Cal~fornia, laX

mw ISSUE - HOOK ENTRY ONLY

Ratings: S&P: A-1+ Fitch: FJ+

Moody's: VMIG-1

ln the opinion qf Fulbright & Jaworski L. L.P, Los Angeles, Cal~fornia, and Curls Bartling PC. Oakland, California, Co-Bond Counsel, under ·risting starures, regufarions, rulings and court deci.~ions. and assuming compliance wirh the hH covenants described herein, interest on the Series '009A Bonds is excluded pursuant to J"ection 103(a) of the /!Ilana/ Revenue Code of 1986 from the gross income of the owners rhere(!f.for federal •Jcomc tax purposes and is 1101 m1 iiem of laX preference for purposes of the federal alternative minimum tax. It is also the opinion of Co-Bond ~Oili!Se[ that under existinf!, law interec,.t on the Series 2009!\ Honds is exempt from f'ersonal income /axes of !he Srate of Cal!fomia. See "TAX 4ATTERS"' hen~in.

<B EBMUD $331,155,000

EAST BAY MUNICIPAL UTILITY DISTRICT (Alameda and Contra Costa Counties, California)

WATER SYSTEM SUBORDINATED REVENUE REFUNDING BONDS, SERIES 2009A (SIFMA-Based Term Interest Rate Period)

oq-oo'ill $165,580,000 Series 2009A-1 oq- 0 1'1, $165,575,000 Series 2009A-2

)a ted: Date of Delivery Mandatory Purclmse Date: March I, 2010 Maturity Date: June 1, 2026 Prke: 100% Spread: 0.0%

'll1is cover page con rains certain i1~{ormation for general reference only. It is not intended to be a swnmar.v of the security or terms of this ss1w. Investors musr read the enlire qf}icia! Statemenl ro obtain information essential to the making of w1 informed investment decision.

Each subscries of the Series 2009A Bonds will be issued in book-entry form, without coupons, initially registered in the name of Cede & Co .. 1S nomine~ of The Depository Tru~t Company. New York. New York ("DTC"). Purchasers of the Series 2009A Bonds will not receive physical ertificates representing their interests in Series 2009A Bonds purchased. DTC will act as securities depository for the Series 2009A Bonds. The Jrincipal of and interest on the Series 2009A Bonds arc payable directly to DTC by The Bank of New York Mellon Trust Company, N.A,, as trustee. Jpon receipt of payments of such principal and interest. DTC is obligated to remit such principal and interest to DTC's Participants in DTC for ubsequent disbursement to the hcncficial owners of the Series 2009A Bonds.

Each sub~erics of the Series 2009A Bonds will be initially issued in a SIFMA-Based Term Interest Rate Period ending on February 28, 2010, md will bear interest at the SIPMA-Hased Interest Rute (which is equal to !he SIFMA Index Rate plus the Spread). a!l as more fully described Jerein. While in a SIFMA-Bascd Term Interest Rate Period, the Series 2009A Bonds will he delivered in denominations of $100.000 or any ntcgral multiple of $5,000 in excess of $100,000. While in a SIFMA-Hased Term Interest Rate Period. interest on the Series 2009A Bonds will Je p::lyahle on the first Business Day of each month. commencing on April I, 2009.

This Official Statement descrihes the Series 2009A Bonds only while bearing interest in the Initial SIFMA-Hased Term Interest Rate leriod. There arc significant difft~rences in the terms of the Series 2009A Bonds while they bear interest at an Interest Rate Period other han the SIFMA-Based Term Intt:rest Rate Period. This Official Statement is not intended to provide information with respect to the Series ~009A Bonds hearing interest in an Interest Rate Period other than the Initial SIFMA-Based Term Interest Rate Period. Owners and Jrospectiw owners of the Series 2009A Bonds should not rely on the Official Statement for information in connection with any convension ~f the Series 2009A Honds to a different Interest Rate Period, but should look solel.v to the offering document to he used in connection with my such conversion.

The Series 2009A Bonds arc subject to mandatory Lemler for purchase on March I. 2010. The failure of the District to p::ly the Purchase Price lf the Series 2009A 11onds upon such mandatory tender would constitute an Event of Default under the Indenture. Sec "THE SERIES 2009A ~onds- Purchase of the Series 2009A Bonds" herein. The Series 2009A Bonds arc also subject to redemption prior to maturity and mandatory ender for purchase under certain other circumstances as described herein. Sec "THE SERIES 2009A BONDS - Redemption" herein. Sec also PLAN OF FINANCE- l~efinancir1g of Series 2009A Bonds on or Prior 10 the Mandawry Purchase Date" herein.

The Series 2009A Bonds proceeds will be used to refund $330,425,000 aggregate principal amount of the District's outstanding Water System ;uhordinated Revenue Refunding Bonds. Series 2008C and to pay costs of issu::Jnce of the Series 2009A Bonds. as desctihed herein.

The Series 2009A Bonds arc special obligations of the District, payable solely from and set~ured by a pledge of Subordinated Water {evenues, and are subordinate to any of the District's Senior Water Bonds hereafter issued, as more fully described herein. There are no ;enior· \Vater Bonds currently outstanding. The Series 2009A Uonds are issued on a parity with the District's Subordinated Water Bonds tnd Parity Debt heretofore or hereafter issued, as more fully described herein, including certain payment obligations of the District under nterest rate swap agreements entered into by the District in connection therewith. Neither the full faith and credit nor the taxing power •f the District is pledged to the p&yment of the Series 2009A Honds or the interest thereon.

The Series 2009A Bonds will be issued subject to the approval of legality by Fulbright & Jaworski L.L.P .. Los Angeles. California. and Curls brtling P.C.. Oakland, California. Co-Bond Counsel, and certain other conditions. Certain leg::Jl matters will be passed upon for the District by its Jeneml Counsel and for the Underwriters by their counsel. Stradling Yucca Carlson & Rauth. A Professional Corporation. It is anticipated !hut the leries 2009A Bonds will be available for delivery through the DTC book entry system on or about March 12. 2009.

Morgan Stanley Stone & Youngberg

Undcrwrilers for the Series 2009A-l Bonds

)ated: March 5. 2009

De La Rosa & Co. Piper Jaffray & Co.

Underwriters for the Series 2009A-2 Bonds

No dealer, broker, salesperson or other person has been authorized by the District or the Underwriters to give any information or to make any representation other than as set forth 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 Underwriters. 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 Series 2009A Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

This Ollicial Statement is not to be construed as a contract with the purchasers of the Series 2009A Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts.

The Underwriters have provided the following sentence for inclusion in this Official Statement: . The Underwriters have reviewed the infonnation in this Official Statement in accordance with, and as part of~ their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

The information set forth in this Official Statement has been obtained trom official sources and other sources which are believed by the District to be reliable. The information and expressions of opinion herein arc 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 Offtcial Statement. including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The District maintains a website. However, the infonnation presented therein is not part of this Official Statement and must not be relied upon in making an investment decision with respect to the Series 2009A Bonds.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2009A BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING. IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

CERTAIN STATEMENTS CONTAINED IN THIS OFFICIAL STATEMENT REFLECT NOT HISTORICAL FACTS BUT FORECASTS AND "FORWARD-LOOKING STATEMENTS." NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS DISCUSSED HEREIN WILL BE ACHIEVED, AND ACTUAL RESULTS MAY lliFFER MATERIALLY FROM THE FORECASTS DESCRIBED HEREIN. IN THIS RESPECT, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT," "INTEND," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALL PROJECTIONS, FORECASTS, ASSUMPTIONS, EXPRESSIONS OF OPINIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH IN THIS OFFICIAL STATRMENT.

EAST BAY MUNICIPAL UTILITY DISTRICT Alameda and Contra Costa Counties, California

375- lith Street Oakland, California 94607

(51 0) 835-3000

Board of Directors

Doug Linney, President John A. Coleman, Vice President

Katy F oulkcs Andy Katz

Lcsa R. Mcintosh Frank Mellon

William B. Patterson

Management

Dennis M. Diemer, General Manager Jylana Collins, General Counsel

Gary Breaux, Director of Finance Alexander R. Coate, Director of Water and Natural Resources

Xavier J. lrias, Director of Engineering and Construction Carol K. Nishita, Director of Administration

Michael J. Wallis, Director of Operations and Maintenance David R. Williams, Director of Wastewater Lynclle M. Lewis, Secretary of the District Wanda Hendrix-Talley, Treasury Manager

Co-Bond Counsel

Fulbright & Jaworski L.L.P. Los Angeles, California

Curls Bartling P. C. Oakland, California

Financial Advisor

Montague DeRose and Associates, LLC Walnut Creek, California

Trustee and Calculation Agent

The Bank ofNew York Mellon Trust Company, N.A. San Francisco, California

The East Bay Municipal Utility District occupies 325 square miles of the San Francisco -Oakland metropolitan region. The Water System serves approximately 1.3 million people, or approximately 55% of the population of Alameda and Contra Costa Counties.

SAN FRANCISCO

I

('- .~_./ ~ ·---/' .17

... <1J

0 0

IIAIIT1HE2

HAYWARD

-LEGEN0-0 Present Service Area

-··-· Ultimate Service Boundary

Raw Water Tunnels & Aqueducts

TABLE OF CONTENTS

Page

INTRODUCTION ....................................................................................................................................... I

Purpose ........................................................................................................................................... I The District ..................................................................................................................................... I The Series 2009A Bonds ................................................................................................................ 2 Security for the Series 2009 A Bonds .............................................................................................. 2 Series 2009A Bond Reserve Fund .................................................................................................. 3 Rate Covenant ................................................................................................................................. 3 Continuing Disclosure .................................................................................................................... 3 Professionals Involved in the Issue ................................................................................................. 3 Summaries Not Definitive .............................................................................................................. 4 Additional Information ................................................................................................................... 4

PLAN OF FINANCE ................................................................................................................................... 4

Refunding of Series 2008C Bonds .................................................................................................. 4 Refinancing of Series 2009 A Bonds on or Prior to the Mandatory Purchase Date ....................... .4 Refinancing and Related Risks ....................................................................................................... 5

ESTIMATED SOURCES AND USES OF FUNDS ................................................................................... 6

THE SERIES 2009A BONDS ..................................................................................................................... 6

General ........................................................................................................................................... 6 SIFMA-Based Interest Rate .......... : ........................ :: ...................................................................... 7 Conversion from a SIFMA-Based Interest Rate or Establishment of a new SIFMA-

Based Term Interest Rate Period ....................................................................................... 8 Mandatory Tender for Purchase of Series 2009A Bonds .............................................................. I 0 Redemption ................................................................................................................................... I I

SECURITY FOR THE SERJES 2009A BONDS ...................................................................................... 13

General ......................................................................................................................................... I 3 Series 2009A Bond Reserve Fund ................................................................................................ I 5 Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt .......................... I 5 Issuance of Additional Senior Water Bonds ................................................................................. I 6 Allocation of Net Revenues Under the Senior Water Bond Resolution; Rate

Stabilization Fund ............................................................................................................ 17 Allocation of Subordinated Water Revenues Under the Indenture ............................................... 17 Investment of Monies in Funds and Accounts Under the Indenture ............................................. 18 Issuance of Additional Subordinated Water Bonds and Parity Debt; Junior and

Subordinate Obligations .................................................................................................. 18 Commercial Paper ......................................................................................................................... 19 State Loans and Federal Loan ....................................................................................................... 19 Interest Rate Swap Agreements .................................................................................................... 20

THE DISTRICT ......................................................................................................................................... 22

Organization .................................................................................................................................. 22 District Board ................................................................................................................................ 22 District Management... .................................................................................................................. 24 Service Area .................................................................................................................................. 25

TABLE OF CONTENTS (continued)

Page

Annexations, Ultimate Service Area and Spheres oflnflucncc .................................................... 25 Insurance ....................................................................................................................................... 26 Employee Relations ...................................................................................................................... 26 Contract Equity Program .............................................................................................................. 27 Employees' Retirement Systcm .................................................................................................... 27 District Investment Policy ............................................................................................................. 30

THE WATER SYSTEM ............................................................................................................................ 30

General ......................................................................................................................................... 30 Water Supply ................................................................................................................................ 30 Water Facilities ............................................................................................................................. 32 Water Rights and Related Proceedings ......................................................................................... 34 Water Treatment ........................................................................................................................... 35 Water Consumption ...................................................................................................................... 36 Current Water Conditions Update ................................................................................................ 3 7 Water Supply Management Plan .................................................................................................. 38 Water Conservation ...................................................................................................................... 41 Wastewater Recycling .................................................................................................................. 41 WSMP 2040 .................................................................................................................................. 42 Capital Improvement Program ...................................................................................................... 43 Seismic Matters ............................................................................................................................. 46

WATER SYSTEM FINANCES ................................................................................................................ 48

Basis of Accounting ...................................................................................................................... 48 Sources ofFunds ........................................................................................................................... 48 Rates and Charges ......................................................................................................................... 50 Comparison of Annual Water Service Charges ............................................................................ 51 Annexations .................................................................................................................................. 52 Billing and Collection Procedures ................................................................................................ 53 Tax Revenues ................................................................................................................................ 53 System Capacity Charge ............................................................................................................... 55 Power Sales ................................................................................................................................... 56 Developer Contributions ............................................................................................................... 56 Grants ...................................... , .................................................................................................. 56 Taxation of the District ................................................................................................................. 56 Outstanding Debt .......................................................................................................................... 57 Management Policies .................................................................................................................... 60 Historical Operating Results ......................................................................................................... 60 District Management's Discussion of Operating Results ............................................................. 61 Projected Operating Results .......................................................................................................... 62

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRlA TIONS ..................................................................................................................... 64

Tax Limitations- Proposition 13 ................................................................................................. 64 Spending Limitations .................................................................................................................... 65 Proposition 62 ............................................................................................................................... 65 Proposition 218 ............................................................................................................................. 66 Future Initiatives ........................................................................................................................... 68

II

TABLE OF CONTENTS (continued)

Page

Effect of Proposition 2I8 and of Possible General Limitations on Enforcement Remedies .......................................................................................................................... 68

CONTINUING DISCLOSUR£ ................................................................................................................. 68

LITIGA TION ............................................................................................................................................. 69

RATINGS .................................................................................................................................................. 69

TAX MATTERS ........................................................................................................................................ 69

UNDERWRITING .................................................................................................................................... 7I

REMARKETING AGENTS ...................................................................................................................... 7I

APPROVAL OF LEGAL PROCEEDINGS .............................................................................................. 72

INDEPENDENT ACCOUNTANTS ......................................................................................................... 72

MISCELLANEOUS .................................................................................................................................. 72

APPENDIX A

APPENDIX B APPENDIXC

APPENDIXD APPENDIXE APPENDIXF APPENDIXG

EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2008 ...................................................... A-I SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ..................... B-I SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION ........................................................................................... C-I FORM OF CO-BOND COUNSEL OPINION ........................................................ D-I BOOK-ENTRY SYSTEM ...................................................................................... E-I SUMMARY OF CERTAIN PROVISIONS OF THE STATE LOANS ................. F-I FORM OF CONTINUING DISCLOSURE AGREEMENT .................................. G-1

111

(THIS PAGE INTENTIONALLY LEFT BLANK)

OFFICIAL STATEMENT

$33 I, I 55,000 EAST BAY MUNICIPAL UTILITY DISTRICT

(Alameda and Contra Costa Counties, California) WATER SYSTEM SUBORDINATED REVENUE REFUNDING BONDS, SERIES 2009A

(SJFMA-Based Term Interest Rate Period)

$165,580,000 Series 2009A-I $165,575,000 Series 2009A-2

INTRODUCTION

This Introduction is not a summary of this Official Statement, and is qualified by more complete and detailed information contained in the entire ()[jicial Statement. A .fit!/ review should be made of the entire Official Statement, including the cover page and attached appendices. The offering of Series 2009A Bonds to potential investors is made only by means of the entire Official Statement. Certain definitions of capitalized terms used and not d~jined herein are set forth in See APPENDIX B -"SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" hereto.

Purpose

The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth certain information concerning the East Bay Municipal Utility District (the "District"), the water supply, treatment and distribution system owned by the District (the "Water System" or the "System"), and System finances in connection with the sale of the District's S331, 155,000 Water System Subordinated Revenue Refunding Bonds, Series 2009A (the "Series 2009A Bonds") comprised of the respective subscries referenced above. The proceeds of the Series 2009A Bonds will be used to refund 5330,425,000 aggregate principal amount of the District's outstanding Water System Subordinated Revenue Refunding Bonds, Series 2008C and to pay costs of issuance of the Series 2009A Bonds. See "PLAN OF FINANCE" and "ESTIMATED SOURCES AND USES OF FUNDS" herein.

This Official Statement describes the Series 2009A Bonds only while bearing interest in the Initial SIFMA-Based Term Interest Rate Period. There are significant differences in the terms of the Series 2009A Bonds while they bear interest at an Interest Rate Period other than the SJFMABased Term Interest Rate Period. This Official Statement is not intended to provide information with respect to the Series 2009A Bonds bearing interest in an Interest Rate Period other than the Initial SIFMA-Based Term Interest Rate Period. Owners and prospective owners of the Series 2009A Bonds should not rely on the Official Statement for information in connection with any conversion of the Series 2009A Bonds to a different Interest Rate Period, but should look solely to the offering document to be used in connection with any such conversion.

The District

The District is a municipal utility district, created in 1923 by vote of the electorate in portions of Alameda and Contra Costa Counties in the State of California (the "State"). The District is formed under the authority of the Municipal Utility District Act, constituting Division 6 of the Public Utilities Code of the State, commencing with Section 1150 I (the "Municipal Utility District Act"). Pursuant to the Municipal Utility District Act, the District is empowered to own and operate the Water System. See "THE DISTRJCT" and "THE WATER SYSTEM" herein. The District also operates a wastewater

.,

system. The District's wastewater system treats and disposes of sewage from a portion of the area within the District, which is designated as Special District No. I.

The Series 2009 A Bonds

Each subserics of the Series 2009A Bonds will be initially issued in a SIFMA-Bascd Term Interest Rate Period ending on February 28,2010 (the "Initial SIFMA-Bascd Term Interest Rate Period"), and will bear interest at the SIFMA-Based Interest Rate (which is equal to the SIFMA Index Rate plus the Spread), all as more fully described herein. While in a SIFMA-Bascd Term Interest Rate Period, the Series 2009A Bonds will be delivered in denominations of S I 00,000 or any integral multiple of $5,000 in excess of $100,000. While in a SIFMA-Bascd Term Interest Rate Period, interest on the Series 2009A Bonds will be payable on the first Business Day of each month, commencing on April l, 2009. The Series 2009A Bonds arc subject to mandatory tender for purchase on April I, 2010. See "THE SERIES 2009A Bonds- Purchase of the Series 2009A Bonds" and "PLAN OF FINANCE- Refinancing of the Series 2009A Bonds on or Prior to the Mandatory Purchase Date" herein. The Series 2009A Bonds arc also subject to redemption prior to maturity and mandatory tender for purchase under certain other circumstances as described herein. Sec "THE SERIES 2009A BONDS" herein.

Security for the Series 2009A Bonds

The Series 2009A Bonds arc special obligations of the District, payable solely from and secured by a pledge of the Subordinated Water Revenues of the District, as defined in the Water System Subordinated Revenue Bond Indenture, dated as of April l, 1990, by and between the District and First Interstate Bank of California, which has been succeeded by The Bank of New York Mellon Trust Company, N.A., as successor trustee (the "Trustee"), as amended and supplemented, including as supplemented by the Fifteenth Supplemental Indenture, dated as of March I, 2009, by and between the District and the Trustee (collectively, the "Indenture"). The Series 2009A Bonds arc subject to mandatory tender for purchase on March I, 20 l 0. The failure of the District to pay the Purchase Price of the Series 2009A Bonds upon such mandatory tender would constitute an Event of Default under the Indenture. The District does not intend to pay the Purchase Price of the Series 2009A Bonds upon mandatory tender for purchase on March I, 2010 from Subordinated Water Revenues. See "PLAN OF FINANCE- Refinancing of the Series 2009A Bonds on or Prior to the Mandatory Purchase Date" herein. Neither the full faith and credit nor the taxing power of the District is pledged to the payment of the Series 2009A Bonds or the interest thereon.

The Series 2009A Bonds are not payable from or secured by the revenues of the Wastewater System of the District. See "SECURITY FOR THE SERIES 2009A BONDS - General - Pledge of Subordinated Water Revenues" herein.

The Series 2009A Bonds arc junior and subordinate to any senior water revenue bonds hereafter / issued pursuant to the Senior Water Bond Resolution (collectively, the "Senior Water Bonds"). There arc

no Senior Water Bonds currently Outstanding.

The Series 2009A Bonds will be secured on parity with approximately $1,605,195,000 aggregate principal amount of the District's Water System Subordinated Revenue Bonds to be Outstanding upon delivery of the Series 2009A Bonds, together with any additional Water System Subordinated Revenue Bonds hereafter issued (collectively, the "Subordinated Water Bonds"), with certain scheduled payments which arc payable by the District with respect to certain interest rate swap agreements as described under "SECURITY FOR THE SERIES 2009A BONDS - Interest Rate Swap Agreements" and with certain outstanding State Loans as described under "WATER SYSTEM FINANCES- Outstanding Debt," and any Parity Debt (as hereinafter defined) that may hereafter be incurred in accordance with the Indenture.

2

Sec "SECURITY FOR THE SERIES 2009A BONDS - Senior Water Bonds and Outstanding Subordinated Water Bonds and Parity Debt," "- Issuance of Additional Senior Water Bonds," "Interest Rate Swap Agreements" and "- Issuance of Additional Subordinated Water Bonds and Parity Debt; Junior and Subordinate Obligations" herein.

Series 2009A Bond Reserve Fund

On the date of issuance of the Series 2009A Bonds, the Series 2009A Bond Reserve Fund will be funded in an amount equal to the Series 2009A Bond Reserve Requirement. "Series 2009A Bond Reserve Requirement" means an amount equal to the interest accruing on the Series 2009A Bonds (based upon the Outstanding Series 2009A Bonds as of the date of calculation and a 3.4069% assumed annual interest rate) for the twelve-month period ending June I, 2010, which amount is Sll,282,119.70. Sec "SECURITY FOR THE SERIES 2009A BONDS- Series 2009A Bond Reserve Fund" herein.

Rate Covenant

The District covenants under the Indenture, while any of the Subordinated Water Bonds (including the Series 2009A Bonds) remain Outstanding, to fix, prescribe and collect rates, fees and charges in connection with the services and facilities furnished by the Water System so as to yield Water Revenues (as hereinafter defined) in each Fiscal Year sufficient so that the sum of the Subordinated Water Revenues (as hereinafter defined) for such year plus all amounts required to be paid under the Senior Water Bond Resolution for the Senior Water Bonds for such year for principal, interest, reserve fund and any other debt service requirements on the Senior Water Bonds shall be at least equal to 1.1 times the amount of Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt for such Fiscal Year. Sec APPENDIX B- "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Covenants" hereto.

Continuing Disclosure

The District has covenanted for the benefit of the holders and beneficial owners of the Series 2009A Bonds to provide certain financial information and operating data relating to the District by not later than 270 days following the end of the District's Fiscal Year (which currently begins on July I and ends on June 30 of each year) (the "Annual Report"), commencing with the Annual Report for Fiscal Year 2008-09, and to provide notices of the occurrence of certain enumerated events, if material. See "CONTINUING DISCLOSURE" herein. These covenants have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The District has not failed to comply in any material respect with the term of any prior continuing disclosure undertaking. Sec APPENDIX G- "FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto.

Professionals Involved in the Issue

The Bank of New York Mellon Trust Company, N.A. serves as Trustee under the Indenture. The Bank of New York Mellon Trust Company, N.A. is also serving as Calculation Agent in connection with the Series 2009A Bonds while in a SIFMA-Based Term Interest Rate Period. Certain legal matters incident to the authorization, issuance and sale of the Series 2009A Bonds arc subject to the approval of legality by Fulbright & Jaworski L.L.P., Los Angeles, California, and Curls Bartling P.C., Oakland, California, Co-Bond Counsel. Certain legal matters will be passed upon for the District by its General Counsel, and for the Underwriters by Stradling Yocca Carlson & Rauth, A Professional Corporation. Montague DeRose and Associates, LLC, Walnut Creek, California, is serving as Financial Advisor to the District in connection with the Series 2009A Bonds.

3

Summaries Not Definitive

The summaries and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary or reference is qualified in its entirety by reference to each such document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined herein, indicates that such word is defined in the Indenture and, as used herein, has the meaning given to it in the Indenture. Unless otherwise indicated, all financial and statistical information herein has been provided by the District.

All references to and summaries of the Indenture, the Senior Water Bond Resolution, the State Loans, the Federal Loan and all documents, statutes, reports and other instruments referred to herein are qualified in their entirety by reference to the full Indenture, the Senior Water Bond Resolution, the State Loans, the Federal Loan and each such document, statute, report or instrument, respectively, copies of which arc available for inspection at the offices of the District in Oakland, California, and will be available trom the Trustee upon request and payment of duplication costs. Forward looking statements in this Official Statement arc subject to risks and uncertainties. Actual results may vary from forecasts or projections contained herein because events and circumstances do not occur as expected, and such variances may be material.

Additio11allnformation

The District regularly prepares a variety of publicly available reports, including audits, budgets and related documents. Any Series 2009 A Bondholder may obtain a copy of any such report, as available, from the Trustee or the District. Additional information regarding this Official Statement may be obtained by contacting the Trustee or:

Director of Finance East Bay Municipal Utility District 375-Eieventh Street Oakland, California 94607 (51 0) 287-0310

PLAN OF FINANCE

Refunding of Series 2008C Bonds

The proceeds of the Series 2009A Bonds will be used to refund $330,425,000 aggregate principal amount of the District's outstanding Water System Subordinated Revenue Refunding Bonds, Series 2008C (the "Refunded Bonds") and to pay costs of issuance of the Series 2009A Bonds. All of the outstanding Refunded Bonds will be retired on March 12, 2009 and will no longer be Outstanding under the Indenture. The sufficiency of the amounts to be deposited with the Trustee for the retirement of the Refunded Bonds to pay principal amount of and accrued interest on the Refunded Bonds on the date of retirement thereof has been verified by Grant Thornton LLP.

Refinancing of Series 2009A Bonds on or Prior to the Mandatory Purchase Date

The obligation of the District to pay the Purchase Price of the Series 2009A Bonds on the mandatory Purchase Date to occur on March I, 20 I 0, the day following the last day of the Initial SIFMABased Term Interest Rate Period, is on a parity with the District's Outstanding Subordinated Water Bonds, with certain scheduled payments which are payable by the District with respect to certain interest rate swap agreements and with certain other Parity Debt. The failure of the District to pay such Purchase

4

Price would constitute an Event of Default under the Indenture. Prior to such mandatory Purchase Date, the District will review its financing alternatives with respect to the Series 2009A Bonds. The District may elect to refund all or a portion of the Series 2009A Bonds on or prior to such March I, 2010 mandatory Purchase Date. The District may also elect to Convert the Series 2009A Bonds from the Initial SIFMA-Based Term Interest Rate Period to another SIFMA-Bascd Term Interest Rate Period or to another Interest Rate Period on or before the Purchase Date in accordance with the provisions of the Indenture. Sec "THE SERIES 2009A BONDS -Conversion from SIFMA-Based Term Interest Rate Period" herein. Pursuant to the Indenture, the District has covenanted to usc commercially reasonable efforts to either {i) issue obligations to refund the Series 2009A Bonds prior to the such mandatory tender date, or (ii) provide a Liquidity Facility or Self Liquidity Arrangement under which funds may be drawn in connection with such mandatory tender of the Series 2009A Bonds, or (iii) provide for the Conversion of such Series 2009A Bonds to another Interest Rate Period or a new SIFMA-Bascd Interest Rate Period in such a manner so as to provide sufficient remarketing proceeds to provide for payment of the Purchase Price of the Series 2009A Bonds upon such mandatory tender.

Refinancing and Related Risks

No assurance can be given that the District will have sufficient funds on hand on March I, 20 I 0 to pay the Purchase Price of the Series 2009A Bonds upon the mandatory tender thereof on such date. In the event that the District docs not have sufficient funds on hand to pay the Purchase Price of the Series 2009A Bonds on such date, the District's ability to pay such Purchase Price is dependent on the District's ability to issue and sell refunding obligations to refund the Series 2009A Bonds prior to such date or to provide for the Conversion of such Series 2009A Bonds to another Interest Rate Period or to a new SIFMA-Based Interest Rate Period on or prior to such date and to receive sufficient remarketing proceeds upon such Conversion to provide for payment of the Purchase Price of the Series 2009A Bonds upon the mandatory tender thereof. While the District has covenanted to use commercially reasonable efforts to either (i) issue obligations to refund the Series 2009A Bonds prior to the such mandatory tender date, or (ii) provide a Liquidity Facility or Self Liquidity Arrangement under which funds may be drawn in connection with such mandatory tender of the Series 2009A Bonds, or (iii) provide for the Conversion of such Series 2009A Bonds to another Interest Rate Period or a new SIFMA-Based Interest Rate Period in such a manner so as to provide sufficient remarkcting proceeds to provide for payment of the Purchase Price of the Series 2009A Bonds upon the mandatory tender thereof, a variety of events could prevent access to the municipal securities market, prohibit the District from issuing such refunding obligations or remarketing the Series 2009A Bonds, or make the issuance of refunding obligations or the remarketing of the Series 2009A Bonds prohibitively expensive. No assurance can be given that the District will be available to effect such a refinancing or remarketing on sufficiently favorable terms. Failure of the District to provide sufficient funds to pay the Purchase Price upon mandatory tender will constitute an Event of Default under the Indenture. See "THE SERIES 2009A BONDS - Mandatory Tender for Purchase of Series 2009A Bonds SJFMA-Based Interest Rate Conversion-Inadequate Funds for Tenders" herein.

The purchase of the Series 2009A Bonds involves a variety of investment risks described in this Official Statement. If a risk factor materializes to a sufficient degree, it could delay or prevent payment of principal of and/or interest on the Series 2009A Bonds. Such risk factors include, but are not limited to, the matters described above and should be considered, along with other information in this Official Statement, by potential investors.

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ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of Series 2009A Bond proceeds and certain other amounts are as follows:

Sources Principal Amount of Series 2009A Bonds Series 2008C Bond Reserve Account Other Available Fundsl'l

Total

Uses Refunding of Refunded Bonds Series 2009A Bond Reserve Fund Costs oflssuance''J

Total

$331,155,000 II ,588,328

133 641 $342 876.969

$330,552,298 11,282,119

I 042 552 $342.876.969

(I) Includes amounts on deposit in the Interest Fund and contribution or District funds. (Z) Includes legal, financing and consulting fees, rating agency fees, Underwriters' discount, printing costs and other

miscellaneous expenses.

THE SERIES 2009A BONDS

The following is a summary of certain provisions of the Series 2009A Bonds. Reference is made to the Series 2009A Bonds for the complete text thereof' and to the Indenture for a more detailed description of such provisions. The discussion herein is qualified by such reference.

General

The Series 2009A Bonds will be issued in the aggregate principal amount of $331,155,000, comprised of two subseries, Series 2009A-I in the principal amount of$165,580,000 and Series 2009A-2 in the principal amount of Sl65,575,000. Each subscries of the Series 2009A Bonds will be dated the date of delivery thereof and will mature on June I, 2026 (the "Maturity Date"), subject to prior redemption. Each subserics of the Series 2009A Bonds will initially be issued in a SJFMA-Bascd Term Interest Rate Period ending on February 28, 2010, and will bear interest at the SlFMA-Based Interest Rate (which is equal to the SIFMA Index Rate plus the Spread), all as more fully described herein. "SIFMA-Bascd Interest Rate" means a variable interest rate borne by the Series 2009A Bonds (or a subscrics thereof) and established in accordance with the Indenture, as described below. Sec "THE SERIES 2009A BONDS - SIFMA-Bascd Interest Rate" herein. Each subserics of the Series 2009A Bonds is subject to mandatory tender on March I, 2010, the day following the last day of the Initial SIFMA-Based Term Interest Rate Period. See "THE SERIES 2009A BONDS -Mandatory Tender for Purchase of Series 2009 A Bonds" herein.

The Series 2009A Bonds of each subserics will initially be delivered in denominations of $100,000 or any integral multiple of $5,000 in excess of $100,000. The Series 2009A Bonds will be prepared as one fully registered bond of the Series 2009A Bonds for each subscrics and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Series 2009A Bonds. Principal of and interest on the Series 2009A Bonds are payable by the Trustee to DTC, which is obligated in tum to remit such principal and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the Series 2009A Bonds. Sec APPENDIX E- "BOOK-ENTRY SYSTEM" herein.

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http://S342.876.969

Under the Indenture, the Series 2009A Bonds may be Converted to a Daily Interest Rate Period, Weekly Interest Rate Period, Short-Tenn Interest Rate Period, Long-Term Interest Rate Period, LIBORBascd Interest Rate Period, CPI-Based Interest Rate Period or ARS Interest Rate Period (each, an "Interest Rate Period"). Sec "THE SERIES 2009A BONDS - Conversion from SIFMA-Bascd Term Interest Rate Period" herein. This Official Statement describes the Series 2009A Bonds only while bearing interest in the Initial SIFMA-Based Term Interest Rate Period. There are significant differences in the terms of the Series 2009A Bonds while they bear interest at an Interest Rate Period other than the SIFMA-Based Term Interest Rate Period. This Official Statement is not intended to provide information with respect to the Series 2009A Bonds bearing interest in an Interest Rate Period other than the Initial SIFMA-Based Term Interest Rate Period. Owners and prospective owners of the Series 2009A Bonds should not rely on the Official Statement for information in connection with any conversion of the Series 2009A Bonds to a different Interest Rate Period, but should look solely to the offering document to he used in connection with any such conversion.

SIFMA-Based Interest Rate

While in a SIFMA-Bascd Term Interest Rate Period, each subscries of the Series 2009A Bonds will bear interest at the SIFMA-Based Interest Rate; provided that no Series 2009A Bond may bear interest at more than the Maximum Bond Interest Rate (i.e., 12% per annum).

Interest on each subseries of the Series 2009A Bonds while in a SIFMA-Bascd Term Interest Rate Period will be payable on the first Business Day of each month, commencing on April I, 2009 (each an "Interest Payment Date"). Each subscries of the Series 2009A Bonds shall bear interest from and including the Interest Accrual Date immediately preceding the date of authentication thereof or, if such date of authentication is an Interest Accrual Date to which interest on the Series 2009A Bonds has been paid in full or duly provided for, from such date of authentication or, if it is the first payment of interest on the Series 2009A Bonds, the dated date thereof. "Interest Accrual Date" means with respect to each subscries of the Series 2009A Bonds bearing interest at the SIFMA-Based Interest Rate, the first day of the applicable SIFMA-Based Term Interest Rate Period, and thereafter, the first Business Day of each calendar month. Interest on each subseries of the Series 2009A Bonds in a SIFMA-Bascd Term Interest Rate Period shall accrue on the basis of the actual number of days elapsed and a year of 365 days (366 days in a leap year).

The SIFMA-Bascd Interest Rate for each subseries of the Series 2009A Bonds shall be a per annum rate equal to the SIFMA Index Rate plus the Spread, applied on the basis of the actual number of days in the applicable Interest Period divided by 365 or 366, as applicable.

An "Interest Period" for the Series 2009A Bonds while in a SIFMA-Based Term Interest Rate Period, means the period fr()m and including each Interest Payment Date for such Series 2009A Bonds to and including the day next preceding the next Interest Payment Date for such Series 2009A Bonds; provided that the first Interest Period shall begin on the date of delivery of the Series 2009A Bonds and the final Interest Period shall end the day next preceding the maturity date of the Series 2009A Bonds.

"SIFMA Index Rate" means, in respect of each Interest Period during a SIFMA-Bascd Term Interest Rate Period, a per annum rate equal to the weighted average of the SIFMA Index in effect for each day in the Interest Period, calculated by multiplying each such SIFMA Index by the numbers of days such SIFMA Index is in effect, determining the sum of such products and dividing such sum by the number of days in such Interest Period.

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"Spread" means for each subseries of the Series 2009A Bonds while in the Initial SIFMA-Bascd Term Interest Rate Period ending February 28,2010, plus 0 basis points {plus 0.0%).

The "SIFMA Index" means the SIFMA Municipal Swap Index (formerly The Bond Market Association Municipal Swap Index), a seven-day high-grade market index composed of selected taxexempt variable-rate demand obligations meeting specific criteria. The SIFMA Index is calculated weekly and released each Wednesday afternoon. Each Thursday (whether or not such day is a Business Day) will be a SIFMA Index Reset Date. If at any time the SIFMA Index is not available, there shall be used in its place an index that the Trustee, following consultation with the District and the Calculation Agent, determines most closely approximates the SIFMA Index.

The SIFMA-Based Interest Rate for each Interest Period shall be determined by the Calculation Agent by applying the SIFMA Index, as determined for each week during the Interest Period to determine the SIFMA Index Rate, and then applying the Spread to obtain the SIFMA-Based Interest Rate for such Interest Period. Such SIFMA-Based Interest Rate shall be multiplied against the outstanding principal amount of each subseries of the Series 2009A Bonds during such Interest Period to determine the interest payable on the Interest Payment Date following such Interest Period.

All percentages resulting from any step in the calculation of interest on Series 2009A Bonds (or any subseries thereof) while in a SIFMA-Bascd Term Interest Rate Period will be rounded, if necessary, to the nearest ten-thousandth of a percentage point (i.e., to five decimal places) with five hundred thousandths of a percentage point rounded upward, and all dollar amounts used in or resulting from such calculation of interest on Series 2009A Bonds (or any subseries thereof) while in a SIFMA-Based Term Interest Rate Period will be rounded to the nearest cent (with one-half cent being rounded upward).

The Bank of New York Mellon Trust Company, N.A., the Trustee for the Series 2009A Bonds, will serve as the initial Calculation Agent in connection with the Series 2009A Bonds while in the Initial SIFMA-Based Term Interest Rate Period.

Conversion from a SIFMA-Based Interest Rate or Establishment of a new SIFMA-Based Term Interest Rate Period

General; Notice Upon Conversion. The District may elect at any time, and shall elect on or before the ninetieth (90'"l day preceding the last day of the Initial SIFMA-Bascd Term Interest Rate Period, by written direction to the Trustee, the Tender Agent and the Remarketing Agent (if any) for the Series 2009A Bonds (or any subserics thereof), subject to the provisions of the Indenture, that, on the day immediately following the last day of the Initial SIFMA-Bascd Term Interest Rate Period or a day on which such Series 2009A Bonds (or subseries thereof) would otherwise be subject to optional redemption pursuant to the Indenture, the Series 2009A Bonds (or subserics thereof) shall no longer bear interest at the current SIFMA-Based Interest Rate and shall instead bear interest at a Weekly Interest Rate, a Daily Interest Rate, Bond Interest Term Rates, an ARS Rate, a LIBOR-Based Interest Rate, a CPI-Based Rate or a Long-Term Interest Rate, or that a new SIFMA-Based Interest Term Interest Rate Period shall be established, as specified in such election. In the notice of such election, the District shall also specify the effective date of the new Interest Rate Period, which date ( 1) shall be a Business Day no earlier than the tenth (10'") Business Day after the second (2"") Business Day following the date of receipt by the Trustee of the notice of election from the District and (2) shall be the day immediately following the last day of the SIFMA-Based Term Interest Rate Period currently in effect or a day on which the Series 2009A Bonds (or subseries thereof) would otherwise be subject to optional redemption pursuant to the Indenture. The Series 2009A Bonds (or subseries thereof) shall be subject to mandatory tender for purchase on the effective date of the new Interest Rate Period, in accordance with the Indenture.

8

The Trustee shall give notice by first-class mail to the Owners of the Series 2009A Bonds of the Conversion to a different Interest Rate Period or the establishment of a new SIFMA-Bascd Term Interest Rate Period not less than ten ( 1 0) Business Days prior to the effective date of the new Interest Rate Period (or subsequent SIFMA-Based Term Interest Rate Period). A copy of such notice shall be sent to the Rating Agencies by the Trustee. Such notice shall state (A) that the Interest Rate Period shall be Converted to a Weekly Interest Rate Period, a Daily Interest Rate Period, a Short--Term Interest Rate Period, an ARS Interest Rate Period, a LIBOR-Bascd Interest Rate Period, a CPI-Bascd Interest Rate Period, a Long-Term Interest Rate Period or a new SIFMA-Bascd Term Interest Rate Period unless the District rescinds its election to Convert the Interest Rate Period to a Weekly Interest Rate Period, a Daily Interest Rate Period, a Short-Term Interest Rate Period, an ARS Interest Rate Period, a LIBOR-Bascd Interest Rate Period, a CPI-Bascd Interest Rate Period, a Long-Tenn Interest Rate Period or a new SIFMA-Bascd Term Interest Rate Period; (B) the proposed effective date, and the duration and last day of the Interest Rate Period in the case of a Long-Term Interest Rate Period or another SIFMA-Based Term Interest Rate Period; (C) that the Series 2009A Bonds (or subserics thereof) are subject to mandatory tender for purchase on such proposed effective date and setting forth the Purchase Price and the place of delivery for purchase of the Series 2009A Bonds (or subserics thereof); and (D) the information required for a notice of mandatory tender for purchase. Sec "THE SERIES 2009A BONDS -Notice of Mandatory Tender for Purchase" herein.

Rescission of Election. In connection with any Conversion of the Interest Rate Period for the Series 2009A Bonds (or any subseries thereof), the District shall have the right (other than in connection with the Conversion at the end of the Initial SIFMA-Based Tcnn Interest Rate Period) to deliver to the Trustee, the Remarkcting Agent (if any), the Tender Agent (if any), for the Series 2009A Bonds (or subscries thereof), on or prior to 10:00 a.m., New York City time, on the tenth (1 O'h) Business Day prior to any such Conversion a notice to the effect that the District elects to rescind its election to make such Conversion. If the District rescinds its election to make such Conversion, then the Interest Rate Period shall not be Converted and the Series 2009A Bonds (or subseries thereof) shall continue to bear interest through the end of the Initial SIFMA-Based Term Interest Rate Period at the SIFMA-Bascd Interest Rate as in effect immediately prior to such proposed Conversion. In any event, if notice of a Conversion has been mailed to the Owners of the Series 2009A Bonds (or subserics thereof) as provided in the Indenture and the District rescinds its election to make such Conversion, then the Series 2009A Bonds (or subseries thereof) shall continue to be subject to mandatory tender for purchase on the date which would have been the effective date ofthc Conversion.

Certain Additional Conditions. No Conversion of Series 2009A Bonds (or any subseries thereof) from one Interest Rate Period to another shall take effect unless each of the following conditions, to the extent applicable, shall have been satisfied.

(i) With respect to the new Interest Rate Period: (i) the District shall have appointed a Rcmarkcting Agent and there shall have been executed and delivered a Rcmarketing Agreement, and (ii) there shall be in effect (except in the case of a LIBOR-Bascd Interest Rate Period, a CPI-Based Interest Rate Period, a SIFMA-Bascd Term Interest Rate Period, a Long-Term Interest Rate Period or an ARS Interest Rate Period) a Liquidity Facility or Self Liquidity Arrangement if required under the Indenture.

(ii) The Trustee shall have received a Favorable Opinion of Bond Counsel with respect to such Conversion.

(iii) In the case of any Conversion with respect to which there shall be no Liquidity Facility or Self Liquidity Arrangement in effect to provide funds for the purchase of Series 2009A Bonds (or any subscries thereof) on the Conversion Date, the remarkcting proceeds available on the Conversion Date

9

shall not be less than the amount required to purchase all of the Series 2009A Bonds (or subseries thereof) at the Purchase Price (but not including any premium).

(iv) In the case of any Conversion of the Series 2009A Bonds (or any subscrics thereof) to an ARS Interest Rate Period, prior to the Conversion Date the District shall have appointed an Auction Agent and one or more Broker-Dealers and there shall have been executed and delivered an Auction Agent Agreement and one or more Broker-Dealer Agreements.

Failure to Meet Conditions. ln the event that any condition to the Conversion of the Series 2009A Bonds (or any subscries thereof) shall not have been satisfied, then the Interest Rate Period shall not be Converted; however, the Series 2009A Bonds (or subscrics thereof) shall continue to be subject to mandatory tender for purchase on the date which would have been the effective date of the Conversion as provided in the Indenture.

Mandatory Tender for Purchase of Series 2009A Bonds

Mandatory Tender for Purchase on Day Next Succeeding Last Day of Initial SIFMA-Based Term Interest Rate Period. On March I, 2010, the first day following the last day of the Initial SIFMA-Based Term Interest Rate Period for the Series 2009A Bonds, unless such day is the first day of a new Interest Rate Period (in which case such Series 2009A Bond shall be subject to mandatory purchase as described under "Mandatory Tender for Purchase on First Day of Each Interest Rate Period" below), each subseries of the Series 2009A Bonds shall be subject to mandatory tender for purchase at the Purchase Price, payable by wire transfer in immediately available funds. For payment of the Purchase Price on the Purchase Date, a Series 2009A Bond (or subscrics thereof) must be delivered at or prior to 10:00 a.m., New York City time, on the Purchase Date. If delivered after that time, the Purchase Price shall be paid on the next succeeding Business Day.

Mandatory Tender for Purchase on Fir.<t Day of Each Interest Rate Period. The Series 2009A Bonds (or any subseries thereof) shall be subject to mandatory tender for purchase on the first day of each Interest Rate Period (or on the day which would have been the first day of an Interest Rate Period had the Conversion to such Interest Rate Period not failed to occur) at the Purchase Price, payable in immediately available funds. For payment of the Purchase Price on the Purchase Date, a Series 2009A Bond (or subseries thereof) must be delivered at or prior to l 0:00 a.m., New York City time, on the Purchase Date. If delivered after that time, the Purchase Price shall be paid on the next succeeding Business Day.

Notice of Mandatory Tender for Purchase. In connection with any mandatory tender for purchase of Series 2009A Bonds as described under "Mandatory Tender for Purchase on Day Next Succeeding Last Day of Initial SIFMA-Based Term Interest Rate Period," the Trustee shall give notice of a mandatory tender for purchase by first-class mail to the Owners, with a copy to the District, the Tender Agent and the Remarkcting Agent, not less than ninety (90) days prior to the Purchase Date. In connection with any mandatory tender for purchase of Series 2009A Bonds as described under "Mandatory Tender for Purchase on First Day of Each Interest Rate Period" above, the Trustee shall give notice of a mandatory tender for purchase by first-class mail to the Owners, with a copy to the District, the Tender Agent and the Remarketing Agent, not less than ten (I 0) Business Days prior to the Purchase Date. Such notice shall state (i) in the case of a mandatory tender for purchase pursuant to a mandatory tender for purchase on first day of a new Interest Rate Period, the type of Interest Rate Period to commence on such mandatory Purchase Date; (ii) that the Purchase Price of any Series 2009A Bond (or subseries thereof) subject to mandatory tender for purchase shall be payable only upon surrender of such Series 2009A Bond (or subserics thereof) to the Tender Agent at its Corporate Trust Office for delivery of Series 2009 A Bonds (or subseries thereof), accompanied by an instrument of transfer, in form satisfactory to the Tender Agent, executed in blank by the Owner of such Series 2009A Bond or its duly-authorized

10

attorney, with such signature guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange; (iii) that, provided that moneys sufficient to effect such purchase shall have been provided through the remarkcting of such Series 2009A Bonds (or subserics thereof) by the Rcmarkcting Agent or through a Liquidity Facility or Self Liquidity Arrangement, all Series 2009A Bonds (or subscrics thereof) subject to mandatory tender for purchase shall be purchased on the mandatory Purchase Date; and (iv) that if any Owner of a Series 2009A Bond (or subscrics thereof) subject to mandatory tender for purchase docs not surrender that Series 2009A Bond (or subscries thereof) to the Tender Agent for purchase on the mandatory Purchase Date, then that Series 2009A Bond (or subseries thereof) shall be deemed to be an Undelivered Bond, that no interest shall accrue on that Series 2009 A Bond (or subseries thereof) on and after the mandatory Purchase Date and that the Owner shall have no rights under the Indenture other than to receive payment of the Purchase Price.

Inadequate Funds for Tenders. In the event sufficient funds arc not available for the purchase of all Series 2009A Bonds tendered or deemed tendered and required to be purchased on any Purchase Date while in the Initial SIFMA-Bascd Term Interest Rate Period, then, notwithstanding any other provision of the Indenture, in such event, such failed purchase shall constitute an Event of Default thereunder. Sec "APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE-Events of Default; Remedies" hereto.

Undelivered Bonds. If any Owner of a Series 2009A Bond subject to mandatory tender for purchase shall fail to deliver that Series 2009A Bond to the Tender Agent at the place and on the Purchase Date and at the time specified, or shall fail to deliver that Series 2009A Bond properly endorsed, that Series 2009A Bond shall constitute an Undelivered Bond. If funds in the amount of the Purchase Price of the Undelivered Bond arc available for payment to the Owner thereof on the Purchase Date and at the time specified, then from and after the Purchase Date and time of that required delivery (i) the Undelivered Bond shall be deemed to be purchased and shall no longer be deemed to be Outstanding under the Indenture; (ii) interest shall no longer accrue on the Undelivered Bond; and (iii) funds in the amount of the Purchase Price of the Undelivered Bond shall be held uninvested by the Tender Agent for the benefit of the Owners thereof (provided that the Owner shall have no right to any investment proceeds derived from such funds), to be paid on delivery (and proper endorsement) of the Undelivered Bond to the Tender Agent at its corporate trust office for delivery of Series 2009A Bonds. Any money which the Tender Agent segregates and holds in trust for the payment of the Purchase Price of any Series 2009A Bond which remains unclaimed for two (2) years after the date of purchase shall be paid to the District. After the payment of such unclaimed money to the District, the former Owner of such Series 2009A Bond shall look only to the District for the payment thereof. The District shall not be liable for any interest on unclaimed money and shall not be regarded as a trustee of such money.

Series 2009A Bonds to be Paid at Maturity or Redeemed Instead of Being Purchased. Series 2009A Bonds that are to be paid at maturity, or to be redeemed as described under "Redemption" below, on the same date that such Series 2009 A Bonds arc to be purchased as hereinabove described (and Series 2009A Bonds issued in exchange for or upon the registration of transfer of such Series 2009A Bonds) shall be paid or redeemed, as applicable, on such date instead of being purchased on such date.

Redemption

No Optional Redemption. While in the Initial SIFMA-Based Term Interest Rate Period, the Series 2009A Bonds bearing interest at a SIFMA-Based Interest Rate shall not be subject to optional redemption by the District.

Mandatory Redemption. The Series 2009A-l Bonds are subject to redemption prior to their stated maturities, in part, by lot, from Mandatory Sinking Account Payments as specified below at the

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principal amount of each Series 2009A-I Bond so redeemed plus accrued interest thereon to but not including the date fixed for redemption, without premium.

Mandatory Sinking Account Payment Dates

(June 1) 2009 2010 2011 2012 2013 2014 2015 2016 2017

t Final Maturity.

Series 2009A-l Bonds

Mandatory Sinking Account Payments

s 2,550,000 2,460,000 2,545,000 2,625,000

13,920,000 14,360,000 14,775,000 13,295,000 8,935,000


(June 1) 2018 2019 2020 2021 2022 2023 2024 2025 20261


s 9,275,000 9,620,000 9,960,000

10,350,000 9,870,000

10,285,000 10,700,000 9,825,000

10,230,000

The Series 2009A-2 Bonds are subject to redemption prior to their stated maturities, in part, by lot, from Mandatory Sinking Account Payments as specified below at the principal amount of each Series 2009A-2 Bond so redeemed plus accrued interest thereon to but not including the date fixed for redemption, without premium.


(June 1) 2009 2010 2011 2012 2013 2014 2015 2016 2017

1 Final Maturity.

Series 2009A-2 Bonds


$2,545,000 2,460,000 2,550,000 2,620,000

13,925,000 14,360,000 14,770,000 13,300,000 8,935,000


(June 1) 2018 2019 2020 2021 2022 2023 2024 2025 20261


$9,270,000 9,625,000 9,960,000

10,345,000 9,875,000

10,285,000 10,695,000 9,830,000

10,225,000

Selection of Series 2009A Bonds To Be Redeemed. If any Series 2009A Bond of a subseries is in a denomination larger than a minimum Authorized Denomination, a portion of such Series 2009A Bond of such subscrics (the minimum Authorized Denomination or any integral multiple thereof) may be redeemed, in which case the Trustee will, without charge to the Owner of such Series 2009A Bond, authenticate and issue a replacement Series 2009A Bond or Series 2009A Bonds of such subseries for the unredeemed portion thereof. Whenever provision is made for the redemption of less than all of the Series 2009A Bonds of a subseries, the maturities of the Series 2009A Bonds of such subscries to be redeemed shall be specified by the District. In the case of a partial redemption of any maturity of the Series 2009A Bonds of a subscries, the Trustee will select the Series 2009A Bonds of such subseries of

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such maturity to be redeemed by lot at such times as directed by the District in writing at least 30 days prior to the redemption date and if such selection is more than 60 days before a redemption date, will appropriately identify the Series 2009A Bonds of such subscrics so called for redemption by stamping them at the time any Series 2009A Bonds of such subscries so selected for redemption is presented to the Trustee for stamping or for transfer or exchange, or by such other method of identification as is deemed adequate by the Trustee, and any Series 2009A Bond or Series 2009A Bonds of such subscries issued in exchange for, or to replace, any Series 2009A Bond of such subseries so called for prior redemption will likewise be stamped or otherwise identified. The Trustee will not select the Series 2009A Bonds of a subscries for mandatory redemption pursuant to the Indenture more than 60 days prior to the redemption date.

Upon surrender of any Series 2009A Bond of a subseries redeemed in part only, the District will execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Series 2009A Bond of such subscries in Authorized Denominations, and of the same Maturity Date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Series 2009 A Bond of such subscries surrendered.

Notice of Redemption. The District will notify the Trustee and the Rcmarkcting Agent (if any) at least forty (40) days (or such shorter time as may be agreed to by the District, the Trustee and the Rcmarketing Agent) prior to the redemption date for Series 2009A Bonds. Notice of redemption will be mailed by the Trustee, not less than thirty (30) days nor more than sixty (60) days prior to the redemption date, (i) to the respective Owners of any Series 2009 A Bonds of a subseries designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, (ii) to the Securities Depository by facsimile and by first-class mail, and (iii) to the Information Services by firstclass mail. Notice of redemption will be given in the form and in accordance with the terms of the Indenture.

In the event of an optional redemption of Series 2009A Bonds of a subseries, if the District shall not have deposited or otherwise made available to the Trustee the money required for the payment of the redemption price of the Series 2009A Bonds of such subseries to be redeemed at the time of such mailing, such notice of redemption shall state that the redemption is expressly conditioned upon the timely deposit of sufficient funds therefor with the Trustee.

Effect of Redemption. If notice of redemption having been duly given, and moneys for payment of the Redemption Price of, together with interest accrued to the redemption date on, the Series 2009A Bonds (or portions thereof) of a subseries so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Series 2009A Bonds (or portions thereof) of such subscrics so called for redemption will 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 Series 2009A Bonds of such subseries so called for redemption shall cease to accrue, the Series 2009A Bonds (or portions thereof) of such subserics shall cease to be entitled to any benefit or security under the Indenture, and the Owners of the Series 2009A Bonds of such subseries shall have no rights in respect thereof except to receive payment of the Redemption Price and accrued interest.

SECURITY FOR THE SERIES 2009A BONDS

General

Authority for Issuance. The Series 2009A Bonds are authorized for issuance pursuant to the Municipal Utility District Act and all laws of the State amendatory thereof or supplemental thereto, including the Revenue Bond Law of 1941, as made applicable by Article 6a of Chapter 6 of Division 6 of

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the Municipal Utility District Act, and Article II of Chapter 3 of Part I of Division 2 of Title 5 of the Government Code of the State (collectively, the "Act"), resolutions adopted by the District and the Indenture. By Resolution No. 33606-07, adopted by the Board of Directors of the District on June 12,2007, the Board declared its intention to issue up to Sl,IOO,OOO,OOO of Water System revenue bonds, of which $1, I 00,000,000 remains unissued. The District has heretofore and may from time to time hereafter adopt other resolutions authorizing the issuance of Senior Water Bonds and additional Subordinated Water Bonds or other Parity Debt, subject to the satisfaction of the conditions set forth in the Senior Water Bond Resolution or the Indenture. The issuance of revenue bonds by the District is not subject to prior voter approval, although such bond resolutions are subject to a 60-day referendum period (which with respect to bonds to be issued pursuant to Resolution No. 33606-07, expired without challenge). See "SECURlTY FOR THE SERlES 2009A BONDS - Senior Water Bonds and Outstanding Subordinated Water Bonds and Parity Debt" herein.

Pledge of Subordinated Water Revenues. Pursuant to the Indenture, the District has irrevocably pledged to the payment of the principal or redemption price of and interest on the Subordinated Water Bonds, the Series 2009A Bonds and any Parity Debt, all Subordinated Water Revenues (as hereinafter defined) and all amounts held by the Trustee under the Indenture (except for amounts held in the Rebate Fund) subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein.

"Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the District for borrowed money or interest rate swap agreements having an equal lien and charge upon the Subordinated Water Revenues and therefore payable on a parity with the Subordinated Water Bonds (whether or not any Subordinated Water Bonds arc Outstanding).

"Subordinated Water Revenues" means, for any fiscal period, the sum of (a) all charges received for, and all other income and receipts derived by the District from, the operation of the Water System, or arising from the Water System, together with income from the investment of any monies in any fund or account established under the Senior Water Bond Resolution relating to the District's Senior Water Bonds or under the Indenture (collectively, the "Water Revenues") for such fiscal period, plus (b) the amounts, if any, withdrawn by the District from the Rate Stabilization Fund established under the Senior Water Bond Resolution for treatment as Water Revenues for such fiscal period, less the sum of(c) all Water Operation and Maintenance Costs (as hereinafter defined) for such fiscal period and (d) the amounts, if any, withdrawn by the District from Water Revenues for such fiscal period for deposit in the Rate Stabilization Fund, and (c) all amounts required to be paid under the Senior Water Bond Resolution for principal, interest, reserve fund and any other debt service requirements on the Senior Water Bonds as the same become due and payable.

"Water Operation and Maintenance Costs" means the reasonable and necessary costs of maintaining and operating the Water System, calculated on sound accounting principles, including (among other things) the reasonable expenses of management, repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and reasonable amounts for administration, overhead, insurance, taxes and other similar costs, but excluding in all cases depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature, and excluding all costs paid from the proceeds of taxes received by the District.

The Series 2009A Bonds are special obligations of the District, payable solely from and secured by a pledge of Subordinated Water Revenues. Neither the full faith and credit nor the taxing power of the District is pledged to the payment of the Series 2009A Bonds or the interest thereon.

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The Series 2009A Bonds are not payable from or secured by the revenues of the Wastewater System of the District.

Rate Covenant. The District has covenanted under the Indenture that it will, at all times while any of the Subordinated Water Bonds remain Outstanding, fix, prescribe and collect rates, fees and charges in connection with the services and facilities fumished by the Water System so as to yield Water Revenues in each Fiscal Year sufficient so that the sum of the Subordinated Water Revenues for such year plus all amounts required to be paid under the Senior Water Bond Resolution for such year for principal, interest, reserve fund and any other debt service requirements on the Senior Water Bonds shall be at least equal to 1.1 times the amount of Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt for such Fiscal Y car.

Series 2009 A Bond Reserve Fund

On the date of the issuance of the Series 2009A Bonds, the Series 2009A Bond Reserve Fund will be funded in an amount equal to the Series 2009A Bond Reserve Requirement. In addition, the Trustee shall deposit in the Series 2009A Bond Reserve Fund, from any amount remaining in the Revenue Fund on any interest payment date following the transfer to the Interest Fund and the Principal Fund as required by the Indenture, that amount of money which shall be required either (i) to maintain the Series 2009A Bond Reserve Fund in the full amount of the Series 2009A Bond Reserve Requirement or (ii) to repay any and all obligations due and payable under the terms and conditions of any letter of credit or insurance policy or surety bond provided for the Series 2009A Bond Reserve Fund. No deposit need be made in the Series 2009A Bond Reserve Fund so long as there shall be on deposit therein a sum equal to at least the amount required by the Indenture to be on deposit therein. Whenever the amount on deposit in the Series 2009A Bond Reserve Fund is less than the Series 2009A Bond Reserve Requirement, such amount shall be increased to the Series 2009A Bond Reserve Requirement as provided for in the Indenture not later than twelve months thereafter. All amounts in the Series 2009A Bond Reserve Fund shall be used and withdrawn by the Trustee solely for the purposes of making up any deficiency in the Interest Fund or the Principal Fund for the payment of principal and interest on the Series 2009A Bonds, or (together with any other moneys available therefor) for the payment or redemption of all Series 2009A Bonds then Outstanding, or for the payment of the final principal and interest payments of the Series 2009A Bonds. Sec APPENDIX B- "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" hereto.

The Series 2009A Bond Reserve Fund secures only the Series 2009A Bonds and is not available for the payment of any other Series of Subordinated Water Bonds. Amounts held in any other Bond Reserve Fund under the lndenrure for any other Series of Subordinated Water Bonds are not available for the payment of the Series 2009A Bonds.

Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt

Currently, there are no Senior Water Bonds outstanding under the District's Senior Water Bond Resolution. Any Senior Water Bonds hereafter issued in accordance with the Senior Water Bond Resolution, would be payable from Water Revenues prior to the payment of the District's Subordinated Water Bonds, including the Series 2009A Bonds hereby offered.

Following the issuance of the Series 2009A Bonds, the District will have Outstanding S I ,936,350,000 aggregate principal amount of Subordinated Water Bonds (collectively, the "Outstanding Subordinated Water Bonds"), issued under and pursuant to the Indenture. See "SECURITY FOR THE SERIES 2009A BONDS- Outstanding Debt" herein. Approximately S711,385,000 principal amount of such Outstanding Subordinated Water Bonds arc variable rate obligations in connection with which the District has entered into liquidity agreements with various banks to provide liquidity support for such

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variable rate Subordinated Water Bonds upon tender thereof. The obligation of the District to repay any draws on such liquidity facilities is payable on a parity with the Outstanding Subordinated Water Bonds to the extent such repayment is not thereafter provided from rcmarketing proceeds of the related Subordinated Water Bonds. Unrcimburscd draws under liquidity arrangements supporting such variable rate Subordinated Water Bonds bear interest at a maximum rate that may be substantially in excess of the rate on the related variable rate Subordinated Water Bonds. Moreover, in certain circumstances, the failure to reimburse draws on the liquidity arrangements may result in the acceleration of the scheduled payment of principal on such variable rate Subordinated Water Bonds.

Additionally, the District has outstanding loans with the State of California's State Water Resources Control Board and certain interest rate swap agreements the scheduled payments under which are payable from Subordinated Water Revenues on a parity with the Subordinated Water Bonds. See"State Loans and Federal Loan," "- Interest Rate Swap Agreements" and "WATER SYSTEM FINANCES - Outstanding Debt" herein. The Outstanding Subordinated Water Bonds, together with any ~dditional Subordinated Water Bonds issued under the Indenture, and any Parity Debt hereafter issued or incurred in accordance with the Indenture, will be on a parity with the Series 2009 A Bonds as to the pledge of and lien on Subordinated Water Revenues.

Issuance of Additional Senior Water Bonds

The District has covenanted under the Indenture that it will not create any pledge, lien or charge upon any of the Subordinated Water Revenues having priority over or having parity with the lien of the Subordinated Water Bonds except for Senior Water Bonds issued pursuant to the Senior Water Bond Resolution and such other indebtedness as permitted in the Indenture. The District also covenanted that it will not amend or change the Senior Water Bond Resolution in any manner which would permit the issuance of additional Senior Water Bonds in a greater principal amount than would have been permitted thereunder prior to such amendment or change or reduce the percentage or coverage requirements contained therein. The Indenture otherwise docs not limit the issuance of additional Senior Water Bonds or the amendment of the Senior Water Bond Resolution. The Indenture provides that the District may not issue any Senior Water Bonds in such amount as would cause the District to be in violation of the rate coveoant contained in the Indenture.

The Senior Water Bond Resolution permits the issuance of additional Senior Water Bonds upon the satisfaction of certain conditions precedent, including that: the sum of (I) the Net Revenues (as hcreatler defined) for any period of 12 consecutive months during the 18 months immediately preceding the issuance of such additional series of Senior Water Bonds, (2) 75% of the amourtt by which the Net Revenues would have been increased had any increase in rates and charges, adopted prior to the issuance of such additional series of Senior Water Bonds but in effect for less than one year, been in effect for a full year, and (3) 75% of the projected increase in annual Net Revenues to be provided by additional facilities under construction (financed from any source) or to be constructed (with the proceeds of the additional series of Senior Water Bonds then being issued), shall have been equal to at least 1.25 times the maximum annual debt service thereafter on the Senior Water Bonds, including the Senior Water Bonds then Outstanding and such additional series of Senior Water Bonds.

"Net Revenues" is defined under the Senior Water Bond Resolution to mean all charges received for, and all other income and receipts derived by the District from the operation of the Water System or arising from the Water System, together with income from the investment of any monies in any fund or accmmt established under the Senior Water Bond Resolution ("Revenues"), less all Water Operation and Maintenance Costs.

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Sec APPENDIX C- "SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION" hereto.

Allocation of Net Revenues Under the Senior Water Bond Resolution; Rate Stabilization Fund

Pursuant to the Senior Water Bond Resolution, Net Revenues will be deposited by the District with the Trustee in the following special funds established and held by the Trustee under the Senior Water Bond Resolution: first, into the Interest Fund, an amount sufficient, together with any balance on hand in the Interest Fund, to pay interest becoming due and payable on the Senior Water Bonds on each interest payment date; second, into the Retirement Fund, an amount sufficient to pay the principal or minimum sinking fund payment becoming due and payable on each maturity or minimum sinking fund payment date; third, into the Bond Reserve Funds for the Senior Water Bonds, all monies required to maintain a balance in the Bond Reserve Funds equal to the sum of the amounts of initial annual debt service on each series of Senior Water Bonds at the time Outstanding; and fourth, into the Rate Stabilization Fund maintained by the District, such amounts as the District may from time to time determine.

The District may withdraw amounts from time to time held in the Rate Stabilization Fund within 120 days after the end of the applicable Fiscal Year. Amounts so withdrawn shall be included in Water Revenues for such Fiscal Year and may be applied for any purposes for which Water Revenues generally are available. All interest and earnings upon deposits in the Rate Stabilization Fund will not be held therein, but will be treated and accounted for as Water Revenues. The amount on deposit in the Rate Stabilization Fund as of December 31, 2008 was $50,000,000. All Net Revenues remaining after such application constitute Subordinated Water Revenues. See APPENDIX C- "SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION- Allocation of Revenues" hereto.

Allocation of Subordinated Water Revenues Under the Indenture

In accordance with the Indenture, all Subordinated Water Revenues, when and as received by the District, shall be deposited into a fund to be established and maintained by the District designated as the "Revenue Fund." So long as any Subordinated Water Bonds are Outstanding, the District will transfer the monies in the Revenue Fund into the following respective funds (established, maintained and held by the Trustee in trust for the benefit of the Owners of the Subordinated Water Bonds) in the following order of priority; provided, that on a parity with such deposits the Trustee may set aside or transfer amounts with respect to outstanding Parity Debt as provided in the proceedings for such Parity Debt (which deposits shall be proportionate in the event such amounts are insufficient to provide for all deposits required as of any date to be made with respect to the Subordinated Water Bonds and such Parity Debt):

Interest Fund. The District will transfer to the Trustee to be set aside in the Interest Fund on or before the Business Day prior to each interest payment date an amount equal to the interest becoming due and payable on the Outstanding Subordinated Water Bonds (excluding any interest for which there arc monies on deposit in the Interest Fund from the proceeds of any series of Subordinated Water Bonds or other source to pay such interest).

Principal Fund; Sinking Accounts. The District shall transfer to the Trustee to be set aside in the Principal Fund on or before the Business Day prior to each principal or sinking account payment date an amount equal to the amount of Bond Obligation (as defined in the Indenture) plus the Mandatory Sinking Account Payments becoming due and payable on such date. All Mandatory Sinking Account Payments shall be made without priority of any payment into any one such sinking account over any other such payment.

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Bond Reserve Funds. Upon the occurrence of any deficiency in any Bond Reserve Funds established under the Indenture for any Series of Subordinated Water Bonds, the District shall transfer to the Tn1stce and the Trustee shall set aside in such Bond Reserve Funds an amount equal to the aggregate amount of each unreplcnishcd prior withdrawal from the Bond Reserve Funds until there is on deposit in such Bond Reserve Funds an amount equal to the respective reserve requirement.

The requirements of each such fund (including the making up of any deficiencies in any such fund resulting from a lack of Subordinated Water Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any deposit is made to any other fund subsequent in priority. The Indenture provides that any Snbordinated Water Revenues remaining in the Revenue Fund after the foregoing transfers, except as otherwise provided in a Supplemental Indenture, shall be held free and clear of the Indenture by the District. The District may use and apply such Subordinated Water Revenues for any lawful purpose of the District, including the redemption of Subordinated Water Bonds upon the terms and conditions set forth in a Supplemental Indenture relating to such Subordinated Water Bonds and the purchase of Subordinated Water Bonds as and when and at such prices as it may determine.

For further information regarding the allocation of Subordinated Water Revenues with respect to the Subordinated Water Bonds, see APPENDIX B- "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE- Allocation of Subordinated Water Revenues" herein.

Investment of Monies in Funds and Accounts Under the Indenture

All monies held in any of the funds and accounts held by the Trustee and established pursuant to the Indenture shall be invested, as directed by the District, solely in Investment Securities (see APPENDIX B- "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE- Definitions" for the definition of Investment Securities under the Indenture). If and to the extent the Trustee does not receive investment instructions from the District with respect to the monies in such funds and accounts, such monies shall be invested in a cash sweep or similar account arrangement of or available to the Trustee described in clause (xi) of the definition of Investment Securities.

Unless otherwise provided in the Supplemental Indenture, all interest, profits and other income received from the investment of monies in any fund or account other than the Rebate Fund shall be transferred to the Revenue Fund when received; provided, however, that an amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund or account from which such accrued interest was paid.

Under the Indenture the District may enter into an interest rate swap agreement corresponding to the interest rate or rates payable on a series of Subordinated Water Bonds or any portion thereof and the amounts received by the District or the Trustee, if any, pursuant to such a swap agreement may be applied to the deposits required under the Indenture. If the District so designates, amounts payable under the interest rate swap agreement shall be secured by Subordinated Water Revenues and other assets pledged under the Indenture to the Subordinated Water Bonds on a parity basis therewith. See APPENDIX B"SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE -Investments" herein.

Issuance of Additional Subordinated Water Bonds and Parity Debt; Junior and Subordinate Obligations

The Indenture provides conditions under which additional series of Subordinated Water Bonds or other Parity Debt payable from Subordinated Water Revenues may be issued on a parity with the

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Outstanding Subordinated Water Bonds. Among other conditions, the Indenture requires that the District shall have placed on file with the Trustee a certificate of the District certifying that the sum of: (I) the Subordinated Water Revenues plus all amounts required to be paid under the Senior Water Bond Resolution for principal, interest, reserve fund and any other debt service requirements on the Senior Water Bonds for any period of 12 consecutive months during the 18 months immediately preceding the date on which such additional Subordinated Water Bonds or Parity Debt will become Outstanding; plus (2) 90% of the amount by which the District projects Subordinated Water Revenues for such period of 12 months would have been increased had increases in rates, fees and charges during such period of 12 months been in effect throughout such period of 12 months; plus (3) 75% of the amount by which the District projects Subordinated Water Revenues will increase during the period of 12 months commencing on the date of issuance of such additional Series of Subordinated Water Bonds due to improvements to the Water System under construction (financed from any source) or to be financed with the proceeds of such additional Series of Subordinated Water Bonds, shall (4) have been at least equal to 1.1 times the amount of Maximum Annual Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt then Outstanding and the additional Subordinated Water Bonds or Parity Debt then proposed to be issued.

Refunding Subordinated Water Bonds may be authorized and issued by the District without compliance with the provisions described above, subject to the terms and conditions of the Indenture, including the condition that Maximum Annual Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt outstanding following the issuance of such refunding Subordinated Water Bonds is less than or equal to Maximum Annual Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt outstanding prior to the issuance of such refunding Subordinated Water Bonds. Sec APPENDIX B- "SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURERefunding Bonds" herein.

Pursuant to the Indenture, the District may incur obligations which are junior and subordinate to the payment of the principal, redemption price, interest and reserve fund requirements for the Subordinated Water Bonds and all Parity Debt and which subordinated obligations are payable as to principal, redemption price, interest and reserve fund requirements, if any, only out of Subordinated Water Revenues after the prior payment of all amounts then required to be paid under the Indenture from Subordinated Water Revenues for principal, redemption price, interest and reserve fund requirements for the Subordinated Water Bonds and all Parity Debt, as the same become due and payable and at the times and in the manner as required in the Indenture or the instrument authorizing such Parity Debt, as applicable.

Commercial Paper

As of December 31, 2008, the District had authorized up to $330,000,000 aggregate principal amount of Commercial Paper Notes (Water Series), of which $315,000,000 was outstanding, payable from available water revenues junior and subordinate to the payment of the principal, redemption price, interest and reserve fund requirements for the Subordinated Water Bonds and all Parity Debt. See "WATER SYSTEM FINANCES - Outstanding Debt" for a description of the District's commercial paper program. The District has initially authorized and expects to implement an extendable commercial paper note program in March 2009 pursuant to which the District will retire existing Commercial Paper Notes (Water Series) with extendable commercial paper notes.

State Loans and Federal Loan

The District participates in the State of California's State Water Resources Control Board (the "State Board") low interest rate loan program, which was established to provide below-market rate

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financing for qualified water resource projects in the State. Under this program, the District has entered into five loan contracts with the State Board (the "State Loans") in the aggregate principal amount of $47,173,629 payable from Water Revenues, of which $31,775,391 aggregate principal amount was outstanding as of December 31, 2008. State Loans entered into prior to January 1993 were silent as to the payment thereof in relation to outstanding debt of the District, and the lien priority, if any, of such State Loans is unclear. State Loans entered into since such date provide that such State Loans shall be either senior to or on a parity with all future debt of the District. For purposes of calculating debt service coverage ratios, the District has assumed that all State Loans entered into prior to 1993 arc payable from Water Revenues subordinate to payments of principal of and interest on the Subordinated Water Bonds and that all State Loans entered into after January 1993 arc Parity Debt. To date, the District has entered into two State Loans payable from Water Revenues (one relating to the Upper San Leandro Reservoir and one relating to East Bayshore Recycled Water Project) which arc subject to the parity requirement of the State Board, in an aggregate principal amount of $22,288,000, of which $21,886,310 aggregate principal amount was outstanding of December 31, 2008. See APPENDIX F- "SUMMARY OF CERTAIN PROVISIONS OF THE STATE WATER LOANS" for a summary of certain provisions of the State Loans.

In June 2002, the District received a loan from the California Energy Commission to fund energy conservation efforts (the "Energy Commission Loan"). The Energy Commission Loan is payable from Water Revenues subordinate to the payments of principal and interest on the Subordinated Water Bonds. As of December 31, 2008, the unpaid principal amount of the Energy Commission Loan was $974,860.

In 1978 and 1979, the District received a drought loan from the United States Department of Commerce to fund drought-related projects (the "Federal Loan"). The Federal Loan is payable from Water Revenues subordinate to the payments of principal and interest on the Subordinated Water Bonds. As of December 31, 2008, the unpaid principal amount of the Federal Loan was $1,281,488.

Interest Rate Swap Agreements

As of December 31, 2008, the District had outstanding the following interest rate swap agreements (collectively, the "Interest Rate Swap Agreements") with the following counterparties (collectively, the "Swap Providers") in the aggregate notional amount of $941,810,000.

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Scheduled Maturity/

Related Subordinated Notional District Termination Water Bond Issue Amount Swap Provider Pays District Recei1•es Date

Series 2002 Bonds s 153,610,000 Citigroup Financial 3.835% 65.0% of30-day 06/01/2025 Products, Inc. LIB OR

Series 2002 Bonds 76,800,000 JPMorgan Chase 3.835 65.0% of30-day 06/01/2025 Bank, N.A. LIB OR

Series 2008A Bonds 49,420,000 SBS Financial 3.115 62.3% of30-day 06/01/2038 Products Company LIBOR

Series 2008A Bonds 113,675,000 Merrill Lynch 3.115 62.3% of 30-day 06/01/2038 Capital Services LIB OR

Series 2008A Bonds 44,480,000 The Bank of New 3.115 62.3% of30-day 06/01/2038 York Mellon LIB OR

Series 2008A Bonds 113,675,000 JPMorgan Chase 3.115 62.3% of30-day 06/01/2038 Bank, N.A. LIB OR

Series 2008B Bonds/ 234,090,000 SBS Financial 3.407 91.0% of USD- 06/01/2026 Series 2008C Bonds(!) Products Company SIFMA Municipal

Swap Index

Series 2008B Bonds/ 78,030,000 Merrill Lynch 3.407 91.0% of USD- 06/01/2026 Series 2008C Bonds( I) Capital Services SIFMA Municipal

Swap Index

Series 20088 Bonds/ 78,030,000 Citibank, N.A. New 3.407 91.0% of USD- 06/01/2026 Series 2008C Bonds(ll York SIFMA Municipal

Swap Index

(lj Upon the issuance of the Series 2009A Bonds, the interest rate swap agreements currently hedging the Series 2008C Bonds are expected to be applied to hedge $330.425,000 principal amount of the Series 2009A Bonds.

The obligation of the District to make regularly scheduled payments to the Swap Providers under the Swap Agreements is on a parity with the District's obligation to make payments on the Series 2009A Bonds. Under certain circumstances, the Swap Agreements may be terminated and the District may be required to make a substantial termination payment to the respective Swap Providers. Pursuant to the Swap Agreements, any such termination payment owed by the District would be payable on a basis that is subordinate to the Series 2009A Bonds but prior to the District's Commercial Paper Notes (Water Series). In the event of early termination of any of the Swap Agreements, there can be no assurance that (i) the District will receive any termination payment payable to the District by the respective Swap Providers, (ii) the District will have sufficient amounts to pay any termination payment payable by it to the respective Swap Providers, or (iii) the District will be able to obtain a replacement Swap Agreement with comparable terms. See Note 6(f) in APPENDIX A- "EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2008" hereto for additional information regarding the terms of the Swap Agreements.

Recently, the floating rates payable to the District pursuant the Swap Agreements have not matched the variable interest rates on the associated Subordinated Water Bonds. There is no guarantee that the floating rate payable to the District pursuant to each of the Swap Agreements will match the variable interest rate on the associated Subordinated Water Revenue Bonds to which the respective Swap Agreement relates at all times or at any time. Under certain circumstances, the Swap Providers may be obligated to make a payment to the District under their respective Swap Agreement that is less than the interest due on the associated Subordinated Water Revenue Bonds to which such Swap Agreement relates. In such event, the District would be obligated to pay such insufficiency from Subordinated Water Revenues.

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The District may, from time-to-time, enter into additional interest rate swap agreements with security and payment provisions as determined by the District and subject to any conditions contained in the Indenture.

THE DISTRICT

Organization

Formation of the District was approved at an election held in portions of Alameda and Contra Costa Counties (known throughout the San Francisco Bay Area as the "East Bay") in May 1923, under the provisions of the Municipal Utility District Act. Under the Municipal Utility District Act, municipal utility districts arc empowered to acquire, construct, own, operate or control works for supplying the District and public agencies in the District with light, water, power, heat, transportation, telephone service or other means of communications, means for the collection, treatment or disposition of garbage, sewage or refuse matter, and public recreation facilities appurtenant to its reservoirs and may do all things necessary and convenient to the full exercise of powers granted in the Municipal Utility District Act. The District presently exercises only those functions relating to water supply, power generation and recreational facilities through its Water System, and sewerage and wastewater interception, treatment and disposal, within an area known as Special District No. I, through its Wastewater System. Special District No. I covers only a portion of the service area of the District. The District presently does not intend to exercise other functions. Such functions and the related facilities would not constitute part of the Water System or the Wastewater System.

District Board

The District, a public agency, is govemed by an elected seven-member Board which determines such matters as wtes and charges for services, approval of contracts, and District policy. Directors are elected by ward to staggered four-year terms. There are seven wards which together cover the entire District. Each year, the Board elects from among its members persons to serve as President and Vice President.

The following persons currently serve on the District Board:

I. Doug Linney is president of The Next Generation, a public relations firm providing services to individuals, organizations and businesses in achieving environmental protection. He is active in a number of community and environmental organizations including the Califomia League of Conservation Voters. Mr. Linney was first elected in 2000. He is currently President of the Board. His current term expires on December 31, 2012.

2. John A. Coleman is the Director of Local Govemmcnt and Community Affairs for KB Homes and has long been active in the community. He is a past president of the board of the Califomia Association of Sanitation Agencies and is past president of DERWA, the joint powers authority for recycled water service provided by EBMUD and the DublinSan Ramon Services District. He currently chairs the Upper Mokelumne River Watershed Authority and the ACWA Infrastructure and Environment Subcommittee and is the past chair of the Freeport Regional Water Authority. He is vice-chair of ACWA's Federal Affairs Committee and also serves on the boards of the Contra Costa Council, the WateReuse Association, and the East Bay Leadership Foundation. He serves on ABAG's CALFED Task Force, the Advisory Council for Califomia Forward, and chairs its Water and Land Usc Subcommittee. He is a member of the National Endangered Species Act

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Reform Coalition of the Association of California Water Agencies and serves on the executive committee of the Contra Costa Housing Trust Fund. Coleman served Governors Wilson and Davis as Deputy Director of External Affairs for the California Conservation Corps.

Long active in the community, Coleman is past president of the Lafayette Chamber of Commerce, former board member of the National Association of Service and Conservation Corps, and former member of the California Biodiversity Council. An Eagle Scout, he is Scoutmaster of Troop 243 in Lafayette. He was first elected in 1990 and is currently Vice President of the Board. His current term expires on December 31, 2010.

3. Katy Foulkes is a former mayor and council member of the City of Piedmont, is currently serving on Alameda County's Local Agency Formation Commission, and also represents the District on the Freeport Regional Water Authority and the Upper Mokelumne River Watershed Authority. She is also active in the Association of California Water Agencies and the Association's State Board. She is also Co-Chair of the Water-Land Use Committee of the Bay Area Water Forum. She was first elected in 1994. Her current term expires on December 31, 20 I 0.

4. Andy Katz is an environmental planner and community liaison for Alameda County Supervisor Keith Carson. He is active in environmental and public health organizations and is a member of the Sierra Club Executive Committee. Prior to his election, he served for five years as a member of the City of Berkeley Zoning Adjustments Board. He is interested in increasing water conservation, protecting water quality and increasing awareness and efforts to stop global warming. He lives in Berkeley and was first elected to the Board in 2006. His current term expires on December 31, 20 I 0.

5. Lesa R. Mcintosh is a law practitioner in Richmond, California, specializing in business, land usc and estate planning. She served as a member of the Richmond City Council from 1996 to 1999. She has long been active in community service, serving in the past as Commissioner of the Port of Richmond, Chair of the Richmond Public Safety Committee of the Richmond City Council, Board member of the Contra Costa County Legal Services Foundation, an instructor at Contra Costa College, and a Police Commissioner. Ms. Mcintosh was appointed by the Board of Directors in February 1999 to fill the unexpired term of Director John Gioia. She was subsequently elected to the Board of Directors in 2000. Her current term expires on December 31, 2012.

6. Frank Mellon has a long history of community involvement. He is a former Scout Master, a former Cub Master, and has been District Chair for the Tres Ranchos District of the San Francisco Bay Area Council as well as a Unit Commissioner. He is a volunteer Director for a retirement facility and is an experienced management trustee on LaborManagement trust funds. Currently, he is employed by Kaiser Permanente Hospitals in Employee and Labor Relations as management representative. Additionally, he has been an employee relations and labor relations consultant in the public and private sectors. He has provided management training or high-quality employee relations and, currently teaches labor law and safety in the California State University, East Bay Human Resources Certificate Program. He was first elected in 1994. His current term expires on December 31, 20 I 0.

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7. William B. Patterson is a retired Manager of Oakland Parks and Recreation and long active in the community. He served on Oakland's Public Ethics and Parks and Recreation Commissions and has received numerous awards for his public service. He was appointed by the Board on September 12, 1997. Mr. Patterson was subsequently elected to the Board in 2000. His current term expires on December 31,2012.

District Management

District management is comprised of:

Dennis M. Diemer was appointed General Manager in 1996 after serving as Interim General Manager and Director of Engineering and Construction since 1993. Prior to that appointment he served as Senior Environmental Engineer from 1981 to 1984, Manager of the Support Services Division from 1984 to 1988, and Assistant Chief Engineer for the Engineering Department. He holds an undergraduate degree in Civil Engineering from Loyola Marymounl University, Los Angeles, and a Master's Degree in Environmental Engineering from Stanford University.

Jylana Collins was appointed as General Counsel for the District in 2006. She joined the District in November 1994 and was appointed Assistant General Counsel in February 2005. Ms. Collins received her law degree in 1982 from the University of San Francisco School of Law and is a forrner Deputy City Attorney for the City of Berkeley. She has over 20 years of experience in public law and the representation of public agencies.

Gary Breaux was appointed Director of Finance in 1994. Prior to !hat appointment, he was Director of Finance/Treasurer for the City of Oakland, California and the Oakland Redevelopment Agency for three years. He has an undergraduate degree in Business from the University of Colorado, a Master's in Public Administration from Virginia Commonwealth University and he is a Certified Public Accountant.

Alexander R. Coate was appointed Director of Water and Natural Resources in 2007. He joined the District in 1993 and has over 24 years of water and wastewater related experience. Prior to joining the District, he was a research and engineering consultant. Mr. Coate served as Manager of Water Supply and Improvements Division for the District where he managed the implementation of the Freeport Regional Water Program immediately prior to his current appointment and, previous to that, was the District's Manager of Regulatory Compliance. He has a Bachelor's degree in Neurobiology and a Master's degree in Civil Engineering, both from the University of California at Berkeley.

Xavier J. Irias was appointed Director of Engineering and Construction in 2006. Prior to thai appointment, he was Manager of Engineering Services from 200 I to 2006. Prior to that, he was Senior Engineer in the Engineering and Construction Department from 1993 to 200 I. He joined the District in 1986. He has an undergraduate degree in Civil Engineering from the University of California at Berkeley.

Carol K. Nishita was appointed as the Director of Administration in 2007. She joined the District in September 1989, and has worked for the past ten years as the Manager of Budget and Rates. Prior to joining the District, Ms. Nishita worked for the County of San Mateo lor eight years. Ms. Nishita received her Master's Degree from the University of Chicago and her undergraduate degree from U.C. Berkeley. She has almost 30 years of experience working in public sector agencies.

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Michael J. Wallis was appointed as Director of Operations and Maintenance in 1996 after serving as Director of the Wastewater Department since 1992. Prior to that he held the positions of Manager of Support Services and Senior Civil Engineer since 1985. He has an undergraduate degree in Civil Engineering from North Carolina State University.

David R. Williams was appointed Director of Wastewater in 1997 after holding the position of Manager of Support Services. Prior to joining the District in 1993, he was Planning Division Manager at the Central Contra Costa Sanitary District. He has an undergraduate degree in Civil Engineering and a Master's in Sanitary Engineering from Purdue University and a Master's in Business Administration from the University of California at Berkeley.

Lynelle M. Lewis was appointed as Secretary of the District in February 1995. She has been with the District since August 1993. She is a Certified Municipal Clerk and a member of the City Clerks Association of California. Ms. Lewis received her Bachelor of Science degree in Business Administration from San Jose State University.

Wanda Hendrix-Talley was appointed Treasury Manager in 2006. She has been with the District since 1994 and held the position of Principal Management Analyst for the Finance Department of the District prior to her appointment. Ms. Hendrix-Talley received her Master's and Bachelor's degrees from San Jose State University.

Service Area

The District occupies an area of approximately 325 square miles in the East Bay. It covers the eastern shore of San Francisco Bay from Carquinez Strait on the north to and including San Lorenzo on the south and it extends approximately 20 miles east, beyond the Oakland-Berkeley hills, into Contra Costa County.

The District's Water System serves this entire area, reaching approximately 1.3 million people or 55% of the combined population of Alameda County and Contra Costa County. Approximately twothirds of the population of the District resides in the cities of Alameda, Berkeley, Oakland, San Leandro, Richmond and Walnut Creek.

The Municipal Utility District Act was amended in 1941 to enable formation of special districts for the provision of wastewater services. In 1944, voters in six East Bay cities elected to form the District's Special District No. I to treat wastewater released into the San Francisco Bay. The District began wastewater treatment in 1951. In 1971, the District annexed Kensington, El Cerrito and a part of Richmond to Special District No. I. The Wastewater System presently serves approximately 642,000 people in an 83-square-milc area of the two counties along the east shore of the San Francisco Bay, extending from Richmond on the north, southward to San Leandro.

Annexations, Ultimate Service Area and Spheres of Influence

Originally formed to include nine cities covering 92.6 square miles on the east side of San Francisco Bay, the District has grown by annexation to a present area of 325 square miles including 20 cities and 15 unincorporated communities in both Alameda and Contra Costa Counties.

There have been more than 450 separate annexations, both of unincorporated territory and hy Cities within the District. As required by State law, the Local Agency Formation Commissions ("LAFCO") in Alameda County and Contra Costa County have established the "spheres of influence" for the District, which define the area which may be annexed to the District. The spheres of influence arc

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consistent with the urban spheres established for the cities and other special districts in the area and include the District's present service area and adjacent lands which the LAFCOs anticipate will need water service from the District in the foreseeable future. The LAFCOs are required to periodically review and update the sphere of influence. Territory annexed to the District is currently required either to contribute a local distribution system or to pay the charges to finance one, and to pay an annexation fee of $600 per acre and certain other fees.

The District established and has revised tram time to time an ultimate service area boundary. The land area between the present service area boundary and the ultimate service area boundary, or approximately 75 square miles, includes some areas of potential development. However, a large part of it is parklands and other undeveloped lands which arc not anticipated to be developed in the foreseeable future. Another 81 square miles within the ultimate service area outside the District's present service area boundary is under the waters of the San Francisco and San Pablo Bays. The ultimate service area boundary is limited on the west and north by the shorelines of the San Francisco and San Pablo Bays. The ultimate service area boundary is limited on the south and northeast by adjoining water agencies which have sources of supply independent of the District. On the west and east sides of the City of San Ramon, potential new development, now in the early stages of land usc planning and environmental documentation, is located just outside the ultimate service area boundary.

Insurance

The District uses a combination of self-funding and insurance coverage in the District's risk management program. The program provides protection lor the District's buildings and facilities, including their contents and equipment, from tire, explosion and related perils including earthquake and flood, and provides protection to the District from liability for bodily injury and property damage which may arise from the District's operations, including but not limited to usc of its property, facilities, or vehicles. The District also maintains fidelity protection against fraudulent acts of employees. The District self-funds workers' compensation risks up to $5,000,000 per occurrence and carries excess insurance coverage up to the statutory limit required by State law.

The District maintains a reserve of approximately $10,000,000 which is earmarked to pay both liability and workers' compensation claims. Selected other coverages include the following:

$90 million of commercial, general and auto liability insurance subject to a $10 million self-insured retention for each of the Water System and the Wastewater System;

S 125 million in coverage for District all risk property insurance subject to a deductible of $100,000;

$25 million in coverage for flood perils, subject to a deductible of S 1.5 million per occurrence;

S l 0 million in coverage for boiler and machinery insurance subject to a $25,000 selfinsured retention; and

$10 million in coverage for crime insurance subject to a deductible of $25,000.

Employee Relations

The District has approximately l ,647 regular employees in the Water System and approximately 265 regular employees in the Wastewater System.

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The District has four unions representing approximately I ,718 workers out of a total full-time equivalent workforce of I ,912 employees: Local 2019 of the American Federation of State, County and Municipal Employees ("AFSCME") represents white collar workers including professionals; Local 444 of AFSCME represents blue collar workers; Local 21, International Federation of Professional and Technical Engineers represents supervisory employees; and Local 39, International Union of Operating Engineers represents water treatment/distribution workers.

Locals 2019,444,21 and 39 are operating under Memoranda of Understanding ("MOUs") which expire on April 24, 20 II. The MOUs are comprehensive in scope and provide for binding arbitration for the resolution of grievances.

The District adopted a voluntary Affirmative Action Plan in 1975, which is continuously updated, with the goal of proportional representation of men and women of all races in all District job categories relative to local labor market availability.

The District has exceeded parity with the civilian labor market of minority groups residing in the counties of Alameda and Contra Costa for total minority representation and has greatly increased the representation of women in the work force. Recruitment and promotion continue to be focused on achieving a better distribution of racial minorities and women among all job categories.

Contract Equity Program

The District established the Contract Equity ("CE") Program to implement Policy 1.03 to "Prevent the District from participating in or perpetuating ongoing discrimination in the marketplace" and Policy 1.04 to "Ensure that all enterprises that do business with the District take lawful and adequate steps to assure that their employment practices comply with EEO laws." The CE Program also has incentives to promote participation of small businesses and local businesses on District contracts.

Employees' Retirement System

Regular and full-time employees of the District (including the Water and Wastewater Systems) are members of the District Employees' Retirement System ("Retirement System"), which was established in 1937 to provide retirement, disability, and survivorship benefits. As of June 30, 2008, collectively for the Water and Wastewater Systems, there were 1,795 active plan members, 234 terminated plan members entitled to but not yet receiving benefits and l, 199 retirees and beneficiaries receiving benefits. Employees of the District are covered by Social Security.

The retirement plan is a defined benefit plan providing a retirement allowance determined by the employee's compensation in the last years of employment and the length of employment with the District. The payment of benefits earned by employee members of the Retirement System are obligations of the District.

Contributions to the Retirement System are made by the members and the District. Each member's contribution is based upon a percentage of that member's covered compensation. District contributions are based upon percentages of the aggregate amount of members' covered compensation. Contribution percentages arc established by the Board of Directors of the District. Such percentages are based upon actuarial valuations.

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Active members, total plan assets, net District contributions and retirement allowances paid in the last five Fiscal Years have been:

Allowances Fiscal Year Active Total Plan (Net) District Paid From

Ended June 30 Members(!) Asset.-12! Contrihution13! Retirement Plan

2004 2,018 $640,640,512 $27,831,130 532,853,312 2005 2,014 694,590,000 32,806,000 38,066,000 2006 2,010 763,455,000 35,635,000 42,298,000 2007 2,027 911,104,000 39,332,000 46,189,000 2008 2,029 838,614,000 44,603,000 50,476,000

(IJ Includes active plan members and terminated plan members entitled to but not yet receiving benefits. (2

) Market value as of June 30 of such Fiscal Year. Although a more current valuation is not available, the District expects that such market value has declined since June 30, 20m.t

O) Approximately 85% of the District's annual contributions are attributable to the Water System. Source: The District.

Under the ordinance governing the Retirement System, the District is required to have an actuarial study performed at least every two years. The actuarial report provides a basis for the Board's decision regarding the rate of contributions by the District to the Retirement System. The unfunded actuarial accrued liability ("UAAL") is currently being funded on a layered approach. Each layer of the UAAL is being funded over a separate 30-ycar period (except for one 9-year period), starting from the date the layer was originally established. The District is making the contribution using rates determined by its outside actuaries.

The Retirement System's current asset allocation target was adopted by the Board in March 2005. The fixed income allocation target of 25% of plan assets is managed by a combination of active and passive asset strategies. Western Asset Management Co. of Pasadena, California provided active management with the passive strategy reflecting the Lehman Aggregate index managed by Northern Trust Globallnvestmcnts of Chicago.

The equity allocation target of 70%, consisting of 40% large cap domestic eqmt1cs, 20% of international equities, and 10% small cap domestic equities is managed in a combination of active and passive strategies. Large cap domestic equities (growth) is managed by IN TECH, T -Rowe Price and complemented by Barrow, Hanley, Mcwhinney & Strauss of Dallas, Texas managing the "value" portion of the allocation. The 20% international equity allocation is managed by Franklin/Templeton Funds of Fort Lauderdale and Fisher Investments, Inc. of Woodside, California. The 10% small cap equity allocation is managed by Mazama Capital Management of Portland, Oregon, Opus Capital Management of Cincinnati, Ohio, and Northern Trust Global Investments manages a passive allocation in the Russell 1000 Index.

In 2006, an allocation of 5% in real estate was added to the portfolio and the RREEF America II Fund was added to manage that allocation.

The Segal Company has completed an actuarial study of the retirement system including the pension and health insurance benefit trusts as of June 30, 2008. The retiree health liabilities reported in the Segal Company study and described herein will not match those required to be used for GASB disclosure. The liabilities as reflected in such study have not yet been adjusted to include the implicit retiree rate subsidy required under GASB disclosure. Also, it is likely that the GASB liabilities will be determined based upon a different discount rate than the 8.25% used in the study. The liabilities

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calculated under the GASB parameters will likely be higher than those reported in the study and described herein. As of June 30, 2008, the market value of the plan's assets was $838,614,000 and the projected benefit obligation ("PBO") was S I ,288,619,000, resulting in a funding ratio of the plan under the PBO valuation of 65.1 %. Under the plan provisions, cost of living increases of up to 5% arc granted when the plan is 85% funded as calculated on the PBO basis. Although a more current valuation is not available, the District expects that the market value of the plan's assets has declined since June 30, 2008.

The combined Actuarial Accrued Liability for pension and health benefits at June 30, 2008 was S I ,336,947,000. The Actuarial Value of Assets was $907,927,000 resulting in an Unfunded Actuarial Accrued Liability of $429,020,000 and a funded ratio of 67.9%. The liabilities for the pension benefits arc calculated in compliance with Statement No. 25 and Statement No. 27 of the Governmental Accounting Standards Board ("GASB"), "Financial Reporting for Defined Benefit Pension Plans, Note Disclosures for Defined Contribution Plans" and "Accounting for Pensions by State and Local Governmental Employers." The Actuarial Accrued Liability, Actuarial Value of Assets, the Unfunded Actuarial Accrued Liability and Funded Ratio as June 30 of each of the last five Fiscal Years has been:

Unfunded Fiscal Year Actuarial Accrued Actuarial Value of Actuarial Accrued

Ended June 30 Liability!'! Assets0! Liability(/) Funded Ratio0!

2004 $ 949,020,000 $665, I 02,000 $283,918,000 70.08% 2005 I ,018,508,000 696,354,000 322,154,000 68.37 2006 l,lll,l59,000 744,230,000 366,929,000 66.98 2007 I ,20 I ,950,000(2) 831,306,000 370,644,000 69.16 2008 1,336,947,000 907,927,000 429,020,000 67.91

OJ Includes Actuarial Accrued Liability and Achmrial Value of Assets of District's health insurance benefit obligations to the Retirement System. The District estimates that 85% of the Unfunded Actuarial Accrued Liability is attributable to the Water System.

(2J The implicit health insurance benefit subsidy was an additional $29,565,000 when measured using a discount rate of 8.25%.

Comparable information for 2008 not yet available. Source: The District.

The valuation study has used the entry age normal actuarial method applied in the aggregate to determine recommended District contributions. The Retirement System's assets were valued at market for accounting purposes, the investment rate assumption was 8.25% per annum and salaries were assumed to increase based on service ranging from as high as 10.00% for less than I year of service to as low as 4. 70% for eight or more years of service. Although a more current valuation is not available, the District expects that the market value of the Retirement System's assets has declined since June 30,2008.

Post Retirement Health Benefits. The Actuarial Accrued Liability of June 30, 2008 of S I ,336,947,000 described above includes the Actuarial Accrued Liability of the District's health insurance benefit obligations to the Retirement System (the "HIB") of S91 ,954,000, which is based on vcstable plan health insurance benefits in effect at June 30, 2008. At June 30, 2008, $84,944,000 of the Unfunded Actuarial Accrued Liability was attributable to HIB. The Actuarial Value of Assets attributable to HIB as of June 30,2008 was $7,010,000, resulting in a funding ratio of7.6%.

Additional information concerning the Retirement System, including the HIB, may be found in APPENDIX A - "EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2008" herein.

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District Investment Policy

Funds of the District are invested in accordance with the Government Code of the State, the Municipal Utility District Act and the District's investment policy. The four primaty investment criteria set forth in the District's written investment policy arc (in order of priority) ( l) preservation of principal, (2) maintenance of liquidity, (3) yield and (4) diversity. In order to keep funds available to meet commitments, the District's investment policy provides that the maturity date of individual investments shall not exceed five years and that the average maturity of the portfolio shall not exceed 720 days. Investments permitted by the District's current investment policy include U.S. Treasury notes, bonds and bills, the State of California Local Agency Investment Fund, obligations issued by federal agencies, bankers' acceptances and commercial paper rated in the highest short-term rating category, as well as collateralized repurchase agreements, certificates of time deposit with maturities not to exceed five years and negotiable certificates of deposit, with maturities not to exceed two years, medium term corporate notes with maturities not to exceed five years, and California municipal bonds with maturities not to exceed five years. Monies in the funds and accounts held by the Trustee under the Indenture may be invested only in Permitted Investments, as defined therein. The District docs not enter into reverse repurchase agreements or otherwise borrow for purposes of investing, and the District does not invest in highly volatile derivatives and other such securities. See Note 2 in APPENDIX A - "EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2008" hereto for a description of the District's investment portfolio.

Pursuant to the District's investment policy, all securities purchased from dealers and brokers are held in safekeeping by the trust department of a state or national bank on a payment vs. delivery basis. Collateral is delivered or assigned under a tri-party agreement for all repurchase agreements. Trade confirmations are reviewed for conformity to the original transaction by an individual other than the one who originated the transaction. Transactions arc ratified by the General Manager and reported quarterly to the Finance/ Administration Committee of the Board.

THE WATER SYSTEM

General

The District's Water System currently serves the cities of Alameda, Albany, Berkeley, Danville, El Cerrito, Emeryville, part of Hayward, Hercules, Lafayette, Moraga, Oakland, Orinda, Piedmont, Pinole, part of Pleasant Hill, Richmond, San Leandro, San Pablo, San Ramon, and part of Walnut Creek, and the unincorporated communities of Alamo, Ashland, Blackhawk, Castro Valley, Cherryland, Crockett, Diablo, El Sobrante, Fairview, Kensington, North Richmond, Olium, Rodeo, San Lorenzo and Selby.

The District supplies water for major parts of Alameda and Contra Costa Counties. Approximately 1.3 million people are served by the District's Water System in an approximately 325 square-mile area extending from Crockett on the north, southward to and including San Lorenzo, encompassing the major cities of Oakland and Berkeley, and eastward from San Francisco Bay to Walnut Creek.

Water Supply

The District's water supply currently is obtained from two sources: the 627-square mile Mokelumne River watershed in the Sierra Nevada mountains, and the runoff from streams within the District. Approximately 90% of the District's current water supply is derived from the Mokelumne River watershed.

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Mokelumne River Watershed. The average runoff of the Mokelumne River is 670 million gallons per day. As described below under "Water Rights and Related Proceedings," the District has water rights permitting the total diversion of 325 million gallons per day or 119 billion gallons (365,000 acre-feet) per year from the Mokelumne River, subject to prior water rights. Average annual water consumption in the District has not exceeded 220 million gallons per day.

The annual Mokelumne River runoff during the ten-year period from 1999 to 2008 has ranged from a daily average low of 340 million gallons per day in 200 I to a daily average high of I ,30 I million gallons per day in 2006, with a ten-year average of 95% of average runoff. In 1977, the lowest year of record since records have been kept, the annual runoff from the Mokelumne River was 129,000 acre-feet (an average of 115 million gallons per day). Faced with the possibility of future drought conditions, the District has developed a conservation program (described below under "Water Conservation") and has developed its Water Supply Management Plan to maximize use of existing resources, improve delivery of water, provide sccuriry of supply and meet long-term water needs. The plan is discussed below under "Water Supply Management Plan."

The Mokelumne River watershed also serves municipal, industrial and agricultural water needs in three Sierra foothill counties (Amador, Calaveras, and San Joaquin), in addition to the municipal and industrial needs of the District's service area. The agencies and individual divertcrs on the Mokelumne River each operate and divert water under separate entitlements, permits and licenses, along with a number of contracts and agreements among various agencies and under certain court decrees.

Entities with water rights in the Mokelumne River watershed senior to those of the District include Pacific Gas and Electric Company ("PG&E"), Amador Water Agency and Jackson Valley Irrigation District (for a total potential consumptive diversion of 20,000 acre-feet per year in Amador County); Calaveras County Water District and Calaveras Public Utility District (for a total of27,000 acrefeet per year in Calaveras County); and Woodbridge Irrigation District and the City ofLodi (for a total of 63,600 acre-feet in normal and wet years and 42,600 acre-feet in dry years in San Joaquin County). Sec "-Water Supply Management Plan" herein for discussion of potential affects of projected increased usc of senior water rights holders on District water supplies and the District's efforts to increase future supply through multiple water supply projects. In addition, the District's water rights permit from the State for the Camanche Reservoir presently requires that minimum releases be made from Camanche Reservoir for the protection of downstream fisheries.

Local runoff In normal water years, District reservoirs in the East Bay receive an additional 30,000 acre feet of water from local watershed runoff. Much of the local runoff is stored in the East Bay reservoirs for system use. In dry years, evaporation and other reservoir losses can total more than the runoff. Thus, there is no firm yield from local watersheds.

United States Bureau of Reclamation Central Valley Project Contract. In December 1970, the District entered into the Central Valley Project Contract ("CVP Contract") with the United States Bureau of Reclamation ("Bureau") entitling the District annually to take up to 150,000 acre-feet (I 34 million gallons per day) of American River water from the Folsom-South Canal Unit of the Bureau's Central Valley Project ("CVP"). The CVP Contract was superseded on July 20,2001 by an Amendatory Contract ("Amendatory Contract"), which, in turn, was superseded on April 10, 2006 by a Long-Term Renewal Contract ("Long-Term Renewal Contract"). The Long-Term Renewal Contract has a term of 40 years, with a right of renewal for an additional 40 years available to the District. The Long-Term Renewal Contract includes as points of diversion of CVP water: ( 1) a location on the Sacramento River ncar the community of Freeport, and (2) a location on the lower American River near the 1-5 highway bridge. See "-Water Supply Management Plan- Freeport Regional Water Project" herein. Under the Long-Term Renewal Contract, the District is entitled to receive deliveries of up to 133,000 acre-feet (I 19 million

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gallons per day) of CVP water in a single dry year, and no more than 165,000 acre-feet over the course of any three consecutive dry-year periods. The District does not currently have completed infrastructure to receive water deliveries pursuant to the CVP Contract. The Freeport Regional Water Project will provide a connection to the existing Mokelumne aqueducts and is under construction, with a projected completion date in late 2009. The Freeport Regional Water Project is projected to be operational for the delivery of CVP water under the Long-Term Renewal Contract in dry years commencing in 2010. See"- Water Supply Management Plan- Freeport Regional Water Project" herein.

Water Facilities

Pardee Reservoir. The District's Mokelumne River water is collected and stored at Pardee Reservoir, located in the Sierra Nevada foothills 90 miles cast of the District and 38 miles northeast of Stockton. Pardee Reservoir was completed in 1929 and has a storage capacity of 197,950 acre-feet.

Camanche Reservoir. Camanche Reservoir, located ten miles below Pardee Reservoir on the Mokelumne River, was completed in 1964. Camanche Reservoir has a capacity of 417,000 acre-feet and serves to control floods and to regulate the river flow in order to satisfy downstream water rights. During the 1988 drought, Camanche Reservoir became virtually dry, dropping to just 8,500 acre feet, or 2 percent of capacity.

Terminal Reservoirs. Five terminal reservoirs, located within the District's service area, San Pablo (completed in 1919 with a capacity of 38,600 acre-feet), Briones (completed in 1964 with a capacity of 60,500 acre-feet), Lafayette (completed in 1928 with a capacity of 4,250 acre-feet), Upper San Leandro (completed in 1926 with a capacity of 41,400 acre-feet) and Chabot (completed in 1875 with a capacity of 10,300 acre-feet), provide usable storage of about 155,000 acre-feet, equal to a four to sixmonth water supply.

Sec"- Current Water Conditions Update" herein for information regarding the District's current water storage levels.

Aqueducts. Raw untreated water is transported 91.5 miles from Pardee Reservoir, through the Pardee Tunnel, the Mokelumne Aqueducts and the Lafayette Aqueducts, to the District's service area, where it is stored in terminal reservoirs or delivered directly to treatment plants prior to distribution. The Pardee Tunnel is an 8-foot-high horseshoe structure 2.2 miles long. The three Mokelumne Aqueducts, completed in 1928, 1949 and 1963, respectively, have a combined capacity of 200 million gallons per day ("MGD") under gravity flow, and approximately 325 MGD with existing pumping facilities. The first Mokelumne Aqueduct is 5 feet, 5 inches in diameter, the second is 5 feet, 7 inches, and the third is 7 feet, 3 inches. All arc steel pipelines extending 82.2 miles from the Pardee Tunnel to the east end of the two Lafayette Aqueducts in Walnut Creek. Approximately nine miles of pipeline is above-ground and the balance is below-ground.

Lafayette Aqueduct No. I is a 9-foot in diameter circular concrete pipe and three tunnels that extend 7.1 miles from Walnut Creek to the Orinda Filter Plant. Lafayette Aqueduct No.2 is a 9-foot in diameter concrete pipe with seven tunnels extending 7.3 miles to the Briones Diversion Works near Orinda. The supply is then pumped (or diverted) through the 7-foot, 6-inch diameter steel Briones Aqueduct into Briones Reservoir, discharged into San Pablo Reservoir, or diverted through the 7-foot, 6-inch diameter steel Orinda Raw Water Line to Orinda Filter Plant. Either or both Lafayette Aqueducts can be used to divert Mokelumne River water from Pardee directly or indirectly to all of the District's water treatment plants.

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On June 3, 2004, a levee break occurred in central San Joaquin County in an area commonly known as the "Delta" located near the City of Stockton, California. As a result of the break, the Upper Jones Tract was inundated with water covering approximately 12,000 acres to a depth of some 16 feet.

Portions of the Mokelumne Aqueducts were submerged in the flood-waters from the break causing damage and corrosion to all three main pipes. State Emergency Services took approximately six months to pump out the flood waters. The damage to the Mokclunmc Aqueducts is currently estimated at approximately S I 0 million. The structure of the pipelines has been inspected and there is no instability or concern that the damage would cause the pipes to fail. The nature of the repairs is limited to repairing and replacing the aqueduct coatings to protect them from further corrosion. The repair work commenced in the spring of 2007 and is anticipated to be completed in the fall of 2009.

Tunnels. Untreated water from San Pablo and Upper San Leandro Reservoirs is delivered to filter plants through two horseshoe tunnels. San Pablo Tunnel is 5 feet in diameter and carries water 2.57 miles from the San Pablo Reservoir to the San Pablo Water Treatment Plant. Upper San Leandro Tunnel is 6 feet, 6 inches in diameter and carries water 1.35 miles from Upper San Leandro Reservoir to the Upper San Leandro Water Treatment Plant.

Pumping Plants. The majority of the Water System is gravity-fed, with seasonal pumping. Walnut Creek No. I and No.2 Pumping Plants, built in 1958, and Walnut Creek No.3 Pumping Plant, built in 1972, increase the capacities of the Mokelunme Aqueducts. When operating, these three pumping plants increase the combined capacity of the aqueducts to over 325 MGD. The Moraga Pumping Plant and Aqueduct, placed in service in 1975, supply water from the Lafayette Aqueducts to Upper San Leandro Reservoir. The plant's four pumps have a combined delivery capacity of 105 MGD; however, the configuration of the existing outlet works limits delivery to a maximum rate of 58 MGD. The Moraga aqueduct is six miles of 5.5-foot, 5-foot and 4-foot steel and concrete pipe between Lafayette and the Upper San Leandro Reservoir ncar Moraga. The Briones Pumping Plant and Aqueduct were placed in service in 1965 following completion of Briones Reservoir. These facilities supply Briones Reservoir with Mokelumne River water. Briones No. 2 Pumping Plant was constructed in 1980. Briones No. I Pumping Plant was retired in June, 1997. The four pumps in the Briones No.2 Pumping Plant can deliver up to a total of 60 MGD.

Treatment Plants. Water delivered to the District's customers is first treated at one of six treatment plants. The six water treatment plants in the District's Water system are capable of filtering and processing a combined total of more than 375 million gallons of water daily. The water treatment plants arc Upper San Leandro in Oakland, San Pablo in Kensington (standby only), Sobrante in El Sobrante, and plants located in and named for Orinda, Lafayette and Walnut Creek. Orinda Water Treatment Plant is the largest, with a peak capacity of 200 MGD. The highest recorded water usc for a single day was 377 million gallons on July 14, 1972.

Distribution Facilities. From the Orinda Water Treatment Plant treated water is carried 3.41 miles through the Claremont Tunnel, a 9-foot-diametcr horseshoe bore to three distribution aqueducts. The water distribution network includes 4,000 miles of pipe, 131 pumping plants and 175 neighborhood reservoirs (including approximately 130 above-ground concrete or steel reservoirs), having an operating capacity of 870 million gallons. The District's service area is divided into 125 pressure zones, ranging in elevation from sea level to I ,450 feet. About 60 percent of treated water is distributed to customers by gravity flow.

Pardee and Camanche Power Plants. Since 1930 the District has generated hydroelectric power with two turbines at Pardee Dam (the "Pardee Power Plant"). ln 1983, the District added a third generating unit to the Pardee Power Plant and constructed a power plant at Camanche Reservoir to double

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total generating capacity to 39 megawatts, and generate about 145,000 megawatt hours in a normal year, enough to serve a community of 30,000. The power is currently being sold to the Sacramento Municipal Utility District. See "WATER SYSTEM FINANCES- Sources of Funds."

Water Rights and Related Proceedings

Mokelumne River Rights. The District holds permits and licenses issued by the State Board which enable the District to utilize waters of the Mokelumne River as the primary source of the water supply for the District's service area. These appropriative Mokelumne River rights include a license, which has a priority date of 1924, entitling the District to divert up to 200 million gallons per day to its service area from the Mokelumne River, and a permit, which has a 1949 priority, entitling the District to divert up to an additional 125 million gallons per day to the service area. The District has completed construction of the water diversion and storage facilities authorized by the permit for the diversion of up to the additional 125 million gallons a day and has petitioned the State Board to extend the permit beyond its stated expiration date in the year 2000, allowing additional time to put the entitlement to full beneficial usc. The State Board posted a public notice of the petition in January 2007, commencing a formal proceeding which includes an opportunity for other entities to protest the District's petition. The protest period ended on February 9, 2007, resulting in seven protests. The District had 180 days within which to resolve the protests from the date which the State Board accepted the protests as valid. The State Board accepted portions of the protests in November 2007. Since all of the protests were not dismissed, a hearing before the State Board on the petition is likely to commence at some point in 2009 or 20 I 0. Although the District is unable to predict the final outcome of these proceedings at this time, the District docs not expect that such proceedings will materially adversely affect its water supply or operations. In accordance with the California Environmental Quality Act ("CEQA"), the District issued a Notice of Preparation ("NOP") of an Environmental Impact Report ("EIR") for the permit extension in November 2008. The comment period for the NOP closed on December ll, 2008, and the District received seven comment letters. The District will consider the comments in preparing the draft EIR for public review in 2009. In addition to the water rights described above, the District also has a series of rights for the production of hydroelectric power at Pardee and Camanche Dams. The District also holds rights associated with its local reservoirs.

The District has a series of agreements with various entities which arc incorporated into or relate to the Mokelumne River water rights and arc important to Water System operations. One series of agreements concerns fisheries issues, particularly mitigation of the impact of the construction of Camanche Dam and Reservoir on historic spawning grounds for anadromous fish. These agreements became the subject of controversy in the late 1980's, particularly as a result of drought-related fisheries problems both in the Mokclunme River and in the State-operated hatchery the District constructed below Camanche Dam.

Supplemental Water Supply Project. On June 26, 2001, the District certified the Supplemental Water Supply Project ("SWSP") Environmental Impact Report/Environmental Impact Statement ("EIR/EJS") for utilization of the District's CVP supplemental water supply contract (sec "- Water Supply- Uniled States Bureau of Reclamation Central Valley Project Contract" above). Concurrently with certification of the EIR/EJS, the District executed the Amendatory Contract which was subsequently superseded by the Long-Term Renewal Contract that provides for alternative points of delivery for the contract supply, including a point of delivery on the Sacramento River ncar Freeport. See "- Water Supply Management Plan- Freeport Regional Water Project" herein. There is currently no litigation pending challenging the District's CVP Contract.

Central Valley Project Improvement Act. In 1992, Congress enacted the Central Valley Project Improvement Act ("CVPIA ") which provides environmental protections for fish and wildlife in the

34

operation of the CVP. In 2000, the Bureau issued a Record of Decision on the CVPIA Programmatic Environmental Impact Statement ("PElS"). The PElS identified the impacts to CVP Contract water supplies as a result of implementing the new fish and wildlife protection provisions of CVPIA. All CVP contractors will be subject to shortages in CVP supply during dry years. The CVPIA requires that aJI CVP contracts contain provisions consistent with the CVPJA, including provisions for conservation and tiered prices. The District has executed the Long-Term Renewal Contract. See"- Water SupplyUnited States Bureau of Reclamation Central Valley Project Contract" above.

Delta Vi•·ion and Bay Delta Conservation Plan. Between 1995 and 2006, the main venue for policy decision making in the San Francisco Bay-Delta estuary was the CALFED Bay-Delta Program. This was a consensus-based effort to dcvclop solutions to ecosystem health, water supply reliability, water quality, and Delta levee problems. The federal and State CALFED agencies sought to work collaboratively with the urban and agricultural water agency and stakeholder interests. While some progress was made on ecosystem restoration and water conservation, the CALFED program failed to substantiaJly address the intensifying problems of declining fish populations, water supply reliability, and levee vulnerability in the Delta. The effort was further compromised by a shortfaJI in funding, first from the federal government and then from the State as previously approved bond funds were depleted.

In December 2006, the Governor announced the creation of a "Delta Vision" process to develop a sustainable management plan for the Delta resources over the next 100 years. To lead this effort, the Governor appointed a Blue Ribbon Task Force to study alternatives and propose a plan. In December 2007, the Task Force released its Delta Vision document which articulated the "co-equal" goals of a reliable water supply and restoring the Delta ecosystem. Since then, the Task Force has finalized and submitted a strategic plan for the Delta Vision, with seven broad goals to guide the implementation of the Delta Vision. It is widely anticipated that a number of legislative bills will be introduced in 2009 to implement portions of the strategic plan.

In addition, the California Department of Water Resources ("CDWR") is leading the devclopment of the Bay Delta Conservation Plan ("BDCP") to meet the requirements of the federal and state Endangered Species Acts in the operation of the export projects in the Delta. Numerous water users (primarily exporters) are seeking permits through this process, which is also joined by public interest groups that arc mainly focused on the ecosystem protections that will be incorporated as permit conditions. The BDCP is expected to be completed in 2010, and is expected to include a recommendation to build a peripheral canal to convey a portion of the export water supply around the Delta.

One of the main achievements for the District in the 2008 legislative year was the passage of SB XXI (Perala), which appropriated $821 million from previous voter-approved bond measures (Propositions IE, 84, 50, 13 ). In recognition of the statewide interest in District infrastructure, the bill allocates a total of $45 million in State funds: $35 million to reinforce levees that protect the District's Mokelumne Aqueducts in the Delta and another S 10 million to construct interconnections between the aqueducts to provide redundancy in case of partial failure. Due to the State's current economic downturn and State budget delays, no assurance can be given on the timing of receipt of such funds.

Water Treatment

Drinking water supplies are subject to increasingly stringent State and federal water quality standards. Currently, the State and the federal government regulate over 100 potential contaminants. Because the District's water supply comes primarily from a remote, semi-protected watershed, it requires only minimal treatment to meet these health standards. The District's drinking water is sampled and tested on an ongoing basis from all parts of the Water System to ensure that it meets or surpasses all primary (health related) and secondary (aesthetic) regulatory standards established by the United States

35

Environmental Protection Agency ("USEPA") and the California Department of Health Services. Test results on the District's water consistently show that regulated constituents of drinking water either arc not detected at all, or they arc present in amounts well below limits permitted by State and federal drinking water standards.

Water Consumption

The current number of accounts and consumption by customer type are shown in Table I below. Approximately 92% of the District's accounts arc residential, but because residential consumption per account is lower than for other customer types, they account for only 60% of consumption and provide 62% of revenues. Commercial accounts consume approximately 23% of the District's water and provide 23% of its revenues, while making up approximately 6% of its accounts. The District has five large customers: Chevron U.S.A. Inc. and its subsidiaries; Tosco Refinery; the University of California; the C&H Sugar Company; and Golden Rain Foundation (Rossmoor). In Fiscal Year 2008, the five largest customers consumed approximately 11.6% of the District's water; Chevron U.S.A. Inc. alone consumed 6.4%.

Table I NUMBER OF ACCOUNTS AND METERED ANNUAL CONSUMPTION

By Customer Type As of June 30, 2008

Type of Number of Percent of Annual Consumption12i Percent of Customer Connection/1! Connections (Thousands ofCcf) Consumption

Residential 351,631 92% 55,997 60% Commercial13l 26,675 6 21,351 23 Industriai1'l 1,221 I 8,285 9 Othcr1'l 2 376 _I 7 580 ~

Total 381 903 100% 2l.lli 100%

<O Connections include inactive services and individual meters grouped and billed as single accounts. <2J Metered water consumption shown here is water delivered and billed to customers. Gross water consumption shown

in Table 2 includes water lost through leaks in the transmission system, used in the treatment process, evaporation, fighting fires and other miscellaneous causes, which approximates I 0% of gross consumption. "Ccf' is the abbreviation for hundred cubic feet.

(Jl Includes the University of California and Golden Rain Foundation. (4

) Includes Chevron U.S.A., Inc., C&H Sugar Company and Tosco Refinery. (j) Includes public agencies and reclaimed water customers. Source: The District.

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Gross water consumption in the District since Fiscal Year 1999 is shown in Table 2 below.

Table 2 GROSS WATER CONSUMPTION<'>

(in MGD)

Average Consumption Peak Fiscal Year Annual Consumption Per Day Demand

1999 76,856 211 322 2000 78,850 215 341 2001 78,877 216 312 2002 77,173 211 312 2003 77,760 213 373 2004 82,088 225 310 2005 74,666 205 310 2006 77,178 211 3 11 2007 76,932 211 329 2008 75,059 205 288

(I) Gross water consumption includes water lost through leaks in the transmission system, used in the treatment process, evaporation, fighting fires and other miscellaneous causes, which approximates 9.5% of gross consumption.

Source: The District.

Current Water Conditions Update

Mokelumne River runoff for Water Year 2008 which ended September 30, 2008 was 410,000 acre-feet or 55% of the long-term average of 740,000 acre-feet. The District's total storage on September 30, 2008 was 414,000 acre-feet. Earlier in the spring when storage was projected to be below 500,000 acre-feet on September 30, 2008, the District implemented a voluntary conservation plan and in May 2008, the District implemented mandatory restrictions on water use, in accordance with its Drought Management Program. A target savings of 32,000 acre-feet (15%) was established for the period of May 2008 though May 2009. As of February 8, 2009, District customers were successful in reducing demand by 17,279 acre-feet since the start of such period. Due to the lower than normal runoff for Water Year 2008 runoff, flood control releases were not required and all reservoirs were operated normally.

Water Year 2009, which began on October 1, 2008, has been dryer than normal. As of February 24,2009, the current median runoff forecast for Water Year 2009 is 500,000 acre-feet. The projected year end storage is 470,000 acre-feet, which will fill Pardee Reservoir, which is the District's primary drinking water supply reservoir.

Total Water System storage, as of February 24, 2009, was 60% of capacity or 74% of average for this time of the water year. Combined Pardee and Camanche reservoir storage is at 70% of average while the East Bay Reservoirs are at 89% of average storage. The San Pablo Reservoir level is currently at 72% of average due to the San Pablo Dam Seismic Upgrade Project. Current Mokelumne Basin Precipitation is at 66% of average and the East Bay Precipitation is at 47% of average.

37

The table below sets forth the current capacity and water storage levels at the District's water reservoirs.

Capacity Current Storage %of %of Data as of 2/24/2009 (acre feet) (acre feet) Capacity Average

Mokelumne

Pardee 197,950 174,060 88% 98% Camanche 417,120 154,110 37 52

Total Mokelumne 615,070 328,170 53 70

Terminal Reservoirs

Briones 60,510 56,410 93% 98% USL 37,960 29,420 78 89 San Pablo 38 600(I) , 24,270 100(1) 72 Chabot 10,350 8,300 80 89 Lafayette 4,250 3,650 86 94

Total Terminal Reservoirs 137,220 122,050 89 89 Total System Storage 752,290 450,220 60 74

(JJ Actual current capacity has been reduced to approximately 24,150 acre-feet due to the San Pablo Dam Seismic Upgrade Project. The percentage of capacity reflected is based on such current reduced capacity level. See ''Capital Improvement Program-Regulatory Compliance'' below.


Depending on the final storage projections at the end of the spring runoff, the District may again implement its Drought Management Program, by asking customers to conserve water either voluntarily or on a mandatory basis. Following the completion of the Freeport Regional Water Project, beginning in 2010, the District may also implement its Central Valley Long-Term Renewal Contract under continued drought conditions. See "-Water Supply-United States Bureau of Reclamation Central Valley Project Contract" herein.

Water Supply Management Plan

In October 1993, the District adopted a Water Supply Management Plan ("WSMP") to guide the provision of water to the District's service area through the year 2020. The District originally forecasted an average daily consumption of 277 MGD by 2020. However, due to successful conservation and recycled water programs, the District has reduced its forecast of average daily consumption to 229 MGD by 2020. Over the same period, projected increased usc by senior water rights holders and in-stream flow requirements to protect and enhance fishery resources on the Mokelumne River will decrease the water supply available to satisfy this projected increase in customer demand.

The WSMP and the District's 2005 Urban Water Management Plan demonstrated that the District's existing water supplies are insufficient to meet current and future customer demand during droughts, despite implementation of conservation and water recycling programs and an aggressive dryyear water rationing policy. Without additional near-term water supplies, the District's customers will experience potentially severe water shortages during prolonged droughts. The conservation component of the WSMP relies on voluntary measures and incentives focusing on efficient residential appliances and landscaping changes, including rebates to customers who purchase and install water-saving ultra-lowflow toilets and clothes washing machines and upgrade their existing landscape irrigation systems. The reclamation component of the WSMP will recycle treated wastewater for non-potable usc on irrigated

38

spaces such as golf courses, cemeteries, and highway medians. Total savings in year 2020 from the conservation and reclamation components of the WSMP is projected to be about 48 MGD.

To satisfy unmet future water needs of its customers, the District has embarked on multiple water supply projects described below.

Freeport Regional Water Project. The Freeport Regional Water Project ("FRWP") is a regional water supply project undertaken in partnership with the Sacramento County Water Agency ("SCWA"). The City of Sacramento is an associate partner in the project. In February 2002, with the support of the Bureau, the District and SCWA formed the Freeport Regional Water Authority ("FRWA") under a joint powers agreement to develop the FRWP. The FRWP will provide up to 100 MGD of supplemental water supplies to the District in dry years which will help meet projected drought year needs. It will also provide up to 85 MGD to SCW A during most years.

The FR WP will divert water from the Sacramento River near the community of Freeport and will convey this water through new pipelines and the existing Folsom South Canal ("FSC") to the Mokelunmc Aqueduct ncar Camanche Reservoir. A turnout in the pipe within central Sacramento County will deliver water to SCWA. Water will be delivered to the District pursuant to the District's Long-Term Renewal Contract with the Bureau executed in 2006.

The Final EIR for the project was certified in April 2004. Necessary regulatory agency approvals have been received including biological opinions from the U.S. Fish and Wildlife Service ("USFWS") and the National Oceanic and Atmospheric Administration and a Record of Decision from the Bureau. The project is under construction with ten construction packages. FRW A, under a number of separate construction contracts, will construct an intake and pumping plant, approximately 16 miles of pipeline and a communications system for the project. The contract for the construction of the 185 MGD capacity intake and pumping plant began in December 2006, with anticipated completion in the fall of 2009. Several pipeline contracts for the construction of the project have also been bid and awarded, including contracts for construction and installation of an 85" diameter pipeline from the intake to the SCW A turnout and contracts for the construction and installation of a 66" pipeline to feed the new SCW A Treatment Plant and a 72" pipeline which feeds the FSC. An additional construction contract is for fiber optic and radio systems to link project facilities and key outside agencies.

The District, on its own, has entered into four separate contracts to construct two I 00 MGD pumping plants and approximately 18 miles of 72" diameter pipeline. Under the first contract, beginning in the summer of 2007, an intake and a pumping plant at the tenninus of the FSC and a high head pumping plant near Camanche Reservoir arc being constructed. Three pipeline construction contracts arc also underway. Completion of all the District's construction is anticipated by fall of 2009, with completion and testing of the entire FRWP system by the end of2009.

In connection with the issuance of Subordinated Water Bonds in 2007, the District entered into a Dedicated Capacity Purchase Agreement, dated as of May I, 2007, by and between the FRWA and the District (the "Dedicated Capacity Purchase Agreement"). Pursuant to the Dedicated Capacity Purchase Agreement, FR W A will sell to the District and the District agrees to acquire I 00 million gallons per day of capacity in the FRWP ("Dedicated Capacity") in accordance with the Second Amended Joint Exercise of Powers Agreement Concerning the Freeport Regional Water Authority dated as of November 20, 2006 (the "FR W A JPA Agreement"). The purchase price of the Dedicated Capacity will be paid by the District in accordance with the FRWA JPA Agreement as a portion of the District's capital cost of the FRWP pursuant to the FRWA JPA Agreement. The District may be required to make additional capital contributions for its share of the costs ofFRWP pursuant to the FRWA JPA Agreement.

39

Mokelumne Aqueduct Sei.<mic and Fi.<heries Protection Elements. Consistent with the approved WSMP the District adopted a Lower Mokelumne River Management Plan ("LMRMP") that balances the long term protection and enhancement of the lower Mokelumne fishery with the public's need for a reliable water supply. Both of these components are well into implementation. An upgrade of the Camanche Fish Hatchery was completed in 2002 and a project to strengthen a portion of the Mokelumne Aqueduct against earthquakes and floods in the Delta was completed in 2005.

Amador Canal Improvement Project. The District, PG&E, and the Amador Water Agency ("A W A") have agreed to jointly contribute to the replacement of the Amador Canal with a pipeline that is anticipated to eliminate between 3,000-6,000 acre-feet per year in seepage losses from the existing earthen ditch canal. Until the A W A needs its full 15,000 acre-feet of entitlement, which is currently estimated to be approximately 2020, the conserved water will be available to PG&E and the District for additional hydropower generation and as additional inflow to Pardee Reservoir. The water conserved by this project will be available to the District in most years for diversion into the Mokelumne Aqueduct or through the Pardee and Camanche power plants. The Board approved an "Amended and Restated" agreement in August 2000 which obligated the District to provide $4,339,000 to A WA upon its issuance of a notice of award for construction of the project. The Amador Canal Improvement Project EIR was certified in 200 I and was challenged in court and after subsequent appeal a supplemental EIR was prepared. In 2006, A W A awarded a contract for construction and the District presented the $4,339,000 payment to A WA. The Amador Canal Improvement Project was completed in 2007.

Groundwater Supply Options. The District is exploring groundwater resource development in San Joaquin County and locally through the Bayside Groundwater Project. These efforts may ultimately contribute to meeting a portion of the WSMP supplemental supply needs.

San Joaquin Countv. The District began negotiating with San Joaquin County water interests for a groundwater banking and conjunctive-usc program in 1992. The ovcrdraftcd aquifer within San Joaquin County, which is traversed by the Mokelumne River and the District's Mokelumne aqueducts, presented an opportunity for a joint project of mutual benefit. However, lack of consensus among local water users and the absence of a legal framework to assure that a portion of the stored water could be exported to serve District customers during droughts has prevented a project from being developed. The District continues to seck opportunities to develop a banking project within San Joaquin County, but no project has been identified.

Bayside Groundwater Project. A draft EIR for this project was published on March 14, 2005 and certified on November 8, 2005. The project is designed to put drinking water into the Deep Aquifer of the South East Bay Plain Basin during wet years for storage so it will be available later in the event of drought. Implementation of the project is planned in two phases. Phase I is a I MGD annual capacity project using a single existing demonstration well in the San Lorenzo area. Phase 2 is the potential future expansion of groundwater facilities to an annual capacity of 2 to I 0 MGD. Phase I is currently underway and scheduled for completion in the fall of 2009. At this time, the District does not know exactly what Phase 2 facilities will be necessary or the location of such facilities. The District intends to use the information gathered from Phase I operations to determine the feasibility of Phase 2 and inform its future determinations on how to proceed with Phase 2. When the District determines to pursue Phase 2, the District will, at that time, complete a subsequent EIR.

The District-SFPUC-Hayward Intertie. The CALFED Bay-Delta Program encourages exploration of Bay Area intertic opportunities. Sec"- Water Rights and Related Proceedings- Delta Vision and Bay-Delta Conservation Program" above. To this end, in April 2003, the City of Hayward completed CEQA documentation necessary to approve a project allowing for 30 MGD of water to be conveyed between the District and the San Francisco Public Utilities Commission ("SFPUC") water

40

system via the City of Hayward's distribution system. This project gives the District and neighboring agencies increased flexibility to provide water throughout the region during an emergency. The intertie allows sharing of water among the parties during emergencies or planned critical work on facilities that would be difficult to remove from service without an alternative water source. The project consisted primarily of improvements within the City of Hayward, although there arc associated minor improvements in District and SFPUC systems. Project construction, funded by the participating agencies, is complete.

Bay Area Regional Desalination Study. The District has joined with SFPUC, Contra Costa Water District and Santa Clara Valley Water District to explore the development of regional desalination facilities that could (I) provide additional source(s) of water during emergencies, (2) provide an alternative water supply that would allow major facilities to be taken out of service for an extended period of time for inspection, maintenance or repairs, and (3) provide a supplemental supply during drought periods.

In October 2003, a preliminary study identified three venues in the Bay Area where a regional desalination facility could be located. The agencies received a joint grant from the CDWR in 2005 to fund a detailed feasibility and environmental study. The feasibility study was completed in 2007. In 2006, the agencies received another grant from the CDWR to conduct a pilot study at an East Contra Costa location. The pilot study is currently in progress and is scheduled for completion in 2009.

Water Conservation

The District encourages customers to help assure an adequate water supply by using water efficiently. The District's water conservation staff advises customers on designing and offers financial incentives for "water wise" landscaping and efficient irrigation methods. Additional conservation efforts include water audits, an ultra-low-flow toilet program, a residential and commercial clothes washer program, a commercial, industrial and institutional rebate program, and free distribution of conservation kits containing devices that reduce water use. The District is also very active in new water conservation technology research and the development of education and demonstration projects. In 1994, the District developed and began implementing its first comprehensive Water Conservation Master Plan to help meet long-term water supply needs. This Master Plan is a blueprint for conservation programs designed to achieve water savings of 35 MGD by the year 2020.

Wastewater Recycling

The District's Water Recycling Program develops and implements projects that reduce demands on potable water supplies. The program now includes five operating recycled water projects. Since the early 1970s, the District's Main Wastewater Treatment Plant has been using recycled water for landscape irrigation, cooling, equipment washdown, and construction purposes. In 1984, the Richmond Country Club became the first golf course in the District to usc recycled water for irrigation. The Metropolitan Golf Links began using recycled water in 1988, followed by both the Alameda Golf Complex and the Harbor Bay Parkway in Alameda in 1991. Recycled water is provided to the Metropolitan Golf Links, Alameda Golf Complex and the Harbor Bay Parkway from the District's recycling facility in San Leandro. In 1996, the District began providing recycled water to the Richmond Chevron Oil Refinery for usc in recirculating cooling towers. The Chevron Oil Refinery is currently the largest single user of recycled water in the District's service area. In 2006, the District began providing recycled water to a number of sites in San Ramon for irrigation purposes.

On April 9, 1996, the District's Board adopted the Nonpotable Water Policy which requires customers of the District to usc nonpotable water (recycled water and other nonpotable water sources) for

41

nondomestic purposes when it is of adequate quality and quantity, available at reasonable cost, not detrimental to public health, and not injurious to plant life, fish and wildlife. The District is currently in the planning, design and construction phases of several new water recycling projects which are scheduled for implementation by 2020.

The District has entered into a Joint Exercise of Powers Agreement with the Dublin San Ramon Services District ("DSRSD") creating the DSRSD/EBMUD Recycled Water Authority ("DERWA") for the purpose of implementing a recycled water program to make available reliable supplies of recycled water to be provided to the District and DSRSD for their distribution within portions of their existing and future service areas. Planning, design and construction of the initial phase of facilities for the DER W A recycled water program have been completed. The first phase of the San Ramon Valley Recycled Water Program became operational in 2006. The costs of such initial phase of facilities arc being financed from commercial paper notes issued by DERWA (currently in an authorized amount up to $50 million of which all $50 million is outstanding), State loan and grant moneys and capital contributions made by the District and DSRSD. The District and DSRSD have entered into an agreement for the sale of recycled water by DER W A to the District and DSRSD pursuant to which each of the District and DSRSD arc responsible for paying their respective share of the costs incurred by DERWA in implementing the DERWA recycled water program (including among other things, administrative costs, construction costs, operation and maintenance costs and costs of debt service on obligations issued by DERWA for the purposes of the recycled water program). Payments to be made by the District under such recycled water sales agreement for the purchase of recycled water arc payable as a Water Operation and Maintenance Expense regardless of whether any recycled water is made available to the District from such facilities.

WSMP2040

In April 2007, the District began the process of updating its Water Supply Management Plan, extending the planning horizon to 2040 ("WSMP 2040"). Ten workshops were held with the Board and the environmental documentation for WSMP 2040 was released for public review on February 19, 2009. The District does not expect WSMP 2040 to significantly increase its projected capital requirements in the foreseeable future.

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Capital Improvement Program

As summarized in Tables 3 and 4 below, the District currently projects a cash expenditure in the amount of approximately Sl.3 billion on Water System capital projects in Fiscal Years 2009 through 2014. The District's Biennial Budget for Fiscal Years 2010-2011, which will include the capital expenditures forecast for Fiscal Years 20 I 0-2014, is currently being developed and will be presented to the Board for approval in June 2009. The District's biennial planning process includes a review and update of facilities needs for the ensuing five Fiscal Y cars.

Table 3 Fiscal Years 2009-2014

Capital Improvement Program Forecast- Cash Expenditures

Fiscal Year Ended June 30

2009 2010 2011 2012 2013 2014 Total

Cash Expenditurei11

$ (Millions)

$ 407.9 247.0 151.2 176.2 170.2 173.3

$1.325.9

(I) Cash expenditures include spending for projects appropriated in earlier Fiscal Y cars. May not add due to rounding. Source: The District

Emergency Preparedness Extensions/Improvements Facilities, Services & Equipment Maintaining Infrastructure Regulatory Compliance Resource Management Water Quality Water Supply


Capital Improvement Program Forecast- Expenditures

(Millions)

Fiscal Year ended June 30

2009 2010 2011 2012

$ 2.741 s 0.962 $ 0 $ 0 $ 56.202 27.915 25.607 55.490

11.862 8.713 7.536 8.015 53.528 54.937 58.019 61.359 37.500 34.346 4.124 8.706

2.160 0.981 0.374 0.338 0.620 1.395 2.111 2.128

213.239 87.749 23.436 10.141 30.000 30.000 30.000 30.000

2013 2014

0 $ 0 28.080 41.520

8.320 7.520 63.360 69.760

3.120 3.680 2.160 0.480 2.240 3.520

32.960 16.960 30.000 30.000

TOTAL

$ 3.703 234.814

51.966 360.963

91.476 6.493

12.014 384.485 180.000 Admin. & General Expense

Total $4.Q1.8~2 S246.22B. $J5_L2ll1 $lli.JTI $LZ0.240 $_1.1:1.~ SJ.,3li2JA


As set forth in Tables 3 and 4 above, of the $1.3 billion currently projected for capital projects for Fiscal Years 2009-2014, approximately $982.3 million comprises estimated capital expenditures for

43

Fiscal Years 2009-2012, based upon the District's Biennial Budget for Fiscal Years 2008-2009, which the District estimates to be funded from the following sources:


Sources of Funds for Capital Improvement Program Expenditures

Funding Sources

Bond Proceeds1'l

Commercial Paper Proceeds Advances and Contributions Grants

(Millions)

$654

Revenues Total

(I} Includes approximately S257 million of proceeds of bonds issued in May 2007. Source: The District.

0 65

8 255

$982

The financial projections related to the District's Capital Improvement Program for Fiscal Years 2009 through 2012 are discussed under "WATER SYSTEM FINANCES- Projected Operating Results" herein.

The current five-year capital plan includes the following projects:

Future Water Supply (Water Supply Management Plan). As discussed above under the caption "-Water Supply Management Plan," the WSMP projects expected for Fiscal Years 2009-2012 include: the Bay Area Regional Desalination Study, the San Joaquin County Conjunctive Usc Alternative Project, the Bayside Groundwater Project and the Freeport Regional Water Project.

The Water Recycling Program implements projects that will provide an additional 8.0 MGD of recycled water by 2020 and includes appropriations to fund the design and construction of a water recycling facility for the San Ramon Valley and facilities for the East Bayshore Recycled Water Project. Expenditures will also be made to design and construct the new Richmond Advanced Recycled Expansion ("RARE") Water Project in Richmond to provide 3.5 to 4 MGD of recycled water to the Chevron Richmond refinery for boiler feed applications. In addition, the District is working with the Conoco Phillips refinery in Rodeo and local wastewater agencies to develop a recycled water project to provide 2 to 4 MGD of recycled water for Conoco Phillips boiler feed applications.

Infrastructure Improvements and Maintenance. These projects will include pipeline and lateral replacements, reservoir rehabilitation, pipeline replacements, and other improvements to protect the system in case of an emergency.

In addition to the Seismic Improvement Program discussed below under "- Seismic Improvement Program," other infrastructure improvements include a Reservoir Rehabilitation Program to maintain the integrity of the District's reservoirs. The Pipeline/Regulators Program will replace valves, connections, hydrants and meters at the end of their useful lives, replace deteriorating pipelines and rehabilitate older regulators.

System Extension;· and Improvements. The Operations Network program will continue to improve the District's control systems for water operations and the operations of the District's power

44

plants. The benefits of the program include maintaining efficient and reliable operation of the water system, optimizing energy cost savings for pumping plants and improved response to disasters and outage planning.

The Pressure Zone Improvement Plan will continue to develop system extension facilities in the San Ramon Valley as well as address storage, pumping and water quality issues with new facility improvements in the Oakland Hills.

The Walnut Creek-San Ramon Valley Improvement Program (the "WCSRVIP") focuses on providing the necessary level of capacity to existing and future customers in the Walnut Creek and San Ramon Valley areas. The WCSRVIP will include major improvements to the Walnut Creek Water Treatment Plant, new transmission facilities, and numerous storage and pumping improvements in the San Ramon Valley area.

The Water Treatment and Transmission Improvements Program includes new facilities and upgrades to existing facilities in Lafayette, Moraga, Oakland, Walnut Creek and unincorporated Contra Costa County. The upgrades at the existing water treatment plants include rehabilitation of the entire Lafayette water treatment plant and 17 distribution system projects. The projects arc driven by a variety of overlapping needs including: meeting regulatory standards related to water quality, complying with permit conditions, addressing treated water stability issues, meeting existing and future water demands, improving aging infrastructure and technology and correcting existing hydraulic/operational constraints.

Water Quality. These programs focus on improving the District's ability to reliably produce the highest quality water, while continuing to meet current and future regulations, water quality goals, and future demands in a coordinated and cost effective manner.

The Water Quality Improvement Program provides ongoing infrastructure improvements related to maintaining the water quality of the Water System. These improvements include the replacement of a number of reservoirs, as well as the installation of remote chlorination and mixing equipment to improve water quality. In addition, valves and controls at critical points in the distribution system will be upgraded to increase reservoir turnover and reduce the amount of time that treated water will be stored within the distribution system.

The Water Treatment Upgrade Program will modernize a number of water treatment plants and include projects that will add sedimentation basins to enhance sludge removal at the Sobrante water treatment plant, new storm drains at the Orinda water treatment plant, new reclaimed water pumps at the Upper San Leandro water treatment plant, and the construction of chemical and containment basins at the San Pablo water treatment plant. In addition, upgrades to chemical handling systems will be installed at a number of facilities in conjunction with the installation of new control systems hardware/software.

Regulatory Compliance. The District's dams frequently undergo required State and federal dam safety inspections in addition to ongoing monitoring of the performance of the dams by the District. The Dam Safety Program upgrades existing dams and associated critical facilities such as outlet towers and spillways to meet earthquake and flood safety requirements. This effort ensures that District dams will not pose a hazard to public safety. Key projects associated with the program include:

San Pablo Dam Seismic Upgrade Project. Seismic evaluation of the San Pablo Dam reservoir embankment indicates that the slopes may become unstable and the crest settlements may be excessive during the maximum credible earthquake ("MCE") on the Hayward Fault. The water levels were lowered 20 feet in the summer of 2004 when this risk was identified. Retrofit measures are required to keep the dam stable and to prevent an uncontrolled release of reservoir water at normal operating levels during an

45

MCE on the Hayward Fault. This project provides for modifications to the downstream slope of the dam embankment to prevent slope instability and crest settlement during the MCE. The EIR was certified in September 2006. The design of the modification was completed in 2007. Construction was started in August of2008 and is anticipated to be completed in Fiscal Year 2010.

Chabot Dam Seismic Upgrade Project. A seismic stability report for the Chabot Dam identifies transverse cracks at the dam crest and liquefaction of sluice fill material at the toe of the dam that may cause damage during an earthquake. The District recognizes that these risks are not significant enough to warrant immediate action but that work is needed to minimize post-earthquake dam repairs. The California Division of Safety of Dams agrees that the District will resolve this issue by Fiscal Year 2012 after the completion of the San Pablo Dam upgrade.

Reservoir Outlet Modifications. The District has also embarked on reservoir outlet works evaluation projects to analyze, design and modify reservoir outlet towers to withstand earthquakes on nearby faults. Detailed analyses have been completed for the Briones, San Pablo, Sobrante, Chabot, Upper San Leandro and Lafayette Reservoir Outlet Towers. All of the above named towers, with the exception of the Sobrante Tower, have been found to be unstable under earthquake loading. San Pablo Tower is no longer a critical tower since this tower feeds the San Pablo Filter Plant which is planned to be removed from service in the near future. For the remaining four towers, namely for the Briones, Chabot, Upper San Leandro and Lafayette Towers, retrofits will be designed and constructed such that each tower wiii be able to safely withstand the seismic event. The design and construction of the retrofits will take place in accordance with prioritization and utilizing the funding built into the Fiscal Year 2009 through 2014 budget cycle.

Seismic Matters

The District's service area is in a seismically active region of the State. The Hayward Fault runs through the entire western portion of the District and the Calaveras Fault runs through the southeastern portion of the District's service area. The Concord and Mt. Diablo Thrust Faults arc located close to the eastside of the District's service area and the San Andreas Fault is located to the west. The Pardee and Camanche Dams and the District's three aqueducts which carry water from Pardee Reservoir to the District's service area arc also in active earthquake fault areas. Although the District has not experienced significant earthquake-related damage to its facilities, the District's Water System and/or its water supply could be adversely affected by a major local earthquake impacting the District's service area, or by earthquake damage to the Pardee or the Camanche Dams or the aqueducts delivering water to the District's service area.

A seismic evaluation study prepared for the District and completed in 1994 examined the likely effects on the District's existing local water system of earthquakes on the Hayward Fault, the Calaveras Fault and the Concord Fault. The study concluded that, in the event of a 7.0 earthquake on the Hayward Fault, the District would likely experience major damage to the Claremont, San Pablo and Upper San Le,mdro Tunnels, substantial damage to buried pipes, damage to potable water reservoirs and a disruption in the operation of the District's pumping plants, rate control stations and water treatment plants. The District also would likely experience significant damage in connection with a lesser magnitude earthquake on the Hayward Fault or an earthquake on the Calaveras or Concord Faults. In the event of such damage, if the Claremont Tunnel were closed, it was determined that severe water rationing would be required in the western portion of the District during the estimated 26-week repair period. Further, in the event of severe earthquake damage to the District's Mokelumne Aqueducts, which carry water from Pardee Reservoir to the District's service area, it was determined repair efforts could take up to one year before water could be transported again to the District's terminal reservoirs. This would necessitate a stringent conservation program to reduce consumption, as the District's terminal reservoirs currently store

46

only a four to six months' supply under normal consumption patterns. A major earthquake could also have a severe adverse impact on the economy of the District's service area.

Studies prepared for the District on the safety of Pardee and Camanche Dams during seismic and extreme flood events also have been completed. The results of the studies indicate that both dams would perform satisfactorily in the event of an MCE of magnitude 6.5.

Following completion of the seismic evaluation study, the District initiated a multi-year Water System Seismic Improvement Program to identify those facilities most susceptible to earthquake damage and to address, to the extent deemed cost-effective by the District, identified needs. In 2008, the District completed the $200 million Seismic Improvement Program to significantly improve performance of the distribution systems and facilities.

The Seismic Improvement Program was designed to strengthen, reinforce and upgrade the District's water distribution and transmission systems to better enable the District to provide postearthquake water service. Accomplishments include upgrades to 70 reservoirs, 75 pipelines, 22 pumping plants, 6 water treatment plants, 3 maintenance yards, the Administration Building and various electrical equipment anchorages throughout the District. Key project accomplishments include the completion of the Southern Loop Pipeline in June 2005, the completion of the Claremont Tunnel by-pass and seismic upgrades of the Mokelumne Aqueduct No. 3 across the Sacramento-San Joaquin Delta. These improvements will allow the District to meet its service restoration goal of providing water service to 70% of its customers within ten days after a major seismic event.

Completed improvements include:

Claremont Corridor Seismic Improvement Project. The Claremont Tunnel is a vital transmission facility providing service to 800,000 customers west of the Oakland-Berkeley Hills. This tunnel crosses the Hayward Fault and current seismic analysis suggests that in a magnitude 7.0 earthquake the tunnel would be damaged and most likely be out of service for up to six months for tunnel repairs. Loss of this transmission facility would result in severe water rationing and reduced supplies for fire fighting, so upgrading this facility was identified as a critical effort. The tunnel upgrade consists of a new 1,501-foot bypass tunnel to replace the vulnerable portion of the tunnel at the Hayward Fault zone and the repair and reinforcement of the liner in the remainder of the tunnel.

The tunnel was removed from service in February 2002 for a physical inspection to assess its current condition and determine the extent of seismic upgrades necessary. An EIR was completed in October 2003, and final design was completed in 2004. Construction began in June 2004 and a new tunnel portal, a 480-foot access tunnel, and over 350 feet of the bypass tunnel was completed in March 2007.

Building Structure Seismic Improvement Project. The Building Structure Seismic Improvement Project retrofits occupied District buildings, including, but not limited to, the upgrade of the Administration Building to meet life safety performance goals and to ensure availability of facilities for post-earthquake operation. The seismic upgrades of the Administrative Building were completed in March 2005.

Reservoir Seismic Upgrades Project. The Reservoir Seismic Upgrades Project addresses seismic risks to 70 distribution tanks to assure continued water storage following an earthquake and mitigate the risks to life safety that would result from tank failure. By the end of Fiscal Year 2006, the District had completed the reservoir seismic upgrades, with the exception of one remaining tank which has been rescheduled for seismic upgrading due to the Claremont Tunnel outages and various ongoing programs.

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Other accomplishments include the completion of landslide mitigations and the installation of seismic isolation valves at reservoirs, and valve pit roof anchorages.

The District has also instituted a Seismic Mitigation Planning Program to establish an ongoing process to ensure earthquake readiness of District infrastructure. This program will identify potential seismic performance problems to ensure the Water System will remain in a constant state of readiness to perform following a major earthquake. Work includes monitoring the physical condition of District facilities on a scheduled basis, keeping District earthquake standards current and providing a performance evaluation of the transmission and distribution system improvements made during the Seismic Improvement Program.

In the event of significant earthquake damage to the Water System and/or the District's service area, there can be no assurance that Subordinated Water Revenues would be sufficient to pay the principal (or Purchase Price) of and interest on any outstanding Series 2009 A Bonds.

WATER SYSTEM FINANCES

Basis of Accounting

The District reports operations on a fiscal year basis (currently July I through June 30, a "Fiscal Y car"). Enterprise funds arc used to account for operations that arc financed and operated in a manner similar to private business enterprises, where the costs of providing goods and services to the general public arc financed or recovered primarily tbrough user charges. Enterprise funds arc accounted for using the accrual basis of accounting. The accounting policies of the District conform to generally accepted accounting principles for municipal water utilities. The accounts are maintained substantially in accordance with the Uniform System of Accounts for Water Utilities prescribed for investor-owned and major municipally-owned water utilities.

Sources of Funds

The Water System's principal source of revenues is water sales. In Fiscal Year 2008, approximately 70.1% of the Water System's $385.8 million in total revenues was provided from water sales. The District's share of the county 1% property tax levy contributed approximately 5.9%, or $22.7 million of revenues, and arc applied to reduce Operation and Maintenance Costs. Such property taxes are not pledged to the repayment of the Subordinated Water Bonds. See"- Tax Revenues" herein.

Sources of cash other than water sales and taxes include income from the sale of energy from the District's hydroelectric power plants, investment income, system capacity charges and grants and contributions in aid of construction. In Fiscal Year 2008, the Water System's hydroelectric power plants produced power revenues of approximately $3.1 million and the District's income on investments was approximately $40.4 million.

The following Table 6 sets forth the District's Water System revenue sources for the five most recent Fiscal Years ended June 30, 2008. Comparative summaries of the Water System's historic operating results appear in Table 13. See "SECURITY FOR THE SERIES 2009A BONDS- General Pledge of Subordinated Water Revenues" herein.

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Revenue: Water Sales SCC Revenuesl2l

Power Sales lnterest13l

Taxes Other!4l

Total Revenues

Contributions: Developers Seismic Surcharge Grants

Total Contributions

Table 6 WATER SYSTEM REVENUE

Summary of Revenues and Contributions by Sources Five Years Ended June 30, 2008

(Millions)

Fiscal Year Ending June 30

1004 1005 1006 1007

$241.9 $235.8 $244.3 $260.7 12.9 12.8 13.7 19.7 2.8 7.0 11.0 4.2 6.2 7.6 18.4 21.8

17.4 18.3 19.1 21.7 ~ _i1 ~ --.....l..S. $288.8 $286.9 $310.9 $335.9

s 25.2 $ 17.9 s 39.3 $30.0 14.1 14.1 14.2 14.3

___!LQ ____Q,Q __Q,Q ____Q,Q $ 39.3 $32.0 $ 53.5 $44.3

Total Revenues and Contributions $328.1 ill.8...2 ~ $380.2

1008

$270.51')

19.7 3.1

40.4 22.7 29.4

$385.8

$10.4 14.8

__ .5 $30.7

$416.5

{I) Total differs from that shown in Table 7 due to inclusion of account establishment charges, reclaimed water fees and certain other miscellaneous charges.

(lJ System Capacity Charge ("SCC") Revenues presented above include the interest payment portion of debt service attributable to SCC-rclated capital facilities. SCC Revenues presented above do not include the principal repayment portion of debt service or the preliminary engineering and design costs of future water supply projects, both of which are funded from SCC charges. SCC receipts are designated as developer contributions under the Unifonn System of Accounts for Water Utilities. SCC Revenues arc described in greater detail under "System Capacity Charge."

(J) Includes interest earnings and net change in fair value of investments. Includes interest earnings on Water System Fund, including earnings on proceeds of the District's Series 2007A Bonds.

(4l Excludes reimbursements and other receipts applied directly to operating expenses.


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The following Table 7 sets forth water sales revenues by customer type.

Table 7 WATER SALES REVENUES BY CUSTOMER TYPE

Fiscal Year Ended June 30,2008 (Thousands)

Type of Customer Sales Revenues '11 Percent

Residential $167,059 62% Commercial 62,303 23 Industrial 23,582 9 Other 15 671 ___§ Total S268.615 100%

(IJ Excludes proceeds from the seismic surcharge which the District capitalizes in its audited financial statements in accordance with the Unifonn System of Accounts for Water Utilities. Seismic surcharge revenues arc Water Revenues for purposes of the Indenture. Sec'·- Historic Operating Results'' and"- Projected Operating Results" herein. Does not include account establishment fees, reclaimed water fees and certain other miscellaneous charges.


Rates and Charges

The District's rates and rate structure arc established by its Board of Directors after a public hearing process, and arc not subject to regulation by any other agency. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218" for a discussion of the notice, hearing and protest procedures to which the District's proposed rate increases will be subject.

Since Fiscal Y car 2005, rates have increased by an average of 4.25% per Fiscal Year. The average rate increases enacted by the District during the current Fiscal Y car, and the past four Fiscal Years arc as follows:

Fiscal Average Rate Year Increase

2005 3.75% 2006 3.75 2007 3.75 2008 5.00 2009 5.00


The District's water rate structure is based on a cost of service methodology by customer class. The rate structure consists of two elements: a monthly service charge and a commodity charge for water delivered. With the exception of single family residential customers, commodity charges for water delivered are based on a uniform volume rate. Single family residential customers arc billed on a threetier inclining block rate structure.

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Table 8 shows the rate schedule effective July I, 2008, and represents an average increase of 5.00% from Fiscal Year 2008 rates. The monthly water bill for a typical residential account consuming I, I 00 cubic feet (8,228 gallons) per month is S35.25 (including the drought surcharge described below). Sec Table 14 under"- Projected Operating Results" for a description of projected future rate increases.

Table 8 WATER SYSTEM RATES AND CHARGES0 l

Effective July I, 2008

Meter Size

5/8-inch and %-inch l-inch I Y,-inch 2-inch Over 2-inch

Service Charge

Per Month

s 9.53 14.78 23.30 33.60

Various

Charge for Water Delivered

Rate Class

Basic Rate- Single Family('! Basic Rate- Multi Family Basic Rate - Other Elevation surcharges- Zones 2 through 5

Zones 6 and higher

Per Hundred Cubic Feet

$1.82 2.36 2.51 0.35 0.72

(I) A Seismic Improvement Surcharge is added to each customer's water bill. The surcharge consists of a meter charge component that varies by meter size and a volume surcharge.

(2J Applies to first 172 gallons per day for single family residential customers. Additional consumption by residential

customers is billed at $2.26 per hundred cubic feet for consumption between 173 and 393 gallons per day and $2.77 for all water used in excess of 393 gallons per day.


Drought Surcharge. On August I, 2008, the District implemented new drought rate increases that included a 10% rate increase on water flow charges, a new surcharge for each account's water use allocation equal to $2.00 per CCF of all water used in excess of the account's water use allocation, and a new non-potable water usc incentive rate. These rates arc designed to encourage customers to reduce water use, to compensate for lost revenue due to reduced water use, and to fund drought management programs in the District.

Comparison of Annual Water Service Charges

Table 9 shows comparative average annual water service charges by various State water agencies for a typical residential account with a 5/8-inch meter using I, I 00 cubic feet of water per month. Charges are for the minimum cost zone or area served by the agency as of May I, 2008 in a survey conducted as part of the Fiscal Year 2008 and Fiscal Year 2009 Biennial Budget.

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Table 9 COMPARATIVE ANNUAL RESIDENTIAL WATER CHARGES

For II Ccf/Month and 5/8" Meter

Water Supplier

City of Palo Alto Contra Costa Water District City of Los Altos City of San Jose Marin Municipal Water District City of Livermore East Bay Municipal Utility District''l Dublin San Ramon Services District City and County of San Francisco Alameda County Water District City of Hayward North Marin Water District City of Pleasanton

{I) Includes drought surcharge. Source: The District.

Annexations

As of January 2009

Average Annual Household Water Service Charge

$640 566 504 497 479 446 423 419 416 398 365 341 299

The District charges S800 for an annexation proceeding plus $600 per acre to be developed, to be paid at the time of application for water service.

Distribution System: District charges are designed to recover the full cost of main extensions. There are fixed charges for District-installed mains 6 inches and under and for District supplied services and materials for applicant-installed mains 8 inches and under. For all other District-installed mains, the actual cost is charged. For inspection and materials for other applicant-installed mains, charges arc based on District engineering cost estimates.

Allocated costs of reservoirs, transmission mains, treatment facilities, pumping plants, and future water supply arc recovered through the SCC as described under"- System Capacity Charge," below.

Service Installation: Charges arc designed to recover full costs of hydrant and service connections.

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Billing and Collection Procedures

All water service customers arc billed directly by the District bimonthly, with the exception of approximately I ,000 accounts consisting of the largest users in the District, which are billed monthly. Billing is staggered throughout the billing cycle by geographic location within the District. Service may be discontinued if an overdue account is not paid after appropriate customer notification. The District considers its rates of payment delinquency, service discontinuance for non-payment, and writc-offs for uncollectible accounts to be low by water industry standards for urban areas. The write-offs for uncollectible accounts by Fiscal Year have been:

Fiscal Year Uncollectible Percent of Gros.< Ended June 30 Revenues Billings

2004 s 764,220 0.32% 2005 841,078 0.36 2006 653,660 0.27 2007 916,256 0.35 2008 I 396 934Cll , , 0.51

(I) For Fiscal Year 2008-09, uncollectible revenues through the six months ended December 31, 2008 are estimated at $828,062.


Tax Revenues

The District's share of the county 1% property tax levy has provided approximately 5% to 6% of total operating revenues of the Water System in each of the past five Fiscal Years for the District. The District's share of the county 1% property tax are not pledged as a source of payment for the Series 2009A Bonds, although such amounts are routinely applied to pay operation and maintenance expenses. Sec "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" herein for a discussion of certain constitutional and statutory limitations on taxes and appropriations.

From time to time legislation has been considered as part of the State budget to shift the share of the one percent ad valorem property tax collected by counties from special districts to school districts or other governmental entities. The State budgets for Fiscal Years 2003-04 and 2004-05 reallocated portions of special districts' shares of the countywide one percent ad valorem tax shifting a portion of the property tax revenues collected by the counties from special districts to school districts. The District has historically, since the 1970's, applied its share of property tax revenues to fund the maintenance of fire protection capacity. As a result of legislation providing for an exemption from the property tax shift for funding fire protection services and facilities, the District did not lose any property tax revenues allocable to the Water System in Fiscal Years 2004 and 2005. Additionally, on November 2, 2004 voters within the State approved Proposition lA, which prevents the State from reducing local government's share of the one percent ad valorem property tax below current levels, except in the case of fiscal emergency. Proposition !A provides that in the case of fiscal emergency, the State could borrow up to eight percent of local property tax revenues to be repaid within three years.

Taxes arc levied by each county for each fiscal year on taxable real and personal property which is situated within the District as of the preceding January 1. For assessment and collection purposes, property is classified either as "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State-assessed public

53

utilities property and property secured by a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll".

Property taxes on the secured roll are due in two installments, on November I and March I of the fiscal year. If unpaid, such taxes become delinquent on December I 0 and April I 0, respectively, and a I 0% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes arc delinquent is declared to be in default on or about June 30 of each year. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty of \ .5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is declared to be subject to the county tax collector's power of sale and may be subsequently sold by the county tax collector.

Property taxes on the unsecured roll arc due as of the March \ lien date and become delinquent, if unpaid, on August 31 of each year. A \0% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November I of each fiscal year. The taxing authority has four ways of collecting unsecured personal property taxes: (I) filing a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifYing certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation in the county recorder's office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging to the taxpayer.

Two exemptions from ad valorem taxation arc currently in effect. Legislation enacted in 1972 provides that S7,000 of the full cash value of owner-occupied dwellings is exempt from taxation. State subventions currently compensate local agencies for tax revenues lost from this exemption. Additionally, the Statutes of 1979 exempted all business inventories from ad valorem taxation.

Pursuant to California Revenue and Taxation Code Sections 4701 ct seq., Contra Costa County and Alameda County each maintain a reserve fund for the purpose of guaranteeing I 00% of the secured levies of the electing governmental jurisdictions for which such county collects taxes (commonly referred to as "The Teeter Plan"). The District has elected to participate in Contra Costa County's reserve fund guaranty program but has elected not to participate in Alameda County's reserve fund guaranty program. Consequently, the District is exposed to the effect of delinquencies in collections only for property located in Alameda County.

Table 10 shows a five-year record of assessed valuations, secured roll levies and delinquencies for the taxable property included within the District. Assessed valuations are expressed by County Assessors as "full cash value" as defined by Article X IliA of the State Constitution. The tax levy shown is the District's allocated share of the maximum ad valorem tax levy by each county of I% of full cash value. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRJA TIONS" herein.

There can be no assurances that future legislation will not reduce or eliminate the District's share of the I% county-wide ad valorem property tax revenues.

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Table 10 TAXABLE PROPERTY WITHIN THE WATER SYSTEM

Assessed Valuation and Tax Collection Record


2004 2005 2006 2007 2008 Assessed Valuation for Taxation Purposes(!)

Alameda County $ 38,190,331,000 s 62,404,795,000 s 67,321,920,000 s 71,515,447,000 s 74,483,103,000 Contra Costa County 60 592 042 000 64 099 004 000 70.724 196 000 74.565 486 000 76 572 779 000

Total s 118,782,3 73,000 Sl26,503,799,000 s 138,046, 116,000 s 146,080,933,000 s 151 ,055,882,000 Secured Roll Tax Levy(2J

Alameda County s 8,981,409 s 9,507,654 s 10,184,907 s 10,621,998 s I 1.506,460 Contra Costa County 8 456 910 8 759 692 8 940 234 11071283 I I 224 646

Total s I 7,438,3 I 9 s 18,267,346 s 19,125,141 s 21,693,281 $ 22,731,106 Delinquent June 30(3)

Amount s 174,250 $ 229,802 s 276,891 $ 464,167 Percent 1.00% 1.26% 1.45% 2.14%

01 Net assessed valuations, plus homeowner's exemptions, the taxes on which are paid by the State. All valuations are stated on a 100% of full cash value basis. For revenue purposes, net assessed valuations require deductions of redevelopment project area incremental valuations.

(lJ Net basis excluding all exemptions. Levies reflect the tax reductions effected by the adoption of Article X IliA of the State Constitution in J 978, the "Jarvis-Gann Initiative."

(J) Amounts apply to Alameda County only, since Contra Costa County guarantees 100% payment of the District's secured roll levy. The delinquency percentages arc based on the two counties' secured roll levies.

Sources: Auditor-Controller's Office, Alameda and Contra Costa Counties, as compiled by the District.

System Capacity Charge

$

The District's System Capacity Charge ("SCC") is designed to recover from new accounts the costs of facilities that have been constructed since 1983, or will be constructed in the future to provide distribution service to future customers based on land usc plans. Under the existing SCC policy, water treatment facilities, distribution reservoirs, pumping plants, and large transmission mains built to meet demands of new development are financed through debt which is repaid from SCC. Pursuant to the Indenture, all SCC receipts are Water Revenues when received and arc deposited into segregated accounts of the Revenue Fund. As of June 30, 2008, the District had $85,005,006 of SCC revenues on deposit in the Revenue Fund.

In accordance with the Uniform System of Accounts for Water Utilities, the District has historically recognized the portion of SCC receipts used to fund the interest expense on the portion of the Subordinated Water Bonds used to finance improvements for new customers as operating revenues when applied to fund such interest and recognized the portion of the SCC receipts used to fund principal repayment as developer contributions. Portions of the SCC that arc identified as costs to provide future water supply facilities will continue to be treated in this manner.

In May 2007, the Board implemented a revised methodology for the administration and collection of the SCC by adopting a blended SCC Methodology that includes both the buy-in and incremental method that went into effect on August 13,2007. Fiscal Year 2008 was the first year that the revised SCC methodology took effect. The buy-in portion of the SCC collected from new connections will no longer be put into the System Capacity Charge Fund to provide funds to reimburse the District for the debt service needed to build facilities to serve new connections. Instead, the funds collected from the buy-in portion of the SCC will be added directly to the District's capital as a Capital Contribution. The portion

55

640,441 2.81%

of the SCC ascribed to the incremental method, namely the Future Water Supply portion, will continue to be deposited into the Future Water Supply Fund.

See Table 13 under"- Historic Operating Results" herein for the District's historic recognition of SCC revenues as Water Revenues which includes the interest expense component of debt service on SCC financed facilities and the revenue that was collected under the buy-in portion of the SCC. If the principal component of the SCC receipts had been included as Water Revenues in Table 13, the resulting Water Revenues, Net Water Revenues and Debt Service Coverage would have been higher than shown therein. Additionally, for purposes of Table 14 under"- Projected Operating Results," the District has included in the projections of future Water Revenues, SCC receipts attributable to both the interest expense and principal repayment as Water Revenues.

Due to the significant capital expenditures projected by the District through 2012 on the Freeport Regional Water Project and other capital improvements as described under "THE WATER SYSTEMCapital Improvement Program" herein, and the resulting increase in debt service, the District projects an increased expenditure of SCC receipts in such years. Accordingly, water revenues on an accounting basis pursuant to the Uniform System of Accounts for Water Utilities may be different than Water Revenues as calculated pursuant to the Indenture as shown in Table 14 under"- Projected Operating Results" herein.

Power Sales

The District operates hydropower plants at Pardee and Camanche Reservoirs. These plants generate 150 million kilowatt hours of electricity in normal rainfall years. The power is sold on the open market. Annual revenues from power sales net of royalty payments have ranged from approximately $2.8 million to $11.0 million over the last five Fiscal Y cars. Revenues from power sales vary depending on power prices and the volume of water available for release from the reservoirs.

Developer Contributions

Cash contributions for main extension and other facilities to serve new customers depend on the level of development. District policy requires new applicants for service to pay the cost of providing capacity and infrastructure necessary to serve them and future water supply costs through a combination of direct charges for mains, hydrants, and services and a system capacity charge. In Fiscal Year 2008, developer contributions were $10.4 million.

Grants

Grants are received for specific recreation projects. In Fiscal Year 2008, $5.5 million was collected. An amount of $8.0 million is budgeted for Fiscal Years 2009-2012 based on projected grant commitments and applications.

Taxation of the District

All property of the District within the District's boundaries generally is exempt from property taxation. District-owned land outside of the District's boundaries is taxable, but improvements constructed on that land by the District are not taxable. As a public agency, the District is exempt from the payment of State and federal income taxes. Employees ofthc District are covered by Social Security.

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Outstanding Debt

Table II shows Water System debt outstanding as of December 31, 2008. By Resolution No. 33606-07 adopted June 12,2007, the Board declared its intention to issue up to SI,IOO,OOO,OOO of Water System revenue bonds of which $1, I 00,000,000 remain unissued. The District may from time to time in the future adopt other resolutions authorizing the issuance of Senior Water Bonds, or additional Subordinated Water Bonds and Parity Debt, subject to the satisfaction of the conditions set forth in the Senior Water Bond Resolution and the Indenture. Currently, no Senior Water Bonds arc Outstanding. Sec "SECURlTY FOR THE SERIES 2009A BONDS - Issuance of Additional Senior Water Bonds" and "- Issuance of Additional Subordinated Water Bonds and Parity Debt; Junior and Subordinate Obligations" herein.

Low-interest loans were made by the State Board to the District to finance certain water reclamation and reuse facilities within the District to conserve fresh water supplies. A federal drought loan was made by the U.S. Department of Commerce to the District in 1978 and 1979 to finance droughtrelated projects. Sec "SECURITY FOR THE SERlES 2009A BONDS- State Loans and Federal Loan" herein.

Commercial Paper Notes (Water Series) are issued by the District from time to time pursuant to Resolution No. 32048, as amended, which authorizes a maximum outstanding principal amount not exceeding the lesser of (I) the annual average of the District's total revenue for the three preceding years or (2) 25% of the District's total outstanding bonds issued pursuant to Chapters 6, 7 and 8 of the Municipal Utility District Act. Resolution No. 32048, as amended, provides that the District will maintain a liquidity facility in an aggregate principal amount of Commercial Paper Notes to be issued. The current facility is in an aggregate principal amount not to exceed $330,000,000 outstanding at any time and is provided by J.P. Morgan Chase Bank under an agreement which expires on April 14, 2009. The District may use capacity under the liquidity facility for either the Commercial Paper Notes (Water Series) or the Commercial Paper Notes (Wastewater Series). The Commercial Paper Notes (Water Series) arc payable from and secured by a pledge of Water Revenues on a basis subordinate to the Senior Water Bonds, if issued, and Subordinated Water Bonds. The District has authorized and expects to implement an extendable commercial paper note program in March 2008 pursuant to which the existing Commercial Paper Notes (Water Series) will be retired with extendable commercial paper notes. The extendable commercial paper notes will be similarly secured by a pledge of Water Revenues on a basis subordinate to the Senior Water Bonds, if issued, and Subordinated Water Bonds; no liquidity facility will be required.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK.]

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Table 11 OUTSTANDING WATER SYSTEM DEBT

As of December 31, 2008

Date of Last Issue Issue Maturity

Subordinated Water Revenue Bonds: Subordinated Revenue Bonds, Series 1998 8/01/98 6/01/09 s Subordinated Revenue Bonds, Series 200 I 6/01/01 6/01112 Subordinated Revenue Refunding Bonds, 3/05/02 6/01/25

Series 200i11

Subordinated Revenue Refunding Bonds, Series 2003 6/19/03 6/01/21 Subordinated Revenue Bonds, Series 2005A 6/02/05 6/01/35 Subordinated Revenue Bonds, Series 2007 A 5/08/07 6/01/37 Subordinated Revenue Refunding Bonds,

Series 20078 5/08/07 6/01/19 Subordinated Revenue Refunding Bonds, Series 2008A'" 3119/08 6/01/38 Subordinated Revenue Refunding Bonds, Series 2008B(J) 4/23/08 6/01/35 Subordinated Revenue Refunding Bonds, Series 2008C'4l 3/19/08 6/01/26

Subordinated Water Parity Debt: State Water Resources Control Board Loan (San Leandro) 1/01/03 1/01/23 State Water Resources Control Board Loan (Eas< Bayshore) 5/22/08 4/1/28

Water Note Parity Debt: State Water Resources Control Board Loan 3/01/88 2/28/09 State Water Resources Control Board Loan 6/06/91 4/30/11 State Water Resources Control Board Loan 2/01/93 7/31114 Federal Drought Loan 9/01/78 9/01/17 California Energy Commission Conservation Loan 6/22/02 6/22/13 Commercial Paper Notes (Water Scriesi5l Various Various

Amount Issued

300,000,000 250,000,000 241 ,850,000

115,730,000 300,000,000 450,000,000

54,790,000

322,525,000

160,000,000

331,950,000

2,188,000

20,100,000

121,875 I ,359,000

22,292,000 5,973,000 1,991,945

315,000,000 To<al Debt $2 825 81Q 820

Out.'ilanding December 31, 1008

s 4,380,000 10.845,000

230,41 0,000

73,795,000 300,000,000 450,000,000

54,790,000

321 ,250,000

159,725,000

330,425,000

1,786,310

20,100,000

8,471 215,979

9,664,631 1,281,488

974,860 315 000000

S2 284 651 132

( > Liquidity support provided by a Standby Bond Purchase Agreement with Dexia Credit Local, acting through its New York Branch, expiring March 6, 2017.

m Liquidity support provided by a Standby Bond Purchase Agreement with Dexia Credit Local, acting through its New York Branch, expiring March 18, 20 II.

(:l} Liquidity support provided by a Standby Bond Purchase Agreement with Landcsbank Badcn-Wurttenburg, acting through its New York Branch, expiring April 22, 2011.

(''l Liquidity support provided by a Standby Bond Purchase Agreement with JPMorgan Chase Bank, National Association, BNP Paribas, acting through its San Francisco Branch, and Lloyds TSB Bank, acting through its New York Branch. expiring March 19, 2009. To be refunded with proceeds of the Series 2009A Bonds.

(j) Liquidity support provided by a Revolving Credit Agreement with JPMorgan Chase Bank. National Association. expiring April 14, 2009. The Commercial Paper Notes (Water Series) arc expected to be retired with extendable municipal commercial paper notes.


Table 12 shows future payments on outstanding debt.

58

V> 'D

Fiscal Series /998 Through Year Series 2008(2)

2009 $ 112,257,272 2010 I 02,758, 115 2011 102,833,848 2012 102,965,731 2013 80,698,129 2014 80,819,119 2015 81,069,667 2016 85,281,315 2017 96,421,631 2018 96,396,618 2019 96,581,984 2020 96,984.189 2021 96,969,600 2022 99,662,292 2023 99,644,581 2024 99,605,937 2025 102,189,779 2026 98,156,572 2027 122,312,530 2028 122,173,013 2029 122, 127,149 2030 121,978,010 2031 121,876,113 2032 121,775,918 2033 121,617,844 2034 121,484,473 2035 121,364,619 2036 66,031,870 2037 66,013,100 2038 15253713 Total(7l :ii2.2.75.lQ.4,727

(l) Debt service is calculated on a cash basis.

W ATI<:K SYSTI<:M t:STIMA I LU ULH I SLK V ILL,.,

Total Subordinated State Parity Water Bonds and Commercial

Series 2009Af.'J LoamJ4J Parity Debt Papel5J

$ 7,569,522 $ 1,400,108 $ 121,226,902 s 9,450,000 16,025,669 I ,409,860 120,193,645 9,450,000 16,033,209 1,409,860 120,276,917 9,450,000 16,009,787 1,409,860 120,385.378 9,450,000 38,431,255 1,409,860 120,539,243 9,450,000 38,357,763 I ,409,860 120,586,742 9,450,000 38,204,460 1,409,860 120,683,987 9,450,000 34,248,051 1,409,860 120,939,226 9,450,000 24,617,145 I ,409,860 122,448,637 9,450,000 24,683,492 1.409,860 122,489,970 9,450,000 24,751,842 I ,409,860 122,743,686 9,450,000 24,771,343 1,409,860 123,165,392 9,450,000 24,867,848 1,409,860 123,247,308 9,450,000 23,212,949 1,409,860 124,285,101 9,450,000 23,365,416 1,400, I 08 124,410,105 9,450,000 23,489,776 1,260,248 124,355,961 9,450,000 21,021,029 I ,260,248 124,471,056 9,450,000 21,151,642 1,260,248 120,568,462 9,450,000

-- I ,260,248 123,572,778 9,450,000 -- I ,260,248 123,433,261 9,450,000 -- 1,260,248 123,387,397 9,450,000 -- -- 121 ,978,010 9,450,000 -- -- 121,876,113 9,450,000 -- -- 121,775,918 9,450,000 -- -- 121,617,844 9,450,000 -- -- 121,484,473 9,450,000 -- -- 121,364,619 9,450.000 -- -- 66,031,870 9,450,000 -- -- 66,013,100 9,450.000 -- -- 15253713 9 450 000

M'\O,Ill2,1.22 $26,6.8.2,8_8_4 SJ,M4.1lll6,1ll0 $283..5J)Q,Qllil

State and Federal Loan.•/61

$ 2,087,507 2,078,804 2,014,086 1.969,542 1,729,217 1,722,098 1,714,978

156,625 149,506

$H,622,ill

T olaf Debt Service(7J

$ 132,764,409 131,722,449 131,741,003 131,804,920 131,718,460 131,758,840 131.848.965 130.545,851 132,048,143 131,939,970 132,193,686 132,615,392 132,697,308 133,735,101 133,860,105 133,805,961 133,921,056 130,018,462 133,022,778 132,883,261 132,837,397 131,428,010 131,326,113 131,225,918 131.067,844 130,934,473 130,814,619 75.481,870 75.463,100 24 703 713

S3 .71.1 .222, LU

(2

) Excludes Series 2008C Bonds to be refunded with Series 2009A Bonds. Includes fees to liquidity providers. Assumes debt service on Series 2002, Series 2008A 13onds and $59,725,000 outstanding principal amount of the Series 20088 Bonds has been fixed pursuant to interest rate swap agreements. See "SECURITY FOR THE SERIES 2009A BONDS- Interest Rate Swap Agreements." Assumes 4.00% interest rate on unhedged Series 20088 Bonds.

(3) Assumes debt service on $330,425,000 principal amount of the Series 2009A Bonds has been tixed pursuant to interest rate swap agreements. Assumes 10-ycar average SIFMA Index plus 10

basis points on unhedgcd Series 2009A Bonds. See "SECURITY FOR THE SERIES 2009A BONDS -Interest Rate Swap Agreements.'' <4> Includes Parity State Loans. See "'SECURITY FOR THE SERIES 2009A BONDS- State Loans and Federal Loan." (S) Assumes $315,000,000 outstanding and interest rate of 3.00%. Includes interest only (no principal amortization). While the commercial paper program is limited by statute to seven years, it is

the District's intention to reestablish the commercial paper program afler each seven-year period. <6> Includes 20-year State Water Resources Control Board loans, federal drought loan and California Energy Commission Conservation loan. (?) May not add due to rounding. Source: The District.

Management Policies

The District has detailed management policies that include guidelines for debt, capital planning, investments, derivatives, and formal reserves. It is the current policy of the District to seck to maintain a debt service coverage ratio of 1.6 on the sum of the outstanding Senior Water Bonds and Subordinate Water Bonds and to fund approximately 35% of its capital program over each five-year planning period from revenues and sources other than debt. The debt policy also limits unhedgcd variable rate debt to 25% of the total debt portfolio. Derivatives usc is governed by a comprehensive derivatives policy with guidelines for countcrparties, termination, and risk exposure. The District budgets for five formal reserves. The current investment policy dictates investment criteria, reporting, and administrative requirements.

Historical Operating Results

The District's financial statements for Fiscal Year 2008, and the Report of Maze & Associates, independent accountants, arc included as Appendix A, and should be read in their entirety. The summary operating results for Fiscal Y cars 2004 through 2008 contained in Table 13 is derived from the audited financial statements for prior Fiscal Y cars and arc qualified in their entirety by reference to such statements, including the notes thereto.

Table 13 sets forth the historic operating results and the calculation of the debt service coverage ratio for the Water System in accordance with the Indenture as footnoted below for each of the last five Fiscal Years.


60

Table 13 WATER SYSTEM

Historical Operating Results and Debt Service Coverage1' 1


WATER REVENUES111:

Water Sales Power Revenue Interest and Net Change in

Fair Value of lnvcstmcnts<3l SCC Rcvenue<41

Seismic Rate Surchargc{SJ Other Revenue

TOTAL WATER REVENUES

WATER OPERATION & MAINTENANCE COSTS: Operating Expenses (Less Tax Rcceipts)<61

TOTAL WATER OPERATION& MAINTENANCE COSTS

NET WATER REVENUES

DEBT SERVICE: Senior Revenue Bonds Subordinated Revenue Bonds Parity State Loans

TOTAL DEBT SERVICE

DEBT SERVICE COVERAGE

2004

$241 ,926,963 2,832,851

6,220,244 12,865,529 14,098,436 7 613 176

$285,557.199

$148,554,221 (17,438 319)

Sl31,ll5,902

s 154,441 ,297

s 0 81,366,576

0 s 81.366,576

1.90

01 Calculated in accordance with the Indenture.

2005

$235,790,209 7,031,210

7,657,082 12,840,377 14,080,961 6214457

$283,614,296

$154,332,249 ( 18.267 309)

s 136,054,840

$147,559,356

s 0 81,600,005

139 860 s 81,739,865

LSI

(ll Revenues exclude grant receipts, taxes, and developer contributions. (J) Includes unrealized gains and losses on investments.

2006

$244,276,762 11,005,761

18,403,943 13,729,912 14,150,544 5 315 162

$306,882,084

s 162,979,643 (19,125,144)

$143,854,509

$163,027,583

s 0 96,759,759

139 860 s 96,899,619

1.68

2007

$260,677,413 4,236,026

21,779,808 19,702,839 14,343,090 7 795 033

$328,534,209

$162,868,727 (21,693,281)

$141,175,446

s 187,358,763

s 0 98,459,235

139 860 s 98,599,095

1.90

2008

$270,564,429 3,090,201

40,439,646171

19,743,005 14,842,821 29,364 93i''

$378,045,034

S177.589,113 (21 693 281)

$155,895 832

$222,149,202

s 0 119,395,490

139 860 $119,535,350

1.86

<4> Excludes portion of SCC receipts accounted for as developer contributions which arc applied by the District to principal

repayment of Outstanding Subordinated Revenue Bonds. Such SCC receipts are Water Revenues for purposes of the Indenture, and if included, Water Revenues, Net Water Revenues and Debt Service Coverage would be higher than shown. See"- System Capacity Charge" above.

CSJ Seismic rate surcharge revenues are capitalized and are not recobrnized as operating revenues for purposes of the District's audited financial statements.

C6l Operation and Maintenance Costs excludes those expenses paid from District's share of countywide 1% property tax

revenues. Under current District policy, District's share of countywide 1% property tax revenues are used to pay for operations allocable to maintenance of fire protection capacity.

(7) Includes interest earnings on the District's Series 2007A bond proceeds.

(S) Includes receipt of nonrecurring litigation proceeds. Source: The District.

District Management's Discussion of Operating Results

Water System Net Revenue was $222.1 million in Fiscal Year 2008 compared to $187.4 million in Fiscal Year 2007. Revenues from water sales increased $9.9 million, primarily due to a 5% increase in rates which became effective July I, 2007. Power revenue decreased approximately $1, I million due to decreased power generation as a result of a decline in available water run-off Water operation and maintenance costs increased by $14,7 million between Fiscal Years 2007 and 2008, primarily due to increased raw water costs, water treatment and distribution expenses and general administrative expenses,

61

http://S285.557.199

http://S306.882.084

http://S328.534.209

http://S13l.115.902

http://f21.693.28t1

and an additional $1.6 million in District contributions made to the Employees' Retirement System during the Fiscal Y car to meet GASB 45 funding requirements. Continued operating surpluses contributed to the District's S273.9 million in unrestricted cash and investments in Fiscal Year 2008 and S232.9 million in Fiscal Year 2007.

See also "Management's Discussion and Analysis" contained in APPENDIX A- "EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2008" hereto.

Projected Operating Results

In the preparation of the projections in this section, the District has made certain assumptions with respect to conditions that may occur in the future. While the District believes these assumptions are reasonable for the purpose of the projections, they arc dependent on future events, and actual conditions may differ from those assumed. To the extent actual future factors differ trom those assumed by the District or provided to the District by others, the actual results will vary from those forecast. This projected information has not been compiled, reviewed or examined by the District's independent accountants. The projected results are based on the District's Biennial Budget for Fiscal Years 2008-2009, which provides a budget forecast for Fiscal Years 2008-2012. The Biennial Budget for Fiscal Y cars 20 I 0-20 II, which will include projected operating results for Fiscal Years 2009 through 2013, will be presented to the Board for approval in June 2009.

Table 14 sets forth the projected operating results and calculation of the debt service coverage ratio for the Water System in accordance with the Indenture as footnoted below for the current and next three Fiscal Y cars.


62

Table 14 WATER SYSTEM

Projected Operating Resnlts and Debt Service Coverage (Millions)

Fiscal Year Ending June 30''l

2009 2010 2011 2012 WATER REVENUES1' 1:

Water Salcs(31 S297.8 $310.6 $323.5 S336.9 Power Revenuc(4

J 5.4 5.7 5.7 5.7 Interest Earnin~s{5 l 14.9 8.1 7.0 7.4 SCC Revenue( 1 38.3 46.3 49.1 50.5 Seismic Rate Surcharge 15.4 16.1 16.8 17.6 Other Revenue ___l_U ___.l.U ~ ---2.2

TOTAL WATER REVENUES $387.5 $402.5 $417.9 $434.0

WATER OPERATION & MAINTENANCE COSTS:

Operating Expensc(7l $203.0 $210.5 $217.8 $225.2 (Less Tax Reccipts)(S) __fl2,}} _QQJ) _@L2) _flU}

TOTAL WATER OPERATION & MAINTENANCE COSTS $183.7 $190.4 $196.9 $203.5

NET WATER REVENUES $203.8 $2I2.1 $221.0 $230.5

DEBT SERVICE: Senior Revenue Bonds s 0.0 s 0.0 s 0.0 s 0.0 Subordinated Revenue Bonds(91 119.8 131.4 135.8 141.3 Parity State Loans _____ld _____ld _____ld _____ld

TOTAL DEBT SERVICE SI2!.2 Sl32.8 $137.2 $142.7

DEBT SERVICE COVERAGE 1.68 1.60 1.61 1.62

lll Figures adopted in the Biennial Budget for Fiscal Years 2008 and 2009. (ll Revenues exclude grant receipts, taxes, and certain developer contributions. Developer contributions are defined as contributions

(not Water Revenues) under the Indenture. (JJ Assumes adoption of 5% rate increases effective for Fiscal Y car 2009 and 4% rate increases effective in each of Fiscal Y cars

2010, 2011 and 2012 and assumes a normal water year. Sec "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" herein.

r4) Assumes "normal" water year. Although 2009 has not been a "normal" water year, based upon operating results to date in Fiscal Year 2009 and the District's implementation of drought rates and other programs, absent unforeseen events, the District currently does not expect actual results for such Fiscal Year will be materially different. Increase in Fiscal Years 2009 and thereafter reflects expiration of power sales agreement with Pacific Gas & Electric Co. on December 31, 2008 and the required profit sharing associated therewith.

{5

) Assumes approximately 5% earning rate on fund balances. Does not include projected change in fair market value of investments.

{6l Accounts for portion of SCC receipts attributable to principal repayment upon expenditure in accordance with the Uniform

System of Accounts for Water Utilities. The Indenture would recognize such SCC receipts as Water Revenues upon receipt. See "-System Capacity Charge" above. Increases beginning in Fiscal Year 2009 from historical amounts attributable to increased reimbursements for costs of Freeport Regional Water Authority Project from SCC Revenues. Reflects approval of SCC fcc increase effective in Fiscal Year 2008.

(7) Fiscal Year 2009 based on Biennial Budget for Fiscal Year 2008 and 2009. Subsequent Fiscal Year projections assume 3.5% increase in Operating Expenses.

{S) Water Operation and Maintenance Costs excludes those expenses paid from ad valorem taxes. Under current District policy, taxes are used to pay for operations allocable to maintenance of fire protection capacity.

(Q) Assumes issuance of Series 2009A Bonds to redeem the Series 2008C Bonds. Assumes that interest with respect to all of the Series 2002 Bonds, the Series 2008A Bonds, $59,725,000 aggregate principal amount of the Series 2008B Bonds and S330,425,000 principal amount of the Series 2009A Bonds have been swapped to fixed rates. Sec "SECURITY FOR THE SERIES 2009A BONDS- Interest Rate Swap Agreements." Assumes 4.00% interest rate on unhedged Series 2008B Bonds. Assumes 10-ycar average SIFMA Index plus 10 basis points on unhedgcd Series 2009A Bonds. Includes liquidity fees with respect to the Series 2002 Bonds, Series 2008A Bonds and Series 2008B Bonds. Assumes issuance of SSO million, S 180 million, $70 million and $87 million in aggregate principal amount of Subordinated Water Bonds in Fiscal Year 2009 through Fiscal Year 2012, respectively, at an average interest rate of 4.50% with full principal amortization over 30 years. Timing of actual issuances may be adjusted in the Biennial Budget process currently underway; however, the District does not currently expect any material increase in the anticipated amount of such future issuances.

63

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS

Tax Limitations - Proposition 13

Article X IliA of the State Constitution, known as Proposition 13, was approved by the voters in June 1978. Section I (a) of Article XIII A limits the maximum ad valorem tax on real property to I% of "full cash value," and provides that such tax shall be collected by the counties and apportioned according to State statutes. Section I (b) of Article XIII A provides that the I% limitation does not apply to ad valorem taxes levied to pay interest or redemption charges on (I) indebtedness approved by the voters prior to July I, 1978, and (2) any bonded indebtedness for the acquisition or improvement of real property approved on or after July I, 1978, by two-thirds of the votes cast by the voters voting on the proposition.

Section 2 of Article XIIIA defines "full cash value" to mean the county assessor's valuation of real property as shown on the 1975-76 Fiscal Year tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XlllA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. Such legislation further provides that each county will levy the maximum tax permitted by Article XIIIA, which is Sl.OO per SIOO of assessed market value. The legislation further establishes the method for allocating the taxes collected by each county among the taxing agencies in the county. Special districts, such as the District, receive an allocation that is based primarily upon their tax levies in certain years prior to the amendment's effective date relative to the tax levies of other congruent agencies. The District receives approximately 1.25% of the non-debt service property taxes collected within its jurisdiction from Alameda and Contra Costa counties.

Since its adoption, Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of the District.

Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the 2% annual adjustment are allocated among the various jurisdictions in the "taxing area" based upon their respective "situs." Any such allocation made to a local agency continues as part of its allocation in future years.

The effect of Article XIIIA on the District's finances has been to restrict ad valorem tax revenues for general purposes to the statutory allocation of the I% levy while leaving intact the power to levy ad valorem taxes in whatever rate or amount may be required to pay debt service on its outstanding general obligation bonds and unissued bonds authorized prior to July I, 1978. Since Fiscal Year 1978-79 tax revenues have consisted exclusively of the District's allocated share of the I% county levy.

Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XlllA.

64

For a description of the property tax collection procedure and certain statistical information concerning tax collections and delinquencies, see "WATER SYSTEM FINANCES - Tax Revenues" above.

Spending Limitations

At the statewide special election of November 6, 1979, the voters approved an initiative entitled "Limitation of Government Appropriations" which added Article XIIIB to the California Constitution. Under Article XJIIB, State and local governmental entities have an annual "appropriations limit" which limits the ability to spend certain monies which are called "appropriations subject to limitation" (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the "appropriations." Article XJIIB does not affect the appropriation of monies which are excluded from the definition of "appropriations subject to limitation." Among the exclusions is an "appropriation of any special district which existed on January I, 1978, and which did not as of the 1977-78 Fiscal Year levy an ad valorem tax on property in excess of 12.5 cents per $100 of assessed value." In the opinion of the District's General Counsel, the appropriations of the District arc excluded from the limitations of Article XIIIB under this clause.

Proposition 62

A statutory initiative ("Proposition 62") was adopted by the voters voting in the State at the November 4, 1986 General Election which (I) requires that any tax for general governmental purposes imposed by local governmental entities be approved by resolution or ordinance adopted by two-thirds vote of the governmental agency's legislative body and by a majority of the electorate of the governmental entity, (2) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters within that jurisdiction, (3) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, ( 4) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XJIIA, (5) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities and (6) requires that any tax imposed by a local governmental entity on or after March I, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988.

Following its adoption by the voters, various prov!Slons of Proposition 62 were declared unconstitutional at the appellate court level. On September 28, 1995, however the California Supreme Court, in Santa Clara County Local Transportation Authority v. Guardino ("Guardino"), upheld the constitutionality of the portion of Proposition 62 requiring a two-thirds vote in order for a local government or district to impose a special tax, and, by implication, upheld a parallel provision requiring a majority vote in order for a local government or district to impose any general tax. Guardino did not address the question of whether or not it should be applied retroactively.

On December 15, 1997, the Court of Appeals for the State of California, Fourth Appellate District, in McBrearty v. City of Brawley, a presently published opinion, determined that (i) Guardino is to be applied retroactively to require voter approval of previously enacted taxes, and (ii) the three-year statute of limitations applicable to such taxes runs from the date of the Guardino decision (September 28, 1995).

65

Proposition 218

On November 5, 1996, the voters of the State approved Proposition 218, the so-called "Right to Vote on Taxes Act." Proposition 218 added Articles XliiC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local governments to levy and collect both existing and future taxes, assessments, fees and charges.

Article XIIID established procedural requirements for imposition of assessments, which are defined as any charge on real property for a special benefit conferred upon the real property. Standby charges are classified as assessments. Procedural requirements include the conducting of a public hearing and an election by mailed ballot, with notice to the record owner of each parcel subject to the assessment. The assessment may not be imposed if a majority of the ballots returned oppose the assessment, with each ballot weighted according to the proportional financial obligation ofthe affected parcel. The District docs not currently impose standby charges or assessments for its Water System.

Article XIIID conditions the imposition or increase of any "fee" or "charge" upon there being no written majority protest after a required public hearing and, for fees and charges other than for sewer, water or refuse collection services, voter approval. Article XIIID defines "fee" or "charge" to mean levies (other than ad valorem or special taxes or assessments) imposed by a local government upon a parcel or upon a person as an incident of the ownership or tenancy of real property, including a user fcc or charge for a "property-related service." One of the requirements of Article XliiD is that before a property-related fee or charge may be imposed or increased, a public hearing upon the proposed fcc or charge must be held and mailed notice sent to the record owner of each identified parcel of land upon which the fcc or charge is proposed for imposition. In the public hearing if written protests of the proposed fee or charge are presented by a majority of the owners of affected identified parcel(s), an agency may not impose the fee or charge.

In Opinion No. 97-302, dated July 14, 1997, the California Attorney General concluded that Article XIIID is inapplicable to the District's tiered water rate structure. The opinion makes a distinction between a water rate structure based upon the amount of water used, which is not subject to Article XliiD, and fees or assessments that arc levied against a parcel of land on a per-parcel or per-acre basis, which arc subject to Article XIJID. The Attorney General concluded that fees for water that are based upon metered amounts used are not imposed as an incident of property ownership and do not have a direct relationship to property ownership and, consequently, such fees would not be governed by Article XIIID. On December I, 2000, the Court of Appeal for the Second Appellate District of the State of California published an opinion regarding Proposition 218's definition of property-related fees that is consistent with Opinion No. 97-302. In Howard Jarvis Taxpayers Association v. City of Los Angeles, the Court of Appeal held that fees for water that arc based upon metered amounts used are charges for a commodity and not related to property ownership and, consequently, Article XIIID docs not apply to such fees. However, in a decision rendered in February 2004, the California Supreme Court in Richmond eta/. v. Shasta Community Services District, 32 Cal. 4th 409, upheld a Court of Appeals decision that water connection fees were not property-related fees or charges subject to Article XIIID, while at the same time stating in dicta that fees for ongoing water service through an existing connection were property-related fees and charges. In October 2004, the California Supreme Court granted review of the decision of the Fourth District Court of Appeal in Bighorn-Desert View Water Agency v. Beringson, 120 Cal. App. 4th 891 (2004), in which the appellate court had relied on Howard Jarvis Taxpayers Association v. City of Los Angeles and rejected the California Supreme Court's dicta in Richmond et al. v. Shasta Community Services District. On March 23, 2005, the California Fifth District Court of Appeal published Howard Jarvis Taxpayers Association v. City of Fresno, 127 Cal.App.4th 914 (5th Dist. 2005), holding that an "in lieu" fcc which is payable to the City of Fresno's general fund from its water utility and which is included in the city's water rate structure was invalid. In reaching its decision, the court concluded that the city's

66

water rates were "property related" fees, governed by the limitations of Article XIII D. The City of Fresno requested a review of this decision by the California Supreme Court, which denied review. On July 24, 2006, the California Supreme Court ruled in Bighorn-Desert View Water Agency v. Verjil. In dicta, the California Supreme Court repeated its previous dicta in Richmond et a/. v. Shasta Community Services District that fees and charges for ongoing water service through an existing connection were property related fees and charges under Article XIIID. Prior to 2007, the District did not comply with the notice, hearing and protest procedures in Article XIII with respect to water rate increases based on the decision in Howard Jarvis Taxpayers Association v. City of Los Angeles and Opinion No. 97-302. However, the District followed the notice, hearing and protest procedures in Article XIIJD in connection with water rate increases for Fiscal Y car 2008 and plans to follow such notice, hearing and protest procedures in connection with future rate increases.

In addition to the procedural requirements of Article XIIID, under Article XIIID all propertyrelated fees and charges, including those which were in existence prior to the passage of Proposition 218 in November 1996, must meet the following substantive standards:

(I) Revenues derived from the fee or charge cannot exceed the funds required to provide the property-related service.

(2) Revenues derived from the fee or charge must not be used for any purpose other than that for which the fee or charge was imposed.

(3) The amount of a fcc or charge imposed upon any parcel or person as an incident of property ownership must not exceed the proportional cost of the service attributable to the parcel.

(4) No fcc or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Fees or charges based on potential or future use of a service are not permitted. Standby charges, whether characterized as charges or assessments, must be classified as assessments and cannot be imposed without compliance with Section 4 of Article XIIID (relating to assessments).

(5) No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services where the service is available to the public at large in substantially the same manner as it is to property owners.

The District believes that its rates comply with the foregoing standards.

Article XIIID provides that nothing in Proposition 218 shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development. The District believes that Proposition 218 does not apply to the District's System Capacity Charge, although there can be no assurance that a court would not determine otherwise. See "WATER SYSTEM FINANCES - System Capacity Charge."

Article XIIIC. Article XIIIC provides that the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge and that the power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. Article XIIIC does not define the terms "local tax," "assessment," "fee" or "charge." On July 24, 2006, the California Supreme Court held in Bighorn-Desert View Water Agency v. Verjil that the provisions of Article XIIIC applied to rates and fees charged for domestic water use. In the decision, the Court noted that the decision did not address whether an initiative to reduce fees and charges could

67

override statutory rate setting obligations. The District and its General Counsel do not believe that Article XliiC grants to the voters within the District the power to repeal or reduce rates and charges in a manner that would be inconsistent with the contractual obligations of the District. No assurance can be given that the voters of the District will not, in the future, approve initiatives which seek to repeal, reduce or prohibit the future imposition or increase of assessments, fees or charges, including the District's water service fees and charges, which arc the source of Water Revenues pledged to the payment of debt service on the Series 2009 A Bonds.

The interpretation and application of Proposition 218 will likely be subject to further judicial determinations, and it is not possible at this time to predict with certainty the outcome of such determinations.

Future Initiatives

Articles XIIIA, XIIIB, XIIIC and XIIID and Proposition 62 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 District's revenues or ability to increase revenues.

Effect of Proposition 218 and of Possible General Limitations nn Enforcement Remedies

The ability of the District to comply with its covenants under the Indenture and to generate Water Revenues sufficient to pay the principal of and interest on the Series 2009A Bonds may be adversely affected by actions and events outside of the control of the District and may be adversely affected by actions taken (or not taken) under Article XliiC or Article XIIID by voters, property owners, taxpayers or payers of assessments, fees and charges. Furthermore, any remedies available to the owners of the Series 2009 A Bonds upon the occurrence of an event of default under the Indenture are in many respects dependent upon judicial actions which arc often subject to discretion and delay and could prove both expensive and time consuming to obtain. In addition to the possible limitations on the ability of the District to comply with its covenants under the Indenture, the rights and obligations under the Series 2009A Bonds and the Indenture may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against municipal utility districts in the State of California.

Based on the foregoing, in the event the District fails to comply with its covenants under the Indenture, including its covenants to generate sufficient Water Revenues, as a consequence of the application of Article XliiC and Article XIIID, or to pay principal of or interest on the Series 2009A Bonds, there can be no assurance that available remedies will be adequate to fully protect the interests of the holders of the Series 2009A Bonds.

CONTINUING DISCLOSURE

The District has covenanted for the benefit of the holders and beneficial owners of the Series 2009A Bonds to provide in an Annual Report certain financial information and operating data relating to the District by not later than 270 days following the end of the District's fiscal year (which currently is June 30 of each year), commencing with the Annual Report for Fiscal Y car 2008-09, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the District with each Nationally Recognized Municipal Securities Information Repository and with the state information repository, if any. The notices of material events will be filed by the District with the Municipal Securities Rulemaking Board and with state information repository, if any. Prior to July I, 2009, the information will be available to owners of the Series 2009A Bonds only if the owners

68

comply with the procedures and pay the charges established by such infonnation vendors or obtain the information through securities brokers who do so. Effective July I, 2009, all such information must be filed with the Municipal Securities Rulcmaking Board, rather than the current Nationally Recognized Municipal Securities Information Repositories. The Municipal Securities Rulemaking Board intends to make the information available to the public without charge through an internet portal. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth in APPENDIX G - "FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto. These covenants have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b )(5).

The District has not failed to comply in any material respect with any of the District's prior continuing disclosure undertakings.

LITIGATION

There is no action, suit or proceeding known to be pending or threatened, restraining or enjoining the District in the execution or delivery of, or in any way contesting or affecting the validity of, the Series 2009A Bonds. There is no litigation known to be pending, or to the knowledge of the District, threatened, questioning the existence of the District or the title of the officers of the District to their respective offices.

There exist lawsuits and claims against the District, which are incidental to the ordinary course of operations of the Water System. In the view of the District's management and General Counsel, there is no litigation, present or pending, which will individually or in the aggregate materially impair the District's ability to service its indebtedness or to expend the proceeds for the purposes for which the Series 2009A Bonds arc authorized or which will have a material adverse effect on the business operations of the District.

RATINGS

It is expected that Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings, Inc. ("Fitch") will assign the Series 2009A Bonds the short term ratings of "A-I+," "VMIG-1" and "F I+," respectively. Such short-term ratings are applicable only to the Initial SJFMA-Based Interest Rate Period. Moody's is expected to assign a long-term rating of"Aa2" to the Series 2009A Bonds. Although S&P and Fitch have not assigned long-term ratings to the Series 2009A Bonds, S&P and Fitch have affirmed the long-term rating of "AAA," and "AA," respectively, on the District's Outstanding Water System Subordinated Revenue Bonds. No application has been made to any other rating agency for the purpose of obtaining any additional rating on the Series 2009A Bonds. Any desired explanation of such ratings should be obtained from the rating agency furnishing the same. Generally, rating agencies base their ratings on information and materials furnished to them and on investigations, studies and assumptions by the rating agencies. There is no assurance that any rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating agency if, in the judgment of such rating agency, circumstances so warrant. Any such change in or withdrawal of such ratings may have an adverse effect on the market price of the Series 2009A Bonds.

TAX MATTERS

The Internal Revenue Code of 1986 (the "Code") imposes certain requirements that must be met subsequent to the issuance and delivery of the Series 2009A Bonds for interest thereon to be and remain excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal

69

income tax purposes. Noncompliance with such requirements could cause the interest on the Series 2009A Bonds to be included in the gross income of the owners thereof for federal income tax purposes retroactive to the date of issuance of the Series 2009A Bonds. The District has covenanted to maintain the exclusion of the interest on the Series 2009A Bonds from the gross income of the owners thereof for federal income tax purposes.

In the opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, and Curls Bartling P.C., Oakland, California, Co-Bond Counsel, under existing statutes, regulations, rulings and court decisions, interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenant, interest on the Series 2009A Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes and will not be treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code.

Co-Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance of the Series 2009A Bonds may affect the tax status of interest on the Series 2009A Bonds or the tax consequences of the ownership of the Series 2009A Bonds. No assurance can be given that future legislation, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of interest on the Series 2009A Bonds from personal income taxation by the State of California or of the exclusion of the interest on the Series 2009A Bonds from the gross income of the owners thereof for federal income tax purposes. Furthermore, Co-Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the Series 2009A Bonds, or the interest thereon, if any action is taken with respect to the Series 2009A Bonds or the proceeds thereof predicated or permitted upon the advice or approval of bond counsel if such advice or approval is given by counsel other than Co-Bond Counsel.

Co-Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the District described above. No ruling has been sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the opinion of Co-Bond Counsel, and Co-Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Series 2009A Bonds is commenced, under current procedures the Service is likely to treat the District as the "taxpayer," and the owners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Series 2009A Bonds, the District may have different or confiicting interests from the owners of the Series 2009A Bonds. Further, the disclosure of the initiation of an audit may adversely affect the market price of the Series 2009A Bonds, regardless of the final disposition of the audit.

Although Co-Bond Counsel is of the opinion that interest on the Series 2009A Bonds is exempt from California personal income tax and that interest on the Series 2009A Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes, an owner's federal, state or local tax liability may be otherwise affected by the ownership or disposition of the Series 2009A Bonds. The nature and extent of these other tax consequences will depend upon the owner's other items of income or deduction. Without limiting the generality of the foregoing, prospective purchasers of the Series 2009A Bonds should be aware that (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Series 2009A Bonds and the Code contains additional limits on interest deductions applicable to financial institutions that own taxexempt obligations (such as the Series 2009A Bonds), (ii) with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b )(5)(B)(i) reduces the deduction for loss reserves by 15 percent of the sum of certain items, including interest on the Series 2009A Bonds,

70

(iii) interest on the Series 2009A Bonds earned by certain foreign corporations doing business in the United States could be subject to a branch profits tax imposed by section 884 of the Code, (iv) passive investment income, including interest on the Series 2009A Bonds, may be subject to federal income taxation under section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25% of the gross receipts of such Subchapter S corporation is passive investment income, (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, receipts or accruals of interest on the Series 2009A Bonds and (vi) under section 32(i) of the Code, receipt of investment income, including interest on the Series 2009A Bonds, may disqualify the recipient thereof from obtaining the earned income credit. Co-Bond Counsel has expressed no opinion regarding any such other tax consequences

A copy of the form of opinion of Co-Bond Counsel is attached hereto as APPENDIX D.

UNDERWRITING

The Series 2009A-l Bonds are being purchased pursuant to a purchase contract between the District and Morgan Stanley & Co. Incorporated, as representative of itself and Stone & Youngberg LLC (the "Series 2009A-l Underwriters"). The Series 2009A-2 Bonds are being purchased pursuant to a purchase contract between the District and E.J. De La Rosa & Co., Inc., as representative of itself and Piper Jaffray & Co. (the "Series 2009A-2 Underwriters" and, together with the Series 2009A-l Underwriters, the "Underwriters"). The Series 2009A-l Underwriters have agreed to purchase the Series 2009A-l Bonds at an aggregate purchase price of $165,356,823.56 (equal to the aggregate principal amount of the Series 2009A-l Bonds, less an underwriters' discount of S223, 176.44). The Series 2009A-2 Underwriters have agreed to purchase the Series 2009A-2 Bonds at an aggregate purchase price of SI65,351,830.14 (equal to the aggregate principal amount of the Series 2009A-2 Bonds, less an underwriters' discount of$223,169.86). The purchase contracts each provide that the Underwriters will purchase all of the Series 2009A Bonds of the respective series if any arc purchased. The obligation of the Underwriters to make such purchase is subject to certain terms and conditions set forth in the respective purchase contracts.

The Underwriters may offer and sell the Series 2009A Bonds to certain dealers and others at prices or yields below those stated on the cover page of this Official Statement. The offering prices or yields may be changed from time to time by the Underwriters.

REMARKETING AGENTS

Morgan Stanley & Co. Incorporated and Stone & Youngberg LLC (the "Series 2009A-l Rcmarketing Agents") have been appointed to serve as initial remarketing agents for the Series 2009A-l Bonds in connection with any Conversion of such Series 2009A-l Bonds to another Interest Rate Period (or a new SIFMA-Bascd Term Interest Rate Period). Morgan Stanley & Co. Incorporated and Stone & Youngberg LLC will carry out the duties and obligations provided under and in accordance with the provisions of the Indenture and the respective Remarkcting Agreements, dated as of March I, 2009, by and between the District and such Series 2009A-l Rcmarketing Agents, executed in connection with the Series 2009A-l Bonds.

E.J. De La Rosa & Co. Inc. and Piper Jaffray & Co. (the "Series 2009A-2 Remarketing Agents") have been appointed to serve as initial remarketing agents for the Series 2009A-2 Bonds in connection with any Conversion of such Series 2009A-2 Bonds to another Interest Rate Period (or a new SIFMABased Term Interest Rate Period). E.J. De La Rosa & Co. Inc. and Piper Jaffray & Co. will carry out the duties and obligations provided under and in accordance with the provisions of the Indenture and the

71

respective Remarketing Agreements, dated as of March 1, 2009, by and between the District and such Series 2009A-2 Rcmarketing Agents, executed in connection with the Series 2009A-2 Bonds.

APPROVAL OF LEGAL PROCEEDINGS

All legal matters incident to the reoffcring of the Series 2009A Bonds arc subject to the approval of legality by Fulbright & Jaworski L.L.P., Los Angeles, California, and Curls Bartling P.C., Oakland, California, Co-Bond Counsel. The form of approving opinion of Co-Bond Counsel to be delivered with the Series 2009A Bonds is included as APPENDIX D to this Official Statement. Certain legal matters will be passed upon for the District by its General Counsel and for the Underwriters by their counsel, Stradling Yocca Carlson & Rauth, A Professional Corporation.

INDEPENDENT ACCOUNTANTS

Included as APPENDIX A to this Official Statement are the audited financial statements of the District's Water System for the Fiscal Year ended June 30, 2008. The District's financial statements for the Fiscal Year ended June 30, 2008, included in APPENDIX A hereto, have been audited by Maze & Associates, certified public accountants. Maze & Associates was not requested to consent to the inclusion of its report in APPENDIX A and it has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Otlicial Statement, and no opinion is expressed by Maze & Associates with respect to any event subsequent to the date of its report.

It is District policy to competitively select and retain independent accountants for a five-year period. Maze & Associates began serving as the District's independent accountants in Fiscal Year 2005.

MISCELLANEOUS

References made herein to certain documents and reports arc brief summaries thereof and do not purport to be complete or definitive and reference is hereby made to such documents and reports for a full and complete statement of the contents thereof.

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or registered owners of any of the Series 2009A Bonds. The delivery and distribution of this Official Statement have been duly authorized by the District.

EAST BAY MUNICIPAL UTILITY DISTRICT

By: /s/ Dennis M. Diemer General Manager

72

APPENDIX A

EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS

JUNE 30, 2008



BASIC FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

PREPARED BY THE FINANCE DEPARTMENT

This Page Left Intentionally Blank

EAST BAY MUNICIPAL UTILITY DISTRICT BASIC FINANCIAL STATEMENTS

For the Years Ended June 30, 2008 and 2007

Table of Contents

Judepeudellf Auditor's Report 011 Basic Fiuaucia/ Statemellfs .......................................................... I

Mauagemeut'.< Discussiou aud Aualysis ............................................................................................. 3

Basic Fiuaucia/ Statemeuts

Balance Sheets- Proprietary Funds- Enterprise .................................................................... 14

Statements of Revenues, Expenses and Changes in Net Assets-Proprietary Funds- Enterprise .......................................................................................... 16

Statements of Cash Flows- Proprietary Funds- Enterprise ................................................. 17

Statements of Fiduciary Net Assets-Fiduciary Fund- Pension and Other Employee Benefit Trust (Component Unit) ......... 19

Statements of Changes in Fiduciary Net Assets-Fiduciary Fund- Pension and Other Employee Benefit Trust (Component Unit) ........ 20

Notes to Basic Financial Statements ....................................................................................... 21

Required Supplemeutal luformatiou

Schedule of Funding Progress ................................................................................................ 53


MAZE& ASSOCIATES

INDEPENDENT AUDITOR'S REPORT

Board of Directors East Bay Municipal Utility District Oakland, California

ACCOUNTANCY CORPORATION 3478 Buskirk Ave. -Suite 215

Pleasant Hill, California 94523 (925) 930-0902 ·FAX (925) 930-0135

[email protected] www.mazeassociates.com

We have audited the financial statements of the business-type activities, each major fund and the discretely presented component unit, of the East Bay Municipal Utility District as of and for the years ended June 30, 2008 and 2007, which collectively comprise the District's basic financial statements as listed in the Table of Contents. These basic financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in the United States of America and the standards for the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the basic financial statements referred to above present fairly in all material respects the respective financial position of the business-type activities, each major fund and the discretely presented component unit of the East Bay Municipal Utility District at June 30, 2008 and 2007 and the respective changes in the financial position and cash flows, where applicable, thereof for the years then ended, in conformity with generally accepted accounting principles in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated August 28, 2008 on our consideration of the East Bay Municipal Utility 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Management's Discussion and Analysis and Required Supplemental Information are not required parts of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit this infornmtion and express no opinion on it.

-~~1>-J-~~ August 28, 2008

A Professional Corporation

mailto:[email protected]

http://www.mazeassociates.com



Management's Discussion and Analysis

June 30, 2008

This section presents management's analysis of the East Bay Municipal Utility District's (the District) financial condition and activities as of and for the years ended June 30, 2008. Management's Discussion and Analysis (MDA) is intended to serve as an introduction to the District's basic financial statements.

This information should be read in conjunction with the audited financial statements that follow this section. The District, as the primary governmental entity, includes within the financial statements, the financial position and activities of the District's Employees' Retirement System (Employees' Retirement System) as a component unit. The Employees' Retirement System issues its own financial statements and MDA under separate cover. Significant matters pertaining to the Employees' Retirement System have been included in the notes to the financial statements as deemed appropriate.

The information in this MDA is presented under the following headings:

• Organization and Business

• Overview of the Basic Financial Statements

• Financial Analysis

• Capital Assets and Debt Administration

• Request for Information

ORGANIZATION AND BUSINESS

The District provides water and wastewater services. The Water System collects, transmits, treats, and distributes high-quality water to approximately 60% of the developed area within Alameda and Contra Costa counties of California. The Wastewater System intercepts and treats wastewater from residences and industries in the communities of Alameda, Albany, Berkeley, Emeryville, Oakland, Piedmont, and Stege Sanitary District. The District's water system serves approximately 1.3 million people. The water is supplied to industrial, commercial, residential, and public authority users in a 325 square mile service area. The wastewater system serves about 600,000 within a 70 square mile service area. The District recovers cost of service through user fees.

OVERVIEW OF THE BASIC FINANCIAL STATEMENTS

The District's basic financial statements are comprised of two components: {l) Fund Financial Statements and (2) Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements.

Fund Financial Statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District, like other special purpose governments, uses fund accounting to ensure and demonstrate compliance with financial-related legal requirements.

Proprietary Funds. The District's proprietary funds consist of two enterprise funds, the Water System and the Wastewater System. Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body 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.

3



June 30, 2008

The District's proprietary fund statements include:

The balance sheet presents information on the District's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the District is improving or deteriorating.

While the balance sheet provides information about the nature and amount of resources and obligations at year-end, the statement of revenues, expenses, and changes in net assets presents the results of the District's operations over the course of the fiscal year and information as to how the net assets changed during the year. This statement can be used as an indicator of the extent to which the District has successfully recovered its costs through user fees and other charges. All changes in net assets are reported during the period in which the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods, such as delayed collection of operating revenues and the expense of employee earned but unused vacation leave.

The statement of cash flows presents changes in cash and cash equivalents resulting from operational, capital, noncapital, and investing activities. This statement summarizes the annual flow of cash receipts and cash payments, without consideration of the timing of the event giving rise to the obligation or receipt and excludes noncash accounting measures of depreciation or amortization of assets.

Fiduciary Fund. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. The District's fiduciary fund consists of the Pension and Other Employee Benefit Trust fund, which is maintained to account for assets held by the Employees' Retirement System in a trustee capacity for vested and retired employees. The accounting used for fiduciary funds is much like that used for the proprietary funds.

Notes to Basic Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to basic financial statements can be found on pages 21 to 52 of this report.

Other Information. 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 and other post-employment healthcare benefits to its employees. Such required supplementary information can be found on pages 53-54 of this report.

4



June 30, 2008

FINANCIAL ANALYSIS

Financial Highlights

• The total assets of the District exceeded the total liabilities by $1.6 billion (net assets).

• Net assets increased by $47 million or 3% during the fiscal year.

• Capital assets increased by $24 7 million or 7% to $3.6 billion.

• During the year, operating revenue increased by $10 million or 3% to $333 million.

• Operating expense increased by $35 million or II% to $345 million.

• Other income (expense) increased by $27 million or 122% from a negative $22 million to a positive $5 million.

• Capital contributions, consisting of capital facility fees, decreased by $18 million or 25% from the prior fiscal year.

Financial Position

The District's net assets increased by $47 million or 3% during the year (see Table I on the following page). There was a decrease of $199 million in the level of current and other assets that were used for investment in capital assets. By far the largest portion of the District's net assets, 73% or $1.2 billion represents its investment in capital assets necessary to provide services. The increase of 3% in Total Net Assets is consistent with the District's implementation of a five-year capital improvement program.

5



June 30, 2008

Table I

Net Assets

Water and Wastewater

Jilllc 30, 2008 and 2007

(In tbousands)

2008 2007 Variance %

Current and other assets $ 809,873 1,008,449 ( 198,576) (20)% Capital assets 3,584,180 3,337,081 247,099 7%

Total assets 4,394,053 4.345,530 48,523 1%

Current and other liabilities 191,691 152,041 39,650 26% Long-tcnn liabilities 2,600,899 2,639,139 (38,240) (1)%

Total liabilities 2,792,590 2,791,180 I ,410 QO/()

Net assets: Invested in capital assets, net of

related debt 1,182,822 1,174,486 8,336 1% Restricted 143,489 130,641 12,848 10% Unrestricted 275,152 249.223 25,929 10%

Total net assets s 1,601,463 I ,554,350 47,113 3%}

Net Assets


J unc 30. 2!Xl7 and 2006

(In tbousands)


Current and other assets $ 1,008,449 523,611 484,838 93% Capital assets 3,337,081 3,181,030 156,051 5%

Total assets 4,345,530 3, 704,641 640,889 17%

Current and other liabilities 152,041 152,317 (276) (0)% Long-term lie1bilities 2,639,139 2,060,455 578,684 28%

Tota11iabilities 2,791,180 2,212,772 578,408 26%

Net assets: Invested in capital assets, net of

related debt 1,174,486 1,226,133 (51,647) (4)% Restricted 130,641 119,236 11,405 10% Unrestricted 249,223 146,500 102,723 70%

Total net assets $ I ,554,350 I ,491,869 62,481 4%

6



June 30, 2008

Results of Operations

The following table (Table 2) shows changes in the District's net assets for the year:

Table 2

Changes in Net Assets


Jtme 30, 2008 and 2007

(In thousands)

2008 2007

Operating Revenues: Water s 270,564 260,678 Sewer 46,161 44,593 Power 3,091 4,236 Wet weather facilities charges 13.669 13.735

Total operating revenues 333,485 323.242

Operating Expenses: Raw Water 29,586 25,252 Water treatment & distribution 80,822 77,021 Recreation areas, net 8,633 9,449 Sewer lines & pumps 12,031 12,270 Sewer treatment plant operations 24,839 22,972 Customer accounting & collecting 14,781 13,992 Financial risk management 17,930 15,732 Facilities management 10.018 11.579 General administration 61.910 37,151 Depreciation (excluding amounts

reported within the Water and Wastewater operations) 84,004 84,494

Total operating expenses 344,554 309,912

Net operating income (expense) (11,069) 13,330

Nonoperating income (expense): Investment income 46,290 24,444

Taxes & subventions 29,922 28,468 Interest & amortization or bond

expenses. net (I 06,705) (88,914) Other income (expense) 35,365 14,117

Total other income (expense), net 4,872 (21 ,885)

Income (Loss) before contributions (6,197) (8,555)

Capital contributions 53.310 71,036

Change in net assets 47,113 62.481

Total net assets- beginning 1,554,350 I ,491,869

Total net assets- ending $ 1,601,463 I ,554,350

7

Variance %

9,886 4% 1,568 4%

(I, 145) (27)% (66) (0)%

10,243 3%

4,334 17% 3,801 5% (816) (9)% (239) (2)% I ,867 8%

789 6% 2,198 14%

(1,561) ( 13)% 24,759 67%

( 490) ( 1)%

34,642 II%

(24,399) (183)%

21,846 89% 1,454 5%

(17,791) 20% 21,248 151%

26,757 (122)%

2,358 (28)%

( 17, 726) (25)%

( 15,368) (25)%

62,481 4%

47,113 3%



June 30, 2008

Table 2 (Continued)

Changes in Net Assets


June 30, 2007 and 2006

(In thousands)


Operating Revenues: Water 260,678 244,280 16,398 7% Sewer 44,593 42.581 2,012 5% Power 4,236 11,006 (6,770) (62)% System capicity charges 19,703 13,730 5.973 44% Wet weather facilities charges 13,735 13,839 (104) (I)%

Total operating revenues 342,945 325,436 17.509 5%

Operating Expenses: Raw Water 25,252 24,239 1,013 4% Water treatment & distribution 77,021 75,983 1,038 I% Recreation areas, net 9,449 8,293 I, 156 14% Sewer lines & pumps 12,270 11.725 545 5% Sewer treatment plant operations 22,972 22,062 910 4% Customer accounting & collecting 13,992 13,267 725 5% Financial risk management 15,732 17,491 (1,759) (10)% Facilities management 11,579 10,923 656 6% General administration 37,151 34.712 2,439 7% Depreciation (excluding amounts

reported within the Water and Wastewater operations) 84.494 76,894 7.600 10%

·rota! operating expenses 309,912 295,589 14,323 5%

Net operating income (expense) 33,033 29,847 3,186 II%

Nonoperating income (expense): Investment income 24,444 20,482 3.962 19% Taxes & subventions 28,468 24,466 4,002 16% Interest & amortization or bond

expenses, net (88,914) (88,863) (51) 0% Other income (expense) 14,117 9,343 4,774 51%

Total other income (expense), net (21 ,885) (34,572) 12,687 (37)%

Income (Loss) before contributions II, 148 (4,725) 15,873 (336)%

Capital contributions 5\,333 55.992 (4,659) (8)%

Change in net assets 62,481 51,267 11,214 22%

Total net assets- beginning 1,491,869 I ,440,602 51,267 4%

Total net assets- ending $ 1,554,350 I ,491,869 62,481 4%

8



June 30, 2008

The District's total operating revenue of $333 million for the year increased by $10 million and total operating expense increased by $35 million. The District's change in net assets for the year, including capital contributions, decreased by $15 million or 25%. The major components of this decrease were:

• Water revenue increased by $10 million, mainly reflecting the 5% rate increase in fiscal year 2008.

• Operating expense increased by $35 million, primarily reflecting increases in raw water, water treatment and distribution, sewer treatment plant operations, financial risk management and general administration expenses across both water and wastewater systems.

• Nonoperating income (net of nonoperating expense) increased by $27 million, primarily reflecting an increase in investment income and other income offset by an increase in interest and amortization or bond expenses (net).

• Capital contributions decreased by $18 million primarily reflecting a reduction in fees received for system capacity charges, mitigation, main, hydrant, service and miscellaneous installations.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

The District had $3.6 billion (net of accumulated depreciation) invested in a broad range of utility capital assets as of June 30, 2008. The investment in capital assets includes land, buildings, improvements, water treatment plants, filter plants, aqueducts, water transmission and distribution mains, water storage facilities, pump stations, water reclamation facilities, wastewater and wet weather treatment facilities, machinery and equipment (see Table 3 on the following page). This amount represents an increase of $247 million or 7% over the prior fiscal year, consistent with the District's implementation of a five-year (FY 08 to FY 12) capital improvement program. The District's net revenue, long-term debt, and contributions from customers are used to finance capital investments. More detailed information about the District's capital assets is presented in Note 3 to the basic financial statements.

Water S\'stcm 2008 2007

Structures, building>, llild equipmt.Tlt s 2.556.570 2,504,980

Land and rights of way 49,862 48.956 Construction work in

progress 422.726 243.707

Totals s 3.029.158 2,797.643

Table 3

Capital Assets, Net of Depreciation


June 30, 2008 and 2007

(ln thousands)

Wastewater Svstem Ziiilk 2d07

489,162 472.424 19.547 16,087

46,313 50.927

555.022 539.438

9

Districtwidc lncrcase/(decreasc) iUUR 2667 Amount 0/.,

3,045,732 2,977,404 68,328 2.3% 69,409 65,043 4.366 6.7'Yo

469,039 294.634 174,405 59.2%

3,584.180 3_337.081 247,099 7.4%



June 30, 2008

Table 3 (Continued)

Capital Assets, Net of Depreciation

Water and Wa<;tewatcr

Water Sntcm 2007 2006

StructureS, buildings, and cquipmmt

Land and rights of way Construclion work in

progn.>Ss

Totals

$ 2.504,980 48,956

243.707

$ 2. 797,643

2.303,555 49.020

314.159

2,666,734

This year's major capital additions included:

Water Folsom South Canal Connection Freeport Regional Water Project Pipeline Infrastructure Renewals Service Lateral Replacements Polybutylene New Service Installations Pipeline System Extensions Baseline/Laguna Pressure Zone Improvement Moraga Road Pipeline Project San Pablo Dam Seismic Modifications Additional Supplemental Supply Projects

Wastewater Digester Upgrade Centrifuge Replacement Power Generation Station Expansion Routine Capital Equipment Replacement

.h.Jnc 30. 2007 and 2006

(In thousands)

Wastewater Svstcm 2007 iuo6

472,424 16,087

50.927

539.438

10

478,696 5.587

30.013

514,296

Districtwidc 2007 2006

2,977.404 65,043

294.634

3.337,081

2,782,251 54,607

344.172

3,181,030

lncreasc/(decreasc) Amount 0/o

195,153 10.436

(49.538)

156,051

$

7.0% 19.1%

(14.4)%

4.9%

89,602 71,547 20,589 13,097 11,809 8,057 7,423 6,!56 6,134 4,575

10,840 6,929 2,729 2,003



June 30, 2008

Long-Term Debt

As of June 30, 2008, the District had total long-term debt outstanding of $2.7 billion (net of unamortized costs), decreasing by $34 million or I%, as shown in Table 4.

Water Svstcm 2608 2007

Gt:neral cbligation bonds s Revenue bonds 1,935,464 1,970.253 Commercial paper 315,000 J 15,000 Loans 15.478 17,189

Totals s 2,265,942 2.302.442

Water Svstcm 2007 2006

General cbligation bonds s Revenue bonds I, 970,253 1,516,564 Commercial paper 315,000 260,000 Loans 17,189 18,855

Totals $ 2.302,442 I. 795.419

Table 4

Long -Term Debt

(Net of Unamortized Costs)


June 30, 2008 and 2007

(In thousands)

Wastewater S\·stem 2008 2007 32,120 34.298

.109,163 315.863 15.000 29.878 34.278

386.161 384.439

Long -Tcnn Debt

(Net of Unamortized Cosl")


June 30. 2007 and 2006

(In thousands)

34,298 36~38 315,863 234.345

34,27H 38,540

384,439 309,223

II

Districtwide Increase (decrease) zuoa 2001 32,120 34,298 (2,178) (6.4)%

2,244.627 2.286.116 (41.489) (l.Sf/o 330,000 315.000 15.000 4.8%

45_156 51,467 (6.111) (11.9)%

2,652.1 OJ 2,686,881 (34,778) (1.3)%

Districrn:ide Increase !decreascl 2007 2006 Amount %

34,298 36,338 (2.040) (5.6f/o 2,286,116 1,750.909 535.207 30.6%

315,000 260,000 55,000 212% 51.467 57.395 (5,928) (10.3)%

2,686,881 2,104.642 582,239 27.7%



June 30, 2008

It is the policy of the District to maintain a reasonable balance between debt and current revenue financing of capital projects. The following targets provide the framework for financing capital projects:

Debt Service Coverage Ratio: Maintain an annual revenue bond debt coverage ratio of at least 1.6 times coverage.

Debt-Funded Capital Spending: Limit debt-funded capital to no more than 65% of the total capital program over each five-year planning period.

Variable Rate Debt: Limit to 25% of outstanding long-term debt.

The District's debt ratings are outlined in Table 5.

Revenue-supported debt authorization for the District can be approved by the District's board of directors, subject to a referendum process. At June 30, 2008, the District had $1.3 billion in authorized but unissued revenue bonds ($1.1 billion Water and $0.2 billion Wastewater).

Table 5

Debt Ratings


June 30, 2008

District debt by type

Water system: Variable Rate Debt Subordinated Revenue Bonds General Obligation Bonds

Wastewater system: Commercial Paper Subordinated Revenue Bonds General Obligation Bonds

Rating by Moody's Investors Standard & Service Poor's

PI Al+ Aa2 AA+ Aa2 AA+

Pl Al+ Aa3 AA+ Aa3 AA+

Additional information on the District's long-term debt can be found in Note 6 to the financial statements.

12



June 30, 2007

REQUEST FOR INFORMATION

This financial report is designed to provide ratepayers and creditors with a general overview of the District's finances and demonstrate the District's accountability for the monies it receives. If you have any questions about this report or need additional information, please contact: the Controller, Accounting Division, P.O. Box 24055, Oakland, CA 94623-1055.

13

East Bay Municipal Utility District AALANCE Sl !EETS

PROPRIETARY FUNDS- ENTERPRISE JUNE 30, 2008 AND 2007 (DOLLARS IN THOUSANDS)

Water S~·stem Wastewater Srstcm Total Asset~ 2008 2007 2008 2007 2008 2007

Current assets: Cash and investments (Note 2) $273,887 $232.897 $42,167 Sll,219 $316,054 $244,116 Receivables:

Customer 20,639 19,638 3.061 3.278 23,700 22,916 Interest and other 6,528 5,418 1,993 6,722 8,521 12.140

Materials and supplies 10,168 10,234 10.168 10.234 Prepaid insurance 1.375 1,909 1,375 1,909

Total current assets 312,597 270,096 47,221 21.219 359,818 291,315

Noncurrent assets: Restricted cash and investments (Note 2):

Bond construction fund 218,662 457,203 32,083 67.083 250.745 524.286 Bond interest and redemption fund 964 211 206 964 417 Debt service reserve fund 48,675 33,793 5,494 3,860 54.169 37,653 Funds received for construction 93.205 100,731 93.205 100.731 FERC partnership fund 2,277 2.257 2,277 2,257 Monetary reserve 706 688 706 688

., Total restricted cash and investments 364.489 594.883 37.577 71,149 402.066 666,032

Unrestricted investments (Note 2): Reserve funded Cl P 13.320 12.665 13.320 12.665 Vehicle/equipment replacement fund 4,811 4,426 8,243 7.611 13,054 12.037

Total unrestricted cash and investments 4.81 I 4.426 2L563 20,276 26.374 24,702

Other assets: Deferred bond issuance cost! 10,194 14.271 1,942 3.067 12,136 17.338 Other 8,078 7,903 I ,401 1,159 9.479 9,062

Total other assets 18.272 22,174 3.343 4,226 21.615 26.400

Capital assets (Note 3): Structures, buildings, and equipment 3,591,588 3,470,290 744.730 711.581 4,336,318 4.181.871 Less accumulated depreciation ( 1.035.0 18) (965,310) (255.568! ~239.157~ (1.290.586~ ( 1.204,4672

Subtotal 2,556,570 2,504,980 489,162 472.424 3,045,732 2,977,404

Land and rights-of-way 49,862 48,956 19,547 16.087 69,409 65.043 Construction in progresf 422.726 243,707 46,313 50.927 469,039 294,634

Total capital assets. net 3.029.158 2.797.643 555,022 539.438 3,584,180 3.337,081

Total noncurrent asset~ 3,416.730 3.419,126 617.505 635.089 4.034.235 __ 4.054.215

Total assets $3.729.327 $3,689,222 $664,726 $056,308 $4,394,053 $4,345,530

(Continued) SP.I': ll.l'l'l'lmnanvim> nn\e<;, 11'1\v.\<Oic. fimmf'ill.l <OI\'1\i"mP.nl,

Liabilities and Net Assets

Current liabilities: Current maturities oflong-tenn debt

and commercir~l paper (Note 5 and 6) Accounts payable and accrued expenses (Note 4) Accrued interest

Tara/ currear li.Wiliri~?S

Noncurrent liabilities: Other liabilities:

Advances for construction Other liabilities

Total other liabilities

Long-term liabilities, net of current maturi~es (Note 6)

-v. Total noncurrent liabilities

Total liabilities

Net assets (Note 7): Invested in capital assets, net of related debt Restricted for construction Restricted for debt service Restricted - other Unrestricted

Total net assets

Total liabilities and net assets

East Bay Municipal Utility District BALANCE SllEETS

PROPRIETARY FUNDS- ENTERPRISE JUNE 30, 2008 AND 2007 (DOLLARS IN THOUSANDS)

Water S~stem Wastewater Svstem 2008 2007 2008 2007

$38,378 $35,462 $12,826 $12,280 101,242 63,695 13.647 10,947

8,031 9.039 2,223 2,185

147,65/ 108.196 28.6% 25,412

7,832 11,102 1,937 1.496 5,575 5.835

9.769 12,598 5.575 5,835

2,227.564 2,266,980 373,335 372,159

2,237,333 2,279.578 378,910 377,994

2,384,984 2,387.774 407,606 403,406

981.878 952.404 200,944 222,082 85,373 89.628 49,639 34,004 5,494 4,064

2,983 2,945 224,470 222.462.._ 50,682 26.756

1,344.343 1.301,448 257,120 252,902

$3,729,327 $3,689.222 $664,726 $656,308

Sec accompanying notes to ba~ic financial statement~

Totals 2008 2007

$51.204 $47.742 114,R89 74,642

10,254 11.224

}76,347 }3],608

7.832 11,102 7,512 7.331

15,344 18.433

2,600,899 2,639, !39

2,616.243 2,657.572

2,792.590 2.791.180

I ,182,822 1,174,486 85.373 89.628 55.133 38,068

2,983 2,945 275,152 249,223

1,601.463 1,554,350

$4,394,053 $4,345.530

EAST BAY MUNICIPAL UTILITY DISTRICl STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS

PROPRIETARY FUNDS- ENTERPRISE FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

(OOLL\RS IN TliOUSANDS)

Water S;rstcm Wastewater S;rstcm Total 2008 2007 2008 2007 2008 2007

Operating revenue: Water $270,564 $260,678 $270,564 $260,678 Sewer $46,161 $44,593 46.161 44,593 Power 3,091 4,236 3,091 4,236 Wet weather facilities charge: 13,669 13,735 13,669 13,735

Total operating re\'CnUf --- 273.~55 264,914 59,830 58,328 333,485 323,242

Operating expense Raw water 29,586 25.252 29,586 25,252 Water treatment and distributi01 80,822 77,021 80,822 77,021 Recreation areas, ne1 8.633 9,449 8,633 9,449 Sewer lines and pump in! 12,031 12,270 12.031 12,270 Sewer treatment plant operation: 24.!139 22,972 24,839 22,972 Custo!Tlcr accounting and collectin; 12,828 12.101 1,953 1,891 14,781 13,992 Financial risk managemcn 17,037 14,652 893 1.080 17,930 15,732 Facilities managcmen 10,018 11,579 10.018 11,579 General administratior 54.047 33,166 7,863 3,985 61,910 37,151 Depreciation on utility plam 67,576 67,727 16,428 16,767 84.004 84,494

~

Total operating cxpcnsf 280,547 250,947 64,007 58,965 344,554 309,912

Net operating income (Joss: (6,892) 13,967 (4,1771 (637) (11,069) 13,330

Other income (expense) Investment incom1 40.440 21,780 5,850 2,664 46.290 24,444 Taxes and subvention 22,731 21,695 7,191 6,773 29,922 28,468 Interest and amortization of bond expenses, net o

capitalized interest of$ 11,533 and S9,938 for the WateJ System and $2,388 and $1,524 forthe Wastewate Sy;;tcm in 2008 and 2007, respective!~ (91,713) (76,290) (14,992) (12,624) (106,705) (88,914)

Other income 27,863 6,927 7,502 7,190 35,365 14,117

Total other income (expense), net (679] (25,8881 5,551 4,003 4,872 (21 ,885)

Income before capital contributiom (7,571) (11,921) 1,374 3,366 (6,197) (8,555)

Capital contribution~ 50,466 64,054 2,844 6,982 53,310 71,036

Change in net asset 42,895 52,133 4,218 10,348 47,10 62.481

Total net assets- beginnin; 1,301,448 I ,249,315 252,902 242,554 1,554,350 1,491,869

Total net assets- endinJ $1,344,343 $1,301,448 ~

$257,120 $252,902 $1,601,463 S I ,554,350

See accompanying note-s \o basic financial sta\cmen

EAST BAY MUNICIPAL UTILITY DISTR!Cl STATEMENTS OF CASH FLOWS

PROPRIETARY FUNDS- ENTERPRISE FOR TilE YEARS ENDED JUNE 30. 2008 AND 2007

(DOLLARS [!\'THOUSANDS)

Water Si:stem Waste\vater Si:stcm Total 2008 2007 2008 2007 2008 2007

Cash flows from operating activitie! Cash received from customen $272.479 $282.219 $60.047 $58.294 $332.526 $340,513 Cash received from other income 27.863 6,927 7,502 7,190 35,365 14.117 Cash payments for judgments and claim: (6.006) (6.980) (528) (714) (6,534) (7.694) Cash payments to suppliers for goods and service. (9,834) ( 12,049) (24,924) (16,391) (34,758) (28,440) Cash payments to employees for service: (138.738) (141.929) ( 19,505) (26.757} !158,243) __ (168,686)

Net cash provided hy operating activities 145.764 128.188 22.592 21.622 168,356 149.810

Cash flows from noncapital financing activities: Tax receipts 22.131 21.695 7.191 6.773 29.922 28.468

Net cash provided by financing activities 22,731 21,695 7.191 6.773 29.922 28,468

Capital and related financing activities: Capital contributions 50,466 44.351 2.844 6,982 53,310 51,333 Proceeds from advances for constructior (3,270) (2.132) (3,270) (2.132) Proceeds from sale of capital assets 962 14 962 14 Net proceeds and premiums from sale of bond: 814,475 931,475 184.600 135.490 999,075 1 ,066.965 Acquisition and construction of capital asset! (248.625) (164.967) (29.168) (41.504) (277.793) (206.471) __, Principal retirement on long-tenn debt and commercial paper (36,297) (32.421) ( 12,278) (11.768) (48,575) (44,189) Amount paid to refunding hand escrow agen (814,475) (448,005) (184,600) (49,351) {999.075) (497.356) Costs and discounts from issuance on long-tenn deb (1.416) (6,177) (731) (984) (2,147) (7.161 J Interest paid on long-term debt (87.228) [71.656) (13,098) (12,036) ( 100,326) (83.692)

Net cash provided by (used in) capital and related financing activities (325.408) _250.482 (52,431) 26.829 (377.839) 277.311

Cash flows !Tom investing activities Net proceeds from (purchases of) securitie: (6,494) (402,447) 23.134 (96,267) 16,640 (498,714) Interest received on investment! 39.330 24,588 10.579 (2.519) 49.909 22.069

Net cash (used in) provided by investing activities 32.836 (377,859) 33.713 (98,786) 66,549 (476,645)

Net increase (decrease) in cash and cash equiYalents (124,077) 22,506 11,065 (43.562) (113.012) (21,056)

Cash and cash equivalents: Beginning of year 151.445 128.939 2.477 46.039 153,922 174.97R

End of year $27,368 $!51 445 $13.542 $2,477 $40,910 $153.922

(Continued)

See accompanying notes to basic financial statement!

00

EAST BAY MUNICIPAL UTILITY DISTRICl STATEMENTS OF CASH FLOWS

PROPRJET ARY FUNDS- ENI"ERPRISE FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

(DOLLARS IN THOUSANDS)

Water S~stem Wastewater System

20118 2007 2008 21107 Reconciliation of net operating {loss) income to net cash provided h)

operating activities: Net operating income (loss; ($6,892) $33.670 ($4, 177) ($637) Adjustments to reconcile net operating income to net cash

provided by operalmg act1vities: Depreciation 67,576 67.727 16,428 16,767 Amortization 19,805 22.291 424 440 Other income 27,863 6.927 7,502 7,190 Changes in assets/liabilities:

Materials and supplies 66 (256) Prepaid insurance 534 1,130 165 Customer receivables (1,001) (248) 217 (34) Other assets ( 175) (2,150) (242) (151) Accounts payable and accrued expense~ 37.988 i9032 2.440 (2.118)

Net cash provided hy operating activities $145,764 $12R,l88 $22,592 521,622

See accompanying notes to basic financial statement~

Total

2008 2007

($11.069) $33,033

84,004 84,494 20,229 22,731 35.365 14,117

66 (256) 534 1,295

(784) (282) (417) (2,301)

40.428 0.021)

$168,356 $149,810

EAST BAY MUNICIPAL UTILITY DISTRICT STATEMENTS OF FIDUCIARY NET ASSETS

FIDUCIARY FUND- PENSION AND OTHER EMPLOYEE BENEFIT TRUST (COMPONENT UNIT)

JUNE 30, 2008 AND 2007 (DOLLARS IN THOUSANDS)

2008 2007 Assets:

Cash and investments (Note 2) $34,645 $48,695 Invested securities lending collateral (Note I.L and 2) 80,965 96,085 Receivables:

Contributions 1,230 974 Interest and other 20,469 14,258

Prepaid insurance 367 355 Retirement system investments, at fair value (Note 2):

U.S. government obligations 71,379 67,404 Domestic corporate bonds 70.299 157,059 International bonds 9,651 6,214 Domestic stocks 491,063 425,744 International stocks 181,016 236,095 Real estate 23,836 21,587

Total Investments 847,244 914,103

Total assets 984,920 1.074,470

Liabilities: Accounts payable and accrued expenses 749 794 Retirement system liabilities 64,592 66,487 Securities lending collateral (Note I.L.) 80,965 96,085

Total liabilities 146,306 163,366

Net assets: Held in trust for pension benefits 832,139 906,492 Held in trust for post-employment healthcare benefits 6.475 4,612

Total net assets $838,614 $911,104

See accompanying notes to basic financial statements.

19

EAST BAY MUNICIPAL UTILITY DISTRICT STATEMENTS OF CHANGES IN FIDUCIARY NET ASSETS

FIDUCIARY FUND- PENSION AND OTHER EMPLOYEE BENEFIT TRUST (COMPONENT UNIT)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007 (DOLLARS IN THOUSANDS)

Additions: Contributions (Note 8)

Employer Plan members

Investment income: Net appreciation (depreciation) in fair value of investments

Traded securities Interest Dividends Real estate operating income~ net

Less: Investment expense Borrowers' rebates and other agent fees on securities lending transactions

Net investment income

Total additions, net

Deductions: Benefits paid Refund of contributions Administrative expenses

Total deductions

Change in net assets

Net assets: Beginning of year

End of year

See accompanying notes to basic financial statements

20

2008

$44,603 10,394

54,997

(96,753) 11,251 13,676 2,249

(69,577)

(2,889) (3,520)

(75,986)

(20,989)

50,476 304 721

51,501

(72,490)

911,104

$838.614

2007

$39,332 9,891

49,223

130,345 11,142 9,976 1,339

152,802

(2,779) (4,239)

145,784

195,007

46,189 319 850

47,358

147,649

763,455

$911,104

EAST BAY MUNICIPAL UTILITY DISTRICT NOTES TO BASIC FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007 (Dollars in Thousands)

I NOTE 1 - SUMMARY 01<' SIGNIFICANT ACCOUNTING POLICIES

A. Description of the Primary Government

The East Bay Municipal Utility District (the District) was formed in May 1923 under the provisions of the Municipal Utility District Act of 1921, as amended in 1941. The District is comprised of two financially independent entities: the Water System and the Wastewater System. These two entities are governed by the same elected seven-member board of directors which determines such matters as rates and charges for services, approval of contracts, and District policies. The Water System provides administrative and other support services to the Wastewater System. These costs are charged to the Wastewater System.

B. Description of the Component Unit

The District's Employees' Retirement System (the Employees' Retirement System or the Plan) has been reported as if it was part of the District's operations as a Pension and Other Employee Benefit Trust fund (a fiduciary fund) in the accompanying basic financial statements and is discretely presented. The District appoints the voting majority of the governing body of the Employees' Retirement System and provides for its funding.

Copies of the audited financial statements of the Employees' Retirement System may be obtained by writing to the Controller, P.O. Box 24055, Oakland, CA 94623.

C Basi~ of Presentation

The accounts of the District are organized and operated on a fund basis. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, net assets, revenues, and expenses.

The basic financial statements include prior year comparative information. A complete presentation of the prior year information can be found in the District's financial statements for the year ended June 30, 2007.

The District reports the following major proprietary (enterprise) funds:

The Water System is engaged in the collection, transmission, and distribution of water to communities within Alameda and Contra Costa counties of California.

The Wastewater System is engaged in the interception and treatment of wastewater from residences and industries in the California communities of Alameda, Albany, Berkeley, Emeryville, Oakland, Piedmont, and the Stege Sanitary District.

Additionally, the District reports the following fiduciary fund:

The Pension and Other Employee Benefit Trust is used to account for the resources held by the Employees' Retirement System which provides retirement, disability, and survivorship benefits for eligible directors, officers, and employees of the District.

21



I NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The Pension and Other Employee Benefit Trust fund is maintained to account for assets held by the Employees' Retirement System in a trustee capacity.

D. Basis of Accounting

Proprietary funds and the Pension and Other Employee Benefit Trust fund are accounted for on a flow of economic resources measurement focus, using the accrual basis of accounting. Under this method, all assets and liabilities associated with operations are included on the balance sheet, and revenues are recorded when earned and expenses are recorded at the time liabilities are incurred.

Proprie!llry funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result rrom providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the District are charges to customers for sales and services. The District also recognizes wet weather facilities charges as operating revenue. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

When both restricted and unrestricted resources are available for use, it is the District's policy to use restricted resources first, then unrestricted resources as they are needed.

For its proprietary activities, the District does not apply Financial Accounting Standards Board (FASB) statements and interpretations issued after November 30, !989. The proprietary funds apply all applicable Governmental Accounting Standards Board (GASB) pronouncements as well as statements and interpretations of FASB, Accounting Principles Board Opinions, and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, !989, unless those pronouncements conflict with or contradict GASB pronouncements.

In addition, the accounting policies of the District conform to accounting policies generally accepted in the United States of America for water utilities. The accounts are maintained substantially in accordance with the Uniform System of Accounts for Water Utilities followed by investor-owned and major municipally owned water utilities.

Balance Sheet - The balance sheet is designed to display the financial position of the District. The District's fund equity is reported as net assets, which are broken down into three categories defined as follows:

• Invested in capital assets, net of related debt - This component of net assets consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets.

22



I NOTE I -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

• Restricted - This component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or law or regulations of other governments. It also pertains to constraints imposed by law or constitutional provisions or enabling legislation.

• Unrestricted- This component of net assets consists of net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt."

Statement of Revenues, Expenses, and Changes in Net Assets - The statement of revenues, expenses, and changes in net assets is the operating statement for proprietary funds. Revenues are reported by major source. This statement distinguishes between operating and non-operating revenues and expenses and presents a separate subtotal for operating revenues, operating expenses, and operating income.

E. Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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.

F. Capital Assets

Utility Plant- at Original Cost

The cost of additions to utility plant and replacement of retired units of property are capitalized. Cost includes material, direct labor and rringe benefits, transportation, and such indirect items as engineering, supervision, and interest on borrowed funds during construction, net of interest earned on unspent construction proceeds. Repairs, maintenance, and minor purchases of equipment are charged to expenses as incurred.

The depreciated cost of capital assets, plus removal costs, less salvage, is charged to expense upon retirement.

Water Supply Management Program

Costs incurred in this program "re debt funded and capitalized in construction in progress. These costs are transferred to utility plant upon completion of the project and depreciated over their useful life. Debt service costs on the debt used to finance the program are recovered in future periods through rates and charges for service to those benefiting from the program.

Preliminary Survey and Investigation Costs

The District capitalizes initial costs incurred to study and evaluate certain potential long-term capital projects. These costs are transferred to property, plant and equipment upon completion of the project and are depreciated over the life of the asset. In the event the project is abandoned, these costs are expensed.

23




G. Depreciation

Depreciation of capital assets is computed on a straight-line basis using the estimated service lives of the related assets (5 to I 00 years). The aggregate provision for depreciation was 2.07% and 2.22% of the average net book value of capital assets for the years ended June 30, 2008 and 2007, respectively.

H. Restricted Assets

The District segregates certain cash and investments which have legal or other external restrictions.

The Bond Construction Fund is used to report proceeds of bond issuances that are restricted for use in the capital program. The Bond Interest and Redemption Fund is used to segregate resources accumulated for debt service payments. Funds received for construction represent capital contributions restricted to fund specific construction projects or amounts received by the District from applicants and developers to cover the cost of extending water and wastewater service to new customers or to fund large wastewater treatment equipment replacements.

I. Deferred Amount on Bond Refundings

Gains and losses incurred in connection with debt refunding transactions are deferred and amortized over the shorter of the life of the refunded debt or the new debt.

J. Cash and Cash Equivalents

For purposes of the statement of cash flows, the District considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

K. District Investments

Investments are stated at fair value. Included in investment income (loss) is the net change in the fair value of investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) of those investments.

Measurement of the fair value of investments is based upon quoted market prices, if available. The estimated fair value of investments that have no quoted market price is determined based on equivalent yields for such securities or for securities of comparable maturity, quality, and type as obtained from market makers.

Each of the financial instruments invested in by the District represents a potential concentration of credit risk. However, as the portfolio and the components of the various instruments are diversified, and issuers of securities are dispersed throughout many industries and geographic locations, the concentrations of credit risk are limited.

24



I NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

L. Retirement System brveMmellls

Investments are reported at fair value. Securities and bonds traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Investments that have no quoted market price are reported at estimated fair value, which is determined based on yields equivalent for such securities or for securities of comparable maturity, quality, and type as obtained tfom market makers. Measurement of the fair value of real estate investments is estimated by the investment managers and reflects both internal and independent appraisals of real estate properties.

The System presents in the Statements of Changes in Plan Net Assets the net change in the fair value of its investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

Each of the financial instruments invested in by the System represents a potential concentration of credit risk. However, as the portfolio and the components of the various instruments are diversified and issuers of securities are dispersed throughout many industries and geographical locations, the concentrations of credit risk are limited.

Retirement Board policies permit the Employees' Retirement System to use investments of the pension plan to enter into securities lending transactions, which are loans of securities to brokerdealers and other entities for collateral with a simultaneous agreement to return collateral for the same securities in the future. The System's securities custodian is an agent in lending the Plan's securities for cash collateral, U.S. government securities, and irrevocable letters of credit of 102% for domestic securities lent and 105% for international securities lent. As of June 30, 2008, the Employees' Retirement System had no credit risk exposure to borrowers because the amounts the Employees' Retirement System owes the borrowers exceed the amounts the borrowers owe the Employees' Retirement System.

Contracts with the lending agent require them to indemnify the Employees' Retirement System under certain circumstances if the borrowers fail to return the securities (and if the collateral is inadequate to replace the securities lent) or fail to pay the System for income distributions by the securities issuers while the securities are on loan. The risk of any loss of collateral or investment of cash collateral (including a loss of income or principal, or loss of market value thereon) lies with the System, except for losses resulting from negligence or intentional misconduct of the agent in performing the duties allocated under the securities lending agreement with respect to collateral. During the year ended June 30, 2008, there were no violations of legal or contractual provisions, and no borrower or lending agent default losses known to the securities lending agent.

25



j NOTE l- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In lending securities, cash collateral is invested in the lending agent's short-term investment pool, which as of June 30, 2008, had a weighted average maturity of 36 days. The relationship between the maturities of the investment pool and the System's loans is affected by the maturities of the securities loans made by other entities that use the agent's pool, which the System cannot determine. Cash collateral may also be invested separately in term loans, in which collateral cannot be pledged or sold unless the borrower defaults. All securities loans can be terminated on demand by either the lender or the borrower, although the average term of overall loans for the System was approximately 75 days. There are no dividends or coupon payments owing on the securities lent. Cash received as collateral on securities lending transactions is reported as an asset of the System with a corresponding liability.

As of June 30, 2008, the fair value of securities on loan was $80,965. The total cash and non-cash collMeral held by the System's custodian to secure these securities on loan was valued at $80,973, consisting of$78,638 cash collateral and $2,335 non-cash collateral.

M. Material and Supplies

Material and supplies inventories are valued at cost, which approximates market, using the averagecost method.

N. Compensated Absence,\'

Compensated absences as of June 30 are included on the balance sheet in accounts payable and accrued expenses. In previous years, trends have shown that the District employees utilize the accruals annually therefore, amounts payable are accrued and reported as a current liability on the financial statements.

The changes in compensated absences were as follows:

0. Revenue

Beginning Balance Additions Payments

Ending Balance

$23,218 29,378

(27,235)

$25,361

Customer water meters are read on a cyclical basis throughout a monthly or bimonthly period. Bills are rendered and revenue is recognized in the period that meters are read.

Wastewater treatment billings are a combination of flow, strength charges, and a monthly service charge. Customer bills are rendered on a cyclical basis throughout a monthly or bimonthly period, and revenue is recognized in the period in which bills are rendered.

Wet weather facilities charges are designed to finance the operating costs related to wet weather sewage flows.

26




P. Interest Rate Swap

The District enters into interest rate swap agreements to modify interest rates on some outstanding debt. Other than the net interest expense resulting from these agreements, no amounts are recorded in the financial statements.

Q. Reclassification

For the year ended June 30, 2008, certain classifications have been changed to improve financial statement presentation. For comparative purposes, prior year balances have been reclassified to conform with the fiscal year 2008 presentation.

I NOTE 2 -CASH AND INVESTMENTS

A. Classification

Reconciliations of cash and investments reported on the financial statements as of June 30, 2008 and 2007 are as follows:

District Enterprise Funds:

Cash and investments included in current assets Cash and investments included in restricted assets Cash and investments included in unrestricted assets

Total District cash and investments

Less non-current investments

District cash and cash equivalents

System Pension Trust Funds:

Cash and investments Invested securities lending collateral

Retirement system investments

Total System cash and investments

27

2008

$316,054

402,066 26,374

744,494

(703,584)

$40,910

$34,645

80,965

847,244

$962.854

2007

$244,116

666,032 24,702

934,850

(780,928)

s 153,922

$48,695

96,085

914,103

S I ,058.883



I Non: 2- CASH AND INVESTMENTS (Continued)

B. District Investments Authorized by the California Government Code and the District's Investment Poliq

The District's Investment Policy and the California Government Code allow the District to invest in the following, provided the credit ratings of the issuers are acceptable to the District; and approved percentages and maturities are not exceeded. The table below also identities certain provisions of the California Government Code, or the District's Investment Policy where the District's Investment Policy is more restrictive.

Authorized Investment Type

Repurchase Agreements

State of California Local Agency

Investment Fund (LAIF Pool)

U. S. Treasury Bonds, Notes and Bills

U.S. Government Agency and

U.S. Government-Sponsored

Enterprise Obligations Bankers' Acceptances

Commercial Paper

Negotiable Certificates of Deposit

Time Certificates of Deposit- Banks or Savings and Loans

Medium Term Corporate Notes

Money Market Mutual Funds

Maximum Maturity

270 Days

Upon Demand

5 Years

5 Years

180 Days

270 Days

5 Years

5 Years

5 Years

N/A

The District does not enter into reverse repurchase agreements.

28

Minimum Credit

Quality

N/A

N/A

NIA

N/A

N/A

AI, PI, F1

AA

N/A

AA

AAA

Maximum In

Portfolio

20%

$40,000

per account

0 to 100%

0 to 100%

40%

25%

30%

30%

30%

40%

Maximum Investment

In One Issue

IO%

N!A

N/A

40% in each

Agency

10%

10%

10%

10%

I 0°/cJ

10%



I NOTE 2- CASH AND INVESTMENTS (Continued)

C District lnvestmellfs Authorized by Debt Agreements

The District must maintain required amounts of cash and investments with trustees or fiscal agents under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged reserves to be used if the District fails to meet its obligations under these debt issues. The California Government Code requires these funds to be invested in accordance with District resolutions, bond indentures or State statutes. The table below identifies the investment types that are authorized for investments held by fiscal agents. The table also identifies certain provisions of these debt agreements:

Authorized Investment Type

Repurchase Agreements

U. S. Treasury Bonds, Notes and Bills

U.S. Government Agency and


Enterprise Obligations

State Obligations

Commercial Paper

Negotiable Certificates of Deposit Time Certificates of Deposit-

Banks or Savings and Loans

Corporate Notes and Bonds

Variable Rate Obligations Cash Sweep Account Guaranteed Investment Contract

Shares of Beneficial Interest

Minimum Credit Quality

Top Four Rating Category

N/A

NIA

Not lower than their bond rating

Top Rating Category

NIA

N/A Not lower than their bond rating

Not lower than their bond rating Top Rating Category

Not lower than their bond rating Top Rating Category

D. Employees Retirement System Authorized lnve.~tment Strategy

The System's investment policies authorize the System to invest in financial instruments in three broad investment categories: equity, fixed income, and real estate. These financial instruments can include, but are not limited to, corporate bonds, commercial paper, U.S. government securities, common and preferred stock, real estate investment trusts, and mutual funds. Fixed income investments may include futures and options contracts in order to provide added flexibility in managing the fixed income portfolio. The following is a summary of the System investment policy adopted by the System with Resolution No. 6439.

29




The Retirement Board is authorized to designate multiple investment managers to manage the assets under their supervision subject to the laws of the State of California and the Investment Guidelines established by the Retirement Board. Allocations of assets to the investment managers are determined by the Retirement Board to accommodate changing conditions and laws. The longrange asset allocation goal is as follows:

Fixed Income Domestic Equity International Equity Real Estate Allocation to Cash

25% 50% 20% 5% 0%

The composite asset allocation goal is pursued by the System on a long-term basis and revised if significant changes occur within the economic and/or capital market environment. Progress toward the goal is reviewed at least annually.

The Director of Finance is authorized to transfer assets from any asset class which exceeds the longterm asset allocation goal by more than 3% at the end of two or more consecutive quarters, allocating the excess assets to a manager or group of managers with the exception of real estate managers. The Director of Finance is further authorized to withdraw assets from assigned managers as necessary to efficiently meet operating needs.

The equity and fixed income asset allocation may range ± 5% from the long-range asset allocation goals. The equity allocation target (50% of the total portfolio) will consist of approximately 45% in large cap market related growth and value (average risk) securities, (5%) in small capitalization securities, and (20%) in international equities with an expected higher return but not closely correlated to domestic returns.

Fixed income targets may also be met by allocating portions of assets among different types of funds or managers. Individual managers may invest up to 20% of their assets in international fixed income securities.

The Allocation to Cash goal recognizes that at any time equity and fixed income managers will have transactional cash on hand and the District will maintain enough cash as working capital to effectively meet cash flow demands on the system. However, there is no specific allocation for cash as all investable cash is allocated to specific investment disciplines.

Holding of securities issued by the United States Government or any of its agencies need not be diversified. Securities of any one issuer with maturities of more than one year, other than the United States Government or any of its agencies, shall not exceed 5% of the value of the total portfolio. Securities of any one issuer of foreign government issues shall not exceed I 0% of the value of the total portfolio at the time of purchase. Fixed income managers have the authority to make international investments, not to exceed 20% of their total portfolio.

The use of futures and options in the fixed income accounts may be used as part of their portfolio management strategy and will be incidental to their securities trading activities. The resulting aggregate risk profile (volatility) of the portfolio will not be different from that permissible by using securities only.

30




Short (sold) options positions will generally be hedged, either with current portfolio security holding, other options or futures options. Mortgage derivatives with significant short option characteristics will not exceed 5% of the portfolio, and will generally be a) offset by position in other mortgage derivatives, or b) offset by other portfolio positions.

No derivatives will be executed which will increase the value at risk of the portfolio by more than 25 basis points of the portfolio's market value.

Structured notes with significant short options positions or increasing leverage will not be purchased, and in no case will structured notes exceed 5% of portfolio value.

Fixed income managers are authorized to use futures and options contracts to supplement their investment capabilities to provide flexibility in managing the fixed income portfolios and reduce the cost of implementing strategies to respond to changing market conditions without incurring the higher transaction costs associated with buying and selling specific securities. These transactions are authorized to enable the manager to reduce the exposure of the portfolio to interest rate changes by reducing or increasing the duration of the portfolio without selling any of the actual holding.

No more than 5% of the portfolio will be invested in original futures margin and options premiums, exclusive of any in-the-money portion of the premiums.

Each equity portfolio shall be diversified. When fully invested in equities or at its normal level of investment, a minimum of 20 securities should be held. At no time may a single equity investment exceed 5% of the value of the total retirement fund.

E. Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Normally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District generally manages its interest rate risk by holding investments to maturity.

Information about the sensitivity of the fair values of the District's investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the District's investments by maturity or earliest call date.

12 Months 13 to 24 25 to 60 Investment T~~ or less Months Months Total

U.S. Government-Sponsored Enterprise Agencies: Non--callable $<.194 $2,194 Callable $181,593 $8,178 681 190.452

Corporate Securities Non-callable 15,052 50,977 11,905 77.934 Callable 1,989 1.989

Municipal Bonds 128,000 128.000 Guaranteed Investment Contracts 284,630 284,630 Demand D~posits and Certificate of Deposit 1,795 1,795 Mutual Funds (U.S. Securities) 21,991 21.991 California Local Agency Investment Fund 11.571 11.571

Total Investments $646.621 $59,155 $14,780 720.556 Cash in banks 23.938

Total District Cash and Investments $744.494

31



\NOTE 2- CASH AND INVESTMENTS (Continued)

Information about the sensitivity of the fair values of the System's investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the System's investments by maturity or earliest call date:

More Maturity Less than 12 to 72 72 to 120 than not

Investment TYPe 12 Months Months Months 120 Months Determined Total

Asset Backed Securities $69 $16 $9,323 $9,408 Equity Securities S647,308 647,308 Commercial Mortgage- Backed 5,469 5,469 Corporate Bonds 3,451 11,590 13,519 10,921 $4,574 44,055 Corporate Convertible Bonds 61 61 Govenunent Agencies 1,978 1.236 745 705 4,664 Govenunent Bonds 643 10 567 1,220 Govenunent Mortgage Backed Securities 70 26 59,567 59,663

Index Linked Government Bonds 479 4,568 5,047

Treasury Security Derivative Futures 2,006 2,006 Short Term Bills and Notes 1,143 1,143 Short Term Investment Funds 23,003 23,003 Mutual Funds 17,224 2,809 20,033 Real Estate 23,836 23,836 Bank Loans 328 328

Total System Investments $678,889 Sl3,608 $15,123 $108,405 $31,219 $847,244

The District and System are participants 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. They report their investment in LAIF at the fair value amount provided by LAIF, which is the same as the value of the pool share. The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are collateralized mortgage obligations, mortgage-backed securities, other assetbacked securities, loans to certain state funds, and floating rate securities issued by federal agencies, government-sponsored enterprises, United States Treasury Notes and Bills, and corporations. At June 30, 2008, these investments matured in an average of 212 days.

Highly Sensitive Investments

Commercial Mortgage - Backed Securities Government Mortgage - Backed Securities

32

Fair Value at Year End

$5,469 59,663


FOR THE YEARS ENDED juNE 30, 2008 AND 2007 (Dollars in Thousands)


F. Credit Risk

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 credit rating organization. Presented below is the actual rating as of June 30, 2008, for each investment type as provided by Moody's.

District Enterprise Funds:

Investment Type


Enterprise Agencies: Non-Callable Callable

Corporate Securities Non-Callable Callable

Municipal Bonds Guaranteed Investment Contracts Mutual Funds (U.S. Securities)

Totals

Not rated:

Demand Deposits and Certificate of Deposit Mutual Funds (U.S. Securities) California Local Agency Investment Fund Cash in Banks

Total District Cash and Investments

System Pension Trust Fund:

Investment Tn!e A"

Asset Backed Securities $6,731

Equity Securities

Commercial Mortgage - Backed 3,059

Corporate Bonds 779

Corporate Convenible Bonds Govcrrunent Agencies 3,557

Government Bonds 206

Government Mortgage Backed Securities

Index Linked Government Bonds 5.047

Treasury Security Derivative Futures

Short Term Bills and Notes

Short Tenn Investment Funds

Mutual Funds

Real Estate

Bank loans

Total System Investments $19,379

Aaa Aa3 Aal A AI AJ

$2,194 190,452

13,276 $49,293 $10,067 $5,298

1.989 94,500 23,500 $10,000

241,237 43,39)

20.691 $300 $469,839 $187,186 $10.067 $)00 $28.798 $10,000

u.s. Govemment Xot

_A_o ___ A __ ~--"'- __ B_ ~ _c_,_ Gmnmteed Rated

$263 $628 $14 $254 $293 $84 $175 $966

647.308

2.410

2,688 7,809 13,175 4,019 5.697 2,852 7,034

10 51 168 86 $644 209

431 51!3

59,663

2,006

1,143

23,003

20,033

23.836

328 ---------------------$3.119 $8,437 $13.706 $4,283 $5.990 $2.987 $!77 $62,033 $727.133 =======

33

Total

$2,194 190,452

77,934

1.989 128,000 284.630

20.991 706.190

1,795 1.000

11,571 23,938

$744,494

Total

$9,408

647.308

5,469

44.055

61 4,664

1,220

59,663

5,047

2,006

1,143

23,003

20,033

23.836

328 $847.244

EAST BAY MUNICIPAL UTILITY DISTRICT NOTES TO BASIC FINAL'iCIAL STATEMENTS


I NOTE 2 -CASH AND INVESTMENTS (Continued)

G. Concentration Risk

Significant District investments in the securities of any individual issuers, other than U. S. Treasury securities, LAIF, and mutual funds. are set forth below:

Reported

Reeortin~ Unit Issuer Investment Tl:Ee Amount

District-Wide FMLC Federal Agency Securities $ 90,334 FHLB Federal Agency Securities 42,516 FNMA Federal Agency Securities 40,190

FSA Guaranteed Investment Contracts 131,906 Trinity Guaranteed Investment Contracts 109,331

AIG Guaranteed Investment Contracts 44,601 BATA Municipal Bonds 82,500

Major Funds: Water System

FHLMC Federal Agency Securities 64,616 FHLB Federal Agency Securities 36,990 FNMA Federal Agency Securities 37,523 BATA Municipal Bonds 80,500 FSA Guaranteed Investment Contracts 130,606

Trinity Guaranteed Investment Contracts 109,331

Wastewater System FHLMC Federal Agency Securities 25,718

SFLH Municipal Bonds 12,000 AIG Guaranteed Investment Contracts 32,083

Significant System Pension Trust Fund investments are:

Nature of investment Fair Value at June 30, 2008

Northern Trust Collective Daily Russell 1000 Equity Index Fund Templeton Institutional Funds, Inc. Foreign Equity Series Federal National Mortgage Association lNG Investment Trust Company Fund

34

$166,037 80,674 44,653 90,307




H. Foreign Currency Risk

Foreign currency risk is the risk that changes in foreign exchange rates will adversely affect the fair values of an investment or deposit. Presented below in US dollars is the fair market value of the System's foreign investments at June 30, 2008:

Equity Securities Foreign Currency Investment Type

Euro $25,468

Japanese Yen 14,691

British Pound Sterling 6,916

Swiss Franc 5,522

Australian Dollar 5,361

Canadian Dollar 2,441

Norwegian Krone 2,220

Swedish Krona 1,953

Hong Kong Dollar 1,946

Indonesian Rupiah 1,610

Mexican Peso 1,556

Singapore Dollar 1,084

South African Rand 480

Malaysia Ringgit 394

Czech Republic Koruna 381

Total $72,023

The Fund's investment policy permits it to invest up to 17% of total investment on foreign currencydenominated investments. The Fund's current position is 9%

I. Custodial Credit Risk

Custodial credit risk for cash on 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, the District or System will not be able to recover the value of its investment or collateral securities that are in the possession of another party.

35




California Law requires banks and savings and loan institutions to pledge government securities with a market value of 110% of the District's cash on deposit, or first trust deed mortgage notes with a market value of 150% of the deposit, as collateral for these deposits. Under California Law this collateral is held in a separate investment pool by another institution in the District's name and places the District ahead of general creditors of the institution.

The District and System invest in individual investments and in investment pools. Individual investments are evidenced by specific identifiable securities instnmwnts, or by an electronic entry registering the owner in the records of the institution issuing the security, called the book entry system. In order to increase security, the District and System employ the Trust Department of a bank or trustee as the custodian of certain District and System managed investments, regardless of their form.

As of June 30, 2008 and 2007, the System's brokers/dealers held $0 and $54, respectively, in cash and US government bonds exposed to custodial credit risk.

I NOTE 3- CAPITAL ASSETS

A. Summary

The District capitalizes all assets with a historical cost of at least $5 and a useful life of at least three years. Contributed property is recorded at estimated fair market value at the date of donation.

The purpose of depreciation is to spread the cost of capital assets equitably among all customers over the life of these assets, so that each customer's bill includes a pro rata share of the cost of these assets. The amount charged to depreciation expense each year represents that year's pro rata share of depreciable capital assets.

Depreciation of all capital assets in service, excluding land, is charged as an expense against operations each year and the total amount of depreciation taken over the years, called accumulated depreciation, is reported on the balance sheet as a reduction in the book value of the capital assets.

Capital assets are depreciated using the straight line method of depreciation, which means the cost of the asset is divided by its expected useful life in years and the result is charged to expense each year until the asset is fully depreciated. The District has assigned the useful lives listed below to capital assets:

Uti I ity plant: Source of supply Raw water transmission and storage Interception and outfall Pumping Treatment

Distribution

Power Generation

Equipment Plant Structures Other

36

Years

25-100

20-100 60-75

25-75 20-75

25-75

25-75

5-20

25-75

5-40



J NOTE 3- CAPITAL ASSETS (Continued)

B. Additions and Retirements

Capital assets activity for all business-type activities for the year ended June 30, 2008, was as follows:

Balance at Additions and Retirements and Balance at June 30. 2007 Transfers, net Transfers, net June 30, 2008

Water System: Capital assets. not being depreciated:

Land and rights-of-way $48.956 $906 $49.862 Construction in progress - Land 1.077 612 ($906) 783 Construction in progress 242.630 323.532 (144.219) 421.943

Total capital assets, not being depreciated 292,663 325.050 (145.125) 472.588

Capital assets. being depreciated: Buildings and improvements 179,860 5,602 185.462 System and improvements 3.217,356 136,793 (20,548) 3,333.601 Machinery and equipment 73.074 1,825 (2.374) 72.525

Total capital assets, being depreciated: 3.470,290 144,220 (22.922) 3.591.588

Less accumulated depreciation for: Buildings and improvements (58,142) (4.711) (62,853) System and improvements (857,825) (63.425) 416 (920.834) Machinery and equipment (49,343) (3.998) 2.010 (51,331)

Total accumulated depreciation (965.310) (72.134) 2.426 (1.035.018)

Total capital assets, being depreciated, net 2.504,980 72,086 (20,496) 2,556,570

Water System capital assets, net $2,797,643 $397.136 ($165,621) $3,029,158

Wastewater System: Capital assets, not being depreciated:

Land and rights-of-way $16,087 $3,460 s 19.547 Construction in progress - Land 2,651 827 ($3,460) 18 Construction in progress 48.276 31,866 (33,847) 46.295

Total capital assets, not being depreciated 67,014 36.153 (37,307) 65.860

Capital assets, being depreciated: Buildings and improvements 69.594 1.200 70,794 System and improvements 636,897 32.507 (684) 668,720 Machinery und equipment 5,090 142 (16) 5,216

Total capital assets, being depreciated 711,581 33,849 (700) 744,730

Less accumulated depreciation for: Buildings and improvements (21.780) (1.633) (23.413) System and improvements (212.855) (14.618) (227.472) Machinery and equipment (4.522) (177) 16 (4.683)

Total accumulated depreciation (239, 157) (16.428) 17 (255.568)

Total capital assets, being depreciated, net 472.424 17.421 (683) 489,162

Wastewater System capital assets, net $539,438 $53,574 ($37,990) $555.022

Business-type activities capital assets, net $3.337.081 $450.7\0 ($203,611) $3.584.180

37



I NOTE 3- CAPITAL ASSETS (Continued)

C. Construction in Progress

Construction in Progress in fiscal 2007-2008 comprises:

Water System:

Freeport Regional Water Project

Folsom South Canal Connection

Pipeline Infrastructure Renewals

Bayside Groundwater Project

Baseline/Laguna Pressure Zone. Improvement

San Pablo Dam Seismic Models

Richmond Advanced Recycled Expansion Water Project

Customer Information System Replacement Project

Moraga Road Pipeline Project

Additional Supplemental Supply Projects

Water Conservation Project

Southern Loop Enhancement

Vulnerability Assessment Security System Improvements

Pumping Plant Rehabilitation

Upcountry Wastewater Treatment Improvements

Meter Replacements

Mokelumne Aqueduct Rccoating

Raw Water Aqueduct Operation and Management Improvements

District Microwave System Upgrade

Other Construction Projects Total Water System

Wastewater System:

Centrifuge Replacement

Digester Upgrade

Wet Weather Master Plan Update

National Pollutant Discharges Elimination System Compliance

Power Generation Station Expansion

Resource Recovery Project

Treatment Plant Infrastructure

Concrete Rehab at SD-1

South Interceptor Relocation High Street

Wet Weather Plant Improvements

Waste to Energy Project

Secondary Process Enhancement

Routine Capital Equipment Replacement

Priority Manhole Intercept Project

Main Wastewater Treatment Plant Power Distribution System Upgrade

Other Construction Projects Total Wastewater System

Total District Construction in Progress

Expended to Date

$\22,873

113,936

20,033

\2,269

\0,282

9,328

7.993

6,8\2

6,609

6.602

5,224

5,100

4,7\6

4,553

4,387

4,358

4,277

3,644

3,348

66,382 $422,726

$13,426

5.804

4,636

3.433

2,729

2,717

2,401

1,375

1,143

1,101

921

503

385

349

335

5,055 $46.313

$469,039

At June 30, 2008, the District's remaining current major project commitments are estimated to be $336,393 for the Water System and $129,147 for the Wastewater System.

38



I NOTE 4- ACCOUNTS PAy ABLE & ACCRUED EXPENSES

Accounts payable and accrued expenses at June 30, 2008 and 2007 consist of:

Water System Wastewater System

2008 2007 2008 2007

Accounts payable $39,090 $18,038 $3,381 $3,641

Accrued salaries 3,360 2,307 559 394

Workers' compensation reserves 24,139 13,653 2,223 2,223

General liability reserves 5,356 3,319 2,375

Accrued compensated absences 21,742 19,875 3,619 3,344

Other 7,555 6,503 1,490 1,345

Total $101,242 $63,695 Sl3,647 $10,947

I NOTE 5- COMMERCIAL pAPER NOTES

Total

2008 2007

$42,471 $21,679

3,919 2,701

26,362 15,876

7,731 3,319

25,361 23,219

9,045 7,848

$114,889 $74,642

The District's Board of Directors has authorized a short-term commercial paper borrowing program of up to the lesser of either (I) the average of the total annual revenue for the three preceding years or (2) 25% of the District's total outstanding bonds. The proceeds from the issuance of commercial paper are restricted as to use. Under this program, which must be authorized by the Board of Directors every seven years and is subject to the right of referendum, the Water System or the Wastewater System may issue commercial paper and bank notes at prevailing interest rates for periods not more than 270 days from the date of issuance. The program was last authorized on October 24, 2000.

As of June 30, 2008, $315,000 in Water Series and $15,000 in Wastewater Series commercial paper notes were outstanding under this program. The Water Series included terms of I to 126 days and interest rates ranging from 0.65% to 3.70% as of June 30,2008, and terms of33 to 150 days and interest rates ranging from 3.52% to 3.68% as of June 30, 2007. The Wastewater Series terms included 28 to I 03 days and interest rates ranging from 0.80% to 3. 72% as of June 30, 2008. The District paid off a portion of the commercial paper in FY 2007 and reissued in FY 2008. There were no unused proceeds as of June 30, 2008. It is the District's policy to use commercial paper as a portion of the District's long-term variable debt exposure.

To provide liquidity for the program, the District maintains a liquidity support agreement (line of credit) with a commercial banlc Combined borrowings by the Water System and the Wastewater System with the commercial paper and bank notes cannot exceed the amount of this agreement. Drawings under the agreement are restricted to pay maturing commercial paper. There were no borrowings under the line of credit agreement during the years ended June 30, 2008 and 2007. The agreement expires on April 14, 2009 and is subject to renewal at the option of the District, in the amount of$330,000.

39



NOTE 6- LONG-TERM DEBT

A. Composition and Changes

The District generally incurs long-term debt to finance projects or purchase assets which will have useful lives equal to or greater than the related debt. The District's debt issues and transactions are summarized below and discussed in detail thereafter.

Amount due Originallsiiue Balance June Balance June within one

Amount 30.2007 Additions Retirements 30,2008 year

Water System Revenue Bonds: Subordinated Series 1996

3. 75 - 6.00%, doc 611/26 S290,475 $2.705 S2,705 Subordinated Series 1998

4.00. 5.25%. doc 611/38 300,000 8,580 4,200 $4,380 S4,380 Subordinated Series 2001

3.60-5.25%, due 611126 250,000 13,300 2,455 10,845 2,550 Subordinated Series 2002

1.250% variable rate, due 6/1/25 241,850 230.880 470 230.410 19,210 Subordinated Series 2003

2.00-5.00%. due 611/21 115,730 94,640 20,845 73,795 4,130 Subordinated Series 2005 A

5.00%. due 611/)5 300,000 300.000 300,000 Subordinated Series 2005 B

3.625% variable rate, due 6/J/38 325,000 322.525 322,525 Subordinated Series 2005 C

3.735% auction rate, due 611/35 100,000 100,000 100,000 Subordinated Series 2007 A

5.00%, due 611/37 450,000 450.000 450,000 Subordinated Series 2007 B

3.75-5.00%. due 611/19 54.790 54.790 54,790 Subordinated Seties 2007 C

3.692% auction rate, due 6/1126 391,950 391,950 391.950 Subordinated Series 2008 A

1.142% variable rate, due 611/38 322,525 $322,525 1,275 321,250 1,325 Subordinated Ser'ies 2008 B

1.186% variable rate, due 6/J/35 160.000 160,000 275 159,725 300 Subordinated Ser'ies 2008 C

1.182% variable rate, due 6/1/26 )) 1,950 331,950 1,525 330,425 4,725

Total water long: tcnn bonds 1,969.370 814,475 848,225 1,935.620 36,620

(Continued)

40

EAST BAY MUNICIPAL, UTILITY DISTRICT NOTES TO BASIC FINANCIAL STATEMENTS


NOTE 6- LONG TERM DEBT (Continued)

Amount due Original Issue Balance June Balance June within one

Amount 30, 2007 Additions Retirements 30,2008 year

Wastewater System General

Obligation Bonds: Series F

2.5%- 5.00%. due 411/18 $41,730 $34,405 $2,240 $32,165 $2.380

Wa.'itewater System Revenue Bonds Subordinaled Series 1996

3.75%-6.00%, due 6/1126 91,410 1.840 1,840 Subordinated Series 1998

4.00-5.25%, due 611/38 50,000 2,970 695 2.275 725 Subordinated Series 2003 A

3.70% auction rate, due 6/1133 50,000 50,000 50,000 Subordinated Series 2003 B

3.70% variable rate. due 611/27 75,050 65.300 65.300 Subordinated Series 2005

3.655%, variable rate, due 6/1/38 70,000 69,300 69,300 Subordinated Series 2007 A

5.00%, due 611/37 80,630 80,630 80,630 Subordinated Series 2007 8

3.75- 5.00%. due 611/26 46,670 46,670 46,670 2,835 Subordinated Series 2008 A

1.25% variable rate. due 6/1/33 50,000 $50,000 50.000 Subordinated Series 2008 B

1.26% variable rate, due 6/1/38 69,300 69,300 375 68,925 425 Subordinated Series 2008 C

1.29% variable rate, due 6/1/27 65.300 65,300 2,730 62,570 1,920

Total wastewater long tcnn bonds 351,115 184.600 192,480 343,235 8,285

Total long-term bonds $2.320,485 $999,075 S1,040,705 $2,278.855 $44,905

(Continued)

41



NOTE 6- LONG TERM DEBT (Continued)

Original Amount due Issue Balance June Balance June within one

Amount 30,2007 Additions Retirements 30,2008 year

Water Loans: 1977 Federal Drought Loan

5.00%, due 911117 $5,973 $1.566 $142 $1.424 $142

2003 California EnergJ Commission

3.00%, due 6122/13 1,992 1,272 196 1,076 202

2004 Upper San Leandro Reser-voir Project

2.51%, due 111/24 2,188 1,880 93 1,787 96

State Water Resources Control Board

1989 Galbraith Golf Course Project

4.01 1%, due 2128/09 122 18 8 10 9

1992 Alameda Reclamation Project

3.20%, due 4/30/11 1,359 384 83 301 85

1993 Chevron Water Reclamation Project

3.00%, due 8/8/15 22,292 12,069 1,187 10,882 1,224

Total water loans 17,189 1,709 15,480 1,758

Wastewater Loans:

State Water Resources Control Board 1989 Oakport Project

4.01%, due 12114/10 2,495 584 152 432 157

1991 Adeline Street Project

3.50%, due 10/ltlO 8,141 2,080 494 1,586 511

1991 South Foothill Project

3.50%, due IOfl/JO 14,293 3,650 866 2,784 896

1992 Point Isabel Wet Weather Project

3.10%, due 10/2/13 21,515 9,364 1,218 8,146 1,256

19941\orth Interceptor Project

2.90%, due 12/31/14 10,091 4,828 545 4.283 561

1995 San Antonio Creek Project

3.40%, due ll/30f16 15,331 9,195 787 8,408 814

1997 Pump Station C Project

2.80%, due 1/31/17 3,849 2,417 191 2,226 196

2000 Pump Station B Project

2.20%, due 2/1/09 3.088 2,159 145 2,014 150

Toal wastewater loans 34,277 4,398 29,879 4,541

Total long-term loans 51,466 6,107 45,359 6,299

Commen.:ial Paper (see Note 5) 315,000 $330,000 315,000 330.000

Amount due within one year (47,742) 3,462 (51,204)

Less: Unamortized discount, net (70) 41,542 43,583 (2,111)

Total long-term liabilities, net S2.690.605 $1,370,617 $1,414,964 $2,600,899 $51,204

42



I NOTE 6- LONG TERM DEBT (Continued)

B. Descriptio11 of the District's Lo11g-Term Debt Is.mes

General obligation and revenue bonds are generally callable at future dates. The general obligation bonds are backed by the assessed values of real property within the District.

Revenue-supported debt can be authorized by the District's Board of Directors, subject to a referendum process.

The net revenues of the Water System are pledged toward the repayment of the Water Revenue Bonds and the State Water Resources Control Board Parity Loans to the Water System. The net revenues of the Wastewater System are pledged toward the repayment of the Wastewater Revenue Bonds and the State Water Resources Control Board Parity Loans to the Wastewater System.

The District is subject to certain revenue bond covenants on outstanding debt, the most restrictive of which requires the setting of rates and charges to yield net revenue, as defined, equal to at least 110% of the current annual debt service requirements of the combined senior and subordinated Water System and Wastewater System Revenue Bonds, respectively. The District has designated $65,000 ($50,000 for the Water System and $15,000 for the Wastewater System) in net revenues as a rate stabilization fund, which is available to satisfy the coverage requirements for debt service in future years. There have never been any draws for this purpose.

Water System

2008 Water System Subordinated Revenue Refunding Bonds, Series 2008A- The District issued Series 2008A on March 19, 2008, to refund $322.53 million principal amount of the District's Water System Subordinated Revenue Refunding Bonds, Series 2005B. The Series 2008A Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Water Revenues. Principal payments commenced on June I, 2008 and are payable annually on June I thereafter. Interest payments commenced on June l, 2008 and are payable semi-annually on June l and December I thereafter.

2008 Water System Subordinated Revenue Refunding Bonds, Series 2008B -The District issued Series 2008B on April 23, 2008, to refund $100 million principal amount of the District's Water System Subordinated Revenue Refunding Bonds, Series 2005C and $60 million principal amount of the District's Water System Subordinate Revenue Refunding Bonds, Series 2007C. The Series 2008B Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Water Revenues. Principal payments commenced on June I, 2008 and are payable annually on June I thereafter. Interest payments commenced on May l, 2008 and are payable on the first business day of each month.

2008 Water System Subordinated Revenue Refunding Bonds, Series 2008C- The District issued Series 2008C on March 19,2008, to refund $331.95 million principal amount of the District's Water System Subordinated Revenue Refunding Bonds, Series 2007C. The Series 2008C Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Water Revenues. Principal payments commenced on June I, 2008 and are payable annually on June I thereafter. Interest payments commenced on April I, 2008 and are payable on the first business day of each month.

43



NOTE 6- LONG-TERM DEBT (Continued)

c.

Wastewater System

2008 Wastewater System Subordinated Revenue Refunding Bonds, Series 2008A - The District issued Series 2008A on March 24, 2008, to refund $50 million principal amount of the District's Wastewater System Subordinated Revenue Refunding Bonds, Series 2003A. The Series 2008A Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Wastewater Revenues. Principal payments commenced on June I, 2027 and are payable annually on June 1 thereafter. Interest payments commenced on June I, 2008 and are payable semiannually June I and December I thereafter.

2008 Wastewater System Subordinated Revenue Refunding Bonds, Series 2008B- The District issued Series 2008B on March 19, 2008, to refund $69.3 million principal amount of the District's Wastewater System Subordinated Revenue Refunding Bonds, Series 2005. The Series 20088 Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Wastewater Revenues. Principal payments commenced on June I, 2008 and are payable annually on June I thereafter. Interest payments commenced on June I, 2008 and are payable semiannually June I and December I thereafter.

2008 Wastewater System Subordinated Revenue Refunding Bonds, Series 2008C- The District issued Series 2008C on March 26,2008, to refund the $65.3 million principal amount of the District's Water System Subordinated Revenue Refunding Bonds, Series 2003B. The Series 2008C Bonds are special obligations of the District and are payable solely from and secured by a pledge of Subordinated Wastewater Revenues. Principal payments commenced on June I, 2008 and are payable annually on June I thereafter. Interest payments commenced on June I, 2008 and are payable semiannually June I and December I thereafter.

Debt Service Requirements

Annual debt service requirements, including the swap payments discussed in F., are shown below for the above debt issues:

For the Year Ending Water Sl:stem Wastewater Sl:stem Total

June 30 Principal Interest Principal Interest Principal Interest

2009 $38,378 $56,258 $12,826 $10,760 $51,204 $67,018 2010 39,874 55,252 13.376 10,176 53,250 65,428 2011 41,497 54.379 13,826 9.671 55,323 64,050

2012 43,156 53,566 12,689 9,324 55,845 62.890 2013 44,983 52,552 13,255 9,302 58,238 61,854

2014-2018 251,768 249,092 65,691 39,508 317,459 288,600 2019- 2023 308,867 222,420 47,188 30,985 356,055 253,405 2024- 2028 369,425 192,702 56,370 25,201 425,795 217,903 2029- 2033 460,435 116.750 68,135 18,228 528,570 134,978 2034- 2038 352,717 21,440 69.758 4,816 422,475 26,256

Totals $1,951,100 $1,074,411 $373,114 $167,971 $2,324,214 $1,242,382

44




Interest payments on auction rate debt were calculated using the rate in effect at June 30, 2008. Interest payments on debt subject to swap agreements were calculated using the variable rates at June 30,2008.

D. Prior- Year Defeasances

In prior years, the District defeased certain debt issues by placing proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the refunded bonds. Accordingly, the trust account assets and the liability for the defeased debt are not included in the District's financial statements. On June 30, 2008, $232.055 million of bonds outstanding are considered defeased.

E. Authorized but Unissued Debt

On June 12, 2007, the Board declared its intention to issue Water Revenue Bonds and Wastewater Revenue Bonds. At June 30, 2008, the District had $1.3 billion in authorized but unissued revenue bonds ($1.1 billion for Water and $169 million for Wastewater).

F. Variable Rate Debt

The District has several bond issues with variable interest rates. The bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest and delivery to the District's remarketing agent. The remarketing agent is authorized to use its best efforts to sell the repurchased bonds at a price equal to I 00 percent of the principal amount by adjusting the interest rate. Under Standby Purchase Agreements issued by banks for each variable rate debt issue, the trustee or the remarketing agent is entitled to draw an amount sufficient to pay the purchase price of bonds delivered to it. The District is required to pay to the Banks an initial take out agreement fee and an annual commitment fee. In addition, the remarketing agent receives an annual fee of four to six basis points of the outstanding principal amount of the bonds. Terms of these arrangements are presented below by debt issue.

Issue

Water System Revenue Subordinated Bonds:

Series 2002 Series 2008A Series 2008B Series 2008C

Wastewater System Revenue Subordinated Bonds:

Series 2008A Series 2008B Series 2008C

Standby Purchase Agreement Terms

Expiration Date

3117/2017 3/18/2011 4/22/2011 3/19/2009

3/24/2011 3118/2011 3118/2011

45

Interest Rate

Variable Bank Rate Variable Bank Rate Variable Bank Rate Variable Bank Rate

Variable Bank Rate Variable Bank Rate Variable Bank Rate

Interest Rate Swap

See below See below See below See below

See below See below See below




G. Interest Rate Swap Agreements

The District has entered into a number of matched interest rate swap contracts with providers in which the District contracted to pay a tixed rate on the nominal amount of outstanding Bonds, in exchange for a floating rate payment, set monthly, two business days prior to the end of each month. The combination of variable rate bonds and a floating swap creates synthetic fixed-rate debt for the District. The transactions allow the District to create a synthetic fixed rate on the Bonds, protecting the District against increases in short-term interest rates. The terms, lair value, and credit risk of each of the swap agreements are disclosed below.

Term and credit risks. The terms and credit ratings of the outstanding swaps, as of June 30, 2008, are included below. The District's swap agreements contain scheduled reductions to outstanding notional amounts that are expected to follow scheduled reductions in the associated bonds.

Maturity/

Effective Counterparty Termination

Related Bond Issue Notional Amount Date Counterparty Credit Ratings Issuer Pays Issuer Receives Date

2002 Water System Citigroup Financial 65% of 30·day Refunding Bonds $153,610 3/6/2002 Products, Inc. Aa3 3.835% LIDOR 6/1/2025

2002 Water System JP Morgan Cha~ & 65%, of30-day Refunding Boods 76.800 316/2002 Co. Aa2 3.835% LIBOR 6/1/2025

2008A Water System J P Morgan Chase & 62.3% of30-Refunding B011ds 113,675 6/2/2005 Co. Aa2 3.115% day LJBOR 6/1/2038

2008A Water System Merrill Lynch 62.3% of 30~

Refunding Bmld<; t 13.675 6/2/2005 Capital Services AI 3.115% day LIBOR 6/1/2038

2008A Water System SBS Financial 62.3% of30~

Refunding Bonds 49,420 6/2/2005 Products Company AI 3.115% day LIBOR 6/1/2038

2008A Water System Lehman Brothers 62.3% of 30~ Refunding Bood<; 44,480 6/2/2005 Special Financing Al 3.115% day LIBOR 611/2038

91.0% ofUSD-2008B~3/2008C Water SJFMA System Refunding SBS Financial Municipal

Bonds 234,090 5/23/2007 Product<; Company A•l 3.407% Swap Index 6/1/2026

'JI.O%ofUSD~

2008B-3/2008C Water SIFMA System Refunding Citi Bank, N.A. New Municipal

Bonds 7l!,030 5/2312007 York Aal 3.407% Swap Index 611/2026

91.0% ofUSD-2008B-3/2008C Water SlFMA System Refunding Merrill Lynch Municipal Bonds 78,030 512312007 Capital Services A• I 3.407% Swap Index 6/1/2026

20088 Wastewater

System Refunding Lehman Brothers 62.3% of30-

Bonds 68,925 6/2/2005 Special Financing Al 3.098% day LIBOR 6/1/2038

2008C Wastewater

System Refunding Citigroup Financial 65% of30-day

Bonds 31,285 31512003 Products, Inc. A•3 3.468% LIBOR 6/1/2027

2008C Wastewater

System Refunding JP Morgan Chase & 65% of 30-day

Bonds 31,285 3/5/2003 Co. Aa2 3.468% LIBOR 6/1/2027

46




The effect of these transactions is structured to result in the approximate equivalent of the District paying a fixed rate on the Bonds, since the inflow of payments from the LIBOR-based swaps are anticipated to approximate the outflow of payments on the variable rate Bonds. Only the net difference in interest payments to the swap providers is made under the swap contracts.

Fair value. The fair value of the swaps takes into consideration the prevailing interest rate environment, the specific terms and conditions of a given transaction and any up front payments that may have been received. The fair value was estimated using the zero-coupon discounting method. This method calculates the future payments required by the swap, assuming that the current forward rates implied by the LIBOR swap yield curve are the market's best estimate of future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for a hypothetical zero-coupon rate bond due on the date of each future net settlement on the swaps. The fair values of each swap at June 30, 2008, are included below:

Related Bond Issue

2002 Water System Refunding Bonds

2008A Water System Refunding Bonds

2008B-3/2008C Water System Refunding Bonds

2008B Wastewater System Refunding Bonds

2008C Wastewater System Refunding Bonds

Fair Value

($14,417)

(4,731)

(6,425)

(969)

(2,606)

($29, 148)

Credit risk. As of June 30, 2008, the District was not exposed to credit risk on its outstanding swaps because the swaps had a negative fair value of$29,148. The District faces a maximum possible loss equivalent to the swaps' fair value. However, if interest rates increase and the fair value of the swaps were to become positive, the District would be exposed to credit risk.

The District will be exposed to interest rate risk only if the counterparty to the swap defaults or if the swap is terminated. The swap agreements contain provisions determining if and when the District or the counterparty must provide collateral. The agreements require full collateralization of the fair value of the swap should the counterparty's credit rating fall below a certain threshold. At June 30, 2008, neither the District nor the counterparty was required to provide collateral.

Basis risk. Basis risk is the risk that the interest rate paid by the District on underlying variable rate bonds to bondholders temporarily differs from the variable swap rate received from the applicable counterparty. The District bears basis risk on its swaps. The swaps have basis risk since the District receives a percentage of LIBOR and/or SJFMA Municipal Swap Index to offset the actual variable bond rate the District pays on its bonds. The District is exposed to basis risk should the floating rate that it receives on a swap be less than the actual variable rate the District pays on the bonds. Depending on the magnitude and duration of any basis risk shortfall, the expected cost of the basis risk may vary.

47




Termination risk. The District or the counterparty may terminate if the other party fails to perform under the terms of the respective contracts. The District will be exposed to variable rates if the providers to the swap contracts default or if the swap contracts are terminated. A termination of the swap contracts may also result in the District's making or receiving a termination payment based on market interest rates at the time of the termination. If at the time of termination the swap has a negative fair value, the District would be liable to the counterparty for a payment equal to the swap's fair value.

Swap payments and associated debt. Using rates as of June 30, 2008, debt service requirements of the District's ou1standing variable-rate debt and net swap payments are as follows. As rates vary, variablerate bond interest payments and net swap payments will vary. These payments below are included in the Debt Service Requirements at C. above:

For the Year Lntercst Rate Ending Variable-Rate Bonds Swaps, Net

June 30 Principal Interest Interest Total

2009 $27,905 $12,579 $19,597 $32,176 2010 30,285 12,204 18,963 31,167 2011 31,530 11,814 18,303 30,117 2012 32,840 11,407 17,615 29,022 2013 37,285 10,958 16,888 27,846

2014. 2018 211,350 47,388 72.542 119,930 2019. 2023 314,055 31,481 47,451 78,932 2024. 2028 238,330 12,073 16,784 28,857 2029- 2033 68,025 6,370 8,606 14,976 2034- 2038 81,700 1.991 2,685 4,676

Totals $1,073,305 $158,265 $239,434 $397,699

I NOTE 7- NET ASSETS

Net Assets is the excess of all the District's assets over all its liabilities, regardless of fund. Net Assets are divided into three captions under GASB Statement 34. These captions apply only to Net Assets and are described below:

Invested in Capital Assets, net of related debt describes the portion of Net Assets which is represented by the current net book value of the District's capital assets, less the outstanding balance of any debt issued to finance these assets.

Restricted describes the portion of Net Assets which is restricted as to use by the terms and conditions of agreements with outside parties, governmental regulations, laws, or other restrictions which the District cannot unilaterally alter. These principally include developer fees received for use on capital projects, debt service requirements, and fees charged for the provision of future water resources.

Unrestricted describes the portion of Net Assets which is not restricted to use.

48



I NOTE 8- EMPLOYEES' RETIREMENT PLAN

A. Description

The Employees' Retirement System is a single-employer, contributory, defined benefit pension plan (the Plan) which provides retirement, disability, survivorship, and post-employment healthcare benefits for eligible directors, officers, and employees of the District. The Plan is administered by a Retirement Board composed of three members appointed by the District's board of directors and two members elected by and from the active membership of the Plan, and a nonvoting member elected by the retirees of the Plan. Retirement Ordinance No. 40 assigns the authority to establish Plan benefit provisions to the District's board of directors.

All regular full-time employees of the District are members of the Plan. In accordance with the ordinance governing the Plan, eligible employees become members on the first day they are physically on the job. District-defined benefits vest in part with members after completion of five years of continuous, full-time employment.

The Plan is funded by contributions from its members and from the District. District contribution percentages are recommended by the Retirement Board, employee contribution rates are established by the Board of Directors pursuant to the Ordinance, giving consideration to actuarial recommendations and prospective changes in factors which affect funding.

B. Post-emp/"yment Healthcare Cost

In addition to retirement benefits, the District provides post-employment health benefits assistance (administered by the Employees' Retirement System) for employees who retire from the District or their surv1vmg spouses. As of June 30, 2008, there were I, I 03 participants receiving these health care benefits.

Effective July I, 1996, a 20-year vesting schedule for full benefits was implemented for all new participants. Effective January I, 1999, retired members who had separated from the District prior to their retirement and who had at least 10 years of service also became eligible for the post-employment health benefits based on the same sliding scale. The scale provides for 25% of healthcare benefits for service from 5 through I 0 years, 50% of health care benefits for service from 10 through 15 years, 75% of health care benefits for service from 15 through 20 years, and 100% of healthcare benefits for service of 20 years or more. Effective July 1, 2003, the District reimbursed up to $450 per month ($550 per month effective July I, 2004, for membership of a spouse or registered domestic partner) for any health, dental, or long-term care insurance premiums paid by the retiree for themselves, current spouse, or domestic partner, or any health, dental, or long-term care insurance premiums paid by the eligible surviving spouse of a retiree. These benefits are paid from a separate post-employment healthcare benefits fund which up until June 17, 2002, was advance funded entirely by the District on an actuarially determined basis. Cash reimbursement of these benefits totaled $5,694 in the year ended June 30, 2008. Effective June 18, 2002, a portion of the post-employment healthcare benefit costs is recovered through employee contributions.

49



I NOTE 8- EMPLOYEES' RETIREMENT PLAN (Continued)

Through June 30, 1999, the medical premium subsidy was not a vested benefit and the District reserved the right to modifY or terminate the benefit at any time. If the medical subsidy were terminated, assets accumulated from contributions made for the subsidy would be used to provide other pension benefits. Effective July I, 1999, the medical premium subsidy became a vested benefit to a maximum of $200 per month, was changed effective October I, 2000, to a maximum of $250 per month, and was changed effective July I, 2002, to a maximum of $400 per month, and was changed effective July I, 2003, to a maximum of $450 per month, and was changed again effective July I, 2004, to a maximum of $450 per month and $550 per month for membership of a spouse or registered domestic partner.

C. Contributions Required and Contributions Made

The Plan's funding policy provides for periodic District contributions at actuarially determined amounts sufficient to accumulate the necessary assets to pay benefits when due as specified by ordinance. The individual-entry-age-normal method is used to determine the normal cost, and the unfunded actuarial accrued liability (past service liability) is amortized as a level percentage of future covered payroll over 30 years for the pension plan and the post-employment healthcare benefit plan. District contributions for the year to cover normal cost and to amortize the unfunded actuarial liability approximated a total of29.94% of covered payroll inclusive of post-employment health care benefits.

Significant assumptions used to compute contribution requirements from the latest unaudited actuarial are as follows:

Valuation date Actuarial cost method Amortization method Remaining amortization period Assets valuation method Actuarial assumptions:

Investment rate of return A vcrage projected salary increases Inflation rate Cost-of-living adjustments

50

June 30, 2007 Entry Age Normal Cost Method Level percent of payroll 30 years 5-year smoothing of market value

8.25% 6.07% 4.00% 3.50%



I NOTE 8- EMPLOYEES' RETIREMENT PLAN (Continued)

Contributions for the year ended June 30, 2008, based on the actuarial valuation (including amounts for post-employment healthcare benefits), were as follows:

Wastewater System Water System Fund Fund Total

Regular contributions: District contributions $37,996 $6,607 $44,603 Member contributions 8,814 1,527 10,341

46,810 8,134 54,944 Other contributions:

Member buy backs 42 II 53 $46,852 $8,145 $54,997

Regular District and member contributions in fiscal 2008 represent an aggregate of 29.94% and 6.94% of covered payroll, respectively. The payroll for the District employees covered by the Plan for the year ended June 30, 2008, was $148,967, which was 89.67% of the total District payroll of $166,130. The total District contribution of $44,603 consisted of $18,225 for normal cost and $26,378 for amortization of the unfunded actuarial accrued liability. The payroll for the District employees covered by the Plan for the year ended June 30, 2007, was $143,689, which was 89.19% of the total District payroll of $161,111. The total District contribution of $39,332 consisted of $16,385 for normal cost and $22,960 for amortization of the unfunded actuarial accrued liability.

Member buyback contributions relate to prior years' service credits for Plan participants. The Plan was amended in 1998 for limited temporary construction workers and in 2003 for intermittent employees to allow current members, who previously worked for the District in a status that did not qualify for membership in the Employees' Retirement System, to establish retirement service credit for prior service with payments over a period of two to eight years.

D. Schedule of Employer Contribution.<

The schedule of employer contributions is shown below:

Annual required Percentage contribution contributed

Fiscal year ended June 30:

2006 $35,635 100% 2007 39,332 100% 2008 44,603 100%

The annual required contributions for fiscal years ended June 30, 2008 and 2007, include amounts for the pay-as-you-go amounts for post-employment healthcare benefits.

51



I NOTE 9- RISK MANAGEMENT

The District has purchased commercial insurance for general, property, public officials' liability and workers' compensation. During the fiscal year ended June 30,2008, the District paid $1,571 for current year coverage.

The District's liability, property, and workers' compensation risks are insured by commercial insurance carriers, all of which are subject to the District's self-insurance retentions, which vary by type of coverage.

Selected other coverages are:

Coverage

Workers' compensation All risk property (except flood) Flood Liability

Crime

Policy limit

Statutory Limit $125,000

25,000 90,000

10,000

Self-insured retention

$5,000 100

1,000 I 0,000 Water

10,000 Wastewater 25

Settled claims have not exceeded the District's policy limits in any of the past five fiscal years.

Claim expenses and liabilities are recorded when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. As of June 30, 2008, the amount of these liabilities was $34,093 and is included in accounts payable and accrued expenses and other non-current liabilities in the accompanying balance sheet. This amount (which has not been discounted) has been actuarially determined and includes an estimate of incurred but not reported losses. Changes in the reported liability are as follows:

Liability at beginning of year Current year claims and changes in estimates Payments of claims Liability at end of year

I NOTE I 0- CONTINGENT LIABILITIES

2008 2007

$19,195 21,432 (6,534)

$34,093

$20,559 4,620

(5,984) $19,195

The District is a defendant in a number of lawsuits which have arisen in the normal course of business including challenges over certain rates and charges. The ultimate outcome of these matters is not presently determinable. In the opinion of the District, these actions when finally adjudicated will not have a material adverse effect on the financial position of the District.

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EAST BAY MUNICWAL UTILITY DISTRICT NOTES TO REQUIRED SUPPLEMENTARY INFORMATION

FOR THE YEAR ENDED JUNE 30, 2008 (Dollars in thousands)

(I) Pension Plan

Schedule of funding progress for the pension plan (in thousands):

Actuarial UAAL as a Accrued Percentage

Actuarial Actuarial liability Unfunded of covered valuation value of (AAL)- AAL Funded Covered payroll

date assets (a) entry age (b) (UAAL) (b-a) ratio (a/b) payroll (c) ((b-a)/c) 06/30/98 $426,193 $466,387 $40,194 91.4% $106,099 37.9% 06/30199 491,935 512,074 20,139 96.1% 111,955 18.0% 06/30100 556,759 611,441 54,682 91.1% 118,798 46.0% 06/30/01 606,896 663,763 56,867 91.4% 125,313 45.4% 06/30/02 631,700 719,660 87,960 87.8% 129,791 67.8% 06/30/03 639,382 838,385 199,003 76.3% 133,678 148.9% 06/30/04 662,387 886,663 224,276 74.7% 137,138 163.5% 06/30/05 692,945 946,616 253,671 73.2% 139,514 181.8% 06130106 740,622 1,039,750 299,128 71.2% 142,373 210.1% 06/30/07 827,098 I, 126, I 06 299,008 73.4% 153,394 194.9%

Unaudited

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EAST BAY M UNI CIP AL UTILITY DISTRICT NOTES TO REQUIRED SUPPLEMENTARY INFORMATION

FOR THE YEAR ENDED JUNE 30, 2008 (Dollars in thousands)

(2) Post-Employment Healthcare Plan

Schedule of funding progress for the post-employment healthcare plan (in thousands):

Actuarial VAAL as a accrued percentage

Actuarial Actuarial liability Unfunded of covered valuation value of (AAL)- AAL Funded Covered payroll

date assets (a) entry age (b) (UAAL) (b-a) ratio (a/b) payroll (c) ((b-a)/c) 6/30/1998 $0 $15,978 $15,978 0.0% $106,099 15.1% 6/30/1999 357 23,132 22,775 1.5% 111,955 20.3% 6/30/2000 805 29,581 28,776 2.7% 118,798 24.2% 6/30/2001 841 30,971 30,130 2.7% 125,313 24.0% 6/30/2002 1,265 50,358 49,093 2.5% 129,791 37.8% 6/30/2003 2,113 58,752 56,639 3.6% 133,678 42.4% 613012004 2,715 62,357 59,642 4.4% 137,!38 43.5% 6/30/2005 3,409 71,892 68,483 4.7% 139,514 49.1% 6/30/2006 3,608 71,409 67,801 5.1% 142,373 47.6% 6/30/2007 4,208 105,409 lO 1,201 4.0% 153,394 66.0%

Unaudited.

54

APPENDIX B

SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

The following is a summary of certain provisions of the Indenture. This summary is not to be considered a filii statement of the terms of the Indenture and accordingly is qualified hy reference thereto and is subject to the full text thereof Capitalized terms not defined in this summary or elsewhere in the Official Statement have rhe respective meanings set forth in the Indenture.

Certain Definitions

"Accreted Value" means, with respect to any Capital Appreciation Indebtedness, the principal amount thereof plus the interest accrued thereon, compounded at the interest rate thereon on each date as specified in the Subordinated Water Bond Indenture.

"Act" means the Municipal Utility District Act, constituting Division 6 of the Public Utilities Code of the State of California, and all laws of the State of California amendatory thereof or supplemental thereto, including the Revenue Bond Law of 1941, as made applicable by Article 6a of Chapter 6 of said Division 6, and Article 11 of Chapter 3 of Part I of Division 2 of Title 5 of the Government Code of the State of California.

"Annual Debt Service" means for any Fiscal Y car the aggregate amount of principal and interest on all Water Bonds, Bonds and Parity Debt becoming due and payable during such Fiscal Y car calculated using the principles and assumptions set forth under the definition of Maximum Annual Debt Service.

"Assumed Debt Service" means for any Fiscal Year the aggregate amount of principal and interest which would be payable on all Water Bonds, Bonds and Parity Debt if each Excluded Principal Payment were amortized for a period specified by the District (but no longer than thirty (30) years from the date of the issuance of the Water Bonds, Bonds or Parity Debt to which such Excluded Principal Payment relates) on a substantially level debt service basis, calculated based on a fixed interest rate equal to the rate at which the District could borrow for such period, as certified by a certificate of a financial advisor or investment banker delivered to the Trustee, who may rely conclusively on such certificate, within thirty (30) days of the date of calculation.

"Bond Obligation" means, as of any given date of calculation, (I) with respect to any Outstanding Bond or Water Bond which is Current Interest Indebtedness, the principal amount thereof, and (2) with respect to any Outstanding Bond or Water Bond which is Capital Appreciation Indebtedness, the Accreted Value thereof.

"Bonds" means the East Bay Municipal Utility District Water System Subordinated Revenue Bonds authorized by, and at any time Outstanding pursuant to, the Indenture.

"Business Day" means any day other than (I) a Saturday, Sunday, or a day on which banking institutions in the State of California or the State of New York are authorized or obligated by law or executive order to be closed, and (2) for purposes of payments and other actions related to Bonds secured by a letter of credit, a day upon which commercial banks in the city in which is located the office of the issuing bank at which demands for payment under the letter of credit are to be presented arc authorized or obligated by law or executive order to be closed.

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"Capital Appreciation Indebtedness" means Water Bonds, Bonds and Parity Debt on which interest is compounded and paid less frequently than annually.

"Code" means the Internal Revenue Code of 1986, and the regulations applicable thereto or issued thereunder, as amended from time to time.

"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the District and related to the authorization, execution, sale and delivery of the Bonds, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, filing and recording fees, travel expenses and costs relating to rating agency meeting and other meeting concerning the Bonds, initial fees and charges of the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, financial advisor fees and expenses, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Bonds surety, insurance and credit enhancement costs, and any other cost, charge or fee in connection with the delivery of the Bonds.

"Current Interest Indebtedness" means the Water Bonds, Bonds and Parity Debt on which interest is paid at least annually.

"Debt Service" means the amount of principal and interest becoming due and payable on all Water Bonds, Bonds and Parity Debt provided, however, that for the purposes of computing Debt Service:

(a) Excluded Principal Payments shall be excluded from such calculation and Assumed Debt Service shall be included in such calculation;

(b) if the Water Bonds, Bonds or Parity Debt are Variable Rate Indebtedness, the interest rate thereon for periods when the actual interest rate cannot yet be determined shall be assumed to be twelve percent (12%) per annum;

(c) principal and interest payments on Water Bonds, Bonds and Parity Debt shall be eJ<cluded to the extent such payments arc to be paid from amounts on deposit with the Trustee or another fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Water Bonds, Bonds or Parity Debt held by the Trustee or another fiduciary as capitalized interest;

(d) in determining the principal amount, payment shall (unless a different subsection of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Water Bonds, Bonds or Parity Debt on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Indebtedness;

(e) if any interest rate swap agreement is in effect with respect to, and is payable on a parity with, the Water Bonds, Bonds or Parity Debt to which it relates, no amounts payable under such interest rate swap agreement shall be included in the calculation of Debt Service unless the sum of (i) interest payable on such Water Bonds, Bonds or Parity Debt, plus (ii) amounts payable by the District under such interest rate swap agreement, less (iii) amounts receivable by the District under such interest rate swap agreement are greater than the interest P"yable on the Water Bonds, Bonds or Parity Debt to which it relates, then, in such instance, the

B-2

amount of such payments to be made that exceed the interest to be paid on the Water Bonds, Bonds or Parity Debt shall be included in such calculation. For such purposes, the variable amount under any such interest rate swap agreement shall be assumed to be equal to twelve percent ( 12%) per annum; and

(f) if any Water Bonds, Bonds or Parity Debt include an option or an obligation to tender all or a portion of such Water Bonds, Bonds or Parity Debt to the District, the Trustee or another fiduciary or agent and require that such Water Bonds, Bonds or Parity Debt or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due, the options or obligations to tender shall be treated as a principal maturity occurring on the first date on which holders or owners thereof may or are required to tender, except that any such option or obligation to tender shall be ignored and not treated as a principal maturity, if (I) such Water Bonds, Bonds or Parity Debt are in one of the two highest Rating Categories by Moody's and by Standard & Poor's or such Water Bonds, Bonds or Parity Debt arc rated in the highest short-term, note or commercial paper Rating Categories by Moody's and by Standard & Poor's and (2) funds for the purchase price are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Water Bonds, Bonds or Parity Debt, shall be subordinated to the obligation of the District on the Bonds and Parity Debt or, if not subordinate, shall be incurred (assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture.

"Excluded Principal Payments" means each payment of principal (or the principal component of lease or installment purchase payments) of Water Bonds, Bonds or Parity Debt which the District determines on a date not later than the date of issuance thereof that the District intends to pay with monies which arc not Water Revenues or Subordinated Water Revenues but from the proceeds of future debt obligations of the District and the Trustee may rely conclusively on such determination of the District.

"Fiscal Year" means the period beginning on July I of each year and ending on the next succeeding June 30, or any other twelve-month period selected and designated as the official fiscal year period of the District, which designation shall be provided to the Trustee in a certificate of the District.

"Indenture" means the Water System Subordinated Revenue Bond Indenture, dated as of April I, 1990, by and between the Trustee and the District, as originally executed or as it may from time to time be supplemented or amended by any Supplemental Indenture delivered pursuant to the provisions thereof.

"Investment Securities" means the following:

(i) any bonds or other obligations which as to principal and interest constitute direct obligations of, or are unconditionally guaranteed by, the United States of America, including obligations of any of the Federal agencies and Federally sponsored entities set forth in clause (iii) below to the extent unconditionally guaranteed by the United States of America;

(ii) any certificates, receipts, sceunlles or other obligations evidencing ownership of, or the right to receive, a specified portion of one or more interest payments or principal payments, or any combination thereof, to be made on any bond, note, or other obligation described above in clause (i);

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(iii) obligations of the Federal National Mortgage Association, the Government National Mortgage Association, Federal Home Loan Banks and Federal Home Loan Mortgage Corporation;

(iv) obligations of any state, territory or commonwealth of the United States of America or any political subdivision thereof or any agency or department of the foregoing; provided that at the time of their purchase such obligations are rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(v) any bonds or other obligations of any state of the United States of America or any political subdivision thereof {a) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee of such bonds or their obligations by the obligor to give due notice of redemption and to call such bonds for redemption on the date or dates specified in such instructions, (b) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described above in clause (i), (ii) or (iii) which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the interest payment dates and the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, (c) as to which the principal of and interest on the bonds and obligations of the character described above in clause (i), (ii) or (iii) which have been deposited in such fund along with any cash on deposit in such fund are sufficient to pay the principal of and interest and redemption premium, if any, on the bonds or other obligations described in this clause (v) on the interest payment dates and the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (a) of this clause (v), as appropriate, and (d) which have been rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vi) bonds, notes, debentures or other evidences of indebtedness issued or guaranteed by any corporation which are, at the time of purchase, rated by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) in their respective highest short-term Rating Categories, or, if the term of such indebtedness is longer than three (3) years, rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vii) demand or time deposits or certificates of deposit, whether negotiable or nonnegotiable, issued by any bank or trust company organized under the laws of any state of the United States of America or any national banking association (including the Trustee), provided that such certificates of deposit shall be purchased directly from such a bank, trust company or national banking association and shall be either (I) continuously and fully insured by the Federal Deposit Insurance Corporation, or (2) continuously and fully secured by such securities and obligations as are described above in clauses (i) through (iv), inclusive, which shall have a market value (exclusive of accrued interest) at all times at least equal to the principal amount of such certificates of deposit and shall be lodged with the Trustee, as custodian, by the bank, trust company or national banking association issuing such certificates of deposit, and the bank, trust company or national banking association issuing each such certificate of deposit required to be so secured

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shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such certificate of deposit will at all times be an amount equal to the principal amount of each such certificate of deposit and the Trustee shall be entitled to rely on each such undertaking;

(viii) taxable commercial paper or tax-exempt commercial paper rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(ix) variable rate obligations required to be redeemed or purchased by the obligor or its agent or designee upon demand of the holder thereof secured as to such redemption or purchase requirement by a liquidity agreement with a corporation and as to the payment of interest and principal either upon maturity or redemption (other than upon demand by the holder thereof) thereof by an unconditional credit facility of a corporation, provided that the variable rate obligations themselves are rated in their respective highest Rating Categories for its short-term rating, if any, and not lower than their respective ratings on the Bonds for its long-term rating, if any, by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds), and that the corporations providing the liquidity agreement and credit facility have, at the date of acquisition of the variable rate obligation by the Trustee, an outstanding issue of unsecured, uninsured and unguaranteed debt obligations rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(x) any repurchase agreement with any bank or trust company organized under the laws of any state of the United States or any national banking association (including the Trustee) having a minimum permanent capital of one hundred million dollars ($100,000,000) and with short-term debt rated by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) in their respective four highest short-term rating categories or government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, which agreement is secured by any one or more of the securities and obligations described in clauses (i), (ii) or (iii) above, which shall have a market value (exclusive of accrued interest and valued at least monthly) at least equal to the principal amount of such investment and shall be lodged with the Trustee or other fiduciary, as custodian for the Trustee, by the bank, trust company, national banking association or bond dealer executing such repurchase agreement, and the entity executing each such repurchase agreement required to be so secured shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such repurchase agreement (as valued at least monthly) will be an amount equal to the principal amount of each such repurchase agreement and the Trustee shall be entitled to rely on each such undertaking;

(xi) any cash sweep or similar account arrangement of or available to the Trustee, the investments of which are limited to investments described in clauses (i), (ii), (iii), (iv) and (x) of this definition of Investment Securities and any money market fund, the entire investments of which arc limited to investments described in clauses (i), (ii), (iii), (iv) and (x) of this definition of Investment Securities and which money market fund is rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds); provided that as used in this clause (xi) and clause (xii) investments will be deemed to

B-5

satisfy the requirements of clause (x) if they meet the requirements set forth in clause (x) ending with the words "clauses (i), (ii) or (iii) above" and without regard to the remainder of such clause (x);

(xii) a guaranteed investment contract with a financial institution or insurance company which has at the date of execution thereof an outstanding issue of unsecured, uninsured and unguaranteed debt obligations or a claims paying ability rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(xiii) shares of beneficial interest in diversified management companies investing exclusively in securities and obligations described in clauses (i) through (xii) of this definition of Investment Securities and which companies are rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) or have an investment advisor registered with the Securities and Exchange Commission with not less than five years experience investing in such securities and obligations and with assets under management in excess of $500,000,000; and

(xiv) any investment approved by the Board for which confirmation is received from each rating agency then rating any of the Bonds that such investment will not adversely affect such agency's rating on such Bonds.

"Mandatory Sinking Account Payment" means the amount required to be deposited by the District in a sinking account for the payment of Term Bonds.

"Maximum Annual Debt Service" shall mean the greatest amount of principal and interest becoming due and payable on all Water Bonds, Bonds and Parity Debt in the Fiscal Y car in which the calculation is made or any subsequent Fiscal Year; provided, however, that for the purposes of computing Maximum Annual Debt Service:

(a) Excluded Principal Payments shall be excluded from such calculation and Assumed Debt Service shall be included in such calculation;

(b) if the Water Bonds, Bonds or Parity Debt arc Variable Rate Indebtedness, the interest rate thereon for periods when the actual interest rate cannot yet be determined shall be assumed to be twelve percent (12%) per annum;

(c) principal and interest payments on Water Bonds, Bonds and Parity Debt shall be excluded to the extent such payments arc to be paid from amounts on deposit with the Trustee or another fiduciary in escrow specifically therefor and to the extent that such interest payments arc to be paid from the proceeds of Water Bonds, Bonds or Parity Debt held by the Trustee or another fiduciary as capitalized interest;

(d) in determining the principal amount due in each Fiscal Year, payment shall (unless a different subsection of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Water Bonds, Bonds or Parity Debt on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a

B-6

principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Indebtedness;

(c) if any interest rate swap agreement is in effect with respect to, and is payable on a parity with, the Water Bonds, Bonds or Parity Debt to which it relates, no amounts payable under such interest rate swap agreement shall be included in the calculation of Maximum Annual Debt Service unless the sum of (i) interest payable on such Water Bonds, Bonds or Parity Debt, plus (ii) amounts payable by the District under such interest rate swap agreement, less (iii) amounts receivable by the District under such interest swap agreement arc greater than the interest payable on the Water Bonds, Bonds or Parity Debt to which it relates, then, in such instance, the amount of such payments to be made that exceed the interest to be paid on the Water Bonds, Bonds or Parity Debt shall be included in such calculation. For such purposes, the variable amount under any such interest rate swap agreement shall be assumed to be equal to twelve percent (12%) per annum; and

(f) if any Water Bonds, Bonds or Parity Debt include an option or an obligation to tender all or a portion of such Water Bonds, Bonds or Parity Debt to the District, the Trustee or another fiduciary or agent and require that such Water Bonds, Bonds or Parity Debt or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due in any Fiscal Y car, the options or obligations to tender shall be treated as a principal maturity occurring on the first date on which holders or owners thereof may or arc required to tender, except that any such option or obligation to tender shall be ignored and not treated as a principal maturity, if(l) such Water Bonds, Bonds or Parity Debt arc rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and by Standard & Poor's (if Standard and Poor's is then rating the Bonds) or such Water Bonds, Bonds or Parity Debt arc rated in the highest short-term note or commercial paper Rating Categories by Moody's (if Moody's is then rating the Bonds) and by Standard & Poor's (if Standard and Poor's is then rating the Bonds) and (2) funds for the purchase price arc to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Water Bonds, Bonds or Parity Debt, shall be subordinated to the obligation of the District on the Bonds and Parity Debt or, if not subordinate, shall be incurred (assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture.

"Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"Opinion of Bond Counsel" means a written opinion of a law finn of national standing in the field of public finance selected by the District and not objected to by the Trustee.

"Outstanding," when used at any particular time with reference to Bonds, means (subject to the provisions relating to disqualified bonds) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except (I) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the District shall have been discharged under the Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

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"Owner" or "Bondholder" or "Bondowner ,'' whenever used with respect to a Bond, means the person in whose name such Bond is registered.

"Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the District for borrowed money or interest rate swap agreement having an equal lien and charge upon the Subordinated Water Revenues and therefore payable on a parity with the Bonds (whether or not any Bonds arc Outstanding).

"Person" means a corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

"Rating Category" means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier.

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

•'Revenue Fund" means the fund held in trust by the District to which the Subordinated Water Revenues arc required to be deposited.

"Series" whenever used with respect to Bonds, means all of the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, regardless of variations in maturity, interest rate, redemption and other provisions, and any Bonds thereafter authenticated and delivered upon transfer or exchange or in lieu of or in substitution for (but not to refund) such Bonds as provided in the Indenture.

"Standard & Poor's" means Standard & Poor's Corporation, a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Standard & Poor's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"Subordinated Water Revenues" for any fiscal period means the sum of (a) the Water Revenues for such fiscal period plus (b) the amounts, if any, withdrawn by the District from the Rate Stabilization Fund created in the Water Bond Resolution for treatment as Water Revenues for such fiscal period, Jess the sum of (c) all Water Operation and Maintenance Costs for such fiscal period, (d) the amounts, if any, withdrawn by the District from Water Revenues for such fiscal period for deposit in such Rate Stabilization Fund, and (e) all amounts required to be paid under the Water Bond Resolution for principal, interest, reserve fund and any other debt service requirements on the Water Bonds as the same become due and payable.

"Variable Rate Indebtedness" means any indebtedness the interest rate on which is not fixed at the time of incurrence of such indebtedness, and has not at some subsequent date been fixed, at a single numerical rate for the entire term of the indebtedness.

"Water Bond Resolution" means Resolution No. 30050 of the District, adopted on January 26, I 982, as amended and supplemented from time to time.

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"Water Bonds" means all bonds and other obligations of the District issued pursuant to the Water Bond Resolution.

"Water Operation and Maintenance Costs" means the reasonable and necessary costs of maintaining and operating the Water System, calculated on sound accounting principles, including (among other things) the reasonable expenses of management, repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and reasonable amounts for administration, overhead, insurance, taxes and other similar costs, but excluding in all cases depreciation and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature, and excluding all costs paid from the proceeds of taxes received by the District.

"Water Revenues" means all charges received for, and all other income and receipts derived by the District from, the operation of the Water System, or arising from the Water System, together with income from the investment of any monies in any fund or account established under the Water Bond Resolution or the Indenture.

"Water System" means the entire water system of the District and all of the facilities thereof, including all facilities for the storage, transmission or distribution of water or the generation or transmission of hydroelectric power, together with all additions, betterments, extensions and improvements to said system or any part thereof. The term "Water System" does not include the sewage disposal system or facilities of Special District No. I of the District (including any power generation facilities constituting a part of said system).

Pledge of Revenues

The Bonds arc revenue obligations of the District and arc payable as to both principal and interest, and any premium upon redemption thereof, exclusively from the Subordinated Water Revenues and other amounts held by the Trustee (except for amounts held in the Rebate Fund). The Subordinated Water Revenues are pledged to the payment of Bonds and Parity Debt without priority or distinction of one over the other. Said pledge constitutes a first lien on the Subordinated Water Revenues and such other amounts referred to in this paragraph.

Allocation of Subordinated Water Revenues

The District is to transfer the monies in the Revenue Fund, into the following respective funds, in the following amounts, in the following order of priority, the requirements of each such fund (including the making up of any deficiencies in any such fund resulting from lack of Subordinated Water Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any deposit is made to any fund subsequent in priority.

(I) Interest Fund. The District shall transfer to the Trustee and the Trustee shall set aside in the Interest Fund on or before the Business Day prior to each interest payment date therefor an amount equal to the interest becoming due and payable on the Outstanding Bonds which arc Current Interest Indebtedness (excluding any interest for which there are monies on deposit in the Interest Fund from the proceeds of any Series of Bonds or other source to pay such interest).

(2) Principal Fund; Sinking Accounts. The District shall transfer to the Trustee and the Trustee shall set aside in the Principal Fund on or before the Business Day prior to each principal or Sinking Account payment date therefor an amount equal to (a) the amount of Bond Obligation becoming due and payable on the Outstanding Serial Bonds, plus (b) the Mandatory

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Sinking Account Payments to be paid into the respective Sinking Accounts for the Term Bonds; provided that if the District certifies to the Trustee that any principal payments arc expected to be refunded on or prior to their respective due dates or paid from excess amounts on deposit in a bond reserve fund upon such payment, no amounts need be set aside towards such principal to be so refunded or paid. All of the aforesaid Mandatory Sinking Account Payments shall be made without priority of any payment into any one such Sinking Account over any other such payment.

{3) Bond Reserve Funds. Upon the occurrence of any deficiency in any Bond Reserve Fund established under the Indenture for any Series of Bonds, the District shall transfer to the Trustee and the Trustee shall set aside in such Bond Reserve Fund an amount equal to the aggregate amount of each unrep\enished prior withdrawal from the Bond Reserve Fund until there is on deposit in such Bond Reserve Fund an amount equal to the respective reserve requirement.

Any Subordinated Water Revenues remaining after the foregoing transfers shall be held free and clear of the Indenture by the District and it may use and apply such Subordinated Water Revenues for any \awful purpose of the District, including the redemption and purchase of Bonds.

If on any principal payment date, interest payment date or mandatory redemption date the amounts on deposit in the Interest Fund and Principal Fund, including the Sinking Accounts therein arc insufficient to make such payments, the Trustee shall immediately notify the District of such deficiency and direct that the District transfer the amount of such deficiency to the Trustee on such payment date. The District covenants and agrees to transfer to the Trustee from any Subordinated Water Revenues in its possession the amount of such deficiency on the principal, interest or mandatory redemption date referenced in such notice.

Investments

All monies in any of the funds and accounts held by the Trustee shall be invested, as directed by the District, solely in Investment Securities.

The District may and the Trustee shall, upon the Request of the District, enter into a financial futures or fit1ancial option contract with an entity the debt securities of which are rated in their respective highest short-term Rating Categories by Moody's and Standard & Poor's.

The District may and the Trustee shall, upon the Request of the District, and provided that the Trustee is supplied with an Opinion of Bond Counsel to the effect that such action is permitted under the laws of the State of California, enter into an interest rate swap agreement corresponding to the interest rate or rates payable on a Series of Bonds or any portion thereof and the amounts received by the District or the Trustee, if any, pursuant to such a swap agreement may be applied to the deposits required hereunder; in which case, the entity with which the District or the Trustee may contract for an interest rate swap is limited to entities the debt securities of which arc rated in their respective highest short-term debt Rating Categories by Moody's and Standard & Poor's. If the District so designates, amounts payable under the interest rate swap agreement shall be secured by Subordinated Water Revenues and other assets pledged hereunder to the Bonds on a parity basis therewith and, in such event, the District shall pay to the Trustee for deposit in the Interest Fund, at the times and in the manner provided in the Indenture, the amounts to be paid under such interest rate swap agreement, as if such amounts were additional interest due on the Bonds to which such interest rate swap agreement relates, and the Trustee shall pay to the other party to the interest rate swap agreement, to the extent required thereunder, amounts deposited in the Interest Fund for the payment of interest on the Bonds with respect to which such agreement was entered into.

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Additional Bonds; Parity Debt

The issuance of additional Water Bonds is not limited by the Indenture. The District may issue Bonds and Parity Debt payable from Subordinated Water Revenues and secured equally and ratably with Bonds previously issued, subject to the following specific conditions precedent to the issuance of any such additional Bonds or Parity Debt:

(a) No Event of Default shall have occurred and then be continuing.

(b) The aggregate principal amount of Bonds or Parity Debt shall not exceed any limitation imposed by law or by any Supplemental Indenture.

(c) The District shall have placed on file with the Trustee a Certificate of the District certifying that the sum of: (I) the Subordinated Water Revenues plus all amounts required to be paid under the Water Bond Resolution for principal, interest, reserve fund and any other debt service requirements on the Water Bonds for any period of 12 consecutive months during the 18 months immediately preceding the date on which such additional Bonds or Parity Debt will become Outstanding; plus (2) 90% of the amount by which the District projects Subordinated Water Revenues for such period of 12 months would have been increased had increases in rates, fees and charges during such period of 12 months been in effect throughout such period of 12 months; plus (3) 75% of the amount by which the District projects Subordinated Water Revenues will increase during the period of 12 months commencing on the date of issuance of such additional Series of Bonds due to improvements to the Water System under construction (financed from any source) or to be financed with the proceeds of such additional Series of Bonds, shall (4) have been at least equal to 1.1 times the amount of Maximum Annual Debt Service on all Water Bonds, Bonds and Parity Debt then Outstanding and the additional Bonds or Parity Debt then proposed to be issued.

Refunding Bonds

Refunding Bonds may be authorized and issued by the District without compliance with the provisions described above under "Additional Bonds; Parity Debt", provided that Maximum Annual Debt Service on ali Water Bonds, Bonds and Parity Debt Outstanding following the issuance of such refunding Bonds is less than or equal to Maximum Annual Debt Service on all Water Bonds, Bonds and Parity Debt Outstanding prior to the issuance of such refunding Bonds.

Covenants

Among other covenants the District has agreed as follows:

The District will not create any pledge, lien or charge upon any of the Subordinated Water Revenues having priority over or having parity with the lien of the Bonds except only as described above. The District will not amend or change the Water Bond Resolution in any manner which would pcnnit the issuance of additional Water Bonds in a greater principal amount than would have been pcnnitted thereunder prior to such amendment or change or reduce the debt service percentage or coverage requirements contained therein. The District will not issue Water Bonds pursuant to the Water Bond Resolution in such amount as would cause the District to fail to be in compliance with the rate covenant described in the second succeeding paragraph hereof.

The District will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest on the Bonds under

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Section I 03 of the Code. The District will not directly or indirectly use or permit the use of any proceeds of the Bonds or any other funds of the District, or take or omit to take any action that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148(a) of the Code. To that end, the District will comply with all requirements of Section 148 of the Code to the extent applicable to the Bonds.

The District will, at all times while any of the Bonds remain Outstanding, fix, prescribe and collect rates, fees and charges in connection with the services and facilities furnished by the Water System so as to yield Water Revenues in each Fiscal Year sufficient so that the sum of the Subordinated Water Revenues for such year plus all amounts required to be paid under the Water Bond Resolution for such year for principal, interest, reserve fund and any other debt service requirements on the Water Bonds shall be at least equal to 1.1 times the amount of Debt Service on all Water Bonds, Bonds and Parity Debt Outstanding for such Fiscal Year.

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. Subject in each case to the condition that insurance is obtainable at rates deemed reasonable by the District and upon terms and conditions deemed reasonable by the District, the District will procure and maintain at all times: (a) insurance on the Water System against such risks as and in such amounts as the District deems prudent taking into account insurance coverage for similar utilities, and (b) public liability insurance in such amounts as the District deems prudent taking into account insurance coverage for similar utilities.

Events of Default; Remedies

The following events are Events of Default:

(a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise, or default in the redemption from any Sinking Account of any Bonds in the amounts and at the times provided therefor;

(b) default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable;

(c) if the District shall fail to observe or perform any covenant, condition, agreement or provision in this Indenture on its part to be observed or performed, other than as referred to in subsection (a) or (b), for a period of sixty (60) days after written notice, specifying such failure and requesting that it be remedied, has been given to the District by the Trustee; except that, if such failure can be remedied but not within such sixty (60) day period and if the District has taken all action reasonably possible to remedy such failure within such sixty (60) day period, such failure shall not become an Event of Default for so long as the District shall diligently proceed to remedy the same in accordance with and subject to any directions or limitations of time established by the Trustee;

(d) if any default shall exist under any agreement governing any Parity Debt and such default shall continue beyond the therein stated grace period, if any, with respect to such default;

(c) if any default shall exist under the Water Bond Resolution and such default shall continue beyond the therein stated grace period, if any, with respect to such default;

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(f) if the District files a petition in voluntary bankruptcy, for the composition of its affairs or for its corporate reorganization under any state or Federal bankruptcy or insolvency law, or makes an assignment for the benefit of creditors, or admits in writing to its insolvency or inability to pay debts as they mature, or consents in writing to the appointment of a trustee or receiver for itself;

(g) if a court of competent jurisdiction shall enter an order, judgment or decree declaring the District insolvent, or adjudging it bankrupt, or appointing a trustee or receiver of the District, or approving a petition filed against the District seeking reorganization of the District under any applicable law or statute of the United States of America or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within 60 days from the date of the entry thereof; and

(h) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the District or of the Subordinated Water Revenues, and such custody or control shall not be terminated within 60 days from the date of assumption of such custody or control.

If an Event of Default shall occur and be continuing, the District is to immediately transfer to the Trustee all Subordinated Water Revenues held by it and received thereafter and the Trustee shall apply all Subordinated Water Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (except as otherwise provided in the Indenture) as follows and in the following order:

(I) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and Parity Debt, including the costs and expenses of the Trustee and the Bondholders in declaring such Event of Default, and payment of reasonable fees and expenses of the Trustee (including reasonable fees and disbursements of its counsel and other agents) incurred in and about the performance of its powers and duties under the Indenture;

(2) To the payment of the whole amount of Bond Obligation then due on the Bonds and Parity Debt (upon presentation of the Bonds and Parity Debt to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Indenture, with interest on such Bond Obligation, at the rate or rates of interest borne by the respective Bonds and Parity Debt, to the payment to the persons entitled thereto of all installments of interest then due and the unpaid principal or Redemption Price of any Bonds and Parity Debt which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue Bond Obligation and Parity Debt at the rate borne by the respective Bonds and Parity Debt, and, if the amount available shall not be sufficient to pay in full all the Bonds and Parity Debt due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or interest or Accreted Value (plus accrued interest) due on such date to the persons entitled thereto, without any discrimination or preference.

In each and every such case during the continuance of such Event of Default, the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding shall be entitled, upon notice in writing to the District, to 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.

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This provision, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, the District shall pay to or shall deposit with the Trustee a sum sufficient to pay all principal on such Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, and the reasonable expenses of the Trustee, and any and all other defaults 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 Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding, by written notice to the District and to the Trustee, may, on behalf of the Owners of all the Bonds, rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

The Trustee is 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) to represent the Owners in the matter of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds, the Indenture, the Act and applicable provisions of any other law. Upon any default or other occasion, giving rise to a right in the Trustee to represent the Bondholders, the Trustee may take such action as may seem appropriate and, upon the request in writing of Owners of not less than 25% in aggregate principal amount of 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 actions as it shall deem most effectual to protect and enforce any such right.

No remedy 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 hereafter existing at law or in equity or otherwise.

Amendments

The Indenture and the rights and obligations of the District, the Owners of the Bonds and the Trustee may be modified or amended at any time by a Supplemental Indenture, with the written consent of the Owners of a majority in the aggregate amount of Bonds then Outstanding. No such modification or amendment shall (a) extend the fixed maturity of any Bond or reduce the amount of principal thereof, or extend the time of payment or reduce the amount of any Mandatory Sinking Account Payment provided for the payment of any Bonds, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Owner of each Bond so affected, or (b) reduce the aforesaid percentage of Bond Obligation the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Subordinated Water Revenues and other assets pledged under the Indenture, or deprive the Owners of the Bonds of the lien created by the Indenture on such Subordinated Water Revenues and other assets, without the consent of the Owners of all of the Bonds then Outstanding.

The Indenture may also be modified or amended at any time with the written consents of each provider of a letter of credit or a policy of bond insurance for the Bonds, provided that at such time the payment of all the principal of and interest on all Outstanding Bonds shall be insured by a policy or policies of municipal bond insurance or payable under a letter of credit the provider of which shall be a financial institution or association having unsecured debt obligations rated, or insuring or securing other debt obligations rated on the basis of such insurance or letters of credit, rated not lower than the respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) or Standard & Poor's (if Standard & Poor's is then rating the Bonds).

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The Indenture and the rights and obligations of the District, of the Trustee and the Owners of the Bonds may also be modified or amended at any time by a Supplemental Indenture, without the consent of any Bondholders but only to the extent permitted by law and only for any one or more of the following purposes:

(I) to add to the covenants and agreements of the District or to surrender any right or power reserved to or conferred upon the District;

(2) to make such provisions for the purpose of curing any omission or ambiguity, or of curing or correcting any defective provision contained in the Indenture, or in regard to questions arising under the Indenture, as the District may deem necessary or desirable, and which shall not materially and adversely affect the interests of the Owners of the Bonds;

(3) to modify the Indenture in such manner as to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other tenns, conditions and provisions as may be permitted by said act or similar federal statutes and which shall not materially and adversely affect the interests of the Owners of the Bonds;

(4) to make modifications or adjustments necessary or desirable to provide for the issuance of Variable Rate Indebtedness, Capital Appreciation Indebtedness or Parity Debt, with such interest rate, payment, maturity and other terms as the District may deem desirable, subject to the provisions of the Indenture;

(5) to provide for the issuance of Bonds in book-entry form or bearer form, provided that such provisions shall not materially and adversely affect the interest of the Owners of the Bonds;

(6) if the District agrees in a Supplemental Indenture to maintain the exclusion of interest on a Series of Bonds from gross income for purposes of federal income taxation, to make such provisions as are necessary or appropriate to ensure such exclusion;

(7) to provide for the issuance of an additional Series of Bonds pursuant to provisions of the Indenture; and

(8) for any other purpose that does not materially and adversely affect the interests of the Owners of the Bonds.

Defeasance

Bonds may be paid by the District in any of the following ways:

(a) by paying or causing to be paid the Bond Obligations of and interest on such Outstanding Bonds, as and when the same become due and payable;

(b) by depositing with the Trustee, an escrow agent or other fiduciary, in trust, at or before maturity, money or securities in the necessary amount to pay or redeem such Outstanding Bonds; or

(c) by delivering to the Trustee, for cancellation by it, such Outstanding Bonds.

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Upon the deposit with the Trustee, escrow agent or other fiduciary, in trust, at or before maturity, of money or securities in the necessary amount to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the District in respect of such Bond shall cease, terminate and be completely discharged, provided that the Owner thereof shall thereafter be entitled to the payment of the principal of and premium, if any, and interest on the Bonds, and the District shall remain liable for such payment, but only out of such money or securities deposited with the Trustee as aforesaid for their payments.

The District may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the District may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.

Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be:

(a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date; or

(b) Investment Securities described in clauses (i), (ii) or (v) of the definition thereof the principal of and interest on which when due will, in the opinion of an independent certified public accountant delivered to the Trustee (upon which opinion the Trustee may conclusively rely), provide money sufficient to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or Redemption Price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as required by the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Request of the District) to apply such money to the payment of such principal or Redemption Price and interest with respect to such Bonds.

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APPENDIXC

SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION

The following is a summary of certain provisions of the Senior Water Bond Resolution. This summary is not to be considered a .full statement of the terms of the Indenture and according~v is qualified by reference thereto and is subject to the fulltexttherer!f Capitalized terms not defined in this summwy or elsewhere in the Official Statement have the respective meanings set forth in the Senior Water Bond Resolution.

Outstanding Water Bonds

There are currently no Water Bonds outstanding pursuant to the Water Bond Resolution. Additional Water Bonds may be issued under the Water Bond Resolution upon the terms and conditions set forth in the Water Bond Resolution. All Water Bonds from time to time outstanding under the Water Bond Resolution are referred to herein as the "Water Bonds."

Security

The Water Bonds are secured by a pledge of and first lien on Net Revenues of the Water System. Net Revenues arc (i) Revenues of the Water System plus (ii) the amounts, if any, withdrawn from the Rate Stabilization Fund (sec "Allocation of Revenues-Rate Stabilization Fund" herein) for treatment as Revenues less (i) operation and maintenance costs and (ii) the amount, if any, withdrawn from Revenues for deposit in the Rate Stabilization Fund. Revenues are defined as charges and other income and receipts derived from the operation of the Water System together with investment earnings on funds associated with the Water System. Revenues do not include taxes. Operation and maintenance expenses are net of such expenses paid from taxes. The Water Bonds are further secured by a pledge of funds held in the Bond Reserve Fund, Interest Fund, Retirement Fund and Sinking Fund when established.

The Bond Reserve Fund

The Bond Reserve Fund, maintained by the Trustee, is maintained in an amount equal to the sum of the principal due and interest accruing, whether or not payable in that period, in the 12 months immediately following the date of the Water Bonds, on the outstanding Water Bonds ("Initial Annual Debt Service"). If the balance in the Bond Reserve Funds exceeds this requirement the Treasurer may request the Trustee to withdraw such excess and pay it to the District. Otherwise, monies held in the Bond Reserve Fund may be used solely for the purpose of paying principal of and interest on Water Bonds then outstanding in the event that no other funds arc available therefor, or for the retirement of all of the Water Bonds then outstanding.

Allocation of Revenues

The Water Bond Resolution provides that the District shall account for all the Revenues, shall make transfers to the Trustee as described below, shall pay operation and maintenance costs, and shall usc and apply remaining funds for any lawful purpose including redemption of the Water Bonds.

Interest Fund- At least one business day before each payment date the District shall deposit with the Trustee an amount sufficient, together with any balance in the Interest Fund, to pay the interest next becoming due on the Water Bonds.

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Retirement Fund- At least one business day before each principal payment date, the District shall deposit with the Trustee an amount sufficient, together with any balance in the Retirement Fund, to pay the principal next becoming due on the Water Bonds.

Bond Reserve Funds - The Bond Reserve Funds was initially funded from proceeds of bond issues. Upon the occurrence of any deficiency in the Bond Reserve Funds, the District shall immediately deposit with the Trustee an amount sufficient to restore the balance therein to an amount equal to Initial Annual Debt Service on each Series of Water Bonds then outstanding.

Rate Stabilization Fund - After making the required deposits as set forth above to the various funds established under the Water Bond Resolution, remaining Revenues may be deposited from time to time in the Rate Stabilization Fund. Such deposits from Revenues may be in any amount determined by the District, subject to the following limitations:

(i) deposits from such Revenues for fiscal years of the District ending on or before June 30, 1985 shall be limited to an aggregate amount of $10 million.

(ii) deposits from such Revenues for each fiscal year of the District ending after June 30, 1985 may only be made if, after such deposits, the debt service coverage ratio described under "Summary of Certain Provisions of the Water Bond Resolution-Covenants-Charges" is at least 1.25 times, and such deposits must be made within 120 days after the end of the applicable fiscal year; and

(iii) no deposit from Revenues may be made in respect of any Fiscal Year to the extent such Revenues were relied upon by the District in certifying that it had satisfied the debt service coverage test for issuing additional Water Bonds during the applicable Fiscal Year (sec "Additional Bonds" below) to the extent such withdrawal would cause the District to fail to satisfy such coverage test.

The District may withdraw amounts from time to time held in the Rate Stabilization Fund within 120 days after the end of the applicable Fiscal Year. Amounts so withdrawn shall be included in Revenues for such Fiscal Year and may be applied for any purposes for which Revenues generally are available. All interest and earnings upon deposits in the Rate Stabilization Fund will not be held therein, but will be treated and accounted for as Revenues.

To date, the District has deposited $50,000,000 in the Rate Stabilization Fund.

Additional Bonds

The Water Bond Resolution specifies conditions under which the District may issue additional Series of Water Bonds on a parity with the Water Bonds, which conditions include:

(l) the District shall be in compliance with all covenants of the Water Bond Resolution.

(2) an amount from the proceeds shall be deposited in the Bond Reserve Funds sufficient, together with the balance in the fund, to make the amount in the fund then equal to the aggregate oflnitial Annual Debt Service on all Series of Water Bonds then outstanding.

(3) the Net Revenues of any 12 consecutive months during the 18 months immediately preceding the issuance of the additional Water Bonds plus (a) 75% of the amount by

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which the Net Revenues would have increased had any increase in rates and charges, adopted prior to the issuance of such additional Water Bonds but in effect for less than a year, been in effect for a full year; and (b) 75% of the projected increase in annual Net Revenues to be provided by facilities under construction or to be constructed with the proceeds of the additional bonds shall have been equal to 1.25 times the maximum debt service on the additional Water Bonds and all outstanding Series of Water Bonds.

Refunding Bonds

The District is also authorized to issue refunding Water Bonds under the Water Bond Resolution upon satisfaction of conditions specified therein which conditions include:

(I) if less than all Water Bonds outstanding under the Water Bond Resolution to be refunded, the District shall be in compliance with all covenants under the Water Bond Resolution.

(2) the District shall deposit with the Trustee funds in the necessary amount to provide for the payment of the refunded Water Bonds together with irrevocable instructions to publish notice of the redemption of the refunded Water Bonds to be redeemed.

Covenants

below. The Resolution sets forth covenants of the District. Certain of these covenants are summarized

I. Charges. The District covenants that so long as any Water Bonds are outstanding it will fix rates and charges in each Fiscal Year so as to provide Revenues that shall be at least sufficient to make all payments required by the Water Bond Resolution, including the necessary expenses of maintaining and operating the Water System and to yield Net Revenues in each Fiscal Year equal to at least 125% of the annual debt service due on the Water Bonds in that Fiscal Y car.

2. Punctual Payment. The District will punctually pay or cause to be paid the principal and interest to become due on the Water Bonds.

3. Against Encumbrances. The District will not mortgage or otherwise encumber, pledge or place any charge upon the System or any part thereof, and the District will not create any pledge, lien or charge upon any of the Revenues except a pledge, lien or charge inferior and subordinate to the lien of the Water Bond Resolution.

4. Against Sale or Other Disposition of Property. The District will not sell, lease or otherwise dispose of the Water System or any part thereof essential to the proper operation of the Water System or to the maintenance of the Revenues. The District will not enter into any lease or agreement which impairs the operation of the Water System or any part thereof necessary to secure adequate Revenues for the payment of the principal of and interest on the Water Bonds, or which would otherwise impair the rights of the Bondholders with respect to the Revenues or the operation of the Water System.

5. Maintenance and Operation of 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.

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6. Payment ()[ Claims. The District will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Revenues prior to or superior to the lien of the Water Bonds, or which might impair the security of the Water Bonds.

7. Use (}[ Praceed1·. The District will make no usc of the proceeds of the Water Bonds which will cause the Water Bonds to be "arbitrage bonds" subject to Federal income taxation by reason of Section 103(c) of the Internal Revenue Code of I954. The District will not make any usc of the proceeds of the Water Bonds which would impair the taxexempt status of the Water Bonds under Section 103(a) of the Internal Revenue Code.

8. Books and Accounts; Financial Statements. The District will keep proper books of record and accounts of all transactions relating to the Water System. Such books will at all times be subject to inspection by the Trustee or holders of not less than 10% of the principal amount of the Water Bonds then outstanding. The District will prepare and file with the Trustee within 120 days after the close of each Fiscal Year a detailed statement of revenues, expenditures and fund balances, and will furnish a copy of a summary of such statement to any Bondholder on request.

9. Protection of Security. The District will preserve and protect the security of the Water Bonds and the rights of the Bondholders, and will warrant and defend their rights against all claims and demands of all persons.

10. Payment of Taxes, Etc. The District will pay and discharge, or cause to be paid and discharged, all taxes, assessments and other governmental charges, if any, which may hereafter be lawfully imposed upon the Water System or upon any Revenues. The District will conform with all valid requirements of any governmental authority relative to the Water System.

11. Eminent Domain Proceedings. The proceeds realized by the District from eminent domain proceedings shall be applied as provided in the Water Bond Resolution.

Events of Def;mlt

The Water Bond Resolution defines events of default as failure to (I) make a payment of principal when due; (2) make a payment of interest within 30 days of its due date; (3) observe any covenants, agreements or conditions for a period of 30 days, or (4) the filing of a petition or answer seeking reorganization under federal bankruptcy laws or court control of the District under laws for relief or aid of debtors.

Remedies

In the event of default and during its continuance, the holders of not less than a maJonty in aggregate principal amount of the Water Bonds at the time outstanding shall be entitled, upon written notice to the District, to declare the principal outstanding and accrued interest immediately due and payable. At any time after such declaration if the District shall deposit with the Trustee a sum sufficient to pay all overdue principal and interest and any reasonable expenses of the Trustee and shall have cured any other default, then the holders of not less than a majority of the Water Bonds then outstanding may rescind such declaration. All funds received by the trustee under such declaration shall be applied by the Trustee to the expenses of the Bondholders in declaring the defaults, to the payment of interest in default

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in order of maturity, and to the payment of principal made ratably to persons entitled thereto without discrimination or preference.

In addition, the Trustee or any Bondholder shall have the right, in addition to certain other equitable remedies set forth in the Water Bond Resolution, for the equal benefit of all Bondholders similarly situated, to bring suit to compel the District to perform its duties under the Act and its agreements under the Water Bond Resolution.

Requirements for Amendment of the Water Bond Resolution

The Water Bond Resolution may be modified or amended with the written consent of holders of 66-2/3% of all Water Bonds then outstanding (exclusive of issuer-owned Bonds) provided that no modification or amendment will extend the maturity, reduce the interest rate or principal amount payable or reduce the percentage of consent required for amendment without the express consent of all Bondholders.

The Water Bond Resolution may also be amended by a supplemental water bond resolution, without the consent of the Bondholders, but only for the purposes of adding covenants and agreements of the District, curing ambiguities or in regard to questions arising under the Resolution, as the Board deems desirable and not inconsistent with the Resolution or adversely affecting the interests of the holders of the Water Bonds, and issuing an additional Series of Water Bonds under the Water Bond Resolution.

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APPENDIXD

(FORM OF CO-BOND COUNSEL OPINION)

Upon the delivery of the Series 2009A Bonds, Fulbright & Jaworski L.L.P., Los Angeles, California, and Curls Bartling P.C., Oakland, California, Co-Bond Counsel, propose to render their final approving opinion with respect to the Series 2009A Bonds in substantially the following fonn:

East Bay Municipal Utility District Oakland, California

[Closing Date]

$331,155,000 EAST BAY MUNICIPAL UTILITY DISTRICT

(Alameda and Contra Costa Counties, California) WATER SYSTEM SUBORDINATED REVENUE REFUNDING BONDS, SERIES 2009A

Ladies and Gentlemen:

We have acted as co-bond counsel to the East Bay Municipal Utility District (the "District") in connection with the issuance of its Water System Subordinated Revenue Refunding Bonds, Series 2009A in the aggregate principal amount of $331,155,000 (the "Bonds"). The Bonds arc being issued pursuant to the Municipal Utility District Act (constituting Division 6 of the Public Utilities Code of the State of California, as amended), the Revenue Bond Law of 1941 as made applicable by Article 6a of Chapter 6 of Division 6 of the Municipal Utility District Act and Article ll of Chapter 3 of Part l of Division 2 of Title 5 of the Government Code of the State of California, as amended (collectively, the "Act"), and a Water System Subordinated Revenue Bond Indenture, dated as of April l, 1990, by and between the District and First Interstate Bauk of California, which has been succeeded by The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), as amended and supplemented, including as amended and supplemented by a Fifteenth Supplemental Indenture, dated as of March l, 2009, providing for the issuance of the Bonds (collectively, the "Indenture").

ln our capacity as co-bond counsel, we have reviewed the Act, the indenture, certifications of the District, the Trustee, and others, opinions of counsel to the District and the Trustee, and such other documents, opinions and instruments as we deemed necessary to render the opinions set forth herein. Capitalized tenns not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

We have assumed the genuineness of all documents and signatures presented to us. W c have not undertaken to verifY independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents. Furthcnnorc, we have assumed compliance with all covenants and agreements contained in the Indenture, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. In addition, we call attention to the fact that the rights and obligations under the Bonds and the Indenture are subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other similar laws affecting creditors' rights, to the application of equitable principles, to the possible

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unavailability of specific performance or injunctive relief, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against public agencies in the State of California. Furthermore, the imposition of fees and charges by the District relating to the Water System m~y be subject to the provisions of Articles XIIIC and XIIID of the California Constitution.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we arc of the following opinions:

I. The Bonds constitute the valid and binding special limited obligations of the District.

2. The Indenture has been duly authorized, executed and delivered by, and constitutes the valid and binding obligation of, the District. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Subordinated Water Revenues of the District, and certain other amounts held by the Trustee under the Indenture (including amounts held in the Series 2009A Bond Reserve Fund), as and to the extent set forth in the Indenture and subject to the provisions of the Indenture permitting the application thereof for the purposes and on the tcnns and conditions set forth therein.

3. The Bonds arc special limited obligations of the District and are payable exclusively from and arc secured by a pledge of Subordinated Water Revenues and certain amounts held under the Indenture. The general fund of the District is not liable, and the credit or taxing power of the District is not pledged, for the payment of the Bonds or the interest thereon.

4. Bonds and other parity debt of the District have been and may from time to time hereafter be issued under the Indenture which arc payable from Subordinated Water Revenues on a parity basis with the Bonds.

5. The Internal Revenue Code of 1986 (the "Code") imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded pursuant to section I 03(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Non-compliance with such requirements could cause the interest on the Bonds to fail to be excluded from the gross income of the owners thereof retroactive to the date of issue of the Bonds. Pursuant to the Indenture, the District has covenanted to maintain the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes.

In our opinion, under existing statutes, regulations, rulings and court decisions, interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenant, interest on the Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes and will not be treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code.

Except as stated in the preceding two paragraphs, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof predicated or permitted upon the advice or approval of other co-bond counsel.

Our opinions are based on existing law, which is subject to change. Such opinions arc further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any

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changes in any law that may hereafter occur or become effective. Moreover, our opinions arc not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

No opinion is expressed herein on the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the Bonds.

This opinion is limited to the laws of the State of California and the federal laws of the United States.

Respectfully submitted, Respectfully submitted,

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APPENDIXE

BOOK-ENTRY SYSTEM

The information in this Appendix E conceming The Depository Trust Company, New York, New York ("DTC"), and DTC's Book-Entry system has been obtained from DTC and the District and the Trustee take no responsibility for the completeness or accuracy thereof. The District and the Trustee cannot and do not give any assurances 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 Series 2009A Bonds, (b) certificates representing ownership interest in or other confirmation of ownership interest in the Series 2009A Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Series 2009A Bonds, or that they will do so on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix A. 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.

DTC will act as securities depository for the Series 2009A Bonds. The Series 2009A Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for each maturity of the Series 2009A Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC.

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 17 A 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 arc registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at w.,w.dtcc.com and www.dtc.org. The information set forth on such wcbsites is not incorporated by reference.

Purchases of Series 2009 A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2009A Bonds on DTC's records. The ownership interest of each actual purchaser of each Series 2009A Bond ("Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners arc, however, expected to receive written

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http://www.dtcc.com

http://www.dtc.org

confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2009A Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2009A Bonds, except in the event that usc of the book-entry system for the Series 2009A Bonds is discontinued.

To facilitate subsequent transfers, all Series 2009A Bonds deposited by Direct Participants with DTC arc 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 the Series 2009A Bonds 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 Series 2009A Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Series 2009A Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible tor keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Series 2009A Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2009A Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Series 2009A Bond documents. For example, Beneficial Owners of the Series 2009A Bonds may wish to ascertain that the nominee holding the Series 2009A Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Series 2009A Bonds are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2009A Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Series 2009A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments of principal of, premium, if any, and interest on the Series 2009A Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the District or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer forrn or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of, premium, if any, and interest evidenced by the Series 2009A Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

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NEITHER THE DISTRICT NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF SERIES 2009A BONDS FOR REDEMPTION.

The District, the Trustee and the Underwriters cannot or do not give any assurances that DTC, the DTC Participants or others will distribute payments of principal or interest on the Series 2009A Bonds paid to DTC or its nominee as the registered owner, or will distribute any notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The District, the Trustee and the Underwriters arc not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner with respect to the Series 2009A Bonds or an error or delay relating thereto.

DTC may discontinue providing its services as securities depository with respect to the Series 2009A Bonds at any time by giving notice to the Trustee and the District and discharging its responsibilities with respect thereto under applicable law, or the District may discontinue usc of the system of book-entry transfers for the Series 2009A Bonds through DTC (or a successor securities depository). If the system of book-entry transfers for the Series 2009A Bonds is discontinued, the District will execute, and the Trustee will authenticate and make available for delivery, replacement Series 2009A Bonds in the form of registered certificates as provided in the Indenture. In addition, the following provisions would apply: the principal or redemption price of the Series 2009A Bonds will be payable upon presentation thereof, at the principal corporate trust office of the Trustee, in San Francisco, California; interest on the Series 2009A Bonds will be payable by check mailed on each interest payment date to the registered owners thereof as shown on the registration books of the Trustee as of the close of business on the applicable record date of the calendar month immediately preceding the applicable interest payment date; and the Series 2009A Bonds will be transferable and exchangeable on the terms and conditions provided in the Indenture.

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(THIS PAGE INTENTIONALLY LEH BLANK)

APPENDIX F

SUMMARY OF CERTAIN PROVISIONS OF THE STATE LOANS

The fiJI/owing is a summary of certain provisions of the Stale Loans between the Stale Water Resources Control Board (the "Stale Board'') and the District. The following summary is qualified in its entirety by reference to the Stale Loans.

Each State Loan is for the purpose of financing a specific project identified to such State Loan (each, the "Project"). Pursuant to the State Loans, the District is required to maintain a dedicated source of revenue sufficient to provide reasonable assurance of repayment of the State Loans. The dedicated source of revenue must comply with the requirements of the Federal Clean Water Act and any applicable Federal and State regulations.

Certain Definitions

"Completion of construction" means the date, as determined by the State Board after consultation with the District, that the work of building and erection of the Project is substantially complete.

"Initiation of construction" means the date that the notice to proceed with work is issued for the Project, or, if notice to proceed is not required, the date of commencement of building and erection of the Project.

"Project completion" means the date, as determined by the State Board after consultation with the District, that operation of the Project is initiated or is capable of being initiated, whichever comes first.

"Revenue Program" means a system of charges, fees, or other means of income production adopted by the District which provides for recovery of appropriate capital costs of the Project, generates adequate income to reasonably assure repayment of loan funds under each State Loan, generates adequate income to provide for reasonable operation and maintenance of the Project, and provides adequate income for reasonable future expansion and improvement of the Project.

Revenue Program

The District agrees to prepare and provide an acceptable final Revenue Program to the State Board at the time of ninety percent (90%) pay-out of loan funds available pursuant to each State Loan. Further loan disbursements may be withheld until an acceptable final Revenue Program is submitted. The District further agrees to periodically review and modify the Revenue Program as necessary to assure reasonable adequacy of the Revenue Program. The final Revenue Program and all modifications thereof shall be consistent with the applicable guidelines and shall be to the reasonable satisfaction of the State Board. The State Board may review the District's records to assure compliance with the approved Revenue Program at any time during the useful life of the Project.

The District agrees to expeditiously provide, during construction of the Project and thereafter during the useful life of the Project, such reports, data, and information as may be reasonably required by the State Board. The District agrees to, among other things, establish certain accounts and maintain certain records in accordance with certain standards. The District agrees to require Project contractors and sub-contractors to maintain books, records, and other material relative to the Project in accordance with generally accepted accounting standards.

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Loan Disbursements; Availability of Funds; Withholding

Amounts available under each State Loan will be disbursed, subject to certain conditions, upon submission of a disbursement request form, duly completed and executed. The District agrees that it will not request disbursement for any Project cost until such cost has been incurred and is due and payable to Project contractors, although it is agreed that actual disbursement of such cost by the District is not required as a condition of disbursement request.

The State Board's obligation to disburse any sum to the District under any State Loan is contingent upon the availability of sufficient funds to permit the disbursements provided for therein. In the event that sufficient funds do not become available for reasons beyond the reasonable control of the State Board, such as failure of the Federal or state government to appropriate funds necessary for disbursement of loan amounts, the State Board shall not be obligated to make any disbursements to the District under such State Loan.

The State Board may withhold all or any portion of the funds available under any State Loan in the event that: (a) the District has materially violated, or threatens to materially violate, any term, provision, condition, or commitment of any State Loan; (b) the District fails to maintain reasonable progress toward completion of the Project; or (c) an acceptable Revenue Program is not submitted at the time of 90 percent pay-out of funds available under any State Loan.

Repayment; Penalties; District Obligation

The loan amount, together with all interest accruing thereon, shall be repaid in full not later than 20 years after the financed facility becomes operational. Repayment generally shall be made in 20 equal annual installments (including interest), with the first repayment due one year after the first disbursement, with annual repayment installments due thereafter until the loan amount and all accrued interest has been paid in fuJI. The actual repayments will be based on actual disbursements.

Upon completion of construction of the Project and submission of necessary reports, the State Board wi!l prepare an appropriate loan repayment schedule and supply the same to the District. The loan repayment schedule may be amended as necessary to accurately reflect amounts due under the State Loans.

The District agrees to make each loan payment on or before the due date therefor. A ten-day grace period will be allowed. A penalty in the amount of one-tenth of one percent (0.1 %) of the amount due will be due for each day of nonpayment. For purposes of penalty assessment, payment will be deemed to have been made if payment is deposited in the U.S. mail within the grace period with postage prepaid and properly addressed.

The District is obligated to make all payments required by the State Loans to the State Board, notwithstanding any individual default by its constituents or others in the payment to the District of taxes, assessments, tolls, or other charges levied by the District. The District shall provide for the punctual payment to the State Board of all amounts which become due under the State Loans. In the event of failure, neglect or refusal of any officer of the District to levy or cause to be levied any tax or assessment necessary to provide payment by the District under the State Loans, to enforce or to collect such tax or assessment, or to pay over to the State Board any money collected necessary to satisfY any amount due under the State Loans, the State Board may take such action in a court of competent jurisdiction as it deems necessary to compel the performance of all duties relating to the levying and collection of the taxes or assessments and the payment of the money collected therefrom to the State Board.

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Default; Termination; Immediate Repayment

Each State Loan may be terminated by written notice during construction of the Project, or thereafter at any time prior to complete repayment of the District, at the option of the State Board, upon violation by the District of any material provision of the related State Loan after such violation has been called to the attention of the District and after failure of the District to bring itself into compliance with the provisions of the related State Loan within a reasonable time as established by the State Board.

In the event of such termination, the District agrees, upon demand, to immediately repay to the State Board an amount equal to the current balance due on such State Loan, including accrued interest, and all penalty assessments due. In the event of termination, interest shall accrue on all amounts due at the highest legal rate of interest from the date that notice of termination is mailed to the District to the date of full repayment by the District.

Disputes

Any dispute arising under the State Loans which is not otherwise disposed of by agreement shall be decided by the Chief of the Division of Clean Water Program of the State Water Resources Control Board, or his authorized representative. The decision shall be final and conclusive unless the District furnishes a written appeal within thirty (30) calendar days after mailing of the decision to the District, to the State Board's Executive Director. The decision of the State Board's Executive Director shall be final and conclusive unless determined by a court of competent jurisdiction to have been fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence. In connection with such appeal the District shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute, the District shall continue to fulfill and comply with all the terms, provisions, commitments, and requirements of the State Loans. In the event of litigation between the District and the State Board, it is agreed that the prevailing party shall be entitled to such reasonable costs and/or attorney fees as may be ordered by the court entertaining such litigation.

Certain Covenants of the District

Compliance with Law. The District agrees that it will, at all times, comply with and require its contractors and subcontractors to comply with all applicable federal and state laws, rules, guidelines, regulations, and requirements.

Construction Activities; Notiflmtions; Protection of Archeological and Historical Resources. The District agrees to promptly notify the State Board in writing of:

(a) Any substantial change in scope of the Project; and the District agrees that no substantial change in the scope of the Project will be undertaken until written notice of the proposed change has been provided to and approved by the State Board;

(b) Cessation of all major construction work on the Project where such cessation of work is expected to or docs extend for a period of 30 days or more;

(c) Any circumstance, combination of circumstances, or condition, which is expected to or does delay completion of construction for a period of 90 days or more beyond the estimated date of completion of construction previously provided to the State Board;

(d) Discovery of any potential archeological or historical resource; and

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(c) Completion of construction of the Project.

Project Access. The District agrees to insure that the State Board will have suitable access to the Project site at all reasonable times during Project construction and thereafter for the useful life of the Project.

Project Completion: Initiation ()(Operations. Upon completion of construction of the Project, the District agrees to expeditiously initiate Project operations. At the time of completion of construction, the State Board, after consultation with the District, will establish a reasonable estimated Project completion date, and the District agrees to make all reasonable efforts to meet the date so established. Extension of the Project completion date by the State Board shall not be unreasonably withheld.

Reports and Records. The District agrees to expeditiously provide, during construction of the Project and thereafter during the useful life of the Project, such reports, data, and information as may be reasonably required by the State Board.

Damages for Breach Affecting Tax Exempt Status. In the event that any breach of any of the provisions of the State Loans by the District shall result in the loss of tax-exempt status for any State bonds related to the State Loan program of the State Board, or if such breach shall result in an obligation on the part of the State to reimburse the Federal government by reason of any arbitrage profits, the District shall immediately reimburse the State in an amount equal to any damages paid by or loss incurred by the State due to such breach.

Amendment

Each State Loan may be amended at any time by mutual written agreement of the parties.

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APPENDIXG

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the "Disclosure Agreement") is executed and delivered by the East Bay Municipal Utility District (the "Issuer") and The Bank of New York Mellon Trust Cornpany, N.A., as successor trustee, as successor in interest to BNY Western Trust Company (the "Trustee") in connection with the issuance of S331, 155,000 aggregate principal amount of Water System Subordinated Revenue Refunding Bonds, Series 2009A, consisting of S!65,580,000 principal amount of Subseries 2009A-I Bonds and Sl65,575,000 principal amount ofSubseries 2009A-2 Bonds (together, the "Series 2009A Bonds"). The Series 2009A Bonds arc being issued pursuant to a Water System Subordinated Revenue Bond Indenture dated as of April I, 1990 between the Issuer and the Trustee, as previously supplemented and amended, including as supplemented and amended by the Fifteenth Supplemental Indenture, dated as of March I, 2009 (collectively, the "Indenture"). In connection therewith the Issuer and the Trustee covenant and agree as follows:

SECTION I. Purpose of this Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Issuer and the Trustee for the benefit of the Bondholders and Beneficial Owners of the Series 2009A Bonds and in order to assist the Participating Underwriters (as defined herein) in complying with Securities and Exchange Commission Rule 15c2-12(b)(5).

SECTION 2. Definitions. In addition to the definitions set forth above and 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 any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

"Beneficial Owner" shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Series 2009A Bonds (including persons holding Bonds through nominees, depositories or other intermediaries); or (b) is treated as the owner of any Series 2009A Bonds for federal income tax purposes.

"Disclosure Representative" shall mean the Director of Finance of the Issuer or his or her designee, or such other officer or employee as the Issuer shall designate in writing to the Trustee from time to time.

"Dissemination Agent" shall mean the Trustee, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Trustee a written acceptance of such designation.

"Holder" shall mean either the registered owners of the Series 2009A Bonds or, if the Series 2009A Bonds arc registered in the name of The Depository Trust Company or another recognized depository, any available participant in such depository system.

"Listed Event" shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.

"National Repository" shall mean, at any time, a then-existing Nationally Recognized Municipal Securities Information Repository as recognized from time to time by the SEC for the purposes referred to in the Rule (hereinafter defined). The National Repositories arc identified on the SEC website at http://www.scc.gov/info/municipal/nrmsir.htm.

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http://www.sec.gov/info/munieipal/nrmsir.htm

"Official Statement" shall mean the Official Statement for the Series 2009A Bonds dated March 5, 2009.

"Participating Underwriter" shall mean any of the original underwriters of the Series 2009A Bonds listed on the cover page of the Official Statement required to comply with the Rule in connection with offering of the Series 2009A Bonds.

"Repository" shall mean each National Repository and each State Repository.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"SEC" shall mean the United States Securities and Exchange Commission.

"State" shall mean the State of California.

"State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rule and recognized as such by the SEC. As of the date of this Disclosure Agreement, there is no State Repository.

SECTION 3. Provision of Annual Reports.

(a) The Issuer shall, or shall cause the Dissemination Agent to, not later than 270 days after the end of the Issuer's Fiscal Year (presently June 30), commencing with the report for the 2008-09 Fiscal Year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. 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 if the audited financial statements of the Issuer are not available by the date required above for the filing of the Annual Report, the Issuer shall submit the audited financial statements as soon as available. If the Issuer's Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section S(f).

(b) If the Issuer is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the Issuer shall send to the Municipal Securities Rulemaking Board and to each Repository a notice in substantially the form attached hereto as Exhibit A.

(c) The Dissemination Agent shall:

(i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and the State Repository, if any; and

(ii) file a report with the Issuer and (if the Dissemination Agent is not the Trustee) the Trustee certifYing that the Annual Report has been provided to each Repository pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided.

SECTION 4. Content of Annual Reports. The Issuer's Annual Report shall contain or include by reference the following categories or similar categories of information updated to incorporate information for the most recent fiscal or calendar year, as applicable (the tables referred to below arc those appearing in the Official Statement relating to the Series 2009A Bonds):

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(a) The audited financial statements of the Issuer for the prior Fiscal Year, prepared in accordance with Generally Accepted Accounting Principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer'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 financial statements shall be filed in the same manner as the Annual Report when they become available;

(b) A table showing the Number of Accounts and Metered Annual Consumption (by customer type) for the preceding Fiscal Y car;

(c) A table showing Gross Water Consumption (including annual consumption and average consumption per day) for the preceding Fiscal Year;

{d) A table showing the Summary of Revenues and Contributions by Source;

(c) A table showing Water System Rates and Charges for the preceding Fiscal Year (as well as average rate increases);

(f) A table showing Outstanding Water System Debt as of the preceding Fiscal Year;

{g) A table showing revenues, operating and maintenance expense, debt service on water revenue bonds and debt service coverage for the Water System for the most recent Fiscal Year; and

{h) Any material changes in the water supply.

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 Issuer or related public entities, which have been submitted to each of the Repositories or the SEC. If any document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board and the Repositories. The Issuer 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, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2009A Bonds, if material:

I. Principal or interest payment delinquencies.

2. Non-payment related defaults.

3. Modifications to the rights of the Bondholders.

4. Optional, contingent or unscheduled calls.

5. Defcasances.

6. Rating changes.

7. Adverse tax opinions or events adversely affecting the tax-exempt status of the Series 2009A Bonds.

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8. Unscheduled draws on the debt service reserves reflecting financial difficulties.

9. Unscheduled draws on the credit enhancements reflecting financial difficulties.

I 0. Substitution of the credit or liquidity providers or their failure to perform.

II. Release, substitution or sale of property securing repayment of the Series 2009A Bonds.

(b) The Dissemination Agent shall, as soon as is reasonably practicable after obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the Issuer promptly notifY the Dissemination Agent in writing whether or not to report the event pursuant to Section 5(1). For purposes of this Disclosure Agreement, "actual knowledge'' of the occurrence of such Listed Event shall mean actual knowledge by the Dissemination Agent, if other than the Trustee, and if the Dissemination Agent is the Trustee, then by the officer at the corporate trust office of the Trustee with regular responsibility for the administration of matters related to the Indenture. The Dissemination Agent shall have no responsibility to determine the materiality of any of the Listed Events.

(c) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Dissemination Agent pursuant to Section 5(b) or otherwise, the Issuer shall as soon as possible determine if knowledge of such event would be material under applicable federal securities laws.

(d) If the Issuer determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the Issuer shall promptly notifY the Dissemination Agent in writing and instruct the Dissemination Agent to report the occurrence pursuant to Section 5(1).

(c) If in response to a request under Section 5(b), the Issuer determines that the Listed Event is not material under applicable federal securities laws, the Issuer shall so notifY the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to Section 5(1).

(f) If the Dissemination Agent has been instructed by the Issuer to report the occurrence of a Listed Event, the Dissemination Agent shall as soon as possible file a notice of such occurrence with each National Repository, and each State Repository, if any, and the Municipal Securities Rulcmaking Board. Notwithstanding the foregoing, notice of Listed Events described in Section 5(a)(4) and Section 5(a)(5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Series 2009A Bonds pursuant to the Indenture.

SECTION 6. Termination of Reporting Obligation. The Issuer's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2009 A Bonds or upon a conversion to an interest rate mode for which no continuing disclosure obligation is required pursuant to Rule 15c2-12(b )(5). If such termination occurs prior to the final maturity of the Series 2009A Bonds, the Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5(1).

SECTION 7. Dissemination Agent. The Issuer 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. If at any time there is not any other designated Dissemination Agent, the Trustee, upon notice from the Issuer, shall be the Dissemination Agent. The initial Dissemination Agent shall be the Trustee. The Dissemination Agent shall not be responsible m any manner for the content of any notice or report

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prepared by the Issuer pursuant to this Disclosure Agreement. The Dissemination Agent shall receive compensation for the services provided pursuant to this Disclosure Agreement.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Issuer and the Dissemination Agent may amend this Disclosure Agreement, (and, to the extent that any such amendment does not materially change or increase its obligations hereunder, the Dissemination Agent shall agree to any amendment so requested by the Issuer), and any provision of this Disclosure Agreement may be waived; provided, that the following conditions arc satisfied:

(a) If the amendment or waiver relates to the provisions of Section 3(a), Section 4 or Section 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Series 2009A Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Series 2009A Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Series 2009A Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Issuer 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 Issuer. 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(1), and (ii) the Annual Report for the year in which the change is made should 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 Issuer 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 Issuer 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 Issuer 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 I 0. Default. In the event of a failure of the Issuer or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the request of any Participating Underwriter or the Holders of at least 25% of the aggregate principal amount of Outstanding Series 2009A Bonds, shall), or any Holder or Beneficial Owner of the Series 2009A Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Issuer or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Issuer or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance hereunder.

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SECTION II. Duties. Immunities and Liabilities of Trustee and Dissemination Agent. The Dissemination Agent (if other than the Trustee in its capacity as Dissemination Agent) shall have only such duties as arc specifically set forth in this Disclosure Agreement, and the Issuer agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding any loss, expense and liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the Issuer under this Section II shall survive resignation or removal of the Dissemination Agent and payment of the Series 2009A Bonds.

SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

To the Issuer:

East Bay Municipal Utility District 375 Eleventh Street Oakland, California 94607-4240 Attention: Treasury Manager Phone: 510-287-0205 Fax: 510-287-0293

To the Dissemination Agent:

The Bank of New York Mellon Trust Company, N.A. 550 Kearny Street, Suite 600 San Francisco, California 94108 Phone: 415-263-2432 Fax: 415-399-1647

SECTION 13. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Trustee, the Dissemination Agent, the Participating Underwriters and the Holders and Beneficial Owners from time to time of the Series 2009A Bonds, and shall create no rights in any other person or entity.

SECTION 14. Counteroarts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

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IN WITNESS WHEREOF, this Disclosure Agreement has been executed on behalf of the Issuer and the Trustee by their duly authorized representatives as of March I, 2009.


By: ___ --c::-----=---------Gary Breaux Director of Finance

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee

By:----,----,------,----;-::::-::::-----Authorized Officer

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EXHIBIT A

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Name of issuer: EAST BAY MUNICIPAL UTILITY DISTRICT

Name of Bond Issue: $331,155,000 East Bay Municipal Utility District Water System Subordinated Revenue Refunding Bonds, Series 2009A

Date oflssuance: March 12, 2009

NOTICE IS HEREBY GIVEN that the East Bay Municipal Utility District (the "Issuer") has not provided an Annual Report with respect to the above-named Bonds as required by Section 3(a) of the Continuing Disclosure Agreement, dated as of March I, 2009, by and between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee") and in accordance with Section 30.37 of the Indenture of Trust dated April I, 1990, as supplemented and amended, including as supplemented and amended by the Fifteenth Supplemental Indenture, dated as of March I, 2009 by and between the Issuer and the Trustee. The Issuer anticipates that the Annual Report will be filed by , 20_.

Dated: ______ , 20

cc: East Bay Municipal Utility District

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee on behalf of the Issuer

By: -~A~u-t~ho-r7iz-e~d~O~f~fi~Ic-cr ________ _

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