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Item 02 - d - Council Reading File - Preliminary Official Statement_San Luis Obispo Water Revenue Bonds 2018 4166-0740-7890 10
OH&S DRAFT 06/01/18 PRELIMINARY OFFICIAL STATEMENT DATED JUNE ___, 2018 This Preliminary Official Statement and the information contained therein are subject to change, completion or amendment without notice. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration qualification under the securities laws of such jurisdiction. 4166-0740-7890.10 NEW ISSUE—FULL BOOK-ENTRY RATING: S&P: “[__]” (See “RATINGS.”) In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other ma tters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2018 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Series 2018 Bonds is not a specific preference item for purposes of the federal alternative minimum tax. Bond Counsel expresses no opinion regarding any othe r tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2018 Bonds. See “TAX MATTERS” within. $11,140,000 CITY OF SAN LUIS OBISPO, CALIFORNIA (San Luis Obispo County, California) Water Revenue Refunding Bonds, Series 2018 Dated: Date of Delivery Due: June 1, as shown on the inside front cover This cover page contains certain information for general reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The City of San Luis Obispo, California Water Revenue Refunding Bonds, Series 2018 (the “Series 2018 Bonds”) are being issued by the City of San Luis Obispo (the “City”) to provide funds to refund the City’s outstanding 2006 Water Revenue Bonds and to pay the costs of issuing the Series 2018 Bonds, as more fully described herein. The Series 2018 Bonds will be payable as to interest on June 1 and December 1 of each year, commencing December 1, 2018. The Series 2018 Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), which will act as securities depository for the Series 2018 Bonds. Purchasers will not receive certificates representing their interests in the Series 2018 Bonds. Payments of principal of and interest on the Series 2018 Bonds will be made by U.S. Bank National Association (the “Trustee”) to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the Series 2018 Bonds. See APPENDIX F—“BOOK-ENTRY SYSTEM.” The Series 2018 Bonds are subject to redemption prior to maturity as described herein. See “THE SERIES 2018 BONDS—Redemption.” Principal of, redemption premium, if any, and interest on the Series 2018 Bonds are secured by and payable from a lien on and pledge of Net Revenues, primarily consisting of charges, income and receipts derived by the City from the ownership and operation of the City’s water collection, supply, treatment and distribution system, after deducting maintenance and operation costs of the water system. See “PLAN OF REFUNDING.” The City may in the future issue additional bonds and other indebtedness secured by and payable on a parity with the Series 2018 Bonds, subject to the terms and conditions of the Indenture, dated as of July 1, 2018 (the “Indenture”), by and between the City and the Trustee . See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.” The City’s pledge of Net Revenues is on parity with a pledge and lien securing the City’s 2012 Water Revenue Refunding Bonds and a loan made to the City by the State Water Resources Control Board, as described herein. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS—Additional Parity Obligations.” No debt service reserve fund has been or will be established for the Series 2018 Bonds. THE SERIES 2018 BONDS DO NOT CONSTITUTE AN INDEBTEDNESS OF THE CITY WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION OR LIMITATION, AND THE CITY IS NOT OBLIGATED TO LEVY ANY AD VALOREM TAXES THEREFOR OR TO USE ANY OTHER FUNDS OF THE CITY OTHER THAN NET REVENUES TO PAY THE PRINCIPAL OF, REDEMPTION PREMIUM, IF ANY, AND INTEREST ON THE SERIES 2018 BONDS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL, REDEMPTION PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2018 BONDS. The Series 2018 Bonds will be offered when, as and if issued by the City and received by the Underwri ter, subject to the approval of and validity of the Series 2018 Bonds and certain other legal matters, by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, and subject to certain other conditions. Orrick, Herrington & Sutcliffe LLP has also served as Disclosure Counsel to the City. Certain matters will be passed upon for the City by the City Attorney of the City . Certain legal matters will be passed upon for the Underwriter by its counsel, Schiff Hardin LLP. The Series 2018 Bonds, in book-entry form, will be available for delivery through the DTC book-entry system in New York, New York on or about July __, 2018. Preliminary, subject to change. 4166-0740-7890.10 [Raymond James Logo] Dated: ___________, 2018. 4166-0740-7890.10 $11,140,000 City of San Luis Obispo, California (San Luis Obispo County, California) Water Revenue Refunding Bonds, Series 2018 MATURITY SCHEDULE Maturity Date (June 1) Principal Amount Interest Rate Yield CUSIP (______)† 2019 $525,000 % % 2020 490,000 2021 510,000 2022 525,000 2023 545,000 2024 570,000 2025 590,000 2026 620,000 2027 640,000 2028 665,000 2029 690,000 2030 720,000 2031 750,000 2032 780,000 2033 810,000 2034 840,000 2035 870,000 Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2018 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. Neither the City nor the Underwriter take any responsibility for the accuracy of such CUSIP® numbers. The CUSIP® number for a specific maturity is subject to being changed after the issuance of the Series 2018 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whol e or in part of such maturity. 4166-0740-7890.10 No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representation other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of the Series 2018 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Series 2018 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information set forth herein has been obtained from the City and from other sources and is believed to be reliable but is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof. This Official Statement is submitted in connection with the sale of the Series 2018 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the City. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provision s. All capitalized terms used herein, unless noted otherwise, shall have the meanings prescribed in the Indenture. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more nationally recognized mun icipal securities information repositories. Any statement made in this Official Statement involving any forecast or matter of estimates or opinion, whether or not expressly stated, is intended solely as such and not as a representation of fact. 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 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”). Such forward-looking statements are generally identified by use of the words “plan,” “project,” “expect,” “estimate,” “budget” or other similar words. Such forward looking statements refer to the achievement of certain results or other expectations or performance which involve known and unknown risks, uncertainties and other factors. These risks, uncertainties and other factors may cause actual results, performance or achievements to be materially different from any projected results, performance or achievements described or implied by su ch forward looking statements. The City does not plan to issue updates or revisions to such forward looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based, occur, or if actual results, perform ance or achievements are materially different from any results, performance or achievements describe d or implied by such forward looking statements. The Series 2018 Bonds have not been registered with the Securities and Exchange Commission by reason of the provisions of Section 3(a)(2) of the Securities Act of 1933, as amended. The registration or qualification of the Series 2018 Bonds in accordance with applicable provisions of Securities Laws of the states in which these Bonds have been registered or qualified, and the exemption from registration or qualification in other states, shall not be regarded as a recommendation thereof. Neither these states nor any of their agencies have passed upon the merits of the securities or the accuracy or completeness of this Official Statement. Any representation to the contrary may be a criminal offense. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the Series 2018 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Series 2018 Bonds to certain dealers and banks at prices lower than the initial public offering prices stated on the inside cover page and such public offering prices may be changed from time to time by the Underwriter. The City has appointed U.S. Bank National Association, a national banking association organized under the laws of the United States, to serve as Trustee. The obligations of the Trustee are described in the Indenture. The Trustee has undertaken only those duties and obligations that are expressly set forth in the Indenture. The Trustee has not independently passed upon the validity of the Series 2018 Bonds, the security of the payment therefor, the value or condition of any assets pledged to the payment thereof, the adequacy of the provisions for such payment, the status for federal or state income tax purposes of the interest on the Series 2018 Bonds, or any other matter with respect to the issuance of the Series 2018 Bonds. Except for the contents of this section, the Trustee has not reviewed or participated in the preparation of this Official Statement and has assumed no responsibility for the nature, content, accuracy, or completeness of the information included in this Official Statement. The City maintains a website. Unless specifically indicated otherwise, the information presented in the website is not incorporated by reference as part of this Official Statement and should not be relied upon in making an investment decision with respect to the Series 2018 Bonds. 4166-0740-7890.10 CITY COUNCIL Heidi Harmon Mayor Carlyn Christianson Vice Mayor Aaron Gomez Council Member Andy Pease Council Member Dan Rivoire Council Member CITY ADMINISTRATION Derek Johnson City Manager J. Christine Dietrick, Esq. City Attorney Carrie Mattingly Utilities Director Aaron Floyd Water Division Manager Brigitte Elke Interim Finance Director PROFESSIONAL SERVICES Bond and Disclosure Counsel Orrick, Herrington & Sutcliffe LLP Municipal Advisor PFM Financial Advisors LLC San Francisco, California Trustee U.S. Bank National Association Verification Agent [____________] TABLE OF CONTENTS Page Page -i- 4166-0740-7890.10 INTRODUCTION ............................................. 2 General .......................................................... 2 Purpose .......................................................... 2 The City ........................................................ 2 Security for the Series 2018 Bonds ............... 2 Parity Obligations ......................................... 3 Rate Covenant ............................................... 3 Summaries Not Definitive ............................ 3 THE SERIES 2018 BONDS ............................. 4 General Description ...................................... 4 Redemption ................................................... 4 Notice of Redemption ................................... 4 Partial Redemption of Series 2018 Bonds .... 5 Effect of Redemption .................................... 5 ESTIMATED SOURCES AND USES OF FUNDS .............................................................. 5 DEBT SERVICE SCHEDULE ......................... 6 PLAN OF REFUNDING .................................. 6 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ............................................ 7 Net Revenue Pledge ...................................... 7 Flow of Funds ............................................... 9 No Debt Service Reserve Fund ................... 10 Rate Covenant; Collection of Rates and Charges ....................................................... 10 Additional Parity Obligations ..................... 10 Rate Stabilization Fund ............................... 12 THE WATER SYSTEM ................................. 12 Background ................................................. 12 Water System Facilities .............................. 13 Service Area ................................................ 14 Water Sources and Supply .......................... 14 Source Description ...................................... 15 Capital Improvement Plan and Future Capital Needs .............................................. 16 Water Connections ...................................... 17 Water Deliveries ......................................... 17 Water Production History ........................... 18 Drought and Conservation Measures .......... 18 FINANCIAL CONDITION OF THE WATER SYSTEM ......................................................... 19 Financial Statements ................................... 19 Basis of Fund Accounting ........................... 19 Customer Base ............................................ 19 Multi-Year Rate Strategy; Current Rate Structure ...................................................... 21 Rate Stabilization Reserves ......................... 24 Outstanding Parity Obligations ................... 24 Water Fund Financial Statements ............... 25 Historic Debt Service Coverage .................. 27 Projected Revenues, Expenditures and Debt Service Coverage ......................................... 28 Employee Retirement System ..................... 29 RISK FACTORS ............................................. 35 General ........................................................ 35 Earthquakes, Floods and Other Natural Disasters ...................................................... 36 Permits and Regulation................................ 38 Investment of Funds .................................... 38 Limitations on Remedies and Bankruptcy ... 38 System Demand ........................................... 39 System Expenses ......................................... 39 Limited Obligations ..................................... 39 Limitations on Remedies and Limited Recourse on Default .................................... 40 Secondary Market for Bonds ....................... 40 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ....................................... 40 Article XIIIA of the State Constitution ....... 40 Proposition 218 ............................................ 41 Proposition 26 .............................................. 43 Future Initiatives .......................................... 43 TAX MATTERS ............................................. 43 LITIGATION AND OTHER MATTERS ....... 45 MUNICIPAL ADVISOR ................................ 45 APPROVAL OF LEGAL PROCEEDINGS ... 45 FINANCIAL STATEMENTS ......................... 46 CONTINUING DISCLOSURE ....................... 46 RATINGS ........................................................ 46 UNDERWRITING .......................................... 46 VERIFICATION OF MATHEMATICAL ACCURACY ................................................... 47 MISCELLANEOUS ........................................ 47 APPENDIX A – AUDITED FINANCIAL STATEMENTS OF THE CITY FOR FISCAL YEAR ENDED JUNE 30, 2017 APPENDIX B – CITY OF SAN LUIS OBISPO GENERAL INFORMATION APPENDIX C – SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE APPENDIX D – PROPOSED FORM OF BOND COUNSEL OPINION APPENDIX E – PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX F – BOOK-ENTRY ONLY SYSTEM 2 4166-0740-7890.10 OFFICIAL STATEMENT $11,140,000 City of San Luis Obispo, California (San Luis Obispo County, California) Water Revenue Refunding Bonds, Series 2018 INTRODUCTION This Introduction is only a brief description of and partial guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Series 2018 Bonds to potential investors is made only by means of the entire Official Statement. General The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth certain information concerning the City of San Luis Obispo (the “City”) and the water collection, supply, treatment and distribution system of the City (the “Water System”), in connection with the sale of the City’s $11,140,000 Water Revenue Refunding Bonds, Series 2018 (the “Series 2018 Bonds”). The Series 2018 Bonds are being issued pursuant to Articles 10 and 11 of Chapter 3 of Part I of Division 2 of Title 5 of the California Government Code and an Indenture, dated as of July 1, 2018 (the “Indenture”), between the City and U.S. Bank National Association, as trustee (the “Trustee”). Purpose The Series 2018 Bonds are being issued to refund the City’s outstanding 2006 Water Revenue Bonds and to pay the costs of issuing the Series 2018 Bonds. The particular uses to which the proceeds of the Series 2018 Bonds are scheduled to be applied are more fully described under “PLAN OF REFUNDING.” The City The City is a charter city and municipal corporation of the State of California located on the central coast of California, about 200 miles northwest of Los Angeles and 235 miles southeast of San Francisco. The City is the county seat of San Luis Obispo County (the “County”) and had a population estimated at 46,724 as of January 1, 2017. See APPENDIX B—CITY OF SAN LUIS OBISPO GENERAL INFORMATION.” Security for the Series 2018 Bonds The Series 2018 Bonds are limited obligations of the City, payable solely from and secured by a pledge of Net Revenues, primarily consisting of charges, income and receipts derived by the City from the ownership and operation of the Water System, after deducting maintenance and operation costs of the Water System. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS—Net Revenue Pledge.” No debt service reserve fund has been or will be established for the Series 2018 Bonds. Preliminary, subject to change. 3 4166-0740-7890.10 THE SERIES 2018 BONDS DO NOT CONSTITUTE AN INDEBTEDNESS OF THE CITY WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION OR LIMITATION AND THE CITY IS NOT OBLIGATED TO LEVY ANY AD VALOREM TAXES THEREFOR OR TO USE ANY OTHER FUNDS OF THE CITY OTHER THAN NET REVENUES TO PAY THE PRINCIPAL OF, REDEMPTION PREMIUM, IF ANY, AND INTEREST ON THE SERIES 2018 BONDS. Parity Obligations The City’s pledge of Net Revenues is on parity with a pledge and lien which secures the City’s 2012 Water Revenue Refunding Bonds (the “Series 2012 Bonds”), with a loan made to the City by the State Water Resources Control Board with respect to the Water System (the “SRF Loan”), and any future bonds, notes, loan agreements, installment sale agreements, leases or other obligations of the City payable from and secured by a pledge and lien upon any of the Net Revenues issued or incurred on parity with the Series 2018 Bonds (together with the Series 2012 Bonds and the SRF Loan, the “Parity Obligations”), as described herein. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS—Additional Parity Obligations” and “FINANCIAL CONDITION OF THE WATER SYSTEM—Outstanding Parity Obligations.” The Series 2012 Bonds are also secured by a reserve fund equal to the lesser of $496,000 or the maximum amount of principal of and interest on the Series 2012 Bonds coming due and payable in the current or any future bond year. This reserve fund is not available for the payment of the Series 2018 Bonds. Rate Covenant The City covenants under the Indenture that it will at all times, while any of the Series 2012 Bonds remain outstanding, fix, prescribe and collect rates and charges for the services and facilities furnished by the Water System that are reasonably estimated to yield Adjusted Net Revenues in each Fiscal Year so that the ratio of Adjusted Net Revenues to annual Debt Service on the Series 2018 Bonds and all Parity Obligations is at least equal to 125%. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS—Rate Covenant; Collection of Rates and Charges” and APPENDIX C— “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE—Rate Covenant.” However, the City’s ability to increase such rates, fees and charges is subject to the limitations imposed by Proposition 218. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 218.” Summaries Not Definitive The summaries and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary or reference is qualified in its entirety by reference to each such document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined herein indicates that such word is defined in the Indenture and, as used herein, has the meaning given to it in the Indenture . Unless otherwise indicated, all financial and statistical information herein has been provided by the City. All references to and summaries of the Indenture and the Series 2018 Bonds referred to herein are qualified in their entirety by reference to the full text of such document, copies of which are available for inspection at the offices of the City and will be available from the Trustee upon request and payment of duplication costs. Forward looking statements in this Official Statement are subject to ri sks and uncertainties. Actual results may vary from forecasts or projections contained herein because events and circumstances do not occur as expected, and such variances may be material. 4 4166-0740-7890.10 THE SERIES 2018 BONDS General Description The Series 2018 Bonds are being issued in fully registered form and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”). DTC will act as securities depository of the Series 2018 Bonds. Individual purchases of ownership interests in the Series 2018 Bonds will be made in book-entry form only in denominations of $5,000 or any integral multiple thereof. See APPENDIX F—“BOOK-ENTRY ONLY SYSTEM.” The Series 2018 Bonds will be dated their date of initial delivery and will bear interest at the rates and mature in the amounts and on the dates set forth on the inside cover page of this Official Statement . Interest on the Series 2018 Bonds is payable on June 1 and December 1 of each year, commencing December 1, 2018, calculated on the basis of a 360-day year comprised of twelve 30-day months. Principal of and redemption premium, if any, and interest on the Series 2018 Bonds are payable by the Trustee to DTC, which is obligated in turn to remit such principal and interest to DTC Participa nts for subsequent disbursement to the Beneficial Owners of the Series 2018 Bonds. Redemption* Optional Redemption. The Series 2018 Bonds maturing on and before June 1, 20__ are not subject to call or redemption prior to maturity. The Series 2018 Bonds maturing on and after June 1, 20__, are subject to redemption prior to their respective stated maturity dates, at the option of the City, from any source of available funds, as a whole or in part (in such amounts and maturities as may be specified by the City, or if the City fails to specify such maturities, in inverse order of maturity) on any date, on or after June 1, 20__, at a redemption price equal to the principal amount of Series 2018 Bonds called for redemption, together with accrued interest thereon to the date fixed for redemption, without premium. Notice of Redemption Notice of redemption of the Series 2018 Bonds shall be mailed by first-class mail by the Trustee, not less than 20 nor more than 60 days prior to the redemption date, to the respective Holders of the Series 2018 Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee. In the case of any optional redemption, the notice may state that it is conditioned upon the deposit of money, in an amount equal to the amount necessary to effect the redemption, with the Trustee no later than the redemption date or that City retains the right to rescind such notice on or prior to the scheduled redemption date (a “Conditional Redemption”), and such notice and optional redemption shall be of no effect if such money is not so deposited or if notice is rescinded. Any Conditional Redemption may be rescinded in whole or in part at any time prior to the redemption date if the City delivers a certificate to the Trustee instructing the Trustee to rescind the redemption notice. The Trustee shall give prompt notice of such rescission to the affected Holders. Any Series 2018 Bonds subject to Conditional Redemption where redemption has been rescinded shall remain Outstanding, and the rescission shall not constitute an Event of Default. Further, in the case of a Conditional Redemption, the failure of the City to make funds available in part or in whole on or before the redemption date shall not constitute an event of default under the Indenture, and the Trustee shall give prompt notice to the affected Holders that the redemption did not occur and that the Series 2018 Bonds called for redemption and not so paid remain Outstanding. * Preliminary, subject to change. 5 4166-0740-7890.10 Partial Redemption of Series 2018 Bonds If less than all Series 2018 Bonds of any maturity or any given portion thereof are to be redeemed at any one time, the Trustee shall select the Series 2018 Bonds of such maturity or any given portion thereof to be redeemed, by lot, in any manner that the Trustee in its sole discretion deems appropriate and fair. For purposes of such selection, Series 2018 Bonds or portions thereof shall be in integral multiples of $5,000 and, in selecting Series 2018 Bonds for redemption, each Series 2018 Bond shall be treated as representing that number of Series 2018 Bonds as is obtained by dividing the principal amount of such Series 2018 Bond by $5,000 any such $5,000 multiple may be separately redeemed. Effect of Redemption If notice of redemption has been duly given as described herein and money for the payment of the redemption price of the Series 2018 Bonds called for redemption is held by the Trustee, then on the redemption date designated in such notice the Series 2018 Bonds so called for redemption shall become due and payable, and from and after the date so designated interest on such Series 2018 Bonds shall cease to accrue, and the Holders of such Series 2018 Bonds shall have no rights in respect thereof. All Series 2018 Bonds redeemed as described herein shall be cancelled by the Trustee and shall be destroyed with a certificate of destruction furnished to the City, if it so requests, and shall not be reissued. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds with respect to the Series 2018 Bonds are as follows: Sources Principal Amount of the Series 2018 Bonds $ Plus/Minus Net Original Issue Premium/Discount Plus Prior Bond Funds Total $ Uses Deposit to Escrow Fund $ Costs of Issuance(1) Total $ ____________________ (1) Includes legal, financing and consulting fees, verification agent fees, rating agency fees, Underwriter’s discount, printing costs and other miscellaneous expenses. 6 4166-0740-7890.10 DEBT SERVICE SCHEDULE The following table sets forth the annual debt service obligations in each year for the Series 2018 Bonds. Period Ending (June 1) Series 2018 Bonds Parity Debt Service Total Debt Service Principal Interest Total SRF Loan Series 2012 Bonds 2019 $ $ $ $525,457.00 $571,600.00 $ 2020 525,457.00 567,800.00 2021 525,457.00 568,400.00 2022 525,457.00 573,200.00 2023 525,457.00 572,000.00 2024 525,457.00 -- 2025 525,457.00 -- 2026 -- -- 2027 -- -- 2028 -- -- 2029 -- -- 2030 -- -- 2031 -- -- 2032 -- -- 2033 -- -- 2034 -- -- 2035 -- -- 2036 -- -- Total $3,678,199.00 $2,853,000.00 PLAN OF REFUNDING The City has previously issued its 2006 Water Revenue Bonds in the original aggregate principal amount of $16,905,000 (the “Series 2006 Bonds”) under an Indenture of Trust dated as of August 1, 2006 (the “2006 Bond Indenture”), between the City and the Trustee. The Series 2006 Bonds to be redeemed and defeased in whole upon issuance of the Series 2018 Bonds are set forth in the following table. 7 4166-0740-7890.10 $16,905,000 City of San Luis Obispo 2006 Water Revenue Bonds Redemption Date: August 3, 2018* Redemption Price: 100% Maturity Date (June 1) Interest Rate Principal Amount CUSIP† (798662) 2019 4.100 475,000 DC3 2020 4.200 490,000 DD1 2021 4.250 515,000 DE9 2022 4.300 535,000 DF6 2023 4.375 555,000 DG4 2024 4.375 580,000 DH2 2025 4.375 605,000 DJ8 2026 4.375 635,000 DK5 2027 4.500 660,000 DL3 2028 4.500 690,000 DM1 2031 4.500 2,265,000 DN9 2036 4.625 4,515,000 DP4 The Series 2006 Bonds were issued to finance certain improvements to the City’s Water System. The Series 2006 Bonds are currently outstanding in the aggregate principal amount of $12,520,000, which will be redeemed in full on or about August 3, 2018* (the “Redemption Date”), at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the Redemption Date. In order to accomplish the plan of refunding, the net proceeds of the Series 2018 Bonds, together with certain other funds on hand with respect to the Series 2006 Bonds, will be transferred to the Trustee, acting as the current trustee for the Series 2006 Bonds (the “Escrow Bank”), for deposit in an escrow fund the “Escrow Fund”) to be established under an escrow agreement between the City and the Escrow Bank. The Escrow Bank will invest the amounts on deposit in the Escrow Fund in investment securities, the principal of and interest thereon, together with any remaining amounts held in cash by the Escrow Bank, will be sufficient to pay and redeem the Series 2006 Bonds in full on the Redemption Date. See “VERIFICATION OF MATHEMATICAL ACCURACY.” SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Net Revenue Pledge The Series 2018 Bonds are revenue obligations of the City and are payable as to both principal and interest, and any premium upon redemption thereof, exclusively from Net Revenues and from the other funds pledged under the Indenture. All Net Revenues are pledged to secure the payment of the Series 2018 Bonds and the Parity Obligations in accordance with their terms, subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2018 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve i n any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. None of the Authority, the City, the Underwriter or their agents or counsel assume responsibility for the accuracy of such numbers. 8 4166-0740-7890.10 conditions set forth in the Indenture. The Net Revenues are irrevocably pledged to the payment of the principal of and interest on the Series 2018 Bonds. “Water System” is defined under the Indenture to mean all facilities, properties and improvements at any time owned, controlled or operated by the City for the collection, supply, treatment and distribution of water to residents of the City and adjacent areas, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto hereafter acquired, constructed or installed by the City. “Parity Obligation” is defined under the Indenture to mean (a) the Series 2012 Bonds, (b) the SRF Loan and (c) any other bond, note, warrant or other evidence of indebtedness, installment payment, lease payment or other payment obligation of the City payable from Net Revenues on a parity with the Series 2018 Bonds and any other Parity Obligations, which are issued, incurred or created in accordance with the Indenture. “Revenues” is defined under the Indenture to mean all income, rents, rates, fees, charges and other moneys derived from the ownership or operation of the Water System determined in accordance with generally accepted accounting principles, consistently applied, including, without limiting the generality of the foregoing, (1) all income, rents, rates, fees, charges, business interruption insurance proceeds, connection fees and charges or other moneys derived by the City from the Water Service or other services, facilities, and commodities sold, furnished or supplied through the facilities of or in the conduct or operation of the business of the Water System; (2) the earnings on and income derived from the investment of amounts described in clause (1) above and from City reserves held for the Water System; and (3) the proceeds derived by the City directly or indirectly from the sale, lease or other disposition of a part of the Water System; but excluding (a) the proceeds of taxes; (b) customers’ deposits or any other deposits or advances subject to refund until such deposits or advances have become t he property of the City; and (c) advances or contributions in aid of construction. Notwithstanding the foregoing, there shall be deducted from current Revenues any amounts transferred into the Rate Stabilization Fund from current Revenues as provided in the Indenture and there shall be added to current Revenues any amounts transferred out of the Rate Stabilization Fund as provided in the Indenture. “Net Revenues” is defined under the Indenture to mean, for any period, the Revenues for such period less the Operation and Maintenance Costs for such period. “Adjusted Net Revenues” is defined under the Indenture to mean, for any period, Net Revenues for such period less, to the extent included in the calculation of Net Revenues for such period, all Subsidy Payments received or expected to be received in such period. “Subsidy Payments” means payments with respect to Parity Obligations made by the United States Treasury to the City or a trustee or fiduciary pursuant to Section 54AA of the Code, Section 6431 of the Code, or Section 1400U-2 of the Code or any successor to or extension or replacement of any of such provisions of the Code, or any provisions of the Code that create similar direct -pay subsidy programs. The City does not currently receive any Subsidy Payments with respect to any of its Parity Obligations. “Rate Stabilization Fund” is defined under the Indenture to mean the fund by that name established pursuant to the Indenture. “Operation and Maintenance Costs” is defined under the Indenture to mean costs spent or incurred by the City for maintaining and operating the Water System, calculated in accordance with generally accepted accounting principles consistently applied, including but not limited to (a) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Water System in good repair and working order and (b) the reasonable administrative costs of the City attributable to the operation and maintenance of the Water System; but in all cases exclu ding 9 4166-0740-7890.10 (i) the interest expense relating to subordinate obligations and unsecured obligations of the City, (ii) depreciation, replacement and obsolescence charges or reserves therefor, and (iii) amortization of intangibles or other bookkeeping entries of a similar nature. “Parity Obligation Contract” is defined under the Indenture to mean any indenture, trust agreement, installment purchase agreement, lease, contract or other instrument or agreement (including any hedge agreement), which is designated as such by the City and pursuant to which Parity Obligations are created. The Series 2018 Bonds are limited obligations of the City. The Series 2018 Bonds are not deemed to constitute a debt or liability of the City, the State of California or of any political su bdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction, or a pledge of the faith and credit of the City, the State of California or of any political subdivision thereof, but are payable, except to the extent of certain amounts held under the Indenture pledged therefor, solely from Net Revenues. Neither the faith and credit nor the taxing power of the City, the State of California or of any political subdivision thereof is pledged to the payment of the principal of, premium, if any, or the interest on the Series 2018 Bonds. The issuance of the Series 2018 Bonds does not directly or indirectly or contingently obligate the City, the State of California or any political subdivision thereof to levy or to pledge any form of taxation whatsoever therefor or to make any appropriation for their payment. The Indenture provides that all funds and accounts created pursuant to the Indenture constitute trust funds in favor of the Holders of the Series 2018 Bonds, until so applied for the purpose set forth in the Indenture. Flow of Funds The City has covenanted that all Revenues will be received by the City in trust and will be deposited when and as received in the Water Fund. The City has covenanted and agreed to maintain the Water Fund at all times so long as any Series 2018 Bonds are Outstanding under the Indenture. All Revenues and Net Revenues, whether held by the City or deposited with the Trustee, will nevertheless be disbursed, allocated, and applied solely to the uses and purposes described below. Moneys in the Water Fund shall be used and applied by the City only in the following order as provided herein: First. The City shall pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as they become due and payable and shall make such deposits to the Rate Stabilization Fund as it may determine from time to time in accordance with the Indenture; and Second. The City shall pay the principal of and interest on the Series 2018 Bonds and pay all Parity Obligations and make any deposits or transfers required to be made by the City pursuant to the Indenture and all Parity Obligation Contracts, in each case at the times and in the amounts required by the Indenture and each Parity Obligation Contract. As long as all payments required to be paid by the City pursuant to the Indenture have been paid and all deposits or transfers required to be made by the City pursuant to the Indenture have been made at the times and in the amounts required therein, Revenues on deposit in the Water Fund may be applied and used by the City for any lawful purpose. 10 4166-0740-7890.10 No Debt Service Reserve Fund No debt service reserve fund will be established for the Series 2018 Bonds. Amounts held in or credited to any other debt service reserve fund established in connection with the Series 2012 Bonds or any Parity Obligations do not secure, and are not available for payment of the Series 2018 Bonds. Rate Covenant; Collection of Rates and Charges Sum Sufficient. The City will, to the extent permitted by law (including, without limitation, Section 6 of Article XIIID of the California Constitution), fix, prescribe and collect rates and charges for the services and facilities furnished by the Water System in each Fiscal Year that are reasonably estimated to yield during each Fiscal Year Adjusted Net Revenues for such Fiscal Year equal to the Coverage Requirement for such Fiscal Year. The City may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Adjusted Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements described in the section. So long as the City has complied with its obligations set forth the Indenture, the failure of the Adjusted Net Revenues for any Fiscal Year to be equal to at least the Coverage Requirement for such Fiscal Year shall not constitute an Event of Default under the Indenture. “Coverage Requirement” is defined under the Indenture to mean, with respect to any specified period, an amount of Adjusted Net Revenues for the specified period equal, in each case, to at least (1) 125% of the Debt Service for all Outstanding Bonds and Parity Obligations for the specified period and (2) 100% of all obligations of the City payable from Net Revenues in the specified period. Collection of Rates and Charges. The City will have in effect at all times bylaws, rules and regulations requiring each customer to pay the rates and charges applicable to the services and facilities furnished by the Water System to such customer and providing for the billing thereof and for a due date and a delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the City may discontinue such service from the Water System, and such service shall not thereafter be recommenced except in accordance with City rules and regulations governing such situations of delinquency. Additional Parity Obligations After the issuance of the Series 2018 Bonds, the City may at any time and from time to time issue, incur or create any Parity Obligations; provided: (i) there shall not have occurred and be continuing an Event of Default under the terms of the Indenture (or the issuance, incurrence or creation of such Parity Obligations will cure any such Event of Default); and (ii) the issuance of such Parity Obligations shall comply with all conditions to the issuance thereof as set forth in the applicable provisions of the Parity Obligation Contracts; and (iii) the City obtains or provides a certificate or certificates prepared by the City or at the City’s option by a Consultant showing that either: (1) the Adjusted Net Revenues for either the most recent Fiscal Year for which audited financial statements are available or any 12 consecutive calendar month period (selected by the City) during the 18 consecutive calendar month period ending immediately prior to the issuance, incurrence or creation of such additional Parity Obligations were at least equal to the Coverage Requirement for the most recently completed Fiscal Year, including in the calculation of the Coverage Requirement for this 11 4166-0740-7890.10 purpose the Average Annual Debt Service for the additional Parity Obligations to be issued, incurred or created; and for the purpose of providing such certificate or certificates, the City or the City’s Consultant, as applicable, may adjust the Adjusted Net Revenues for such Fiscal Year or 12 calendar month period, as the case may be, to reflect: (A) an allowance for Net Revenues that would have been derived from each new connection to the Water System that was made prior to the issuance, incurrence or creation of such additional Parity Obligations but which was not in existence during all or any part of such Fiscal Year or 12 calendar month period under consideration, in an amount equal to the estimated additional Net Revenues that would have been derived from each such connection if it had been made prior to the beginning of such Fiscal Year or 12 calendar month period; provided that such certificate or certificates shall show that the amount of Adjusted Net Revenues for the Fiscal Year or 12 calendar month period under consideration was equal to at least 100% of the Debt Service for all Outstanding Bonds and Parity Obligations for such Fiscal Year or 12 calendar month period before making any allowance for new connections to the Water System as described in this subparagraph (A), and (B) an allowance for Net Revenues that would have been derived from any increase in the rates, fees and charges fixed and prescribed for Water Service which became effective prior to the issuance, incurrence or creation of such additional Parity Obligations but which was not in effect during all or any part of such Fiscal Year or 12 calendar month period, in an amount equal to the estimated additional Net Revenues that would have been derived from such increase in rates, fees and charges if it had been in effect prior to the beginning of such Fiscal Year or 12 calendar month period; or (2) the estimated Adjusted Net Revenues for each of the five full Fiscal Years next following the earlier of (x) the end of the period during which interest on such additional Parity Obligations is to be capitalized or, if no interest is capitalized, the Fiscal Year in which such additional Parity Obligations are issued, incurred or created, or (y) the date on which substantially all projects financed with the proceeds of such additional Parity Obligations plus all projects financed with all existing Parity Obligations are expected to commence operations, will be at least equal to the Coverage Requirement for each such Fiscal Year; and for the purpose of providing such certificate or certificates, the City or the City’s Consultant, as applicable, may adjust the foregoing estimated Adjusted Net Revenues to reflect: (A) an allowance for Net Revenues that are estimated to be derived from any increase in the rates, fees and charges for Water Service which have been adopted and which will be in effect during all or any portion of the period for which such estimates are provided; and (B) an allowance for Net Revenues that are estimated to be derived from new connections to the Water System reasonably expected during all or any portion of the period for which such estimates are provided in an amount equal to the additional Net System Revenues that are estimated to be derived from such connections; provided that such certificate or certificates shall show that the estimated Adjusted Net Revenues for each of the five Fiscal Years for which such estimates are provided will be equal to at least 100% of the Debt Service for all Outstanding Bonds and Parity Obligations for each such Fiscal Year before 12 4166-0740-7890.10 making any allowance for new connections to the Water System as described in this subparagraph (B). For purposes of clause (2) described above, with respect to Operation and Maintenance Costs, the City or the City’s Consultant, as applicable, shall use such assumptions as such believes to be reasonable, taking into account: (i) historical Operation and Maintenance Costs, (ii) Operation and Maintenance Costs associated with any additions, improvements or betterments to or extensions or replacements of the Water System to be financed with the proceeds of such additional Parity Obligations and any other new additions, improvements or betterments to or extensions or replacements of the Water System during the period for which such estimates are provided and (iii) such other factors, including inflation and changing operations or policies, as the City or the City’s Consultant, as applicable, believes to be appropriate. Without regard to the provisions of the Indenture described above under this subheading, the City may at any time issue, incur or create Parity Obligations that are Reimbursement Obligations or issue, incur or create Parity Obligations under a Hedge Agreement provided that such Reimbursement Obligations or Hedge Agreement relate to Parity Obligations or anticipated Parity Obligations. Without regard to the provisions of the Indenture described above under this subheading, the City may at any time issue, incur or create Parity Obligations for the purpose of refunding, refinancing or prepaying any obligation payable from Net Revenues (including the payment of any costs incurred in connection with such refunding, refinancing or prepayment and the creation of such Parity Obligations and the creation of reserve funds, if any, for such Parity Obligations). Nothing contained in the Indenture shall limit the ability of the City to issue, incur or create obligations payable from the Net Revenues on a basis that is subordinate in both payment and lien priority to the Series 2018 Bonds and any other Parity Obligations. See also “FINANCIAL CONDITION OF THE WATER SYSTEM—Outstanding Parity Obligations.” Rate Stabilization Fund The City covenants under the Indenture to maintain and hold a Rate Stabilization Fund. From time to time the City may deposit into the Rate Stabilization Fund, from current Revenues, such amounts as the City shall determine and the amount of available current Revenues shall be reduced by the amount so transferred. The City may also deposit amounts in the Rate Stabilization Fund from any lawfully available source other than current Revenues and the amount of available current Revenues shall not be reduced by the amounts so transferred. Amounts may be transferred from the Rate Stabilization Fund and deposited in the Water Fund, and any amounts so transferred shall be deemed Revenues when so transferred. Deposits to and transfers from the Rate Stabilization Fund for each Fiscal Year shall be made within 270 days after the end of such Fiscal Year. All interest or other earnings upon amounts in the Rate Stabilization Fund may be withdrawn therefrom and accounted for as Revenues. Any amounts transferred into the Rate Stabilization Fund from current Revenues shall be deducted from current Revenues, and any amounts transferred out of the Rate Stabilization Fund shall be added to current Revenues for purposes of the calculation of Revenues pursuant to the Indenture. THE WATER SYSTEM Background History. The City has provided water service to its residents for over 100 years. During this time the City has developed its Water System to satisfy the City’s growing water needs. The operation of the Water System is administered and managed by a separate Utilities Department, which includes a Water 13 4166-0740-7890.10 Division and a Wastewater Division as separate enterprise funds. The Water System’s operation is aided by the use of computers, automated controls, and telemetry systems. The City’s water portfolio encompasses three surface reservoirs in three distinct watersheds and a drought-independent component (recycled water), and is completely local and independent from the State water system. See “—Water Sources and Supply” below. Management. The operation of the Water System is administered and managed by the City’s Utilities Department. The Water System is currently staffed by 36 full-time equivalent City employees. Biographies of the key Water System and Finance personnel are set forth below. Carrie Mattingly, Utilities Director. Carrie Mattingly has been the Utilities Director for the City of San Luis Obispo since September 2008. She has worked in the utility field since 1987 as an inspector, superintendent, and department director for various public agencies. Carrie has a Bachelor of Science degree in Public Administration from the University of La Verne. Ms. Mattingly holds Grade 4 California Water Environment Association technical certifications for collection system maintenance and environmental compliance inspection. Aaron Floyd, Deputy Director of Utilities. Aaron Floyd is the Deputy Director of Utilities for the City of San Luis Obispo. He has worked in the operational and regulatory fields of wastewater, stormwater, and drinking water for over 18 years. In his current role, he oversees the City’s source water supplies and provides oversight to the City’s water treatment plant and water distribution systems. Mr. Floyd also serves on several regional commissions and advisory bodies covering regional water supply, sustainability planning, and groundwater management. Mr. Floyd graduated from California Polytechnic State University, San Luis Obispo with a Master of Science in Biological Sciences. Brigitte Elke, Interim Finance Director. Brigitte Elke assumed her role as the Interim Finance Director on April 30, 2018. Ms. Elke began her career with the City of San Luis Obispo Finance Department in 2001 after which she served as the Principal Administrative Analyst in the City Manager’s office for seven years. She was then promoted to the Utilities Department’s Business Manager, serving five years in this capacity. Ms. Elke has a Bachelor’s degree in Business and Economics and a Master’s degree in Marketing and Advertising. Water System Facilities The City’s existing water treatment plant is located on Stenner Creek Road, northwest of the California Polytechnic State University, San Luis Obispo campus. This facility was originally constructed in 1964 to provide treatment of surface water from Salinas and Whale Rock Reservoirs. Since 2011, this plant (the “Water Plant”) also treats water from Nacimiento Reservoir. The Water Plant was originally designed to treat up to 8 million gallons per day (mgd). The Water Plant has been upgraded three times and, under the current drinking water permit, the Water Plant can treat up to 16.0 mgd, a level consistent with the Water and Wastewater Element of the General Plan. The Water Plant was most recently upgraded in 2008 to provide full-conventional treatment for the entire 16.0 mgd rated flow. The water is first oxidized and disinfected using ozone, then flows to rapid mixers where alum and polymer are added for coagulation and then to a ballasted flocculation process (Actiflo) which uses micro-sand to enhance removal of floc particles from the water. The water is then finally filtered, chlorinated and fluoride is added before the treated water is stored for use in the SLO water distribution system. The City’s existing water distribution facilities include 13 reservoirs/tanks, 10 booster pumpi ng stations, 16 pressure regulating stations, and a total of approximately 191 miles of water mains, service 14 4166-0740-7890.10 lines, pressure regulators, and hydrants. The City’s existing water storage facilities have a total nominal capacity of approximately 24 million gallons. The Water System is divided into 16 pressure zones due to the wide range in ground elevations. The engineering estimate for the life expectancy of these facilities is 50 years. Service Area The Water System currently provides water within a service area which consists primarily of the incorporated boundaries of the City, serving a population of 46,724 as of January 1, 2017, as estimated by the State Department of Finance. In addition, the Water System serves several users located outside city limits, including the California Polytechnic State University and the County Regional Airport, under separate agreements. [Insert Water System map here] The following table shows active accounts in SLO by type of customer as of December 2017. TABLE 1 CITY OF SAN LUIS OBISPO WATER SYSTEM Estimated Active Accounts by Type of Customer As of December 2017 Type of Customer Active Accounts Percent Single Family 11,203 73% Multi-Family 1,877 12 Non-Residential(1) 1,675 11 Dedicated Landscape Irrigation 575 4 Total 15,330 100% (1) Includes users outside City limits. Source: City of San Luis Obispo. Water Sources and Supply The City has five water resources to meet current and future City water demand: 1. Nacimiento Reservoir 2. Whale Rock Reservoir 3. Salinas Reservoir 4. Groundwater 5. Recycled Water The table below summarizes the water availability from each of the City’s sources of water supply (other than groundwater). For purposes of planning, the City calculates “water availability” as reliable water supply based on source reservoir safe annual yield, contractual volumetric delivery, and historical data. See Table 5 and Table 6 for a history of water deliveries and water production. The City is currently using 5,100 acre feet of water annually and considers its water portfolio to be secure through General Plan build-out. 15 4166-0740-7890.10 TABLE 2 CITY OF SAN LUIS OBISPO 2017 Water Supply Availability (in acre-feet) Water Resource 2017 Availability Salinas Reservoir (Santa Margarita Lake) and Whale Rock Reservoir 4,910 Safe Annual Yield(1) Nacimiento Reservoir 5,482 Dependable Yield(2) Recycled Water 238 2017 Annual Usage Total 10,630 (1) The maximum quantity of water that can be delivered from the water source each year during a historic drought period. (2) Contractual amount of water City has rights to from Nacimiento Reservoir. Source: City of San Luis Obispo 2017 Water Resources Status Report. The City’s multi-source diversified water portfolio encompasses three distinct watersheds (captured in the Nacimiento, Whale Rock and Salinas Reservoirs) and benefits from a drought- independent component (recycled water), resulting in a highly reliable water supply. The Water System is completely local and independent from the State water system. Historically, the City met its water supply demand primarily from surface water supplies and a small amount of groundwater. These water supplies are expected to meet all future water demands through 2035. Completion of the Nacimiento pipeline (described below) further augmented the City water supply with additional surface water supplies. Source Description The existing City Water System is made up of raw water supply from Nacimiento, Whale Rock, and Salinas Reservoirs, four groundwater wells, and the Stenner Canyon water treatment plant. Brief descriptions of the water sources are as follows: Nacimiento Reservoir. Since 1959, the San Luis Obispo County Flood Control and Water Conservation District has had an entitlement to 17,500 acre-feet per year (“AFY”) of water from the Nacimiento Reservoir for use in the County. Nacimiento Reservoir provides flood protection and is a source of supply for groundwater recharge for the Salinas Valley. The Nacimiento Reservoir is owned and operated by the Monterey County Water Resources Agency. Approximately 1,750 AFY have been designated for uses around the lake, leaving 15,750 acre feet for allocation to other areas within the County. The City has a contractual entitlement to 5,482 AFY. Construction of the Nacimiento pipeline was substantially completed in December 2010 and water deliveries to the City began in January 2011. In 2017, the Nacimiento Reservoir supplied 3,215 acre feet of water to the City, constituting 58.95% of the total supply for that year. The San Luis Obispo County Flood Control and Water Conservation District and the City have entered into a water delivery entitlement contract, which is pledged to the payment of certain outstanding revenue bonds of the San Luis Obispo County Financing Authority. Amounts paid by the City under the water delivery entitlement contract constitute operating expenses, which are senior to the pledge of Net Revenues securing the Series 2018 Bonds. Whale Rock Reservoir. The Whale Rock Reservoir, owned and operated by a joint exercise of powers agency formed by the City and the State, is a 38,967 acre feet reservoir created by the construction of an earthen dam on Old Creek near the town of Cayucos. The State Department of Water Resources (“DWR”) designed and completed the dam in 1961 to provide water to the City, California Polytechnic State University, and the California Men’s Colony. The Whale Rock Dam captures water from a 20.3-square mile watershed and water is delivered to the three agencies through 17.6 miles of 16 4166-0740-7890.10 shared 30-inch pipeline and two pumping stations. The Whale Rock Reservoir is considered a backup supply and provides water during off-peak operations, when Salinas Reservoir has excessive turbidity problems following storm events, or to supplement supply when water demand exceeds delivery cap acity from Salinas Reservoir. In 2017, the Whale Rock Reservoir supplied 1,351 acre feet of water, constituting 24.77% of the total supply for that year. Salinas Reservoir. The Salinas Dam was built in 1941 by the War Department to supply water to Camp San Luis Obispo and, secondarily, to meet the water needs of the City. The Salinas Reservoir (Santa Margarita Lake) captures water from a 112-square mile watershed and can currently store up to 23,843 acre-feet. In 1947, the Salinas Dam and delivery system was transferred from the regular Army to the U.S. Army Corps of Engineers. Since 1965, the San Luis Obispo County Flood Control and Water Conservation District has operated this water supply for the exclusive use of the City under a lease from the U.S. Army Corps of Engineers. Water from this reservoir is pumped through the Cuesta Tunnel (a one-mile long tunnel through the mountains of the Cuesta Ridge) and then flows by gravity to the Water Plant. The City has water rights to store up to 45,000 acre feet in the Salinas Reservoir. The original design of the dam included a gate in the spillway to increase the storage capacity. In 2017, due to drought conditions, the Salinas Reservoir supplied 887 acre feet of water, constituting 16.28% of the total supply for that year. Recycled Water. Recycled water is highly-treated wastewater approved for reuse by the California Department of Public Health for a variety of applications, including landscape irrigation and construction dust control. Completed in 2006, the Water Reuse Project created the first new source of water for the City since 1961 following construction of Whale Rock Dam. The project resulted in improvements at the Water Resource Recovery Facility and an initial eight miles of distribution pipeline. The first delivery of recycled water to the City took place in 2006. Current demand exists for approximately 1,000 acre feet of recycled water for landscape irrigation and other approved uses within the City limits. In 2017, the City delivered 238 acre feet for irrigation to construction projects, parks, the San Luis Coastal Unified School District, and private development landscape areas. Groundwater. The City transitioned from its long-term utilization of groundwater for potable purposes in the 1990s with the most recent withdrawal occurring on one well in April 2015. This strategy allows for greater water supply resiliency as the City is currently keeping its groundwater supplies in aquifer storage. Wells remain in an operable, standby position should the use of groundwater be required, while other existing well casings are being revitalized to provide greater drought resiliency. The City is also working with a hydrogeologist to site a future well field for a potential groundwater program expansion and for possible siting for an indirect potable reuse system of highly treated wastewater. Currently the City utilizes two non-potable wells. One is located at the City Laguna Lake Golf Course and is used for irrigation use. The other is located at the City Corporation Yard and provides for non-potable uses for the City staff and temporarily for a select number of outside-city residents who rely on the well for non-potable use while recovering from the recent drought. In March 2017, the City and the County formed the San Luis Obispo Valley Groundwater Basin Groundwater Sustainability Agency to work in a coordinated effort on the preparation of a Groundwater Sustainability Plan as required by the Sustainable Groundwater Management Act. Capital Improvement Plan and Future Capital Needs On January 19, 2016, the City Council approved the final Potable Water Distribution System Operations Master Plan (the “Operations Master Plan”). The recommendations in the Operations Master Plan assist the City in prioritizing both current and future Water System needs. Implementation of the plan has led to and may eventually lead to the further removal of assets such as pump stations and tanks. Additionally, the plan recommends numerous pressure zone consolidation projects to reduce operational and long-term infrastructure maintenance and replacement costs. The hydraulic model will be used to evaluate future development projects and contribute to the design of capital improvement projects. 17 4166-0740-7890.10 The City has a proposed capital improvement budget for the next five years (Fiscal Years 2017- 18 through 2021-22) of approximately $32,000,000 including improvements to the Water Plant, distribution systems, replacement of Reservoir 2 at the Water Treatment Plant, fleet maintenance and meter replacement. The City also anticipates embarking on an energy efficiency project at the Water Treatment Plant that is anticipated to cost $14.3 million. Capital improvements are expected to be financed by water revenues and loans from the State Revolving Fund. Water Connections As of June 30, 2017, there were 15,357 consumer connections compared with 15,167 as of June 30, 2016. The SLO Water System consists of raw water supply from Nacimiento, Whale Rock, and Salinas Reservoirs, the Stenner Canyon water treatment plant and two active groundwater wells. For additional water supply information, see “—Source Description.” The following table shows the growth in the number of water connections to the Water System for the five most recent Fiscal Years: TABLE 3 CITY OF SAN LUIS OBISPO Water Connections For Fiscal Years Ended June 30, 2013 through 2017 Fiscal Year Connections Increase/(Decrease) 2012-13 14,767 (0.04)% 2013-14 14,842 0.51 2014-15 14,952 0.74 2015-16 15,167 1.43 2016-17 15,357 1.25 2017-18(1) 15,400 0.28 (1) Estimate. Source: City of San Luis Obispo. Water Deliveries The following table presents a summary of historic water deliveries, excluding recycled water deliveries, for the Water System in acre-feet per year for the five most recent Fiscal Years. TABLE 4 CITY OF SAN LUIS OBISPO Water Deliveries in Acre Feet Per Year For Fiscal Years Ended June 30, 2013 through 2017 Fiscal Year Deliveries Increase/(Decrease) 2012-13 5,823 (2.93)% 2013-14 5,933 1.89 2014-15 5,955 0.37 2015-16 4,957 (16.80)(1) 2016-17 5,039 1.60 2017-18(2) 5,100 1.21 (1) Decrease due to State mandated water conservation measures during drought conditions. See “—Drought and Conservation Measures.” (2) Estimate. Source: City of San Luis Obispo. 18 4166-0740-7890.10 Water Production History The table below provides a five-year history of water production, service area population, per capita use, and corresponding annual rainfall. TABLE 5 CITY OF SAN LUIS OBISPO Water Production and Population Calendar Years 2013 through 2017 Year Total Water Production(1) Estimated Population Served Per Capita Use Per Person(2) Annual Rainfall 2013 5,715 45,541 112 10.61 2014 5,339 45,473 104 11.52 2015 4,721 45,484 93 19.47 2016 4,520 46,117 88 38.93 2017 5,039 46,724 96 13.05 2018(4) 5,100 47,400 96 N/A(3) (1) Expressed in acre-feet. Does not include domestic water delivered to California Polytechnic State University. See “FINANCIAL CONDITION OF THE WATER SYSTEM—Customer Base” and “—Multi-Year Rate Strategy; Current Rate Structure.” (2) Expressed in gallons per capita per day. (3) Expressed in inches. Not yet available for calendar year 2018. (4) Estimate. Source: City of San Luis Obispo. Drought and Conservation Measures On May 5, 2015, the SWRCB adopted regulations that require water purveyors to reduce water use as a result of extreme drought conditions across the State. The City was given a target reduction of 12%. Since the reduction was based on 2013 use levels, the City was required to reduce water use to 101 gallons per capita, per day. In its rates for Fiscal Years 2015-16 and 2016-17, consumption reduction was taken into consideration and a drought surcharge was added to the rates. In June 2017, the drought declaration was rescinded. The City had lowered its consumption by 20%. To date, use has increased by 5%. The City has now turned its attention to water loss under the State’s regulations. One of the measures is an aggressive meter replacement program to eliminate old and inaccurate meters. See “—Capital Improvement Plan and Future Capital Needs.” On May 31, 2018, the Governor of the State of California signed Senate Bill 606 (2018) (“SB 606”) and Assembly Bill 1668 (2018) (“AB 1668” and, together with SB 606, the “Water Efficiency Legislation”) into law, requiring the establishment of statewide water efficiency standards. The Water Efficiency Legislation requires that urban water suppliers create urban water use objectives, submit annual reports to DWR on such objectives and actual water use, and establish water shortage contingency plans. The Water Efficiency Legislation also provides incentive to increase potable water reuse. The City is currently reviewing the Water Efficiency Legislation. Preliminary analysis shows the City is already within close range of meeting water efficiency goals. The City expects to be able to implement new standards and provide reporting as required to comply with the Water Efficiency Legislation. 19 4166-0740-7890.10 FINANCIAL CONDITION OF THE WATER SYSTEM Financial Statements A copy of the most recent audited financial statement of the City of San Luis Obispo, prepared by Glenn Burdette, Certified Public Accountants, San Luis Obispo, California (the “Auditor”) is included as APPENDIX A hereto (the “Financial Statements”). See “—Water Fund Financial Statements.” Basis of Fund Accounting The accounts of the City are organized and operated on the basis of funds and accounts, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The Water System is accounted for as an Enterprise Fund. Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis is to 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. The City accounts for its Enterprise Funds on the flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. Customer Base General. The Water System’s service area consists almost entirely of properties located within the City. A small number of users located outside the City are served by the Water System, under separate agreements with the City, including California Polytechnic State University, which is the largest water customer of this group. For additional information regarding the service area served by the Water System, see “THE WATER SYSTEM—Service Area” and APPENDIX B—“CITY OF SAN LUIS OBISPO GENERAL INFORMATION.” Largest Users. The following table sets forth the 10 largest customers of the SLO Water System during Fiscal Year 2016-17 as determined by water use. 20 4166-0740-7890.10 TABLE 6 CITY OF SAN LUIS OBISPO Ten Largest Users by Water Use Fiscal Year 2016-17 Name Service Type Water Use (acre feet) Percent of Total Water Use City of SLO – Parks & Golf Parks 60.5 1.20% Silver City Mobile Home Park Mobile Homes 47.0 0.93 Mustang Village Apartments 36.8 0.73 Sierra Vista Hospital Care Facilities 32.3 0.64 Creekside Community Mobile Homes 27.3 0.54 Laguna Lake Mobile Homes Mobile Homes 24.9 0.49 Irish Hills Hamlet Apartments 23.9 0.47 Embassy Suites Hotels 22.9 0.45 Chumash Village Mobile Homes 20.8 0.41 SLO Coastal Unified School District Schools 20.2 0.40 Total 316.6 6.26% (1) Does not include California Polytechnic State University, San Luis Obispo, the largest water customer (373 acre feet as of June 30, 2017), which is located outside of City limits. Source: City of San Luis Obispo. The following table sets forth the 10 largest customers of the SLO Water System during Fiscal Year 2016-17 as determined by water sales. TABLE 7 CITY OF SAN LUIS OBISPO Ten Largest Users by Water Sales Fiscal Year 2016-17 Name Service Type Water Sales (dollars) Percent of Total Water Sales City of SLO – Parks & Golf Parks $212,811 1.10% Silver City Mobile Home Park Sierra Vista Hospital Mustang Village Embassy Suites Creekside Community Laguna Lake Mobile Homes Irish Hills Hamlet Fiero Lane Mobile Homes Care Facility Apartments Hotel Mobile Homes Mobile Homes Apartments Commercial 164,272 140,995 128,531 99,629 95,358 87,215 83,562 78,336 0.88 0.75 0.69 0.53 0.51 0.46 0.45 0.42 Chumash Village Mobile Homes 72,586 0.39 Total $1,163,295 6.20% (1) Does not include California Polytechnic State University, San Luis Obispo, the largest water customer ($793,749 as of June 30, 2017), which is located outside of City limits. Source: City of San Luis Obispo. The City serves several customers located outside its city limits, including California Polytechnic State University (the “University”), the largest customer of the Water System. Under the agreement with the University, which automatically renews annually absent change of circumstances, the City charges rates based on the actual consumption of water, in accordance with a formula established by the City which is based on rates charged to commercial users generally as modified to reflect the part of the rate 21 4166-0740-7890.10 structure which is applicable to the University. For the Fiscal Year ended June 30, 2017, the University used 373 acre feet of water supplied by the Water System, for which it paid $827,578 which was approximately 5% of total revenues derived from water sales in that year. Multi-Year Rate Strategy; Current Rate Structure Current Rates. The SLO Water System receives revenues from three primary sources: (i) monthly water rates and service charges, (ii) development impact fees and (iii) miscellaneous sources including interest income. SLO’s current rate structure imposes charges based on consumption, and fixed components in form of a base fee. SLO water rates apply a flat (base) fee plus a volumetric charge based on a unit fee for the amount of water used. SLO also charges for disconnections and reconnections to the SLO Water System. In addition, SLO charges impact fees for new connections to the SLO Water System. SLO’s unit charge is based on the number of 100 cubic feet (“HCF”) used and calculated at the rate shown on the following schedule (as of July 2017). TABLE 8 CITY OF SAN LUIS OBISPO Current Water Rates, as of July 1, 2017 Single Family Residential Quantity Cost/HCF Inside City Cost/HCF Outside City Base Fee: $12.33 $24.66 Volumetric Charge: 1-8 7.27 14.54 9+ 9.08 18.16 Source: City of San Luis Obispo. Rate Setting Process. The City reviews its water rate schedule on an annual basis. Water rates are adjusted by resolution adopted by the City Council at a public meeting noticed and held in accordance with the procedures prescribed by Proposition 218. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 218.” In considering whether to impose rate increases, the City Council considers all costs of maintaining and operating the Water System, as well as capital project costs relating to the Water System. In Fiscal Year 2013-14, the City implemented a base fee and reduced the volumetric rates from three to two tiers. In Fiscal Year 2015-16, the City Council approved a drought surcharge on both the base fee and volumetric rate due to the then-ongoing drought conditions. The following rates are expressed as the amount of water (per 100 cubic feet) used monthly. TABLE 9 CITY OF SAN LUIS OBISPO Historic and Approved Water Rate Increases Fiscal Years 2012-13 through 2017-18 Fiscal Year Fee Increase 2012-13 9% 2013-14(1) 7.5% 2014-15 5.5% 2015-16 Base Fee: 44.5% -- Volumetric: 0%; Drought Surcharge Applied 2016-17 Base Fee: 30.8% -- Volumetric: 0%; Drought Surcharge Applied 2017-18 Base Fee: 23.5% -- Volumetric: 5% 22 4166-0740-7890.10 (1) Change from three tiers to two tiers; implementation of base fee. Source: City of San Luis Obispo. TABLE 10 CITY OF SAN LUIS OBISPO Current Water Sales Rates Fiscal Year Monthly Base Fee Monthly Consumption 0-8 ccf Monthly Consumption 9 ccf 2013-14 $ 5.00 $6.56 $8.20 2014-15 5.28 6.92 8.65 2015-16 7.63 6.92 8.65 2015-16(1) 0.37 0.98 1.23 2016-17 9.98 6.92 8.65 2016-17(1) 0.74 1.10 1.37 2017-18 12.33 7.27 9.08 (1) Drought surcharge. Source: City of San Luis Obispo. The City is in the process of reviewing its rate structure with rate recommendations being considered by the City Council in June 2018. Under the current water rate structure, all customers, whether residential, non-residential, or irrigation are charged the same base fee and usage based on metered consumption. There is no distinction between customer classes. The proposed water rate structure recognizes different customer classes and their proportionate costs associated with the system. If adopted, the proposed rate structures and proposed rate increases will become effective J uly 1, 2018. The City presently anticipates adopting rate increases under the proposed rate structure for only one year to enable customers to adjust to the new methodology. TABLE 11 CITY OF SAN LUIS OBISPO Proposed Water Sales Rates - Residential Proposed Structure Units(1) Proposed Rate Single Class Monthly Base Fee $20.61 Per Unit Cost: Tier 1 0-5 units 5.90 Tier 2 6-12 units 6.87 Tier 3 13+ units 12.59 (1) One unit is equal to 748 gallons. Source: City of San Luis Obispo. 23 4166-0740-7890.10 TABLE 12 CITY OF SAN LUIS OBISPO Proposed Water Sales Rates – Multi-Family, Non-Residential, Irrigation Proposed Structure Proposed Rate Base Fee by Meter Size Monthly Base Fee 3/4 inch or less $ 20.61 1-inch meter 34.40 1.5- inch meter 68.65 2-inch meter 109.85 3-inch meter 206.10 4-inch meter 343.55 6-inch meter 686.95 8-inch meter 1,099.15 10-inch meter 1,580.15 Usage (per unit cost) Per Unit Cost Multi-Family $ 6.73 Non-Residential 8.17 Landscape Irrigation 10.02 Source: City of San Luis Obispo. Development Impact Fees. The City charges development impact fees for improvement or expansion of water treatment and distribution facilities to meet the requirements of community growth. Fiscal Year 2017-18 development impact fee for single family residences is $11,322.16. Non-residential projects are charged based on meter size and range between $19,247.68 (for a 1” meter) to $378,153.92 (for a 6” meter). Delinquencies; Enforcement. The City prepares and mails water billings on a monthly basis. Customers receive a combined utility bill that itemizes amounts due for water and sewer. Payments received from the combined utility bills are allocated to the appropriate funds. If a payment received from a customer is insufficient to cover the total amount due and payable under the combined utility bill, that payment is credited in the following order of priority: 1. Water 2. Utility Tax 3. Sewer 4. Penalty 5. Misc (i.e. set up fees) 6. Deposit Bills are due on presentation and are considered late after 30 days, at which point a late fee is charged in an amount equal to $15 or 1.5% of the outstanding balance of the bill, whichever is greater. If the billing has not been paid within 60 days from issue the water is shut off. To re -establish water service a $90 security deposit and a minimum service charge of $110 must be paid in addition to payment of the account balance. Because of the City’s enforcement policies and practices, the City does not experience significant long-term delinquencies or bad debts in its collection of revenues from the Water System. Comparative Water Bills. The table below presents a comparison of the City’s average monthly residential water bills with those of neighboring communities, based on current rates as of July 1, 2017, for each community. 24 4166-0740-7890.10 TABLE 13 CITY OF SAN LUIS OBISPO Comparison of Monthly Residential Water Bills As of July 1, 2017 (Based on 11,000 Gallons per month) Water Agency Average Monthly Water Bill Arroyo Grande $ 76.90 Los Osos Golden State 183.12 Santa Maria 96.11 San Luis Obispo 124.89 Atascadero Mutual 55.75 Nipomo CSD 80.23 Paso Robles 72.45 Morro Bay 145.50 Source: Water & Sewer Rate Survey prepared by City of San Luis Obispo. Rate Stabilization Reserves City budget and fiscal policies require that the City maintain a reserve for the purposes of offsetting unanticipated fluctuations in Water Fund revenues to provide financial stability, including the stability of revenues and the rates and charges related to the Water System (the “Rate Stabilization Reserve”). The funding requirement for the Rate Stabilization Reserve is 10% of sales revenue in the Water Fund. Conditions for utilization and plan for replenishment of the reserve will be brought to Council for its consideration during the preparation and approval of the City’s biannual Financial Plan or as may become necessary during any fiscal year. Outstanding Parity Obligations Series 2012 Bonds. The 2012 Bonds are currently outstanding in the principal amount of $2,540,000. The proceeds of the Series 2012 Bonds were used to (i) refund and defease the City’s outstanding 2002 Water Revenue Bonds originally issued in the aggregate principal amount of $9,485,000; (ii) fund a reserve for the Series 2012 Bonds; and (iii) pay the costs of issuing the Series 2012 Bonds. The Series 2012 Bonds are payable from and secured by Net Revenues derived from the operation of the City’s Water System. The Series 2012 Bonds are also secured by a reserve fund equal to the lesser of $496,000 or the maximum amount of principal of and interest on the Series 2012 Bonds coming due and payable in the current or any future bond year. This reserve fund is not available for the payment of the Series 2018 Bonds. State Revolving Fund Loan. In 2004 the City entered into the SRF Loan with the State Water Resources Control Board through its revolving fund loan program, Agreement Number 02 -818-550-0 in the original principal amount of $8,883,231, which was subsequently amended to provide for a maximum loan amount of $8,114,137. Proceeds of the SRF Loan were used to finance water recycling facilities for the Water System. The SRF Loan is currently outstanding in the principal amount of $3,336,331. The SRF Loan is secured by revenues of the Water System on a parity with the Series 2012 Bonds and the Series 2018 Bonds, and is payable in annual installments with a final payment due in 2024. The SRF Loan is not secured by a reserve fund. 25 4166-0740-7890.10 Water Fund Financial Statements The following table presents a four-year history of the revenues, expenses and changes in net assets for the Water Fund, based on audited results for Fiscal Years 2013-14 through 2016-17. The City uses the full accrual method of accounting for the Water Fund. See APPENDIX A for a more complete summary of the City’s accounting policies. TABLE 14 CITY OF SAN LUIS OBISPO Statement of Revenues and Expenses and Changes in Net Assets For the Water Fund Fiscal Years 2013-14 through 2016-17 (Audited) Audited 2013-14 Audited 2014-15 Audited 2015-16 Audited 2016-17 Operating Revenues: Charges for sales and service $18,645,973 $17,761,926 $18,182,433 $18,757,311 Impact fees(1) 819,477 2,471,502 1,543,268 1,266,674 Other Revenues 210,749 137,736 146,310 162,054 Total Operating Revenues 19,676,199 20,371,164 19,871,011 20,186,039 Operating Expenses: Salaries and benefits 2,926,028 2,852,010 3,236,393 3,615,448 Supplies and maintenance 1,506,090 1,263,952 1,412,312 1,682,244 Contract services 8,295,509 8,275,084 8,715,864 8,842,359 General government 1,268,800 1,167,004 1,328,061 1,477,598 Depreciation 2,716,681 2,700,098 2,608,348 2,665,385 Total Operating Expenses 16,713,108 16,258,148 17,300,978 18,283,034 Operating income (loss) 2,963,091 4,113,016 2,570,033 1,903,005 Nonoperating revenues (expenses) Interest 136,205 165,281 306,307 63,970 Interest expense (862,853) (869,893) (835,142) (786,933) Income from investment in joint venture - - 239,200 206,700 Misc. nonoperating revenue (expense) 79,710 75,567 13,839 (5,108) Total nonoperating revenues (expense) (646,938) (629,045) (275,796) (521,371) Income (loss) before capital contributions and transfers 2,316,153 3,483,971 2,294,237 1,381,634 Capital contributions and transfers - (20,800) (469,607) (561,244) Change in net position 2,316,153 3,463,171 1,824,630 820,390 Total net assets, beginning of year (before restatements) 72,261,726 74,577,879 69,555,015 71,607,674 Prior year restatements(2) - (8,486,035) 228,029 - Total net assets, beginning of year (as restated) 72,261,726 66,091,844 69,783,044 71,607,674 Total net assets, end of year $74,577,879 $69,555,015 $71,607,674 $72,428,064 (1) See “—Multi-Year Rate Strategy; Current Rate Structure—Development Impact Fees.” (2) Restatements in Fiscal Year 2015-16 resulted from implementation of GASB 68, to record $458,800 investment in Whale Rock that was not previously recorded for the Water Fund, and certain recordation of fixed assets. Restatements in Fiscal Year 2014- 15 resulted from implementation of GASB 68. Source: City of San Luis Obispo Audited Financial Reports. 26 4166-0740-7890.10 The following table shows the balance sheets of the Water Fund as of June 30 in each of the past four fiscal years. TABLE 15 CITY OF SAN LUIS OBISPO Balance Sheet for the Water Fund June 30, 2014 through 2017 (Audited) Audited 2013-14 Audited 2014-15 Audited 2015-16 Audited 2016-17 Assets Current assets Cash and cash equivalents $ 621,194 $ 5,547,777(1) $ 160,747 $ 382,881 Investments 17,266,322 16,367,733 15,918,304 16,934,518 Accounts receivable 1,903,979 2,182,478 2,855,749 2,790,240 Accrued interest receivable 39,048 38,132 48,536 64,633 Prepayments - - 5,831,567 5,619,037 Due from other governments 71,622 - - - Total current assets 19,902,165 24,136,120 24,814,903 25,791,309 Noncurrent assets Cash and investments held by fiscal agent 1,642,349 1,639,406 1,654,826 1,623,009 Investment in joint venture - - 698,000 906,000 Capital assets Land 915,926 915,926 945,926 945,926 Infrastructure 96,258,042 96,258,042 98,608,048 98,608,048 Buildings and improvements 19,134,912 19,134,912 19,134,912 19,134,912 Equipment 3,763,752 3,861,786 4,284,455 4,217,640 Construction in progress 991,395 1,641,254 712,646 1,372,947 Total capital assets 121,064,027 121,811,920 123,685,987 124,279,473 Less accumulated depreciation (42,837,003) (45,515,228) (48,032,223) (50,574,950) Capital assets net of depreciation 78,227,024 76,296,692 75,653,764 73,704,523 Total noncurrent assets 79,869,373 77,936,098 78,006,590 76,233,532 Total assets 99,771,538 102,072,218 102,821,493 102,024,841 Deferred Outflow of Resources Deferred pensions(2) - 650,536 1,245,627 2,050,530 Deferred amounts from refunding of debt 231,299 207,164 183,029 - Unamortized loss on refunding of debt - - - 158,894 Total deferred outflow of resources 231,299 857,700 1,428,656 2,209,424 Liabilities Current liabilities Accounts payable 262,704 379,794 405,728 493,190 Accrued liabilities 88,127 310,478 134,452 9,739 Compensated absences 102,736 90,140 191,323 259,484 Deposits payable 30,960 31,680 29,340 21,780 Interest payable 172,942 161,843 150,323 138,519 Current portion of long-term debt 1,244,700 1,285,686 1,332,288 1,379,482 Total current liabilities 1,902,169 2,259,621 2,243,454 2,302,194 Noncurrent liabilities Compensated absences 147,844 193,697 112,728 60,730 Lease revenue bonds 18,172,495 17,297,300 16,385,760 15,855,977 Bond premium 603,643 541,906 480,169 - State loan/note payable 4,598,807 4,188,347 3,767,598 3,336,331 Net pension liability - 8,104,149 8,389,149 9,387,364 Total noncurrent liabilities 23,522,789 30,325,399 29,135,404 28,640,402 Total liabilities 25,424,958 32,585,020 31,378,858 30,942,596 Deferred Inflows of Resources Pension related - 789,883(2) 1,263,617(3) 863,605 27 4166-0740-7890.10 TABLE 15 CITY OF SAN LUIS OBISPO Balance Sheet for the Water Fund June 30, 2014 through 2017 (Audited) Audited 2013-14 Audited 2014-15 Audited 2015-16 Audited 2016-17 Net Position Net investment in capital assets $53,838,678 $53,190,617 $53,870,978 $53,291,627 Restricted: Debt service 1,642,349 1,639,406 1,654,826 1,623,009 Subsequent year expenditures - 1,638,811 448,499 1,298,017 Committed: Rate stabilization reserves - 1,776,193 1,650,000 - Contingency fund - 4,175,416 2,950,800 - Unrestricted 19,096,852 7,134,572 11,032,571 16,215,411 Total net position $74,577,879 $69,555,015 $71,607,674 $72,428,064 (1) [Provide description for anomaly in this year.] (2) Reflects implementation of GASB 68. See “-Employee Retirement System – Retirement Plan.” (3) Restatements in Fiscal Year 2015-16 resulted from implementation of GASB 68, to record $458,800 investment in Whale Rock that was not previously recorded for the Water Fund, and certain recordation of fixed assets. Source: City of San Luis Obispo Audited Financial Reports. In addition, the City funds reserves for each of the three reservoirs that supply the Water System. Capital and operating reserves are included in the City’s Operation and Maintenance budget for the Nacimiento Water Operating Fund; reserves are also funded to cover contingencies for Salinas and Whale Rock Reservoirs. These reserves are held and accounted for by the respective governing body of each reservoir, on behalf of the City. Historic Debt Service Coverage The following table shows the historic amount of Net Revenues (excluding impact fees) derived from the Water System, the total debt service represented by the SRF Loan, the Series 2006 Bonds and the Series 2012 Bonds, and the resulting debt service coverage ratios. City covenanted with respect to the Series 2006 Bonds and Series 2012 Bonds state that the City will fix, prescribe, revise and collect rates, fees and charges for services and facilities furnished by the Water System during each fiscal year which, together with existing unreserved, unrestricted working capital balances in the Water Fund, and taking into account allowances for contingencie s, are sufficient to yield estimated Net Revenues at least equal to 125% of the aggregate amount of principal of and interest on the Series 2018 Bonds and the Parity Obligations coming due and payable during such fiscal year. 28 4166-0740-7890.10 TABLE 16 CITY OF SAN LUIS OBISPO Historic Debt Service Coverage Fiscal Years 2013-14 through 2016-17 2013-14 2014-15 2015-16 2016-17 Revenues Operating Revenues $18,645,973 $17,761,926 $18,182,433 $18,757,311 Other Revenues 210,749 137,736 146,310 162,054 Total Revenues(1) $18,856,722 $17,899,662 $18,328,743 $18,919,365 Maintenance and Operation Costs(2) $13,996,427 $13,558,050 $14,692,630 $15,617,649 Net Revenues(3) $4,860,295 $4,341,612 $3,636,113 $3,301,716 Debt Service $2,124,848 $2,192,461 $2,126,804 $2,128,405 Coverage Ratio 229% 198% 171% 155% (1) Calculated in accordance with the Series 2006 Bonds Indenture and the Series 2012 Bonds Indenture , excluding impact fees. (2) Does not include depreciation and amortization. (3) Gross revenues received less Maintenance and Operations Costs. Source: City of San Luis Obispo. Projected Revenues, Expenditures and Debt Service Coverage The following table shows the projected amount of Net Revenues derived from the Water System, the total projected debt service represented by the SRF Loan, the 2012 Bonds and the Series 2018 Bonds and the resulting debt service coverage ratios. The following table assumes no optional or special mandatory redemption of the Series 2018 Bonds or prepayment of any existing Parity Obligations. The following projections are based on the City’s current circumstances and currently available information and are believed to be reasonable. The projections may be affected by various factors and there can be no assurance that they will be achieved and any variation from projected operating results may be material. 29 4166-0740-7890.10 TABLE 17 CITY OF SAN LUIS OBISPO Projected Debt Service Coverage Fiscal Years 2017-18 through 2020-21 2017-18 2018-19 2019-20 2020-21 Revenues Operating Revenues $18,839,453 $20,135,172 $20,836,404 $21,562,178 Other Revenues 521,760 670,900 677,858 684,955 (Deposits to)/withdrawal from Rate Stabilization - (119,572) (68,023) (70,404) Total Revenues(1) $19,361,213 $20,686,500 $21,446,239 $22,176,729 Maintenance and Operation Costs(2) $16,530,335 $17,584,835 $17,742,207 $17,910,256 Net Revenues(3) $2,830,878 $3,101,665 $3,704,032 $4,266,473 Debt Service SRF Loan Debt Service 525,457 525,457 525,457 525,457 Series 2006 Bonds Debt Service 1,033,548 - - - Series 2012 Bonds Debt Service 569,600 571,600 567,800 568,400 Series 2018 Bonds Debt Service* - 906,266 897,963 903,263 Total Debt Service $2,128,605 $2,003,323 $1,991,220 $1,997,120 Coverage Ratio* 133% 155% 186% 214% Working Capital at Year-End(4) $23,489,115 $15,077,104 $15,475,294 $16,677,960 Total Funds Available for Debt Service $15,077,104 $15,475,294 $16,677,960 $16,039,128 * Preliminary, subject to change. (1) Calculated in accordance with the Series 2006 Bonds Indenture and the Series 2012 Bonds Indenture. Excludes impact fees which, for Fiscal Year 2017-18, total approximately $1.931 million in collections through May 31, 2018 . (2) Does not include depreciation and amortization. (3) Gross revenues received less Maintenance and Operations Costs. (4) Fund goal is to maintain $10 million in unrestricted working capital. Source: City of San Luis Obispo. The assumptions on which these projections are based include the following: Revenues. For purposes of conservative projections, no development impact fee receipts are assumed. In Fiscal Year 2017-18, the City has collected approximately $1.931 million in development impact fees through May 31, 2018, which are also not included in the table above. Maintenance and Operating Costs. Maintenance and operating costs are assumed to grow at approximately 2% per year. The City is expecting increased expenses for payment of the CalPERS unfunded liability. See “-Employee Retirement System – Retirement Plan” below. The City has enacted a fiscal health response plan (the “Fiscal Health Response Plan”) in order to accommodate these increased expenses. The Fiscal Health Response Plan requires the Water Fund to reduce expenditures by $542,000 over a three-year period. The reduction will be accomplished by operating reductions, employee concessions, and new revenue sources, if available. The above numbers reflect the target set by the Fiscal Health Response Plan. Employee Retirement System Retirement Plan. General. The City’s permanent employees, including Water System employees, are covered by the California Public Employees Retirement System (“CalPERS”) through agent multiple-employer defined benefit plans administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership 30 4166-0740-7890.10 information that can be found on the CalPERS website at www.calpers ca.gov. The foregoing internet address is included for reference only, and the information on the internet site is not incorporated by reference herein. The Water System is a part of the City’s CalPERS Miscellaneous Plan, therefore all related information included in this Official Statement and in Note 7 in APPENDIX A – “AUDITED FINANCIAL STATEMENTS OF THE CITY FOR FISCAL YEAR ENDED JUNE 30, 2017 ” refers to the City as a whole unless specifically indicated otherwise. The Water System is obligated to contribute amounts necessary to provide for normal and unfunded liability allocated to the Water System’s portion of the City’s required contribution to the Miscellaneous Plan as determined by CalPERS actuaries. No employees assigned to the Water System participate in the City’s Safety Plan. Eligibility. All full-time and part-time benefited City employees are eligible to participate in the retirement program. Benefits vest after five years of service. In addition to basic retirement benefits, the retirement program also provides death and survivor’s benefits. These benefit provisions and all other requirements are established by State statute and City ordinance. About CalPERS. Along with over 3,000 other cities and local agencies, the City contracts with CalPERS for its “defined benefit” retirement plan, which covers all of its regular employees (except in rare circumstances, temporary employees are not covered by the CalPERS plan). Due to changes mad e by the City and through legislation, there are several CalPERS retirement benefit programs. The City enacted a 2nd Tier benefit plan program which provides a lower level of benefits than the original plan. This plan is available to eligible new employees who are hired after December 6, 2012 for miscellaneous plan members. A 3rd tier program was created following the enactment of the Public Employee Pension Reform Act (AB 340) (“PEPRA”) in January 2013. Under this program, employees who are considered new to the CalPERS retirement program are enrolled as required by the new law. The PEPRA program provides the lowest level of benefit of the three plans that are now in effect. The following chart summarizes these benefits which reflect the benefit earned each year, as a percentage of the employees qualifying salary and the normal retirement age for the program: 1st Tier 2nd Tier PEPRA Miscellaneous 2.7% @ 55 2% @ 60 2% @ 62 The City’s required contributions to CalPERS fluctuate each year and include a normal cost component and a component equal to an amortized amount of the unfunded liability. Many assumptions are used to estimate the ultimate liability of pensions and the contributions that will be required to meet those obligations. Beginning with the June 30, 2013 valuation, CalPERS no longer uses an actuarial value of assets and instead uses the market value of assets to determine contribution rates per CalPERS’ direct rate smoothing policy. Under its direct rate smoothing policy, adopted in April 2013, CalPERS employs an amortization and smoothing policy that will pay for all gains and losses over a fixed 30 -year period with the increases or decreases in the rate spread directly over a 5-year period. In February 2018, CalPERS revised its amortization policy to reduce the amortization period for gains and losses from a 30- year period to a 20-year period, effective with its June 30, 2019 valuation. Although CalPERS has not provided the City with revised projected contributions, the reduced amortization period may result in increased required employer contributions. The CalPERS Board of Administration has adjusted and may in the future further adjust certain assumptions used in the CalPERS actuarial valuations, which adjustments may increase the Ci ty’s required contributions to CalPERS in future years. One of the most significant factors used in determining the liability and the funding requirements is the rate of return that investments will yield prior to making payments, known as the discount rate. CalPERS has approved a reduction in the discount rate to be used in its actuarial valuation from 7.5% to 7.0% to be applied incrementally over the three valuations from June 30, 2018 through June 30, 2020, which is expected to result in an increase in the unfunded liability and the contributions required to meet those obligations. The City has taken into 31 4166-0740-7890.10 account future increases in the CalPERS contribution rates in its forecasts of salary and benefit projections shown in the table under the heading, “—Projected Revenues, Expenditures and Debt Service Coverage.” Effective for the Fiscal Year ended June 30, 2015, the City adopted Governmental Accounting Standards Board (“GASB”) Statement No. 68, affecting the reporting of pension liabilities for accounting purposes. Under GASB Statement No. 68, the City is required to report the Net Pension Liability (i.e., the difference between the Total Pension Liability and the Pension Plan’s Net Position or market value of assets) in its financial statements. In accordance with applicable State law, the contribution rate for all public employers is determined annually by the CalPERS actuary and is effective on the July 1 following notice of a change in rate. Funding contribution amounts are determined annually on an actuarial basis as of June 30 by CalPERS which impacts participants’ contribution rates two fiscal years later . The actuarially determined rate applied to annual payroll 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 City is required to contribute the actuarially determined amounts, net of contributions by employees, necessary to fund the benefits for its members, using the actuarial basis recommended by CalPERS actuaries and actuarial consultants and adopted by the CalPERS Board of Administration. The cost of the Miscellaneous Plan is funded through bi-weekly contributions from employees and from employer contributions by the City. The employer contribution rates are established, and may be amended, by CalPERS. All employees contribute the full amount of the required member contribution. For Miscellaneous Plan members, the required contribution is either 6.25%, 7% or 8% of annual covered salary depending upon which plan they participate in. The City’s required contribution to CalPERS is shown below for Fiscal Years 2017-18 and 2018-19. As of the Fiscal Year 2017-18 contribution, CalPERS no longer determines the employer contribution toward the Unfunded Liability as a percentage of payroll, but as a flat dollar contribution. The employer contribution toward the Normal Cost is still provided as a percentage of payroll: Fiscal Year 2017-18 Employer Normal Cost Unfunded Liability Payment Miscellaneous Plan* 10.387% $4,341,995 *CalPERS provides a blended rate for all three tiers. Fiscal Year 2018-19 Employer Normal Cost Unfunded Liability Payment Miscellaneous Plan* 10.497% $4,919,847 *CalPERS provides a blended rate for all three tiers. The Water System is allocated its portion of the City’s required contribution for the Miscellaneous Plan. This allocation is based on eligible employee wages. Set forth below is a table showing the City’s required contributions to its CalPERS Miscellaneous Plan for the four Fiscal Years ended June 30, 2017, 2016, 2015, and 2014 and the amount in each year allocated to the Water System: 32 4166-0740-7890.10 TABLE 18 CITY OF SAN LUIS OBISPO WATER SYSTEM Historical Employer and Employee Contribution Rates for the City and Water System Allocation Fiscal Years 2013-14 through 2016-17 Fiscal Year City Required Contribution Amount Allocated to the Enterprise 2013-14 $4,528,325 $500,458 2014-15 3,152,985 285,626 2015-16 3,862,563 499,816 2016-17 5,584,518 501,580 Sources: CalPERS, Miscellaneous Plan of the City of San Luis Obispo, Annual Valuation Report as of June 30, 2016; City of Obispo Finance Department. The City has made all actuarially required payments to CalPERS for its Pension Plans on a timely basis. CalPERS provided the City with the following projected contributions from Fiscal Year ended June 30, 2019 through June 30, 2023: TABLE 19 CITY OF SAN LUIS OBISPO Required and Projected Future Employer Contributions (1) Miscellaneous Plan Fiscal Years 2018-19 through 2024-23 Fiscal Year Total Contributions(2) 2018-19 $4,925,421 2019-20 5,539,940 2020-21 5,946,319 2021-22 6,371,563 2022-23 6,723,286 (1) Assumes 7.375% return for Fiscal Year 2016-17. Does not reflect potential impact of reduced amortization period of 20 years, as described above in “—Employee Retirement System—Retirement Plan.” (2) Total contribution consists of the normal cost plus the UAL payment. Figures are for the City as a whole for its Miscellaneou s Plan only. Source: CalPERS, Miscellaneous Plan of the City of San Luis Obispo, Annual Valuation Report as of June 30, 2016. Approximately 11% of the total Miscellaneous Plan contributions are expected to be allocable to the Water System and are included in “Operating Expenses” in the projected debt service coverage table. Future increases in required CalPERS contributions will impact the City’s reserve levels and require future action to either reduce expenses through service reductions or increase revenues through tax or service rate increases. The City’s ability to increase taxes and service rates is subject to Constitutional limitations. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.” The City cannot provide any assurances that the City’s required contributions to CalPERS in future years will not significantly increase (or otherwise vary) from any past or current projected levels of contributions. 33 4166-0740-7890.10 Other Post-Employment Benefits. The City’s primary Other Post-Employment Benefits (“OPEB”) are for retiree health benefits under the City’s election to participate in the CalPERS Health Benefit Program. The City entered the CalPERS medical insurance program in 1993 under the Public Employees’ Medical and Hospital Care Act. The required employer contribution is $128.00 per month in 2017 and $133.00 per month in 2018. Retirees pay the differential monthly amount of the premium, which varies depending on the health benefits they select. Additionally, the City has established certain post-retirement health care benefits available to executive management employees appointed prior to August 2000 (together with the City’s participation in the CalPERS Health Benefit Program, the “Plan”). Two retirees remain eligible for this benefit. The City pays one-half of the retiree health insurance premiums for these employees, and 50% of the costs associated with one of these employees is allocated to the Water Fund. During the Fiscal Year ended June 30, 2009, the City entered into an agreement with California Employers’ Retiree Benefit Trust (“CERBT”) to pre-fund the City’s OPEB liability. The contribution requirement of the plan members and the City are established and may be amended by the City. The City prefunds the plan through CERBT by contributing at least 100% of the annual required contribution including fully funding implied subsidy (the “ARC”). The ARC is an amount actuarially determined in accordance with the parameters of GASB standards. The City’s ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize the unfunded liability over a period of 30 years. For Fiscal Year 2016-17, the City contributed $1,432,000 to the Plan, which fully funded the annual required contribution. The City paid a total of $253,500 to the CalPERS Health Benefit Program and retirees during the year and $604,500 to the CERBT. In addition, the City contributed an additional $574,000 to prefund benefits and pay down a portion of the implied subsidy of the Plan. CERBT is a tax-qualified irrevocable trust organized under Internal Revenue Code Section 115 and established to pre-fund retiree healthcare benefits. CERBT issues a publicly available financial report including GASB disclosure information in aggregate with other CERBT participating employers. That report may be obtained by contacting CalPERS, 400 P Street, Sacramento, California 95814. For the Fiscal Years ended June 30, 2015, 2016 and 2017, the City’s annual OPEB costs (expense) of $588,000, $607,000 and $1,187,000, respectively, were equal to the annual required contribution. Trend and funding status information is as follows, based on the Plan’s most recent actuarial valuation date of June 30, 2015. Fiscal Year Ending June 30 Annual OPEB Cost (AOC) Actual Contributions % of AOC Contributed Net OPEB Obligation (Asset) 2017 $1,182,000 $1,432,000 121% $(495,000) 2016 607,000 857,000 141% (250,000) 2015 588,000 588,000 100% -- 34 4166-0740-7890.10 Actuarial accrued liability (AAL) $ 13,173,000 Actuarial value of plan assets $ 4,788,000 Unfunded AAL $ 8,385,000 Funded ratio (actuarial value of plan assets/AAL) 36.3% Covered payroll (active plan members) $ 29,989,000 UAAL as % of covered payroll 28.0% Source: City of San Luis Obispo Audited Financial Reports. Governmental Accounting Standards Board Statement No. 45 – “Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions” has required the City to account for and disclose its OPEB liability since the Fiscal Year ended June 30, 2009. Additional information regarding the City’s retirement plans and OPEB, including information regarding the assumptions used to determine the pension and OPEB liabilities and the funding requirements therefor, can be found in Note 7 and the Required Supplementary Information to the City’s audited financial statements included in the City’s comprehensive annual financial report for the Fiscal Year ended June 30, 2017, attached hereto as Appendix B. The Water System is allocated its portion of the City’s required contribution for OPEB. This allocation is based on eligible employee wages. Set forth below is a table showing the City’s required and actual contributions to its OPEB Plan for the four Fiscal Years ended June 30, 2013 through 2017. Approximately 10% of the actual contributions in each year were allocated to the Water System. TABLE 20 CITY OF SAN LUIS OBISPO Other Post-Employment Benefits (OPEB) Historical Employer and Employee Contribution Rates for the City Fiscal Years 2013-14 through 2016-17 Fiscal Year City Required Contribution Actual Contribution Actual Amount Allocated to the Enterprise 2013-14 $576,000 $576,000 $63,658 2014-15 588,000 588,000 53,266 2015-16 607,000 857,000 99,510 2016-17 1,187,000 1,432,000 128,617 Source: City of San Luis Obispo Finance Department. 35 4166-0740-7890.10 The City projects the following OPEB contributions for calendar years 2018 through 2024: TABLE 21 CITY OF SAN LUIS OBISPO Projected Future Employer OPEB Contributions Calendar Years 2018 through 2024 Calendar Year Total Contribution 2018 $1,221,000 2019 1,261,000 2020 1,303,000 2021 1,346,000 2022 1,390,000 2023 1,436,000 2024 1,484,000 Source: City of San Luis Obispo Department of Finance. Approximately 10% of these contributions are expected to be allocable to the Water System and are included in “Operating Expenses” in the projected debt service coverage table. Future increases in required OPEB contributions will impact the City’s reserve levels and require future action to either reduce expenses through service reductions or increase revenues through tax or service rate increases. The City’s ability to increase taxes and service rates is subject to Constitutional limitations. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.” The City cannot provide any assurances that the City’s required contributions to CalPERS in future years will not significantly increase (or otherwise vary) from any past or current projected levels of contributions. RISK FACTORS The following section describes certain risk factors affecting the payment of and security for the Series 2018 Bonds. The following discussion of risks is not meant to be an exhaustive list of the risks associated with the purchase of the Series 2018 Bonds and does not necessarily reflect the relative importance of the various risks or the probability of their occurrence. Potential investors are advised to consider the following factors, along with all other information in this Official Statement, in evaluating the Series 2018 Bonds. There can be no assurance that other risk factors will not become material in the future. General The payment of principal of and interest on the Series 2018 Bonds is secured solely by a pledge of the Net Revenues and certain funds under the Indenture. The realization of the Net Revenues is subject to, among other things, the capabilities of management of the City, the ability of the City to provide water services to its users, and the ability of the City to establish and maintain water fees and charges sufficient to provide the required debt service coverage as well as pay for Operation Expenses. The ability of the City to comply with its covenants under the Indenture and to generate Revenues sufficient to pay principal of and interest on the Series 2018 Bonds may be adversely affected by actions and events outside the control of the City and may be adversely affected by actions taken (or not taken) by voters, property owners, taxpayers or other persons obligated to pay fees and chan ges. Among other matters, drought, general and local economic conditions and changes in law and government regulations 36 4166-0740-7890.10 (including initiatives and moratoriums on growth) could adversely affect the amount of Net Revenues realized by the City. Earthquakes, Floods and Other Natural Disasters The financial stability of the Water System can be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such improvements. The City, like many California communities, may be subject to unpredictable seismic activity, fires, flood, or other natural disasters. Seismic activity, wildfires and other natural disasters represents a potential risk for damage to buildings, roads, bridges and property within the City. Although the City has implemented disaster preparedness plans and made improvements to the Water System in connection with such natural disasters, there can be no assurance that these or any additional measures will be adequate in the event that a natural disaster occurs, nor that costs of preparedness measures will be as currently anticipated. Further, damage to components of the Water System could cause a material increase in costs for repairs or a corresponding material adverse impact on Net Revenues. As provided in the Indenture, the City is required to procure and maintain or cause to be procured and maintained insurance on the Water System with responsible insurers in such amounts and against such risks (including damage to or destruction of the Water System) as are usually covered in connection with facilities similar to the Water System, so long as such insurance is available from reputable insurance companies and obtai nable at a reasonable cost. The City is further required to procure and maintain such other insurance as it shall deem advisable or necessary to protect its interests, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with municipal water systems similar to the Water System. The City maintains casualty insurance on many of the assets of the Water System, including, among other assets, treatment plants, pump stations, administration buildings, garages, warehouses, concession buildings, and labs. The City does not currently maintain property insurance for the pipelines of the Water System because such insurance is not available at commercially reasonable rates, but is insured under its liability policy for damage to property as a result of a pipe break. The City currently maintains earthquake insurance on buildings, plant facilities and reservoirs of the Water System, however, the City is not obligated under the Indenture to maintain earthquake insurance on the Water System, and may elect to discontinue such coverage at its discretion. Earthquake. Many California communities, including the City, are subject to periodic earthquake activity. In addition, land susceptible to seismic activity may be subject to liquefaction during the occurrence of such event. The City is surrounded by earthquake faults. According to the City’s Local Hazard Mitigation Plan, the City is located near several active fault zones including the San Andreas Fault, the Hosgri Fault and the Los Osos Fault. If an earthquake were to substantially damage or destroy taxable property within the City, the assessed valuation of such property would be reduced. If there were to be an occurrence of severe seismic activity in the City, there could be an impact on the cost or the ability to provide water services until repairs could be made, possibly diminishing Net Revenues. Earthquakes or other natural disasters could interrupt operation of the Water System and thereby interrupt the ability of the City to realize Net Revenues sufficient to pay the principal of and interest on the Series 2018 Bonds. The Water System has not experienced any significant losses of facilities or services as a result of earthquakes. In anticipation of such potential disasters, the City designs and constructs all facilities of the Water System to the seismic codes in effect at the time of design of the project. Building codes require that some of these factors be taken into account, to a limited extent, in the design of improvements, including the Water System. Some of these factors may also be taken into account, to a limited extent, in the design of other infrastructure and public improvements neither designed nor subject to design approval by the City. Design criteria in any of these circumstances are established upon the basis of a variety of considerations and may change, leaving previously-designed improvements unaffected by more stringent subsequently established criteria. In general, design criteria reflect a balance at the time of protection and the future costs of lack of protection, based in part upon a present perception of the 37 4166-0740-7890.10 probability that the condition will occur and the seriousness of the condition should it occur. Conditions may occur and may result in damage to improvements of varying seriousness, such that the damage may entail significant repair or replacement costs and that repair or replacement may never occur either because of the cost or because repair or replacement will not facilitate habitability or other use, or because other considerations preclude such repair or replacement. Under any of these circumstances, the actual value of public and private improvements within the City in general may well depreciate or disappear, notwithstanding the establishment of design criteria for any such condition. Wildfires. Most of the community within the City is within one mile of an area with a significant risk to wildland fire. The City is confronted with one of the more hazardous wildfire risks in the County because of its location near the foothills of the Santa Lucia Mountains and the Irish Hills, with increased wildfire risk in these foothills as well as on Chumash Peak, Bishop Peak, Cerro San Luis, and Islay Hill. Major fires have endangered the City on numerous occasions. Although the fires did not result in property losses within the City limits, structures in the City were threatened by the Las Pilitas and Highway 41, and Chimney fires that occurred in 1985, 1994 and 2014. Drought Risks. The ability of the City to operate effectively can be affected by the water supply available to the City. If the water supply or availability for sale decreases significantly, whether by operation of mandatory supply restrictions, prohibitively high water costs or otherwise, water sales will diminish, and Net Revenues available to pay the principal of and interest on the Series 2018 Bonds may be adversely affected. Dam Failure. The Nacimiento Dam and Reservoir (“Nacimiento”), located in the northern part of San Luis Obispo County (the “County”), was recently evaluated by the State Division of Safety of Dams, which classified Nacimiento as having an extremely high downstream hazard and mandated certain emergency repairs to be made to Nacimiento. The Monterey County Flood Control and Water Conservation District, the owner and operator of Nacimiento, is currently in the process of making such repairs. Repairs completed to-date permit full operations of Nacimiento and water storage. Dams at Whale Rock Reservoir (“Whale Rock”) and the Salinas Reservoir (“Salinas”) are also undergoing inspection and may be subject to repair requirements. The City has a hazard mitigation plan in the event of a dam failure. Geologic, topographic and climatic conditions, if severe, could result in damage to Nacimiento, Whale Rock or Salinas, which could then cause damage to the surrounding region and may limit water supply for the City. The City cannot predict if and to what extent damage to Nacimiento, Whale Rock or Salinas would adversely affect the Water System’s financial condition or the ability of the City to pay debt service on the Series 2018 Bonds. Climate Change. The issue of climate change has become an important factor in water resources planning in the State, and it is being considered during planning for water supplies and systems. Many studies cite evidence that increasing concentrations of greenhouse gases have caused and will continue to cause a rise in temperatures around the world, which will result in a wid e range of changes in climate patterns. Moreover, they cite evidence that a warming trend occurred during the latter part of the 20th century and will likely continue through the 21st century. These changes could have a direct effect on water resources in the State, and numerous studies on climate and water in the State have been conducted to determine the potential impacts. Based on these studies, global warming could result in the following types of water resources impacts in the State, including impacts on water supplies and systems: • Sea level rise and an increase in saltwater intrusion into groundwater, • Changes in the timing, intensity, and variability of precipitation, and an increased amount of precipitation falling as rain instead of as snow, • Reductions in the average annual snowpack due to a rise in the snowline and a shallower snowpack in the low- and medium-elevation zones, and a shift in snowmelt runoff to earlier in the year, 38 4166-0740-7890.10 • Long-term changes in watershed vegetation and increased incidence of wildfires that could affect water quality, • Increased water temperatures with accompanying adverse effects on some fisheries, • Increases in evaporation and concomitant increased irrigation need, and • Changes in urban and agricultural water demand. However, other than the general trends listed above, there is no clear scientific consensus on exactly how global warming will quantitatively affect water supplies with respect to the Water System. Permits and Regulation The Water System is subject to a variety of federal and State statutory and regulatory requirements. Laws and regulations governing treatment and delivery of water are enacted and promulgated by federal, state and local government agencies. Compliance with these laws and regulations is and will continue to be costly and, as more stringent standards are developed to ensure safe drinking water standards and the provision of water for other purposes, such costs will likely increase. The City’s failure to comply with applicable laws and regulations could result in significant fines and penalties. Such claims are payable from assets of the Water System or from other legally available sources. In addition to claims by private parties, changes in the scope and standards for public agency water systems such as that operated by the City may also lead to administrative orders issued by federal or State regulators. Future compliance with such orders can also impose substantial additional costs on the Water System. No assurance can be given that the cost of compliance with such laws, regulations, and orders would not adversely affect the ability of the City to generate Net Revenues sufficient to pay the principal of and interest on the Series 2018 Bonds. Investment of Funds All funds and accounts held under the Indenture are required to be invested in Permitted Investments as provided under the Indenture. See APPENDIX C attached hereto for a summary of the definition of Permitted Investments. All investments, including the Permitted Investments and those authorized by law from time to time for investments by public agencies, contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected, loss of market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Indenture or by the City, including but not limited to the Rate Stabilization Fund, could have a material adverse effect on the security of the Series 2018 Bonds. Limitations on Remedies and Bankruptcy The rights and remedies provided in the Indenture may be limited by and are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors’ rights, to the application of equitable principles if equitable remedies are sought, and to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California. The various opinions of counsel to be delivered with respect to such documents, including the opinion of Bond Counsel (the form of which is attached as APPENDIX D), will be similarly qualified. The enforcement of the remedies provided in the Indenture could prove both expensive and time consuming. In addition, the rights and remedies provided in the Indenture may be limited by and are subject to provisions of the federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect creditors’ rights. If the City were to file a petition under Chapter 9 of 39 4166-0740-7890.10 the Bankruptcy Code (Title 11, United States Code), the Bondholders and the Trustee could be prohibited or severely restricted from taking any steps to enforce their rights under the Indenture. System Demand There can be no assurance that the local demand for the services provided by the Water System will be maintained at levels described in this Official Statement. Any factor which results in a decline in the level of demand for water or other adverse changes in demographics within the boundaries of the City could cause the demand for water services to decline, from time to time, or over the term of the Series 2018 Bonds. Reduction in the level of demand could require an increase in rates or charges in order to produce Net Revenues sufficient to comply with the City’s rate covenant in the Indenture. A significant decline in demand might create a situation in which the City could not increase Water System rates and charges sufficiently to offset the decrease in customers or usage. This would reduce the City’s ability to make payments of the principal of and interest on the Series 2018 Bonds as and when due. Further, among other factors affecting demand, water use is affected by economic conditions. Economic recession and its associated impacts such as job losses, income losses, and housing foreclosures or vacancies affect aggregate levels of water use and the City’s water sales. Among other matters, water supply and demand, general and central California economic conditions and changes in law and government regulations could adversely affect the amount of operating revenues to the Water Fund. There can be no assurance that an entity with regulatory authority over the Water System will not adopt further restrictions on operation of the Water System. System Expenses The operation and maintenance expenditures related to the Water System are expected to increase in the next five years. See “FINANCIAL CONDITION OF THE WATER SYSTEM—Projected Revenues, Expenditures and Debt Service Coverage.” However, there can be no assurance that the projected future operation and maintenance costs of the Water System will actually be as projected by the City and described in this Official Statement. Changes in technology, demographic changes, lifestyle changes and new regulatory requirements, and increases in the cost of energy or other expenses could reduce Net Revenues, and each could require substantial increases in rates or charges in order to comply with the rate covenant for the Water System under the Indenture. Also, any such rate increases could increase the likelihood of nonpayment by purchasers of water from the City and could also decrease demand from such purchasers and may impact the City’s ability to make payments of the principal of and interest on the Series 2018 Bonds as and when due. Limited Obligations The Series 2018 Bonds are limited obligations of the City and are not secured by a legal or equitable pledge or charge or lien upon any property of the City or any of its i ncome or receipts, except the Net Revenues. The obligation of the City to pay the Series 2018 Bonds does not constitute an obligation of the City to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The City is obligated under the Indenture to pay the Series 2018 Bonds solely from the Net Revenues. There is no assurance that the City can succeed in operating the Water System such that the Net Revenues in the future amounts projected in this Official Statement will be realized. 40 4166-0740-7890.10 Limitations on Remedies and Limited Recourse on Default The ability of the City to comply with its covenants under the Indenture and to generate Net Revenues sufficient to pay the Series 2018 Bonds may be adversely affected by actions and events outside of the control of the City and may be adversely affected by actions taken (or not taken) by voters, property owners, taxpayers or persons obligated to pay assessments, fees and charges . See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS— Proposition 218” below. Failure by the City to pay the Series 2018 Bonds as required under the Indenture constitutes an event of default under the Indenture and the Trustee is permitted to pursue remedies at law or in equity to enforce the City’s obligation to make such payments. The remedies available to the holders of the Series 2018 Bonds upon the occurrence of an event of default under the Indenture are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain. In addition to the limitations on remedies contained in the Indenture, the rights and obligations under the Indenture may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public entities in the State of California. The opinion to be delivered by Bond Counsel concurrently with the issuance of the Series 2018 Bonds will be subject to such limitations and the various other legal opinions to be delivered concurrently with the issuance of the Series 2018 Bonds will be similarly qualified. See APPENDIX D—“PROPOSED FORM OF BOND COUNSEL OPINION.” If the City fails to comply with its covenants under the Indenture or fails to pay the Series 2018 Bonds, there can be no assurance of the availability of remedies adequate to protect the interest of the holders of the Series 2018 Bonds. Secondary Market for Bonds There can be no guarantee that there will be a secondary market for the Series 2018 Bonds or, if a secondary market exists, that any Series 2018 Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particu lar issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then- prevailing circumstances. Such prices could be substantially different from the original purchase price. CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS The activities of the City and the Water System, including, without limitation, the establishment of rates for water service and the issuance of bonds, are subject to a number of limitations under State law. Certain of such limitations are summarized below. Additionally, such limitations may be revised, enhanced, expanded, or otherwise altered as provided under State law, including in certain instances by legislation adopted by State, regional or local authorities, including the State Legislature or the City Council, or by the voters of the State or the City themselves through the power of initiative or referendum, by voting in favor of amendments to the City’s Charter, or in any other lawful manner. Article XIIIA of the State Constitution Section 1(a) of Article XIIIA of the State Constitution limits the maximum ad valorem tax on real property to 1% of full cash value (as defined in Section 2 of Article XIIIA), to be collected by counties and apportioned according to law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to ad valorem taxes to pay interest or redemption charges on (1) indebtedness approved by the 41 4166-0740-7890.10 voters prior to July 1, 1978 or (2) any bonded indebtedness for the acquisit ion or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast by the voters voting on the proposition. Section 2 of Article XIIIA defines “full cash value” to mean “the County assessor’s valuation of real property as shown on the 1975-76 tax bill under full cash value or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction or reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. The voters of the State subsequently approved various measures which further amended Article XIIIA. One such amendment generally provides that the purchase or transfer of (i) real property between spouses or (ii) the principal residence and the first $1,000,000 of the full cash value of other real property between parents and children, do not constitute a “purchase” or “change of ownership” triggering reassessment under Article XIIIA. This amendment could serve to reduce the p roperty tax revenues of the City. Other amendments permitted the State Legislature to allow persons over 55 or “severely disabled homeowners” who sell their residence and buy or build another of equal or lesser value within two years in the same city, to transfer the old residence’s assessed value to the new residence. In the November 1990 election, the voters approved an amendment of Article XIIIA to permit the State Legislature to exclude from the definition of “new construction” seismic retrofitting imp rovements or improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1990. Article XIIIA has also been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, provided that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster. County assessors may “recapture” the reduced assessed valuation of such property up to its pre-decline value, depending on the county assessor’s measurement of the value subsequently restored to such property. Under State law, any fee that exceeds the reasonable cost of providing the service for which the fee is charged may be considered a “special tax” that must be authorized by a two thirds vote of the electorate. Accordingly, if a portion of the City’s water user rates or capacity charges were determined by a court to exceed the reasonable cost of providing service, the City might not be permitted to continue to collect that portion unless it were authorized to do so by a two thirds majority of the votes cast in an election to authorize the collection of that portion of the rates or fees. If the City were unable to obtain such a two thirds majority vote and were unable to reduce costs, such failure could adversely affect the City’s ability to pay the debt service on the Series 2018 Bonds. However, the reasonable cost of providing water services has been determined by the State Controller to include depreciation and allowance for the cost of capital improvements. In addition, State courts have determined that fees such as capacity charges will not be special taxes if they approximate the reasonable cost of constructing the water system improvements contemplated by the local agency imposing the fee. The United States Supreme Court has upheld Article XIIIA against a challenge alleging violation of equal protection under the Fourteenth Amendment to the United States Constitution. Proposition 218 Proposition 218, a State ballot initiative known as the “Right to Vote on Taxes Act,” was approved by the voters on November 5, 1996. The initiative added Articles XIIIC and XIIID to the 42 4166-0740-7890.10 California Constitution, creating additional requirements for the imposition by most local governments of “general taxes,” “special taxes,” “assessments,” “fees,” and “charges.” Articles XIIIC and XIIID became effective, pursuant to their terms, as of November 6, 1996, although compliance with some of the provisions was deferred until July 1, 1997, and certain of the provisions purport to apply to any tax imposed for general governmental purposes (i.e., “general taxes”) imposed, extended or increased on or after January 1, 1995 and prior to November 6, 1996. Article XIIID imposes substantive and procedural requirements on the imposition, extension or increase of any “fee” or “charge” subject to its provisions. A “fee” or “charge” subject to Article XIIID includes any levy, other than an ad valorem tax, special tax or assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership. Article XIIID prohibits, among other things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee or charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee or charge by a majority of owners of the parcels upon which the fee or charge is to be imposed. Except for fees and charges for water, sewer and refuse collection services, the approval of a majority of the property owners subject to the fee or charge, or at the option of the agency, by a two thirds vote of the electorate residing in the affected area, is required not less than 45 days following the public hearing on any such proposed new or increased fee or charge. The California Supreme Court decisions in Richmond v. Shasta Community Services District, 32 Cal. 4th 409 (2004), and Bighorn Desert View Water Agency v. Verjil, 39 Cal. 4th 206 (2006) have clarified uncertainty surrounding the applicability of Section 6 of Article XIIID to service fees and charges. In Richmond, the Shasta Community Services District charged a water connection fee, which included a capacity charge for capital improvements to the water system and a fire suppression charge. The Court held that both the capacity charge and the fire suppression charge were not subject to Article XIIID because a water connection fee is not a property related fee or charge because it results from the property owner’s voluntary decision to apply for the connection. In both Richmond and Bighorn, however, the Court stated that a fee for ongoing water service through an existing connection is imposed “as an incident of property ownership” within the meaning of Article XIIID, rejecting, in Bighorn, the water agency’s argument that consumption based water charges are not imposed “as an incident of property ownership” but as a result of the voluntary decisions of customers as to how much water to use. The City provides public notice of proposed water rate increases in accordance with the requirements of Article XIIID through means that include, among others, mailings to residential and commercial customers of public hearings on rate increases, followed by public hearings. The City also develops and adopts retail utility user rates and fees in accordance with the requirements of Article XIIID(6)(b) that limit property related fees and charges. Article XIIIC extends the people’s initiative power to reduce or repeal previously authorized local taxes, assessments, fees and charges. This extension of the initiative power is not limited by the terms of Article XIIIC to fees, taxes, assessment fees and charges imposed after November 6, 1996 and absent other authority could result in retroactive reduction in any existing taxes, assessments, fees or charges. In Bighorn, the Court concluded that under Article XIIIC local voters by initiative may reduce a public agency’s water rates and delivery charges. The Court noted, however, that it was not holding that the authorized initiative power is free of all limitations, stating that it was not determining whether the electorate’s initiative power is subject to the public agenc y’s statutory obligation to set water service charges at a level that will “pay the operating expenses of the agency, … provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due.” The courts have not fully interpreted the provisions of Proposition 218. The City is unable to predict how courts will further interpret Article XIIIC and Article XIIID, and what, if any, further implementing legislation will be enacted. Under the Bighorn case, City voters could adopt an initiative 43 4166-0740-7890.10 measure that reduces or repeals the City’s water rates and charges, though it is not clear whether (and 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 bonded 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 the City to impose, levy, charge and collect increased fees and charges for the Water System, or to call into question water rate increases previously adopted by the City. No assurance may be given that Articles XIIIC and XIIID will not have a material adverse impact on Revenues of the Water System. Proposition 26 Proposition 26, which amended Article XIIIA and XIIIC of the California Constitution, was approved by the electorate at the November 2, 2010 election. Proposition 26 imposes a two thirds voter approval requirement for the imposition of fees and charges by the State. It also imposes a majority voter approval requirement on local governments with respect to fees and charges for general purposes, and a two thirds voter approval requirement with respect to fees and charges for special purposes. According to its supporters, Proposition 26 was designed to prevent the circumvention of tax limitations imposed by the voters pursuant to Proposition 13, approved in 1978, Proposition 218, and other measures through the use of non tax fees and charges. Proposition 26 expressly excludes from its scope “a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable cost to the governmental entity of providing the service or product to the payor” and “assessments and property related fees imposed in accordance with the provisions of Article XIIID.” The California Supreme Court has held that a fee for ongoing water service through an existing connection is imposed “as an incident of property ownership” within the meaning of Article XIIID. See “—Proposition 218.” The City believes that the initiative is not intended to, and would not, apply to fees for water deliveries and services charged by the City. The City, however, is unable to predict how Proposition 26 will be interpreted by the courts to apply to the provision of water services by local governments such as the City. Future Initiatives Article XIIIA and Articles XIIIC and XIIID of the California Constitution were adopted pursuant to the State’s constitutional initiative process. From time to time other initiative measures could be adopted by State voters, or by voters of the City, placing additional limitations on the ability of the City to increase revenues. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2018 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Series 2018 Bonds is not a specific preference item for purposes of the federal alternative minimum tax. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX D hereto. To the extent the issue price of any maturity of the Series 2018 Bonds is less than the amount to be paid at maturity of such Series 2018 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Series 2018 Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Series 2018 Bonds which is excluded from gross income for federal income tax 44 4166-0740-7890.10 purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Series 2018 Bonds is the first price at which a substantial amount of such maturity of the Series 2018 Bonds 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 Series 2018 Bonds accrues daily over the term to maturity of such Series 2018 Bonds 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 Series 2018 Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Series 2018 Bonds. Beneficial Owners of the Series 2018 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Series 2018 Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Series 2018 Bonds is sold to the public. Series 2018 Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series 2018 Bonds. The City has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Series 2018 Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Series 2018 Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Series 2018 Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s atten tion after the date of issuance of the Series 2018 Bonds may adversely affect the value of, or the tax status of interest on, the Series 2018 Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the Series 2018 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the Series 2018 Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislative proposals, if enacted into law, clarificati on of the Code or court decisions may cause interest on the Series 2018 Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest . The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Series 2018 Bonds. Prospective purchasers of the Series 2018 Bonds should consult their own tax advisors regarding the 45 4166-0740-7890.10 potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Series 2018 Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service (“IRS”) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code. Bond Counsel’s engagement with respect to the Series 2018 Bonds ends with the issuance of the Series 2018 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the Beneficial Owners regarding the tax-exempt status of the Series 2018 Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax- exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Series 2018 Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Series 2018 Bonds, and may cause the City or the Beneficial Owners to incur significant expense. LITIGATION AND OTHER MATTERS At the time of delivery of and payment for the Series 2018 Bonds, the City will certify that there is no action, suit, litigation, inquiry or investigation before or by any court, govern mental agency, public board or body served, or to the best knowledge of the City threatened, against the City in any material respect affecting the existence of the City or the titles of their officers to their respective offices or seeking to prohibit, restrain or enjoin the sale or delivery of the Series 2018 Bonds or the Indenture. Various legal actions are pending against the City. The aggregate amount of the uninsured liabilities of the City which may result from all legal claims currently pending against it will not, in the opinion of the City, materially affect the finances of the Water System. MUNICIPAL ADVISOR The City has retained PFM Financial Advisors LLC, of San Francisco, California, as municipal advisor (the “Municipal Advisor”) in connection with the issuance of the Series 2018 Bonds. The Municipal Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. The Municipal Advisor is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. APPROVAL OF LEGAL PROCEEDINGS The validity of the Series 2018 Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City. A complete copy of the proposed form of Bond Counsel opinion is contained in APPENDIX D hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement . Certain legal matters will be passed upon for the City by the City Attorney. Certain legal matters will be passed upon for the Underwriter by its counsel, Schiff Hardin LLP, Underwriter’s Counsel. 46 4166-0740-7890.10 FINANCIAL STATEMENTS The City’s most recent audited financial statements for the fiscal year ending June 30, 2017, included in Appendix A hereto, were prepared by the City and audited by Glenn Burdette, Certified Public Accountants, San Luis Obispo, California (the “Auditor”). The financial statements should be read in their entirety. The City has not requested nor did the City obtain permission from the Auditor to include the audited financial stat ements as an appendix to this Official Statement. Accordingly, the Auditor has not performed any post -audit review of the financial condition or operations of the City or the General Fund. In addition, the Auditor has not reviewed this Official Statement. CONTINUING DISCLOSURE The City has covenanted for the benefit of holders of the Series 2018 Bonds to provide certain financial information and operating data relating to the Water System by not later than nine months after the end of the City’s fiscal year (which is currently June 30) in each year commencing with the report for the fiscal year ended June 30, 2018 (the “Annual Report”) and to provide notices of the occurrence of certain enumerated events. The Annual Report and event notices will be filed by the City with the Municipal Securities Rulemaking Board. These covenants have been made in order to assist the Underwriters in complying with Securities Exchange Commission Rule 15c2-12(b)(5) (the “Rule”). The specific nature of the information to be contained in the Annual Report or the notices of significant events by the City is set forth in APPENDIX E—“PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE” hereto. In 2018, the City discovered that it failed to (i) file EMMA notices of rating upgrades on certain of its outstanding bonds and failed to associate its audited financial statements for years ending June 30, 2015 and 2016 with certain CUSIPs relating to outstanding bonds and (ii) timely file certain annual information related to its Water Fund in connection with the SLO County Financing Authority Nacimiento Water Project Revenue Bonds, 2007 Series A for the fiscal years ended June 30, 2013 and June 30, 2014. All such notices and remedial filings were subsequently filed and such financial statements have been associated with all CUSIPs relating to outstanding bonds. RATINGS S&P Global Ratings (“S&P”), has assigned their municipal bond rating of “[___]” to the Series 2018 Bonds. Certain information was supplied by the City to S&P to be considered in evaluating the Series 2018 Bonds. The rating expresses only the view of the rating agency and is not a recommendation to buy, sell or hold the Series 2018 Bonds. An explanation of the significance of the rating may be obtained from S&P Global Ratings, 55 Water Street, New York, New York 10041. There is no assurance that such rating will continue for any given period of time or that it will not be reduced or withdrawn entirely by the rating agency, if in its judgment, circumstances so warrant . The City and the Trustee undertake no responsibility to oppose any such revision or withdrawal . Any such downward revision or withdrawal may have an adverse effect on the market price of the Series 2018 Bonds. UNDERWRITING The Series 2018 Bonds are being purchased pursuant to a purchase contract between the City and Raymond James & Associates, Inc. (the “Underwriter”). The Underwriter has agreed to purchase the Series 2018 Bonds at a price of $__________ (which price is equal to $__________, the principal amount of the Series 2018 Bonds, [plus/less] a net original issue [premium/discount] of $_________, less an underwriter’s discount of $__________). The purchase contract provides that the Underwriter will purchase all of the Series 2018 Bonds if any are purchased. The obligation of the Underwriter to make such purchase is subject to certain terms and conditions set forth in the purchase contract. 47 4166-0740-7890.10 The Underwriter may offer and sell the Series 2018 Bonds to certain dealers and others at prices or yields below those stated on the inside cover page of this Official Statement. The initial offering prices or yields may be changed from time to time by the Underwriter. VERIFICATION OF MATHEMATICAL ACCURACY [_________________] (the “Verification Agent”), upon delivery of the Series 2018 Bonds, will deliver a report on the mathematical accuracy of certain computations contained in schedules provided to them, which were prepared by the Municipal Advisor, relating to (1) the sufficiency of the anticipated receipts from the federal securities and uninvested moneys deposited in the Escrow Fund to pay, when due, the principal and interest requirements of the Series 2006 Bonds, and (2) the yield on the Series 2018 Bonds. The report of the Verification Agent will include the statement that the scope of its engagement is limited to verifying the mathematical accuracy of the computations contained in such schedules provided to it, and that it has no obligation to update its report because of events occurring, or data or information coming to its attention, subsequent to the date of its report. MISCELLANEOUS The purpose of this Official Statement is to supply information to prospective buyers of the Series 2018 Bonds. Quotations from and summaries and explanations of the Series 2018 Bonds and of statutes and other documents contained in this Official Statement do not purport to be complete, and reference should be made to the Series 2018 Bonds and such statutes and other documents for full and complete statements of their provisions. The preparation and distribution of this Official Statement have been authorized by the City. CITY OF SAN LUIS OBISPO By City Manager 4166-0740-7890.10 APPENDIX A AUDITED FINANCIAL STATEMENTS OF THE CITY FOR FISCAL YEAR ENDED JUNE 30, 2017 B-1 4166-0740-7890.10 APPENDIX B CITY OF SAN LUIS OBISPO GENERAL INFORMATION The information in this Appendix B concerning the City and the surrounding area is provided as supplementary information only. It should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Series 2018 Bonds is payable from the General Fund of the City. The Series 2018 Bonds are payable from Net Revenues of the Water System of the City, as provided in the Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.” General The City of San Luis Obispo, California (the “City”) is located approximately 235 miles south of downtown San Francisco and 200 miles north of Los Angeles, on the central coast of California. The City is situated along State Highway 101 and is the county seat of San Luis Obispo County. The City is located 315 feet above sea level in gentle mountain valley. San Luis Obispo has mild summers with an average high temperature of 70 degrees. San Luis Obispo County (the “County”) is the fifteenth largest county in the State and is located in mid coast of California. The County borders the Pacific Ocean, with Monterey County to the north, Santa Barbara County to the south and Kern County to the east. Population The following table summarizes the population estimates for the City, the County and State of California as of January 1, for the years 2013 through 2017. CITY OF SAN LUIS OBISPO 2013 THROUGH 2017 POPULATION ESTIMATES Calendar Year City of San Luis Obispo County of San Luis Obispo State of California 2013 45,561 273,417 38,238,492 2014 45,843 275,762 38,572,211 2015 46,130 276,862 38,915,880 2016 46,298 278,480 39,189,035 2017 46,724 280,101 39,523,613 Source: State Department of Finance. B-2 4166-0740-7890.10 Employment The following table summarizes the labor force, employment and unemployment figures over the past five years for the City, the County, the State of California and the United States. LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT CITY OF SAN LUIS OBISPO, SAN LUIS OBISPO COUNTY, STATE OF CALIFORNIA AND UNITED STATES Calendar Years 2013 through 2017 Area Labor Force Employment Unemployment Rate 2013 City of San Luis Obispo 25,283 23,462 7.2% San Luis Obispo County 138,254 128,828 6.8 California 18,624,325 16,958,735 8.9 United States 155,389,000 143,929,000 7.4 2014 City of San Luis Obispo 25,625 24,115 5.9% San Luis Obispo County 140,501 132,670 5.6 California 18,755,025 17,348,645 7.5 United States 155,922,000 146,305,000 6.2 2015 City of San Luis Obispo 25,568 24,297 5.0% San Luis Obispo County 139,604 133,044 4.7 California 18,893,152 17,723,266 6.2 United States 157,130,000 148,834,000 5.3 2016 City of San Luis Obispo 25,701 24,542 4.5% San Luis Obispo County 140,365 134,383 4.3 California 19,102,726 18,065,043 5.4 United States 159,187,000 151,436,000 4.9 2017 City of San Luis Obispo(1) 25,400 24,800 2.5% San Luis Obispo County 142,100 137,000 3.6 California 19,312,000 18,393,100 4.8 United States 160,320,000 153,337,000 4.4 (1) Preliminary, as of December 2017; full calendar year 2017 data not yet available. Source: U.S. Department of Labor – Bureau of Labor Statistics. The County comprises the San Luis Obispo-Paso Robles Metropolitan Statistical Area (the “MSA”), reported by the State Employment Development Department. The following table summarizes employment information for the MSA, including unemployment rate and employment by industry B-3 4166-0740-7890.10 METROPOLITAN STATISTICAL AREA (SAN LUIS OBISPO COUNTY) CIVILIAN LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT Calendar Years 2013 through 2017 Annual Averages 2013 2014 2015 2016 2017 Civilian Labor Force(1) 138,300 140,500 139,600 140,400 142,200 Employment 128,800 132,700 133,000 134,400 137,100 Unemployment 9,400 7,800 6,600 6,000 5,100 Unemployment Rate 6.8% 5.6% 4.7% 4.3% 3.6% Wage and Salary Employment(2) Agriculture 4,500 4,700 5,000 4,900 5,300 Natural Resources/Mining/Construction 6,100 6,400 6,700 7,200 7,500 Manufacturing 6,500 6,800 7,000 6,900 7,200 Wholesale Trade 2,600 2,800 2,800 2,900 2,900 Retail Trade 13,800 13,800 13,900 14,100 14,400 Transportation, Warehousing, Utilities 4,000 4,000 4,000 4,100 4,100 Information 1,400 1,400 1,500 1,400 1,400 Financial and Insurance 2,300 2,200 2,300 2,200 2,300 Real Estate, Rental & Leasing 1,900 1,900 1,900 1,900 1,900 Professional and Business Services 9,300 9,400 10,100 10,300 10,600 Educational and Health Services 14,000 14,500 14,600 15,000 15,500 Leisure and Hospitality 16,200 16,800 17,600 18,500 19,100 Other Services 4,800 5,300 5,700 5,800 5,900 Federal Government 600 500 500 500 500 State Government 9,500 9,900 10,200 10,300 10,600 Local Government 11,400 12,500 12,900 13,000 13,000 Total All Industries(3) 108,800 112,900 116,700 119,100 122,100 (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 Department . The principal employers in or immediately adjacent to the City are shown in the following table. SAN LUIS OBISPO PRINCIPAL EMPLOYERS Fiscal Year 2016-17 Employer Name Number of Employees Rank % of Total City Employment Cal Poly State University 3,000 1 11.95% County of San Luis Obispo 2,920 2 11.63 Dept. of State Hospitals – Atascadero 2,000 3 7.97 P.G. & E. (Diablo Canyon) 1,866 4 7.43 California Men’s Colony 1,517 5 6.04 Cal Poly Foundation (Corporation) 1,400 6 5.58 Tenet Health Care Corp. 1,305 7 5.20 Compass Health 1,200 8 4.78 Lucia Mar Unified School District 1,000 9 3.98 Paso Robles Public Schools 935 10 3.73 Total 17,143 68.30% Source: City of San Luis Obispo. B-4 4166-0740-7890.10 The Diablo Canyon nuclear power plant (“Diablo Canyon”), a principal employer in the County and located in the community of Avila Beach, will cease operations in 2025 under a plan approved by the State Public Utilities Commission in January 2018. The approved plan includes a program to retain skilled workers through 2025 and funding to retrain workers displaced by the closure. The City cannot predict at this time if and to what extent the closure of Diablo Canyon may impact the City’s financial condition. Commercial Activity The following table presents a summary of historic taxable sales reported within the City for calendar year 2012 through calendar year 2016, as compiled by the State Board of Equalization. Data are not yet available for 2017. CITY OF SAN LUIS OBISPO TAXABLE RETAIL SALES (Dollars in Thousands) 2012 2013 2014 2015 2016(1) Retail and Food Services Motor Vehicle and Parts Dealers $ 226,483 $ 265,732 $ 280,691 $ 292,390 $ 290,520 Home Furnishings/Appliances 65,835 66,335 70,932 75,209 72,214 Bldg. Materials/Garden Equip. 88,910 101,278 105,193 109,427 112,412 Food and Beverage Stores 59,262 59,613 60,112 61,475 61,550 Gasoline Stations 107,593 102,774 101,518 88,119 78,039 Clothing and Accessories Stores 85,042 87,897 86,460 91,236 89,652 Gen. Merchandise Stores 175,233 177,324 182,829 147,340 145,341 Food Services, Drinking Places 146,733 155,497 166,137 180,747 186,795 Other Retail Stores 131,388 129,910 133,284 138,261 145,878 Retail Store Totals 1,086,480 1,146,360 1,187,157 1,184,204 1,182,401 All Other Outlets 192,049 198,256 206,948 228,768 247,156 Total All Outlets $ 1,278,529 $ 1,344,616 $ 1,394,105 $ 1,412,972 $ 1,429,557 (1) Most recent annual data available. Source: State of California, Board of Equalization. Preliminary total taxable sales during calendar year 2016 in the City were reported to be approximately $1,429,557,000, a 1.2% increase over the total taxable sales of approximately $1,412,972,000 reported during calendar year 2015. The valuations of taxable transactions in the City are presented in the following table: B-5 4166-0740-7890.10 CITY OF SAN LUIS OBISPO TAXABLE RETAIL SALES NUMBER OF PERMITS AND VALUATION OF TAXABLE TRANSACTIONS (Dollars in Thousands) Year Retail Permits on July 1 Retail Stores Taxable Transactions Total Permits on July 1 Total Outlets Taxable Transactions 2012 1,201 $1,086,480 1,867 $1,278,529 2013 1,272 1,146,360 1,936 1,344,616 2014 1,333 1,187,157 2,011 1,394,105 2015 1,299 1,184,204 2,158 1,412,972 2016(1) 1,326 1,182,401 2,198 1,429,557 (1) Most recent annual data available. Source: State of California, Board of Equalization. Construction Activity The following tables show a five year summary of the number and valuation of building permits issued in the City. CITY OF SAN LUIS OBISPO BUILDING PERMIT VALUATION (Valuation in Thousands of Dollars) Permit Valuation 2013 2014 2015 2016 2017 New Single-Family $15,698 $15,412 $36,722 $26,441 $16,340 New Multi-Family 1,560 6,744 26,499 13,500 15,022 Total Residential 17,258 22,156 63,221 39,941 31,362 Non Residential 1,935 15,310 9,791 11,484 56,308 Additions, alterations, demolitions 20,761 19,139 22,897 30,230 24,787 Total $39,954 $56,605 $95,909 $81,655 $112,457 New Dwelling Units Single Family 19 102 146 56 62 Multiple Family 73 115 71 51 13 Total 92 217 217 107 75 Source: City of San Luis Obispo. Education and Community Facilities The City is adjacent to Cal Poly, one of the more prominent campuses in the California State University system. Cal Poly offers a wide variety of degree programs at both undergraduate and graduate levels. Current enrollment at this four-year school is estimated at 21,306 students. Cuesta Community College schedules day and evening courses where residents can complete a two-year degree, obtain vocational training or take general education courses. Current enrollment is approximately 11,355 full-time students. B-6 4166-0740-7890.10 San Luis Coastal Unified School District provides 10 elementary schools, two middle schools, three senior high schools and two adult schools. The total enrollment is nearly 8,000 students. The boundaries of the San Luis Coastal Unified School District are significantly larger than the City. Medical facilities include Sierra Vista Regional Medical Center with approximately 164 licensed beds and a designated trauma center and French Hospital with approximately 103 licensed beds. Recreational facilities in close proximity include 12 golf courses within a 30 minute drive of the City’s downtown, Lake Lopez, Lake Nacimiento and Montana De Oro State Park. Community facilities include the Performing Arts Center located on the campus of Cal Poly , Mission San Luis Obispo de Tolosa, San Luis Obispo County Historical Museum and San Luis Obispo Art Center. The City has seven designated open spaces and owns 18 parks and 14 playgrounds. The City operates a 10-hole municipal golf course and the San Luis Obispo Swim Center that offers participants a full range of aquatic programs. Transportation Primary access to the City is provided by State Route 101, which is a major transportation corridor that extends in a general north-south direction from Los Angeles to San Francisco. San Luis Obispo can be accessed at various off-ramps from the highway. This network of roads provides access to the various neighborhoods and business areas dispersed throughout the community. The San Luis Obispo County Airport is within ten minutes from downtown. Commercial service is offered to San Francisco, Los Angeles, Denver, Seattle and Phoenix International Airports. Rail passenger service is provided by AMTRAK, which has a station in the City. Six trains daily pass through each direction and stop at the San Luis Obispo Station. Union Pacific Transportation Company provides freight rail service to the City. Local bus service is provided by SLO Transit and is linked to a trolley line which operates in the City’s downtown area, and to the County-run RTA bus service. C-1 4166-0740-7890.10 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following is a brief summary of certain provisions of the Indenture. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Indenture. Reference is directed to the Indenture for the complete text thereof. Copies of the Indenture are available from the City Clerk of the City of San Luis Obispo. Definitions “Accountant’s Report” means a report signed by an Independent Certified Public Accountant. “Accreted Value” means, with respect to any Capital Appreciation Obligation, the principal amount thereof plus the interest accrued thereon, compounded at the approximate interest rate thereon on each date specified therein. The Accreted Value of any Capital Appreciation Obligation at any date shall be the amounts set forth in the accreted value table for the Capital Appreciation Obligation as of such date, if such date is a compounding date, and if not, as of the immediately preceding compounding date. “Adjusted Net Revenues” means, for any period, Net Revenues for such period less, to the extent included in the calculation of Net Revenues for such period, all Subsidy Payments received or expected to be received in such period. “Annual Debt Service” means, with respect to any Parity Obligations and for any Fiscal Year, the aggregate amount of Debt Service on such Parity Obligations becoming due and payable during such Fiscal Year. “Average Annual Debt Service” means with respect to any Parity Obligations and as of any date of calculation, the quotient obtained by dividing (1) the sum of the Annual Debt Service on such Parity Obligations for all Fiscal Years during the period commencing with th e Fiscal Year in which such calculation is made (or, if appropriate, the first full Fiscal Year following the issuance, incurrence or creation of such Parity Obligations) and terminating in the last Fiscal Year in which any Debt Service on such Parity Obligations is due by (2) the number of such Fiscal Years. “Balloon Indebtedness” means, with respect to the Bonds or Parity Obligations twenty-five percent (25%) or more of the principal or other similar amount of which matures or becomes due on the same date or within a 12-month period (with mandatory sinking fund payments deemed to be payments of matured principal), that portion of the principal or other similar amount of the Bonds or Parity Obligations which matures or becomes due on such date or within such 12-month period. “Beneficial Owner” means any Person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any of the Bonds (including any Person holding Bonds through nominees, depositories or other intermediaries). “Board of Directors” means the Board of Directors of the City. “Bonds” means the City of San Luis Obispo, California Water Revenue Refunding Bonds, Series 2018, authorized, executed, issued and delivered by the City under and pursuant to the Law and under and pursuant the Indenture and that are secured thereby. C-2 4166-0740-7890.10 “Business Day” means any day (other than a Saturday or a Sunday) on which banks in New York, New York, are open for business and on which the Trustee is open for business at its Principal Corporate Trust Office. “Capital Appreciation Obligation” means any Parity Obligation designated as such in the Parity Obligation Contract providing for the creation of such Parity Obligation and on which interest is compounded and paid at maturity or on prior redemption. “Certificate of the City” means an instrument in writing signed by City Administrative Officer, the Finance Director, or by any other officer of the City duly authorized by the Board of Directors for that purpose. “Code” means the Internal Revenue Code of 1986, as amended, and all then applicable regulations of the United States Department of the Treasury issued thereunder, and in this regard reference to any particular section of the Code shall include reference to all successors to such section of the Code. “Consultant” means the consultant, consulting firm, engineer, architect, engineering firm, architectural firm, accountant or accounting firm retained by the City to perform acts or carry out the duties provided for such consultant under the Indenture. “Continuing Disclosure Certificate” means that certain Continuing Disclosure Certificate, dated the date of delivery of the Bonds, executed by the City, as originally executed and as it may be amended in accordance with its terms. “Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the City and related to the authorization, execution and delivery of the Indenture and the related sale of the Bonds, including, but not limited to, costs of preparation and reproduction of documents, filing fees, initial fees and charges of the Trustee, legal fees and charges, fees and expenses of consultants and professionals, fees and expenses of the financial advisor, fees and charges for preparation, execut ion and safekeeping of the Bonds and any other charge, cost or fee in connection with the original issuance, sale and delivery of the Bonds. “Costs of Issuance Fund” means the fund by that name established pursuant to the Indenture. “Coverage Requirement” means, with respect to any specified period, an amount of Adjusted Net Revenues for the specified period equal, in each case, to at least (1) 125% of the Debt Service for all Outstanding Bonds and Parity Obligations for the specified period and (2) 100% of all obligations of the City payable from Net Revenues in the specified period. “Debt Service,” when used with respect to the Outstanding Bonds and Parity Obligations, means, for any period, the sum of (1) the interest payable during such period on the Outstanding Bonds and Parity Obligations, (2) the principal or mandatory sinking fund payments to be paid with respect to the Outstanding Bonds and Parity Obligations during such period, and (3) any other scheduled payments coming due on Outstanding Parity Obligations in such period and not otherwise included in clauses (1) and (2) of this definition, all of which are to be computed on the assumption that no portion of the Outstanding Bonds or Parity Obligations shall cease to be Outstanding during such period except by reason of the application of scheduled payments; provided that, for purposes of such computation: (a) unless a different subsection of this definition applies for purposes of determining maturities or amortization, in determining the amount due in any period, payment shall be assumed to be made in accordance with any amortization schedule established for the Bonds or C-3 4166-0740-7890.10 Parity Obligations, including any mandatory sinking fund payments or any scheduled redemption or payment of Parity Obligations on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date and any contingencies that may result in a request for earlier payment shall be disregarded; (b) Balloon Indebtedness may, at the option of the City, be treated as if it were to be amortized with substantially level debt service over a term of up to 4 0 years (which period shall be designated by the City), from the date of calculation, and the interest rate used for such computation shall be assumed by the City to be equal to (i) the interest rate in effect for such Balloon Indebtedness on the date of calculation, if the interest rate determination method in effect for such Balloon Indebtedness on the date of calculation provides for interest rates that are fixed for at least 12 months from the date such interest rates are determined or (ii) if the inter est rate determination method in effect for such Balloon Indebtedness on the date of calculation provides for interest rates that are not fixed for at least 12 months from the date such interest rates are determined, the average of (x) the SIFMA Swap Index if the interest on such Balloon Indebtedness is excluded or expected to be excluded from gross income for federal income tax purposes or (y) the One Month USD LIBOR Rate if the interest on such Balloon Indebtedness is included or expected to be included in gross income for federal income tax purposes, in each case over the 12 months preceding the date of calculation (provided, however, that if any such index is no longer published, the interest rate to be used by the City for such computation shall be calculated based upon such similar index as is determined by the City); (c) if any Parity Obligations bear, or if any Parity Obligations proposed to be issued, incurred or created will bear, interest at a variable interest rate for which a Hedge Agreement is n ot in place and the interest on which is excluded or expected to be excluded from gross income for federal income tax purposes, the interest rate on such Parity Obligations for periods when the actual interest rate cannot yet be determined shall be assumed to be equal to the average of the SIFMA Swap Index for the 12 months preceding such date of calculation (provided, however, that if such index is no longer published, the interest rate on such Parity Obligations shall be calculated based upon such similar index as is determined by the City); (d) if any Parity Obligations bear, or if any Parity Obligations proposed to be issued, created or incurred will bear, interest at a variable interest rate for which a Hedge Agreement is not in place and the interest on which is included or expected to be included in gross income for federal income tax purposes, the interest rate on such Parity Obligations for periods when the actual interest rate cannot yet be determined shall be assumed to be equal to 100% of the aver age One Month USD LIBOR Rate during the 12 months preceding such date of calculation (provided, however, that if such index is no longer published, the interest rate on such Obligations shall be calculated based upon such similar index as is determined by the City); (e) with respect to any Parity Obligations bearing interest, or expected to bear interest, at a variable interest rate for which a Hedge Agreement is in place providing for a synthetic fixed interest rate to maturity or for a specific term with respect to such Parity Obligations, the interest rate on such Parity Obligations shall be assumed to be the synthetic fixed interest rate specified in such Hedge Agreement for such term; (f) with respect to any Bonds or Parity Obligations bearing interest, or expected to bear interest, at a fixed interest rate for which a Hedge Agreement is in place providing for a net variable interest rate with respect to such Bonds or Parity Obligations for a specific term, the C-4 4166-0740-7890.10 interest rate on such Bonds or Parity Obligations shall be assumed to be equal for such term to the sum of (i) the fixed interest rate or rates to be paid on such Bonds or Parity Obligations, minus (ii) the fixed interest rate or rates receivable by the City under such Hedge Agreement, plus (iii) t he variable interest rate to be paid by the City under the Hedge Agreement, calculated, for periods in which the actual variable rate under the Hedge Agreement cannot be determined, at the average interest rate of the index on which the Hedge Agreement is based, or, if not based on an identifiable index, then the average of (x) the SIFMA Swap Index if the interest on the related Bonds or Parity Obligations is excluded or expected to be excluded from gross income for federal income tax purposes or (y) the One Month USD LIBOR Rate if the interest on the related Bonds or Parity Obligations is included or expected to be included in gross income for federal income tax purposes, in each case over the 12 months preceding the date of calculation (provided, however, that if any such index is no longer published, the variable interest rate to be paid by the City under the Hedge Agreement shall be calculated based upon such similar index as is determined by the City); (g) if any Parity Obligations feature an option, on the part of the owners or a requirement under the terms of such Parity Obligations, to tender all or a portion of such Parity Obligations to the City, or other fiduciary or agent, and to purchase such Parity Obligations or portion thereof if properly presented, then for purposes of determining the amounts due in any period with respect to such Parity Obligations, the options or obligations of the owners of such Parity Obligations to tender the same for purchase or payment shall be ignored; (h) payments on the Bonds and Parity Obligations shall be excluded to the extent such payments are to be paid from amounts on deposit with a trustee or other fiduciary in escrow specifically therefor, and interest payments shall be excluded to the extent that such interest payments are (1) to be paid from the proceeds of the Bonds or Parity Obligations, including any investment earnings thereon, held by a trustee or other fiduciary as capitalized interest specifically to pay such interest or (2) paid or expected to be paid from Subsidy Payments; (i) with respect to Parity Obligations for which a reserve fund is in place, the calculation of Debt Service for such Parity Obligations for any period shall be reduced by the amount of investment earnings on amounts on deposit in such reserve fund used or expected to be used to pay Debt Service on such Parity Obligations during such period, as estimated by the City; (j) with respect to Parity Obligations for which a reserve fund is in place, the amount on deposit in such reserve fund on any date of calculation of Debt Service shall be deducted from the amount due on the final maturity or due date of such Parity Obligations if such amount on deposit in such reserve fund would be released at such maturity or due date and, to the extent the amount on deposit in such reserve fund is in excess of the amount due on the final maturity or due date of such Parity Obligations, such excess shall be applied to the full amount due on each preceding payment date for such Parity Obligations, in inverse order, until such amount on deposit in such reserve fund is exhausted; (k) Reimbursement Obligations or potential Reimbursement Obligations shall be ignored; and (l) payments or potential payments under Hedge Agreements may, at the option of the City, be ignored except as provided in clauses (e) and (f) of this definition. “Debt Service Fund” means the fund by that name established pursuant to the Indenture. C-5 4166-0740-7890.10 “City” means the City of San Luis Obispo, California a charter city and municipal corporation duly organized and existing under and pursuant to the laws of the State of California, and any successor thereto. “Event of Default” means an event described below under the subheading “—Events of Default and Remedies—Events of Default.” “Fiscal Year” means the period beginning on July 1 of each year and ending on the last day of June of the succeeding calendar year, or any other twelve-month period selected and designated as the official fiscal year of the City. “Hedge Agreement” means an interest rate swap, cap, collar, option, floor, forward, derivative, or other hedging agreement, arrangement, or security, however denominated, entered into between the City and a counterparty, in connection with or incidental to the issuance, incurrence, or carrying of the Bonds or Parity Obligations, including an interest rate swap, cap, collar, option, floor, forward, derivative, or other hedging agreement, arrangement, or security entered into in advance of the issuance, incurrence or carrying of any Parity Obligations. “Holder,” whenever used with respect to a Bond means the Person in whose name such Bond is registered. “Indenture” means the Indenture, by and between the City and the Trustee, and all Supplemental Indentures. “Independent Certified Public Accountant” means any firm of certified public accountants appointed and paid by the City, and each of whom -- (1) is in fact independent and not under the domination of the City; (2) does not have a substantial financial interest, direct or indirect, in the operations of the City; and (3) is not connected with the City as a member of the Board of Directors or an officer or employee of the City, but may be regularly retained to audit the accounting records of and make reports thereon to the City. “Interest Payment Date” means June 1 and December 1 of each year, commencing December 1, 2018. “Law” means Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State. “Net Proceeds” means, when used with respect to any casualty insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all expenses (including attorneys’ fees) incurred in the collection of such proceeds. “Net Revenues” means, for any period, the Revenues for such period less the Operation and Maintenance Costs for such period. “One Month USD LIBOR Rate” means the rate for deposits in U.S. dollars for a one-month maturity that appears on Reuters Screen LIBOR01 Page (or such other page as may replace that page on that service, or such other service as may be nominated by the British Bankers Association, for the purpose of C-6 4166-0740-7890.10 displaying London interbank offered rates for U.S. dollar deposits) as of 11:00 a.m., London time on the date of determination of such rate. “Operation and Maintenance Costs” means costs spent or incurred by the City for maintaining and operating the Water System, calculated in accordance with generally accepted accounting principles consistently applied, including but not limited to (a) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Water System in good repair and working order and (b) the reasonable administrative costs of the City attributable to the operation and maintenance of the Water System; but in all cases excluding (i) the interest expense relating to subordinate obligations and unsecured obligations of the City, (ii) depreciation, replacement and obsolescence charges or reserves therefor, and (iii) amortization of intangibles or other bookkeeping entries of a similar nature. “Opinion of Counsel” means a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the City. “Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the provisions described below under the subheading “—Disqualified Bonds”) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except -- (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the City shall have been discharged in accordance with the provisions of the Indenture described below under the subheadin g “— Discharge of Liability on Bonds;” and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture. “Outstanding” when used as of any particular time with reference to Parity Obligations, means (subject to the terms of the related Parity Obligation Contract) all Parity Obligations theretofore issued, incurred or created by the City, except -- (1) Parity Obligations theretofore cancelled or terminated or surrendered for cancellation or termination; (2) Parity Obligations paid or deemed to be paid within the meaning of the Parity Obligation Contract providing for the issuance, incurrence or creation of such Parity Obligations; (3) Parity Obligations owned or held by or for the City; and (4) Parity Obligations in lieu of or in substitution for which other Parity Obligations have been issued, incurred or created pursuant to the terms of the Parity Obligation Contract providing for the issuance, incurrence or creation of such Parity Obligations. “Parity Obligation” means (a) the City of San Luis Obispo 2012 Water Revenue Refunding Bonds issued by the City in the aggregate principal amount of $4,960,000, (b) the SRF Loan, and (c) any other bond, note, warrant or other evidence of indebtedness, installment payment, lease payment or other payment obligation of the City payable from Net Revenues on a parity with the Bonds and any other Parity Obligations, which are issued, incurred or created in accordance with the Indenture. C-7 4166-0740-7890.10 “Parity Obligation Contract” means any indenture, trust agreement, installment purchase agreement, lease, contract or other instrument or agreement (including any Hedge Agreement), which is designated as such by the City and pursuant to which Parity Obligations are created. “Permitted Investments” means any of the following which at the time are legal investments under the laws of the State for moneys held hereunder and then proposed to be invested therein (the Trustee is entitled to rely upon any investment direction from the City as a certification that such investment constitutes a Permitted Investment): (A) for all purposes, including defeasance investments in refunding escrow accounts: (1) cash, or (2) direct 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, (B) for all purposes other than defeasance investments in refunding escrow accounts: (1) obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including the Export-Import Bank; Farm Credit System Financial Assistance Corporation; Farmers Home Administration; General Services Administration; United States Maritime Administration; Small Business Administration; Government National Mortgage Association (GNMA); United States Department of Housing & Urban Development (PHA’s); and Federal Housing Administration; (2) senior debt obligations rated “AAA” by Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business; (“S&P”) and “Aaa” by Moody’s Investors Service, Inc. (“Moody’s”) issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation; (3) U.S. dollar denominated deposit accounts, federal funds and banker’s acceptances with domestic commercial banks (including the Trustee or any of its affiliates) which have a rating on their short-term certificates of deposit on the date of purchase of “A-1” or “A-1+” or “P-1+” by S&P and “P-1” by Moody’s and maturing no more than 360 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, “A-1+” by S&P and “P-1” by Moody’s and which matures not more than 270 days after the date of purchase; (5) investments in a money market fund rated “AAAm” or “AAAm-G” or better by S&P, including such funds for which the Trustee, its affiliates or subsidiaries provide investment advisory or other management services or for which the Trustee or an affiliate of the Trustee serves as investment administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives fees from funds for services rendered, (ii) the Trustee collects fees for services rendered pursuant to the Indenture, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to the C-8 4166-0740-7890.10 Indenture may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee; (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 S&P and Moody’s or any successors thereto; or (b) (i) 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) The State of California Local Agency Investment Fund, a pooled investment fund managed by the State of California Treasurer’s office meeting all legal guidelines and requirements for the investment of California public agency funds, provided, as to any investment made by the Trustee, the Trustee shall be entitled to make investments and withdrawals directly in its own name as Trustee; and (8) any investment agreement by a provider, supported by appropriate opin ions of counsel, provided that, without limiting the foregoing, any such Investment Agreement shall (i) be from a provider rated by S&P or Moody’s at AA or Aa2 or above, and (ii) expressly permit the withdrawal, without penalty, of any amounts necessary at any time to fund any deficiencies on account of debt service requirements with respect to the Bonds, together with such amendments as may be approved by the City and the Trustee from time to time. “Person” means an individual, corporation, firm, association, partnership, limited liability company, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. “Principal Corporate Trust Office” means the corporate trust office of the Trustee in Los Angeles, California, at which at any particular time its corporate trust business is being administered, except that with respect to presentation of Bonds for registration, payment, redemption, transfer or exchange, such term shall mean the corporate trust operations office of the Trustee in St. Paul, Minnesota, or such other office designated by the Trustee from time to time. “Rate Stabilization Fund” means the fund by that name established pursuant to the Indenture. “Rebate Fund” means the fund by that name established pursuant to the Indenture. “Reimbursement Obligations” means any obligation of the City to repay, from Net Revenues, amounts provided by a credit enhancement provider or a liquidity facility provider as credit or liquidity support relating to any Parity Obligations. C-9 4166-0740-7890.10 “Revenues” means all income, rents, rates, fees, charges and other moneys derived from the ownership or operation of the Water System determined in accordance with generally accepted accounting principles, consistently applied, including, without limiting the generality of the foregoing, (1) all income, rents, rates, fees, charges, business interruption insurance proceeds, connection fees and charges or other moneys derived by the City from the Water Service or other services, facilities, and commodities sold, furnished or supplied through the facilities of or in the conduct or operation of the business of the Water System; (2) the earnings on and income derived from the investment of amounts described in clause (1) above and from City reserves held for the Water System; and (3) the proceeds derived by the City directly or indirectly from the sale, lease or other disposition of a part of the Water System; but excluding (a) the proceeds of taxes; (b) customers’ deposits or any other deposits or advances subject to refund until such deposits or advances have become the property of the City; and (c) advances or contributions in aid of construction. Notwithstanding the foregoing, there shall be deducted from current Revenues any amounts transferred into the Rate Stabilization Fund from current Revenues as described below under the subheading “—Rate Stabilization Fund” and there shall be added to current Revenues any amounts transferred out of the Rate Stabilization Fund as described below under the subheading “—Rate Stabilization Fund.” “SIFMA Swap Index” means, on any date, a rate determined on the basis of the seven-day high grade market index of tax-exempt variable rate demand obligations, as produced by Municipal Market Data and published or made available by the Securities Industry & Financial Markets Association (formerly the Bond Market Association) (“SIFMA”) or by any person acting in cooperation with or under the sponsorship of SIFMA and effective from such date. “SRF Loan” means the loan made to the City by the California State Water Resources Control Board with respect to the Water System in the aggregate principal amount of not to exceed $8,114,137, under an agreement executed by the City on February 24, 2004, as amended. “State” means the State of California. “Subsidy Payments” means payments with respect to Parity Obligations made by the United States Treasury to the City or a trustee or fiduciary pursuant to Section 54AA of the Code, Section 6431 of the Code, or Section 1400U-2 of the Code or any successor to or extension or replacement of any of such provisions of the Code, or any provisions of the Code that create similar direct-pay subsidy programs. “Supplemental Indenture” means any indenture then in full force and effect which has been executed by the City and the Trustee, amendatory of or supplemental to the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture. “Tax Certificate” means the Tax Certificate delivered by the City at the time of the issuance and delivery of the Bonds, as the same may be amended or supplemented in accordance with its terms. “Trustee” means U.S. Bank National Association, a national banking association duly organized and existing under and by virtue of the laws of the United States of America and authorized to accept and execute trusts of the character set forth in the Indenture, at its Principal Corporate Trust Office, acting in its capacity as trustee under and pursuant to the Indenture, and its successors or assigns, or any other bank or trust company or national banking association at its Principal Corporate Trust Office which may at any time be substituted in its place as provided in the Indenture. “Water Fund” means the Water Fund of the City, and such other funds as the City Council shall establish and designate as a part of the Water Fund which shall constitute the Water Fund established pursuant to the Indenture. C-10 4166-0740-7890.10 “Water Service” means the water collection, supply, treatment and distribution services made available or provided by the Water System. “Water System” means all facilities, properties and improvements at any time owned, controlled or operated by the City for the collection, supply, treatment and distribution of water to residents of the City and adjacent areas, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto hereafter acquired, constructed or installed by the City. “Written Request of the City” means an instrument in writing signed by the City Administrative Officer, the Finance Director, or by any other officer of the City duly authorized by the Board of Directors for that purpose. Pledge of Net Revenues and Other Amounts The City irrevocably pledges in the Indenture the Net Revenues to the payment of the Bonds and the Parity Obligations without priority or distinction of one over the other and the Net Revenues shall not be used for any other purpose while any of the Bonds remain Outstanding; provided that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted in the Indenture. This pledge constitutes a first and exclusive lien on Net Revenues. In additi on, the City irrevocably pledges in the Indenture all amounts (including proceeds of the sale of the Bonds) held by the Trustee in any fund or account established thereunder (other than amounts on deposit in the Rebate Fund) to the payment of the interest on and principal of the Bonds as provided in the Indenture and such amounts shall not be used for any other purpose while any of the Bonds remain Outstanding; provided, however, that out of such amounts there may be applied such sums for such purposes as are permitted under the Indenture. Allocation of Revenues In order to carry out and effectuate the pledge of and lien on Net Revenues as described above under the subheading “—Pledge of Net Revenues and Other Amounts,” the City has agreed and covenanted in the Indenture that all Revenues shall be received by the City in trust and shall be deposited when and as received in a special fund designated as the “Water Fund,” which fund the City has previously established and which the City has agreed and covenanted to maintain and to hold separate and apart from other funds so long as any Bonds remain Outstanding. Moneys in the Water Fund shall be used and applied by the City only in the following order as provided in the Indenture: (a) the City shall pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as they become due and payable and shall make such deposits to the Rate Stabilization Fund as it may determine from time to time in accordance with the provisions described below under the subheading “—Rate Stabilization Fund; and (b) the City shall pay the principal of and interest on the Bonds and pay all Pari ty Obligations and make any deposits or transfers required to be made by the City pursuant to the Indenture and all Parity Obligation Contracts, in each case at the times and in the amounts required by the Indenture and each Parity Obligation Contract. As long as all payments required to be paid by the City have been paid and all deposits or transfers required to be made by the City have been made at the times and in the amounts required, all C-11 4166-0740-7890.10 pursuant to the provisions described under this subheading, Revenues on deposit in the Water Fund may be applied and used by the City for any lawful purpose. Debt Service Fund On or before each Interest Payment Date, the City, from amounts in the Water Fund, shall transfer to the Trustee pursuant to subsection (b) described above under the subheading “—Allocation of Revenues” for deposit in the “Debt Service Fund,” which fund the Trustee shall establish, maintain and hold in trust so long as any Bonds remain Outstanding, a sum equal to the amount of interest on and principal of and mandatory sinking fund payments for the Bonds becoming due on such Interest Payment Date; provided, no such transfer need be made if the amount on deposit in the Debt Service Fund is at least equal to the amount of interest on and principal of and mandatory sinking fund payments for the Bonds becoming due on such Interest Payment Date. All money on deposit in the Debt Service Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on and principal of and man datory sinking fund payments for the Bonds as such interest, principal and mandatory sinking fund payments become due and payable. Rate Stabilization Fund The City may establish a fund designated as the “Rate Stabilization Fund” to be held by the City. From time to time the City may deposit into the Rate Stabilization Fund, from current Revenues, such amounts as the City shall determine and the amount of available current Revenues shall be reduced by the amount so transferred. The City may also deposit amounts in the Rate Stabilization Fund from any lawfully available source other than current Revenues and the amount of available current Revenues shall not be reduced by the amounts so transferred. Amounts may be transferred from the Rate Stabilization Fund and deposited in the Water Fund, and any amounts so transferred shall be deemed Revenues when so transferred. Deposits to and transfers from the Rate Stabilization Fund for each Fiscal Year shall be made within 270 days after the end of such Fiscal Year . All interest or other earnings upon amounts in the Rate Stabilization Fund may be withdrawn therefrom and accounted for as Revenues. Additional Parity Obligations (a) After the issuance of the Bonds, the City may at any time and from time to time issue, incur or create any Parity Obligations; provided: (i) there shall not have occurred and be continuing an Event of Default under the terms of the Indenture (or the issuance, incurrence or creation of such Parity Obligations will cure any such Event of Default); and (ii) the issuance of such Parity Obligations shall comply with all conditions to the issuance thereof as set forth in the applicable provisions of the Parity Obligation Contracts; and (iii) the City obtains or provides a certificate or certificates prepared by the City or at the City’s option by a Consultant showing that either: the Adjusted Net Revenues for either the most recent Fiscal Year for which audited financial statements are available or any 12 consecutive calendar month period (selected by the City) during the 18 consecutive calendar month period ending immediately prior to the issuance, incurrence or creation of such additional Parity Obligations were at least equal to the Coverage Requirement for the most recently C-12 4166-0740-7890.10 completed Fiscal Year, including in the calculation of the Coverage Requirement for this purpose the Average Annual Debt Service for the additional Parity Obligations to be issued, incurred or created; and for the purpose of providing such certificate or certificates, the City or the City’s Consultant, as applicable, may adjust the Adjusted Net Revenues for such Fiscal Year or 12 calendar month period, as the case may be, to reflect: an allowance for Net Revenues that would have been derived from each new connection to the Water System that was made prior to the issuance, incurrence or creation of such additional Parity Obligations but which was not in existence during all or any part of such Fiscal Year or 12 calendar month period under consideration, in an amount equal to the estimated additional Net Revenues that would have been derived from each such connection if it had been made prior to the beginning of such Fiscal Year or 12 calendar month period; provided that such certificate or certificates shall show that the amount of Adjusted Net Revenues for the Fiscal Year or 12 calendar month period under consideration was equal to at least 100% of the Debt Service for all Outstanding Bonds and Parity Obligations for such Fiscal Year or 12 calendar month period before making any allowance for new connections to the Water System pursuant to this subparagraph (A), and an allowance for Net Revenues that would have been derived from any increase in the rates, fees and charges fixed and prescribed for Water Service which became effective prior to the issuance, incurrence or creation of such additional Parity Obligations but which was not in effect during all or any part of such Fiscal Year or 12 calendar month period, in an amount equal to the estimated additional Net Revenues that would have been derived from such increase in rates, fees and charges if it had been in effect prior to the beginning of such Fiscal Year or 12 calendar month period; or the estimated Adjusted Net Revenues for each of the five full Fiscal Years next following the earlier of (x) the end of the period during which interest on such additional Parity Obligations is to be capitalized or, if no interest is capitalized, the Fiscal Year in which such additional Parity Obligations are issued, incurred or created, or (y) the date on which substantially all projects financed with the proceeds of such additional Parity Obligations plus all projects financed with all existing Parity Obligations are expected to commence operations, will be at least equal to the Coverage Requirement for each such Fiscal Year; and for the purpose of providing such certificate or certificates, the City or the City’s Consultant, as applicable, may adjust the foregoing estimated Adjusted Net Revenues to reflect: an allowance for Net Revenues that are estimated to be derived from any increase in the rates, fees and charges for Water Service which have been adopted and which will be in effect during all or any portion of the period for which such estimates are provided; and an allowance for Net Revenues that are estimated to be derived from new connections to the Water System reasonably expected during all or any portion of the period for which such estimates are provided in an amount equal to the additional Net System Revenues that are estimated to be derived from such connections; provided that such certificate or certificates shall show that the C-13 4166-0740-7890.10 estimated Adjusted Net Revenues for each of the five Fiscal Years for which such estimates are provided will be equal to at least 100% of the Debt Service for all Outstanding Bonds and Parity Obligations for each such Fiscal Year before making any allowance for new connections to the Water System pursuant to this subparagraph (B). For purposes of clause (2) above, with respect to Operation and Maintenance Costs, the City or the City’s Consultant, as applicable, shall use such assumptions (which shall be set forth in such certificate or certificates) as such believes to be reasonable, taking into account: (i) historical Operation and Maintenance Costs, (ii) Operation and Maintenance Costs associated with any additions, improvements or betterments to or extensions or replacements of the Water System to be financed with the proceeds of such additional Parity Obligations and any other new additions, improvements or betterments to or extensions or replacements of the Water System during the period for which such estimates are provided and (iii) such other factors, including inflation and changing operations or policies, as the City or the City’s Consultant, as applicable, believes to be appropriate. (b) Without regard to subsection (a) described above, the City may at any time issue, incur or create Parity Obligations that are Reimbursement Obligations or issue, incur or create Parity Obligations under a Hedge Agreement provided that such Reimbursement Obligations or Hedge Agreement relate to Parity Obligations or anticipated Parity Obligations. (c) Without regard to subsection (a) described above, the City may at any time issue, incur or create Parity Obligations for the purpose of refunding, refinancing or prepaying any obligation payable from Net Revenues (including the payment of any costs incurred in connection with such refunding, refinancing or prepayment and the creation of such Parity Obligations and the creation of reserve funds, if any, for such Parity Obligations). (d) Nothing contained in the Indenture limits the ability of the City to issue, incur or create obligations payable from the Net Revenues on a basis that is subordinate in both payment and lien priority to the Bonds and any other Parity Obligations. Deposit and Investments of Money in Accounts and Funds Subject to the provisions of the Indenture described below under the subheading “—Covenants of the City—Tax Covenants and Matters; Rebate Fund,” all money held by the Trustee in any of the accounts or funds established pursuant to the Indenture shall be invested in Permitted Investments at the Written Request of the City. Such investments shall mature on or before the dates on which such money is anticipated to be needed for disbursement thereunder. Subject to the provisions of the Indenture described below under the subheading “—Covenants of the City—Tax Covenants and Matters; Rebate Fund,” all interest or profits received from the investment of the money held by the Trustee in any of the accounts or funds under the Indenture shall be deposited in the Debt Service Fund. The Trustee or an affiliate may act as principal or agent in the acquisition or disposition of any investment and shall be entitled to its customary fees therefor. The Trustee shall not be liable for any loss for any investment made in accordance with the provisions described under this subheading. C-14 4166-0740-7890.10 Covenants of the City Pursuant to the Indenture, the City has covenanted as follows: Punctual Payment. The City will punctually pay the interest on and principal of the Bonds in strict conformity with the terms of the Indenture and of the Bonds, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Indenture and in the Bonds required to be observed and performed by it. Extension of Payment of Bonds. The City shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of an y claims for interest by the purchase or funding of such Bonds or claims for interest or by any other arrangement and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default under the Indenture, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon that shall not have been so extended. Nothing described under this subsection is deemed to limit the right of the City to issue, incur or create Parity Obligations for the purpose of refunding any Outstanding Bonds, and such issuance, incurrence or creation shall not be deemed to constitute an extension of maturity of Bonds. Accounting Records and Reports. The City will keep or cause to be kept proper books of record and accounts in which complete and correct entries shall be made of all transactions relating to the receipts, disbursements, allocation and application of the Revenues, and such books shall be available for inspection by the Trustee, at reasonable hours and under reasonable conditions. The City shall also keep or cause to be kept such other information as required under the Tax Certificate. The City will prepare (commencing with the Fiscal Year ending June 30, 2018), within 270 days after the end of each Fiscal Year, financial statements of the City (which shall include the Water Fund) for the preceding Fiscal Year and prepared in accordance with generally accepted accounting principles, together with an Accountant’s Report thereon. Tax Covenants and Matters; Rebate Fund. The City shall at all times do and perform all acts and things permitted by law and the Indenture that are necessary or desirable in order to assure that interest paid on the Bonds will be excluded from gross income for purposes of federal income taxes and shall take no action that would result in such interest not being excluded fr om gross income for federal income taxes. Without limiting the generality of the foregoing, the City has agreed to comply with the provisions of the Tax Certificate. In addition to the funds established pursuant to the Indenture, the City agrees and coven ants to establish and maintain with the Trustee a fund separate from any other fund established and maintained hereunder to be known as the “Rebate Fund.” Upon receipt of a Written Request of the City, there shall be deposited in the Rebate Fund such amounts furnished by the City as are required to be deposited therein pursuant to the Tax Certificate, and all money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement (as th at term is defined in the Tax Certificate), for payment to the United States of America. All amounts required to be deposited into or on deposit in the Rebate Fund shall be governed exclusively by the provisions of the Indenture described under this subsection and by the Tax Certificate, and by all Written Requests of the City related thereto filed with the Trustee, and the Trustee shall follow all such Written Requests of the City, and shall have no liability or responsibility to enforce compliance by the City with the terms of the Tax Certificate; provided, that notwithstanding any provisions of the Indenture described under this subsection, if the City shall provide to the Trustee an Opinion of Counsel that any specified action C-15 4166-0740-7890.10 required under the provisions described under this subsection is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest with respect to the Bonds, the City and the Trustee may conclusively rely on such opinion in complying with such requirements, and, notwithstanding anything to the contrary contained in the Indenture, the agreements and covenants under the Indenture shall be deemed to be modified to that extent. The covenants described under this subsection shall survive payment in full or defeasance of the Bonds. Protection of Security and Rights of Holders. The City will preserve and protect the security of the Bonds and the rights of the Holders under the Indenture, and will warrant and defend such rights against all claims and demands of all persons. Against Encumbrances. The City will not make any pledge of or place any lien on the Net Revenues (or any portion thereof) having priority over or having parity with the pledge and lien created pursuant to the Indenture except as provided in the Indenture; provided, that nothing contained therein shall limit the ability of the City to create obligations that are secured by a pledge, lien or other encumbrance on Net Revenues that is subordinate to the pledge and lien on Net Revenues created pursuant to the Indenture. Against Sale or Other Disposition of Property. The City will not enter into any agreement or lease which impairs the operation of the Water System or any part thereof necessary to secure adequ ate Net Revenues for the payment of the principal of and interest on the Bonds, or which would otherwise impair the rights of the Holders under the Indenture or the operation of the Water System. Any real or personal property which has become non-operative or which is not needed for the efficient and proper operation of the Water System, or any material or equipment which has become worn out, may be sold if such sale will not impair the ability of the City to pay the principal and interest on the Bonds. N othing in the Indenture shall restrict the ability of the City to sell any portion of the Water System if such portion is immediately repurchased by the City and if such arrangement cannot by its terms result in the purchaser of such portion of the Water System exercising any remedy which would deprive the City of or otherwise interfere with its right to own and operate such portion of the Water System or interfere with its right to collect the Revenues therefrom. Against Competitive Facilities. The City will not, to the extent permitted by law, 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, city or political subdivision or any p erson whomsoever to acquire, construct, maintain or operate within the City any Water System competitive with the Water System. Operation and Maintenance of the Water System. The City will maintain and preserve the Water System in good repair and working order at all times and will operate the Water System in an efficient and economical manner and will pay all Operation and Maintenance Costs as they become due and payable. Payment of Claims. The City will pay and discharge any and all lawful claims for la bor, materials or supplies which, if unpaid, might become a lien on the Revenues or the funds or accounts created under the Indenture or on any funds in the hands of the City pledged to pay principal and interest on the Bonds or to the Holders or which might impair the security of the Bonds. Compliance with Contracts; Parity Obligation Contracts. The City will comply with, keep, observe and perform all agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the use of the Water System and all other contracts affecting or involving the Water System, to the extent that the City is a party thereto. The City will observe and C-16 4166-0740-7890.10 perform all of the covenants, agreements and conditions on its part required to be observed and performed under the Parity Obligation Contracts. The City will not take or omit to take any action within its control which would, or which if not corrected with the passage of time would, constitute an event of default under and within the meaning of the Parity Obligation Contracts. Insurance. The City will procure and maintain or cause to be procured and maintained insurance on the Water System in such amounts and against such risks (including accident to or destruction of the Water System) as are usually covered in connection with water systems similar to the Water System; provided that the City shall not be required to procure or maintain or cause to be procured or maintained any such insurance unless such insurance is commercially available at reasonable cost. Any insurance required to be maintained pursuant to the Indenture may be maintained under a self -insurance program so long as such self-insurance is maintained in the amounts and manner usually maintained in connection with water systems similar to the Water System. Eminent Domain and Insurance Proceeds. If all or any part of the Water System shall be taken by eminent domain proceedings, or if the City receives any insurance proceeds (excluding any rental interruption insurance) resulting from a casualty loss to the Water System, the Net Proceeds of any eminent domain award or insurance proceeds (excluding any rental interruption insurance) shall, at the option of the City, be applied either to (A) in the following order of priority, the prepayment of (1) Outstanding Bonds and Parity Obligations, ratably, in accordance with their respective terms and (2) any other obligation payable from Net Revenues or (B) to acquire and construct additions, betterments or improvements to the Water System. Payment of Taxes and Compliance with Governmental Regulations. The City will pay and discharge all taxes, assessments and other governmental charges which may be lawfully imposed upon the Water System, or any part thereof or upon t he Revenues when the same shall become due. The City will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Water System, or any part thereof, but the City shall not be required to comply with any regulations or requirements so long as the validity or application thereof shall be contested in good faith. Continuing Disclosure. The City covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Indenture, failure of the City to comply with the provisions of the Continuing Disclosure Certificate shall not be considered an Event of Default; however, the Trustee shall, at the written request of any Participating Underwriter (as defined in the Continuing Disclosure Certificate) or of the Holders of at least 25% in aggregate principal amount of the Bonds then Outstanding (but only to the extent funds in an amount satisfactory to the Trustee have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense, or additional charges and fees of the Trustee whatsoever, including reasonable fees and expenses of its attorneys), or any Holder or Beneficial Owner may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations described under this subsection. Waiver of Laws. The City shall not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension law now or at any time hereafter in force that may affect the covenants and agreements contained in the Indenture or in the Bonds, and all benefit or advantage of any such law or laws is hereby expressly waived by the City to the extent permitted by law. Further Assurances. The City will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the C-17 4166-0740-7890.10 intention or to facilitate the performance of the Indenture and for the better assuring and confirming unto the Holders of the rights and benefits provided in the Indenture. Rates and Charges Amount of Rates and Charges. The City shall, to the extent permitted by law (including, without limitation, Section 6 of Article XIIID of the California Constitution), fix, prescribe and collect rates and charges for the Water Service in each Fiscal Year that are reasonably estimated to yield during each Fiscal Year Adjusted Net Revenues for such Fiscal Year equal to the Coverage Requirement for such Fiscal Year. The City may make adjustments from time to time in such rates and charges and may mak e such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Adjusted Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements described under this subsection. So long as the City has complied with its obligations, as set forth in this subsection, the failure of the Adjusted Net Revenues for any Fiscal Year to be equal to at least the Coverage Requirement for such Fiscal Year shall not constitute a n Event of Default under the Indenture. Collection of Rates and Charges. The City will have in effect at all times bylaws, rules and regulations requiring each customer to pay the rates and charges applicable to the Water Service to such customer and providing for the billing thereof and for a due date and a delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the City may discontinue such service from the Water System, and such service shall not thereafter be recommenced except in accordance with City rules and regulations governing such situations of delinquency. The Trustee Appointment; Removal or Resignation. U.S. Bank National Association, shall serve as the Trustee for the Bonds for the purpose of receiving all money which the City is required to deposit with the Trustee under the Indenture and for the purpose of allocating, applying and using such money as provided therein and for the purpose of paying the interest on and princi pal of the Bonds presented for payment, with the rights and obligations provided therein at the Principal Corporate Trust Office of the Trustee. The City agrees that it will at all times maintain a Trustee having a principal corporate trust office in the United States of America. The City may at any time, unless there exists any Event of Default as described below under the subheading “—Events of Default and Remedies—Events of Default,” remove the Trustee initially appointed and any successor thereto and may appoint a successor or successors thereto by an instrument in writing; provided that any such successor shall be a bank, national banking association or trust company doing business and having a principal corporate trust office in the United States of America, having a combined capital (exclusive of borrowed capital) and surplus of at least fifty million dollars ($50,000,000) and subject to supervision or examination by federal or state agency. The Trustee may at any time resign by giving written notice of such resignation to the City and by mailing to the Holders notice of such resignation. Upon receiving such notice of resignation, the City shall promptly appoint a successor Trustee by an instrument in writing. Any removal or resignation of a Trustee and appointment of a successor Trustee shall become effective only upon the acceptance of appointment by the successor Trustee. If, within thirty (30) days after notice of the removal or resignation of the Trustee no successor Trustee shall have been appointed and shall have accepted such appointment, the removed or resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, which court may thereupon, after such notice, if any, as it may deem proper and prescribe and as may be required by law, appoint a successor Trustee having the qualifications required hereby. C-18 4166-0740-7890.10 Merger or Consolidation. Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it is a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided such company will be eligible under the Indenture, will be the successor to such Trustee without the execution or filing of any paper or any further act, anything in the Indenture to the contrary notwithstanding. Compensation. The City shall from time to time, subject to any agreement in effect with the Trustee, 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 Indenture. Such compensation and reimbursement shall be paid by the City. These obligations of the City shall survive resignation or removal of the Trustee and payment of the Bonds and discharge of the Indenture. Protection. The Trustee shall be protected and shall incur no liability in acting or refraining from acting or proceeding in good faith upon any resolution, notice, telegram, request, order, consent, waiver, certificate, statement, facsimile transmission, electronic mail, affidavit, voucher, bond, requisition or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions of the Indenture, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee shall not be bound to recognize any person as a Holder of any Bonds or to take any action at the request of any such person unless such Bond shall be deposited with the Trustee or satisfactory evidence of the ownership of such Bonds shall be furnished to the Trustee. The Trustee undertakes to perform such duties, and only such duties as are specifically set forth in the Indenture and no implied duties or obligations shall be read into the Indenture against the Trustee. No provision in the Indenture shall require the Trustee to risk or expend its own funds or otherwise incur any financial liability in the performance of any of its duties under the Indenture. The Trustee shall not be deemed to have knowledge of any Event of Default under the Indenture unless and until it shall have actual knowledge thereof or have received notice thereof at its corporate trust office at the address set forth in the Indenture. The Trustee shall, during the existence of any Event of Default (which has not been cured) use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Trustee shall not be liable for any action taken or not taken by it in accordance with the direction of the Holders of a majority (or other percentage provided for in the Indenture) in aggregate principal amount of Bonds Outstanding relating to the exercise of any right, power or remedy available to the Trustee. The Trustee shall not be considered in breach of or in default in its obligations under the Indenture or progress in respect thereto in the event of 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 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, C-19 4166-0740-7890.10 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. The permissive right of the Trustee to do things enumerated in the Indenture shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request, order or direction of any of the Holders pursuant to the provisions of the Indenture unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Indemnification. To the extent permitted by law, the City shall indemnify the Trustee and hold it harmless against any loss, liability, expenses or advances, including but not limited to fees and expenses of counsel and other experts, incurred or made without negligence or willful misconduct on the part of the Trustee, (i) in the exercise and performance of any of the powers and duties under th e Indenture by the Trustee, or (ii) arising out of or relating to any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading in any official statement or other offering circular utilized in connection with the sale of the Bonds, including the costs and expenses of defending itself against any claim of liability arising under the Indenture. Such indemnity shall survive payment of the Bonds and discharge of the Indenture or resignation or removal of the Trustee. Amendment of the Indenture Amendments Permitted with Consent. The Indenture and the rights and obligations of the City, the Trustee and of the Holders may be modified or amended from time to time and at any time by a Supplemental Indenture which shall become binding when the written consents of the Holders of a majority in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as described below under the subheading “—Disqualified Bonds,” are filed with the Trustee. No such modification or amendment shall (1) extend the maturity of or reduce the interest rate on or amount of interest on or principal of or mandatory sinking fund payment for any Bond without the express written consent of the Holder of such Bond, (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Net Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture (except as expressly provided in the Indenture), or deprive the Holders of the Bonds of the lien created by the Indenture on such Net Revenues and other assets, without the consent of the Holders of all Bonds then Outstanding, or (3) modify any rights or obligations of the Trustee or the City without their prior written assent thereto, respectively. It shall not be necessary for the consent of the Holders to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Amendments Not Requiring Consent. The Indenture and the rights and obligations of the City and of the Holders may also be modified or amended from time to time and at any time by a Supplemental Indenture which shall become binding upon execution and delivery without the consent of any Holders, but only to the extent permitted by law and only for any one or more of the following purposes: (1) to add to the agreements and covenants required to be performed in the Indenture by the City or other agreements and covenants thereafter to be performed by the C ity, to pledge or assign additional security for the Bonds (or any portion thereof) or to surrender any right or power reserved to or conferred in the Indenture on the City, provided, that no C-20 4166-0740-7890.10 such covenant, agreement, pledge, assignment or surrender shall materially adversely affect the interests of the Holders of the Bonds; (2) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Indenture or in regard to questions arising under the Indenture which the City may deem desirable or necessary or desirable and not inconsistent herewith, and which shall not materially adversely affect the interests of the Holders of the Bonds; (3) to modify, amend or supplement the Indenture in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Holders of the Bonds; (4) to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, including the amendment of the Tax Certificate; or (5) to make any other changes which will not materially adversely affect the interests of the Holders of the Bonds. Disqualified Bonds Bonds owned or held by or for the account of the City shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided in the Indenture, and shall not be entitled to consent to or take any other action provided in the Indenture. Events of Default and Remedies Events of Default. The following events will constitute Events of Default under the Indenture: (a) the City shall default in the due and punctual payment of the interest on or principal of any Bonds when and as the same shall become due and payable (whether at maturity, by proceedings for redemption, by acceleration or otherwise); (b) the City shall default in any material respect in the performance of any of the agreements or covenants contained in the Indenture required to be performed by it, and such default shall have continued for a period of sixty (60) days after the City shall have been given notice in writing of such default by the Trustee; or (c) the City shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the City seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the City or of the whole or any substantial part of its property. In each and every such case during the continuance of an Event of Default, the Trustee may and by notice in writing to the City declare the entire principal amount of the Bonds and the accrued C-21 4166-0740-7890.10 interest thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, anything contained in the Indenture to the contrary notwithstanding. The provisions described under this subsection, however, are subject to the condition that if at any time after the principal amount of the Bonds and the accrued interest thereon shall have been so declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered the City shall deposit with the Trustee a sum sufficient to pay the unpaid principal amount of the Bonds due prior to such declaration and the accrued interest thereon, with interest on such overdue installments, at the rate or rates applicable to the principal balance of the Bonds if paid in accordance with their terms, and the reasonable expenses of the Trustee, and any and all other defaults known to the Trustee (other than in the payment of the entire principal amount of the unpaid Bonds and the accrued interest thereon due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then and in every such case the Trustee, by written noti ce to the City may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. Application of Funds upon Acceleration. Upon the date of the declaration of acceleration as described above under the subsection “—Events of Default,” all Revenues thereafter received by the City shall be applied in the following order: First, to the payment of the fees, costs and expenses necessary to protect the interests of the Holders of the Bonds and the holders of Parity Obligations, including the fees, costs and expenses of the Trustee, the Holders of the Bonds and any trustee, paying agent or holder of Parity Obligations in connection with such declaration, including reasonable compensation to their respective agents, advisors, accountants and counsel; Second, to the payment of the Operation and Maintenance Costs; and Third, to the payment of the entire principal amount of the unpaid Bonds and the accrued interest thereon and the unpaid Parity Obligations, with interest on the overdue payments at the rate or rates of interest applicable to the Bonds and such Parity Obligations if paid in accordance with their respective terms, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority, according to the amounts due respectively, to the Persons entitled thereto without any discrimination or preference. Trustee to Represent Holders. The Trustee is irrevocably appointed under the Indenture (and the successive respective Holders of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Holders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Bonds, the Indenture, the Law and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Holders, the Trustee in its discretion may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for the enforcement of any other appropriate legal C-22 4166-0740-7890.10 or equitable right or remedy vested in the Trustee, in such Holders under the Indenture, the Law or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Net Revenues and other assets pledged under the Indenture, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise ma y be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Holders of such Bonds, subject to the provisions of the Indenture. Holders’ Direction of Proceedings. Anything in the Indenture to the contrary notwithstanding, the Holders of a majority in aggregate principal amount of the Bonds then Outstanding, shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee under the Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction that in the opinion of the Trustee would be unjustly prejudicial to Holders not parties to such direction. Limitation on Holders’ Right to Sue. No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture, the Law or any other applicable law with respect to such Bond, unless (1) such Holder shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted in the Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of thirty (30) 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 omission are hereby declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture or under law; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by such Holder’s or Holders’ action to affect, disturb or prejudice the security of the Indenture or the rights of any other Holders of Bonds, or to enforce any right under the Indenture, the Law or other applicable law with respect to the Bonds, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the benefit and protection of all Holders of the Outstanding Bonds, subject to the provisions of the Indenture. Absolute Obligation of the City. Nothing described above under the subsection “—Limitation on Holders’ Right to Sue” or in any other provision of the Indenture or in the Bonds shall affect or impair the obligation of the City, which is absolute and unconditional, to pay the principal of and interest on the Bonds to the respective Holders of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, but only out of the Net Revenues and other assets pledged therefor, or affect or impair the right of such Holders, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds. Termination of Proceedings. In case any proceedings taken by the Trustee or any one or more Holders on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Holders, then in every such case the City, the Trustee and the Holders, subject to any determination in such proceedings, shall be restored to their C-23 4166-0740-7890.10 former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the City, the Trustee and the Holders shall continue as though no such proceedings had been taken. Remedies Not Exclusive. No remedy conferred upon or reserved to the Trustee or the Holders in the Indenture is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to every other remedy given under the Indenture or now or hereafter existing, at law or in equity or otherwise. No Waiver of Default. No delay or omission of the Trustee or of any Holder of the Bonds to exercise any right or power arising upon the occurrence of any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee or the Holders of the Bon ds may be exercised from time to time and as often as may be deemed expedient. Defeasance Discharge of Indenture. The Bonds may be paid by the City or the Trustee on behalf of the City in any of the following ways: (a) by paying or causing to be paid the principal or redemption price of and interest on all Bonds Outstanding, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, moneys or securities in the necessary amount (as described below under the subsection “—Deposit of Money or Securities with Trustee”) to pay when due or redeem all Bonds then Outstanding; or (c) by delivering to the Trustee, for cancellation by it, all Bonds then Outstanding. If the City shall pay all Bonds Outstanding and shall also pay or cause to be paid all other sums payable under the Indenture by the City, then and in that case at the election of the City (evidenced by a Certificate of the City filed with the Trustee signifying the intention of the City to discharge all such indebtedness and the Indenture), and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of Net Revenues and other assets made under the Indenture and all covenants, agreements and other obligations of the City under the Indenture (except as otherwise specifically provided in the Indenture) shall cease, terminate, become void and be completely discharged and satisfied. In such event, upon the request of the City, the Trustee shall cause an accounti ng for such period or periods as may be requested by the City to be prepared and filed with the City and shall execute and deliver to the City all such instruments as may be necessary to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the City all moneys or securities or other property held by it pursuant to the Indenture that are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption; provided that in all events moneys in the Rebate Fund shall be subject to the provisions of the Indenture. Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as descri bed below under the subsection “—Deposit of Money or Securities with Trustee”) to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all C-24 4166-0740-7890.10 liability of the City in respect of such Bond shall cease, terminate beco me void and be completely discharged and satisfied, except only that thereafter the Holder thereof shall be entitled to payment of the principal of and interest on such Bond by the City, and the City shall remain liable for such payments, but only out of such money or securities deposited with the Trustee as aforesaid for their payment, subject, however, to the provisions described below under the subsection “—Unclaimed Money.” The City may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the City may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture (other than the Rebate Fund) and shall be: (a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or redemption price of such Bonds and all unpaid interest thereon to the redemption date; or (b) Permitted Investments described in clause (A) of the definition thereof (not callable by the issuer thereof prior to maturity), the principal of and interest on which when due (without any income from the reinvestment thereof) will provide money sufficient to pay the principal or redemption price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or redemption price and interest become due; provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed to apply such money to the payment of such principal or redemption price and interest with respect to such Bonds. Unclaimed Money. Anything contained in the Indenture to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of the interest on or the principal of any of the Bonds which remains unclaimed for two (2) years after the date when such payments have become due and payable, if such money was held by the Trustee at such date, or for two (2) years after the dat e of deposit of such money if deposited with the Trustee after the date when such payments became due and payable, shall be repaid by the Trustee to the City as its absolute property and free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Holders shall look only to the City for the making of such payments; provided, that before being required to make any such payment to the City, the Trustee shall mail by first class mail to the Holders of such Bonds (at the expense of the City) at their addresses as they appear in the registration books maintained by the Trustee pursuant to the Indenture a notice that such money remains unclaimed and that, after a date named in such notice, which date shall not be less than thirty (30) days after the date of the mailing of such notice, the balance of such money then unclaimed will be returned to the City. C-25 4166-0740-7890.10 Liability of City Limited to Net Revenues and Certain Other Funds Notwithstanding anything contained in the Indenture, the City shall not be required to advance any money derived from any source of income other than the Net Revenues and the other funds provided in the Indenture for the payment of the interest on or the principal or redemption price of the Bonds or for the observance or performance of any agreements, conditions, covenants or terms contained in the Indenture; provided, that the City may advance funds for any such payment as long as such funds are derived from a source legally available for such purpose. The Bonds are limited obligations of the City and are payable, as to the interest thereon and the principal and redemption price thereof, solely from the Net Revenues and such other funds, and the City is not obligated to pay them except from the Net Revenues a nd such other funds. The Bonds are not a debt of the State or any of its political subdivisions (other than the City), and neither the State nor any of its political subdivisions (other than the City) is liable therefor, nor in any event shall the Bonds o r any interest thereon payable out of any funds or properties other than those of the City. The Bonds do not constitute an indebtedness of the City within the meaning of any constitutional or statutory limitation or restriction, and no persons executing the Bonds shall be liable personally on the Bonds by reason of their issuance. D-1 4166-0740-7890.10 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION [DATE] City of San Luis Obispo San Luis Obispo, California San Luis Obispo, California Water Revenue Refunding Bonds, Series 2018 (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the City of San Luis Obispo, California (the “City”) in connection with issuance of $_________ aggregate principal amount of City of San Luis Obispo, California Water Revenue Refunding Bonds, Series 2018 (the “Bonds”), issued pursuant to Articles 10 and 11 of Chapter 3 of Part I of Division 2 of Title 5 of the California Government Code and an Indenture, dated as of July 1, 2018 (the “Indenture”), between the City and U.S. Bank National Association, as trustee (the “Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. In such connection, we have reviewed the Indenture, the Tax Certificate, dated the date hereof (the “Tax Certificate”), an opinion of counsel to the City, certificates of the City, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof . We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance , and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and of the legal conclusions contained in the opinion, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Indenture and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against a municipal corporation and chartered city in the State of California. We express D-2 4166-0740-7890.10 no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the assets described in or as subject to the lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such assets. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Bonds constitute the valid and binding limited obligations of the City. 2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Net Revenues and any other amounts held by the Trustee in any fund or account established pursuant to the Indenture, other than amounts on deposit in the Rebate Fund, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture. 3. Interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal alternative minimum tax. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP per E-1 4166-0740-7890.10 APPENDIX E PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the “Disclosure Certificate”) is executed and delivered by the CITY OF SAN LUIS OBISPO, California (the “City”) in connection with the execution and delivery of the City’s Water Revenue Refunding Bonds, Series 2018 (the “Bonds”). The Bonds are being executed and delivered pursuant to an Indenture, dated as of July 1, 2018 (the “Indenture”), by and between the City and U.S. Bank National Association, as trustee (the “Trustee”). The City covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: “Annual Report” shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. “Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning the ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). “Dissemination Agent” means the City or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation . As of the date of this Disclosure Certificate, the City has not appointed a separate Dissemination Agent. “MSRB” 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. “Official Statement” means the final official statement dated __________, 2018, prepared with respect to the Bonds. “Participating Underwriter” shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. “Report Date” means March 1 of each year. “Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “Significant Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate. E-2 4166-0740-7890.10 SECTION 3. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent to, not later than the Report Date, commencing March 1, 2019, with the report for the 2017-18 fiscal year, provide to the MSRB, in an electronic format as prescribed by the MSRB, an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 business days prior to the Report Date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by 15 business days prior to the Report Date the Dissemination Agent (if other than the City) has not received a copy of the Annual Report, the Dissemination Agent shall contact the City to determine if the City 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 City may be submitted separately from the balance of the Annual Report, and later than the Report Date if not available by the Report Date. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Significant Event under Section 5(c). The City 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 City hereunder. (b) If the City does not provide (or cause the Dissemination Agent to provide) an Annual Report by the Report Date, the City shall provide (or cause the Dissemination Agent to provide) 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 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 City, file a report with the City 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 City’s Annual Report shall contain or incorporate by reference the following: (a) Audited Financial Statements of the City 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 City’s audited financial statements are not available by the 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. (b) To the extent not contained in the audited financial statements filed under the preceding clause (a), the Annual Report shall contain information showing: (i) information concerning any revision in the adopted rates and charges which are generally imposed by the City upon users within the service area of the Water System; (ii) total Net Revenues received by the City during the preceding fiscal year and the amount by which such Net Revenues provide coverage for the payments of debt service coming E-3 4166-0740-7890.10 due in such fiscal year with respect to the Bonds, the Series 2012 Bonds, the SRF Loan and any other Parity Obligations; and (iii) for any customer whose total billings in the preceding fiscal year represent 10% or more of the Revenues of the Water System, (1) the total amount of Revenues derived from such customer and (2) the percent of total Revenues represented by such customer for such fiscal year. (c) In addition to any of the information expressly required t o be provided under paragraphs (a) and (b) of this Section, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. (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 City 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 City shall clearly identify each such other document so included by reference. SECTION 5. Reporting of Significant Events. (a) The City shall give, or cause to be given, notice of the occurrence of any of the following Significant Events with respect to the Bonds in a timely manner not later than ten business days after the occurrence of the event: 1. Principal and interest payment delinquencies; 2. Unscheduled draws on debt service reserves reflecting financial difficulties; 3. Unscheduled draws on credit enhancements reflecting financial difficulties; 4. Substitution of credit or liquidity providers, or their failure to perform; 5. Issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); 6. Tender offers; 7. Defeasances; 8. Rating changes; or 9. Bankruptcy, insolvency, receivership or similar event of the obligated person. Note: for the purposes of the event identified in subparagraph (9), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of E-4 4166-0740-7890.10 reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) The City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material, in a timely manner not later than ten business days after the occurrence of the event: 1. Unless described in paragraph 5(a)(5), adverse tax opinions or other material notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; 2. Modifications to rights of Bond holders; 3. Optional, unscheduled or contingent Bond calls; 4. Release, substitution, or sale of property securing repayment of the Bonds; 5. Non-payment related defaults; 6. The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; or 7. Appointment of a successor or additional trustee or the change of name of a trustee. (c) Whenever the City obtains knowledge of the occurrence of a Significant Event described in Section 5(b), the City shall determine if such event would be material under applicable federal securities laws. (d) If the City learns of the occurrence of a Significant Event described in Section 5(a), or determines that knowledge of a Significant Event described in Section 5(b) would be material under applicable federal securities laws, the City shall within ten business days of occurrence file a notice of such occurrence with the MSRB. Notwithstanding the foregoing, notice of the Significant Event described in subsections (a)(7) or (b)(3) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Indenture. 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. SECTION 7. Termination of Reporting Obligation. The City’s obligations under this Disclosure Certificate shall terminate (a) upon the legal defeasance, prior redemption or payment in full of all of the Bonds or (b) if, in the opinion of nationally recognized bond counsel, the City ce ases to be an “obligated person” (within the meaning of the Rule) with respect to the Bonds or the Bonds otherwise cease to be subject to the requirements of the Rule. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Significant Event under Section 5(c). E-5 4166-0740-7890.10 SECTION 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. SECTION 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City 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 Bonds, 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 Bonds, 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 Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of holders, or (ii) does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds. If the annual financial information or operating data to be provided in the Annual Report is amended under the provisions hereof, the first annual financial information 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 d ata or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be filed in the same manner as for a Significant Event under Section 5(c). SECTION 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City 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 Significant Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Significant Event in addition to that which is specifically required by this Disclosure Certificate, the City 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 Significant Event. SECTION 11. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate any holder or beneficial owner of the Bonds may take such actions as may be E-6 4166-0740-7890.10 necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City 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 Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance. SECTION 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. SECTION 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time to time of the Bonds and shall create no rights in any other person or entity. Date: _____________, 2018 CITY OF SAN LUIS OBISPO By Finance Director E-7 4166-0740-7890.10 EXHIBIT A FORM OF NOTICE TO THE MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Obligated Person: CITY OF SAN LUIS OBISPO Name of Bond Issue: CITY OF SAN LUIS OBISPO, CALIFORNIA Water Revenue Refunding Bonds, Series 2018 Date of Issuance: __________, 2018 NOTICE IS HEREBY GIVEN that the City of San Luis Obispo, California, has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of the Continuing Disclosure Certificate of the City. The City anticipates that the Annual Report will be filed by _____________. Dated: _______________ CITY OF SAN LUIS OBISPO By [to be signed only if filed F-1 4166-0740-7890.10 APPENDIX F DTC AND THE BOOK-ENTRY ONLY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Series 2018 Bonds, payment of principal of, premium, if any, and interest on the Series 2018 Bonds to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Series 2018 Bonds, and other related transactions by and between DTC, Participants and Beneficial Owners, is based on information furnished by DTC which the City and the completeness or accuracy thereof. The City cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners either (a) payments of principal, premium, if any, and interest with respect to the Series 2018 Bonds or (b) certificates representing ownership interests in or other confirmation of ownership interests in the Series 2018 Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Official Statement. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2018 Bonds. The Series 2018 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered bond will be issued for each maturity (and each yield in the case of bifurcated maturities) of the Series 2018 Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uni form Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Secur ities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com; provided that nothing contained in such website is incorporated into this Official Statement. Purchases of Series 2018 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2018 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2018 Bond (“Beneficial Owner”) is in turn to be recorded F-2 4166-0740-7890.10 on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2018 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Series 2018 Bonds, except in the event that use of the book-entry system for the Series 2018 Bonds is discontinued. To facilitate subsequent transfers, all Series 2018 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2018 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2018 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2018 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2018 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2018 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Indenture. For example, Beneficial Owners of Series 2018 Bonds may wish to ascertain that the nominee holding the Series 2018 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Series 2018 Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2018 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Series 2018 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Series 2018 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or the Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participa nt and not of DTC, the Trustee or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will be the F-3 4166-0740-7890.10 responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, bond certificates will be printed and delivered to DTC. NEITHER THE CITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF SERIES 2018 BONDS FOR REDEMPTION. DTC (or a successor securities depository) may discontinue providing its services as securities depository with respect to the Series 2018 Bonds at any time by giving reasonable notice to the City. The City, in its sole discretion and without the consent of any other person, may terminate the services of DTC (or a successor securities depository) with respect to the Series 2018 Bonds. The City undertakes no obligation to investigate matters that would enable the City to make such a determination. In the event that the book-entry system is discontinued as described above, the requirements of the Indenture will apply. THE CITY AND THE UNDERWRITERS CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, THE PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS OF PRINCIPAL, INTEREST OR PREMIUM, IF ANY, WITH RESPECT TO THE SERIES 2018 BONDS PAID TO DTC OR ITS NOMINEE AS THE REGISTERED OWNER, OR WILL DISTRIBUTE ANY REDEMPTION 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 CITY AND THE UNDERWRITERS ARE NOT RESPONSIBLE OR LIABLE FOR THE FAILURE OF DTC OR ANY PARTICIPANT TO MAKE ANY PAYMENT OR GIVE ANY NOTICE TO A BENEFICIAL OWNER WITH RESPECT TO THE SERIES 2018 BONDS OR AN ERROR OR DELAY RELATING THERETO. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City deems reliable, but the City takes no responsibility for the accuracy thereof. DTC may discontinue providing its services as depository with respect to the Series 2018 Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series 2018 Bonds are required to be printed and delivered as described in the Indenture. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Series 2018 Bonds will be printed and delivered as described in the Indenture and payment of interest to each Holder who owns of record $1,000,000 or more in aggregate principal amount of Series 2018 Bonds may be made to such Holder by wire transfer to such wire address within the United States that such Holder may request in writing for all Interest Payment Dates following the 15th day after the Trustee’s receipt of such request.