 2009 Installment Agreement, the District pledged District Net Revenues as security for the 2009 Installment Payments. However, the District used the "new money" portion of the proceeds of the 2009 Installment Payments to finance improvements only to the Water System and used the remaining proceeds to prepay the 1996 Installment Payments, which, as described above, were payable from Water System Net Revenues and Property Tax Revenues. As a result, the 2009 Installment Payments were payable from Water System Net Revenues and Property Tax Revenues. 1 Because the Certificates are being executed and delivered, in part, for the purpose of prepaying the 2009 Installment Payments, the limitations that were applicable to the 2009 Installment Payments are equally applicable to the Certificates.

(ii) With respect to the 2013 Bonds, the District used the proceeds of the 2013 Bonds to refinance outstanding installment payments and loans of the District that were payable from Water System Net Revenues, Preserve System Net Revenues, Sewer System Net Revenues, and Property Tax Revenues. As a result, currently approximately 38% of the 2013 Bonds constitutes the Preserve Proportionate Share of the 2013 Bonds, approximately 21 % of the 2013 Bonds constitutes the Sewer Proportionate Share of the 2013 Bonds and approximately 31.3% of the 2013 Bonds constitutes the Water Proportionate Share of the 2013 Bonds. Commencing in fiscal year 2017-18 and each fiscal year thereafter, the Preserve Proportionate Share of the 2013 Bonds will be 100% of the debt service on the 2013 Bonds due to the fact that the portions of the 2013 Bonds allocable to the 1995 State Loan and the 1996 State Loan mature in fiscal year 2016-17. The use before or during fiscal year 2016-17 of Water System Net Revenues and Property Tax Revenues to pay the Preserve Proportionate Share of the 2013 Bonds or the Sewer Proportionate Share of the 2013 Bonds and the use of Sewer System Net Revenues to pay the Preserve Proportionate of the 2013 Bonds or the Water Proportionate Share of the 2013 Bonds would constitute an

The District was authorized to use the Preserve System Net Revenues to pay for the 2009 Installment Payments even though they were not used to finance improvements to the Preserve System.

1 5

interfund loan that would need to be repaid. During and after fiscal year 2017-18, the use of Water System Net Revenues, Property Tax Revenues or Sewer System Net Revenues to pay the Preserve Proportionate Share of the 2013 Bonds will constitute an interfund loan with respect to the Preserve System that will need to be repaid to the applicable system of the District.

(iii) The District currently expects to use the "new money" portion of the proceeds of the Certificates to finance improvements only to the Preserve System. The District will use the remaining proceeds of the Certificates to prepay the 2009 Installment Payments, which, as described above, were payable from Water System Net Revenues and Property Tax Revenues. Because of limitations established by California law, (i) although Water System Net Revenues and Property Tax Revenues may be used to pay for the Preserve Proportionate Share of the Certificates, the payment would constitute an interfund loan that would need to be repaid and (ii) although Sewer System Net Revenues may be used to pay for the Water Proportionate Share of the Certificates, the payment would constitute an interfund loan that would need to be repaid.

See "RISK FACTORS - Property Taxes" and "- Articles XIIIC and XIIID of the California Constitution."

Rate Stabilization Funds

The District is authorized under the Installment Purchase Agreement to maintain certain Rate Stabilization Funds. Amounts in the Rate Stabilization Funds may be credited to the District in order to comply with the Parity Debt tests and the rate covenants, as described below.

Water System Rate Stabilization Fund. The District has established the Water System Rate Stabilization Fund that is held by the District for the purpose of stabilizing the rates and charges imposed by the District with respect to the Water System. From time to time, the District may deposit amounts in the Water System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Water System Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Water System Rate Stabilization Fund will be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

The District may, but is not be required to, withdraw amounts on deposit in the Water System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt coming due and payable in such Fiscal Year. All interest or other earnings on deposits in the Water System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Water System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

Sewer System Rate Stabilization Fund. The District has established the Sewer System Rate Stabilization Fund that is held by the District for the purpose of stabilizing the rates and charges imposed by the District with respect to the Sewer System. From time to time, the District may deposit amounts in the Sewer System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Sewer System Net Revenues which are

1 6

released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Sewer System Rate Stabilization Fund will be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

The District may, but is not be required to, withdraw amounts on deposit in the Sewer System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt coming due and payable in such Fiscal Year. All interest or other earnings on deposits in the Sewer System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Sewer System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

Preserve System Rate Stabilization Fund. The District has established the Preserve System Rate Stabilization Fund that is held by the District for the purpose of stabilizing the rates and charges imposed by the District with respect to the Preserve System. From time to time, the District may deposit amounts in the Preserve System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Preserve System Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Preserve System Rate Stabilization Fund will be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

The District may, but is not be required to, withdraw amounts on deposit in the Preserve System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt coming due and payable in such Fiscal Year. All interest or other earnings on deposits in the Preserve System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Preserve System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

Capital Replacement Funds. The District also maintains Capital Replacement Funds, one for each of the Water System, the Sewer System and the Preserve System. The Capital Replacement Funds provide resources for capital improvement projects for the related system. The District has the right at any time to withdraw any or all amounts on deposit in the Capital Replacement Funds and apply those amounts for any lawful purposes of the District.

Combined Balance in the Rate Stabilization Funds and the Capital Replacement Funds. As of December 31, 2016, the District had a combined balance of $13,305,146 in unrestricted designated funds in the Rate Stabilization Funds and the Capital Replacement Funds.

Prior Parity Debt; Limitations on Parity Debt and Superior Obligations

General. Under the Installment Purchase Agreement, the District may issue "Parity Debt" of the District payable from and secured by a pledge of and lien upon any of the District Net Revenues only in compliance with the conditions described below.

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Prior Parity Debt. Debt service on the 2013 Bonds is payable from District Net Revenues on a parity with the payment of the Installment Payments. See "INTRODUCTION -Prior Parity Debt."

Additional Parity Debt. In addition to the Installment Payments, the District may issue or incur Parity Debt in any Fiscal Year subject to the provisions of the Installment Purchase Agreement. The following are the applicable Parity Debt limitations:

(i) an Independent Financial Consultant having a favorable reputation for special skill, knowledge and experience in analyzing the operations of enterprise systems of special districts shall render to and file with the District and the Trustee a written opinion that the District Net Revenues (adjusted as provided below) for any 12 consecutive calendar months of the 18 calendar months immediately preceding the issuance of the Parity Debt have been equal to at least 120% of the sum of ( 1) the Installment Payments, and (2) the aggregate amount of debt service or other payments due in such 12-month period with respect to outstanding Parity Debt, including the Parity Debt to be issued; and

(ii) an Independent Financial Consultant having a favorable reputation for special skill, knowledge and experience in analyzing the operations of enterprise systems of special districts shall render to and file with the District and the Trustee written opinion that District Net Revenues (adjusted as provided below) in each of the three Fiscal Years succeeding the issuance of the Parity Debt will equal at least 120%, and that such District Net Revenues as so adjusted, less District Reserves (defined in the Installment Purchase Agreement to mean, collectively, the Preserve System Reserve, the Water System Reserve and the Sewer System Reserve) and the District Rate Stabilization Fund available for payment of Bonds during such period, will equal at least 105%, of the sum of (1) the aggregate amount of the debt service payments on the Certificates, and (2) the aggregate amount of annual debt service or other payments with respect to outstanding Parity Debt, including the Parity Debt to be issued, and all other obligations constituting a lien on the District Net Revenues which will be due in any Fiscal Year succeeding the issuance of the Parity Debt.

For purposes of clauses (i) and (ii) above, District Net Revenues may be adjusted in consideration of the following:

(1) To give effect to any change in service charges for the Preserve System, the Sewer System and/or the Water System which has been adopted subsequent to the commencement of the 12-month period specified in clause (i) above but prior to the date of issuance of the Parity Debt;

(2) To give effect to customers added to the Water System and/or the Sewer System subsequent to the commencement of said 12-month period but prior to the date of issuance of the Parity Debt;

(3) To give effect to the estimated change in District Net Revenues which will result from the connection of existing residences or businesses to the Water System and/or the Sewer System within 12 months following completion of any project to be funded or facilities to be acquired from the proceeds of the Parity Debt; and

(4) To give effect to the estimated change in the District Net Revenues which will result from services provided under any long-term, guaranteed contract

1 8

that extends for the life of the Parity Debt if entered into subsequent to the commencement of said 12-month period but prior to the date of issuance of the Parity Debt.

The District may issue or incur Parity Debt for the purpose of refunding the 2013 Bonds, without complying with the provisions described above if maximum annual debt service on the 2013 Bonds does not exceed maximum annual debt service on the 2013 Bonds, by more than 10%, and if the final maturity of such Parity Debt is not later than the final maturity of the 2013 Bonds.

Variable Rate Interest Rate. The Installment Purchase Agreement establishes certain provisions governing Parity Debt in the event the interest component is variable. See

"APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS."

Subordinate Obligations

There is no prohibition in the Installment Purchase Agreement on issuance by the District of obligations payable from District Net Revenues on a subordinate basis to the Installment Payments and Parity Debt.

Rate Covenants

The District has agreed in the Installment Payment Agreement to the following rate covenants.

District Net Revenues. The District covenants in the Installment Purchase Agreement, subject to the provisions of the following paragraph, to establish, maintain and collect the District Gross Revenues sufficient in each Fiscal Year to provide District Net Revenues equal to at least 1.20 times the sum of (i) the amount of the Installment Payments due in the Fiscal Year and (ii) the aggregate amount of annual debt service or other payments due in such Fiscal Year with respect to outstanding Parity Debt.

Notwithstanding the provisions of the previous paragraph, the District will be deemed to have satisfied its rate covenant pursuant to the previous paragraph only if the total of the District Net Revenues for a Fiscal Year, less the amount of the District Reserves and the amounts on deposit in the District Rate Stabilization Funds, available for payment of Installment Payments, at the beginning of the Fiscal Year, excluding interest earnings during the Fiscal Year, is equal to at least 105% of the total of amounts specified in clauses (i) and (ii) in the previous paragraph for the Fiscal Year.

In the event the District fails in any Fiscal Year to comply with the rate covenants described above, the District will retain an Independent Financial Consultant to undertake a rate study of the Preserve System, the Sewer System and the Water System for the purpose of establishing a rate structure for the Preserve System, the Sewer and Water System which will enable the District to comply with the rate covenant during the succeeding Fiscal Year. The District will within 60 days of receipt of such study revise its rates and charges with respect to the Preserve System, the Sewer System and the Water System in conformity with the recommendations of the study.

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Preserve System Net Revenues. The District covenants in the Installment Purchase Agreement to establish, maintain and collect the Preserve System Gross Revenues sufficient in each Fiscal Year to provide Preserve System Net Revenues equal to at least 1.00 times the sum of (i) the amount of the Preserve System Proportionate Share of the Installment Payments allocable to the Preserve System due in the Fiscal Year and (ii) the aggregate amount of annual debt service or other payments allocated by the District to the Preserve System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Preserve System Net Revenues.

In the event the District fails in any Fiscal Year to comply with its rate covenant contained in the previous paragraph, the District will retain an Independent Financial Consultant to undertake a rate study of the Water System Preserve System for the purpose of establishing a rate structure for the Preserve System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District will within 60 days of receipt of such study revise its rates and charges with respect to the Preserve System in conformity with the recommendations thereof.

Water System Net Revenues. The District further covenants to establish, maintain and collect the Water System Gross Revenues sufficient in each Fiscal Year to provide Water System Net Revenues equal to at least 1.00 times the sum of (i) the amount of the Proportionate Share of the Installment Payments allocable to the Water System due in the Fiscal Year and (ii) the aggregate amount of annual debt service or other payments allocated by the District to the Water System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Water System Net Revenues.

In the event the District fails in any Fiscal Year to comply with the rate covenant described above, the District will retain an Independent Financial Consultant to undertake a rate study of the Water System for the purpose of establishing a rate structure for the Water System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District will within 60 days of receipt of such study revise its rates and charges with respect to the Water System in conformity with the recommendations of the study.

Sewer System Net Revenues. The District further covenants to establish, maintain and collect the Sewer System Gross Revenues sufficient in each Fiscal Year to provide Sewer System Net Revenues equal to at least 1.00 times the sum of the aggregate amount of annual debt service or other payments allocated by the District to the Sewer System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Sewer System Net Revenues.

In the event the District fails in any Fiscal Year to comply with the rate covenant described above, the District will retain an Independent Financial Consultant to undertake a rate study of the Sewer System for the purpose of establishing a rate structure for both the Sewer System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District shall within 60 days of receipt of such study revise its rates and charges with respect to the Sewer System in conformity with the recommendations of the study.

Evidence of Compliance. The District will furnish to the Trustee, within 180 days from the close of each Fiscal Year, an audit report with respect to the Fiscal Year, together with a certificate of an independent certified public accountant certifying that the District has complied with the rate covenants described above for the Fiscal Year.

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Variable Interest Rates. The Installment Purchase Agreement establishes certain provisions relating to the rate covenants in the event of a variable interest rate component. See

"APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS."

Installment Payments are Unconditional

The obligations of the District to make the Installment Payments from the District Net Revenues and to perform and observe the other agreements contained in the Installment Purchase Agreement are absolute and unconditional and are not subject to any defense or any right of set-off, counter-claim, or recoupment arising out of any breach of the Corporation or the Trustee of any obligation to the District or otherwise with respect to the Project, whether thereunder or otherwise, or out of indebtedness or liability at any time owing to the District by the Corporation or the Trustee. Until such time as all of the Installment Payments have been fully paid or prepaid or secured, the District:

(i) will not suspend or discontinue any Installment Payments; (ii) will perform and observe all other agreements contained in the Installment

Purchase Agreement; and (iii) will not terminate the Term of the Installment Purchase Agreement for any

cause, including, without limiting the generality of the foregoing, the occurrence of any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, destruction of or damage to the Project, the taking by eminent domain of title to or temporary use of any or all of the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either thereof or any failure of the Corporation or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Trust Agreement or the Installment Purchase Agreement.

The obligation of the District to make the Installment Payments from the District Net Revenues will be absolute and unconditional and until such time as the purchase price has been paid in full ( or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the District will not discontinue or suspend any Installment Payments required to be made by it under the Installment Purchase Agreement when due, whether or not the Preserve System, the Sewer System and/or the Water System or any part of any such system or systems is operating or operable, or the use of any such system or systems is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such 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.

Additional Covenants

The District makes certain additional covenants in the Installment Purchase Agreement including covenants relating to maintenance and modification of the Preserve System, the Water System and the Sewer System, maintenance of insurance and operation of the Preserve System, the Water System and the Sewer System. See "APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS."

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Limited Obligation

THE DISTRICT'S OBLIGATION TO PAY THE INSTALLMENT PAYMENTS SHALL BE A SPECIAL OBLIGATION, LIMITED SOLELY TO DISTRICT NET REVENUES. UNDER NO CIRCUMSTANCES SHALL THE DISTRICT BE REQUIRED TO ADVANCE ANY MONEYS DERIVED FROM ANY SOURCE OF INCOME OTHER THAN DISTRICT NET REVENUES AND OTHER SOURCES SPECIFICALLY IDENTIFIED IN THE INSTALLMENT PURCHASE AGREEMENT FOR THE PAYMENT OF THE INSTALLMENT PAYMENTS. NO OTHER FUNDS OR PROPERTY OF THE DISTRICT SHALL BE LIABLE FOR THE PAYMENT OF THE INSTALLMENT PAYMENTS. THE OBLIGATION OF THE DISTRICT TO MAKE INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION.

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THE DISTRICT

Formation and Organization

The Rio San Diego Municipal Water District was formed in 1955 pursuant to the Municipal Water District Law of 1911 (California Water Code Sections 71000 et seq.) to provide for a supplemental water supply to its residents. On November 2, 1976, voters of Santee County Water District approved dissolution of that district and the merger of that area into the Rio San Diego Municipal Water District. The latter assumed all functions and operations of the former as of December 31, 1976. Effective January 1, 1977, the District's name was changed to the Padre Dam Municipal Water District.

The District comprises about 72 square miles and is located in the eastern portion of the County of San Diego, adjacent to the City of El Cajon, approximately 25 miles east of downtown San Diego. Its service area includes the City of Santee and the unincorporated communities of Blossom Valley, Dehesa, Crest, Alpine, Harbison Canyon and Flinn Springs. The District's service area population per January 2016 census data was estimated at 100,142.

The District is a multi-purpose public utility providing potable water, wastewater collection, disposal, treatment, water reclamation and recreation facilities in the Preserve. The District is governed by a five-member Board of Directors elected for four-year staggered terms. As of June 30, 2016, the District employed approximately 131 full-time equivalent employees to provide management, engineering maintenance and operation of the District.

The District provided service to approximately 24,285 customer accounts as of June 30, 2016, including water and sewer service to 13,545 customer accounts, potable water-only service to approximately 8,972 customer accounts, and sewer-only service to approximately 1,536 customer accounts in the cities of Santee, parts of El Cajon, and the unincorporated areas of Lakeside, Flinn Springs, Harbison Canyon, Blossom Valley, Alpine, Dehesa and Crest. Recycled water service was provided to 232 accounts as of June 30, 2016.

The District can be segregated into two geographic areas: the Western Service Area and the Eastern Service Area.

The Western Service Area provides potable water and sewer services to the City of Santee and parts of the City of El Cajon. The Preserve and the Ray Stoyer Water Recycling Facility are located within the Western Service Area.

The District's Eastern Service Area provides potable water service to the communities of Alpine, Crest and Harbison Canyon. As of June 30, 2016, approximately 69% of the customers of the Water System were in the Western Service Area compared to 31 % in the Eastern Service Area; the District does not provide sewer service to the Eastern Service Area. The District also provides sewer-only services to some customers in the Helix and Lakeside water districts and bills these customers directly.

Management and Personnel

Board of Directors. The District is governed by a five-member Board of Directors, each representing a geographic area within the District. Directors are elected by the voters within their divisions for four-year staggered terms.

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Management. Following are brief biographies of the District's key management personnel.

Geoffrey Allen Carlisle is the District's Chief Executive Officer/General Manager. Mr. Carlisle has more than 38 years' experience in the field of public administration, including 12 years with the City of El Cajon, 5 years with the City of Escondido, 5 years with the YMCA of the County of San Diego, and 16 years with the District. Mr. Carlisle earned a Bachelor of Arts, Recreation Administration from California State University, San Diego and a Master of Arts, Public Administration, from Walden University.

Karen Jassoy is the District's Chief Financial Officer/Director of Finance. Ms. Jassoy is a Certified Public Accountant with over 27 years' experience in the finance/accounting field, including 13 years with the San Diego Catholic Diocese and 9 years at the District. Ms. Jassoy earned a Bachelor of Arts in Political Science from the University of California, San Diego and a Master of Business Administration (Accounting) from San Diego State University.

Paul Clarke has served as the District's Director of Operations and Water Quality for over 3 years. Prior to that, Mr. Clarke served as the Operations Manager for the District for 6 years. Mr. Clarke holds a Bachelor's Degree in Management from National University, an Associate's Degree in Water Technology Education from Palomar College and is a Certified Public Manager. Mr. Clarke is certified by the State of California as a 05 Water Distribution Operator and a T2 Water Treatment Operator.

Lisa Sorce has served as the District's Director of Human Resources for the previous five years. Ms. Sorce has more than 18 years' experience in human resource administration with her experience spanning both the public and private sector. Ms. Sorce earned a Bachelor of Science in Strengths Based Business Management from Bellevue University.

Laura Koval is the District's Director of Park and Recreation for the Preserve and has been a member of the District's team for more than five years. Prior to joining the Park and Recreation team, Ms. Koval was the District's Customer Service Manager for three years. Prior to joining the District, Ms. Koval worked for the San Diego Padres assuming many roles over her 25-year career including oversight of revenue retention, fan loyalty programs, ticket customer services and the contract center. Ms. Koval holds a Bachelor's Degree in Sociology from San Diego State University.

Albert Lau is the District's Director of Engineering and Planning. Mr. Lau is a Registered Professional Engineer in the State of California and has more than 23 years' experience in the engineering/water resources/wastewater treatment field, including 16 years with the District and 7 years in private consulting. Mr. Lau earned a Master of Science in Civil Engineering from University of Colorado, Boulder, Master of Business Administration from San Diego State University, and a Bachelor of Science in Civil Engineering from California Polytechnic University.

Employee Organizations. The District is a party to a Memorandum of Understanding (each, an "MOU") with each of (i) the Padre Dam Municipal Water District Employees Association (which currently represents 119 employees) and (ii) the Mid-Management and Confidential Association (which currently represents 17 employees). Each MOU extends through fiscal year 2021-22. The MOUs govern 97% of the District's employees.

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Pass Through Ordinance and Energy Charges

The District's Board of Directors, by the enactment of Ordinance No. 2011-05 adopted on June 17, 2011 ("Ordinance No. 201 1 -05"), authorized the General Manager to pass through increases in certain rates and charges imposed by (i) the San Diego County Water Authority ("CWA") (or any other water provider) for wholesale water and water related services to District water customers (see 'THE WATER SYSTEM - Source of Water"); (ii) the City of San Diego with respect to its Metropolitan Sewerage System for wastewater conveyance, treatment and disposal to District sewer customers (see 'THE SEWER SYSTEM - San Diego Metropolitan Sewerage System"); and (iii) San Diego Gas & Electric Company (or any other energy provider) for electricity pumping costs. In addition, the Ordinance authorized the pass through of any reduction in or elimination of ad valorem property taxes allocated to the District that is a result of actions by the State of California. See "RISK FACTORS - Property Taxes" for a discussion of Proposition 1 A and the limitation it places on the State of California with respect to the District's Property Tax Revenues. Ordinance No. 2011-05 limits all pass through increases to 20% per provider per year, and any ad valorem pass-through to 8% per year. Ordinance No. 2011-05 is effective July 1, 2012 through and including July 1, 2017. The District is currently working with a consultant on a comprehensive cost of service and rate study to determine revenue requirements for its operations and related rates for fiscal years 2017-18 through 2021-22. The Board of Directors of the District is anticipated to consider adopting the rates proposed in response to such study along with an ordinance substantially similar to Ordinance No. 2011-05 in June 2017. New rates along with such replacement ordinance are anticipated to be effective July 1, 2017 through June 30, 2022. The District cannot provide any assurance that such new rates or replacement ordinance will be adopted as currently anticipated, if ever.

Five Year Business Plan and Budget

The District's Board of Directors affirmed the District's 2013 Five-Year Business Plan and Budget (the "2013-17 Business Plan") by Resolution 2012-32 on June 6, 2012 which was later revised and approved on November 27, 2012 by Resolution 2012-52. The 2013-17 Business Plan, which covers fiscal years 2012-13 through 2016-17, is a comprehensive roadmap for achieving operational performance, capital replacements and preventive maintenance for the benefit of the District's customers. The 2013-17 Business Plan identifies the work to be performed and the related rates needed to accomplish the goals.

The 2012-17 Business Plan covers the first five years of the District's 2012-2022 Strategic Plan (the "2021 -22 Strategic Plan") and provides mechanisms to ensure compliance with the 2021-22 Strategic Plan. The 2013-17 Business Plan is responsive to the needs of customers by providing essential services in the most cost-effective manner possible as dictated by the District's mission statement. It includes a reliable revenue stream to fund the maintenance and replacement of vital infrastructure. The District intends to accomplish all goals identified in the 2012-13 Business Plan only if projected revenues are realized. If revenue is restricted, then the District intends to curtail work or reprioritize projects so that spending matches revenues. A reasonable level of rate stabilization funds can be used to smooth out temporary revenue swings.

The 2013-17 Business Plan provides the District with flexibility to address new conditions and requirements that may arise in the future. For example, funding for budgeted expenses not used in earlier years will be available in future years. Likewise, any overspending in earlier years will have to be made up in subsequent years. Although spending levels and priorities within each year are flexible, overall spending for the full five years will not change.

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Annually the budget is re-projected based on new information and the reaffirmed by the Board of Directors.

Capital Improvement Plan

The District's 201 2- 1 7 Business Plan includes a Capital Improvement Plan Budget (the "CIP Budget"). A focused CIP is vital because a significant amount of District infrastructure is more than 40 years old with the primary water transmission pipeline dating back to pre-World War I I . The CIP Budget projects capital expenditures to be approximately $72.5 million for fiscal years 201 2-1 3 through 201 6-1 7 . In addition, the CIP Budget estimates total project costs to be $68 mil l ion over the five year period: $41 million is required from Capital Replacement Funds (including $31 million from the Retail Water Fund) , $8 million from Capital Expansion Funds, and the remaining $23.5 mill ion from grants.

The District anticipates that its business plan for fiscal years 201 7- 1 8 through 2021-22 will include a capital improvement plan budget providing for additional investments in the District's infrastructure in the future. The following table shows the approved CIP Budget for fiscal year 201 6-1 7 and estimated capital improvements for fiscal years 201 7- 1 8 and 2021 -22.

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Table 1 PADRE DAM MUNICIPAL WATER DISTRICT

Capital Improvement Budget: Fiscal Years 2016-17 through 2021-22

Project (Budget)

Fiscal Year Fiscal Year Fiscal Year Fiscal Year Category 2016-17 (1) 2017-18 (2) 2018-19 (2) 2019-20 (2)

Expenditures Water $ 22,024, 167 $ 4,617,000 $ 6,750,000 $ 5,085, 196 Sewer 5,223,620 2,499,000 7,308,520 6,678,202 Recycling 771,685 270,000 1 ,612,480 494,602 Preserve 796,071 920,000 7,260,000 622,500 Other 323,601 Total Expenditures 29,139,144 8,306,000 22,931 ,000 12,880,500

Financing Source Water

Pay-as-you-go 10,408,698 4,209,000 6,542,000 4,661 , 196 Debt (3) 9,346,488 Grant CEF/Restricted (2) 2,268,980 408,000 208,000 424,000 Other

Sewer Pay-as-you-go 4,650,666 2,448,000 6,403,370 5,708,242 Debt Grant CEF/Restricted (5) 572,954 51,000 905, 150 969,960 Other

Recycled Pay-as-you-go 730,314 270,000 1 ,612,480 494,602 Debt Grant CEF/Restricted (5) 41,371 Other

Preserve Pay-as-you-go 596,071 120,000 60,000 622,500 Debt (4) 200,000 800,000 7,200,000 Grant CEF/Restricted (5) Other 323,601 Total Sources: $29,139,144 $8,306,000 $22,931 ,000 $12,880,500

(1) Included as part of the CIP Budget in the 2012-17 Business Plan. (2) Estimated as of November 2016. (3) To be paid from proceeds of the 2009 Certificates and other sources. (4) To be paid from deposits into the Acquisition and Construction Fund from proceeds of the Certificates. (5) Equal to restricted capacity fee revenue, which is not included in District Net Revenues. Source: Padre Dam Municipal Water District.

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Fiscal Year Fiscal Year 2020-21 (2) 2021-22 (2)

$ 5,447,696 $ 7,279,626 2,385,752 1 ,018,718

204,552 465,656 312,500 435,000

8,350,500 9, 199,000

5,015,696 6,694,476

432,000 585, 150

2, 187,532 963,518

198,220 55,200

204,552 465,656

312,500 435,000

$8,350,500 $9, 199,000

Total

$ 51,203,685 25, 113,812

3,818,975 10,346,071

323,601 90,806, 144

37,531 ,066 9,346,488

4,326, 130

22,361,328

2,752,484

3,777,604

41,371

2, 146,071 8,200,000

323,601 $90,806, 144

Employee Retirement System

This section contains certain information relating to California Public Employees ' Retirement System ("Ca/PERS"). The information is primarily derived from information produced by Ca/PERS, its independent accountants and actuaries. The District has not independently verified the information provided by Ca/PERS and makes no representations and expresses no opinion as to the accuracy of the information provided by Ca/PERS.

The comprehensive annual financial reports of Ca/PERS are available on its Internet website at www.calpers.ca.gov. The Ca/PERS website also contains Ca/PERS ' most recent actuarial valuation reports and other information concerning benefits and other matters. The District does not take any responsibility for the continued accuracy of the foregoing Internet address or for the accuracy, completeness or timeliness of information on such website, and such information is not incorporated herein by this reference. Actuarial assessments are "forward-looking" statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or may be changed in the future. Actuarial assessments will change with the future experience of the pension plans.

Ca/PERS Plan Description. All qualified permanent and probationary employees are eligible to participate in the District's Miscellaneous Plans (the "Miscellaneous Plans"), an agent multiple-employer defined benefit pension plans administered by CalPERS, which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Miscellaneous Plans are established by State statute and District resolution. CalPERS issues publicly available reports that include a full description of the pension plans including benefit provisions, assumptions and membership information that can be found on the CalPERS website.

Ca/PERS Benefits Provided. CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for non-duty disability after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each Miscellaneous Plan are applied as specified by the Public Employee's Retirement Law.

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http://www.calpers.ca.gov

The Miscellaneous Plans' provisions and benefits in effect at June 30, 2016, are summarized as follows:

Hire Date Benefit formu la Benefit vesting schedule Benefit payments Retirement age Required employee contribution rates Required employer contribution rates

Source: Padre Dam Municipal Water District.

Tier I Prior to

June 26, 2010 3% @ 60

5 years of service Monthly for life

50 - 60 Bo/o

24.248%

Miscellaneous Tier II

June 26, 2010 to December 31, 2012

2.5% @ 55 5 years of service

Monthly for life 50 - 55

Bo/o 24.248%

Tier Ill - PEPRA On or after

January 1 , 2013 2% @ 62

5 years of service Monthly for life

52 - 67 6.25%

24.248%

Employees Covered. At June 30, 2016, the following employees were covered by the benefit terms for each Miscellaneous Plan:

Inactive employees or beneficiaries currently receiving benefits

Inactive employees entitled to but not yet receiving benefits

Active employees

Total


# of Employees

114

49

129

292

Contributions. Section 20814(c) of the California Public Employees' Retirement Law ("PERL") requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The actuarially determined rate, determined by CalPERS, is the estimated amount necessary to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees.

The actuarially determined rates and amounts for Miscellaneous Plans for the fiscal years ended June 30, 2016 through June 30, 2018, are as follows:

District's Required Employer Contribution Rate

Fiscal Year 2015-16 Fiscal Year 2016-17 Fiscal Year 2017-18(' 1

Employer Employer Employer Employer Payment of Employer Payment of Employer Payment of Normal Unfunded Normal Unfunded Normal Unfunded

Cost Rate Liability Cost Rate Liability Cost Rate Liability Miscellaneous Plans 24.248% $1,733,827 26.989% $1 ,939,397 9.124% $2,216,482

(1) Projected. Source: Cal PERS Actuarial Reporls dated October 2015 and August 2016.

Implementation of GASB Nos. 68 and 71. In June 2012, the Governmental Accounting Standards Board issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions- an amendment of GASB Statement No. 27 ("GASB Statement No. 68"), and was subsequently amended in November 2013 by GASB No. 71, Pension Transition for

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Contributions Made Subsequent to the Measurement Date - An Amendment of GASB Statement No. 68 ("GASB Statement No. 71 "). The primary objective of these GASBs is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions provided by other entities.

In particular, GASB Statement No. 68 requires a state or local government employer such as the District to recognize a net pension liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. If a state or local government employer makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government's reporting period, GASB Statement No. 68 requires that the government recognize its contribution as a deferred outflow of resources. In addition, GASB Statement No. 68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer that arise from other types of events. GASB Statement No. 68, as amended, requires that at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability and that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported only if it is practical to determine all such amounts. As a result of its implementation, the beginning net position of the District's Governmental Activities was reduced by approximately $36.2 million for fiscal year 2014-15.

Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions. For the year ended June 30, 2016, the District recognized pension expense of $2, 117,077. At June 30, 2016, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Pension contributions subsequent to measurement date Differences between actual and expected experience Changes in assumptions Net differences between projected and actual earnings

on plan investments

Total


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Deferred Outflows of Resources $ 2,508,068

$ 2,508,068

Deferred Inflows of

$ Resources

(537,380) (1,379,543)

(602,093) $ (2,519,016)

The deferred outflows of resources described on the previous page in the amount of $2,508,068 related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 2017. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows:

Year Ended June 30

2016 2017 2018 2019

Thereafter

Annual Amortization

$ (1,038,269) ( 1 ,038,269) ( 1 ,038,268)

595,790


Funded Status. The following table sets forth the schedule of funding for the District's Miscellaneous Plans for the fiscal years ended June 30, 2013, 2014, and 2015.

Miscellaneous Plans

Valuation Date

(June 30)

2013 2014 2015

Accrued Liability

$89,220,885 98,053, 197

102,942,489

Market Value of Assets

$58,688,083 67,602,950 67,973,235

(1) Based on the Market Value of Assets. Source: Ca!PERS Actuarial Repori Dated August 2016.

Unfunded Liability

$30,532,802 30,450,247 34,969,254

Funded Ratio (1 l

65.8% 68.9 66.0

Annual Covered Payroll

$10,172,929 10,031,893

9,946,859

Recent Ca/PERS Actions. At its April 17, 2013 meeting, CalPERS' Board of Administration (the "CalPERS Board") approved a recommendation to change the CalPERS amortization and smoothing policies. Prior to this change, CalPERS employed an amortization and smoothing policy that spread investment returns over a 15-year period with experience gains and losses paid for over a rolling 30-year period. After this change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with increases or decreases in the rate spread directly over a 5-year period. The new amortization and smoothing policy was used for the first time in the June 30, 2013 actuarial valuations to set employer contribution rates for fiscal year 2015-16.

On February 18, 2014, the CalPERS Board approved new demographic actuarial assumptions based on a 2013 study of recent experience. The largest impact, applying to all benefit groups, is a new 20-year mortality projection reflecting longer life expectancies and that longevity will continue to increase. Because retirement benefits will be paid out for more years, the cost of those benefits will increase as a result. The CalPERS Board also assumed earlier retirements for Police 3% at age 50, Fire 3% at 55, and Miscellaneous 2.7% at 55 and 3% at 60, which will increase costs for those groups. As a result of these changes, rates will increase beginning in fiscal year 2016-17 (based on the June 30, 2014 valuation) with full impact by fiscal year 2020-21.

On November 18, 2015, the CalPERS Board adopted a funding risk mitigation policy intended to incrementally lower its discount rate - its assumed rate of investment return - in years of good investment returns, help pay down the pension fund's unfunded liability, and

31

provide greater predictability and less volatility in contribution rates for employers. The policy establishes a mechanism to reduce the discount rate by a minimum of 0.05 percentage points to a maximum of 0.25 percentage points in years when investment returns outperform the existing discount rate, currently 7.5%, by at least four percentage points. CalPERS staff modeling anticipates the policy will result in a lowering of the discount rate to 6.5% in about 21 years, improve funding levels gradually over time and cut risk in the pension system by lowering the volatility of investment returns.

On December 21, 2016, the CalPERS Board voted to lower its discount rate from the current 7.5% to 7.0% over the next three years according to the following schedule.

Fiscal Year

201 7- 1 8

201 8- 1 9

201 9-20

Discount Rate

7.375%

7.250

7.000

For public agencies like the District, the new discount rate will take effect July 1, 2018. Lowering the discount rate means employers that contract with CalPERS to administer their pension plans will see increases in their normal costs and unfunded actuarial liabilities. Active members hired after January 1, 2013, under the Public Employees' Pension Reform Act ("PEPRA") (discussed below) will also see their contribution rates rise. The three-year reduction of the discount rate will result in average employer rate increases of about 1 percent to 3 percent of normal cost as a percent of payroll for most miscellaneous retirement plans, and a 2 percent to 5 percent increase for most safety plans. Additionally, many CalPERS employers will see a 30 to 40 percent increase in their current unfunded accrued liability payments. These payments are made to amortize unfunded liabilities over 20 years to bring the pension fund to a fully funded status over the long-term.

More information about the funding risk mitigation policy can be accessed through CalPERS' web site at www.calpers.ca.gov/page/newsroom/calpers-news/2015/adopts-fundingrisk-mitigation-policy. The reference to this Internet website is provided for reference and convenience only. The District does not take any responsibility for the continued accuracy of the foregoing Internet address or for the accuracy, completeness or timeliness of information on such website, and such information is not incorporated herein by this reference.

California Public Employees' Pension Reform Act of 2013. On September 12, 2012, the Governor of the State of California signed into law PEPRA, which impacted various aspects of public retirement systems in the State of California, including the CalPERS programs. In general, PEPRA (i) increased the retirement age for public employees depending on job function, (ii) capped the annual pension benefit payouts for public employees hired after January 1, 2013, (iii) required public employees hired after January 1, 2013 to pay at least 50% of the costs of their pension benefits (as described in more detail below), (iv) required final compensation for public employees hired after January 1, 2013 to be determined based on the highest average annual pensionable compensation earned over a period of at least 36 consecutive months, and (v) attempted to address other perceived abuses in the public retirement systems in the State of California. PEPRA applies to all public employee retirement systems in the State of California, except the retirement systems of the University of California, and charter cities and charter counties whose pension plans are not governed by State of California law. PEPRA's provisions went into effect on January 1, 2013 with respect to new State of California, school, city and local agency employees hired on or after that date; existing

32

http://www.calpers.ca.gov/page/newsroom/calpers-news/2015/adopts-funding-risk-mitigation-policy

http://www.calpers.ca.gov/page/newsroom/calpers-news/2015/adopts-funding-risk-mitigation-policy

employees who are members of employee associations, including employee associations of the District, have a five-year window to negotiate compliance with PEPRA through collective bargaining.

CalPERS has predicted that the impact of PEPRA on employees and employers in the CalPERS system will vary based on each employer's current level of benefits. As a result of the implementation of PEPRA, new members must pay at least 50% of the normal costs of the plan, which can fluctuate from year to year. To the extent that the new formulas lower retirement benefits, employer contribution rates could decrease over time as current employees retire and employees subject to the new formulas make up a larger percentage of the workforce. This change would, in some circumstances, result in a lower retirement benefit for employees than they currently earn.

The District is unable to predict the amount of future contributions it will be required to make to CalPERS as a result of the implementation of PEPRA, and as a result of negotiations with its employee associations, or, notwithstanding the adoption of PEPRA, resulting from any legislative changes regarding the CalPERS employer contributions that may be adopted in the future.

Other Post-Employment Benefits

Plan Description. The District contributes to a single-employer defined benefit plan (the "Plan") to provide medical benefits to eligible retired District employees and beneficiaries. The Plan has three tiers of retiree health insurance benefits. Members who were hired on or before August 27, 2002 and who met full eligibility requirements receive medical benefits paid entirely by the employer; members must meet additional eligibility requirements after this date to receive the same benefit. Reduced benefits are available to members hired after August 27, 2002 and before August 6, 2006. For members hired after August 8, 2006, the District will contribute up to $600 per month towards health insurance at the time of retirement if the member meets certain requirements; this coverage ends when the member becomes eligible for Medicare. The Plan does not provide a publicly available financial report.

Funding Policy. The contribution requirements of Plan members and the District are established and may be amended by the Board of Directors. The District's annual OPEB expense is calculated based on the annual required contribution of the employer ("ARC"), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost of the Plan plus a portion of the unfunded actuarial accrued liability (or funding excess). Any unfunded actuarial liability (or funding excess) is amortized over a period not to exceed thirty years. The current ARC rate is 12.25% of the annual covered payroll.

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Annual OPEB Cost and Net OPEB Obligation. The following table shows the components of the District's annual OPEB expense for the year ending June 30, 2016, the amount actually contributed to the Plan, and changes in the District's net OPEB obligation:

Annual Requ ired Contribu tion (ARC) Interest on net OPEB obliga tion Adjustment to Annual Requ ired Contribu tion (ARC) Annual OPEB cost (expense) Contribu tions made Increase in net OPEB obliga tion Net OPEB obliga tion · beginning of year Net OPEB obliga tion · end of year


FY 2015-16 $ 1 ,237,125

$

1 ,237, 125 1 ,237, 125

The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and net OPEB obligation for fiscal years 2016, 2015 and 2014 were as follows:

Percentage of Fiscal Annual OPEB Annual OPEB Net OPEB Year Cost (AOC) Cost Contributed Obligation

2015-16 $ 1 ,237,125 100% $ 2014-15 1 ,268,717 100 2013-14 1 ,268,717 100


Funded Status and Funding Progress. The funded status of the Plan as of the June 30, 2015 actuarial valuation was as follows:

Actuarial Accrued Liability (AAL) Actuarial Va lue of Plan Assets Unfunded Actuarial Accrued Liability (UAAL) Funded Ratio (Actuarial Va lue of Plan Assets/ML) Covered Payroll (Active Plan Members) UAAL as a Percentage of Covered Payroll


$ 26,695,832 $ 10,966,557 $ 15,729,275

41.08%

$ 10,100,905 155.72%

See Note 8 of the District's June 30, 2016 audited financial statements for a summary of the June 30, 2015 actuarial valuation.

Investment Policy

The investment policies and practices of the District are established by ordinance of the District's Board of Directors, most recently Ordinance No. 2017-02, which was adopted on April 19, 2017. The investment policy is reviewed annually by the Board of Directors. The District's current investment policies have five primary goals:

1. To protect principal.

2. To insure that funds are available to pay obligations of the District without having to liquidate investments at an inopportune time and risk the loss of principal or accrued interest.

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3. To maximize the interest yield earned on deposits.

4. To insure that all investment transactions are properly authorized and that all transactions are properly carried out in a procedure designed to minimize risk and prevent unauthorized transactions.

5. To assure compliance with all Federal, state and local laws governing the investment of moneys under the control of the Director of Finance.

The Investment Policy provides that no investment, other than a security underlying a repurchase or reverse repurchase agreement, may have a term remaining to maturity in excess of five years without specific approval of the Board of Directors, and prohibits investment in mortgage-backed securities, inverse floaters, range notes, interest-only strips that are derived from a pool of mortgages or any security that could result in zero interest accrual if held to maturity.

The Director of Finance of the District submits a monthly investment report to the Board of Directors. As of June 30, 2016, the District has invested funds as set forth in the following table.

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Investment T:tee

US Treasury Obligations US Treasury Notes US Treasury Notes US Treasury Notes US Treasury Notes US Treasury Notes US Treasury Notes

US Government Sponsored Federal Home Loan Bank Notes FHLMC Notes FHLMC Notes FNMA Global Notes FNMA Notes FNMA Notes FNMA Notes Freddie Mac Global Notes Freddie Mac Global Notes

Corporate Obligations Berkshire Hathaway Global Notes Chevron Corp Global Notes JP Morgan Chase & Co. Notes Toyota Motor Credit Corp Notes Wells Fargo & Co. Global Notes

Local Agency Investment Fund

Cash & Money Market Funds

Restricted COP Funds

Total


Investment Portfolio Summary (as of June 30, 2016)

Market Par Maturity Coupon Value Value Date Rate

$ 3,741,535 $ 3,650,000 03/31/19 1.625% 2,028,516 2,000,000 11/30/18 1.250 2,009,296 2,000,000 01/31/18 0.875 2,001,328 2,000,000 04/30/18 0.625 1,530,938 1,500,000 12/31/18 1.500 1 ,421,984 1 ,400,000 07/31/18 1.375

$ 2,007,794 $ 2,000,000 06/21/17 1.000% 1,002,389 1,000,000 02/22/17 0.875

999,948 1,000,000 01 /27 /17 0.500 1,004,521 1,000,000 01/30/17 1.250 2,563,880 2,500,000 09/18/18 1.875 2,511,070 2,500,000 04/27/17 1.125 2,210,824 2,200,000 02/26/19 1.000 2,008,136 2,000,000 06/29/17 1.000 1,506,419 1,500,000 07/28/17 1.000

$ 500,175 $ 500,000 08/15/16 0.950% 505,599 500,000 05/16/19 1.561 601,219 600,000 02/15/17 1.350 503,646 500,000 01/12/18 1.450 412,296 410,000 01/16/18 1.500

$ 21,111,284 $ 21,111 ,284 N/A N/A

$ 21,236,580 $ 21,236,580 N/A N/A

$ 6,864,675 $ 16,864,675 N/A N/A

$ 90,284,050 $ 89,972,539


Permit and Licenses

YTM at YTM at Cost Market

1.130% 0.700% 1.220 0.650 0.890 0.580 1.050 0.590 1.240 0.670 1.080 0.620

0.760% 0.600% 0.860 0.500 0.590 0.510 0.820 0.470 1.24 0.710 0.670 0.590 0.960 0.810 0.750 0.590 0.950 0.600

0.890% 0.670% 1.350 1.160 1.420 1.020 1.420 0.970 1.570 1.130

0.576% 0.576%

.01 %-.03% .01%-.03%

.04%-.95% .04%-.95%

The District operates and is governed under a variety of licenses and permits from regulatory agencies. All of the District's permits and licenses are current and the District is in compliance with all of the permits. See 'THE WATER SYSTEM - Water System Regulatory Issues" and 'THE SEWER SYSTEM - Sewer System Regulatory Issues" for information about material permits relating to the respective systems.

36

THE WATER SYSTEM

Water System Description

District water facilities consist of approximately 389 miles of potable water mains and 28 tank reservoirs (7 partially underground and 3 completely underground). High water elevations range from 630 to 2,646 feet. The District has 27 reservoir tanks and existing storage capacity is 104.9 million gallons of potable storage and 1.5 million gallons of recycled water storage. The District has 17 pump stations with elevations varying from 455 to 2,286 feet above sea level.

The District used to be a wholesale provider of water to the Lakeside and Riverview Water Districts. On November 16, 2006, Lakeside and Riverview Water Districts detached from Padre Dam. Lakeside and Riverview then merged to form Lakeside Water District. Starting in January 2007, CWA began billing Lakeside directly for its water. At that point the District only billed Lakeside a wheeling charge to recoup the direct cost of delivering water to it. Subsequently, Lakeside began developing a direct connection to CWA's distribution system and reducing its reliance on the District. The District retains the ability to deliver water to the Lakeside and Riverview Water Districts in emergency situations.

Source of Water

General. The District purchases all of its water from CWA. The District has no reservoirs to collect natural runoff.

Historical Water Purchases. The following table identifies the volume of water purchased from CWA in fiscal years 2011-12 through 2015-16.

Table 3a PADRE DAM MUNICIPAL WATER DISTRICT

Historical Water Purchases

Fiscal Year 201 1 - 1 2 201 2- 1 3 201 3-14 2014- 1 5 201 5-1 6 11 1

In Acre Feet

Amount Purchased 1 1 ,458 1 1 ,842 1 2,034 1 0,444 8,613

(1) Reduced purchases from CWA reflect reduced demand on water from the Water System due to the restrictions on water usage imposed by the California State Water Resources Control Board as a result of Governor Brown's declaration of state of drought emergency in January 2014. See "THE WATER SYSTEM - WATER DEMAND.""


CWA. The CWA purchases most of its water (41 % in calendar year 2016) from the Metropolitan Water District of Southern California ("MWD"). MWD water is a blend in varying amounts from the Colorado River and State Water Project sources. CWA also receives water from local supplies (local runoff, ground water reclamation, and its Claude "Bud" Lewis Carlsbad Desalination Plant completed in 2015) and non-MWD imports (the CWA/lmperial Irrigation District Conserved Water Transfer Agreement and the Coachella Canal Lining Project). On June 23, 2016, CWA issued its Subordinate Lien Water Revenue Refunding Bonds, Series 20168-1 (the "2016 CWA Bonds"). In connection with issuance of the 2016 CWA Bonds, CWA prepared

37

an official statement dated June 7, 2016 (the "CWA Official Statement"). The CWA Official Statement includes a discussion of CWA's water sources and a variety of factors that affects the availability of water. Although the District believes CWA is the best source of information about CWA 's water sources, and, therefore, encourages potential investors to review the CWA Official Statement, the District can provide no assurances as to the accuracy, completeness or timeliness of the CWA Official Statement. The CWA Official Statement and its continuing disclosure reports are available on the Municipal Securities Rulemaking Board's Electronic Municipal Market Access ("EMMA") system.

On March 1, 2017, MWD issued its Water Revenue Bonds, 2017 Authorization Series A (the "2017 MWD Bonds"). In connection with the issuance of the 2017 MWD Bonds, MWD prepared an official statement dated February 24, 2017 (the "MWD Official Statement"). The MWD Official Statement includes a discussion of MWD's water sources and the impact of drought conditions and environmental restrictions. Although the District believes MWD is the best source of information about M WD's water sources and operational plans, and, therefore, encourages potential investors to review the MWD Official Statement, the District can provide no assurances as to the accuracy, completeness or timeliness of the MWD Official Statement. The MWD Official Statement and its continuing disclosure reports are available on EMMA.

The water rates charged to the District by CWA are subject to rate adjustments from time to time, as determined by CWA. It is the District's practice to pass through any increase in water costs to its customers (see "THE DISTRICT - Pass-Through Ordinance and Energy Charges" above).

CWA is an entity created by a special act of the California legislature. The District has a single seat on CWA's 26-member board of directors. The District's representative has direct input into all of CWA's rate decisions.

Local Water Services. In a section of the CWA Official Statement entitled "WATER AUTHORITY WATER SUPPLY - Future Water Supply," the CWA describes its plans to diversify its water supply, which would include water from MWD, long-term water transfers from conserved Imperial Irrigation District agricultural water, water savings from the lining of the AllAmerican Canal and Coachella Canal, local seawater desalination, surface water, and continued development of recycled water and groundwater.

Recycled Water. In 1959, the District opted to develop a local wastewater treatment and water recycling facility, known as the Ray Stoyer Water Recycling Facility, in lieu of joining the regional METRO wastewater collection and treatment system being developed at the time by the City of San Diego. The District developed the Preserve and the Ray Stoyer Water Recycling Facility consisting of seven recycled water lakes and a 190 acre regional park and campground in the 1960s, and expanded its water recycling facility to 2 million gallons per day in 1997. The facility treats wastewater to the tertiary level for use at the Preserve and throughout the community.

The cost of imported water is the most substantial cost incurred by the District. As part of its new strategic plan, the District is committed to create more independence from imported water suppliers. The development of local water resources will provide more independence to the District in a number of ways, including greater control in avoiding cutbacks or allocations during times of drought and/or regulatory cutbacks.

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Currently, a large portion of wastewater collected in the East County is conveyed to the City of San Diego's Metropolitan Wastewater System (the "METRO System") to be treated at Point Loma Wastewater Treatment Plant and be disposed of into the Pacific Ocean. The treatment costs associated with the METRO System are projected to increase in the near future due to the planned system upgrades under the City of San Diego's Pure Water Program. This would in turn increase the cost for the agencies in the East County that discharge wastewater to the METRO System, including the District.

Potential Participation in A WP Program and Issuance of Related Parity Debt. In an effort to reduce its reliance on imported water through the CWA and its wastewater treatment costs, the District is actively working with its project partners, Helix Water District, City of El Cajon and the County of San Diego (collectively, the "AWP Program Partners"), on developing the East County Advanced Water Purification Program (the "AWP Program"). The AWP Program is a joint effort of the District and the other AWP Program Partners to create a new source of local sustainable water and reduce the region's dependence on imported water. The AWP Program aims to treat up to 21 million gallons per day of wastewater that is generated in the eastern portion of the County of San Diego (the "East County") and produce up to 17,000 acre feet of treated water supply for potable uses, which represents up to 30% of the current demand.

The AWP Program is anticipated to be developed in three phases. The first phase of the AWP Program is anticipated to be completed in 2019-2020 and have the capacity to purify 2.2 to 3.5 million gallons of water per day. The second phase is anticipated to be completed in 2023-2025 to expand the AWP Program's capacity to treat wastewater from the City of El Cajon and County of San Diego. After completion of the second phase, the AWP Program is anticipated to have the capacity to treat 10.4 million gallons of water per day. The third and final phase of the AWP Program is anticipated to completed in 2035 providing the program with anticipated capacity to treat 21 million gallons of water per day.

The District anticipates financing its share of the first phase of the AWP Program through various funding sources. To date, the District has received approximately $6 million in the form of a grant from the State Water Resources Control Board made with proceeds of State of California bonds issued under the Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Bond Act of 2006, and approximately $4.5 million from the Bureau of Reclamation's Title XVI program for this purpose. Additionally, the District has applied for, and anticipates receiving, a grant of approximately $15 million from the State Water Resources Control Board to be made with proceeds of State of California bonds issued under the Water Quality, Supply, and Infrastructure Improvement Act of 2014. The District anticipates financing the rest of its share of the costs for the first phase of the AWP Program with a loan from the State Water Resources Control Board under the State of California Revolving Fund Loan Program in the principal amount of approximately $101 million (the "AWP Program State Loan"). The District anticipates that the AWP Program State Loan will be payable from District Net Revenues on a parity with the 2013 Bonds and the Certificates and mature in November 2049. See "RISK FACTORS - Parity Debt" for a discussion regarding the risks associated with the District's ability to issue or incur Parity Debt in the future, such as the AWP Program State Loan.

The District's participation in the AWP Program remains subject to final approval of the District's Board of Directors. The District cannot, and does not, provide any assurance that such approval will, if ever, be obtained or that any phase of the AWP Program will, if ever, be completed. The debt service coverage projections set forth in this Official Statement do not take

39

into account any potential savings in wastewater treatment costs that may accrue to the District as a result of its participation in the AWP Program or any debt service payments that may come due in connection with the anticipated AWP Program State Loan. See "HISTORICAL AND PROJECTED DEBT SERVICE COVERAGE - Projected Debt Service Coverage."

The following is a summary of certain of the goals and objectives of the AWP Program:

• Implement a potable reuse program to provide the East County with a local, reliable, and drought proof drinking water supply while assisting the City of San Diego by diverting solids and wastewater flow from the Point Loma Wastewater Treatment Plant.

• Increase the reliability and sustainability of the East County's water supply by creating a new, local, drought-proof drinking water supply and by increasing the use of non-potable recycled water.

• Increase local control over supply reliability and price certainty of water supply by reducing reliance on imported water.

• Produce up to 30 percent of East County's drinking water supply. • Minimize the financial impacts from the projected increase in wastewater

treatment costs and disposal costs by the City of San Diego's METRO System while obtaining regulatory and price certainty on long term Clean Water Act compliance.

• Reduce energy consumption associated with importing water and repurpose wastewater treatment by-products for beneficial use, including electricity generation from biosolids.

• Assist the METRO System in its goal to reduce flows to the Point Loma Wastewater Treatment Plant and reduce total suspended solids load discharged at the Point Loma ocean outfall to the same or lower levels as would be achieved by implementing secondary treatment at the full plant capacity.

See 'THE SEWER SYSTEM - San Diego Metropolitan Sewerage System" and See"lnterjurisdictional Pretreatment Agreement" for further discussion regarding the METRO System and the Point Loma Wastewater Treatment Plant.

Historical Water Loss. The following table sets forth water production and water consumption for each of the ten previous fiscal years along with an estimate of water loss for each such fiscal year.

40

Table 3b PADRE DAM MUNICIPAL WATER DISTRICT

Summary of Water Production and Water Consumption In Acre Feet

Flushing & Water Water % of Water Reservoir Net Lost

Fiscal Year Production Consumption Difference Production Discharge Water

2007 -08 16 ,150,5 15 ,168,0 982,5 6°/o 9,8 972,7 2008 -09 14 ,653,0 13 ,997 ,0 656,0 4 40,8 615,2 2009-10 12 ,456,4 11 ,843,0 613,4 5 29,3 584, 1 2010 -11 11 ,450,8 11 ,189,0 261,8 2 25,9 235,9 2011 -12 11 ,457,1 11 ,162,0 295, 1 3 25,8 269,3 2012 -13 11 ,842,6 11 ,427,0 415,6 4 31,0 384,6 2013 -14 12 ,033,2 12 ,002,0 31,2 Less than O 11.6 19,6 2014 -15 10 ,422 , 1 10 ,256,0 166, 1 2 8,8 157 ,4 2015 -16 8 ,613 ,0 8 , 143 ,0 470,0 5 9,8 460 ,2

Average 12 ,119,9 11 ,687,4 432,4 4 21,4 411.0


Risk Factors. See "RISK FACTORS - Threat to Water Supply" for information about conditions that could adversely impact the availability of water to the District.

Water Demand

The following table identifies the demand for the District's water for fiscal years 2011-12 through 2015-16.


Historical Water Demand (in acre feet)

201 1 -12 2012-13 Residential 8,688 8,964 Commercial 2,451 2,465 Sales to other agencies Recycled 632 828 Shrinkage 319 413

Total Demand 12,090 12,671 Recycled (633) (828) Purchased From CWA 1 1 ,458 1 1 ,842

(1) Reduced demand is a result of drought conditions and conservation. Source: Padre Dam Municipal Water District.

2013-14 9,407 2,595

915 32

1 1 ,119 (915)

12,034

2014-15 7,487 2,769

767 188

1 1 ,211 (767)

10,444

2015-16''' 6,533 1 ,609

658 470

9,271 (658)

8,613

In 2008, in response to worsening water supply conditions, Governor Schwarzenegger ordered retail water suppliers statewide to reduce water use 20% by 2020. Senate Bill X7-7 (California Water Code, Section §10608 (e)), which was adopted by the State of California Legislature in November 2009, implemented the Governor's order and set up the regulatory framework that suppliers will follow to achieve the targeted water savings by 2020. The District

41

is currently meeting its water savings target and could actually increase water consumption District-wide and still remain in compliance.

In recent years, the State of California has faced significant water shortfalls, and on January 17, 2014, Governor Brown (the "Governor") declared a state of drought emergency, calling on Californians to conserve water. As part of his declaration, the Governor directed State of California officials to assist agricultural producers and communities that may be economically impacted by dry conditions. Thereafter, the California State Water Resources Control Board issued a statewide notice of water shortages and potential future curtailment of water right diversions. On April 1, 2015, the Governor issued an executive order mandating certain conservation measures including a requirement that the California State Water Resources Control Board impose restrictions to achieve a statewide 25% reduction in urban water usage through February 28, 2016. On May 9, 2016, the Governor issued an additional executive order directing the California State Water Resources Control Board to permanently prohibit practices that waste potable water such as hosing off sidewalks, driveways and other hardscapes. The California State Water Resources Control Board subsequently imposed such restrictions which have been extended several times, including most recently on February 8, 2017.

On April 7, 2017, the Governor issued an executive order lifting the drought emergency in all of the State of California except for Fresno, Kings, Tulare and Tuolumne counties. Pursuant to the April 7, 2017 executive order, the Governor directed the California State Water Resources Control Board to, among other things, continue to develop permanent prohibitions on wasteful water use and adopt urban water use efficiency standards as directed in the Governor's May 9, 2016 executive order, that include indoor use, outdoor use, leaks as well as performance measures for commercial, industrial and institutional water use.

In an effort to satisfy the directives issued by the Governor in his April 7, 2017 executive order, the Department of Water Resources, the California State Water Resources Control Board, the California Public Utilities Commission, the California Department of Food and Agriculture and California Energy Commission (collectively, the "EO Agencies") issued a report entitled, Making Water Conservation a Cal ifornia Way of Life - Implementing Executive Order B-37-16 (the "Conservation Report"). Pursuant to the Conservation Report, the EO Agencies have developed actions and recommendations to achieve four primary objectives: (1) use water more wisely; (2) eliminate water waste; (3) strengthen drought resilience; and (4) improve agricultural water use efficiency and drought planning. Certain of the actions proposed in the Conservation Report to achieve the forgoing objectives include, new water use targets starting in 2018, permanent monthly reporting, water use prohibition on wasteful practices and mandatory water shortage contingency plans. The EO Agencies have released proposed legislation to implement the actions and recommendations in the Conservation Report. Information regarding such proposed legislation and a copy of the Conversation Report may be obtained at www.water.ca.gov/wateruseefficiency/conservation/. The reference to this Internet website is provided for reference and convenience only. The District does not take any responsibility for the continued accuracy of the foregoing internet address or for the accuracy, completeness or timeliness of information on such website, and such information is not incorporated herein by this reference.

42

http://www.water.ca.gov/wateruseefficiency/conservation/

The restrictions imposed as a result of the Governor's executive orders in 2015 on urban water usage caused a reduction in water charges of the Water System in fiscal year 2015-16. However, water sales for fiscal year 2016-17 through December 2016 exceeded water sales for the same period for fiscal year 2014-15 by approximately 1.2% and budgeted water sale by approximately 9.8%. See "HISTORICAL AND PROJECTED DEBT SERVICE COVERAGE -Statement of Revenues and Expenses." The District does not believe that the restrictions previously imposed by the California State Water Resources Control Board and the restrictions proposed in the Conservation Report will have a material adverse effect on the Water System's revenues in the future.

Water and Sewer System Billing and Collections

Procedures. The District's water and sewer billing and collection procedures begin when the meter is read. The District receives hourly electronic meter readings from its advanced meeting infrastructure network (the "AMI Network"). The AMI Network is a mesh system that transmits data from each of its water meters through a network of repeaters and gateways. The AMI Network is estimated to capture approximately 99.92% of the meter data. As a result, the District is required to manually read only a relatively small number of meters each month. The data collected by the AMI Network is used for monthly water billing, customer service inquiries, and is available to the District's customers through an online website portal that permits customers to track usage and set notification alerts.

After a meter is read, the original bill is mailed to the customer. The bill is due on delivery and delinquent after 15 days. The late fee is added on the 10th day after the Due Date (on the 25th day after the original bill is mailed).

Approximately 28-35 days after the original bill is mailed, the District prepares the next bill. If there is a past due amount, the bill will note the amount past due and state the past due amount is due immediately to avoid further fees and possible discontinuances of service. The new charges will be due on delivery and delinquent after 15 days.

Approximately 41 days after the original bill is mailed, an outbound past due notice is emailed to those customers who have provided the District with their email address. The notice tells the customer to pay by the following Monday to avoid the Final Discontinuance Notice.

Approximately 46 days after the original bill is mailed, a Final Discontinuance Notice is generated and delivered to the customer approximately 48 days after the original bill was mailed. The notice lists the amount past due, a $25.00 notification fee assessed for the processing, printing, packaging, and delivery of the Final Discontinuance Notice, and additional fees that will be due if the bill is not paid by the indicated Discontinuation Date.

Approximately 54 days after the original bill is mailed, a District employee will discontinue water service for a customer for failure to pay their bill. All fees and penalties must be paid before service can be re-established and a deposit may be required to assure future and timely payments. For accounts of the Sewer System only, the District levies a charge on the owner's property tax bill, rather than turning sewer service off.

Customer deposits remain with the District for at least a two-year period. If the customer goes for a two-year period with no more than two late fees, the deposit will be applied against the customer's next bill. When an account is closed, any deposit on file is applied to the final

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bill. Any unpaid balances will be written off as uncollectible and sent to a collection agency no sooner than 45 days after the first final bill was mailed.

History of Billings and Collections. A five-year history of billings and collections by the District for water and sewer service is set forth in the following table. The District has a very low number of uncollectible accounts because, if payment has not been received within approximately 35 days after a bill is mailed, a customer's service is shut off. The customer must then make a payment along with an additional fee and deposit before its service is restored. Once an account is closed, any unpaid balance is written off as uncollectible approximately 45 days after the final bill was mailed. Because of this method, any bills outstanding at the end of a fiscal year will have either been paid or will be written off within approximately 80 days after fiscal year end.

Beginning June 30 Balance FY

201 6 $ 2,507 , 151

201 5 2,687,873

201 4 2,543,787

201 3 2,498,204

201 2 1 ,749 , 152


History of Bil l ings and Col lections Fiscal Years 201 1 -1 2 through 2015-16

Ending Bill ings Payments Balance FY

$ 50,680,677 $(50,604,949) $ 2,582,879

54,383,594 (54,564,316) 2,507, 1 51

58,564,573 (58,420,487) 2,687,873

50,971 ,81 1 (50,926,228) 2,543,787

46, 1 73,763 (45,424,71 1 ) 2,498,204


Water System Customers

Net % of Write-off Billing $ 37,397 0. 1 %

37,878 0 . 1

12 , 1 64 0.0

97,571 0.2

45,295 0.1

Based on customers' geographical location within the District, they may receive either water services, sewer services or both from the District. District provides sewer-only services to some water customers from both Helix and Lakeside Water Districts. Approximately 69% of the customers of the Water System are in the Western Service Area. Approximately 31 % of Water System customers are in the Eastern Service Area.

Water delivery to the Eastern Service Area requires multiple lift stations and extra pumping/electricity because of the elevation of the Eastern Service Area (600-1,800 feet above sea level). The Eastern Service Area customers are charged for the extra power necessary to pump water to them.

Connections. The following table identifies the District's current and historic water service connections. As of December 31, 2016, the 22,551 water service connections included 13,577 water and sewer connections and 8,974 water-only connections, and excluded 235 recycled water connections.

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Current and Historic Water Service Connections Calendar Years 1992-2016

Year11 1

1 992 1 993

1 994

1 995

1 996

1 997

1 998

1 999

2000

2001

2002

2003 2004

2005

2006

2007

2008

2009

201 0 201 1

201 2

201 3

2014

201 5

201 6

(1) December 31 each year.

Water Connections121

1 9 ,622 1 9 ,743

1 9 ,864

1 9 ,987

20,295

20,675

21 ,055

21 ,290

21 ,365

21 ,4 1 9

21 ,804

22,040 22,325

22,596

22,7 1 6

22,932

23, 1 40

23,201

23,331 23,4 1 0

23,222

22,226

22,556

22,534

22,551

(2) Excludes recycled water, construction and fire connections. Source: Padre Dam Municipal Water District.

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Largest Retail Water Users. The following table describes the District's 10 largest retail water users for fiscal year 2015-16.


Ten Largest Retai l Water Customers Fiscal Year 2015-16

Customer Rios Canyon Ranch San Diego County General Services Gross-Cuyamaca Community College District Carefree East Owners Sycuan Band Of Kumeyaay Nation Alpine Village Cameron Mobile Estates The Meadows HOA Inc. Woodglen Vista Apartments Santee Villas Apartments

Total - Largest Customers

Total District Water Billings


Current Water Rates

Annual Billings

$ 432,370 241 , 1 03 224,544 206,962 1 86,4 1 5 1 55,565 1 37,361 1 31 ,327 1 29,526 1 24 499

$ 1 ,939,672

$ 33,029, 708

Percent of District Total

1 .3 1 % 0.73 0.68 0.63 0.56 0.47 0.42 0.40 0.39 0.38

5.96%

The District adopted water rates for fiscal years 2012-13 through 2016-17 on August 15, 2012 by Ordinance No. 2012-05 ("Ordinance No. 2012-05"). The proposed rate structure is comprised of four components: (1) a commodity charge (water rate), which is determined on the basis of the amount of water served to a parcel of property in hundreds of cubic feet (HCF); (2) a fixed monthly service charge (water systems charge) established on the basis of the meter size on the parcel of property receiving water service; (3) a CWA Infrastructure Access Charge (IAC Charge), which is imposed on the District by CWA for all water meters and is passed through to District customers; and (4) an energy charge (pumping charge), which is based on the amount of energy required to pump water to identified pump zones within the District's service area.

The District is currently working with a consultant on a comprehensive cost of service and rate study to determine revenue requirements for its operations and related rates needed for fiscal years 2017-18 through 2021-22. The Board of Directors of the District is anticipated to consider adopting the rates proposed in response to such study in June 2017.

Pursuant to Ordinance No. 2011-05, the Board of Directors also authorized the General Manager to pass through (i) increases in certain water rates and charges, commencing July 1, 2012 through June 30, 2017, imposed by (A) CWA and (B) San Diego Gas and Electric Company ("SDG&E"); and (ii) any reduction in or elimination of the allocation of ad valorem taxes by the State of California pursuant to Proposition 1A approved by the voters in 2004. See 'THE DISTRICT - Pass Through Ordinance and Energy Charges" for additional information regarding Ordinance No. 2011-05.

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The following tables identify the District's water rates approved by Ordinance No. 201 2-05 and do not include any future pass-through of (i) increased rates imposed by CWA or SDG&E; or (ii) any reduction in the allocation of ad valorem taxes by the State of California pursuant to Proposition 1 A. As future increases or reductions are passed through, the new rates will be established by administrative action of the General Manager.

Meter 201 2 ( 1 ) 5/8" $ 25.85 3/4" 25.85 1 " 37.35 1 .5" 55.35 2" 78.80 3" 144.00 4" 21 7.90 6" 424.70 8" 51 1 .85 1 0" 682.45

Table 8 PADRE DAM MUNICIPA L WATER DISTRICT

Current Water Rates

MONTHLY FIXED CHARGE 201 3 (1 ) 2014 (2) 201 5 (2) $ 27 . 10 $ 28.40 $ 29.75

27. 1 0 28.40 29.75 39. 1 0 40.95 42.90 58.00 60.75 63.65 82.55 86.45 90.55

1 50.85 1 58.00 1 65.50 228.25 239. 1 0 250.45 444.85 466.00 488 . 15 536 . 15 561 .60 588.30 714.85 748.80 784.35

RESIDENTIAL WATER RATES/PER MONTH

201 6 (2) $ 31 . 1 5

3 1 . 1 5 44.95 66.65 94.85

1 73.35 262.35 51 1 .35 61 6.25 821 .60

201 2 (1 ) 201 3 (1 ) 2014 (2) 201 5 (2) 201 6 (2) Tier 1 Tier 2 Tier 3 Tier 4 ESA Credit

Commercial Potable Irrigation Recycled Irrigation Agriculture Construction Potable Construction Recycled Flushing ESA Credit

Service Line 1 "

Larger than 1 "

$ 4.75 $ 5.27 $ 5.66 $ 6.02 $ 6.87 5.27 5.81 6.22 6.60 7.48 6.00 6.58 7.03 7.45 8.37 6.55 7. 1 5 7.63 8.08 9.03

(0.56) (0.56) (0.57) (0.57) (0.58)

NON-RESIDENTIAL WATER RATES/PER MONTH 201 2 (1 ) 201 3 ( 1 ) 2014 (2) 201 5 (2) 201 6 (2) $ 4.99 $ 5.52 $ 5.92 $ 6.29 $ 7 . 15

5.29 5.83 6.24 6.63 7.51 4.76 5.25 5.62 5.97 6.73 4.54 4.77 5. 1 1 5.37 5.94

1 2.00 1 2.86 1 3.61 14.34 1 5.59 9.49 1 0.20 1 0.81 1 1 .40 1 3.46 6.00 6.58 7.02 7.45 8.36

�.56) �.56) �.57) �.57) �.58)

201 2 (1 ) $ 1 7.60

30.25

MONTHLY FIRE SERVICE CHARGES 201 3 (1 ) 2014 (2) 2015 (2) $ 1 8.44 $ 1 9.32 $ 20.24

31 .69 33.20 34.78

201 6 (2) $ 21 .20

36.43

(1) Effective November 1 of such year. (2) Effective December 1 of such year. Source: Padre Dam Municipal Water District.

Recycled water is currently available in the District's Western Service Area. The charge for recycled water used for irrigation is 90% of the potable irrigation rate.

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Comparative Water Rates

The following table compares the District's single-family residential water rates to other water service providers within the vicinity of the District.


Water Service Provider Sweetwater San Dieguito Del Mar Lakeside Helix Vallecitos Oceanside Santa Fe San Diego Olay Poway Carlsbad Olivenhain Rincon Escondido Yuima Vista Valley Center Fall brook Padre Dam Ramona Rainbow Sweetwater

Monthly Water Charges as of December 1 , 2016

Total Fixed Fee 111

$ 1 5.33 1 8.70 1 9.91 7.38

21 .78 31 .42 1 6.78 37.63 22.26 35.75 1 7. 1 4 29.87 36.63 30.79 35.65 39.44 37.63 39.06 41.01 32.51 32.33 58.84 1 5.33

Total Variable Fee 1'1

$ 27.30 24.37 26.47 39.75 26.54 1 9.44 34.87 14. 1 7 29.73 1 6.72 35.76 23.60 1 7.98 27.75 26.65 24.94 27.01 31 .84 33.24 44.18 44.85 31.64 27.30

Total Fee

$ 42.63 43.07 46.38 47. 1 3 48.32 50.86 51 .65 51 .80 51 .99 52.47 52.90 53.47 54.61 58.54 62.30 64.38 64.64 70.90 74.25 76.69 77. 1 8 90.48 42.63

(1) Systems charge based on 5/8-inch meter except Fallbrook, Otay and Valley Center which are for 3/4" meter. (2) Usage total based on 6.68 units per month. Source: Padre Dam Municipal Water District.

Water System Connection Fees

Water System Gross Revenues includes "Connection Fees," which are defined in the Installment Purchase Agreement as "any fee or fees collected by the District from property owners as a condition to District providing water service from the Water System to residential, commercial or industrial property." The majority of connection fee revenue is derived from capacity fees that the District charges per Equivalent Dwelling Unit (EDU). The District's capacity fees include a portion that is unrestricted (called "buy-in" or CRF) and a portion that is restricted for capital expansion (CEF). Unrestricted capacity fees are available for the payment of debt service.

The District's current Capacity Fee structure of the Water System, excluding fees that are charged and payable to CWA, is summarized in the following table.

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Table 1 0 PADRE DAM MUNICIPAL WATER DISTRICT

Water System Capacity Fees Effective January 1 , 2016

Type of Usage Single-Family Dwelling up to .50 Acre Ft. Single-Family Dwelling .51 to 2.0 Acre Ft. Single-Family Dwelling 2.01 Acre Ft. and up Townhouses, Condominiums (per unit) Apartment & Mobile Home Parks (per unit) Motels, Hotels, & R.V. Parks (per unit) Institutional Commercial and Industrial (by use) Irrigation (per 5,000 S.F.)


% EDU 1 00 1 50 200

92 83 37

1 00 1 00 1 00

Capacity Fee $1 0,502

1 5,754 21 ,004

9,662 8,7 17 3,886

1 0,502 1 0,502 1 0,502

Pursuant to Ordinance No. 2011-03 adopted March 22, 2011 ("Ordinance No. 201 1 -03"), the General Manager is authorized to automatically adjust Capacity Fees based on the Engineering News Record Construction Cost Index ("ENR-CCI-LA") on January 1 for calendar years 2012 through 2016. The Ordinance limits the annual adjustment in any fiscal year to 5% or lower and may not exceed the estimated reasonable cost of providing the facilities for which the fees are imposed. The ENR-CCI-LA adjustment will be based on the September-toSeptember annual time frame. If the ENR-CCI-LA increase is greater than 5%, the General Manager will not adjust the fee but will instead submit such adjustment to the Board of Directors for approval before adjusting Capacity Fees. The District is currently working with a consultant on a comprehensive cost of service and rate study to determine revenue requirements for its operations and related rates needed for fiscal years 2017-18 through 2021-22. The Board of Directors of the District is anticipated to consider adopting the rates proposed in response to such study along with an ordinance substantially similar to Ordinance No. 2011-03 in June 2017. New rates along with such replacement ordinance are anticipated to be effective July 1, 2017 through June 30, 2022. The District cannot provide any assurance that such new rates or replacement ordinance will be adopted as currently anticipated, if ever.

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The following table identifies Water System Connection Fee revenue for the previous five fiscal years and the current fiscal year as of September 30, 2016. The "Unrestricted" and

"Other" columns represent revenues that are considered part of Water System Gross Revenues.


Water Connection Fee Revenue Fiscal Years 201 1-12 through 201 6-1 7

Other Unrestricted Capacity Fee

Revenue (CRF)

Restricted Capacity Fee

Revenue (CEF) Connection Fee

Fiscal Year 201 1 - 1 2 201 2-1 3 2013-14 2014- 1 5 201 5-1 6 201 6-1 i1 J

$ 876,772 497,915

2,021 , 1 21 41 9,742

1 ,378,689 255,283

(1) Through September 30, 2016 Source: Padre Dam Municipal Water District.

Water System Regulatory Issues

$ 1 87,491 87,460

446, 146 69,809

280,737 1 05,276

Revenue

$ 65, 1 39 38,592

1 26, 1 98 1 14,481 1 1 7,501

60,672

General. The District is not aware of any environmental or regulatory issues that would adversely impact its ability to deliver water.

Drinking Water. The applicable drinking water standards for the Water System are provided in the California Domestic Water Quality and Monitoring Regulations, Title 22 of the California Administrative Code. These regulations incorporate the requirements of the U.S. Environmental Protection Agency in conformance with the Safe Drinking Water Act (PL 93-523). The standards specify water quality sampling frequencies and location as well as maximum concentrations of chemical constituents and are continuously revised and amended.

The District purchases all of its potable water from the CWA (see "- Source of Water" above) pretreated for potable purposes, and the distribution system is in compliance with all current Federal and State requirements.

Recycled Water. The District's recycled water operations are subject to regulation under Section 402 of the federal Clean Water Act, implementing regulations adopted by the United States Environmental Protection Act, the California Water Code and regulations promulgated by the California Department of Health Services.

Specifically, the District operates pursuant to the following:

(i) Waste discharge requirements relating to discharge from Santee Lakes established by the California Regional Water Quality Control Board, San Diego Region ("Regional Water Board"), most recently by Order No. R9-2015-0002/NPDES No. CA0107492 effective July 1, 2015 (expiring June 30, 2020).

(ii) Waste discharge requirements relating to discharge from the Ray Stoyer Water Recycling Facility established by the Regional Water Board, San Diego Region,

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most recently by Order No. 97-49 dated December 10, 1997. The District has submitted an application for renewal, which the Regional Water Board determined was complete by letter dated October 17, 2008, and is entitled to operate under Order No. 97-49 during the renewal process. This permit was amended by the Regional Water Board in January 2013 to allow the use of recycled water for street sweeping purposes.

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THE SEWER SYSTEM

Sewer System Description

The District's sewer facilities consist of approximately 160 miles of sewer mains, three sewage lift stations, and one-main sewage pump station. Currently, the District collects approximately 5 million gallons per day ("mgd") of wastewater. Of this amount, approximately 3 mgd is conveyed to the METRO System for treatment at the Point Loma Wastewater Treatment Plant and released into the ocean via an outfall. The remaining 2.0 mgd is processed as recycled water and the recycled water is conveyed to irrigation customers and the Preserve.

In 1997, the District increased the treatment capacity of the Ray Stoyer Water Recycling Facility to 2.0 mgd, installed a BardenPho treatment process, tertiary filters and a chlorine contact chamber. One million gallons per day are utilized at the Preserve and one mgd is distributed in Santee through a 32-mile separate delivery system to customers for outdoor irrigation and commercial uses.

Since fiscal year 2008-09, the District's sewer operation was also impacted by reduced water consumption, largely due to the advent of high-efficiency plumbing fixtures and water conservation programs: the District has observed approximately 25% reduction in sewer return flows. The reduction in sewer flow did not significantly reduce the District's direct cost to process sewer because the reduction of cost to process additional flow is offset by the additional cost to process higher strength flow.

San Diego Metropolitan Sewerage System

The District is a party to three contracts with the City of San Diego to participate in the METRO System, specifically:

(i) a Regional Wastewater Disposal Agreement between the City of San Diego and certain "Participating Agencies" (including the District) filed May 18, 1998 (the "Regional Wastewater Disposal Agreement")

(ii) an lnterjurisdictional Pretreatment Agreement between the City of San Diego and the District dated November 29, 1999 (the "lnterjurisdictional Pretreatment Agreement"), and

(iii) a Regional Transportation Agreement between the City of San Diego and the District. Currently, the District and the City of San Diego are negotiating the renewal of the transportation agreement.

The METRO System processes the District's sewage that is beyond the capability of the Ray Stoyer Water Recycling Facility and all of the sludge created by the Ray Stoyer Water Recycling Facility. All payments by the District to the City of San Diego with respect to the METRO System are treated as Sewer System Operation and Maintenance Expenses.

Regional Wastewater Disposal Agreement. Under the terms of the Regional Wastewater Disposal Agreement, as described below, the District shares in the cost of the METRO System. It is the District's practice to pass through any increase in treatment costs to its customers (see "THE DISTRICT - Pass Through Ordinance and Energy Charges" above).

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Pursuant to the Regional Wastewater Disposal Agreement, the Participating Agencies are required to pay their respective share of planning, design and construction of the METRO System facilities and costs relating to the operation and maintenance of the METRO System by the City of San Diego. The amount to be paid by the Participating Agencies is calculated based on a Sewer System Charge and a New Contract Capacity Charge.

The "Sewer System Charge" is a charge that is calculated annually, billed quarterly and based on flow and strength coming into the METRO System. The "New Contract Capacity Charge" is an amount to be paid by any Participating Agency for the right to discharge any new or additional capacity into the METRO System beyond its existing allotted capacity.

The City of San Diego and the Participating Agencies are currently reviewing the Participating Agencies' obligation to pay their proportionate share of the cost of the METRO System maintaining the City of San Diego's operating reserve and contractual debt coverage. The City of San Diego is working with the Participating Agencies through the Metropolitan Joint Power Authority (the "Metropolitan JPA"), a coalition comprised of the Participating Agencies that was formed in 1998, to clarify that the cost of maintaining the operating reserve and debt coverage is included in the operation and maintenance costs payable under the Regional Wastewater Disposal Agreement. The City of San Diego expects the modification to result in approximately $15 million to $20 million in additional operation and maintenance charges from the Participating Agencies. See "CONCLUDING INFORMATION - Litigation" below.

The Regional Wastewater Disposal Agreement terminates on December 31, 2050, subject to extension by agreement of the parties; the parties agree in the Regional Wastewater Disposal Agreement to begin discussing an extension no later than December 31, 2040. The Participating Agencies' right to obtain wastewater treatment services from the METRO System will survive termination of the Regional Wastewater Disposal Agreement; in that case, the Participating Agencies are obligated to pay their proportional share of costs based on their respective flow and strength. However, the City of San Diego may abandon the METRO System on December 31, 2050 with 10 years' prior notice to the Participating Agencies.

For information about regulatory requirements applicable to the METRO System and the METRO System capital improvement program, the District refers potential investors to an Official Statement prepared by the Public Facilities Financing Authority of the City of San Diego in connection with the issuance of Senior Sewer Revenue Refunding Bonds, Series 2016A relating to the METRO System dated March 2, 2016 (the "METRO Official Statement"). Although the District believes the City of San Diego is the best source of information about the METRO System, and, therefore, encourages potential investors to review the METRO Official Statement, the District can provide no assurances as to the accuracy, completeness or timeliness of the METRO Official Statement. The METRO Official Statement and its continuing disclosure reports are available on EMMA.

lnterjurisdictional Pretreatment Agreement. The lnterjurisdictional Pretreatment Agreement arises out of the City of San Diego's obligation to develop and implement an industrial pretreatment program pursuant to its waste discharge permit. Among other things, the lnterjurisdictional Pretreatment Agreement obligates the District to adopt and diligently enforce an ordinance that establishes an industrial pretreatment program that incorporates discharge limits that are at least as stringent as those established by the City of San Diego and any categorical pretreatment standards promulgated by the Environmental Protection Agency ("EPA").

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Opened in 1963, the Point Loma Wastewater Treatment Plant treats approximately 175 million gallons of wastewater per day (it is rated for 240 million gallons per day). In November 1995, the City of San Diego received a modified permit (also called a "waiver") from Secondary Treatment requirements of the Clean Water Act. This modified permit was renewed in September 2002, and again in June 2010. The City of San Diego remains in negotiations with the EPA over its permit. The City of San Diego is on its third waiver and was up for renewal again in 2015. The District believes that the renewal process is ongoing. The renewal process is expected to require the City of San Diego to recycle more of its sewage than it does today. Cost estimates for upgrading the Point Loma Wastewater Treatment Plant have ranged from $1.2 billion to $2 billion. The District's financial liability associated with the proposed improvements is approximately 3% of the total cost.

A WP Program. See "THE WATER SYSTEM - Source of Water - Potential Participation in AWP Program and Issuance of Related Parity Debt" for a discussion regarding the District's anticipated participation in the AWP Program and proposed recycling of sewage.

Billings and Collections

See "THE WATER SYSTEM - Water and Sewer System Billing and Collections."

Sewer System Customers

Based on customers' geographical location, they may receive either water or sewer services or both from the District. Customers who receive water-only services from the District may receive sewer services from the City of El Cajon, the County of San Diego, or from individual sewer septic systems. The District also provides sewer-only services to some customers in the Helix and Lakeside districts. The District does not provide sewer service to properties in its Eastern Service Area.

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Connections. The following table provides the District's current and historic sewer connections.


Current and Historic Sewer Service Connections Calendar Years 1992-2016

Year 11 1

1 992

1 993

1 994

1 995

1 996

1 997

1 998

1 999

2000 2001

2002

2003

2004

2005

2006

2007 2008

2009

201 0

201 1

201 2

201 3

2014 201 5

201 6

Number of Sewer Connections

1 3 ,470

1 3 ,523

1 3 ,584

1 3 ,648

1 3 ,791

1 3 ,906

1 4 ,001

1 4 ,094

1 4 ,204 1 4 ,230

1 4 ,320

14 ,450

1 4 ,570

1 4 ,751

1 4 ,823

14 ,914 1 5 ,052

1 5 , 1 09

1 5 , 1 89

1 5 ,259

1 5 ,098

1 5 ,099

1 5 , 1 58 1 5 ,096

1 5 , 1 30

(1) As of December 31 of each year. Source: Padre Dam Municipal Water District.

55

Largest Users. The following table ind icates the District's 1 0 largest sewer users for fiscal year 201 5-1 6 :


Ten Largest Retai l Sewer Customers Fiscal Year 2015-16

Customer San Diego County General Services

Carefree East Owners New Frontier Mobile Park Cameron Mobile Estates Meadowbrook Mobile Estates Highland"s Mobile Home Co Wil lowbrook Mobile Estates HCA Arbors Apartments

Parkway Club Apartment Riderwood Gardens

Total - Largest Customers

Total District Sewer Billings


Current Sewer Rates

Annual Billings

$ 251 ,544

141 ,244 1 40,092 1 26,052 1 1 8,000 1 09,264 1 08,806 1 08, 1 88 1 07,097

1 05,825 $ 1 ,3 1 6, 1 1 0

$1 5,600,030

Percent of District

Total 1 .6 1 %

0.91 0.90 0.81 0.76 0.70 0.70

0.69 0.69

0.68 8.44%

The District's sewer rates for fiscal years 201 2- 1 3 through 201 6-1 7 were adopted by the Board of Directors on August 1 5 , 201 2 by Ordinance No. 201 2-06 ("Ordinance No. 201 2-06") and are set forth in the following tables. The District is currently working with a consultant on a comprehensive cost of service and rate study to determine revenue requirements for its operations and related rates needed for fiscal years 2017-18 through 2021 -22. The Board of Directors of the District is anticipated to consider adopting the rates proposed in response to such study in June 2017.

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Table 1 4 PADRE DAM MUNICIPA L WATER DISTRICT

Schedule of Sewer Rates for the Fiscal Years 2012-13 through 201 6-1 7

SINGLE FAMILY SEWER RATE 2012 201 3 2014 201 5 2016

Base Monthly Sewer Fee $ 27.60 $ 28.05 $ 28.50 $ 28.95 $29.40 Sewer Rate ($/HCF) 3.47 3.52 3.57 3.62 3.68 New Customer Fee (Monthly) 51 .89 52.69 53.49 54.29 55. 1 6 Maximum Fee (Monthly) 67.51 70.29 71 .34 72.39 73.56

MULTI-FAMILY SEWER RATE 2012 2013 201 4 2015 2016

Base Mthly Sewer Fee/EDU Townhouse/Condo $ 22.90 $ 23.25 $ 23.60 $ 23.95 $ 24.30 Base Mthly Sewer Fee/EDU Apartments/MHP 1 8.80 1 9. 1 0 1 9.40 1 9.70 20.00 Sewer Rate ($/HCF) 3.47 3.52 3.57 3.62 3.68 Maximum Fee-Townhouse/Condo 67.51 70.29 71 .34 70.70 71 .76 Maximum Fee-Apartments/MHP No Max No Max No Max No Max No Max

COMMERCIAL SEWER RATES 2012 2013 201 4 2015 2016

Base Rate per EDU (Min/Month) $ 27.60 $ 28.05 $ 28.50 $ 28.95 $ 29.40 Suspended

Volume I Strength Rate (S/HCF) Solids (mg/I) Concentration Level 1 0 - 400 3.34 3.39 3.44 3.49 3.54 Concentration Level 2 401 - 500 3.50 3.55 3.60 3.66 3.72 Concentration Level 3 501 - 799 3.91 3.97 4.03 4.09 4. 1 5 Concentration Level 4 800 - 1 ,000 4.95 5.03 5. 1 1 5. 1 9 5.27 Concentration Level 5 1 ,001 - 1 ,600 7.91 8.03 8 . 15 8.28 8.41 Concentration Level 6 >1 ,600 8.08 8.20 8.33 8.46 8.59


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Comparative Sewer Rates

The following table compares the District's sewer rates to other sewer service providers within the vicinity of the District. However, any comparison of the rates charged by disparate agencies is difficult because of a myriad of factors, including, but not limited to, different levels of property tax revenue and varying commitments to maintaining and improving infrastructure.


Comparative Sewer Charges Effective January 1, 2016

District Rates (lJ

Carlsbad $ 26.03 Leucadia 26.04 County of San Diego 28.00 Olay 31.40 National City 32.08 El Cajon 33. 1 8 Imperial Beach 33.59 Poway 34.02 Escondido 35.53 La Mesa 36.93 Chula Vista 37.91 Vallecitos 38.99 San Diego 39.79 Lemon Grove 45.32 Valley Center - MG 51 .20 Solana Beach 51 .26 Olivenhain 53.03 Padre Dam 53.56

Vista 54.25 Ramona 57.79 Buena 59.25 Oceanside 59.74 Fall brook 62.50 Rainbow 63.20 Encinitas 64.96 Rancho Santa Fe 66.67 Del Mar 86.24 Valley Center - MP 93.45 Valley Center - WV 98.60

(1) Assumes water usage of 6.68 HCF per month and 3/4" residential meter. Source: Padre Dam Municipal Water District.

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Sewer System Connection Fees

Sewer System Gross Revenues includes "Connection Fees," which are defined in the Installment Purchase Agreement as "any fee or fees collected by the District from property owners as a condition to the District providing sewer service from the Sewer System to residential, commercial or industrial property." The majority of connection fee revenue is derived from capacity fees which the District charges per Equivalent Dwelling Unit (EDU). The District's capacity fees include a portion that is unrestricted ( called "buy-in" or CRF) and a portion that is restricted for capital expansion (CEF). Unrestricted capacity fees are available for debt service.

The District's current Capacity Fee structure of the Sewer System, excluding fees that are charged and payable to the METRO System, is summarized in the following table.

Table 1 6 PADRE DAM MUNICIPAL SEWER DISTRICT

Sewer System Capacity Fees per EDU Effective January 1 , 2016

Type of Usage Single-Family Dwellings Townhouses, Condominiums (per unit) Apartments & Mobile Home Parks (per unit) Motels & R.V. Parks (per unit) Institutional (Schools and Churches) Commercial & Industrial


% EDU 1 00 83 68 28

1 00 200

District $7,418

6, 1 57 5,044 2,077 7,4 18

14,836

Pursuant to Ordinance No. 2011-03, the General Manager is authorized to automatically adjust Capacity Fees based on the ENR-CCI-LA on January 1 for calendar years 2012 through 2016. The Ordinance limits the annual adjustment in any fiscal year to 5% or lower and may not exceed the estimated reasonable cost of providing the facilities for which the fees are imposed. The ENR-CCI-LA adjustment will be based on the September to September annual time frame. If the ENR-CCI-LA increase is greater than 5%, the General Manager will not adjust the fee but will instead submit such adjustment to the Board of Directors for approval before adjusting Capacity Fees. See 'THE WATER SYSTEM - Water System Connection Fees" for additional information regarding Ordinance No. 2011-03.

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The following table identifies the Sewer System Capacity Fee Revenue. The "Unrestricted" and "Other" columns represent revenues that are considered part of Sewer System Gross Revenues.

Table 1 7 PADRE DAM MUNICIPAL SEWER DISTRICT

Sewer Connection Fee Revenue Fiscal Years 2004-05 through 2015-16

Other Unrestricted Capacity Fee

Revenue (CRF)

Restricted Capacity Fee

Revenue (CEF) Connection Fee

Fiscal Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-1 0 2010-1 1 201 1 - 1 2 201 2-1 3 2013-14 2014- 15 201 5-1 6 201 6-1 i11

(1) Through Sept 3. 2016

$344, 1 09 1 64,365 266,287 349,574 3 1 1 ,485 3 1 1 ,225 1 84, 1 03 327,482 245,665 805,518

1 1 ,900 1 ,064,962

67,788

Source: Padre Dam Municipal Sewer District.

Sewer System Regulatory Issues

$386,434 367,337 440,997 652,828 533,080 270,975 430,897 460,854 306,733

1 ,01 3,456 1 6,752

1 ,432,994 67,666

Revenue

$ 50,520 37, 1 83 30,897 44,290 34,426 14,836 1 0,000 5,640

22,852 64, 1 98 23,357 21 ,000

7,000

General. Regulatory requirements applicable to the Sewer System are contained in or imposed by regulation pursuant to the Federal Water Pollution Control Act, as amended, and the State of California Porter Cologne Water Quality Control Act of 1969, as amended. Both Federal and State regulations are administered through the Regional Water Board. The District is not aware of any environmental or regulatory issues that would adversely impact its ability to provide sewer service.

Waste Discharge Requirements. The waste discharge requirements applicable to the Sewer System are a product of the following:

(i) the waste discharge requirements described in 'THE WATER SYSTEM -Water System Regulatory Issues" and

(ii) Waste discharge requirements applicable to the METRO System. See"- San Diego Metropolitan Sewerage System" above.

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THE PRESERVE

The Preserve System

The Preserve exemplifies the District's pioneering efforts in recycled water, dating back to 1959 and is an integral part of the District's reclamation process. Located in the District's Western Service Area, the original purpose for its lakes was to aid in the treatment of wastewater and provide a recreational facility for the community using recycled water.

The Preserve consists of approximately 190 acres of open space, including seven recycled water lakes and provides many outdoor activities including fishing, hiking, picnicking, running, mountain biking, boating and camping. The existing amenities on the Preserve include:

300 full hook-up campsites with laundry and shower facilities 10 furnished cabins (3 floating and 7 lakefront) A clubhouse for parties and camping clubs Two swimming pools and a hot tub A general store with food, beverages, fishing tackle and supplies Covered picnic areas for corporate and family events Prime bird habitat with over 175 species Kayak, canoe, pedal boat and bike rentals 7 lakes stocked with fish year-round Over 5 miles of paved trails for inline skating, biking, running and walking 7 playgrounds including a Sprayground and the Kiwanis Playground for children with disabilities

The Preserve has more than 775,000 visitors annually who contribute millions of dollars to the local economy each year. Maintenance, operations and staffing expenses are covered through user fees. The annual budget is $4.3 million. The Preserve employs 10 full-time and 6 part-time staff members and more than 40 volunteers and camp hosts.

The Preserve is financially self-sufficient, relying entirely on user fees. Although the Preserve System is part of the District, no ratepayer money goes to fund its operations. In fiscal year 2015-16, the Preserve System generated revenues in excess of $5.4 million and continues to grow year after year in both popularity and amenities. The Preserve's recently released

"Dynamic Vision Plan" is a 20-year plan for future expansion and revenue opportunities designed to ensure Santee Lakes remains a sustainable and premier destination A copy of the Dynamic Vision Plan may be obtained at www.santeelakes.com/dynamic-vision-plan. The reference to this Internet website is provided for reference and convenience only. The District does not take any responsibility for the continued accuracy of the foregoing internet address or for the accuracy, completeness or timeliness of information on such website, and such information is not incorporated herein by this reference.

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http://www.santeelakes.com/dynamic-vision-plan

Campground Inventory

The following table lists the entire campground inventory for the County of San Diego (a total of 34 ), including the Preserve's campgrounds.


Campground Inventory for San Diego County (As of November 7, 2016)

Park Name Lilac Oaks Campground Lake O'Neil Campground Rancho Garrido Bigfoot Campground & RV Park Lake Jennings County Park Oak Knoll Campground Agua Caliente Regional Park International Motor Inn Admiral Baker (Mil itary) Leapin Lizard RV Ranch Woods Valley Campground Trailer Rancho Alpine Springs RV Park Santa Fe Paradise by the Sea Palm Canyon Oak Creek RV Resort Oceanside RV Park Escondido RV Resort Rancho Los Caches RV Park Champagne Lakes The Vacationeer RV Park All Seasons RV Park La Pacifica RV Resort Circle RV Ranch San Diego RV Resort KOA San Diego KQ Ranch Pinezanita Trailer Ranch Chula Vista RV Resort Butterfield Ranch Stagecoach Trails Padre Dam's Santee Lakes Camp land By the Bay


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# Of Full Hook Up Sites 1 3 1 7 20 24 35 38 42 42 48 61 80 83 88 95 96

1 03 1 20 1 25 1 27 1 34 140 140 1 50 1 79 1 80 1 80 1 98 200 232 237 278 285 300 500

Preserve Usage

The following table sets forth the total gate attendance of Preserve users during fiscal years 2013-14 through 2015-16.

July August

September October

November December

January February

March April May June

TOTAL

Table 19 PADRE DAM MUNICIPAL WATER DISTRICT Padre Dam's Santee Lakes Gate Statistics

2013-14 2014-15 2015-16 Total Attendance Total Attendance Total Attendance

1 0,464 1 0,019 1 0,289 1 0, 143 9,923 1 0,447

6,744 6,456 7,022 5,4 1 9 5,81 7 5,438 5,374 6,031 5,445 3,836 3,705 4,082 5,61 1 5, 1 83 4,832 4,338 5,257 6, 1 40 7,4 1 9 8 , 1 4 1 9,290

1 0,769 1 0,441 8,549 1 0,361 9,494 9,495 1 1 044 1 0,073 1 0 7 1 8 91 ,522 90,540 91 ,747


Over the last two years, the Preserve System has made a significant shift towards demand pricing strategies. Under its demand pricing strategy, rather than setting one price yearround, most assets (picnics, camping and cabins) are set within a range and supply and demand principles determine pricing. With new pricing strategies in place, the Preserve has significantly increased its annual profit. Prior to the implementation of demand pricing strategies, the Preserve System averaged approximately $328,000 in annual profits. With new pricing strategies in place, over the last 2 years the Preserve has averaged approximately $963,500 annual profit, or an increase of approximately $635, 140. The District anticipates that the Preserve System's revenues will continue to increase in the future as its vacancy rates are very low. See "HISTORICAL AND PROJECTED DEBT SERVICE COVERAGE - Projected Debt Service Coverage" for projected revenues of the Preserve System for fiscal years 2016-17 through 2020-21.

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The following table sets forth the percentage of campground occupancy for the Preserve's full hook-up campsites since fiscal year 2006-07 through fiscal year 2015-16, together with the 3-year and 5-year average occupancy.

Table 20 PADRE DAM MUNICIPA L WATER DISTRICT

Padre Dam's Santee Lakes Campground Occupancy

FY FY FY FY FY FY FY FY FY FY 3-Year 5-Year 2006-07 2007-08 2008-09 2009-10 2010-11 201 1 -12 2012-13 2013-14 2014-15 2015-16 Average Average

July 89% 92% 9 1% 93% 9 1 % 94% 96% 96% 96% 97% 96% 96%

August 82 90 91 88 85 88 91 89 93 92 91 91

September 80 82 78 78 76 81 79 78 82 85 82 81

October 74 81 78 73 74 76 76 80 82 86 83 80

November 76 83 84 74 77 80 80 84 87 87 86 84

December 82 87 86 78 81 85 82 83 88 89 87 85

January 84 87 84 83 85 86 81 86 90 88 88 86

February 87 88 84 86 87 88 85 88 89 90 89 88

March 83 92 85 83 84 84 87 89 90 93 91 89

April 87 83 82 76 87 84 83 90 90 87 89 87

May 78 83 76 70 77 81 87 84 87 86 86 85

June 87 86 84 81 86 91 83 91 92 92 92 90

TOTAL 82% 86% 84% 80% 83% 85% 84% 87% 89% 89% 88% 87%


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PROPERTY TAX REVENUES

Definition of Property Tax Revenues

The Trust Agreement defines "Property Tax Revenues" to mean all property tax revenues as defined in Revenue and Taxation Code Section 95 required to be allocated to the District. Section 95 is the section of the Revenue and Taxation Code that governs the ad valorem property tax levied by the County of San Diego on taxable property in the District's boundaries.

See "RISK FACTORS - Property Taxes" for a discussion of certain factors that could impact the availability of Property Tax Revenues.

Limited Use of Property Tax Revenues

As described in "SECURITY FOR THE CERTIFICATES - District Net Revenues -Restrictions on Use of Certain District Net Revenues," although Property Tax Revenues are included in District Net Revenues and are available to pay debt service on the Preserve Proportionate Share of the Certificates, any use for that purpose would constitute an interfund loan that would need to be repaid. This limitation arises from the fact that the Property Tax Revenues are generated only in the following two improvement districts within the District's boundaries:

Improvement District 1: Improvement District 1, also known as the "eastern service area," was established to enable the annexation of territory for the purpose of delivering imported water supply.

Improvement District C: The boundaries of Improvement District C are coterminous with the boundaries of the District. Improvement District C was formed to provide wholesale water service.

As a result, Property Tax Revenues may legally be used only for purposes of the Water System, which includes the payment of debt service on the Water Proportionate Share of the Certificates. It is the District's practice to apply the Property Tax Revenues as a credit against the water rates that would otherwise be levied in the District.

Property Tax Limitations; Article XIIIA of the California Constitution

State of California voters, on June 6, 1978, approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the State of California Constitution. This amendment, which added Article XIIIA to the State of California Constitution, among other things, affects the valuation of real property for the purpose of taxation in that it defines the full cash value of property to mean "the county assessor's valuation of real property as shown on the 1975/76 tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or any reduction in the consumer price index or comparable local data, or any reduction in the event of declining property value caused by damage, destruction or other factors. The amendment further limits the amount of any ad valorem tax on real property to 1 % of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978. In addition, an amendment to Article

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XIIIA was adopted in June 1986 by initiative which exempts any bonded indebtedness approved by two-thirds of the votes cast by voters for the acquisition or improvement of real property from the 1 % limitation.

In the general election held November 4, 1986, voters of the State of California approved two measures, Propositions 58 and 60, which further amend Article XIIIA. Proposition 58 amends Article XIIIA to provide that the terms "purchased" and "change of ownership," for purposes of determining full cash value of property under Article XI I IA, do not include the purchase or transfer of (1) real property between spouses and (2) the principal residence and the first $1,000,000 of other property between parents and children.

Proposition 60 amends Article XI I IA to permit the State of California Legislature to allow persons over age 55 who sell their residence to buy or build another of equal or lesser value within two years in the same county, to transfer the old residence's assessed value to the new residence. Pursuant to Proposition 60, the State of California Legislature has enacted legislation permitting counties to implement the provisions of Proposition 60.

Implementing Legislation

Legislation enacted by the State of California Legislature to implement Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides that, notwithstanding any other law, local agencies may not levy any property tax, except to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and that each county will levy the maximum tax permitted by Article XIIIA of $4.00 per $100 assessed valuation (based on the traditional practice in the State of California of using 25% of full cash value as the assessed value for tax purposes). The legislation further provided that, for fiscal year 1978-79, the tax levied by each county was to be appropriated among all taxing agencies within the county in proportion to their average share of taxes levied in certain previous years.

The apportionment of property taxes in fiscal years after fiscal year 1978-79 has been revised pursuant to Statutes of 1979, Chapter 282 which provides relief funds from State moneys beginning in fiscal year 1978-79 and is designed to provide a permanent system for sharing State taxes and budget surplus funds with local agencies. Under Chapter 282, cities and counties receive about one-third more of the remaining property tax revenues collected under Proposition 13 instead of direct State of California aid. School districts receive a correspondingly reduced amount of property taxes, but receive compensation directly from the State of California and are given additional relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per $100 assessed valuation) and the bonded debt tax rate.

Effective as of fiscal year 1981-82, assessors in the State of California no longer record property values in the tax rolls at the assessed value of 25% of market values. All taxable property is shown at full market value (subject to a 2% annual limit in growth so long as property is not sold). In conformity with this change in procedure, all taxable property value included in this Official Statement is shown at 100% of market value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for bond service and pension liability are also applied to 100% of market value.

Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, annual inflationary value growth of up to 2%) will be allocated on the basis of

"situs" among the jurisdictions that serve the tax rate area within which the growth occurs except for certain utility property assessed by the State of California Board of Equalization ("Unitary

66

Property") which is allocated by a different method as described under "- Unitary Property" below.

Property Tax Collection Procedures

Classifications. In the State of California, property which is subject to ad valorem taxes is classified as "secured" or "unsecured." Secured and unsecured properties are entered on separate parts of the assessment roll maintained by the county assessor.

The secured classification includes property on which any property tax levied by the County becomes a lien on that property sufficient, in the opinion of the county assessor, to secure payment of the taxes. Every tax which becomes a lien on secured property has priority over all other liens on the secured property, regardless of the time of the creation of other liens. A tax levied on unsecured property does not become a lien against the taxes on unsecured property, but may become a lien on certain other property owned by the taxpayer.

Collections. The method of collecting delinquent taxes is substantially different for the two classifications of property. The taxing authority has four ways of collecting unsecured property taxes in the absence of timely payment by the taxpayer: ( 1) a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts an order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the county recorder's office, in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of the personal property, improvements or possessory interests belonging or assessed to the assessee. The exclusive means of enforcing the payment of delinquent taxes with respect to property on the secured roll is the sale of property securing the taxes to the State of California for the amount of taxes which are delinquent. A 10% penalty also applies to delinquent taxes on property on the unsecured roll, and further, an additional penalty of 1 Y,% per month accrues with respect to such taxes beginning the first day of the third month following the delinquency date.

The valuation of property is determined as of January 1 each year and equal installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on unsecured property are due August 1 and become delinquent August 31.

Supplemental Assessments. A bill enacted in 1983, SB 813 (Statutes of 1983, Chapter 498) provides for the supplemental assessment and taxation of property as of the occurrence of a change in ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date following the change and thus delayed the realization of increased property taxes from the new assessments for up to 14 months. As enacted, Chapter 498 provided increased revenue to redevelopment agencies to the extent that supplemental assessments as a result of new construction or changes of ownership occur within the boundaries of redevelopment projects subsequent to the tax lien date. To the extent such supplemental assessments occur within the District, Property Tax Revenues may increase.

Property Tax Administration Costs. In 1990, the State of California Legislature enacted SB 2557 (Chapter 466, Statutes of 1990) which allows counties to charge for the cost of assessing, collecting and allocating property tax revenues to local government jurisdictions on a prorated basis.

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Unitary Property

Commencing in fiscal year 1988-89, the Revenue and Taxation Code of the State of California changed the method of allocating property tax revenues derived from state assessed utility properties. It provides for the distribution of state assessed values to tax rate areas by a county-wide mathematical formula rather than assignment of state assessed value according to the location of those values in individual tax rate areas.

Commencing with fiscal year 1988-89, each county has established one county-wide tax rate area. The assessed value of all Unitary Property in the county has been assigned to this tax rate area and one tax rate is levied against all such property ("Unitary Revenues").

The property tax revenue derived from the assessed value assigned to the county-wide tax rate area shall be allocated as follows: (1) each jurisdiction will be allocated up to 2% of the increase in Unitary Revenues on a pro rata basis county-wide; and (2) any decrease in Unitary Revenues or increases less than 2%, or any increase in Unitary Revenues above 2% will be allocated among jurisdictions in the same proportion of each jurisdiction's Unitary Revenues received in the prior year to the total Unitary Revenues county-wide.

However, legislation adopted in 2006 (SB 1317, Chapter 872) and taking effect with fiscal year 2007-08 required counties to transfer certain railroad properties into a countywide tax rate area from their existing tax rate area. Taxes on these properties are now distributed in a manner similar to other unitary properties, except that redevelopment agencies no longer share in the distribution.

Assessment Appeals

An assessee of locally assessed or state-assessed property may contest the taxable value enrolled by the county assessor or by the State of California Board of Equalization ("SBE"), respectively. The assessee of SSE-assessed property or locally-assessed personal property, the valuation of which is subject to annual reappraisal, actually contests the determination of the full cash value of property when filing an assessment appeal. Because of the limitations to the determination of the full cash value of locally assessed real property by Article XI I IA, an assessee of locally assessed real property generally contests the original determination of the base assessment value of the parcel, i.e. the value assigned after a change of ownership or completion of new construction. In addition, the assessee of locally assessed real property may contest the current assessment value (the base assessment value plus the compounded annual inflation factor) when specified conditions have caused the full cash value to drop below the current assessment value.

At the time of reassessment, after a change of ownership or completion of new construction, the assessee may appeal the base assessment value of the property. Under an appeal of a base assessment value, the assessee appeals the actual underlying market value of the sale transaction or the recently completed improvement. A base assessment appeal has significant future revenue impact because a reduced base year assessment will then reduce the compounded value of the property prospectively. Except for the 2% inflation factor allowable under Article XIIIA, the value of the property cannot be increased until a change of ownership occurs or additional improvements are added.

Under Section 51 (b) of the Revenue and Taxation Code, the assessor may place a value on the tax roll lower than the compounded base assessment value if the full cash value of

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real property has been reduced by damage, destruction, depreciation, obsolescence, removal of property or other factors causing a decline in the value. Reductions in value under Section 51 (b), commonly referred to as Proposition 8 reductions, can be achieved either by formal appeal or administratively by assessor staff appraising the property. A reduced full cash value placed on the tax roll does not change the base assessment value. The future impact of a parcel subject to a Proposition 8 appeal is dependent upon a change in the conditions which caused the drop in value. In fiscal years following a successful Proposition 8 appeal, the assessor may determine that the value of the property has increased as a result of corrective actions or improved market conditions and enroll a value on the tax roll up to the parcel's compounded base assessment value. Additionally, successful appeals regarding property on the unsecured rolls do not necessarily affect the valuation of such property in any succeeding fiscal year.

Utility companies and railroads may contest the taxable value of utility property to the SBE. Generally, the impact of utility appeals is on the State-wide value of a utility determined by SBE.

The actual valuation impact to the District from successful assessment appeals will occur on the assessment roll prepared after the actual valuation reduction.

Historical Assessed Values and Property Tax Revenues

Set forth in the following table is a summary of (i) historical assessed values in the District for fiscal years 2012-13 through 2016-17, (i) Property Tax Revenues for fiscal years 2011-12 through 2015-16 and (iii) estimated Property Tax Revenues for fiscal year 2016-17. See "RISK FACTORS - Property Taxes."


Historic Assessed Values and Property Tax Revenues

FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16

Secured $11,722,832,402 $1 1 ,971 ,237, 1 1 1 $12,563,030,902 $13,171 ,519,043 H/0 Exemption Secured Utility Unsecured $278,365,937 $278,035,281 $282,729,796 $286,233,952

Total $12,001 ,198,339 $12,249,272,392 $12,845,760,698 $13,457,752,995

Change in Assessed Value N/A 2.07% 4.87% 4.76%

Property Tax Revenues (1) $2,395,863 $2,496,918 $2,610,830 $2,735,760

(1) Property Tax Revenues for fiscal year 2016-17 are estimated. Source: Padre Dam Municipal Water District.

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FY 2016-17

$13,732,617,215

$285,333, 779

$14,017,950,994

4.16%

$2,738,892

Rate of Col lections

The following table details the property tax delinquency rate in the District as of June 30 of the listed fiscal years.

Fiscal Year

201 5- 16 2014- 15 201 3-14 201 2- 13 201 1 - 12 201 0- 1 1 2009-1 0 2008-09


Property Tax Delinquency Rate Fiscal Years 2008-09 through 2015-16

Total Levy

$2,672,878 2,592,738 2,481 ,979 2,401 ,420 2,408,765 2,399,473 2,448,570 2,565,588

Collections 111

$2,658,573 2,576,244 2,465,306 2,379,971 2,375,533 2,362, 18 1 2,378,908 2,479,403

Delinquencies at end of FY

$14,305 1 6,494 1 6,673 21 ,449 33,232 37,292 69,662 86, 1 84

(1) Does not include collections of prior years' delinquencies. Source: Padre Dam Municipal Water District.

Delinquency Rate 0.54% 0.64 0.67 0.89 1.38 1.55 2.85 3.36

The Board of Supervisors of the County of San Diego has not adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the 'Teeter Plan"), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. As a result, the District can expect to receive its share of the ad valorem property tax levy with adjustments for delinquencies, refunds, interest and penalties. Additionally, because the Board of Supervisors of the County of San Diego has not been adopted the Teeter Plan, the amount of the levy of property tax revenue that will be allocated to the District depends upon the actual collections of the secured taxes within the District. Substantial delinquencies in the payment of property taxes could impair the timely receipt by the District of Property Tax Revenues.

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HISTORICAL AND PROJECTED DEBT SERVICE COVERAGE

Statement of Revenues and Expenses

The following table sets forth the District's statement of revenues and expenses based on the District's aud ited financial statements. The District's fiscal year 201 5- 1 6 aud ited financial statements are appended as Appendix C.


Statement of Revenues and Expenses Fiscal Years Ended June 30, 201 2 through June 30, 201 6

Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2011-12 2012-13 2013-14 2014-15

Operating Revenues (1) Water Operations (2) $34.628.310 $39.199.744 $43.035.859 $42.637.035 Waste Disposal Operations 14.651.455 15.544.162 16.016.064 15.589.443 Park Operations 4.553.223 4.692.903 4.891.704 5.109.641

Total Operating Revenues 53.832.988 59.436.809 63.943.627 63.336.119

Operating Expenses (3) Water Operations 34.051.003 35.178.988 38.137.991 40.679.625 Waste Disposal Operations 13.095.015 13.198.786 13.294.246 12.206.049 Park Operations 4.095.722 4.028.874 4.271.515 4.367.767

Total Operating Expenses 51.241.740 52.406.648 55.703.752 57.253.441 Operating Income (Loss) 2.591.248 7.030.161 8.239.875 6.082.678

Non-Operating Revenues (Expenses) Investment Income 102.372 39.269 182.994 173.744 Other Expenses Interest Expense (4) (3.038.014) (2.980.215) (2.730.720) (2.733.760) Restricted Investment Income 216.698 125.504 165.964 123.884 Taxes and Assessments 2.397.733 2.612.561 2.769.104 2.698.948 Gain on Sale of Assets 4.829 4.005 3.445 11.386 Settlement Income 12.349.602 Other Nonoperating (199.240) Loss on Abandonment of Assets (6.026.640) (5)

Total Non-Operating Revenues (Expenses) (6.343.022) (398.116) 390.787 12.623.804

Income (Loss) Before Contributions (3.751.774) 6.632.045 8.630.662 18.706.512 Capital Contributions 13.800.374 6.337.006 4.350.288 3.899.640 Change in Net Assets 10.048.600 12.969.051 12.980.950 22.606.152 Total Net Assets at Beginning of Year, as Originally Stated 206.136.136 217.426.313 229.795.442 242.776.392 Prior Period Adjustment (6)(7)(8) 1 .241.577 (599.922) (36.223.351) Total Net Assets at Beginning of Year, as Restated 207.377.713 216.826.391 229.795.442 206.553.041

TOTAL NET ASSETS $217.426.313 $229.795.442 $242.776.392 $229.159.193

(1) Includes revenues from retail water, sewer and park operations but excludes property taxes reported as non-operating. (2) Includes recycled water revenue but excludes property tax revenue reported as non-operating. (3) Includes Depreciation and excludes Interest Expense. (4) Represents all interest on indebtedness and other obligations of the District, net of capitalized interest. (5) Represents a one-time adjustment to property previously purchased by the District.

Fiscal Year 2015-16

$39.421.377 15.755.212 5.423.050

60.599.639

36.747.359 14.250.648 4.591.793

55.589.800 5.009.839

443.844

(2.630.634) 160.000

2.789.112 10.534

772.856

5.782.695 6.144.804

11 .927.499

229.159.193

229.159.193

$241.086.692

(6) Prior period adjustment in fiscal year 2011-12 resulting from implementation of GASB Statement No. 51, "Accounting and Financial Reporting for Intangible Assets."

(7) Prior period adjustment in fiscal year 2012-13 resulting from implementation of GASB Statement No. 65, "Items Previously Reported as Assets and Liabilities."

(8) Prior period adjustment in fiscal year 2014-15 resulting from implementation of GASB Statement No. 68 and GASB Statements No. 71.


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Historical District Net Revenues

Set forth in the following tables are calculations of the various components of District Net Revenues, except Property Tax Revenues (see "PROPERTY TAX REVENUES - H istorical Assessed Values and Property Tax Revenues"). Although the definitions of Preserve System Gross Revenue, Water System Gross Revenue and Sewer System Gross Revenue under the Trust Agreement include amounts on deposit in the related Rate Stabil ization Fund and Capital Replacement Fund, the following tables do not reflect any such amounts.

Preserve System Gross Revenues Preserve System O&M Preserve System Net Revenues


Preserve System Net Revenues Fiscal Years 201 1-12 through 2015-16

Fiscal Year

201 1 -1 2 $4,562,845

3,462,385 $1,100,461

Fiscal Year 2012-13

$4,699,657 3,306,442

$1,393,215

Fiscal Year 2013-14

$4,896,915 3,544,482

$1,352,433


Sewer System Gross Revenues Sewer System O&M Sewer System Net Revenues


Sewer System Net Revenues Fiscal Years 201 1 -1 2 through 2015-16

Fiscal Year 201 1 -1 2

$15,059,084 12,255, 192

$ 2,803,893

Fiscal Year 2012-13

$15,929,831 12,235,786 $3,694,045

Fiscal Year 2013-14

$16,878,374 12,322,295 $4,566,079


Water System Revenues Property Tax Revenue Water System Gross Revenues Water System O&M Water System Net Revenues


Water System Net Revenues <1 1

Fiscal Years 201 1-12 through 2015-16

Fiscal Year Fiscal Year Fiscal Year

201 1 -2012 2012-13 2013-14 $36,361 ,511 $39,932,414 $45, 126, 120

2,397,734 2,612,562 2,769, 106 38,762,245 42,544,976 47,895,226 29,577,471 30,278,590 33,014,243

$ 9,184,774 $12,266,386 $14,880,983

Fiscal Year 2014-15

$5,116,720 3,610,246

$1 ,506,474

Fiscal Year 2014-15

$15,678,076 11 ,134,313 $4,543,763

Fiscal Year

2014-15 $43, 150,688

2,698,947 45,849,635 35,632,834

$10,216,800

Fiscal Year 2015-16

$5,436,630 3,836,489

$1 ,600,141

Fiscal Year 2015-16

$16,967,379 13,172,714 $3,794,664

Fiscal Year

2015-16 $40,980,225

2,789,112 43,769,337 31,247,630

$12,521 ,707

(1) Property Tax Revenues may legally be used only for purposes of the Water System. It is the District's practice to apply the Property Tax Revenues as a credit against the water rates that would otherwise be levied in the District.


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Historical Debt Service Coverage

The following table presents historical debt service coverage based on District Net Revenues.


Historical Debt Service Coverage Fiscal Years Ended June 30, 201 2 through June 30, 201 6

Fiscal Year Fiscal Year Fiscal Year Fiscal Year

201 1 -2012 2012-13 2013-14 2014-15 District Net Revenues

Water System Net Revenues $ 9.184.774 $12.266.386 $14.880.983 $10.216.800 Sewer System Net Revenues 2.803.893 3.694.045 4.566.079 4.543.763 Preserve System Net Revenues 1 .100.461 1.393.215 1.352.433 1 .506.474

Total District Net Revenues $13.089.128 $17.353.646 $20.799.495 $16.267.037

Parity Debt Service 1996 Installment Payments $1.047.688 $1.047.688 $ $ 2004 Installment Payments 445.268 446.423 2009 Installment Payments 3.099.881 3.128.906 3.171.356 3.171.019 2013 Bonds 1.401.158 1.399.125

Total Parity Debt Service $4.592.837 $4.623.017 $4.572.514 $4.570.144

Parity Debt Service Coverage 2.85 3.75 4.55 3.56

Fiscal Year

2015-16

$12.521 .707 3.794.664 1 .600.141

$17.916.512

$

3.161.906 1.461.950

$4.623.856

3.87

(1) Property Tax Revenues are in cluded in District Net Revenues. However, Property Tax Revenues may legally be used only for purposes of the Water System. It is the District's practice to apply the Property Tax Revenues as a credit against the water rates that would otherwise be levied in the District.


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Projected Debt Service Coverage

The following table sets forth projected District Net Revenues and debt service coverage for the Installment Payments and the 2013 Bonds for fiscal years 2016-17 through and including 2020-21. The projected results are based on actual results for fiscal year 2016-17 and the District's estimates and projections that are anticipated to be included in its five year budget for fiscal years 2017-18 through and including 2021-22 which is currently in process of being prepared.

Water System Net Revenues for fiscal year 2016-17 are forecasted to be higher than the previous two fiscal years ($1.4 million above fiscal year 2014-15 and $0.6 million above fiscal year 2015-16) due to drought-related bounce-back demands; Water System operating expenses for fiscal year 2016-17 are also forecasted to be higher as a result of increased water purchases to meet the demand bounce-back. For future fiscal years, Water System demand is projected conservatively and Water System revenues are expected to increase due to proposed rate increases. The District also expects Sewer System Gross Revenues to increase during the same time period due to proposed rate increases. In addition, operating expenses for fiscal years 2017-18 through 2020-21 are anticipated to increase annually based on the assumptions below for both the Water System and Sewer System and any increases in supplier costs are anticipated to be passed through to customer rates.

Growth and Rate Adjustments: Fiscal year 2017-18 projections assume Water System acre foot sales will increase 3% over calendar year 2016. Overall rates are projected to increase by 3% for potable water, 4% for recycled water and 3% for the Sewer System with a proportionality higher increase on fixed charges to ensure revenue stability. Revenues for the Preserve System are projected to increase 4% whether as a result of increased rates, increased occupancy levels, or both. Fiscal years 2018-19 through 2020-21 conservatively assume no increase in the acre-foot demand for water. Overall rates are projected to increase by 3% for potable water, 4% for recycled water and 3% for the Sewer System with a proportionality higher increase on fixed charges to ensure revenue stability. Revenues for the Preserve System are projected to increase between 2.5% and 4% whether as a result of increased rates, increased occupancy levels, or both. Projections assume rates will be consistent with the rates described in 'THE WATER SYSTEM - Current Water Rates" and "THE SEWER SYSTEM - Current Sewer Rates."

Interest earnings: The projections for fiscal years 2016-17 through 2020-21 assume interest earnings of 2%.

Expenses: The projections for fiscal years 2016-17 through 2020-21 assume annual operation and maintenance expenses of the Water System and Sewer System will increase by an average of 5.3% annually, based on the following: a 4.6% average annual increase in salaries and wages, a 10.2% average annual increase in benefits, 5% average annual increase in utility costs and a 5% average annual increase in other expenses. All increases from suppliers for the cost of water, treatment of wastewater or energy for pumping will be passed on to customers in the form of a rate adjustment equal to the amount of the increase. With respect to the Preserve System, the projections assume 2.5-4% increases for other operating expenses and an annual average increase of 6.2% for administration and general expenses.

Property Tax Revenues: The projections assume 3% annual increases in assessed property values for fiscal years 2017-18 through 2020-21.

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Rate Stabilization Funds and Capital Replacement Funds: For the purposes of projected debt service coverage, it is assumed that moneys in the Rate Stabilization Funds and the Capital Replacement Funds, if any, will not be used to pay principal of and interest with respect to the Certificates or the 2013 Bonds.

The financial forecast represents the District's estimate of projected financial results based upon its judgment of the most probable occurrence of certain important future events. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. The obligation of the District to make principal and interest payments on the Certificates under the Installment Purchase Agreement is limited to District Net Revenues and the District is not obligated to apply any other revenues to make such principal and interest payments.

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Projected Debt Service Coverage Fiscal Years Ended June 30, 201 7 through June 30, 2021

Fiscal Year Fiscal Year Fiscal Year 2016-17 2017-18 2018-19

District Net Revenues $8,840,540 $7,856,248 $9,824,339 Water System Net Revenues 2,738,892 2,821,059 2,877,000 Sewer System Net Revenues 557,314 1,826,421 2,767,731 Preserve System Net Revenues 1,632,412 1,507,426 1,405,295 Property Tax Revenues (1) $13,769,158 $14,011,154 $16,874,365 Total District Net Revenues

Parity Debt Service 2009 Installment Payments $3,160,406 $ $ Installment Payments 3,907,677 3,909,481 2013 Bonds Debt Service 1,066,151 412,250 408,725

Total Parity Debt Service $4,226,557 $4,319,927 $4,318,206

Parity Debt Service Coverage 3,26 3,24 3,91

Preserve System Debt Service Installment Payments $ $490,728 $491,870 2013 Bonds 405,025 412,250 408,725

Total Preserve System Debt Service $405,025 $902,978 $900,595 Preserve System Net Revenues 1 ,632,412 1,507,426 1,405,295 Preserve System Net Revenues Debt Service Coverage 4,03 1,67 1 ,56

Sewer System Debt Service 2013 Bonds $224,783 $ $

Total Sewer System Debt Service $224,783 Sewer System Net Revenues 557,314 Sewer System Net Revenues Debt Service Coverage (2) 2.48

Water System Debt Service 2009 Installment Payments $3,160,406 $ $ Installment Payments 3,416,949 3,417,611 2013 Bonds 436,343

Total Water System Debt Service $ 3,596,749 $3,416,949 $3,417,611

Water System Net Revenues and Property Tax $11,579,432 $10,677,307 $12,701,339 Revenues

Water System Net Revenues/Property Tax Debt Service 3,22 3,12 3,72 Coverage (3)

Fiscal Year Fiscal Year 2019-20 2020-21

$10, 504,933 $10,570,725 2,935,000 2,994,000 2, 151 ,386 2,146,291 1,418,838 1,397,468

$17,010,157 $17,108,484

$ $ 3,909,481 3,909,481

409,700 405,050 $4,319,181 $4,314,531

3,94 3,97

$491,370 $490,370 409,700 405,050

$901,070 $895,420 1,418,838 1,397,468

1 ,57 1 ,56

$ $

$ $ 3,417,736 3,417,736

$3,417,736 $3,417,736

$13,439,933 13,564,725

3,93 3,97

(1) Property Tax Revenues may legally be used only for purposes of the Water System. It is the District's practice to apply the Property Tax Revenues as a credit against the water rates that would otherwise be levied in the District.

(2) Does not in clude Preserve System Net Revenues or Water System Net Revenues, although they are legally available through fiscal year 2016-17 to pay the Sewer Proportionate Share of the 2013 Bonds.

(3) Does not in clude Preserve System Net Revenues or Sewer System Net Revenues, although they are legally available to pay the Water Proportionate Share of the Certificates and, through fiscal year 2016-17, the Water Proportionate Share of the 2013 Bonds.


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RISK FACTORS

The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating the risks in the purchase of the Certificates.

Demand and Usage

There can be no assurance that the local demand for services provided by the Water System, the Sewer System and the Preserve System will continue according to historical levels. See "THE WATER SYSTEM - Water Demand." Reductions in the level of demand could require an increase in rates or charges in order to produce District Net Revenues sufficient to comply with the District's rate covenants in the Installment Purchase Agreement. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand, although studies have shown that water demand is price inelastic.

In addition, drought conditions and voluntary or mandatory conservation measures could decrease usage of the services of the Water System and the Sewer System. See 'THE WATER SYSTEM - WATER DEMAND" for a description of existing restrictions on water usage. Reduction in usage could require an increase in rates or charges in order to produce Water System Net Revenues and Sewer System Net Revenues sufficient to comply with the District's rate covenants, particularly the rate covenants described in "SECURITY FOR THE CERTIFICATES - Rate Covenants - Water System Net Revenues."

Expenses

There can be no assurance that Operation and Maintenance Expenses of the Preserve System, the Sewer System and the Water System will be consistent with the levels described in this Official Statement. Changes in technology, increases in the cost of energy or other expenses and increased regulatory requirements would reduce District Net Revenues, and could require substantial increases in rates or charges in order to comply with the rate covenant. Such rate increases could increase the likelihood of nonpayment, and could also decrease demand.

Property Taxes

The amount of Property Tax Revenues is dependent upon assessed values and property tax collections in the District. Decreases in assessed values (whether as a result of assessment appeals or otherwise) and increased property tax delinquencies will result in reduced Property Tax Revenues.

In addition, the amount of Property Tax Revenues is dependent upon State action. In previous years the State of California has reallocated ad valorem property tax revenues from local agencies such as the District. On November 2, 2004, California voters approved Proposition 1A, which amended the State of California Constitution to significantly reduce the State of California's authority over major local government revenue sources. Under Proposition 1A, the State of California cannot, without providing replacement funding, (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-third approval of both houses of the State of California Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Proposition 1A allows the

77

State of California to borrow up to 8% of total local property tax revenues during a fiscal emergency declared by the Governor. Pursuant to Proposition 1 A, the funds must be repaid within three years; if the funds are not repaid within three years, the State of California may not borrow additional funds for 10 years.

The District can provide no assurance that its Property Tax Revenues will not be adversely affected by action of the State of California in the future. However, pursuant to Ordinance No. 2011-05, the District is authorized to pass through any reduction in or elimination of ad valorem property taxes. See 'THE DISTRICT - Pass Through Ordinance and Energy Charges" for additional information regarding Ordinance No. 2011-05.

As described in "SECURITY FOR THE CERTIFICATES - District Net Revenues -Restrictions on Use of Certain District Net Revenues" and "PROPERTY TAX REVENUES -Limited Use of Property Tax Revenues," although Property Tax Revenues are included in District Net Revenues and are available to pay debt service on the Preserve Proportionate Share of the Certificates and the Water Proportionate Share of the Certificates, any use for that purpose would constitute an interfund loan that would need to be repaid; Property Tax Revenues can only be used for purposes of the Water System, which includes payment of the Water Proportionate Share of the Certificates.

Parity Debt

Although the District has covenanted not to issue additional obligations payable from District Net Revenues senior to the Certificates, the Installment Purchase Agreement permits the issuance by the District of certain indebtedness which may have a lien upon the District Net Revenues which is on a parity basis to the lien which secures the Certificates and Installment Payments.

These coverage tests involve, to some extent, projections of District Net Revenues. If such indebtedness is issued, the debt service coverage for the Certificates will be diluted below what it otherwise would be subject to under the coverage tests. Moreover, there is no assurance that the assumptions that form the basis of such projections, if any, will be actually realized subsequent to the date of such projections. If such assumptions are not realized, the amount of future District Net Revenues may be less than projected, and the actual amount of District Net Revenues may be insufficient to provide for the payment of the Certificates and such additional indebtedness.

See 'THE CERTIFICATES - Prior Parity Debt; Limitations on Parity Debt and Superior Obligations" for a description of the conditions that must be satisfied prior to the District incurring Parity Debt in the future, such as the potential AWP Program State Loan. See 'THE WATER SYSTEM - Source of Water - Potential Participation in AWP Program and Issuance of Related Parity Debt" for a discussion regarding the District's potential participation in the AWP Program and the related AWP Program State Loan.

Threat to Water Supply

The District primarily receives its water from the San Diego County Water Authority, which currently purchases most of its water from MWD.

MWD's principal sources of water are the State Water Project and the Colorado River, both of which are subject to drought conditions that have recently contributed to lower overall

78

water deliveries to MWD. Recent drought conditions and court-ordered restrictions, including but not limited to restrictions under the Federal and California Endangered Species Acts, have placed additional limitations on MWD's ability to acquire and transport water supplies to its member agencies. Effective July 1, 2009, MWD allocates available supplies among its member agencies pursuant to a Water Supply Allocation Plan, and may be unable to provide all water deliveries requested by its member agencies. A reduction in water deliveries to its member agencies might adversely affect MWD's net operating revenues, which could lead to an increase in MWD's rates and charges. The MWD Official Statement described in the section of this Official Statement entitled 'THE WATER SYSTEM - Source of Water" includes a discussion of MWD's water sources and the impact of drought conditions and environmental restrictions.

The CWA Official Statement described above also includes a discussion of drought and environmental conditions that could impact the availability of water from CWA. See 'THE WATER SYSTEM - Source of Water."

Natural Disasters

The District, like all southern California communities, is likely to be subject to unpredictable seismic activity, fires or floods. If there were a severe seismic, flood or fire event in the District, there could be substantial damage to and interference with the District, including the Preserve System, the Sewer System and the Water System, which could affect the District's ability to pay principal and interest with respect to the Certificates.

Seismic Activity. The District is not located in the immediate vicinity of any known faults. The Elsinore Fault (Julian Segment) and the Rose Canyon Fault are the closest known potentially active faults. Historically, the County of San Diego has periodically experienced low magnitude earthquakes. According to the US GS/CGS Probabilistic Seismic Hazard Assessment Model 2002, the District is located within an area which has a 10% probability of exceeding a 0.3g (g-9.8 ms) peak ground acceleration every 50 years.

Although an earthquake could potentially impact all District assets, the cost of repairing the District's distribution systems (i.e., system piping) as a result of earthquake damage is expected to be negligible.

In addition, all reservoirs constructed after 1988 are assumed to be resistant to earthquake due to the seismic requirements of the 1988 Uniform Building Code. All reservoirs built prior to 1988 are assumed to require 100% reconstruction in the event of an earthquake resulting in a peak ground acceleration of 0.3g. There are 20 District reservoirs that were constructed prior to 1988.

Flooding Hazards. Portions of the District lie in 100-year floodplains, including more than 1,000 acres in the City of Santee. The District utilized FEMA's Flood Insurance Rate Map (FIRM) to determine which of the District's assets lie within a 100-year flood plain. A portion of the District's assets within a 100-year flood plain are constructed underground and would experience negligible damage in the event of a large-scale flood. The District's reservoirs are not considered to be potentially susceptible to flooding because all of the reservoirs are located in elevated locations. Also, the effect of flooding on the distribution system piping is not expected to be significant because the piping is submerged and waterproof by design. There are four

79

area dams ( one of which is owned by the District) and other District assets that are vulnerable to dam failure because they are in "Dam Inundation Zones."

Fire Hazards. The District, like all California communities, may be subject to wildfires. The District is located in the County of San Diego, which suffered a major wildfire disaster in October 2003 and again in May 2014. The wildfires in October 2003 burned more than 250,000 acres and destroyed more than 3,000 homes, of which 580 homes were located within the boundaries of the District. The wildfires in May 2014 burned more than 26,000 acres and destroyed an estimated 65 structures.

Articles XIIIC and XIIID of the California Constitution

General. On November 5, 1996, California voters approved Proposition 218, the socalled "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State of California Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property-related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property-related "fee" or "charge," which is defined as "any levy other than an ad valorem tax, a special tax or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service" (and referred to in this section as a

"property-related fee or charge").

On November 2, 2010, California voters approved Proposition 26, the so-called "Supermajority Vote to Pass New Taxes and Fees Act". Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State of California Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as "fees." Proposition 26 amended Articles XIIIA and XIIIC of the State of California Constitution. The amendments to Article XIIIA limit the ability of the State of California Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the State of California Legislature. Proposition 26's amendments to Article XIIIC broadly define "tax," but specifically exclude, among other things:

"(1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

(2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.

(6) A charge imposed as a condition of property development. (7) Assessments and property-related fees imposed in accordance with the

provisions of Article XIII D."

Property-Related Fees and Charges. Under Article XIIID, before a municipality may impose or increase any property-related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The municipality must then hold a hearing upon the proposed imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written

80

protests against the proposal, the municipality may not impose or increase the property-related fee or charge.

Further, under Article XIIID, revenues derived from a property-related fee or charge may not exceed the funds required to provide the "property-related service" and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property-related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property-related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question. Article XIIID is the basis for the limitations on the use of Water System Net Revenues and Sewer System Net Revenues described in "SECURITY FOR THE CERTIFICATES - District Net Revenues."

Initiative Power. In addition, Article XIIIC states that "the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the State of California Legislature nor any local government charter shall impose a signature requirement higher than that applicable to statewide statutory initiatives."

Judicial Interpretation of Articles XI/IC and XI/ID. After Proposition 218 was enacted in 1996, appellate court cases and an Attorney General's opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property-related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three recent cases have held that certain types of water and wastewater charges could be subject to the requirements of Article XI I ID under certain circumstances.

In Richmond v. Shasta Community Services District (2004) 32 Cal.4th 409, the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain charges related to water service. In Richmond, the Court held that capacity charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID.

In Howard Jarvis Taxpayers Association v. City of Fresno (2005) 127 Cal.App.4th 914, the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property-related fees subject to Proposition 218 and a municipality must comply with Article XIIID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno's petition for review of the Court of Appeal's decision on June 15, 2005.

In July 2006 the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, addressed the validity of a local voter initiative measure that would have (a) reduced a water agency's rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency's charges for ongoing water delivery are "fees and charges" within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also "fees" within the meaning of Article XIIIC's mandate

81

that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency's water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.)

The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate's initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due.

Articles XI/IC and XI/ID and the District's Rates and Charges. The District's current water rates and sewer rates were adopted on August 15, 2012 by Ordinance No. 2012-05 and Ordinance No. 2012-06, respectively, following notice to property owners and a public hearing held at least 45 days after the notice had been mailed, in compliance with the Bighorn decision. The District is currently working with a consultant on a comprehensive cost of service and rate study to determine revenue requirements for its operations and related rates needed for fiscal years 2017-18 through 2021-22. The Board of Directors of the District is anticipated to consider adopting the rates proposed in response to such study in June 2017. See 'THE WATER SYSTEM - Current Water Rates" and 'THE SEWER SYSTEM - Current Sewer Rates" above.

The District believes its water rates and charges and its sewer rates and charges do not constitute "taxes" under Article XIIIC as revised by Proposition 26 because, as described in subsection 1 (e)(7) of Article XIIIC, they are "property-related fees imposed in accordance with the provisions of Article XIIID" (and are also charges for a "property-related service" as defined in subsection 2(g) of Article XIIID) and because, as described in subsection 1 (e)(2) of Article XIIIC, they are charged for water and sewer service, "a specific government service or product provided directly to the payor that is not provided to those not charged."

The District will continue to comply with the provisions of Articles XIIIC and XIIID in connection with future rate increases.

Conclusion. It is not possible to predict how courts will further interpret Article XIIIC and Article XIIID in future judicial decisions, and what, if any, further implementing legislation will be enacted.

Under the Bighorn case, local voters could adopt an initiative measure that reduces or repeals the District's rates and charges, although it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness.

There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XIIIC and Article XIIID to limit the ability of local agencies to impose, levy, charge and collect increased fees and charges for utility service, or to call into question previously adopted utility rate increases.

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Limited Recourse on Default

If the District defaults on its obligation to make Installment Payments, the Trustee, as assignee of the Corporation, has the right to accelerate the total unpaid principal amounts of the Installment Payments. However, in the event of a default and such acceleration there can be no assurance that the District will have sufficient District Net Revenues to pay the accelerated Installment Payments.

Limitations on Remedies Available; Bankruptcy

The enforceability of the rights and remedies of the Owners and the obligations of the District may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors' rights generally, now or hereafter in effect; equitable principles which may limit the specific enforcement under State law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercising of powers by the federal or State government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights.

Limited Obligation

The District's obligation to make Installment Payments is a special obligation of the District payable solely from District Net Revenues ( subject to the limitations described in

"SECURITY FOR THE CERTIFICATES - District Net Revenues - Restrictions on Use of Certain District Net Revenues") and other funds provided for in the Installment Purchase Agreement. Although District Net Revenues includes ad valorem property taxes allocated to the District, the District has not agreed to levy any form of taxation to pay the Installment Payments. The obligation of the District to pay Installment Payments does not constitute a debt or indebtedness of any City, the State of California or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction.

Change in Law

In addition to the other limitations described in this Official Statement, the State of California electorate or Legislature could adopt a constitutional or legislative property tax decrease or an initiative with the effect of reducing revenues payable to or collected by the District. There is no assurance that the State of California electorate or Legislature will not at some future time approve additional limitations that could have the effect of reducing the District Net Revenues and adversely affecting the security of the Certificates.

To mitigate possible loss of revenue as a result of the current State of California budget situation, the District adopted Ordinance No. 2011-05, which authorizes the pass through of any reduction in or elimination of ad valorem property taxes allocated to the District as a result of actions by the State of California commencing July 1, 2012 through and including July 1, 2017. See "THE DISTRICT - Pass Through Ordinance and Energy Charges" for additional information regarding Ordinance No. 2011-05.

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See also"- Loss of Tax Exemption" below.

Loss of Tax Exemption

As discussed in this Official Statement under the caption "CONCLUDING INFORMATION - Tax Matters," interest with respect to the Certificates could become includable in gross income for purposes of federal income taxation retroactive to the date the Certificates were issued, as a result of future acts or omissions of the District in violation of its covenants in the Installment Purchase Agreement or Trust Agreement. In addition, current and future legislative proposals, if enacted into law, may cause interest on the Certificates to be subject, directly or indirectly, to federal income taxation by, for example, changing the current exclusion or deduction rules to limit the aggregate amount of interest on state and local government bonds that may be treated as tax exempt by individuals. Should such an event of taxability occur, the Certificates are not subject to a special prepayment and will remain outstanding until maturity or until prepaid under one of the other prepayment provisions contained in the Trust Agreement.

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CONTINUING DISCLOSURE

The District will covenant for the benefit of owners of the Certificates to provide certain financial information and operating data relating to the District by the date that is nine months after the end of the District's Fiscal Year (currently March 31 based on the District's Fiscal Year end of June 30), commencing with the report for the 2016-17 fiscal year (the "Annual Report"), and to provide notices of the occurrence of certain enumerated events. Such reports are required to be filed with EMMA. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events is described in "APPENDIX E - FORM OF CONTINUING DISCLOSURE CERTIFICATE," attached to this Official Statement. These covenants have been made in order to assist the purchaser of the Bonds in complying with Securities Exchange Commission Rule 15c2 12(b)(5) (the "Rule").

The District and its related governmental entities have previously entered into numerous disclosure undertakings under the Rule in connection with the issuance of long-term obligations. See "APPENDIX C - AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2016, Notes to Financial Statements, Note 5." Over the past five years, the District has complied in all material respects with its continuing disclosure requirements relating to its long-term obligations.

CONCLUDING INFORMATION

Competitive Sale of Certificates

The Certificates were sold pursuant to a competitive bidding process held on June 1, 2017 pursuant to the terms set forth in the Official Notice of Sale for the Certificates (the "Official Notice of Sale").

The Certificates were awarded to Mesirow Financial, Inc. (the "Purchaser"), whose proposal represented the lowest true interest cost for the Certificates as determined in accordance with the Official Notice of Sale. The Purchaser has agreed to purchase the Certificates at a purchase price of $57,810,126.37 (which is equal to the principal amount of the Certificates ($53, 195,000.00), plus a net original issue premium of $5,018,078.50 and less a Purchaser's discount of $402,952.13).

The Purchaser intends to offer the Certificates to the public at the offering prices set forth on the cover page of this Official Statement. The Purchaser may offer and sell to certain dealers and others at a price lower than the offering prices stated on the cover page hereof. The offering price may be changed from time to time by the Purchaser.

Legal Opinions

All legal matters in connection with the issuance of the Certificates are subject to the approval of Best Best & Krieger LLP, San Diego, California, Special Counsel. A copy of the approving opinion of Special Counsel will be provided to the registered owners of the Certificates, and the forms of such opinion is attached hereto as Appendix D. Certain legal matters will be passed upon for the District by the general counsel to the District, and Jones Hall, A Professional Law Corporation, is acting as Disclosure Counsel to the District.

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Tax Matters

Federal Tax Law Status. In the opinion of Best Best & Krieger LLP, San Diego, California, Special Counsel, subject, however, to the qualifications set forth below, under existing law, the portion of Installment Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations.

The opinions set forth in the preceding paragraph are subject to the condition that the District comply with all requirements of the Code that must be satisfied subsequent to the execution and delivery of the Certificates in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of the portion of Installment Payments designated as and comprising interest and received by the owners of the Certificates in gross income for federal income tax purposes to be retroactive to the date of execution and delivery of the Certificates. Special Counsel expresses no opinion regarding other federal tax consequences arising with respect to the Certificates.

State Tax Law Status. In the further opinion of Special Counsel, the portion of Installment Payments designated as and comprising interest and received by the owners of the Certificates is exempt from California personal income taxes.

Tax Treatment of Original Issue Discount and Premium. To the extent the issue price of any maturity of the Certificates is less than the amount to be paid at maturity of such Certificates (excluding amounts stated to be interest and payable at least annually over the term of such Certificates), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each Owner thereof, is treated as interest which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Certificates is the first price at which a substantial amount of such maturity of the Certificates is sold to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Certificates accrues daily over the term to maturity of such Certificates on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Certificates to determine taxable gain or loss upon disposition (including sale, redemption or payment on maturity) of such Certificates. Owners of the Certificates should consult their own tax advisors with respect to the tax consequences of ownership of Certificates with original issue discount, including the treatment of purchasers who do not purchase such Certificates in the original offering to the public at the first price at which a substantial amount of such Certificates is sold to the public.

Certificates purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity ( or, in some cases, at their earlier call date) ("Premium Certificates") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of tax-exempt obligations, like the Premium Certificates, the interest on which is excluded from gross income for federal income tax purposes. However, a purchaser's basis in a Premium Certificate, and under Treasury Regulations, the amount of tax exempt interest received will be reduced by the amount of

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amortizable bond premium properly allocable to such purchaser. Owners of Premium Certificates should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

Owners of the Certificates should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the Certificates may have federal or state tax consequences other than as described above. Special Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Certificates other than as expressly described above.

Form of Special Counsel Opinion. The form of the opinion of Special Counsel relating to the Certificates is attached hereto as Appendix D.

Litigation

Except as described herein, the District is not aware of any litigation pending or threatened concerning the validity of the Certificates or challenging any action taken by the District with respect to the Installment Purchase Agreement, the Trust Agreement or any other agreements or actions undertaken in connection with the issuance of the Certificates or the payment of principal and interest on the Certificates. Furthermore, the District is not aware of any pending or threatened litigation to restrain, enjoin, question or otherwise affect the Indenture or in any way contesting or affecting the validity or enforceability of any of the foregoing or any proceedings of the District taken with respect to any of the foregoing.

The District is subject to a number of lawsuits in the ordinary conduct of its affairs. The District believes that, including the potential City of San Diego litigation described in the following paragraph, there are no claims or actions, threatened or pending which, if determined against the District, either individually or in the aggregate, would have a material adverse effect on the financial condition of the District or the District Net Revenues.

The District transports a portion of its sewage through a pipeline system owned and operated by the City of San Diego, an arrangement that has been in effect since a contract was executed in 1974. The City of San Diego made substantial improvements in the system in the mid-1990s. The City of San Diego has told the District that it believes the District owes the City of San Diego approximately $7.5 million for the District's share of the improvements. The District disputes any obligation to pay a share of said improvements. The City of San Diego has not formally threatened to sue the District, but the two parties will be negotiating a new Sewage Transportation Agreement (the current agreement expires on December 31, 2050) and, absent a resolution of this matter, there is at least a possibility that the City of San Diego would sue the District to recover the disputed amount.

Financial Statements

White Nelson Diehl Evans, LLP, Certified Public Accountants and Consultants (the "Auditor"), audited the financial statements of the District for the Fiscal Year ended June 30, 2016. The Auditor's examination was made in accordance with generally accepted auditing standards and Governmental Auditing Standards, issued by the Comptroller General of the United States. See "APPENDIX C - AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2016."

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The Auditor consented to the District including the audited financial statements as an appendix to this Official Statement. However, the Auditor has not performed any post-audit review of the financial condition or operations of the District.

Ratings

S&P Global Ratings, a Standard & Poor's Financial Services LLC business, and Fitch Ratings have assigned a rating of "AA+" and "AA", respectively, to the Certificates.

These rating reflect only the views of the rating agencies, and an explanation of the significance of these ratings, and any outlook assigned to or associated with these ratings, should be obtained from the rating agencies.

Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. The District has provided certain additional information and materials to the rating agencies (some of which does not appear in this Official Statement).

There is no assurance that this rating will continue for any given period of time or that this rating will not be revised downward or withdrawn entirely by one or both rating agencies, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of any rating on the Certificates may have an adverse effect on the market price or marketability of the Certificates.

Municipal Advisor

Fieldman Rolapp & Associates, Inc. is acting as municipal advisor to the District in connection with execution and delivery of the Certificates.

Miscellaneous

All of the descriptions of California laws, other applicable legislation, the Installment Purchase Agreement, the Trust Agreement, the District, the Corporation, agreements and other documents are made subject to the provisions of such legislation and documents respectively and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District for further information in connection therewith.

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Any statements made in this Official Statement involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized.

The execution and delivery of this Official Statement has been duly authorized by the District.

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By: is/ Karen Jassov �� Authorized Representative

[THIS PAGE IN1ENTIONALLY LEFT BLANK]

APPENDIX A

SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS

The following is a summary of certain provisions of the Trust Agreement and the Installment Purchase Agreement and is supplemental of other provisions of such documents described elsewhere in this Official Statement. This summary does not purport to be comprehensive or definitive, and reference should be made to such documents for full and complete statements of their respective provisions. All capitalized terms used but not otherwise defined in this Appendix shall have the meanings assigned to such terms in the Trust Agreement and the Installment Purchase Agreement.

TRUST AGREEMENT

DEFINITIONS

Unless the context otherwise requires, the terms defined below shall have the meanings for purposes of the Trust Agreement and the Installment Purchase Agreement.

"20 13 Bonds" shall mean the Padre Darn Municipal Water District Revenue Refunding Bonds, Series 2013A (Bank Qualified) originally issued in the aggregate principal amount of $7,225,000.

" 2013 Indenture of Trust" means the Indenture of Trust, dated as of May 1 , 2013 , by and between the District and The Bank of New York Mellon Trust Company, N.A. relating to the District's 2013 Bonds.

"Acquisition and Construction Costs" means the purchase prices for the acquisition of the property and easements which are necessary for the construction and installation of the Project and the contract prices paid or to be paid for the design, acquisition, construction, installation or delivery of any portion of the Project and related facilities, in accordance with a purchase or construction contract therefore. Acquisition and Construction Costs include any other administrative, engineering, legal, financial and other costs incurred by the District and the Seller in connection with the construction, installation and financing of the Project, including costs incurred prior to the date of the Trust Agreement.

"Acquisition and Construction Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.

"Agency Agreement" means the Agency Agreement, dated as of June 1 , 2017, by and between the District and the Seller, and any duly authorized and executed amendment thereto.

"Certificates" means the $53 , 1 95,000 aggregate principal amount of "Certificates of Participation (20 17 Capital Improvement and Refunding Project), Series A" to be executed and delivered pursuant hereto.

"Closing Date" means the day when the Certificates, duly executed by the Trustee, are delivered to the original purchaser thereof.

"Code" means the Internal Revenue Code of 1 986, as amended, and the regulations promulgated thereunder.

"Corporation" means the Padre Darn Public Facilities Corporation, a nonprofit public benefit corporation duly organized and existing under the laws of the State . .

"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the District or the Seller relating to the sale, execution and delivery of the Certificates, including but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee (including legal fees), financing discounts, legal fees and charges, financial and other professional consultant fees, costs of rating agencies or credit ratings, fees for execution, transportation and safekeeping of the Certificates, and charges and fees in connection with the foregoing.

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"Costs of Issuance Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.

"District" means Padre Darn Municipal Water District, a municipal water district duly organized and existing under the laws of the State of California.

"District Gross Revenues" means the sum of (a) the Water System Gross Revenues, (b) the Sewer System Gross Revenues, ( c) the Preserve System Gross Revenues and ( d) the Property Tax Revenues.

"District Net Revenues" means the sum of (a) the Water System Net Revenues, (b) the Sewer System Net Revenues, (c) the Preserve System Net Revenues and (d) the Property Tax Revenues.

"District Rate Stabilization Funds" means collectively the Water System Rate Stabilization Fund, the Sewer System Rate Stabilization Fund and the Preserve System Rate Stabilization Fund.

"District Reserves" means collectively the Water System Reserve, the Sewer System Reserve and the Preserve System Reserve.

"District Representative" means the General Manager or Finance Manager of the District or any other person designated in writing to the Trustee by the Board of Directors of the District to act on behalf of the District with respect to the Trust Agreement.

"Escrow Bank" means The Bank of New York Mellon Trust Company, N.A.

"Escrow Agreement" means the Escrow Deposit and Trust Agreement among the District, the Corporation and the Escrow Bank.

"Escrow Fund" means the fund by that name established and held by the Escrow Bank pursuant to the Escrow Agreement.

"Event of Default" means an event of default under the Instalhnent Purchase Agreement, as defined in the Trust Agreement.

"Federal Securities" means any of the following which are noncallable and which at the time of investment are legal investments under the laws of the State of California for the moneys proposed to be invested therein:

( ! ) cash; or

(2) direct general obligations of (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), or obligations, the payment of principal of and interest on which is unconditionally guaranteed by the United States of America.

"Financial Newspaper" means any of the following: ( I ) the western and eastern editions of The Wall Street Journal or The Bond Buyer; or (2) any other newspaper of general circulation in Los Angeles, California, and the same or similar newspaper of general circulation in New York, New York, each of which carries financial news and is customarily published on each business day.

"Fiscal Year" means any period of twelve ( 12) consecutive months established by the District as its fiscal year and shall initially mean the period commencing on July I of one year and ending on June 30 of the following year.

"Independent Counsel" means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Seller, the Trustee or the District.

"Independent Engineer" means a consulting engineering firm or engineer which is not an employee of, or otherwise controlled by, the Seller, the Trustee or the District.

"Independent Financial Consultant" means a firm of certified public accountants or a consulting

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engineering firm or engineer which is not an employee of, or otherwise controlled by, the Seller, the Trustee or the District.

"Installment Payment" means any payment required to be paid by the District to the Seller pursuant to the Installment Purchase Agreement.

"Installment Payment Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.

"Installment Purchase Agreement" means the installment purchase agreement, dated as of June 1 , 2017, by and between the District and the Seller, and any duly authorized and executed amendment thereto.

"Insurance and Condemnation Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.

"Interest Payment Date" means April 1 or October 1 of each year, commencing October 1 , 2017, and ending on October 1, 2039 or the earlier redemption of all Certificates.

"Issue Price" means the initial offering price to the public ( excluding bond houses and brokers) of the Certificates, or the aggregate principal amount of the Certificates, less original issue discount, if any, plus accrued interest, if any, from the original issue date of the Certificates to the Closing Date.

"Moody's" means Moody's Investor Service, its successors and assigns.

"Net Proceeds" means any insurance proceeds or condemnation award paid with respect to the Project, remaining after payment therefrom of all expenses incurred in the collection thereof.

"Outstanding" when used as of any particular time with respect to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except:

(a) Certificates theretofore canceled by the Trustee or surrendered to the Trustee for cancellation;

(b) Certificates for the payment or redemption of which funds or eligible securities in the necessary amount shall have theretofore been deposited with the Trustee pursuant to the Trust Agreement ( whether upon or prior to the maturity or redemption date of such Certificates); provided that, if such Certificates are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and

( c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to the Trust Agreement.

"Owner" or "Certificate Owner" or "Owner of a Certificate" or any similar term, when used with respect to a Certificate, means the person in whose name the Certificate shall be registered on the registration books required to be maintained by the Trustee under the Trust Agreement.

"Parity Debt" means indebtedness or other obligations (including leases and installment sale agreements), including the Prior Parity Debt, issued or incurred by the District and secured by a pledge of and lien on District Net Revenues equally and ratably with the Installment Payments.

"Payment Date" means the date upon which any Installment Payment is due and payable.

"Permitted Encumbrances" means, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the District may, pursuant to provisions of the Installment Purchase Agreement, permit to remain unpaid; (ii) the Installment Purchase Agreement and the assignment of the Seller's interests in the Installment Purchase Agreement pursuant to the Trust

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Agreement; (iii) any right or claim of any mechanic, laborer, rnaterialrnan, supplier or vendor not filed or perfected in the manner prescribed by law; and (iv) easements, rights-of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the date of the Trust Agreement and which the District certifies in writing will not materially impair the use of the Project.

"Permitted Investments" shall include the following:

( ! ) Cash (insured at all times by the Federal Deposit Insurance Corporation),

(2) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including:

• U.S. treasury obligations

• All direct or fully guaranteed obligations

• Farmers Horne Administration

• General Services Administration

• Guaranteed Title XI financing

• Government National Mortgage Association (GNMA)

• State and Local Government Series

Any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or prepayable prior to maturity or earlier redemption of the rated debt ( excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date).

The following obligations may be used as Permitted Investments for all purposes other than defeasance investments in refunding escrow accounts.

( ! ) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including :

• Export Import Bank

• Rural Economic Community Development Administration

• U.S. Maritime Administration

• Small Business Administration

• U.S. Department of Housing & Urban Development (PHAs)

• Federal Housing Administration

• Federal Financing Bank

(2) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America:

• Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Horne Loan Mortgage Corporation (FHLMC).

• Obligations of the Resolution Funding Corporation (REFCORP)

Senior debt obligations of the Federal Horne Loan Bank System

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(3) U.S. dollar denominated deposit accounts, federal funds and bankers' acceptances with domestic commercial banks which may include the Trustee and its affiliates which have a rating on their short term certificates of deposit on the date of purchase of "P I " by Moody's and "A I " or "A l+" by S&P and maturing not more than 360 calendar days after the date of purchase (Ratings on holding companies are not considered as the rating of the bank);

( 4) Commercial paper which is rated at the time of purchase in the single highest classification, "P I " by Moody's and "A l+" by S&P and which matures not more than 270 calendar days after the date of purchase;

(5) Investments in a money market fund rated "AAAm" or "AAAm G" or better by S&P, including funds for which the Trustee or its affiliates receives and retains a fee for services provided to the fund, whether as a custodian, transfer agent, investment advisor or otherwise;

(6) Pre-refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

(A) which are rated, based on an irrevocable escrow account or fund (the "escrow"), in the highest rating category of Moody's or S&P or any successors thereto; or

(B) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph A(2) above, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate;

(7) Municipal obligations rated "Aaa/AAA" or general obligations of States with a rating of "A2/A" or higher by both Moody's and S&P.

(8) Certificates of deposit, demand deposits and money market savings accounts (including those of the Trustee, its parent and its affiliates) which are fully insured at all times by the Federal Deposit Insurance Corporation and which will be placed by using the tax identification number of the District, in banks which participate in the Certificate of Deposit Registry Account Service (CDARS) or any sucessor thereto, or in banks which participate in the Money Market Insured Account Service (MMIDAS) or any sucessor thereto.

(9) The Local Agency Investment Fund (LAIF) administered by the Treasurer of the State to the extent that such deposits remain in the name and control of the Trustee.

( 10) California Asset Management Program (CAMP).

"Prepayment" means any payment applied towards the prepayment of the Installment Payments pursuant to the Installment Purchase Agreement.

"Preserve System" means all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the Santee Lakes Recreation Preserve operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equippings thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Preserve System.

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"Preserve System Gross Revenues" means all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Preserve System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees, charges, or other moneys derived from campground use, parking, fishing, boating, facility use, general store, laundry and all other activities and services provided as part of the Preserve System and any other services and commodities sold, furnished or supplied through the Preserve System, (ii) any funds held from time to time in the Preserve System Rate Stabilization Fund or Preserve System Reserves established by the District in connection with the Preserve System, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees, charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Preserve System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Preserve System as permitted by the Trust Agreement; provided that the term "Preserve System Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

"Preserve System Net Revenues" means the Preserve System Gross Revenues less the Preserve System Operation and Maintenance Expenses.

"Preserve System Operations and Maintenance Expenses" means all expenses and costs of management, operation, maintenance and repair of the Preserve System, and all incidental costs, fees and expenses properly chargeable to the Preserve System (but excluding debt service or other similar payments on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

"Preserve System Proportionate Share" means the amount of moneys deposited into the Acquisition and Construction Fund divided by the total amount of proceeds of the Certificates deposited into the Acquisition and Construction Fund and the Escrow Fund.

"Preserve System Rate Stabilization Fund" means moneys in the fund established by the District into which the District has or may hereafter deposit from the Preserve System Net Revenues of the Preserve System remaining at the end of any Fiscal Year after payment of the interest component of the Instalhnent Payments which have not been applied to Preserve System Operation and Maintenance Expenses and which are lawfully available for payment of Instalhnent Payments.

"Preserve System Capital Replacement Funds" or "Preserve System Reserves" means moneys in the fund established by the District into which the District has or may hereafter deposit contributions from the Preserve System Net Revenues of the Preserve System remaining at the end of each Fiscal Year after payment of the principal component of the Instalhnent Payments which have not been applied to Preserve System Operation and Maintenance Expenses and which are lawfully available for payment of Installment Payments.

"Principal Corporate Trust Office" means the principal corporate trust office of the Trustee which at any particular time its corporate trust business shall be administered except that with respect to presentation of Certificates for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted.

"Prior Parity Debt" means the 2013 Bonds.

"Project" means the facilities of the Water System and/or the Sewer System more fully described in the Instalhnent Purchase Agreement.

"Property Tax Revenues" means all property tax revenues as defined in Revenue and Taxation Code Section 95 required to be allocated to the District.

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"Rebate Fund" means the fund by that name as may be established and held by the Trustee pursuant to the Trust Agreement.

"Regulations" means the proposed, temporary and permanent regulations of the Department of the Treasury of the United States promulgated under Section 1 03 and Sections 141 through 150 of the Code.

"Seller" means Padre Darn Public Facilities Corporation, a nonprofit public benefit corporation duly organized and existing under the laws of the State of California.

"Seller's Representative" means the President, Vice President or Chief Financial Officer of the Seller, or any person authorized to act on behalf of the Seller under or with respect to the Trust Agreement, as evidenced by a certificate conferring such authorization executed by the President, Vice President or Chief Financial Officer of the Seller, given to the District or the District Representative and the Trustee.

"Sewer System" means all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the collection, transmission, treatment and disposition of wastewater and sewage operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equipping thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Sewer System.

"Sewer System Capital Replacement Fund" or "Sewer System Reserves" means moneys in the fund established by the District into which the District has or may hereafter deposit contributions from the Sewer System Net Revenues remaining at the end of each Fiscal Year after payment of the principal component of the Installment Payments which have not been applied to Sewer System Operation and Maintenance Expenses and which are lawfully available for payment oflnstallrnent Payments.

"Sewer System Connection Fees" means any fee or fees collected by the District from property owners as a condition to the District providing sewer service from the Sewer System to residential, commercial or industrial property.

"Sewer System Gross Revenues" means all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Sewer System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees (including Sewer System Connection Fees), charges, or other moneys derived from the furnishing and supplying of sewer services from the facilities of the Sewer System and any other facilities and commodities sold, furnished or supplied through the facilities of the Sewer System, (ii) any funds held from time to time in the Sewer Rate Stabilization Fund or Sewer System Capital Replacement Fund established by the District, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees (including Sewer System Connection Fees), charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Sewer System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Sewer System as permitted by the Trust Agreement; provided that the term "Sewer System Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

"Sewer System Net Revenues" means the Sewer System Gross Revenues less the Sewer System Operation and Maintenance Expenses.

"Sewer System Operation and Maintenance Expenses" means all expenses and costs of management, operation, maintenance and repair of the Sewer System, and all incidental costs, fees and expenses properly chargeable to the Sewer System (but excluding debt service or other similar payments

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on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

"Sewer System Rate Stabilization Fund" means moneys in the fund established by the District into which the District has or may hereafter deposit Sewer System Net Revenues of the Sewer System remaining at the end of any Fiscal Year after payment of the Instalhnent Payments which have not been applied to Sewer System Operation and Maintenance Expenses and which are lawfully available for payment of Installment Payments.

"S&P" means S&P Global Ratings, a business unit of Standard & Poor's Financial Services LLC, its successors and assigns.

"State" means the State of California.

"Tax Agreement" means the certificate delivered by the District on the Closing Date with regard to, among other matters, payments, if any, to be made from the Rebate Fund to the United States of America, as it may be amended and supplemented from time to time.

"Term of the Installment Purchase Agreement" means the time during which the Instalhnent Purchase Agreement is in effect, as provided in the Instalhnent Purchase Agreement.

"Trust Agreement" or "Agreement" means the Trust Agreement, together with any amendments or supplements thereto permitted to be made thereunder.

"Trustee" means The Bank of New York Mellon Trust Company, N.A., or any successor thereto, acting as Trustee pursuant to the Trust Agreement.

"Water System" means all properties and assets, real and personal, tangible and intangible, of the District now or hereafter existing, used or pertaining to the storage, transmission, distribution and sale of water, including treated and reclaimed water, operated by the District, and all additions, extensions, expansions, improvements and betterments thereto, and equipping thereof; provided, however, that to the extent the District is not the sole owner of an asset or property, only the District's ownership interest in such asset or property shall be considered to be part of its Water System.

"Water System Capital Replacement Fund" or "Water System Reserves" means moneys in the fund established by the District into which the District has or may hereafter deposit contributions from the Water System Net Revenues of the Water System remaining at the end of each Fiscal Year after payment of the principal component of the Installment Payments which have not been applied to Water System Operation and Maintenance Expenses and which are lawfully available for payment of Instalhnent Payments.

"Water System Connection Fees" means any fee or fees collected by the District from property owners as a condition to the District providing water service from the Water System to residential, commercial or industrial property.

"Water System Gross Revenue" means all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, including, without limiting the generality of the foregoing, (i) all income, rents, rates, fees (including Water System Connection Fees), charges, or other moneys derived from the furnishing and supplying of water services and the sale, furnishing and supplying of water, including reclaimed water, from the facilities of the Water System and any other facilities and commodities sold, furnished or supplied through the facilities of the Water System, (ii) any funds held from time to time in the Water Rate Stabilization Fund or Water System Capital Replacement Fund established by the District, (iii) the earnings on and income derived from the investment of such income, rents, rates, fees (including Water System Connection Fees), charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to law to the Water System, and (iv) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted by the Trust Agreement; provided that the

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term "Water Gross Revenues" does not include customers' deposits or any other deposits subject to refund until such deposits have become the property of the District.

"Water System Net Revenues" means the Water System Gross Revenues less the Water System Operation and Maintenance Expenses.

"Water System Operation and Maintenance Expenses" means all expenses and costs of management, operation, maintenance and repair of the Water System, and all incidental costs, fees and expenses properly chargeable to the Water System (but excluding debt service or other similar payments on Parity Debt or other obligations and depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature).

"Water System Proportionate Share" means the amount of moneys deposited into the Escrow Fund divided by the total amount of the proceeds of the Certificates deposited into the Acquisition and Construction Fund and the Escrow Fund.

"Water System Rate Stabilization Fund" means moneys in the fund established by the District into which the District has or may hereafter deposit Water System Net Revenues of the Water System remaining at the end of any Fiscal Year after payment of the Installment Payments which have not been applied to Water System Operation and Maintenance Expenses and which are lawfully available for payment of Installment Payments.

FUNDS AND ACCOUNTS

Acqnisition and Construction Fund. The Trustee shall establish a special fund designated as the "Acquisition and Construction Fund," shall keep such fund separate and apart from all other funds and moneys held by it, and shall administer such fund as provided in the Trust Agreement and in the Installment Purchase Agreement. The Acquisition and Construction Fund and the accounts therein shall be held and applied by the Trustee in accordance therewith.

Purpose. Moneys in the Acquisition and Construction Fund shall be expended for payment or reimbursement of Acquisition and Construction Costs.

Deposit of Funds; Payment of Acquisition and Construction Costs. There shall be deposited into the Acquisition and Construction Fund from the proceeds from the sale of the Certificates the amount set forth in the Trust Agreement. There shall also be deposited into the Acquisition and Construction Fund any other funds from time to time deposited with the Trustee for credit to the Acquisition and Construction Fund.

The Trustee shall disburse moneys in the Acquisition and Construction Fund from time to time for the payment of Acquisition and Construction Costs upon receipt by the Trustee of a requisition substantially in the form set forth in the Trust Agreement signed by the District Representative which: (a) states with respect to each disbursement to be made: (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii) the amount to be disbursed, and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Acquisition and Construction Fund, has not been the basis of any previous disbursement; (b) specifies in reasonable detail the nature of the obligation and whether or not such obligation constitutes the reimbursement to the District for funds advanced by the District prior to the Closing Date to pay Acquisition and Construction Costs; (c) states that there has not been filed with or served upon the District notice of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of any of the moneys payable to any of the persons named in the requisition which has not been released or will not be released simultaneously with the payment of such obligation, other than materialmen's or mechanics' liens accruing by operation of law; (d) is accompanied by a certificate of the District Representative certifying that amounts remaining in the Acquisition and Construction Fund will be sufficient to pay the remaining Acquisition and Construction Costs as estimated, and that no Event of Default has occurred and is

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continuing; and ( e) in the event of final payment of construction costs, is accompanied by a notice of completion.

The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein.

The Trustee shall be responsible for the safekeeping and investment of the moneys held in the Acquisition and Construction Fund, and the payments therefrom in accordance with the Trust Agreement.

Transfers of Unexpended Proceeds of the Certificates. Upon the earlier of (!) the filing with the Trustee of a certificate of the District Representative that all Acquisition and Construction Costs to be paid have been paid or are provided for, or (2) June 15, 2020, the Trustee shall retain in Acquisition and Construction Fund the amount, if any, specified in a written notice signed by the Seller's Representative and filed with the Trustee to be required to pay future Acquisition and Construction Costs, and the Trustee shall withdraw and transfer to the Installment Payment Fund the balance of moneys in the Acquisition and Construction Fund. Thereafter, all amounts so retained in the Acquisition and Construction Fund but not subsequently used, and timely notice of such failure of use of which shall be given by the Seller's Representative to the Trustee, shall also be transferred by the Trustee into the Installment Payment Fund. The amounts so transferred from the Acquisition and Construction Fund to the Installment Payment Fund shall be credited to the payment of the Installment Payments as the same shall become due and payable and shall be invested so that the aggregate Yield (as defined in and calculated by the District pursuant to the Tax Agreement) on such moneys as invested shall not exceed the Yield on the Certificates.

Costs of Issuance Fund. The Trustee shall establish a special fund designated the "Costs of Issuance Fund," shall keep such fund separate and apart from all other funds and moneys held by it, and shall administer such fund as provided in the Trust Agreement.

Moneys on deposit in the Costs of Issuance Fund shall be applied to pay Costs of Issuance to the extent they are approved by the District. Such costs shall be payable upon receipt of a written request signed by a District Representative setting forth the amounts to be disbursed for payment or reimbursement of Costs of Issuance and the person or persons to whom said amounts are to be disbursed, and stating that the amounts to be disbursed are for Costs of Issuance properly chargeable to the Costs of Issuance Fund. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein.

Any moneys remaining in the Costs of Issuance Fund six (6) months after the Closing Date and determined, as evidenced by a Certificate of the District Representative delivered to the Trustee, not to be necessary for the payment of any Costs of Issuance shall be transferred to the Acquisition and Construction Account to be used for the payment of Acquisition and Construction Costs.

ASSIGNMENT; INSTALLMENT PAYMENT FUND

Assignment of Rights in Installment Purchase Agreement. The Seller transfers, assigns and sets over to the Trustee all of its right, title and interest in the Installment Purchase Agreement ( excepting only its rights under the Trust Agreement), including but not limited to all of the Seller's rights to receive and collect all of the Installment Payments, the Prepayments and all other amounts required to be deposited in the Installment Payment Fund pursuant to the Installment Purchase Agreement and its rights to enforce remedies upon an Event of Default. The Trustee accepts such assignment, provided, however, that such assignment shall impose no obligations upon the Trustee beyond those expressly provided in the Trust Agreement. The assignment to the Trustee under the Trust Agreement is to the Trustee solely in its capacity as Trustee under the Trust Agreement. The Trustee is not responsible for any covenants, representations or warranties of the Seller. All Installment Payments, Prepayments and such other amounts (excluding reimbursed amounts), which the Seller may at any time be entitled to receive, shall be

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paid directly to the Trustee, and all of the Instalhnent Payments and Prepayments collected or received by the Seller shall be deemed to be held and to have been collected or received by the Seller as the agent of the Trustee, and if received by the Seller at any time shall be deposited by the Seller with the Trustee within one (!) business day after receipt thereof, and all such Instalhnent Payments, Prepayments and such other amounts shall be forthwith deposited by the Trustee upon receipt thereof in the Installment Payment Fund.

Establishment of Installment Payment Fund. The Trustee shall establish a special fund designated as the "Installment Payment Fund." All moneys at any time paid to the Trustee by the District as payments of Instalhnent Payments or Prepayments shall be deposited by the Trustee in the Instalhnent Payment Fund, which shall be held by the Trustee in trust for the benefit of the District and the Owners of the Certificates, and such moneys shall be used and applied by the Trustee as set forth in the Trust Agreement.

Application of Moneys. All amounts in the Installment Payment Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of and interest and redemption premiums, if any, with respect to the Certificates as the same shall become due and payable, in accordance with the provisions of the Trust Agreement. The Trustee shall be responsible for the safekeeping of the moneys held in the Instalhnent Payment Fund.

Surplus. Any surplus remaining in the Installment Payment Fund after redemption and payment of all Certificates, including premiums, if any, and accrued interest and payment of any applicable fees and expenses to the Trustee, or after provision for such redemption or payment has been made in accordance with the Trust Agreement to the satisfaction of the Trustee, shall upon the written direction of the District be withdrawn by the Trustee and remitted to the District to be used for any lawful purpose.

INSURANCE AND CONDEMNATION FUND; INSURANCE; EMINENT DOMAIN

Establishment of Insurance and Condemnation Fund; Application of Net Proceeds of Insurance Award. Any Net Proceeds of insurance against injury to or destruction of any structure constituting any part of the Water System or the Sewer System, as applicable, collected by the District in the event of any such injury or destruction shall be transferred to the Trustee pursuant to the Installment Purchase Agreement and deposited by the Trustee in a special fund, to be established by the Trustee when funds are required to be deposited therein, designated as the "Insurance and Condemnation Fund" to be applied and disbursed by the Trustee as provided in the Installment Purchase Agreement.

Application of Net Proceeds of Eminent Domain Award. If all or any part of the Water System or the Sewer System, as applicable, shall be taken by eminent domain proceedings ( or sold to a government agency threatening to exercise the power of eminent domain), the Net Proceeds therefrom shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Installment Purchase Agreement and shall be applied and disbursed by the Trustee as follows:

(a) If the District determines that such eminent domain proceedings have not materially affected the operation of the Water System or the Sewer System, as applicable, or the ability of the District to meet any of its obligations under the Installment Purchase Agreement, and if the District determines that such proceeds are not needed for repair or rehabilitation of the Water System or the Sewer System, as applicable, upon the filing with the Trustee of a certificate of an Independent Financial Consultant to the effect that such taking will not have a material effect on the Water System or the Sewer System, as applicable, and that the rate covenant of the District set forth in the Installment Purchase Agreement, based on projections of said engineer or financial consultant, will continue to be satisfied following such taking, the Trustee shall, upon the receipt of written instructions from the District, transfer such funds pro rata among all Parity Debt to (a) the Instalhnent Payment Fund to be applied to the redemption of Certificates in the manner provided in the Trust Agreement and (b) the trustee or trustees for any Parity Debt to be applied to the redemption of such Parity Debt.

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(b) If the District determines that such eminent domain proceedings have not materially affected the operation of the Water System or the Sewer System, as applicable, or the ability of the District to meet any of its obligations under the Installment Purchase Agreement, and if the District determines that such proceeds are needed for repair or rehabilitation of the Water System or the Sewer System, as applicable, the Trustee shall pay to the District, or to its order, from said proceeds such amounts as the District may expend for such repair or rehabilitation, upon the filing with the Trustee of requisitions of the District Representative and a certificate of an Independent Engineer or Independent Financial Consultant to the effect that such taking will not have a material effect on the Water System or the Sewer System, as applicable, and that the rate covenant of the District set forth in the Installment Purchase Agreement, based on projections of said engineer or financial consultant, will continue to be satisfied following such taking. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein.

(c) If less than all of the Water System or the Sewer System, as applicable, shall have been taken in such eminent domain proceedings, and if the District determines that such eminent domain proceedings have materially affected the operation of the Water System or the Sewer System, as applicable, or the ability of the District to meet any of its obligations under the Installment Purchase Agreement, or if all of the Water System or the Sewer System, as applicable, shall have been taken in such eminent domain proceedings, then the Trustee shall transfer such proceeds pro rata among all Parity Debt to (a) the Installment Payment Fund to be applied to the redemption of Certificates in the manner provided in the Trust Agreement and (b) to the trustee for any Parity Debt to be applied to the redemption of such Parity Debt.

Excess Net Proceeds. After all of the Certificates have been redeemed and the entire amount of principal of and the entire amount of interest and any redemption premiums with respect to the Certificates have been paid in full, and all fees and expenses of the Trustee paid, the Trustee shall transfer any remaining Net Proceeds to the District to be used for any lawful purpose.

Cooperation. The Seller and the Trustee shall cooperate fully with the District, at the expense of the District, in filing any proof of loss with respect to any insurance policy maintained pursuant to the Installment Purchase Agreement and in the prosecution or defense of any prospective or pending eminent domain proceedings with respect to the Water System or the Sewer System, as applicable, or any part thereof.

MONEYS IN FUNDS; INVESTMENT; TAX COVENANTS; REBATE FUND

Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement, other than moneys held in the Rebate Fund or required to be transferred to the Rebate Fund pursuant to the Trust Agreement, are irrevocably held in trust for the benefit of the Owners of the Certificates and for the purposes specified in the Trust Agreement, and such moneys shall be expended only as provided in the Trust Agreement, and shall not be subject to levy or attachment or lien by or for the benefit of any creditor of the Seller, the Trustee, the District or any Owner of Certificates, or any of them.

Investments Authorized. Moneys held by the Trustee under the Trust Agreement shall, at the written direction of the District Representative, be invested and reinvested by the Trustee in Permitted Investments. If no direction is received by the Trustee from the District Representative, the Trustee will invest in Permitted Investments described in the Trust Agreement; provided that as long as the Trustee is The Bank of New York Mellon Trust Company, N.A. , the Trustee shall invest such money in the money market fund set forth in the letter of authorization and direction executed by the District and delivered to the Trustee. If no specific money market fund has been specified by the District, the Trustee shall make a request to the District for investment directions. Such moneys shall be held in cash, uninvested, until

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specific investment directions are provided by the District to the Trustee. . Such investments shall be registered in the name of the Trustee for the benefit of the Certificate Owners and held by the Trustee. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by the Trust Agreement. In giving written direction to the Trustee regarding such investments and reinvestments the District Representative shall give full consideration for the time at which moneys are required to be available. The Trustee may act as principal or agent in the making or disposing of any investment. Moneys on deposit in the Reserve Fund shall be invested only in Permitted Investments having a term to maturity which is not longer than five (5) years.

Acconnting. The Trustee shall furnish to the District monthly accountings of all investments made by the Trustee. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment of funds made by it in accordance with the Trust Agreement. The District acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the District periodic cash transaction statements which include detail for all investment transactions made by the Trustee thereunder.

The Trustee or any of its affiliates may act as sponsor, advisor or manager in connection with any investments made by the Trustee thereunder.

Allocation of Earnings or Loss. Any income, profit or loss on such investments, other than that which is required to be transferred to the Rebate Fund pursuant to the Trust Agreement, shall be deposited in or charged to the respective funds from which such investments were made, and any interest on any deposit of funds shall be deposited in the fund from which such deposit was made.

Valnation and Disposition of Investments. Except as hereinafter provided with respect to valuations for purposes of the Trust Agreement, the Trustee shall value each fund semiannually on or before each Interest Payment Date and shall value the Reserve Fund immediately upon any withdrawal from the Reserve Fund. For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued at market value, exclusive of accrued interest. To the extent of any valuations made by the Trustee under the Trust Agreement, the Trustee may utilize such securities pricing services as may be available to it, including, without limitation, those available in its regular accounting system. The Trustee shall sell, or present for redemption, any Permitted Investment purchased by the Trustee whenever it shall be necessary in order to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting therefrom. For purposes of determining the amounts, if any, to be deposited in the Rebate Fund pursuant to the Trust Agreement, the Permitted Investments credited to the funds established pursuant to the Agreement shall be valued by the District as provided in the Tax Agreement.

Deposit and Investment of Moneys in Fnnds. The Trustee may, and upon the written request of the District Representative shall, commingle any of the funds other than the Rebate Fund, held by it pursuant to the Agreement into a separate fund or funds for investment purposes; provided, however, that all funds or accounts held by the Trustee under the Trust Agreement shall be accounted for separately notwithstanding such commingling by the Trustee.

Tax Covenants. The Seller and the District covenant in the Trust Agreement with the Owners of the Certificates that:

(a) They will not take any action or omit to take any action, which action or omission, if reasonably expected on the date of the initial execution and delivery of the Certificates, would have caused any of the Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1 986, as amended from time to time (the "Code");

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(b) They will not take any action or omit to take any action, which action or omission, if reasonably expected on the date of initial issuance and delivery of the Certificates, would result in loss of exclusion from gross income for purposes of federal income taxation under Section 103(a) of the Code, of interest paid with respect to the Certificates;

( c) They will not take any action or omit to take any action, which action or omission if reasonably expected on the date of initial execution and delivery of the Certificates, would have caused any of such Certificates to be "private activity bonds" within the meaning of Section 141 of the Code;

( d) The District will comply with the Tax Agreement as a source of guidance for achieving compliance with the Code; and

( e) In order to maintain the exclusion from gross income for purposes of federal income taxation of interest paid with respect to the Certificates, the District shall comply with each applicable requirement of Section 1 03 and Sections 141 through 150 of the Code.

The covenants of the Seller and the District contained in the Trust Agreement shall survive the payment or defeasance of the Trust Agreement pursuant to the Trust Agreement.

Establishment and Application of Rebate Fund. The Trustee agrees to establish a trust fund to be designated the Rebate Fund (the "Rebate Fund"), if so requested by the District pursuant to the Trust Agreement and pursuant to the Tax Agreement. Moneys in the Rebate Fund shall not be considered a part of the "trust estate" held for the benefit of the Certificate Owners, or, except as otherwise provided in the Trust Agreement or as provided in the Tax Agreement, for the benefit of the District. Moneys in the Rebate Fund (including earnings and deposits therein) shall be held in trust by the Trustee and held for future payment to the United States Government as required by Section 148(±) of the Code and as contemplated by the provisions of the Tax Agreement and shall be paid out by the Trustee, in such amounts and at such times as shall be set forth in written instructions delivered to the Trustee by a District Representative. The Trustee shall be deemed conclusively to have complied with the requirements of the Trust Agreement and the Tax Agreement if it follows the written directions of an Authorized District Representative and shall have no independent responsibility to, or liability resulting from its failure to enforce compliance by the District with the terms of the Trust Agreement or the Tax Agreement.

Accounting Records and Financial Statements. The Trustee shall at all times keep, or cause to be kept, proper books of record and account prepared in accordance with corporate trust customary standards of the corporate trust industry, in which complete and accurate entries shall be made of all transactions made by it relating to the receipt, investment, disbursement, allocation and application of the proceeds of the Certificates, the Installment Payments and all funds and accounts established pursuant to the Agreement. Such books of record and account shall specify the account or fund to which each investment ( or portion thereof) held by the Trustee is to be allocated and shall set forth, in the case of each Permitted Investment (a) its purchase price, (b) identifying information, including par amount, coupon rate and payment dates, ( c) the amount received at maturity or sale price thereof, as the case may be, ( d) the amounts and dates of any payments made with respect thereto, and ( e) such documentation as is required to be obtained by the Trustee as evidence to establish the market value of such Permitted Investment.

Such books of record and account shall be available for inspection by the District and any Certificate Owner, or his agent or representative duly authorized in writing, at reasonable hours and under reasonable circumstances.

The Trustee shall file and furnish to the District and to each Certificate Owner who shall have filed his or her name and address with the Trustee for such purpose within thirty (30) days after the end of each month, a statement ( which need not be audited) covering receipts, disbursements, allocation and application of Installment Payments and any other moneys (including proceeds of Certificates) in any of the funds and accounts established pursuant to the Agreement for such month.

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THE TRUSTEE

Compensation of the Trnstee. The District shall from time to time, on demand, pay to the Trustee reasonable compensation for its services and shall reimburse the Trustee for all its advances and expenditures, including but not limited to advances to and fees and expenses of independent appraisers, accountants, consultants, counsel, agents and attorneys at law, or other experts employed by it in the exercise and performance of its powers and duties under the Trust Agreement. Such compensation and reimbursement shall be paid by the District, and amounts owing therefore shall constitute a first and prior lien on moneys in the Installment Payment Fund. If the District fails to reimburse the Trustee for any such advances by the Trustee within thirty (30) days of the date when the District receives notice thereof, the District shall pay interest thereon at the maximum rate allowed by law.

Removal of Trnstee. The District and the Seller ( so long as no event of default has occurred and is continuing under the Trust Agreement) may by written agreement between themselves, or the Owners of a majority in aggregate principal amount of all Certificates then Outstanding may by written request, at any time and for any reason remove the Trustee and any successor thereto, and shall there upon appoint a successor or successors thereto, but any such successor shall be a bank, national banking association or trust company doing business and having an office in Los Angeles or San Francisco, California, having a combined capital ( exclusive of borrowed capital) and surplus of at least Seventy Five Million Dollars ($75,000,000), be subject to supervision or examination by federal or state authority. If such bank, national banking association or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of the Trust Agreement the combined capital and surplus of such bank, national banking association or trust company shall be deemed to be its combined capital and surplus set forth in its most recent report of condition so published.

Resignation of Trnstee. The Trustee or any successor may at any time resign by giving written notice to the District and the Seller and by giving mailed notice to the Owners of the Certificates then Outstanding of its intention to resign and of the proposed date of resignation, which shall be a date not less than thirty (30) days after mailing of such notice, unless an earlier resignation date and the appointment of a successor Trustee shall have been or are approved by the Owners of a majority in aggregate principal amount of the Certificates then Outstanding.

Upon receiving such notice ofresignation, the District shall promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event the District fails to appoint a successor Trustee within thirty (30) days following receipt of such written notice of resignation, the resigning Trustee may petition the appropriate court having jurisdiction to appoint a successor Trustee.

Any resignation or removal of the Trustee shall become effective upon acceptance of appointment by the successor Trustee.

Appointment of Agent. The Trustee may appoint an agent to exercise any of the powers, rights or remedies granted to the Trustee under the Trust Agreement, and to hold title to property or to take any other action which may be desirable or necessary.

Merger or Consolidation. Any entity into which the Trustee may be merged or converted or with which it may be consolidated or any entity resulting from any merger, conversion or consolidation to which it shall be a party or any entity to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such entity shall be eligible under the Trust Agreement, shall be the successor to the Trustee without the execution or filing of any document or further act, anything herein to the contrary notwithstanding.

Protection and Rights of the Trnstee. The Trustee shall be protected and shall incur no liability in acting, refrain from acting, or proceeding in good faith upon any resolution, opinion, notice, telegram, telecopy, electronic mail, direction, request, consent, waiver, certificate, statement, affidavit, voucher,

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bond, requisition or other paper or docwnent which it shall in good faith believe to be genuine and to have been authorized or signed by the proper board or person or to have been prepared and furnished pursuant to any of the provisions of the Trust Agreement, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrwnent, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such instrument. The Trustee shall not be bound to recognize any person as an Owner of any Certificate or to take any action at his or her request unless such Certificate shall be deposited with the Trustee or satisfactory evidence of the ownership of such Certificate shall be furnished to the Trustee.

Whenever in the administration of its duties under the Trust Agreement the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Trust Agreement, such matter ( unless other evidence in respect thereof be specifically prescribed in the Trust Agreement) shall be deemed to be conclusively proved and established by the certificate of the District Representative or the Seller's Representative, and such certificate shall be full warranty to the Trustee for any action taken or suffered under the provisions of the Trust Agreement upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of any such matter or may require such additional evidence as it may deem reasonable.

The Trustee may become the Owner of Certificates with the same rights it would have if it were not the Trustee; may acquire and dispose of bonds or other evidence of indebtedness of the District with the same rights it would have if it were not the Trustee; and may act as a depositary for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners of Certificates, whether or not such committee shall represent the Owners of a majority in aggregate principal amount of the Certificates then Outstanding.

The recitals, statements and representations by the District and the Seller contained in the Trust Agreement, the Installment Purchase Agreement or the Certificates shall be taken and construed as made by and on the part of the District or the Seller, as the case may be, and not by the Trustee, and the Trustee does not asswne and shall not have any responsibility or obligation for the correctness of any thereof.

The Trustee may execute any of the trusts or powers and perform the duties required of it under the Trust Agreement by or through attorneys, agents or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty under the Trust Agreement, and the Trustee shall not be answerable for the negligence or misconduct of any such attorney, agent or receiver selected by it with due care. The Trustee shall not be answerable for the exercise of any discretion or power under the Trust Agreement or for anything whatever in connection with the funds and accounts established under the Trust Agreement, except only for its own negligence or willful misconduct.

In addition to the foregoing protection and rights afforded the Trustee, the following provisions further limit the Trustee's undertakings under the Trust Agreement:

(a) Except during the continuance of an Event of Default, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Trust Agreement, and no implied covenants or obligations shall be read into the Trust Agreement against the Trustee.

(b) 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 the Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circwnstances in the conduct of his own affairs.

(c) The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts.

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( d) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of a majority ( or other percentage provided for in the Trust Agreement) in principal amount of the Certificates relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Trust Agreement.

(e) No provision of the Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under the Trust Agreement, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Trust Agreement at the request or direction of any of the Owners pursuant to the Trust Agreement, unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.

(g) The permissive right of the Trustee to do things enumerated in the Trust Agreement shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct.

(h) The Trustee shall not be accountable for the use or application by the District or the Seller of Certificates or the proceeds thereof.

(i) Every provision of the Trust Agreement and the Sale Agreement relating to the conduct or liability of the Trustee shall be subject to the provisions of the Trust Agreement, including without limitation, the Trust Agreement.

(j) In acting as Trustee under the Trust Agreement, the Trustee acts solely in its capacity as Trustee under the Trust Agreement and not in its individual or personal capacity, and all persons, including without limitation the Owners, the District and the Seller, having any claim against the Trustee shall look only to the funds and accounts held by the Trustee under the Trust Agreement for payment, except as otherwise provided in the Trust Agreement. Under no circumstances shall the Trustee be liable in its individual or personal capacity for the obligations evidenced by the Certificates.

(k) The Trustee makes no representation or warranty, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the District or the Seller of the Project or any portion thereof, or any other representation or warranty with respect to the Project or any portion thereof. In no event shall the Trustee be liable for incidental, indirect, special or consequential damages in connection with the Trust Agreement or the Sale Agreement for the existence, furnishing or functioning of the Project or the District's use of the Project.

(1) The Trustee shall not be responsible for the use of application by the District or any other party of any funds released by the Trustee in accordance with the provisions of the Trust Agreement.

(m) The Trustee shall have no responsibility for any information, statement or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Certificates.

(n) The Trustee shall not be considered in breach of or in default in its obligations under the Trust Agreement or progress in respect thereto in the event of enforced delay ("unavoidable delay") in the performance of such obligations due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, Acts of God or of the public enemy or terrorists, acts of a government, acts of the other party, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or

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rationing of labor, equipment, facilities, sources of energy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction pertaining to the project, malicious mischief, condemnation, and unusually severe weather or delays of suppliers or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee.

( o) The Trustee shall have the right to accept and act upon instructions, including funds transfer instructions ("Instructions") given pursuant to the Agreement and delivered using Electronic Means ("Electronic Means" shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services under the Trust Agreement); provided, however, that the District shall provide to the Trustee an incumbency certificate listing officers with the authority to provide such Instructions ("Authorized Officers") and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the District whenever a person is to be added or deleted from the listing. If the District elects to give the Trustee Instructions using Electronic Means and the Trustee in its discretion elects to act upon such Instructions, the Trustee's understanding of such Instructions shall be deemed controlling. The District understands and agrees that the Trustee cannot determine the identity of the actual sender of such Instructions and that the Trustee shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Trustee have been sent by such Authorized Officer. The District shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Trustee and that the District and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the District. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee's reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The District agrees: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the District; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Trustee immediately upon learning of any compromise or unauthorized use of the security procedures.

(p) The Trustee's rights to immunities and protection from liability under the Trust Agreement and its rights to payment of its fees and expenses shall survive its resignation or removal and final payment or defeasance of the Certificates. All indemnifications and releases from liability granted in the Trust Agreement to the Trustee shall extend to the directors, officers, employees and agents of the Trustee.

(q) The Trustee shall not be deemed to have knowledge of any default or Event of Default unless an officer at the Principal Corporate Trust Office responsible for the administration of its duties under the Trust Agreement shall have actual knowledge thereof.

MODIFICATION OR AMENDMENT OF AGREEMENTS

Amendments Permitted. The Trust Agreement and the Installment Purchase Agreement and the rights and obligations of the parties hereto or thereto may be modified or amended at any time by a supplemental agreement which shall become effective when the written consents of the Owners of at least sixty percent (60%) in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in the Trust Agreement, shall have been filed with the Trustee. No

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such modification or amendment shall (i) extend or have the effect of extending the fixed maturity date of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest or reducing the amount of principal thereof or reducing any premium payable upon the redemption thereof, or (ii) reduce or have the effect ofreducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of the Trust Agreement or the Installment Purchase Agreement, or (iii) modify any of the rights or obligations of the Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in the Trust Agreement.

The Trust Agreement and the Installment Purchase Agreement and the rights and obligations of the parties hereto or thereto may be modified or amended at any time by a supplemental agreement, without the consent of any such Owners, but only to the extent permitted by law and only (i) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement, or (ii) in regard to questions arising under the Trust Agreement or under the Installment Purchase Agreement, as the parties hereto or thereto may deem necessary or desirable, and which shall not adversely affect the interests of the Owners of the Certificates, or ( iii) to accomplish the deletion of a facility or facilities from the Project and the substitution a facility or facilities therefore as provided in the Installment Purchase Agreement. Any such supplemental agreement shall become effective upon execution and delivery by the parties hereto or thereto, as the case may be. In executing, or accepting the additional trusts created by, any supplemental agreement permitted by the Trust Agreement or the modification thereby of the trusts created by the Trust Agreement, the Trustee shall receive, and shall be fully protected in relying upon, an opinion addressed and delivered to the Trustee stating that the execution of such supplemental agreement is permitted by and in compliance with the Trust Agreement, and that the execution and delivery thereof will not in and of itself adversely affect the exclusion from federal gross income of interest on the Certificates.

Procednre for Amendment with Written Consent of Certificate Owners. If the consent of the Owners of the Certificates is required pursuant to the Trust Agreement or the Installment Purchase Agreement may be amended by a supplemental agreement only upon compliance with the provisions of the Trust Agreement. A copy of the supplemental agreement, together with a request to the Certificate Owners for their consent thereto, shall be mailed by the Trustee to each Owner of a Certificate at his address as set forth on the Certificate registration books maintained pursuant to the Trust Agreement, but failure to mail copies of any such supplemental agreement and request shall not affect the validity of the supplemental agreement when assented to as in the Trust Agreement.

Such a supplemental agreement shall not become effective unless there shall be filed with the Trustee the written consents of the Owners of at least sixty percent ( 60%) in aggregate principal amount of the Certificates then Outstanding ( exclusive of Certificates disqualified as provided in the Trust Agreement) and a notice shall have been mailed as provided in the Trust Agreement. Each such consent shall be effective only if accompanied by proof of ownership of the Certificates for which such consent is given, which proof shall be such as is permitted by the Trust Agreement. Any such consent shall be binding upon the Owner of the Certificate giving such consent and on any subsequent Owner of the same Certificate or a replacement thereof (whether or not such subsequent Owner has notice thereof) unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Trustee prior to the date when the notice hereinafter provided for has been given.

After the Owners of the required percentage of Certificates shall have filed their consents to such a supplemental agreement, the Trustee shall mail a notice to the Owners of the Certificates in the manner previously provided in the Trust Agreement for the mailing of the supplemental agreement, stating in substance that the supplemental agreement has been consented to by the Owners of the required percentage of Certificates and will be effective as provided in the Trust Agreement (but failure to mail copies of said notice shall not affect the validity of the supplemental agreement or consents thereto). Such a supplemental agreement shall become effective upon the mailing by the Trustee of the notice

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pursuant to the Trust Agreement, and the supplemental agreement shall be deemed conclusively binding upon the parties pursuant to the Installment Purchase Agreement and the Owners of all Certificates at the expiration of sixty (60) days after such mailing, except in the event of a final decree of a court of competent jurisdiction setting aside such consent in a legal action or equitable proceeding for such purpose commenced within such sixty (60)-day period. A record, consisting of the documents required by the Trust Agreement to be mailed by the Trustee and a certificate of the Trustee as to its compliance with the requirements of the Trust Agreement shall be proof of the matters therein stated until the contrary is proved.

Disqnalified Certificates. Certificates owned or held by or for the account of the District or by any person directly or indirectly controlled by, or under direct or indirect common control with the District ( except any Certificates held in any pension or retirement fund), shall not be deemed outstanding for the purpose of any vote, consent, waiver or other action or any determination of Outstanding Certificates provided for in the Trust Agreement, and shall not be entitled to vote upon, consent to, or take any other action provided for in the Trust Agreement.

The District may adopt appropriate regulations to require each Certificate Owner, before his consent provided for in the Trust Agreement shall be deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in the Trust Agreement. Upon request of the Trustee, the District and the District shall specify in a certificate to the Trustee those Bonds disqualified pursuant to the Trust Agreement and the Trustee may conclusively rely on such certificate.

Effect of Supplemental Agreement. From and after the time any supplemental agreement becomes effective pursuant to the Trust Agreement, or the Installment Purchase Agreement, as the case may be, shall be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations of the parties pursuant to the Trust Agreement and all Owners of Certificates Outstanding shall thereafter be determined, exercised and enforced under the Trust Agreement subject in all respects according to such modification and amendment, and all the terms and conditions of any such supplemental agreement shall be deemed to be part of the terms and conditions of the Trust Agreement or the Installment Purchase Agreement, as the case may be, for any and all purposes.

Endorsement or Replacement of Certificates Delivered After Amendments. The District may determine that Certificates delivered after the effective date of any action taken as provided in the Trust Agreement shall bear a notation by endorsement or otherwise, in form approved by the District, as to such action. In that case, upon demand of the Owner of any Outstanding Certificate at such effective date and presentation of his Certificate at the Principal Corporate Trust Office of the Trustee a suitable notation shall be made on such Certificate. The District may determine that new Certificates, so modified as in the opinion of the District is necessary to conform with action taken pursuant to the Trust Agreement, shall be prepared, executed and delivered. In that case, upon demand of the Trustee on the Owner of any Outstanding Certificate, such Owner shall surrender such Outstanding Certificate at said office of the Trustee and it shall be exchanged for a new Certificate of the same character upon surrender of such Certificate, without cost to the Owner.

Amendatory Endorsement of Certificates. The provisions of the Trust Agreement shall not prevent any Certificate Owner from accepting any amendment as to the particular Certificates held by him, provided that due notification thereof is made on such Certificates.

COVENANTS; NOTICES

Compliance with and Enforcement of Installment Purchase Agreement. The District covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Installment Purchase Agreement. The Seller covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Installment Purchase Agreement.

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The District will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of the Installment Purchase Agreement by the Seller. The Seller and the District, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective estates, or either of them, in the Project, which may or can in any manner affect the estate of the District therein, will deliver the same, or a copy thereof, to the Trustee.

Payment of Taxes. The District will pay or cause to be paid all taxes, assessments and other governmental charges, if any, that may be levied, assessed or charged upon the Project, the Water System, the Sewer System or the Preserve System or any part thereof, promptly as and when the same shall become due and payable; and the District will, upon request of the Trustee, from time to time keep the Trustee advised of such payments, and deliver such evidence thereof as the Trustee may reasonably require. The District will not suffer the Project, or any part thereof, to be sold for any taxes, assessments or other charges whatsoever, or to be forfeited therefore.

Observance of Laws and Regulations. The District will well and truly keep and observe and perform all valid and lawful obligations or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States of America, or of the State of California, or by any officer, board or commission having jurisdiction or control as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the District, to the end that such rights, privileges and franchises shall be maintained and preserved, and shall not become abandoned, forfeited or in any manner impaired.

Prosecution and Defense of Suits. The District shall promptly, upon request of the Trustee, from time to time take such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Project, the Water System, the Sewer System or the Preserve System whether now existing or hereafter developing, and shall prosecute all such suits, actions and other proceedings as may be appropriate for such purpose, and shall indemnify and save the Trustee, the Seller and the Certificate Owners harmless from all loss, cost, damage and expense, including attorneys' fees, which they or any of them may incur by reason of any such defect, cloud, suit, action or proceedings.

Recordation and Filing. The District shall record and file the Installment Purchase Agreement and all such documents as may be required by law (together with whatever else may be necessary or be reasonably required by the Trustee), all in such manner, at such times and in such places as may be required by law, in order fully to preserve, protect and perfect the security of the Certificate Owners.

Further Assurances. The Seller and the District will make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Trust Agreement and for better assuring and confirming unto the Owners of the Certificates the rights and benefits provided in the Trust Agreement.

LIMITATION OF LIABILITY

Limited Liability of District. Except for the payment of Installment Payments and Prepayments when due in accordance with the Installment Purchase Agreement and the performance of the other covenants and agreements of the District contained in said agreement and the Trust Agreement, the District shall have no obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the payment of lnstallment Payments to the Owners by the Trustee.

No Liability of District or the Seller for Trustee Performance. Neither the District nor the Seller shall have any obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement.

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Anything in the Trust Agreement, the Installment Purchase Agreement or the Certificates to the contrary notwithstanding, it is understood that no recourse shall be had against the Seller for the payment of the principal of or interest or premium on the Certificates or for any claim based on or in respect of the Trust Agreement or the Certificates.

Limited Liability of Trustee. The Trustee shall have no obligation or responsibility for providing information to the Owners of the Certificates concerning the investment character of the Certificates, or for the actions or representations of any other party to the Trust Agreement. The Trustee shall have no obligation or liability to any of the other parties or the Owners of the Certificates with respect to the Trust Agreement or the failure or refusal of any other party to perform any covenant or agreement made by it under the Trust Agreement or the Installment Purchase Agreement. The Trustee makes no representations as to the validity or sufficiency of the Trust Agreement, the Installment Purchase Agreement or of the Certificates and shall not incur any responsibility in respect thereof, other than in connection with the duties or obligations in the Trust Agreement or in the Certificates assigned to or imposed upon it. The Trustee shall not be liable in connection with the performance of its duties under the Trust Agreement, except for its own negligence or willful misconduct.

Indemnification. The District agrees to indemnify and save harmless the Trustee from and against all claims, suits and actions brought against it, or to which it is made a party, and from all losses, damages and expenses, including legal fees and expenses, suffered by it as a result thereof, arising out of (i) the exercise and performance of its duties under the Trust Agreement or under the Installment Purchase Agreement, (ii) the transactions contemplated by the Trust Agreement and by the Installment Purchase Agreement, (iii) the offer and sale of the Certificates, (iv) the actions of any other party to the Trust Agreement, or (v) ownership, operation or use of the Project by the District. Such indemnification shall extend to claims, suits and actions brought against the Trustee for failure to perform and carry out the duties specifically imposed upon and to be performed by it pursuant to the Trust Agreement, except for its own negligence or willful misconduct. In the event the District is required to indemnify the Trustee as provided in the Trust Agreement, the District shall be subrogated to the rights of the Trustee to recover such losses or damages from any other person or entity.

Opinion of Counsel. Before being required to take any action, the Trustee may require an opinion of Independent Counsel acceptable to the Trustee, which opinion shall be made available to the other parties hereto upon request, which counsel may be counsel to any of the parties hereto, or a verified certificate of any party hereto, or both, concerning the proposed action. If it does so in good faith, the Trustee shall be absolutely protected in relying on any such opinion or certificate.

Limitation of Rights to Parties and Certificate Owners. Nothing in the Trust Agreement or in the Certificates expressed or implied is intended or shall be construed to give any person other than the District, the Seller, the Trustee and the Owners of the Certificates any legal or equitable right, remedy or claim under or in respect to the Trust Agreement or any covenant, condition or provision hereof, and all such covenants, conditions and provisions are and shall be for the sole and exclusive benefit of the District, the Seller, the Trustee and the Owners of the Certificates.

ASSIGNMENT; EVENTS OF DEFAULT AND REMEDIES

Assignment of Rights. Pursuant to the Trust Agreement, the Seller transfers, assigns and sets over to the Trustee all of the Seller's rights, title and interest under the Installment Purchase Agreement (excepting only the Seller's rights, under the Trust Agreement), including without limitation the Seller's right to exercise such rights and remedies conferred on the Seller pursuant to the Installment Purchase Agreement upon the occurrence of an Event of Default or as may be necessary or convenient (i) to enforce payment of the Installment Payments, Prepayments and any other amounts required to be deposited in the Installment Payment Fund or the Insurance and Condemnation Fund, and (ii) otherwise to protect the interests of the Seller or the Trustee in an Event of Default.

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Remedies. If an Event of Default shall happen, then and in each and every such case during the continuance of such Event of Default, the Trustee, upon receipt of written notice of such Event of Default at its Principal Corporate Trust Office, may exercise or shall exercise, as the case may be, any and all remedies available pursuant to law or granted pursuant to the Installment Purchase Agreement.

Application of Funds. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Trust Agreement or the Installment Purchase Agreement shall be applied by the Trustee in the following order upon presentation of the several Certificates and the noting thereon of the payment, ifonly partially paid, or upon the surrender thereof, if fully paid:

First, to the payment of the fees, costs and expenses of the Trustee and, thereafter, of the Certificate Owners in declaring such Event of Default, including reasonable compensation to its or their agents, attorneys and counsel, and with regard to the Trustee, incurred in and about the performance of its powers and duties under the Trust Agreement.

Second, to the payment of the whole amount then owing and unpaid with respect to the Certificates for principal and interest, with interest on the overdue principal and installments of interest at the rate or rates specified in the respective Certificates (but such interest on overdue installments of interest shall be paid only to the extent funds are available therefore following payment of principal and interest on overdue principal, as aforesaid), and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid with respect to the Certificates, then to the payment of such principal and interest, without preference or priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, ratably to the aggregate of such principal and interest.

Institution of Legal Proceedings. If one or more Events of Default shall happen and be continuing, the Trustee in its discretion may, and upon the written request of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, and upon being indemnified to its satisfaction therefore, shall proceed to protect or enforce its rights or the rights of the Owners of Certificates by a suit in equity or an action at law, either for the specific performance of any covenant or agreement contained in the Trust Agreement, or in aid of the execution of any power granted in the Trust Agreement, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights or duties under the Trust Agreement.

Non-Waiver. Nothing in the Trust Agreement or in any other provision of the Trust Agreement, or in the Certificates, shall affect or impair the obligation of the District, which is absolute and unconditional subject to the Installment Purchase Agreement, to pay or prepay the Installment Payments as provided in the Installment Purchase Agreement, or affect or impair the right of action, which is also absolute and unconditional, of the Certificate Owners to institute suit to enforce such payment. No delay or omission of the Trustee or of any Owner of any of the Certificates to exercise any right or power arising upon the happening of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every power and remedy given by the Trust Agreement to the Trustee or to the Owners of the Certificates may be exercised from time to time and as often as shall be deemed expedient by the Trustee or the Certificate Owners.

Remedies Not Exclusive. No remedy conferred upon or reserved to the Trustee or to the Certificate Owners in the Trust Agreement is intended to be exclusive of any other remedy, and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Trust Agreement or now or hereafter existing, at law or in equity or by statute or otherwise.

Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial proceedings or otherwise, pursuant to its duties under the Trust Agreement, whether upon its own discretion or upon the request of the Owners of a

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majority in aggregate principal amount of the Certificates then Outstanding, the Trustee shall have full power, in the exercise of its discretion for the best interests of the Owners of the Certificates, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not, unless there no longer continues an Event of Default under the Trust Agreement, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Owners of at least a majority in aggregate principal amount of the Certificates then Outstanding opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation.

Limitation on Certificate Owners' Right to Sue. No Owner of any Certificate executed and delivered under the Trust Agreement shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under the Trust Agreement, unless (i) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default; (ii) the Owners of a majority in aggregate principal amount of the Certificates then Outstanding shall have made written request upon the Trustee to exercise the powers herein before granted or to institute such action, suit or proceeding in its own name; (iii) said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (iv) the Trustee shall have refused or failed to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.

Such notification, request, tender of indemnity and refusal or failure are declared, in every case, to be conditions precedent to the exercise by any Owner of Certificates of any remedy under the Trust Agreement; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by his or her or their action to enforce any right under the Trust Agreement, except in the manner herein provided, and that all proceedings at law or in equity with respect to an Event of Default shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners of the Outstanding Certificates.

The right of any Owner of any Certificate to receive payment of said Owner's proportionate interest in the Installment Payments as the same become due, or to institute suit for the enforcement of such payment, shall not be impaired or affected without the consent of such Owner, notwithstanding the foregoing provisions or any other provision of the Trust Agreement.

Agreement to Pay Attorneys' Fees and Expenses. In the event any party to the Trust Agreement should default under any of the provisions hereof and a non-defaulting party should employ attorneys or incur other expenses for the collection of moneys or the enforcement or performance or observance of any obligation or agreement on the part of the defaulting party herein contained, the defaulting party agrees that it will, on demand therefore, pay to the nondefaulting party or parties the reasonable fees of such attorneys and such other expenses so incurred by the nondefaulting party or parties.

DEFEASANCE

Defeasance. All Outstanding Certificates shall be paid and discharged in any one of the following ways:

(a) by well and truly paying or causing to be paid the principal of and interest with respect to all Certificates Outstanding, as and when the same become due and payable; or

(b) by depositing with the Trustee, in trust, an amount which together with amounts then on deposit in the Installment Payment Fund and the Reserve Fund and the amount of earnings calculated to accrue on any investment of such amounts in Federal Securities, Refcorp interest strips, CATS, TIGRS and STRPS, or defeased municipal bonds rated AAA by Standard & Poor's Corporation or Aaa by Moody's Investors Service (or any combination thereof) to maturity or applicable redemption date will be sufficient to pay and discharge all Certificates Outstanding (including all principal, interest and

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redemption premiwns, if any) at or before their respective maturity dates as verified by the report of a nationally recognized independent certified public accountant;

and if such Certificates are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice, then, at the election of the District, and notwithstanding that any Certificates shall not have been surrendered for payment, all obligations of the Seller, the Trustee and the District under the Trust Agreement with respect to all Outstanding Certificates shall cease and terminate, except only the obligation of the Trustee to pay or cause to be paid to the Owners of the Certificates not so surrendered and paid all swns due thereon. Notice of such election shall be filed with the Trustee.

Notwithstanding the preceding provisions of the Trust Agreement, if the amount to be deposited with the Trustee pursuant to the Trust Agreement provided through an advance refunding of the Certificates within the meaning of Section 149 (d) of the Code, such amount shall be invested in Federal Securities which are direct general obligations as defined in subparagraph (3) of the definition of Federal Securities set forth in the Trust Agreement.

Prior to any defeasance becoming effective under the Agreement, the District shall have provided to the Trustee a verification report of a nationally recognized independent certified public accountant as to the adequacy of the defeasance escrow account.

Any funds held under the Trust Agreement by the Trustee, at the time of receipt of such notice from the District, which are not required for the purpose above mentioned, shall upon written request of the District be paid over to the District.

INSTALLMENT PURCHASE AGREEMENT

CONSTRUCTION AND ACQUISITION OF THE PROJECT

Constrnction of the 2017 Project; Acquisition of Property. The Seller agrees to construct, install and equip the 2017 Project and to provide funds for and assist the District in acquiring property and easements, if any, which may be necessary for the construction and installation of the 2017 Project. Pursuant to the Agency Agreement, the Seller has appointed the District as its agent to carry out the construction, installation and equipping of the 2017 Project. The District, as such agent, shall cause such construction, installation and equipping to be completed and to enter into such contracts or purchase orders as are necessary therefor, all as provided in the Agency Agreement. The Seller further agrees to provide funds for and assist the District in acquiring property and easements, if any, necessary for the construction and installation of the 2017 Project. The costs of the design, construction, installation and equipping of the 2017 Project and the purchase prices for the acquisition of such property and easements shall be paid from the Acquisition and Construction Fund as Acquisition and Construction Costs in accordance with the Trust Agreement.

Payment of Acquisition and Construction Costs. Payment of the purchase prices for the acquisition of property and easements, if any, necessary for the construction and installation of the 2017 Project and of the costs of designing, constructing, installing and equipping the 2017 Project shall be made from the moneys deposited with the Trustee which shall be disbursed from the Acquisition and Construction Fund in accordance and upon compliance with the Trust Agreement. In the event that the amounts on deposit in the Acquisition and Construction Fund shall at any time be insufficient to provide for the payment of any Acquisition and Construction Costs when due, the amount of such deficiency shall be deposited therein by the District from any legally available source of funds.

Deletion and Substitution of Project Facilities. The District may delete facilities which comprise portions of the Project described in the Installment Purchase Agreement and substitute other facilities therefor, provided that the following conditions are satisfied:

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(a) The District Representative shall certify in writing to the Seller and the Trustee that the construction and installation of the facility or facilities to be substituted will be completed on or before June 15, 2020, and either (I) that the cost of the construction and installation of such substituted facility or facilities will not exceed the cost of the construction and installation of the facility or facilities which are to be deleted from the Project, or (ii) that the District will be able to pay any excess cost of the construction and installation of the substituted facility or facilities from any legally available source of funds; and

(b) The District shall deliver to the Seller and the Trustee an opinion of a nationally recognized bond counsel firm that the proposed deletion and substitution of facilities is authorized or permitted by the laws of the State of California, the Trust Agreement and the Trust Agreement and will not adversely affect the validity of the Trust Agreement or the Certificates or the exclusion from gross income for federal income tax purposes of the interest component of the Installment Payments.

Any such deletion and substitution of facilities shall be accomplished by a supplemental agreement to be entered into by and between the Seller and the District which shall not require the consent of the Trustee or the Certificate Owners. Upon the execution and delivery of such a supplemental agreement, the substituted facility or facilities shall be a part or parts of the Project and shall replace the deleted facility or facilities to the same extent and with the same effect as if the substituted facility or facilities had been a part or parts of the Project and described in the Installment Agreement on the Closing Date.

SALE OF PROJECT; INSTALLMENT PAYMENTS; TITLE TO THE PROJECT

Sale. In consideration for the Seller's assistance refinancing the 2009 Project, the District sells and conveys the 2009 Project to the Seller. In consideration of the Installment Payments as set forth in the Instalhnent Purchase Agreement, the Seller sells, bargains and conveys the Project to the District, and the District purchases the Project from the Seller, upon the terms and conditions set forth in the Instalhnent Purchase Agreement.

Title. The District and the Seller agree that title to the Project shall be deemed conveyed to and vested in the District upon the delivery of the Instalhnent Purchase Agreement, subject only to Permitted Encumbrances. The District and the Seller further agree that title to all parcels of property and easements which may be acquired for the construction and installation of the Project shall be vested in the District at the time of the purchase and acquisition thereof. The Seller and its officers shall take all actions necessary to vest in the District all of the Seller's rights in and title to the Project and title to such parcels of property and easements.

Installment Payments.

(a) Obligation to Pav; Time of Payment. The District shall pay to the Seller, or its assignee, as the purchase price of the Project, the Installment Payments set forth in the Instalhnent Agreement. The Instalhnent Payments shall be due on the fifteenth (1 5th) business day preceding each Payment Date; provided that there shall be applied as a credit (provided there are no delinquent Installment Payments) against the Instalhnent Payments payable on each such date an amount equal to the sum of:

(i) The amount of interest or income, other than amounts, if any, required to be rebated to the United States pursuant to the Trust Agreement, earned on the Instalhnent Payment Fund since the preceding Payment Date; plus

(ii) The amount of interest or income, other than amounts, if any, required to be rebated to the United States pursuant to the Trust Agreement; plus

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(iii) The amount, if any, then on deposit in the Installment Payment Fund which is not on deposit therein to pay Certificates which have matured or been called for redemption and have not been surrendered.

In the event that the total amount of credit exceeds the Installment Payment due on any Payment Date, the amount of such excess shall be applied as a credit against subsequent Installment Payments. The Installment Payments shall be paid solely from District Net Revenues and the credits provided for in subparagraphs (i), (ii) and (iii) above.

(b) Option to Prepay. Subject to the terms and conditions of the Installment Purchase Agreement, the Seller grants an option to the District to prepay the Installment Payments, in whole or in part. Said option may be exercised on any date on or after October I , 20 _. Said option shall be exercised by the District by giving written notice to the Trustee of the exercise of such option at least sixty (60) days prior to the date of prepayment or such lesser time as is consented to by the Trustee. Said option shall be exercised by the District depositing with the Trustee with said notice cash in integral multiples of $5,000 in the minimum principal amount of $20,000, plus an amount equal to accrued interest on the principal amount to be prepaid to the date of prepayment, together with the amount of any Installment Payment then due but unpaid.

(c) Payment in Lawful Money; No Set-Off. Each Installment Payment shall be paid by the District in lawful money of the United States of America, which at the time of payment is legal tender for the payment of public and private debts to or upon the order of the Trustee at the Principal Corporate Trust Office of the Trustee in Los Angeles, California or at such other place as the Trustee shall designate in writing to the District. Any Installment Payment accruing under the Installment Purchase Agreement which shall not be paid when due shall bear interest at the rate of twelve percent (12%) per annum from the date when the same is due under the Installment Purchase Agreement until the same shall be paid. Notwithstanding any dispute between the District and the Seller, or any other party, the District shall make or cause to be made each and all Installment Payments when due and shall not withhold or permit to be withheld any Installment Payments pending the final resolution of any such dispute, and the District shall not assert or permit to be asserted any right of set-off or counter-claim against its obligation to make Installment Payments as set forth in the Purchase Installment Agreement.

( d) Assignment. The District understands and agrees that the Seller has assigned its rights under the Installment Purchase Agreement to the Trustee in trust for the benefit of the Owners of the Certificates and the District consents to such assignment. The Seller directs the District, and the District agrees, to pay to the Trustee at the Trustee's Principal Corporate Trust Office in Los Angeles, California, or at such other place as the Trustee shall direct in writing, all payments payable by the District pursuant to the Installment Purchase Agreement.

(e) Deposit to Secure Payment of Installment Payments. Notwithstanding any other provision of the Installment Purchase Agreement, the District may on any date secure the payment of the Installment Payments by a deposit with the Trustee in trust, as provided in the Trust Agreement, of an amount which, together with amounts on deposit in the Installment Payment Fund and the amount of earnings calculated to accrue on any investments of such amounts in Federal Securities, Refcorp interest strips, CATS, TIGRS and STRPS, or defeased municipal bonds rated AAA by Standard & Poor's Corporation or Aaa by Moody's Investors Service (or any combination thereof), to maturity or applicable redemption date, will be sufficient to pay all unpaid Installment Payments, including the principal and interest components thereof, in accordance with the schedule of Installment Payments set forth in the Installment Agreement, and any applicable premium. In the event of a deposit pursuant to the Installment Purchase Agreement, all obligations of the District under the Installment Purchase Agreement, and all security provided by the Installment Purchase Agreement for said obligations, shall cease and terminate, excepting only the obligation of the District to make, or cause to be made, Installment Payments from the deposit made by the District pursuant to the Installment Purchase Agreement. Such deposit shall be

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deemed to be and shall constitute a special fund for the payment of Installment Payments in accordance with the provisions of the Installment Purchase Agreement. Upon such deposit, the Seller or its assignee shall execute or cause to be executed any and all documents as may be necessary to evidence the release of any security provided for by the Installment Purchase Agreement.

Interest Component. A portion of each Installment Payment is paid as, and represents payment of, interest. The interest component of each Installment Payment is set forth in the Installment Agreement.

Special Obligation of the District. The District's obligation to pay the Installment Payments shall be a special obligation, limited solely to the District Net Revenues. Under no circumstances shall the District be required to advance any moneys derived from any source of income other than the District Net Revenues and other sources specifically identified in the Installment Purchase Agreement for the payment of the Installment Payments. No other funds or property of the District shall be liable for the payment of the Installment Payments; provided, however, that the District may elect to pay any Installment Payment from the Preserve System Reserves or the Water System Capital Replacement Fund and/or Sewer System Capital Replacement Fund. The obligation of the District to make Installment Payments does not constitute an indebtedness within the meaning of any constitutional or statutory debt limit or restriction.

The obligations of the District to make the Installment Payments from the District Net Revenues and to perform and observe the other agreements contained in the Installment Purchase Agreement shall be absolute and unconditional and shall not be subject to any defense or any right of set-off, counterclaim, or recoupment arising out of any breach of the Seller or the Trustee of any obligation to the District or otherwise with respect to the Project, whether under the Installment Purchase Agreement or otherwise, or out of indebtedness or liability at any time owing to the District by the Seller or the Trustee. Until such time as all of the Installment Payments shall have been fully paid or prepaid or secured, the District (i) will not suspend or discontinue any payments provided for in the Installment Purchase Agreement, (ii) will perform and observe all other agreements contained in the Installment Purchase Agreement, and (iii) will not terminate the Term of the Installment Purchase Agreement for any cause, including, without limiting the generality of the foregoing, the occurrence of any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, destruction of or damage to the Project, the taking by eminent domain of title to or temporary use of any or all of the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either thereof or any failure of the Seller or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Trust Agreement or the Installment Purchase Agreement. Nothing contained in the Installment Purchase Agreement shall be construed to release the Seller or the Trustee from the performance of any of the agreements on its part in the Installment Purchase Agreement or in the Trust Agreement contained and in the event the Seller or the Trustee shall fail to perform any such agreements on its part, the District may institute such action against the Seller or the Trustee as the District may deem necessary to compel performance so long as such action does not abrogate the obligations of the District contained in the first sentence of this paragraph. The District may, however, at the District's own cost and expense and in the District's own name or in the name of the Seller, prosecute or defend any action or proceeding or take any other action involving third persons which the District deems reasonably necessary in order to secure or protect the District's rights of possession, occupancy and use under the Installment Purchase Agreement , and in such event the Seller agrees to cooperate fully with the District and to take such action as is necessary to effect the substitution of the District for the Seller in such action or proceeding if the District shall so request.

The obligation of the District to make the Installment Payments from the District Net Revenues will be absolute and unconditional and until such time as the purchase price shall have been paid in full ( or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the District will not discontinue or suspend any Installment Payments required to be made

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by it under the Installment Purchase Agreement when due, whether or not the Preserve System, the Sewer System and/or the Water System or any part of any such system or systems is operating or operable, or the use of any such system or systems is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such 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.

Pledge of District Net Revenues; Deposits to Pay Installment Payments. The District agrees that the payment of the Installment Payments shall be secured, equally and ratably and on a parity with, the Parity Debt by a pledge of and charge and lien upon the District Net Revenues. The payments of the Installment Payments shall be, and are, secured, equally and ratably and on a parity with, the Parity Debt, by a pledge of and charge and lien upon the District Net Revenues, and, except as otherwise provided in the Installment Purchase Agreement, all of the District Net Revenues are pledged, charged, assigned, transferred and set over by the District to the Seller and its assignee for the purpose of securing payment of the Installment Payments and the Parity Debt, and the District Net Revenues and any interest earned on the District Net Revenues , shall constitute a trust fund for the security and payment of the Installment Payments and the Parity Debt. The District further covenants that it will not encumber or create a lien on District Net Revenues superior to the pledge of the District Net Revenues created under the Installment Purchase Agreement.

(a) Payments to Trustee for Deposit into Installment Payment Fund. In order to provide for the timely payment of Installment Payments when due, the Treasurer of the District ( or his or her authorized successor, for the purposes of the Installment Purchase Agreement) shall pay the Installment Payments when due to the Trustee, for deposit into the Installment Payment Fund.

Rate Covenants. The following covenants shall apply to the Installment Purchase Agreement at all times:

(a) The District covenants, subject to the provisions of the Installment Purchase Agreement, to establish, maintain and collect the District Gross Revenues sufficient in each Fiscal Year to provide District Net Revenues equal to at least 1 .20 times the sum of (i) the amount of the Installment Payments due in the Fiscal Year and (ii) the aggregate amount of annual debt service or other payments due in such Fiscal Year with respect to outstanding Parity Debt.

(b) Notwithstanding the provisions of the Installment Purchase Agreement, the District shall be deemed to have satisfied its rate covenant pursuant to the Installment Purchase Agreement only if the total of the District Net Revenues for a Fiscal Year, less the amount of the District Reserves and the amounts on deposit in the District Rate Stabilization Funds, available for payment of Installment Payments, at the beginning of the Fiscal Year, excluding interest earnings during the Fiscal Year, is equal to at least one hundred five percent (105%) of the total of amounts specified in clauses (i) and (ii) above for the Fiscal Year.

(c) The District covenants to establish, maintain and collect the Preserve System Gross Revenues sufficient in each Fiscal Year to provide Preserve System Net Revenues equal to at least 1 .00 times the sum of (i) the amount of the Preserve System Proportionate Share of the Installment Payments allocable to the Preserve System due in the Fiscal Year and (ii) the aggregate amount of annual debt service or other payments allocated by the District to the Preserve System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Preserve System Net Revenues.

(d) The District covenants to establish, maintain and collect the Water System Gross Revenues sufficient in each Fiscal Year to provide Water System Net Revenues equal to at least 1 .00 times the sum of (i) the amount of the Water System Proportionate Share of the Installment Payments allocable to the Water System due in the Fiscal Year and (ii) the aggregate amount of annual debt service

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or other payments allocated by the District to the Water System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Water System Net Revenues.

(e) The District covenants to establish, maintain and collect the Sewer System Gross Revenues sufficient in each Fiscal Year to provide Sewer System Net Revenues equal to at least 1 .00 times the aggregate amount of annual debt service or other payments allocated by the District to the Sewer System due in such Fiscal Year with respect to outstanding Parity Debt and all other obligations constituting a lien on Sewer System Net Revenues.

(f) The District shall furnish to the Trustee, within one hundred eighty (1 80) days from the close of each Fiscal Year, an audit report with respect to the Fiscal Year, together with a certificate of an independent certified public accountant certifying that the District has complied with its rate covenant contained in the Installment Purchase Agreement for the Fiscal Year. The Trustee shall have no duty to review any audit report required to be prepared pursuant to the provisions of the Installment Purchase Agreement.

(g) In the event the District fails in any Fiscal Year to comply with its rate covenant contained in subsections (a) and (b) above, the District shall retain an Independent Financial Consultant to undertake a rate study of the Preserve System, the Sewer System and the Water System for the purpose of establishing a rate structure for the Preserve System, the Sewer and Water System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District shall within sixty (60) days of receipt of such study revise its rates and charges with respect to the Preserve System, the Sewer System and the Water System in conformity with the recommendations thereof.

(h) In the event the District fails in any Fiscal Year to comply with its rate covenant contained in subsection ( c) above, the District shall retain an Independent Financial Consultant to undertake a rate study of the Preserve System for the purpose of establishing a rate structure for the Preserve System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District shall within sixty (60) days of receipt of such study revise its rates and charges with respect to the Preserve System in conformity with the recommendations thereof.

(i) In the event the District fails in any Fiscal Year to comply with its rate covenant contained in subsection ( d) above, the District shall retain an Independent Financial Consultant to undertake a rate study of the Water System for the purpose of establishing a rate structure for the Water System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District shall within sixty (60) days of receipt of such study revise its rates and charges with respect to the Water System in conformity with the recommendations thereof.

(j) In the event the District fails in any Fiscal Year to comply with its rate covenant contained in subsection ( e) above, the District shall retain an Independent Financial Consultant to undertake a rate study of the Sewer System for the purpose of establishing a rate structure for the Sewer System which will enable the District to comply with such rate covenant during the succeeding Fiscal Year. The District shall within sixty (60) days of receipt of such study revise its rates and charges with respect to the Sewer System in conformity with the recommendations thereof.

For purposes of the Installment Purchase Agreement, it shall be assumed that any Parity Debt which bears a variable interest rate bears interest at a fixed rate equal to the highest of: (i) the actual rate on the date of calculation, or if the Parity Debt is not yet outstanding, the initial rate (if established and binding), (ii) if the Parity Debt has been outstanding for at least twelve (12) months, the average rate over the twelve ( 12) months immediately preceding the date of calculation, and (iii) ( 1 ) if interest on the Parity Debt is excludable from gross income under the applicable provisions of the Internal Revenue Code of 1986, as amended, the most recent published Bond Buyer 25 Bond Revenue Index ( or comparable index if no longer published) plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate

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on direct obligations of the United States of America with comparable maturities plus fifty (50) basis points.

Collection of Rates and Charges. The District will have in effect at all times by-laws, rules and regulations requiring each customer to pay the rates and charges applicable to the Water Service and Sewer Service and providing for the billing thereof and for a due date and a delinquency date for each bill.

Prohibition of Priority Debt. The District shall not issue or incur any Priority Debt.

Limitations on Parity Debt Issued or Incurred. The following limitations shall apply to any Parity Debt issued or incurred:

(a) Parity Debt may be issued or incurred by the District in any Fiscal Year subject to the following provisions:

(i) an Independent Financial Consultant having a favorable reputation for special skill, knowledge and experience in analyzing the operations of enterprise systems of special districts shall render to and file with the District and the Trustee a written opinion that the District Net Revenues (adjusted as provided below) for any twelve ( 1 2) consecutive calendar months of the eighteen ( 18) calendar months immediately preceding the issuance of the Parity Debt have been equal to at least one hundred twenty percent ( 120%) of the sum of ( 1 ) the Installment Payments, and (2) the aggregate amount of debt service or other payments due in such twelve ( 1 2) month period with respect to outstanding Parity Debt, including the Parity Debt to be issued; and

(ii) an Independent Financial Consultant having a favorable reputation for special skill, knowledge and experience in analyzing the operations of enterprise systems of special districts shall render to and file with the District and the Trustee written opinion that District Net Revenues (adjusted as provided below) in each of the three (3) Fiscal Years succeeding the issuance of the Parity Debt will equal at least one hundred twenty percent ( 120%), and that such District Net Revenues as so adjusted, less District Reserves and the District Rate Stabilization Fund available for payment of Installment Payments during such period, will equal at least one hundred and five percent ( 105%), of the sum of ( 1 ) the aggregate amount of the Installment Payments, and (2) the aggregate amount of annual debt service or other payments with respect to outstanding Parity Debt, including the Parity Debt to be issued, and all other obligations constituting a lien on the District Net Revenues which will be due in any Fiscal Year succeeding the issuance of the Parity Debt.

For purposes of the Instalhnent Purchase Agreement, District Net Revenues may be adjusted in consideration of the following:

( 1 ) Any change in service charges for the Preserve System, the Sewer and/or the Water System which has been adopted subsequent to the commencement of the twelve ( 12) month period specified in subsection (a) but prior to the date of issuance of the Parity Debt;

(2) Customers added to the Water System and/or the Sewer System subsequent to the commencement of said twelve ( 12) month period but prior to the date of issuance of the Parity Debt;

(3) The estimated change in District Net Revenues which will result from the connection of existing residences or businesses to the Water System and/or the Sewer System within twelve ( 12) months following completion of any project to be funded or facilities to be acquired from the proceeds of the Parity Debt; and

(4) The estimated change in the District Net Revenues which will result from services provided under any long-term, guaranteed contract that extends for the life of the Parity

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Debt if entered into subsequent to the commencement of said twelve (12) month period but prior to the date of issuance of the Parity Debt.

(b) Notwithstanding the preceding provisions of subsection (a) above, the District may issue or incur Parity Debt for the purpose of refunding the 20 13 Bonds, without complying with the provisions of subsection (a) if maximum annual debt service on such Parity Debt does not exceed maximum annual debt service on the 2013 Bonds, by more than ten percent ( 10% ), and if the final maturity of such Parity Debt is not later than the final maturity of the 2013 Bonds.

(c) For purposes of the Installment Purchase Agreement, it shall be assumed that any Parity Debt which bears a variable interest rate bears interest at a fixed rate equal to the highest of: (i) the actual rate on the date of calculation, or if the Parity Debt is not yet outstanding, the initial rate (if established and binding), (ii) if the Parity Debt has been outstanding for at least twelve (12) months, the average rate over the twelve (12) months immediately preceding the date of calculation, and (iii) (1) if interest on the Parity Debt is excludable from gross income under the applicable provisions of the Internal Revenue Code of 1986, as amended, the most recent published Bond Buyer 25 Bond Revenue Index ( or comparable index if no longer published) plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate on direct obligations of the United States of America with comparable maturities plus fifty (50) basis points. Notwithstanding the foregoing, for purposes of clause (i) of subsection (a) above, it shall be assumed that any outstanding Parity Debt which bears a variable interest rate bears interest at the actual per annum interest rate which was in effect during the twelve (12) month period selected for the purpose of determining whether or not the Parity Debt may be issued or incurred.

The Rate Stabilization Funds.

(a) Water System Rate Stabilization Fund. The District has established the Water District Rate Stabilization Fund that is held by the District and to be administered in accordance with the Installment Purchase Agreement, for the purpose of stabilizing the rates and charges imposed by the District with respect to the Water System. From time to time the District may deposit amounts in the Water System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Water System Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Water System Rate Stabilization Fund shall be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

The District may, but is not be required to, withdraw amounts on deposit in the Water System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt corning due and payable in such Fiscal Year. All interest or other earnings on deposits in the Water System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Water System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

(b) Sewer System Rate Stabilization Fund. The District has established the Sewer System Rate Stabilization Fund that is held by the District and to be administered in accordance with the Installment Purchase Agreement, for the purpose of stabilizing the rates and charges imposed by the District with respect to the Sewer System. From time to time the District may deposit amounts in the Sewer System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Sewer System Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Sewer System Rate Stabilization Fund shall be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

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The District may, but is not be required to, withdraw amounts on deposit in the Sewer System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt corning due and payable in such Fiscal Year. All interest or other earnings on deposits in the Sewer System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Sewer System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

(c) Preserve System Rate Stabilization Fund. The District has established the Preserve System Rate Stabilization Fund that is held by the District and to be administered in accordance with the Installment Purchase Agreement, for the purpose of stabilizing the rates and charges imposed by the District with respect to the Preserve System. From time to time the District may deposit amounts in the Preserve System Rate Stabilization Fund, from any source of legally available funds, including but not limited to Preserve System Net Revenues which are released from the pledge and lien which secures the Installment Payments and any Parity Debt, as the District may determine. The Preserve System Rate Stabilization Fund shall be accounted for as a separate fund, although amounts credited to it may be commingled with other funds of the District.

The District may, but is not be required to, withdraw amounts on deposit in the Preserve System Rate Stabilization Fund and transfer such amounts in any Fiscal Year to the Trustee for deposit in the Installment Payment Fund for the purpose of paying the Installment Payments or the principal of and interest on any Parity Debt corning due and payable in such Fiscal Year. All interest or other earnings on deposits in the Preserve System Rate Stabilization Fund will be retained therein or, at the option of the District, be applied for any other lawful purposes. The District has the right at any time to withdraw any or all amounts on deposit in the Preserve System Rate Stabilization Fund and apply such amounts for any other lawful purposes of the District.

MAINTENANCE OF THE WATER SYSTEM, THE SEWER SYSTEM AND THE PRESERVE SYSTEM; TAXES; INSURANCE; AND OTHER MATTERS

Maintenance of the Water System, the Sewer System and the Preserve System, Utilities, Taxes and Assessments. The District covenants to operate both the Water System, the Sewer System and the Preserve System in an efficient and economical manner and to operate, maintain and preserve the Water System, the Sewer System and the Preserve System in good repair and working order.

The District shall also pay or cause to be paid all taxes and assessments of any type or nature levied, assessed or charged against the Water System, the Sewer System and/or the Preserve System or the respective interests or estates of the Seller and the District therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the District shall be obligated to pay only such installments as are required to be paid during the Term of the Installment Purchase Agreement as and when the same become due. The District shall not be required to pay any federal, state or local income, inheritance, estate, succession, transfer, gift, franchise, gross receipts, profit, excess profit, capital stock, corporate, or other similar tax payable by the Seller, its successors or assigns, unless such tax is made in lieu of or as a substitute for any real estate or other tax upon property comprising the Water System, the Sewer System and/or the Preserve System.

The District may, at the District's expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Seller or the Trustee shall notify the District that, in the opinion of Independent Counsel, by nonpayment of any such items, the Water System, the Sewer System or the Preserve System, as applicable, or any part thereof, will be subject to loss or forfeiture, in which event the

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District shall promptly pay such taxes, assessments or charges, or provide the Seller with full security against any loss which may result from nonpayment, in form satisfactory to the Seller or the Trustee.

Modification of the Water System, the Sewer System or the Preserve System. The District shall, at its own expense, have the right to make additions, modifications and improvements to the Water System, the Sewer System and/or the Preserve System. Such additions, modifications and improvements shall not in any way damage the Water System, the Sewer System or the Preserve System, as applicable, or cause such system to be used for purposes other than those authorized under the provisions of state and federal law, or in any way which would impair the tax-exempt status of the interest component of the Installment Payments; and the Water System, the Sewer System or the Preserve System, as applicable, upon completion of any additions, modifications and improvements made pursuant to the Installment Purchase Agreement, shall have a value at least equal to the value of thereof immediately prior to the making of such additions, modifications and improvements.

Covenant Against Competitive Facilities. To the extent permitted by law, the District covenants that it will not acquire, construct, maintain or operate and will not, to the extent permitted by law and within the scope of its powers, permit any other public or private agency, corporation, district or political subdivision or any person whomsoever to acquire, construct, maintain or operate within the District any water or sewer systems competitive with the Water System or the Sewer System.

Pnblic Liability and Property Damage Insnrance. The District shall maintain or cause to be maintained, throughout the Term of the Installment Purchase Agreement, insurance policies, including a standard comprehensive general liability insurance policy or policies, in protection of the District, its officers, agents and employees, and the Seller, its officers, agents, and employees, and the Trustee. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the construction or operation and maintenance of the Water System, the Sewer System and the Preserve System. Said policy or policies shall provide coverage in the minimum liability limits of $ 1 ,000,000 for personal injury or death of each person and $3 ,000,000 for personal injury or deaths of two or more persons in a single accident or event, and in a minimum amount of $250,000 (subject to a deductible clause of not to exceed $200,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3 ,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the District, and may be maintained in the form of self-insurance by the District; provided, however, that any self-insurance shall be in an appropriate form and provide adequate coverage, as determined by an independent insurance consultant or risk manager. The Net Proceeds of such liability insurance shall be applied toward extinguishrnent or satisfaction of the liability with respect to which the insurance proceeds shall have been paid.

Errors and Omissions Insnrance. The District shall procure and maintain, or cause to be procured and maintained, throughout the Term of the Installment Purchase Agreement a policy of errors and omissions insurance for the protection of the officers and trustees or directors of the Seller in furtherance of the District's covenant to indemnify the Seller as set forth in the Installment Purchase Agreement.

Fire and Extended Coverage Insnrance. The District shall procure and maintain, or cause to be procured and maintained throughout the Term of the Installment Purchase Agreement (but, during the period of construction of the Project, as to the Project only if such insurance is not provided by the contractors) insurance against loss or damage to any structures constituting any part of the Water System, the Sewer System and the Preserve System, including the Project, ( excluding water storage reservoirs, transmission and distribution pipelines and other underground facilities) by fire and lightning, with extended coverage insurance. A maximum deductible amount of $ 100,000 for any one loss shall be allowable. Such insurance shall be in an amount equal to one hundred percent ( 1 00%) of the replacement

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cost of the Water System, the Sewer System and the Preserve System, including the Project, ( excluding collection, transmission and distribution pipelines and equipment in public and private rights of way). Such insurance may be maintained as part of or in conjunction with any other fire and extended coverage insurance carried or required to be carried by the District, and may be maintained in the form of selfinsurance by the District; provided, however, that any self-insurance shall be in an appropriate form and provide adequate coverage, as determined by an independent insurance consultant or risk manager. The Net Proceeds of such insurance shall be applied as provided in the Installment Purchase Agreement.

Insnrance Proceeds; Form of Policies. All proceeds of the insurance required by the Installment Purchase Agreement for any damage or destruction to the Project shall be payable to the Trustee for the benefit of the Certificate Owners. The District shall pay or cause to be paid when due the premiums for all insurance policies required by the Installment Purchase Agreement, and shall promptly furnish or cause to be furnished evidence of such payments to the Trustee. All such policies shall provide that the Trustee shall be given thirty (30) days' notice of each expiration thereof, and any intended cancellation thereof or reduction of the coverage provided thereby. Neither the Seller nor the Trustee shall be responsible for the sufficiency of any insurance required in the Installment Purchase Agreement and the Seller or Trustee shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by the Seller or the Trustee. The District shall cause to be delivered to the Seller and the Trustee annually on or before July I a Certificate of a District Representative stating that the insurance policies required by the Installment Purchase Agreement are in full force and effect. The Trustee may conclusively rely upon such Certificates as evidence of compliance with the insurance requirements under the Installment Purchase Agreement.

Advances. If the District fails to perform any of its obligations under the Installment Purchase Agreement, the Seller may, but shall not be obligated to, take such action as may be necessary to cure such failure, including the advancement of money, and the District shall be obligated to repay all such advances as soon as possible, with interest thereon at the maximum legal rate of interest for public agencies from the date of the advance to the date ofrepayment.

Installation of District's Equipment. The District may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or personal property in or upon the Project. All such items shall remain the sole property of the District, in which neither the Seller nor the Trustee shall have any interest, and may be modified or removed by the District at any time, provided that the District shall repair and restore any and all damage to the Project resulting from the installation, modification or removal of any such items. Subject to the provisions of the Installment Purchase Agreement, nothing in the Agreement shall prevent the District from purchasing items to be installed pursuant to the Installment Purchase Agreement under a conditional sale or lease purchase contract, or subject to a vendor's lien or security agreement, as security for the unpaid portion of the purchase price thereof.

Operation of the Water System, the Sewer System and the Preserve System. The District shall operate, or cause to be operated, the Water System, the Sewer System and the Preserve System in accordance with customary standards and business practices applicable to similar facilities.

DAMAGE, DESTRUCTION AND EMINENT DOMAIN; USE OF NET PROCEEDS

Eminent Domain. If the entire Water System or the Sewer System, as applicable, shall be taken permanently under the power of eminent domain ( or sold to a government agency threatening to exercise the power of eminent domain), the Term of the Installment Purchase Agreement shall continue until all Certificates, including the interest thereon, are paid in full. If less than the entire Water System or the Sewer System, as applicable, shall be taken permanently, or if the entire Water System or the Sewer System, as applicable,, or any part thereof, shall be taken temporarily, under the power of eminent domain, the Installment Purchase Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking, and the parties waive the benefit of any law to the contrary. In such

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event, if any Certificates then outstanding are redeemed with the Net Proceeds of the eminent domain award, the amount of the Installment Payments shall be proportionately reduced, such that the resulting Installment Payments are in an amount equal to the amount necessary to pay principal of and interest on the Certificates which are then outstanding as the same become due and payable. The District shall provide the Trustee with a revised schedule oflnstallment Payments.

Application of Net Proceeds.

(a) From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or destruction of the Water System or the Sewer System, as applicable, by fire or other casualty shall be utilized as provided for in the Installment Purchase Agreement. Such proceeds shall be deposited by the Trustee in the Insurance and Condemnation Fund promptly upon receipt thereof and, if the District Representative notifies the Trustee in writing of the District's determination that the replacement, repair, restoration, modification or improvement of the Water System or the Sewer System, as applicable, is not economically feasible or in the best interest of the District, together with a certificate of an Independent Financial Consultant to the effect that such action will not have a material effect on the operation of the Water System or the Sewer System, as applicable, and that the rate covenants of the District set forth in the Installment Purchase Agreement, based on projections of said engineer or financial consultant, will continue to be satisfied following such action, then such Net Proceeds shall be promptly transferred pro rata among all outstanding Parity Debt by the Trustee to (a) the Installment Payment Fund and applied to the retirement of the Certificates in accordance with the Trust Agreement and (b) the trustee for any outstanding Parity Debt to be applied to the redemption of such Parity Debt. All such Net Proceeds deposited in the Insurance and Condemnation Fund and not so transferred shall be applied to the prompt replacement, repair, restoration, modification or improvement of the Water System or the Sewer System, as applicable, by the District, upon receipt by the Trustee of a requisition or requisitions acceptable to the Trustee signed by the District Representative stating with respect to each payment to be made (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii) the amount to be paid, and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, and has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of each such obligation. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein. Any balance of the Net Proceeds of any insurance award remaining after the replacement, repair, restoration, modification or improvement of the Water System or the Sewer System, as applicable, has been completed shall be transferred to the Installment Payment Fund.

(b) From Eminent Domain Award. The Net Proceeds of any eminent domain award or settlement resulting from any event described in the Installment Purchase Agreement shall be deposited in the Insurance and Condemnation Fund and shall be held and applied by the Trustee pursuant to the Trust Agreement.

EVENTS OF DEFAULT AND REMEDIES

Events of Default Defined. The following shall be "events of default" under the Installment Purchase Agreement and the terms "event of default" and "default" shall mean, whenever they are used in the Installment Purchase Agreement, any one or more of the following events:

(i) Failure by the District to pay any Installment Payment or other payment required to be paid at the time specified in the Installment Purchase Agreement for payment.

(ii) Failure by the District to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in the Installment Agreement, including, but not limited to, failure by the District to observe or perform any covenant, condition or agreement contained in the Installment Purchase Agreement, for a period

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of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the District by the Seller and the Trustee or the Owners of not less than twentyfive percent (25%) in aggregate principal amount of the Certificates then outstanding; provided, however, if the failure stated in the notice cannot be corrected within the applicable period, the Seller and the Trustee or such Owners shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the District within the applicable period and diligently pursued until the default is corrected.

(iii) The filing by the District of a voluntary petition in bankruptcy, or failure by the District promptly to obtain relief from any execution, garnishment or attachment, or adjudication of the District as a bankrupt, or assignment by the District for the benefit of creditors, or the entry by the District into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the District in any proceedings instituted under the provisions of the United States Bankruptcy Code, as amended, or under any similar acts which may hereafter be enacted.

Remedies on Default. Whenever any event of default referred to in the Installment Purchase Agreement shall have happened and be continuing, the Seller, or the Trustee, shall have the right, at its option and without any further demand or notice, to:

(a) by written notice to the District, declare all principal components of the unpaid Installment Payments, together with accrued interest at the rate or rates specified in the respective outstanding Certificates from the immediately preceding Payment Date on which payment was made, to be immediately due and payable, whereupon the same shall become due and payable; and

(b) take whatever action at law or in equity may appear necessary or desirable to collect the Installment Payments then due or thereafter to become due during the Term of the Installment Purchase Agreement, or enforce performance and observance of any obligation, agreement or covenant of the District under the Installment Purchase Agreement.

No Remedy Exclusive. No remedy conferred upon or reserved to the Seller in the Installment Purchase Agreement is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Installment Purchase Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Seller to exercise any remedy reserved to it in the Installment Purchase Agreement, it shall not be necessary to give any notice, other than such notice as may be required in the Installment Purchase Agreement by law.

Agreement to Pay Attorneys' Fees and Expenses. In the event either party to the Installment Purchase Agreement should default under any of the provisions hereof and the non-defaulting party should employ attorneys or incur other expenses for the collection of moneys or the enforcement or performance or observance of any obligation or agreement on the part of the defaulting party contained in the Installment Purchase Agreement, the defaulting party agrees that it will on demand therefor pay to the non-defaulting party the reasonable fees of such attorneys and such other expenses so incurred by the non-defaulting party.

No Additional Waiver Implied by One Waiver. In the event any agreement contained in the Installment Purchase Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach under the Installment Purchase Agreement.

Application of the Proceeds. All amounts received by the Seller under the Installment Purchase Agreement shall be transferred to the Trustee and after payment of all fees and expenses of the Trustee,

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including fees and expenses of its attorneys shall be deposited with the Trustee to be applied by the Trustee pursuant to the Trust Agreement.

Liability Limited to District Net Revenues. Notwithstanding any provision of the Installment Purchase Agreement, the District's liability to pay the Installment Payments and other amounts under the Installment Purchase Agreement shall be limited solely to District Net Revenues as provided in the Ins. In the event that the District Net Revenues shall be insufficient at any time to pay an Installment Payment in full, the District shall not be liable to pay or prepay such Installment Payment other than from the District Net Revenues.

Trustee to Exercise Rights. Such rights and remedies as are given to the Seller under the Installment Purchase Agreement have been assigned by the Seller to the Trustee under the Trust Agreement, to which assignment the District consents. Such rights and remedies shall be exercised by the Trustee for the benefit of the Owners of the Certificates as provided in the Trust Agreement. To the extent that the Installment Purchase Agreement confers upon or gives or grants the Trustee any right, remedy or claim under or by reason of the Installment Purchase Agreement, the Trustee is explicitly recognized as being a third-party beneficiary under the Installment Purchase Agreement and may enforce any such right, remedy or claim conferred, given or granted under the Installment Purchase Agreement.

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APPENDIX B

GENERAL INFORMATION ABOUT THE CITY OF SANTEE AND SAN DIEGO COUNTY

The following information relating to the District and the City of Santee, California, the County of San Diego, and the State of California is supplied solely for the purposes of information. Neither the faith and credit, nor the taxing power of the District, the City, the County, the State of California, or any of its political subdivisions is pledge to the payment of the Certificates.

General Description and Background

The County. The District is located in the eastern portion of the County of San Diego (the "County"). The County is the southern-most county in the State of California (the "State"). The County covers an area of approximately 4,280 square miles, about the size of the state of Connecticut. The County is bordered by the Pacific Ocean to the west, Orange and Riverside Counties to the north, Imperial County to the east, and the State of Baja California, Mexico to the south. The County includes 70 miles of the Pacific Ocean coastline, the Anza-Borrego Desert, which forms the eastern third of the county, the Laguna Mountains, the San Diego Bay, one of the world's largest natural deep-water harbors, and the San Diego International Airport.

The City of Santee. A significant portion of the District is located in the City of Santee (the "City"). The City was incorporated December 1980. With a population of 56,755 and located in the eastern portion of the County, the City is the twelfth largest of the County's 18 cities. With approximately half of its land undeveloped, the City is one of the few cities in the county with space to grow.

Population

The following sets forth the City, the County and the State population estimates as of January 1 for calendar years 2012 to 2016.

CITY OF SANTEE, COUNTY OF SAN DIEGO AND STATE OF CALIFORNIA Estimated Population

Year City of San Diego State of (January 1 ) Santee County California

201 2 54,384 3,1 28,749 37,668,804 201 3 55, 1 1 0 3, 1 54,574 37,984, 1 38 2014 55,658 3, 1 92,457 38,357, 1 21 201 5 55,805 3,227,496 38,714,725 201 6 56,755 3,288,6 1 2 39,255,883

Source: State of California Department of Finance, Demographic Research Unit.

B-1

Commercial Activity

A summary of historic taxable sales within the City during the past five years in which data is available is shown in the following table. Total taxable sales calendar year 2015 in the City were reported to be $1,062,269,000, a 5.56% increase over the total taxable sales of $1,006,359,000 reported during the first two quarters of calendar year 2014. Annual figures are not yet available for calendar year 2016.

201 1 201 2 201 3 2014 2015(lJ

CITY OF SANTEE Taxable Retai l Sales

Number of Permits and Valuation of Taxable Transactions (Dollars in thousands)

Retail Stores Total All Outlets

Number Taxable Number Taxable of Permits Transactions of Permits Transactions

821 $598, 1 57 1 ,244 $706, 1 60 802 618,544 1 ,21 1 727,037 8 1 6 662,088 1 ,240 849,505 842 672,757 1 ,280 1 ,006,359 8 1 0 752,749 1 ,404 1 ,062,269

(1) Permit figures as of fourth quarter for calendar year 2015. Data for calendar year 2015 preliminary and subject to review and adjustment.

Source: California State Board of Equalization, Taxable Safes in California (Safes & Use Tax).

A summary of historic taxable sales within the County during the past five years in which data is available is shown in the following table. Total taxable sales reported during calendar year 2015 in the County were reported to be $54, 185,588,000, a 2.80% increase over the total taxable sales of $52,711,639,000 reported during calendar year 2014. Annual figures are not yet available for calendar year 2016.

201 1 201 2 201 3 2014 201 5

COUNTY OF SAN DIEGO Taxable Retai l Sales

Number of Permits and Valuation of Taxable Transactions (Dollars in thousands)

Retail Stores Total All Outlets

Number Taxable Number of Taxable of Permits Transactions Permits Transactions

56,723 $31 ,985,292 83,971 $45,090,382 55,699 34, 1 53,236 82,293 47,947,035 58,466 35,948,594 85, 143 50,297,331 59,705 37,257,495 86,671 52,71 1 ,639 58,740 37,989,566 95,480 54, 1 85,588

Source: California state Board of Equalization, Taxable Safes in California (Safes & Use Tax).

B-2

Employment and Industry

The District is included in the San Diego-Carlsbad Metropolitan Statistical Area ("MSA"), which includes the entire County. The unemployment rate in the County was 4.5% in January 201 7 , up from a revised 4 . 1 % in December 201 6 , and below the year-ago estimate of 4.8%. This compares with an unadjusted unemployment rate of 5.5% for the State and 5 . 1 % for the nation during the same period. The following table shows the average annual estimated numbers by industry comprising the civilian labor force, as well as unemployment information for calendar years 201 2 through 201 6 .

SAN DIEGO-CARLSBAD METROPOLITAN STATISTICAL AREA (San Diego County)

Civilian Labor Force, Employment and Unemployment (Annual Averages)

March 201 6 Benchmark

2012 2013 2014 2015 2016 Civilian Labor Force \iJ 1 ,542,800 1 ,547,000 1 ,549,800 1,563,800 1 ,570,400 Employment 1 ,402,000 1 ,425,900 1 ,450,300 1 ,482,500 1 ,497,000 Unemployment 140,800 121,100 99,500 81 ,300 73,500 Unemployment Rate 9.1 o/o 7.Bo/o 6.4o/o 5.2o/o 4.7o/o

Wage and Salary Employment: ''' Agriculture 9,800 9,800 9,400 9, 100 9,000 Mining and Logging 400 400 400 400 300 Construction 57,000 60,900 63,800 69,500 76, 100 Manufacturing 97,800 99,000 101 ,600 105,300 107,800 Wholesale Trade 43,500 43,900 43,700 44,000 44,800 Retail Trade 137,200 141 ,300 144,300 146,800 147,400 Transportation, Warehousing and Utilities 27,300 27,200 27,000 28,200 29,400 Information 24,500 24,300 24,400 23,900 23,600 Finance and Insurance 43,700 43,900 42, 100 43,600 44,900 Real Estate and Rental and Leasing 26, 100 26,900 27,300 27,700 28, 100 Professional and Business Services 213,900 221 ,600 224,900 230,900 234,000 Educational and Health Services 174,500 181 ,000 186,000 193,200 198,500 Leisure and Hospitality 161,700 168,600 177,000 184,000 190,700 Other Services 49,200 49,300 52,000 53,000 54,900 Federal Government 46,800 46,500 45,800 46,000 46,500 State Government 42,600 43, 100 44, 100 45,600 47,500 Local Government 138,500 139,900 142,000 144,300 148, 100 Total, All Industries <3J 1 ,294,300 1 ,327,500 1 ,355,900 1 ,395,500 1 ,431 ,600

(1) Labor force data is by place of residence; includes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike.

(2) Industry employment is by place of work; excludes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike.

(3) Totals may not add due to rounding. Source: State of California Employment Development Deparlment.

B-3

Major Employers

The major employers as of May 2017 in the County are shown below.

Employer Name 32nd St Naval Station Barona Resort & Casino DJO Finance LLC General Dynamics NASSCO Kaiser Permanente Palomar Kaiser Permanente San Diego Kaiser Permanente Sn Diego Med Kaiser Permanente Vandever Med Kyocera Communications Inc Merchants Bui lding Maintenance Naval Medical Ctr San Diego Palomar Pomerado Health Rehab Rady Children"s Hospital San Diego County Sheriff Scripps Cl inic Scripps Mercy Hospital Scripps Research I nstitute Seaworld San Diego Sharp Grossman! Brier Patch Sharp Mary Birch Hosp-Women Sharp Memorial Hospital Sony Electronics Inc Tyco Health Care UC San Diego Health Ucsd All Campus Dept Listings

COUNTY OF SAN DIEGO Major Employers

Location San Diego Lakeside Vista San Diego Escondido San Diego San Diego San Diego San Diego San Diego San Diego Escondido San Diego Santee La Jolla San Diego La Jolla San Diego La Mesa San Diego San Diego San Diego San Diego San Diego La Jolla

Industry Federal Government-National Security Casinos

Surgical Appliances-Manufacturers Ship Bui lders & Repairers (mfrs) Health Services Hospitals Foundation-Educ Philanthropic Research Physicians & Surgeons Communications

Janitor Service Hospitals Rehabil itation Services Hospitals Police Departments Clinics Hospitals Laboratories-Research & Development Aquariums-Public Rehabil itation Services Hospitals Hospitals Electronic Equipment & Suppl ies-Retail Manufacturers Hospitals College & University Placement Service

Source: State of California Employment Development Deparlment; compiled from America's Labor Market Information System (ALM/SJ Employer Database, 2017 1st Edition.

B-4

Construction Activity

The following tables show valuation summaries of building permits issued in the City and the County, respectively. Annual figures are not yet available for calendar year 201 6 .

Permit Valuation New Sing le-family New Mu lti-family Res. Alterations/Additions

Total Residential

New Commercial New Industrial New Other

CITY OF SANTEE Building Activity and Permit Valuation

(Dollars in Thousands)

201 1

$23,833.6 7 , 1 78.0 4,946.3

35,957.9

0.0 0.0 0.0

2012

$1 9,501.5 4, 1 04.2 1 ,732.8

25,338.5

201 3

$ 1 1 ,423.2 1 0 , 1 57.6

1 ,970.0 23,550.8

Com. Alterations/Additions 3,093.6 3,093.6

1 ,632.4 0.0 0.0

4,900.6

824.5 0.0 0.0

6,966.2 7,790.7 Total Nonresidential

New Dwelling Un its Single Family Multiple Family

TOTAL

81 70

1 5 1

6,533.0

69 44

1 1 3

31 1 02 1 33

Source: Construction Industry Research Board, Building Permit Summary.

Permit Valuation: New Single-family New Multi-family Res. Alterations/Additions Total Residential

New Commercial New Industrial New Other Com. Alterations/Additions Total Nonresidential

New Dwell ing Un its Single Family Multiple Family

TOTAL

COUNTY OF SAN DIEGO Building Activity and Permit Valuation

(Dollars in Thousands)

201 1

$71 1 ,514.7 375,732.6 335 344.7

1 ,422,592.0

252,659.0 3,636.1

21 ,025.5 684,283.0 961 ,603.6

2,242 3,038 5,280

2012

$773,429.6 613 ,538.9 222,81 3.5

1 ,609,782.0

595,236.6 24,224.3 36,851 . 1

647 051.4 1 ,303,363.4

2 , 100 4 319 6,41 9

2013

$936,634.3 878, 1 79.2 245 435.7

2,060,249.3

652,509.8 20,783.9 67,963.4

696 1 40.0 1 ,437,397.1

2,539 5,803 8,342

Source: Construction Industry Research Board, Building Permit Summary.

B-5

2014

$ 1 ,428.0 1 8,534.9

3,490.4 23,453.3

0.0 0.0

861.7 2,236. 1 3,097.8

4

1 72 1 76

2014

$860,232.6 6 1 1 ,730.7 346,889.7

1 ,81 8,853.0

881 , 1 82.3 9, 1 60.0

233,997.8 796,287.2

1 ,920,627.3

2,276 4,327 6,603

2015

$3,975.0 0.0

2,971.5 6,946.5

1 ,390.2 0.0

2,330.1 14 784.2 1 8,504.5

1 6 0

1 6

2015

$1 ,069,272.9 1 ,028,733.2

349,035.7 2,447,041 .8

521 ,789.4 77,376.7

493,579.9 769,756.1

1 ,862,502.1

3, 1 36 6,869

1 0,005

Effective Buying Income

"Effective Buying Income" is defined as personal income less personal tax and nontax payments, a number often referred to as "disposable" or "after-tax" income. Personal income is the aggregate of wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor's income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as

"disposable personal income."

The following table summarizes the total effective buying income for the City, the County, the State and the United States for the period 2011 through 2015. Annual figures are not yet available for calendar year 2016.

CITY OF SANTEE AND COUNTY OF SAN DIEGO Effective Buying Income

201 1 through 201 5

Total Effective Buying Income

Year Area (OOO's Omitted)

201 1 City of Santee $1 , 1 64,0 1 5 County of San Diego 70,602,550 California 81 4,578,458 Un ited States 6,438, 704,664

201 2 City of Santee $1 ,221 ,203 County of San Diego 74,593,405 California 864,088,828 Un ited States 6, 737,867, 730

201 3 City of Santee $1 ,289,303 County of San Diego 73,266, 1 55 California 858,676,636 Un ited States 6,982,757,379

2014 City of Santee $1 ,388,895 County of San Diego 76,880,343 California 901 , 1 89,699 Un ited States 7,357, 1 53,421

201 5 City of Santee $1 ,558,01 5 County of San Diego 76,880,343 California 901 , 1 89,699 Un ited States 7,357, 1 53,421

Source: Safes & Marketing Management SutVey of Buying Power.

B-6

Median Household Effective

Buying Income

$53,978 48, 1 1 1 47,062 41 ,253

$53,467 48,634 47,307 41 ,358

$55,673 49,302 48,340 43,71 5

$58,831 51 ,447 50,072 45,448

$63,821 51 ,447 50,072 45,448

APPENDIX C

AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2016

Board of Directors Audit Cornrnittee Padre Darn Municipal Water District Santee, California

We have audited the financial statements of the Padre Darn Municipal Water District (the District) for the year ended June 30, 20 16. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, as well as certain information related to the planned scope and timing of our audit. We have cornrnunicated such information in our letter dated May 6, 20 16. Professional standards also require that we cornrnunicate to you the following information related to our audit.

Significant Audit Findings:

Qualitative Aspects of Accounting Practices

Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Padre Darn Municipal Water District are described in Note I to the financial statements. As discussed in Note I to the financial statements, the District has implemented Governmental Accounting Standards Board (GASB) Statement No. 72, "Fair Value Measurement and Application". The adoption of this standard had no material impact on the District's financial statements. No other accounting policies were adopted and the application of other existing policies was not changed during the year ended June 30, 2016. We noted no transactions entered into by Padre Darn Municipal Water District during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period.

Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected.

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2965 Roosevelt Street, Carlsbad, CA 92008-2389 • Tel: 760.729.2343 • Fax: 760.729.2234

Offices located in Orange and San Diego Counties

Significant Audit Findings (Continued):

Qualitative Aspects of Accounting Practices (Continued)

The most sensitive estimates affecting the District's financial statements were:

a. Management's estimate of the fair market value of investments which is based on market

values by outside sources.

b. Management's estimate of useful lives of depreciable capital assets is based on the length of

time it is believed that those assets will provide some economic benefit in the future.

c. Management's estimate of the allowance for doubtful accounts is based on historical water

revenues, historical loss levels, and an analysis of the collectability of individual accounts.

d. Management's estimate of the Other Post-Employment Benefits Plan actuarial accrued

liability which impacts the annual required contributions are based upon several key

assumptions that are set by management with the assistance of an independent third party

actuary. These key assumptions include anticipated investment rate of return, health care

cost trends, projected salary increases, mortality and certain amortization periods.

e. The annual required contributions, pension expense, net pension liability and corresponding

deferred outflows of resources and deferred inflows of resources for the Authority's public

defined benefit plans with CalPERS are based on actuarial valuations provided by

CalPERS.

We evaluated the key factors and assumptions used to develop these estimates in determining that they

were reasonable in relation to the financial statements taken as a whole.

Certain financial statement disclosures are particularly sensitive because of their significance to

financial statement users. The most sensitive disclosures affecting the financial statements were reported in Note l .k. regarding depreciation expense, Note 7 regarding the defined benefit pension

plan and Note 8 regarding Other Post-Employment Benefits.

The financial statement disclosures are neutral, consistent, and clear.

Dijjiculties Encountered in Performing the Audit

We encountered no significant difficulties in dealing with management in performing and completing

our audit.

Corrected and Uncorrected Adjustments

Professional standards require us to accumulate all known and likely adjustments identified during the

audit, other than those that are clearly trivial, and communicate them to the appropriate level of

management. The attached schedule summarizes uncorrected misstatements of the financial

statements. Management has determined that their effects are immaterial, both individually and in the

aggregate, to the financial statements taken as a whole. In addition, none of the misstatements detected

as a result of audit procedures and corrected by management were material, either individually or in

the aggregate, to each opinion unit's financial statements taken as a whole.

- 2 -

Significant Audit Findings ( continued)

Disagreements with Management

For the purposes of this letter, a disagreement with management is a financial accounting, reporting, or

auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditors' report. We are pleased to report that no such disagreements arose during the course of our audit.

Management Representations

We have requested certain representations from management that are included in the management representation letter dated October 24, 20 16.

Management Consultations with Other Independent Accountants

In some cases, management may decide to consult with other accountants about auditing and

accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the Padre Dam Municipal Water District's financial statements or a determination of the type of auditor's opinion that may be expressed on those

statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants.

Other Audit Findings or Issues

We generally discuss a variety of matters, including the application of accounting principles and

auditing standards, with management each year prior to retention as the Padre Dam Municipal Water District's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention.

Other Matters

We applied certain limited procedures to Management's Discussion and Analysis, Schedule of Funding Progress for the Other Post-Employment Benefit Plan, Schedule of Changes in the Net Pension Liability and Related Ratios, and the Schedule of Contributions- Defined Benefit Plan, which

are required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic

financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI.

- 3 -

We were not engaged to report on the Supplementary Schedule of Income (Loss) Before Contributions by Fund Services, the Supplementary Schedule of Income (Loss) Before Contributions (Budget to Actual), and Schedule of Change in Cash, Cash Equivalents and Investments, which accompany the

financial statements but are not RSI. We did not audit or perform other procedures on this other information and we do not express an opinion or provide any assurance on it.

Restriction on Use

This information is intended solely for the use of the Board of Directors, Audit Committee and

management of the Padre Dam Municipal Water District and is not intended to be, and should not be, used by anyone other than these specified parties.

October 24, 2016 Carlsbad, California

- 4 -

AJE

#1

#2

Padre Dam Municipal Water District Schedule of Uncorrected Adjustments

June 30, 20 16

Account Description

Receivables- All Others

Deferred Revenue

To adjust AIR as Deferred Revenue at June 30, 2016.

Accts Rec- Customer Billings

Deposits-Customer Wtr & Swr

To reclassify receipts in advance of income earned as deferred revenue.

- 5 -

Debit Credit

1 89,33 1 .84

1 89,331.84

1 14,406.76

1 14,406.76


FINANCIAL STATEMENTS

WITH REPORT ON AUDIT BY INDEPENDENT

CERTIFIED PUBLIC ACCOUNTANTS

JUNE 30, 2016


JUNE 30, 2016

Independent Auditors' Report

Management's Discussion and Analysis (Required Supplementary Information)

Basic Financial Statements:

Statement of Net Position

Statement of Revenues, Expenses and Changes in Net Position

Statement of Cash Flows

Notes to Basic Financial Statements

Required Supplementary Information:

Schedule of Changes in the Net Pension Liability and Related Ratios

Schedule of Contributions - Defined Benefit Pension Plan

Schedule of Funding Progress for Other Post-Employment Benefits

Supplementary Information:

Schedule of Income (Loss) Before Contributions by Fund Services For the Year Ended June 30, 2016

Schedule of Income (Loss) Before Contributions by Fund Services For the Year Ended June 30, 2015

Schedule of Income (Loss) Before Contributions (Budget to Actual) For the Year Ended June 30, 2016

Schedule of Income (Loss) Before Contributions (Budget to Actual) For the Year Ended June 30, 2015

Schedule of Change in Cash, Cash Equivalents and Investments For the Year Ended June 30, 2016

Schedule of Change in Cash, Cash Equivalents and Investments For the Year Ended June 30, 2015

TABLE OF CONTENTS

1 - 2

3 - 8

9 - 10

1 1

12 - 13

14 - 41

42

43

44

45

46

47

48

49

50

INDEPENDENT AUDITORS' REPORT

Board of Directors Padre Dam Municipal Water District Santee, California

We have audited the accompanying financial statements of Padre Dam Municipal Water District as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the State Controller's Minimum Audit Requirements for California Special Districts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves perfonning procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Padre Dam Municipal Water District as of June 30, 2016, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America, as well as the accounting systems prescribed by the California State Controller's Office and California regulations governing Special Districts.

-1-

2965 Roosevelt Street, Carlsbad, CA 92008-2389 • Tel: 760.729.2343 • Fax: 760.729.2234

Offices located in Orange and San Diego Counties

Other Matters

Summarized Comparative Information

We have previously audited the Padre Darn Municipal Water District's 20 15 financial statements, and our report dated February 1 1 , 2016, expressed an unmodified opinion on those audited financial statements. In our opinion, the surnrnarized comparative information presented herein as of and for the year ended June 30, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived.

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, and the schedule of changes in the net pension liability and related ratios, the schedule of contributions Defined Benefit Pension Plan and the schedule of funding progress for Other Post-Employment Benefit Plan, as identified in the accompanying table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

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 supplementary information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it.

Carlsbad, California

October 24, 2016

-2-

PADRE DAM MUNICIPAL WATER DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS

MANAGEMENT'S DISCUSSION AND ANALYSIS

Our discussion and analysis of Padre Darn Municipal Water District's (District) financial performance provides an overview of the District's financial activities for the year ended June 30, 2016. Please read it in conjunction with the District's financial statements, which follow this section.

Financial Statements

This discussion and analysis provides an introduction and a brief description of the District's financial statements, including the relationship of the statements to each other and the significant differences in the information they provide. The District's financial statements include four components:

• Statement of Net Position • Statement of Revenues, Expenses and Changes in Net Position • Statement of Cash Flows • Notes to Basic Financial Statements

The statement of net position includes all the District's assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference between the four reported as net position. Net position may be displayed in the categories:

• Net Investment in Capital Assets • Restricted • Unrestricted

The statement of net position provides the basis for computing rate of return, evaluating the capital structure of the District and assessing the liquidity and financial flexibility of the District.

The statement of revenues, expenses and changes in net position presents information which shows how the District's net position changed during the year. All of the current year's revenues and expenses are recorded when the underlying transaction occurs, regardless of the timing of the related cash flows. The statement ofrevenues, expenses and changes in net position measures the success of the District's operations over the past year and determines whether the District has recovered its costs through current services and other revenues.

The statement of cash flows provides information regarding the District's cash receipts and cash disbursements during the year. This statement may report cash activity in four categories:

• Operating • N oncapital and related financing • Capital and related financing • Investing

This statement differs from the statement of revenues, expenses and changes in net position because it accounts only for transactions that result in cash receipts or cash disbursements.

The notes to the financial statements provide a description of the accounting policies used to prepare the financial statements and present material disclosures required by generally accepted accounting principles that are not otherwise present in the financial statements.

3


Financial Highlights

During the year ended June 30, 2016, the District's total net position increased by $1 1 ,927,499. The District's operating revenues of$60,599,639 decreased by $2,736,480 while operating expenses of$55,589,800 decreased by $1 ,663,641 . Non-operating revenues and expenses decreased by $ 1 1 ,954,104 and $ 103 , 126 respectively. The prior year's nonoperating revenues included revenues from the City of San Diego METRO for settlement proceeds and the write off of a liability for capital infrastructure.

Financial Analysis of the Financial Statements

Net Position

The District's net position at June 30, 2016 totaled $24 1,086,692 compared with $229, 159,193 at June 30, 2015. The $1 1 ,927,499 increase in net position is primarily attributed to operating income of $5,009,839, non-operating revenues of $3,403,490, capital contributions of $6, 144,804, and is offset by interest expense of $2,630,634. The following is a sununary of the District's statement of net position:

June 30, 2016 Jnne 30, 2015 Change Assets

Current Assets $ 75,028,919 $ 69,757,396 $ 5,27 1 ,523 Noncurrent Assets:

Restricted Assets 24,302,607 24,422, 1 85 (1 1 9,578) Capital Assets, net of depreciation 247,340,000 244,479,542 2,860,458

Total Assets 346,67 1 ,526 338,659, 123 8,012,403

Deferred Outflows of Resources Pension Contribtuion 2,508,068 2,293 , 148 2 14,920 Deferred Amount on Refunding 1 14,382 133 ,825 (19,443)

Total Deferred Outflows of Resources 2,622,450 2,426,973 195,477

Liabilities Current Liabilities 1 1 ,340,604 10,916,805 423,799 Due to Other Agencies 42 1 ,92 1 42 1 ,92 1 Long-Term Debt 92,750,039 93 ,712,264 (962,225) Other Noncurrent Liabilities 1 , 1 75,704 2,678,5 1 1 (1,502,807)

Total Liabilities 105,688,268 107,307,580 (1,619,3 12)

Deferred Inflows of Resources 2,519,016 4,619,323 (2,100,307)

Net Position Net investment in capital assets 197,386,757 1 9 1 ,9 1 9,773 5,466,984 Restricted for future capital projects 6,254,788 4,358,606 1 ,896, 1 82 Restricted for future debt service 4,500,097 4,480,450 19,64 7 Unrestricted 32,945,050 28,400,364 4,544,686

Total Net Position $ 24 1 ,086,692 $ 229, 159, 193 $ 1 1 ,927 ,499

4


Financial Analysis of the Financial Statements (Continned)

Revennes, Expenses and Changes in Net Position

The District reported an increase in net position of $ 1 1 ,927,499 for the year ended June 30, 2016. Operating revenues were lower than the prior year by $2,736,480 mostly due to lower water sales. Current year potable water sales were lower than the prior year by 20.6%. The lower water sales were offset by rate increases for water and wastewater operations as well as an increase in campground revenues. Operating expenses were $ 1 ,663,641 lower than the prior year due to a $ 1 ,339,07 1 decrease in water and sewer services direct costs, a $78 1 ,490 decrease in internal operating expenses and a $456,920 increase in depreciation expense as a result of capital asset additions. Nonoperating revenues decreased by $ 1 1 , 954, 1 04 and non operating expenses decreased by $ 103, 126. Since current year water sales were lower than prior year the amount of water purchased from San Diego County Water District (CW A) was also lower. However the cost of the water purchased was higher due to an increase by CW A in the external unit cost of water. The prior year nonoperating revenues included revenues from the City of San Diego METRO for settlement proceeds and the write off of a liability for capital infrastructure. The following is a sununary of the District's statement ofrevenues, expenses and changes in net position:

June 30, 2016 June 30, 2015 Change

Operating Revenues $ 60,599,639 $ 63,336, 1 1 9 $ (2,736,480) Nonoperating Revenues 3,403,490 15,357,594 (1 1,954, 104)

Total Revenues 64,003,129 78,693,713 (14,690,584)

Operating Expenses 55,589,800 57,253,441 (1,663,641)

Nonoperating Expenses 2,630,634 2,733,760 (103,1 26)

Total Expenses 58,220,434 59,987,201 (1,766,767)

Income Before Capital Contributions 5,782,695 1 8,706,512 (12,923,8 17)

Capital Contributions 6,144,804 3,899,640 2,245,164

Change in Net Position 1 1 ,927,499 22,606, 152 (10,678,653)

Net Position at Beg. of Year (as originally stated) 229,159,193 242,776,392 (13,617,199)

Prior Period Adjustment (36,223,35 1 ) 36,223,351

Net Position at Beg. of Year (as restated) 229,1 59,193 206,553,041 22,606, 152

Net Position at End of Year $ 241 ,086,692 $ 229,159,193 $ 1 1 ,927,499

5


Capital Assets

At June 30, 2016, the District had invested $247,340,000 in capital assets, net of accwnulated depreciation of $ 1 16 ,944,290, including land, franchises and water rights, a water system, sewer system, water recycling system, buildings, equipment, park and campgrounds and construction-in-progress (CIP). This amount represents an increase of $2,860,458, net of depreciation, over the prior year.

The following is a summary of the capital assets at June 30, 2016 and 2015 :

June 30, 2016

Land, Franchises and Water Rights $ 898,5 1 1

Water System 2 1 1 ,280,641

Sewer System 48,977,722

Water Recycling System 26,429,104

Parks and Campgrounds 20,1 80,329

Buildings 15 ,595,065

Equipment 10,755,262

Construction-in-Progress 30,167,656

Total 364,284,290

Less: Accumulated Depreciation ( 1 16,944,290)

Net Capital Assets $ 247,340,000

Significant additions to CIP for the year ended June 30, 2016 include:

CSC Ops Yard hnprovement

PS I Surge Tank Replacement Design & Construction

ESA Secondary Connection Alternate Site

ESA Secondary Connection Grading

Emergency Diesel Trailer Pump

WSA Polyservice Replacement

Sewer Projects 15/16

JPS Grinders & Gates Replacement

Prop One - WRF Expansion

County of SD Wing Avenue

June 30, 2015

$ 898,5 1 1

2 10,60 1 ,49 1

48,75 1 ,473

26,400,489

20,159,3 1 8

14,921 ,429

10,594,920

2 1 ,792,6 15

354,120,246

(109,640,704)

$ 244,479,542

$ 6,458,247

557,666

487,536

350,649

206,628

191 ,630

177,021

170,224

150,574

139,289

Additional information on the District's capital assets can be found in notes 1 and 4 of the notes to financial statements.

6


Long-Term Debt

At June 30, 2016, the District had $62,4 15, 1 8 1 in long-term debt, including certificates of participation, a note payable, a capital lease, revenue bonds, unamortized premiums/discounts and other debt. Long term debt decreased $3,224,933 primarily due to principal payments made on debt. The following is a summary of the long-term debt at June 30, 2016 and 2015:

June 30, 2016 June 30, 2015

Certificates of Participation $ 50,265,000 $ 50,915 ,000

Notes Payable 2,244,343 2,583,959

Revenue Bonds 3,650,000 4,930,000

Capital Leases 2,253,562 2,834,898

Park Cabin Loan 1,055,598 1 , 134,867

Other Long-Term Debt 4 1 ,942

Total Long-Term Debt 59,468,503 62,440,666

Add: Unamoritzed Premiums/Discounts 2,946,678 3, 199,448

$ 62,415 , 18 1 $ 65 ,640,114

Additional information on the District's long-term debt can be found in note 5 of the notes to fmancial statements.

Conditions Affecting Current Financial Position

California has been in a drought for the last several years. In January 2014, Governor Jerry Brown declared a drought emergency and called on California residents to conserve. Although management cannot accurately predict how this drought will affect water sales and the cost of operations in the future, water sales have been lower due to the drought and lower consumption from conservation. Potable water sales decreased 20.6% from the year ended June 30, 2015 to the year ended June 30, 2016.

In June 2012, the Board approved the second Five Year Business Plan & Budget that covered fiscal years 2013-2017. The budgeted expenditures for preventative maintenance were $3 million per year and capital replacement and improvements were expected to average $13 . 9 million per year. Annual rate increases were approved by the Board to cover the costs ofregular operations and capital improvements. The average annual approved rate increases were 4.75% for water and 1 .5% for sewer. At the same time the Board approved a pass through ordinance authorizing the pass through of rate increases from external agencies. For FY 2015/16, the pass through of costs from suppliers resulted in an average 5.3% increase in water rates and 0% for sewer.

In 2012, the District hired an independent rate consultant, HOR, to perform a cost of service study. HOR found the District's rate structures to be sound but recommended changes to simplify the billing structure for water. Their proposed water and sewer rate adjustments and corresponding rate designs were developed using generally accepted rate setting methodologies and were based on accounting, budgeting, and customer record information provided by the District. The proposed rates were approved by the Board and are intended to provide adequate revenue to maintain the water and sewer utility system in a sustainable manner. On a periodic basis the rate structures should be reviewed to makes sure they remain sound. In 201 7, the District hired Carollo Engineers, Inc., an independent rate consultant, to perform a comprehensive cost of service and rate design study.

7


Contacting the District's Financial Manager

This financial report is designed to provide Padre Dam Municipal Water District's customers, investors, and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Padre Darn Municipal Water District Chief Financial Officer.

8


STATEMENT OF NET POSITION June 30, 20 16

(with prior year data for comparison only)

ASSETS

Current Assets: Cash and cash equivalents (Notes I and 2) Restricted cash and cash equivalents (Notes I and 2) Investments (Notes I and 2) Accounts receivable, net (Note I) Property taxes receivable, net (Note I) Accounts receivable - other

Accrued interest receivable

Inventory Prepaid expenses

Total Current Assets

Noncurrent Assets :

Restricted Assets (Notes I, 2 and 3) : Cash and cash equivalents Investments

Accrued interest receivable

Total Restricted Assets

Capital Assets (Note 4): Land, franchise and water rights

Construction in progress

Capital assets, net of depreciation

Total Capital Assets, Net of Depreciation

Total Noncurrent Assets

Total Assets

DEFERRED OUTFLOWS OF RESOURCES Deferred outflow - pension contributions

Deferred amount on refunding

Total Deferred Outflows of Resources

2016

$ 37,720,900 606,858

27,672,309 5,684,889

10 1 ,912 1 ,944,752

105,494 1 ,058,179

133,626

75,028,919

6,975 ,624 17,308,360

18,623

24,302,607

898,5 1 1 30,167,656

216,273,833

24 7,340,000

27 1 ,642,607

346,67 1,526

2,508,068 1 14,382

2,622,450

See accompanying independent auditors' report and notes to basic financial statements.

$

2015

41 ,600,780 300,790

19,460,201 5,002,704

99,698 2,105,855

54,235 995,275 137,858

69,757,396

7,920,220 16,487,195

14,770

24,422, 185

898,5 1 1 2 1 ,792,615

221 ,788,416

244,479,542

268,901 ,727

338,659,123

2,293 ,148 133,825

2,426,973

(Continued) 9


STATEMENT OF NET POSITION (Continued) June 30, 2016


LIABILITIES

Current Liabilities:

Accounts payable Accrued expenses and other liabilities Accrued interest payable Current portion oflong-term debt Liabilities payable from restricted assets:

Deposits and advances on construction

Total Current Liabilities

Noncurrent Liabilities:

Due to Other Agencies

Long-Term Debt (Note 5): Capital lease obligations Certificates of participation Note payable Revenue bonds Other long-term debt Net pension liability

Total Long-Term Debt

Other Noncurrent Restricted Liabilities: Prepaid capacity fees (Note 6) Accrued pension benefits and other

Total Other Noncurrent Restricted Liabilities

Total Noncurrent Liabilities

Total Liabilities

DEFERRED INFLOWS OF RESOURCES Deferred amount on pension

Total Deferred Inflows of Resources

NET POSITION Net investment in capital assets Restricted for future capital projects Restricted for debt service Unrestricted

Total Net Position

$

2016

4,999,991 2,35 1 ,388

746,006 2,636,361

606,858

1 1 ,340,604

42 1,92 1

1 ,645,475 52,075 ,944

1 ,894,4 19 3 , 190,734

972,246 32,971 ,221

92,750,039

1 , 1 6 1 ,755 13 ,949

1 , 175,704

94,347,664

105,688,268

2,5 19,016

2,5 19,0 16

197,386,757 6,254,788 4,500,097

32,945,050

$ 241 ,086,692


$

2015

4,7 1 1 ,008 2,174,572

755,599 2,974,836

300,790

10,916,805

2,253,563 52,886,707

2,241 , 103 4,227,741 1 ,056,164

3 1 ,046,986

93,7 12,264

2,664,564 13,947

2,678,5 1 1

96,390,775

107,307,580

4,6 19,323

4,619,323

19 1 ,9 19,773 4,358,606 4,480,450

28,400,364

$ 229,159,193

10


STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the year ended June 30, 2016


2016 2015

OPERATING REVENUES

Water operations $ 39,421 ,377 $ 42,637,035 Wastewater operations 15,755,212 15,589,443 Park operations 5,423,050 5 ,109,641

Total Operating Revenues 60,599,639 63,336, 1 1 9

OPERATING EXPENSES Water operations 36,747,359 40,679,625 Wastewater operations 14,250,648 12,206,049 Park operations 4,591,793 4,367,767

Total Operating Expenses 55,589,800 57,253,441

Operating Income 5,009,839 6,082,678

NONOPERATING REVENUES (EXPENSES) Investment income 443,844 173,774 Restricted investment income 160,000 123,884 Taxes and assessments 2,789,1 12 2,698,948 Settlement income 12,349,602 Gain on sale of assets 10,534 1 1 ,386 Interest expense (2,630,634) (2,733,760)

Total Nonoperating Revenues (Expenses) 772,856 12,623,834

Income Before Capital Contributions 5,782,695 18,706,5 12

Capital Contributions 6, 144,804 3,899,640

Change in Net Position 1 1 ,927,499 22,606,152

Net Position, Beginning of Year, As Originally Stated 229, 159, 193 242,776,392

Prior period adjustment (36,223,35 1)

Net Position, Beginning of Year 229, 159, 193 206,553,041

Net Position, End of Year $ 241 ,086,692 $ 229,159, 193

See accompanying independent auditors' report and notes to basic financial statements. 1 1


STATEMENT OF CASH FLOWS For the year ended June 30, 2016


CASH FLOWS FROM OPERATING ACTIVITIES

2016

Receipts from customers $ 58,575,748 Payments for operating goods and services

Payments to employees

Net Cash Provided by Operating Activities

(3 1 ,339,830) ( 16 , 172,878)

1 1 ,063,040

CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTIVITIES

Receipts from taxes and assessments

Net Cash Provided by Noncapital and Related Financing Activities

2,786,898

2,786,898

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES

Acquisition and construction of capital assets (9,847, 149) Principal payments on long-term debt (2,972, 163) Proceeds from capital contributions 5,798,529 Proceeds from settlement

Interest paid, net of amounts capitalized

Proceeds from sale of assets

Net Cash (Used) by Capital and Related Financing Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investments

Proceeds from sale and maturities of investments

Interest received on investments

Net Cash Provided (Used) by Investing Activities

Net Decrease in

Cash and Cash Equivalents

Cash and Cash Equivalents, Beginning of Year

Cash and Cash Equivalents, End of Year

(2,873,554) 10,532

(9,883,805)

(20,906,648) 1 1 ,970,000

452,107

(8,484,54 1)

(4,5 18,408)

49,821 ,790

$ 45,303,382


2015

$ 63,009,804

$

(34,684,5 1 1 ) ( 16,006,299)

12,3 18,994

2,709,633

2,709,633

(7,869,7 16) (2,816,972)

848,984 9,230,842

(2,981 ,982) 1 1 ,386

(3,577,458)

(21,412,617) 22,755,000

301 ,940

1 ,644,323

13,095,492

36,726,298

49,821 ,790

(Continued) 12


STATEMENT OF CASH FLOWS (Continued) For the year ended June 30, 2016


2016

Reconciliation of operating income to net cash flows provided by operating activities:

Operating income $ 5,009,839 Adjustments to reconcile operating income

to net cash provided by operating activities: Depreciation 7,332,966 GASB 68 adjustment to pension expense (390,992) (Increase )/Decrease in accounts receivable (682,185) (Increase )/Decrease in accounts receivable - other 16 1 , 103 (Increase )/Decrease in inventories (62,904) Decrease in prepaid expenses 4,232 Increase/(Decrease) in accounts payable 288,983 Increase in accrued expenses and other liabilities 598,737 Increase/(Decrease) in deposits and advances on construction 306,068 (Decrease) in accrued pension benefits and other ( 1 ,502,807)

Net Cash Provided By Operating Activities $ 1 1 ,063,040

Financial Statement Classification

Cash and cash equivalents Current assets :

Cash and cash equivalents $ 37,720,900 Restricted cash and cash equivalents 606,858

Noncurrent assets:

Restricted cash and cash equivalents 6,975,624

Total Cash and Cash Equivalents 45,303,382

Investments Current assets :

Investments 27,672,309 Noncurrent assets:

Restricted investments 17,308,360

Total Investments 44,980,669

Total Cash, Cash Equivalents and Investments $ 90,284,05 1

Supplemental Disclosures: Noncash Investing and Financing Activities

Contributed Capital for Capital Assets $ 346,275 Amortization Related to Long-Term Debt $ (252,77 1 ) Unrealized gain/(loss) on Investments $ 96,625


2015

$ 6,082,678

6,876,046 1 14,430

1,680,5 18 ( 1 ,688,240)

33,490 89,398

(538,085) 73,7 10

(86,307) (3 1 8,644)

$ 12,31 8,994

$ 4 1 ,600,780 300,790

7,920,220

49,821 ,790

19,460,201

16,487,195

35,947,396

$ 85,769 , 186

$ 2,409,812

$ (252,771 )

$ (3,888)

13

PADRE DAM MUNICIPAL WATER DISTRICT NOTES TO BASIC FINANCIAL STATEMENTS

June 30, 2016

1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a . Reporting Entity:

The Padre Darn Municipal Water District (the "District") was organized November 23, 1955, (as Rio San Diego Municipal Water District) pursuant to the Municipal Water District Law of 191 1 , Division 20 of the Water Code, as the result of an election held December 2, 1952. The name changed to Padre Darn Municipal Water District effective January 1 , 1977.

Santee County Water District (formed in 1956 pursuant to the County Water District Law, Division 12 of the Water Code) operated within the territory of the District. As the result of an election held on November 2, 1976, Santee County Water District dissolved and its functions and operations were assumed by the District on December 3 1 , 1976.

The communities of Alpine, Crest, and Harbison Canyon (Eastern Service Area) were annexed to the District in 196 1 . The area within Crest Public Utility District was annexed in 1985 when that agency dissolved.

The District purchases its water supply from the San Diego County Water Authority.

The District sends its wastewater to City of San Diego METRO for treatment.

The District produces recycled water for construction and irrigation.

The District owns and operates Santee Lakes Recreation Preserve.

The District is comprised of two geographically distinct Service Areas:

Western Service Area

Western Service Area provides retail potable water, recycled water and sewer services to the community of Santee. The Santee Lakes Recreation Preserve and the Santee Water Reclamation Facility are located within this senrice area.

Eastern Service Area

Eastern Service Area provides retail potable water service to the communities of Alpine, Crest and Harbison Canyon.

b. Basis of Presentation:

The basic financial statements of the District have been prepared in conformity with accounting principles generally accepted in the United States of America. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for governmental accounting financial reporting purposes.

The District is accounted for as an enterprise fund. An enterprise fund is a proprietary type fund used to account for operations (a) that are financed and operated in a rnauner similar to private business enterprises -where the intent of the governing body is that the costs ( expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes.

See accompanying independent auditors' report. 14


1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

c. Measurement Focus and Basis of Accounting:

"Measurement Focus" is a term used to describe which transactions are recorded within the various fmancial

statements. "Basis of Accounting" refers to when transactions are recorded regardless of the measurement focus applied. The accompanying financial statements are reported using the "economic resources measurement focus," and the "accrual basis of accounting." Accordingly, all assets, deferred outflows ofresources, liabilities (whether current or noncurrent) and deferred inflows of resources are included on the Statement of Net Position. The Statement of Revenues, Expenses, and Changes in Net Position presents increases (revenues) and decreases (expenses) in total net position. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows.

The District distinguishes operating revenues and expenses from nonoperating revenues and expenses. Operating revenues are generated by water sales, wastewater services and park services while operating expenses are directly related to furnishing those services. Nonoperating revenues and expenses are not directly associated with the normal business of supplying water, wastewater treatment services and park services.

When both restricted and unrestricted resources are available for use, it is the District's policy to use restricted resources first, and then unrestricted resources as necessary.

d. Net Position:

Net position of the District is classified into three components: (I) net investment in capital assets (2) restricted net position, and (3) unrestricted net position. These classifications are defined as follows:

Net Investment in Capital Assets

This component of net position consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of notes or borrowing that are attributable to the acquisition, construction, or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds is not included in the calculation of net investment in capital assets.

Restricted Net Position

This component of net position consists of net position whose use is constrained by external sources such as creditors (i.e. debt covenants), grantors, contributors, laws or regulations of other governments, or constraints imposed by law through constitutional provisions or enabling legislation.

Unrestricted Net Position

This component of net position consists of net position that does not meet the definition of"net investment in capital assets" or "restricted net position".




e. New Accounting Pronouncements:

Current Year Standards:

• In fiscal year 2015-2016, the District implemented Governmental Accounting Standards Board (GASB) Statement No. 72, "Fair Value Measurement and Application ". GASB Statement No. 72 requires the District to use valuation techniques which are appropriate under the circumstances and are either a market approach, a cost approach or income approach. GASB Statement No. 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels. Level I inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs, other than quoted prices included within Level I , that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs, and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. GASB Statement No. 72 also contains note disclosure requirements regarding the hierarchy of valuation inputs and valuation techniques that were used for the fair value measurements. There was no material impact on the District's financial statements as a result of the implementation of GASB Statement No. 72.

• GASB Statement No. 76 - "The Hierarchy of Generally Accepted Accounting Principles for State and

Local Governments ", was required to be implemented in the current fiscal year and did not impact the District.

• GASB Statement No. 79 - "Certain External Investment Pools and Pool Participants ", was required to be implemented in the current fiscal year, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing, which are effective for periods beginning after December 15, 2015, and did not impact the District.

• The District also early implemented GASB Statement No. 82 - "Pension Issues - an Amendment of GASE

Statement No. 67, No. 68 and No. 73. "

Pending Accounting Standards:

GASB has issued the following statements which may impact the District's financial reporting requirements in the future:

• GASB 73 - "Accounting and Financial Reporting for Pensions and Related Assets That Are Not

within the Scope of GASE Statement 68, and Amendments to Certain Provisions of GASE

Statements 67 and 68 ", the provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of Statement 68 is effective for periods beginning after June 15 , 2016.

• GASB 74 - "Financial Reporting/or Postemployment Benefit Plans Other Than Pension Plans ",

effective for periods beginning after June 15 , 20 16.

• GASB 75 - "Accounting and Financial Reporting for Postemployment Benefits Other Than

Pensions ", effective for periods beginning after June 15 , 2017.




e. New Accounting Pronouncements (Continued):

Pending Accounting Standards (Continued):

• GASB 77 - "Tax Abatement Disclosure ", effective for periods beginning after December 15, 20 15.

• GASB 78 - "Pensions Provided through Certain Multiple- Employer Defined Benefit Pension Plans ",

effective for periods beginning after December 15, 2015.

• GASB 79 - "Certain External Investment Pools and Pool Participants ", the certain provisions on portfolio quality, custodial credit risk, and shadow pricing, is effective for periods beginning after December 15, 2015.

• GASB 80 - "Blending Requirements for Certain Component Units ", effective for periods beginning after June 15, 2016.

• GASB 8 1 - "Irrevocable Split -Interest Agreements ", effective for periods beginning after December 15, 2016.

f. Deferred Outflows/Inflows of Resources:

In addition to assets, the Statement of Net Position will sometimes report a separate section for deferred outflows ofresources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until that time. The District has two items that qualify for reporting in this category. The first item is deferred amount on refunding. The second is deferred outflow related to pensions, and is equal to employer contributions made after the measurement date of the net pension liability.

In addition to liabilities, the Statement of Net Position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future period( s) and will not be recognized as an inflow of resources (revenue) until that time. The District has three items that qualify for reporting in this category. The first item is from the difference in projected and actual earnings on investments of the pension plan. This amount is deferred and amortized over five years. The second item is deferred inflows from pensions resulting from changes in assumptions. This amount is deferred and amortized over four years. The third item is deferred inflows from pensions resulting from differences between actual and expected experience. This amount is deferred and amortized over four years.

g. Statement of Cash Flows:

For purposes of the Statement of Cash Flows the District considers all financial instruments purchased with a maturity of three months or less to be cash and cash equivalents.

h. Investments:

Investments are stated at their fair value, which represents the quoted or stated market value. Investments that are not traded on a market, such as investments in external pools, are valued based on the stated fair value as represented by the external pool.




1. Accounts Receivable and Allowance for Doubtful Accounts:

Accounts receivable are from billed and unbilled customer accounts and total $5,684,889 at June 30, 2016. Management believes that all uncollectible accounts have been identified and written-off. Due to historically low write-offs of water and sewer revenue billed, no allowance has been established as of June 30, 2016.

J. Inventory:

Inventory consists primarily of materials and supplies used in the construction and maintenance of capital assets. Inventory is valued at cost using a weighted average cost method. Inventory items are charged to expense or construction in progress at the time that individual items are withdrawn from inventory or consumed.

k. Capital Assets:

The District records the acquisition of capital assets and additions, improvements and other capital outlays that significantly extend the life of an asset at historical cost. Contributed assets are recorded at their fair market value at the date of donation. Self-constructed assets are recorded in the amount of direct labor, material, and allocated overhead. District policy has set the capitalization threshold for reporting capital assets at $5,000 and an estimated useful life of greater than five years.

The District capitalizes interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest is included in the cost of the assets and is depreciated on the straight-line basis over the estimated useful life of such assets.

Depreciation is calculated on the straight-line method over the estimated useful life of an asset, which ranges from five to one hundred years as follows:

Water system Wastewater system Water recycling system Park and campgrounds Buildings Equipment

10 - 75 years 10 - 100 years 5 - 50 years 5 - 30 years

20 - 30 years 5 - 10 years

Depreciation totaled $7,332,966 for the year ended June 30, 2016. Depreciation expense has been allocated to Water Operations, Wastewater Operations and Park Operations on the Statement of Revenues, Expenses and Changes in Net Position. The allocation of depreciation expense for the years ended June 30, 2016 is as follows:

Water Operations

Wastewater Operations

Park Operations

I. Compensated Absences:

$5,499,726

1,077,935

755,305

$7,332,966

Vested or accumulated vacation and sick leave are recorded as expenses and liabilities as benefits accrue to employees. At June 30, 2016 accumulated vacation and sick leave totaled $ 1 ,8 13,575, and is included in accrued expenses and other liabilities on the Statement of Net Position.




m. Restricted Assets and Liabilities:

Certain current liabilities have been classified as current liabilities payable from restricted assets as they will be funded from restricted assets.

n. Use of Estimates:

The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and, accordingly, include amounts that are based on management's best estimates and judgments. Actual results could differ from those estimates.

o. Property Taxes:

Property taxes are billed by the County of San Diego to property owners. The District takes into account differences in the property taxes assessed in the two service areas when establishing its water rates for each area. The District's property tax calendar for the fiscal year ended June 30, 2016 was as follows:

Lien Date: Levy Date: Due Date:

Delinquent Date:

January I July I First Installment - November I Second Installment - February I First Installment - December 10 Second Installment - April 10

Property taxes receivable of $101 ,912 as ofJune 30, 2016 have been reported net ofan allowance for estimated uncollectible taxes in the amount of $5, 150.

p. Amortization of Deferred Charges, Bond Discounts and Premiums Costs:

Deferred charges, bond discounts, and premiums are being amortized over the periods of debt maturities. Amortization of deferred charges, bond discounts, and premiums totaled $233 ,3 28 for the year ended June 30, 2016, and is included in interest expense on the Statement of Revenues, Expenses and Changes in Net Position.

q. Interest Expense:

The District incurs interest charges on long-term debt. Interest expense for the year ended June 30, 2016, is as follows (does not include amortization of bond premium):

r. Pensions:

Amount Expensed $ 2,854, 929 Amount Capitalized as a Cost of Construction Projects 63 949

Total Interest $ 2,918,878

For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the District's California Public Employees' Retirement System (Ca!PERS) plans (Plans) and additions to/deductions from the Plan's fiduciary net position have been determined on the same basis as they are reported by Ca!PERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.



2. CASH AND INVESTMENTS:

Cash and investments at June 30, 2016 are classified in the accompanying financial statements as follows:

Statement of Net Position:

Current Assets:

Cash and cash equivalents

Restricted cash and cash equivalents

Investments

Noncurrent Assets:

Restricted:

Cash and cash equivalents

Investments

Total cash and investments

Cash and investments consist of the following:

Cash on hand

Deposits with financial institutions

Investments

Total cash and investments

$ 37,720,900

606,858

27,672,309

6,975,624

17,308,360

$ 90,284,051

$ 2,950

30,650,164

59,630,937

$ 90,284,051

GASB Statement No. 9 defines cash equivalents and investments for presentation in the financial statements (Statement of Net Position and Statement of Cash Flows), and GASB Statement No. 3 defrnes cash equivalents and investments for presentation in the notes to the financial statements. GASB Statement No. 9 classifies investments with an original maturity of three months or less when purchased and investment pools with no withdrawal penalty as cash equivalents. GASB Statement No. 3 classifies both of these items as investments for note disclosure.



2. CASH AND INVESTMENTS (CONTINUED):

Investments Authorized by the California Government Code and the District's Investment policy:

The table below identifies the investment types that are authorized for the District by the California Government Code ( or the District's investment policy, where more restrictive). The table also identifies certain provisions of the California Government Code ( or the District's investment policy, where more restrictive) that address interest rate risk, credit risk, and concentration of credit risk.

Maximwn

Percentage of

Authorized Investment T�ee Maximwn Maturit� Portfolio

U.S. Treasury Obligations 5 years None

U.S. Government Sponsored Entities 5 years None

Banker's Acceptances 1 80 days 40%

Commercial Paper 270 days 25%

Certificates of Deposit 5 years 30%

Repurchase Agreements I year None

Reverse Repurchase Agreements 92 days 20o/o of base value

Mediwn-Term Notes 5 years 30%

Money Market Mutual Funds NIA 20%

Local Agency Investment Fund (LAIF)** NIA None

San Diego County Pooled Investment Fund NIA None

California Asset Management Program (CAMP) NIA None

**Maximum investment in LAIF is $65 million per California Government Code.

Investments Authorized by Debt Agreements:

Maximwn

Investment in One

Issuer

None

None

None

10%

None

None

None

None

Multiple

None

None

None

Investments of debt proceeds held by a bond trustee are governed by the general provisions of the California Government Code or the District's investment policy (whichever is more restrictive).

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 the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District 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 corning close to maturity evenly over time to provide the cash flow and liquidity needed for operations.




Disclosures Relating to Interest Rate Risk (Continued):

Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuations is provided by the following table that show the distribution of the District's investments by maturity.

As of June 30, 2016 the District had the following investments:

Remaining Matmity (in Months)

1 2 Months 13 to 24 25 to 60 More than 60 Investment Type Total or Less Months Months Months

CAMP $ 67,719 $ 67,719 $ $ $ Local Agency Investment Fund (LAIF) 2 1 , 1 1 1 ,284 2 1 ,1 1 1 ,284

Money Market Mutual Funds 2,971 ,265 2,971 ,265

U.S. Government Sponsored Entities 1 8 ,023,567 1 1 ,742,448 1 ,506,420 4,774,699 U.S. Treasury Obligations 14,934, 168 2,200,561 4,010,620 8,722,987

Corporate Obligations 2,522,934 1 , 1 0 1 ,393 915,941 505,600

Total $ 59,630,937 $39,1 94,670 $ 6,432,981 $ 14,003,286 $

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 recognized statistical rating organization. Presented below is the minimum rating required by the California Government Code, the District's investment policy or debt agreements, and the Standard and Poor' s rating as of June 30, 2016 for each investment type.

The District's investment policy and the actual rating as of June 30, 20 16 for each investment type is as follows:

Rating as ofYearEnd

Minimum Exempt from

Investment Type Total Legal Rating Disclosure AAA AA A Not Rated

CAMP $ 67,7 19 NIA $ $ 67,7 19 $ $ $

Local Agency Investment Fund (LATF) 21 , 1 1 1,284 NIA 21 , 1 1 1,284

Money Market Mutual Funds 2,971,265 AAA 2,971,265

U.S. Government Sponsored Entities 18,023,567 NIA 2,208,573 15,814,994

U.S. Treasury Obligations 14,934,168 NIA 14,934, 168

Corporate Obligations 2,522,934 NIA 1,013,514 1 ,509,420

Total $ 59,630,937 $ 14,934, 168 $ 5,247,557 $ 1 6,828,508 $ 1 ,509,420 $ 21 , 1 1 1,284




Concentration of Credit Risk:

The investment policy of the District contains various limitations on the amounts that can be invested in any one type or group of investments and in any issuer, beyond that stipulated by the California Government Code, Sections 53600 through 53692. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of total District investments are as follows as of June 30, 2016.

Issuer

Federal National Mortgage Association

Federal Home Loan Mortgage Corporation

Federal Home Loan Bank

Custodial Credit Risk:

Investment Type U.S. Government Sponsored Entities

U.S. Government Sponsored Entities

U.S. Government Sponsored Entities

$

$

$

Reported Amount 8,290,294

5,516,900

4,216,373

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, an entity 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 custodial credit for investments is the risk that, in the event of the failure of the counterparty ( e.g. broker-dealer) to a transaction, an entity 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 the District's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local government 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 1 10% 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. As of June 30, 2016, $20,682,203 of the District's deposits with financial institutions in excess of federal depository insurance limits was held in collateralized accounts.

Local Agency Investment Fund (LAIF) :

The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by the California Government Code under the oversight of the Treasurer of the State of California. The fair value of the District's investment in this pool is reported in the accompanying financial statements at amounts based upon the District's pro-rata share of the fair value provided by LAIF for the entire LAIF 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.

California Asset Management Program (CAMP):

The District is a voluntary participant in the California Asset Management Program (CAMP). CAMP is an investment pool offered by the California Asset Management Trust (the Trust). The Trust is a joint powers authority and public agency created by the Declaration of Trust and established under the provisions of the California Joint Exercise of Powers Act for the purpose of exercising the common power of its Participants to invest funds. The investments are limited to investments permitted by California Government Code. The District reports its investment in CAMP at the fair value amounts provided by CAMP, which is the same value of the pool share. At June 30, 2016 the fair value approximated the District's cost.

Fair Value Measurements:

The District categorizes its fair value measurement within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the relative inputs used to measure the fair value of the investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level 3 measurements).




Fair Value Measurements (Continued):

The three levels of the fair value hierarchy are described as follows:

Level I :

Level 2:

Level 3:

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the District has the ability to access.

Inputs to the valuation methodology include:

• Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • Inputs other than quoted prices that are observable for the asset or liability; • Inputs that are derived principally from or corroborated by observable market data

by correlation or other means.

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect the District's own assumptions about the inputs market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the District's own data.

The asset's or liability's level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Valuation techniques used need to maximize the use ofobservable inputs and minimize the use of unobservable inputs.

The determination of what constitutes observable requires judgment by the District's management. District management considers observable data to be that market data which is readily available, regularly distributed or updated, reliable, and verifiable, not proprietary, and provided by multiple independent sources that are actively involved in the relevant market.

The categorization of an investment or liability within the hierarchy is based upon the relative observability of the inputs to its fair value measurement and does not necessarily correspond to District management's perceived risk of that investment or liability.

The following is a description of the recurring valuation methods and assumptions used by the District to estimate the fair value of its investments. The methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

When available, quoted prices are used to determine fair value. When quoted prices in active markets are available, investments are classified within Level 1 of the fair value hierarchy. When quoted prices in active markets are not available, fair values are based on evaluated prices received by District management.




Fair Value Measurements (Continued):

The District has no investments categorized in Level 3. When valuing Level 3 securities, the inputs or methodology are not necessarily an indication of the risks associated with investing in those securities. Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy.

Investments by Fair Value Level U.S. Government Sponsored

Entity Securities FNMA FHLMC FHLB

U.S. Treasury Securities Corporate Obligations

Total Investments by Fair Value Level

Investments measured at Cost or Net Asset Value (NAV) Local Agency Investment Fund (LAIF) California Asset Management Program (CAMP) Money Market Mutual Funds

Quoted Prices Level 1

$

$

Total Investments at Cost or Net Assets Value (NAV)

Total Investments

3 . RESTRICTED ASSETS:

$

$

Observable Inputs Level 2

8,290,294 5,516,900 4,216,373

14,934,168 2,522,934

35,480,669

Restricted assets were provided by, and are to be used for, the following:

Funding Source Use

Customer and construction deposits Various

Capacity expansion funds and accrued interest Acquisiton and construction

receivable

$

$

Unobservable Inputs Level 3 June 30, 2016

$ 8,290,294 5,51 6,900 4,216,373

14,934, 168 2,522,934

35,480,669

21 , 1 1 1 ,284 67,719

2,971,265

24, 150,268

$ 59,630,937

2016

$ 606,858

7,423,983

Debt proceeds, capital contributions and Debt service and acquisition and

interest earned construction

Pensions and other Various

16,864,675

13,949

$ 24,909,465



4. CAPITAL ASSETS:

The following is a sunnnary of changes in Capital Assets for the year ended June 30, 2016:

June 30, 2015 Additions Deletions June 30, 2016

Capital Assets, Not Depreciated:

Land, Franchise and Water Rights $ 898,5 1 1 $ $ $ 898,5 1 1

Construction in Progress 21 ,792,6 15 9,849,873 ( 1 ,474,832) 30,167,656

Total Capital Assets Not Depreciated 22,69 1 , 1 26 9,849,873 ( 1 ,474,832) 3 1 ,066, 167

Capital Assets, Being Depreciated:

Water System 2 10,601,491 679,150 2 1 1 ,280,641

Sewer System 48,75 1 ,473 226,249 48,977,722

Water Recycling System 26,400,489 28,615 26,429, 104

Park and Campgrounds 20, 159,3 18 2 1 ,0 1 1 20,1 80,329

Buildings 14,92 1 ,429 673,636 15,595,065

Equipment 10,594,920 189,722 (29,380) 10,755,262

Total Capital Assets Being Depreciated 33 1 ,429, 120 1 ,8 1 8,383 (29,380) 333,2 18 , 123

Less Accumulated Depreciation: ( 109 ,640, 704) (7,332,966) 29,380 ( 1 16,944,290)

Total Capital Assets Being Depreciated, Net 221 ,788,416 (5,514,583) 2 16,273,833

Total Capital Assets, Net $ 244,479,542 $ 4,335,290 $ ( 1,474,832) $ 247,340,000



5. LONG-TERM DEBT:

Long-term liabilities for the year ended June 30, 20 16 are as follows:

Balance at Balance at Due within

June 30, 2015 Additions Deletions June 30, 2016 One Year

Certificates of Participation (COPS):

2009 COPS $ 50,915,000 $ $ (650,000) $ 50,265,000 $ 675,000

2009 COPS Unamortized Premium 2,621,707 (135,763) 2,485,944

Net COPS 53,536,707 (785,763) 52,750,944 675,000

Note Payable:

California Bank and Trust 2,583,959 (339,616) 2,244,343 349,924

Capital Leases:

Banc of America 2,834,898 (581 ,336) 2,253,562 608,087

Revenue Bonds:

2013 Refunding Revenue Bonds 4,930,000 (1 ,280,000) 3,650,000 920,000

2013 Unamortized Premuim 577,741 ( 1 17,007) 460,734

Net Revenue Bonds 5,507,741 (1 ,397,007) 4,1 10,734 920,000

Other Long-Term Debt:

Capital One Park Cabins Loan 1 , 134,867 (79,269) 1,055,598 83,350

Lakeside Detachment Liability 41 ,942 (41,942)

Total Other Long-Term Debt 1 , 176,809 (121,21 1) 1,055,598 83,350

$ 65,640,1 14 $ $ (3,224,933) $ 62,415,181 $ 2,636,361



5. LONG-TERM DEBT (CONTINUED):

Certificates of Participation (COPS):

On September 1 , 2009, the District issued $53,695,000 of2009 Capital Improvement and Refunding Project, Series A Certificates of Participation which consisted of serial bonds and term bonds. $27,020,000 of serial bonds mature annually from October 1 , 2010 to October 1 , 2029 and bear varying interest rates between 2.00% and 5.25%. An $ 1 1 ,600,000 term bond matures on October 1 , 2034 and bears an interest rate of 5.25%, and a $15,075,000 term bond matures on October 1 , 2039 and bears an interest of5 .25%. The COPs were issued in part to refinance the Certificates of Participation issued in 1996 and in part to finance various improvements to the District's Water System.

Future debt service requirements for the 2009 Certificates of Participation are as follows:

For the Year

Ended June 30, Principal Interest Total

2017 $ 675,000 $ 2,485,406 $ 3,160,406

201 8 1,715,000 2,437,606 4,152,606

2019 1,780,000 2,376,606 4,156,606

2020 1 ,835,000 2,313,206 4,148,206

2021 1,915,000 2,238,206 4,153,206

2022-2026 8,350,000 9,884,028 1 8,234,028

2027-2031 9,400,000 7,736,731 17,136,731

2032-2036 12,225,000 4,918,594 17, 143,594

2037-2040 12,370,000 1,341,375 13,71 1,375

$ 50,265,000 $ 35,731,758 $ 85,996,758

Note Payable:

In April 1996, the District obtained an unsecured loan from California Bank and Trust, which was refinanced in 2002, 2007 and again in 2012, in the amount of $5,000,000. The note bears interest at 6 1 % of the prime rate (1 .98% at June 30, 2016). The note requires monthly interest and principal payments of $32,651 with the remaining unpaid principal balance due August, 201 7. This note is payable from revenues levied by the District for purposes other than the payment of principal and interest of bonded debt.

Future debt service requirements for the California Bank and Trust Note are as follows:

For the Year

Ended June 30, Principal Interest Total

2017 $ 349,924 $ 41 ,896 $ 391,820

201 8 1 ,894,419 3,224 1 ,897,643

$ 2,244,343 $ 45,120 $ 2,289,463




Capital Lease:

The District entered into a capital lease agreement on July 16, 2009 with Banc of America for $5,604,125 to finance a portion of the $8,706,363 cost of various new equipment. Accumulated depreciation on this equipment at June 30, 20 16 was $3, 1 88,4 15 . The ca pi tal l ease is for a term of ! 0 years with semiannual lease payments of $35 1 ,892 which include interest at 6.75%. Upon the expiration of the lease term the equipment can be purchased for $ 1 .00.

Future minimum lease payments under the capital lease are as follows:

For the Year Ended June 30, Principal Interest Total

2017 $ 608,087 $ 95,698 $ 703,785

2018 636,070 67,715 703,785

2019 665,340 38,445 703,785

2020 344,065 7,827 35 1,892

$ 2,253,562 $ 209,685 $ 2,463,247

Revenue Bonds:

In April 2013, the 2013 Refunding Revenue Bonds were issued to defease the 2004 Certificates of Participation and the 1995 and 1996 State of California Loans Payable. The bonds were issued with a face value of$7,225,000 plus an $83 1,257 original issue premium. The bonds bear interest at I% to 5% and are due in annual instalhnents of$395,000 to $1 ,120,000 from December 3 1 , 2013 through December 3 1 , 2024.

Future debt service requirements for the revenue bonds are as follows:

For the Year Ended June 30,

2017 $ 201 8 2019 2020 2021

2022-2025

$

Other Long- Term Debt:

Principal

920,000 295,000 305,000 320,000 330,000

1 ,480,000

3,650,000

$

$

Interest

146,150 1 17,250 103,725 89,700 75,050

140,900

672,775

Total

$ 1,066,150 412,250 408,725 409,700 405,050

1 ,620,900

$ 4,322,775

The District had a wholesale agreement with Lakeside Water District. Effective November 16, 2006, Lakeside Water District (Lakeside) detached from the District. Per the detachment agreement, the District was required to make ten annual payments to Lakeside totaling $448,000. This debt was paid off before June 30, 2016.




On October 1, 2010, the District entered into an installment sale agreement with Capital One to finance the purchase and site work necessary to install 7 land based cabins and 3 floating cabins at Santee Lakes. The total amount financed, including legal and closing costs, is $ 1 ,415,000. The term of the agreement is 15 years with an effective interest rate of 5. 14 7%. Annual payments of $137,682 are required and are made with Park Funds. The agreement is subordinate to the existing COPs and is secured by a pledge of Park and District net revenues.

Future debt service requirements for the Government Capital Corporation instalhnent agreement is as follows:

For the Year Ended June 30, Principal Interest Total

2017 $ 83,351 $ 54,331 $ 137,682

201 8 87,641 50,041 137,682

2019 92, 151 45,531 137,682

2020 96,895 40,787 137,682

2021 101,882 35,800 137,682

2022-2026 593,678 94,734 688,412

$ 1,055,598 $ 321 ,224 $ 1,376,822

6. PREPAID CAPACITY FEES:

The District records capacity fees collected as a liability until its duty to perform has been completed and service has begun at which time these fees are recorded as capital contributions. Fallowing is a sununary of the prepaid capacity fee liability at June 30, 2016:

Balance, Beginning of Year

Add:

Less:

Construction and Capacity Fees Received

Water and Sewer Connections

Balance, End of Year

See accompanying independent auditors' report.

$ 2,664,564

4,387,429

(5,890,238)

$ 1 , 16 1 ,755

30


7. PENSION PLANS

Summary of Siguificaut Accouutiug Policies

Pensions - For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the District's California Public Employees' Retirement System (Ca!PERS) plans (plans) and additions to/deductions from the Plans' fiduciary net position have been determined on the same basis as they are reported by Ca!PERS. For this purpose, benefit payments ( including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.

A. General Information about the Pension Plans:

Plan Descriptions

All qualified permanent and probationary employees are eligible to participate in the District's Miscellaneous Plans, agent multiple-employer defined benefit pension plans administered by the California Public Employees' Retirement System (Ca!PERS), which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Plans are established by State statute and District resolution. Ca!PERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the Ca!PERS website.

Benefits Provided

Ca!PERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. Members under Tier III PEPRA are eligible to retire at age 52. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each plan are applied as specified by the Public Employees' Retirement Law.

The Plans' provisions and benefits in effect at June 30, 2016, are summarized as follows:

Miscellaneous Plan

Tier I Tier II Tier III - PEPRA Hire date Prior to June 26, 2010 to On or After

June 26, 2010 December 3 1 , 2012 January 1, 2013

Benefit formula 3%@60 2.5%@55 2%@62

Benefit vesting schedule 5 years of service 5 years of service 5 years of service

Benefit payments monthly for life monthly for life monthly for life

Retirement age 50 - 60 50 - 55 52 - 67 Required employee contribution rates 8% 8% 6.25%

Required employer contribution rates 24.248% 24.248% 24.248%

See accompanying independent auditors' report. 3 1


7. PENSION PLANS (Continued)

A. General Information about the Pension Plans (Continued):

Employees Covered

At June 30, 2016, the following employees were covered by the benefit terms for the Plans:

Contributions

Inactive employees or beneficiaries

currently receiving benefits

Inactive employees entitled to but

not yet receiving benefits

Active employees

Total

1 14

49

129

292

Section 208 14( c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July I following notice of a change in the rate. Funding contributions for the Plan is determined annually on an actuarial basis as of June 30 by Ca!PERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees.




B. Net Pension Liability:

The District's net pension liability for the Plans is measured as the total pension liability, less the pension plan's fiduciary net position. The net pension liability of the Plans is measured as of June 30, 2015, using an annual actuarial valuation as of June 30, 2014 rolled forward to June 30, 20 15 using standard update procedures. A sununary of principal assumptions and methods used to determine the net pension liability is shown below.

Actuarial Assumptions

The total pension liabilities in the June 30, 2014 actuarial valuations were determined using the following actuarial assumptions:

Valuation Date

Measurement Date

Actuarial Cost Method

Actuarial Assumptions:

Discount Rate

Inflation

Payroll Growth

Projected Salary Increase

Investment Rate of Return

Mortality

(1) Depending on age, service and type of employment

Miscellaneous Plan

June 30, 2014

June 30, 2015

Entry-Age Normal

Cost Method

7.65%

2.75%

3 .00%

3.3% - 14.2% (1)

7.5% (2)

(3)

(2) Net of pension plan investment expenses, including inflation

(3) Mortality table used was developed based on CalPERS specific data. The table

includes 20 years of mortality improvements using Society of Actuaries Scale

BB. For more details on the table please refer to the 2014 experience study

report.

The underlying mortality assumptions and all other actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period 1997 to 2007. Further details of the Experience Study can be found on the Ca!PERS website.




B. Net Pension Liability (Continued):

Change of Assumptions

NOTES TO BASIC FINANCIAL STATEMENTS

GASB 68, paragraph 30, states that the long-term expected rate of return should be determined net of pension plan investment expense but without reduction for pension plan administrative expense. The discount rate of 7.50% used for the June 30, 2014 measurement date was net of administrative expenses. The discount rate of 7.65% used for the June 30, 2015 measurement date is without reduction of pension plan administrative expense.

Discount Rate

The discount rate used to measure the total pension liability was 7.65% for the Plans. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, Ca!PERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.65% discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long term expected discount rate of7.65% will be applied to all plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed report that can be obtained from the Ca!PERS website.

Ca!PERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management (ALM) review cycle that is scheduled to be completed in February 2018 . Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, Ca!PERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least fiscal year 20 I 7-18 . Ca!PERS will continue to check the materiality of the difference in calculation until such time as a change in methodology occurs.

The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return ( expected returns, net of pension plan investment expense and inflation) are developed for each major asset class.

In determining the long-term expected rate of return, Ca!PERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound returns were calculated over the short-term (first 10 years) and the long-term ( 1 1-60 years) using a building-block approach. Using the expected nominal returns for both shortterm and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate ofreturn was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent.




B. Net Pension Liability (Continued):

Discount Rate


The table below reflects the long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These rates ofretum are net of administrative expenses.

Asset Class

Global Equity

Global Fixed Income

Inflation Sensitive

Private Equity

Real Estate

Infrastructure and Forestland

Liquidity

Total

( a) An expected inflation of 2.5% used for this period

(b) An expected inflation of 3 .0% used for this period


New

Strategic

Allocation

5 1%

19%

6%

10%

10%

2%

2%

100%

Real Return

Years

1 - lO (a)

5.25%

0.99%

0.45%

6.83%

4.50%

4.50%

-0.55%

Real Return

Years

1 1+ (b)

5.7 1%

2.43%

3.36%

6.95%

5 .13%

5.09%

-1 .05%

35



C. Changes in the Net Pension Liability:

The changes in the net pension liability for the Miscellaneous Plans are as follows:

Increase (Decrease)

Total Plan Net

Pension Fiduciary Pension

Liability Net Position Liability

Balance at June 30, 2014 $ 98,758,508 $ 67,71 1 ,522 $ 31 ,046,986

Changes in the Year:

Service cost 1,708,536 1,708,536

Interest on the total pension liability 7,268,299 7,268,299

Differences between actual and

expected experience (705,3 1 1) (705,31 1 )

Changes in assumptions (1 ,810,650) (1,81 0,650)

Changes in benefit terms

Contribution - employer 2,277,997 (2,277,997)

Contribution - employee 819,055 (81 9,055)

Net investment income 1 ,516,313 (1,5 1 6,313)

Administrative expenses (76,726) 76,726

Benefit payments, including refunds

of employee contributions (4, 172,721) (4, 1 72,721)

Net Changes 2,288, 153 363, 918 1 ,924,235

Balance at June 30, 2015 $ 101 ,046,661 $ 68,075,440 $ 32,97 1,221

Due to the timing of the CALPers Actuarial valuations, the June 30, 2014 balance above is reported as the June 30, 2015 balance on the Statement of Net Position, and the June 30, 2015 balance above is reported as the June 30, 2016 balance on the Statement of Net Position.

Sensitivity of the Net Pension Liability to Changes in the Discount Rate

The following presents the net pension liability of the District for the Plans, calculated using the discount rate for the Plan, as well as what the District's net pension liability would be if it were calculated using a discount rate that is I-percentage point lower or I-percentage point higher than the current rate:

1% Decrease

Net Pension Liability

Current Discount Rate


1 % Increase


$

$

$

Miscellaneous

6.65%

46,738,752

7.65%

32,971,221

8.65%

21,563,649




C. Changes in the Net Pension Liability (Continued):


Detailed information about each pension plan's fiduciary net position is available in the separately issued Ca!PERS financial reports.

D. Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions:

For the year ended June 30, 2016, the District recognized pension expense of $2,1 17,077. At June 30, 2016, the District reported deferred outflows ofresources and deferred inflows ofresources related to pensions from the following sources:

Deferred Deferred

Outflows Inflows

of Resources of Resources

Pension contributions subsequent to measurement date $ 2,508,068 $

Differences between actual and expected experience (537,380)

Change in assumptions (1,379,543)

Net differences between projected and actual

earnings on plan investments (602,093)

Total $ 2,508,068 $ (2,519,016)

$2,508,068 reported as deferred outflows ofresources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 2016. Other amounts reported as deferred outflows ofresources and deferred inflows ofresources related to pensions will be recognized as pension expense as follows:

E. Payable to the Pension Plans:

Year

Ending

June 30,

2016

2017

201 8

2019

2020

Thereafter

Amount

$ (1,038,269)

(1,038,269)

(1,038,268)

595,790

At June 30, 2016, the District had no outstanding amount of contributions to the pension plans required for the year ended June 30, 2016.



8. OTHER POST EMPLOYMENT BENEFITS (OPEB):

Plan Description

The District contributes to a single-employer defined benefit plan (Plan) to provide medical benefits to eligible retired District employees and beneficiaries. The Plan has three tiers ofretiree health insurance benefits. Members who were hired on or before August 27, 2002 and who meet full eligibility requirements receive medical benefits paid for entirely by the employer; members must meet additional eligibility requirements after this date to receive the same benefit. Reduced benefits are available to members hired after August 27, 2002 and before August 6, 2006. For members hired after August 8, 2006, the District will contribute up to $600 per month towards health insurance at the time of retirement if the member meets certain requirements; this coverage ends when the member becomes eligible for Medicare. The Plan does not provide a publicly available financial report.

Funding Policy

The contribution requirements of Plan members and the District are established and may be amended by the Board of Directors. The District's annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost plus the portion of the unfunded actuarial accrued liability (or funding excess). Any unfunded actuarial liability ( or funding excess) is amortized over a period not to exceed thirty years. The current ARC rate is 12.25% of the annual covered payroll.

Annual OPEB Cost and Net OPEB Obligation

The following table shows the components of the District's annual OPEB cost for the year ending June 30, 2016, the amount actually contributed to the Plan, and changes in the District's net OPEB obligation:

Annual Required Contribution (ARC)

Interest on net OPEB obligation

Adjustment to Annual Required Contribution (ARC)

Annual OPEB cost (expense)

Contributions made

Increase in net OPEB obligation

Net OPEB obligation - beginning of year

Net OPEB obligation - end of year


$

$

1,237,125

1,237,125

1,237,125

38


8. OTHER POST EMPLOYMENT BENEFITS (CONTINUED):

The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for the fiscal years 2016, 2015 and 2014 were as follows:

Fiscal Year

6/30/16 6/30/15 6/30/14

Annual OPEB Percentage of Annual Cost (AOC) OPEB Cost Contributed

$ $ $

1,237,125 1,268,717 1,268,717

100% 100% 100%

Funded Status and Funding Progress

$ $ $

Net OPEB Obligation

The funded status of the Plan as of the June 30, 2015 actuarial valuation was as follows:

Actuarial Accrued Liability (AAL) $ Actuarial Value of Plan Assets $ Unfunded Actuarial Accrued Liability (UAAL) $ Funded Ratio (Actuarial Value of Plan

Assets/ AAL) Covered Payroll (Active Plan Members) $ UAAL as a Percentage of Covered Payroll

Actuarial Methods and Assumptions

26,695,832 10,966,557 15,729,275

4 1 .08%

10,100,905 155.72%

The required contribution was determined as part of the June 30, 2015 actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included a 7.28% investment rate of return. The District's projected healthcare cost trend rate is projected to be 9% per annum graded down approximately one-quarter percent increments to an ultimate rate of 4.5%. The District's unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll over a fixed 30-year period. The District's projected salary increase was 3.00%. Inflation was projected at 3.25%. The average remaining amortization period at June 30, 20 15 was 22 years. The asset valuation method is based on the market value basis.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the benefits.

9. REIMBURSEMENT CONTRACTS:

The District has entered into a number of reimbursement contracts with developers who have made contributions to the District to aid in the construction of water and sewer facilities. These contracts are to be repaid as new connections are made to the related water and sewer facilities. The District's liability is limited to collecting the applicable connection fees and payment of the fees to the developers. The District currently has three active reimbursement contracts. The active contracts consist of two agreements that expire in March of2019 and have an option for a 5 year extension and the third agreement has no expiration date but has a limited amount of money to be reimbursed per the agreement.



10. COMMITMENTS AND CONTINGENCIES:

Leases

The District entered into a twenty-five year agreement in 197 6 with the City of San Diego for the use of a portion of a major water transmission line. The lease was extended for an additional ten years in December 2002 and another ten years in November 201 1 . The minimum annual payments under the terms of the agreement are $33,339 through December 2021.

The District entered into a lease agreement in 1997 with the City of San Diego for the use of an antenna for the purpose of a mobile relay station and as a data relay station. The lease was amended in February 2008 to extend the lease to February 2018 . Monthly payments are $1 ,360 with an annual cost ofliving increase of3%.

Rent expense under these non-cancellable leases was $54,013 for the year ended June 30, 2016.

Future minimum lease payments as of June 30, 20 16 are as follows:

2017 $ 54,633 201 8 55,272 2019 33,339 2020 33,339 2021 33 339

$ 209,922

Litigation

In the ordinary course of operations, the District is subject to claims and litigation from outside parties. After consultation with legal counsel, the District believes the ultimate outcome of such matters, if any, would not materially affect the operations or financial condition of the District.

Construction Contracts

The District has entered into various contracts for the purchase of material and construction of facilities. The amounts contracted for are based on the contractors' estimated cost of construction. At June 30, 2016 the total unpaid amount on these contracts was $19,353,442.

1 1 . CERTIFICATION OF RATE COVENANT REQUIREMENTS:

In connection with the execution and delivery of the outstanding Certificates of Participation and Revenue Bonds, the District agreed to meet certain covenants to maintain and collect gross revenues sufficient in each fiscal year to provide District net revenues which meet or exceed required ratios, as defined in the Rate Covenant section of the Official Statements. The District has complied with the Rate Covenants as outlined in the 2009 Certificates of Participation agreement and the 20 13 Refunding Revenue Bonds for the year ending June 30, 2016. In connection with the execution and delivery of the California Bank and Trust Note, the District agreed to meet certain covenants to meet or exceed required ratios, as defined in the Rate Covenant section of the Note Agreement. The District has complied with the Rate Covenants as outlined in the Note agreement for the year ended June 30, 2016.



12. RISK MANAGEMENT:

The District is exposed to various risks ofloss related to torts, theft, damage and destruction of assets, errors and omissions, and natural disasters. The District participates in an insurance pool through the Special District Risk Management Authority (SDRMA). SDRMA is a not-for-profit public agency formed under California Government Code Sections 6500 et. Seq. SDRMA is governed by a board composed of members from participating agencies. The mission of SDRMA is to provide renewable, efficiently priced risk financing and risk management services through a financially sound pool. The District pays an aunual premium for commercial insurance covering general liability, excess liability, property, automobile, public employee dishonesty, and various other risks. Accordingly, the District retains no risk ofloss. Separate financial statements ofSDRMA may be obtained at Special District Risk Management Authority, 1 1 12 "!" Street, Suite 300, Sacramento, CA 95814. During its membership, the following policies are in effect:

General and Auto Liability - Public Officials' and Employees' Errors and Omissions and Employment Practices Liability: Total risk financing limits of $10 million, combined single limit at $10 million per occurrence, subject to the following deductibles:

• $ 10,000 per occurrence for third party general liability property damage.

• $10,000 per occurrence for third party auto liability property damage.

• 50% co-insurance of cost expended by SDRMA in excess of $10,000 up to $50,000 per occurrence for employment related claims. However 100% of the obligation may be waived if certain criteria are met.

Employee Dishonesty Coverage - Total of $1 million per loss includes Public Employee Dishonesty, Forgery or Alteration and Theft, and Disappearance and Destruction.

Property Loss - Replacement cost, for property on file, ifreplaced and if not replaced within two years after the loss, paid on an actual cash value basis, to a combined total of $1 billion per occurrence, subject to $1 ,000 deductible per occurrence.

Boiler and Machinery - Replacement cost up to $100 million per occurrence, subject to a $ 1 ,000 deductible.

Comprehensive and Collision - On selected vehicles, with deductibles of$250/$500 or $500/$1 ,000, as elected; ACY limits, fully self-funded by SDRMA.

Public Officials' Personal Liability - $500,000 each occurrence, with an annual aggregate of$500,000 per each elected/appointed official to which this coverage applies, subject to the terms, conditions and exclusions as provided in the Memorandum of Coverages, deductible of $500 per claim.

Workers' Compensation & Employer's Liability � Statutory limits per occurrence for Workers' Compensation and $5 million for Employer's Liability Coverage.

Members are subject to dividends and/or assessments, in accordance with the Sixth Amended Joint Powers Agreement and amendments thereto. No such dividends have been declared, nor have any assessments been levied. Presently, there are no known refunds or credits due to the District.

During the past three fiscal years none of the above programs of protection have had settlements or judgments that exceeded pooled or insured coverage. There have been no significant reductions in pooled or insured liability coverage from coverage in the prior year.


Required Supplementary Information

PADRE DAM MUNICIPAL WATER DISTRICT REQUIRED SUPPLEMENTARY INFORMATION

SCHEDULE OF CHANGES IN THE NET PENSION LIABILITY AND RELATED RATIOS

Last Ten Fiscal Years*

Total Pension Liability:

Service cost

Interest on total pension liability

Differences between expected and actual experience

Changes in assumptions

Changes in benefits

Benefit payments, including refunds of employee contributions

Net Change in Total Pension Liability

Total Pension Liability - Beginning ofY ear

Total Pension Liability - End of Year (a)

Plan Fiduciary Net Position:

Contributions - employer

Contributions - employee

Net investment income

Benefit payments, including refunds of employee contributions

Administrative Expense

Net Change in Plan Fiduciary Net Position

Plan Fiduciary Net Position - Beginning of Year

Plan Fiduciary Net Position - End of Year (b)

Net Pension Liability - Ending (a)-(b)

Plan fiduciary net position as a percentage of the

total pension liability

Covered - employee payroll

Net pension liability as percentage of

covered- employee payroll

Notes to Schedule:

Benefit Changes:

20 16

$ l ,708,536

7,268,299

(705,31 l)

(l ,8 l0,650)

(4, 172,72 1 )

2,288, 153

98,758,508

$ lO l ,046,66 l

$ 2,277,997

8 19,055

l ,5 16,3 13

(4, 172,721)

(76,726)

363,9 1 8

67,7 1 1 ,522

$ 68,075,440

$ 32,97 1 ,221

67.37%

$ l0,332,850

3 19.09%

The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2014. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes).

Changes in Assumptions: The discount rate was changed from 7.5% (net of administrative expense) to 7.65%.

* - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown.


$

$

$

$

$

$

20 15

l ,792,91 l

6,967,691

(4,016,332)

4,744,270

94,014,238

98,758,508

2,023,l 75

877,391

l0,094,956

(4,016,332)

8,979, l 90

58,732,332

67,7 1 1 ,522

3 l ,046,986

68.56%

l0,478,l l 7

296.30%

42


SCHEDULE OF CONTRIBUTIONS - DEFINED BENEFIT PENSION PLAN

Last Ten Fiscal Years*

Actuarially determined contribution

Contributions in relation to the actuarially determined contributions

Contribution deficiency (excess)

Covered - employee payroll

Contributions as a percentage of covered - employee payroll

Notes to Schedule:

Valuation Date June 30, 2012

Methods and Assumptions Used to Determine Contribution Rates:

Actuarial cost method Entry Age Normal

Amortization method

Remaining amortization period

Asset valuation method

Inflation

Salary increases

Investment rate of return

Retirement age

Mortality

Level percent of payroll

29 years as of the valuation date

15 Year Smoothed Market

2.75%

Varies by Entry Age and Service

7.50% Net of Pension Plan Investment and

Administrative Expenses; includes Inflation

The probabilities of Retirement are based on the 20 1 0

CalPERS Experience Study for the period 1997 - 2007.

The probabilities of mortality are based on the 2010

CalPERS Experience Study for the period from 1997-2007. Pre-retirement and Post-Retirement mortality rates

include 5 years of projected mortality improvement using

Scale AA published in the Society of Actuaries.

* - Fiscal year 2015 was the 1st year of implementation, therefore only two years are shown.


2016 2015

$ 2,277,997 $ 2,023 , 1 75

(2,277,997) (2,023, 1 75)

$ $

$ l0,332,850 $ l 0,478 , 1 1 7

22.05% 19.3 1%

43


Schedule of Fuudiug Progress for OPEB

Actuarial Accrued

Actuarial Actuarial Liability Unfunded Annual UAAL as a Valuation Value of (AAL) AAL Funded Covered Percentage of

Date Assets Entry Age (UAAL) Status Payroll Covered Payroll (A) (B) (B-A) (A/B) (C) [(B-A)/C]

June 30, 201 1 $5,568,515 $23,247,868 $ 17,679,353 24.0% $9,608,620 184.0%

June 30, 2013 $8,489,252 $24,390, 130 $ 15,900,878 34.8% $9,921,986 160.3%

June 30, 2015 $10,966,557 $26,695,832 $ 15,729,275 4 1 . 1% $ 10, 100, 905 155.7%


Supplementary Information


SCHEDULE OF INCOME (LOSS) BEFORE CONTRIBUTIONS BY FUND SERVICES FOR THE YEAR ENDED TUNE 30, 2016

Water Sewer Park Other Restricted Total Operating Revenues:

Water Sales $ 23,575,774 $ $ $ $ $ 23,575, 774 Sewer Revenues 1 5,600,030 1 5,600,030 System Charges 9,1 37,904 9,1 37,904 Park Fees 5,419,637 5,419,637 Other Operating Income 6,707,699 155,182 3,413 6,866,294

Total Operating Revenues 39,421,377 1 5,755,212 5,423,050 60,599,639

Operating Expenses:

Direct Expenses Water Purchases 13,382,614 13,382,614 Sewer METRO Costs 3,853,866 3,853,866 Other Operating Expenses 2,044,61 7 2,267,831 303,407 4,61 5,855

Internal Expenses Salary and Wages 7,546,283 3,002,057 1 ,069,751 1 1 ,618,091 Employee Benefits 4,051 ,582 1 ,704,899 568,442 6,324,923 Professional Services 2, 1 95,251 855,522 465,642 3,516,415 Materials, Supplies, Vehicle, & Bldg. Rent 2,309,893 1,336, 922 646,538 4,293,353 Administrative Expenses 807,431 3 1 8,491 1 5 1 ,821 1 ,277,743 Utilities 276,556 450,841 630,887 1,358,284 Depreciation 5,499,726 1 ,077, 935 755,305 7,332,966 Billing Credits (1,366,594) (617,716) 0 (1 ,984,3 10)

Total Operating Expenses 36,747,359 14,250,648 4,591 ,793 55,589,800

Operating Income (Loss) 2,674,018 1 ,504,564 831 ,257 5,009,839

Non operating Revenues and (Expenses): Investment Income (Loss) 180,159 147,205 13,580 1 02,900 443,844 Restricted Investment Income (Loss) 1 60,000 1 60,000 Taxes and Assessments 2,789, 1 1 2 2,789, 1 1 2 Settlement Income Gain on Sale of Assets 1 0,534 1 0,534 Interest Expense (1,838,321) (1 7,389) (147,579) (627,345) (2,630,634)

Total Nonoperating Revenues and (Expenses) 1 , 1 30,950 129,816 (133,999) 1 1 3,434 (467,345) 772,856

Income (Loss) Before Capital Contributions $ 3,804,968 $ 1 ,634,380 $ 697,258 $ 1 1 3,434 $ (467,345) $ 5,782,695



SCHEDULE OF INCOME (LOSS) BEFORE CONTRIBUTIONS BY FUND SERVICES FOR THE YEAR ENDED TUNE 30, 2015

Water Sewer Park Other Restricted Total Operating Revenues:

Water Sales $ 25,824,838 $ $ $ $ $ 25,824,838 Sewer Revenues 1 5,589,443 1 5,589,443 System Charges 8,556,185 8,556, 185 Park Fees 5,099,855 5,099,855 Other Operating Income 8,256,01 2 9,786 8,265,798

Total Operating Revenues 42,637,035 1 5,589,443 5,1 09,641 63,336, 1 1 9

Operating Expenses:

Direct Expenses Water Purchases 14,897,128 14,897,128 Sewer METRO Costs 3,479,445 3,479,445 Other Operating Expenses 2,341 ,582 2, 1 59,839 3 1 3,412 4,814,833

Internal Expenses Salary and Wages 7,5 1 1 ,267 2,847,298 1 ,044,804 1 1 ,403,369 Employee Benefits 4,23 1 , 1 08 1 ,780,444 575, 197 6,586,749 Professional Services 2,460,512 1 0,848 252,878 2,724,238 Materials, Supplies, Vehicle, & Bldg. Rent 4,444,221 676,906 628,219 5,749,346 Administrative Expenses 695,707 269,851 1 58,554 1 , 1 24,1 1 2 Utilities 287,307 468,365 638,234 1 ,393,906 Depreciation 5,046,788 1,071,737 757,521 6,876,046 Billing Credits (1,235,995) (558,684) (1 ,052) (1,795,73 1)

Total Operating Expenses 40,679,625 1 2,206,049 4,367,767 57,253,441

Operating Income (Loss) 1 ,957,4 10 3,383,394 741,874 6,082,678

Non operating Revenues and (Expenses): Investment Income (Loss) 93,910 76, 733 7,079 (3,948) 1 73,774 Restricted Investment Income (Loss) 1 23,884 1 23,884 Taxes and Assessments 2,698,948 2,698,948 Settlement Income 1 2,349,602 1 2,349,602 Gain on Sale of Assets 1 1 ,386 1 1 ,386 Interest Expense (1,939,025) (33, 792) (1 59,329) (601,614) (2,733,760)

Total Nonoperating Revenues and (Expenses) 853,833 1 2,392,543 (1 52,250) 7,438 (477,730) 1 2,623,834

Income (Loss) Before Capital Contributions $ 2,8 1 1 ,243 $ 1 5,775,937 $ 589,624 $ 7,438 $ (477,730) $ 1 8,706,512



Operating Revenues: Revenues:

Water Sales lnlrastructure Access Charge Energy Billings CWAIMWD Credits Padre Dam Sewer Processing Fee Sewer Revenues System Charges Park Fees Other Revenues

Total Operating Revenues

Operating Expenses: Direct Expenses:

Water Purchases lnlrastructure Access Charge Energy Purchases Sewer METRO Costs Padre Dam Sewer Treatment Fish Stock, Propane, & Retail

Total Direct Expenses

Internal Expenses: Salary & Wages Employee Beneli ts Prolessional Services Materials, Supplies, Vehicle, & Bldg. Rent Administrative Expenses Utilities Billing Credits

Subtotal

Depreciation

Total Internal Expenses

Total Operating Expenses

Operating Income (Loss)

Nonoperating Revenues and (Expenses): Interest Income (Designated) Interest Income (Restricted) Gain (Loss) on Investments Taxes and Assessments SetLlement Income Gain (Loss) on Sale olOther Capital Assets Interest Expense Other Expense

Total Nonoperating Revenues and (Expenses)

Income (Loss) Before Capital Contributions

See accompanying independent auditors' reporL

SCHEDULE OF INCOME (LOSS) BEFORE CONTRIBUTIONS (BUDGET TO ACTUAL) FOR THE YEAR ENDED JUNE 30, 2016

PRIOR YEAR CURRENT YEAR ACTUAL A C T U A L B U D G E T

$ $ % $ %

25,824,838 23,575,774 38.9 1 9,873,738 38.1 858,767 876, 1 3 1 1 4 874,865 1.7

1 ,225,273 1 , 1 62,809 1 .9 1 ,088,384 2.1 325,898 304,920 0.5 3 1 2,479 0.6

2, 1 59,839 2,267,831 3.7 2,267,831 44 15,589,443 1 5,600,030 25.7 1 2,996,608 24.9 8,556,185 9,1 37,904 15 . 1 8,928,271 17.1 5,099,855 5,419,637 8.9 4,846,859 9.3 3,696,021 2,254,603 3.7 944,883 1.8

63,336,119 60,599,639 100.0 52,133,918 100.0

14,897, 128 13,382,614 22.1 12,206,545 23.4 851 ,460 868,8 1 8 1 4 874,865 1.7

1 ,490, 122 1 , 1 75,799 1 .9 1 ,088,384 2.1 3,479,445 3,853,866 64 4,390,940 84 2,1 59,839 2,267,831 3.7 2,267,831 44

313,412 303,407 0.5 291,921 0.6

23,191,406 21,852,335 36.1 21,120,486 40.5

1 1 ,403,369 1 1 ,61 8,091 1 9.2 1 1 ,419,643 2 1 .9 6,586,749 6,324,923 I 0.4 6,88 1 , 100 13.2 2,724,238 3,516,415 5.8 2, 1 77,548 4.2 5,749,346 4,293,353 7.1 4,1 94,090 8.0 1 , 124, 1 1 2 1 ,277,743 2.1 1 ,447, 136 2.8 1 ,393,906 1 ,358,284 2.2 1 ,368,479 2.6

( 1 ,795,731) (1 ,984,3 1 0) ______Q_B (2,520,028) (4.8)

27,1 85,989 26,404,499 43.6 24,967,968 47.9

6,876,046 7,332,966 12 . 1 8,054,562 15.4

34,062,035 33,737,465 55.7 33,022,530 63.3

57,253,441 55,589,800 91.7 54,143,016 103.8

6,082,678 5,009,839 8.3 (2,009,098) (3.8)

177,722 340,944 0.6 1 80, 958 0.3 124,581 141,841 0.2 79,000 0.2

(4,645) 1 2 1 ,059 0.2 2,698,948 2,789, 1 1 2 4.6 2,71 1 ,774 5.2

1 2,349,602 1 1 ,386 I 0,534

(2,733,760) (2,630,634) (4.3) (2,720,8 1 1) (5.2)

12,623,834 772,856 1.3 250,921 0.5

18,706,512 5,782,695 - -,-.5- (1,758,177) (3.4)

CURRENT YEAR ACTUAL TO - FAVl(UNFAV) BUDGET PRIOR YEAR

$ % $ %

3,702,036 18.6 (2,249,064) (8.7) 1,266 0.1 17,364 2.0

74,425 6.8 (62,464) (5.1) (7,559) (2.4) (20,978) (6.4)

107,992 5.0 2,603,422 20.0 10,587 0.1

209,633 2.3 581 ,719 6.8 572,778 1 1 .8 3 1 9,782 6.3

1,309,720 138.6 ( 1 ,441,418) (39.0)

8,465,721 16.2 (2,736,480) (4.3)

( I , 176,069) (9.6) 1,514,514 I 0.2 6,047 0.7 (1 7,358) (2.0)

(87,415) (8.0) 3 1 4,323 2 1 . 1 537,074 12.2 (374,42 1 ) ( 1 0.8)

(1 07,992) (5.0) ( 1 1 ,486) (3.9) 10,005 3.2

(731,849) (3.5) 1,339,071 5.8

( 1 98,448) ( 1 .7) (214, 722) ( 1 .9) 556, 177 8.1 261,826 4.0

( 1 ,338,867) (61.5) (792, 177) (29.1) (99,263) (2.4) 1,455,993 25.3 169,393 1 1 .7 (153,631) ( 1 3.7)

10, 195 0.7 35,622 2.6 (535,718) (21.3) 188,579 I 0.5

( 1 ,436,53 1 ) (5.8) 781,490 2.9

721,596 9.0 (456,920) (6.6)

(714,935) (2.2) 324,570 1.0

(1,446,784) (2.7) 1,663,641 2.9

7,018,937 (349.4) (1,072,839) (17.6)

159,986 88.4 163,222 91.8 62,841 79.5 17,260 13.9

1 2 1 ,059 NIA 125,704 2,706.2 77,338 2.9 90,164 3.3

NIA (1 2,349,602) NIA 10,534 NIA (852) (7.5) 90, 177 331% 103,126 3.8

NIA NIA

521,935 208.0 (11,850,978) (93.9)

7,540,872 (428.9) (12,923,817) (69.1)

47


Operating Revenues: Revenues:

Waler Sales lnlras!ruc!ure Access Charge Energy Billings CWAil'v!WD Credits Padre Dam Sewer Processing Fee Sewer Revenues System Charges Park Fees Other Revenues

Total Operating Revenues

Operating Expenses: Direct Expenses:

Waler Purchases lnlras!ruc!ure Access Charge Energy Purchases Sewer METRO Costs Padre Dam Sewer Treatment Fish Stock, Propane, & Retail

Total Direct Expenses

Internal Expenses: Salary & Wages Employee Benellts Prolessional Services Materials, Supplies, Vehicle, & Bldg. Rent Administrative Expenses Utilities Billing Credits

Subtotal

Depreciation

Total Internal Expenses

Total Operating Expenses

Operating Income (Loss)

Nonoperating Revenues and (Expenses): Interest Income (Designated) Interest Income (Restricted) Gain (Loss) on Investments Taxes and Assessments Settlement Income Gain (Loss) on Sale ol Other Capital Assets Interest Expense Other Expense

Tola] Nonoperating Revenues and (Expenses)

Income (Loss) Before Capital Contributions


SCHEDULE OF INCOME (LOSS) BEFORE CONTRIBUTIONS (BUDGET TO ACTUAL) FOR THE YEAR ENDED JUNE 30, 2015

PRIOR YEAR CURRENT YEAR ACTUAL A C T U A L B U D G E T

$ $ % $ %

28,773,739 25,824,838 40.8 28,51 2,226 45.0 879,429 858,767 1 4 849,576 1 .3

1,482,004 1,225,273 1 .9 1 ,522,372 24 337,450 325,898 0.5 331 ,455 0.5

2,056,989 2, 1 59,839 3.4 2, 159,839 34 16,000,749 15,589,443 24.6 16,074,261 25.4 8, 173,645 8,556, 185 13.5 8,243,677 13.0 4,891 ,662 5,099,855 8. 1 4,800,000 7.6 1 ,347,960 3,696,021 5.8 886,786 1 4

63,943,627 63,336,119 100.0 63,380,192 100.0

16, I 00,836 14,897,128 23.5 16,087,479 25.4 835,350 851 ,460 1 .3 849,576 1 .3

1,41 0,262 1 ,490, 122 2.4 1 ,522,372 24 3,728,490 3,479,445 5.5 3,540,940 5.6 2,056,989 2, 1 59,839 34 2, 159,839 34

292,428 3 1 3,412 0.5 289,099 0.5

24,424,355 23,191 ,406 36.6 24,449,305 38.6

1 1 ,270,354 1 1 ,403,369 18.0 1 1 ,692,222 1 8.4 6,368,469 6,586,749 10.4 7, 130,067 1 1 .2 2,823,441 2,724,238 4.3 3,367,607 5.3 4,134,989 5,749,346 9.1 5,457,8 1 6 8.6 1 ,094,868 1 , 1 24, 1 1 2 1 .8 1 ,654,658 2.6 1 ,263,573 1,393,906 2.2 1 ,3 13 ,606 2. 1

(2,499,028) ( 1 ,795,73 1 ) � (2,991 ,204) � 24,456,666 27,1 85,989 42.9 27,624,772 43.6

6,822,731 6,876,046 10.9 7,973,268 12.6

31,279,397 34,062,035 53.8 35,598,040 56.2

55,703,752 57,253,441 90.4 60,047,345 94.7

8,239,875 6,082,678 9.6 3,332,847 5.3

1 30,842 177,722 0.3 150,340 0.2 1 56,761 124,581 0.2 1 1 7,734 0.2 61,355 (4,645)

2,769,104 2,698,948 4.2 2,689,872 4.2 12,349,602 19.5

3,445 1 1 ,386 (2,730,720) (2,733,760) (4.3) (2,81 2,963) (4.4)

390,787 12,623,834 19.9 144,983 0.2

8,630,662 18,706,512 � 3,477,830 - -5-.5-

CURRENT YEAR ACTUAL TO- FAVl(UNFAV) BUDGET PRIOR YEAR

$ % $ %

(2,687,388) (9.4) (2,948,901) (1 0.2) 9, 191 L I (20,662) (2.3)

(297,099) (1 9.5) (256,731) (1 7.3) (5,557) (1 .7) ( 1 1 ,552) (3.4)

102,850 5.0 (484,818) (3.0) (41 1 ,306) (2.6) 3 1 2,508 3.8 382,540 4.7 299,855 6.2 208,193 4.3

2,809,235 3 1 6.8 2,348,061 174.2

(44,073) (0.1) (607,508) (1.0)

1 , 1 90,351 7.4 1,203,708 7.5 ( 1,884) (0.2) ( 1 6, 1 1 0) (1 .9) 32,250 2. 1 (79,860) (5.7) 6 1 ,495 1 .7 249,045 6.7

( I 02,850) (5.0) (24,313) (8.4) (20,984) (7.2)

1,257,899 5.1 1,232,949 5.0

288,853 2.5 (133,015) (1 .2) 543,3 1 8 7.6 (21 8,280) (3.4) 643,369 19.1 99,203 3.5

(291 ,530) (5.3) ( 1 ,614,357) (39.0) 530,546 32.1 (29,244) (2.7) (80,300) (6.1) ( 130,333) (1 0.3)

( 1 , 1 95,473) (40.0) (703,297) (28.1)

438,783 1 .6 (2,729,323) ( 1 1 .2)

1 ,097,222 13.8 (53,315) (0.8)

1,536,005 4.3 (2,782,638) (8.9)

2,793,904 4.7 (1,549,689) (2.8)

2,749,831 82.5 (2,157,197) (26.2)

27,382 18.2 46,880 35.8 6,847 5.8 (32,1 80) (20.5)

(4,645) NIA (66,000) 107.6 9,076 0.3 (70, 156) (2.5)

1 2,349,602 NIA 12,349,602 NIA 1 1 ,386 NIA 7,941 230.5 79,203 282% (3,040) (0.1)

NIA NIA

12,478,851 8,607.1 12,233,047 3,130.4

15,228,682 437.9 10,075,850 116.7

48


SCHEDULE OF CHANGE IN CASH, CASH EQUIVALENTS AND INVESTMENTS FOR THE YEAR ENDED JUNE 30, 2016

Restricted Non-Operating Non-Operating Water Total CEFI Restricted Woodside & Grand

Retail Recycling Sewer Park Designated Other '09 COP LWD METRO Total Cash Flows From Operating Activities: Operating Income (Loss) 1,029,179 1,644,839 1,504,564 831,257 5,009,839 5,009,839

Depreciation 4,755,605 744, 1 2 1 1,077,935 755,305 7,332,966 7,332,966 GASB 68 Adjustment lo Pension Expense (253,437) (37,153) ( 100,402) (390,992) (390,992) Accounts Receivable (442,186)* (64,823) * ( 175, 176)* (682,185) (682, 185) Accounts Receivable - Other I 04,426 * 15,308 * 41,369 * 16 1 , 103 1 6 1 , 1 03 Inventory (40,774) * (5,977)* (16, 153)* (62,904) (62,904) Prepaid Expenses 2,743 * 402 * 1 ,087 * 4,232 4,232 Accounts Payable 187,316 * 27,460 * 74,207 * 288,983 288,983 Accrued Expense and Other Liabilities 388,095 * 56,894 * 153,748 * 598,737 598,737 Deposits & Advances on Construction 198,391 * 29,083 * 78,594 * 306,068 306,068 Other Noncurrenl Liabilities (974, 104)* (142,801) * (385,902)* ( 1 ,502,807) (1 ,502,807)

Nel Cash Provided by Operating Activities 4,955,254 2,267,353 2,253,871 1 ,586,562 1 1 ,063,040 1 1 ,063,040

Cash & Cash Equivalents and Investments From Noncapital and Related Financing Activities:

Properly Tax Receipts 2,786,898 2,786,898 2, 786,898 Nel Cash Provided (Used) by Noncapital and Related Financing Activities 2,786,898 2,786,898 2, 786,898

Cash Flows From Capital and Related Financing Activities: Acquisition and Construction or Capital Assets (4,475,206) (797,828) (2, 1 23,984) (86,138) (7,483,1 56) (2,363,993) (9,847,149) Net Proceeds rrom Issuance or Long-Tenn Dehl Principal Payments on Long-Tenn Dehl (1 ,432,859) (806,828) (353,700) (349,271) (2,942,658) (29,505) (2,972,163) Bond Issuance Costs Paid Proceeds rrom Capital Contributions 5,798,529 5,798,529 Proceeds rrom Settlements Interest Paid, Net or Amount Capitalized (1 ,887,38 1) (166,288) (44,961) (147,579) (2,246,209) (627,345) (2,873,554) Proceeds rrom Sale or Assets 10,532 10,532

Nel Cash Provided (Used) by Capital and Related Financing Activities (7,795,446) (1,770,944) (2,522,645) (582,988) ( 12,672,023) 2,777,686 10,532 (9,883,805)

Cash Flows From Investing Activities: Interest Received on Investments 98,044 60,428 139,712 1 3,580 3 1 1 ,764 65,027 75,3 1 6 452,107

Nel Cash Provided by Investing Activities 98,044 60,428 139,712 1 3,580 3 1 1 ,764 65,027 75,3 1 6 452,107

Transfers: Transrers 73,527 10,779 29,128 1 1 3,434 ( 1 1 3,434) Transrers Sales Proceeds Woodside Properly Transrers 2009 COP 378,916 378,916 240,227 (619, 143) Transrers 2009 AMR Transrers 20 IO Park Loan Transrers LWD Detachment 44,800 44,800 (44,800) Transrers Dehl Service (2009 COP) Transrers (METRO) 463,024 32,066 1 92,944 688,034 (688,034) Transrers Other 1 ,526,508 ( 1 39,520) 902,717 60,500 2,350,205 (2,359,659) 3, 183 102,896 96,625

Net Transrers 2,486,775 (96,675) 1 , 1 24,789 60,500 3,575,389 (2, 1 1 9,432) (615,960) (55,338) (688,034) 96,625

Nel Increase (Decrease) in Cash and Cash Equivalents and Investments 2,531,525 460, 162 995,727 1 ,077,654 5,065,068 723,281 (540,644) (44,806) (688,034) 4,514,865

Cash and Cash Equivalents and Investments al Beginning or Year 1 8,491,967 9,299,91 1 20,908,959 3,240,031 5 1 ,940,868 7,302,886 1 7,405,3 1 9 44,806 9,075,307 85,769, 186

Cash and Cash Equivalents and Investments at End of Year $ 21,023,492 9,760,073 $ 21,904,686 4,317,685 $ 57,005,936 8,026,167 $ 16,864,675 8,387 ,273 $ 90,284,051

* Note: Allocation (or changes in receivables/payables/other assets) are based upon a constant percentage (overhead allocation percentage) applied throughout the llscal year.

See accompanying independent auditors' reporL 49


SCHEDULE OF CHANGE IN CASH, CASH EQUIVALENTS AND INVESTMENTS FOR THE YEAR ENDED JUNE 30, 2015

Restricted Non-Operating Non-Operating Water Total CEFI Restricted Woodside & Grand

Retail Recycling Sewer Park Designated Other '09 COP LWD METRO Total Cash Flows From Operating Activities: Operating Income (Loss) (24,063) 1,981,473 3,383,394 741,874 6,082,678 6,082,678

Depreciation 4,306,629 740, 159 1,071,737 757,521 6,876,046 6,876,046 GASB 68 Adjustment lo Pension Expense 74,173 10,873 29,384 1 14,430 1 1 4,430 Accounts Receivable 1 ,089,295 * 159,687 * 431,536 * 1,680,5 1 8 1,680,518 Accounts Receivable - Other (1 ,094,300) * (1 60,42 1 ) * (433,519)* ( 1 ,688,240) (1 ,688,240) Inventory 2 1 ,708 * 3,182 * 8,600 * 33,490 33,490 Prepaid Expenses 57,947 * 8,495 * 22,956 * 89,398 89,398 Accounts Payable (348, 782) * (51 , 1 30) * ( 138, 173)* (538,085) (538,085) Accrued Expense and Other Liabilities 47,778 * 7,004 * 18,928 * 73,710 73,710 Deposits & Advances on Construction (55,943) * (8,201) * (22,163)* (86,307) (86,307) Other Noncurrenl Liabilities (206,542)* (30,278) * (81 ,824)* (31 8,644) (318,644)

Nel Cash Provided by Operating Activities 3,867,900 2,660,843 4,290,856 1 ,499,395 12,31 8,994 12,31 8,994

Cash & Cash Equivalents and Investments From Noncapital and Related Financing Activities:

Properly Tax Receipts 2,709,633 2,709,633 2,709,633 Nel Cash Provided (Used) by Noncapital and Related Financing Activities 2,709,633 2,709,633 2,709,633

Cash Flows From Capital and Related Financing Activities: Acquisition and Construction or Capital Assets (5,504, 1 5 1 ) (19,124) (649,083) 78,833 (6,093,525) ( 1 ,776, 19 1) (7,869,716) Net Proceeds rrom Issuance or Long-Tenn Dehl Principal Payments on Long-Tenn Dehl (1 ,296,835) (895,699) (260,803) (335,390) (2,788,727) (28,245) (2,81 6,972) Bond Issuance Costs Paid Proceeds rrom Capital Contributions 848, 984 848,984 Proceeds rrom Settlements 9,230,842 9,230,842 9,230,842 Interest Paid, Net or Amount Capitalized (1 ,952,418) (205,896) (62,725) (1 59,329) (2,380,368) (601,614) (2,981 ,982) Proceeds rrom Sale or Assets 1 1 ,386 1 1 ,386

Nel Cash Provided (Used) by Capital and Related Financing Activities (8,753,404) ( 1 , 120,719) 8,258,231 (415,886) (2,031 ,778) ( 1 ,557,066) 1 1 ,386 (3,577,458)

Cash Flows From Investing Activities: Interest Received on Investments 6 1 ,702 33,052 77,024 7,079 178,857 36,223 86,860 301 ,940

Nel Cash Provided by Investing Activities 6 1 ,702 33,052 77,024 7,079 178,857 36,223 86,860 301 ,940

Transfers: Transrers 4,821 707 1 ,9 10 7,438 (7,438) Transrers Sales Proceeds Woodside Properly 1 ,097,664 250,701 992,640 2,341,005 (2,341 ,005) Transrers 2009 COP 406,275 406,275 171 ,714 (577,989) Transrers 2009 AMR Transrers 20 IO Park Loan Transrers LWD Detachment 44,800 44,800 (44,800) Transrers Dehl Service (2009 COP) Transrers (METRO) (9,075,307) (9,075,307) 9,075,307 Transrers Other ( 1 1 2,365) (788,708) 1 65,254 122,802 (613,017) 600,285 (250) (3,948) (1 6,930)

Net Transrers 1 ,441, 195 (537,300) (7,915,503) 122,802 (6,888,806) 771,999 (578,239) (2,397, 19 1) 9,075,307 (1 6,930)

Nel Increase (Decrease) in Cash and Cash Equivalents and Investments (672,974) 1,035,876 4,71 0,608 1 ,2 1 3,390 6,286,900 (748,844) (491,379) (2,385,805) 9,075,307 1 1 ,736,179

Cash and Cash Equivalents and Investments al Beginning or Year 19, 164,941 8,264,035 16, 198,351 2,026,641 45,653,968 8,051,730 1 7,896,698 2,430,6 1 1 74,033,007

Cash and Cash Equivalents and Investments at End of Year $ 18,491,967 9,299,911 $ 20,908,959 3,240,031 $ 51,940,868 7,302,886 $ 17,405,319 44,806 $ 9,075,307 $ 85,769,186

* Note: Allocation (or changes in receivables/payables/other assets) are based upon a constant percentage (overhead allocation percentage) applied throughout the llscal year.

See accompanying independent auditors' reporL 50

APPENDIX D

PROPOSED FORM OF FINAL OPINION

Padre Dam Municipal Water District Santee, California

$53,195 ,000 Padre Dam Municipal Water District

Certificates of Participation (20 17 Capital Improvement and Refunding Project), Series A

Ladies and Gentlemen:

We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the Padre Dam Municipal Water District (the "District") in connection with

the authorization, execution and delivery by the District of the Installment Purchase Agreement, dated as of June 1 , 20 17 (the "Installment Purchase Agreement"), by and between the Padre Dam

Public Facilities Corporation (the "Corporation") and the District. We have also reviewed the Trust Agreement, dated as of June 1 , 2017 (the "Trust Agreement"), by and among Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), the Corporation and the District; and such other information and documents as we consider necessary to render this opinion.

Pursuant to the Trust Agreement, the Trustee has agreed to execute and deliver certificates of participation designated Padre Dam Municipal Water District Certificates of

Participation (2017 Capital Improvement and Refunding Project), Series A (the "Certificates") evidencing direct, undivided, fractional interests in Installment Payments (as defined in the Trust

Agreement) to be made by the District pursuant to the Installment Purchase Agreement.

Based on the foregoing, we are of the opinion that the obligation of the District to pay

Installment Payments under the Installment Purchase Agreement is a valid and binding obligation payable from and secured by a pledge of and charge and lien upon Net District Revenues on a parity with the District's Prior Parity Debt (as such terms are defined in the Trust Agreement).

We are further of the opinion that the Installment Purchase Agreement and the Trust Agreement have been duly authorized, executed and delivered by the District and cons ti lute valid

and legally binding agreements of the District enforceable in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws

relating to or affecting generally the enforcement of creditors' rights and except as their enforcement may be subject to the exercise of judicial discretion in accordance with general principles of equity. The Certificates have been duly executed and delivered by the Trustee and are entitled to the benefits of the Trust Agreement.

The Internal Revenue Code of 1986, as amended (the "Code"), sets forth certain investment, rebate and related requirements which must be met subsequent to the issuance and

delivery of the Certificates for the portion of each Installment Payment due under the Installment Purchase Agreement designated as and comprising interest and received by the owners of the

Certificates ( the "Interest Component") to be and remain excluded from gross income for

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purposes of federal taxation. Noncompliance with such requirements could cause the Interest Component to be included in gross income for purposes of federal taxation retroactive to the date

of delivery of the Certificates. Pursuant to the Trust Agreement, the District has covenanted to comply with the requirements of the Code. We are of the opinion that, under existing statutes,

regulations, rulings and court decisions, assuming compliance with the aforementioned covenant, the Interest Component is excluded from gross income for purposes of federal income taxation.

We are further of the opinion that the Interest Component is not a specific preference item for purposes of the alternative minimum tax provisions of the Code. Although the Interest Component is excluded from gross income for purposes of federal income taxation, the accrual or receipt of the Interest Component may otherwise affect the federal income tax liability of the

recipient. The extent of these other tax consequences will depend on the recipient's particular tax status or other items of income or deduction. We express no opinion regarding any such

consequences.

We are further of the opm10n that the Interest Component 1s exempt from personal

income taxation imposed by the State of California.

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 Certificates. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Certificates, or the interest paid with respect thereto, if any action is taken with respect to the Certificates or the proceeds thereof predicated or permitted upon

the advice or approval of bond counsel other than ourselves.

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 hereafter come to our

attention or to reflect any changes in any law that may hereafter 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.

No opinion is expressed herein on the accuracy, completeness or sufficiency of the

Official Statement or other offering material relating to the Certificates.

Respectfully submitted,

BEST BEST & KRIEGER, LLP

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APPENDIX E

FORM OF CONTINUING DISCLOSURE CERTIFICATE



This CONTINUING DISCLOSURE CERTIFICATE (this "Disclosure Certificate") is executed and delivered by the Padre Dam Municipal Water District (the "District") in connection with the execution and delivery of the Certificates captioned above (the "Certificates"). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of June 1, 2017, by and among the District, the Padre Dam Public Facilities Financing Corporation and The Bank of New York Mellon Trust Company N.A., as trustee (the ''Trustee").

The District covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the holders and beneficial owners of the Certificates and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth above and in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:

"Annual Reporf' means any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

"Annual Report Date" means the date that is 9 months after the end of the District's fiscal year (currently March 31 based on the District's fiscal year end of June 30).

"Dissemination Agenf' means the District, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation.

"Listed Events" means any of the events listed in Section 5(a) of this Disclosure Certificate.

"MS RB" means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information that may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future.

"Official Statemenf' means the final official statement executed by the District in connection with the issuance of the Certificates.

"Participating Underwriter' means the original purchaser of the Certificates required to comply with the Rule in connection with offering of the Certificates.

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"Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as it may be amended from time to time.

Section 3. Provision of Annual Reports.

(a) The District shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing March 31, 2018, with the report for the 2016-17 fiscal year, provide to the MSRB, in an electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 Business Days prior to the Annual Report Date, the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If by 15 Business Days prior to the Annual Report Date the Dissemination Agent (if other than the District) has not received a copy of the Annual Report, the Dissemination Agent shall contact the District to determine if the District is in compliance with the previous sentence. 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 4 of this Disclosure Certificate; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report, and later than the Annual Report Date, 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 Section 5(c). The District shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the District hereunder. The Dissemination Agent may conclusively rely upon such certification of the District and shall have no duty or obligation to review such Annual Report.

(b) If the District does not provide ( or cause the Dissemination Agent to provide) an Annual Report by the Annual Report Date, the District shall provide (or cause the Dissemination Agent to provide) in a timely manner to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A.

(c) With respect to each Annual Report, the Dissemination Agent shall:

(i) determine each year prior to the Annual Report Date the then-applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and

(ii) if the Dissemination Agent is other than the District, file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, and stating the date it was provided.

Section 4. Content of Annual Reports. The District's Annual Report shall contain or incorporate by reference the following:

(a) The District's audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District's audited financial statements are not available by the Annual Report Date, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

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(b) Unless otherwise provided in the audited financial statements filed on or before the Annual Report Date, financial information and operating data with respect to the District for the preceding fiscal year, substantially similar to that provided in the corresponding tables in the Official Statement:

(i) Principal amount of Certificates outstanding.

(ii) The information for the most recently completed fiscal year in the form of Tables 3a, 4, 5, 6, 8, 12, 14, 23 and 28.

(iii) A description of any Parity Debt issued during the most recently completed fiscal year.

(c) In addition to any of the information expressly required to be provided under this Disclosure Certificate, the District shall provide such further material 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.

(d) 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 are available to the public on the MSRB's Internet web site or filed with the Securities and Exchange Commission. The District shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events.

(a) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates:

( 1) Principal and interest payment delinquencies.

(2) Non-payment related defaults, if material.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

(6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security.

(7) Modifications to rights of security holders, if material.

(8) Certificate calls, if material, and tender offers.

(9) Defeasances.

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(10) Release, substitution, or sale of property securing repayment of the securities, if material.

(11) Rating changes.

(12) Bankruptcy, insolvency, receivership or similar event of the District or other obligated person.

(13) The consummation of a merger, consolidation, or acquisition involving the District or an obligated person, or the sale of all or substantially all of the assets of the District or an obligated person (other than in the ordinary course of business), the entry into a definitive agreement to undertake such an action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material.

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall, or shall cause the Dissemination Agent (if not the District) to, file a notice of such occurrence with the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) above 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 under the Trust Agreement.

(c) The District acknowledges that the events described in subparagraphs (a)(2), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13), and (a)(14) of this Section 5 contain the qualifier "if material" and that subparagraph (a)(6) also contains the qualifier "material" with respect to certain notices, determinations or other events affecting the tax status of the Certificates. The District shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that it determines the event's occurrence is material for purposes of U.S. federal securities law. Whenever the District obtains knowledge of the occurrence of any of these Listed Events, the District will as soon as possible determine if such event would be material under applicable federal securities law. If such event is determined to be material, the District will cause a notice to be filed as set forth in paragraph (b) above.

(d) For purposes of this Disclosure Certificate, any event described in paragraph (a)(12) above is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the District in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District.

Section 6. Identifying Information for Filings with the MSRB. All documents provided to the MSRB under the Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.

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Section 7. Termination of Reporting Obligation. The District's obligations under this Disclosure Certificate 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 Section 5(c).

Section 8. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be the District. Any Dissemination Agent may resign by providing 30 days' written notice to the District.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), 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 either (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 nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Certificates.

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first Annual Report filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

If an amendment is made to this Disclosure Certificate modifying the accounting principles to be followed in preparing financial statements, the Annual Report 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 any amendment made pursuant to this Section 9 shall be filed in the same manner as for a Listed Event under Section 5(c).

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Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate 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 Certificate. 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 Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 11. Default. If the District fails to comply with any provision of this Disclosure Certificate, the Participating Underwriter 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 to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. (a) Article IX of the Trust Agreement is hereby made applicable to this Disclosure Certificate as if this Disclosure Certificate were (solely for this purpose) contained in the Trust Agreement. The Dissemination Agent shall be entitled to the protections and limitations from liability afforded to the Trustee thereunder. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, 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 they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys' fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the District hereunder, and shall not be deemed to be acting in any fiduciary capacity for the District, the holders of the Certificates or any other party. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates.

(b) The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees as amended from time to time, and shall be reimbursed for all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder.

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and the holders and beneficial owners from time to time of the Certificates, and shall create no rights in any other person or entity.

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Section 14. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument.

Date: June 15, 2017

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PADRE DAM MUNICIPAL WATER

DISTRICT

Name of Issuer:

Name of Issue:

Date of Issuance:

EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Padre Dam Municipal Water District

Padre Dam Municipal Water District Certificates of Participation (2017 Capital Improvement and Refunding Project), Series A

June 15, 2017

NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Certificates as required by the Continuing Disclosure Certificate dated June 15, 2017. The District anticipates that the Annual Report will be filed by _ _ _ _

Dated: - - - -

DISSEMINATION AGENT:

By: _________ _ Its: -----------

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APPENDIX F

BOOK ENTRY PROVISIONS

The following description of the Depository Trust Company ("DTC''), the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, interest and other payments on the Certificates to OTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Certificates and other related transactions by and between OTC, the OTC Participants and the Beneficial Owners is based solely on information provided by O T C. Accordingly, no representations can be made concerning these matters and neither the D T C Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with OTC or the OTC Participants, as the case may be.

Neither the issuer of the Certificates (the "Issuer'') nor the trustee, fiscal agent or paying agent appointed with respect to the Certificates (the "Agent'') take any responsibility for the information contained in this Appendix.

No assurances can be given that O T C, O T C Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Certificates, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Certificates, or (c) redemption or other notices sent to D T C or Cede & Co., its nominee, as the registered owner of the Certificates, or that they will so do on a timely basis, or that O T C, O T C Participants or O T C Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to O T C are on file with the Securities and Exchange Commission and the current "Procedures" of OTC to be followed in dealing with D T C Participants are on file with D T C.

1. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the securities (the "Certificates"). The Certificates will be issued as fullyregistered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of OTC. One fully-registered certificate will be issued for the Certificates, in the aggregate principal amount of such issue, and will be deposited with OTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. OTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. OTC 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 countries that DTC's participants ("Direct Participants") deposit with OTC. OTC 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. OTC is a wholly-owned

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subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of OTC 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 OTC system is also available to others such as both U.S. and nonU.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). OTC has Standard & Poor's highest rating: AAA. The OTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about OTC can be found at www.dtcc.com and www.dtc.org.

3. Purchases of Certificates under the OTC 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 OTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates, except in the event that use of the book-entry system for the Certificates is discontinued.

4. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with OTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of OTC. The deposit of Certificates with OTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. OTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by OTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them.

6. Redemption notices shall be sent to OTC. If less than all of the Certificates within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

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http://www.dtcc.com

http://www.dtc.org

7. Neither OTC nor Cede & Co. (nor such other OTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, OTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of OTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from Issuer or Agent 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 OTC nor its nominee, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of OTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of OTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. OTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor securities depository is not obtained, security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry-only transfers through OTC (or a successor securities depository). In that event, security certificates will be printed and delivered to OTC.

11. The information in this section concerning OTC and DTC's book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.

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