TAX MATTERS $32,435,000 OTAY WATER DISTRICT ......Global Services, managed by S&P Capital IQ on...

NEW ISSUE RATING

BOOK-ENTRY ONLY S&P: AA

(See “CONCLUDING INFORMATION - Rating on the Bonds” herein)

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. See “TAX MATTERS” herein.

$32,435,000 OTAY WATER DISTRICT FINANCING AUTHORITY

WATER REVENUE BONDS, SERIES 2018A

Dated: Date of Delivery Due: September 1, as shown on the inside front cover page.

The cover page contains certain information for general reference only. It is not a summary of the issue. Potential investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. See “RISK FACTORS” herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds.

The Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) are payable from revenues pledged under the Indenture (defined below) consisting of 2018 Installment Payments (defined herein) to be made by the Otay Water District (the “District”) to the Otay Water District Financing Authority (the “Authority”) pursuant to an Installment Purchase Agreement, as described herein and from investment earnings on funds held under the Indenture of Trust (the “Pledged Revenues”). The Bonds will be issued pursuant to an Indenture of Trust, dated as of November 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Bonds are being issued to provide funds for construction of water storage, treatment and transmission facilities of the District and to refinance certain outstanding obligations of the District. See “THE FINANCING PLAN” herein. The District is required under the Installment Purchase Agreement to make the 2018 Installment Payments in each fiscal year from Taxes and Net Revenues of the District’s water system (the “Water System”) in an amount sufficient to pay the annual principal and interest due on the Bonds, as described herein. See “SOURCES OF PAYMENT FOR THE BONDS” and “RISK FACTORS” herein.

Interest on the Bonds is payable on March 1, 2019, and semiannually thereafter on September 1 and March 1 of each year until maturity. The Bonds are subject to optional and sinking account redemption prior to maturity (see “THE BONDS - General Provisions” and “THE BONDS - Redemption” herein).

The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts on deposit in the Bond Payment Fund under the Indenture. The District’s obligation to make the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make the 2018 Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, as General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of The Depository Trust Company on or about November 1, 2018 (see “THE BONDS - General Provisions - Book-Entry-Only System” herein).

The date of the Official Statement is October 11, 2018.


WATER REVENUE BONDS, SERIES 2018A MATURITY SCHEDULE

$28,585,000 Serial Bonds

(Base CUSIP®† 68881R)

Maturity Date Principal Interest Reoffering Reoffering

September 1 Amount Rate Yield Price CUSIP®†

2019 $1,245,000 5.000% 1.700% 102.716 AS0

2020 1,310,000 5.000 1.850 105.649 AT8

2021 1,370,000 5.000 1.930 108.422 AU5

2022 1,455,000 5.000 2.010 110.975 AV3

2023 1,650,000 5.000 2.130 113.112 AW1

2024 1,730,000 5.000 2.250 114.951 AX9

2025 1,820,000 5.000 2.350 116.635 AY7

2026 1,915,000 5.000 2.450 118.071 AZ4

2027 1,030,000 5.000 2.550 119.264 BA8

2028 1,080,000 5.000 2.650 120.222 BB6

2029 1,135,000 5.000 2.750 119.266* BC4

2030 1,195,000 5.000 2.830 118.509* BD2

2031 1,245,000 4.000 3.130 107.311* BE0

2032 1,295,000 4.000 3.300 105.833* BF7

2033 1,350,000 4.000 3.350 105.403* BG5

2034 1,400,000 4.000 3.450 104.549* BH3

2035 1,460,000 4.000 3.670 102.699* BJ9

2036 1,270,000 4.000 3.730 102.201* BK6

2037 1,235,000 3.500 3.685 97.500 BL4

2038 1,185,000 4.000 3.800 101.624* BM2

2039 1,210,000 3.625 3.800 97.500 BN0

$3,850,000 4.00% Term Bonds maturing September 1, 2043, Yield 3.94%, Price 100.480* CUSIP®† BS9

__________________________ * Priced to the first optional call date of September 1, 2028 at par. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP

Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. CUSIP numbers have been assigned by an independent company not affiliated with the Authority, the District, the Municipal Advisor or the Underwriter and are included solely for the convenience of the holders of the Bonds. None of the Authority, the District, the Municipal Advisor or the Underwriter is responsible for the selection or use of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the execution and delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

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

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

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District, any press release and any oral statement made with the approval of an authorized officer of the District or any other entity described or referenced herein, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds 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 the District or the Municipal Advisor. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. 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 District since the date hereof. This Official Statement is submitted in connection with the sale of the 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 District. All summaries of the Bonds, the Indenture or other documents, are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District Secretary for further information. See “INTRODUCTION - Summaries Not Definitive.”

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, its 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.

Bonds are Exempt from Securities Laws Registration. The issuance, sale and delivery of the Bonds has not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the execution, sale and delivery of municipal securities provided under Section 3(a)(2) of the Securities Act of 1933 and Section 3(a)(l2) of the Securities Exchange Act of 1934.

Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the 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 Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside cover page hereof and said public offering prices may be changed from time to time by the Underwriter.

District Website. The District maintains a website. The information on such website is not part of this Official Statement and is not intended to be relied on by investors with respect to the Bonds unless specifically set forth or incorporated herein.

OTAY WATER DISTRICT

SAN DIEGO COUNTY, CALIFORNIA

BOARD OF DIRECTORS

Tim Smith, President - Division 1 Mitch Thompson, Vice President - Division 2

Mark Robak, Treasurer - Division 5 Gary D. Croucher, Division 3 Hector Gastelum, Division 4

______________________________________________

MANAGEMENT TEAM

Mark Watton, General Manager Adolfo Segura, Chief, Administrative Services

Rod Posada, PE, PLS, CCM, Chief, Engineering Joseph R. Beachem, Chief Financial Officer Pedro Porras, PE, Chief, Water Operations Dan Martin, Assistant Chief of Engineering Kevin Koeppen, Assistant Chief of Finance

Jose Martinez, Assistant Chief, Water Operations ________________________________________

PROFESSIONAL SERVICES

Bond Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation

Newport Beach, California

General Counsel to the District and the Authority Artiano Shinoff

San Diego, California

Municipal Advisor Harrell & Company Advisors, LLC

Orange, California

Trustee MUFG Union Bank, N.A. Los Angeles, California

TABLE OF CONTENTS INTRODUCTION ...................................................... 1

The District ................................................................ 1 The Authority ............................................................. 1 Sources of Payment for the Bonds ............................. 2 No Reserve Fund ....................................................... 3 Legal Matters ............................................................. 3 Offering of the Bonds ................................................ 3 Summaries Not Definitive ......................................... 3

THE BONDS ............................................................... 4 General Provisions ..................................................... 4 Redemption ................................................................ 5 Scheduled Debt Service ............................................. 7

THE FINANCING PLAN .......................................... 9 The Refunding Program............................................. 9 Estimated Sources and Uses of Funds ....................... 9

OTAY WATER DISTRICT ...................................... 11

THE WATER SYSTEM ........................................... 12 Existing Facilities .................................................... 12 Water Storage ........................................................... 13 Water Supply ........................................................... 13 Capital Improvement Program ................................. 18 Water Service ........................................................... 20 Water Charges .......................................................... 21 Taxes ........................................................................ 24 Personnel ................................................................. 26 Retirement Program ................................................. 26 Other Post-Employment Benefits ............................ 31 Insurance .................................................................. 33 District Reserves and Investment Policy ................. 34 Outstanding Indebtedness of the District ................. 35 Historical Operating Results .................................... 36 Historical Debt Service Coverage ............................ 39 Projected Debt Service Coverage ............................ 41

SOURCES OF PAYMENT FOR THE BONDS ..... 44 General ..................................................................... 44 2018 Installment Payments ...................................... 44 Taxes and Net Revenues .......................................... 44 Allocation of Taxes and Net Revenues .................... 45 No Reserve Fund for the Bonds ............................... 46 Event of Default and Acceleration of Maturities ..... 46 Rate Covenant .......................................................... 47 Parity Debt ............................................................... 47 Property Insurance ................................................... 48

CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS ...................... 48 Article XIIIB Gann Limit ........................................ 48 Proposition 218 ........................................................ 49 Future Initiatives ...................................................... 51

RISK FACTORS ....................................................... 52 System Demand ....................................................... 52 Drought .................................................................... 52 Increased Operation and Maintenance Costs ........... 52 Rate Covenant Not a Guarantee; Failure to Meet

Projections............................................................. 52 Additional Obligations Payable from Taxes and

Net Revenues ........................................................ 53 Risks Relating to Water Supplies ............................. 53 California WaterFix Costs and Long Term Rate

Impacts .................................................................. 53 Environmental Regulation ....................................... 54 Proposition 218 ........................................................ 54 Natural Hazards ....................................................... 55 Interest Subsidy Payment; Sequestration ................. 56 Acceleration; Limited Recourse on Default ............. 56 Bankruptcy Risks ..................................................... 56 No Obligation to Tax................................................ 56 Change in Law ......................................................... 56 Loss of Tax Exemption ............................................ 57 IRS Audit of Tax-Exempt Bond Issues .................... 57 Secondary Market Risk ............................................ 57

TAX MATTERS ........................................................ 57

LEGAL MATTERS .................................................. 59 Enforceability of Remedies ...................................... 59 Approval of Legal Proceedings ................................ 59 Litigation .................................................................. 59

CONCLUDING INFORMATION .......................... 60 Rating on the Bonds ................................................. 60 Underwriting ............................................................ 60 The Municipal Advisor ............................................ 61 Continuing Disclosure ............................................. 61 Audited Financial Statements .................................. 61 References ................................................................ 61 Execution ................................................................. 62

APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS

APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS

APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO

APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT

APPENDIX E - PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL

APPENDIX F - THE BOOK-ENTRY SYSTEM

OTAY WATER DISTRICT LOCATION MAP

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OFFICIAL STATEMENT


WATER REVENUE BONDS, SERIES 2018A This Official Statement which includes the cover page, the inside cover page and appendices (the “Official Statement”) is provided to furnish certain information concerning the sale of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”), in the aggregate principal amount of $32,435,000.

INTRODUCTION This Introduction contains only a brief description of this issue and does not purport to be complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Bonds to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” herein). For definitions of certain capitalized terms used herein and not otherwise defined, and the terms relating to the Bonds, see the summary included in “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS” herein.

The District

The Otay Water District (the “District”) was established in 1956. The District is a municipal water district organized and existing under and in accordance with Division 20 of the Water Code of the State of California, commencing with Section 71000, as amended (the “Law”). The District’s boundaries currently encompass an area of approximately 125 square miles in San Diego County, lying immediately east of the San Diego metropolitan area and running from the City of El Cajon south to the Mexican border, abutting the cities of El Cajon and La Mesa and encompassing most of the City of Chula Vista and a small portion of the City of San Diego. The District currently serves a population of approximately 223,000 and expects the service area to experience moderate growth in the next ten years (see “OTAY WATER DISTRICT” and “APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO” herein).

The District is administered by a Board of Directors consisting of five members who are elected to four-year alternating terms by the voters residing within the District’s boundaries. The District is divided into five divisions, with each Director representing a specific division within which he or she must reside. The positions of General Manager and General Counsel are filled by appointments of the Board. The District employs 137 full-time equivalent employees.

The Authority

The Otay Water District Financing Authority (the “Authority”) is a joint exercise of powers authority organized and existing under and by virtue of the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California (the “Joint Powers Act”). The District and the California Municipal Finance Authority, a joint exercise of powers authority, formed the Authority by the execution of a joint exercise of powers agreement on March 3, 2010. The Authority functions as an independent entity and was formed to assist the District in the financing of public capital improvements. Pursuant to the Joint Powers Act, the Authority is authorized to issue revenue bonds to provide funds to finance and refinance public capital improvements of the District, with such revenue bonds to be repaid from the installment payments for such improvements, such as the installment payments described herein.

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The Authority is governed by a five-member Board which consists of all members of the District’s Board of Directors. The Board President serves as the Chairman of the Authority. The General Manager acts as the Executive Director, the District Secretary acts as the Secretary, and the Chief Financial Officer acts as the Treasurer/Auditor of the Authority. See “THE AUTHORITY” herein.

Sources of Payment for the Bonds

The Bonds. The Bonds are being issued pursuant to the Joint Powers Act and an Indenture of Trust, dated as of November 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., Los Angeles, California, as trustee (the “Trustee”). The Bonds are being issued to provide funding for the 2018 Project, as defined below, and to refinance the District’s obligations under an installment sale agreement dated as of June 1, 1996 securing the District’s outstanding Variable Rate Demand Certificates of Participation (1996 Capital Projects) (the “1996 Certificates”). The proceeds of the Bonds deposited in the 2018 Project Fund will be used by the District for the acquisition, construction and installation of the 2018 Project on behalf of the Authority. A portion of the proceeds will also be used to pay costs of issuance.

The Bonds are secured by Pledged Revenues (as defined in the Indenture), consisting of installment payments (the “2018 Installment Payments”) and other amounts (other than payments related to indemnification of the Authority) to be paid by the District to the Authority, pursuant to an Installment Purchase Agreement, dated as of November 1, 2018, by and between the Authority and the District (the “Installment Purchase Agreement”) and amounts held in the Bond Payment Fund established under the Indenture. The 2018 Installment Payments are scheduled to be sufficient to pay, when due, the annual principal and interest on the Bonds. Pursuant to the Indenture, the Authority will assign to the Trustee, for the benefit of the Owners of the Bonds, all of its rights, title and interest under the Installment Purchase Agreement except for its right to be indemnified by the District. For a summary of the Indenture and the Installment Purchase Agreement see “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS” herein.

The 2018 Installment Payments. The Installment Purchase Agreement is being executed and delivered to finance the construction of water storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements (the “2018 Project”) and to refinance the 1996 Certificates which will be prepaid, in whole, on November 1, 2018. See “THE FINANCING PLAN” and “THE WATER SYSTEM.”

The 2018 Installment Payments are secured by a charge and lien on Taxes and Revenues of the Water System and are payable from Taxes and Net Revenues, on a parity with:

the payments required to be made by the District under an installment purchase agreement dated as of March 1, 2010 (the “2010 Installment Purchase Agreement”) securing the Otay Water District Financing Authority’s outstanding Water Revenue Bonds, Series 2010A and Water Revenue Bonds, Series 2010B (collectively, the “2010 Bonds”),

the debt service payments on the District’s 2013 Water Revenue Refunding Bonds (the “2013 Bonds”), and

the debt service payments on the District’s 2016 Water Revenue Refunding Bonds (the “2016 Bonds”).

See “SOURCES OF PAYMENT FOR THE BONDS” herein.

Collectively, the 2010 Installment Purchase Agreement, the 2013 Bonds, and the 2016 Bonds are referred to herein as the “Existing Parity Obligations.” See “THE WATER SYSTEM - Outstanding Indebtedness of the District” herein.

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The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts deposited in the Bond Payment Fund established under the Indenture. The District’s obligation to make the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make 2018 Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

No Reserve Fund

The Authority will not establish or fund a reserve fund for the Bonds.

Legal Matters

Certain legal matters relating to the issuance of the Bonds are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, as General Counsel for the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District.

Offering of the Bonds

Authority for Issuance and Delivery. The Bonds are to be issued pursuant to the Joint Powers Act, the Indenture and Resolution No. 2018-02 of the Authority adopted on September 5, 2018 and Resolution No. 2018-03 of the Authority adopted on October 3, 2018.

Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about November 1, 2018 through the facilities of The Depository Trust Company.

Summaries Not Definitive

The summaries and references contained herein with respect to the Indenture, the Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of these documents may be obtained after delivery of the Bonds from the District at 2554 Sweetwater Springs Blvd., Spring Valley, California 91978.

[Remainder of Page Intentionally Left Blank]

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THE BONDS

General Provisions

Payment of the Bonds. The Bonds will be issued in the form of fully registered bonds in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds is payable at the rates per annum set forth on the inside front cover page hereof, on March 1, 2019 and semiannually on September 1 and March 1 of each year to and including the date of maturity (each, an “Interest Payment Date”). Interest on the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months. The Bonds mature on September 1 in each of the years and in the amounts set forth on the inside front cover page hereof.

The Bonds shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (a) a Bond is authenticated after the 15th day of the calendar month prior to an Interest Payment Date (each, a “Record Date”) and on or before the following Interest Payment Date, in which event it shall bear interest from such Interest Payment Date; or (b) a Bond is authenticated on or before February 15, 2019, in which event it shall bear interest from the date of initial delivery; provided, however, that if, as of the date of authentication of any Bond, interest thereon is in default, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon.

Interest on the Bonds shall be payable on each Interest Payment Date to the person whose name appears on the Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date. Both the principal of and interest on the Bonds shall be payable in lawful money of the United States of America.

Book-Entry-Only System. The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Bonds. The 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. Interest and principal on the Bonds will be payable when due by wire transfer of the Trustee to DTC which will, in turn, remit such interest and principal to DTC Participants (as defined herein), which are obligated, in turn, to remit such interest and principal to Beneficial Owners (as defined herein) of the Bonds (see “APPENDIX F - THE BOOK-ENTRY SYSTEM” herein). As long as DTC or its nominee is the registered owner of the Bonds and DTC’s book-entry method is used for the Bonds, the Trustee will send any notices to Bond Owners only to DTC and not the Beneficial Owners.

Discontinuance of Book-Entry-Only System. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered as described in the Indenture. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered as described in the Indenture.

In the event that the Bonds are no longer held in book-entry form, any Bond may, in accordance with its terms, be transferred or exchanged, pursuant to the provisions of the Indenture, upon surrender of such Bond for cancellation at the principal corporate trust office of the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the Trustee shall execute and deliver a new Bond or Bonds for an aggregate principal amount of Bonds of authorized denominations of the same maturity. The Trustee may require the payment by the Bond Owner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange.

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Redemption

Optional Redemption. The Bonds maturing on or before September 1, 2028, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on or after September 1, 2029 shall be subject to optional redemption, in whole or in part, on any date on or after September 1, 2028, from such maturities as are selected by the District in a Written Request of the District delivered to the Trustee, from any source of available funds provided to the Authority, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium.

Mandatory Sinking Fund Redemption. The Bonds maturing on September 1, 2043 (the “Term Bonds”) shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, from Sinking Account payments as set forth in the following schedule, at a redemption price equal to the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium; provided, however, that if some but not all of the Term Bonds have been redeemed pursuant to the optional redemption provisions of the Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee:

Redemption Date (September 1)

Principal Amount

2040 $1,290,000 2041 985,000 2042 775,000 2043 800,000

________________________ Final Maturity.

In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale for cancellation, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the District, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the District and subsequently cancelled or surrendered to the Trustee for cancellation. If during the twelve-month period immediately preceding any August 15 on which a Sinking Account payment is due, the District has purchased Term Bonds and surrendered them to the Trustee for cancellation, the par amount of any Term Bonds so purchased will be credited towards and will reduce the principal amount of such Term Bonds required to be redeemed on the succeeding September 1.

Notice of Redemption; Rescission. When redemption is authorized or required, notice of redemption shall be given by the Trustee, not less than 30 nor more than 60 days prior to the redemption date, (i) so long as the Bonds are held under the Book-Entry System by DTC electronically to DTC or by such method as is acceptable to DTC, (ii) if the Bonds are no longer held under the Book-Entry System, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, and (iii) to the Information Services. Such notice shall state the date of the notice, the redemption date, the redemption place and the redemption price and shall designate the CUSIP numbers, if any, and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice will also state that on said date there will become due and payable on each of said Bonds the Redemption Price thereof or of said specified portion of the principal thereof in the case of a Bond to be redeemed in part only, together with interest accrued with respect thereto to the redemption date, and that (provided that moneys for redemption have been deposited

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with the Trustee) from and after such redemption date interest thereon ceases to accrue, and will require that such Bond be then surrendered to the Trustee. Any failure to receive such notice or any defect in the notice or the delivery of such notice will not affect the validity of the redemption of any Bond.

With respect to any notice of any optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption shall not be made, and the Trustee shall within a reasonable time thereafter give notice to the persons to whom, and, in the manner in which the notice of redemption was given, that such moneys were not so received and that the redemption shall not take place.

Selection of Bonds for Redemption. Whenever provision is made for the optional redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds or such given portion of the Bonds not previously called for redemption, among maturities as directed in a Written Request of the District and within each maturity by lot. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond.

Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond a new Bond or Bonds of Authorized Denominations, and of the same maturity date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered.

Effect of Notice of Redemption. If notice of redemption having been duly given pursuant to the Indenture and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable at the redemption price specified in such notice together with interest accrued thereon to the date fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue, such Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of such Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price and accrued interest. Neither the failure to receive any notice nor any defect therein shall not affect the sufficiency of the proceedings of redemption.


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Scheduled Debt Service

The following presents the scheduled annual debt service on the Bonds, assuming no optional redemption prior to maturity.

Bond Year

Ending

September 1 Principal Interest Total

2019 $ 1,245,000.00 $ 1,213,364.60 $ 2,458,364.60 2020 1,310,000.00 1,393,787.50 2,703,787.50 2021 1,370,000.00 1,328,287.50 2,698,287.50 2022 1,455,000.00 1,259,787.50 2,714,787.50 2023 1,650,000.00 1,187,037.50 2,837,037.50 2024 1,730,000.00 1,104,537.50 2,834,537.50 2025 1,820,000.00 1,018,037.50 2,838,037.50 2026 1,915,000.00 927,037.50 2,842,037.50 2027 1,030,000.00 831,287.50 1,861,287.50 2028 1,080,000.00 779,787.50 1,859,787.50 2029 1,135,000.00 725,787.50 1,860,787.50 2030 1,195,000.00 669,037.50 1,864,037.50 2031 1,245,000.00 609,287.50 1,854,287.50 2032 1,295,000.00 559,487.50 1,854,487.50 2033 1,350,000.00 507,687.50 1,857,687.50 2034 1,400,000.00 453,687.50 1,853,687.50 2035 1,460,000.00 397,687.50 1,857,687.50 2036 1,270,000.00 339,287.50 1,609,287.50 2037 1,235,000.00 288,487.50 1,523,487.50 2038 1,185,000.00 245,262.50 1,430,262.50 2039 1,210,000.00 197,862.50 1,407,862.50 2040 1,290,000.00 154,000.00 1,444,000.00 2041 985,000.00 102,400.00 1,087,400.00 2042 775,000.00 63,000.00 838,000.00 2043 800,000.00 32,000.00 832,000.00 Total $32,435,000.00 $16,387,914.60 $48,822,914.60

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Annual 2018 Installment Payments related to the Bonds, along with the expected annual installment payments and debt service for the outstanding Existing Parity Obligations and the 1996 Certificates, are set forth in the following table. The payments are calculated on an accrual basis for each July 1 to June 30 period, consistent with the debt service calculations for the District’s Comprehensive Annual Financial Report.

Otay Water District Aggregate Parity Obligations

Fiscal 1996 2010 2013 Bonds 2016 Bonds 2018 Total

Year Ending Installment Installment Debt Debt Installment Parity

June 30 Payments (1) Payments Service Service Payments Obligations

2019 $742,000 $ 3,701,856 $ 844,567 $ 2,201,040 $ 970,692 $ 8,460,155

2020 - 3,693,064 846,167 2,201,498 2,649,163 9,389,892

2021 - 3,690,231 846,567 2,199,206 2,649,204 9,385,208

2022 - 3,689,689 845,767 2,198,956 2,641,204 9,375,616

2023 - 3,686,398 843,767 2,205,290 2,654,163 9,389,618

2024 - 3,685,148 840,567 2,203,331 2,768,288 9,497,334

2025 - 3,678,200 - 2,202,915 2,762,454 8,643,569

2026 - 3,664,330 - 2,203,790 2,762,204 8,630,324

2027 - 3,657,767 - 2,200,915 2,762,246 8,620,928

2028 - 3,655,252 - 2,207,998 1,818,371 7,681,621

2029 - 3,646,679 - 2,209,865 1,814,788 7,671,332

2030 - 3,641,516 - 2,208,931 1,813,496 7,663,943

2031 - 3,634,392 - 2,205,198 1,814,246 7,653,836

2032 - 3,626,430 - 2,252,102 1,812,788 7,691,320

2033 - 3,619,409 - 2,252,185 1,811,321 7,682,915

2034 - 3,613,290 - 2,248,878 1,812,688 7,674,856

2035 - 3,602,689 - 2,251,419 1,807,021 7,661,129

2036 - 3,596,730 - 2,246,996 1,809,021 7,652,747

2037 - 3,584,973 - 2,246,175 1,566,954 7,398,102

2038 - 3,576,542 - - 1,487,467 5,064,009

2039 - 3,565,724 - - 1,390,763 4,956,487

2040 - 3,556,588 - - 1,371,310 4,927,898

2041 - 3,543,421 - - 1,401,000 4,944,421

2042 - - - - 1,054,567 1,054,567

2043 - - - - 812,167 812,167

2044 - - - - 805,333 805,333

Total $742,000 $83,610,316 $5,067,400 $42,146,687 $48,822,915 $180,389,323 ____________________________________

(1) Payments estimated to November 1, 2018 prepayment date.

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THE FINANCING PLAN

The Refunding Program

The District has previously caused the 1996 Certificates to be executed and delivered pursuant to a trust agreement (the “1996 Agreement”) and an installment purchase agreement between the District and the Otay Service Corporation (the “1996 Installment Purchase Agreement”). The District pledged the Taxes and Net Revenues of the Water System to repay amounts due under the 1996 Installment Purchase Agreement and evidenced by the 1996 Certificates.

On the Closing Date, a portion of the proceeds of the Bonds will be deposited with the letter of credit bank for the 1996 Certificates to effect a prepayment, in whole, of the 1996 Certificates on November 1, 2018. Upon the prepayment of the 1996 Certificates, they will no longer be secured by a pledge of the Taxes and Net Revenues and the 1996 Installment Sale Agreement will terminate.

Amounts held by the 1996 Trustee are pledged solely to the prepayment of the 1996 Certificates and are not available for payments on the Bonds.

Estimated Sources and Uses of Funds

Under the provisions of the Indenture, the Trustee will receive the proceeds from the sale of the Bonds and other funds and will apply them as follows:

Sources: Principal Amount of Bonds $32,435,000.00 Net Original Issue Premium 2,710,512.45 Total Sources $35,145,512.45 Uses: Prepay 1996 Certificates $ 6,900,000.00 2018 Project Fund 28,000,000.00 Underwriter’s Discount 61,810.42 Costs of Issuance Fund (1) 183,702.03 Total Uses $35,145,512.45 ____________________________________

(1) Expenses include fees of Bond Counsel, the Municipal Advisor, Disclosure Counsel, the Trustee, rating fees, costs of printing the Official Statement, and other costs of delivery of the Bonds.

Proceeds deposited in the 2018 Project Fund will be used to fund capital expenditures of the District for storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements.

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OTAY WATER DISTRICT The District was formed in January 1956 pursuant to Section 71000 et seq., of the California Water Code, and joined the San Diego County Water Authority (which is a member of the Metropolitan Water District of Southern California) in September 1956 to acquire the right to purchase and distribute imported water throughout its service area. The San Diego County Water Authority (“CWA” or the “Water Authority”) is an agency responsible for the wholesale supply of water to its 24 public agency members in San Diego County.

The District’s boundaries currently encompass an area of approximately 125 square miles and is generally located within the south central portion of San Diego County. The District serves a wide spectrum of communities, including southern El Cajon, La Mesa, Rancho San Diego, Jamul, Spring Valley, Bonita, eastern Chula Vista, and a small portion of the City of San Diego on Otay Mesa (the “Service Area”). The southern boundary of the District is the international border with Mexico. The District is the sole provider of water in the Service Area. The District provides water service to about 72 percent of its projected ultimate population. Ultimately, the District is projected to serve 308,000 people by 2035, creating an average daily demand of 40.9 million gallons of potable water per day (“mgd”).

The District currently meets its potable demands with imported treated water from the Water Authority. The potable water is delivered via the Second San Diego County Aqueduct, (“Pipeline No. 4”) which is owned and operated by the Water Authority. The water is treated at the Water Authority’s Twin Oaks Water Treatment Plant (“WTP”), the Metropolitan Water District Skinner WTP located in Riverside County, and a private developer’s (Poseidon) desalinated seawater WTP in Carlsbad. Pipeline No. 4 is the District’s primary supply system. The Water Authority has multiple flow control facilities or connections to Pipeline No. 4 that feed into the District’s water system.

In addition, the District entered into an agreement with the Water Authority, known as the East County Regional Treated Water Improvement Program (“ECRTWIP Agreement”). The ECRTWIP Agreement provides for transmission of raw water to the Helix Water District’s R. M. Levy Water Treatment Plant (“Levy WTP”) for treatment and delivery to the Northern Service area of the District. The ECRTWIP Agreement allows access to the region’s raw water supply system and also provides treatment at the local facility. The District receives an average of 8.4 mgd from the Levy WTP. This additional source provides the District with a more diversified water supply.

Through a 1999 agreement with the City of San Diego, the District may obtain up to 10 mgd of supply from the City’s Otay Water Treatment Plant (“Otay WTP”). The Otay WTP was originally constructed in 1940, and has a current rated capacity of 34.4 mgd. Under the terms of the agreement, the City of San Diego’s obligation to supply treated water to the District is contingent upon its surplus treatment capacity, beyond what the City of San Diego needs for its own area system.

The District owns and operates a recycled water distribution network. Recycled water is used to irrigate golf courses, landscaping at schools, public parks, public right of ways, and various other approved uses in eastern Chula Vista. The District has two sources of recycled water supply: Recycled water produced locally at the District’s Ralph W. Chapman Water Recycling Facility (“RWCWRF”) and a recycled water supply produced at the City of San Diego’s South Bay Water Reclamation Plant (“SBWRP”). The RWCWRF is located near the intersection of Campo Road/Highway 94 and Singer Lane within the Middle Sweetwater River basin. The RWCWRF was originally constructed in 1979 and upgraded in 2012. It has a rated design capacity to produce 1.2 mgd of recycled water. The SBWRP has a rated capacity of 15 mgd and is located at Monument and Dairy Mart Roads near the international border, adjacent to the Tijuana River. The agreement between the District and the City of San Diego for purchase of recycled water from the SBWRP was finalized on October 20, 2003. In accordance with the agreement, the City of San Diego will provide an annual amount of at least 6 mgd of recycled water to the District. The term of the agreement is 20 years from January 1, 2007. Using these resources to meet recycled water demands on the Water System has resulted in the District being able to allocate approximately 4,300 acre-feet per year of potable

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water to other uses. The District has sued the City of San Diego with respect to the rates charged to the District for the recycled water. The District does not expect the litigation to disrupt the delivery of the recycled water to the District.

The District also owns and operates a wastewater collection system, providing public sewer service to approximately 4,714 customer accounts within the Jamacha drainage basin, which is located in the northern section of the District. Revenues from the District’s wastewater collection system are not pledged to the payment of the Bonds.

THE WATER SYSTEM The following information concerning the Water System was obtained from District officials except where otherwise indicated. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety.

Existing Facilities

The District is divided into two distinct systems; the North District and South District, and five geographic areas. These five areas contain five potable water systems and a recycled water distribution system with two sources of supply. The systems are called Hillsdale, Regulatory, La Presa, Central Area, and Otay Mesa. The Hillsdale, Regulatory, and La Presa systems are collectively referred to as the North District, while the Central Area and Otay Mesa systems are collectively referred to as the South District. Recycled water service is currently limited to the South District. There are multiple pressure zones within each system, except Otay Mesa.

North District. The Hillsdale system serves the northernmost part of the North District. The Regulatory system serves the sparsely developed eastern portion of the North District. The La Presa system serves the western part of the North District near Sweetwater reservoir and is the southernmost system of the North District. Two 10 million gallon reservoirs are located within the La Presa system and provide storage for the treated water delivered through a 36 inch pipeline, which connects to the Helix Water District system. The reservoirs within the La Presa system provide operational and emergency storage for the entire North District.

South District. The Central Area system is roughly bounded by Interstate 805 on the west, Otay River on the south, the Lower Otay Reservoir on the east, and the Regulatory System on the north. The Otay Mesa system includes the extreme south portion of the District Service Area and is generally located between the Otay River on the north and the international border with Mexico on the south. The South District is expected to experience the most growth in the District’s Service Area.

Potable Water Facilities - The principal facilities of the existing potable water system consist of five water supply connections with CWA, six water supply connections with the City of San Diego, seven connections with Helix Water District and two connections with Sweetwater Authority, 21 pump stations, over 727 miles of pipelines, and 40 storage reservoirs.

The District currently meets all of its potable demands with imported treated water from CWA. Forty percent of this water is in turn purchased from the region’s primary water importer, the Metropolitan Water District of Southern California (“MWD”). The District also has entered into an agreement with the CWA to have the neighboring Helix Water District treat imported water on behalf of the District at the Levy WTP. See “OTAY WATER DISTRICT.” This action brought regional water treatment closer to customers, which helps reduce dependence on water treatment facilities located outside of San Diego County.

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Recycled Water Facilities - The principal facilities of the existing recycled water system consist of 2 recycled water supply sources, 3 pump stations, 104 miles of pipelines, and 4 storage reservoirs.

The District currently produces recycled water at the RWCWRF, which is owned and operated by the District. Recycled water from the RWCWRF and purchased recycled water from the SBWRP are delivered into storage reservoirs that provide recycled water service to recycled water customers. See “OTAY WATER DISTRICT.” Only when treatment facilities are unavailable due to maintenance issues is potable water used to supplement the recycled water system.

Water Storage

The District currently operates 40 potable reservoirs and 4 recycled reservoirs as shown below with a total capacity of 262.3 million gallons. The District estimates that the reservoirs are 50 percent full on a typical day.

System

Reservoirs

Capacity (million gallons)

Hillsdale 6 13.9 Regulatory 14 58.8 La Presa 7 12.7 Central Area 11 85.5 Otay Mesa 2 47.7 Total Potable 40 218.6 Recycled 4 43.7 Total Storage 44 262.3

Water Supply

Service Area Water Supply - Potable. The District does not have a local source of surface water. The District purchases all of its potable water from the CWA either directly or indirectly from Helix Water District. Under a contractual arrangement with the CWA, the District receives potable water from the Helix Water District’s Levy WTP, and also has an emergency agreement with the City of San Diego to receive treated water in the case of a shutdown of CWA treated water Pipeline 4.

Service Area Water Supply - Recycled. The District produces approximately 1.2 mgd of recycled water at the RWCWRF. The District has contracted with the City of San Diego to purchase up to 6 mgd of recycled water produced by the SBWRP. Construction of the required pump station, reservoir, and the 6-mile delivery system allowing the District to connect to the City of San Diego’s recycled water pipeline was completed in 2007.

CWA Water Supply. Historically, the principal source of supply for the CWA’s service area has been water purchased from MWD for sale to the CWA member agencies. For the Fiscal Year ended June 30, 2017, the CWA supplied the District 27,002 acre-feet of water, approximately 6.4 percent of total CWA water supplies.

As an alternative to purchasing all of its imported water from MWD, CWA began to diversify its purchases through supply transfers and dry-year transfers. Since 2003, CWA has been receiving a portion of its imported water pursuant to the terms of the Quantification Settlement Agreement (“QSA”) among the State of California acting by and through the Department of Fish and Game, the Coachella Valley Water District (“CVWD”), the Imperial Irrigation District (“IID”) and CWA, executed on October 10, 2003, the Water Transfer Agreement (defined below) and other QSA related agreements. Water that CWA receives from IID is conveyed through the Colorado River Aqueduct pursuant to an exchange agreement with MWD.

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CWA began receiving transfer water from IID in December 2003. Starting with the initial delivery of 10,000 acre-feet, the amount of water to be delivered is increasing according to an agreed-upon schedule until the maximum transfer yield of 200,000 acre-feet per year is achieved in 2021. In addition, CWA’s portfolio includes imported supplies from water conserved as a result of the lining of the All-American Canal and the Coachella Canal. CWA began receiving water from the Coachella Canal Lining Project in 2007 and from the All-American Canal Lining Project in 2009. In 2017-18, CWA received a total of approximately 80,000 acre-feet from the Coachella Canal Lining Project and the All-American Canal Lining Project transfers. In 2016-17, MWD purchases represented approximately 40 percent of total CWA water supplies. By 2020, MWD purchases are expected to represent about 21 percent of total CWA supplies.

The CWA continues to pursue supply diversification efforts for itself and the region, including long-term planning, recycling of local surface water, groundwater, recycled water, local seawater desalination and conservation efforts. A significant milestone in local supply development was reached at the end of 2012, when the CWA board of directors approved a 30-year water purchase agreement (“Water Purchase Agreement”) with Poseidon Resources (Channelside) LP for the purchase of 48,000 to 56,000 acre-feet of desalinated seawater from the Carlsbad Desalination Project (the “Carlsbad Project”). The Carlsbad Project came online in December 2015. In 2017, the Carlsbad Project represented 9 percent of the region’s water demand and is a significant advance in CWA’s long-term strategy to diversify and improve the reliability of the region’s water supply portfolio.

CWA made a number of improvements to its aqueduct system and a water treatment plant to integrate desalinated water into the CWA aqueduct system, which cost CWA $80 million. In addition, a substantial portion of the cost of financing the Carlsbad Project was made by CWA under various agreements, including the Water Purchase Agreement. CWA incorporated the payments required under these agreements into its charges for water to member agencies in future years. CWA estimates that the financial impact of the Carlsbad Project will increase the supply cost by $59.2 million and transportation cost by $7.4 million per year. These amounts were incorporated into the CWA calendar year 2019 rate and into the District’s budget. Under its rate structure, the District intends to pass any increase in CWA rates directly along to District customers.

Water storage facilities are also critical to assuring consistent water availability notwithstanding fluctuation in available supply. CWA has entered into agreements to expand available storage capacity. In 2010, the CWA issued over $600 million in water bonds to finance its Capital Improvement Program. One of the purposes of the Capital Improvement Program was to interconnect a number of member agency storage facilities. Another purpose was to enhance the CWA’s own storage capacity. In June 2014, after five years of construction, the largest water storage project in San Diego County history was completed. The San Vicente Dam Raise added 152,000 acre-feet of water storage capacity to the reservoir, enough to serve more than 300,000 homes for one year.

CWA faces various challenges in the continued supply of water to the District and other member agencies. A description of these challenges as well as a variety of other operating information with respect to the CWA is included in certain disclosure documents prepared by CWA. CWA has entered into certain continuing disclosure agreements pursuant to which CWA is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 of the Securities Exchange Act of 1934 (“Rule 15c2-12”) and annual audited financial statements (the “CWA Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement.

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CWA HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO CWA. CWA IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH CWA INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12.

MWD Water Supply. MWD obtains its water supply from two primary sources: the Colorado River, via MWD’s Colorado River Aqueduct, and the State of California Department of Water Resources’ State Water Project (“SWP”), via the Edmund G. Brown California Aqueduct. CWA purchased approximately 25.0 percent of MWD’s supplies in Fiscal Year 2016-17, and has preferential rights to 18.27 percent of MWD’s supplies.

MWD faces various challenges in the continued supply of imported water to CWA and other member agencies. A description of these challenges as well as a variety of other operating information with respect to MWD is included in certain disclosure documents prepared by MWD. MWD has entered into certain continuing disclosure agreements pursuant to which MWD is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 and annual audited financial statements (the “MWD Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement.

MWD HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO MWD. MWD IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH MWD INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12.

Drought Conditions and Response. On January 17, 2014, the California Governor declared a drought state of emergency through Proclamation 1-17-2014 (the “Proclamation”) with immediate effect throughout the state. The Proclamation included the following orders, among others: (a) local urban water suppliers, including the District, were encouraged to implement their local water shortage contingency plans; (b) local urban water suppliers, including the District, were encouraged to update their urban water management plans to prepare for extended drought conditions; (c) The State Department of Water Resources (“DWR”) and the State Water Resources Control Board (the “SWRCB”) were directed to expedite the processing of water transfers; (d) the SWRCB was directed to put water rights holders on notice that they may be required to cease or reduce water diversions in the future; (e) the SWRCB was directed to consider modifying requirements for reservoir releases or diversion limitations; and (f) DWR was directed to take necessary actions to protect water quality and supply in the Sacramento-San Joaquin River Delta/San Francisco Bay Estuary (the “Delta”), including the installation of temporary barriers or temporary water supply connections, while minimizing impacts to aquatic species. In addition, on July 15, 2014, the SWRCB adopted emergency measures requiring water suppliers to implement mandatory Statewide water conservation actions.

On March 17, 2015, the SWRCB adopted additional emergency regulations limiting outdoor irrigation to two days per week, extending certain measures set forth in the July 15, 2014 action for an additional 270 days, prohibiting outdoor irrigation for 48 hours following rain and prohibiting restaurants from serving water to customers unless requested. MWD also invoked its Water Supply Allocation Plan (the “WSAP”) in response to the March 17, 2015 regulations. The WSAP provided for the equitable distribution of available water supplies in case of extreme water shortage within MWD’s service area. On April 14, 2015, MWD approved implementation of WSAP Level 3 (Water Supply Allocation) effective July 1, 2015, which among other things imposed a surcharge of between $1,480 and $2,960 per acre foot of water usage above MWD members’ water allocation. No surcharges were required to be imposed on CWA or the District.

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On April 1, 2015, the California Governor issued an Executive Order extending the measures set forth in the Proclamation and adopting the following additional orders, among others: (i) the SWRCB was directed to impose restrictions to reduce potable urban water usage, including usage by commercial, industrial and institutional properties and golf courses, by 25 percent from 2013 amounts through February 28, 2016; portions of a water supplier’s service area with higher per capita use must achieve proportionally greater reductions than areas with lower per capita use; (ii) DWR was directed to lead a Statewide initiative to replace 50 million square feet of lawns with drought tolerant landscaping; (iii) the California Energy Commission was directed to implement a rebate program for replacement of inefficient appliances; (iv) urban water suppliers were required to provide monthly water usage, conservation and enforcement information; (v) service providers were required to monitor groundwater basin levels in accordance with California Water Code § 10933; (vi) permitting agencies were required to prioritize approval of water infrastructure and supply projects; and (vii) DWR was required to plan salinity barriers in the Delta.

On May 6, 2015, the SWRCB adopted regulations in response to the Governor’s executive order that required the District to effect a 20 percent reduction from 2013 water usage. On November 13, 2015, the Governor issued Executive Order B-36-15, which called for an extension of urban water use restrictions that remained in effect until November 25, 2017, when the emergency regulations expired.

On May 31, 2018, the Governor signed two bills as part of the ongoing efforts to “make water conservation a California way of life.” SB 606 (Hertzberg) and AB 1668 (Friedman). The legislation calls for creation of new urban water use efficiency standards for indoor and outdoor use that the SWRCB will adopt by regulations no later than June 30, 2022. Each urban retail water agency will annually, beginning November 2023, calculate its own objective, based on the water needed in its service area for efficient indoor residential water use, outdoor residential water use, commercial, industrial and institutional (CII) irrigation with dedicated meters.

At this time, the District does not have a water supply shortage. Based on availability of imported and local water supplies this year, CWA has sufficient supplies for 2018-19 and given statewide and regional storage reserves, it is unlikely that the San Diego region will see a water supply shortage, due to hydrology, in the near term. CWA has supplies for 97 percent of current demand.

Historic and Projected Water Supply. At its peak in Fiscal Year 2006-07, the District purchased 41,909 acre-feet of potable water from CWA, which included 3,073 acre-feet of potable water that was needed to provide water to the customers of the District’s mandated recycled water system. The District developed additional sources of recycled water and no longer needs to purchase potable water to supplement the recycled system. This, along with economic factors, voluntary and mandated conservation efforts, additional rainfall in some years and cooler temperatures in some years has resulted in a reduction of purchased potable water from CWA from the high of 41,909 acre-feet in Fiscal Year 2006-07 to a low of 25,501 acre-feet in Fiscal Year 2015-16. The District purchased 29,638 acre-feet from CWA in Fiscal Year 2017-18.


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Set forth below is a summary of the District’s sources of water supply for the last ten fiscal years.

HISTORIC WATER SUPPLY IN ACRE-FEET PER YEAR

Fiscal Year Ended

June 30

Produced Recycled

Water

Purchased Recycled

Water

Purchased Potable Water

Total

2009 844 3,658 34,971 39,473

2010 1,033 2,870 31,175 35,078

2011 1,058 2,969 29,861 33,888

2012 655 3,171 30,543 34,369

2013 1,117 3,250 31,884 36,251

2014 1,155 3,881 33,409 38,385

2015 1,017 3,326 30,299 34,642

2016 1,009 2,670 25,501 29,180

2017 557 (1) 3,183 27,002 30,742

2018 867 (1) 3,352 29,638 33,857 ____________________________________

(1) The RWCWRF was not in operation for planned maintenance, consistent with regulatory and operating permit requirements.

Source: Otay Water District.

For Fiscal Year 2017-18 the District’s potable and recycled sales unit volumes were 29.1 and 3.8 acre feet, respectively. This equates to a 16 percent increase in potable volumes and a 12 percent increase in recycled volumes compared to volumes experienced during the period of State drought mandates in 2016. The growth in water sales was supported by the cancellation of the drought mandates and District growth. During 2017-18 the District added approximately 400 new potable customer meters and estimates an additional 700 new potable customer meters will be installed in 2019. The District currently expects that demand for potable water may reach as high as 46,000 acre-feet per at buildout.

The District currently obtains 100 percent of its potable water supply as imported water from CWA. CWA, in turn, obtains imported water from MWD and IID. The reliability of the District’s potable supply is currently dependent on these wholesale agencies. The District is committed to investing in alternative water sources, such as groundwater or desalination that would reduce its dependence on imported water. For example, a desalination project may be constructed in the Mexican State of Baja California but, at present, the District is not part of this project.


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Set forth below is a summary of the District’s projection of water sources for the current and five succeeding Fiscal Years.

PROJECTED WATER SUPPLY IN ACRE-FEET PER YEAR

Fiscal Year Ending June 30

Produced Recycled Water (1)

Purchased Recycled Water (2)

Purchased Potable Water (3)

Total

2019 1,049 2,544 30,836 34,429

2020 1,057 2,563 31,144 34,764

2021 1,070 2,595 31,455 35,120

2022 1,087 2,635 31,826 35,548

2023 1,109 2,688 32,287 36,084

2024 1,137 2,757 32,758 36,652 ____________________________________

(1) Maximum capacity for the District’s treatment plant is 1,456 acre-feet. (2) Purchased from the City of San Diego’s South Bay Water Reclamation Plant.

(3) Includes purchases from CWA, raw water treated to potable level by the City of San Diego and the Helix Water District, and assumes no desalinated water purchases.


Capital Improvement Program

The District currently serves a population of approximately 223,000. Ultimately, the District is projected to serve 308,000 people and it estimates an additional $318 million investment in capital assets will be required through ultimate buildout, over approximately 30 years.

The District reviews and updates its six-year Capital Improvement Program (the “CIP”) annually based on an analysis of the potable and recycled water demands most recently projected by developers, demographics, and population estimates by the San Diego Association of Governments (“SANDAG”). In addition, the District has commissioned a study on the local economy to further refine its projections. In the latest annual updated report entitled “Economic Outlook Update for the Otay Water District”, prepared by the Expera Group (“Expera”) and dated March 2018 (the “Report”), Expera projected new residential construction for Fiscal Years 2018 - 2024. The average number of residential units (single-family homes, rental units and condominiums) identified in the Report for the next five years is 1,642 units per year. Growth projections by SANDAG for the Series 12 Planned Land Use Inventory identified the District as having 56.8 percent of the new industrial projected development in San Diego County and 20.1 percent of the new residential projected development with land use densities higher than 4 dwelling units per acre.

The Water System capital improvements are categorized by operational area of the District, which includes potable and recycled water operations. The CIP is then further separated into improvement categories - Expansion, Betterment, Replacement and New Supply.

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The table below summarizes the current six-year CIP for the Water System and the categories of work to be completed, updated as part of the 2018-19 budget.

Fiscal Year Ending June 30

2019 2020 2021 2022 2023 2024 Total

Expansion $ 78,000 $ 399,000 $ 192,000 $1,263,000 $ 2,448,000 $ 1,653,000 $ 6,033,000

Betterment 789,000 2,401,000 554,000 1,219,000 1,723,000 2,084,000 8,770,000

Replacement 18,886,000 14,143,000 11,257,000 7,222,000 7,362,000 7,903,000 66,773,000

New Supply 3,000 3,000 3,000 3,000 3,000 32,000 47,000

Total $19,756,000 $16,946,000 $12,006,000 $9,707,000 $11,536,000 $11,672,000 $81,623,000 _______________________________


The District has identified the timing and method of funding the capital improvements over the next six years. The above improvement categories are designed to be funded with operational net cashflow, proceeds of the Bonds, transfers between operational areas, other capital related charges, reserves or a combination of these sources, and currently, the District expects to fund $28,000,000 of these improvements with Bond proceeds, $47,590,000 with reserves and/or operating income, and $6,033,000 with capacity fees and other fees. The District does not expect that additional debt financing for the Water System will occur during the next six years. In order to implement the CIP, the District anticipates that it will need to increase its rates as described herein (see “Water Charges” herein). However, there is no guarantee that the District will implement such rate increases at the amount and at the time anticipated in its planning documents. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218.”


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Water Service

Historical Water Use. Table No. 1 shows the amount of water usage, connections and revenue generated from water and recycled water sales in the last five Fiscal Years.

TABLE NO. 1 CONNECTIONS AND WATER SALES VOLUME AND REVENUE

Fiscal Years 2013-14 through 2017-18

2013-14 2014-15 2015-16 2016-17 2017-18 (5)

Potable

Residential - Volume in ccf (1) 8,050,828 7,248,930 5,832,549 6,266,299 6,987,742

- Volume in acre-feet 18,482 16,641 13,390 14,385 16,042

Residential - Connections 44,826 44,941 45,038 45,086 45,318

Residential - Sales Revenue (2) $ 26,984 $ 24,266 $ 19,287 $ 24,512 $ 29,507

All Others - Volume in ccf 5,669,291 5,495,495 4,642,741 4,984,032 5,682,216


All Others – Connections 4,322 4,367 4,387 4,416 4,587

All Others - Sales Revenue (2) $ 19,872 $ 19,759 $ 17,957 $ 21,754 $ 24,707

Recycled (3)

Recycled - Volume in ccf 2,068,330 1,841,956 1,591,677 1,625,768 1,661,454


Recycled – Connections 702 705 708 721 720

Recycled - Sales Revenue (2) $ 9,245 $ 8,025 $ 7,637 $ 8,868 $ 9,177

Total

Total Volume in ccf 15,788,449 14,586,381 12,066,967 12,876,099 14,331,412

Total Volume in acre-feet 36,245 33,484 27,702 29,559 32,900

Total Connections 49,850 50,013 50,133 50,223 50,625

Total Sales Revenue (2) $ 56,101 $ 52,050 $ 44,881 $ 55,134 $ 63,391

Fixed Charges (2) (4) $ 25,186 $ 27,085 $ 29,059 $ 28,586 $ 28,915

Total Revenue (2) $ 81,287 $ 79,135 $ 73,940 $ 83,720 $ 92,306 ____________________________________

(1) ccf refers to a measurement of 100 cubic feet (1 cubic foot = 7.48 gallons).

(2) Dollars in thousands.

(3) The District receives a credit of $185 per acre-foot and $200 per acre-foot from MWD and CWA, respectively for every acre-foot of recycled water sold.

(4) Includes fixed charges, energy charges and delinquency collections on both potable and recycled water sales.

(5) Unaudited.


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Table No. 2 shows the 10 largest water users for Fiscal Year 2017-18.

TABLE NO. 2 TEN LARGEST CUSTOMERS BY WATER SALES REVENUES (1)

Year ended June 30, 2018

Customer

Usage in CCF (2)

% of Water System

Consumption

Water Sales

Revenues

% of Total Water Sales

Revenues City of Chula Vista 658,655 4.7% $ 4,220,009 4.6%

Eastlake III Community 217,434 1.5 1,230,790 1.3

State of California 231,976 1.7 1,127,462 1.2

County of San Diego 167,318 1.2 981,647 1.1

Sweetwater Union High School District 137,010 1.0 853,335 0.9

Chula Vista Elementary School District 117,774 0.8 817,826 0.9

Homefed Otay Land II, LLC 70,346 0.5 684,441 0.7

Eastlake Country Club 152,552 1.1 569,602 0.6

Winding Walk Master Association 71,576 0.5 438,215 0.5

Eastlake I HOA 66,871 0.5 429,266 0.5

Total $1,891,512 13.5% $11,352,593 12.3% ____________________________________

(1) Includes both potable and recycled water sales and excludes fixed charges.

(2) Hundred cubic feet.


Water Charges

Water Service Rates. The District held a public hearing on October 4, 2017 and approved a five-year schedule of rates through 2022, which included authorization to raise rates by up to 10 percent per year during the five year period for costs other than CWA, City of San Diego and MWD rate increases. Authorization was also approved to pass through all CWA, City of San Diego and MWD increases without limitation during the five year period. There was no rate increase as of January 1, 2018. The adopted rate increase effective January 1, 2019 is 3.2%

The Board of Directors is expected to continue to take action each year through 2022 to set rates in accordance with the October 4, 2017 rate action. However, there can be no assurance that rates will be increased as contemplated herein. All rate increases are subject to the procedural and substantive provisions of Proposition 218. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” below.

Based on its internal rate model updated in June 2018 and the need to fund the CIP, the District anticipates that it will need to increase its rates by approximately 3.2 percent in each of the next four years.

The water rate structure uses both fixed and variable charges. All potable water customer classes are charged the two “monthly fixed charges” based on the meter size as shown in Table No. 3. Recycled customers do not receive water from MWD or CWA and therefore do not pay the pass-through charge. The commodity or consumption rates as outlined in Table No. 4 are variable in that they are charges per unit. The District also uses an inclining block rate structure for the commodity rate for residential uses.

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TABLE NO. 3 MONTHLY FIXED CHARGES

As of January 1, 2018

Meter Size Residential

Multi-Residential

Business/ Publicly Owned

Irrigation/ Commercial Agriculture

Recycled Irrigation

Recycled Commercial

MWD/CWA Passthrough (1)

Fire Service

3/4” $17.38 $ 38.21 $ 35.99 $ 30.40 $ 31.11 $ 36.85 $ 15.45

1” 24.56 53.97 50.83 42.93 43.94 52.04 28.68

1 1/2” 42.49 93.37 87.95 74.28 76.04 90.06 64.85

2” 64.00 140.61 132.45 111.85 114.50 135.63 110.30

3” N/A 266.66 251.19 212.13 217.15 257.21 234.60

4” N/A 408.50 384.79 324.98 332.67 394.01 375.68

6” N/A 802.55 755.97 638.44 653.54 774.07 769.02

8” N/A 1,275.34 1,201.32 1,014.56 1,038.56 1,230.08 1,241.89

10” N/A 1,826.91 1,720.86 1,453.33 1,487.72 1,762.08 1,787.55

Fire Service:

≤ 3” $20.77

≥ 4” 27.98 ____________________________________

(1) Potable only.


TABLE NO. 4 COMMODITY RATES As of January 1, 2018

Units Residential Units Multi-

Residential 1-10 $3.05 0-4 $2.85

11-22 5.44 5-9 5.17

23 + 7.03 10+ 6.35

Units

Business/ Publicly Owned

Irrigation/ Commercial Agriculture

Recycled Irrigation

Recycled Commercial

All $3.61 $5.27 $4.26 $3.01 ____________________________________


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As previously noted, the District has projected that future rate increases will be necessary to implement the current six-year CIP. Additionally, the rates, charges and fees may be increased each year to pass-through additional actual cost increases imposed by the City of San Diego, CWA or MWD if such increases are greater than already factored in to the District’s rates.

The average residential customer uses 13 units of water per month. One unit of water is equal to 100 cubic feet of water (one cubic foot of water equals 7.48 gallons). Customers outside the District and tanker trucks are charged two times the commodity rate.

Table No. 5 compares average residential water rates charged by the District with surrounding cities and other water agencies in San Diego County.

TABLE NO. 5 COMPARISON OF

AVERAGE RESIDENTIAL WATER RATES Based on Rates to be Effective as of January 1, 2019

City/Water Agency Average Rates (1) (2) Lakeside $ 67.41 San Dieguito (3) 76.30 Santa Fe (3) 78.83 Otay Water District 84.25 Oceanside 85.54 Carlsbad 86.83 Poway (3) 88.88 Sweetwater 89.88 Vallecitos 89.88 Helix 92.30 Olivenhain 92.92 San Diego 96.79 Del Mar 97.87 Vista 98.60 Escondido 108.08 Rincon 111.16 Valley Center 111.85 Yuima 113.06 Rainbow (3) 115.24 Fallbrook 117.00 Ramona 119.56 Padre Dam (3) 131.32 ____________________________________

(1) These amounts reflect the charges on the water bills of various agencies and cities. Availability fees and general obligation debt are not included in this total.

(2) Average rates based on assumed 13 units (hcf) water use and 3/4” meter size.

(3) At the time of the survey, September 2018, the Fiscal Year 2019 rate was unavailable. The estimated increase is equal to the average of all Districts’ known rate increases.


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Delinquencies. Accounts receivable that have not been paid in over 60 days represent less than 0.21 percent of the District’s annual water sales for the last two Fiscal Years. Accounts receivable between 30 to 60 days delinquent in payment have averaged 0.84 percent of the District’s annual water sales for the last two Fiscal Years. In the last three Fiscal Years, the District has written off less than $80,500 a year in uncollectible accounts. The collection process includes automatic dialers, making it possible to address collections of smaller balances. The District has improved the collection process related to properties in foreclosure by collecting deposits and locking all vacant properties. The District has also provided convenient payment options by introducing payments by telephone and via the Internet, electronic bill presentation, recurring payments via credit card, and the ability to make water payments at select retailers using the same electronic network used by the District’s bank. The District has increased the availability of account information by introducing 24/7 Interactive Voice Response. In addition, with the improvements in online banking systems, the turnaround time on payment processing is only 2 days. These improvements have all assisted the District in better managing its accounts receivable. The District continues to be focused on finding new ways to assist customers in managing their accounts. Recently, the District expanded its delinquent notification process to include an additional bill for closed accounts with outstanding balances and an email and auto dial notification for closed accounts one week prior to being sent to an outside collection agency.

Other Charges. For all connections over a 450 foot elevation, the District charges an energy charge of $0.056 per 100 feet of elevation over 450 feet.

Capacity Fees and Meter Fees. The District charges capacity fees to connect to the Water System. As of July 1, 2018, the capacity fees for a ¾-inch meter are $7,065 plus a new water supply charge of $825 for a single family residential connection, increased quarterly according to the Engineering News-Record index. The District also charges a meter fee for the materials and installation cost of a meter. The meter fees range from $235 for a single family residence to $11,841 for a 10” meter.

Availability Fees. The District levies and collects annual standby availability charges. Current legislation provides that any availability charge in excess of $10 per acre shall be used only for the purpose of the improvement district for which it was assessed. Therefore, availability fees shown in “Availability/Annexation Fees” Table No. 13 include only the first $10 of availability fees.

Annexation Fees. When service is requested outside the boundaries of the District, the land to be serviced is annexed and an annexation fee is charged by the District. Current annexation fees are $2,089 for single family residential connections and are adjusted quarterly according to the Engineering News-Record index.

Taxes

The County levies a 1% ad valorem tax on behalf of all taxing agencies in the County, including the District. For Fiscal Year 2017-18, the District’s share of such property tax was $3.8 million, representing an increase of approximately $350,000 from amounts received in Fiscal Year 2016-17. Such taxes are a source of payment for the Installment Payments due under the 2010 Installment Purchase Agreement and the 2018 Installment Purchase Agreement, and debt service on the 2013 Bonds and the 2016 Bonds. See “SOURCES OF PAYMENT FOR THE BONDS.” All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, non-profit hospitals and charitable institutions.

The taxes collected are allocated to taxing agencies within San Diego County, including the District, on the basis of a formula established by State law enacted in 1979 and modified from time to time. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of “situs” growth in assessed value (due to new construction, change of ownership, or a 2% inflation allowance allowed under Article XIIIA of the State Constitution) prorated among the jurisdictions which serve the tax rate area within which the growth occurs. Tax rate areas are groups of parcels which are taxed by the same taxing entities. Cities, counties, special districts and school districts share the growth of “base”

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revenues from each tax rate area. Assessed valuation growth is cumulative, i.e., each year’s growth in property value becomes part of each District’s allocation in the following year.

Historical assessed valuations for the District may be found in the District’s Comprehensive Annual Financial Report, attached hereto as “APPENDIX B.” During the economic recession between 2008-09 and 2012-13, property values in the District declined by approximately 15 percent. The District’s assessed value has had moderate increases in recent years, with the Fiscal Year 2018-19 assessed value of $30.77 billion 4.7% higher than the 2017-18 assessed value of $29.4 billion.

A portion of the District’s tax base is within a redevelopment plan area. The availability of property tax revenue from growth in the tax base was affected by the establishment of redevelopment agencies which, under certain circumstances, were entitled to revenues resulting from the increase in certain property values. However, with the dissolution of redevelopment agencies Statewide as of February 1, 2012, the District receives additional property tax. In Fiscal Year 2017-18 the District received $26,568 in redevelopment related property tax. Litigation is pending against the County and certain taxing agencies relating to the calculation and distribution of redevelopment tax sharing amounts between school districts, college districts and other taxing agencies such as cities, the County and special districts. The District expects that any reallocation of the District’s share of redevelopment property tax sharing as a result of the litigation will not be material.

California law exempts $7,000 of the assessed valuation of an owner-occupied dwelling but this exemption does not result in any loss of revenue to local agencies since an amount equivalent to the taxes which would have been payable on such exempt values is made up by the State.

Under AB 454 (Statutes of 1987, Chapter 921), the State reports to each county auditor-controller only the county-wide unitary taxable value of State-assessed utility property, without an indication of the distribution of the value among tax rate areas. The provisions of AB 454 apply to all State-assessed property except railroads and non-unitary properties, and do not constitute an elimination of a revision of the method of assessing utilities by the State Board of Equalization. AB 454 allows generally valuation growth or decline of State-assessed unitary property to be shared by all jurisdictions within a county.

From time to time, legislation has been considered as part of the State budget to shift the share of the 1% ad valorem property tax collected by counties from special districts to school districts or other governmental entities (the “ERAF Shift”). While legislation enacted in connection with the Fiscal Year 1992-93 State budget shifted approximately 35 percent of many special districts’ shares of the countywide 1% ad valorem tax, the share of the countywide 1% ad valorem tax pledged to debt service by special districts was exempted. None of the State budgets enacted since Fiscal Year 1992-93 have permanently reallocated additional portions of the special districts’ shares of the countywide 1% ad valorem tax, although there have been temporary shifts as well as deferrals.

However, in 2009, the California legislature approved amendments to the 2009-10 Budget to close its anticipated $26.3 billion budget shortfall. The approved amendments included borrowing from local governments by withholding of the equivalent of 8 percent of Fiscal Year 2008-09 property related tax revenues from cities’, counties’ and special districts’ property tax collections under provisions of Proposition 1A (approved by the voters in 2004), which the State was required to repay with interest within three years. The first (and to date, only) shift occurred in Fiscal Year 2009-10. Fiscal Year 2012-13 was the first year that another shift was allowable, but the State has not implemented another borrowing yet.

There can be no assurance that the share of the 1% ad valorem property tax the District currently receives will not be reduced further or deferred or delayed pursuant to State legislation enacted in the future to address future State budget deficits. See Table Nos. 12 and 13 for historic and projected receipts of Taxes.

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Personnel

The District has 137 full-time positions budgeted for Fiscal Year 2018-19. The OWD Employee Association represents 100 of these full-time employees as a collective bargaining unit. The District has not experienced any strikes and continues to have positive labor relations, which includes a negotiated multi-year Collective Bargaining Agreement. This agreement, the Memorandum of Understanding (“MOU”), with amendments, is in effect from July 1, 2014 to June 30, 2019.

Retirement Program

This caption contains certain information relating to the California Public Employees Retirement System (“CalPERS”). The information is primarily derived from information produced by CalPERS, its independent accountants and its actuaries. The District has not independently verified the information provided by CalPERS and makes no representations nor expresses any opinion as to the accuracy of the information provided by CalPERS.

The comprehensive annual financial reports of CalPERS are available on its Internet website at www.calpers.ca.gov. The CalPERS website also contains CalPERS’ most recent actuarial valuation reports and other information concerning benefits and other matters. The textual reference to such Internet website is provided for convenience only. None of the information on such Internet website is incorporated by reference herein. The District cannot guarantee the accuracy of such information. Actuarial assessments are “forward-looking” statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future.

Plan Description. The District provides retirement benefits, disability benefits, periodic cost-of-living adjustments, and death benefits to plan members and beneficiaries (the “Plan”). The Plan is part of the CalPERS, an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State. Benefit provisions are established by State statute and District Resolution.

California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (the “Reform Act” or “PEPRA”), made changes to CalPERS Plans, most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For non-safety CalPERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67.

The Reform Act also: (i) requires all new participants enrolled in CalPERS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary to a maximum of 8% of salary, (ii) requires CalPERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off.

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Benefit Tiers. Due to PEPRA, the District has one benefit tier for employees hired prior to January 1, 2013 (“Tier 1”) and one for employees subject to PEPRA (“PEPRA Tier”). Ultimately, the Reform Act is expected to reduce the District’s long-term pension obligation as existing employees retire and new employees are hired to replace them.

The Plans’ provisions and benefits in effect at June 30, 2018, are summarized as follows:

Tier 1 PEPRA Tier

Benefit Formula 2.7% at 55 2% at 62 Benefit Vesting Schedule 5 years service 5 years service Benefit Payments Monthly for life Monthly for life Retirement Age 50 - 55 52 - 67 Monthly Benefits, as a % of Eligible Compensation 2.0% to 2.7% 1.0% to 2.5% Required Employee Contribution Rates 8% 6.25% Required Employer Contribution Rates for 2018-19 (1) 11.150% 11.150% ____________________________________

(1) Normal cost only, excludes funding of the unfunded actuarial liability which is calculated as a fixed amount and no longer as a percent of payroll. See Table No. 7 below.

Funding Policy. Active members in Tier 1 are required to contribute 8% of their annual covered salary and employees in the PEPRA Tier are required to contribute 6.25% of their annual covered salary.

Actuarial Methods and Assumptions Used to Determine Total Pension Liability. The total pension liabilities in the June 30, 2017 actuarial valuation were determined using the following actuarial assumptions:

Valuation Date June 30, 2016Measurement Date June 30, 2017Actuarial Cost Method Entry-Age Normal Cost MethodActuarial Assumptions: Discount Rate 7.15% Inflation 2.75% Payroll Growth 3.0% Projected Salary Increase 3.3% - 14.2% (1)

Investment Rate of Return 7.5% (2)

____________________________________

(1) Depending on age, service and type of employment.

(2) Net of pension plan investment expenses, including inflation.

The underlying mortality assumptions and all other actuarial assumptions used in the June 30, 2017 valuation were based on the results of a January 2014 actuarial experience study for the period 1997 to 2011. Further details of the Experience Study can be found on the CalPERS website.

Changes in Actuarial Assumptions. Changes in Actuarial Assumptions generally take two years to affect the District’s contribution rate due to the time required by CalPERS to calculate and implement the change. For example, a change made effective July 1, 2017 will be reflected in the District’s contribution rates (normal cost or unfunded liability) for Fiscal Year 2019-20.

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On March 14, 2012, the CalPERS Board of Administration approved a change in the inflation assumption used in the actuarial assumptions used to determine employer contribution rates. This reduced the assumed investment return from 7.75% to 7.50%, reduced the long-term payroll growth assumption from 3.25% to 3.0%, and adjusted the inflation component of individual salary scales from 3% to 2.75%.

On April 17, 2013, the CalPERS Board of Administration approved a plan: (i) to replace the current 15-year asset-smoothing policy with a 5-year direct-rate smoothing process; and (ii) to replace the current 30-year rolling amortization of unfunded liabilities with a 30-year fixed amortization period. CalPERS’ Chief Actuary stated that the revised approach provides a single measure of funded status and unfunded liabilities, less rate volatility in extreme years, a faster path to full funding and more transparency to employers about future contribution rates. These changes accelerate the repayment of unfunded liabilities (including CalPERS’ Fiscal Year 2009 market losses) of the District’s Plan in the near term. These changes are reflected beginning with the June 30, 2014 actuarial valuation, which affected contribution rates for Fiscal Year 2015-16 and thereafter.

On February 19, 2014, the CalPERS Board of Administration approved changes to actuarial assumptions and methods based upon a recently completed experience study. These changes include: moving from using smoothing of the market value of assets to obtain the actuarial value of assets to direct smoothing of employer contribution rates; increased life expectancy; changes to retirement ages (earlier for some groups and later for others); lower rates of disability retirement; and other changes.

On December 21, 2016, the CalPERS Board of Administration approved an incremental lowering of the discount rate from 7.5% to 7.0% over the following three Fiscal Years. For Fiscal Years 2017-18, 2018-19 and 2019-20, the Board of Administration approved discount rates of 7.375%, 7.25% and 7.0%, respectively. While the full impact of the discount rate changes on the District is not yet reflected in the District’s contribution rates, CalPERS expected such changes to increase the District’s employer rates by approximately 2% of normal cost as a percent of payroll. CalPERS also expected the discount rate changes to result in increased unfunded accrued liability payments for employers, and estimated that the District will see such payments increase by 30% to 40%. Based on the revised discount rates, over the next seven years the District expected its annual payments to double compared to the amount paid in Fiscal Year 2017-18. The District paid $30,000,000 to CalPERS in August 2018 to reduce its unfunded liability and future contribution rate increases. The District expects that the CalPERS contribution rates will stabilize as a result of the contribution toward the unfunded liability.

Contribution Rates. The contribution requirements of Plan members and the District are established by CalPERS.

The District’s percentage of payroll for CalPERS payments for the Tier 1 employee Plan for Fiscal Years 2013-14 through 2016-17 are shown in the table below. These rates do not include the employees’ contribution rates.

TABLE NO. 6 EMPLOYER RETIREMENT CONTRIBUTION RATES

Normal Unfunded Actuarial Total Fiscal Year Cost Liability (UAL) Rate Rate

2013-14 10.250% 15.185% 25.435% 2014-15 9.715 19.437 29.152 2015-16 10.408 20.404 30.812 2016-17 10.748 21.883 32.631

____________________________________

Source: California Public Employees’ Retirement System.

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CalPERS modified the calculation of the contribution rates beginning in Fiscal Year 2017-18. They now represent only the employer’s normal cost as a percentage of payroll, and include a dollar amount for the amortization of the unfunded actuarial liability (“UAL”). Shown in Table No. 7 are the June 30, 2017 CalPERS projections of the normal cost and amortization of the UAL prior to the District’s early payment of $31.8 million in August 2018, and the District’s projected new estimated UAL payments following the payment. For comparison, the normal cost for 2016-17 was 10.748% of payroll.

TABLE NO. 7 ACTUAL AND PROJECTED EMPLOYER RETIREMENT CONTRIBUTIONS

Fiscal Year

Normal

Cost

Original Amortization of

UAL (1)

Projected Amortization of

UAL 2017-18 10.692% $3,190,518 $3,190,518 2018-19 11.150 3,577,723 3,577,723 2019-20 11.545 4,005,195 897,000 (2) 2020-21 12.300 4,317,000 1,287,000 (3) 2021-22 12.300 4,691,000 1,430,000 (3) 2022-23 12.300 5,021,000 1,501,000 (3)

____________________________________

(1) Projected by CalPERS based on various assumptions as of July 2018.

(2) Provided by CalPERS to reflect payment of $31.8 million in August 2018 and a future discount rate of 7.0%.

(3) Projected by the District to reflect payment of $31.8 million to CalPERS in August 2018.


Annual Pension Costs. A five-year history of the District’s required annual pension costs is shown in the table below. The required contribution was determined as part of an annual actuarial valuation. The most recent actuarial assumptions are described above under the caption “Actuarial Methods and Assumptions Used to Determine Total Pension Liability.”

TABLE NO. 8 FIVE-YEAR TREND INFORMATION FOR ANNUAL PENSION COSTS

COMBINED EMPLOYER AND EMPLOYEE COSTS

Fiscal Year

Annual Pension

Cost (APC) 2013-14 $3,294,341 2014-15 3,525,338 2015-16 3,870,544

2016-17 4,157,354

2017-18 4,310,436

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Pension Liabilities. The District’s net pension liability for the Plan is measured as the total pension liability, less the pension plan’s fiduciary net position. The net pension liability of the Plan was measured as of June 30, 2017, using the annual actuarial valuation as of June 30, 2016 rolled forward to June 30, 2017 using standard update procedures. The District’s changes in net pension liability for the Plan between June 30, 2016 and 2017 was as follows:

Increase (Decrease)

Total

Pension Liability

Plan Fiduciary

Net Position

Net Pension

Liability/(Asset) Balance at: 6/30/2016 $119,095,572 $73,846,128 $45,249,444 Changes Recognized for the Measurement Period: Service Cost 2,556,902 - 2,556,902 Interest on Total Pension Liability 8,836,284 - 8,836,284 Changes of Benefit Terms - - - Changes of Assumptions 7,308,486 - 7,308,486 Differences Between Actual and Expected Experience (1,208,593) - (1,208,593) Contribution – Employer - 4,105,810 (4,105,810) Contribution – Employee - 1,014,329 (1,014,329) Net Investment Income - 8,149,097 (8,149,097) Benefit Payments, Including Refunds of Employee Contributions (5,779,040) (5,779,040) - Administrative Expense - (109,029) 109,029 Net Changes during 2016-17 11,714,039 7,381,167 4,332,872 Balance at: 6/30/2017 $130,809,611 $81,227,295 $49,582,316

These figures do not reflect the $31.8 million payment by the District to CalPERS in August 2018.

Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following presents the District’s net pension liability as of June 30, 2017, calculated by CalPERS using the discount rate of 7.25%, as well as what the District’s net pension liability would be if it were calculated using a discount rate of 6.0%, 7.0% and 8.0%.

Discount Rate

Unfunded Accrued Liability (UAL)

7.25% $47,725,131 6.0 68,916,533 7.0 51,277,763 8.0 36,636,951

____________________________________


See Note 7 of the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the Plan. These figures also do not reflect the District’s $31.8 million payment towards the UAL in August 2018.

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Other Post-Employment Benefits

Plan Description. The District’s defined benefit post-employment healthcare plan (“DPHP”) provides medical benefits to eligible retired District employees and beneficiaries. DPHP is part of the Public Agency portion of the California Employers’ Retiree Benefit Trust Fund (“CERBT”), an agent multiple employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the CalPERS’ annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California 95814.

Funding Policy. The contribution requirements of plan members and the District are established and may be amended by the Board of Directors. Effective January 1, 2013, represented employees hired prior to January 1, 2013 or hired on or after January 1, 2013 from another public agency that has reciprocity without having a break in service of more than six months, contribute .75% of covered salaries. In addition, unrepresented and represented employees hired on or after January 1, 2013, and do not have reciprocity from another public agency, contribute 1.75% and 2.5% of covered salaries, respectively. DPHP members receiving benefits contribute based on their selected plan options of EPO, HMO or PPO and whether they are outside the State of California. Contributions by plan members range from $0 to $165 per month for coverage to age 65, and from $0 to $202 per month, respectively, thereafter.

Annual Other Post-Employment Benefits (OPEB) Cost and Net OPEB Obligation/Asset. The District’s annual OPEB cost (expense) is calculated based on the annual determined contribution (“ADC”) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ADC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost. Any unfunded actuarial liability (or funding excess) is amortized over a period not to exceed thirty years. The current ADC rate of annual covered payroll is 8.9%.

The following table shows the components of the District’s annual OPEB cost for the year ended June 30, 2017, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation/asset:

Annual Required Contribution (ADC) $ 1,245,000 Interest on Net OPEB (Asset) (907,667) Adjustment to ARC 911,000 Annual OPEB Cost 1,248,333 Contributions Made 2,284,420 Increase in Net OPEB (Asset) (1,036,087) Net OPEB (Asset) - Beginning of Year (12,519,549) Net OPEB (Asset) - End of Year $(13,555,636)

In addition to the ADC, the District has contributed cash benefit payments outside the trust (healthcare premium payments for retirees to Special District Risk Management Authority (“SDRMA”), which are included in the contributions shown above.

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The District’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation (asset) for the Fiscal Years ending June 30, 2017, 2016 and 2015 were as follows:

TREND INFORMATION FOR CERBT

Fiscal Year Annual

OPEB Cost

% of OPEB Cost Contributed

Net OPEB (Asset) (1)

2016-17 $1,248,333 183% $(13,555,636) 2015-16 1,217,252 186 (12,519,549) 2014-15 1,373,063 179 (11,472,386)

____________________________________

(1) Represents funds on deposit with the CERBT administrator, CalPERS.


Funded Status and Funding Progress. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress presents information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the benefits.

Actuarial Valuation

Date

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued

Liability (AAL)

Unfunded AAL

(UAAL)

Funded Ratio

Covered Payroll

UAAL as a

Percent of Covered Payroll

6/30/2017 $21,739,035 $26,449,527 $ 4,710,492 82.20% $12,513,000 37.60% 6/30/2015 16,920,000 23,689,000 6,769,000 71.42 13,080,000 51.75 6/30/2013 11,831,000 22,891,000 11,060,000 51.68 11,969,000 92.41 6/30/2011 7,893,000 18,289,000 10,396,000 43.16 12,429,000 83.64 6/30/2009 6,273,000 10,070,000 3,797,000 62.29 11,878,000 31.97

____________________________________



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Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial assets, consistent with the long-term perspective of the calculations.

The following is a summary of the actuarial assumptions and methods:

Valuation Date: June 30, 2017 Actuarial Cost Method: Entry Age Normal Cost Method Amortization Method: Level Percent of Payroll Remaining Amortization Period: 20 Years Fixed (Closed) Period as of the Valuation Date Asset Valuation Method: 5-Year Smoothed Market Actuarial Assumptions: Investment Rate of Return: 7.00% (Net of Administrative Expenses) Projected Salary Increase: 3.00% Inflation: 2.75% Individual Salary Growth: CalPERS 2007-2011 Experience Study Healthcare Cost Trend Rate: Medical: 10% per annum graded down in approximately

one-half percent increments to an ultimate rate of 5%. Dental: 4% per annum.

See Note 8 in the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the DPHP.

Insurance

General Liability and Property Damage

The District is exposed to various risks of loss related to torts, theft, damage and destruction of assets, errors and omissions, and natural disasters. Beginning in July 2003, the District began participation in a risk financing pool under California Government Code Section 6500 et seq., through SDRMA. Coverages through SDRMA are as follows: property coverage (excluding earthquake) - replacement cost to a combined total of $1 billion per occurrence for scheduled property; replacement cost to $100 million per occurrence for boiler and machinery; $500,000 per occurrence for personal liability coverage for board members; $1 million per loss for employee dishonesty coverage; $10 million per occurrence for each of the following types of coverage - auto liability, public officials errors and omissions, employment practices liability and general liability; and $2 million cyber security coverage.

Separate financial statements for SDRMA may be obtained at: Special District Risk Management Authority, 1112 I Street, Suite 300, Sacramento, California 95814.

Workers’ Compensation

Through SDRMA, the District is insured up to the statutory limit per occurrence for Workers’ Compensation and $5 million in Employer’s Liability.

Health Insurance

The District provides health insurance through SDRMA covering all of its employees, retirees, and other dependents. SDRMA is a self-funded pooled medical program administered in conjunction with the California State Association of Counties.

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District Reserves and Investment Policy

As of June 30, 2018, the District had approximately $89.0 million in cash and investments (combined Water System and wastewater operations), of which the Board had designated $24.5 million for capital projects and reserved $31.8 million for the payment toward the UAL. The District’s reserves are not pledged to and do not secure the District’s obligation to pay the 2018 Installment Payments.

In accordance with State of California law, the District Board of Directors has approved an investment policy (the “Investment Policy”) which complies with Sections 53601 through 53630 of the Government Code of the State of California providing legal authorization for the investment or deposit of funds of local agencies. All investments of the District conform to the restrictions of those laws. The District’s investments by category and their respective market value and book value as of June 30, 2018 are set forth in Table 9 below. For additional information relating to the District’s investments, see “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS,” Note 2.

TABLE NO. 9 SUMMARY OF INVESTMENTS

As of June 30, 2018

Investments Market Value Book Value % of Portfolio Federal Agency Issues – Callable $64,967,885 $65,624,952 73.70% Local Agency Investment Fund (LAIF) 11,204,070 11,225,096 12.61 San Diego County Pool 12,131,000 12,194,528 13.69 $88,302,955 $89,044,577 100.00% ____________________________________


The Investment Policy may be changed at any time at the discretion of the District (subject to the State law provisions relating to authorized investments) and as the California Government Code is amended. Any exception to the Investment Policy must, however, be formally approved by the Board of Directors of the District. There can be no assurance the State law or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such State law or the Investment Policy, or that the objectives of the District with respect to investments will not change.


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Outstanding Indebtedness of the District

The District had outstanding indebtedness as of September 1, 2018 as shown in Table No. 10. The District has not issued any additional debt since September 1, 2018.

TABLE NO. 10 OTAY WATER DISTRICT

OUTSTANDING INDEBTEDNESS As of September 1, 2018

Original Amount Final

Debt Issue Issue Outstanding Maturity

(1) 1996 Certificates of Participation $15,400,000 $ 6,900,000 2026

(2) 2009 General Obligation Refunding Bonds 7,780,000 2,755,000 2023

(3) 2010 Water Revenue Bonds Series A 13,840,000 6,905,000 2025

(3) 2010 Water Revenue Bonds Series B 36,355,000 36,355,000 2041

(4) 2013 Water Revenue Refunding Bonds 7,735,000 3,875,000 2023

(4) 2016 Water Revenue Refunding Bonds 33,385,000 30,125,000 2036 _______________________________________

(1) To be prepaid with a portion of the proceeds of the Bonds.

(2) Voters within Improvement District No. 27 of the District authorized $100 million general obligation bonds in 1989. The District issued $11,500,000 general obligation bonds in 1992 and refinanced the bonds in 1998 and again in 2009. Annual debt service is approximately $764,000. The District also has approximately $29 million of issued general obligation bonds authorized between 1960 and 1978 for various Improvement Districts throughout the District, but unissued. The general obligation bonds are payable solely from ad valorem property tax revenues, which are not a part of Taxes which secure the installment payments relating to Existing Parity Obligations and the 2018 Installment Purchase Agreement and the debt service on the 2013 Bonds and 2016 Bonds. The District has no current plans to issue any of the authorized but unissued general obligation bonds.

(3) The 2010 Bonds were sold by the Otay Water District Financing Authority to provide funds for the construction of water storage and transmission facilities. The 2010 Bonds are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with other Existing Parity Obligations and the 2018 Installment Purchase Agreement.

(4) The District issued the 2013 Bonds and 2016 Bonds to refinance its previously issued 2004 Refunding Certificates of Participation and 2007 Certificates of Participation respectively. The 2013 Bonds and 2016 Bonds are payable from Net Revenues and Taxes on a parity with the other Existing Parity Obligations and the 2018 Installment Purchase Agreement.


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Historical Operating Results

The following table summarizes the Statement of Net Position included in the District’s audited financial statements for the last four fiscal years with estimated results for the Fiscal Year ended June 30, 2018. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety.

The District accounts for moneys received and expenses paid in accordance with generally accepted accounting principles applicable to governmental agencies such as the District (“GAAP”). In certain cases, GAAP requires or permits moneys collected in one Fiscal Year to be recognized as revenue in a subsequent Fiscal Year and requires or permits expenses paid or incurred in one Fiscal Year to be recognized as expenses in a subsequent Fiscal Year. See “APPENDIX B.” Except as otherwise expressly noted herein, all financial information derived from the District’s audited financial statements reflects the application of GAAP.

The Governmental Accounting Standards Board (“GASB”) has issued various statements relating to the reporting of pension and other post-retirement benefit liabilities and expense, and most recently, new accounting and financial reporting requirements for OPEB plans. The required reporting of net pension liability was incorporated into the District’s financial statements for the Fiscal Year ending June 30, 2015 and the required reporting of net OPEB liability in accordance with GASB Statement No. 75 will be incorporated into the District’s financial statements for the Fiscal Year ending June 30, 2018. GASB Statement No. 75 is effective for fiscal years beginning after June 15, 2017 and replaces GASB Statement No. 45.


37


STATEMENT OF NET POSITION For the Fiscal Years Ended June 30

Unaudited

2014 2015 2016 2017 2018

ASSETS

Current Assets:

Cash and Cash Equivalents $ 30,493,474 $ 23,168,511 $ 21,122,543 $ 17,427,875 $24,147,997

Restricted Cash and Cash Equivalents 116,639 47,083 8,208 50,204 80,477

Investments 27,631,622 35,888,511 36,806,704 38,401,158 30,866,180

Board Designated Investments 21,605,368 22,395,347 23,876,678 24,743,895 29,879,617

Restricted Investments 4,564,972 4,532,725 4,394,093 4,256,520 4,166,548

Accounts Receivable, Net 12,879,121 9,987,050 11,116,393 12,372,840 12,109,378

Accrued Interest Receivable 83,679 97,291 157,620 216,011 295,947

Taxes and Availability Charges Receivable, Net 333,589 321,178 341,651 222,092 215,704

Restricted Taxes and Availability Charges Receivable, Net

41,091

31,848

32,173

34,375

27,480

Inventories 775,007 807,008 722,225 737,185 822,737

Prepaid Items and Other Receivables 1,047,708 988,882 1,309,335 962,019 1,018,820

Total Current Assets 99,572,270 98,265,434 99,887,623 99,424,174 103,630,885

Non-current Assets:

Net OPEB Asset 10,385,336 11,472,386 12,519,549 13,555,636 - (2)

Capital Assets:

Land 13,714,963 13,714,963 14,085,251 14,389,187 14,406,778

Construction in Progress 11,642,506 15,106,336 12,541,701 14,201,511 17,618,059

Capital Assets, Net of Accumulated Depreciation 441,293,934 430,370,095 427,341,594 421,606,252 418,825,726

Total Capital Assets, Net of Depreciation 466,651,403 459,191,394 453,968,546 450,196,950 450,850,563

Total Non-Current Assets 477,036,739 470,663,780 466,488,095 463,752,586 450,850,563

Total Assets 576,609,009 568,929,214 566,375,718 563,176,760 554,481,448

DEFERRED OUTFLOWS OF RESOURCES

Deferred Amount on Refunding 78,118 - 1,339,997 191,428 -

Deferred Actuarial Pension Costs - 3,575,595 7,001,426 10,681,129 10,186,229

Deferred Actuarial OPEB Costs - - - - 2,202,004

Total Deferred Outflows of Resources $ 78,118 $ 3,575,595 $ 8,341,423 $ 10,872,557 $ 12,388,233

Continued on next page.

38


STATEMENT OF NET POSITION For the Fiscal Years Ended June 30

Continued from previous page. Unaudited 2014 2015 2016 2017 2018

LIABILITIES

Current Liabilities:

Current Maturities of Long-term Debt $ 3,495,000 $ 3,690,000 $ 3,920,000 $ 3,820,000 $ 4,040,000

Accounts Payable 11,906,026 9,779,477 11,497,728 11,544,414 15,437,565

Accrued Payroll Liabilities 3,054,520 3,335,149 574,037 785,496 694,859

Other Accrued Liabilities 3,397,500 3,642,511 3,813,262 3,771,503 4,089,640

Customer and Developer Deposits 2,418,754 2,227,173 3,313,631 3,451,690 3,340,010

Accrued Interest 1,564,992 1,540,122 1,197,113 1,417,440 1,380,446

Unearned Revenues - - 421,800 305,560 233,251

Liabilities Payable From Restricted Assets:

Restricted Accrued Interest 70,804 65,304 59,604 53,267 45,200

Total Current Liabilities 25,907,596 24,279,736 24,797,175 25,149,370 29,260,971 ,971Non-current Liabilities:

Long-term Debt:

General Obligation Bonds 5,283,563 4,697,208 4,095,853 3,474,498 2,823,143

Certificates of Participation 44,980,314 43,355,103 8,191,803 7,592,548 6,893,293

Revenue Bonds 55,058,490 53,402,993 87,483,686 84,519,618 81,465,550

Net Pension Liability - 38,723,345 40,143,128 45,249,444 49,582,316

Net OPEB Liability - - - - 4,710,492

Other Non-current Liabilities 649,344 656,158 3,040,648 3,074,313 3,117,705

Total Non-Current Liabilities 105,971,711 140,834,807 142,955,118 143,910,421 148,592,499

Total Liabilities 131,879,307 165,114,543 167,752,293 169,059,791 177,853,47

DEFERRED INFLOWS OF RESOURCES

Deferred Actuarial OPEB Costs - - - - 539,449

Deferred Actuarial Pension Costs - 4,967,940 5,677,071 3,802,537 936,234

Total Deferred Inflows of Resources - 4,967,940 5,677,071 3,802,537 1,475,683

NET POSITION

Net Investment in Capital Assets 357,912,154 354,046,090 351,617,201 350,981,714 355,628,577

Restricted for Debt Service 3,855,673 4,658,306 4,402,301 4,306,724 4,247,025

Unrestricted 83,039,993 43,717,930 (1) 45,268,275 45,898,551 27,664,926 (2)

Total Net Position $444,807,820 $402,422,326 (1) $401,287,777 $401,186,989 $387,540,528 (2)

____________________________________

(1) The District’s Net Position decreased in Fiscal Year 2014-15 primarily due to an adjustment as a result of the implementation of GASB Statement No. 68, which required the District to record the net pension liability as described above.

(2) The District’s Net Position decreased in Fiscal Year 2017-18 primarily due to an adjustment as a result of the implementation of GASB Statement No. 75, which required the District to record the net OPEB liability as described above.

Source: Otay Water District Audited Financial Statements for 2014 – 2017; Unaudited Financial Statement for 2018.

39

Historical Debt Service Coverage

Table No. 12 on the following page sets forth historical Taxes and Net Revenues and Debt Service coverage ratio for the Fiscal Years 2013-14 through 2016-17 and the estimated amounts for the 2017-18 Fiscal Year.

The historical debt service coverage set forth in Table No. 13 has been calculated in accordance with the 1996 Installment Sale Agreement which requires the inclusion of the Interest Subsidy Payment as part of Revenues and not as a deduction from debt service. This will change as described in footnote 1 to Table No. 13 upon the prepayment of the 1996 Certificates. Such calculations, which are derived from definitions of Revenues, Operation and Maintenance Costs, Net Revenues set forth in Appendix A, are intended to reflect the District’s compliance with the rate covenant and additional debt covenants contained in the 2018 Installment Purchase Agreement and described under the caption “SOURCES OF PAYMENT FOR THE BONDS” and for no other purpose. Such calculations may reflect non-recurring or extraordinary accounting transactions permitted under the 2018 Installment Purchase Agreement and GAAP. In providing a rating on the Bonds, Standard & Poor’s may have performed independent calculations of coverage ratios using its own internal formulas and methodology which may not reflect the provisions of the Indenture. See the caption “CONCLUDING INFORMATION - Rating on the Bonds.” The District makes no representations as to any such calculations, and such calculations should not be construed as a representation by the District as to past or future compliance with any bond covenants, the availability of particular revenues for the payment of Debt Service or for any other purpose.


40

TABLE NO. 12 HISTORICAL TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE

For the Fiscal Year Ended June 30

Unaudited

2014 2015 2016 2017 2018

Revenues:

Water Sales $81,287 $79,135 $73,940 $83,720 $ 92,595

Meter Fees 2,494 2,120 2,243 3,653 2,295

Availability/Annexation Fees 686 641 544 638 646

Capacity Fees 1,245 2,344 3,010 1,054 8,647

Betterment Fees 742 567 491 511 463

BABs Interest Subsidy Payment (1) 768 752 791 773 775

Investment Earnings 832 959 1,045 744 1,050

Total Revenue $88,054 $86,518 $82,064 $91,093 $106,472

Operation and Maintenance Costs:

Water Purchases $48,239 $46,198 $43,874 $48,406 $ 53,584

Utilities 2,663 2,895 2,570 2,781 2,978

Payroll 17,943 18,149 17,975 19,062 21,556

Administrative 5,313 5,596 6,342 7,395 6,636

Materials and Maintenance 1,418 1,483 1,357 1,419 1,672

Total Operation and Maintenance Costs $75,576 $74,321 $72,118 $79,063 $ 86,426

Net Revenues $12,478 $12,197 $ 9,946 $12,030 $ 20,046

Taxes $ 2,894 $ 3,129 $ 3,354 $ 3,458 $ 3,802

Taxes and Net Revenues $15,372 $15,326 $13,300 $15,488 $ 23,848

Debt Service:

1996 Installment Payments (2) $ 683 $ 627 $ 719 $ 763 $ 781

2004 Installment Payments 57 - - - -

2007 Installment Payments 2,509 2,502 2,475 - -

2010 Installment Payments 3,725 3,720 3,712 3,707 3,709

2013 Bonds 857 864 855 850 849

2016 Bonds - - - 2,435 2,222

Total Debt Service $ 7,831 $ 7,713 $ 7,761 $ 7,755 $ 7,561

Coverage Ratio 196% 199% 171% 200% 315% ____________________________________

(1) Build America Bonds Interest Subsidy Payment paid by federal government with respect to the 2010B Bonds. After prepayment of the 1996 Certificates, this amount will be deducted from Debt Service and excluded from Net Revenues for the purpose of calculating the coverage ratio. See Table No. 13 below.

(2) Includes annual letter of credit fees.


41

Projected Debt Service Coverage

The projections of Revenues and the corresponding Taxes and Net Revenues shown in Table No. 13 are based on the assumptions shown below. The District believes the assumptions used for the projections are reasonable based on its own data and on projections from outside sources regarding expected growth in the District; however, some assumptions may not materialize and unanticipated events and circumstances may occur (see “RISK FACTORS”). To the extent that the assumptions are not actually realized the coverage levels shown in Table No. 13 will likely be reduced and, if substantial reductions in Net Revenues were to result, the District’s ability to timely pay the 2018 Installment Payments, which, in turn, pay debt service on the Bonds, may be adversely affected.

Following is a discussion of assumptions used in the projection of Revenues, Net Revenues and Taxes:

(a) Potable connections in equivalent dwelling units (“EDU”) are projected to increase as shown below, for an overall 5.4 percent increase during the next five year period. Recycled connections in EDUs are projected to increase by 4.9 percent during the next five year period as shown below. The District has based its projections for growth on information contained in the Expera Report (see “THE WATER SYSTEM - Capital Improvement Program” herein).

Potable System Recycled System Number of Number of Additional EDUs % Increase Additional EDUs % Increase

2019 884 1.3% 41 0.9% 2020 888 1.3 44 1.0 2021 738 1.0 44 1.0 2022 708 1.0 44 1.0 2023 534 0.7 44 1.0

____________________________________

Note: EDUs do not reflect actual number of projected connections. An EDU is the approximate equivalent of 1 single-family home.

(b) Water usage in the District in Fiscal Year 2018-19 is anticipated to be slightly higher than the 2017-18 level. The District expects some growth in water sales due to new customers as shown in (a) above. Water sales volume (in acre-feet) is projected as follows.

Potable System Recycled System Total

2019 29,377 3,593 32,971 2020 29,671 3,629 33,300 2021 29,968 3,675 33,643 2022 30,321 3.732 34,053 2023 30,761 3,807 34,568

The District receives a credit of $185 per acre-foot and $200 per-acre foot from MWD and CWA, respectively, for each acre-foot of recycled water. These credits are included in water sales revenue.

(c) Water rates to District customers are projected to increase 3.2% annually based on the District’s most recently updated projections (see “Water Charges” herein). These projected rates reflect the District’s estimate of potential rate increases that would be passed through to the District’s customers as a result of rate increases by CWA and MWD. The District intends, but does not guarantee, to continue to pass-through any increases in water costs by CWA and MWD.

42

(d) Capacity and annexation fee rates are estimated to increase 3 percent in each year based on the projected Engineering News-Record index increases. Revenue from these fees will also increase as the number of connections increase as shown in (a) above. The District has based its projections for growth on information contained in the Expera Report (see “Capital Improvement Program” herein).

(e) Water availability charges, included in Availability Fees, are limited to an amount not exceeding $10 per acre per year. To the extent the water availability charges exceeding $10 per acre and are authorized for operational purposes, such fees are included in Betterment Fees.

(f) Taxes do not include ad valorem taxes levied for the purpose of paying debt service on the District’s 2009 General Obligation Refunding Bonds. Taxes are projected to increase by approximately 2 percent annually (see “Taxes” herein).

(g) Non-operating income is excluded from the projection. Non-operating revenues within “Miscellaneous Revenues” shown in the District’s financial statements consists of property rental and golf course income. Golf course operations have ceased as of the end of Fiscal Year 2017-18.

(h) Water Supply costs are projected to increase 3.6 percent in 2018-19 and are anticipated to increase annually as a result of increases in cost of purchased water and usage by new customers as follows:

2020 6.5% 2021 6.5 2022 6.1 2023 5.0 2024 5.0

These projected increases in supply costs reflect supply cost increase by CWA resulting from the funding of the Carlsbad Project desalination plant by CWA (see “Water Supply - CWA Water Supply” herein.)

(i) Operating costs shown in Fiscal Year 2018-19 are based on current year budget estimates. Costs for subsequent fiscal years include the annual average inflationary factors shown below.

Utilities 3.5% Materials and Maintenance 4.0 Administrative Costs 3.0 Salaries 3.5 Medical Benefits 5.3 Workers Comp 5.0

Other benefits are projected to decline by 35% in 2019-20 due to the additional funding of the UAL and then increase by 5% thereafter.

Base operating costs are also increased based on the projected growth in District operations, similar to the growth rates shown for connections in (a) above.

(j) The Interest Subsidy Payment reflects an estimated $118,600 reduction from the maximum 35% of interest on the 2010B Bonds . See “RISK FACTORS - Interest Subsidy Payment; Sequestration” herein.

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TABLE NO. 13 PROJECTED TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE

For the Fiscal Year ended June 30 (1)

2019 2020 2021 2022 2023 Revenues:

Water Sales $ 96,360 $100,735 $104,917 $109,474 $114,549 Meter Fees 2,193 2,462 2,484 2,506 2,269 Availability/Annexation Fees 634 638 645 652 662 Capacity Fees 7,220 7,376 6,171 6,280 4,860 Betterment Fees 461 479 498 518 539 BABs Interest Subsidy Payment (1) 712 712 712 712 712 Investment Earnings 1,133 1,239 1,407 1,623 1,840 Total Revenue $108,713 $113,641 $116,834 $121,765 $125,431

Operation and Maintenance Costs:

Water Purchases $ 56,329 $ 60,239 $ 64,537 $ 69,073 $ 73,655 Utilities 3,016 3,153 3,297 3,455 3,632 Payroll 20,915 20,032 20,843 21,668 22,650 Administrative 5,869 6,013 6,211 6,415 6,625 Materials and Maintenance 2,574 2,677 2,784 2,895 3,011 Total Operation and Maintenance Costs $ 88,703 $ 92,114 $ 97,672 $103,506 $109,573

Net Revenues Including BABs Interest Subsidy Payment

$ 20,010

$ 21,527

$ 19,162

$ 18,259

$ 15,858

Less BABs Interest Subsidy Payment (1) (712) (712) (712) (712) (712)

Net Revenues Excluding BABs Interest Subsidy Payment

$ 19,298

$ 20,815

$ 18,450

$ 17,547

$ 15,146

Taxes $ 3,745 $ 3,820 $ 3,896 $ 3,974 $ 4,053

Taxes and Net Revenues $ 23,043 $ 24,635 $ 22,346 $ 21,521 $ 19,199

Debt Service (2)

1996 Installment Payments (3) $ 742 $ - $ - $ - $ -

2010 Installment Payments 3,702 3,693 3,690 3,690 3,686 BABs Interest Subsidy Payment (1) (712) (712) (712) (712) (712) 2013 Bonds 845 846 847 846 844 2016 Bonds 2,201 2,201 2,199 2,199 2,205 2018 Installment Payments 971 2,649 2,649 2,641 2,654 Total $ 7,749 $ 8,676 $ 8,673 $ 8,664 $ 8,677

Coverage Ratio 297% 284% 258% 248% 221% ____________________________________

(1) The BABs Interest Subsidy Payment is included in the definition of Revenues, and therefore in Net Revenues. However, for the purposes of calculating the coverage ratio in this table, it is permitted to be deducted from Debt Service and therefore is also deducted from Net Revenues. See “RISK FACTORS - Interest Subsidy Payment; Sequestration.”

(2) Calculated on an accrual basis for each July 1 to June 30 period. (3) Estimated through October 2018.


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The projected Revenues, Taxes and Operation and Maintenance Costs shown above are subject to several variables as described on the previous pages. The District provides no assurance that the projected Taxes and Net Revenues or Coverage Ratios will be achieved (see “RISK FACTORS” herein).

SOURCES OF PAYMENT FOR THE BONDS

General

The Bonds are limited obligations of the Authority and are payable solely from the Pledged Revenues (as defined in the Indenture) and amounts on deposit in the Bond Payment Fund established under the Indenture. Pledged Revenues consist of the 2018 Installment Payments and other payments paid by the District and received by the Authority pursuant to the Installment Purchase Agreement (other than payments related to the indemnification of the Authority) and all interest or other income from any investment of any money in the Bond Payment Fund established pursuant to the Indenture. The Pledged Revenues, amounts on deposit in the Bond Payment Fund and all rights of the Authority under the Installment Purchase Agreement (other than its right to indemnify thereunder) will be assigned to the Trustee and irrevocably pledged to the payment of the interest and redemption premium, if any, on and principal of the Bonds as provided in the Indenture. The Pledged Revenues are not permitted to be used for any other purpose while any of the Bonds remain Outstanding.

The 2018 Installment Payments are calculated to be sufficient to pay, when due, the scheduled payment of principal and interest on by the Bonds.

2018 Installment Payments

The 2018 Installment Payments are payable from and secured by Taxes and Net Revenues all as set forth in the Installment Purchase Agreement and in the manner described herein.

The District’s obligation to pay the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any if its political subdivisions is pledged for the payment of the 2018 Installment Payments.

Taxes and Net Revenues

The following definitions are from the Installment Purchase Agreement and the Indenture and capitalized terms used below have the meanings set forth in the Indenture. See “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS.”

The Taxes and Net Revenues securing the 2018 Installment Payments are payable on parity with installment payments securing the 2010 Bonds and debt service on the 2013 Bonds and 2016 Bonds (together, the “Existing Parity Obligations”) and other Contracts and Parity Bonds issued in the future.

“Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof.

“Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, or any portion thereof, including, without limiting the generality of the foregoing, (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings

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on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted under the Installment Purchase Agreement, and (d) any Interest Subsidy Payments; provided that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District.

“Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of the Installment Purchase Agreement, or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges.

“Net Revenues” means, for any Fiscal Year, the Revenues for such Fiscal Year or other 12-month period less the Operation and Maintenance Costs for such Fiscal Year. See “Rate Covenant” and “Parity Debt” herein.

“Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009.

The District will timely submit all required documentation to the United States Treasury and take any and all action necessary to receive and collect the Interest Subsidy Payments.

Allocation of Taxes and Net Revenues

In order to carry out and effectuate the pledge and lien contained in the Installment Purchase Agreement, the District has agreed and covenanted that all Revenues and Taxes shall be received by the District in trust and shall be deposited when and as received in special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously maintained by the District in accordance with the provisions of the 1996 Installment Sale Agreement and the Existing Parity Obligations, and are continued by the terms of the Installment Purchase Agreement, and which funds the District has agreed and covenanted to maintain and to hold separate and apart from other funds so long as any Contracts or Parity Bonds remain unpaid, including the Installment Purchase Agreement securing the Bonds. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in the Installment Purchase Agreement and in the other Contracts and Parity Bonds. All moneys in the Revenue Fund shall be held in trust and shall be applied, used and withdrawn for the purposes set forth in the Installment Purchase Agreement.

The District shall, from the moneys in the Revenue Fund, 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 such Operation and Maintenance Costs become due and payable. All moneys in the Tax Fund, and, to the extent such moneys are insufficient, all remaining moneys in the Revenue Fund shall be set aside by the District at the following times for the transfer to the following respective special funds in the following order of priority and all

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moneys in each of such funds shall be held in trust and shall be applied, used and withdrawn only for the following purposes:

(i) Bond Payment Fund and other Debt Service Payments. On or before the 4th Business Day prior to each March 1 and September 1 (each an “Installment Payment Date”), the District shall, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 Installment Payment due and payable on that Installment Payment Date. The District shall also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, Debt Service payments due in accordance with any other Contract or Parity Bond or resolution or Indenture relating thereto.

No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the 2018 Installment Payment due and payable on the next succeeding Installment Payment Date.

All money in the Bond Payment Fund shall be used and withdrawn by the Trustee in accordance with the Indenture.

(ii) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds, the District shall, from the remaining moneys in the Tax Fund, and to the extent needed, the Revenue Fund, thereafter, without preference or priority and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts.

(iii) Surplus. Moneys on deposit in the Tax Fund or the Revenue Fund not necessary to make any of the payments required above or as required by any of the Parity Bonds or Contracts may be expended by the District at any time for any purpose permitted by law.

See “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS - INSTALLMENT PURCHASE AGREEMENT - SECURITY - Pledge of Taxes and Revenues.”

No Reserve Fund for the Bonds

There is no reserve fund established for the Bonds, the 2016 Bonds or the 2013 Bonds.

With respect to the reserve requirement attributable to the 2010 Bonds, the District deposited $3,738,105.85 in the 2010 Bonds reserve fund. None of the amounts deposited in the 2010 Bonds reserve fund are available for payment of the Bonds.

Event of Default and Acceleration of Maturities

The 2018 Installment Payments are not secured by, and the Owners of Bonds have no security interest in or mortgage on the property of the Water System, or of the District. Default by the District will not result in loss of any property to the District. Should the District default, the Trustee may declare the entire principal amount of the 2018 Installment Payments and the accrued interest thereon, to be due and payable immediately, whereupon the same shall become due and payable, and take whatever action at law or in equity may appear necessary or desirable to enforce performance and observance of any obligation,

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agreement or covenant of the District under the Installment Purchase Agreement. A default under the Installment Purchase Agreement is also an Event of Default under the Indenture which may result in an acceleration of Bonds. See “APPENDIX A - DEFINITIONS AND SUMMAY OF CERTAIN DOCUMENTS - INSTALLMENT PURCHASE AGREEMENT - EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY” and “RISK FACTORS - Acceleration; Limited Recourse on Default.”

Rate Covenant

Pursuant to the Installment Purchase Agreement, to the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which are reasonably expected to be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District 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 Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. The Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this provision of the Installment Purchase Agreement.

See “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS - INSTALLMENT PURCHASE AGREEMENT - COVENANTS OF THE DISTRICT - Amount of Rates and Charges.”

Parity Debt

Pursuant to the Existing Parity Obligations and the Installment Purchase Agreement, the District may at any time execute any Contract or issue any Parity Bonds the payments under or of which are on a parity with the 2018 Installment Payments, as the case may be, provided an Independent Financial Consultant or Independent Certified Public Accountant shall render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any 12 consecutive calendar months in the 18 calendar months immediately preceding the issuance of the additional Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or Parity Bonds had been issued at the beginning of such twelve-month period.

For purposes of calculating the ratio required for the issuance of additional Contracts or Parity Bonds, the Interest Subsidy Payments will be deducted from Net Revenues and the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of the Interest Subsidy Payments the District is entitled to receive during such twelve-month period.

For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following:

(1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts;

(2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts;

(3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and

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(4) the estimated change in Net Revenues which will result from services provided under any long-term, guaranteed contract that extends for the life of the additional Parity Bonds or Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts.

Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts (including refunding of the Existing Parity Obligations or the Bonds), may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such additional Contracts. Further, for the purpose of calculating Debt Service for any Parity Bonds or Contracts which bear a variable interest rate, the rate of interest used to calculate Debt Service shall be 110% of the greater of (i) the then current variable interest rate borne by such Parity Bonds or additional Contracts plus 2%, and (ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued. See “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS - INSTALLMENT PURCHASE AGREEMENT - SECURITY - Additional Contracts and Parity Bonds.”

In addition to the foregoing, in the event any amounts are past due and owing to any insurer of Parity Bonds or with respect to any Contracts, such insurer must provide written consent to the issuance of any additional Parity Bonds or the execution of any Contracts.

Property Insurance

The Installment Purchase Agreement requires the District to maintain or cause to be maintained with respect to the properties of the Water System, insurance in such amounts and against such risks (including accident to or destruction of the Water System which are of an insurable nature) as are usually covered in connection with facilities similar to the Water System so long as such insurance is available from reputable insurance companies. All proceeds of insurance against property damage and all proceeds of condemnation awards shall be payable to the District alone, and the District shall retain and collect such proceeds. All claims under any such insurance policy or with respect to any condemnation proceeding relating to the Water System may be settled by the District without the consent of the Trustee. Such proceeds shall be applied by the District to the repair or rebuilding of the Water System or to repay the Bonds, other Contracts and Parity Bonds. See also “APPENDIX A - DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS - COVENANTS OF THE DISTRICT - Insurance” herein.

CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS

Article XIIIB Gann Limit

Article XIIIB of the California State Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The “base year” for establishing such appropriation limit is the 1978-79 fiscal year and the limit is to be adjusted annually to reflect changes in population and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or (iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years.

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Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.

Certain expenditures are excluded from the appropriations limit including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly.

The District is of the opinion that its charges with respect to Water Service do not exceed the costs that it reasonably bears in providing Water Service and are not subject to the limits of Article XIIIB.

Proposition 218

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

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

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

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

A charge imposed as a condition of property development.

Assessments and property-related fees imposed in accordance with the provisions of Article XIIID.

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

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

Further, under Article XIIID, revenues derived from a property-related fee or charge may not exceed the funds required to provide the “property-related service” and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property-related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property-related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question.

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

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

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

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

In July 2006, the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, addressed the validity of a local voter initiative measure that would have (a) reduced a water agency’s rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency’s charges for ongoing water delivery are “fees and charges” within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also “fees” within the meaning of Article XIIIC’s mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency’s water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.)

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

On April 20, 2015, the California Court of Appeal, Fourth District, issued an opinion in Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano, 235 Cal. App. 4th 1493 (2015) (the “SJC Case”) upholding tiered water rates under Proposition 218 provided that the tiers correspond to the actual cost of furnishing service at a given level of usage. The opinion was specific to the facts of the case, including a finding that the City of San Juan Capistrano did not attempt to calculate the actual costs of providing water at various tier levels. The District’s tiered water rates, are described under the caption “THE WATER SYSTEM - Water Charges.” District management believes that this case will not have any material impact on the District’s ability to make the 2018 Installment Payments or to meet its rate covenant.

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

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

The District believes that its rates with respect to the Water Service comply with the requirements of Proposition 218 and expect that future fees and charges will comply with Proposition 218’s procedural and substantive requirements to the extent applicable thereto. The requirements of, or a voter initiative pursuant to, Proposition 218 could impact the ability of the District to set or raise service charges.

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

Future Initiatives

Articles XIIIB, XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California’s initiative process. From time to time other initiatives could be proposed and adopted affecting the revenues of the District.


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RISK FACTORS The following information should be considered by prospective investors in evaluating the Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks.

System Demand

There can be no assurance that the local demand for service provided by the Water System will be consistent with to levels described in this Official Statement under the heading “THE WATER SYSTEM.” Reduction in the level of new connections could require an increase in rates or charges in order to produce Taxes and Net Revenues sufficient to comply with the District’s rate covenant in the Installment Purchase Agreement. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. Another factor that can impact demand is economic conditions, including associated impacts of economic recession such as job losses, income losses, housing foreclosure and vacancies. Furthermore, there can be no assurance that any other entity with regulatory authority over the Water System will not adopt further restrictions on the operation of the Water System.

Drought

Hydrological conditions in California can vary widely from year to year. The State recently announced the end of a period of extreme and prolonged drought after a season of heavy rainfall in the winter of 2017. The recent drought led to a number of executive orders mandating across the board reductions in water usage (see “THE WATER SYSTEM - Water Supply - Drought Conditions and Response.” Such executive orders, or additional actions or legislation could be implemented again when the next prolonged drought occurs.

In addition, lower water usage by customers in response to new State laws regarding water conservation and consumption and drought measures imposed by the State or adopted by the District could result in reduced water consumption, and absent a corresponding increase in water rates, lower Net Revenues.

Increased Operation and Maintenance Costs

There can be no assurance that Operation and Maintenance Costs of the Water System will be consistent with the levels contemplated in this Official Statement. Changes in technology, increases in the cost of operation, increased water treatment requirements or other costs mandated by regulatory agencies, (see “THE WATER SYSTEM - Water Supply - Historic and Projected Water Supply”), pension costs or other expenses could require increases in rates or charges in order to comply with the rate covenant described herein and in the Installment Purchase Agreement, and could increase the possibility of nonpayment of the Bonds.

Rate Covenant Not a Guarantee; Failure to Meet Projections

The ability of the District to make the 2018 Installment Payments thereby providing the Trustee with sufficient Pledged Revenues to pay the Bonds, depends on the ability of the District to generate Taxes and Net Revenues in the levels required by the Installment Purchase Agreement. Although, as more particularly described herein, the District expects that sufficient revenues will be generated through the imposition and collection of water charges and fees for the Water Service, there is no assurance that such imposition of water charges and fees will result in the generation of Taxes and Net Revenues in the amounts required by the Installment Purchase Agreement. As a result, the District’s covenant does not constitute a guarantee that sufficient Taxes and Net Revenues will be available to make the 2018 Installment Payments when due.

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The projected operating results included herein are based on certain assumptions and forecasts. Any forecast is subject to uncertainties. There will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material.

Accordingly, the projected operating results are not necessarily indicative of future performance, and the District does not assume any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the District are subject to change. No representation is made or intended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the Bonds are cautioned not to place undue reliance upon the projected operating results. If actual results are less favorable than the results projected or if the assumptions used in preparing such projections prove to be incorrect, the amount of Net Revenues may be materially less than expected and consequently, the ability of the District to make timely payment of the 2018 Installment Payments may be materially adversely affected.

Neither the District’s independent auditors, nor any other independent accountants have compiled, examined or performed any procedures with respect to the projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results.

Additional Obligations Payable from Taxes and Net Revenues

The District may issue additional Parity Bonds or enter into additional Contracts payable from Taxes and Net Revenues on a parity with its pledge of such Taxes and Net Revenues to the 2018 Installment Payments, and the debt service or the installment payments relating to the Existing Parity Obligations. The ability of the District to enter into such Parity Bonds and Contracts is subject to certain requirements set forth in the Installment Purchase Agreement. See “SOURCES OF PAYMENT FOR THE BONDS - Parity Debt.”

The District may also enter into obligations payable from Taxes and Net Revenues which are subordinate to the Installment Purchase Agreement and Existing Parity Obligations.

Risks Relating to Water Supplies

The District’s current potable water supply primarily comes from purchases from CWA. Supplies from MWD and IID account for the majority of CWA’s total water supply.. This source of water could become limited due to possible events that include prolonged droughts or similar changes in State-wide weather patterns, earthquakes or other natural disasters, contamination by environmental hazards, or acts of terrorism or civil unrest. There can be no assurance that currently available water supplies would be sufficient to meet demand under current conditions in the event of a prolonged drought or other interruption of the District’s source of water supply, or that the District would be able to secure alternate sources of water to meet its customer demand. See “THE WATER SYSTEM - Water Supply” herein for a discussion of the water supply in the region and the District’s sources of water in particular.

California WaterFix Costs and Long Term Rate Impacts

California WaterFix is a project that was approved by DWR in July 2017. Upon completion, it would provide new conveyance facilities for the transportation of State Water Project and Central Valley Project water from the north Delta, principally from three new intakes through two 30-mile long tunnels running under the Delta, to the existing aqueduct systems in the south Delta.

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According to DWR, the California WaterFix is expected to improve the reliability of Southern California’s water delivery system by updating aging infrastructure. In addition to the more efficient and effective delivery of water supplies through the Delta, DWR has identified other benefits of the California WaterFix, including: allowing for more operational flexibility to deliver water through the Delta, and enabling a more natural flow of rivers in the Delta to protect sensitive fish species; providing greater opportunity to capture and convey water from storm flows in wet and above-normal hydrological weather years to the State Water Contractors to refill reservoirs and replenish groundwater basins; improving the quality of water for export; reducing climate change risk of increased salinity from rising sea levels; and reducing the risks from a catastrophic seismic event in the Delta.

DWR estimates that it will take approximately 15 years to substantially complete the·California WaterFix after commencement of construction. Based upon DWR’s preliminary estimate, the capital costs of California WaterFix are estimated to be approximately $17 billion (in 2017 dollars). The preliminary cost estimate includes contingencies for construction costs and unknown expenses related to land acquisition. Given the scope of the project and the length of time it will take DWR to construct the project, this cost estimate may change based on numerous factors and the actual cost of construction of the project may differ materially.

On April 10, 2018, MWD’s Board approved the funding of up to 64.6 percent (approximately $10.8 billion in 2017 dollars) of the overall capital cost of the California WaterFix necessary to allow for the construction of the full project. In its official statement dated June 5, 2018 relating to the issuance of its Subordinate Water Revenue Refunding Bonds, 2018 Series A and Subordinate Water Revenue Bonds, 2018 Series B, MWD stated that it has projected that the impact on overall water rates and charges of an investment of this magnitude, based on MWD’s 2017-18 revenue requirements and assuming financing over a 40-year term at an assumed annual interest cost of 4.0 percent, would be an incremental increase in overall water rates and charges of approximately 2.2 percent per year over the anticipated construction timeline, or an approximate cumulative 33 percent at the end of 15 years. It is not possible to calculate the precise water rate impacts on retail ratepayers because of the wide variation of costs and water sources for each retail agency, and the fact that each retail agency makes its own retail rate decisions based on various factors. However, there will be an impact on the cost of water that is purchased by CWA from MWD and the cost of water that the District purchases from CWA as a result of the California WaterFix project, if and when constructed.

Environmental Regulation

The kind and degree of water treatment effected through the water system is regulated, to a large extent, by the federal government and the State of California. Treatment standards set forth in federal and state law control the operations of the Water System and mandate the use of water treatment technology. If the federal government, acting through the Environmental Protection Agency, or the State of California, acting through the Department of Health Services, or additional federal or state agencies, should impose stricter water quality standards upon the Water System, the District’s expenses could increase accordingly and rates and charges would have to be increased to offset those expenses. It is not possible to predict the direction federal or state regulation will take with respect to water quality standards, although it is likely that, over time, both will impose more stringent standards with attendant higher costs.

Proposition 218

On November 5, 1996, California voters approved Proposition 218-Voter Approval for Local Government Taxes-Limitation on Fees, Assessments, and Charges-Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” for a discussion of specific issues and risks raised by Proposition 218. The District’s current projections

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assume future rate increases which will be subject to the Proposition 218 notice process, will be needed during the time that the Bonds are Outstanding.

Natural Hazards

Any natural disaster or other physical calamity, including drought, wildfires, floods, landslides, high winds or earthquakes, may have the effect of reducing Revenues and Taxes through damage to the Water System and/or adversely affecting the economy of the surrounding area. The Installment Purchase Agreement requires the District to maintain insurance or self-insurance, but only if and to the extent available at a reasonable cost from reputable insurers, and the District is not expressly required to provide earthquake insurance. The District is located in a seismically active region and structures in the District could be impacted by a major earthquake originating from the numerous faults in the area. Seismic hazards encompass both potential surface rupture and ground shaking. In the event of total loss of the Water System, there can be no assurance that there will be any insurance coverage for the loss or that any insurance proceeds will be adequate to rebuild the Water System or to repay all Outstanding Bonds or that losses in excess of the insured amount will not occur.

The District’s facilities are generally located in urbanized areas, and not likely to be significantly impacted by wildfire.

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 wide 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,

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.

Other than the general trends listed above, there is no specific information on exactly how global warming will quantitatively affect water supplies with respect to the Water System. However, there can be no assurance that climate change will not affect the District’s water sources, costs of operation and revenue coverage.

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Interest Subsidy Payment; Sequestration

The 2010B Bonds were designated as “Build America Bonds,” and as such, qualified for the Interest Subsidy Payment from the United States Treasury equal to 35% of the interest payable with respect to the 2010B Bonds. From time to time, Congress has reduced the maximum Interest Subsidy Payment. For the federal government Fiscal Year ending September 30, 2018, the Interest Subsidy Payment was 32.7%.

The District has included the Interest Subsidy Payment in its Revenues. In 2018-19, this amount is $712,000. The District cannot predict the amount of reduction in Interest Subsidy Payments due to any future sequestration by the federal government or the period of time that Interest Subsidy Payments will be reduced due to any future sequestration. The projected operating results set forth under the caption “THE WATER SYSTEM - Projected Debt Service Coverage” reflect announced reductions in Interest Subsidy Payments.

Acceleration; Limited Recourse on Default

If the District defaults on its obligation to pay the 2018 Installment Payments when due, the Trustee has the right to accelerate the total unpaid principal amount of the 2018 Installment Payments and/or the Bonds. However, in the event of a default and such acceleration there can be no assurance that the District will have sufficient Taxes and Net Revenues to pay the accelerated principal. Default by the District will not result in loss of the Water System or any other assets of the District.

So long as the Bonds are in book-entry form, DTC (or its nominee) will be the sole registered owner of the Bonds, and the rights and remedies of the Bond Owners will be exercised through the procedures of DTC.

Bankruptcy Risks

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

No Obligation to Tax

The obligation of the District to pay the 2018 Installment Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation, except the Taxes. The obligation of the District to pay the 2018 Installment Payments does not constitute a debt or indebtedness of the District, the State of California or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction.

Change in Law

In addition to the other limitations described herein, the California electorate or Legislature could adopt a constitutional or legislative initiative with the effect of reducing revenues payable to or collected by the District. There is no assurance that the California electorate or Legislature will not at some future time

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approve additional limitations that could have the effect of reducing the Taxes and Net Revenues and adversely affecting the security of the Bonds.

Loss of Tax Exemption

In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, the Authority will covenant in the Indenture and the District will covenant in the Installment Purchase Agreement to comply with each applicable requirement of Section 103 and Sections 141 through 150 of the Internal Revenue Code. The interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of execution and delivery of the Bonds, as a result of acts or omissions of the Authority or the District in violation of this or other covenants in the Indenture or the Installment Purchase Agreement. Should such an event of taxability occur, the Bonds are not subject to prepayment or any increase in interest rates and will remain outstanding until maturity. See “- Acceleration; Limited Recourse on Default” and “TAX MATTERS” herein.

IRS Audit of Tax-Exempt Bond Issues

The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Bonds might be adversely affected as a result of such an audit of the Bonds (or by an audit of similar bonds).

Secondary Market Risk

There can be no assurance that there will be a secondary market for purchase or sale of the Bonds, and from time to time there may be no market for them, depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition of the District. Secondary market prices for the Bonds could be more or less than the original issue price depending on market factors.

TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax.

In the opinion of Bond Counsel, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity of such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Beneficial Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Beneficial Owner will increase the Beneficial Owner’s basis in the applicable Bond. The amount of original issue discount that accrues to the Beneficial Owner of the Bonds is excluded from the gross income of such Beneficial Owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax.

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Bond Counsel’s opinion as to the exclusion from gross income for federal income tax purposes of interest on the Bonds (including any original issue discount) is based upon certain representations of fact and certifications made by the Authority, the District, the Underwriter and others and is subject to the condition that the Authority and the District comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”) that must be satisfied subsequent to the issuance of the Bonds to assure that interest on the Bonds (including any original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest on the Bonds (including any original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The Authority and the District will covenant to comply with all such requirements.

The amount by which a Beneficial Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Beneficial Owner’s basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Beneficial Owner realizing a taxable gain when a Bond is sold by the Beneficial Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Beneficial Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium.

The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar bonds). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adversely affects the exclusion from gross income of interest (and original issue discount) on the Bonds or their market value.

SUBSEQUENT TO THE ISSUANCE OF THE BONDS THERE MIGHT BE FEDERAL, STATE, OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY CHANGES TO OR INTERPRETATIONS OF FEDERAL, STATE, OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE, OR LOCAL TAX TREATMENT OF THE BONDS INCLUDING THE IMPOSITION OF ADDITIONAL FEDERAL INCOME OR STATE TAXES ON OWNERS OF TAX-EXEMPT LOCAL OBLIGATIONS, SUCH AS THE BONDS. THESE CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE BONDS. NO ASSURANCE CAN BE GIVEN THAT SUBSEQUENT TO THE ISSUANCE OF THE BONDS STATUTORY CHANGES WILL NOT BE INTRODUCED OR ENACTED OR JUDICIAL OR REGULATORY INTERPRETATIONS WILL NOT OCCUR HAVING THE EFFECTS DESCRIBED ABOVE. BEFORE PURCHASING ANY OF THE BONDS, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE BONDS.

Bond Counsel’s opinion may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.

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Although Bond Counsel will render an opinion that interest on the Bonds (including any original issue discount) is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the accrual or receipt of interest on the Bonds (including any original issue discount) may otherwise affect the tax liability of the recipient. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, all potential purchasers should consult their tax advisors before purchasing any of the Bonds.

A copy of the proposed form of opinion of Bond Counsel for the Bonds is attached in “APPENDIX E”.

LEGAL MATTERS

Enforceability of Remedies

The remedies available to the Trustee and the Owners of the Bonds upon an event of default under the Indenture, the Installment Purchase Agreement or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of certain legal rights related to the Indenture and the Installment Purchase Agreement are subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally.

Approval of Legal Proceedings

The legality and enforceability of the Indenture and the Installment Purchase Agreement and certain other legal matters are subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, acting as Bond Counsel. See “APPENDIX E” for the proposed form of Bond Counsel’s Opinion.

The District has no knowledge of any fact or other information which would indicate that the Indenture and the Installment Purchase Agreement are not so enforceable against the Authority or the District except to the extent such enforcement is limited by principles of equity and by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors’ rights generally.

Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District. A portion of the fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds.

Litigation

At any given time, including the present, there are certain claims, disputes and litigation actions that arise in the normal course of the District’s activities. Such matters could, if determined adversely to the District, affect the expenditures of the District and in some cases its Revenues. The Authority and the District will furnish a certificate dated as of the date of delivery of the Bonds that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the Indenture or the Installment Purchase Agreement, or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture or the Installment Purchase Agreement are to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof or, in the case of the District, which if decided adversely to the District would have a material adverse effect on the District’s financial condition and its ability to pay the 2018 Installment Payments.

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Both the SJC Case (see “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218 - Judicial Interpretation of Articles XIIIC and XIIID”) and the recent drought have heightened public awareness of water usage and water rates in California. Numerous lawsuits have been filed statewide challenging the cost of service basis for tiered pricing.

In July 2015, a District ratepayer filed a lawsuit against the District contending that the District’s water rates that were in effect from 2009 through 2017 violated Proposition 218. Specifically, it is alleged that the rates in certain tiers exceeded the reasonable cost of providing the service to customers in those tiers. The lawsuit does not challenge the District’s current rates that were approved in 2017 following a Proposition 218 process. The lawsuit seeks refunds on behalf of all ratepayers affected by the rates that are in dispute. The court has not yet ruled on whether the plaintiff may sue on behalf of all ratepayers. The District has the burden of proof in the case to demonstrate that its rates complied with Proposition 218. The District is asserting that the plaintiff is not entitled to sue on behalf of all ratepayers. If the court were to agree, any recovery would be limited to the amount of any refund owed to the plaintiff plus possible attorneys’ fees, if any, awarded to plaintiff. With this outcome, the District’s financial exposure would be minimal. The District has estimated that if the court were to allow the plaintiff to represent all ratepayers as a class, and if the court were to determine that refunds are owed, the District’s maximum exposure for refunds plus possible attorneys’ fees, if any, would not have a material effect on the District’s financial condition or its ability to pay the 2018 Installment Payments when due, but could require additional rate increases to fund any liability.

CONCLUDING INFORMATION

Rating on the Bonds

S&P Global Ratings has assigned its rating of “AA” to the Bonds. Such rating reflects only the views of the rating agency and any desired explanation of the significance of such rating should be obtained from the rating agency. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own.

Except as otherwise required in the Continuing Disclosure Agreement, the District undertakes no responsibility either to bring to the attention of the owners of any Bonds any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.

Underwriting

The Bonds were sold to Morgan Stanley & Co. LLC (the “Underwriter”) at competitive bid. The Underwriter is offering the Bonds at the initial offering prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter will purchase the Bonds at a price equal to $35,083,702.03, which amount represents the principal amount of the Bonds, plus a net original issue premium of $2,710,512.45 and less an Underwriter’s discount of $61,810.42. The Underwriter will pay certain of its expenses relating to the offering from the Underwriter’s discount.

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Morgan Stanley & Co. LLC., an underwriter of the Bonds, has entered into a distribution agreement with its affiliate, Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds.

The Municipal Advisor

The material contained in this Official Statement was prepared by the District with the assistance of the Municipal Advisor, who advised the District as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein received from sources other than the District is believed to be reliable, but such information is not guaranteed by the Authority, the District or the Municipal Advisor as to accuracy or completeness, nor has it been independently verified. A portion of the fees paid to the Municipal Advisor are contingent upon the sale and delivery of the Bonds.

Continuing Disclosure

The District will covenant to provide certain annual financial information by not later than March 31 in each year (the “Annual Reports”) and notices of the occurrence of certain listed events in accordance with Rule 15c2-12 of the Securities Exchange Act of 1934 as amended (the “Rule”). Harrell & Company Advisors, LLC will act as Dissemination Agent. The specific nature of the information to be contained in the Annual Reports or the notices of listed events and certain other terms of the continuing disclosure obligation are found in the form of the District’s Continuing Disclosure Agreement attached in “APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT.”

Within the last five years, the District believes it has not failed to comply in all material respects with any prior undertakings with regard to the Rule.

Audited Financial Statements

The District’s audited financial statements for Fiscal Year 2016-17 included in this Official Statement have been audited by Teaman, Ramirez & Smith, Inc. (the “Auditor”), independent auditors. Attention is called to the scope limitation described in the Auditor’s report accompanying the financial statements. The Auditor has not been requested to consent to the inclusion of its report in this Official Statement. The Auditor has not undertaken to update the audited financial statements for Fiscal Year 2016-17 or its report, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated October 18, 2017. See “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS” herein.

References

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Bonds.

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Execution

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

OTAY WATER DISTRICT

By: /s/ Joseph R. Beachem Chief Financial Officer

OTAY WATER DISTRICT FINANCING AUTHORITY

By: /s Mark Watton Executive Director

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APPENDIX A

DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS

The following is a summary of certain provisions of the Installment Purchase Agreement and the Indenture which are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the respective agreement for a full and complete statement of the provisions thereof.

INSTALLMENT PURCHASE AGREEMENT

DEFINITIONS

Definitions. Unless the context otherwise requires, the terms defined in the Installment Purchase Agreement will for all purposes thereof and of any amendment thereof or supplement thereto and of any report or other document mentioned therein have the meanings defined therein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein. All capitalized terms used therein and not defined therein will have the meanings ascribed thereto in the Indenture.

Authority. The term “Authority” means the Otay Water District Financing Authority, a joint exercise of powers authority, duly organized and existing under and by virtue of the laws of the State of California.

Contracts. The term “Contracts” means the Installment Purchase Agreement and all contracts of the District authorized and executed by the District, the Installment Payments or payments under which are payable on a parity with the 2018 Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 2010 Installment Purchase Agreement.

Costs. The term “Costs” means with respect to the 2018 Project all costs necessary to the planning, design, engineering, acquisition and construction of the 2018 Project, including, but not limited to, the following items:

(a) The cost incurred in the acquisition of a site for any portion of the 2018 Project;

(b) Obligations incurred or assumed for labor, materials and equipment in connection with the improvement of such site and the construction and equipping of the 2018 Project;

(c) The cost of performance, labor and material bonds and of insurance of all kinds that may be required or necessary during the course of construction and equipping of the 2018 Project or improvement of a site, to the extent not purchased by contractors or subcontractors for the 2018 Project;

(d) All costs of engineering services, including the costs incurred or assumed for design and development work, test borings, surveys, estimates, plans and specifications, and for supervising construction as well as for the performance of all of the duties required by or consequent to the proper improvement of a site and construction and equipping of the 2018 Project, and all costs or architectural services in connection with the preparation of plans and specifications for the 2018 Project;

(e) All costs which shall be required to be paid under the terms of any contract or contracts, for the purchase of a site and the construction and equipping of the 2018 Project;

(f) All costs incurred in preparing or obtaining permits or approval from regulatory agencies in connection with the improvement of a site and construction and equipping of the 2018 Project; and

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(g) All other costs which are considered to be a part of the cost of the 2018 Project in accordance with generally accepted accounting principles and which will not affect the exclusion from gross income for federal income tax purposes of interest on the 2018 Bonds.

Corporation. The term “Corporation” means the Otay Service Corporation, a non-profit public benefit corporation duly organized and existing under and by virtue of the laws of the State of California.

Debt Service. The term “Debt Service” means, for any Fiscal Year, the sum of:

(1) the interest accruing during such Fiscal Year on all outstanding Parity Bonds, assuming that all outstanding serial Parity Bonds are retired as scheduled and that all outstanding term Parity Bonds are redeemed or paid from sinking fund payments as scheduled (except to the extent that such interest is capitalized);

(2) that portion of the principal amount of all outstanding serial Parity Bonds maturing in such Fiscal Year or maturing in the next succeeding Fiscal Year accruing during such Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts;

(3) that portion of the principal amount of all outstanding term Parity Bonds required to be redeemed or paid in such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts; and

(4) that portion of the Installment Payments required to be made during such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such Installment Payments were deemed to accrue daily during such Fiscal Year in equal amounts (except to the extent that the interest portion of such Installment Payments is capitalized); less the earnings derived from investment of moneys on deposit in any debt service reserve fund, and any construction fund created with respect to any Contracts or Parity Bonds to the extent such earnings are deposited in a debt service fund, including the Bond Payment Fund;

provided that, as to any such Parity Bonds or Installment Payments bearing or comprising interest at other than a fixed rate, the rate of interest used to calculate Debt Service will be one hundred ten percent (110%) of the greater of:

(i) the then current variable interest rate borne by such Parity Bonds or Contracts plus 2%, and

(ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued;

provided further that if any series or issue of such Parity Bonds or Installment Payments have twenty-five percent (25%) or more of the aggregate principal amount of such series or issue due in any one year, Debt Service will be determined for the Fiscal Year of determination as if the principal of and interest on such series or issue of such Parity Bonds or Installment Payments were being paid from the date of incurrence thereof in substantially equal annual amounts over a period of thirty (30) years from the date of calculation; and

provided further that the amount on deposit in a debt service reserve fund on any date of calculation of Debt Service will be deducted from the amount of principal due at the final maturity of the Parity Bonds and Contracts for which such debt service reserve fund was established and in each preceding year until such amount is exhausted;

provided further that Debt Service will be reduced by the amount of investment earnings credited to any debt service fund created with respect to Contracts or Parity Bonds;

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provided further that if the Parity Bonds or Contracts constitute Paired Obligations, the interest rate on such Parity Bonds or Contracts will be the resulting linked rate or the effective fixed interest rate to be paid by the District with respect to such Paired Obligations; and

provided further that, the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of Interest Subsidy Payments the District is entitled to receive during such twelve-month period.

District. The term “District” means the Otay Water District, a municipal water district duly formed and existing under and by virtue of the laws of the State of California.

Event of Default. The term “Event of Default” means an event described in the Installment Purchase Agreement.

Fiscal Year. The term “Fiscal Year” means the period beginning on July 1 of each year and ending on June 30 of the next calendar year, or any other twelve-month period selected and designated as the official Fiscal Year of the District.

Indenture. The term “Indenture” means the Indenture of Trust, dated as of November 1, 2018, by and between the Authority and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms.

Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any firm of certified public accountants appointed by the District, and each of whom is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants.

Independent Financial Consultant. The term “Independent Financial Consultant” means a financial consultant or firm of such consultants appointed by the District, and who, or each of whom:

(1) is in fact independent and not under domination of the District;

(2) does not have any substantial interest, direct or indirect, with the District; and

(3) is not connected with the District as an officer or employee of the District, but who may be regularly retained to make reports to the District.

Installment Payment Date; 2018 Installment Payment Date. The term “Installment Payment Date” means any date on which Installment Payments are scheduled to be paid by the District under and pursuant to the Contracts. The term “2018 Installment Payment Date” means four (4) Business Days prior to September 1 and March 1 of each year, commencing on March 1, 2019.

Installment Payments; 2018 Installment Payments. The term “Installment Payments” means the installment payments of interest and principal scheduled to be paid by the District under and pursuant to the Contracts. The term “2018 Installment Payments” means the Installment Payments scheduled to be paid by the District under and pursuant to the Installment Purchase Agreement.

Installment Purchase Agreement. The term “Installment Purchase Agreement” means the Installment Purchase Agreement, by and between the District and the Authority, dated as of November 1, 2018, as originally executed and as it may from time to time be amended or supplemented in accordance therewith.

Interest Subsidy Payments. The term “Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009.

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Law. The term “Law” means the sections of the Water Code of the State of California applicable to municipal water districts, including the sections commencing with Section 71000, and all laws amendatory thereof or supplemental thereto.

Net Proceeds. The term “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. The term “Net Revenues” means, for any Fiscal Year or other twelve-month period, the Revenues for such Fiscal Year or other twelve-month period less the Operation and Maintenance Costs for such Fiscal Year or other twelve-month period.

1996 Certificates. The term “1996 Certificates” means the Otay Water District $15,400,000 Variable Rate Demand Certificates of Participation (1996 Capital Projects) executed and delivered pursuant to the 1996 Installment Sale Agreement.

1996 Installment Sale Agreement. The term “1996 Installment Sale Agreement” means the Installment Sale Agreement, dated as of June 1, 1996, as amended by the First Amendment to Installment Sale Agreement, dated as of August 1, 2004, and by the Second Amendment to Installment Sale Agreement, dated as of July 1, 2011 each by and between the District and the Corporation.

1996 Letter of Credit Bank. The term “1996 Letter of Credit Bank” means MUFG Union Bank, N.A. as the issuer of the letter of credit securing the 1996 Certificates.

1996 Project. The term “1996 Project” means the acquisitions, repairs, additions, betterments, extensions and improvements to the Water System, including real property and buildings which were financed under the 1996 Installment Sale Agreement.

1996 Trustee. The term “1996 Trustee” means The Bank of New York Mellon Trust Company, N.A. and any successor thereto.

Operation and Maintenance Costs. The term “Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of the Installment Purchase Agreement or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges.

Paired Obligations. The term “Paired Obligations” means any Parity Bond or Contract (or portion thereof) designated as paired obligations in the resolution, indenture or other document authorizing the issuance or execution and delivery thereof, which are simultaneously issued or executed and delivered (i) the principal of which is of equal amount maturing and to be redeemed or prepaid (or cancelled after acquisition thereof) on the same dates and in the same amounts, and (ii) the interest rates which, taken together, result in an irrevocably substantially fixed interest rate obligation of the District for the term of such Parity Bond or Contract.

Parity Bonds. The term “Parity Bonds” means all revenue bonds or notes of the District authorized, executed, issued and delivered by the District, the payments of which are payable on a parity with the 2018

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Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 2013 Bonds and the 2016 Bonds.

Project. The term “Project” means the 1996 Project and the 2018 Project.

Purchase Price. The term “Purchase Price” means the principal amount plus interest thereon owed by the District to the Authority under the terms thereof as provided in the Installment Purchase Agreement.

Revenue Fund. The term “Revenue Fund” means the fund previously established by the District and continued by the terms of the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and the Installment Purchase Agreement.

Revenues. The term “Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; and (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, or any portion thereof, including without limiting the generality of the foregoing (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted under the Installment Purchase Agreement and (d) any Interest Subsidy Payments; provided that the term “Revenues” does not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District.

Taxes. The term “Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof.

Tax Fund. The term “Tax Fund” means the fund previously established by the District and continued by the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and the Installment Purchase Agreement.

Trustee. The term “Trustee” means MUFG Union Bank, N.A., acting in its capacity as Trustee under and pursuant to the Indenture, and its successors and assigns.

2010 Installment Purchase Agreement. The term “2010 Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of March 1, 2010 by and between the District and the Authority.

2010B Bonds. The term “2010B Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010B (Taxable Build America Bonds) issued under the Trust Agreement, dated as of March 1, 2010, by and between the Authority and Union Bank, N.A., as trustee (now known as MUFG Union Bank, N.A.).

2013 Bonds. The term “2013 Bonds” means the Otay Water District 2013 Water Revenue Refunding Bonds issued under the Indenture of Trust, dated as of June 1, 2013, as amended by the First Supplemental Indenture of Trust, dated as of October 1, 2018, each by and between the District and MUFG Union Bank, N.A., as trustee.

2016 Bonds. The term “2016 Bonds” means the Otay Water District 2016 Water Revenue Refunding Bonds, issued under the Indenture of Trust, dated as of May 1, 2016, as amended by the First Supplemental Indenture of Trust, dated as of October 1, 2018, each by and between the District and MUFG Union Bank, N.A., as trustee.

2018 Bonds. The term “2018 Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A issued under the Indenture.

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2018 Project. The term “2018 Project” means the acquisitions, repairs, additions, betterments, extensions and improvements to the Water System, including real property and buildings, if any, as described in the Installment Purchase Agreement.

2018 Project Fund. The term “2018 Project Fund” means the fund by that name established pursuant to the Installment Purchase Agreement.

Water Service. The term “Water Service” means the water distribution service made available or provided by the Water System.

Water System. The term “Water System” means the entire potable and reclaimed water supply, treatment, storage and distribution system of the District, including but not limited to all facilities, properties and improvements at any time owned, controlled or operated by the District for the supply, treatment and storage of potable or reclaimed water to customers of the District, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto at any time acquired, constructed or installed by the District.

PURCHASE AND SALE OF PROJECT; 2018 PROJECT FUND

Sale and Purchase of the Project; District as Agent.

In consideration for the 2018 Installment Payments, the Authority agrees to acquire the 1996 Project from the District by transferring the amount set forth in the Indenture to the 1996 Letter of Credit Bank to reimburse the drawing made to prepay the 1996 Certificates and to acquire, construct and install the 2018 Project and agrees to sell and does sell, to the District, and the District agrees to simultaneously purchase and does purchase, from the Authority, the 1996 Project and the 2018 Project at the Purchase Price (payable in installments) as specified in the Installment Purchase Agreement and otherwise in the manner and in accordance with the provisions of the Installment Purchase Agreement. The Authority transfers and assigns to the District all of the Authority’s right, title and interest to the Project; provided, that, title to the 2018 Project will pass as provided under the caption “Title” below.

The Authority thereby appoints the District as its agent for the purposes of acquisition, construction and installation of the 2018 Project, and the District thereby agrees to enter into such engineering, design and construction contracts and purchase order as may be necessary, to provide for the complete acquisition, construction and installation of the 2018 Project. Notwithstanding the foregoing, it is thereby expressly understood and agreed that the Authority will be under no liability of any kind or character whatsoever for the payment of any costs or expenses incurred by the District for the acquisition, construction and installation of the 2018 Project and that all such costs and expenses will be paid by the District, regardless of whether the funds deposited in the 2018 Project Fund (established in the Installment Purchase Agreement) are sufficient to cover all such costs.

Construction of 2018 Project. From the moneys on deposit in the 2018 Project Fund (established in the Installment Purchase Agreement) and other moneys available therefor in the Revenue Fund, the District will acquire and construct the 2018 Project with all practicable dispatch, and such acquisition and construction will be made in an expeditious manner and in conformity with the law so as to complete the same as soon as possible.

(a) Time for Completion. The District expects that the 2018 Project will be completed on or before three years from the date of issuance of the 2018 Bonds.

Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the 2018 Project Fund or the Revenue Fund or any part thereof, or upon any funds held by the Trustee, or which might impair the security of the 2018 Installment Payments; provided, that nothing contained in the Installment Purchase Agreement requires the District to make any such payments so long as the District in good faith contests the validity of any such claims and such

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nonpayment will not materially adversely affect the District’s ability to perform its obligations under the Installment Purchase Agreement.

Changes to 2018 Project. The District may substitute other improvements for those listed as components of the 2018 Project in the Installment Purchase Agreement if the facilities being constructed in lieu of the ones listed in the Installment Purchase Agreement are determined by the District to be in its best interests to the proper functioning of the Water System at the time of said determination, or may add additional projects or improvements determined by the District to be necessary for the operation of the Water System all of which shall become a part of the 2018 Project; provided that the District will prepare and file with the Trustee a revised Exhibit A to the Installment Purchase Agreement listing the substituted or additional components to be financed, which shall then automatically supersede the Exhibit A then in effect.

Title. All right, title and interest in each element and component of the 2018 Project will vest in the District immediately upon execution and delivery of the Installment Purchase Agreement or, if later, upon the acquisition of any rights with respect to such element or component. Such vesting will be automatic and will require no further action by the District or the Authority, but the Authority agrees to execute and deliver, from time to time, any documents the District deems necessary or desirable to evidence such vesting.

2018 Project Fund. The District will establish, maintain and hold a fund separate from any other fund established and maintained by the District designated as the “2018 Project Fund” (the “2018 Project Fund”). The District thereby agrees to maintain the 2018 Project Fund until the 2018 Project has been acquired and constructed by the District or until all amounts therein are expended towards acquisition and construction.

On the Closing Date, the Authority will cause a portion of the proceeds of the 2018 Bonds to be transferred by the Trustee to, or at the direction of the District, as provided in the Indenture, for deposit in the 2018 Project Fund.

Moneys in the 2018 Project Fund will be expended by or at the direction of the District for Costs of the 2018 Project in accordance with the Installment Purchase Agreement.

(a) There will be credited to the 2018 Project Fund the following amounts:

(1) the proceeds of sale of the 2018 Bonds transferred by the Trustee to the District; and

(2) any other funds from time to time deposited in the 2018 Project Fund to pay Costs of the 2018 Project, including interest earnings on investments.

Interest earned on amounts on deposit in the 2018 Project Fund will be used by or at the direction of the District for Costs of the 2018 Project.

Upon a determination by the District that the work on the 2018 Project has been completed, any amounts remaining in the 2018 Project Fund and not otherwise committed for payment of Costs of the 2018 Project will be withdrawn from the 2018 Project Fund and transferred to the Trustee for deposit into the Bond Payment Fund established under the Indenture and the 2018 Project Fund will be closed.

2018 INSTALLMENT PAYMENTS

Purchase Price.

(a) The Purchase Price to be paid by the District under the Installment Purchase Agreement to the Authority is the sum of the principal amount of the District’s obligations thereunder plus the interest to accrue on the unpaid balance of such principal amount from the effective date thereof over the term thereof, subject to prepayment as provided in the Installment Purchase Agreement.

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(b) The principal amount of the Purchase Price to be paid by the District thereunder is set forth in the Installment Purchase Agreement; and

(c) The interest to accrue on the unpaid balance of the principal amount of the Purchase Price is as specified in the Installment Purchase Agreement, and will be paid by the District as and constitute interest paid on the principal amount of the District’s Purchase Price obligations thereunder. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months.

Payment of 2018 Installment Payments. The District will, subject to its rights of prepayment provided in the Installment Purchase Agreement, pay the Trustee as assignee of the Authority the Purchase Price in installment payments of interest and principal in the amounts and on the 2018 Installment Payment Dates as set forth in the Installment Purchase Agreement.

Payment of 2018 Installment Payments to Trustee.

Each 2018 Installment Payment will be paid to the Authority in lawful money of the United States of America. In the event the District fails to make any of the payments required to be made by it under the Installment Purchase Agreement, such payment will continue as an obligation of the District until such amount has been fully paid and the District agrees to pay the same with interest accruing thereon at the rate or rates of interest then applicable to the remaining unpaid principal balance of the 2018 Installment Payments if paid in accordance with their terms.

The obligation of the District to make the 2018 Installment Payments is, subject to the Installment Purchase Agreement, absolute and unconditional, and until such time as the Purchase Price has been paid in full (or provision for the payment thereof will be made pursuant to the Installment Purchase Agreement), the District will not discontinue or suspend any 2018 Installment Payment required to be made by it under the Installment Purchase Agreement when due, whether or not the Water System or any part thereof is operating or operable or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such payments will not be subject to reduction whether by offset or otherwise and will not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever.

Reimbursement for Costs. The District will reimburse the Authority for any costs incurred by the Authority in connection with the issuance of the 2018 Bonds including costs incurred by the Authority pursuant to the Indenture.

Payment to Trustee. The District will pay or cause to be paid to the Trustee all amounts due and payable to the Trustee pursuant to the Indenture.

SECURITY

Pledge of Taxes and Revenues. All Taxes and Revenues and all amounts on deposit in the Revenue Fund and the Tax Fund are thereby irrevocably pledged to the payment of the 2018 Installment Payments as provided in the Installment Purchase Agreement and the Taxes and Revenues will not be used for any other purpose while any of the 2018 Installment Payments remain unpaid; provided that out of the Taxes and Revenues and amounts on deposit in the Tax Fund and the Revenue Fund there may be apportioned such sums for such purposes as are expressly permitted in the Installment Purchase Agreement. The pledge will constitute a first and exclusive lien on Taxes and Revenues and all amounts on deposit in the Tax Fund and the Revenue Fund on a parity with the pledge under any Contracts or Parity Bonds; subject to application of amounts on deposit therein as permitted therein, the Revenue Fund, the Tax Fund and the other funds and accounts created thereunder are pledged for the payment of the 2018 Installment Payments in accordance with the terms of the Installment Purchase Agreement and of the Indenture. Such lien on the Taxes and Revenues will attach, be perfected and be valid and binding from and after the Delivery Date, without any physical delivery of the Revenues and Taxes or further act and will be valid and binding against all parties having claims of any kind in tort, contract or otherwise against the District, irrespective of whether such parties have notice thereof.

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Allocation of Taxes and Revenues. In order to carry out and effectuate the pledge and lien contained in the Installment Purchase Agreement, the District agrees and covenants that all Taxes and Revenues will be received by the District in trust thereunder and will be deposited when and as received in separate special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously established under the 1996 Installment Sale Agreement and continued under the 2010 Installment Purchase Agreement and Parity Bonds and are thereby continued by the terms of the Installment Purchase Agreement, and which funds the District agrees and covenants to maintain and to hold separate and apart from other funds so long as any Installment Payments, Contracts or Parity Bonds remain unpaid. Moneys in the Revenue Fund and Tax Fund will be used and applied by the District as provided in the Installment Purchase Agreement and as provided in the Contracts and the Parity Bonds.

The District will, from the moneys in the Revenue Fund, 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. All moneys in the Tax Fund, and, to the extent such moneys are insufficient, all remaining moneys in the Revenue Fund, will be set aside by the District at the following times in the following respective special funds in the following order of priority and all moneys in each of such funds will be held in trust and will be applied, used and withdrawn only for the purposes thereinafter authorized in the Installment Purchase Agreement:

(a) Bond Payment Fund and Other Debt Service Payments. On or before each 2018 Installment Payment Date, the District will, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 Installment Payment due and payable on that 2018 Installment Payment Date. The District will also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any other Debt Service in accordance with the provisions of any other Contract or Parity Bond or resolution or indenture relating thereto.

No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the 2018 Installment Payment due and payable on the next succeeding 2018 Installment Payment Date.

All money in the Bond Payment Fund will be used and withdrawn by the Trustee in accordance with the Indenture.

(b) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds or Contracts, the District will, from the remaining moneys in the Tax Fund and, to the extent needed, the Revenue Fund, thereafter, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts.

(c) Surplus. Moneys on deposit in the Tax Fund or Revenue Fund not necessary to make any of the payments required above or as required by any other Contract or Parity Bond may be expended by the District at any time for any purpose permitted by law.

Additional Contracts and Parity Bonds. The District may, at any time, execute any Contract or issue any Parity Bonds, as the case may be, in accordance with the Installment Purchase Agreement, provided an Independent Financial Consultant or an Independent Certified Public Accountant will render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any twelve (12) consecutive calendar months in the eighteen (18) calendar months immediately preceding the issuance of the additional

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Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or additional Parity Bonds had been issued at the beginning of such twelve-month period. The Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of the Installment Purchase Agreement.

For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following:

(1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts;

(2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts;

(3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and

(4) the estimated change in Net Revenues which will result from services provided under any long-term, guaranteed contract that extends for the life of the additional Parity Bonds or Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts.

Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such Contracts.

In addition to the foregoing, in the event any amounts owed to any insurer are past due and owing, such insurer must provide written consent to the issuance of any Parity Bonds or the execution of any additional Contracts.

Investments. All moneys held by the District in the Tax Fund and Revenue Fund will be invested in the manner authorized by the District’s financial policies or as otherwise permitted by law. Investment earnings on amounts in each fund shall be deposited into such fund.

COVENANTS OF THE DISTRICT

Compliance with Installment Purchase Agreement and Indenture. The District will punctually pay the 2018 Installment Payments in strict conformity with the terms of the Installment Purchase Agreement, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Installment Purchase Agreement required to be observed and performed by it, and will not terminate the Installment Purchase Agreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either or any failure of the Authority to observe or perform any agreement, condition, covenant or term contained therein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected therewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Authority or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities.

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The District will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Indenture required to be observed and performed by it, and it is expressly understood and agreed by and among the parties to the Installment Purchase Agreement and the Indenture that, subject to the Installment Purchase Agreement, each of the agreements, conditions, covenants and terms contained in each such agreement is an essential and material term of the by obligation of the District to pay the Purchase Price pursuant to, and in accordance with, and as authorized under the Law and the Installment Purchase Agreement.

The District will faithfully observe and perform all the agreements, conditions, covenants and terms required to be observed and performed by it pursuant to all outstanding Contracts and Parity Bonds as such may from time to time be executed or issued, as the case may be.

Against Encumbrances. The District will not make any pledge of or place any lien on Revenues or the moneys in the Revenue Fund or Taxes or moneys in the Tax Fund except as provided in the Installment Purchase Agreement and in the Contracts and Parity Bonds. The District may at any time, or from time to time, issue evidences of indebtedness or incur other obligations for any lawful purpose which are payable from and secured by a pledge of and lien on Revenues or any moneys in the Revenue Fund or Taxes or moneys in the Tax Fund as may from time to time be deposited therein (as provided in the Installment Purchase Agreement) provided that (i) any such pledge and lien, which will be on a parity with the pledge of and lien thereon provided therein, will satisfy the requirements of the Installment Purchase Agreement; or (ii) such pledge and lien will be subordinate in all respects to, the pledge of and lien thereon provided therein.

Against Sale or Other Disposition of Property. The District will not enter into any agreement or lease which impairs the operation of the Water System or any part thereof necessary to secure adequate Revenues for the payment of the 2018 Installment Payments, or which would otherwise impair the rights of the Authority under the Installment Purchase Agreement or the operation of the Water System. Any real or personal property which has become nonoperative 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 District to pay the 2018 Installment Payments and if the proceeds of such sale are deposited in the Revenue Fund.

Nothing in the Installment Purchase Agreement will restrict the ability of the District to sell any portion of the Water System if such portion is immediately repurchased by the District 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 District of or otherwise interfere with its right to own and operate such portion of the Water System.

Against Competitive Facilities. The District 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, district or political subdivision or any person whomsoever to acquire, construct, maintain or operate within the District any water system competitive with the Water System.

Tax Covenants. The District will comply with the tax covenants set forth in the Indenture and the Tax Certificate.

Maintenance and Operation of the Water System. The District 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 District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the Revenues, Taxes or the funds or accounts existing under the Installment Purchase Agreement or under the Indenture or on any funds in the possession of the District pledged to pay the 2018 Installment Payments or to the Owners prior or superior to the lien of the 2018 Installment Payments or which might impair the security of the 2018 Installment Payments.

Compliance with Contracts. The District 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

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use of the Water System and all other contracts affecting or involving the Water System, to the extent that the District is a party thereto.

Insurance. (a) The District will procure and maintain such other insurance which it deems advisable or necessary to protect its interests and the interests of the Authority, which insurance affords protection 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.

In the event of any damage to or destruction of the Water System caused by the perils covered by such insurance, the Net Proceeds thereof will be applied to the reconstruction, repair or replacement of the damaged or destroyed portion of the Water System if determined by the District to be material to the operation of the Water System or if funded with proceeds of the 2018 Bonds. The District will begin such reconstruction, repair or replacement promptly after such damage or destruction will occur, and will continue and properly complete such reconstruction, repair or replacement as expeditiously as possible, and will pay out of such Net Proceeds all costs and expenses in connection with such reconstruction, repair or replacement so that the same will be completed and the Water System will be free and clear of all claims and liens.

If such Net Proceeds exceed the costs of such reconstruction, repair or replacement portion of the Water System, and/or the cost of the construction of additions, betterments, extensions or improvements to the Water System, then the excess Net Proceeds will be deposited in the Revenue Fund. If such Net Proceeds are sufficient to enable the District to retire all of the 2018 Bonds as well as all Parity Bonds and Contracts then remaining unpaid prior to their final respective due dates, the District may elect not to reconstruct, repair or replace the damaged or destroyed portion of the Water System, and/or not to construct other additions, betterments, extensions or improvements to the Water System; and thereupon Net Proceeds in an amount sufficient to retire all of the 2018 Bonds will be transferred to the Trustee and deposited to the Bond Payment Fund. If the Bonds are not subject to optional redemption at the time of the deposit, the District shall provide a Written Order to the Trustee describing how such funds are to be invested and applied . In the event that the Bonds are to be redeemed from such Net Proceeds, the District shall provide a Written Request to the Trustee with respect to such redemption as provided in the Indenture.

(b) The District will procure and maintain such other insurance as it deems advisable or necessary to protect its interests and the interests of the 2018 Bond Owners, which insurance will afford protection in such amounts and against such risks as are usually covered in connection with municipal water systems similar to the Water System.

(c) Any insurance required to be maintained by paragraph (a) above and, if the District determines to procure and maintain insurance pursuant to paragraph (b) above, such insurance, 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 and is, in the opinion of an accredited actuary, actuarially sound.

Accounting Records; Financial Statements and Other Reports. The District will keep appropriate accounting records in which complete and correct entries will be made of all transactions relating to the Water System, which records will be available for inspection by the Authority and the Trustee at reasonable hours and under reasonable conditions.

Protection of Security and Rights of the Authority. The District will preserve and protect the security of the Installment Purchase Agreement and the rights of the Authority to the 2018 Installment Payments under the Installment Purchase Agreement and will warrant and defend such rights against all claims and demands of all persons.

Payment of Taxes and Compliance with Governmental Regulations. The District will pay and discharge all taxes, assessments and other governmental charges which may thereafter be lawfully imposed upon

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the Water System, or any part thereof or upon the Revenues when the same becomes due. The District 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 District will not be required to comply with any regulations or requirements so long as the validity or application thereof will be contested in good faith.

Amount of Rates and Charges. To the fullest extent permitted by law, the District will fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which will be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but will not reduce the rates and charges then in effect unless the Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of the Installment Purchase Agreement. The Interest Subsidy Payments will be deducted from Net Revenues for purposes of the foregoing coverage calculations.

Collection of Rates and Charges. The District will have in effect at all times by-laws, rules and regulations requiring each customer to pay the rates and charges applicable to the Water Service to such land 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 District may discontinue such service from the Water System, and such service will not thereafter be recommenced except in accordance with the District laws or rules and regulations governing such situations of delinquency.

Eminent Domain Proceeds. If all or any part of the Water System will be taken by eminent domain proceedings, the Net Proceeds thereof will be applied as follows:

(a) If: (1) the District files with the Trustee a certificate showing: (i) the estimated loss of annual Net Revenues, if any, suffered or to be suffered by the District by reason of such eminent domain proceedings; (ii) a general description of the additions, betterments, extensions or improvements to the Water System proposed to be acquired and constructed by the District from such Net Proceeds; and (iii) an estimate of the additional annual Net Revenues to be derived from such additions, betterments, extensions or improvements; and (2) the District, on the basis of such certificate filed with the Trustee, determines that the estimated additional annual Net Revenues will sufficiently offset the estimated loss of annual Net Revenues resulting from such eminent domain proceedings so that the ability of the District to meet its obligations under the Installment Purchase Agreement will not be substantially impaired (which determination will be final and conclusive), then the District will promptly proceed with the acquisition and construction of such additions, betterments, extensions or improvements substantially in accordance with such certificate and such Net Proceeds will be applied for the payment of the costs of such acquisition and construction, and any balance of such Net Proceeds not required by the District for such purpose will be deposited in the Revenue Fund.

(b) If the foregoing conditions are not met, then such Net Proceeds will be applied by the District, in part, to the payment of the 2018 Installment Payments due under the Installment Purchase Agreement in the same proportion which the aggregate unpaid principal balance of 2018 Bonds then bears to the aggregate unpaid principal amount of such 2018 Bonds and all Parity Bonds and Contracts. In such event, the Net Proceeds so applied and will be transferred to the Trustee and deposited to the Bond Payment Fund. If the Bonds are not subject to optional redemption at the time of the deposit, the District shall provide a Written Order to the Trustee describing how such funds are to be invested and applied . In the event that the Bonds are to be redeemed from such Net Proceeds, the District shall provide a Written Request to the Trustee with respect to such redemption as provided in the Indenture.

Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Installment Purchase Agreement and for the better assuring and confirming unto the Authority of the rights and benefits provided to it therein.

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Continuing Disclosure. The District covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Installment Purchase Agreement, failure of the District to comply with the Continuing Disclosure Agreement will not be considered an Event of Default; provided however, the Authority may (and, at the request of any participating underwriter or the Owners of at least 25% aggregate principal amount of Outstanding 2018 Bonds, will, after receiving indemnification to its satisfaction) or any Owner may take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the District to comply with its obligations under the Installment Purchase Agreement.

PREPAYMENT OF 2018 INSTALLMENT PAYMENTS

Prepayment. The District shall have the right at any time to prepay the 2018 Installment Payments corresponding to principal of and interest on the 2018 Bonds and at any time and from time to time from any available funds; provided that any prepayment of a principal component of the 2018 Installment Payments to be applied to the redemption or defeasance of 2018 Bonds shall be in an amount sufficient to provide for such redemption or defeasance of 2018 Bonds in integral multiples of five thousand dollars ($5,000) and otherwise in accordance with the provisions of the Indenture and the Installment Purchase Agreement and that such prepayment shall be permitted only if it does not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. The Authority shall accept such prepayments when the same are tendered by the District. With respect to prepayments of 2018 Installment Payments pursuant to this Section, the District may determine, by written direction to the Authority and the Trustee, which 2018 Installment Payments are to be prepaid, including the principal component of the 2018 Installment Payment due on each 2018 Installment Payment Date to be prepaid, plus accrued interest to the date of prepayment, and, subject to the provisions of this Section, the date on which each such prepayment is to be made; provided, however, the remaining 2018 Installment Payments shall be sufficient to make the scheduled debt service payments on the 2018 Bonds.

Notwithstanding any such prepayment, the District shall not be relieved of its obligations under the Installment Purchase Agreement until the Purchase Price shall have been fully paid (or provision for payment thereof shall have been provided to the written satisfaction of the Authority).

EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY

Events of Default and Acceleration of Maturities. Each of the following will constitute an Event of Default under the Installment Purchase Agreement:

(1) the District will default in the due and punctual payment of any 2018 Installment Payment or any Contract or Parity Bond when and as the same becomes due and payable;

(2) the District will default in the performance of any of the other agreements or covenants required in the Installment Purchase Agreement to be performed by it, and such default will have continued for a period of sixty (60) days after the District has been given notice in writing of such default by the Authority or the Trustee;

(3) the District will 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 will approve a petition filed with or without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction will assume custody or control of the District or of the whole or any substantial part of its property; or

(4) an occurrence and continuance of any event of default under and as defined in any Contract or Parity Bond;

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then and in each and every such case during the continuance of an Event of Default, the Trustee as assignee of the Authority, will have the right at its option and without any further demand or notice, but subject in all respects to the provisions of the Indenture to declare the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon to be due and payable immediately, and upon any such declaration the same becomes immediately due and payable, anything contained in the Installment Purchase Agreement to the contrary notwithstanding. The Installment Purchase Agreement, however, is subject to the condition that if at any time after the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon has been so declared due and payable and before any judgment or decree for the payment of the moneys due has been obtained or entered the District will deposit with the Authority a sum sufficient to pay the unpaid principal amount of the 2018 Installment Payments or the unpaid payment of any other Contract or Parity Bond referred to in clause (1) above due prior to such declaration and the accrued interest thereon, with interest on such overdue installments, at the rate or rates applicable to the remaining unpaid principal balance of the 2018 Installment Payments or such Contract or Parity Bond if paid in accordance with their terms, and the reasonable expenses of the Authority, and any and all other defaults known to the Authority (other than in the payment of the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon due and payable solely by reason of such declaration) will have been made good or cured to the satisfaction of the Authority or provision deemed by the Authority to be adequate will have been made therefor, then by written notice to the District, the Authority may rescind and annul such declaration and its consequences; but no such rescission and annulment will extend to or will affect any subsequent default or will impair or exhaust any right or power consequent thereon.

Application of Funds Upon Acceleration. Upon the date of the declaration of acceleration as provided in the Installment Purchase Agreement, all Taxes and Revenues thereafter received by the District will be applied in the following order --

First, to the payment, without preference or priority, and in the event of any insufficiency of such Revenues or Taxes ratably without any discrimination or preference, of the fees, costs and expenses of the Authority and Trustee, if any, in carrying out the provisions of the Installment Purchase Agreement, including reasonable compensation to their respective accountants and counsel;

Second, other than Taxes, to the payment of the Operation and Maintenance Costs; and

Third, to the payment of the entire principal amount of the unpaid 2018 Installment Payments and the unpaid principal amount of all Parity Bonds and Contracts and the accrued interest thereon, with interest on the overdue installments at the rate or rates of interest applicable to the 2018 Installment Payments and such Parity Bonds and Contracts if paid in accordance with their respective terms.

Other Remedies of the Authority. The Authority will have the right:

(a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District or any director, officer or employee thereof, and to compel the District or any such director, officer or employee to perform and carry out its or his duties under the Law and the agreements and covenants required to be performed by it or him contained in the Installment Purchase Agreement;

(b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Authority; or

(c) by suit in equity upon the happening of an Event of Default to require the District and its directors, officers and employees to account as the trustee of an express trust.

Notwithstanding anything contained in the Installment Purchase Agreement, the Authority will have no security interest in or mortgage on the Project, the Water System or other assets of the District and no default thereunder will result in the loss of the Project, the Water System, or other assets of the District.

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Non-Waiver. Nothing in the Installment Purchase Agreement or in any other provision thereof will affect or impair the obligation of the District, which is absolute and unconditional, to pay the 2018 Installment Payments to the Authority at the respective due dates or upon prepayment from the Net Revenues, the Revenue Fund, the Tax Fund and the other funds therein pledged for such payment, or will affect or impair the right of the Authority, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied therein.

A waiver of any default or breach of duty or contract by the Authority will not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Authority to exercise any right or remedy accruing upon any default or breach of duty or contract will impair any such right or remedy or will be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Authority by the Law or by the Installment Purchase Agreement may be enforced and exercised from time to time and as often as will be deemed expedient by the Authority.

If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Authority, the District and the Authority will be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken.

Remedies Not Exclusive. No remedy in the Installment Purchase Agreement conferred upon or reserved to the Authority is intended to be exclusive of any other remedy, and each such remedy will be cumulative and will be in addition to every other remedy given thereunder or now or thereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by the Law or any other law.

DISCHARGE OF OBLIGATIONS

Discharge of Obligations. When

(a) all or any portion of the 2018 Installment Payments will have become due and payable in accordance with the Installment Purchase Agreement or a written notice of the District to prepay all or any portion of the 2018 Installment Payments will have been filed with the Trustee; and

(b) there has been deposited with the Trustee at or prior to the 2018 Installment Payment Dates or date (or dates) specified for prepayment, in trust for the benefit of the Authority, or its assigns, and irrevocably appropriated and set aside to the payment of all or any portion of the 2018 Installment Payments, sufficient moneys and Defeasance Obligations, the principal of and interest on which when due will provide money sufficient to pay all principal, prepayment premium, if any, and interest of such 2018 Installment Payments to their respective 2018 Installment Payment Dates or prepayment date or dates as the case may be; and

(c) provision has been made for paying all fees and expenses of the Trustee;

then and in that event, if an opinion of Bond Counsel acceptable to the Trustee is filed with the Trustee to the effect that the actions authorized by and taken pursuant to the Installment Purchase Agreement will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the 2018 Bonds, the right, title and interest of the Authority therein and the obligations of the District thereunder will, with respect to all or such portion of the 2018 Installment Payments as have been so provided for, thereupon cease, terminate, become void and be completely discharged and satisfied (except for the right of the Trustee and the obligation of the District to have such moneys and such Defeasance Obligations applied to the payment of such 2018 Installment Payments).

In such event, upon request of the District the Trustee will cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the District and will execute and deliver to the District all such instruments as may be necessary or desirable to evidence such total or partial discharge and satisfaction, as the case may be, and, in the event of a total discharge and satisfaction, the Trustee will pay over to

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the District, after payment of all amounts due the Trustee pursuant to the Indenture, as an overpayment of 2018 Installment Payments, all such moneys or such Defeasance Obligations held by it pursuant to the Installment Purchase Agreement other than such moneys and such Defeasance Obligations, as are required for the payment or prepayment of the 2018 Installment Payments, which moneys and Defeasance Obligations will continue to be held by the Trustee in trust for the payment of the 2018 Installment Payments and will be applied by the Trustee to the payment of the 2018 Installment Payments of the District.

MISCELLANEOUS

Liability Limited of the District. Notwithstanding anything contained in the Installment Purchase Agreement, the District will not be required to advance any moneys derived from any source of income other than the Revenues, Taxes, the Revenue Fund, the Tax Fund and the other funds provided therein for the payment of amounts due thereunder or for the performance of any agreements or covenants required to be performed by it contained therein. The District may, however, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose.

The obligation of the District to make the 2018 Installment Payments is a special obligation of the District payable solely from the Taxes, Net Revenues and amounts on deposit in the Revenue Fund and the Tax Fund and does not constitute a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

Benefits of Installment Purchase Agreement Limited to Parties. Except as set forth in the Installment Purchase Agreement, nothing contained therein, expressed or implied, is intended to give to any person other than the District or the Authority any right, remedy or claim under or pursuant thereto, and any agreement or covenant required therein to be performed by or on behalf of the District or the Authority will be for the sole and exclusive benefit of the other party.

Successor Is Deemed Included in all References to Predecessor. Whenever either the District or the Authority is named or referred to in the Installment Purchase Agreement, such reference will be deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Authority, and all agreements and covenants required thereby to be performed by or on behalf of the District or the Authority will bind and inure to the benefit of the respective successors thereof whether so expressed or not.

Waiver of Personal Liability. No Board member, officer or employee of the District will be individually or personally liable for the payment of the 2018 Installment Payments, but nothing contained in the Installment Purchase Agreement will relieve any director, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or by the Installment Purchase Agreement.

Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required thereby to be performed by or on the part of the District or the Authority will be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof will be null and void and will be deemed separable from the remaining agreements and covenants or portions thereof and will in no way affect the validity of the Installment Purchase Agreement. The District and the Authority thereby declare that they would have executed the Installment Purchase Agreement, and each and every other article, section, paragraph, subdivision, sentence, clause and phrase thereof irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases thereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid.

Assignment. The Installment Purchase Agreement and the Authority’s rights thereunder (except the rights of the Authority to indemnity as set forth in the Installment Purchase Agreement) will be assigned by the Authority, to the Trustee as provided in the Indenture, to which assignment the District thereby acknowledges and consents.

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Net Contract. The Installment Purchase Agreement will be deemed and construed to be a net contract, and the District will pay absolutely net during the term thereof the 2018 Installment Payments and all other payments required thereunder, free of any deductions and without abatement, diminution or set-off whatsoever.

California Law. The Installment Purchase Agreement will be construed and governed in accordance with the laws of the State of California.

Effective Date. The Installment Purchase Agreement will become effective upon its execution and delivery, and will terminate when the Purchase Price will have been fully paid (or provision for the payment thereof will have been made to the written satisfaction of the Authority).

Indemnification of Authority. The District agrees to indemnify and hold harmless the Authority and its assignee to the extent permitted by law, from and against all claims, advances, damages and losses, including legal fees and expenses, arising out of or in connection with the acceptance or the performance of its duties under the Installment Purchase Agreement and under the Indenture provided that no indemnification will be made to the Authority, or its assignee, as applicable for its willful misconduct, negligence or breach of an obligation thereunder or under the Indenture.

Amendments Permitted.

(a) The Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds and of the Trustee may be modified or amended at any time by an amendment thereto which will become binding when the written consents of the Owners of a majority in aggregate principal amount of the 2018 Bonds then Outstanding, exclusive of 2018 Bonds disqualified as provided in the Indenture have been obtained. No such modification or amendment will (1) extend the stated maturities of the 2018 Bonds, or reduce the rate of interest represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Bond so affected, or (2) reduce the aforesaid percentage of Owners of 2018 Bonds whose consent is required for the execution of any amendment or modification of the Installment Purchase Agreement, or (3) modify any of the rights or obligations of the Trustee or the Authority without its written consent thereto.

(b) The Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds may also be modified or amended at any time by an amendment thereto which will become binding upon adoption, without the consent of the Owners of any 2018 Bonds, but only to the extent permitted by law and only for any one or more of the following purposes--

(1) to add to the covenants and agreements of the Authority or the District contained in the Installment Purchase Agreement other covenants and agreements thereafter to be observed or to surrender any right or power therein reserved to or conferred upon the Authority or the District, and which will not adversely affect the interests of the Owners of the 2018 Bonds;

(2) to cure, correct or supplement any ambiguous or defective provision contained in the Installment Purchase Agreement or in regard to questions arising under the Installment Purchase Agreement, as the Authority or the District may deem necessary or desirable and which will not adversely affect the interests of the Owners of the 2018 Bonds; and

(3) to make such other amendments or modifications as may be in the best interests of the Owners of the 2018 Bonds which will not adversely affect the interests of the Owners of the 2018 Bonds.

No amendment without consent of the Owners may modify any of the rights or obligations of the Trustee without the written consent thereto.

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INDENTURE

DEFINITIONS; EQUAL SECURITY

Capitalized terms used in the Indenture and not otherwise defined therein shall have the respective meanings ascribed to such terms in the Installment Purchase Agreement. Unless the context otherwise requires, the terms defined in the Indenture shall for all purposes thereof and of any amendment thereof or supplement thereto and of the Bonds and of any certificate, opinion, request or other document mentioned therein have the meanings defined therein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined therein:

Authority. The term “Authority” means the Otay Water District Financing Authority, a joint exercise of powers authority duly organized and existing under and by virtue of the laws of the State of California.

Authorized Denominations. The term “Authorized Denominations” means $5,000 or any integral multiple

thereof.

Authorized Officer of the Authority. The term “Authorized Officer of the Authority” means the Authority’s Board President, Board Vice President, Executive Director, Treasurer/Auditor or any other person designated as an Authorized Representative of the Authority by a Certificate of the Authority signed by the Authority’s Board President, Board Vice President, Executive Officer or Treasurer/Auditor and filed with the Trustee.

Authorized Officer of the District. The term “Authorized Officer of the District” means the District’s Board President, Board Vice President, General Manager, Chief Financial Officer or any other person designated as an Authorized Representative of the District by a Certificate of the District signed by the District’s Board President, Board Vice President, Board Treasurer, General Manager or Chief Financial Officer and filed with the Trustee.

Bond Counsel. The term “Bond Counsel” means any attorney at law or firm of attorneys selected by the District, of nationally-recognized standing in matters pertaining to the federal tax exemption of interest with respect to obligations of states and political subdivisions.

Bond Payment Fund. The term “Bond Payment Fund” means the fund by that name established pursuant to the Indenture.

Bond Year. The term “Bond Year” means each twelve month period extending from September 2 in one calendar year to September 1 of the succeeding calendar year, except in the case of the initial Bond Year which shall be the period from the Closing Date of the Bonds to September 1, 2019, both dates inclusive.

Bonds. The term “Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A in the aggregate principal amount of $32,435,000.

Book-Entry System. The term “Book-Entry System” means the system maintained by the Securities Depository and described in the Indenture.

Business Day. The term “Business Day” means any day other than: (i) a Saturday or Sunday; or (ii) a day on which banks located in the city in which the Corporate Trust Office of the Trustee is located are authorized or required to remain closed; or (iii) a day on which The New York Stock Exchange is closed.

Certificate; Request. The term “Certificate” or “Request” means: (i) with respect to the District, an instrument in writing signed on behalf of the District by an Authorized Officer of the District, or by any other person duly authorized by the District’s Board of Directors to sign documents on its behalf with respect to the matters referred to therein; and (ii) with respect to the Authority, an instrument in writing signed on behalf of the Authority by an Authorized Officer of the Authority, or by any other person duly authorized by the Board of Directors of the Authority to sign documents on its behalf with respect to the matters referred to therein.

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Code. The term “Code” means the Internal Revenue Code of 1986, as amended, and the United States Treasury Regulations in effect with respect thereto.

Defeasance Securities. The term “Defeasance Securities” means: (1) cash, (2) non-callable direct obligations of the United States of America (“Treasuries”), (3) securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, (4) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, and (5) pre-refunded municipal obligations rated “AAA” and “Aaa” by S&P and Moody’s, respectively.

Delivery Date. The term “Delivery Date” means the date of the delivery of the Bonds to the initial purchaser thereof.

Depository. The term “Depository” means DTC or another recognized securities depository selected by the Authority which maintains a book-entry system for the Bonds.

District. The term “District” means the Otay Water District.

DTC. The term “DTC” means The Depository Trust Company, New York, New York, and its successors and assigns.

Event of Default. The term “Event of Default” means an Event of Default as defined in the Installment Purchase Agreement.

Executive Director. The term “Executive Director” means the Executive Director of the Authority.

Favorable Opinion of Bond Counsel. The term “Favorable Opinion of Bond Counsel” means an opinion of Bond Counsel addressed to the District and the Trustee to the effect that an action proposed to be taken is not prohibited by the laws of the State or the Indenture and will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds.

General Manager. The term “General Manager” means the General Manager of the District.

Hazardous Substances. The term “Hazardous Substances” means any hazardous substances, wastes, pollutants or contaminants now or later included in such (or any similar) term under any federal, state, or local statute, code, ordinance or regulation now in effect or later enacted or amended.

Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any form of certified public accountants appointed by the Authority which is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants.

Indenture. The term “Indenture” means the Indenture of Trust dated as of November 1, 2018, by and between the Trustee and the Authority, as originally executed and as it may from time to time be amended or supplemented in accordance therewith.

Information Services. The term “Information Services” means the Municipal Securities Rulemaking Board; or, in accordance with then current guidelines of the Securities and Exchange Commission, such other services providing information with respect to called bonds as the District may specify in a Certificate to the Trustee and as the Trustee may select.

Installment Payment Date. The term “Installment Payment Date” means each date on which Installment Payments are scheduled to be paid by the District pursuant to the Installment Purchase Agreement.

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Installment Payments. The term “Installment Payments” means the installment payments payable by the District pursuant to the Installment Purchase Agreement and in the amounts and at the times set forth in the Installment Purchase Agreement.

Installment Purchase Agreement. The term “Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of November 1, 2018, by and between the District and the Authority, as originally executed or as it may from time to time be amended of supplemented in accordance with its terms.

Interest Account. The term “Interest Account means the account by that name established pursuant to the Indenture.

Interest Payment Date. The term “Interest Payment Date” means March 1 and September 1 of each year, commencing March 1, 2019.

Issuance Costs. The term “Issuance Costs” means all the costs of issuing and delivering the Bonds, including, but not limited to, all printing and document preparation expenses in connection with the Indenture, the Installment Purchase Agreement, the Bonds and any preliminary official statement and final official statement pertaining to the Bonds, rating agency fees, CUSIP Service Bureau charges, market study fees, legal fees and expenses of counsel with the issuance and delivery of the Bonds, the initial fees and expenses of the Trustee, and its counsel and other fees and expenses incurred in connection with the issuance and delivery of the Bonds, to the extent such fees and expenses are approved by the District.

Issuance Costs Fund. The term “Issuance Costs Fund” means the fund by that name established pursuant to the Indenture.

Letter of Representations. The term “Letter of Representations” means the letter of the District delivered to and accepted by the Depository on or prior to delivery of the Bonds as book-entry certificates setting forth the basis on which the Depository serves as depository for such book-entry certificates, as originally executed or as it may be supplemented or revised or replaced by a letter from the District delivered to and accepted by the Depository.

Maturity Date. The term “Maturity Date” means September 1 of each year in which principal payments are due on the Bonds commencing in 2019 and ending in 2043.

Moody’s. The term “Moody’s” means Moody’s Investors Service, Inc. and its successors and assigns.

Nominee. The term “Nominee” means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Indenture.

Outstanding. The term “Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds except: (i) Bonds canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Bonds paid or deemed to have been paid within the meaning of the Indenture; and (iii) Bonds in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

Owner. The term “Owner” or “Bond Owner” or “Owner of Bonds” or any similar term, when used with respect to the Bonds, means any person who shall be the registered owner of any Outstanding Bond.

Participant. The term “Participant” means, with respect to DTC or another Securities Depository, a member of or participant in DTC or such other Securities Depository, respectively.

Person. The term “Person” means a natural person or any legal entity.

Permitted Investments. The term “Permitted Investments” means any of the following, if and to the extent permitted by law and by any policy guidelines promulgated by the Authority or the District (provided that the

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Trustee shall be entitled to rely upon any investment directions from the Authority or District as conclusive certification to the Trustee that the investments described therein comply with any policy guidelines promulgated by the Authority and the District and are so authorized under the laws of the State of California):

(a) Cash;

(b) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including: U.S. treasury obligations; All direct or fully guaranteed obligations; Farmers Home Administration; General Services Administration; Guaranteed Title XI financing; Government National Mortgage Association (GNMA); and State and Local Government Series;

(c) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including: Export-Import Bank; Rural Economic Community Development Administration; Federal Farm Credit Bureau; U.S. Maritime Administration; Small Business Administration; U.S. Department of Housing & Urban Development (PHAs); and Federal Housing Administration and Federal Financing Bank;

(d) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC); Obligations of the Resolution Funding Corporation (REFCORP); Senior debt obligations of the Federal Home Loan Bank System; and Senior debt obligations of other Government Sponsored Agencies;

(e) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks which may include the Trustee and its affiliates which (i) have a rating on their short term certificates of deposit on the date of purchase of “P-1” by Moody’s and “A-1” by S&P and maturing not more than 360 calendar days after the date of purchase; or (ii) are collateralized by Permitted Investments described in clause (b) above for amounts in excess of FDIC insurance. (Ratings on holding companies are not considered as the rating of the bank);

(f) Commercial paper which is rated at the time of purchase in the single highest classification, “P-1” by Moody’s or “A-1” by S&P and which matures not more than 270 calendar days after the date of purchase;

(g) Investments in a money market fund rated “AAm”, “AAAm” or “AAAm-G” or better by S&P, excluding funds with a floating net asset value but 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 and retains a fee for services provided to the fund, (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 Indenture may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee;

(h) 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:

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

(2) (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 (b) above, which escrow may be applied only to the payment of such principal and interest and redemption premium, if any, on such bonds or other

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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 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;

(i) Municipal Obligations rated “Aaa/AAA” or general obligations of States with a rating of “A2/A” or higher by both Moody’s and S&P;

(j) the Local Agency Investment Fund of the State, created pursuant to Section 16429.1 of the California Government Code, to the extent the Trustee is authorized to register such investment in its name;

(k) Local Government Investment Pools (LGIP). Shares of beneficial interest issued by a joint powers authority organized pursuant to Government Code §6509.7. To be eligible for purchase, the pool must meet the requirements of CGC §53601(p); and

(l) Certificates of deposit insured by the Federal Deposit Insurance Corporation.

The value of the above investments shall be determined as follows:

(a) For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued at fair market value;

(b) As to certificates of deposit and bankers’ acceptances: the face amount thereof, plus. accrued interest thereon; and

(c) As to any investment not specified above: the value thereof established by prior agreement among the Authority and the Trustee.

Pledged Revenues. The term “Pledged Revenues” means amounts received by the Authority pursuant to or with respect to the Installment Purchase Agreement (other than payments related to the indemnification of the Authority) and all interest or gains derived from the investment of amounts in any of the funds or accounts established under the Indenture.

Principal Account. The term “Principal Account” means the account by that name established pursuant to the Indenture.

Principal Corporate Trust Office. The term “Principal Corporate Trust Office” means the principal corporate trust office of the Trustee in Los Angeles, California, or such other office as the Trustee may from time to time designate in writing to the District, the Authority and the Owners except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted.

Project. The term “Project” has the meaning given in the Installment Purchase Agreement.

Rating Agencies. The term Rating Agencies means S&P or Moody’s, or both, as applicable, so long as such entity maintains a rating on the Bonds which was obtained at the request of the District.

Rebate Fund. The term “Rebate Fund” means the fund by that name established and held by the Trustee pursuant to the Indenture.

Record Date. The term “Record Date” means the fifteenth (15th) day of the month immediately preceding an Interest Payment Date whether or not such day is a Business Day.

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Redemption Account. The term “Redemption Account” means the account by that name established pursuant to the Indenture.

Redemption Price. The term “Redemption Price” means, with respect to any Bond (or portion thereof), the principal amount with respect to such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Indenture.

Securities Depository. The term “Securities Depository” means DTC or, if applicable, any successor securities depository appointed pursuant to the Indenture.

Sinking Account. The term “Sinking Account” means the account established pursuant to the Indenture.

S&P. The term “S&P” means S&P Global Ratings, a Standard & Poor’s Financial Services, LLC business, and its successors and assigns.

State. The term “State” means the State of California.

Statement of the Authority or the District. The term “Statement of the Authority or the District” means a statement signed by or on behalf of: (i) the Authority by an Authorized Officer; or (ii) the District by an Authorized Officer.

Tax Certificate. The term “Tax Certificate” means the Tax Certificate dated the date of initial issuance of the Bonds, concerning certain matters pertaining to the use and investment of proceeds of the Bonds executed by and delivered by the District and the Authority on the date of execution and delivery of the Bonds, including any and all exhibits attached thereto.

Term Bonds. The term “Term Bonds” means the Bonds maturing on September 1, 2043 which are subject to mandatory sinking fund redemption.

Trustee. The term “Trustee” means MUFG Union Bank, N.A., a national banking association, duly organized and existing under and by virtue of the laws of the United States, having a principal corporate trust office in Los Angeles, California, or its successor as Trustee under the Indenture.

2018 Project Fund. The term “2018 Project Fund” means the fund by that name established by the District in accordance with the Installment Purchase Agreement.

Written Order of the Authority or the District; Written Request of the Authority or the District; Written Requisition of the Authority or the District. The terms “Written Order of the Authority or the District,” “Written Request of the Authority or the District,” and “Written Requisition of the Authority or the District” mean, respectively, a written order, request or requisition signed by or on behalf of: (i) the Authority by and Authorized Officer; or (ii) the District by an Authorized Officer.

Equal Security. In consideration of the acceptance of the Bonds by the Owners, the Indenture shall be deemed to be and shall constitute a contract between the Trustee and the Owners to secure the full and final payment of the interest and principal and redemption premiums, if any, on the Bonds, subject to the agreements, conditions, covenants and terms contained in the Indenture, including without limitation the terms included in thereof; and all agreements, conditions, covenants and terms contained therein required to be observed or performed by or on behalf of the Trustee shall be for the equal and proportionate benefit, protection and security of all Owners without distinction, preference or priority as to benefit, protection or security of any Bonds over any other Bonds by reason of the number or date thereof or the time of sale, execution or delivery thereof or otherwise for any cause whatsoever, except as expressly provided therein or therein.

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REDEMPTION OF BONDS

Selection of Bonds To Be Redeemed. Whenever provision is made in the Indenture for the optional redemption of less than all of the Bonds, the Trustee will select the Bonds to be redeemed from all Bonds or such given portion of the Bonds not previously called for redemption, among maturities as directed by the District in a Written Request and within each maturity by lot. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond.

Notice of Redemption. The District shall notify the Trustee at least forty-five (45) days (or such lesser number of days acceptable to the Trustee in the sole discretion of the Trustee) prior to any optional redemption date for Bonds pursuant to the Indenture. Notice of redemption shall be given by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date, (i) so long as Bonds are held under the Book-Entry System to the Securities Depository electronically or by such method as is acceptable to the Securities Depository, (ii) if the Bonds are no longer held under the Book-Entry System, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, and (iii) to the Information Services. Notice of redemption shall be given in the form and in accordance with the terms of the Indenture.

Each such notice of redemption will state the date of notice, the redemption date, the place or places of redemption and the Redemption Price, will designate the maturities, CUSIP numbers, if any, and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed, and, if the Bonds are no longer held in book-entry form and less than all of any such maturity is to be redeemed, the serial numbers of the Bonds of such maturity to be redeemed by giving the individual number of each Bond called for redemption or by stating that all Bonds between two stated numbers, both inclusive, have been called for redemption. Each such notice will also state that on said date there will become due and payable on each of said Bonds the Redemption Price thereof or of said specified portion of the principal thereof in the case of a Bond to be redeemed in part only, together with interest accrued with respect thereto to the redemption date, and that (provided that moneys for redemption have been deposited with the Trustee) from and after such redemption date interest thereon ceases to accrue, and will require that such Bond be then surrendered to the Trustee. Any failure to receive such notice or any defect in the notice or the delivery of such notice will not affect the validity of the redemption of any Bond.

With respect to any notice of optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption shall not be made, and the Trustee shall within a reasonable time thereafter give notice to the persons to whom, and in the manner in which the notice of redemption was given, that such moneys were not so received.

Partial Redemption of Bonds. Upon surrender of any Bond redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond or Bonds of Authorized Denominations, and of the same Maturity Date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered.

Effect of Redemption of Bonds. If notice of redemption having been duly given pursuant to the Indenture, and moneys for payment of the Redemption Price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable at the Redemption Price specified in such notice together with interest accrued thereon to the date fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue, the Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of the Bonds shall have no rights in respect

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thereof except to receive payment of the Redemption Price and accrued interest. Neither the failure to receive any notice nor any defect therein shall not affect the sufficiency of the proceedings of redemption.

All Bonds redeemed pursuant to the Indenture shall be cancelled upon surrender thereof and destroyed.

ASSIGNMENT AND APPLICATION OF REVENUES

Assignment and Pledge of Pledged Revenues. The Authority, for good and valuable consideration, does unconditionally grant, transfer, assign and irrevocably pledge to the Trustee, without recourse, the Pledged Revenues, amounts on deposit in the Bond Payment Fund and all its rights under the Installment Purchase Agreement (other than its right to indemnification pursuant to the Installment Purchase Agreement) to receive the Installment Payments and enforce the Installment Purchase Agreement upon an event of default thereunder for the benefit of the Owners of the Bonds, for the purpose of securing: (a) the payment of all sums due and owing to the Owners of the Bonds under the terms of the Indenture; and (b) the observance, performance and discharge of each agreement, condition, covenant and term of the District contained in the Installment Purchase Agreement, and the Trustee accepts such assignment.

All Installment Payments shall be paid directly by the District to the Trustee, and all Installment Payments received by the Trustee shall be held in trust by the Trustee under the terms of the Indenture for the benefit of the District until deposited in the funds provided in the Indenture, whereupon such money shall be held in trust in such funds by the Trustee for the benefit of the Owners.

Deposit of Pledged Revenues. The Trustee shall deposit all Pledged Revenues paid to it into the Bond Payment Fund and shall transfer such funds to the Interest Account, Principal Account, Sinking Account and the Redemption Account in the manner and at the times later provided. The Bond Payment Fund (and all accounts contained therein) shall be maintained so long as any Bonds are Outstanding. All moneys in the Bond Payment Fund (and the accounts contained therein) shall be disbursed only for the purposes and uses later authorized:

(a) Interest Account. On or prior to each Interest Payment Date, the Trustee shall transfer to the Interest Account that amount of money necessary, together with other amounts on deposit therein, to pay the interest becoming due and payable on such Interest Payment Date. All money in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds on their respective Interest Payment Dates.

(b) Principal Account. On or prior to each maturity date (commencing on September 1, 2019), the Trustee shall transfer to the Principal Account that amount of money necessary, together with other amounts on deposit therein, to pay the principal becoming due and payable on such maturity date. All money in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal on the Bonds on their respective maturities. Notwithstanding the foregoing, no principal payments shall be made on the Term Bonds from the Principal Account.

(c) Sinking Account. On or prior to each date on which the Term Bonds are subject to mandatory sinking fund redemption, the Trustee shall transfer to the Sinking Account that amount of money representing the portion of the Pledged Revenues constituting the principal becoming due and payable on such date. All money in the Sinking Account shall be used and withdrawn by the Trustee solely for the purpose of paying the mandatory sinking fund redemption of the Term Bonds as they become due and payable.

(d) Redemption Account. Any prepayments of 2018 Installment Payments paid to the Trustee pursuant to the Installment Purchase Agreement shall immediately be transferred to the Redemption Account. All money in the Redemption Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest and principal and redemption premiums, if any, on the Bonds to be redeemed on their respective optional or mandatory redemption dates.

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Rebate Fund.

(a) Establishment. The Trustee shall establish, when required, a separate fund designated the “Rebate Fund.” Absent an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected, the Authority shall cause to be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Indenture and the Tax Certificate. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust for payment to the United States Treasury. All amounts on deposit in the Rebate Fund shall be governed by the Indenture and the Tax Certificate for the Bonds, unless and to the extent that the Authority delivers to the Trustee an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected if such requirements are not satisfied.

(A) Computation. Within 55 days of the end of the fifth Bond Year (as such term is defined in the Tax Certificate) and each fifth Bond Year thereafter, the Authority shall calculate or cause to be calculated the amount of rebatable arbitrage, in accordance with Section 148(f)(2) of the Code and Section 1.148-3 of the Treasury Regulations (taking into account any applicable exceptions with respect to the computation of the rebatable arbitrage, described, if applicable, in the Tax Certificate (e.g., the temporary investments exception of Section 148(f)(4)(B) and the construction expenditure exception of Section 148(f)(4)(C) of the Code or Section 1.148-7(d) of the Treasury Regulations), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the “1½% Penalty”) has been made), for this purpose treating the last day of the applicable Bond Year as a computation date, within the meaning of Section 1.148-1(b) of the Treasury Regulations (the “Rebatable Arbitrage”). The Authority shall obtain expert advice as to the amount of the Rebatable Arbitrage to comply with the Indenture.

(B) Transfer. Within 55 days of the end of the fifth Bond Year and each fifth Bond Year thereafter, upon the Written Request of the Authority, an amount shall be deposited to the Rebate Fund by the Trustee from any Pledged Revenues legally available for such purpose (as specified by the Authority in the Written Request), if and to the extent required so that the balance in the Rebate Fund shall equal the amount of Rebatable Arbitrage so calculated in accordance with the Indenture. In the event that immediately following the transfer required by the previous sentence, the amount then on deposit to the credit of the Rebate Fund exceeds the amount required to be on deposit therein, upon Written Request of the Authority, the Trustee shall withdraw the excess from the Rebate Fund and then credit the excess to the Bond Payment Fund.

(C) Payment to the Treasury. The Trustee shall pay, as directed by Request of the Authority, to the United States Treasury, out of amounts in the Rebate Fund,

not later than 60 days after the end of (X) the fifth Bond Year, and (Y) each applicable fifth Bond Year thereafter, an amount that, together with all previous rebate payments, is equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Bond Year; and

not later than 60 days after the payment of all the Bonds, an amount equal to 100% of the Rebatable Arbitrage calculated as of the date of such payment and any income attributable to the Rebatable Arbitrage determined to be due and payable, computed in accordance with Section 1.148-3 of the Treasury Regulations.

In the event that, prior to the time of any payment required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the Authority shall calculate or cause to be calculated the amount of such deficiency and deposit an amount received from any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant to the Indenture shall be made to the Internal Revenue Service Center, Ogden, Utah 84201 on or before the date on which such payment is due, and shall be accompanied by an Internal Revenue Service Form 8038-T prepared by the Authority, or shall be made in such other manner as provided under the Code.

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(b) Disposition of Unexpended Funds. Any funds remaining in the Rebate Fund after redemption and payment in full of the Bonds and the payments described in the Indenture being made may be withdrawn by the Authority upon written direction of the Authority to the Trustee and utilized in any manner by the Authority.

(c) Survival of Defeasance. Notwithstanding anything in the Indenture to the contrary, the obligation to comply with the requirements of the Indenture shall survive the defeasance or payment in full of the Bonds.

(d) Recordkeeping. The Authority shall retain records of all determinations made under the Indenture until six years after the complete retirement of the Bonds.

The Trustee shall not be responsible for calculating rebate amounts or for the adequacy or correctness or any rebate report or rebate calculations. The Trustee shall be deemed conclusively to have complied with the provisions of the Indenture and the Tax Certificate regarding calculation and payment of rebate if it follows the directions of the Authority and it shall have no independent duty to review or such calculations or enforce compliance with such rebate requirements.

COVENANTS

Compliance with Indenture and Installment Purchase Agreement. The Authority will not execute and the Trustee will not authenticate or deliver any Bonds in any manner other than in accordance with the provisions of the Indenture; and the Authority will not suffer or permit any default by it to occur under the Indenture, but will faithfully observe and perform all the agreements, conditions, covenants and terms contained therein required to be observed and performed by it.

The Authority will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Installment Purchase Agreement required to be observed and performed by the Authority, and will enforce such agreements against the other party thereto in accordance with their terms.

Tax Covenants. Notwithstanding any other provision of the Indenture, absent an opinion of Bond Counsel that the exclusion from gross income of interest on Bonds will not be adversely affected for federal income tax purposes, the Authority covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows:

(a) Private Activity. The Authority will take no action or refrain from taking any action or make any use of the proceeds of the Bonds or of any other moneys or property which would cause the Bonds to be “private activity bonds” within the meaning of Section 141 of the Code;

(b) Arbitrage. The Authority will make no use of the proceeds of the Bonds or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code;

(c) Federal Guaranty. The Authority will make no use of the proceeds of the Bonds or take or omit to take any action that would cause the Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the Code;

(d) Information Reporting. The Authority will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149(e) of the Code;

(e) Hedge Bonds. The Authority will make no use of the proceeds of the Bonds or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause either the Bonds to be considered “hedge bonds” within the meaning of Section 149(g) of the Code unless the

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Authority takes all necessary action to assure compliance with the requirements of Section 149(g) of the Code to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes; and

(f) Miscellaneous. The Authority will take no action or refrain from taking any action inconsistent with its expectations stated in that certain Tax Certificate executed by the Authority in connection with each issuance of Bonds and will comply with the covenants and requirements stated therein and incorporated by reference in the Indenture.

Prosecution and Defense of Suits. The Authority will defend against every action, suit or other proceeding at any time brought against the Trustee, the Authority or any Owner upon any claim arising out of the receipt, deposit or disbursement of any of the Installment Payments or involving any rights or obligations of the Trustee, the Authority or any Owner under the Indenture; provided, that the Trustee, the Authority or any Owner at its, his or her election may appear in and defend any such action, suit or other proceeding. The Authority will indemnify and hold harmless the Trustee and the Owners against any and all liability claimed or asserted by any person arising out of any such receipt, deposit or disbursement, and will indemnify and hold harmless the Owners against any attorneys’ fees or other expenses which any of them may incur in connection with any litigation or otherwise in connection with the foregoing to which any of them may become a party in order to enforce their rights under the Indenture or under the Bonds; provided that such litigation shall be concluded favorably to such Owners’ contentions therein.

Accounting Records and Statements. The Trustee shall keep proper books of record and account in accordance with corporate trust industry standards in which complete and correct entries shall be made of all transactions made by the Trustee relating to the receipt, investment, disbursement, allocation and application of the Pledged Revenues and the proceeds of the Bonds. Such records shall be open to inspection by the Authority and by any Owner at any reasonable time during regular business hours on reasonable notice. Not later than the fifteenth (15th) day of each month, commencing on the first calendar month after the initial issuance of the Bonds, and continuing so long as any Bonds are Outstanding, the Trustee will furnish to the Authority and to the District a complete statement covering the receipts, deposits and disbursements of the funds held by the Trustee under the Indenture for the preceding month; provided that the Trustee shall not be obligated to provide an accounting for any fund or account that: (a) has a balance of $0.00; and (b) has not had any activity since the last reporting date.

Further Assurances. Whenever and so often as requested to do so by the Trustee or any Owner, the Authority will promptly execute and deliver, or cause to be executed and delivered, all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee and the Owners the benefit, protection and security conferred, or intended to be conferred, upon them by the Indenture.

DEFAULT AND LIMITATIONS OF LIABILITY

Events of Default. The following events shall be Events of Default under the Indenture:

(a) Default by the Authority in the due and punctual payment of the principal of any Bonds when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration, or otherwise.

(b) Default by the Authority in the due and punctual payment of any installment of interest on any Bonds when and as the same shall become due and payable.

(c) Default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the Bonds contained, if such default shall have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee or by the Owners of a majority in aggregate principal amount of Bonds Outstanding; provided, however, that if in the reasonable opinion of the Authority the default stated in the notice can be corrected, but not within such thirty (30) day period and corrective action is instituted by the Authority

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within such thirty (30) day period and diligently pursued in good faith until the default is corrected, such failure shall not become an Event of Default.

(d) The Authority 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 Authority 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 Authority or of the whole or any substantial part of its property.

(e) An event of default shall have occurred under the Installment Purchase Agreement.

Remedies Upon Event of Default. If any Event of Default specified in the Indenture shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, and upon written direction of a majority of the Owners of the Bonds shall, declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding.

Any such declaration is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Authority shall deposit with the Trustee a sum sufficient to pay all the principal of and interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds to the extent permitted by law, and the reasonable charges and expenses of the Trustee, and any and all other Events of Default known to the Trustee (other than in the payment of principal of and interest on the Bonds 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 shall, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such Event of Default; but no such rescission and annulment shall extend to or shall affect any subsequent Event of Default, or shall impair or exhaust any right or power consequent thereon.

Application of Pledged Revenues and Other Funds After Default. If an Event of Default shall occur and be continuing, all Pledged Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture shall be applied by the Trustee as follows and in the following order:

(a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and payment of reasonable fees, charges and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture;

(b) To the payment of the principal of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping or otherwise noting thereon of the payment if only partially paid, or surrender thereof if fully paid) in accordance with the provisions of the Indenture, in the following order of priority:

First: To the payment to the persons entitled thereto of all interest then due in the order of the due date of such interest, and, if the amount available shall not be sufficient to pay in full any interest due on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the persons entitled thereto of the unpaid principal of any Bonds which shall have become due, whether at maturity or by acceleration or redemption, with interest on the overdue principal on each Bond at a rate equal to the interest rate per annum on such Bond, and, if the amount available shall not be

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sufficient to pay in full all the Bonds, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.

After payment of reasonable expenses of the Trustee, the application of funds realized upon default will be applied to the payment of expenses of the Authority or rebate only after the payment of past due and current debt service on the Bonds, any other amounts due and owing under the Installment Purchase Agreement.

Trustee to Represent Bond Owners. Subject to the Indenture, the Trustee is irrevocably appointed (and the successive respective Owners 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 Owners of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds or the Indenture 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 Bond Owners, the Trustee in its discretion may, and upon the written request of the Owners of 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 Owners 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 therein granted, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee or in such Owners under the Bonds or the Indenture 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 Pledged Revenues and other assets pledged under the Indenture, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise may 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 Owners of such Bonds, subject to the provisions of the Indenture.

Notwithstanding anything contained in the Indenture, the Trustee shall have no security interest in or mortgage on the Project, any property of the District or other assets or property thereof and no default thereunder shall result in the loss of the Project, any property of the District or other assets or property thereof.

Bond Owners’ Direction of Proceedings. Subject to the Indenture, anything in the Indenture to the contrary notwithstanding, the Owners 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, and upon indemnification of the Trustee to its reasonable satisfaction, to direct the method of conduct in 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 which in the opinion of the Trustee would be unjustly prejudicial to Bond Owners not parties to such direction.

Limitation on Bond Owners’ Right to Sue. No Owner of any Bonds 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 Installment Purchase Agreement or any other applicable law with respect to such Bonds, unless: (a) such Owners shall have given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers previously granted or to institute such suit, action or proceeding in its own name; (c) such Owner or Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee shall have failed to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee; (e) no direction inconsistent with such written request shall have been given to the Trustee during such sixty (60) day period by the Owners of a majority in aggregate principal amount of the Bonds then Outstanding; and (f) such suit, action or proceeding is instituted subject to the Indenture.

Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy under the Indenture or under law; it

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being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Bonds, the Indenture, the Installment Purchase Agreement 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 therein provided and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of the Indenture.

Absolute Obligation of Authority. Nothing in the Indenture or in the Bonds contained shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay the principal of and interest on the Bonds to the respective Owners of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, but only out of the Pledged Revenues and other assets therein pledged therefor, or affect or impair the right of such Owners, 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 Bond Owners 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 Bond Owners, then in every such case the Authority, the Trustee and the Bond Owners, subject to any determination in such proceedings, shall be restored to their former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the Authority, the Trustee and the Bond Owners shall continue as though no such proceedings had been taken.

Remedies Not Exclusive. No remedy in the Indenture conferred upon or reserved to the Trustee or to the Owners of the Bonds 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 any other remedy given under the Indenture or now or later existing at law or in equity or otherwise.

No Waiver of Default. No delay or omission of the Trustee or of any Owner of the Bonds to exercise any right or power arising upon the occurrence of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; provided, however, that every power and remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient.

THE TRUSTEE

Employment and Duties of the Trustee. The Authority appoints and employs the Trustee to receive, deposit and disburse the Pledged Revenues as provided in the Indenture, to prepare, authenticate, deliver, transfer, exchange and cancel the Bonds as provided therein, to pay the interest and principal and redemption premiums, if any, on the Bonds to the Owners thereof as provided therein, and to perform the other obligations contained therein; all in the manner provided therein and subject to the conditions and terms thereof. By executing and delivering the Indenture, the Trustee undertakes to perform such obligations (and only such obligations) as are specifically set forth therein, and no implied obligations shall be read therein against the Trustee.

Removal and Resignation of the Trustee. The Authority may at any time, as long as an Event of Default, or to its knowledge an event which with notice or passage of time or both would become an Event of Default, has not occurred and is continuing, and shall, after any breach by the Trustee under the Indenture, remove the Trustee initially a party thereto and any successor thereto by giving written notice of such removal to the Trustee, and by giving notice by mail in accordance with the Indenture of such removal to all Owners of Bonds, and the Trustee initially a party thereto and any successor thereto may at any time resign by giving written notice of such resignation to the Authority and the District and by giving notice by mail in accordance with the Indenture of such resignation to all Owners of Bonds. Upon giving any such notice of removal or upon receiving any such notice of resignation, the Authority shall promptly appoint a successor Trustee by an instrument in writing; provided, that in the event the Authority and the District do not appoint a successor Trustee within sixty (60) days following the giving of any such notice of removal or the receipt of any such notice of resignation, the removed or resigning Trustee may petition any appropriate court having jurisdiction to appoint a successor Trustee. No removal, resignation or termination of

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the Trustee shall take effect until a successor trustee shall be appointed. Any successor Trustee shall be a bank, national banking association with trust powers or trust company doing business and having a principal corporate trust office in the United States of America, having (or if such bank, national banking association or trust company is a member of a bank holding company system, its bank holding company has) a combined capital, (exclusive of borrowed capital) and surplus of at least seventy-five million dollars ($75,000,000), unless the District consents to a lesser amount therefor, and shall be subject to supervision or examination by state or national authorities. If such bank, national banking association or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of the Indenture the combined capital and surplus of such bank, national banking association or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Any removal or resignation of a Trustee and appointment of a successor Trustee shall become effective only upon the acceptance of the appointment by the successor Trustee.

Compensation and Indemnification of the Trustee. The Authority shall from time to time, subject to any agreement then in effect with the Trustee, pay the Trustee reasonable compensation for its services and reimburse the Trustee for all its reasonable advances and expenditures under the Indenture, including, but not limited to, advances to and the reasonable fees and expenses of accountants, agents, appraisers, consultants, counsel or other experts employed by it in the observance and performance of its rights and obligations thereunder; provided, except as otherwise provided therein, that the Trustee shall not have any lien for such compensation or reimbursement against any money held by it in any of the funds established thereunder, although the Trustee may take whatever legal actions are available to it directly against the Authority to recover such compensation or reimbursement. To the extent permitted by law, the Authority assumes liability for, and agree to defend, indemnify, protect, save and keep harmless, the Trustee and its directors, officers and employees and its successors and assigns from and against any and all liabilities, obligations, losses, damages (including consequential damages incurred by others), taxes and impositions, penalties, fines, claims, actions, suits, costs and expenses and disbursements (including legal fees and expenses) of whatsoever kind and nature imposed in, asserted against or incurred or suffered by the Trustee or its directors, officers or employees or its successors and assigns in any way relating to or arising out of (i) the condition, management, maintenance or use of or from any work done in connection with the Water System by the District including, the use, storage, preserve, disposal or release of any Hazardous Substances in or about the Water System, (ii) any act of negligence of the District or of any of its agents, contractors, directors, employees, invitees, licensees or officers in connection with the Water System, (iii) the authorization of the payment to any costs or expenses of the acquisition and construction of the 2018 Project, or (iv) the exercise of any rights or obligations of the Trustee under the Indenture; provided, that no indemnification will be made for willful misconduct or negligence thereunder by the Trustee.

The Trustee’s rights to immunities and protection from liability under the Indenture and its rights to payment of its fees and expenses shall survive its resignation or removal and the final payment or defeasance of the Bonds.

Protection of the Trustee. The Trustee shall be protected and indemnified as stated in the Indenture by the Authority and shall incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, telegram, electronic mail, facsimile, voucher, waiver or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant to any of the provisions 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 may consult with counsel, who may be counsel to the District, before being required to take any action under the Indenture with regard to legal questions arising thereunder, and the opinion of such counsel shall be full and complete authorization and protection in respect to any action taken or suffered by it thereunder in good faith in accordance therewith.

The Trustee shall not be responsible for the sufficiency of the Installment Purchase Agreement or of the assignment made to it in the Indenture of all rights to receive the Pledged Revenues under the Installment Purchase Agreement, or of the title or value of the Project, and shall not be deemed to have knowledge of any Event of Default

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unless and until it shall have actual knowledge thereof or have received written notice thereof at its corporate trust office in Los Angeles, California. All recitals, warranties or representations contained therein are statements of the District, and the Trustee assumes no responsibility for their correctness, and the Trustee shall not be accountable for the use or application by the District, or any other party, of any funds which the Trustee properly releases to the District or which the District may otherwise receive from time to time. The Trustee makes no representation concerning, and has no responsibility for, the validity, genuineness, sufficiency, or performance by parties other than the Trustee of the Indenture, any Bond, or of any other paper or document, or for taking any action on them (except as specifically and expressly stated for the Trustee in the Indenture), or with respect to any obligation of the Authority or the District under the Indenture or for the sufficiency of any insurance on the Water System.

Whenever in the observance or performance of its rights and obligations under the Indenture or under the Bonds, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action thereunder, the Trustee may request a Certificate of the District and such matter (unless other evidence in respect thereof be therein specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the District, and such certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions thereof upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable.

The Trustee may buy, sell, own, hold and deal in any of the Bonds and may join in any action which any Owner may be entitled to take with like effect as it were not a party to the Indenture. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the District, and may act as agent, depositary or trustee for any committee or body of Owners or of owners of obligations of the Authority or the District as freely as if it were not the Trustee under the Indenture. The Trustee shall not be answerable for the exercise of any of its rights under the Indenture or for the performance of any of its obligations thereunder or for anything whatsoever in connection with the funds established thereunder, except only for its own willful misconduct or negligence.

No provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties under the Indenture, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

The Trustee shall, prior to an Event of Default, and after the curing or waiver of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in the Indenture. The Trustee shall, during the existence of any Event of Default which has not been cured or waived, exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

The Trustee shall not be responsible for monitoring the compliance of the District and the Authority with the covenants as set forth in the Indenture and the Installment Purchase Agreement and may conclusively rely on all written instructions and calculations of the District and the Authority with respect thereto; provided, the Trustee shall promptly comply with all such written instructions as provided in the Indenture.

The Authority shall not be deemed to be an agent of the Trustee and the Trustee shall not be liable for the acts or omissions of the Authority in connection with the transactions contemplated by the Indenture and by the Installment Purchase Agreement.

The Trustee shall have no responsibility with respect to any information, statement or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Bonds.

Whenever in the administration of the trusts imposed upon it by the Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter (unless other evidence in respect thereof be specifically prescribed therein) may be deemed to be conclusively proved and established by a Certificate of the District, and such Certificate shall be full warrant

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to the Trustee for any action taken or suffered in good faith under the provisions of the Indenture in reliance upon such Certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it may deem reasonable.

The Trustee shall have the right to accept and act upon instructions, including funds transfer instructions (“Instructions”) given pursuant to the Indenture and delivered using Electronic Means (“Electronic Means” shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services under the Indenture); provided, however, that the Authority and District shall provide to the Trustee an incumbency certificate listing officers with the authority to provide such Instructions (“Authorized Officers”) and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the Authority and District whenever a person is to be added or deleted from the listing. If the Authority and District elect to give the Trustee Instructions using Electronic Means and the Trustee in its discretion elects to act upon such Instructions, the Trustee’s understanding of such Instructions shall be deemed controlling. The Authority and District understand and agrees that the Trustee cannot determine the identity of the actual sender of such Instructions and that the Trustee shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Trustee have been sent by such Authorized Officer. The Authority and District shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Trustee and that the Authority and District and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the Authority and District. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The Authority and District agree: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Authority and District; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Trustee immediately upon learning of any compromise or unauthorized use of the security procedures.

The Trustee may execute any of the trusts or powers hereof and perform the duties required of it under the Indenture by or through attorneys, agents, affiliates, or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty under the Indenture.

The Trustee shall not be liable to the parties to the Indenture or deemed in breach or default thereunder if and to the extent its performance thereunder is prevented by reason of force majeure. The term “force majeure” means an occurrence that is beyond the control of the Trustee and could not have been avoided by exercising due care. Force majeure shall include, but not be limited to, acts of God, terrorism, war, riots, strikes, fire, floods, earthquakes, epidemics or other similar occurrences.

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 Owners pursuant to the provisions of the Indenture unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby.

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 shall be a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, shall be the successor to

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the Trustee without the execution or filing of any paper or further act, anything in the Indenture to the contrary notwithstanding.

AMENDMENT OF OR SUPPLEMENT TO THE INDENTURE

Amendment or Supplement by Consent of Owners. The Indenture and the rights and obligations of the Authority, the District, Owners and the Trustee thereunder may be amended or supplemented at any time by an amendment thereof or supplement thereto which will become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Indenture, are filed with the Trustee. No such amendment or supplement will: (1) reduce the rate of interest on any Bond or extend the time of payment thereof or reduce the amount of principal or redemption premium, if any, of any Bond or extend the maturity thereof or otherwise alter or impair the obligation of the Authority to pay the interest and principal and redemption premium, if any, thereon at the time and place and at the rate and in the currency and from the funds provided therein without the prior written consent of the Owner of the Bond so affected; or (2) modify any of the rights or obligations of the Trustee without its prior written consent thereto.

The Indenture and the rights and obligations of the Authority, the District, the Owners and the Trustee thereunder may also be amended or supplemented at any time by an amendment thereof or supplement thereto which shall become binding upon execution without the written consents of any Owners, but only to the extent permitted by law and only if, in the opinion of the Trustee (which opinion may be based upon an Opinion of Bond Counsel or a Certificate of the District), such amendment or supplement is not materially adverse to the interests of the Owners, including, but not limited to, amendments or supplements for any other following purposes:

(a) to add to the agreements, conditions, covenants and terms contained in the Indenture required to be observed or performed by the Authority other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority, or to surrender any right reserved therein to or conferred therein on the Authority or the District, and which in either case shall not adversely affect the interests of the Owners;

(b) to modify, amend or supplement the Indenture in such manner as to preserve the exemption of the Bonds from the registration requirements of the Securities Act of 1933 or any similar federal statute later in effect or to permit the qualification of the Indenture under the Trust Indenture Act of 1939 or any similar federal statute later in effect;

(c) 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 thereunder which the Authority may deem desirable or necessary, and which shall not adversely affect the interests of the Owners; and

(d) to make any modifications or changes necessary or appropriate as set forth in a Favorable Opinion of Bond Counsel to preserve or protect the exclusion from gross income for federal income tax purposes of interest on the Bonds.

The Authority shall give written notice of any amendment, or supplement to the Indenture, requiring the consent of the Owners under the Indenture to the Rating Agencies not less than fifteen (15) days prior to the execution thereof; provided, however, the failure to provide such notice shall not be an Event of Default under the Indenture and shall not invalidate any amendment.

In executing, or accepting the additional trusts created by, any supplemental indenture permitted by the Indenture or the modification thereby of the trusts created by the Indenture, the Trustee will be entitled to receive, and will be fully protected in relying upon, an opinion of counsel stating that the execution of such supplemental indenture is authorized or permitted by the Indenture and complies with the terms thereof. The Trustee may, but will not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under the Indenture or otherwise.

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Disqualified Bonds. Bonds known to the Trustee to be held for the account of the Authority or the District (but excluding Bonds held in any pension or retirement fund of the Authority or the District) 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 therein, and the Trustee may adopt appropriate regulations to require each Owner, before his or her consent provided for therein shall be deemed effective, to reveal if the Bonds as to which such consent is given are disqualified as provided in the Indenture. Upon request of the Trustee, the District and the Authority shall specify in a Certificate of the District and the Authority those Bonds disqualified pursuant to the Indenture and the Trustee may conclusively rely on such Certificate.

Endorsement or Replacement of Bonds After Amendment or Supplement. After the effective date of any action taken as provided in the Indenture, the Trustee may determine that the Bonds may bear a notation by endorsement in form approved by the Trustee as to such action, and in that case, upon demand of the Owner of any Outstanding Bond and presentation of the Bond for such purpose at the corporate trust office of the Trustee in Los Angeles, California, a suitable notation as to such action shall be made on such Bond. If the Trustee shall so determine, new Bonds so modified as in the opinion of the Trustee shall be necessary to conform to such action shall be prepared, and in that case upon demand of the Owner of any Outstanding Bonds such new Bonds shall be exchanged without cost to each Owner for Bonds then Outstanding at the corporate trust office of the Trustee in Los Angeles, California, upon surrender of such Outstanding Bonds. All Bonds surrendered to the Trustee pursuant to the provisions of the Indenture shall be canceled by the Trustee and shall not be redelivered.

Amendment or Supplement by Mutual Consent. The provisions of the Indenture shall not prevent any Owner from accepting any amendment or supplement as to the particular Bonds owned by him or her; provided, that due notation thereof is made on such Bonds.

DEFEASANCE

Discharge of Bonds and Indenture.

(a) Any or all of the Outstanding Bonds may be paid, in whole or in part, as set forth in the Indenture. If the Trustee shall pay or cause to be paid or there shall otherwise be paid to the Owners of any Outstanding Bonds the interest and principal and redemption premiums, if any, evidenced and represented thereby at the times and in the manner provided in the Indenture, then all agreements and covenants of the Authority and the District to such Owners thereunder shall thereupon cease, terminate and become void and shall be completely discharged and satisfied except for the obligation of the Trustee to pay from amounts described in the Indenture the interest and principal or Redemption Price, on such Bonds and the covenant of the Authority to comply with the Indenture.

(b) Any Outstanding Bonds shall on their maturities or redemption date or dates prior thereto, as applicable, be deemed to have been paid within the meaning of and with the effect expressed in the Indenture if there shall be on deposit with the Trustee money held in trust for the benefit of the Owners of such Bonds which is sufficient to pay the interest and principal and Redemption Price, as applicable, on such Bonds payable on and prior to their maturities or their redemption date or dates, as applicable.

(c) Any Outstanding Bonds shall prior to their maturities or their redemption date or dates prior thereto be deemed to have been paid within the meaning of and with the effect expressed in the Indenture if: (l) in case any of such Bonds are to be redeemed within the next succeeding sixty (60) days, the Authority shall have given to the Trustee in form satisfactory to it irrevocable instructions to give notice of redemption in accordance with the Indenture to the Owners of such Bonds of the redemption of such Bonds on such redemption date or dates; (2) there shall have been deposited with the Trustee, or an escrow agent selected by the Authority, Defeasance Securities, the interest on and principal of which when paid will provide money which, together with money, if any, deposited with the Trustee or the escrow agent at the same time, shall be sufficient (as evidenced by a report of an Independent Certified Public Accountant regarding such sufficiency) to pay when due the interest on such Bonds on and prior to the earlier of their maturities or their redemption date or dates, as the case may be, and the principal

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or Redemption Price on such Bonds; and (3) in the event such Bonds are not by their terms subject to redemption within the next succeeding sixty (60) days, the Authority shall have given the Trustee in form satisfactory to it irrevocable instructions to give notice in accordance with the Indenture to the Owners of such Bonds that the deposit required by clause (2) above has been made with the Trustee and that such Bonds are deemed to have been paid in accordance with the Indenture and stating their maturities or their redemption date or dates prior thereto upon which money is to be available for the payment of the interest and principal and redemption premiums, if any, on such Bonds.

To accomplish a defeasance of all or a portion of the Bonds, the Authority shall cause to be delivered to the Trustee (i) a report of an Independent Certified Public Accountant verifying the sufficiency of the escrow established to pay the Bonds being defeased in full, to their maturity or redemption date or dates (the “Verification”); (ii) an opinion of Bond Counsel to the effect that the Bonds are no longer “Outstanding” under the Indenture; and (iii) a certificate of discharge of the Trustee with respect to such Bonds. Each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the Authority and the Trustee.

Bonds shall be deemed “Outstanding” under the Indenture unless and until they are in fact paid and retired or the above criteria are met.

(d) After the payment of all interest and principal and redemption premiums, if any, of all Outstanding Bonds as provided in the Indenture, and the payment of all fees and expenses of the Trustee, upon receipt of a Written Request of the District, the Trustee shall cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the Authority and the District and shall authenticate and deliver to the Authority and the District all such instruments as may be necessary or desirable to evidence such total discharge and satisfaction of the Indenture, and the Trustee shall pay over or deliver to the District all money or investments held by it pursuant to the Indenture which are not required for the payment of the interest and principal and redemption premiums, if any, evidenced and represented by such Bonds, which money and investments shall be used by the District for any lawful purpose.

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 or principal or redemption premium, if any, on any Bonds which remains unclaimed for one (1) year after the date when the payments on such Bonds have become payable, if such money was held by the Trustee on such date, or for one (1) year after the date of deposit of such money if deposited with the Trustee after the date when the interest and principal and redemption premiums, if any, on such Bonds have become payable, shall be repaid by the Trustee to the Authority as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the Authority for the payment of the interest and principal and redemption premiums, if any, on such Bonds; provided, that before being required to make any such payment to the Authority, the Trustee shall, at the expense of the Authority, give notice by mail in accordance with the Indenture to Owners of Bonds with respect to which moneys remain unclaimed that such money remains unclaimed and that after a date named in such notice, which date shall not be less than sixty (60) days after the date of giving such notice, the balance of such money then unclaimed will be returned to the Authority.

MISCELLANEOUS

Benefits of the Indenture Limited to Parties. Nothing contained in the Indenture, expressed or implied, is intended to confer upon, or to give or grant to, any person or entity other than the Authority, the District, the Trustee and the Owners any claim, remedy or right under or pursuant thereto, and any agreement, condition, covenant or term contained therein required to be observed or performed by or on behalf of the Authority or the District shall be for the sole, exclusive benefit of the Trustee and the Owners.

Successor Deemed Included in All References to Predecessor. Whenever either the Authority, the District or the Trustee or any officer, director or employee thereof is named or referred to in the Indenture, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the Authority, the District or the Trustee or such officer, director or employee, and all agreements, conditions,

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covenants and terms contained therein required to be observed or performed by or on behalf of the Authority, the District or the Trustee or any officer, director or employee thereof shall bind and inure to the benefit of the respective successors thereof whether so expressed or not.

Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required in the Indenture to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact and date of the execution by any Owner or such Owner’s attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state or territory in which he or she purports to act that the person signing such declaration, request or other instrument or writing acknowledged to him or her the execution thereof; or by an affidavit of a witness to such execution duly sworn to before such notary public or other officer, or by such other proof as the Trustee may accept which it may deem sufficient.

Any declaration, acceptance, request or other instrument in writing of the Owner of any Bond shall bind all future Owners of such Bond with respect to anything done or suffered to be done by the Authority or the District or the Trustee in good faith and in accordance therewith.

Waiver of Personal Liability. No officer, director or employee of the District, the Authority or the Trustee shall be individually or personally liable for the payment of the interest or principal or redemption premiums, if any, on the Bonds, but nothing contained in the Indenture shall relieve any officer, director or employee of the Authority, the District or the Trustee from the performance of any official duty provided by any applicable provisions of law or by the Installment Purchase Agreement or by the Indenture.

Content of Certificates. Every certificate with respect to compliance with any agreement, condition, covenant or term contained in the Indenture shall include: (a) a statement that the person or persons executing such certificate have read such agreement, condition, covenant or term and the definitions therein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based; (c) a statement that, in the opinion of the signers, they have made or caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such agreement, condition, covenant or term has been complied with; and (d) a statement as to whether, in the opinion of the signers, such agreement, condition, covenant or term has been complied with.

Any certificate may be based, insofar as it relates to legal matters, upon an Opinion of Bond Counsel unless the person or persons executing such certificate know that the Opinion of Bond Counsel with respect to the matters upon which his, her or their certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of Bond Counsel may be based, insofar as it relates to factual matters or information with respect to which is in the possession of the District, upon a representation by an officer or officers of the District unless the counsel executing such Opinion of Bond Counsel knows that the representation with respect to the matters upon which his or her opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous.

Notice by Mail. Any notice required to be given under the Indenture by mail to any Owners of Bonds shall be given by mailing a copy of such notice, first class postage redeemed, to the Owners of such Bonds at their addresses appearing in the books required to be kept by the Trustee pursuant to the provisions of the Indenture not less than the number of days specified in the Indenture following the action or prior to the event concerning which notice thereof is required to be given; provided, that receipt of any such notice shall not be a condition precedent to the effect of such notice and neither failure to receive any such notice nor any immaterial defect contained therein shall affect the validity of the proceedings taken in connection with the action or the event concerning which such notice was given. Notwithstanding the foregoing, so long as the Bonds are held under the Book-Entry System, any notice required to be given hereunder by mail to any Owners may be given to the Securities Depository in a manner agreed to by the Securities Depository.

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Funds. Any fund required to be established and maintained in the Indenture by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purpose of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund; but all such records with respect to all such funds shall at all times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the Bonds and the rights of the Owners. In addition to the funds and accounts required to be established under the Indenture, the Trustee may establish such other funds and accounts as it deems necessary or appropriate to perform its obligations.

Destruction of Bonds. All Bonds acquired by the Authority or the District shall be surrendered to the Trustee for cancellation. Whenever in the Indenture provision is made for the cancellation by the Trustee of any Bonds, the Trustee shall destroy such Bonds and deliver a certificate of such destruction to the Authority.

Deposits and Investments.

(a) Any money held by the Trustee in any of the funds provided in the Indenture shall be invested in one or more Permitted Investments in accordance with a Written Request of the Authority. In the absence of a Written Request of the Authority funds shall be held uninvested. Any such money shall be invested by the Trustee as directed by the Authority pursuant to a Written Request of the Authority in Permitted Investments which will, as nearly as practicable, mature on or before the dates on which such money is anticipated to be needed for disbursement under the Indenture.

(b) The Trustee may act as principal or agent in the acquisition or disposition of any such deposit or investment and may, for the purpose of any such deposit or investment, commingle any of the money held by them under the Indenture, and the Trustee shall not be liable or responsible for any loss suffered in connection with any such deposit or investment made by them under the terms of and in accordance with the Indenture. The Trustee may present for redemption or sell any such deposit or investment whenever it shall be necessary in order to provide money to meet any payment of the money so deposited or invested, and the Trustee shall not be liable or responsible for any losses resulting from any such deposit or investment presented for redemption or sold. Any Permitted Investments that are registrable securities shall be registered in the name of the Trustee. The Trustee is authorized, in making or disposing of any investment permitted by the Indenture, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account.

The Authority (and the District by is execution of the Installment Purchase Agreement) acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority the right to receive brokerage confirmations of security transactions as they occur, the Authority specifically waives receipt of such confirmations to the extent permitted by law. The Authority further understands that trade confirmations for securities transactions effected by the Trustee will be available upon request and at no additional cost and other trade confirmations may be obtained from the applicable broker. The Trustee will furnish periodic cash transaction statements to the Authority in accordance with the Indenture which include detail for all investment transactions made by the Trustee thereunder. Upon the Authority’s election, such statements will be delivered via the Trustee’s online service and upon electing such service, paper statements will be provided only upon request.

(c) Interest earnings on the Issuance Costs Fund, the Rebate Fund and the Bond Payment Fund will be deposited to the Bond Payment Fund for application in accordance with the Indenture.

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APPENDIX B

DISTRICT AUDITED FINANCIAL STATEMENTS

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Otay Water District Comprehensive Annual Financial Report for the Years Ended June 30, 2017 and 2016

BOARD OF DIRECTORS Mark Robak, Division 5 President Tim Smith, Division 1 Vice President Mitch Thompson, Division 2 Treasurer Gary Croucher, Division 3 Hector Gastelum, Division 4

DISTRICT FINANCIAL MANAGEMENT Mark Watton General Manager

Joseph R. Beachem Chief Financial Officer

Kevin Koeppen Assistant Chief of Finance

PREPARED BY Finance Department

Otay Water District, Spring Valley, California

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Table of Contents

Introductory Section

Letter of Transmittal…………………………………………………………………………………………………………………… iii Organization Chart…………………………………………………………………………………………...……………………….. xi List of Principal Officials……………………………………………………………………………………………………………… xii GFOA Certificate of Achievement………………………………………………………………………………………………. xii

Financial Section Independent Auditors’ Report………………………………………………………………………………………………..…. 1 Management’s Discussion & Analysis…………………………………………………...……………………………… 3 Basic Financial Statements: Statements of Net Position..……………………………………………………………………………………………….…. 13 Statements of Revenues, Expenses, and Changes in Net Position…………..………………. 15 Statements of Cash Flows……………………………………………………………….……………………………………… 16 Notes to Financial Statements……………………………………………………………………………………………... 18

Required Supplementary Information: Schedule of Funding Progress for DPHP……………………………………………...…………………………… 61 Schedule of Changes in the Net Pension Liability and Related Ratios……………………… 62 Schedule of Plan Contributions……………………………………………………………………………………………. 63

Statistical Section Net Position by Component………………………………………………………………………………………………….. 66 Changes in Net Position………………………………………………………………..…………………………………………. 67 Operating Revenues by Source…………………………………………………………………………………………….. 68 Operating Expenses by Function………………………………………………………..………………………………… 69 Non-Operating Revenues by Source…………………………………………………………………………………… 70 Non-Operating Expenses by Function……………………………………………………………………………… 71 Assessed Valuation of Taxable Property within the District………………………………………… 72 Water Purchases, Production, and Sales……………………………………………...………………………….… 73 Meter Sales by Type…………………………………………………………………….……………………………………………. 74 Number of Customers by Service Type……………………………………………………………………………….. 75 Property Tax Levies and Collections…………………………………………………………………………………….. 76 Water Fixed Rates ……….………………………………………………………………………………………………………….…. 77 Water Variable Rates…….…………………………………………………………………………………………………………... 78 Sewer Variable and Fixed Rates…….………………………………………………………………………..…………….. 79 Ten Largest Customers…………………………………………………………………………………………………………….. 80 Ratios of Outstanding Debt by Type…………………………………………………….……………………………….. 81 Pledged Revenue Coverage………………………………………………………………………………………………….... 82 Ratios of General Bonded Debt Outstanding…………………………………………………………………...… 83 Computation of Direct and Overlapping Bonded Debt………………………………………………… 84 Principal Employers…………………………..………………………………………......................................................... 86 Demographic and Economic Statistics……………………………………………………………………………….. 87 Number of Employees by Function………………………………………………………………………………………. 88 Active Meters by Size………………………………………………………………..………………………………………………. 89 Operating and Capital Indicators…………………………………………………………………………………………... 90

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October 18, 2017 Honorable Board of Directors Otay Water District I am pleased to present the Otay Water District’s (the “District”) Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2017.

This report was prepared by the District’s Finance Department following guidelines set forth by the Government Accounting Standards Board (GASB) and generally accepted accounting principles (GAAP). Responsibility for the accuracy of the data presented and the completeness and fairness of the presentation, including all disclosures, rests with the District’s management. We believe the data, as presented, is accurate in all material respects and that it is presented in a manner that provides a fair representation of the financial position and results of the District’s operations. Included are all disclosures we believe necessary to enhance your understanding of the financial condition of the District. GAAP requires that management provide a narrative introduction, overview, and analysis, to accompany the basic financial statements in the form of Management’s Discussion and Analysis (MD&A), which should be read in conjunction with this report. The District’s MD&A can be found immediately following the Independent Auditors’ Report.

The District’s financial statements have been audited by Teaman, Ramirez & Smith, Inc. a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the District for the fiscal year ended June 30, 2017, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. In the independent auditors’ opinion, the following financial statements present fairly, in all material respects, the respective financial position of the District as of June 30, 2017 and are presented in conformity with GAAP. The Independent Auditors’ Report is presented as the first component of the financial section of this report. REPORTING ENTITY

The District is a publicly-owned water and sewer agency, authorized on January 27, 1956 as a California special district by the State Legislature, with an entitlement to import water under the provisions of the Municipal Water District Act of 1911. Its ordinances, policies, taxes, and rates for

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service are set by five Directors, elected by voters in their respective divisions, to serve staggered four-year terms on its Governing Board. The District is a “revenue neutral” public agency which does not operate at a profit. The District also performs cost of service studies to ensure that each end-user pays only their fair share of the District’s costs of water acquisitions, construction, operation, maintenance, betterment, renewal, and replacement of the public water and sewer facilities.

The General Manager reports directly to the Board of Directors and, through the four District Chiefs, oversees day-to-day operations of Administrative Services, Finance, Water Operations, and Engineering. These and other lines of reporting are shown on the organization chart on page xi.

Over the last 60 years, the District has grown from a handful of customers and two employees to become an organization operating a network of more than 919 miles of pipelines, 44 operational reservoirs, a recycled water facility, and one of the largest recycled water distribution networks in the State of California. The character of the service area has also changed from predominantly dry-land farming and cattle ranching, to businesses, high-tech industries, and large master-planned communities.

Today the District provides water service to approximately 49,596 potable and 730 recycled customers within 125 square miles of the southeastern San Diego metropolitan area. The District purchases all potable water sold to its customers from the San Diego County Water Authority (CWA). The CWA purchases much of this water from the region’s main water importer; the Metropolitan Water District of Southern California (MWD), and the Imperial Irrigation District. Beginning in December 2015, a new desalination plant, the Claude “Bud” Lewis Carlsbad Desalination Plant, began delivering water to the region. The District also entered into an agreement to purchase treated water from CWA directly, and from the Helix Water District through a contract with CWA. These actions have brought regional water treatment closer to our customers and helped reduce dependence on water treatment facilities located outside of San Diego County.

To deliver this locally treated water to customers the District constructed a 5.1-mile, 36-inch diameter pipeline in 2010. Drinking water delivered by this pipeline is stored in two 10 million gallon reservoirs.

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In addition to bringing water treatment closer to customers, this source of water diversifies the District’s supply and improves reliability.

The District also owns and operates a wastewater collection and recycling system providing public sewer service to approximately 4,700 customer accounts within portions of the communities of La Mesa, Rancho San Diego, El Cajon, Jamul, and Spring Valley. Wastewater collected is conveyed to the District’s Ralph W. Chapman Water Recycling Facility, which is capable of recycling wastewater at a rate of 1.3 million gallons per day. The District also has the capability to purchase up to 6 million gallons per day of recycled water from the City of San Diego’s South Bay Reclamation Plant. Recycled water from these two sources is used to irrigate eastern Chula Vista golf courses, schools, public parks, roadway landscapes, and various other approved uses per California Code of Regulations, Title 22. The use of recycled water reduces dependency on imported supplies and provides a local supply, thereby diversifying District resources. MISSION, CURRENT ECONOMIC CONDITIONS, AND OUTLOOK

The mission of the District is to provide high quality and reliable water and wastewater services to the customers of the Otay Water District, in a professional, effective, and efficient manner.

During the last several years, the State of California has experienced below average rainfall. According to the United States Geological Survey, the State of California has been in a drought for more than five years. Fortunately, in 2017, California experienced above-average precipitation and snowpack. The majority of reservoirs are currently above historic average levels and most rivers, creeks, and lakes have been reported to be in good condition. On April 7, 2017, Governor Jerry Brown issued an executive order officially ending the drought state of emergency in most of California. The Governor also released the state’s long-term plan to better prepare the state for future droughts and make conservation a way of life in California. On April 26, 2017, the State Water Resources Control Board (SWRCB) rescinded the conservation mandates but continued the water-use reporting requirements and prohibitions against wasteful practices. As part of the Governor’s mandate, the SWRCB adopted Resolution No. 2016-0029, which allowed individual suppliers to self-certify there would be no supply shortfall assuming three additional dry years. The District has consistently advocated for state policies and legislation that include supply development and water-use efficiency and continues to work with the CWA and other water agencies in San Diego County to advocate that the targets and measures in the Governor’s long-term framework support a balanced approach.

With the certification of the Carlsbad Desalination Plant, additional water storage capacity, and upgraded conveyance systems, the San Diego region’s water agencies have the ability to provide sufficient water supplies to meet customer demands, assuring there would be no supply shortfall during three additional dry years. Additionally, the region experienced large water supply cost increases totaling more than 106.7% since 2007. Finally, the deterioration of the Sacramento–San Joaquin Bay-Delta -- the source of 30% of Southern California’s water supply -- and the uncertainty of

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the California WaterFix Project, adds further ambiguity to the future cost and availability of water supplies. Fortunately, the District, as a member of the CWA, is well positioned for water coming from the Colorado River due to the Quantification Settlement Agreements and the development of the new desalination plant in Carlsbad.

Growth in San Diego County has remained flat over the last six years, but is now expected to gradually improve. The District’s Public Services Division has seen improvements in recent years approving an average of 8 permits per month and selling 100 water meters during fiscal 2016-2017. The population within the District’s service area continues to increase, albeit at a reduced rate. As of July 2017, it is estimated that the District served approximately 223,754 residents. The San Diego Association of Governments (SANDAG), the regional planning agency, has estimated the District’s approximate growth will be 1.4% per year for the next decade. Using historical data and considering current economic conditions, staff has moderated this projection to a growth rate of 0.3% for FY2018. The District projects an ultimate customer population of 308,000 residents by 2050. STRATEGIC PLAN

The Strategic Plan is the core document, which guides the District’s efforts to meet and positively adapt to change. The FY 2015-2018 Strategic Plan consisted of a two-phased approach. Phase 1 has been completed with the primary focus on developing key enterprise-wide projects – SCADA, Work Order/Asset Management, and Emergency Preparedness/NIMS. As of July 1, 2016 the District entered Phase 2 of the FY 2015-2018 Strategic Plan, where the focus is to build upon the system foundation, business process improvement, and facilities. Where rapid growth had been a significant focus in the early years of the District and in its earlier strategic plans, today it is primarily focused on managing long-term maintenance and replacement of infrastructure.

The change is based on the recognition that as an organization matures, fewer resources are needed to support growth, but greater effort is required to maintain and upgrade infrastructure and assets. This is important because in this phase of its lifecycle, an organization derives income more from customer rates and less from developer fees. Therefore, the increased maintenance and replacement costs place increased pressure on customer rates. To balance the customer’s interest in minimizing rate increases while also maintaining an organization’s infrastructure, investments, and a strong financial position, the management team must place greater emphasis on internal efficiency and the development of technology assisted best practices. In effect, the organization must use investments in technology to do more with the same or fewer resources.

From a water supply perspective, this means determining the optimum mix of water supply, treatment, and delivery solutions for customers. From a daily operating perspective, efficiency improvements have become the primary source of competitive advantage and cost optimization for utilities.

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Since its establishment, the District’s motto has been “Dedicated to Community Service”. From modest beginnings in 1956 through today, the District remains dedicated to providing outstanding service to the residents and businesses the District has the honor to serve. This serves as a great reminder as to why the District exists. BUDGETING CONTROLS

The District views the budget as an essential tool for proper financial management and is adopted prior to the start of each fiscal year. The budget is developed by combining the District’s strategic objectives and measures with input from the various departments of the organization. By incorporating these strategic measures and objectives, the budget becomes a direct reflection of the District’s strategic plan. The budget is designed and presented for the general needs of the District, its staff, and its customers. It is a comprehensive and balanced financial plan that features District services, resources and their allocation, financial policies, strategic objectives, and other useful information that allows the users to gain a general understanding of the District’s financial status and future. To monitor the District’s performance monthly, comparison reports of budget to actual are prepared and distributed to all department heads, with top-level information provided to the Board at the monthly board meetings. BUDGET SUMMARY

The District’s operating expenditures consist of three major sectors: potable water, recycled water, and sewer. The total budget is $98,248,200 for FY 2018. Revenues from potable and recycled water sales are projected to be $86,899,400, about $5,760,500 (7.1%) higher than the FY 2017 budget. Water sales volumes are expected to increase by 3.1% versus FY 2017. The MWD and CWA water supply rate increased by 3.9% due to the high cost of supply programs, higher energy costs, and increasing operating costs. District staff projects sewer revenues to be $2,869,400, approximately $49,500 less than the FY 2017. The remaining budgeted revenues of $8.4 million come from various special fees, assessments, and miscellaneous income. No overall water rate increase has been budgeted for January 1, 2018, while a 7.5% rate increase for sewer has been budgeted, effective January 1, 2018.

The 2017-18 Capital Improvement Program (CIP) budget consists of 87 projects and a budget of $20.0 million. The budget emphasizes maintenance of existing infrastructure and long-term planning for ongoing programs to meet population growth while functioning within fiscal constraints. This year’s six-year CIP budget increased by $12.5 million, from $89.8 to $102.3, compared to last year’s projection, primarily due to the addition of the meter replacement project. The budget emphasizes long-term planning for on-going programs while functioning within fiscal constraints and population growth.

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THE FUTURE

The District continues its commitment to diversify water resources, reducing dependence on traditional water supplies from the Colorado River and the Sacramento-San Joaquin Bay-Delta. The coming years will continue to pose challenges for those in California’s water community. With the conservation mandates ending in FY 2017, potable sales volumes increased 7% from FY 2016 levels. Regardless of the end of the drought emergency and the District meeting the state’s mandated conservation targets, the District’s customers were still seeing and hearing public campaigns promoting conservation and drought-related messages throughout the county from the CWA, the state, and MWD. Homeowners and businesses have also implemented conservation measures that are expected to generate permanent reductions in water use. As a result, the District expects sales volumes to recover 3% in FY 2018 due to the easing of conservation mandates, but remain 12% below 2015 levels due to ongoing conservation measures taken by customers. Additional remaining increases in sales volumes are expected to come from new customers. SAN DIEGO COUNTY WATER SUPPLY

San Diego County imports about 85% of its water from the Colorado River and Northern California. Since these sources face legal and environmental constraints, the region has been exploring other ways to ensure an adequate water supply, including increased water recycling, incorporating water-use efficiency and conservation programs as a way of life, increased water storage, groundwater desalination, and seawater desalination. ROSARITO DESALINATION AND THE OTAY MESA CONVEYANCE AND DISINFECTION SYSTEM PROJECTS

In light of the growing need for new potable water supplies in Mexico and San Diego County, the District is preparing for the future by leveraging its unique proximity to the U.S.-Mexico border to create a potential cross-border regional alternative to traditional water sources. The proposed Rosarito plant and the District’s Otay Mesa Conveyance and Disinfection System CIP Project could potentially provide a new drought-proof water supply to its customers. On May 16, 2017, the U.S. Department of State granted a presidential permit to allow the District to build a nearly four-mile long potable water pipeline that begins at the U.S.-Mexico border. This permit authorizes the District to “construct, connect, operate, and maintain cross-border water pipeline facilities for the importation of desalinated seawater at the International Boundary between the United States and Mexico in San Diego County, California.” Although purchasing and transporting water from Aguas de Rosarito’s desalination plant in Baja California, Mexico, is a component of the District’s water supply diversification efforts, the plant must first satisfy the water needs of Rosarito Beach and Tijuana. The Rosarito Desalination Project would produce 100 million gallons of water daily in two phases. The first phase, expected to be operational by late 2019 or early 2020, would make 50 million gallons or more of desalinated water available daily to the Tijuana/Rosarito region. The second phase, expected to be completed by 2024, would deliver up to an additional 50 million gallons daily, with

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10% to 30% of that water potentially available to the District. In addition to the construction of a potable water pipeline on the U.S. side of the border, the project also includes a pump station and disinfection facility. This would be the first cross-border water supply project of its kind to import water to the U.S. from Mexico. The project has undergone environmental review as required by the California Environmental Quality Act and National Environmental Policy Act and has obtained a U.S. Fish and Wildlife biological permit. The District recognizes that such a project requires rigorous safeguards and review to ensure the protection of public health and has applied for a permit from the California Water Resources Control Board’s Division of Drinking Water to ensure that water imported from Mexico meets the same water quality drinking standards as water from regional lakes, from the Claude “Bud” Lewis Carlsbad Desalination Plant, and from the City of San Diego’s Pure Water Program. ACCOUNTING SYSTEM

The Finance Department is responsible for providing financial services to the District including financial accounting; reporting; payroll; accounts payable; investment of funds; billing and collection of water and wastewater charges; taxes; and other revenues. The District’s books and records are maintained on an enterprise basis, matching revenues against the costs of providing services. Revenues and expenses are recorded on the accrual basis in the period in which revenues are earned and expenses are incurred. INTERNAL CONTROLS

The District operates within a system of internal controls established and periodically reviewed by management. This provides reasonable assurance that assets are adequately safeguarded and transactions are recorded correctly according to District policies and procedures. When establishing or reviewing controls, management must also consider the cost of the control and the value of the benefit derived from its utilization. Management maintains and implements all sensitive controls and those controls whose value adequately exceeds their cost.

Management believes the District’s internal controls, procedures, and policies adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. In addition, the District maintains controls to provide for compliance with all finance related legal and contractual provisions. Management believes the activities reported within the presented Comprehensive Annual Financial Report comply with these finance related legal and contractual provisions including bond covenants and fiduciary responsibilities. AWARDS AND ACKNOWLEDGMENTS

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to Otay Water District for its Comprehensive Annual Financial Report for the fiscal year ended June 30, 2016. To earn a Certificate of Achievement, a government agency must publish an easily readable and efficiently

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Organization Chart

District Position Count— (135 Positions)

Citizens and Customers Board of Directors

Safety and

Security

Administration

Assistant General Manager

General Manager (6)

Purchasing

and Facilities

Controller and

Budgetary

Services

Treasury and

Accounting

Services

Customer

Service

Meter

Maintenance

Water System

Operations

Utility

Maintenance/

Construction

Water Resources,

Planning, Design and

Environmental

Services

Administrative

Services

(23)

Human

Resources

Information

Technology

and Strategic

Planning

Finance

(31)

Geographic

Information

System

Public Services

and

Field Services

Engineering

(24)

Water

Operations

(51)

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List of Principal Officials

Mark Robak President Division 5

Tim Smith Vice President Division 1

Mitch Thompson Treasurer Division 2

Gary Croucher Division 3

Board of Directors The Otay Water District is a revenue-neutral public agency established in accordance with the California Water Code. This not-for-profit status means Otay has no private shareholders, pays no dividends and therefore does not report to, nor answer to the California Public Utilities Commission. The District does, however, answer to the public through a five-member Board of Directors. Each Director is elected by voters within their respective division boundaries to represent the public's interest with regard to rates for service, taxes, policies, ordinances, and other matters related to the management and operation of the Otay Water District. Directors serve four-year alternating terms on the Board.

Hector Gastelum Division 4

Mission Statement To provide high quality and reliable water and wastewater services to the customers of the Otay Water district, in a professional, effective and efficient manner.

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GFOA CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING

The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Otay Water District for its CAFR for the fiscal year ended June 30, 2016. This is the thirteenth year that the District has achieved this prestigious award. In order to be awarded a Certificate of Achievement, the District had to publish an easily readable and comprehensive report. This report must satisfy both Generally Accepted Accounting Principles (GAAP) and applicable legal requirements. This award is valid for a period of one year only. We believe our current CAFR continues to meet the Certificate of Achievement Program’s requirements, and will be submitting it to GFOA to determine its eligibility for another certificate.

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INDEPENDENT AUDITORS' REPORT Board of Directors Otay Water District Spring Valley, California Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities of the Otay Water District (the “District”), as of and for the years ended June 30, 2017 and 2016, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and the State Controller’s Minimum Audit Requirements for California Special Districts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities of the Otay Water District as of June 30, 2017 and 2016, and the respective changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America, as well as the accounting systems prescribed by the California State Controller’s Office and California regulations governing Special Districts.

Richard A. Teaman, CPA David M. Ramirez, CPA Javier H. Carrillo, CPA Bryan P. Daugherty, CPA Joshua J. Calhoun, CPA

4201 Brockton Avenue Suite 100 Riverside CA 92501 951.274.9500 TEL 951.274.7828 FAX www.trscpas.com

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Emphasis of Matter As described in Note 2 to the basic financial statements, the District adopted the provisions of Governmental Accounting Standards Board Statement No. 82, Pension Issues - An Amendment of GASB No. 67, No. 68, and No. 72. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and required supplementary information on pages 3-10 and 61-63 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District’s basic financial statements. The introductory section and statistical section are presented for purposes of additional analysis and are not required part of the basic financial statements. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 18, 2017, on our consideration of the District’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control over financial reporting and compliance.

Riverside, California October 18, 2017

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Management’s Discussion and Analysis

As management of the Otay Water District (the “District”), we offer readers of the District’s financial statements, this narrative overview, and analysis of the District’s financial performance during the fiscal year ending June 30, 2017. Please read it in conjunction with the District’s financial statements that follow Management’s Discussion and Analysis. All amounts, unless otherwise indicated, are expressed in millions of dollars.

Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the District’s basic financial statements, which are comprised of the following: (1) Statements of Net Position, (2) Statements of Revenues, Expenses, and Changes in Net Position, (3) Statements of Cash Flows, and (4) Notes to the Financial Statements. This report also contains other supplementary information in addition to the basic financial statements. The Statements of Net Position presents information on all of the District’s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference reported as net position. Over time, increases or decreases in net positions may serve as a useful indicator of whether the financial position of the District is improving or weakening. The Statements of Revenues, Expenses and Changes in Net Position presents information showing how the District’s net position changed during the most recent fiscal year. All changes in net positions are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). The Statements of Cash Flows presents information on cash receipts and payments for the fiscal year. The Notes to the Financial Statements provide additional information that is essential to a full understanding of the data supplied in each of the specific financial statements listed above.

Financial Highlights

The assets and deferred outflows of resources of the District exceeded its liabilities and deferred inflows of resources at the close of the most recent fiscal year by $401.2 million (net position). Of this amount, $45.9 million (unrestricted net position) may be used to meet the District’s ongoing obligations to citizens and creditors. The overall net positions remains relatively unchanged.

Total assets decreased by $3.3 million or .58% during Fiscal Year 2017, to $563.1 million, due primarily to depreciation offset by investments in capital infrastructure, contributions, and improved operating results.

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In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning the District’s progress in funding its obligation to provide pension benefits to its employees. Financial Analysis: As noted, net position may serve, over time, as a useful indicator of an entity’s financial position. In the case of the District, assets and deferred outflows of resources exceeded liabilities and deferred inflows of resources by $401.2 million at the close of the most recent fiscal year. By far, the largest portion of the District’s net position, $351.0 million (87%), reflects its investment in capital assets, less any remaining outstanding debt used to acquire those assets. The District uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the District’s investment in its capital assets is reported effectively as a resource, it should be noted that the resources needed to repay the debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

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Statements of Net Position

(In Millions of Dollars)

2017 2016 2015 Assets Current and Other Assets $ 112.9 $ 112.4 $ 109.7 Capital Assets 450.2 454.0 459.2 Total Assets 563.1 566.4 568.9 Deferred Outflows of Resources Deferred Amount on Refunding 0.2 1.3 0.0 Deferred Contributions to Pension Plan 10.7 7.0 3.6 Total Deferred Outflows of Resources 10.9 8.3 3.6 Liabilities

Long-Term Debt Outstanding 95.6 99.8 101.5 Net Pension Liability 45.2 40.1 38.7 Other Liabilities 28.2 27.8 24.9 Total Liabilities 169.0 167.7 165.1 Deferred Inflows of Resources Deferred Actuarial Pension Costs 3.8 5.7 5.0 Total Deferred Inflows of Resources 3.8 5.7 5.0 Net Position Net Investment in Capital Assets 351.0 351.6 354.0 Restricted for Debt Service 4.3 4.4 4.6 Unrestricted 45.9 45.3 43.8 Total Net Position $ 401.2 $ 401.3 $ 402.4

The District’s operations and population continue to grow, albeit at slower rates than the housing boom years. Much of this growth has and will continue to occur in the residential sector, especially in the area of multi-family dwellings, as well as in the commercial area. The District still has available land to develop unlike other parts of the County, as well as low unemployment and job creation, which has spurred the development in the service area. In FY 2017, the District’s Capital Assets increased by $9.5 million before accumulated depreciation. (See Note 4 in the Notes to Financial Statements). The District also saw a decrease in Long-Term Debt of $4.2 million due to the annual payments of long-term debt (See Note 5 in the Notes to Financial Statements). Certain planning and environmental study costs associated with capital projects such as the Otay Mesa Desalination and Recycled CIP Projects due to the Permanent Moratorium in Otay Mesa do not qualify as capital costs under Generally Accepted Accounting Principles and are included in the miscellaneous (non-

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operating) expenses of the District. For FY 2017 and FY 2016 those expenses were $2.3 million and $1.4 million, respectively. At the end of FY 2017 the District is able to report positive balances in all categories of net position. This situation also held true for the prior two fiscal years.

Statements of Revenues, Expenses, and Changes in Net Position

(In Millions of Dollars) 2017 2016 2015 Water Sales $ 83.7 $ 73.9 $ 79.1 Wastewater Revenue 3.0 3.2 3.1 Connection and Other Fees 1.8 1.8 1.7 Non-operating Revenues 10.1 8.9 8.9 Total Revenues 98.6 87.8 92.8 Depreciation Expense 17.8 16.5 16.2

Other Operating Expenses 78.8 73.2 75.7 Non-operating Expenses 7.7 6.2 6.0 Total Expenses 104.3 95.9 97.9 Loss Before Capital Contributions (5.7) (8.1) (5.1) Capital Contributions 5.6 7.0 3.1 Change in Net Position (0.1) (1.1) (2.0) Beginning Net Position, As Previously Stated 401.3 402.4 444.8 Prior Period Adjustment 0.0 0.0 (40.4) Beginning Net Position, As Restated 401.3 402.4 404.4 Ending Net Position $ 401.2 $ 401.3 $ 402.4

Water Sales increased by $9.8 million in FY 2017 and decreased by $5.2 million in FY 2016. The increase in FY 2017 was due to both increases in units sold and water rates. The increases in unit sales is largely due to the elimination of water use restrictions in FY 2017. The decrease in FY 2016 was mainly due to decreases in units sold as a result of the drought conditions and usage restrictions. The financial impact related to the reduction in unit sales was partially offset by increases in rates. Other Operating Expenses increased by $5.6 million in FY 2017 and decreased by $2.5 million in FY 2016 predominantly due to the increase and decrease in Cost of Water Sales brought about by the increase and decrease in units purchased in FY 2017 and FY 2016 respectively.

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Connection and Other Fees revenues remains the same in FY 2017 and increased by $0.1 million in FY 2016. Capital Contributions decreased by $1.4 million in FY 2017 and increased by $3.9 million in FY 2016. The decrease is mainly due to decrease in Grants and reimbursement from Caltrans in FY 2017. Non-operating Revenues

Non-operating Revenues by Major Source

(In Millions of Dollars)

2017 2016 2015 Taxes and Assessments $ 4.1 $ 4.0 $ 3.8 Rents and Leases 1.4 1.3 1.2 Other Non-operating Revenue 4.6 3.6 3.9 Total Non-operating Revenues $ 10.1 $ 8.9 $ 8.9

The District’s total non-operating revenues increased by $1.2 million in FY 2017 and remained the same in FY 2016. The increase in FY 2017 was primarily due to the transfer of $1.8 million capacity revenue from capital contribution to fund a portion of the CIP projects that did not qualify as capital expenditures and were included in the miscellaneous expense. Capital Assets and Debt Administration The District’s capital assets (net of accumulated depreciation) as of June 30, 2017, totaled $450.2 million. Included in this amount is land. The District’s net capital assets decreased by .84% for FY 2017 and 1.1% for FY 2016.

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Capital Assets (In Millions of Dollars)

2017 2016 2015 Land $ 14.4 $ 14.1 $ 13.7 Construction in Progress 14.2 12.5 15.1 Water System 483.8 476.6 468.7 Recycled Water System 112.3 111.8 110.5 Sewer System 44.5 42.8 42.0 Field Equipment 9.0 9.1 8.7 Buildings 20.6 20.6 19.0 Transportation Equipment 3.3 3.4 3.4 Communication Equipment 3.4 3.3 3.1 Office Equipment 17.6 19.4 18.2 723.1 713.6 702.4 Less Accumulated Depreciation (272.9) (259.6) (243.2) Net Capital Assets $ 450.2 $ 454.0 $ 459.2

As indicated by figures in the table above, the majority of capital assets added during both fiscal years were related to the potable and sewer systems. In addition, the majority of the cost of construction-in-progress is also related to water systems. Additional information on the District’s capital assets can be found in Note 4 of the Notes to Financial Statements. At June 30, 2017, the District had $95.6 million in outstanding debt (net of $3.8 million of maturities occurring in FY 2018), which consisted of the following: General Obligation Bonds $ 3.5 Certificates of Participation 7.6 Revenue Bonds 84.5 Total Long-Term Debt $ 95.6 In May 2016, the District issued $33.4 million of 2016 Water Revenue Refunding Bonds for an advance refunding of its 2007 Certificates of Participation, which will be called on September 1, 2017. Excluding costs of issuance the District received $36.6 million in proceeds, including a $3.6 million premium, to fund the $34.8 million of outstanding principal and $1.8 million of remaining interest payments. In accordance with GASB Nos. 23 and 65, the remaining interest payments of $0.2 million in FY 2017 and $1.3 million in FY 2016 is reflected as a deferred outflow of resources on the Statements of Net Position. Additional information on the District’s long-term debt can be found in Note 5 of the Notes to Financial Statements.

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Prior Period Adjustment The Governmental Accounting Standards Board (GASB) issued Statement No. 68, “Accounting and Financial Reporting for Pensions-an amendment of GASB Statement No. 27”, and No. 71 “Pension Transitions for Contributions Made Subsequent to the Measurement Date-an amendment of GASB No. 68” for periods beginning after June 15, 2014. The District implemented these standards in FY 2015. The result of the implementation of these standards was to decrease the net position at July 1, 2014 by $40.4 million which consists of net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense. Fiscal Year 2017-2018 Budget Economic Factors The San Diego region imports 84% of its potable supply so factors such as local rainfall as well as weather conditions elsewhere in the western portion of the nation can affect the region. San Diego received more than normal rainfall in FY 2017, and the District anticipates an average rainfall pattern in the coming years. Water sales have declined for the District by nearly 30% in the last ten years. This was driven by many factors including the economic downturn caused by the great recession, increases in the price of imported water, and most recently the State mandated cuts in potable water use due to the prolonged statewide drought. The conservation mandates by the State ended in FY 2017 because of record rain and snowfall. Customers will still see messages to conserve water as this has become a way of life in California. The District expects sales volume to recover 3% in FY 2018, but remain 12% below FY 2015 levels due to ongoing conservation efforts. Decreases in water sales revenue have been offset by the corresponding decreases in water purchase expense, as well as reductions in District managed costs such as reduced employee count and internal cost cuts, achieved through automation and streamlining of processes. Should further loss in water sales continue due to limited supplies or mandated cuts, the District’s actions will be commensurate with the magnitude of the reduction. The District continues to respond to the challenges presented by growth and the ongoing conservation efforts by creating new opportunities and new organizational efficiencies. By utilizing and continuing to refine its Strategic Business Plan, it has captured the Board of Director’s vision and united its staff in a common mission. The District has achieved a number of significant accomplishments based on its successful adherence to its Strategic Business Plan. The District is not only poised to continue successfully providing an affordable, safe, and reliable water supply for the people of its service area, but is set to reap the rewards of greater efficiencies and economies of scale. The District is currently at about 73% of its projected ultimate population, serving approximately 224,000 people. Long-term, this percentage should continue to increase as the District's service area continues to develop and grow. By 2050, the District is projected to serve approximately 308,000 people, with an average

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daily demand of 41 million gallons per day (MGD). Currently, the District services the needs of this growing population by purchasing water from the San Diego County Water Authority (CWA), who in turn purchases its water from the Metropolitan Water District (MWD) and the Imperial Irrigation District (IID). Otay takes delivery of the water through several connections of large diameter pipelines owned and operated by CWA. The District currently receives treated water from CWA directly and from the Helix Water District via a contract with CWA. In addition, the District has an emergency agreement with the City of San Diego to purchase water in the case of a shutdown of the main treated water source. The City of San Diego also has a long-term contract with the District to provide recycled water for landscape and irrigation usage. Through innovative agreements like these, benefits can be achieved by both parties by using excess capacity of another agency, and diversifying local supply, thereby increasing reliability. Financial The District is budgeted to deliver approximately 25,600 acre-feet of potable water to 49,761 potable customer accounts during FY 2017-2018. Management feels that these projections are realistic after accounting for low growth, supply changes, and a focus on conservation. A combination of factors, including the drought and economic uncertainty, have created challenges in developing projections for the current fiscal year. Both unemployment and levels of distressed activity in the commercial and residential resale market have improved from their economic crisis peaks. However, while unemployment has recovered, housing starts remain significantly below the levels of the boom years from 2001 to 2005. The negative impacts to the District of the economic indicators and conservation are partially offset by growth as the District’s commercial and residential permits have shown slow and steady improvement from previous lows. While all of these factors impact the region’s water usage, people’s need for water remains an underlying constant. Staff continues working diligently on developing new water supplies as they work through the financial impacts of conservation and the modest economic turnaround. Management is unaware of any other conditions that could have a significant impact on the District’s current financial position, net position, or operating results. Contacting the District’s Financial Management This financial report is designed to provide a general overview of the Otay Water District’s finances for the Board of Directors, citizens, creditors, and other interested parties. Questions concerning any of the information provided in the report or requests for additional information should be addressed to the District’s Finance Department, 2554 Sweetwater Springs Blvd., Spring Valley, CA 91978-2004.

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2017 2016ASSETSCurrent Assets:

Cash and Cash Equivalents (Notes 1 and 2) 17,427,875$ 21,122,543$ Restricted Cash and Cash Equivalents (Notes 1 and 2) 50,204 8,208 Investments (Note 2) 38,401,158 36,806,704 Board Designated Investments (Note 2) 24,743,895 23,876,678 Restricted Investments (Notes 1 and 2) 4,256,520 4,394,093 Accounts Receivable, Net 12,372,840 11,116,393 Accrued Interest Receivable 216,011 157,620 Taxes and Availability Charges Receivable, Net 222,092 341,651 Restricted Taxes and Availability Charges Receivable, Net 34,375 32,173 Inventories 737,185 722,225 Prepaid Items and Other Receivables 962,019 1,309,335

Total Current Assets 99,424,174 99,887,623

Non-current Assets:Net OPEB Asset (Note 8) 13,555,636 12,519,549

Capital Assets (Note 4):Land 14,389,187 14,085,251 Construction in Progress 14,201,511 12,541,701 Capital Assets, Net of Depreciation 421,606,252 427,341,594

Total Capital Assets, Net of Depreciation 450,196,950 453,968,546

Total Non-current Assets 463,752,586 466,488,095

Total Assets 563,176,760 566,375,718

DEFERRED OUTFLOWS OF RESOURCESDeferred Actuarial Pension Costs (Note 7) 10,681,129 7,001,426 Deferred Amount on Refunding 191,428 1,339,997

Total Deferred Outflows of Resources 10,872,557$ 8,341,423$

Continued

STATEMENTS OF NET POSITIONJune 30, 2017 and 2016

The accompanying notes are an integral part of these statements.

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2017 2016LIABILITIESCurrent Liabilities:

Current Maturities of Long-term Debt (Note 5) 3,820,000$ 3,920,000$ Accounts Payable 11,544,414 11,497,728 Accrued Payroll Liabilities 785,496 574,037 Other Accrued Liabilities 3,771,503 3,813,262 Customer and Developer Deposits 3,451,690 3,313,631 Accrued Interest 1,417,440 1,197,113 Unearned Revenues 305,560 421,800.00 Liabilities Payable from Restricted Assets:

Restricted Accrued Interest 53,267 59,604

Total Current Liabilities 25,149,370 24,797,175

Non-current Liabilities:Long-term Debt (Note 5):

General Obligation Bonds 3,474,498 4,095,853 Certificates of Participation 7,592,548 8,191,803 Revenue Bonds 84,519,618 87,483,686

Net Pension Liability 45,249,444 40,143,128 Other Non-current Liabilities 3,074,313 3,040,648

Total Non-current Liabilities 143,910,421 142,955,118

Total Liabilities 169,059,791 167,752,293

DEFERRED INFLOWS OF RESOURCESDeferred Actuarial Pension Costs (Note 7) 3,802,537 5,677,071

Total Deferred Inflows of Resources 3,802,537 5,677,071

NET POSITIONNet Investment in Capital Assets 350,981,714 351,617,201 Restricted for Debt Service 4,306,724 4,402,301 Unrestricted 45,898,551 45,268,275

Total Net Position 401,186,989$ 401,287,777$

Statements of Net Position - continuedJune 30, 2017 and 2016


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2017 2016OPERATING REVENUES

Water Sales 83,720,150$ 73,940,200$ Wastewater Revenue 2,983,495 3,175,300Connection and Other Fees 1,777,609 1,760,807

Total Operating Revenues 88,481,254 78,876,307

OPERATING EXPENSESCost of Water Sales 56,882,487 51,826,046Wastewater 1,964,855 2,051,913Administrative and General 19,991,542 19,318,247Depreciation 17,785,497 16,473,337

Total Operating Expenses 96,624,381 89,669,543

Operating Income (Loss) (8,143,127) (10,793,236)

NON-OPERATING REVENUES (EXPENSES)Investment Earnings 408,754 758,004Taxes and Assessments 4,114,583 3,966,593Availability Charges 729,325 616,591Gain (Loss) on Sale of Capital Assets (605,536) 46,423Rents and Leases 1,375,305 1,281,150Miscellaneous Revenues 4,107,558 2,228,200Donations (125,742) (120,722)Interest Expense (5,069,767) (4,603,093)Miscellaneous Expenses (2,463,060) (1,485,778)

Total Non-operating Revenues (Expenses) 2,471,420 2,687,368

Income (Loss) Before Capital Contributions (5,671,707) (8,105,868)

Capital Contributions 5,570,919 6,971,319

Change in Net Position (100,788) (1,134,549)

Total Net Position, Beginning 401,287,777 402,422,326

Total Net Position, Ending 401,186,989$ 401,287,777$

For the Years Ended June 30, 2017 and 2016

Statements of Revenues, Expenses, and Changes in Net Position


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2017 2016CASH FLOWS FROM OPERATING ACTIVITIES

Receipts from Customers 85,585,257$ 77,072,615$ Receipts from Connections and Other Fees 1,777,609 1,760,807Other Receipts 3,991,318 2,650,000Payments to Suppliers (57,754,567) (52,065,783)Payments to Employees (21,985,918) (22,197,793)Other Payments (2,462,313) (1,505,690)

Net Cash Provided By (Used For) Operating Activities 9,151,386 5,714,156

CASH FLOWS FROM NONCAPITAL AND RELATEDFINANCING ACTIVITIES Receipts from Taxes and Assessments 4,231,939 3,945,795 Receipts from Property Rents and Leases 1,249,563 1,160,428

Net Cash Provided By (Used For) Noncapital and Related Financing Activities 5,481,502 5,106,223

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIESProceeds from Capital Contributions 1,653,484 5,122,137Proceeds from Sale of Capital Assets 8,507 60,925 Proceeds from Debt Related Taxes and Assessments 729,325 616,591Deposit to Escrow Account for Advance Refunding - (36,099,997) Proceeds from Long-Term Debt - 37,015,950 Principal Payments on Long-Term Debt (3,920,000) (3,690,000)Interest Payments and Fees (4,254,214) (4,951,802)Acquisition and Construction of Capital Assets (10,528,927) (9,415,809)

Net Cash Provided By (Used For) Capital and Related Financing Activities (16,311,825) (11,342,005)

CASH FLOWS FROM INVESTING ACTIVITIES Interest Received on Investments 350,363 697,675Proceeds from Sale and Maturities of Investments 35,603,790 65,385,175Purchase of Investments (37,927,888) (67,646,067)

Net Cash Provided By (Used For) Investing Activities (1,973,735) (1,563,217)

Net Increase (Decrease) in Cash and Cash Equivalents (3,652,672) (2,084,843)

Cash and Cash Equivalents - Beginning 21,130,751 23,215,594

Cash and Cash Equivalents - Ending 17,478,079$ 21,130,751$

Continued

Statements of Cash Flows

For the Years Ended June 30, 2017 and 2016


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2017 2016Reconciliation of Operating Income (Loss) to Net Cash Flows

Provided By (Used For) Operating Activities: Operating Income (Loss) (8,143,127)$ (10,793,236)$ Adjustments to Reconcile Operating Income to Net Cash Provided By (Used For) Operating Activities: Depreciation 17,785,497 16,473,337 Miscellaneous Revenues 3,991,318 2,650,000 Miscellaneous Expenses (2,462,313) (1,505,690) (Increase) Decrease in Accounts Receivable (1,256,447) (1,129,343) (Increase) Decrease in Inventory (14,960) 84,783 (Increase) Decrease in Net OPEB Asset (1,036,087) (1,047,163) (Increase) Decrease in Prepaid Items and Other Receivables 347,316 (320,453) (Increase) Decrease in Deferred Actuarial Pension Costs (3,679,703) (2,716,700) Increase (Decrease) in Accounts Payable 46,686 1,718,251 Increase (Decrease) in Accrued Payroll and Related Expenses 211,459 (483,939) Increase (Decrease) in Other Accrued Liabilities (41,759) 170,751 Increase (Decrease) in Customer and Developer Deposits 138,059 1,086,458 Increase (Decrease) in Prepaid Capacity Fees 33,665 107,317 Increase (Decrease) in Net Pension Liability 5,106,316 1,419,783 Increase (Decrease) in Deferred Actuarial Pension Costs (1,874,534)

Net Cash Provided By (Used For) Operating Activities 9,151,386$ 5,714,156$

Schedule of Cash and Cash Equivalents:Current Assets: Cash and Cash Equivalents 17,427,875$ 21,122,543$ Restricted Cash and Cash Equivalents 50,204 8,208

Total Cash and Cash Equivalents 17,478,079$ 21,130,751$

Supplemental DisclosuresNon-Cash Investing and Financing Activities Consisted of the Following: Contributed Capital for Water and Sewer System 3,917,435$ 1,849,182$ Change in Fair Value of Investments and Recognized Gains/Losses 414,578 60,177 Amortization Related to Long-term Debt 364,678 191,428

Statements of Cash Flows - continued

For the Years ended June 30, 2017 and 2016


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Notes to Financial Statements

NOTE DESCRIPTION PAGE

1 Reporting Entity and Summary of Significant Accounting Policies..……….. 19

2 Cash and Investments………………………………………………………………………………………….. 27

3 Fair Value Measurements…………………………………………..………………………………………. 32

4 Capital Assets…………………………………………………..………………………………………………………. 34

5 Long-Term Debt………………………………………………….…………………………………………………... 36

6 Net Position………………………………………………………………………………………………………………. 42

7 Defined Benefit Pension Plan………………………………………………………………………….….. 42

8 Other Post Employment Benefits………………………..………….......................................... 50

9 Water Conservation Authority………………………………………............................................. 52

10 Commitments and Contingencies…………………………………………………………….………. 53

11 Risk Management……………………………………………………………………………………………….…. 54

12 Interest Expense……………………………………………………......................................................... 55

13 Segment Information…………………………………………………………………………………..……….. 55

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Years Ended June 30, 2017 and 2016

1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) Reporting Entity

The reporting entity Otay Water District (the “District”) includes the accounts of the District, Otay Service Corporation (the “Corporation”) and the Otay Water District Financing Authority (the “Financing Authority”). The Otay Water District (the “District”) is a public entity established in 1956 pursuant to the Municipal Water District Law of 1911 (Section 711 et. Seq. of the California Water Code) for the purpose of providing water and sewer services to the properties in the District. The District is governed by a Board of Directors consisting of five directors elected by geographical divisions based on District population for a four-year alternating term. The District formed the Otay Service Corporation on June 21, 1993, a nonprofit public benefit corporation duly organized and existing under the laws of the State of California. The Service Corporation was formed to assist the District in the financing of public capital improvements. The District formed the Financing Authority on March 3, 2010 under the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the California Government Code. The Financing Authority was formed to assist the District in the financing of public capital improvements. The financial statements present the District and its component units. The District is the primary government unit. Component units are those entities which are financially accountable to the primary government, either because the District appoints a voting majority of the component unit’s board, or because the component units will provide a financial benefit or impose a financial burden on the District. The District has accounted for the Service Corporation and Financing Authority as “blended” component units. Despite being legally separate, the Service Corporation and Financing Authority are so intertwined with the District that they are in substance, part of the District’s operations. Accordingly, the balances and transactions of these component units are reported within the funds of the District. Separate financial statements are not issued for the Service Corporation and the Financing Authority.

B) Measurement Focus, Basis of Accounting and Financial Statement Presentation

Measurement focus is a term used to describe “which” transactions are recorded within the various financial statements. Basis of accounting refers to “when” transactions are recorded regardless of the measurement focus applied. The accompanying financial statements are reported using the economic resources measurement focus, and the accrual basis of accounting. Under the economic measurement focus all assets and liabilities (whether current or noncurrent) associated with these activities are included on the Statements of Net Position. The Statements of Revenues, Expenses and Changes in Net Position present increases (revenues) and decreases (expenses) in total net position. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. The District reports its activities as an enterprise fund, which is used to account for operations that are financed and operated in a manner similar to a private business enterprise, where the intent of the

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

B) Measurement Focus, Basis of Accounting and Financial Statement Presentation– Continued District is that the costs (including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.

The basic financial statements of the Otay Water District have been prepared in conformity with accounting principles generally accepted in the United States of America. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for governmental accounting financial reporting purposes. Net position of the District is classified into three components: (1) net investment in capital assets, (2) restricted net position, and (3) unrestricted net position. These classifications are defined as follows:

Net Investment in Capital Assets This component of net position consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of notes or borrowing that are attributable to the acquisition of the assets, construction, or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of the net investment in capital assets. Restricted Net Position This component of net position consists of net position with constrained use through external constraints imposed by creditors (such as through debt covenants), grantors, contributions, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted Net Position This component of net position consists of net position that do not meet the definition of “net investment in capital assets” or “restricted net position”. The District distinguishes operating revenues and expenses from those revenues and expenses that are non-operating. Operating revenues are those revenues that are generated by water sales and wastewater services while operating expenses pertain directly to the furnishing of those services. Non-operating revenues and expenses are those revenues and expenses generated that are not associated with the normal business of supplying water and wastewater treatment services. The District recognizes revenues from water sales, wastewater revenues, and meter fees as they are earned. Taxes and assessments are recognized as revenues based upon amounts reported to the District by the County of San Diego, net of allowance for delinquencies of $28,496 at June 30, 2017 and $41,536 at June 30, 2016. Additionally, capacity fee contributions received which are related to specific operating expenses are offset against those expenses and included in Cost of Water Sales in the Statements of Revenues, Expenses, and Changes in Net Position. Sometimes the District will fund outlays for a particular purpose from both restricted (e.g., restricted

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued B) Measurement Focus, Basis of Accounting and Financial Statement Presentation - Continued

bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to report as restricted - net position and unrestricted - net position, a flow assumption must be made about the order in which the resources are considered to be applied. It is the District’s practice to consider restricted - net position to have been depleted before unrestricted - net position is applied, however it is at the Board’s discretion.

C) New Accounting Pronouncements Implemented

Governmental Accounting Standard Board Statement No. 74 In June of 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. This Statement was issued to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) for making decisions and assessing accountability. This Statement replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. It also includes requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement No. 43, and Statement No. 50, Pension Disclosures. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2016. Currently, this statement has no effect on the District’s financial statements. Governmental Accounting Standard Board Statement No. 77 In August of 2015, GASB issued Statement No. 77, Tax Abatement Disclosures. This Statement is intended to provide financial statement users needed information about certain limitations on a government’s ability to raise resources and for financial reporting purposes requires disclosure on tax abatement information about (1) a reporting government’s own tax abatement agreements and (2) those that are entered into by other governments that reduce the reporting government’s tax revenues. Statement No. 77 is effective for periods beginning after December 15, 2015. It is believed that the implementation of this Statement will not have a material effect on the District’s financial statements. Governmental Accounting Standard Board Statement No. 78 In December of 2015, GASB issued Statement No. 78, Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans. This statement addresses a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. This statement amends the scope and applicability of Statement 68 to exclude pensions provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit pension plan that (1) is not a state or local governmental pension plan, (2) is used

21



1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued C) New Accounting Pronouncements - Continued Implemented - Continued

Governmental Accounting Standard Board Statement No. 78 - Continued to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local governmental employers, and 3) has no predominant state or local governmental employer. This Statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosures; and required supplementary information for pensions that have the characteristics described above. The requirements of this Statement are effective for reporting periods beginning after December 15, 2015. Currently, this statement has no effect on the District’s financial statements. Governmental Accounting Standard Board Statement No. 80 In January of 2016, GASB issued Statement No. 80, Blending Requirements for Certain Component Units – An Amendment of GASB Statement No. 14. This statement was issued to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This Statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. This Statement amends the blending requirements for the financial statement presentation of component units of all state and local governments. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016. Currently, this statement has no effect on the District’s financial statements. Governmental Accounting Standard Board Statement No. 82 In March of 2016, GASB issued Statement No. 82, Pension Issues – An Amendment of GASB Statements No. 67, No. 68, and No. 73. This statement was issued to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Specifically, this Statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. Prior to the issuance of this Statement, Statements 67 and 68 required presentation of covered payroll, which is the payroll of employees that are provided with pensions through the pension plan, and ratios that use that measure, in schedules of required supplementary information. This Statement amends Statements 67 and 68 to instead require the presentation of covered payroll, defined as the payroll on which contributions to a pension plan are based, and

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued C) New Accounting Pronouncements - Continued

Implemented - Continued

Governmental Accounting Standard Board Statement No. 82 - Continued

ratios that use that measure. This Statement also clarifies the term deviation used in Actuarial Standards of Practice and payments made by the employer to satisfy contribution requirements. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer’s pension liability is measured as of a date other than the employer’s most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. The District has implemented GASB No. 82 which is reflected on the District’s financial statements.

Pending Accounting Standards

GASB has issued the following statements which impact the District’s financial reporting requirements in the future:

i. GASB 75 – “Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions”, effective for fiscal years beginning after June 15, 2017.

ii. GASB 81– “Irrevocable Split Interest Agreements”, effective for fiscal years ending after December 15, 2016.

iii. GASB 83 – “Certain Asset Retirement Obligations”, effective for fiscal years beginning after June 15, 2018.

iv. GASB 84 – “Fiduciary Activities”, effective for fiscal years beginning after December 15, 2018.

v. GASB 85 – “Omnibus 2017”, effective for fiscal years beginning after June 15, 2017.

vi. GASB 86 – “Certain Debt Extinguishment Issues”, effective for fiscal years beginning after June 15, 2017.

vii. GASB 87 – “Leases”, effective for fiscal years beginning after December 15, 2019. D) Deferred Outflows / Inflows of Resources

In addition to assets, the statements of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. The District has two items that qualifies for reporting in this category, deferred accrued pension costs are items that are deferred and recognized as an outflow of resources in the period the amounts become available. Additionally, the category, deferred amount on refunding, which resulted from the difference in the carrying value of refunded debt and its reacquisition price. This amount is shown as deferred and amortized over the shorter of the life of the refunded or refunding debt.

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued D) Deferred Outflows / Inflows of Resources - Continued

In addition to liabilities, the statements of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and will not be recognized as an inflow of resources (revenue) until that time. The District has only one item that qualifies for reporting in this category. Accordingly, the item, deferred actuarial pension cost, are deferred and recognized as an inflow of resources in the period that the amounts become available.

E) Statements of Cash Flows

For purposes of the Statements of Cash Flows, the District considers all highly liquid investments (including restricted assets) with a maturity period, at purchase, of three months or less to be cash equivalents.

F) Investments

Investments are stated at their fair value, which represents the quoted or stated market value. Investments that are not traded on a market, such as investments in external pools, are valued based on the stated fair value as represented by the external pool. All investments are stated at their fair value, the District has not elected to report certain investments at amortized costs.

G) Inventory and Prepaids

Inventory consists primarily of materials used in the construction and maintenance of the water and sewer system and is valued at weighted average cost. Both inventory and prepaids use the consumption method whereby they are reported as an asset and expensed as they are consumed.

H) Capital Assets

Capital assets are recorded at cost, where historical records are available, and at an estimated historical cost where no historical records exist. Infrastructure assets in excess of $20,000 and other capital assets in excess of $10,000 are capitalized if they have an expected useful life of two years or more. The District will also capitalize individual purchases under the capitalization threshold if they are part of a new capital program. The cost of purchased and self-constructed additions to utility plant and major replacements of property are capitalized. Costs include materials, direct labor, transportation, and such indirect items as engineering, supervision, employee fringe benefits, overhead, and interest incurred during the construction period. Repairs, maintenance, and minor replacements of property are charged to expense. Donated assets are capitalized at their acquisition value on the date contributed.

The District capitalizes interest on construction projects up to the point in time that the project is substantially completed. Capitalized interest for fiscal years ending June 30, 2017 of $181,582 and 2016 of $274,429 is included in the cost of water system assets and is depreciated on the straight-line basis over the estimated useful lives of such assets.

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

H) Capital Assets - Continued Depreciation is calculated using the straight-line method over the following estimated useful lives:

Water System 15-70 Years Field Equipment 2-50 Years Buildings 30-50 Years Communication Equipment 2-10 Years Transportation Equipment 2-7 Years Office Equipment 2-10 Years Recycled Water System 50-75 Years Sewer System 25-50 Years

I) Compensated Absences

It is the District’s policy to record vested or accumulated vacation and sick leave as an expense and liability as benefits accrue to employees.

June 30, 2017 Beginning Ending Due Within Balance Additions Reductions Balance One Year Compensated Absences $ 2,634,850 $ 2,846,634 $ 2,747,784 $ 2,733,700 $ 273,370

Current portion is reflected in Accrued Payroll Liabilities and remainder in other non-current liabilities on the Statements of Net Position.

June 30, 2016

Beginning Ending Due Within Balance Additions Reductions Balance One Year Compensated Absences $ 2,530,192 $ 2,805,394 $ 2,700,736 $ 2,634,850 $ 263,485

Current portion is reflected in Accrued Payroll Liabilities and remainder in other non-current liabilities on the Statements of Net Position.

J) Classification of Liabilities

Certain current liabilities have been classified as current liabilities payable from restricted assets as they will be funded from restricted assets.

K) Allowance for Doubtful Accounts

The District charges doubtful accounts arising from water sales receivable to bad debt expense when

it is probable that the accounts will be uncollectible. Uncollectible accounts are determined by the allowance method based upon prior experience and management’s assessment of the collectibility of existing specific accounts. The allowance for doubtful accounts was $154,581 for 2017 and $170,887 for 2016.

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1) REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued L) Property Taxes

Tax levies are limited to 1% of full market value (at time of purchase) which results in a tax rate of $1.00 per $100 assessed valuation, under the provisions of Proposition 13. Tax rates for voter-approved indebtedness are excluded from this limitation. The County of San Diego (the “County”) bills and collects property taxes on behalf of the District. The County’s tax calendar year is July 1 to June 30. Property taxes attach as a lien on property on January 1. Taxes are levied on July 1 and are payable in two equal installments on November 1 and February 1, and become delinquent after December 10 and April 10, respectively.

M) Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources

related to pensions, and pension expense, information about the fiduciary net position of the District’s California Public Employees’ Retirement System (CalPERS) plans (Plans) and additions to/deductions from the Plans’ fiduciary net position have been determined on the same basis as they are reported by CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.

N) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, deferred outflows of resources, liabilities, and deferred inflows of resources, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

O) Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

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2) CASH AND INVESTMENTS The primary goals of the District’s Investment Policy are to assure compliance with all Federal, State, and

Local laws governing the investment of funds under the control of the organization, protect the principal of investments entrusted, and generate income under the parameters of such policies.

Cash and Investments are classified in the accompanying financial statements as follows:

Statements of Net Position: 2017 2016

Cash and Cash Equivalents $ 17,427,875 $ 21,122,543 Restricted Cash and Cash Equivalents 50,204 8,208 Investments 38,401,158 36,806,704 Board Designated Investments 24,743,895 23,876,678 Restricted Investments 4,256,520 4,394,093

Total Cash and Investments $ 84,879,652 $ 86,208,226

Cash and Investments consist of the following: 2017 2016

Cash on Hand $ 2,950 $ 2,950 Deposits with Financial Institutions 1,112,650 1,485,808 Investments 83,764,052 84,719,468

Total Cash and Investments $ 84,879,652 $ 86,208,226 Investments Authorized by the California Government Code and the District’s Investment Policy

The table below identifies the investment types that are authorized for the District by the California Government Code (or the District’s Investment Policy, where more restrictive). The table also identifies certain provisions of the California Government Code (or the District’s Investment Policy, where more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the District, rather than the general provisions of the California Government Code or the District’s Investment Policy.

Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity Of Portfolio In One Issuer U.S. Treasury Obligations 5 years None None U.S. Government Sponsored Entities 5 years None None Certificates of Deposit 5 years 15% None Corporate Medium-Term Notes 5 years 10% None Commercial Paper 270 days 10% 10% Money Market Mutual Funds N/A 10% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None

(1) Excluding amounts held by bond trustee that are not subject to California Government Code restrictions.

(1)

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2) CASH AND INVESTMENTS - Continued Investments Authorized by Debt Agreements

Investments of debt proceeds held by the bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the District’s Investment Policy.

Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District manages its exposure to interest rates risk is by purchasing investments with shorter durations than the maximum allowable under the District investment policy and by timing cash flows from maturities, so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary, to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the District’s investments to market interest rate

fluctuations are provided by the following tables that show the distribution of the District’s investments by maturity as of June 30, 2017 and 2016. June 30, 2017

Remaining Maturity (in Months) 12 Months 13 to 24 25 to 60 More Than Investment Type Or Less Months Months 60 Months

U.S. Government Sponsored Entities $ 67,349,620 $ 9,979,720 $27,850,900 $29,519,000 $ - Local Agency Investment Fund (LAIF) 12,276,228 12,276,228 - - - San Diego County Pool 4,088,000 4,088,000 - - - Money Market Funds 50,204 50,204 - - -

Total $ 83,764,052 $ 26,394,152 $27,850,900 $29,519,000 $ - June 30, 2016

Remaining Maturity (in Months) 12 Months 13 to 24 25 to 60 More Than Investment Type Or Less Months Months 60 Months

U.S. Government Sponsored Entities $ 64,993,625 $ 10,005,920 $17,207,568 $37,780,137 $ - Local Agency Investment Fund (LAIF) 6,331,635 6,331,635 - - - San Diego County Pool 13,386,000 13,386,000 - - - Money Market Funds 8,208 8,208 - - -

Total $ 84,719,468 $ 29,731,763 $17,207,568 $37,780,137 $ -

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2) CASH AND INVESTMENTS - Continued Disclosures Relating to Credit Risk

Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code or the District’s Investment Policy, or debt agreements, and the Moody’s ratings as of June 30, 2017 and 2016.

June 30, 2017

Minimum Rating as of Year End Legal Not Investment Type Rating AAA AA A-1 Rated

U.S. Government Sponsored Entities $ 67,349,620 N/A $67,349,620 $ - $ - $ - Local Agency Investment Fund (LAIF) 12,276,228 N/A - - - 12,276,228 San Diego County Pool 4,088,000 N/A - - - 4,088,000 Money Market Funds 50,204 N/A - - 50,204 -

Total $ 83,764,052 $ 67,349,620 $ - $ 50,204 $16,364,228 June 30, 2016

Minimum Rating as of Year End Legal Not Investment Type Rating AAA AA A-1 Rated

U.S. Government Sponsored Entities $ 64,993,625 N/A $64,993,625 $ - $ - $ - Local Agency Investment Fund (LAIF) 6,331,635 N/A - - - 6,331,635 San Diego County Pool 13,386,000 N/A - - - 13,386,000 Money Market Funds 8,208 N/A - - 8,208 -

Total $ 84,719,468 $ 64,993,625 $ - $ 8,208 $19,717,635 Concentration of Credit Risk

The investment policy of the District contains various limitations on the amounts that can be invested in any one type or group of investments and in any issuer, beyond that stipulated by the California Government Code, Sections 53600 through 53692. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of total District investments as of June 30, 2017 and 2016 are as follows: June 30, 2017

Issuer Investment Type Reported Amount

Federal Home Loan Bank U.S. Government Sponsored Entities $ 15,927,740 Federal Home Loan Mortgage Corp U.S. Government Sponsored Entities $ 13,930,280 Federal National Mortgage Association U.S. Government Sponsored Entities $ 23,578,680 Federal Farm Credit Banks U.S. Government Sponsored Entities $ 11,914,080

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2) CASH AND INVESTMENTS - Continued Concentration of Credit Risk - Continued

June 30, 2016

Issuer Investment Type Reported Amount

Federal Home Loan Bank U.S. Government Sponsored Entities $ 13,221,648 Federal Home Loan Mortgage Corp U.S. Government Sponsored Entities $ 26,023,080 Federal National Mortgage Association U.S. Government Sponsored Entities $ 11,740,057 Federal Farm Credit Banks U.S. Government Sponsored Entities $ 14,008,840

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the District’s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local government units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. As of June 30, 2017, $2,207,200 and as of June 30, 2016, $1,403,394 of the District’s deposits with financial institutions in excess of federal depository insurance limits were held in collateralized accounts.

Local Agency Investment Fund (LAIF)

The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the District’s investment in this pool is reported in the accompanying financial statements at amounts based upon District’s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost-basis. The LAIF is a special fund of the California State Treasury through which local governments may pool investments. The District may invest up to $65,000,000 in the fund. Investments in LAIF are highly liquid, as deposits can be converted to cash within twenty-four hours without loss of interest. Investments with LAIF are secured by the full faith and credit of the State of California. The yield of LAIF for the quarter ended June 30, 2017 and 2016 was 0.92% and 0.51%, respectively. The estimated amortized cost and fair value of the LAIF pool at June 30, 2017 was $77,539,216,146 and $75,442,588,513 at June 30, 2016. The

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2) CASH AND INVESTMENTS - Continued

Local Agency Investment Fund (LAIF) - Continued

District’s share of the pool at June 30, 2017 was approximately 0.0158 and June 30, 2016 was approximately 0.0084%.

San Diego County Pooled Fund The San Diego County Pooled Investment Fund (SDCPIF) is pooled investment fund program governed

by the County of San Diego Board of Supervisors, and administered by the County of San Diego Treasurers and Tax Collector. Investments in SDCPIF are highly liquid as deposits and withdrawals can be made at anytime without penalty, which are determined on an amortized cash basis, the same as the fair value of the District’s position in the pool.

The County of San Diego’s bank deposits are either federally insured or collateralized in accordance with

the California Government Code. Pool detail is included in the County of San Diego Comprehensive Annual Financial Report (CAFR). Copies of the CAFR may be obtained from the County of San Diego Auditor-Controller’s Office - 1600 Pacific Coast Highway, San Diego California 92101.

Restricted Cash and Cash Equivalents

2017 2016 Debt Service: Water Revenue Bond Series 2010A $ 13,845 $ 2,264 Water Revenue Bond Series 2010B 36,359 5,944

Total $ 50,204 $ 8,208 Board Designated Investments Investments are Board restricted for the cost of the following District projects:

2017 2016 New Water Supply $ 622,723 $ 487,059 Replacement 24,121,172 23,389,619

Total $ 24,743,895 $ 23,876,678 Restricted Investments

2017 2016 Debt Service: General Obligation Bond ID No. 27-2009 $ 551,400 $ 657,076 Water Revenue Bond Series 2010A 1,021,760 1,030,556 Water Revenue Bond Series 2010B 2,683,360 2,706,461

Total $ 4,256,520 $ 4,394,093

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3) FAIR VALUE MEASUREMENTS Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurements and

Application, provides the framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value with Level 1 given the highest priority and Level 3 the lowest priority. The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the

organization has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the

asset or liability, either directly or indirectly. Level 2 inputs include the following:

a. Quoted prices for similar assets or liabilities in active markets. b. Quoted prices for identical or similar assets or liabilities in markets that are not active.

c. Inputs other than quoted prices that are observable for the asset or liability (for example,

interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).

d. Inputs that are derived principally from or corroborated by observable market data by

correlation or other means (market-corroborated inputs).

Level 3 inputs are unobservable inputs for the asset or liability. Fair value of assets measured on a recurring basis at June 30, 2017, are as follows:

Significant Other Observable

Inputs June 30, 2017 Fair Value (Level 2) Uncategorized U.S. Government Sponsored Entities

$ 67,349,620

$ 67,349,620

$ -

Local Agency Investment Fund (LAIF) 12,276,228 - 12,276,228 San Diego County Pool 4,088,000 - 4,088,000 Money Market Funds 50,204 50,204 -

Total $ 83,764,052 $ 67,399,824 $ 16,364,228

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3) FAIR VALUE MEASUREMENTS - Continued Fair value of assets measured on a recurring basis at June 30, 2016, are as follows:

Significant Other Observable

Inputs June 30, 2016 Fair Value (Level 2) Uncategorized U.S. Government Sponsored Entities

$ 64,993,625

$ 64,993,625

$ -

Local Agency Investment Fund (LAIF) 6,331,635 - 6,331,635 San Diego County Pool 13,386,000 - 13,386,000 Money Market Funds 8,208 8,208 -

Total $ 84,719,468 $ 65,001,833 $ 19,717,635

Investments classified in Level 2 of the fair value hierarchy are valued using a matrix pricing technique. Matrix pricing is used to value securities based on the securities’ relationship to benchmark quoted prices. Uncategorized investments do not fall under the fair value hierarchy as there is no active market for the investments.

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4) CAPITAL ASSETS The following is a summary of changes in Capital Assets for the year ended June 30, 2017: Beginning Ending Balance Additions Deletions Adjustments (1) Balance Capital Assets, Not Depreciated Land $ 14,085,251 $ 303,936 $ - $ - $ 14,389,187 Construction in Progress 12,541,701 10,502,297 (8,842,487) - 14,201,511 Total Capital Assets Not Depreciated 26,626,952 10,806,233 (8,842,487) - 28,590,698 Capital Assets, Being Depreciated Infrastructure 631,201,238 10,874,045 (1,384,141) (49,540) 640,641,602 Field Equipment 9,123,178 672,982 (1,203,861) 396,321 8,988,620 Buildings 20,574,350 328,324 (326,549) - 20,576,125 Transportation Equipment 3,437,794 227,545 (31,560) (346,781) 3,286,998 Communication Equipment 3,283,251 264,362 (176,572) - 3,371,041 Office Equipment 19,355,538 451,069 (2,186,023) - 17,620,584 Total Capital Assets Being Depreciated 686,975,349 12,818,327 (5,308,706) - 694,484,970 Less Accumulated Depreciation: Infrastructure 220,794,506 15,198,502 (697,049) (15,137) 235,280,822 Field Equipment 7,667,659 438,346 (1,203,861) 134,748 7,036,892 Buildings 9,303,722 553,998 (260,737) - 9,596,983 Transportation Equipment 2,589,264 170,113 (31,560) (119,611) 2,608,206 Communication Equipment 2,577,906 225,912 (176,572) - 2,627,246 Office Equipment 16,700,698 1,198,626 (2,170,755) - 15,728,569 Total Accumulated Depreciation 259,633,755 17,785,497 (4,540,534) - 272,878,718 Total Capital Assets Being Depreciated, Net

427,341,594

(4,967,170)

(768,172)

-

421,606,252

Total Capital Assets, Net $ 453,968,546 $ 5,839,063 $ (9,610,659) $ - $ 450,196,950 (1) Adjustments are related to recategorization of capital assets during the fiscal year.

Depreciation expense for the year ended June 30, 2017 was $17,785,497.

34


Years Ended June 30, 2017 and 2016 4) CAPITAL ASSETS - Continued The following is a summary of changes in Capital Assets for the year ended June 30, 2016:

Beginning Ending Balance Additions Deletions Balance Capital Assets, Not Depreciated Land $ 13,714,963 $ 370,418 $ (130) $ 14,085,251 Construction in Progress 15,106,336 9,127,008 (11,691,643) 12,541,701 Total Capital Assets Not Depreciated 28,821,299 9,497,426 (11,691,773) 26,626,952 Capital Assets, Being Depreciated Infrastructure 621,338,227 9,880,756 (17,745) 631,201,238 Field Equipment 8,720,188 500,562 (97,572) 9,123,178 Buildings 18,992,652 1,592,991 (11,293) 20,574,350 Transportation Equipment 3,398,370 127,517 (88,093) 3,437,794 Communication Equipment 3,097,068 221,871 (35,688) 3,283,251 Office Equipment 18,223,444 1,135,511 (3,417) 19,355,538 Total Capital Assets Being Depreciated 673,769,949 13,459,208 (253,808) 686,975,349 Less Accumulated Depreciation: Infrastructure 206,825,493 13,972,386 (3,373) 220,794,506 Field Equipment 7,569,568 195,663 (97,572) 7,667,659 Buildings 8,841,448 473,567 (11,293) 9,303,722 Transportation Equipment 2,443,598 233,759 (88,093) 2,589,264 Communication Equipment 2,219,957 393,637 (35,688) 2,577,906 Office Equipment 15,499,790 1,204,325 (3,417) 16,700,698 Total Accumulated Depreciation 243,399,854 16,473,337 (239,436) 259,633,755 Total Capital Assets Being Depreciated, Net

430,370,095

(3,014,129)

(14,372)

427,341,594

Total Capital Assets, Net $ 459,191,394 $ 6,483,297 $ (11,706,145) $ 453,968,546

Depreciation expense for the year ended June 30, 2016 was $16,473,337.

35


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT Long-term liabilities for the year ended June 30, 2017 are as follows: Beginning Ending Due Within Balance Additions Deletions Balance One Year General Obligation Bonds: Improvement District No. 27 - 2009 $ 4,580,000 $ - $ 585,000 $ 3,995,000 $ 605,000 Unamortized Bond Premium 100,853 - 16,355 84,498 - Net General Obligation Bonds 4,680,853 - 601,355 4,079,498 605,000 Certificates of Participation: 1996 Certificates of Participation 8,800,000 - 600,000 8,200,000 600,000 1996 COPS Unamortized Discount (8,197) - (745) (7,452) - Net Certificates of Participation 8,791,803 - 599,255 8,192,548 600,000 Revenue Bonds: 2010 Water Revenue Bonds Series A 9,720,000 - 900,000 8,820,000 940,000 2010 Water Revenue Bonds Series B 36,355,000 - - 36,355,000 - 2013 Water Revenue Refunding Bonds 5,855,000 - 635,000 5,220,000 660,000 2016 Water Revenue Refunding Bonds 33,385,000 - 1,200,000 32,185,000 1,015,000 2010 Series A Unamortized Premium 613,813 - 74,402 539,411 - 2013 Bonds Unamortized Premium 688,683 - 96,095 592,588 - 2016 Bonds Unamortized Premium 3,601,190 - 178,571 3,422,619 - Net Revenue Bonds 90,218,686 - 3,084,068 87,134,618 2,615,000 Total Long-Term Liabilities $ 103,691,342 $ - $ 4,284,678 $ 99,406,664 $ 3,820,000

36


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT - Continued Long-term liabilities for the year ended June 30, 2016 are as follows: Beginning Ending Due Within Balance Additions Deletions Balance One Year General Obligation Bonds: Improvement District No. 27 - 2009 $ 5,150,000 $ - $ 570,000 $ 4,580,000 $ 585,000 Unamortized Bond Premium 117,208 - 16,355 100,853 - Net General Obligation Bonds 5,267,208 - 586,355 4,680,853 585,000 Certificates of Participation: 1996 Certificates of Participation 9,400,000 - 600,000 8,800,000 600,000 2007 Certificates of Participation 35,795,000 - 35,795,000 - - 1996 COPS Unamortized Discount (8,942) - (745) (8,197) - 2007 COPS Unamortized Discount (195,955) - (195,955) - - Net Certificates of Participation 44,990,103 - 36,198,300 8,791,803 600,000 Revenue Bonds: 2010 Water Revenue Bonds Series A 10,590,000 - 870,000 9,720,000 900,000 2010 Water Revenue Bonds Series B 36,355,000 - - 36,355,000 - 2013 Water Revenue Refunding Bonds 6,470,000 - 615,000 5,855,000 635,000 2016 Water Revenue Refunding Bonds - 33,385,000 - 33,385,000 1,200,000 2010 Series A Unamortized Premium 688,215 - 74,402 613,813 - 2013 Bonds Unamortized Premium 784,778 - 96,095 688,683 - 2016 Bonds Unamortized Premium - 3,630,950 29,760 3,601,190 - Net Revenue Bonds 54,887,993 37,015,950 1,685,257 90,218,686 2,735,000 Total Long-Term Liabilities $105,145,304 $37,015,950 $ 38,469,912 $103,691,342 $ 3,920,000 General Obligation Bonds In June 1998, the District issued $11,835,000 of General Obligation Refunding Bonds. The proceeds of this

issue, together with other lawfully available monies, were to be used to establish an irrevocable escrow to advance refund and defease in their entirety the District’s previous outstanding General Obligation Bond issue. In November 2009, the District issued $7,780,000 of General Obligation Refunding Bonds Improvement District No. 27-2009 to refund the 1998 issue. The proceeds from the bond issue were $7,989,884, which included an original issue premium of $209,884. An amount of $7,824,647, which consisted of unpaid principal and accrued interest, was deposited into an escrow fund. Pursuant to an optional redemption clause in the 1998 bonds, the District was able to redeem the 1998 bonds, without premium at any time after September 1, 2009. On December 15, 2009 the 1998 bonds were refunded.

37


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT - Continued General Obligation Bonds - Continued

These bonds are general obligations of Improvement District No. 27 (ID 27) of the District. The Board of Directors has the power and is obligated to levy annual ad valorem taxes without limitation, as to rate or amount for payment of the bonds and the interest upon all property which is within ID 27 and subject to taxation. The General Obligation Bonds are payable from District-wide tax revenues. The Board may utilize other sources for servicing the bond debt and interest.

The Improvement District No. 27-2009 General Obligation Refunding Bonds have interest rates from 3.00% to 4.00% with maturities through FY 2023.

Future debt service requirements for the bonds are as follows:

For the Year Ended June 30, Principal Interest

2018 $ 605,000 $ 147,700 2019 635,000 122,900 2020 650,000 97,200 2021 680,000 70,600 2022 705,000 42,900 2023 720,000 14,400

$ 3,995,000 $ 495,700 Certificates of Participation (COPS) In June 1996, COPS with face value of $15,400,000 were sold by the Otay Service Corporation to finance

the cost of design, acquisition, and construction of certain capital improvements. An installment purchase agreement between the District, as Buyer, and the Corporation, as Seller, was executed for the scheduled payment of principal and interest associated with the COPS. The installment payments are to be paid from taxes and net revenues, as described in the installment agreement. The certificates bear interest at a variable weekly rate not to exceed 12%. The variable interest rate is tied to the 30-day LIBOR index and the Securities Industry and Financial Markets Association (SIFMA) index. An irrevocable letter of credit facility is necessary to market the District’s variable rate debt. This facility is with Union Bank and covers the outstanding principal and interest. The facility expires on June 29, 2020. The interest rate at June 30, 2017 was 0.90%. The installment payments are to be paid annually at $350,000 to $1,100,000 from September 1, 1996 through September 1, 2026.

In March 2007, Revenue Certificates of Participation (COPS) with face value of $42,000,000 were sold by the Otay Service Corporation to improve the District’s water storage system and distribution facilities. An installment purchase agreement between the District, as a Buyer, and the Corporation, as Seller, was executed for the scheduled payment of principal and interest associated with the COPS. The installment payments are to be paid from taxes and net revenues, as described in the installment agreement. The certificates are due in annual installments of $785,000 to $2,445,000 from September 1, 2007 through September 1, 2036; bearing interest at 3.7% to 4.47%. On May 1, 2016 the 2007 COPS was refunded.

38


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT – Continued Certificates of Participation (COPS) – Continued

There is no aggregate reserve requirement for the COPS. Future debt service requirements for the certificates are as follows:

For the Year 1996 COPS Ended June 30, Principal Interest (1)

2018 $ 600,000 $ 38,500 2019 700,000 35,083 2020 700,000 31,583 2021 700,000 28,083 2022 800,000 24,167

2023-2027 4,700,000 54,417

$ 8,200,000 $ 211,833

(1) Variable Rate - Interest reflected at June 30, 2017 at a rate of 0.90%.

The COPS debt issue contain various covenants and restrictions, principally that the District fix, prescribe, revise and collect rates, fees and charges for the Water System which will at lease sufficient to yield, during each fiscal year, taxes and net revenues equal to one hundred twenty-five percent (125%) of the debt service for such fiscal year. The District was in compliance with these rate covenants for the fiscal year ended June 30, 2017. Defeased Certificate of Participation (COPS) In May 2016, the March 2007 COPS were refunded with the issuance of the 2016 Water Revenue Refunding Bonds. Proceeds of $36,577,898, which consisted of unpaid principal and accrued interest, were used to establish an irrevocable escrow to advance refund and defease in their entirety the District’s 2007 COPS. Pursuant to an optional redemption clause in the 2007 COPS, the District will be able to redeem the 2007 bonds, without premium at any time after September 1, 2017. As a result, the 2007 COPS are considered to be defeased and the liability of those bonds has been removed from long-term liabilities. The outstanding balance at June 30, 2017 was $34,760,000.

Water Revenue Bonds In April 2010, Water Revenue Bonds with a face value of $50,195,000 were sold by the Otay Water District

Financing Authority to provide funds for the construction of water storage and transmission facilities. The bond issue consisted of two series; Water Revenue Bonds, Series 2010A (Non-AMT Tax Exempt) with a face value of $13,840,000 plus a $1,078,824 original issue premium, and Water Revenue Bonds, Series 2010B (Taxable Build America Bonds) with a face value of $36,255,000. The Series 2010A bonds are due in annual installments of $785,000 to $1,295,000 from September 1, 2012 through September 1, 2025; bearing interest at 2% to 5.25%. The Series 2010B bonds are due in annual installments of $1,365,000 to $3,505,000 from September 1, 2026 through September 1, 2040; bearing interest at 6.377% to 6.577%.

39


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT - Continued Water Revenue Bonds - Continued Interest on both Series is payable on September 1, 2010 and semiannually thereafter on March 1st and

September 1st of each year until maturity or earlier redemption. The installment payments are to be made from Taxes and Net Revenues of the Water System as described in the installment purchase agreement, on parity with the payments required to be made by the District for the 1996 Certificates of Participation described above and the 2013 and 2016 Water Revenue Refunding Bonds described below.

The proceeds of the bonds will be used to fund the project described above as well as to fund reserve

funds of $1,030,688 (Series 2010A) and $2,707,418 (Series 2010B). $542,666 was used to fund various costs of issuance.

The original issue premium is being amortized over the 14 year life of the Series 2010A bonds.

Amortization for the year ending June 30, 2017 was $74,402 and is included in interest expense. The unamortized premium at June 30, 2017 is $539,411 and June 30, 2016 was $613,813.

The 2010 Water Revenue Bonds contains various covenants and restrictions, principally that the District

fix, prescribe, revise and collection rates, fees and charges for the Water System which will at lease sufficient to yield, during each fiscal year, taxes and net revenues equal to one hundred twenty-five percent (125%) of the debt service for such fiscal year. The District was in compliance with these rate covenants for the fiscal year ended June 30, 2017.

In June 2013, the 2013 Water Revenue Refunding Bonds were issued to defease the 2004 Refunding

Certificates of Participation. The bonds were issued with a face value of $7,735,000 plus a $984,975 original issue premium. The bonds are due in annual installments of $660,000 to $835,000 from September 1, 2013 through September 1, 2023; bearing interest at 1% to 4%. The installment payments are to be made from Taxes and Net Revenues of the Water System, on parity with the payments required to be made by the District for the 1996, and 2007 Certificates of Participation and the 2010A and 2010B described above.

The original issue premium is being amortized over the 11 year life of the Series 2013 bonds.

Amortization for the year ending June 30, 2017 was $96,095 and is included in interest expense. The unamortized premium at June 30, 2017 is $592,588 and June 30, 2016 was $688,683.

In May 2016, Water Revenue Refunding Bonds were issued to defease the 2007 Revenue Certificates of

Participation. The bonds are due in annual installments of $1,200,000 to $2,235,000 from September 1, 2016 through September 1, 2036; bearing interest of 2% to 5%. The bonds were issued with a face value of $33,385,000 plus $3,630,950 original issue premium. The savings between the cash flow required to service, the old debt and the cash flow required to service the new debt is $5,664,140 and represent an economic gain on refunding of $4,538,175.

The original issue premium is being amortized over the 20 year life of the Series 2016 bonds.

Amortization for the year ending June 30, 2017 was $178,571 and is included in interest expense. The unamortized premium at June 30, 2017 is $3,422,619 and at June 30, 2016 was $3,601,190.

40


Years Ended June 30, 2017 and 2016 5) LONG-TERM DEBT – Continued Water Revenue Bonds – Continued The total amount outstanding at June 30, 2017 and aggregate maturities of the revenue bonds for the

fiscal years subsequent to June 30, 2017, are as follows:

For the Year

2010 Water Revenue Bond Series A

2010 Water Revenue Bond Series B

Ended June 30, Principal Interest Principal Interest

2018 $ 940,000 $ 406,288 $ - $ 2,371,868 2019 975,000 367,988 - 2,371,868 2020 1,015,000 323,112 - 2,371,868 2021 1,065,000 271,112 - 2,371,868 2022 1,120,000 216,487 2,371,868

2023-2027 3,705,000 291,969 2,815,000 11,682,540 2028-2032 - - 8,760,000 9,631,794 2033-2037 - - 12,005,000 6,275,281 2038-2042 - - 12,775,000 1,747,345

$ 8,820,000 $ 1,876,956 $ 36,355,000 $ 41,196,300

For the Year 2013 Water Revenue Refunding Bonds

2016 Water Revenue Refunding Bonds

Ended June 30, Principal Interest Principal Interest

2018 $ 660,000 $ 195,600 $ 1,015,000 $ 1,214,806 2019 685,000 168,700 1,045,000 1,173,456 2020 715,000 140,700 1,100,000 1,119,831 2021 745,000 111,500 1,155,000 1,063,456 2022 775,000 81,100 1,215,000 1,004,206

2023-2027 1,640,000 66,200 7,120,000 4,014,907 2028-2032 - - 8,955,000 2,238,719 2033-2037 - - 10,580,000 761,972

$ 5,220,000 $ 763,800 $ 32,185,000 $ 12,591,353 Revenues Pledged The District has pledged a portion of future water sales revenues to repay its Water Revenue Bonds and

Certificates of Participation. Total principal and interest remaining on the water revenue bonds and certificates of participation is $147,420,242 payable through fiscal year 2042. For the current year, principal and interest paid by the water sales revenues were $3,335,000 and $4,082,446, respectively.

41



6) NET POSITION Designations of Net Position

In addition to the restricted net position, a portion of unrestricted net position, have been designated by the Board of Directors for the following purposes as of June 30, 2017 and 2016:

2017 2016 Designated Betterment $ 2,564,335 $ 2,081,586 Replacement Reserve 22,353,996 32,508,472 Designated New Supply Fund 100,751 64,711 Employee Benefits Reserve 188,381 135,933

Total $ 25,207,463 $ 34,790,702 7) DEFINED BENEFIT PENSION PLAN A) General Information about the Pension Plans

Plan Descriptions All qualified permanent and probationary employees are eligible to participate in the District’s Plan, agent multiple-employer defined benefit pension plans administered by the California Public Employees’ Retirement System (CalPERS), which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Plans are established by State statute and District resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding provisions, assumptions and membership information that can be found on the CalPERS website.

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

42


Years Ended June 30, 2017 and 2016 7) DEFINED BENEFIT PENSION PLAN - Continued A) General Information about the Pension Plans - Continued Benefits Provided - Continued

The Plans’ provisions and benefits in effect at June 30, 2017 and 2016, are summarized as follows: Prior to On or After Hire Date January 1, 2013 January 1, 2013

Benefit Formula 2.7% at 55 2% at 62 Benefit Vesting Schedule 5 years service 5 years service Benefit Payments Monthly for life Monthly for life Retirement Age 50 - 55 52 - 67 Monthly Benefits, as a % of Eligible Compensation 2.0% to 2.7% 1.0% to 2.5% Required Employee Contribution Rates 8% 6.25% Required Employer Contribution Rates 20.869% - 25.435% 25.435% - 32.631%

Employees Covered The following employees were covered by the benefit terms for the Plan: 2017 2016

Inactive Employees or Beneficiaries Currently Receiving Benefits 174 169 Inactive Employees Entitled to But Not Yet Receiving Benefits 140 138 Active Employees 137 138

Total 451 445

Contributions Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the Plan are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The District is required to contribute the difference between the actuarially determined rate and the contribution rate of employees.

B) Net Pension Liability

The District’s net pension liability for the Plan is measured as the total pension liability, less the pension plan’s fiduciary net position. The net pension liability of the Plan is measured as of June 30, 2016, using the annual actuarial valuation as of June 30, 2015 rolled forward to June 30, 2016 using standard update procedures. A summary of principal assumptions and methods used to determine the net pension liability is shown on the following page:

43



7) DEFINED BENEFIT PENSION PLAN - Continued B) Net Pension Liability - Continued

Actuarial Assumptions The total pension liabilities in the June 30, 2015 actuarial valuations were determined using the following actuarial assumptions:

Valuation Date June 30, 2015 Measurement Date June 30, 2016 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.65% Inflation 2.75% Payroll Growth 3.0% Projected Salary Increase 3.3% - 14.2% (1)


(1) Depending on age, service and type of employment (2) Net of pension plan investment expenses, including inflation


The total pension liabilities in the June 30, 2014 actuarial valuations were determined using the following actuarial assumptions:

Valuation Date June 30, 2014 Measurement Date June 30, 2015 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.65% Inflation 2.75% Payroll Growth 3.0% Projected Salary Increase 3.3% - 14.2% (1)


(1) Depending on age, service and type of employment (2) Net of pension plan investment expenses, including inflation


44




Discount Rate The discount rate used to measure the total pension liability was 7.65% for the Plan. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.65% discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long term expected discount rate of 7.65% will be applied to all plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed report that can be obtained from the CalPERS website. According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrator expense. The 7.50% investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65%. Using this lower discount rate has resulted in a slightly higher Total Pension Liability and Net Pension Liability. CalPERS checked the materiality threshold for the difference in calculation and did not find it to be a material difference. CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management (ALM) review cycle that is scheduled to be completed in February 2018. Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least 2017-18 fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds’ asset classes, expected compound returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above the rounded down to the nearest one quarter of one percent.

45




Discount Rate - Continued The following table reflects the long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These rates of return are net of administrative expenses.

Asset Class

New Strategic Allocation

Real Return Years 1 - 10 (a)

Real Return Years 11+ (b)

Global Equity 51.0% 5.25% 5.71% Global Fixed Income 20.0% 0.99% 2.43% Inflation Sensitive 6.0% 0.45% 3.36% Private Equity 10.0% 6.83% 6.95% Real Estate 10.0% 4.50% 5.13% Infrastructure and Forestland 2.0% 4.50% 5.09% Liquidity 1.0% -0.55% -1.05%

Total 100%

(a) An expected inflation of 2.5% used for this period. (b) An expected inflation of 3.0% used for this period.

C) Changes in the Net Position Liability

The changes in the Net Position Liability for the Plan for June 30, 2017:

Increase (Decrease) Total

Pension Liability

Plan Fiduciary

Net Position

Net Pension

Liability/(Asset)

Beginning Balance $114,283,338 $ 74,140,210 $ 40,143,128 Changes in the Year: Service Cost 2,298,617 - 2,298,617 Interest on the Total Pension Liability 8,575,275 - 8,575,275 Changes in Benefit Terms - - - Differences Between Actual and Expected Experience

(613,440)

-

(613,440)

Changes in Assumptions - - - Contribution - Employer - 3,819,770 (3,819,770) Contribution - Employee - 1,010,337 (1,010,337) Net Investment Income - 369,214 (369,214) Benefit Payments, Including Refunds of Employee Contributions

(5,448,218)

(5,448,218)

-

Administrative Expense - (45,185) 45,185 Net Changes 4,812,234 (294,082) 5,106,316 Ending Balance $119,095,572 $ 73,846,128 $ 45,249,444

46


Years Ended June 30, 2017 and 2016 7) DEFINED BENEFIT PENSION PLAN - Continued

C) Changes in the Net Position Liability The changes in the Net Position Liability for the Plan for June 30, 2016:

Increase (Decrease)

Total Pension Liability

Plan Fiduciary Net Position

Net Pension Liability/(Asset)

Beginning Balance $112,069,436 $ 73,346,091 $ 38,723,345 Changes in the Year: Service Cost 2,250,860 - 2,250,860 Interest on the Total Pension Liability 8,229,312 - 8,229,312 Changes in Benefit Terms - - - Differences Between Actual and Expected Experience

(981,200)

-

(981,200)

Changes in Assumptions (1,996,819) - (1,996,819) Contribution - Employer - 3,557,098 (3,557,098) Contribution - Employee - 1,007,023 (1,007,023) Net Investment Income - 1,601,760 (1,601,760) Benefit Payments, Including Refunds of Employee Contributions

(5,288,251)

(5,288,251)

-

Administrative Expense - (83,511) 83,511 Net Changes 2,213,902 794,119 1,419,783 Ending Balance $114,283,338 $ 74,140,210 $ 40,143,128

Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the District for the Plan, calculated using the discount rate for the Plan, as well as what the District’s net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate:

2017 2016

1% Decrease 6.65% 6.65% Net Pension Liability $ 60,824,149 $ 55,289,674

Current Discount Rate 7.65% 7.65% Net Pension Liability $ 45,249,444 $ 40,143,128

1% Increase 8.65% 8.65% Net Pension Liability $ 32,314,666 $ 27,584,842

Note: In a decision by CalPERS in December 2016, the discount rate will be lowered over the next three fiscal years as follows:

FY 2017-2018 7.375% FY 2018-2019 7.25% FY 2019-2020 7.00%

47



7) DEFINED BENEFIT PENSION PLAN - Continued

C) Changes in the Net Position Liability - Continued Pension Plan Fiduciary Net Position Detailed information about the pension plan’s fiduciary net position is available in the separately issued CalPERS financial reports.

D) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended June 30, 2017, the District recognized pension expense of $3,682,561. At June 30, 2017, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following services:

Deferred Outflows of Resources

Deferred Inflows of Resources

Pension contributions subsequent to measurement date $ 4,130,482 $ - Differences between actual and expected experience - (698,864) Changes in assumptions - (619,703) Net differences between projected and actual earnings on pension plan investments

6,550,647

(2,483,970)

Total $ 10,681,129 $ (3,802,537) $4,130,482 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 2018. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows:

Deferred Year Ended Outflow/(Inflows)

June 30 of Resources

2017 $ (550,942) 2018 417,089 2019 1,834,343 2020 1,047,620 2021 -

Thereafter -

48



7) DEFINED BENEFIT PENSION PLAN - Continued D) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions - Continued

For the year ended June 30, 2016, the District recognized pension expense of $2,557,616. At June 30, 2016, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following services:

Deferred Outflows of Resources

Deferred Inflows of Resources

Pension contributions subsequent to measurement date $ 3,854,533 $ - Differences between actual and expected experience - (642,855)Changes in assumptions - (1,308,261)Net differences between projected and actual earnings on pension plan investments

3,146,893

(3,725,955)

Total $ 7,001,426 $ (5,677,071) $3,854,533 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 2017. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows:

Deferred Year Ended Outflow/(Inflows)

June 30 of Resources

2017 $ (1,482,165) 2018 (1,379,475) 2019 (455,262) 2020 786,724 2021 -

Thereafter -

E) Payable to the Pension Plan At June 30, 2017, the District reported a payable of $80,021 for the outstanding amount of contributions to the pension plan required for the year ended June 30, 2017 and $61,904 for June 30, 2016 reflected in the accrued payroll liabilities on the Statements of Net Position.

49



8) OTHER POST EMPLOYMENT BENEFITS

Plan Description

The District’s defined benefit postemployment healthcare plan, (DPHP), provides medical benefits to eligible retired District employees and beneficiaries. DPHP is part of the Public Agency portion of the California Employers’ Retiree Benefit Trust Fund (CERBT), an agent multiple-employer plan administered by California Public Employees’ Retirement System (CalPERS), which acts as a common investment and administrative agent for participating public employers within the State of California. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the CalPERS’ annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California 95814. Prior to the plan agreements signed in 2011, the eligibility in the plan was broken into 3 tiers, employees hired before January 1, 1981, employees hired on or after January 1, 1981 but before July 1, 1993 and employees hired on or after July 1, 1993. Board members elected before January 1, 1995 are also eligible for the plan. Eligibility also includes age and years of service requirements which vary by tier. Benefits include up to 100% medical and/or dental premiums for life for the retiree for Tier I, II or III employees, and up to 100% spouse premium until death of retiree or age 65 whichever is greater and dependent premium up to age 19 depending on the tier. Subsequent to the agreements in 2011 and 2012 all employees are eligible for the plan after 20 years of consecutive service and unrepresented employees hired before January 1, 2013 are eligible after 15 years. Survivor benefits are covered beyond Medicare.

Funding Policy The contribution requirements of plan members and the District are established and may be amended by the Board of Directors. Effective January 1, 2013, represented employees hired prior to January 1, 2013 or hired on or after January 1, 2013 from another public agency that has reciprocity without having a break in service of more than six months, contribute .75% of covered salaries. In addition, unrepresented and represented employees hired on or after January 1, 2013, and do not have reciprocity from another public agency, contribute 1.75% and 2.5% of covered salaries, respectively. DPHP members receiving benefits contribute based on their selected plan options of EPO, HMO or PPO and whether they are outside the State of California. Contributions by plan members range from $0 to $196 per month for coverage to age 65, and from $0 to $202 per month, respectively, thereafter. Annual OPEB Cost and Net OPEB Obligation/Asset The District’s annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost. Any unfunded actuarial liability (or funding excess) is amortized over a period not to exceed thirty years. The current ARC rate is 8.9% of the annual covered payroll.

50



8) OTHER POST EMPLOYMENT BENEFITS - Continued

Annual OPEB Cost and Net OPEB Obligation/Asset - Continued The following table shows the components of the District’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation/assets:

2017 2016 Annual Required Contribution (ARC) $ 1,245,000 $ 1,239,000Interest on Net OPEB Asset (907,667) (831,748)Adjustment to Annual Required Contribution (ARC) 911,000 810,000 Annual OPEB Cost (Expense) 1,248,333 1,217,252 Contributions Made 2,284,420 2,264,415 Increase in Net OPEB Asset (1,036,087) (1,047,163) Net OPEB Asset - Beginning of Year (12,519,549) (11,472,386)

Net OPEB Asset - End of Year $ (13,555,636) $ (12,519,549)

For 2017, in addition to the ARC, the District contributed cash benefit payments outside the trust (healthcare premium payments for retirees) to Special District Risk Management Authority (SDRMA) in the amount of $919,420, which is included in the $2,284,420 of contributions shown above. For 2016, this amount was $909,415, which is included in the $2,264,415 of contributions shown above. The District’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation/asset for the fiscal years 2017, 2016 and 2015 were as follows:

THREE-YEAR TREND INFORMATION FOR CERBT Fiscal Annual OPEB Percentage of Net OPEB Year Cost (AOC) OPEB Cost Contributed Obligation

6/30/17 $ 1,248,333 183% $ (13,555,636) 6/30/16 $ 1,217,252 186% $ (12,519,549) 6/30/15 $ 1,373,063 179% $ (11,472,386)

Funded Status and Funding Progress The funded status of the plan as of June 30, 2015, the most recent actuarial valuation date, was as follows:

Actuarial Accrued Liability (AAL) $ 23,689,000 Actuarial Value of Plan Assets $ 16,920,000 Unfunded Actuarial Accrued Liability (UAAL) $ 6,769,000 Funded Ratio (Actuarial Value of Plan Assets/AAL) 71.42% Covered Payroll (Active Plan Members) $ 13,080,000 UAAL as a Percentage of Covered Payroll 51.75%

51



8) OTHER POST EMPLOYMENT BENEFITS - Continued

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of the plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The following is a summary of the actuarial assumptions and methods:

Valuation Date June 30, 2015 Actuarial Cost Method Entry Age Normal Cost Method Amortization Method Level Percent of Payroll Remaining Amortization Period 23-Year Fixed (Closed) Period as of the Valuation Date Asset Valuation Method 5-Year Smoothed Market Actuarial Assumptions: Investment Rate of Return 7.25% (Net of Administrative Expenses) Projected Salary Increase 3.25% Inflation 3.00% Individual Salary Growth CalPERS 1997-2007 Experience Study Healthcare Cost Trend Rate Medical: 10% per annum graded down in approximately

one-half percent increments to an ultimate rate of 5%. Dental: 4% per annum.

9) WATER CONSERVATION AUTHORITY In 1999 the District formed the Water Conservation Garden Authority (the “Authority”), a Joint Powers

Authority, with other local entities to construct, maintain and operate a xeriscape demonstration garden in the furtherance of water conservation. The authority is a non-profit public charity organization and is exempt from income taxes. During the years ended June 30, 2017 and 2016, the District contributed $125,742 and $120,722, respectively, for the development, construction and operation costs of the xeriscape demonstration garden.

52



9) WATER CONSERVATION AUTHORITY - Continued A summary of the Authority’s June 30, 2016 audited financial statement is as follows (latest report

available):

Assets $ 1,316,319 Liabilities 0 Net Assets $ 1,316,319

Revenues, Gains and Other Support $ 500,000 Expenses 569,995 Changes in Net Assets $ (69,995)

10) COMMITMENTS AND CONTINGENCIES Construction Commitments The District had committed to capital projects under construction with an estimated cost to complete of

$9,520,486 at June 30, 2017. Litigation Certain claims, suits and complaints arising in the ordinary course of operation have been filed or are

pending against the District. In the opinion of the staff and counsel, all such matters are adequately covered by insurance, or if not so covered, are without merit or are of such kind, or involved such amounts, as would not have significant effect on the financial position or results of operations of the District if disposed of unfavorably.

Refundable Terminal Storage Fees The District has entered into an agreement with several developers whereby the developers prepaid the

terminal storage fee in order to provide the District with the funds necessary to build additional storage capacity. The agreement further allows the developers to relinquish all or a portion of such water storage capacity. If the District grants to another property owner the relinquished storage capacity, the District shall refund to the applicable developer $746 per equivalent dwelling unit (EDU). There were 17,867 EDUs that were subject to this agreement. At June 30, 2017, 1,750 EDUs had been relinquished and refunded, 15,086 EDUs had been connected, and 1,031 EDUs have neither been relinquished nor connected. At June 30, 2016, 1,750 EDUs had been relinquished and refunded, 15,083 EDUs had been connected, and 1,034 EDUs have neither been relinquished nor connected.

Developer Agreements

The District has entered into various Developer Agreements with developers towards the expansion of District facilities. The developers agree to make certain improvements and after the completion of the projects the District agrees to reimburse such improvements with a maximum reimbursement amount for each developer. Contractually, the District does not incur a liability for the work until the work is accepted by the District. As of June 30, 2017, none of the outstanding developer agreements had been accepted.

53



11) RISK MANAGEMENT General Liability

The District is exposed to various risks of loss related to torts, theft, damage and destruction of assets, errors and omissions, and natural disasters. Beginning in July 2003, the District began participation in an insurance pool through the Special District Risk Management Authority (SDRMA). SDRMA is a not-for-profit public agency formed under California Government Code Sections 6500 et. Seq. SDRMA is governed by a board composed of members from participating agencies. The mission of SDRMA is to provide renewable, efficiently priced risk financing and risk management services through a financially sound pool. The District pays an annual premium for commercial insurance covering general liability, excess liability, property, automobile, public employee dishonesty, and various other claims. Accordingly, the District retains no risk of loss. Separate financial statements of SDRMA may be obtained at Special District Risk Management Authority, 1112 “I” Street, Suite 300, Sacramento, CA 95814. General and Auto Liability, Public Officials’ Errors and Omissions and Employment Practices Liability: Total risk financing limits of $10 million combined single limit at $10 million per occurrence, subject to the following deductibles:

$5,000 per occurrence for third party general liability property damage;

$1,000 per occurrence for third party auto liability property damage;

50% co-insurance of cost expended by SDRMA, in excess of $10,000 up to $50,000, per occurrence, as respects any employment practices claim or suit arising in whole or any part out of any action involving discipline, demotion, reassignment or termination of any employee of the member.

Employee Dishonesty Coverage: Total of $1,000,000 per loss includes Public Employee Dishonesty,

Forgery or Alteration and Theft, Disappearance and Destruction coverage’s effective July 1, 2016. Property Loss: Replacement cost, for property on file, if replaced, and if not replaced within two years

after the loss, paid on an actual cash value basis, to a combined total of $1 billion per occurrence, subject to a $1,000 deductible per occurrence, effective July 1, 2016.

Boiler and Machinery: Replacement cost up to $100 million per occurrence, subject to a $1,000

deductible, effective July 1, 2016. Public Officials Personal Liability: $500,000 each occurrence, with an annual aggregate of $500,000 per

each elected/appointed official to which this coverage applies, subject to the terms, conditions and exclusions as provided in the Memorandum of Coverage’s, deductible of $500 per claim, effective July 1, 2016.

Comprehensive and Collision: On selected vehicles, with deductibles of $500/$1,000, as elected; ACV

limits; fully self-funded by SDRMA; Policy No. LCA - SDRMA – 2015-16, effective July 1, 2016.

54



11) RISK MANAGEMENT – Continued General Liability - Continued Workers’ Compensation Coverage and Employer’s Liability: Statutory limits per occurrence for Workers’

Compensation and $5.0 million for Employer’s Liability Coverage, subject to the terms, conditions and exclusions as provided in the Memorandum of Coverage, effective July 1, 2016.

Health Insurance Beginning in January 2008, the District began providing health insurance through SDRMA covering all of

its employees, retirees, and other dependents. SDRMA is a pooled medical program, administered in conjunction with the California State Association of Counties (CSAC).

Adequacy of Protection During the past three fiscal (claims) years none of the above programs of protection have had

settlements or judgments that exceeded pooled or insured coverage. There have been no significant reductions in pooled or insured liability coverage from coverage in the prior year.

12) INTEREST EXPENSE Interest expense for the years ended June 30, 2017 and 2016 is as follows:

2017 2016

Amount Expensed $ 5,069,767 $ 4,603,093 Amount Capitalized as a Cost of Construction Projects 181,582 274,429

Total Interest $ 5,251,349 $ 4,877,522 13) SEGMENT INFORMATION During the June 30, 2011 fiscal year, the District issued Revenue Bonds to finance certain capital

improvements. While water and wastewater services are accounted for jointly in these financial statements, the investors in the Revenue Bonds rely solely on the revenues of the water services for repayment.

55



13) SEGMENT INFORMATION - Continued

Summary financial information for the water services is presented for June 30, 2017:

Condensed Statement of Net Position

June 30, 2017 Water Services ASSETS Cash and Investments $ 76,498,144 Accounts Receivable 12,196,393 Other Current Asset 2,137,382 Capital Assets 428,761,526 Other Assets 13,088,537 Total Assets 532,681,982 DEFERRED OUTFLOWS OF RESOURCES Deferred Amount of Refunding 191,428 Deferred Actuarial Pension Costs 10,230,653 Total Deferred Outflows of Resources 10,422,081 LIABILITIES Accounts Payable 11,461,508 Other Miscellaneous Liabilities 4,301,290 Other Current Liabilities 9,047,957 General Obligation Bonds 3,474,498 Certificates of Participation 7,592,548 Revenue Bonds 84,519,618 Net Pension Liability 43,181,320 Other Non-current Liabilities 3,074,313 Total Liabilities 166,653,052 DEFERRED INFLOWS OF RESOURCES Deferred Actuarial Pension Costs 3,638,714 Total Deferred Inflows of Resources 3,638,714 NET POSITION Net Investment in Capital Assets 329,546,290 Restricted for Debt Service 4,306,724 Unrestricted 38,959,283 Total Net Position $ 372,812,297

56




Condensed Statement of Revenues, Expenses and Changes in Net PositionFor the Year Ended June 30, 2017

Water Services Operating Revenues Water Sales $ 83,720,150 Connection and Other Fees 1,776,557 Total Operating Revenues 85,496,707 Operating Expenses Cost of Water Sales 56,882,487 Administrative and General 20,034,652 Depreciation 16,723,248 Total Operating Expenses 93,640,387 Operating Income (Loss) (8,143,680) Non-operating Revenues (Expenses) Investment Earnings 358,684 Taxes and Assessments 4,098,267 Availability Charges 638,357 Gain (Loss) on Sale of Capital Assets (605,536) Rents and Leases 1,375,305 Miscellaneous Revenues 3,323,595 Donations (125,742) Interest Expense (5,069,767) Miscellaneous Expenses (2,447,969) Total Non-operating Revenues (Expenses) 1,545,194 Income (Loss) Before Capital Contributions (6,598,486) Capital Contributions 5,490,495 Change in Net Position (1,107,991) Total Net Position, Beginning 373,920,288 Total Net Position, Ending $ 372,812,297

57




Condensed Statement of Cash FlowsFor the Year Ended June 30, 2017

Water Services Net Cash Provided/(Used) by: Operating Activities $ 7,757,465 Non-capital and Related Financing Activities 5,481,502 Capital and Related Financing Activities (14,867,834) Investing Activities (2,023,805)

Net Increase (Decrease) in Cash and Cash Equivalents (3,652,672) Cash and Cash Equivalents, Beginning 21,130,751 Cash and Cash Equivalents, Ending $ 17,478,079

58

Required Supplementary Information

59


60

Schedule of Funding Progress for DPHP


Actuarial

Accrued

UAAL as a Actuarial Actuarial Liability Unfunded Percentage ofValuation Value of (AAL) Entry AAL Funded Covered Covered

Date Assets Age (UAAL) Ratio Payroll Payroll (A) (B) (B - A) (A/B) (C) [(B-A)/C] 6/30/15 Miscellaneous $ 16,920,000 $ 23,689,000 $ 6,769,000 71.42% $ 13,080,000 51.75% 6/30/13 Miscellaneous $ 11,831,000 $ 22,891,000 $ 11,060,000 51.68% $ 11,969,000 92.41% 6/30/11 Miscellaneous $ 7,893,000 $ 18,289,000 $ 10,396,000 43.16% $ 12,429,000 83.64%

61

Schedule of Changes in the Net Pension Liability and Related Ratios

(1) Measurement period 2015-16 (FY 2016-2017) was the third year of implementation; therefore, only three years are shown. (2) Historical information is required only for measurement periods for which GASB 68 is applicable.

Notes to Schedule: Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2015. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes).

Changes of Assumptions: For the 2017 fiscal year, there were no changes. For the 2016 fiscal year, amounts reported reflect an adjustment of the discount rate from 7.5% (net of administrative expense) to 7.65% (without a reduction for pension plan administrative expense). In 2014, amounts reported were based on the 7.5% discount rate.

Measurement Period (2) 2015-2016 2014-2015 2013-2014

TOTAL PENSION LIABILITY Service Cost $ 2,298,617 $ 2,250,860 $ 2,330,709 Interest 8,575,275 8,229,312 7,907,915 Changes of Benefit Terms - - - Changes of Assumptions - (1,996,819) - Difference Between Expected and Actual Experience (613,440) (981,200) - Benefit Payments, Including Refunds of Employee Contributions (5,448,218) (5,288,251) (4,885,406)

Net Change in Total Pension Liability 4,812,234 2,213,902 5,353,218 Total Pension Liability - Beginning 114,283,338 112,069,436 106,716,218

Total Pension Liability - Ending (a) $ 119,095,572 $ 114,283,338 $ 112,069,436 PLAN FIDUCIARY NET POSITION Contributions - Employer $ 3,819,770 $ 3,557,098 $ 3,137,174 Contributions - Employee 1,010,337 1,007,023 1,074,954 Net Investment Income 369,214 1,601,760 10,874,999 Benefit Payments, Including Refunds of Employee Contributions (5,448,218) (5,288,251) (4,885,406) Administrative Expense (45,185) (83,511) - Other Changes in Fiduciary Net Position - - -

Net Change in Fiduciary Net Position (294,082) 794,119 10,201,721 Plan Fiduciary Net Position - Beginning 74,140,210 73,346,091 63,144,370

Plan Fiduciary Net Position - Ending (b) $ 73,846,128 $ 74,140,210 $ 73,346,091

Plan Net Pension Liability/(Asset) - Ending (a) - (b) $ 45,249,444 $ 40,143,128 $ 38,723,345 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability

62.01% 64.87% 65.45%

Covered Payroll $ 12,767,963 $ 12,451,513 $ 12,276,578 Plan Net Pension Liability/(Asset) as a Percentage of Covered Payroll

354.40%

322.40%

315.42%

Last 10 Years (1)

62

Schedule of Plan Contributions (1)


(1) Historical information is required only for measurement periods for which GASB 68 is applicable. (2) Employers are assumed to make contributions equal to the actuarially determined contributions. However, some employers may choose to make additional contributions toward their unfunded liability. Employer contributions for such plans exceed the actuarially

determined contributions. (3) Payroll from prior year $12,451,513 was assumed to increase by the 3.00% payroll growth assumption. Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for FY 2015-16

were from the June 30, 2013 public agency valuations.

Actuarial Cost Method Entry Age Normal Amortization Method/Period For details see June 30, 2013 Funding Valuation Report Asset Valuation Method Actuarial Value of Assets. For details, see June 30, 2013 Funding

Valuation Report Inflation 2.75% Salary Increases Varies by Entry Age and Service Payroll Growth 3.00% Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative

Expenses; includes Inflation Retirement Age

The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007

Mortality

The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Pre-retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries.

Fiscal Year 2016-17

Fiscal Year 2014-15

Fiscal Year 2013-14

Actuarially Determined Contribution (2) $ 3,819,770 $ 3,557,098 $ 3,137,174 Contributions in Relation to the Actuarially Determined Contribution (2) (3,819,770) (3,557,098) (3,137,174) Contribution Deficiency (Excess) $ - $ - $ -

Covered Payroll (3) $12,767,963 $12,451,513 $12,276,578

Contributions as a Percentage of Covered Payroll (3) 29.92% 28.55% 25.55%

63


64

Statistical Schedules

The Statistical Schedule is part of understanding what the information in the financial statements, note disclosures, and required supplementary information says about the District’s overall financial health. Contents Page

Financial Trends 66 These schedules contain trend information to help the reader understand how the District’s financial performance and well-being have changed over time.

Revenue Capacity 72

These schedules contain information to help the reader assess the factors affecting the District’s ability to generate its potable and recycled water, and sewer sales as well as property and sales taxes.

Debt 81

These schedules present information to help the reader assess the affordability of the District’s current levels of outstanding debt and the District’s ability to issue additional debt.

Demographic and Economic Information 86

These schedules offer demographic and economic indicators to help the reader understand the environment within which the District’s financial activities take place and to help make comparisons over time and with other governments.

Operating Information 88

These schedules contain information about the District’s operation and resources to help the reader understand how the District’s financial information relates to the services the District provides and the activities it performs.

Sources Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports of the relevant year. The District implemented GASB Statement 34 in 2001; schedules presenting government-wide information include information beginning in that year.

65

Fiscal Net Investment TotalYear in Capital Assets Restricted Unrestricted Net Position

2017 350,981,714$ 4,306,724$ 45,898,551$ 401,186,989$

2016 351,617,201 4,402,301 45,268,275 401,287,777

2015 354,046,090 4,658,306 43,717,930 402,422,326 (1)

2014 357,912,154 3,855,673 83,039,993 444,807,820

2013 376,549,168 4,612,890 67,071,849 448,233,907

2012 381,725,015 4,715,904 67,701,068 454,141,987

2011 377,656,762 4,915,555 74,627,563 457,199,880

2010 375,953,042 5,192,111 80,204,428 461,349,581

2009 382,410,491 1,797,512 76,136,868 460,344,871

2008 372,696,591 9,411,114 74,719,712 456,827,417

(1) For Fiscal Year ending June 30, 2015, the $42.4 million decrease of Total Net Position is primarily due to the

implementation of Governmental Accounting Standards Board (GASB) Statements No. 68 "Accounting and Financial Reporting for Pensions-an amendment of GASB Statement No. 27" and No. 71 "Pension Transitions for Contributions Made Subsequent to the Measurement Date-an amendment of GASB No. 68". Implementations of these standards resulted in a decrease of Net Position at July 1, 2014 by $40.4 million.

Source: Otay Water District

Net Position by Component - Last Ten Fiscal Years

$360,000

$380,000

$400,000

$420,000

$440,000

$460,000

$480,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total Net Positon, in Thousands ($)

66

TotalOperating Non-Operating Income/ (Loss) Changes

Fiscal Operating Operating Income/ Revenues/ Before Capital Capital in NetYear Revenues Expenses (Loss) (Expenses) Contributions Contributions Position

2017 88,481,254$ 96,624,381$ (8,143,127)$ 2,471,420$ (5,671,707)$ 5,570,919$ (100,788)$

2016 78,876,307 89,669,543 (10,793,236) 2,687,368 (8,105,868) 6,971,319 (1,134,549)

2015 83,865,407 91,863,728 (7,998,321) 2,965,607 (5,032,714) 3,081,894 (1,950,820)

2014 86,025,573 92,567,023 (6,541,450) (277,057) (6,818,507) 3,392,420 (3,426,087)

2013 76,881,388 87,335,338 (10,453,950) 1,770,738 (8,683,212) 2,775,132 (5,908,080)

2012 68,400,349 81,795,466 (13,395,117) 3,511,327 (9,883,790) 6,825,897 (3,057,893)

2011 63,204,216 77,266,228 (14,062,012) 4,452,825 (9,609,187) 7,866,190 (1,742,997)

2010 60,686,681 73,126,342 (12,439,661) 5,937,575 (6,502,086) 8,839,892 2,337,806

2009 57,103,311 71,507,161 (14,403,850) 10,932,096 (3,471,754) 6,989,208 3,517,454

2008 55,714,845 71,474,372 (15,759,527) 10,623,457 (5,136,070) 14,941,962 9,805,892


Changes in Net Position - Last Ten Fiscal Years

-$6,000

-$4,000

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Changes in Net Position, in Thousands ($)

67

Fiscal Connection and PercentYear Water Sales Wastewater Other Fees Total Change

2017 83,720,150$ 2,983,495$ 1,777,609$ 88,481,254$ 12.2%

2016 73,940,200 3,175,300 1,760,807 78,876,307 -5.9%

2015 79,135,000 3,044,158 1,686,249 83,865,407 -2.5%

2014 81,287,164 2,791,523 1,946,886 86,025,573 11.9%

2013 72,187,081 2,625,087 2,069,220 76,881,388 12.4%

2012 63,830,272 2,400,313 2,169,764 68,400,349 8.2%

2011 58,293,184 2,396,385 2,514,647 63,204,216 4.1%

2010 56,249,816 2,299,585 2,137,280 60,686,681 6.3%

2009 52,428,648 2,182,429 2,492,234 57,103,311 2.5%

2008 50,808,825 2,386,285 2,519,735 55,714,845 4.6%


Operating Revenues by Source - Last Ten Fiscal Years

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Operating Revenues, in Thousands ($)

68

Fiscal Cost of Administrative PercentYear Water Sales Wastewater and General Depreciation Total Change

2017 56,882,487$ 1,964,855$ 19,991,542$ 17,785,497$ 96,624,381$ 7.8%

2016 51,826,046 2,051,913 19,318,247 16,473,337 89,669,543 -2.4%

2015 54,364,884 1,866,711 19,437,141 16,194,992 91,863,728 -0.8%

2014 56,068,147 1,834,465 18,608,603 16,055,808 92,567,023 6.0%

2013 50,600,551 1,638,354 18,550,811 16,545,622 87,335,338 6.8%

2012 46,106,403 2,547,929 17,926,430 15,214,704 81,795,466 5.9%

2011 42,029,819 2,592,823 18,763,380 13,880,206 77,266,228 5.7%

2010 39,338,495 2,169,988 18,320,362 13,297,497 73,126,342 2.3%

2009 37,252,482 1,890,804 19,888,161 12,475,714 71,507,161 0.05%

2008 35,296,002 2,009,876 21,127,922 13,040,572 71,474,372 10.6%


Operating Expenses by Function - Last Ten Fiscal Years

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Operating Expenses, in Thousands ($)

Cost of Water Sales Wastewater Administrative and General Depreciation

69

Fiscal Investment Taxes and Availability Rents and PercentYear Earnings Assessments Charges Leases Miscellaneous Total Change

2017 408,754$ 4,114,583$ 729,325$ 1,375,305$ 4,107,558$ (2) 10,735,525$ 20.7%

2016 758,004 3,966,593 616,591 1,281,150 2,274,623 8,896,961 -0.6%

2015 656,925 3,856,276 685,555 1,232,920 2,521,078 8,952,754 15.2%

2014 522,286 3,537,162 729,961 1,317,736 1,661,992 7,769,137 -0.2%

2013 22,155 3,545,595 707,881 1,276,914 2,233,804 7,786,349 -14.9%

2012 436,596 3,502,155 696,863 1,222,060 3,288,111 9,145,785 4.4%

2011 854,440 3,895,938 653,012 1,185,573 2,174,690 8,763,653 0.2%

2010 1,323,844 3,973,328 670,784 1,083,988 1,693,942 8,745,886 -37.7%

2009 2,252,335 4,586,823 625,065 1,029,506 5,545,344 (1) 14,039,073 3.5%

2008 4,538,791 4,591,023 744,722 962,929 2,729,277 13,566,742 22.3%

(1) The District received a large, one-time legal settlement as a member of a class action lawsuit in FY 2009.(2) Miscellaneous revenue includes $1.8 million of capacity fee drawdown from contributed capital.


Non-Operating Revenues by Source - Last Ten Fiscal Years

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Non-Operating Revenues, in Thousands ($)

70

Fiscal Interest Percent

Year Donations (1) Expense Miscellaneous Total Change

2017 125,742$ 5,069,767$ 3,068,596$ (4) 8,264,105$ 33.1%

2016 120,722 4,603,093 1,485,778 6,209,593 3.7%

2015 117,462 4,545,530 1,324,155 5,987,147 -25.6%

2014 119,687 4,872,060 3,054,447 (3) 8,046,194 33.8%

2013 120,684 3,977,538 1,917,389 6,015,611 6.8%

2012 121,617 3,899,927 1,612,914 (2) 5,634,458 35.6%

2011 120,648 3,877,531 158,337 4,156,516 48.0%

2010 100,240 2,404,530 303,541 2,808,311 -9.6%

2009 95,270 1,340,110 1,671,597 3,106,977 5.6%

2008 80,541 2,601,252 261,492 2,943,285 126.1%

(1) Donations are contributions to the Water Conservation Authority formed in 1999. See Note 9 in the Notes

to Financial Statements for more information.(2) Miscellaneous expense includes $1.4 million of non-capitalizable expenses with corresponding

miscellaneous revenues. In prior years these expenses and revenues were presented, net of revenue, in miscellaneous revenues.(3) Miscellaneous expense includes $2.3 million of non-capitalizable expenses which were partially funded

by capacity revenue.(4) Miscellaneous expense includes $1.8 million of non-capitalizable expenses which were primarily funded

by capacity revenue.


Non-Operating Expenses by Function - Last Ten Fiscal Years

- 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Non-Operating Expenses, in Thousands ($)

Miscellaneous Interest Expense Donations

71

Fiscal Total DirectYear Real Personal Total Tax Rate

2017 27,060,627,238$ 538,359,438$ 27,598,986,676$ 1.00%

2016 25,506,243,489 551,455,064 26,057,698,553 1.00%

2015 24,109,906,912 572,400,598 24,682,307,510 1.00%

2014 22,739,584,104 564,518,965 23,304,103,069 1.00%

2013 22,253,255,369 583,080,854 22,836,336,223 1.00%

2012 22,556,489,450 588,978,085 23,145,467,535 1.00%

2011 22,997,752,952 521,424,896 23,519,177,848 1.00%

2010 23,671,616,006 527,200,694 24,198,816,700 1.00%

2009 26,269,630,081 482,465,611 26,752,095,692 1.00%

2008 25,333,821,005 568,975,196 25,902,796,201 1.00%

Source: County of San Diego Auditor and Controller

Last Ten Fiscal Years

Assessed Valuation of Taxable Property within the District -

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Assessed Valuation of Property, In Thousands ($)

72

Fiscal

Year Purchases Sales Production Purchases Sales

2017 11,762,115 11,251,664 242,800 1,386,600 1,625,790

2016 11,108,105 10,475,379 439,650 1,163,117 1,591,677

2015 13,198,201 12,744,425 443,090 1,447,737 1,841,956

2014 14,554,049 13,720,119 503,120 1,664,630 2,068,330

2013 13,888,496 13,189,042 486,610 1,415,610 1,878,950

2012 13,304,444 12,510,894 285,190 1,381,300 1,652,833

2011 13,007,365 12,363,608 461,060 1,293,310 1,676,775

2010 13,580,004 12,749,799 449,771 1,250,873 1,774,563

2009 15,233,498 14,923,843 367,461 1,593,621 1,991,737

2008 16,572,271 15,575,662 538,227 1,566,148 2,001,137

(1) Rates are not presented on this schedule because the District has multiple water rates for various meter sizes and customer classes and cannot represent rates in a meaningful manner with a weighted average rate. See Water and Sewer rates on pages 77-79 for meter sizes and their corresponding water rates.


Per 100 Cubic Feet

Water Purchases, Production, and Sales - Last Ten Fiscal Years

Recycled Water (1)

Per 100 Cubic Feet Potable Water (1)

0

50,000

100,000

150,000

200,000

2008 2009 2010 2011 2012 2013 2014 2015 2015 2016 2017

Recycled Purchases Recycled Production Potable Purchases

Water Purchases, Productions, and Sales, in Hundred Cubic Feet (HCF)

73

FiscalYear Total (1)

2017 109 9 118

2016 116 4 120

2015 138 8 146

2014 195 3 198

2013 305 5 310

2012 457 24 481

2011 283 9 292

2010 288 17 305

2009 113 44 157

2008 224 22 246

(1) Meters may not be activated in the year sold.


Meter Sales by Type - Last Ten Fiscal Years

Potable Recycled

0

200

400

600

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Meter Sales by Type

Recycled Potable

74

FiscalYear Potable Recycled Sewer Total

2017 49,502 721 4,683 54,906

2016 49,425 708 4,677 54,810

2015 49,308 705 4,679 54,692

2014 49,148 702 4,657 54,507

2013 48,962 704 4,655 54,321

2012 48,665 696 4,655 54,016

2011 48,154 685 4,655 53,494

2010 47,845 683 4,646 53,174

2009 47,689 671 4,638 52,998

2008 47,593 626 4,627 52,846


Number of Customers by Service Type - Last Ten Fiscal Years

5,000

15,000

25,000

35,000

45,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Number of Customers by Service Type

Sewer Recycled Potable

75

Fiscal Year 1% Property Tax

Special Assessments

Total Levies

Total

Collections (1)

End of the Year Percent

Collected

2017 3,539,836 1,999,480 5,539,316 5,532,395 100%

2016 3,367,615 1,998,874 5,366,489 5,127,563 96%

2015 3,276,296 2,012,420 5,288,716 5,071,336 96%

2014 3,032,618 2,096,409 5,129,027 4,885,718 95%

2013 3,014,180 2,139,415 5,153,595 4,790,286 93%

2012 3,115,841 2,108,269 5,224,110 4,809,293 92%

2011 3,156,446 2,497,117 5,653,563 5,199,833 92%

2010 3,622,861 2,179,270 5,802,131 5,272,728 91%

2009 3,661,961 2,455,211 6,117,172 5,591,554 91%

2008 3,437,810 2,561,574 5,999,384 5,612,821 94%

(1) Levies and collections include Current Secured, Current Unsecured, and Supplemental Homeowners Exemptions.


Property Tax Levies and Collections - Last Ten Fiscal Years

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Levies and Collections, in Thousands ($)

Levy Collections

76

Fixed Rates 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

System Fee by Meter Size

Residential3/4" 15.91$ 18.91$ 19.39$ 16.19$ 16.74$ 14.58$ 14.58$ 14.58$ 13.83$ 12.30$ 1" 22.47 26.71 27.39 22.87 21.26 18.52 18.52 18.52 17.56 19.80 1.5" 38.88 46.22 47.40 39.58 32.57 28.37 28.37 28.37 26.90 51.95

Non-Residential & Others 3/4" 15.91 18.91 19.39 16.19 16.74 14.58 14.58 14.58 13.83 24.00 1" 22.47 26.71 27.39 22.87 21.26 18.52 18.52 18.52 17.56 36.95 1.5" 38.88 46.22 47.40 39.58 32.57 28.37 28.37 28.37 26.90 51.95 2" 58.55 69.61 71.39 59.62 46.13 40.18 40.18 40.18 38.10 64.95 3" 111.04 132.02 135.41 113.08 82.29 71.68 71.68 71.68 67.98 104.55 4" 170.10 202.24 207.43 173.22 122.99 107.13 107.13 107.13 101.59 119.70 6" 334.18 397.31 407.50 340.29 236.02 205.59 205.59 205.59 194.96 239.20 8" 531.05 631.37 647.56 540.76 371.64 323.73 323.73 323.73 307.00 - 10" 760.72 904.44 927.63 774.64 529.88 461.57 461.57 461.57 437.71 456.60

CWA and MWD Pass-through charges by Meter Size

Residential3/4" 15.00 16.84 13.67 14.45 13.28 14.01 11.82 9.77 4.33 3.85 1" 27.84 31.24 25.35 26.79 22.12 23.33 19.69 16.28 6.91 6.15 1.5" 62.96 70.66 57.35 60.61 44.31 46.74 39.44 32.61 13.04 11.60

Non-Residential & Others 3/4" 15.00 16.84 13.67 14.45 13.28 14.01 11.82 9.77 4.33 3.85 1" 27.84 31.24 25.35 26.79 22.12 23.33 19.69 16.28 6.91 6.15 1.5" 62.96 70.66 57.35 60.61 44.31 46.74 39.44 32.61 13.04 11.60 2" 107.08 120.17 97.53 103.08 70.85 74.74 63.07 52.15 22.54 20.05 3" 227.75 255.60 207.44 219.23 141.71 149.48 126.14 104.30 41.53 36.95 4" 364.72 409.32 332.20 351.09 221.43 233.58 197.17 162.98 70.98 63.15 6" 746.59 837.89 680.02 718.69 442.80 467.09 394.17 325.92 129.82 115.50 8" 1,205.65 1,353.09 1,098.15 1,160.59 708.53 747.39 630.71 521.51 374.62 - 10" 1,735.39 1,947.62 1,580.67 1,670.55 1,015.06 1,070.74 903.58 749.61 538.52 300.30

Fire Services All Types 30.11 30.11 30.11 28.55 25.40

Less than 3 inch 20.77 24.69 25.32 21.14 34.57 4 inch and higher 27.98 33.27 34.12 28.49 34.57


Water Fixed Rates - Last Ten Fiscal Years

77

Usage Rate (1) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Tier 1 2.53$ 2.13$ 1.95$ 1.86$ 1.73$ 1.58$ 1.49$ 1.35$ 1.12$ 1.12$ Tier 2 3.95 3.32 3.04 2.90 2.69 2.45 2.31 2.10 1.74 1.85 Tier 3 5.13 4.32 3.95 3.77 3.50 3.19 3.00 2.73 2.26 2.01 Tier 4 7.90 6.65 6.08 5.80 5.39 4.92 4.63 4.21 3.48 2.94

Tier 1 3.90 3.28 3.00 2.86 2.66 2.43 2.29 2.08 1.72 1.85 Tier 2 5.05 4.25 3.89 3.71 3.45 3.15 2.97 2.70 2.23 2.01 Tier 3 7.80 6.56 6.00 5.73 5.32 4.85 4.57 4.15 3.43 2.94

Publicly-Owned (2) 2.06 Commercial & Others (3) 1.98 Government Fee (2) 0.41 0.37 0.32 0.31 0.29 0.29 0.29 0.29 0.29 0.28 Tier 1 4.17 3.51 3.21 3.06 2.84 2.59 2.44 2.22 1.84 Tier 2 4.23 3.56 3.26 3.14 2.92 2.66 2.50 2.27 1.88 Tier 3 4.30 3.62 3.31 3.19 2.96 2.70 2.54 2.31 1.91

Tier 1 5.68 4.78 4.37 4.17 3.87 3.53 3.32 3.02 2.50 Tier 2 5.74 4.83 4.42 4.25 3.95 3.60 3.39 3.08 2.55 Tier 3 5.81 4.89 4.47 4.32 4.01 3.66 3.45 3.14 2.60

Recycled (Commercial) 1.67 Recycled (Publicly-Owned) (2) 1.75 Tier 1 4.85 4.08 3.73 3.56 3.31 3.02 2.84 2.58 2.13 Tier 2 4.92 4.14 3.79 3.61 3.35 3.06 2.88 2.62 2.17 Tier 3 4.99 4.20 3.84 3.68 3.42 3.12 2.94 2.67 2.21

Energy Pumping FeePer 100 cubic feet (4) 0.044 0.072 0.050 0.048 0.042 0.045 0.044 0.038 0.034 0.034

(1) Effective 2009, all non-residential customers are charged based on a tiered rate system in which the water rates are based on meter size and amount of water units consumed each month.(2) An additional $.41 per unit was charged to governmental customers in lieu of tax revenues. (3) Others include agricultural and temporary meters. (4) Water customers are charged an energy pumping charge based on the quantity of water used and the elevation to which the water has been lifted to provide service. The energy pumping charge is the rate of $.044 per 100 cubic feet of water for each 100 feet of lift above the base elevation of 450 feet. All water customers are in one of twenty-nine zones based on elevation.


Water Variable Rates - Last Ten Fiscal Years

Recycled

Public Agency & Commercial

Landscape, Agricultural & Construction

Master Meter

Residential

78

Description 2017 2016 2015 2014 2013** 2012 2011 2010 2009 2008*

1 Unit 2.58$ 2.46$ 2.46$ 2.46$ 2.35$ 1.77$ 1.67$ 1.56$ 1.47$ 1.41$

Low Strength 2.58 2.46 2.46 2.46 2.35 Medium Strength 3.70 3.53 3.53 3.53 3.37 High Strength 5.90 5.63 5.63 5.63 5.37

Sewer Rate Per ASU 41.75 39.39 36.88 34.79 33.26

3/4" 15.89 27.07 15.89 15.89 14.38 12.26 11.57 10.80 10.20 9.75 1" 15.89 27.07 15.89 15.89 14.38 17.88 16.87 15.75 14.90 14.25

3/4" 28.37 27.07 27.07 27.07 25.83 1" 41.80 39.86 39.86 39.86 38.03 1.5" 75.27 71.82 71.82 71.82 68.53 2" 115.46 110.17 110.17 110.17 105.12 3" 209.24 199.66 199.66 199.66 190.52 4" 343.23 327.51 327.51 327.51 312.51 6" 678.18 647.12 647.12 647.12 617.48 8" 1,080.14 1,030.67 1,030.67 1,030.67 983.46 10" 1,549.07 1,478.12 1,478.12 1,478.12 1,410.42

Calculation of Monthly Residential Sewer Billing:*Bill calculation prior to calendar year 2008: Sewer Rate per ASU

(9)

Bill calculation beginning calendar year 2008: (Winter Average (8) x .85 (2) x Usage Fee) + Fixed Fee (7)

Calculation of Monthly Non-Residential Sewer Billing:

Footnotes:(1) Flow in gallons per day (Flow) is calculated using monthly readings from account's water meter.(2) Flow is reduced by 15% to reflect that not all water purchased is disposed of into the public sewer system.(3) Flow is divided by 250 gallons per day to convert it into terms of residential equivalence.(4) Strength factors for business customers are categorized as low, medium or high strength.(5) The average annual usage is defined as the units of water billed from January-December of previous year.(6) The usage fee is based on the commercial account's strength factor as shown on the usage fee table as being either

Low, Medium, or High.(7) The fixed rate is based on the size of the water meter.(8) The winter average for a residential customer is defined as the units of water billed from January-April of the previous

calendar year divided by the number of months of service.(9) The ASU (assigned service unit) is then multiplied by the district-wide sewer rate.


**Bill calculation prior to calendar year 2012: ((Flow in gallons per day (1) x .85 (2)/250 (3))) x Strength Factor (4)

Bill calculation beginning calendar year 2013: ((Average Annual Usage (5) x .85 (2)/250 (3) x Usage Fee (6))) + Fixed Fee (7)

Residential

Non-Residential

Residential

Sewer Variable and Fixed Rates - Last Ten Fiscal Years

Non-Residential

Fixed Rates

Usage Fee

79

Customer Customer Annual % of Water Name Type Revenues Sales

1. City of Chula Vista Publicly Owned 3,620,279$ 4.3%2. State of California Publicly Owned 950,739 1.1%3. Eastlake III Community Commercial 901,399 1.1%4. County of San Diego Publicly Owned 864,096 1.0%5. Homefed Otay Land II, LLC Commercial 692,260 0.8%6. Chula Vista School District Publicly Owned 604,169 0.7%7. EastLake Country Club Commercial 505,967 0.6%8. Steele Canyon Golf Club LLC Commercial 474,689 0.6%9. Sweetwater School District Publicly Owned 408,549 0.5%

10. Windingwalk Master Association Commercial 403,636 0.5%

Total Top Ten Customers 9,425,783$ 11.2%Other Customers 74,294,367 88.8%Total Water Sales 83,720,150$ 100.0%

Customer Customer Annual % of Water Name Type Revenues Sales

1. City of Chula Vista Publicly Owned 1,934,992$ 3.8%2. State of California Publicly Owned 961,095 1.9%3. County of San Diego Publicly Owned 772,190 1.5%4. Eastlake III Community Construction (Potable Temporary) 602,122 1.2%5. Eastlake Country Club Irrigation (Recycled Permanent) 399,287 0.8%6. Steele Canyon Irrigation (Recycled Permanent) 359,162 0.7%7. Salt Creek Partners LLC Irrigation (Recycled Permanent) 349,322 0.7%8. Eastlake Summit Master Metered 316,696 0.6%9. Sweetwater School District Publicly Owned 294,320 0.6%

10. Otay Project LP Construction (Potable Temporary) 271,068 0.5%

Total Top Ten Customers 6,260,254$ 12.3%Other Customers 44,548,571 87.7%Total Water Sales 50,808,825$ 100.0%


Ten Largest Customers - Current Year and Nine Years Ago

Fiscal Year 2017

Fiscal Year 2008

80

As a ShareFiscal Population GO Revenue Capital Per of PersonalYear Estimate Bond COPS Bonds Notes Leases Total Capita Income (1)

2017 224,000 4,079,498$ 8,192,548$ 87,134,618$ -$ -$ 99,406,664$ 443.78$ 0.78%

2016 220,000 4,680,853 8,791,803 (3) 90,218,686 - - 103,691,342 471.32 0.84%

2015 217,000 5,267,208 44,990,103 54,887,993 - - 105,145,304 484.54 0.90%

2014 213,000 5,833,563 46,475,314 56,508,490 - - 108,817,367 510.88 0.99%

2013 211,000 6,384,918 47,920,525 (2) 58,158,987 - - 112,464,430 533.01 1.06%

2012 208,500 6,921,271 58,023,740 50,321,421 - - 115,266,432 552.84 1.14%

2011 206,500 6,803,577 59,715,531 51,180,822 6,010 - 117,705,940 570.00 1.19%

2010 206,000 7,283,127 61,489,612 51,255,224 359,744 - 120,387,707 584.41 1.28%

2009 195,000 7,726,575 63,213,693 - 701,516 - 71,641,784 367.39 0.83%

2008 191,500 8,093,302 64,892,774 - 1,031,730 - 74,017,806 386.52 0.85%

(1) See the Demographics and Economic Statistics schedule on page 87 for personal income data. (2) 2004 COPS were refunded with the issuance of 2013 Water Revenue Refunding Bonds in June 2013.(3) 2007 COPS were refunded with the issuance of 2016 Water Revenue Refunding Bonds in May 2016.


Ratios of Outstanding Debt by Type - Last Ten Fiscal Years

$0

$100

$200

$300

$400

$500

$600

$700

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Outstanding Debt, Per Capita

81

Adjusted Net Revenues

Fiscal Adjusted Operating Available for Debt Service Requirements (4) Coverage

Year Revenues (1) Expenses (2) Debt Service Principal Interest Total Factor (3)

2017 94,551,308$ 79,062,983$ 15,488,325$ 3,335,000$ 4,420,433$ 7,755,433$ 200%

2016 85,417,850 72,117,631 13,300,219 3,120,000 4,640,947 7,760,947 171%

2015 89,646,845 74,320,591 15,326,254 2,945,000 4,767,618 7,712,618 199%

2014 90,948,021 75,575,679 15,372,342 2,935,000 4,895,622 7,830,622 196%

2013 81,778,447 70,228,987 11,549,460 2,800,000 4,988,640 7,788,640 148%

2012 74,484,691 64,028,686 10,456,005 1,850,000 6,050,746 7,900,746 132%

2011 69,653,627 60,117,245 9,536,382 1,795,000 5,084,450 6,879,450 139%

2010 65,573,058 57,084,904 8,488,154 1,745,000 2,720,258 4,465,258 190%

2009 63,739,773 57,076,567 6,663,207 1,700,000 2,342,048 4,042,048 165%

2008 63,732,275 56,420,286 7,311,989 800,000 2,567,884 3,367,884 217%

(1) Adjusted revenues exclude sewer revenues and taxes collected for Improvement District 27 and are inclusive of capacity fees.

(2) Adjusted operating expenses exclude sewer expenses and depreciation expense.(3) The District's bond covenants require a minimum coverage factor of 125%. (4) Pledge debts are Certificates of Participation (COPS) and Revenue Bonds.

Source : Otay Water District

Pledged Revenue Coverage - Last Ten Fiscal Years

00%

50%

100%

150%

200%

250%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Coverage Factor, in Percentage (%)

Actual Ratio Minimum Ratio

82

Net BondedNet Debt to Net Bonded

Fiscal Population Assessed Bonded Assessed Debt PerYear Estimate Valuation Debt Valuation Capita

2017 224,000 27,598,986,676$ 4,079,498$ 0.01% 18.21

2016 220,000 26,057,698,553 4,680,853 0.02% 21.28

2015 217,000 24,682,307,510 5,267,208 0.02% 24.27

2014 213,000 23,304,103,069 5,833,563 0.03% 27.39

2013 211,000 22,836,336,223 6,384,918 0.03% 30.26

2012 208,500 23,145,467,535 6,921,271 0.03% 33.20

2011 206,500 23,519,177,848 6,803,577 0.03% 32.95

2010 206,000 24,198,816,700 7,283,127 0.03% 35.35

2009 195,000 26,752,095,692 7,726,575 0.03% 39.62

2008 191,500 25,902,796,201 8,093,302 0.03% 42.26


Ratios of General Bonded Debt Outstanding - Last Ten Fiscal Years

0.00%

0.01%

0.02%

0.03%

0.04%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Bonded Debt Ratios, in Percentage (%)

83

Computation of Direct and Overlapping Bonded Debt

June 30, 2017 2016-17 Assessed Valuation: $27,598,986,676 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Metropolitan Water District Otay Water District Improvement District No. 27 Grossmont-Cuyamaca Community College District Southwestern Community College District Grossmont Union High School District Sweetwater Union High School District Chula Vista City School District and School Facilities Improvement District San Ysidro School District Other School Districts Grossmont Healthcare District City of Chula Vista Community Facilities District Sweetwater Union High School District Community Facilities Districts City 1915 Act Bonds California Statewide Communities Development Authority San Diego County / Venture Community Center Assessment District TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations San Diego County Pension Obligation Bonds San Diego Superintendent of Schools Certificates of Participation Otay Water District Grossmont and Southwestern Community College District General Fund Obligations Grossmont Union High School District Certificates of Participation Sweetwater Union High School District Certificates of Participation Chula Vista City School District Certificates of Participation San Ysidro School District Certificates of Participation Other School District Certificates of Participation City of Chula Vista Certificates of Participation City of San Diego General Fund Obligations San Miguel Consolidated Fire Protection District Certificates of Participation TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT Less: Otay Water District Revenue Certificate of Participation & Revenue Bonds (100% self-supporting) TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT

Total Debt District’s Share of 6/30/17 % Applicable (1) Debt 6/30/17$ 74,905,000 1.066% $ 798,487 4,079,498 100. 4,079,498 231,455,364 15.214 35,213,619 326,088,676 41.073 133,934,402 554,893,365 15.599 86,557,816 391,939,739 49.018 192,121,021 132,330,000 61.487 & 24.793 50,696,902 127,867,132 49.647 63,482,195 4,393,044,780 Various 56,603,362 263,913,330 13.830 36,499,214 133,015,000 100. 133,015,000 90,380,607 10.894-100. 84,459,682 9,185,,000 100. 9,185,000 992,767 100. 992,767 $ 887,638,965 $ 291,180,000 5.907% $ 17,200,003 605,520,000 5.907 35,768,066 11,800,000 5.907 697,026 95,327,166 100. 95,327,166 1,680,000 15.214 & 41.073 485,741 340,000 15.599 53,037 43,565,000 49.018 21,354,692 158,000,000 61.487 97,149,460 41,219,715 49.647 20,464,352 24,105,000 Various 5,761,577 106,025,000 69.586 73,778,557 570,460,000 0.808 4,609,317 2,440,000 51.958 1,267,775 $ 373,916,769 95,327,166 $ 278,589,603 Continued

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Computation of Direct and Overlapping Bonded Debt - continued

OVERLAPPING TAX INCREMENT DEBT (Successor Agency): TOTAL GROSS DIRECT DEBT TOTAL NET DIRECT DEBT TOTAL OVERLAPPING DEBT COMBINED TOTAL DEBT

Ratios to 2016-17 Assessed Valuation: Direct Debt ($4,079,498) ........................................................................... 0.01% Total Overlapping Tax and Assessment Debt .......................................... 3.22 % Combined Total Debt............................................................................................. 4.24% Ratios to Redevelopment Successor Agency Incremental Valuation ($301,877,394): Total Overlapping Tax Increment Debt ........................................................ 1.67%

(1) The percentage of overlapping debt applicable to the district is estimated using taxable assessed property value. Applicable percentages were estimated by determining the portion of the overlapping district's assessed value that is within the boundaries of the water district divided by the overlapping district's total taxable assessed value. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal due at maturity. (3) Excludes $95,327,166 certificates of participation and revenue bonds supported by water revenues and backed by a rate covenant.

Source: California Municipal Statistics, Inc. and Otay Water District

$29,315,000 17.181% $5,036,610 $99,406,664 $4,079,498 (3) $ 1,167,185,680 $ 1,171,180,680 (2)

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2008

% of Total % of TotalCounty County

Employer Employees Rank Employment Employees Rank Employment

UC San Diego 30,671 1 2.04% 24,790 4 1.71%

Sharp HealthCare 17,809 2 1.19% 13,872 8 0.96%

Scripps Health 14,863 3 0.99% 10,313 9 0.71%

City of San Diego 11,347 4 0.76% 20,700 6 1.43%

Kaiser Permanente 8,406 5 0.56% 7,386 10 0.51%

UC San Diego Health System 7,438 6 0.50% - - -

San Diego Community College District 5,902 7 0.39% - - -

General Atomics Aeronautical Systems Inc 5,480 8 0.37% - - -

Rady Children's Hospital-San Diego 5,129 9 0.34% - - -

YMCA of San Diego County 5,102 10 0.34% - - -

United States Navy (1) - - - 42,000 1 2.90%

Federal Government (1) - - - 39,100 2 2.70%

State of California (1) - - - 37,100 3 2.56%

San Diego Unified School District (1) - - - 21,073 5 1.45%

County of San Diego (1) - - - 18,900 7 1.30%

Total 112,147 7.48% 235,234 16.23%

Diego Unified School District, and County of San Diego declined to participate in the survey organized by the San Diego Business Journal.

Source: Book of Lists, San Diego Business Journal.

Principal Employers - Current Year and Nine Years Ago

2017

(1) For Fiscal Year ending June 30, 2017, the United States Navy, Federal Government, State of California, San

86

Personal Per CapitaFiscal Income Personal UnemploymentYear Population (in 000'S) Income Rate

2017 (1) 3,378,000 192,107,000$ 57,085$ 4.37%

2016 3,340,000 183,056,000 56,400 4.86%

2015 3,275,500 177,300,000 54,100 5.75%

2014 3,212,300 172,900,000 54,000 7.11%

2013 3,182,100 161,100,000 50,288 7.40%

2012 3,143,429 154,200,000 48,674 9.30%

2011 3,140,069 149,600,000 47,776 10.40%

2010 3,095,313 137,525,000 45,627 10.50%

2009 3,173,407 134,696,000 44,412 10.20%

2008 3,001,072 143,783,000 45,728 6.00%

(1) Forecast

Source: SANDAG; Census 2010, California Department of Finance; LAEDC-Los Angeles Economic Development Corp.

Demographic and Economic Statistics - Last Ten Fiscal Years

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Unemployment Rate, in Percentage (%)

87

Department 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

General Manager 6 5 5 5 5 5 6 6 6 6

Finance 31 32 34 34 36 39 42 45 44 43

Operations/Maintenance 51 51 51 51 54 54 54 56 58 60

Engineering 24 24 24 25 24 26 26 26 28 31

Administrative Services 23 26 26 28 29 31 31 33 33 33

Total 135 138 140 143 148 155 159 166 169 173


Number of Employees by Function - Last Ten Fiscal Years

125130135140145150155160165170175180

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total Employees

88

Meter Size 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

3/4" & 5/8" 44,423 44,413 44,395 44,375 44,354 44,376 44,065 43,815 43,641 43,551

1" 2,800 2,756 2,674 2,557 2,412 2,099 1,881 1,815 1,804 1,747

1-1/2" 1,349 1,342 1,335 1,332 1,333 1,326 1,317 1,317 1,309 1,275

2" 1,301 1,299 1,294 1,293 1,295 1,277 1,278 1,292 1,299 1,283

3" 87 82 81 77 76 75 75 75 75 76

4" 232 210 207 189 169 180 193 184 202 258

6" 22 22 18 18 18 19 21 22 21 19

Others 9 9 9 9 9 9 9 8 9 10

Total 50,223 50,133 50,013 49,850 49,666 49,361 48,839 48,528 48,360 48,219

% Change 0.2% 0.2% 0.3% 0.4% 0.6% 1.1% 0.6% 0.3% 0.3% 0.4%

Increase 90 120 163 184 305 522 311 168 141 171


Active Meters by Size - Last Ten Fiscal Years

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Active Meters by Size

89

2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Water SystemService Area (Square Miles) 125.5 125.5 125.5 125.5 125.5 125.5 125.5 125.5 125.5 125.5 Miles of Potable Water Main 727.0 727.0 727.0 726.0 725.0 724.0 723.0 723.0 722.0 722.0

40 40 40 40 40 40 40 40 38 36 Water Storage Capacity (in Acre-Feet) 672.0 672.0 668.0 668.0 667.8 670.8 673.8 663.8 655.5 605.5 Total Potable Water Connections (No. of Meters in Service) 49,596 49,534 49,308 49,148 48,962 48,665 48,154 47,845 47,689 47,593 Number of Pump Stations 21 21 21 21 21 21 21 21 21 21 Number of Potable Water Valves 20,746 20,746 20,676 20,460 20,317 20,317 19,522 19,522 19,192 19,131

Sewer SystemMiles of Sewer Lines 88.0 88.0 88.0 88.0 88.0 88.0 88.0 88.0 88.0 88.0 Number of Treatment Plants 1 1 1 1 1 1 1 1 1 1 Treatment Plant Capacity (Million Gallons per Day) 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Total Flows for Fiscal Year (in Million Gallons) 393 336 388 405 422 423 481 474 483 503

Recycled SystemMiles of Recycled Water Mains 104.0 104.0 104.0 102.0 99.0 99.0 98.0 98.0 97.0 93.0 Number of Pumping Facilities 3 3 3 3 3 3 3 3 3 3 Number of Operational Storage Reservoirs in Service 4 4 4 4 4 4 4 4 4 4 Number of Acre-Feet Storage 134.2 134.2 134.2 134.2 134.1 134.1 134.1 134.1 133.2 135.0 Total Recycled Water Connections 730 710 705 702 704 696 685 683 671 626 Number of Recycled Water Valves 1,497 1,497 1,492 1,473 1,430 1,430 1,380 1,380 1,338 1,314


Operating and Capital Indicators - Last Ten Fiscal Years

Number of Operational Storage Reservoirs in Service

550

600

650

700

750

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Potable Water Mains, in Miles

90

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APPENDIX C

ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO

Introduction

The County of San Diego (the “County”) is the southernmost major metropolitan area in the State of California. The County covers 4,255 square miles, extending 70 miles along the Pacific Coast from the Mexican border to Orange County, and inland 75 miles to Imperial County. Riverside and Orange Counties form the northern boundary. The County is approximately the size of the State of Connecticut.

The County possesses a diverse economic base consisting of a significant manufacturing presence in the fields of electronics and shipbuilding, a large tourist industry attracted by the favorable climate of the region, and a considerable defense-related presence.

The County is also growing as a major center for culture and education. A number of recognized art organizations, including the San Diego Opera, the Old Globe Theater productions, the La Jolla Chamber Orchestra, as well as museums and art galleries, are located in the County. Higher education is provided through five two-year colleges and six four-year colleges and universities.

The San Diego Convention Center contains 361,000 square feet of exhibit space and over 100,000 square feet of meeting/banquet rooms. The Convention Center can accommodate events for 30,000-40,000 people.


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Population

The following table shows the January 1 State of California Department of Finance estimates of total population in the County of San Diego and the State of California for each year since 2009, and the increase from the previous year.

TABLE NO. C-1 COUNTY OF SAN DIEGO AND STATE OF CALIFORNIA

POPULATION

COUNTY OF SAN DIEGO STATE OF CALIFORNIA

January 1 Percentage Percentage

Year Population Change Population Change

2009 3,064,436 36,966,713

2010 3,091,579 0.9% 37,223,900 0.7%

2011 3,119,963 0.9% 37,529,913 0.8%

2012 3,153,521 1.1% 37,874,977 0.9%

2013 3,193,688 1.3% 38,234,391 0.9%

2014 3,230,269 1.1% 38,568,628 0.9%

2015 3,264,449 1.1% 38,912,464 0.9%

2016 3,284,477 0.6% 39,179,627 0.7%

2017 3,309,509 0.8% 39,500,973 0.8%

2018 3,337,456 0.8% 39,809,693 0.8%

% Increase Between

2009 – 2018 8.9% 7.7% _______________________________________

Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties, and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, November 2012 and “E-4 Population Estimates for Cities, Counties and the State, 2011-2018, with 2010 Census Benchmark” Sacramento, California, May 2018.


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Per Capita Personal Income

Per capita personal income information for San Diego County, the State of California and the United States are summarized in the following table.

TABLE NO. C-2 PER CAPITA PERSONAL INCOME (1)

SAN DIEGO COUNTY, STATE OF CALIFORNIA AND UNITED STATES 2012 – 2016

Year San Diego County State of California United States

2012 $48,004 $48,369 $44,282

2013 49,017 48,570 44,493

2014 51,439 51,344 46,494

2015 53,963 54,718 48,451

2016 55,168 56,374 49,246 ____________________________________

(1) For San Diego County, State of California and United States, per capita personal income was computed using Census Bureau midyear population estimates. Estimates for 2010-2016 reflect county population estimates available as of March 2017.

Note: All dollar estimates are in current dollars (not adjusted for inflation).

Last updated: November 16, 2017 - new estimates for 2016; revised estimates for 2010-2015.

Source: U.S. Department of Commerce, Bureau of Economic Analysis.


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The District is located in the San Diego-Carlsbad Metropolitan Statistical Area (MSA). The June 2018 unemployment rate in the San Diego-Carlsbad MSA was 3.7%. The State of California June 2018 unemployment rate (unadjusted) was 4.5%.

TABLE NO. C-3 SAN DIEGO-CARLSBAD MSA

WAGE AND SALARY WORKERS BY INDUSTRY (1)

(in $ thousands)

Industry 2014 2015 2016 2017 2018

Government 237.7 238.8 245.4 252.4 255.9

Other Services 52.2 53.5 54.7 55.9 57.5

Leisure and Hospitality 180.9 187.2 194.3 201.7 197.3

Educational and Health Services 185.4 191.4 198.0 204.9 208.2

Professional and Business Services 219.9 226.0 230.0 231.8 242.1

Financial Activities 69.3 71.0 72.7 74.0 73.0

Information 24.8 24.2 23.9 24.5 24.7

Transportation, Warehousing and Utilities 27.1 28.2 29.4 31.8 31.4

Service Producing

Retail Trade 142.2 145.1 145.1 146.7 147.5

Wholesale Trade 46.4 46.3 46.9 47.8 49.1

Manufacturing

Nondurable Goods 25.1 26.4 27.2 28 27.9

Durable Goods 76.9 79.7 80.8 80.8 85.8

Goods Producing

Construction 63.3 69.6 75.9 80.1 82.4

Mining and Logging 0.4 0.3 0.3 0.3 0.4

Total Nonfarm 1,351.6 1,387.7 1,424.6 1,460.7 1,483.2

Farm 9.7 9.2 9.5 8.7 9.1

Total (all industries) 1,361.3 1,396.9 1,434.1 1,469.4 1,492.3 ____________________________________

(1) Annually, as of June.

Note: The unemployment rate is calculated using unrounded data. Data may not add due to rounding.

Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month March 2017 Benchmark.”

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Major Employers

The major employers operating within the County as of June 30, 2017 are shown in Table No. C-4.

TABLE NO. C-4 COUNTY OF SAN DIEGO

MAJOR EMPLOYERS

Employer Number of Employees Percent of Total Employment

University of California, San Diego 32,524 2.17%

Sharp Healthcare 17,962 1.20%

County of San Diego 17,396 1.16%

Scripps Health 15,238 1.02%

Qualcomm Inc. 12,600 0.84%

City of San Diego 11,544 0.77%

Kaiser Permanente San Diego Medical Center 8,965 0.60%

UC San Diego Health 8,923 0.60%

San Diego Community College District 6,817 0.46%

San Diego State University 5,921 0.40%

137,890 9.22% ____________________________________

Source: County of San Diego Comprehensive Annual Financial Report.

Transportation

Interstate 5 parallels the coast of San Diego County, starting at the border with Mexico and traveling to the Los Angeles area and points north. Interstate 15 runs inland through the County, leading to Riverside-San Bernardino, Las Vegas and Salt Lake City. Interstate 8 runs eastward providing access to the southern United States.

San Diego’s International Airport (Lindbergh Field) is located approximately one mile west of the downtown San Diego at the edge of the San Diego Bay. The facilities are owned and maintained by the San Diego Unified Port District and are leased to commercial airlines and other tenants. The airport is the third most active commercial airport in California, served by most major airlines. In addition to San Diego International Airport, there are two naval air stations and seven general aviation airports located in the County.

San Diego is the terminus of the Santa Fe Railway’s main line from Los Angeles. Amtrak passenger service is available at San Diego with stops at Del Mar and Oceanside in the north county. San Diego’s harbor is one of the world’s largest natural harbors. The harbor, a busy commercial port, also serves cruise ships. The Port of San Diego is administered by the San Diego Unified Port District, which includes the cities of San Diego, National City, Chula Vista, Imperial Beach and Coronado.

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APPENDIX D

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement, dated November 1, 2018 (the “Disclosure Agreement”) is executed and delivered by the Otay Water District (the “District”) and Harrell & Company Advisors, LLC (the “Dissemination Agent”) in connection with the issuance of $32,435,000 Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) by the Otay Water District Financing Authority (the “Authority”). The Bonds are being issued pursuant to an Indenture of Trust, dated as of November 1, 2018 (the “Indenture”), by and between MUFG Union Bank, N.A., as trustee (the “Trustee”) and the Authority. The District covenants as follows:

SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the District for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule.

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean the Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

“Beneficial Owner” shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

“Disclosure Representative” shall mean the General Manager of the District and the Chief Financial Officer of the District, or their designee, or such other officer or employee as the District shall designate in writing from time to time.

“Dissemination Agent” shall mean Harrell & Company Advisors, LLC, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation.

“EMMA” shall mean the Electronic Municipal Market Access system of the MSRB.

“Holder” shall mean the registered owner of any Bond.

Listed Events” shall mean any of the events listed in Section 5(a) and (b) of this Disclosure Agreement. “MSRB” shall mean the Municipal Securities Rulemaking Board.

“Official Statement” shall mean the Official Statement relating to the Bonds, dated October 11, 2018.

“Participating Underwriter” shall mean the original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds.

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“Repository” shall mean the EMMA system of the MSRB or any other entity designated under the Rule as the repository for filings made pursuant to the Rule.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“State” shall mean the State of California.

SECTION 3. Provision of Annual Reports.

(a) The District shall, or, upon delivery of the Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, not later than March 31 of each year, commencing March 31, 2019, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report shall be provided to the Repository in an electronic format as prescribed by the Repository and shall be accompanied by identifying information as prescribed by the Repository. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the District’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(d).

(b) Not later than five (5) business days prior to the date specified in subsection (a) for providing the Annual Report to the Repository, the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If the District is unable to provide to the Repository an Annual Report by the date required in subsection (a), the Dissemination Agent shall send a notice to the Repository that the Annual Report has not been delivered by the District.

(c) The Dissemination Agent shall:

(i) confirm the electronic filing requirements of the Repository for the Annual Reports; and

(ii) if the Dissemination Agent is other than the District, file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the Repository.

(d) Notwithstanding any other provision of this Disclosure Agreement, all filings shall be made in accordance with the MSRB’s EMMA system, or in another manner approved under the Rule.

SECTION 4. Content of Annual Reports. The District’s Annual Report due by March 31, 2019 shall consist of the Official Statement and the District’s audited financial statements for the fiscal year ended June 30, 2018. Thereafter, the Annual Reports shall contain or include by reference the following:

(a) The District’s audited financial statements for the previous fiscal year, prepared in accordance with generally accepted auditing standards for special districts in the State of California. If the District’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), 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

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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 pursuant to the preceding subsection (a) by the date required by Section 4 hereof, updates of Tables 1 through 4 and 9 through 12 under the caption “THE WATER SYSTEM.”

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to the Repository or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The District shall clearly identify each such other document so included by reference.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5(a), the District shall give, or cause the Dissemination Agent to give, notice of the occurrence of any of the following events with respect to the Bonds in a timely manner not more than ten (10) business days after 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. adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations of taxability or of a Notice of Proposed Issue (IRS Form 5701-TEB);

6. tender offers;

7. defeasances;

8. ratings changes; and

9. bankruptcy, insolvency, receivership or similar proceedings.

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 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.

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(b) Pursuant to the provisions of this Section 5(b), the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

1. unless described in paragraph 5(a)(5) above, 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. 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;

3. appointment of a successor or additional trustee or the change of the name of a trustee;

4. nonpayment related defaults;

5. modifications to the rights of Owners of the Bonds;

6. notices of redemption; and

7. release, substitution or sale of property securing repayment of the Bonds.

(c) Whenever the District obtains knowledge of the occurrence of a Listed Event under 5(b) above, the District shall as soon as possible determine if such event would be material under applicable federal securities laws.

(d) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, within 10 business days after the event, the District shall file a notice of such occurrence with the Repository, or provide the notice to the Dissemination Agent for filing with the Repository. If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Repository. Notwithstanding the foregoing, notice of Listed Events described in subsection (b)(6) 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 Trust Agreement.

(e) The District hereby agrees that the undertaking set forth in this Disclosure Agreement is the responsibility of the District and that the Dissemination Agent shall not be responsible for determining whether the District’s instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule.

(f) Any of the filings required to be made under this Section 5 shall be made in accordance with the MSRB’s EMMA system or in another manner approved under the Rule.

SECTION 6. Termination of Reporting Obligation. The District’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(d).

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SECTION 7. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the form or content of any notice or report prepared by the District pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing thirty days written notice to the District. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the District and shall have no duty to review any information provided to it by the District. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the District in a timely manner and in a form suitable for filing.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that, in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule; provided, the Dissemination Agent shall have first consented to any amendment that modifies or increases its duties or obligations hereunder. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the District shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(d), and (ii) the Annual Report for the year in which the change is made shall present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the District shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Agreement, any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the District or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance.

No Bondholder or Beneficial Owner may institute such action, suit or proceeding to compel performance unless they shall have first delivered to the District satisfactory written evidence of such Holder’s or Beneficial Owner’s status as such, and a written notice of and request to cure such failure, and the District shall have refused to comply therewith within a reasonable time.

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SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees, to the extent permitted by law, 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 attorney’s fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s, its officers’, directors’, employees’ and agents’ negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. In performing its duties hereunder, the Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the District, the Holders, or any other party. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.


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SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

District: Otay Water District 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: General Manager

Dissemination Agent: Harrell & Company Advisors, LLC 333 City Boulevard West, Suite 1215 Orange, CA 92868 Attn: Suzanne Harrell

SECTION 13. Beneficiaries. This Disclosure Agreement solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

SECTION 14. Signature. This Disclosure Agreement has been executed by the undersigned on the date hereof, and such signature binds the District to the undertaking herein provided.

OTAY WATER DISTRICT

By: Chief Financial Officer

HARRELL & COMPANY ADVISORS, LLC, as Dissemination Agent By: Authorized Officer

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APPENDIX E

PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL

Bond Counsel will deliver an opinion for the Bonds, which will be substantially in the following form:

[Closing Date]

Otay Water District Financing Authority Spring Valley, CA 91978

Re: $32,435,000 Otay Water District Financing Authority Water Revenue Bonds, Series 2018A

Members of the Board of Directors:

We have acted as Bond Counsel to the Otay Water District Financing Authority (the “Authority”) in connection with the issuance of $32,435,000 aggregate principal amount of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”). The Bonds have been issued by the Authority pursuant to the terms of the Indenture of Trust, dated as of November 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”).

The Bonds are limited obligations of the Authority payable solely from Pledged Revenues (as such term is defined in the Indenture), consisting of payments (the “2018 Installment Payments”) to be made by the Otay Water District (the “District”) to the Authority pursuant to an Installment Purchase Agreement, dated as of November 1, 2018 (the “Installment Purchase Agreement”), by and between the District and the Authority, and certain other amounts held under the Indenture.

In rendering the opinions set forth below, we have examined certified copies of the proceedings of the Authority and the District, and other information submitted to us relative to the issuance and sale by the Authority of the Bonds. We have examined originals, or copies identified to our satisfaction as being true copies, of the Indenture, the Installment Purchase Agreement, the Tax Certificate relating to the Bonds (the “Tax Certificate”), the resolutions of the Authority and the District adopted on September 5, 2018 and October 3, 2018 with respect to the Bonds, opinions of counsel to the Authority and the District, certificates of the Authority, the District and others, and such other documents, agreements, opinions and matters as we have considered necessary or appropriate under the circumstances to render the opinions set forth herein.

We have assumed the genuineness of all documents and signatures presented to us, the authenticity of documents submitted as originals and the conformity to originals of documents submitted as copies. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in the preceding paragraph. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Installment Purchase Agreement 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

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the 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, the Installment Purchase Agreement and the Tax Certificate may be limited by bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, by the application of equitable principles and the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against public agencies in the State of California.

We express no opinion herein with respect to any indemnification, contribution, choice of law, choice of forum, penalty or waiver provisions contained in the Bonds, the Indenture or the Installment Purchase Agreement.

Based upon the foregoing and after examination of such questions of law as we have deemed relevant in the circumstances, we are of the opinion that:

1. The proceedings of the Authority show lawful authority for the issuance and sale by the Authority of the Bonds under the laws of the State of California now in force, and the Indenture has been duly authorized, executed and delivered by the Authority, and, assuming due authorization, execution and delivery of the Indenture by the Trustee, the Bonds and the Indenture are valid and binding obligations of the Authority enforceable against the Authority in accordance with their respective terms.

2. The obligation of the Authority to make the payments of principal and interest on the Bonds from Pledged Revenues is an enforceable obligation of the Authority and does not constitute an indebtedness of the Authority in contravention of any constitutional or statutory debt limit or restriction.

3. The obligation of the District to make the 2018A Installment Payments from Taxes and Net Revenues (as such terms are defined in the Installment Purchase Agreement) is an enforceable obligation of the District and does not constitute a debt of the District, or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation other than the Taxes.

4. Under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in the Indenture and the Installment Purchase Agreement, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals.

5. Interest on the Bonds is exempt from State of California personal income tax.

6. The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of the same maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond Owner will increase the Bond Owner’s basis in the applicable Bond. Original issue discount that accrues for the Bond Owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal

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alternative minimum tax imposed on individuals and is exempt from State of California personal income tax.

7. The amount by which a Bond Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the “Code”); such amortizable Bond premium reduces the Bond Owner’s basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond Owner realizing a taxable gain when a Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium.

The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds are based upon certain representations of fact and certifications made by the Authority, the District and others and are subject to the condition that the Authority and the District comply with all requirements of the Code that must be satisfied subsequent to issuance of the Bonds to assure that interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The Authority and the District have covenanted to comply with all such requirements.

The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. No opinion is expressed herein as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Bonds if any such action is taken or omitted based upon the opinion or advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Other than expressly stated herein, we express no other opinion regarding tax consequences with respect to the Bonds.

Our engagement as Bond Counsel terminates upon the issuance of the Bonds.

Our opinion is limited to matters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction.

We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Bonds or other offering material relating to the Bonds and expressly disclaim any duty to advise the owners of the Bonds with respect to matters contained in the Official Statement.

Respectfully submitted,

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APPENDIX F

THE BOOK-ENTRY SYSTEM

The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

Neither the issuer of the Bonds (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Bonds (the “Agent”) take any responsibility for the information contained in this Appendix.

No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the 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 Appendix. 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.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds (the “Securities”). The Securities 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 Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of

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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. The information contained on such Internet site is not incorporated herein by reference.

3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities 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 Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities 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 Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. 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 Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities 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.

6. Redemption notices shall be sent to DTC. If less than all of the Securities 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.

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds and distributions on the Securities 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 Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject

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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 Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

11. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.


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