DRAFT OF 10/04/10 PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER __, 2010

NEW ISSUE—BOOK-ENTRY ONLY CREDIT RATINGS S&P: “____” Fitch: “____” (See “CREDIT RATINGS” herein) In the opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel, under existing law interest on the 2010 Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the covenants described herein, interest on the 2010-A Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the “Code”) from the gross income of the owners thereof for federal income tax purposes and is not an item of tax preference for purposes of computing the alternative minimum tax imposed under section 55(a) of the Code. In the opinion of Bond Counsel, under existing law, interest on the 2010-B Bonds is exempt from personal income taxes of the State of California. The Authority has taken no action to cause, and does not intend interest on the 2010-B Bonds to be excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. See “TAX MATTERS” herein. $______1 $______* Anaheim Public Financing Authority Anaheim Public Financing Authority Revenue Bonds, Series 2010-A Revenue Bonds, Series 2010-B (Water System Project) (Water System Project) (Tax-Exempt) (Federally Taxable Build America Bonds) Dated: Date of Delivery Due: October 1, as shown on inside cover The Anaheim Public Financing Authority (the “Authority”) is issuing its Revenue Bonds Series 2010-A (Water System Project) (Tax- Exempt) (the “2010-A Bonds”) and its Revenue Bonds Series 2010-B (Water System Project) (Federally Taxable Build America Bonds) (the “2010-B Bonds,” each of the 2010-A Bonds and 2010-B Bonds being a “Series” and, collectively, the “2010 Bonds”) pursuant to an Indenture of Trust, dated as of October 1, 2010 (the “Indenture”), by and between the Authority and U.S. Bank National Association, as trustee. The 2010 Bonds are secured by, among other things, Project Revenues, which consist primarily of 2010 Purchase Payments to be made by the City of Anaheim, California (the “City”) under an Installment Purchase Agreement, dated as of October 1, 2010 (the “Installment Purchase Agreement”), between the Authority and the City. The 2010 Purchase Payments and all other payments with respect to Qualified Obligations are payable from Surplus Revenues in the Qualified Obligations Account of the City’s Water System Surplus Revenue Fund, subject to application as provided in the Indenture and the Installment Purchase Agreement. The 2010 Purchase Payments will rank junior to any of the City’s Senior Bonds that may be issued in the future with the requisite majority voter approval pursuant to the City Charter. There are no Senior Bonds currently outstanding, and the City has no plans to issue any Senior Bonds. As Qualified Obligations of the City’s Water System, the 2010 Purchase Payments will rank on a parity with $64,596,191.37 in principal amount of existing Qualified Obligations of the City and all other Qualified Obligations that may be issued in the future. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS.” The 2010 Bonds are being issued as fully registered bonds. The 2010 Bonds when initially issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York (“DTC”), and will be available to ultimate purchasers in book-entry form only in denominations of $5,000 or any integral multiple thereof. Interest on the 2010 Bonds is payable semiannually on April 1 and October 1 of each year, commencing April 1, 2011. Payments of principal of and interest on the 2010 Bonds are to be made to purchasers by DTC through DTC Participants. Purchasers will not receive physical delivery of the 2010 Bonds purchased by them. See “DESCRIPTION OF THE 2010 BONDS – Book-Entry System” and “APPENDIX E – BOOK-ENTRY SYSTEM.” The Authority expects to designate the 2010-B Bonds as “Build America Bonds” that are “qualified bonds” under the provisions of the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), the interest on which will not be excluded from gross income for federal income tax purposes but will be exempt from State of California personal income taxes. The Authority expects to receive a cash subsidy from the United States Treasury equal to 35% of the interest payable on such 2010-B Bonds. The Authority has not undertaken or made any covenant for the benefit of the Owners of the 2010-B Bonds to comply with any conditions to the receipt of such cash subsidy or to maintain its right to retain or receive future cash subsidy payments in respect of the 2010-B Bonds. The Authority is obligated to make all payments of principal of and interest on the 2010-B Bonds from the sources described herein whether or not it receives any cash subsidy payments pursuant to the Stimulus Act. See “DESCRIPTION OF THE 2010 BONDS – Designation of the 2010-B Bonds as Qualified ‘Build America Bonds.’” The 2010 Bonds are subject to redemption prior to maturity as described herein. See “DESCRIPTION OF THE 2010 BONDS – Redemption of 2010-A Bonds” and “ – Redemption of 2010-B Bonds.” The 2010 Bonds are being issued to finance the acquisition and construction of certain capital improvements to the Water System and to pay related costs of issuance. See “ESTIMATED SOURCES AND USES OF FUNDS” and “PLAN OF FINANCING.” THE OBLIGATION OF THE CITY TO MAKE 2010 PURCHASE PAYMENTS UNDER THE INSTALLMENT PURCHASE AGREEMENT IS PAYABLE SOLELY FROM SURPLUS REVENUES IN THE QUALIFIED OBLIGATIONS ACCOUNT UNLESS OTHERWISE PAID FROM OTHER SOURCES OF LEGALLY AVAILABLE FUNDS. THE 2010 BONDS SHALL NOT IN ANY WAY BE CONSTRUED TO BE A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN CONTRAVENTION OF ANY APPLICABLE CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION, NOR WILL ANYTHING CONTAINED IN THE INSTALLMENT PURCHASE AGREEMENT OR INDENTURE CONSTITUTE A PLEDGE OF GENERAL REVENUES, FUNDS OR MONEYS OF THE CITY OR THE AUTHORITY OR AN OBLIGATION OF THE CITY OR THE AUTHORITY FOR WHICH THE CITY OR THE AUTHORITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR

1 Preliminary; subject to change. 90165268.7 FOR WHICH THE CITY OR THE AUTHORITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE AUTHORITY HAS NO TAXING POWER. ______

Maturity Schedule on inside cover ______

This cover page contains certain information for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to making an informed investment decision. The 2010 Bonds are offered when, as and if issued and received by the Underwriter, subject to approval of legality by Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel. Certain legal matters will be passed upon for the Authority and the City by the City Attorney and for the Underwriter by its counsel, Nossaman LLP. It is expected that the 2010 Bonds will be available for delivery through the facilities of the DTC book-entry system on or about October__, 2010. DE LA ROSA & CO. Dated: October __, 2010.

90165268.7 MATURITY SCHEDULE

$______2010-A Bonds

CUSIP Due Principal Interest Number(1) October 1 Amount Rate Yield (03255M)

$______2010-B Bonds

CUSIP Due Principal Interest Number(1) October 1 Amount Rate Yield (03255M)

90165268.7 ANAHEIM PUBLIC FINANCING AUTHORITY

MEMBERS OF THE AUTHORITY BOARD AND CITY COUNCIL Curt Pringle Chairman of the Authority, Mayor Harry Sidhu, Mayor Pro Tem and Robert Hernandez, Council Council Member Member Lucille Kring, Council Member Lorri Galloway, Council Member

CITY PUBLIC UTILITIES BOARD Lon Cahill Chairperson Kristine Murray, Vice Chairperson John Machiaverna, Member Jordan Brandman, Member David M. Morgan, Member Pat Carroll, Member Charles Peltzer, Member

OFFICIALS OF THE AUTHORITY AND CITY Thomas J. Wood, City Manager Marie Edwards, Assistant City Manager Elisa Stipkovich, Authority Executive Director Kristine Ridge, Authority Financial Advisor and City Finance Director Cristina L. Talley, Authority Counsel and City Attorney Linda N. Andal, Authority Secretary and City Clerk Henry W. Stern, Authority Treasurer and City Treasurer

CITY PUBLIC UTILITIES DEPARTMENT Marcie L. Edwards, General Manager Edward P. Zacherl, Assistant General Manager–Finance & Administration Mark S. Ward, Assistant General Manager–Electric Services Donald C. Calkins, Assistant General Manager–Water Services Stephen J. Sciortino, Acting Assistant General Manager–Joint Services

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

FINANCIAL ADVISOR Public Financial Management, Inc. Los Angeles, California

TRUSTEE U.S. Bank National Association Los Angeles, California

90165268.7

No dealer, broker, salesperson or other person has been authorized by the Authority, the City or the City’s Public Utilities Department (the “Department”) to give any information or to make any representations, other than as contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by the Authority, the City or the Department. 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 2010 Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale.

This Official Statement is not to be construed as a contract with the purchasers of the 2010 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 representation of facts.

The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

The information set forth herein has been obtained from official sources and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Authority, the City or the Department. The information and expressions of opinion contained herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority, the City or the Department since the date hereof. This Official Statement is submitted with respect to the sale of the 2010 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the Authority, the City and the Department. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2010 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

90165268.7

TABLE OF CONTENTS

Page

INTRODUCTION...... 1 Purpose of the 2010 Bonds...... 1 Security for the 2010 Bonds...... 1 Designation of 2010-B Bonds as Qualified “Build America Bonds”...... 3 The Water System...... 3 DESCRIPTION OF THE 2010 BONDS...... 4 General...... 4 Designation of 2010-B Bonds as Qualified “Build America Bonds”...... 4 Redemption of 2010-A Bonds...... 4 Redemption of 2010-B Bonds...... 5 Redemption Procedures...... 7 Transfer and Exchange of the 2010 Bonds...... 8 Book-Entry System...... 8 SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS...... 8 2010 Purchase Payments...... 8 Water System Flow of Funds...... 9 Rate Covenant...... 12 No Reserve Account for the 2010 Bonds...... 12 Insurance...... 13 Additional Qualified Obligations...... 13 Modifications to Installment Purchase Agreement Definitions on Transition Date...... 14 ESTIMATED SOURCES AND USES OF FUNDS...... 14 PLAN OF FINANCING...... 14 THE CITY’S PUBLIC UTILITIES DEPARTMENT...... 15 General Description...... 15 Management of the Public Utilities Department...... 15 Public Utilities Board...... 16 THE WATER SYSTEM...... 18 History of the Water System...... 18 Existing Facilities...... 18 Sources of Water...... 19 Water Treatment and Quality Control...... 20 Consumers...... 21 Rates and Charges...... 22 Operations and Maintenance of the Water System...... 23 Parity Debt Service Requirements...... 24 Water System Capital Program...... 27 Labor Relations...... 28 ADEQUACY OF WATER SUPPLIES...... 29 Orange County Water District – Groundwater Basin...... 29 Metropolitan Water District of Southern California – Imported Water...... 31 The City’s Water Use Efficiency Programs...... 37

90165268.7 6 TABLE OF CONTENTS

Page

CONSTITUTIONAL AND CHARTER LIMITATIONS...... 37 Constitutional Limitations on Governmental Spending...... 37 City Charter Revenue Bond Limitations...... 39 RISK FACTORS...... 39 Limited Obligations...... 39 System Operation and Expenses...... 39 Limitations on Revenues...... 40 No Debt Service Reserve Account...... 40 Casualty Risk...... 40 Regulatory Risk...... 40 Limited Recourse on Default...... 40 THE AUTHORITY...... 41 LITIGATION...... 41 CREDIT RATINGS...... 41 TAX MATTERS...... 41 2010-A Bonds...... 41 2010-B Bonds...... 44 CERTAIN LEGAL MATTERS...... 47 FINANCIAL STATEMENTS...... 47 FINANCIAL ADVISOR...... 47 UNDERWRITING...... 47 CONTINUING DISCLOSURE...... 48 MISCELLANEOUS...... 48

APPENDIX A – GENERAL INFORMATION REGARDING THE CITY APPENDIX B – CITY OF ANAHEIM – WATER UTILITY FUND AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JUNE 30, 2008 AND JUNE 30, 2009 APPENDIX C – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS APPENDIX D – FORM OF CONTINUING DISCLOSURE AGREEMENT APPENDIX E – BOOK-ENTRY SYSTEM APPENDIX F – FORM OF OPINION OF BOND COUNSEL

90165268.7 7 OFFICIAL STATEMENT

$______2 $______* Anaheim Public Financing Authority Anaheim Public Financing Authority Revenue Bonds, Series 2010-A Revenue Bonds, Series 2010-B (Water System Project) (Water System Project) (Tax-Exempt) (Federally Taxable Build America Bonds)

INTRODUCTION

This Official Statement, which includes the cover page and attached appendices, provides certain information in connection with the sale and delivery of the $______* Anaheim Public Financing Authority Revenue Bonds, Series 2010-A (Water System Project) (Tax-Exempt) (the “2010-A Bonds”) and $______* Anaheim Public Financing Authority Revenue Bonds, Series 2010-B (Water System Project) (Federally Taxable Build America Bonds) (the “2010-B Bonds,” and together with the 2010-A Bonds, the “2010 Bonds”). This Introduction is not a summary of this Official Statement, and is qualified by more complete and detailed information contained in the entire Official Statement. A full review should be made of the entire Official Statement, including the cover page and attached appendices. The offering of the 2010 Bonds to potential investors is made only by means of the entire Official Statement.

The 2010 Bonds will be issued pursuant to an Indenture of Trust, dated as of October 1, 2010 (the “Indenture”), by and between the Anaheim Public Financing Authority (the “Authority”) and U.S. Bank National Association, as trustee (the “Trustee”). The 2010 Bonds will be secured by, among other things, Project Revenues, which consist primarily of purchase payments (the “2010 Purchase Payments”) to be made by the City of Anaheim, California (the “City”) pursuant to an Installment Purchase Agreement, dated as of October 1, 2010 (the “Installment Purchase Agreement”), between the Authority and the City.

Brief descriptions of the 2010 Bonds and the City’s Water System (the “Water System”) and summaries of the Installment Purchase Agreement, the Indenture and certain other documents are included in this Official Statement. Such descriptions and summaries do not purport to be comprehensive or definitive. All references herein to the 2010 Bonds, the Installment Purchase Agreement, the Indenture and any other documents are qualified in their entirety by reference to such documents, copies of which are available for inspection at the principal corporate trust office of the Trustee. Terms capitalized but not defined herein have the meanings set forth in the respective documents.

Purpose of the 2010 Bonds

The 2010 Bonds are being issued to finance the acquisition and construction of certain capital improvements to the Water System and to pay related costs of issuance. See “ESTIMATED SOURCES AND USES OF FUNDS” and “PLAN OF FINANCING.”

Security for the 2010 Bonds

The 2010 Bonds are secured by a pledge, charge and lien upon Project Revenues which consist primarily of 2010 Purchase Payments to be made by the City under the Installment Purchase Agreement. The 2010 Bonds are also secured by (i) all moneys deposited and held from time to time by the Trustee in the funds and accounts established under the Indenture, and (ii) income and gains with respect to the investment of amounts on deposit in the funds and accounts established under the Indenture. Pursuant to the Indenture, the Authority will assign and transfer in trust to the Trustee all of the Project Revenues, all of its rights to receive 2010 Purchase Payments under the Installment Purchase Agreement and all of its rights to enforce the payment of 2010 Purchase Payments under the Installment Purchase Agreement.

2 Preliminary; subject to change. 90165268.7 Pursuant to the Installment Purchase Agreement, the City is obligated to make 2010 Purchase Payments solely from Surplus Revenues in the Qualified Obligations Account of the City’s Water System Surplus Revenue Fund (the “Qualified Obligations Account”). The City is also required to pay, as additional purchase payments (“Additional Purchase Payments”), any taxes or assessments charged to the Authority or to the Trustee affecting the amount available to the Authority or the Trustee from payments to be received under the Installment Purchase Agreement or arising due to the transactions contemplated thereby, any taxes which may be imposed on the sale, resale, use, possession or ownership of the Water System pursuant to the Installment Purchase Agreement, the reasonable fees, charges and expenses of the Trustee, the reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the Authority or the Trustee to provide services required under the Installment Purchase Agreement or the Indenture, the reasonable costs and expenses of the Authority incurred in connection with the Installment Purchase Agreement, the 2010 Bonds and the Indenture or any other documents contemplated thereby and amounts required to be rebated to the United States Treasury Department pursuant to the Installment Purchase Agreement. The City is obligated to make Additional Purchase Payments solely from Surplus Revenues in the Remaining Surplus Account (the “Remaining Surplus Account”).

The 2010 Purchase Payments and Additional Purchase Payments rank junior to any of the City’s Senior Bonds that may be issued in the future with the requisite majority voter approval pursuant to the City Charter. See “CONSTITUTIONAL AND CHARTER LIMITATIONS – City Charter Revenue Bond Limitations.” There are no Senior Bonds currently outstanding, and the City has no plans to issue any Senior Bonds. In addition, the 2010 Purchase Payments are payable on a parity with other Qualified Obligations of the Water System, the outstanding principal amount of which is currently $64,596,191.37. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS – Water System Flow of Funds” and “THE WATER SYSTEM – Parity Debt Service Requirements.”

The City has covenanted in the Installment Purchase Agreement to prescribe and collect charges for the services and facilities of the Water System so that in each Fiscal Year the Surplus Revenues shall equal at least the sum of (a) 1.10 times the amount of Qualified Obligation Service (as defined herein) with respect to such Fiscal Year, (b) 1.00 times the principal of and interest on the Notes due and payable and to be paid from Surplus Revenues in such Fiscal Year, and (c) 1.00 times all other payments required to be made from Surplus Revenues in such Fiscal Year. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS – Rate Covenant.”

Under the Installment Purchase Agreement, the obligation of the City to make 2010 Purchase Payments from Surplus Revenues in the Qualified Obligations Account is absolute and unconditional, and is not to be abated, rebated, set-off, reduced, abrogated, terminated, waived, diminished, postponed or otherwise modified in any manner while any 2010 Purchase Payments remain unpaid, regardless of any contingency, act of God, event or cause whatsoever, including failure of consideration, eviction or constructive eviction, the taking by eminent domain, or destruction of or damage to the Water System.

THE OBLIGATION OF THE CITY TO MAKE 2010 PURCHASE PAYMENTS UNDER THE INSTALLMENT PURCHASE AGREEMENT IS PAYABLE SOLELY FROM SURPLUS REVENUES IN THE QUALIFIED OBLIGATIONS ACCOUNT. THE 2010 BONDS ARE NOT A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY. NEITHER THE INSTALLMENT PURCHASE AGREEMENT NOR THE INDENTURE CONSTITUTES A PLEDGE OF GENERAL REVENUES, FUNDS OR MONEYS OF THE CITY OR THE AUTHORITY.

Designation of 2010-B Bonds as Qualified “Build America Bonds”

The Authority expects to designate the 2010-B Bonds as “Build America Bonds” that are “qualified bonds” under the provisions of the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), the interest on which will not be excluded from gross income for federal income tax purposes but will be exempt from State of California personal income taxes. The Authority expects to

90165268.7 receive a cash subsidy from the United States Treasury equal to 35% of the interest payable on such 2010-B Bonds. The Authority has not undertaken or made any covenant for the benefit of the Owners of the 2010-B Bonds to comply with any conditions to the receipt of such cash subsidy or to maintain its right to retain or receive future cash subsidy payments in respect of the 2010-B Bonds. Prior to the Transition Date, any cash subsidy payments received by the Authority will be transferred to the City and treated as Revenues of the Water System. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS – Water System Flow of Funds” and “– Modifications to Installment Purchase Agreement Definitions on Transition Date.” The Authority is obligated to make all payments of principal of and interest on the 2010-B Bonds (and the City is obligated to make all 2010 Purchase Payments under the Installment Purchase Agreement required therefor) from the sources described herein whether or not the Authority receives any cash subsidy payments pursuant to the Stimulus Act. See “DESCRIPTION OF THE 2010 BONDS – Designation of 2010-B Bonds as Qualified ‘Build America Bonds.’”

The Water System

The Water System consists of facilities designed to serve an existing population of approximately 360,000 residents as well as having the ability to serve an expanded population of approximately 400,000 expected by the year 2030. The Water System serves virtually the entire area within the limits of the City and a small area that lies outside of the incorporated City boundary. During Fiscal Year 200910 (i.e., the City’s Fiscal Year ending June 30, 2010), the Water System distributed 20.4 billion gallons of water to an average of 63,127 metered customers. The Water System’s peak day distribution of 104.3 million gallons occurred in Fiscal Year 2003-04, with daily distribution currently averaging 56.1 million gallons.

The City has traditionally provided its customers with water from two sources. Production wells overlying the Orange County groundwater basin have historically provided approximately 64% to 80% of the water supply needs of the City, with the remaining amount coming from water purchased from the Metropolitan Water District of Southern California (“MWD”). MWD imports water into the region from the California State Water Project and the Colorado River Aqueduct.

The City is approximately 18 miles wide (from the west to east boundary) and varies in elevation from 60 feet to over 1,200 feet above sea level. Because of this geographical diversity, the water system was designed to serve the flatlands of west and central Anaheim, as well as the hill and canyon area of east Anaheim. Major facilities therefore include the state-of-the-art Lenain Water Filtration Plant designed to treat raw water stored in Walnut Canyon Reservoir (920 million gallon capacity) and distribute throughout most areas of east Anaheim, 17 active production wells with the capacity to extract groundwater at a combined rate of approximately 75 million gallons per day (MGD) and to distribute this high-quality water directly into the distribution system, and 12 other storage reservoirs for holding an additional 29 million gallons of water for high demand periods or emergency fire fighting purposes. In addition, the City has eight MWD connections amounting to a combined capacity of 110 MGD. This highly reliable water system has been given a Class 1 rating by an independent rating agency, the Insurance Services Office.

For a more detailed discussion of the Water System, see “THE WATER SYSTEM” and “ADEQUACY OF WATER SUPPLIES.”

DESCRIPTION OF THE 2010 BONDS

General

The 2010 Bonds will be issued in the form of fully registered bonds without coupons and in denominations of $5,000 or any integral multiple thereof. The 2010 Bonds will be dated the Date of Delivery and will bear interest at the rates per annum and will mature, subject to redemption provisions set forth below, on the dates and in the principal amounts, all as set forth on the inside cover page hereof. Interest on the 2010 Bonds will be payable semiannually on April 1 and October 1 (each, an “Interest Payment Date”) of each year, commencing April 1, 2011.

90165268.7 Interest on each 2010 Bond accrues from the Interest Payment Date next preceding the date of authentication thereof unless (i) it is executed on an Interest Payment Date, in which event interest accrues from the date of execution thereof, (ii) it is authenticated on or before March 15, 2011, in which event interest accrues from its dated date, or (iii) it is authenticated after the fifteenth calendar day of the month immediately preceding an Interest Payment Date, in which case interest accrues from such Interest Payment Date. If, at the time of authentication of any 2010 Bond, interest thereon is in default, such 2010 Bond will bear interest from the Interest Payment Date to which such interest has previously been paid in full or made available for payment on such outstanding 2010 Bond. Interest on the 2010 Bonds will be computed on the basis of a 360-day year of twelve 30-day months.

Designation of 2010-B Bonds as Qualified “Build America Bonds”

The Authority is issuing the 2010-B Bonds as taxable bonds, and expects to designate the 2010-B Bonds as “Build America Bonds” under section 54AA(d) of the Internal Revenue Code of 1986 (the “Code”), and as “qualified bonds” under section 54AA(g) of the Code. In connection with the issuance of the 2010-B Bonds, and as permitted by the Stimulus Act, the Authority will irrevocably elect to receive directly from the United States Department of the Treasury a subsidy payment equal to 35% of the taxable interest it pays on the 2010-B Bonds to the holders thereof (the “2010-B Subsidy Payment”). The 2010-B Subsidy Payment does not constitute a full faith and credit obligation of or guarantee by the United States Government, but is to be paid as a tax credit by the Department of the Treasury under the Stimulus Act. If either the Authority or the City fails to comply with the conditions to receiving the 2010-B Subsidy Payment throughout the term of the 2010-B Bonds, the Authority may no longer receive the 2010-B Subsidy Payment and could be subject to a claim for the return of previously received 2010-B Subsidy Payments. The Authority has not undertaken or made any covenant to comply with such conditions and maintain its right to retain or receive future subsidy payments in respect of the 2010-B Bonds.

Redemption of 2010-A Bonds3

Optional Redemption. The 2010-A Bonds maturing on or prior to October 1, 2020 are not subject to redemption prior to maturity. The 2010-A Bonds maturing on or after October 1, 2021 are subject to redemption prior to maturity, at the option of the Authority, as a whole or in part, on October 1, 2020 or on any Business Day thereafter, in any order of maturity and by lot within a maturity, at a redemption price equal to 100% of the principal amount of the 2010-A Bonds to be redeemed, together with accrued interest to the redemption date.

Mandatory Sinking Account Redemption. The 2010-A Bonds maturing on October 1, 20__ are subject to redemption prior to maturity from mandatory sinking account installments due on October 1 of each of the years set forth in the following table in the respective redemption amounts set forth opposite such years in said table (together with accrued interest thereon), without premium:

2010-A Bonds Maturing October 1, 20__

Redemption Date Redemption (October 1) Amount

20__ $_____

20__* _____

______* Maturity

3 Preliminary; subject to change. 90165268.7 Selection of 2010-A Bonds to be Redeemed. Whenever provision is made for the redemption of less than all of the 2010-A Bonds, the Trustee shall select the 2010-A Bonds to be redeemed to correspond to the Principal Components of the 2010 Purchase Payments prepaid by the City in accordance with the Installment Purchase Agreement and by lot within a maturity; provided, that in the case of any redemption of any 2010-A Bond, or portion thereof, prior to its maturity, the Trustee shall first select those 2010-A Bonds delivered to such Trustee by the Authority, and designated by the Authority as satisfying the 2010 Purchase Payments previously redeemed or acquired by the Authority, in lieu of making such redemption, and then such Trustee shall select by lot within a maturity the other 2010-A Bonds to be redeemed. Any selection of such 2010-A Bonds by such Trustee shall be binding upon the Owners. For purposes of such selection, all 2010-A Bonds shall be deemed to be comprised of separate $5,000 portions and such portions shall be treated as separate 2010-A Bonds which may be separately redeemed.

Redemption of 2010-B Bonds4

Optional Make-Whole Redemption. The 2010-B Bonds maturing on or prior to October 1, 2010 are subject to redemption prior to their stated maturity dates, at the option of the Authority, from any source of available funds, as a whole or in part and, if in part, in such order of maturity as the Authority shall direct (and pro rata pass-through distribution of principal within a maturity in accordance with DTC procedures, or if DTC procedures do not allow for pro rata pass-through distribution of principal, by lot as described further under “Selection of 2010-B Bonds to be Redeemed”), on any date, at the Make-Whole Redemption Price. The Make-Whole Redemption Price will be calculated by an independent banking institution or independent financial advisor appointed by the Authority.

“Make-Whole Redemption Price” means for each maturity of the 2010-B Bonds the greater of (i) 100% of the principal amount of the 2010-B Bonds of such maturity to be redeemed or (ii) the sum of the present value of the remaining scheduled payments of principal of and interest on the 2010-B Bonds of such maturity to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the 2010-B Bonds are to be redeemed, discounted to the date on which the 2010-B Bonds of such maturity are to be redeemed on a semi-annual basis, assuming a 360-day year containing twelve 30-day months, at the Treasury Rate plus [twenty-five (25)] basis points, plus accrued interest on the 2010-B Bonds of such maturity to be so redeemed to the redemption date.

“Treasury Rate” means, with respect to any redemption date for a particular 2010-B Bond, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date (excluding inflation- indexed securities) (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to the maturity date of the 2010-B Bonds to be redeemed; provided, however that if the period from the redemption date to the maturity date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.

Optional Redemption at Par. The 2010-B Bonds maturing on or after October 1, 2021 are subject to redemption prior to maturity, at the option of the Authority, as a whole or in part, on October 1, 2020 or on any Business Day thereafter, in any order of maturity, at a redemption price equal to 100% of the principal amount of the 2010-B Bonds to be redeemed, together with accrued interest to the redemption date.

Extraordinary Optional Redemption. The 2010-B Bonds maturing on or prior to October 1, 2020 are subject to redemption prior to their stated maturity dates, at the option of the Authority, upon the occurrence of an Extraordinary Event, from any source of available funds, as a whole or in part and, if in part, in such order of maturity as the Authority shall direct (and pro rata pass-through distribution of principal within a maturity in accordance with DTC procedures, or if DTC procedures do not allow for

4 Preliminary; subject to change. 90165268.7 pro rata pass-through distribution of principal, by lot as described further under “–Selection of 2010-B Bonds to be Redeemed”), on any date, at the Extraordinary Optional Redemption Price. The Extraordinary Optional Redemption Price will be calculated by an independent banking institution or independent financial advisor appointed by the Authority.

The “Extraordinary Optional Redemption Price” means the amount equal to the greater of the following:

(i) the issue price of the 2010-B Bonds set forth in the Official Statement relating to the 2010-B Bonds (but not less than 100% of the principal amount of the 2010-B Bonds to be redeemed); or

(ii) the sum of the present value of the remaining scheduled payments of the principal of and interest with respect to the 2010-B Bonds to be redeemed to the maturity date of such 2010-B Bonds, not including any portion of those payments of interest accrued and unpaid as of the date on which the 2010- B Bonds are to be redeemed, discounted to the date on which the 2010-B Bonds are to be redeemed on a semi-annual basis assuming a 360-day year containing twelve 30-day months, at the Treasury Rate, plus ___ basis points; plus, in each case, accrued interest on the 2010-B Bonds to be redeemed to the rate of redemption.

“Extraordinary Event” means an event causing the Federal Subsidy expected to be received with respect to the 2010-B Bonds to be eliminated or reduced, as reasonably determined by the Authority, which determination shall be conclusive, as a result of:

(i) a material adverse change to section 54AA or 6431 of the Code,

(ii) guidance published by the Internal Revenue Service or the United States Treasury with respect to such sections, or

(iii) a determination by the Internal Revenue Service or the United States Treasury, which determination is not the result of a failure of the Authority or the City to satisfy the requirements of the Tax Certificate.

Mandatory Sinking Account Redemption. The 2010-B Bonds maturing on October 1, 20__ are subject to redemption prior to maturity from mandatory sinking account installments due on October 1 of each of the years set forth in the following table in the respective redemption amounts set forth opposite such years in said table (together with accrued interest thereon), without premium:

2010-B Bonds Maturing October 1, 20__

Redemption Date Redemption (October 1) Amount

20__ $_____

20__* _____

* Maturity Selection of 2010-B Bonds to be Redeemed. Whenever by the terms of the Indenture, 2010-B Bonds are to be redeemed at the direction of the Authority, the Authority shall select the maturity or maturities of 2010-B Bonds to be redeemed. If less than all of the 2010-B Bonds of a maturity are called for prior redemption, the particular 2010-B Bonds or portions thereof to be redeemed shall be selected on a pro rata pass-through distribution of principal basis in accordance with DTC procedures, provided that, so long as the 2010-B Bonds are held in book-entry form, the selection for redemption of such 2010-B Bonds shall be made in accordance with the operational arrangements of DTC then in effect, and, if the 90165268.7 DTC operational arrangements do not allow for redemption on a pro rata pass-through distribution of principal basis, the 2010-B Bonds will be selected for redemption, in accordance with DTC procedures, by lot. In connection with any optional redemption of any 2010-B Bonds that are term bonds subject to mandatory sinking fund redemption, the principal amount of such 2010-B Bonds being redeemed shall be allocated against the scheduled sinking fund redemption amounts in such manner as the Authority may direct and the scheduled sinking fund installments payable thereafter shall be modified as to such term 2010-B Bonds. In such event, the Authority shall provide to the Trustee a revised schedule of sinking fund installments.

It is the Authority’s intent that redemption allocations made by DTC be made on a pro rata pass-through distribution of principal basis as described above. However, none of the Authority, the City or the Underwriter can provide any assurance that DTC, DTC’s direct and indirect participants or any other intermediary will allocate the redemption of 2010-B Bonds on such basis. If the DTC operational arrangements do not allow for the redemption of the 2010-B Bonds on a pro rata pass-through distribution of principal basis as discussed above, then the 2010-B Bonds will be selected for redemption, in accordance with DTC procedures, by lot.

Redemption Procedures

Notice of Redemption. The Trustee on behalf and at the expense of the Authority shall mail (by first-class mail) notice of any redemption to the Owners of any 2010 Bonds designated for redemption, at their respective addresses appearing on the Registration Books under the Indenture, and to the Securities Depositories and to the Information Services, at least 30 but not more than 60 days prior to the date fixed for redemption; provided, however, that neither failure to receive any such notice so mailed nor any defect therein shall affect the validity of the proceedings for the redemption of such 2010 Bonds or the cessation of the accrual of interest thereon. Such notice shall state the date of the notice, the Redemption Date, the redemption place and the redemption price and shall designate the CUSIP numbers, the 2010 Bond numbers (but only if less than all of the Outstanding 2010 Bonds are to be redeemed) and the maturity or maturities in the event of redemption of less than all of the 2010 Bonds, and shall require that such 2010 Bonds be then surrendered at the Corporate Trust Office of the Trustee for redemption at the redemption price, giving notice also that further interest on such 2010 Bonds will not accrue from and after the Redemption Date.

Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the principal of and interest (and premium, if any) on the 2010 Bonds so called for redemption shall have been duly provided, such 2010 Bonds so called shall cease to be entitled to any benefit under the Indenture other than the right to receive payment of the principal, interest accrued to the Redemption Date, and premium, if any, and no interest shall accrue thereon from and after the Redemption Date specified in such notice.

Transfer and Exchange of the 2010 Bonds

Any 2010 Bond may, in accordance with its terms, be transferred, upon the Registration Books under the Indenture, by the person in whose name it is registered, in person or by his attorney duly authorized in writing, upon surrender of such 2010 Bond for cancellation at the Corporate Trust Office of the Trustee, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed by the registered owner or his duly authorized attorney and upon payment by the registered owner of any charges the Trustee may make under the Indenture. Whenever any 2010 Bond shall be surrendered for transfer, the Authority shall execute and the Trustee shall authenticate and deliver to the transferee a new 2010 Bond of like tenor, maturity and aggregate principal amount. The Trustee is not required to transfer either (a) 2010 Bonds during the period established by such Trustee for the selection of such 2010 Bonds for redemption or (b) any 2010 Bonds selected for redemption pursuant to the Indenture. The 2010 Bonds may be exchanged upon surrender thereof at the Corporate Trust Office of the Trustee upon payment by the registered owner of any charges such Trustee may make for an equal

90165268.7 aggregate principal amount of 2010 Bonds of other Authorized Denominations and of the same tenor and maturity.

Book-Entry System

The Depository Trust Company (“DTC”) will act as securities depository for the 2010 Bonds. The 2010 Bonds will be executed and delivered as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered bond will be issued for the 2010 Bonds of each maturity, in the initial aggregate principal amount of such maturity, and will be deposited with DTC or its authorized agent. For further information regarding DTC, please refer to “APPENDIX E— BOOK-ENTRY ONLY SYSTEM.”

SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS

2010 Purchase Payments

The 2010 Bonds are secured by, among other things, Project Revenues, which consist primarily of 2010 Purchase Payments to be made by the City under the Installment Purchase Agreement. Pursuant to the Indenture, the Authority assigns and transfers in trust to the Trustee its right to receive the 2010 Purchase Payments and all of its rights to enforce the payment of 2010 Purchase Payments under the Installment Purchase Agreement.

Pursuant to the Installment Purchase Agreement, the City is obligated to make 2010 Purchase Payments solely from Surplus Revenues in the Qualified Obligations Account. The City is obligated to make Additional Purchase Payments under the Installment Purchase Agreement solely from Surplus Revenues in the Remaining Surplus Account. Nothing in the Installment Purchase Agreement precludes the City from making 2010 Purchase Payments and Additional Purchase Payments from other lawfully available moneys of the City.

Subject to the limitations set forth in the preceding paragraph, the obligation of the City to make the 2010 Purchase Payments and Additional Purchase Payments required by the Installment Purchase Agreement is absolute and unconditional, and is not to be abated, rebated, set off, reduced or otherwise modified in any manner or to any extent whatsoever while any 2010 Purchase Payments or Additional Purchase Payments remain unpaid, regardless of any contingency, act of God, event or cause whatsoever, including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, commercial frustration of purpose, any change in the laws of the United States or the State of California or any political subdivision of either or the rules or regulations of any governmental authority, or any failure of the Authority or the Trustee to perform and observe any agreement, duty, liability or obligation arising out of or connected with the Installment Purchase Agreement or the Indenture. The Installment Purchase Agreement is deemed to constitute a “net contract” pursuant to which the City will pay absolutely the full amount of the 2010 Purchase Payments, Additional Purchase Payments and all other payments required thereunder, regardless of any rights of set off, recoupment, abatement or counterclaim the City might otherwise have against the Authority, the Trustee or any other party.

The City has covenanted in the Installment Purchase Agreement to take such action as may be necessary to include and maintain the applicable 2010 Purchase Payments and Additional Purchase Payments due under the Installment Purchase Agreement in its budget for the appropriate Fiscal Year or pursuant to a separate resolution of the City Council and to make the appropriations necessary for the payment of all such 2010 Purchase Payments and Additional Purchase Payments required under the Installment Purchase Agreement. The performance of this covenant by the City is to be deemed and understood under the Installment Purchase Agreement to be a ministerial duty.

THE OBLIGATION OF THE CITY TO MAKE 2010 PURCHASE PAYMENTS UNDER THE INSTALLMENT PURCHASE AGREEMENT IS PAYABLE SOLELY FROM SURPLUS REVENUES

90165268.7 IN THE QUALIFIED OBLIGATIONS ACCOUNT. THE 2010 BONDS SHALL NOT IN ANY WAY BE CONSTRUED TO BE A DEBT OF THE CITY, THE STATE OF CALIFORNIA, OR ANY POLITICAL SUBDIVISION THEREOF (OTHER THAN THE AUTHORITY) IN CONTRAVENTION OF ANY APPLICABLE CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION, NOR WILL ANYTHING CONTAINED IN THE INSTALLMENT PURCHASE AGREEMENT OR THE INDENTURE CONSTITUTE A PLEDGE OF GENERAL REVENUES, FUNDS OR MONEYS OF THE CITY OR THE AUTHORITY OR AN OBLIGATION OF THE CITY OR THE AUTHORITY FOR WHICH THE CITY OR THE AUTHORITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OR THE AUTHORITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE AUTHORITY HAS NO TAXING POWER.

Water System Flow of Funds

2010 Purchase Payments are to be made from the Qualified Obligations Account (a special fund of the City held by the City Treasurer and created pursuant to Ordinance No. 5376). The City is required by the Installment Purchase Agreement to pay, on or before each Purchase Payment Date, from the Qualified Obligations Account to the Trustee for deposit in the Purchase Payment Account, the amount of the 2010 Purchase Payments due on the next succeeding April 1 and October 1. Additional Purchase Payments are to be made from the Remaining Surplus Account of the Surplus Revenue Fund. See “SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Installment Purchase Agreement.”

Water System Funds and Accounts. Pursuant to the Installment Purchase Agreement, all rates, fees and charges for providing water service to persons and real property (including connection fees) and all other fees, rents and charges and other income derived by the City from the ownership, operation, use or services of the Water System (the “Revenues”) are to be deposited as received by the City Treasurer to the Revenue Account in the Water Enterprise Fund (also known as the Water Utility Fund) held by the City Treasurer.

On or before the 20th day of each calendar month, there shall be withdrawn from the Revenue Account the entire amount on deposit in the Revenue Account and there shall be allocated and deposited such amount in the funds and accounts, in the order of priority listed below.

Maintenance and Operation Account Bond Service Account Reserve Fund Renewal and Replacement Account Extension and Improvement Account Water System Surplus Revenue Fund

The amount to be deposited in each such account is set forth below.

First, to the Maintenance and Operation Account in the Water Enterprise Fund, amounts sufficient for the payment of the Operating Expenses of the Water System as they become due and payable.

“ Operating Expenses” means the reasonable and necessary current expenses of maintaining, repairing and operating the Water System, including City administrative expenses directly attributable to Water System functions, but excluding depreciation and amortization, transfers to the City’s general fund and debt service requirements of the City’s general obligation water bonds, all computed in accordance with sound accounting principles and consistent with existing accounting practices of the City.

Second, to the Bond Service Account in the Water Enterprise Fund, one-sixth of the interest which will become due and payable (less any interest which has already been provided for) on the outstanding Senior Bonds within the next six month period and one-twelfth of the principal

90165268.7 amount which will mature and be payable on the outstanding Senior Bonds within the next twelve month period and, to the Bond Sinking Account in the Water Enterprise Fund, the amount required with respect to any term Senior Bonds to provide for mandatory sinking fund installments.

“ Senior Bonds” means the City’s revenue bonds, revenue notes or other similar evidences of indebtedness issued at any time in connection with the acquisition, construction or financing of additions to and improvements of the Water System, payable out of and secured by Net Revenues. There are currently no Senior Bonds outstanding, and the City has no plans to issue any Senior Bonds. The City Charter requires majority voter approval to authorize the issuance of Senior Bonds. See “CONSTITUTIONAL AND CHARTER LIMITATIONS – City Charter Revenue Bond Limitations.”

Third, to the Reserve Fund for the Senior Bonds, the amount required (when added to amounts on deposit therein), if any, for such Fund to equal the Maximum Annual Debt Service with respect to the Senior Bonds.

Fourth, so long as any Senior Bonds are outstanding, to the Renewal and Replacement Account in the Water Enterprise Fund, an amount equal to two percent (2%) of the Revenues received in the preceding calendar month until a balance is established or reestablished therein equal to one percent (1%) of the depreciated book value of the land, general plant and equipment which constitute the net utility plant of the Water System, or such other balance as the consulting engineer may recommend. The moneys contained in such Account may be used for extraordinary maintenance and repairs, renewals and replacements to, but not for additions to or extensions of, the Water System and may be transferred to the Bond Service Account, the Sinking Account and other accounts established to pay debt service on Senior Bonds to prevent default in payment of the principal and interest on outstanding Senior Bonds. Since this Account may be depleted at any time for various purposes, no assurance can be given that moneys in such Account will be available at any particular time for transfer to the Bond Service Account. The balance of the Renewal and Replacement Account as of June 30, 2010 was $2,738,533.

Fifth, so long as any Senior Bonds are outstanding, for deposit in the Extension and Improvement Account in the Water Enterprise Fund, such amounts as shall be deemed desirable by the City Council or appropriate City staff by appointment of the City Council. The moneys contained in said Account may be used for extensions and improvements to the Water System and may be transferred to the Bond Service Account, the Sinking Account and other accounts established to pay debt service on Senior Bonds, and to prevent default in payment of the principal of and interest on outstanding Senior Bonds. Since this Account may be depleted at any time for various purposes, no assurance can be given that moneys in such Account will be available at any particular time for transfer to the Bond Service Account. The balance in the Extension and Improvement Account as of June 30, 2010 was $0.

Sixth, to the Water System Surplus Revenue Fund, all moneys in the Revenue Account remaining after the above transfers have been made and all covenants required by the resolutions relating to the Senior Bonds have been performed. The moneys in the Water System Surplus Revenue Fund constitute the Surplus Revenues.

Surplus Revenues. So long as any Bonds are Outstanding, promptly after the deposit in any month to the Surplus Revenue Fund, the entire amount of the Surplus Revenues in the Surplus Revenue Fund shall be transferred to the following accounts in the order of priority listed below.

Qualified Obligations Account WRAN (Water Revenue Anticipation Note) Account Remaining Surplus Account

The amount to be deposited in each such account is set forth below.

90165268.7 First, to the Qualified Obligations Account, the amount of Qualified Obligation Service with respect to such calendar month (to the extent not already transferred to such Account in such month) or, if less, the entire amount of Surplus Revenues then available for transfer to such Account.

Second, to the WRAN Account, the amount required to be transferred thereto in such month for the payment of the principal of and interest on the Notes to the extent required by the resolution(s) or ordinance(s) pursuant to which the Notes are issued (to the extent not already transferred to such Account in such month), or, if less, the entire amount of Surplus Revenues then available for transfer to such Account. There are no Notes currently outstanding.

Third, to the Remaining Surplus Account, all remaining Surplus Revenues, to be used for any lawful purpose of the City, provided, however, that in the event of any deficiency in the Qualified Obligations Account or the WRAN Account, moneys in the Remaining Surplus Account shall be transferred to such Accounts in the order of priority indicated above to cover such deficiency.

“Qualified Obligation Service” means, with respect to any period, the amount of principal and interest or other payments accrued or to accrue in such period with respect to all outstanding Qualified Obligations (excluding the amount of proceeds of Qualified Obligations held in any fund or account for the payment of Qualified Obligation Service accrued or to accrue during such period). For purposes of accrual under this definition, all payments with respect to Qualified Obligations due in a calendar month are to be deemed due on the first day of such calendar month. “Qualified Obligations” means, without duplication, (i) the 2010 Purchase Payments, (ii) the 2008 Purchase Payments, (iii) the 2004 Purchase Payments, (iv) obligations of the City with respect to the DWR Loan (as defined below) and (v) Bonds and Obligations which at the time of initial delivery thereof satisfy the issuance test set forth in the Installment Purchase Agreement (see “Additional Qualified Obligations”). “Bond” is defined to include any revenue bond, revenue note, warrant or other evidence of indebtedness issued, incurred or delivered for the financing, or refinancing of extensions of, additions to, repairs and replacements to, renewals of, and improvements of, the Water System, designated by the City at the initial delivery thereof as payable from Surplus Revenues in the Qualified Obligations Account, to the extent that the payments under such revenue bond, revenue note, warrant or other evidence of indebtedness are payable from Surplus Revenues in the Qualified Obligations Account, but does not include any Obligation. “Obligation” means any contract, instrument or other agreement for the purchase, acquisition or lease of facilities, properties, structures or equipment for the Water System, designated by the City at the initial delivery thereof as payable from Surplus Revenues in the Qualified Obligations Account to the extent that payments under such contract, instrument or agreement are payable from Surplus Revenues in the Qualified Obligations Account, and the final payments under which are due more than one year following the incurrence thereof. “Obligation” does not include any Bond.

Qualified Obligation Service includes the City’s payments of (i) 2010 Purchase Payments relating to the 2010 Bonds, (ii) 2008 Purchase Payments relating to the Authority's Revenue Bonds, Series 2008 (Water System Project) in the outstanding aggregate principal amount of $48,580,000 (the “2008 Bonds”), (iii) 2004 Purchase Payments relating to the Authority’s Revenue Bonds, Series 2004 (Water System Refunding) in the outstanding aggregate principal amount of $4,430,000 (the “2004 Bonds”), and (iv) principal of and interest on a loan made by the California Department of Water Resources to the City, currently outstanding in the principal amount of $11,586,191 (the “DWR Loan”). See “THE WATER SYSTEM – Parity Debt Service Requirements.”

Rate Covenant

The City has agreed pursuant to the Installment Purchase Agreement to prescribe, revise and collect such charges for the services and facilities of the Water System so that, in each Fiscal Year, the Surplus Revenues shall at least equal the sum of (i) 1.10 times the amount of Qualified Obligation Service with respect to such Fiscal Year, (ii) 1.00 times the principal of and interest on the outstanding Notes due

90165268.7 and payable and to be paid from Surplus Revenues in such Fiscal Year, and (iii) 1.00 times all other payments required to be made from Surplus Revenues in such Fiscal Year.

No Reserve Account for the 2010 Bonds

The Authority is not funding a reserve account for the 2010 Bonds. The Authority has funded separate reserve accounts for the 2008 Bonds and the 2004 Bonds. The reserve accounts for the 2008 Bonds and the 2004 Bonds are not available to pay debt service on the 2010 Bonds.

Insurance

The City agrees in the Installment Purchase Agreement to maintain at all times with responsible insurers all such insurance on the Water System as is customarily maintained by similar utilities systems with respect to works and properties of like character against accident to, loss of, or damage to, such works or properties.

The City further agrees that any useful parts of the Water System that are damaged or destroyed shall be restored to use. Proceeds of insurance against accident, loss or damage shall be used for repairing or rebuilding the lost, damaged or destroyed works and properties, and, to the extent not so used, shall be applied to the retirement of outstanding Senior Bonds and Qualified Obligations.

The City is permitted under the Installment Purchase Agreement to satisfy the foregoing covenant through a self-insurance program.

Additional Qualified Obligations

The City has agreed pursuant to the Installment Purchase Agreement, after the date on which the 2010 Bonds are delivered by the Trustee pursuant to the Indenture to the original purchasers thereof, not to issue, incur or deliver any Bonds or Obligations payable from the Surplus Revenues in the Qualified Obligations Account unless, at the initial delivery thereof, the Surplus Revenues, calculated on sound accounting principles, as shown by the books of the City for any consecutive twelve-month period selected by the City during the 18 months prior to the adoption of the resolution approving the delivery of such Bonds or Obligations, plus, at the option of the City, the allowance for earnings described in the following paragraph, shall have amounted to at least 1.10 times the Maximum Annual Qualified Obligation Service on all Qualified Obligations to be outstanding immediately subsequent to the initial delivery of such Bonds or Obligations. Notwithstanding the foregoing, the City may issue Bonds or Obligations to refund outstanding Qualified Obligations if, after giving effect to the application of the proceeds thereof, either (i) total Qualified Obligation Service will not be increased in any Fiscal Year in which Qualified Obligations (outstanding on the date of issuance or incurrence of such refunding Bonds or Obligations, but excluding such refunding Bonds or Obligations) not being refunded are outstanding, or (ii) the Surplus Revenues, calculated on sound accounting principles, as shown by the books of the City for any consecutive twelve-month period selected by the City during the 18 months prior to the adoption of the resolution approving the delivery of such Bonds or Obligations, plus, at the option of the City, the allowance for earnings described in the following paragraph, shall have amounted to at least 1.10 times total Qualified Obligation Service in the Fiscal Year next succeeding the Fiscal Year in which such Bond or Obligation is initially delivered.

For the purpose of applying the restrictions set forth in the preceding paragraph, the following allowance may be added to the Surplus Revenues: an allowance for earnings arising from any increase in the charges made for service from the Water System which has become effective prior to the initial delivery of such Bonds or Obligations but which, during all or any part of said twelve-month period, was not in effect, in an amount equal to the amount by which the Surplus Revenues would have been increased if such increase in charges had been in effect during the whole of said twelve-month period, as certified by the City.

90165268.7 The Installment Purchase Agreement also provides that the Surplus Revenues will not be mortgaged, encumbered, sold, leased, pledged, any charge placed thereon, or disposed of or used except as permitted by the Installment Purchase Agreement.

Modifications to Installment Purchase Agreement Definitions on Transition Date

The Installment Purchase Agreement contains certain definitions that will be modified on the Transition Date, which is defined as the first date on which all remaining 2004 Bonds and 2008 Bonds have been paid or discharged in accordance with their terms and are no longer outstanding for purposes of their respective issuance documents. The definition of “Maximum Annual Qualified Obligation Service” provides that on the Transition Date, such definition will be modified by the addition of the following paragraph (ix):

“(ix) if interest on any Qualified Obligation is reasonably anticipated to be reimbursed to the Authority or the City by a Federal Subsidy, then interest payments with respect to such Qualified Obligation may be reduced by the amount of such Federal Subsidy at the election of the City, but only to the extent that the City has committed to applying such amount to the payment of interest on such Qualified Obligation.”

In addition, the definition of “Revenues” includes the following proviso:

“Revenues” shall mean all rates, fees and charges for providing water service to persons and real property (including connection fees) and all other fees, rents and charges and other income derived by the City from the ownership, operation, use or services of the Water System; provided, however, that from and after the Transition Date, there shall be excluded from the definition of “Revenues” any Federal Subsidy, at the election of the City.

See “APPENDIX C – SUMMARY OF PRINCIPAL LEGAL DOCUMENTS – Installment Purchase Agreement.”

ESTIMATED SOURCES AND USES OF FUNDS

The sources and uses of funds in connection with the issuance of the 2010 Bonds are estimated to be applied as follows:

SOURCES: Principal Amount of 2010 Bonds...... $ Net Original Issue Discount/Bond Premium...... ______Total Sources...... $

USES: Deposit to Acquisition Fund...... $ Costs of Issuance(1)...... ______Total Uses...... $

______(1) Includes underwriter’s discount, fees and expenses of Bond Counsel, the Financial Advisor and the Trustee, rating agency fees and printing costs.

PLAN OF FINANCING

The net proceeds of the 2010 Bonds will be used to finance various rehabilitation and replacement projects to improve the Water System’s service reliability, as well as the construction of new facilities and upgrades to improve and augment the water supply and delivery capabilities of the Water System, including construction of water storage improvements, new groundwater wells, upgrades of existing pump stations, water recycling facilities and water main relocation and replacement. See

90165268.7 “ESTIMATED SOURCES AND USES OF FUNDS” and “THE WATER SYSTEM – Water System Capital Programs” herein.

THE CITY’S PUBLIC UTILITIES DEPARTMENT

General Description

Under the provisions of the California Constitution, the Charter and Title 10 of the Municipal Code of the City, the City owns and operates both the Water System and the City’s electric system (the “Electric System”) for the citizens of the City. The City’s Public Utilities Department (the “Department”) exercises jurisdiction over both the Water System and the Electric System and is under the supervision of the Public Utilities General Manager (the “General Manager”). The General Manager is responsible for the supervision of the planning, design, construction, maintenance and operation of both the Water System and the Electric System. The Finance Director of the City is charged with the accounting and the administration of the financial affairs of the City. The General Manager and Finance Director are under the direction of the City Manager who is appointed by the City Council.

The Department provides water as well as electricity to virtually all the residential, commercial and industrial customers within the City limits. The funds and accounts of the Water System and the Electric System are held separately, and the funds and accounts of one system are not pledged to the other system’s obligations.

Management of the Public Utilities Department

Marcie L. Edwards, Public Utilities General Manager, has been with the Department since January 2001. Ms. Edwards has a Bachelor of Science degree in Organizational Management, and a Masters degree in Public Administration. She has full management responsibility to plan, direct and manage the day-to-day activities and operations of the Department. Ms. Edwards has over 30 years of utility industry experience gained during her past tenure at the Los Angeles Department of Water and Power (“LADWP”). Starting in 1978, Ms. Edwards earned a Los Angeles City Unlimited Steam Engineer license and was responsible for operating steam generation facilities of various sizes. Moving in 1985 to the LADWP electric operations group, Ms. Edwards ultimately took over as Energy Control Center Manager where she managed power grid operations and wholesale marketing activities. In 1994, Ms. Edwards was appointed as Manager of Bulk Power Operations & Maintenance and subsequently became the Director over the Bulk Power Business Unit for LADWP in 1995. As Director, Ms. Edwards provided management oversight for various energy related functions, including power flow analysis, power contracts, regulatory activities, and transmission grid operations. In addition, she managed the development of a fledgling wholesale energy-trading floor that subsequently netted over $300 million for LADWP by 1998. Finally, in 1998, Ms. Edwards became the Assistant General Manager of the LADWP Marketing and Customer Service Organization. This organization was comprised of two business units; Customer Service with over 1,400 employees providing all customer related services including Call Center operations, meter reading, and billing, and the Marketing Business Unit, providing account management, rate analysis, energy audits, and new program development.

Ms. Edwards is currently a member of the American Public Power Association Board of Directors, Region 6, Southwest, the Southern California Public Power Association Board of Directors, Intermountain Power Project Coordinating Committee, the American Water Works Association and is Vice President of the California Municipal Utilities Association Board of Governors. She is a past member of the California Independent System Operator Governing Board, past chairman of the Southern California Utility Power Pool, and past member of the Intermountain Power Services Corporation Board.

Donald C. Calkins, Assistant General Manager—Water Services, is responsible for managing the Water System, including water resources, planning, design, construction, operations and maintenance. Mr. Calkins joined the Public Utilities Department in September 1996 as Water Engineering Manager. He was promoted to Assistant General Manager in July 2000.

90165268.7 Mr. Calkins came to the City with 25 years of experience in providing planning, design, construction and operations services to water utilities throughout the western United States. At CH2M Hill, Mr. Calkins was Senior Project Manager for water resources, treatment and reclamation projects. Also, as Water Business Line Staff manager for the southwest region, he was responsible for staff reviews, compensation, development and training. Mr. Calkins is a registered Professional Civil Engineer in California. He has a B.S. degree in Civil Engineering and an M.S. degree in Sanitary Engineering, both from the University of Missouri – Columbia. He also has a Masters degree in Public Administration from the University of LaVerne.

Edward Zacherl, Assistant General Manager – Finance and Administration, joined the City in 1990 as the Assistant Finance Director. Mr. Zacherl has 34 years of experience in finance and accounting. Mr. Zacherl earned a Bachelor of Arts degree in Economics from Slippery Rock University and a Masters of Business and Administration from Duquesne University in Pittsburgh, Pennsylvania. He is a member of the Government Finance Officers Association and a member of the California Society of Municipal Finance Officers. Mr. Zacherl is also a member of the Southern California Public Power Authority (SCPPA) Finance Committee and a member of the Intermountain Power Project (IPP) Coordinating Committee.

Public Utilities Board

The City Council, by Ordinance No. 3557 approved July 6, 1976, established a Public Utilities Board (the “Board”) with the power and duty to make recommendations to the City Council concerning (i) the operation and conduct of the Electric System and the Water System, (ii) the establishment of rules and regulations and rates for the operation of the Electric System and the Water System, (iii) the duties and qualifications of the General Manager and other employees of the Department, (iv) the acquisition, construction, improvement, extension, enlargement, diminution or curtailment of all or any part of the Electric System and the Water System, (v) the annual budget of the Department, and (vi) financing, including the issuance of bonds for the Electric System and the Water System. The Board may also exercise such other powers and duties as may be prescribed by ordinance not inconsistent with the Charter.

The Board consists of seven members, none of whom may hold any paid office or employment in the City government. The members of the Board are appointed by the City Council and may be removed by a majority vote of the City Council. Board members serve four-year overlapping terms, and are limited to serving two consecutive four-year terms.

The present members of the Board and their terms of appointment are:

Lon Cahill, Chairperson, term expires June 30, 2011. Mr. Cahill joined the Public Utilities Board in 2003, bringing with him 38 years of experience in municipal and private fire departments. Currently, Mr. Cahill serves as our Board Chair, which he has served for the last four years. He has worked for four Orange County cities’ Fire Departments, and retired as Garden Grove’s Fire Chief in 1993, going on to become Fire Chief for the Disneyland Resort. He is also the past President of the Orange County Fire Chiefs Association and former board member of the California Fire Chiefs Association representing Orange and Los Angeles Counties, and has taught 14 years in state and local fire technology programs as a credentialed vocational education instructor.

Kristine Murray, term expires June 30, 2014. Ms. Murray joined the Board in September 2007, and was elected Vice Chairperson in July 2009. Ms. Murray currently is the executive director of government relations at the Orange County Transit Authority, overseeing local, state and federal affairs for the agency. She was recently appointed Anaheim’s representative to the board of the Metropolitan Water District of Southern California (MWD). Ms. Murray is vice chair of MWD’s Real Property and Asset Management Committee and a member of Water Planning and Stewardship and Communications and Legislation committees, as well as the Special Committee on Bay-Delta. Ms. Murray has a bachelor’s degree in political science from California State University, Long Beach, and a master’s

90165268.7 certificate in transportation management from the Mineta Transportation Institute at San Jose State University.

Jordan Brandman, term expires June 30, 2011. Mr. Brandman joined the Board in July 2007. He currently is a director of his family’s environmental planning and consulting firm, Michael Brandman Associates, and is involved in the development of public and private projects around Orange County and the state. Mr. Brandman was elected to the Board of Trustees of the Anaheim Union High School District in February 2008. Previously, Mr. Brandman served as the director of workforce development for the Orange County Business Council, a policy advisor in the Governor’s Office of the Secretary for Education and as a legislative aide in the California State Assembly, advising on policy issues including education, local government and transportation. He earned a bachelor’s degree from the University of California at Irvine.

Pat Carroll, term expires June 30, 2013. Mr. Carroll joined the Board in April 2006. He has resided in Anaheim for 19 years and has been active in various community organizations including the Boys and Girls Club, Acacia Adult Day Care and Anaheim Community Center Authority. Mr. Carroll received his B.A. from University of California, Irvine and his Juris Doctorate from Loyola University. Mr. Carroll is currently the University Counsel at California State University, Fullerton where he is responsible for a variety of legal issues in areas including human resources, risk management, litigation, and construction.

John Machiaverna, term expires June 30, 2013. Mr. Machiaverna joined the Board in July 2009. A resident of Anaheim for more than 45 years and business owner in the community for approximately 17 years, Mr. Machiaverna has been active in community and civic affairs, which have kept him in close touch with community needs and concerns. His community work was recognized in 2000, by the National Philanthropic Society as an Orange County Volunteer of the Year.

Dave Morgan, term expires June 30, 2013. Mr. Morgan joined the Board in September 2009. Mr. Morgan retired as the City Manager of the City of Anaheim in June, 2009, after having served almost eight years as Anaheim’s top executive officer and culminating a career with the city that spanned 35 years. His experience ranged from administrative analysis and budget, to assistant director of MIS and data processing functions, to Resource Development Manager and Human Resources Director, a position he held for four years, prior to being named assistant City Manager in 1993. Mr. Morgan has a Bachelor of Arts in Political Science/Public Administration and a Masters of Public Administration from California State University, Fullerton. He also completed the Leadership for the 21st Century Program offered by Harvard University’s John F. Kennedy School of Government.

Charles Peltzer, term expires June 30, 2013. Mr. Peltzer has been a member of the Public Utilities Board since 2002. He is the owner of Peltzer Pines, and a third generation farmer in Anaheim. As a product of Anaheim schools and an Anaheim native, Mr. Peltzer is passionate about providing low- cost, efficient utility services to the Anaheim community. He is a local businessman who has served as the Orange County Farm Bureau representative to the State of California Department of Water Resources and currently serves on the Farm Bureau's Board of Directors.

THE WATER SYSTEM

History of the Water System

The Anaheim municipal water utility commenced operations in 1879 and metering of customers began in 1890. The early municipal Water System consisted of a single well, a pumping plant and a 20,000 gallon redwood storage tank. Groundwater from wells was the sole source of water for the City until the 1940’s when MWD made supplemental water from the Colorado River available. MWD had been formed in 1928 as a regional agency to develop or contract for imported water and to provide the principal facilities for transmission, storage and treatment of such water. The City was one of the original member agencies to form MWD.

90165268.7 The Orange County Water District (“OCWD”) was formed in 1933 to protect the natural groundwater basin underlying much of the north-central portion of Orange County (the “Basin”). The Basin is the source of groundwater for the City, and the City has historically pumped from the Basin approximately 64% to 80% of the annual supply of water delivered to Water System customers. The balance of the water needed to meet annual demand has been purchased from MWD.

Unless otherwise noted, the City’s Public Utilities Department has provided all statistical and financial information herein.

The following table sets forth statistical information relating to the Water System during the five Fiscal Years shown. TABLE 1 WATER SYSTEM STATISTICS

Fiscal Year Ended June 30 2006 2007 2008 2009 2010(1) Anaheim Population Served...... 342,717 345,559 346,823 348,467 353,643 Population Served Outside City (Est.)...... 5,100 5,100 5,100 5,100 5,100 Total Population Served...... 347,817 350,659 351,923 353,567 358,743 Total Water Sales (Million Gallons)...... 22,887 24,075 23,154 22,238 20,488 Capacity (Million Gallons Per Day) From Metropolitan Water District Connections..... 110 110 110 110 110 From Water System Wells (Average)...... 82 80 81 76 75 Total Supply Capacity ...... 192 190 191 186 185 Treatment Plant Capacity...... 15 15 15 15 15 Peak Day Distribution (Million Gallons)...... 97.5 96.5 89.6 87.8 87.2 Average Daily Distribution (Million Gallons)...... 65.0 68.5 66.3 63.3 56.1 Average Daily Sales Per Capita (Gallons)...... 180 188 180 172 156 ______(1) Unaudited.

Existing Facilities

The area served by the Water System encompasses approximately 50 square miles, and includes a small portion that lies outside of the incorporated City boundary. Approximately 360,000 residential customers (both within and outside of City limits) and 4,000 businesses are presently served by the Water System. The Water System’s major facilities consist of eight connections to the MWD Water Distribution System (seven for treated water and one for untreated water); the Lenain Water Filtration Plant; the Walnut Canyon Reservoir (a 920 million gallon storage facility for untreated water); 12 additional reservoirs representing an additional 29 million gallons of treated water storage capacity; active groundwater extraction facilities consisting of 17 production wells; and approximately 750 miles of transmission and distribution pipelines and nine booster pump stations.

Sources of Water

During Fiscal Year 2009-10, the Water System distributed an average of 56.1 million gallons of water per day with a peak day distribution of 87.2 million gallons. Total water sales of approximately 20.5 billion gallons were recorded. During that Fiscal Year, groundwater pumped from the City’s wells in the Basin accounted for 64% of total water production and imported water purchased from MWD accounted for the remaining 36% of total water production.

The following table indicates the total water pumped from Water System wells and purchases of imported water from MWD during the past five Fiscal Years shown.

90165268.7 TABLE 2 WATER PRODUCTION (Millions of Gallons)

Fiscal Year Ended June 30 2006 2007 2008 2009 2010(3) From Water System Wells Pumping from 13,705 Groundwater 13,580 16,844 19,077 16,420 Wells...... In-lieu 964 Program or 1,690 311 - 752 CUP Water(1)...... Total 15,270 17,155 19,077 17,172 14,669 Pumping from System Wells......

Percentage of 64% 64% 69% 80% 69% Total Supply......

From MWD Purchases from MWD, not 8,498 7,737 4,978 7,372 8,054 including in- lieu water......

Percentage of 36% 36% 31% 20% 31% Total Supply ......

Total Water 22,723 23,768 24,892 24,055 24,544 Production(2)...... ______(1) In-lieu Program or Conjunctive Use Pumping (CUP) Water represents water taken from MWD, at OCWD’s request and at the OCWD standard rate, in lieu of permitted groundwater pumping in order to replenish the Basin. (2) Total Water Production represents all water produced from local wells and purchases from MWD. This differs from water sales, which also accounts for water losses in the system that occur during distribution, and timing differences between actual production and billing. (3) Unaudited.

The City and other water agencies within north-central Orange County obtain a significant portion of their total water supply needs from the Basin. OCWD is the agency responsible for managing the groundwater basin and for ensuring that adequate quantities of potable water are available for retail water agencies, including the City. For a more detailed discussion of OCWD’s Basin management policies and pricing, see “ADEQUACY OF WATER SUPPLIES – Orange County Water District – Groundwater Basin.”

In addition to pumping groundwater from the Basin, the City purchases imported water from MWD. MWD supplies water to Southern California through two aqueduct systems. The older system, the Colorado River Aqueduct, was built to import water from the Colorado River, 260 miles to the east. This aqueduct began operation in June 1941 and was brought to full capacity in stages through 1960. The newer system is the California Aqueduct (which is a part of the State Water Project approved in 1960) that began delivering water to Southern California in 1973. During Fiscal Year 200910, the City purchased approximately eight billion gallons of water from MWD or 36% of the City’s total water supply.

90165268.7 Effective January 1, 2003, MWD implemented a new two-tiered rate structure. Each member agency will be allowed to purchase water at the Tier I rate up to a maximum amount equal to 90% of its single highest year of firm water purchases from MWD over the last ten years, currently equal to 22,240 acre-feet per year for the City. All purchases in excess of the Tier I limit will be billed at a higher Tier II rate. For calendar year 2010, MWD’s Tier I rate is $701 per acre-foot for treated water and $484 per acre-foot for untreated water, and the Tier II rate is $811 per acre-foot for treated water and $594 per acre-foot for untreated water. For calendar year 2011, MWD’s Tier I rate is $744 per acre-foot for treated water and $527 per acre-foot for untreated water, and the Tier II rate is $869 per acre-foot for treated water and $652 per acre-foot for untreated water. Due to the recent decrease in OCWD’s Basin Production Percentage, the City currently must purchase a certain amount of Tier II imported water in order to meet its total water demand. See “ADEQUACY OF WATER SUPPLIES – Orange County Water District – Groundwater Basin.”

For a more detailed discussion of MWD’s water resources, see “ADEQUACY OF WATER SUPPLIES – Metropolitan Water District of Southern California – Imported Water.”

Water Treatment and Quality Control

The water delivered to Water System consumers meets or exceeds all State and federal drinking water standards. The Water System has never been cited for any violations of public health standards.

As previously noted, groundwater is the principal source of the City’s total water supply. Water pumped from groundwater wells is naturally filtered by the underlying layers of sand, silt and clay. Because of the high quality of the City’s groundwater supply, State and federal regulatory agencies do not require it to be treated before delivery to customers. The Public Utilities Department does add disinfectant to the water to ensure that its quality is maintained as it travels through the Water System’s distribution system, which is a standard water utility practice.

The Water System’s remaining supply is provided by MWD, which imports water from the Colorado River and Northern California. Untreated imported water purchased from MWD is received at the City’s Walnut Canyon Reservoir via connections with MWD’s Santiago Lateral. The City’s Lenain Water Filtration Plant treats and disinfects the water prior to distribution. Treated water purchased from MWD is filtered and disinfected at MWD’s Diemer Treatment Plant in Yorba Linda.

The City monitors all of its water for regulated substances in compliance with all State and federal regulations, and conducts over 47,000 analyses of its water each year. Since 1966, the City has operated its own testing laboratory to facilitate constant surveillance of water and to conduct the bacterial and other tests prescribed by State and federal authorities. In 1967 the State Public Health Department certified the City’s water testing laboratory for complete bacteriological analysis. The City’s organizational structure places the Water Quality Section within the Environmental Services Division in order to provide an appropriate level of oversight of Water System operations. There are currently five staff personnel assigned to the Water Quality Laboratory.

Chemical analyses of the Water System’s supply are conducted by a State certified laboratory under contract with the City, or in the case of groundwater, by OCWD.

All water quality results are recorded and submitted to State and federal regulatory agencies as required. An annual water quality report is prepared and delivered to all residents of the City and available on the City’s website.

In order to ensure a reliable supply of potable water, the City has constructed five deep, high- production wells since 2001. These deeper wells generally produce higher quality water than shallow wells. The City intends to add at least two additional deep, high-production wells in the near future. See “Water System Capital Programs” below.

90165268.7 Consumers

During Fiscal Year 2009-10, the Water System delivered approximately 20.5 billion gallons of water to an average of 63,127 customers. About 59.5% of such water was used for residential purposes, 39.4% for commercial and industrial purposes, and 1.1% for other purposes. Billed water revenues for Fiscal Year 2009-10 totaled approximately $54.5 million. About 60.2% of revenues were provided by residential users, 36.7% were provided by commercial and industrial users, and 3.1% were provided by other users. The following table sets forth the volume of Water System sales by customer class and the corresponding revenues for the five Fiscal Years shown:

TABLE 3 WATER SALES

Fiscal Year Ended June 30 2006 2007 2008 2009 2010(1) Water Sold (in millions of gallons) Residential 13,491 14,151 13,646 13,125 12,196 ...... Commercial and Industrial 9,124 9,653 9,276 8,892 8,072 ...... Other 272 271 232 221 220 ...... Total 22,887 24,075 22,238 22,238 20,488 ......

Billed Revenues (in thousands) Residential $27,231 $28,423 $28,390 $29,722 $32,768 ...... Commercial and Industrial 16,701 17,664 17,652 18,402 19,973 ...... Other 1,705 1,734 1,684 1,705 1,808 ...... Total $45,637 $47,821 $47,821 $48,829 $54,549 ...... ______(1) Unaudited.

The following table sets forth the three largest public agency customers and the ten largest commercial and industrial customers of the Water System in terms of total water sales for Fiscal Year 2009-10. The three largest public agencies noted accounted for 4.6% of total water consumption and 4.3% of total annual billings in the aggregate. The ten largest commercial and industrial customers accounted for approximately 9.3% of total water consumption and 9.6% of total annual billings of the Water System in the aggregate. The largest of such customers accounted for 4.4% of total water consumption and 5.2% of total annual billings of the Water System.

90165268.7 TABLE 4 LARGEST WATER CUSTOMERS Fiscal Year Ended June 30, 2010

Public Agency Customers

Anaheim Union High School District City of Anaheim Orange County Department of Harbors, Beaches and Parks

Commercial and Industrial Customers

AlStyle Apparel/A&G Inc. Anaheim Hills Planned Community Association The Boeing Company CDIII Hilton Hotel Disneyland Resort Expo Dyeing & Finishing, Inc. Highlands Homeowners Association James G. Kallins - DBA Nor-Cal Beverage Company, Inc. Rondell Homes, Inc. Summit Community Homeowners Association Sunny Delight Beverages Company

Rates and Charges

The City is obligated by its charter and by the Installment Purchase Agreement to establish rates and collect charges in an amount sufficient to service the Water System’s indebtedness and to meet its expenses of operation and maintenance, with specified requirements as to priority and coverage. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2010 BONDS – Rate Covenant.” Water rates are fixed by City Council and are not subject to regulation by the California Public Utilities Commission or by any other state or federal agency.

The City’s Public Utilities Board makes recommendations to the City Council concerning water rates and charges. The Charter provides that water rates shall be based upon the cost of service to the various customer classes. The rate structure consists of (i) a monthly customer charge, (ii) a base commodity charge, (iii) a water commodity adjustment charge, and (iv) a water system reliability adjustment.

The monthly customer charge is typically $5.00 per residential customer, and ranges from $5.00 to $153.50 per commercial or industrial customer, depending on the size of the pipeline connection. The base commodity charge covers the cost of labor and materials for operation and maintenance necessary to meet water system requirements. The base commodity charge for all water customers within City limits is 50 cents per 100 cubic feet (hcf) of water usage. The water commodity adjustment charge is an administrative adjustment made by the General Manager to cover increases or decreases in (i) all costs of water provided by MWD, (ii) all costs of water provided by OCWD, (iii) all costs of electricity to move water throughout the Water System’s distribution system and (iv) federal and State mandated rules and regulations pertaining to water quality. The water commodity adjustment charge for all customers is currently set at $1.22 per hcf. The City Council approved a water system reliability adjustment on March 18, 2008. This adjustment is limited to annual increases of not more than 7.5 cents per hcf, and is intended to recover the Water System’s capital costs, including associated debt service costs. The water system reliability adjustment is 15 cents per hcf for all customers.

90165268.7 During Fiscal Year 2009-10, the Water System had an average of 63,127 connected meters. The Water System’s residential customers are billed bimonthly, and most commercial and industrial customers are billed monthly. Water bills are past due if not paid within 15 days of the billing date. When a bill becomes past due, a discontinuance of service notice for nonpayment is issued. Service may be discontinued if the bill is not paid within the time required by such notice.

Anaheim water remains competitively priced with other water purveyors within Orange County. The table below compares the City’s rates to those of other representative water service providers in the region.

TABLE 5 WATER RATE COMPARISON BY MONTHLY BILL

Average Residential Water Bill Agency (based on 20 hcf/month)

Laguna Beach $77.70 Yorba Linda Water District 60.60 Santa Ana 56.96 Garden Grove 52.82 Newport Beach 46.10 Anaheim 42.40 Fullerton 41.07 Orange 26.53

Operations and Maintenance of the Water System

During Fiscal Year 2009-10 the total operating expenses of the Water System were approximately $45,730,000, excluding depreciation and amortization. The total gross revenues of the Water System were approximately $57,665,000, resulting in net revenues available for debt service and depreciation and amortization of approximately $11,935,000.

Public Utilities Department staff analyzes water sales and Water System expenses on a continuing basis. Projections of future revenues, customers, and water consumption are made annually and are revised when appropriate. Rates are thoroughly examined each year and are adjusted as needed to meet budgetary requirements.

The following table summarizes the Operating Expenses of the Water System (excluding depreciation and amortization) during the five Fiscal Years shown.

TABLE 6 OPERATING EXPENSES (EXCLUDING DEPRECIATION AND AMORTIZATION) (In Thousands)

Fiscal Year Ended June 30 2006 2007 2008 2009 2010(1)

Purchased water...... $22,043 $22,922 $21,608 $22,558 $27,227 Treatment and pumping...... 4,625 5,605 6,650 6,747 6,448 Operations, maintenance and

90165268.7 administration...... 13,077 15,360 13,653 11,537 12,307 Total...... $39,745 $43,887 $41,911 $40,842 $45,982 ______(1) Unaudited.

The Water System’s accounting records, financial transactions and billing are computerized. Annual audits of the Water System are made by the City’s independent auditors. The audits are made simultaneously with the audits of the non-utility financial activity of the City.

Since July 1971, funds of the Water System have been segregated from the City’s General Fund and the books and records are maintained separate and apart from all other accounts of the City.

Transfers to the City’s General Fund from surplus funds of the Water System (after payment of, among other things, operation and maintenance expenses and debt service) are made annually. Under the Charter, annual transfers are limited to 4.0% of gross revenues of the Water Revenue Fund for the prior Fiscal Year. Such transfers may be further limited by Article XIIIB of the California Constitution. See “CONSTITUTIONAL AND CHARTER LIMITATIONS.”

For further information concerning the Water System’s financial position, see “FINANCIAL STATEMENTS” and the audited financial statements of the Water System for the Fiscal Years 2007-08 and 2008-09, attached hereto as Appendix B.

Parity Debt Service Requirements

The following table presents the debt service on the outstanding Qualified Obligations and the schedule of 2010 Purchase Payments with respect to the 2010 Bonds. The City has no Senior Bonds currently outstanding.

TABLE 7 Parity Debt Service Requirements Including 2010 Bond Net Debt Service Fiscal Years 2011 through 2039 (Assumes payments due July 1 are paid by June 30)

For Year Existing 2010-A Bonds 2010-B Bonds Total 2010 Total Net Ending Qualified Federal Bond Net Debt June 30 Obligations(1) Principal Interest Principal Interest Subsidy Debt Service Service

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 90165268.7 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 Total( 2) ______(1) Qualified Obligations outstanding at June 30, 2010 include $4,430,000 Anaheim Public Financing Authority Revenue Bonds, Series 2004 (Water System Refunding), $48,580,000 Anaheim Public Financing Authority Revenue Bonds, Series 2008 (Water System Project) and $11,586,191 Note Payable to the California Department of Water Resources Safe Drinking Water State Revolving Fund, issued June 12, 2001. (2) Totals may not add due to rounding.

The following table summarizes results of the Water System, together with calculation of debt service coverage of outstanding Water System obligations for the five Fiscal Years shown.

TABLE 8 CITY OF ANAHEIM WATER UTILITY FUND FINANCIAL RESULTS OF THE WATER SYSTEM ($ in Thousands) Fiscal Year Ended June 30,

2006 2007 2008 2009 2010(3) REVENUES: Sale of water: Residential $27,231 $28,423 $28,390 $29,677 $32,768 Commercial/Industrial 16,701 17,664 17,652 18,401 19,973 Other 1,705 1,734 1,684 1,722 1,718 Billed revenue from the sale of water $45,637 $47,821 $47,726 $49,800 $54,459 Change in unbilled water revenue (29) 241 212 185 (31) Total revenue from the sale of water $45,608 $48,062 $47,938 $49,985 $54,427 Rate Stabilization Account revenues ------1,300 Other revenue (including interest income) 2,296 3,533 3,114 3,054 2,038 Total gross revenues $47,904 $51,595 $51,052 $53,039 $57,765

EXPENSES (excluding depreciation and amortization): Purchased water $22,043 $22,922 $21,608 $22,558 $27,227 Treatment and pumping 4,625 5,605 6,650 6,747 6,448 Operations, maintenance and administration 13,077 15,360 13,653 11,537 12,307 Total expenses $39,745 $43,887 $41,911 $40,842 $45,982

NET REVENUES (a) $ 8,159 $ 7,708 $ 9,141 $12,197 $11,935

Senior Bond debt service requirements (b) $ 618 ------Deposits to Renewal and Replacement Account 28 21 111 242 --

SURPLUS REVENUES (c) $ 7,513 $ 7,687 $ 9,030 $11,955 $11,783

Qualified Obligations (d)(1) $ 2,886 $ 2,889 $ 2,885 $ 4,587 $ 5,219

NET REVENUES AFTER SENIOR AND PARITY DEBT SERVICE PAYMENTS $ 4,627 $ 4,798 $ 6,145 $ 7,368 $ 6,564

90165268.7 Transfers to Anaheim General Fund(2) $ (1,756) $ (1,882) $ (2,008) $ (4,062) $ (2,380) Transfers (to)/from other City funds (137 ) 80 (16 ) (938 ) 784

BALANCE FOR OTHER PURPOSES $ 2,734 $ 2,996 $ 4,121 $ 2,368 $ 4,969

Senior Bond debt service coverage (a/b) 13.2 N/A N/A N/A N/A Qualified Obligation debt service coverage (c/d) 2.6 2.7 3.1 2.6 2.3 Total debt service coverage (a/(b+d)) 2.3 2.7 3.2 2.7 2.3 ______(1) Qualified Obligations outstanding at June 30, 2010 include $4,430,000 Anaheim Public Financing Authority Revenue Bonds, Series 2004 (Water System Refunding), $48,580,000 Anaheim Public Financing Authority Revenue Bonds, Series 2008 (Water System Project) and $11,586,191 Note Payable to the California Department of Water Resources Safe Drinking Water State Revolving Fund, issued June 12, 2001. (2) Transfers of Water System funds to the City’s General Fund are made semi-annually. Under the City’s charter, annual transfers are limited to 4% of gross revenues of the Water Revenue Fund for the prior Fiscal Year. (3) Unaudited.

Water System Capital Program

The City has an on-going capital program (the “Water System Capital Program”) to construct new facilities as needed to improve Water System capacity and reliability, and to rehabilitate or replace existing facilities of the Water System, such as older water mains, valves and pressure regulation stations that have reached the end of their useful lives or are no longer capable of supplying customer needs. The Water System Capital Program follows and implements the recommendations and objectives of the City's Water System Planning Study completed in 1999.

Over the next five years, the Water System Capital Program includes completing the construction of the Nohl Canyon Tank (replacement to the Olive Hills Reservoir), and to design and construct the replacement of the Linda Vista Reservoir and Pump Station, both of which have been in service for over 40 years. Also, the City intends to complete the construction of two new wells at Anaheim Substation and at Willow Park, and design and construct a new water well at Anaheim Lake, to replace old shallow wells.

In east Anaheim, a new 1.6 million gallon water storage tank and transmission main is planned, to provide peak hour, emergency, and fire flow storage in the highest pressure zone in the Water System. Also, the City is upgrading the Parkview Pump Station and the Hidden Canyon Pump Station, to increase their pumping capacity, to meet anticipated future water demands, and increase the reliability in high elevation areas in east Anaheim. The East End Reliability Study is being completed and has identified improvements to strengthen and provide redundancy to the water supply and delivery systems for east Anaheim in the event of a prolonged outage of imported water supplies.

As part of the City’s plan to aggressively pursue new drought-proof supplies for its water supply portfolio, a water recycling facility is underway near the City Hall Complex, and another project is budgeted to construct a backbone distribution system of recycled water in the Platinum Triangle, Anaheim Resort and Canyon Business areas. Also, due to redevelopment, new land uses and higher fire flow requirements, approximately 4.5 miles of new transmission and distribution main are planned over the next five years in the downtown and west Anaheim areas to improve existing service levels and fire flows.

To implement the recommended capital projects, the total budgeted expenditures for the Water System Capital Program over the next five years are approximately $57.3 million. The City intends to fund the Water System Capital Program through a combination of 2010 Bond proceeds, Water System revenues and future bond issues. The components of the Water System Capital Program are summarized in the following table:

90165268.7 TABLE 9 Water System Capital Program Fiscal Years 2010-11 through 2014-15

Five-Year Program/Project Name Project Costs

Wells $ 4,226,000 Well at Anaheim Substation Well at Willow Park Well at Anaheim Lake Other Well Projects Pumping/Regulating Stations 3,473,000 Hidden Canyon Pump Station Upgrade Parkview Pump Station Upgrade Other Pumping/Regulating Station Projects Water Mains 20,927,000 Maychelle Dr 12” Main Hills Area Water Main R&R Peralta Hills Water Main R&R Dyke Water System R&R Other Water Main Projects Water Storage 13,824,000 Nohl Canyon Tank (OHR Replacement) Linda Vista Reservoir and Pump Station Replacement Mountain Park 1.6 MG Tank Other Water Storage Projects Other Capital 14,818,000 Recycled Water Projects East End Reliability Improvements Water System Security Improvements Water System Fiberoptics Improvements Water System SCADA Upgrade Other Capital Projects

TOTAL $57,268,000

Labor Relations

Of the Water System’s 104 employees, 4042 full-time employees are represented by the International Brotherhood of Electrical Workers (“IBEW”). The City has a current contract with IBEW through January 6, 2011. In addition to the IBEW, the Anaheim Municipal Employees Association (“AMEA”) represents three full-time employees of the Water System. The City’s contract with AMEA expires on January 7, 2011, and the parties are currently in contract negotiations. The City has not experienced any strike, work stoppage or other labor action by the Water System’s employees in over ten years.

ADEQUACY OF WATER SUPPLIES

In recent years, the City has pumped approximately 64% to 69% of its total annual water demand from the Basin, and expects groundwater from the Basin to be its primary source of water supply for the foreseeable future. The City expects the remainder of its water demands to be met by purchasing water from MWD.

90165268.7 Orange County Water District – Groundwater Basin

The following information regarding OCWD has been obtained from OCWD and sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy or completeness hereof. Additional information about OCWD may be obtained from OCWD’s website at www.ocwd.com. No information contained in such website is incorporated herein by reference.

The Orange County Water District is the agency responsible for managing the Orange County groundwater Basin, which is Anaheim’s major source of water. OCWD is governed by a ten-member board of directors, which has the power to establish and adjust the annual Basin Production Percentage, the Basin Equity Assessment and the Replenishment Assessment by a vote of eight out of ten of its directors. Each of the cities of Anaheim, Fullerton and Santa Ana has the power to appoint one director; the remaining seven directors are elected by the residents in the geographic districts composing the balance of OCWD’s boundaries.

Prior to 1968, OCWD managed the Basin from the supply side. This approach did not limit the amount of water that could be taken from the Basin by any of the groundwater producers. OCWD’s philosophy was for the Basin to provide sufficient water supply to meet demand regardless of growth, development or drought.

In 1968, OCWD obtained authorization to implement the Basin Production Percentage (the “BPP”) as another tool to manage the Basin. The BPP is defined as the proportion of total water production that can be produced from groundwater withdrawals without incurring an additional assessment, known as the Basin Equity Assessment (the “BEA”). The BPP and BEA do not result in a rigid cap on the quantity of groundwater that may be pumped, but instead create a financial disincentive to pump in excess of the BPP. A groundwater producer may in fact pump as much groundwater from the Basin as its system capacity permits, although all water pumped above the BPP is charged the additional BEA, which effectively increases its cost to the MWD Tier II rate. Despite the financial disincentive of the BEA, the fact that the City has the ability to pump as much groundwater as the Water System can accommodate provides a reliable source of alternate water supply in the event that MWD water purchases are disrupted.

For many years prior to 2004, OCWD established the Basin Production Percentage at 75%, with a goal of replenishing the Basin with sufficient quantities of water to sustain that pumping level. Continued growth and several consecutive years of below normal precipitation, however, have decreased groundwater levels significantly. As a result, OCWD developed and implemented a new Basin management strategy that began in Fiscal Year 2003-04. The goal of this strategy was to reverse the declining trend in water levels and ultimately to refill the Basin.

To achieve this goal, OCWD has reduced the BPP in recent years. Since Fiscal Year 200506, the BPP generally has ranged from 64% to 80% depending on Basin conditions. OCWD will set each future BPP at a level that corresponds to the total amount of water that it estimates will be available for recharge that year, including replenishment water purchased from MWD. As part of this process, OCWD will take into account the level of water in the Basin, as well as hydrologic and replenishment conditions.

In addition to adjusting the BPP and the BEA annually, OCWD also annually increases the pump tax or Replenishment Assessment (the “RA”), which is the cost that groundwater producers must pay to pump water from the Basin. The RA provides OCWD with the necessary revenue to construct capital improvement projects to enhance Basin production, to protect the water quality of the Basin’s supply, and to purchase replenishment water from MWD when available. The RA for Fiscal Year 2010-11 is set at $249 per acre-foot, and for Fiscal Year 2011-12 it is estimated to be approximately $250 per acre-foot. With the energy costs for pumping the groundwater added to the OCWD RA costs, the City pays approximately $314 for each acrefoot of groundwater produced.

90165268.7 OCWD’s Groundwater Replenishment System (“GWRS”) became operational in January 2008. The GWRS constitutes a “new” source of supply that will increase the reliability of replenishment water for OCWD. The GWRS can produce nearly 70 million gallons per day, or a total of 72,000 acre-feet of water per year, to recharge the Basin and to support a seawater intrusion barrier in Fountain Valley. In the year ended June In the Fiscal Year ended June 30, 2010, the GWRS produced 65,950 acre-feet of recycled water. In addition, OCWD has developed a Long-Term Facilities Plan identifying capital projects that will appropriately enhance the recharge capacity of the Basin. This plan, along with the GWRS, is expected to allow the Basin to accommodate a BPP of approximately 60% to 75% in the long term, depending on the availability of replenishment water deliveries from MWD. Due to recent imported water supply challenges encountered by MWD, replenishment water is not expected to be available during the next few years and as a result, the BPP has been and will continue to be between approximately 60% and 65%. In years when replenishment water will be available (estimated by MWD to be approximately every three out of ten years) the BPP is expected to be increased to between 70% and 75%.

Occasionally, OCWD will implement programs in cooperation with specific water agencies, including the City, to under-pump or over-pump in certain strategic locations to better address localized Basin conditions or to meet other OCWD objectives, such as refilling the Basin. For example, during Fiscal Year 2002-03, the City participated in a program to help refill the Basin by purchasing additional quantities of MWD imported water “in-lieu” of pumping that water from the Basin, thereby decreasing the Water System’s groundwater production to 68% of its total supply even though the BPP was at 75% for that Fiscal Year. As another example, during Fiscal Years 2000-01 and 2001-02, the City participated in the Coastal Pumping Transfer Program (“CPTP”) at OCWD’s request and pumped 78% of its total supply when the BPP was at 75%. The CPTP minimizes seawater intrusion to the groundwater basin by encouraging agencies along the coast to pump below the BPP, while inland agencies, such as the City, pump a corresponding amount above the BPP. These programs do not increase the City’s annual water supply costs, but provide regional benefits by purchasing surplus MWD water for recharging the groundwater basin or preventing seawater intrusion along the coast.

Metropolitan Water District of Southern California – Imported Water

The following information regarding MWD has been obtained from MWD and sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy or completeness hereof. Additional information about MWD may be obtained from MWD’s website at www.mwdh2o.com. No information contained in such website is incorporated herein by reference.

MWD is a public agency organized in 1928 by vote of the electorates of several Southern California cities, including the City, following adoption of the original Metropolitan Water District Act (the “MWD Act”) by the California Legislature. MWD is not subject to regulation by the California Public Utilities Commission, although its enabling statute is subject to amendment by the California Legislature. MWD currently has full authority to set rates and policies as necessary to provide a dependable water supply to Southern California. MWD provides nearly between 40% and 60% in any given year of the water used in its service area, which consists of approximately 5,200 square miles in portions of Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura Counties. MWD serves a population of almost 19 million people.

MWD is governed by a 37-member Board of Directors consisting of at least one representative from each of the 26 member public agencies, including the City, that comprise the MWD. Each member public agency is entitled to have at least one representative on the Board, plus an additional representative for each full 5% of its assessed valuation of property in MWD’s service area. Accordingly, from time to time, the Board may have more than 37 members. Representation and voting rights are based upon each agency’s assessed valuation.

MWD Water Supply. MWD’s two primary sources of water are the State Water Project and the Colorado River.

90165268.7 The State Water Project is owned by the State and operated by the State Department of Water Resources (“DWR”). The State Water Project transports water available from the San Francisco Bay/Sacramento-San Joaquin Delta (the “Bay/Delta”) to Southern California via the California Aqueduct. MWD contracted with DWR in the 1960s (as amended, the “State Water Contract”) for a share of the State Water Project water (approximately 46%). The State Water Contract, under a 100% allocation, provides MWD 1,911,500 acre-feet of water. Deliveries from the State Water Project to MWD over the past eight years (2002 through 2009), including water from water transfer, groundwater banking and exchange programs described below, varied from a low of 908,000 acre-feet in calendar year 2009 to a high of 1,800,000 acre-feet in 2004. (An acre-foot is the amount of water that will cover one acre to a depth of one foot and equal’s approximately 326,000 gallons.) For calendar year 2010, DWR’s initial allocation estimate to State Water Project contractors was set at 5% of contracted amounts. The estimate was adjusted upward during the winter and spring and on June 22, 2010, DWR adjusted its allocation to 50% of contracted amounts, reflecting late spring storms, a return to normal precipitation and reservoir levels and an above normal Sierra snowpack. For MWD, the revised allocation provides 955,750 acre- feet.

Management of the availability of State Water Project supplies through water marketing and groundwater banking plays an important role in meeting California water needs. MWD is participating in groundwater banking programs, including the Arvin-Edison/MWD Water Management Program, the Semitropic/MWD Groundwater Storage and Exchange Program and the California Aqueduct Dry-Year Transfer Program. MWD also has been negotiating, and will continue to pursue, water purchase, storage and exchange programs with other agencies in the Sacramento and San Joaquin Valleys. These programs involve the storage of both State Water Project supplies and water purchased from other sources to enhance MWD’s dry-year supplies and the exchange of normal year supplies to enhance MWD’s water reliability and water quality, in view of dry conditions and potential impacts from recent Endangered Species Act litigation.

The State Water Resources Control Board (“SWRCB”) is the agency responsible for setting water quality standards and administering water rights throughout California. Decisions of the SWRCB can affect the availability of water to MWD and other users of State Water Project water. The SWRCB exercises its regulatory authority over the Bay/Delta by means of public proceedings leading to regulations and decisions. These include the Bay/Delta Water Quality Control Plan (“WQCP”), which establishes the water quality standards and proposed flow regime of the estuary, and water rights decisions, which assign responsibility for implementing the objectives of the WQCP to users throughout the system by adjusting their respective water rights. The SWRCB is required by law to periodically review its WQCP to ensure that it meets the changing needs of this complex system.

To obtain its Colorado River supply, MWD has a permanent service contract with the United States Secretary of the Interior for delivery of water via the Colorado River Aqueduct. California is apportioned the use of 4.4 million acre-feet of water from the Colorado River each year plus one-half of any surplus that may be available for use collectively in Arizona, California and Nevada. In addition, California has historically been allowed to use Colorado River water apportioned to but not used by Arizona and Nevada. Under the priority system that governs the distribution of Colorado River water made available to California, MWD holds the fourth priority right to 550,000 acre-feet per year. This is the last priority within California’s basic apportionment of 4.4 million acre-feet. In addition, MWD holds the fifth priority right to 662,000 acre-feet of water, which is in excess of California’s basic apportionment. Until 2003, MWD had been able to take full advantage of its fifth priority right entitlement as a result of the availability of surplus water and unused water. However, Arizona and Nevada increased their use of water from the Colorado River, significantly reducing unused apportionment available for California since 2002. In addition, a severe drought in the Colorado River Basin reduced storage in system reservoirs, such that MWD stopped taking surplus deliveries in 2003 in an effort to mitigate the effects of the drought. If surplus and/or unused water is not available in future years, Colorado River water under MWD’s fifth priority could be limited or unavailable. See “– Risks to Water Supply” below. MWD has taken steps to augment its share of Colorado River water through agreements with other agencies that have rights to use such water.

90165268.7 MWD has entered into agreements with the Imperial Irrigation District, Central Arizona Water Conservation District and Palo Verde Irrigation District and is seeking additional agreements with other agencies to reduce their diversions from the Colorado River, thereby augmenting MWD’s available supply.

In January 2001, the Secretary of the Interior adopted guidelines (the “Interim Surplus Guidelines”) for use through 2016 in determining if there is surplus Colorado River water available for use in California, Arizona and Nevada. The purpose of the Interim Surplus Guidelines is to provide a greater degree of predictability with respect to the availability and quantity of surplus water through 2016. The Interim Surplus Guidelines were later extended through 2026.

Under the Interim Surplus Guidelines, MWD initially expected to divert up to 1.25 million acre- feet of Colorado River water annually under foreseeable runoff and reservoir storage scenarios from 2004 through 2016. However, an extended drought in the Colorado River Basin reduced these initial expectations. From 2000 to 2004, snowpack and runoff in the Colorado River Basin were well below average. Although runoff was slightly above average in 2005, the runoff in 2006 and 2007 was again below average, making 2000 through 2007 the driest eight-year period on record. Although 2008 and 2009 runoff was near normal, combined storage in Lake Mead and Lake Powell remains at 50% of capacity. MWD’s initial 2010 diversion approval from the Bureau of Reclamation totaled 935,700 acre- feet plus any unused Priority 1 through 3 water. MWD anticipates its ultimate 2010 diversion approval from the Bureau of Reclamation will exceed 1 million acre-feet.

The Southern Nevada Water Authority (“SNWA”) and MWD entered into an Agreement Relating to Implementation of Interim Colorado River Surplus Guidelines on May 16, 2002, in which SNWA and MWD agreed on the allocation of unused Arizona apportionment and on the priority of SNWA for interstate banking in Arizona. SNWA and MWD entered into a storage and interstate release agreement on October 21, 2004. Under this program, Nevada can request MWD to store unused Nevada apportionment of Colorado River water in California. The amount of water stored through 2009 under this agreement was 70,000 acre-feet. In subsequent years, Nevada may request recovery of this stored water. As part of a recently executed amendment, it is expected that Nevada will not request return of this water until 2022. The stored water provides flexibility to MWD for blending Colorado River water with State Water Project water and improves near-term water supply reliability.

MWD Rates. MWD water rates are established by majority vote of the MWD board in March of each year, after a public hearing held in February. Rates are not subject to regulation by any local, state or federal agency. Under the MWD Act, MWD must, so far as practicable, fix such rates for water as will result in revenue which, together with revenue from any water standby or availability of service charge or assessment, will pay the operating expenses of MWD, provide for repairs and maintenance, provide for payment of the purchase price or other charges for property or services or other rights acquired by MWD and provide for the payment of the interest and principal of the bonded debt of MWD.

MWD’s current rate structure became effective in January 2003. In October 2002, PWP entered into a voluntary purchase order contract with MWD, whereby PWP will be able to purchase up to 90% of its “initial base demand” at the “Tier 1” rate. The “initial base demand” is defined as the maximum firm demand (not including water delivered for in-lieu groundwater storage programs) for MWD water experienced since Fiscal Year 1989. PWP estimates its “initial base demand” to be 23,520 acre-feet/year. This means that with the purchase order contract, PWP may currently purchase up to 21,170 acre- feet/year of water at the Tier 1 rate. In the future, “base demand” is defined as either the agency’s “initial base demand” or the rolling 10-year average of firm demands for MWD water, whichever is higher. Any water purchased from MWD in excess of 90% of the “base demand” must be purchased at the higher Tier 2 rate.

The following table shows water rates under MWD’s current rate structure. This table includes rates effective January 1, 2009, January 1, 2010 and to become effective January 1, 2011. The City purchases both treated and untreated water from MWD.

90165268.7

TABLE 10 MWD WATER RATES (Dollars per Acre-Foot)

Rate Category 2009 Rates(1) 2010 Rates 2011 Rates Tier 1 Tier 2 Tier 1 Tier 2 Tier 1 Tier 2

Supply Rate $101 $250 $101 $280 $104 $280 Delta Supply Surcharge 69 69 51 System Access Rate 154 154 154 154 204 204 Water Stewardship Rate 41 41 41 41 41 41 System Power Rate 119 119 119 119 127 127 Untreated Full Service $484 $564 $484 $594 $527 $652

Treatment Surcharge $217 $217 $217 $217 $217 $217 Treated Full Service $701 $781 $701 $811 $744 $869 ______(1) Rates became effective September 1, 2009. Source: MWD.

The Tier 1 and Tier 2 Water Supply Rates are designed to recover MWD’s water supply costs. The Tier 2 Supply Rate is designed to reflect MWD’s costs of acquiring new supplies. MWD member agencies are charged the Tier 1 or Tier 2 Water Supply Rate for water purchases, as described above.

The System Access Rate is intended to recover a portion of the costs associated with the conveyance and distribution system, including capital, operating and maintenance costs. All users (including member agencies and third-party wheeling entities of the MWD system) pay the System Access Rate.

The Water Stewardship Rate is charged on a dollar per acre-foot basis to collect revenues to support MWD’s financial commitment to conservation, water recycling, groundwater recovery and other water management programs approved by MWD’s Board. The Water Stewardship Rate is charged for every acre-foot of water conveyed by MWD.

The System Power Rate is charged on a dollar per acre-foot basis to recover the cost of power necessary to pump water from the State Water Project and Colorado River through the conveyance and distribution system for MWD’s member agencies. The System Power Rate is charged for all MWD supplies. Entities wheeling water will continue to pay the actual cost of power to convey water on the State Water Project, the Colorado River Aqueduct or the MWD distribution system, whichever is applicable.

MWD charges a treatment surcharge on a dollar per acre-foot basis for treated deliveries. The treatment surcharge is set to recover the cost of providing treated water service, including capital and operating cost.

The Delta Supply Surcharge is applicable to (among other rates) all Tier 1 untreated and treated water rates and reflects the additional supply costs that MWD faces along with other costs due to the pumping restrictions on the State Water Project.

Additional charges for the availability of MWD’s water are: the Readiness-to-Serve Charge and the Capacity Charge.

90165268.7 The Readiness-to-Serve Charge is a variable annual charge of approximately $80 million that is divided proportionally among all agencies that receive water from MWD. This money is used by MWD to recover costs associated with standby and peak conveyance capacity and system emergency storage capacity. Currently, PWP’s share of MWD’s annual readiness to serve charge is about 1%.

The Capacity Charge is a fixed annual charge, which is based on the capacity that is requested by the member agency. This charge will be used by MWD to recover the cost of providing peak capacity within the distribution system. Effective January 1, 2010, the capacity charge was $7,200/ per cfs of maximum daily flow. The capacity charge is scheduled to increase to $7,400 per cfs effective January 1, 2012.

MWD estimates that it can meet its member agencies’ supplemental demands through the year 2025, even under a repeat of the worst single-year and multipleyear drought events. MWD has committed to make additional resource and infrastructure improvements in order to maintain reliability and high water quality for at least the next 25 years, as demands grow. MWD’s current practices of diversifying water supplies and securing supply reserves allow MWD and its member agencies to adjust to changes in demands and supplies and maintain a high degree of reliability. MWD’s storage capacity, which includes reservoirs, conjunctive use and other groundwater and surface storage accounts delivered through the State Water Project or Colorado River Aqueduct, has increased to 5.62 million acre-feet. In 2010, approximately 626,000 acre-feet of stored water is emergency storage that is reserved for use in the event of supply disruption from earthquakes or similar emergencies, as well as extended drought. As of January 1, 2010, MWD had approximately 1.64 million acre-feet of water in storage.

The MWD Act provides a preferential entitlement for the purchase of water by each of the MWD member agencies. This preferential right is based on the ratio of all payments made to MWD by each agency compared to total payments made by all member agencies on tax assessments and otherwise, except purchases of water, toward the capital cost and operating expenses of MWD. Historically MWD has not used this criterion in allocating water. The MWD Act provides that water surplus to MWD’s needs for domestic and municipal uses may be sold for other beneficial uses.

MWD Scheduling and Operations. MWD member agencies request water from MWD at various delivery points within MWD’s system and pay for such water at uniform rates established by the MWD Board for each class of service. No member is required to purchase water from MWD, but all member agencies are required to pay readiness-to-serve charges (as described below) whether or not they purchase water from MWD. The current rate structure provides for a member agency’s agreement to purchase water from MWD by means of a voluntary purchase order. In consideration of executing its purchase order, the member agency is entitled to purchase a greater amount of water at the lower “Tier 1 Water Supply Rate”, as described under “ – MWD Rates” above. Under each purchase order, a member agency agrees to purchase, over the ten-year term of the contract, an amount of water equal to at least 60% of its highest firm demand for MWD water in any Fiscal Year from 1989-90 through 2001-02 multiplied by ten. MWD Member agencies are allowed to vary their purchases from year to year, but a member agency will be obligated to pay for the full amount committed under the purchase order, even if it does not take its full purchase order commitment by the end of the ten-year period.

Water is delivered to the member agencies on demand and is metered at the point of delivery. Member agencies are billed monthly and a late charge of 1% of the delinquent payment is assessed for delinquent payments not exceeding five business days. A late charge of 2% of the amount of the delinquent payment is charged for a payment that is delinquent for more than five business days for each month or portion of a month that the payment remains delinquent. MWD has the authority to suspend service to any agency delinquent for more than 30 days. Delinquencies have been rare; in such instances late charges have been collected. No service has been suspended because of delinquencies.

Drought and Resources Management Plans. Possible causes of water supply deficits are droughts, failures of major water transmission facilities and other adverse events. MWD’s current

90165268.7 approach to managing water shortages has evolved from its experiences during the droughts of 1976-77 and 1987-92 into the Water Surplus and Drought Management Plan (“WSDM Plan”).

The WSDM Plan splits resource actions into two major categories: Surplus Actions and Shortage Actions. The Surplus Actions store surplus water, first inside then outside the region. The Shortage Actions of the WSDM Plan are split into three subcategories: Shortage, Severe Shortage and Extreme Shortage. Each category has associated actions that could be taken as a part of the response to prevailing shortage conditions. Conservation and water efficiency programs are part of MWD’s resource management strategy through all categories.

In August 2007, MWD launched a significant water conservation outreach and public education effort for voluntary water conservation, promotion of water-saving rebates and incentives and education of the public about the uncertainties of future water supplies. The campaign was intensified following MWD’s declaration of a regional Water Supply Alert on June 10, 2008 and with the February 2009 declaration of statewide water emergency by the Governor of California. MWD urged cities, counties and water districts in its service area to achieve extraordinary conservation by adopting and enforcing drought ordinances, accelerating public outreach and conservation messaging, and developing additional local supplies. MWD’s Board also authorized agreements with public agencies to provide financial incentives for water saving measures, ranging from $195 to $500 per acre-foot of potable water saved, up to a maximum of $15 million for the Public Sector Water Efficiency Partnership Demonstration Program. This program aims to continue public support for conservation through public agency accomplishments and efforts.

MWD’s plan for allocation of water supplies in the event of shortage (the “MWD Water Supply Allocation Plan”) allocates MWD’s water supplies among its member agencies, based on the principles contained in the WSDM Plan, to reduce water use and drawdowns from water storage reserves. The Water Supply Allocation Plan was approved by the Board in February 2008. The Water Supply Allocation Plan provides a formula for equitable distribution of available supplies in case of extreme water shortages within MWD’s service area. On April 14, 2009, MWD’s Board adopted a resolution declaring a regional water shortage and implementing the Water Supply Allocation Plan, effective July 1, 2009. The MWD Board set the “Regional Shortage Level” at Water Supply Allocation Plan Level 2, which required reduction of regional water use by approximately 10% and resulted in the sale of about 1.89 million acre-feet of MWD water in Fiscal Year 2009-10. The final 2009-10 allocation for each member agency is dependent upon its local production during the allocation year and is currently being determined through a formal local supply certification process with the member agencies. On April 13, 2010, the MWD Board adopted a resolution recognizing the continuing regional water shortage and again setting the Regional Shortage Level at Water Supply Allocation Plan Level 2, which sustains the prior year’s regional water use reduction of approximately 10% and allows for the sale of about 1.96 million acre-feet of MWD water in Fiscal Year 2010-11.

Delivery within a member agency of more than its allocated amount of MWD supplies will subject the member agency to a penalty of one to four times MWD’s full service rate for untreated Tier 2 water, depending on how much the member agency’s water use for the twelve-month period beginning on July 1 exceeds its allocated amount. Any penalties collected may be rebated to the member agency that paid them to fund water management projects.

The MWD Act provides a preferential entitlement for the purchase of water by each of the MWD member agencies. This preferential right is based on the ratio of all payments made to MWD by each agency compared to total payments made by all member agencies on tax assessments and otherwise, except purchases of water, toward the capital cost and operating expenses of MWD. Historically MWD has not used this criterion in allocating water. The MWD Act provides that water surplus to MWD’s needs for domestic and municipal uses may be sold for other beneficial uses.

90165268.7 The City’s Water Use Efficiency Programs

Even though the City has developed long-term reliable sources of water supply, it is still actively promoting water use efficiency throughout Anaheim. The City is a signatory to the Memorandum of Understanding regarding Urban Water Conservation in California and is, therefore, a member of the California Urban Water Conservation Council. As such, the City has long-term plans to assure a reliable water supply by reducing water demand by 15% by the year 2020 (using a base year of 1993) through the aggressive implementation of water use efficiency programs.

The City began designing and implementing water use efficiency programs in 1992. Some of the more significant programs include financial incentives to install ultra-low-flush toilets and water efficient washing machines, water use surveys to assist commercial, industrial and institutional customers in identifying methods to reduce water use, and financial incentives to assist those customers implement the recommended improvements. City staff estimates that the implementation of these programs has reduced water demand to date by approximately seven percent.

Given the flexibility in the amount of water that the City can produce from the Orange County groundwater Basin, the projected availability of supplemental water from MWD and the City’s water use efficiency programs currently in place, the City believes that there is an adequate water supply for the residents and businesses of Anaheim for the next 20 years.

CONSTITUTIONAL AND CHARTER LIMITATIONS

Constitutional Limitations on Governmental Spending

Article XIIIB. Under Article XIIIB of the California Constitution, state and local government entities have an annual “appropriations limit” which limits their ability to spend certain moneys called “appropriations subject to limitation,” which consist of tax revenues, certain state subventions and certain other moneys, including user charges to the extent they exceed the costs reasonably borne by the entity in providing the service for which it is levying the charge. The City believes that the water service and use charges imposed by the City do not exceed the costs it reasonably bears in providing water service. In general terms, the “appropriations limit” is to be based on certain 1978/79 expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population, and services provided by these entities. Among other provisions of Article XIIIB, if an entity’s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.

Article XIIIC and Article XIIID. Proposition 218, a State ballot initiative known as the “Right to Vote on Taxes Act,” was approved by the voters on November 5, 1996. The initiative added Articles XIIIC and XIIID to the California Constitution, creating additional requirements for the imposition by most local governments of “general taxes,” “special taxes,” “assessments,” “fees,” and “charges.” Proposition 218 became effective, pursuant to its terms, as of November 6, 1996, although compliance with some of its provisions was deferred until July 1, 1997, and certain of its provisions purport to apply to any tax imposed for general governmental purposes (i.e., “general taxes”) imposed, extended or increased on or after January 1, 1995 and prior to November 6, 1996.

Article XIIID imposes substantive and procedural requirements on the imposition, extension or increase of any “fee” or “charge” subject to its provisions. A “fee” or “charge” subject to Article XIIID includes any levy, other than an ad valorem tax, special tax or assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership. Article XIIID prohibits, among other things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee or charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee or charge by a majority of owners of the parcels upon which the fee or charge is to be imposed. Except for fees and charges for water, sewer and refuse collection services, the approval of a majority of the property owners subject to the fee or charge, or at the option of the agency, by a two-

90165268.7 thirds vote of the electorate residing in the affected area, is required within 45 days following the public hearing on any such proposed new or increased fee or charge. The California Supreme Court’s decisions in Richmond v. Shasta Community Services District, 32 Cal.4th 409 (2004) (“Richmond”), and BighornDesert View Water Agency v. Verjil, 39 Cal.4th 205 (2006) (“Bighorn”) have clarified some of the uncertainty surrounding the applicability of Section 6 of Article XIIID to service fees and charges. In Richmond, the Shasta Community Services District charged a water connection fee, which included a capacity charge for capital improvements to the water system and a fire suppression charge. The Court held that both the capacity charge and the fire suppression charge were not subject to Article XIIID because a water connection fee is not a property-related fee or charge because it results from the property owner’s voluntary decision to apply for the connection. In both Richmond and Bighorn, however, the Court stated that a fee for ongoing water service through an existing connection is imposed “as an incident of property ownership” within the meaning of Article XIIID, rejecting, in Bighorn, the water agency’s argument that consumption-based water charges are not imposed “as an incident of property ownership” but as a result of the voluntary decisions of customers as to how much water to use.

Article XIIID also provides that “standby charges” are considered “assessments” and must follow the procedures required for “assessments” under Article XIIID and imposes several procedural requirements for the imposition of any assessment, which may include (1) various notice requirements, including the requirement to mail a ballot to owners of the affected property; (2) the substitution of a property owner ballot procedure for the traditional written protest procedure, and providing that “majority protest” exists when ballots (weighted according to proportional financial obligation) submitted in opposition exceed ballots in favor of the assessments; and (3) the requirement that the levying entity “separate the general benefits from the special benefits conferred on a parcel” of land. Article XIIID also precludes standby charges for services that are not immediately available to the parcel being charged.

Article XIIID provides that all existing, new or increased assessments are to comply with its provisions beginning July 1, 1997. Existing assessments imposed on or before November 5, 1996, and “imposed exclusively to finance the capital costs or maintenance and operations expenses for [among other things] water” are exempted from some of the provisions of Article XIIID applicable to assessments.

Article XIIIC extends the people’s initiative power to reduce or repeal existing local taxes, assessments, fees and charges. This extension of the initiative power is not limited by the terms of Article XIIIC to fees, taxes, assessment fees and charges imposed after November 6, 1996 and absent other authority could result in retroactive reduction in any existing taxes, assessments, fees or charges. In Bighorn, the Court concluded that under Article XIIIC local voters by initiative may reduce a public agency’s water rates and delivery charges. The Court noted, however, that it was not holding that the authorized initiative power is free of all limitations, stating that it was not determining whether the electorate’s initiative power is subject to the public agency’s statutory obligation to set water service charges at a level that will “pay the operating expenses of the agency, . . . provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due.”

Future Initiatives. Articles XIIIB, XIIIC and XIIID were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time other initiative measures could be adopted, further affecting City revenues or the City’s ability to expend revenues. The nature and impact of these measures on the operation of the Water System cannot be anticipated by the City.

City Charter Revenue Bond Limitations

Section 1210 of the Charter of the City of Anaheim (the “Charter”) provides that bonds of the City that are payable out of revenues specified in such bonds may be issued when the City has established by ordinance a procedure for the issuance of such bonds, provided that such bonds cannot be issued

90165268.7 without the assent of a majority of the voters voting upon the proposition for the issuance of such bonds at an election at which such proposition has been submitted to the qualified voters. The Charter also provides for the issuance of certain revenue anticipation notes to be issued in anticipation of any water revenue bonds authorized by the voters.

In addition, the Charter makes provision for the issuance of certain revenue anticipation notes in anticipation of the receipt of revenues of the Water System; provided that the aggregate principal amount of such revenue anticipation notes outstanding in accordance with their terms at any one time cannot exceed an amount equal to 25% of the gross revenue earned by the Water System during the immediately preceding Fiscal Year as set forth in the audited financial statements of the Water System for such year.

There are no authorized but unissued City bonds (also defined herein as “Senior Bonds”) payable from the revenues of the Water System.

RISK FACTORS

Payment of principal of and interest on the 2010 Bonds depends primarily upon the revenues derived from operation of the Water System. Some of the events which could affect the revenues received by the Water System, as well as issues that could affect the availability of moneys in any reserves, are set forth below. The following discussion of risks is not meant to be an exhaustive list of the risks associated with the purchase of the 2010 Bonds and the order in which the risks are discussed does not necessarily reflect the relative importance of the various risks.

Limited Obligations

The 2010 Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Project Revenues. Neither the full faith and credit nor the taxing power of the City is pledged to the payment of the Purchase Payments or the principal of, premium, if any, or interest on the 2010 Bonds. No tax or other source of funds, other than the Project Revenues, is pledged to pay the principal of, premium, if any, or interest on the 2010 Bonds. Neither the payment of the principal of, nor the interest on, the 2010 Bonds constitutes a debt, liability or obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which it has levied or pledged any form of taxation.

System Operation and Expenses

There can be no assurance that the City’s expenses for the Water System will be consistent with the descriptions in this Official Statement. Changes in technology, changes in quality standards, availability and cost of water, loss of large customers, increased or decreased development, increases in the cost of operation and/or other expenses could require increases in rates or charges in order to comply with the City’s rate covenant in the Installment Purchase Agreement. See “RISK FACTORS – Regulatory Risk” below.

Limitations on Revenues

The ability of the City to comply with its covenants under the Installment Purchase Agreement and to generate Surplus Revenues sufficient to pay the required Purchase Payments (which are needed to pay principal of and interest on the 2010 Bonds) may be adversely affected by actions and events outside of the control of the City and may be adversely affected by actions taken (or not taken) by voters, property owners, taxpayers or persons obligated to pay assessments, fees and charges. See “CONSTITUTIONAL AND CHARTER LIMITATIONS.” Furthermore, the remedies available to the owners of the 2010 Bonds upon the occurrence of an event of default under the Indenture are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain.

90165268.7 No Debt Service Reserve Account

The Authority is not funding a debt service reserve account for the 2010 Bonds. The funds on deposit in the debt service reserve accounts for the Authority’s existing Qualified Obligations are not available to pay debt service on the 2010 Bonds.

Casualty Risk

Any natural disaster or other physical calamity, including earthquake, may have the effect of reducing Surplus Revenues through damage to the Water System or adversely affecting the economy of the surrounding area. The Installment Purchase Agreement requires the City to maintain such insurance as is customarily maintained by similar utilities systems with respect to works and properties of like character against accident to, loss of or damage to such works or properties, but there can be no assurance that losses in excess of the insured amount will not occur.

Regulatory Risk

Laws and regulations governing the diversion and storage of surface waters and water treatment are enacted and promulgated by government agencies on the federal, State and local levels. Compliance with these laws and regulations may be costly.

Although the City has covenanted in the Installment Purchase Agreement to prescribe, revise and collect revenues for the Water System during each Fiscal Year which are at least sufficient to pay operating and maintenance expenses, to pay required debt service and meet certain coverage requirements, no assurance can be given that the cost of compliance with such laws and regulations will not adversely affect the ability of the City to generate Surplus Revenues in the amounts required by the Installment Purchase Agreement to pay all 2010 Purchase Payments (which are needed to pay debt service on the 2010 Bonds).

Limited Recourse on Default

If the City defaults under the Installment Purchase Agreement, the Trustee, as assignee of the Authority pursuant to the Indenture, may exercise any right to enforce the Installment Purchase Agreement provided therein or by law. In the event of such default, the Installment Purchase Agreement does not provide any remedy of acceleration of the 2010 Purchase Payments due over the term of the Installment Purchase Agreement, and the Trustee is not empowered to sell the Water System or any portion thereof and use the proceeds of such sale to prepay any obligations in respect of the 2010 Bonds. Any such suit for money damages would be subject to limitations on legal remedies against cities in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest.

THE AUTHORITY

The Authority was created pursuant to a Joint Exercise of Powers Agreement, dated January 28, 1992 (the “Joint Powers Agreement”), by and between the City and the Anaheim Redevelopment Agency. Pursuant to the Joint Powers Agreement, as amended, the Authority may enter into agreements to acquire, construct, maintain, improve, renovate, repair and expand certain real property, buildings, works and improvements and acquire, maintain, lease and operate certain personal property and equipment. The Authority also has the authority to issue bonds and incur indebtedness.

The members of the City Council serve as the members of the Board of Directors of the Authority. See “APPENDIX A—GENERAL INFORMATION REGARDING THE CITY—City Council.”

90165268.7 LITIGATION

At the time of delivery and payment for the 2010 Bonds, the City Attorney, acting as City Attorney and Authority Counsel, will certify that to the best of her actual knowledge, there is no action, suit, proceeding, inquiry or investigation at law or in equity or before or by any court, public board or body pending or, to the knowledge of the City Attorney, threatened, questioning (i) the corporate existence of the Authority, or the title of the officers of the Authority to their respective offices, (ii) the validity of the 2010 Bonds or the power and authority of the Authority to issue the 2010 Bonds, (iii) the validity of the Installment Purchase Agreement, the Indenture or the Charter (as it relates to the 2010 Bonds) or (iv) the authority of the City to prescribe, revise and collect rates as provided in the Installment Purchase Agreement.

The City has pending against it a number of claims and lawsuits arising out of matters usually incidental to the operation of a utility such as the Water System. The City is of the view that, if determined adversely to the City, the actual damage awards likely to be ultimately paid with respect to such claims and lawsuits would not, in the aggregate, materially impair the City’s ability to make 2010 Purchase Payments when due.

CREDIT RATINGS

Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings (“Fitch”) have assigned ratings of “____” and “____,” respectively, to the 2010 Bonds. No application has been made to any other rating agency in order to obtain additional ratings on the 2010 Bonds. Any explanation as to the significance of the above ratings may be obtained from S&P or Fitch.

The above described ratings are not a recommendation to buy, sell or hold the 2010 Bonds, and such ratings may be subject to revision or withdrawal at any time by S&P or Fitch. Any downward revision or withdrawal of the ratings may have an adverse effect on the market price of the 2010 Bonds.

TAX MATTERS

2010-A Bonds

The Internal Revenue Code of 1986 (the “Code”) imposes certain requirements that must be met subsequent to the issuance and delivery of the 2010-A 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 income tax purposes. Noncompliance with such requirements could cause the interest on the 2010-A 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 2010-A Bonds. Each of the Authority and the City has covenanted to comply with each applicable requirement of the Code necessary to maintain the exclusion pursuant to section 103(a) of the Code of the interest on the 2010-A Bonds from the gross income of the owners thereof for federal income tax purposes.

In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel to the Authority, under existing law interest on the 2010-A Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenants, interest on the 2010-A Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Bond Counsel are of the further opinion that the 2010-A Bonds are not “specified private activity bonds” within the meaning of section 57(a)(5) of the Code and, therefore, that the interest on the 2010-A Bonds is not treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code; however, the receipt or accrual of interest on the 2010- A Bonds owned by a corporation may affect the computation of its alternative minimum taxable income, upon which the alternative minimum tax is imposed, to the extent that such interest is taken into account in determining the adjusted current earnings of that corporation (75% of the excess, if any, of such adjusted current earnings over the alternative minimum taxable income being an adjustment to alternative

90165268.7 minimum taxable income (determined without regard to such adjustment or to the alternative tax net operating loss deduction)).

To the extent that a purchaser of a 2010-A Bond acquires a 2010-A Bond at a price that exceeds the aggregate amount of payments (other than payments of qualified stated interest within the meaning of section 1.1273-1 of the Treasury Regulations) to be made on the 2010-A Bond (determined, in the case of a callable 2010-A Bond, under certain assumptions specified in Code), such excess will constitute “bond premium” under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a tax-exempt obligation must be amortized on a constant yield, economic accrual, basis; the amount of premium so amortized will reduce the owner’s basis in such obligation for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. The rate and timing of the amortization of the bond premium and the corresponding basis reduction may result in an owner realizing a taxable gain when a 2010-A Bond owned by such owner is sold or disposed of for an amount equal to or in some circumstances even less than the original cost of the 2010-A Bond to the owner. Any person considering purchasing a 2010- A Bond at a price that includes bond premium should consult his or her tax advisors respect to the amortization and treatment of such bond premium, including, but not limited to, the calculation of gain or loss upon the sale, redemption or other disposition of such 2010-A Bonds.

The excess, if any, of the stated redemption price at maturity of 2010-A Bonds of a maturity over the initial offering price to the public of the 2010-A Bonds of that maturity set forth on the inside cover of this Official Statement is “original issue discount.” Such original issue discount accruing on a 2010-A Bond is treated as interest excluded to the same extent as would be interest on such 2010-A Bonds from gross income of the owner thereof for federal income tax purposes and is exempt from California personal income. Original issue discount on any 2010-A Bond purchased at such initial offering price and pursuant to such initial offering will accrue on a semiannual basis over the term of the 2010-A Bond on the basis of a constant yield method and, within each semiannual period, will accrue on a ratable daily basis. The amount of original issue discount on such a 2010-A Bond accruing during each period is added to the adjusted basis of such 2010-A Bond to determine taxable gain upon disposition (including sale, redemption or payment on maturity) of such 2010-A Bond. The Code includes certain provisions relating to the accrual of original issue discount by a purchaser of a 2010-A Bond who purchases such 2010-A Bonds other than at its initial offering price and pursuant to the initial offering: these provisions are not addressed herein and are not within the scope of the opinion of Bond Counsel.

Any person considering purchasing a 2010-A Bond of a maturity having original issue discount should consult his or her own tax advisors with respect to the tax consequences of ownership of 2010-A Bonds with original issue discount, including the treatment of purchasers who do not purchase in the original offering and at the original offering price, the allowance of a deduction for any loss on a sale or other disposition, and the treatment of accrued original issue discount on such 2010-A Bonds under federal individual and corporate alternative minimum taxes.

Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance of the 2010-A Bonds may affect the tax status of interest on the 2010-A Bonds or the tax consequences of the ownership of the 2010-A Bonds. No assurance can be given that pending or future legislation, or amendments to the Code, if enacted into law, or any proposed legislation or amendments to the Code, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of interest on the 2010-A Bonds from personal income taxation by the State of California or of the exclusion of the interest on the 2010-A Bonds from the gross income of the owners thereof for federal income tax purposes. Furthermore, Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the 2010-A Bonds, or the interest thereon, if any action is taken with respect to the 2010-A 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 Bond Counsel.

Although Bond Counsel is of the opinion that interest on the 2010-A Bonds is exempt from personal income tax by the State of California and interest on the 2010-A Bonds is excluded from the

90165268.7 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 2010-A 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 2010-A 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 2010-A Bonds and the Code contains additional limitations on interest deductions applicable to financial institutions that own tax-exempt obligations (such as the 2010-A 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% of the sum of certain items, including interest on the 2010-A Bonds, (iii) interest on the 2010-A 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 2010-A 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 2010-A Bonds, and (vi) under section 32(i) of the Code, receipt of investment income, including interest on the 2010-A Bonds, may disqualify the recipient thereof from obtaining the earned income credit. Bond Counsel has expressed no opinion regarding any such other tax consequences.

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 City and the Authority described above. No ruling has been sought from the Internal Revenue Service (the “Service”) with respect to the matters addressed in the opinion of Bond Counsel, and 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 2010-A Bonds is commenced, under current procedures the Service is likely to treat the Authority 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 2010-A Bonds, the Authority may have different or conflicting interests from the owners of the 2010-A Bonds. Further, the disclosure of the initiation of an audit of the 2010-A Bonds could adversely affect the value and liquidity of the 2010-A Bonds during the pendency of the audit regardless of the ultimate outcome.

2010-B Bonds

State Tax Exemption. In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, under existing law, interest on the 2010-B Bonds is exempt from personal income taxes of the State of California.

Federal Income Tax Considerations. The following is a general summary of certain United States federal income tax consequences of the purchase and ownership of the 2010-B Bonds. The discussion is based upon laws, Treasury Regulations, rulings and decisions now in effect, all of which are subject to change (possibly, with retroactive effect) or possibly differing interpretations. No assurances can be given that future changes in the law will not alter the conclusions reached herein. The Authority makes no representation or covenant for the benefit of the Owners of the 2010-B Bonds as to the present or future qualification of the 2010-B Bonds as “build America bonds” within the meaning of section 54AA of the Code.

The discussion below does not purport to deal with United States federal income tax consequences applicable to all categories of investors. Further, this summary does not discuss all aspects of United States federal income taxation that may be relevant to a particular investor in the 2010-B Bonds in light of the investor’s particular personal investment circumstances or to certain types of investors subject to special treatment under United States federal income tax laws (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, and persons who have hedged the risk of

90165268.7 owning any 2010-B Bonds). This summary is therefore limited to certain issues relating to initial investors who will hold the 2010-B Bonds as “capital assets” within the meaning of section 1221 of the Code, and acquire such 2010-B Bonds for investment and not as a dealer or for resale. This summary addresses certain federal income tax consequences applicable to initial investors of the 2010-B Bonds who are United States persons within the meaning of section 7701(a)(30) of the Code (“United States persons”) and, except as discussed below, does not address any consequences to persons other than United States persons.

Prospective investors should note that no rulings have been or will be sought from the IRS with respect to any United States federal income tax consequences, including those discussed below, and no assurance can be given that the IRS will not take contrary positions.

INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE 2010-B BONDS.

Internal Revenue Service Circular 230 Notice.

Investors should be aware that:

(i) the discussions with respect to United States federal tax matters in this Official Statement are not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer;

(ii) such discussions were written to support the promotion or marketing (within the meaning of IRS Circular 230) of the transactions or matters addressed by such discussions; and

(iii) in making his or her decision whether to invest in the 2010-B Bonds, each taxpayer should seek advice based on his or her particular circumstances from an independent tax advisor.

This notice is given to ensure compliance with IRS Circular 230.

Interest on the 2010-B Bonds. Bond Counsel has rendered no opinion regarding the exclusion pursuant to section 103(a) of the Code of interest on the 2010-B Bonds from gross income for federal income tax purposes. The Authority has taken no action to cause, and does not intend, interest on the 2010-B Bonds to be excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Further, to the extent that the Authority designates a 2010-B Bond as a build America bond, section 54AA(f)(1) of the Code provides that interest on such 2010-B Bond shall be includible in gross income for federal income tax purposes. The Authority intends to treat the 2010-B Bonds as debt instruments for all federal income tax purposes, including any applicable reporting requirements under the Code. THE AUTHORITY EXPECTS THAT THE INTEREST PAID ON A 2010-B BOND GENERALLY WILL BE INCLUDED IN THE GROSS INCOME OF THE OWNER THEREOF FOR FEDERAL INCOME TAX PURPOSES WHEN RECEIVED OR ACCRUED, DEPENDING UPON THE TAX ACCOUNTING METHOD OF THAT OWNER.

Original Issue Discount. If the first price at which a substantial amount of the 2010-B Bonds of any stated maturity is sold at original issuance (the “Issue Price”) is less than the face amount by more than one quarter of one percent times the number of complete years to maturity, the 2010-B Bonds of that maturity will be treated as being issued with “original issue discount”. The amount of the original issue discount on each 2010-B Bond of that maturity will equal the excess of the principal amount payable on that 2010-B Bond at maturity over its Issue Price, and the amount of the original issue discount on such 2010-B Bond will be accrued over its term using the “constant yield method” provided in the Treasury Regulations. As original issue discount on a 2010-B Bond accrues under the constant yield method, the Beneficial Owner of a 2010-B Bond with original issue discount will be required to include as interest each such accrual in its gross income regardless of its regular method of accounting. This can result in

90165268.7 taxable income to the Beneficial Owner of a 2010-B Bond issued with original issue discount that exceeds actual cash distributions on that 2010-B Bond in the taxable year.

The amount of any original issue discount that accrues on the 2010-B Bonds each year will be reported annually to the IRS and to the Beneficial Owners. The portion of the original issue discount included in each Beneficial Owner’s gross income while the Beneficial Owner holds a 2010-B Bond will increase the adjusted tax basis of the 2010-B Bond in the hands of such Beneficial Owner.

Disposition of 2010-B Bonds and Market Discount. A Beneficial Owner of 2010-B Bonds will generally recognize gain or loss on the redemption, sale or exchange of the 2010-B Bonds equal to the difference between the redemption or sales price (exclusive of the amount paid for accrued interest) and the Beneficial Owner’s adjusted tax basis in the 2010-B Bonds. Generally, the Beneficial Owner’s adjusted tax basis in the 2010-B Bonds will be the Beneficial Owner’s initial cost, increased by any original issue discount previously included in the Beneficial Owner’s income to the date of disposition. Any gain or loss generally will be capital gain or loss and will be long-term or short-term, depending on the Beneficial Owner’s holding period for the 2010-B Bonds.

Under current law, a purchaser of 2010-B Bonds who did not purchase the 2010-B Bonds in the initial public offering (a “subsequent purchaser”) generally will be required, on the disposition of the 2010-B Bonds, to recognize as ordinary income a portion of the gain, if any, to the extent of the accrued “market discount”. In general, market discount is the amount by which the price paid for the 2010-B Bonds by a subsequent purchaser is less than the principal amount payable at maturity (or, in the case of 2010-B Bonds issued with original issue discount, the sum of the Issue Price and the amount of original issue discount previously accrued on the 2010-B Bonds), except that market discount is considered to be zero if it is less than one quarter of one percent of the principal amount times the number of complete remaining years to maturity. The Code also limits the deductibility of interest incurred by a subsequent purchaser on funds borrowed to acquire 2010-B Bonds with market discount. As an alternative to the inclusion of market discount in income upon disposition, a subsequent purchaser may elect to include market discount in income currently as it accrues on all market discount instruments acquired by the subsequent purchaser in that taxable year or thereafter, in which case the interest deferral rule will not apply. The recharacterization of gain as ordinary income on a subsequent disposition of 2010-B Bonds could have a material effect on the market value of the 2010-B Bonds.

Defeasance. Persons considering the purchase of a 2010-B Bond should be aware that the bond documents permit the Authority under certain circumstances to deposit monies or securities with the Trustee, resulting in the release of the security interests created under the Indenture (a “defeasance”). A defeasance could result in the realization of gain or loss by the owner of the 2010-B Bond for federal income tax purposes, without any corresponding receipts of monies by the owner. Such gain or loss generally would be subject to recognition for the tax year in which such realization occurs, as in the case of a sale or exchange described above. In addition, for federal income tax purposes, the character and time of receipt of payments on the 2010-B Bonds subsequent to any such defeasance could also be affected. Owners are advised to consult their tax advisers with respect to the tax consequences resulting from such events.

Backup Withholding. Under section 3406 of the Code, a Beneficial Owner of the 2010-B Bonds who is a United States person, as defined in section 7701(a)(30) of the Code, may, under certain circumstances, be subject to “backup withholding” of current or accrued interest on the 2010-B Bonds or with respect to proceeds received from a disposition of the 2010-B Bonds. This withholding applies if such Beneficial Owner of 2010-B Bonds: (i) fails to furnish to the payor such Beneficial Owner’s social security number or other taxpayer identification number (“TIN”); (ii) furnishes the payor an incorrect TIN; (iii) fails to properly report interest, dividends, or other “reportable payments” as defined in the Code; or (iv) under certain circumstances, fails to provide the payor with a certified statement, signed under penalty of perjury, that the TIN provided to the payor is correct and that such Beneficial Owner is not subject to backup withholding.

90165268.7 Backup withholding will not apply, however, with respect to payments made to certain Beneficial Owners of the 2010-B Bonds. Beneficial Owners of the 2010-B Bonds should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedures for obtaining such exemption.

Withholding on Payments to Nonresident Alien Individuals and Foreign Corporations. Under sections 1441 and 1442 of the Code, nonresident alien individuals and foreign corporations are generally subject to withholding at the current rate of 30% (subject to change) on periodic income items arising from sources within the United States, provided such income is not effectively connected with the conduct of a United States trade or business. Assuming the interest income of such a Beneficial Owner of the 2010-B Bonds is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will be subject to 30% withholding, or any lower rate specified in an income tax treaty, unless such income is treated as portfolio interest. Interest will be treated as portfolio interest if: (i) the Beneficial Owner provides a statement to the payor certifying, under penalties of perjury, that such Beneficial Owner is not a United States person and providing the name and address of such Beneficial Owner; (ii) such interest is treated as not effectively connected with the Beneficial Owner’s United States trade or business; (iii) interest payments are not made to a person within a foreign country that the IRS has included on a list of countries having provisions inadequate to prevent United States tax evasion; (iv) interest payable with respect to the 2010-B Bonds is not deemed contingent interest within the meaning of the portfolio debt provision; (v) such Beneficial Owner is not a controlled foreign corporation, within the meaning of section 957 of the Code; and (vi) such Beneficial Owner is not a bank receiving interest on the 2010-B Bonds pursuant to a loan agreement entered into in the ordinary course of the bank’s trade or business.

Assuming payments on the 2010-B Bonds are treated as portfolio interest within the meaning of sections 871 and 881 of the Code, then no withholding under section 1441 and 1442 of the Code and no backup withholding under section 3406 of the Code is required with respect to Beneficial Owners or intermediaries who have furnished Form W-8 BEN, Form W-8 EXP or Form W-8 IMY, as applicable, provided the payor does not have actual knowledge or reason to know that such person is a United States person.

Reporting of Interest Payments. Subject to certain exceptions, interest payments made to Beneficial Owners with respect to the 2010-B Bonds will be reported to the IRS. Such information will be filed each year with the IRS on Form 1099 which will reflect the name, address, and TIN of the Beneficial Owner. A copy of Form 1099 will be sent to each Beneficial Owner of a 2010-B Bond for United States federal income tax purposes.

CERTAIN LEGAL MATTERS

Legal matters incident to the authorization, issuance and sale of the 2010 Bonds are subject to the unqualified approving opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel. Said opinion in substantially the form attached as Appendix F will be delivered at the time of delivery of the 2010 Bonds. Bond Counsel has undertaken no responsibility for the accuracy, completeness or fairness of this Official Statement or any other offering material related to the 2010 Bonds, and expresses no opinion or view with respect thereto. Certain legal matters will be passed upon for the City and the Authority by the City Attorney, and for the Underwriter by its counsel, Nossaman LLP.

FINANCIAL STATEMENTS

The audited financial statements of the City Water Utility Fund as of and for the year ended June 30, 2009 and 2008, included in Appendix B to this Official Statement, have been audited by KMPG LLP, independent accountants (the “Auditor”), as stated in their report appearing in Appendix B. The City has not requested, nor has the Auditor given, the Auditor’s consent to the inclusion in Appendix B of its report on such financial statements. The Auditor’s review in connection with the audited financial statements included in Appendix B included events only as of June 30, 2009, and no review or

90165268.7 investigation with respect to subsequent events has been undertaken in connection with such financial statements by the Auditor.

FINANCIAL ADVISOR

The Authority and the City have retained Public Financial Management, Inc. as financial advisor (the “Financial Advisor”) in connection with the preparation of this Official Statement and with respect to the issuance of the 2010 Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. Public Financial Management, Inc. is an independent financial advisory firm and is not engaged in the business of underwriting municipal securities or other public securities.

UNDERWRITING

The 2010-A Bonds will be purchased by the Underwriter at an aggregate purchase price of $______, representing the par amount of the 2010-A Bonds of $______, less an Underwriter’s discount of $______and plus a net original issue premium of $______, and the 2010-B Bonds will be purchased by the Underwriter at an aggregate purchase price of $______, representing the par amount of the 2010-B Bonds of $______less an Underwriter’s discount of $______. The Underwriter will be obligated to purchase all of the 2010 Bonds if any of the 2010 Bonds are purchased.

The Underwriter has certified the reoffering prices or yields set forth on the inside cover page hereof at which the 2010 Bonds have been reoffered to the public and at which at least 10% of the 2010 Bonds of each maturity have been sold. The Underwriter may offer and sell the 2010 Bonds to certain dealers and others at prices lower than the public offering prices shown on the inside cover page hereof. The offering prices may be changed from time to time by the Underwriter.

CONTINUING DISCLOSURE

Pursuant to a Continuing Disclosure Agreement, the City has covenanted for the benefit of owners of the 2010 Bonds to provide certain financial information and operating data relating to the City and the Water System by not later than six months after the end of each of the City’s Fiscal Years (presently, by each December 31), commencing with the reports for the Fiscal Year 2009-10 (the “Annual Report”), and to provide notices of the occurrences of certain enumerated events, if material. The Annual Report and the notices of material events will be filed by the Dissemination Agent on behalf of the City with the Municipal Securities Rulemaking Board. The specific nature of information to be contained in each Annual Report or notice of material events is set forth in “APPENDIX D—FORM OF CONTINUING DISCLOSURE AGREEMENT.” This covenant has been made by the City in order to assist the Underwriter in complying with Rule 15c2-12 promulgated by the Securities and Exchange Commission. The City has never failed to comply in all material respects with any previous continuing disclosure undertakings pursuant to Rule 15c2-12.

MISCELLANEOUS

The execution and delivery of this Official Statement have been duly authorized by the Anaheim Public Financing Authority.

ANAHEIM PUBLIC FINANCING AUTHORITY

By Executive Director

90165268.7 90165268.7 APPENDIX A

GENERAL INFORMATION REGARDING THE CITY

The Bonds will not be secured by any pledge of ad valorem taxes or General Fund revenues but will be payable solely from the revenues of the City’s Water System, as more fully described in the body of this Official Statement. The description of the financial and economic position of the City set forth below and on the following pages is included in this Official Statement for informational purposes only.

The City of Anaheim (the “City”) was founded and incorporated in 1857, disincorporated in 1872, reincorporated in 1876, and reorganized in 1888. No change in organization took place until June 1964, when the local voters approved a City Charter. The City operates under the Charter and with a Council Manager form of government. The five City Council members are elected to four year terms in alternate slates every two years. The Mayor presides over meetings of the City Council and has one vote.

The City Council appoints the City Manager, who heads the executive branch of government, implements City Council directives and policies, and manages the administrative and operational functions through the various departmental heads, who are appointed by the City Manager.

City full time employees numbered 2,171 as of June 30, 2009, of whom 610 were assigned to the Police Department and 289 to the Fire Department. The latter has eleven stations; the City enjoys a Class One fire insurance rating, the highest rating possible.

The City covers 50 square miles and is located in the northern portion of Orange County, about 28 miles southeast of downtown Los Angeles and about 90 miles north of San Diego. The City lies on a coastal plain which is bordered by the Pacific Ocean on the west and the Santa Ana Mountains on the east.

The City is in the center of an area with 15 million people which is comprised of Orange, San Diego, Los Angeles, Riverside and San Bernardino counties. Major freeways in and through the City provide convenient access for industries to labor markets and recreation and commerce to consumers of an even much broader area. The Santa Ana Freeway (Interstate 5) connecting Los Angeles and San Diego, is the main artery traversing the City and connects, in or near the City, with the Artesia/Riverside (State Route 91), the Garden Grove (State Route 22), the Orange (State Route 57), and the Costa Mesa (State Route 55) freeways.

AMTRAK rail passenger service is available to a station situated at Angel Stadium of Anaheim. Anaheim is also served by four other railroads, the UPSP Railroad, the Santa Fe, the Burlington Northern Santa Fe, and the Metrolink Commuter Service, and by numerous truck carriers in Southern California.

The major airports in the area include John Wayne International (14 miles south), Ontario International (20 miles northeast), Los Angeles International (30 miles northwest) and Long Beach (14 miles west).

Daily bus service for residents and the 20 million tourists and conventioneers who visit Anaheim annually is provided by various lines including the Orange County Transportation Authority, MWD Transportation Authority, Greyhound Lines and Valen Transportation Services.

90165268.7 A-53 CITY COUNCIL

Curt Pringle, Mayor, term expires in 2010. Mr. Pringle was first elected Mayor of Anaheim in 2002, and was overwhelmingly re elected to a second four-year term in 2006 with 79% of the vote. Mayor Pringle’s “freedom friendly” policy initiatives have sparked an economic renaissance in Anaheim and positioned the City – the 10th largest in California – as a model of free-market-oriented urban renewal.

Mr. Pringle brought a significant depth of public policy experience to the Mayor’s office of Anaheim. He served in the California State Assembly from 1988-1990 and again from 1992-1998. During his tenure in the State Assembly, Mr. Pringle served as the Speaker of the Assembly in 1996, Republican Leader, Republican Caucus Chair, chairman of the Appropriations Committee, chairman of the Rules Committee and vice chairman of the Budget Committee. He also served on the Insurance, Governmental Organization, Banking, Local Government and Joint Legislative Budget Review Committees. Additionally, he served as a budget conferee in 1995, where he authored the 1995-1996 California State Budget.

Mr. Pringle is also a successful businessman who has built his Orange County public relations company, Curt Pringle & Associates, into one of the region’s leading PR, land use and public affairs firms.

Harry S. Sidhu, P.E., Mayor Pro Tem and Council Member, term expires in 2012. Mr. Sidhu was elected to the City Council in November 2004. In 1974, he immigrated to the United States from India with his parents, as a permanent resident, and settled in Philadelphia, Pennsylvania, where he received a Bachelor of Science Degree in Mechanical Engineering from Drexel University. In 1977, Mr. Sidhu became a United States citizen. He moved to California in 1981 and began his professional life as a consulting engineer with Rockwell International and General Dynamics, and as a U.S. Defense Industry Engineer for Hughes Aircraft. During that period, Mr. Sidhu became a licensed Professional Engineer - Registered Mechanical Engineer in the State of California, and obtained a General Contractor’s License (B). He is also a licensed franchise business broker. In 1994, he moved to Anaheim where he presently resides with his wife and two children. His community involvement has included the following: Boys and Girls Clubs of Anaheim – Board of Directors; Anaheim General Hospital – Board of Directors; Anaheim Historical Society; Anaheim Beautiful; Orange County Community Housing Corporation; Anaheim Chamber of Commerce; Anaheim Small Business Chamber; Anaheim Youth Soccer Coach; charity fundraiser and sponsor of children’s sports, and many civic activities. Prior to joining the City Council, he served as Chairman for the Budget Advisory Commission for the City of Anaheim. Mr. Sidhu was also formerly the 4th District At-Large Representative to the Executive Steering Committee, Orange County Division, League of California Cities. He also currently serves on the Board of Directors of the Orange County Sanitation District, and as a member of the Board of Trustees of the Orange County Vector Control District.

Lorri Galloway, Council Member, term expires in 2012. Ms. Galloway was elected to the City Council in November 2004. She is the founder and executive director of The Eli Home for Abused Children. The Eli Home has provided award-winning child abuse prevention and domestic violence prevention programs throughout Orange County. Through emergency shelters, walk-in counseling centers, advocacy and outreach, Eli has benefited thousands of victims since 1983. Ms. Galloway is a member of the CSUF Non-Profit Professionals Alumni Association, California Bar Association – Probation Department, Canyon Hills Community Council, Los Amigos, United Latinos of Anaheim (ULA) and the Anaheim Sesquicentennial Commission. Among her awards and achievements are: Rancho Santiago College Women of Achievement Award, First Lady of California Community Service Award, National Philanthropy Association Outstanding Founder Award, Orange County Spirit of Volunteerism Award, Outstanding Filipino American in Orange County Centennial Award, LA Times

90165268.7 A-54 Volunteers of Distinction Award, Orange County Bar Association Liberty Bell Award, and the Orange County Labor Council Community Services Award.

Robert Hernandez, Council Member, term expires in 2010. Mr. Hernandez was first elected to the Anaheim City Council in November 2002 after a 38-year career serving in the Anaheim Fire Department. He has served on the Anaheim Firefighters Association as treasurer and board member at large. He has a long history of service to the community in such organizations as the American Cancer Society, American Heart Association, Anaheim Chamber of Commerce, Western Medical Centers Foundation Board of Trustees, Latino Peace Officers Association, and was a founding member of the Downtown Anaheim Association. Council Member Hernandez addresses the housing needs of people with disabilities as Outreach Chair of the Dayle MacIntosh Center, and currently serves as Chairman of the Board of Anaheim Memorial Medical Center and as Anaheim’s representative at the Transportation and Maglev Committees of the Southern California Association of Governments.

Lucille Kring, Council Member, term expires in 2010. Ms. Kring was re-elected to the Anaheim City Council in November, 2006 after a four-year absence. Ms. Kring also served as a City Councilmember from 1998-2002. Ms. Kring is a graduate from Western State University College of Law. She practices in the field of labor, employment contract and real estate law. She also has a real estate broker’s license and a B.S. degree in Chemistry. During her previous tenure on the Anaheim City Council, Ms. Kring served as chair of the League of California Cities’ Employee Relations Policy Committee, a member of the Energy & Environment Committee for the Southern California Association of Governments and a member of the National League of Cities’ Energy, Environment and Natural Resources Committee. She also was a member of the Orange County-City Hazardous Materials Emergency Response Authority and chair of the Training Joint Powers Authority.

Ms. Kring was an Anaheim Chamber of Commerce Ambassador and was Ambassador of the Year, after amassing 500 hours of volunteer service to the community. In 1996, she was elected to the Chamber’s Board of Directors and continues to serve as a board member. Ms. Kring is active in numerous local charitable organizations. She sits on the boards of Anaheim Memorial Medical Center, Anaheim Family YMCA, Canyon Hills Community Council, Anaheim Police Activities League, Anaheim Republican Assembly, and is currently president of the Anaheim Rotary Club. A cancer survivor, she has served on the Board of the American Cancer Society-North Orange County Unit and regularly participates in fundraising for Muscular Dystrophy Association, Leukemia & Lymphoma Society and Paint Your Heart Out Anaheim.

She is a former president of a local Toastmaster’s chapter and has served as a religious education teacher at St. Columban Church in Garden Grove. Ms. Kring is also a graduate of the inaugural Leadership Anaheim class and served as a deputy foreman for the Federal Grand Jury for 18 months.

CITY MANAGEMENT

Thomas J. Wood, City Manager, joined the City in 1990 and presently serves as the City Manager. Prior to being appointed City Manager, Mr. Wood was Assistant City Manager. During his tenure with the City he has led complex negotiations leading to the revitalization of the Anaheim Resort, and the restructuring of the Honda Center operating agreement. During Mr. Wood’s 30 plus years in municipal management, he has directed the renewal of neighborhoods, balanced budgets, coordinated public safety efforts, and has focused on land use, infrastructure, economic development, crisis management, organizational development and public affairs issues. Mr. Wood holds a Bachelor of Arts degree from Whittier College and a master’s degree in Public Administration from the University of Southern California, and has instructed graduate level courses in productivity, finance and administration.

90165268.7 A-55 Kristine Ridge, Acting Finance Director, was appointed as the acting director of the department that oversees the Accounting, Purchasing, Budget, Risk Management and Information Services functions of the City. Ms. Ridge started her career in the public sector 20 years ago; first, in the capacity of a financial auditor then continued in auditing but as an internal auditor for the City of Anaheim focusing on internal investigations, operational efficiencies and internal controls. She managed the City’s internal audit program for approximately ten years then was asked to fill in as the City Treasurer on an interim basis. After serving in that capacity for one year she became the City’s Human Resources Director where she oversees a full service department including employee relations, benefits, recruitment, classification and compensation, organization development and training; and, management of the Human Resource Information System. Most recently she has assumed the role of the City of Anaheim’s Acting Finance Director overseeing accounting, purchasing, information technology, budget, and risk management. Her background includes an undergraduate degree in accounting from Arizona State University, a Certificate in Public Accounting, a Certification as a Governmental Financial Manager, completion of IPMA Core Competencies, Certificate in Leadership from University of Chicago; a Master’s in Organizational Leadership from Chapman University and a Certificate in Public Sector Human Resources. In addition, over the years she has been very active in various professional associations holding a number of key positions; she currently serves as Chairperson of the Board for CPS and a past executive board member for SCIPMA, and participates in a number of citywide initiatives for leadership development, exceptional customer service, and strategic planning.

Cristina L Talley, City Attorney, has been City Attorney of Anaheim, California, since April 2009. The City Attorney's Office represents and advises the City Council and City officials on all legal matters, represents the City in civil litigation and prepares all City contracts, ordinances and other legal documents. Ms. Talley's Office also prosecutes all misdemeanor and infractions crimes occurring in the City of Anaheim. Prior to her appointment as Acting City Attorney in December 2008, she was the Senior Assistant City Attorney in Anaheim, a position she held for approximately 12 years. As Senior Assistant City Attorney, Ms. Talley was responsible for the day-to-day operations of the Civil Division of the City Attorney's Office, including supervision of 10 attorneys and one paralegal, and was also the legal advisor to the Anaheim Police Department. Ms. Talley was the City Attorney for Pasadena for two years prior to joining the City of Anaheim. Before working for Pasadena, Ms. Talley was in private practice for approximately 12 years, specializing in municipal law with an emphasis in litigation. Ms. Talley received her Juris Doctorate degree from the University of Southern California Gould School of Law, and was admitted to practice law in California in 1982. She is a member of the Orange County Hispanic Bar Association and is currently the Treasurer of the Orange County City Attorney's Association.

Linda N. Andal, City Clerk, joined the City in April 2001 and thereafter was appointed to Deputy City Clerk. During this time, she managed and implemented the automated agenda process, which resulted in increased workflow efficiencies and reduced paper production, citywide. Ms. Andal left the City in December 2005 for a position with the County of Orange as a Human Resources Manager, and returned to Anaheim in February 2007 as its City Clerk. Ms. Andal has a bachelor’s degree in political science and a masters degree in public administration from California State University of Fullerton. She is active in the International Institute of Municipal Clerks; the City Clerk’s Association of California; the Southern California Public Management Association, and the Society for Human Resources Management.

Henry W. Stern, City Treasurer, was appointed in January 2007. Mr. Stern responsibilities include the direct management of the City’s general portfolio of over $500 million, administrator of the City’s defined contribution plans and investment management of the City’s outstanding debt issues. Mr. Stern has held previous positions as Chief Investment Officer for the City of Los Angeles, Treasury Operations Officer for the City of Long Beach and Deputy Treasurer for the City of Lakewood, California. Mr. Stern has a bachelor’s degree in political science and a masters degree in public administration from California State University, Long Beach. He has been a Certified Treasury

90165268.7 A-56 Professional since 2001 and received the prestigious Honors Program award in 2007 from the Association of Finance Professionals. Mr. Stern lectures to professional organizations on investment topics such as cash flow analysis, banking services, risk management, asset allocation and advanced investments strategies and portfolio management.

PENSIONS

All full-time and certain part-time City personnel belong to the California Public Employees’ Retirement System (“CalPERS”). As of June 30, 2009, CalPERS had separate contracts with the State of California plus 3,026 local public agencies and school districts. Membership includes the State of California, cities, counties, school districts and other public agencies. Each agency has somewhat differing benefit programs and amounts of actuarial liabilities. For the Public Employees’ Retirement Fund as a whole, the CalPERS investment portfolio market value as of June 30, 2009, was approximately $183.5 billion, compared to $237.1 billion as of June 30, 2008. As of June 30, 2008, the CalPERS unfunded actuarial accrued liability was $35 billion. Note that such information is the most recent information available and that no assurances can be given that there has not been a reduction in the market value of the assets held by PERS.

For the City, net assets available for benefits as of June 30, 2008 were $1,348,104,000 with an unfunded liability of $207,879,000.

The City’s contribution rate is determined by annual actuarial valuations based on the benefit formula and the number of employees and their respective salary schedules. As of July 1, 2010, the City’s contribution rate was 15.793% for miscellaneous employees and 23.997% for fire safety employees, and 26.513% for police safety employees. Contributions totaled $54,200,000 for Fiscal Year 2008-09. For more information, see Note 11 of the Audited Basis Financial Statements of the City for the Fiscal Year ended June 30, 2009.

LABOR RELATIONS

A majority of City employees are represented by various unions, including the Anaheim Municipal Employees Association, the Anaheim Police Association, the Anaheim Firefighters Association, the International Brotherhood of Electrical Workers, Local 47 (IBEW), the Service Employees International Union, Local 1877; and the General Truck Drivers Union, Local 952. The preceding are designated representatives under the Meyer Milias Brown Act (Section 3500 et seq. of the Government Code of California). The expiration dates of current memoranda of understanding are: IBEW (full-time employees), January 6, 2010; IBEW (part-time employees), January 7, 2011; Anaheim Municipal Employees Association General Employees, January 7, 2011; Anaheim Municipal Employees Association Clerical Employees, January 7, 2011; Anaheim Municipal Employees Association Part Time Unit, July 17, 2011, Anaheim Police Association, January 7, 2011; Anaheim Firefighters Association, December 31, 2010; Service Employees International Union, Local 1877, July 11, 2011; and the General Truck Drivers (Teamsters), July 7, 2011.

AREA AND POPULATION

The City land area remained at 3.7 square miles from 1900 through 1940. From 1940 to 2006, that area increased to 50.37 square miles. The City’s population grew from 14,556 in 1950 to 353,643 in 2010. Anaheim is California’s tenth most populous city. The following chart includes the growth in the area and population of the City since 1900 as well as the growth in the population of Orange County.

90165268.7 A-57 CITY OF ANAHEIM AND ORANGE COUNTY Area and Population Calendar Year

Annual City City of Average Population Size of Anaheim City Population Orange County Percent of California Year Square Miles Population Change(1) Population County Cities 1900...... 3.70 1,456 0.0% 19,696 7.4% 51 1910...... 3.70 2,628 80.5 34,436 7.6 66 1920...... 3.70 5,526 110.3 61,375 9.0 42 1930...... 3.70 10,995 99.0 118,674 9.3 44 1940...... 3.70 11,031 0.3 130,760 8.4 N/A 1950...... 4.40 14,556 32.0 216,224 6.7 68 1960...... 27.34 104,184 615.7 703,925 14.8 12 1970...... 33.10 166,701 60.0 1,420,386 11.7 8 1980...... 42.05 219,310 31.6 1,931,570 11.4 8 1990...... 45.03 266,406 21.5 2,410,556 11.1 10 2000...... 49.79 328,014 23.1 2,846,289 11.5 10 2006...... 50.37 341,472 4.0 3,066,483 11.1 10 2007...... 50.37 343,973 0.5 3,089,707 11.1 10 2008...... 50.37 346,823 0.7 3,121,251 11.1 10 2009...... 50.37 348,467 0.9 3,139,017 11.1 10 2010...... 50.37 353,643 1.5 3,166,461 11.2 10 ______(1) Expressed as the annual average population change over each period as a percent of the prior year. Sources: California Department of Finance and City of Anaheim Planning Department.

BUILDING ACTIVITY

Total valuation of all building permits issued by the City Building Division was approximately $310.8 million in 2009; total permits issued in 2009 were 2,312. The following table presents building permit activity and valuation for the calendar years 2005 through 2009.

90165268.7 A-58 CITY OF ANAHEIM Building Activities Calendar Year

2005 2006 2007 2008 2009

Total Valuation (thousands) $217,422 $379,728 $408,296 $308,756 $310,766 Total Permits Issued 2,403 2,822 2,210 2,367 2,312 New Construction Residential (thousands) $ 89,406 $120,138 $142,645 $ 75,318 $ 38,677 Permits 108 134 56 51 40 Non-Residential (thousands) $ 42,476 $148,360 $140,002 $ 34,058 $ 88,937 Permits 45 73 33 26 33 Additions and Alterations Residential (thousands) $ 29,278 $ 37,771 $ 29,172 $ 23,634 $ 22,178 Permits 1,788 2,147 1,675 1,592 1,294 Other (thousands) $ 56,262 $ 73,458 $ 96,476 $175,746 $160,974 Permits 462 468 446 698 945

Total New Residential Units 771 732 967 507 307 ______Source: City of Anaheim Planning Department, Building Division.

EMPLOYMENT

No annual information is regularly compiled on employment and unemployment for the City alone. Employment in Orange County increased from about 60,400 in 2005 to about 143,200 in 2009. The County unemployment rate was lower than that in the State in each of the past five years. The mobile resident labor force of Orange County is employed not only in the County but also in adjacent counties, such as Los Angeles, San Bernardino and Riverside.

ORANGE COUNTY Employment, Unemployment and Labor Force(1) (2) Calendar Year Averages: 2005-2009 (000s except for Unemployment Rates)

2005 2006 2007 2008 2009

Employment...... 1,541.8 1,568.3 1,568.8 1,549.0 1,451.0 Unemployment...... 60.4 55.4 64.3 87.7 143.2 Civilian Labor Force...... 1,602.2 1,623.7 1,633.1 1,636.7 1,594.2

Unemployment Rate...... 3.8% 3.4% 3.9% 5.4 9.0 State Unemployment Rate...... 5.4% 4.9% 5.4% 7.2 11.4 ______(1) By place of residence, including workers involved in labor disputes. (2) Data not seasonally adjusted. Source: State of California, Employment Development Department.

The table below lists the major manufacturing and non-manufacturing employers within the City.

90165268.7 A-59 CITY OF ANAHEIM Top Ten Private Employers 2009

Number of Company Employees Products/Purpose

Walt Disney Company 20,050 Theme Park Kaiser Foundation Hospital 3,660 Medical Facilities Airport Bus 2,000 Transportation Northgate Gonzalez Supermarkets 2,000 Grocery Retailer Anaheim Memorial Medical Center 1,185 Medical Facilities AT&T 1,000 Communications Honda Center of Anaheim 1,000 Entertainment and Sports Venue Hilton Anaheim 920 Hotel West Anaheim Medical Center 774 Medical Facilities AlStyle Apparel 750 Apparel Manufacturer

TOURISM AND COMMUNITY AND RECREATIONAL FACILITIES

Tourism is a major industry in Anaheim. Much of that industry is centered around the Anaheim Resort Area, an area of 2.2 square miles that includes the Disneyland Park, Disney’s California Adventure, the Anaheim Convention Center, and a majority of the City’s 18,000 hotel and motel rooms. Overall, the City has about 150 lodging establishments and 600 restaurants in a broad range of styles, ethnicities and price ranges.

In 2001, the Anaheim Resort completed a major renovation including the following improvements: increasing the size of the Anaheim Convention Center by 40% to 1.6 million square feet at a cost of $180 million, making it the eighth largest convention facility in the United States; the creation of Disney’s California Adventure, a second gated theme park adjacent to the original Disneyland, as well as construction of Disney’s Grand Californian Hotel and Downtown Disney, a retail, dining and entertainment destination at a cost of $1.4 billion; improvements to the I-5 Freeway leading to the Anaheim Resort Area, doubling capacity from six to 12 lanes, at a cost of $1.1 billion; and, major improvements to landscaping, roads, and signage throughout the Anaheim Resort Area. In response to these dramatic changes, more than 70% of the rooms in the Anaheim Resort Area have either been remodeled or are new construction.

Early indicators are that this investment is a major success. Normal bookings at the Anaheim Convention Center have traditionally averaged about 300 groups at any one time. With the completion of construction, that number has risen to more than 900 groups representing 4.7 million future room nights.

In 1964, the City commenced construction of the Anaheim Stadium (renamed Angel Stadium of Anaheim) for the public presentation of major league baseball, football, soccer, track, field and other sporting and nonsporting events. In 1964, the City entered into a 35-year agreement with Golden West Baseball Company (the California Angels) for the purpose of exhibiting American League Baseball at the Stadium.

In early 1996, a newly formed limited partnership now known as Anaheim Angels L.P., acquired 100% of what is now known as the Anaheim Angeles American League Baseball franchise and reached agreement with the City on a plan to keep the Angels in Anaheim for the next 33 years. The agreement centered around a $118 million renovation of Anaheim Stadium, with Anaheim Angels L.P. (formerly

90165268.7 A-60 known as The California Angels L.P.) obligated to pay $80 million of the total costs and for any costs overruns in excess of $100 million. The renovation made the Stadium a smaller and more intimate park with about 45,000 seats and upgraded concessions, suites, seating and other amenities. Also as part of the agreement, the Anaheim Angels L.P. took over operation of the Stadium effective October 1, 1996. The team was crowned Major League’s Baseball’s World Champions in 2002 after collecting a franchise-best 99 wins in the regular season. In 2003, Arturo Moreno purchased the team for $185 million.

In June 1993, the City completed construction on the $103 million 19,400-seat Honda Center with approximately 3,900 parking spaces. The Honda Center is now home to the National Hockey League’s Anaheim Ducks and is equipped to accommodate National Basketball Association games, national touring shows as well as major concerts.

Orange County is a major tourist center of Southern California. In 2004, the County had more than 43 million visitors. Forty-four miles of shorelines with more than twenty publicly maintained beach areas provide year-round aquatic activities.

In the City, there are two 18-hole golf courses, twelve community parks, all of which contain major athletic facilities, 46 neighborhood parks and special-use facilities, a nature center, and two community centers that include senior citizen centers.

Previously mentioned recreational and amusement facilities in Anaheim include Disneyland, Disney’s California Adventure, Downtown Disney, House of Blues-Anaheim, the Anaheim Convention Center, Angel Stadium of Anaheim, and the Honda Center. Within one hour’s drive from the City are Knott’s Berry Farm in the adjacent City of Buena Park, the Los Alamitos Race Course, the renowned Spanish Mission of San Juan Capistrano, and the Art Colony at Laguna Beach which sponsors an annual art festival and numerous cultural events and attractions in Los Angeles. The Newport Harbor area, a few miles south of the City, provides anchorage facilities for approximately 4,600 private boats. Boat launching ramps, deep sea fishing, scuba-diving, and other aquatic activities are readily accessible. Within a two-hour drive are numerous summer and winter resort areas in the San Bernardino and San Jacinto mountains.

Other Anaheim facilities include a main public library, four branch libraries and two bookmobiles. Within the City, there are five general hospitals with a capacity of 997 beds, two FM radio stations, 37 banks, 15 savings and loan associations, ten credit unions and 66 churches of all major denominations.

RETAIL SALES

The table below presents the City’s taxable retail sales for calendar years 2004 through 2008 in comparison to other cities in Orange County and the State of California. Owing to changes in the sales tax base for retail goods, the years are not totally comparable, but the trend in relative magnitude of retail sales tax bases is exhibited.

ANAHEIM, COUNTY CITIES, ORANGE COUNTY, CALIFORNIA TAXABLE RETAIL SALES, ALL OUTLETS Calendar Year ($000)

2004 2005 2006 2007 2008

Anaheim ...... $ 5,283,841 $ 5,725,673 $ 5,827,440 $ 5,694,919 $ 5,334,216 Brea...... 1,467,636 1,582,264 1,657,090 1,666,298 1,560,580

90165268.7 A-61 Buena Park...... 1,390,281 1,504,214 1,898,407 2,253,841 2,096,149 Costa Mesa ...... 3,820,884 4,059,880 4,117,047 4,153,047 3,747,661 Fullerton ...... 1,546,622 1,659,029 1,671,246 1,666,413 1,624,647 Garden Grove...... 1,768,357 1,788,182 1,789,812 1,751,333 1,642,666 Huntington Beach...... 2,411,197 2,479,780 2,594,565 2,631,199 2,563,546 Irvine...... 4,421,676 4,617,019 4,581,082 4,860,237 4,372,094 Mission Viejo ...... 1,511,913 1,609,328 1,628,124 1,549,469 1,405,375 Newport Beach...... 2,124,545 2,358,641 2,572,821 2,648,351 2,404,864 Orange...... 2,834,411 3,051,952 3,202,565 3,188,144 3,057,454 Santa Ana...... 3,802,432 3,950,188 4,021,276 3,970,778 3,670,635 Tustin...... 1,670,674 1,753,089 1,756,086 1,825,309 1,772,441 Westminster...... 1,477,837 1,531,790 1,516,407 1,478,386 1,318,703 Major Cities...... 35,532,306 37,671,029 38,833,968 39,337,724 36,571,031 All Other...... 16,149,753 17,392,217 13,368,779 17,955,747 17,035,798 Orange County...... $ 51,682,059 $ 55,063,246 $ 52,202,747 $ 57,293,471 $ 53,606,829 California...... $500,076,783 $536,904,428 $559,652,437 $561,050,149 $531,653,540 ______Source: California State Board of Equalization.

Following is the breakdown of calendar year 2008 sales tax permits in the City by type of outlet, and the percentage of the City’s total tax derived from the type of outlet identified:

Percent of Type of Outlet Permits Transactions (1)

Apparel Stores 97 1.5% General Merchandise Stores 38 4.5 Food Stores 43 2.6 Eating and Drinking Places 179 11.6 Home Furnishings and Appliances 47 2.6 Building Materials 16 8.1 Motor Vehicles and Parts 64 8.5 Service Stations 29 9.0 Other Retail Stores 379 7.3 All Other Outlets 721 44 .2 Total 1,613 100 .0% ______(1) Total may not add due to rounding. Source: California State Board of Equalization.

Following is a table indicating the growth of taxable transactions for calendar years 2004 through 2008 by type of business.

CITY OF ANAHEIM TAXABLE TRANSACTION BY TYPE OF BUSINESS Calendar Year ($000)

2004 2005 2006 2007 2008

Apparel Stores...... $ 64,450 $ 72,488 $ 75,763 $ 80,506 $ 81,599 General Merchandise...... 232,177 248,515 255,055 245,939 238,386 Food Stores...... 132,562 138,891 143,762 141,046 140,006 Eating and Drinking Places ...... 469,249 541,142 554,262 592,135 620,356

90165268.7 A-62 Home Furnishing Appliances...... 160,043 164,052 160,569 139,894 139,432 Building Materials...... 539,636 571,174 548,448 484,109 430,776 Motor Vehicles and Parts...... 581,870 597,199 552,223 574,083 452,668 Service Stations...... 328,691 368,469 426,496 444,710 478,804 Other Retail Stores ...... 463,517 460,665 485,620 450,895 391,925 Retail Stores Total...... 2,972,195 3,162,595 3,202,190 3,153,317 2,973,952 All Other Outlets ...... 2,311,646 2,563,078 2,625,250 2,541,602 2,360,264 Total All Outlets...... $5,283,841 $5,725,623 $5,827,440 $5,694,919 $5,334,216 ______Source: California State Board of Equalization.

The table below compares the taxable sales per capita for the City and Orange County during the calendar years 2004 to 2008.

COMPARISON OF TAXABLE SALES CITY OF ANAHEIM AND ORANGE COUNTY

Calendar Year City of Anaheim Orange County Taxable Sales Per Capita Taxable Taxable Taxable Sales ($000) Population Sales ($000) Population Sales ($000) Population

2004...... $5,283,841 341,044 $51,682,059 3,019,889 $15,493 17,114 2005...... 5,725,673 345,317 55,063,246 3,047,054 16,581 18,071 2006...... 5,827,440 341,159 52,202,747 3,072,336 17,081 16,991 2007...... 5,694,919 342,990 57,293,471 3,098,121 16,603 18,493 2008...... 5,334,216 345,349(1) 53,606,829 3,107,500(1) 15,446 17,251 ______(1) Population estimate as of January 1, 2008. Sources: California State Board of Equalization, United States Bureau of Statistics and California Department of Finance.

EDUCATION

The City is served by nine public high schools, ten public junior high schools and forty four public elementary schools. Almost all of the City lies within eight districts: the Anaheim City, Magnolia, Savanna and Centralia Elementary School Districts, the Anaheim Union High School District, the Placentia and Orange Unified School Districts, and the North Orange County Community College District.

There are eleven institutions of higher learning in Orange County and an additional twelve in adjacent areas of southern Los Angeles County. Within Orange County, there are the University of California, Irvine, California State University, Fullerton, Chapman University, Southern California College, and public community colleges with grades 13 and 14.

CITY FINANCIAL INFORMATION

SUMMARY OF FUNDS

The following unaudited summaries of certain funds of the City have been prepared by the City Finance Department from audited financial statements.

90165268.7 A-63 CITY OF ANAHEIM, ALL GOVERNMENTAL FUND TYPES(1) SUMMARY OF REVENUES, TRANSFERS AND OTHER FINANCING SOURCES(2) Fiscal Years Ended June 30, 2005 through 2009 ($000)

2005 2006 2007 2008 2009

Property taxes $ 81,949 $ 90,323 $ 102,486 $ 109,351 $ 112,168 Sales and use taxes 59,976 66,045 66,761 65,352 57,449 Transient occupancy taxes 67,141 75,979 83,914 87,183 80,055 Licenses, fees and permits 18,749 40,625 37,991 24,705 21,062 Fines, forfeits and penalties 3,454 3,464 3,689 3,767 3,409 Intergovernmental revenue 101,447 103,653 111,527 134,016 157,773 Use of money and property 9,144 13,203 18,208 16,923 9,293 Charges for services 12,130 12,649 12,960 13,690 13,627 Other revenues 13,685 26,026 15,132 10,508 16,588 Revenues before transfers and other financing sources 367,675 431,967 452,668 465,495 471,424 Other financing sources 19,428 36,011 27,917 45,500 51,795 Total revenue and other financing sources $387,103 $467,978 $480,585 $510,995 $523,219 ______(1) Includes the General Fund, special revenue funds, debt service funds and capital projects funds and excludes the enterprise funds and internal service funds. (2) Amounts have been restated from audited financial statements to conform with current presentation. Additionally, prior period adjustments for changes in accounting principles and corrections of errors have generally been treated as adjustments to beginning fund balances. Therefore, no adjustments have been made to revenues or other financing sources. See audited financial statements for further details.

90165268.7 A-64 CITY OF ANAHEIM, ALL GOVERNMENTAL FUND TYPES(1)(2) SUMMARY OF EXPENDITURES Fiscal Years Ended June 30, 2005 through 2009 ($000)

2005 2006 2007 2008 2009

General government $ 12,276 $ 13,667 $ 15,354 $ 16,325 $ 16,953 Public Safety 130,711 142,985 157,668 169,880 168,023 Community Development 83,384 89,098 94,789 104,991 112,406 Planning 12,313 13,907 14,762 15,949 15,489 Public Works and Maintenance 22,248 24,646 26,820 25,810 29,321 Community Services 25,724 28,753 32,788 35,203 33,572 Public Utilities 1,557 1,704 1,791 2,120 1,507 Convention, Sports and Entertainment 5,140 6,131 7,399 7,390 6,699 Total operating expenditures $293,353 $320,891 $351,371 $377,668 $383,970 Redemption of serial bonds, general obligations $ 10,134 $ 19,032 $ 18,065 $ 27,472 $ 16,085 Interest expenditures 38,681 39,037 41,187 28,324 34,830 Debt issuance costs 4,017 5,182 70 Capital outlay 41,301 77,738 76,161 60,906 52,229 Total expenditures $383,469 $456,698 $490,801 $499,552 $487,184

______(1) Includes the General Fund, special revenue funds, debt service funds and capital projects funds and excludes the enterprise funds and internal service funds. (2) Amounts have been restated from audited financial statements to conform with current presentation. Additionally, prior period adjustments for changes in accounting principles and corrections of errors have generally been treated as adjustments to beginning fund balances. Therefore, no adjustments have been made to expenditures. See audited financial statements for further details.

BUDGETARY PROCESSES

The Fiscal Year of the City begins on the first day of July of each year and ends on the thirtieth day of June of the following year.

At such date as the City Manager determines, each department head must furnish to the City Manager an estimate of revenues and expenditures for such department, for the ensuing Fiscal Year, detailed in such manner as may be prescribed by the City Manager. In preparing the proposed budget, the City Manager reviews the estimates, holds conferences thereon with the respective department heads, and revises the estimates as he may deem advisable.

At least thirty days prior to the beginning of each Fiscal Year, the City Manager submits to the City Council the proposed budget as prepared by the City Manager. After reviewing and making such revisions as it deems advisable, the City Council determines the time for the holding of a public hearing thereon and causes to be published a notice thereof not less than ten days prior to the hearing date. Copies of the proposed budget are available for inspection by the public in the office of the City Clerk at least ten days prior to the hearing.

At the conclusion of the public hearing, the City Council further considers the proposed budget and makes any revisions thereof that it deems advisable. On or before June 30, the City Council adopts the budget with revisions, if any, by the affirmative vote of at least a majority of the total members of the City Council.

90165268.7 A-65 From the effective date of the budget, the amounts stated as proposed expenditures are appropriated to the departments, for the objects and purposes named. The City Manager is empowered to transfer funds from one object or purpose to another within the same department, as necessary. All appropriations lapse at the end of the Fiscal Year to the extent that they have not been expended or lawfully encumbered. At any public meeting after the adoption of the budget, the City Council may amend or supplement the budget by the affirmative vote of at least a majority of the total members of the City Council.

Under the City Charter, the City may not incur indebtedness evidenced by general obligation bonds which would in the aggregate exceed 15% of the total assessed valuation, for purposes of City taxation, of all the real and personal property within the City, and no bonded indebtedness which shall constitute a general obligation of the City may be created unless authorized by the affirmative votes of two thirds of the electors.

The City Council employs, at the beginning of each Fiscal Year, an independent certified public accountant who, at such time or times as specified by the City Council, at least annually, and at such other times as they shall determine, examines the books, records, inventories and reports of all officers and departments as the City Council may direct. As soon as practicable after the end of the Fiscal Year, a report is submitted by such accountant to the City Council and a copy of the financial statements as of the close of the Fiscal Year is published.

ASSESSED VALUATION AND TAX COLLECTIONS

Taxes are levied each Fiscal Year on taxable real and personal property which is situated in the City 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 utilities property and real property, the taxes on which are a lien, 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 1 and February 1 of each Fiscal Year. If unpaid, such taxes become delinquent after December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. Delinquent taxes must be paid by June 30 to avoid additional penalties, which are equal to 1.5% per month on the unpaid base tax amount for each June 30th delinquent amount, plus a $15 redemption fee. Taxpayers may elect to pay delinquent taxes in installments of 1/5 (20%) of the redemption amount over a five (5) year period. In June of the fifth year anniversary of original delinquency, those parcels still unpaid are officially processed for Power to Sell (i.e., for Tax Action sale). Consequently, sometime in the 6th year of delinquency, if still unpaid, the property is officially offered at tax sale by the Orange County Tax Collector’s office.

Property taxes on the unsecured roll are mailed between March and July of each Fiscal Year and are due upon receipt. If unpaid, such taxes become delinquent after August 31 and a 10% penalty plus a $48 collection fee attaches to any delinquent payment. Delinquent taxes must be paid by October 31 to avoid the filing of a tax lien and additional penalties, which are equal to 1.5% per month until paid. The Orange County Tax Collector further has the right to enforce tax collection through seizure and sale or a suit in court.

Assessed valuation for revenue purposes increased by 13.8% in Fiscal Year 2005-06 over the prior Fiscal Year. Such assessed valuations include secured and unsecured properties assessed by the Orange County Assessor, and secured utility properties assessed by the State Board of Equalization. Such assessed valuations exclude business inventory exemptions and exclude veterans, religious, charitable, and other such nonrecoverable exemptions.

90165268.7 A-66 The table below shows the assessed valuations, total City tax levies, total current tax levy collections, collection percentage, and per capita assessed valuation for the last ten completed Fiscal Years. The assessed valuation for Fiscal Year 2009-10 is $______.

CITY OF ANAHEIM Assessed Valuation and Tax Collection Record ($000)

Total Percent of Current Current Tax Per Capital Fiscal Year Assessed Total City Tax Levy Levy Population Assessed Ended June 30 Valuation Tax Levy Collections Collected (000s) Valuation

2001 $17,503,408 $26,860 $26,661 99.3% 332 $53 2002 19,475,528 29,203 28,690 98.2 335 58 2003 22,787,461 32,856 32,554 99.1 338 67 2004 22,114,199 32,326 31,923 98.8 341 65 2005 23,450,862 34,618 34,305 99.1 341 69 2006 25,198,349 36,608 36,114 98.7 342 74 2007 28,950,188 40,633 39,787 97.9 346 84 2008 29,672,033 39,693 38,694 97.5 346 86 2009 30,555,271 40,266 39,734 98.7 348 88 2010 ______N/A N/A ______Source: City of Anaheim Comprehensive Annual Financial Reports and California Municipal Statistics, Inc.

Summarized below is a ten-year history of property tax rates levied by the City and overlapping taxing agencies in a typical tax code area in Anaheim.

CITY OF ANAHEIM TYPICAL TAX CODE AREA Property Tax Rate History (Per $100 of Assessed Valuation)

Fiscal Basic Orange Total Rate Year County, County Metropolitan Per $100 Ended City, County of School Flood Water Assessed June 30 School Levy City Orange Districts Control District Valuation

2000 1.0000 .0038 ------.0088 1.0126 2001 1.0000 .0038 ------.0088 1.0126 2002 1.0000 .0035 ------.0077 1.0112 2003 1.0000 .0029 -- .0699 -- .0067 1.0795 2004 1.0000 .0035 -- .0646 -- .0061 1.0742 2005 1.0000 .0030 -- .0671 -- .0058 1.0088 2006 1.0000 .0027 -- .0692 -- .0052 1.0771 2007 1.0000 .0022 -- .0603 -- .0047 1.0673 2008 1.0000 .0022 -- .0756 -- .0045 1.0824 2009 1.0000 .0021 -- .0610 -- .0043 1.0674 ______Source: County Tax Rates (various years); Auditor Controller, County of Orange.

90165268.7 A-67 LARGEST PROPERTY TAXPAYERS

The ten largest property taxpayers in Anaheim and their 2009 full market valuations as of July, 2009 are as follows:

CITY OF ANAHEIM 2009 Largest Property Taxpayers ($000) Percentage of 2009 ($000) 2009 Taxable Total City Full Taxpayer Type of Business Assessed Valuation Market Valuation

Walt Disney World Company Family Recreation $3,466,814 10.63% Lennar Platinum Triangle Property Management 205,049 0.63 Kaiser Foundation Health Medical Facility 149,332 0.46 Anaheim Hotel Partnership Hotel 129,662 0.40 PPC Anaheim Apartments Property Management 104,040 0.32 CREA/Nexus Anaheim Property Management 95,333 0.29 Anaheim Memorial Hospital Medical Facility 88,254 0.27 Maguire Properties Property Management 81,600 0.25 Boeing North America Aircraft and Navigation Systems 81,428 0.25 Angeli LLC Hotel 78,733 0 .24

Total $4,480,245 13.74% ______Source: Orange County Assessor’s Office and City Finance Department.

90165268.7 A-68 APPENDIX B

CITY OF ANAHEIM – WATER UTILITY FUND AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JUNE 30, 2008 AND JUNE 30, 2009

90165268.7 B-69 APPENDIX C

SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

90165268.7 C-70 APPENDIX D

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the “Disclosure Agreement”) is executed and delivered by the City of Anaheim, California (the “City”) and U.S. Bank National Association, as trustee (the “Trustee”), in connection with the issuance of $______aggregate principal amount of Anaheim Public Financing Authority Revenue Bonds, Series 2010-A (Water System Project) (Tax-Exempt) (the “2010-A Bonds”) and $______aggregate principal amount of Anaheim Public Financing Authority Revenue Bonds, Series 2010-B (Water System Project) (Federally Taxable Build America Bonds) (the “2010-B Bonds,” and together with the 2010-A Bonds, the “ 2010 Bonds”). The 2010 Bonds are being issued pursuant to an Indenture of Trust, dated as of October 1, 2010 (the “Indenture”), by and between the Anaheim Public Financing Authority (the “Authority”) and the Trustee. The City and the Trustee covenant and agree as follows:

SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the City and the Trustee for the benefit of the Holders and Beneficial Owners of the 2010 Bonds and in order to assist the Participating Underwriter in complying with SEC Rule 15c212.

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:

“Annual Report” means any Annual Report of the City provided by the City pursuant to, and as described in, Sections 2 and 3 hereof.

“Beneficial Owner” means any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

“Disclosure Representative” means the Director of Finance and Administrative Services of the City, or such other officer or employee of the City as the City shall designate in writing to the Dissemination Agent and the Trustee from time to time.

“ Dissemination Agent” means an entity selected and retained by the City, or any successor thereto selected by the City. The initial Dissemination Agent shall be U.S. Bank National Association.

“EMMA” shall mean the MSRB’s Electronic Municipal Market Access system, which has been approved by the SEC as the central repository for ongoing disclosure by municipal issuers.

“Listed Events” means any of the events listed in subsection (a) of Section 4 hereof.

“ MSRB” means the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934 or any other entity designated or authorized by the SEC to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the SEC, filings with the MSRB are to be made through the EMMA website of the MSRB, currently located at http://emma.msrb.org.

90165268.7 D-71 “Official Statement” means the Official Statement, dated October __, 2010, relating to the 2010 Bonds.

“Participating Underwriter” means any of the original underwriters of the 2010 Bonds required to comply with the Rule in connection with the offering of the 2010 Bonds.

“Repository” means, until otherwise designated by the SEC, EMMA.

“Rule” means Rule 15c2-12 adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“SEC” means the Securities and Exchange Commission.

SECTION 3. Provision of Annual Report.

(a) The City shall, or shall cause the Dissemination Agent to, not later than six months after the end of each Fiscal Year (presently by each December 31), commencing with the report for the 200910 Fiscal Year, provide to the 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 include by reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the City Water Utility Fund may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Fiscal Year changes for the City, the City shall give notice of such change in the manner provided under Section 5 hereof.

(b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to Repositories, the City shall provide its Annual Report to the Dissemination Agent (if other than the City). If by fifteen (15) Business Days prior to such date, the Dissemination Agent (if other than the City) has not received a copy of the Annual Report from the City, the Dissemination Agent shall contact the City to determine if the City is in compliance with subsection (a).

(c) If the Dissemination Agent is unable to verify that an Annual Report of the City has been provided to the Repository by the date required in subsection (a), the Dissemination Agent shall send a notice to the Repository in substantially the form attached hereto as Exhibit A.

(d) The Dissemination Agent shall:

(i) determine prior to the date for providing the Annual Report for such year the name and address of the Repository; and

(ii) by not later than the date required for delivery of the Annual Report to the Repository pursuant to Section 3(a), file a report with the City (if the Dissemination Agent is other than the City and if the Dissemination Agent is not the Trustee, the Trustee) certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided. The Dissemination Agent (if other than the City) shall have no responsibility for the content of any Annual Report.

90165268.7 D-72 SECTION 4. Content of Annual Reports.

(a) The City’s Annual Report shall contain or include by reference the-following:

(i) The audited financial statements of the City’s Water Utility Fund for the most recently completed Fiscal Year, prepared in accordance with generally accepted accounting principles for governmental enterprises as prescribed from time to time by any regulatory body with jurisdiction over the City and by the Governmental Accounting Standards Board;

(ii) Updated information comparable to the information in Table 1 entitled “WATER SYSTEM STATISTICS” as it appears in the Official Statement;

(iii) Updated information comparable to the information in Table 2 entitled “WATER PRODUCTION” as it appears in the Official Statement;

(iv) Updated information comparable to the information in Table 3 entitled “WATER SALES” as it appears in the Official Statement;

(v) Updated information comparable to the information in Table 4 entitled “LARGEST WATER CUSTOMERS” as it appears in the Official Statement;

(vi) Updated information comparable to the information in Table 6 entitled “OPERATING EXPENSES” as it appears in the Official Statement; and

(vii) Updated information comparable to the information in Table 8 entitled “CITY OF ANAHEIM WATER UTILITY FUND – FINANCIAL RESULTS OF THE WATER SYSTEM.”

(b) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or public entities related thereto, which have been submitted to the Repository. If the document included by reference is a final official statement, it must be available from the MSRB. The City shall clearly identify each such other document so included by reference.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the 2010 Bonds, if material:

(i) principal and interest payment delinquencies;

(ii) non-payment related defaults;

(iii) modifications to rights of 2010 Bondholders;

(iv) optional, contingent or unscheduled 2010 Bond calls;

(v) defeasances;

(vi) rating changes;

(vii) adverse tax opinions or events affecting the tax-exempt status of the 2010 Bonds;

90165268.7 D-73 (viii) unscheduled draws on the debt service reserves reflecting financial difficulties;

(ix) unscheduled draws on the credit enhancements reflecting financial difficulties;

(x) substitution of credit or liquidity providers, or their failure to perform; or

(xi) release, substitution or sale of property securing repayment of the 2010 Bonds.

(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable federal securities laws.

(c) If the City has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the City shall promptly notify the Dissemination Agent (if other than the City) in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (e).

(d) If the City determines that the Listed Event would not be material under applicable federal securities laws, the City shall so notify the Dissemination Agent (if other than the City) in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (e).

(e) If the Dissemination Agent has been instructed by the City to report the occurrence of a Listed Event (if the Dissemination Agent is other than the City or, if the Dissemination Agent is the City and the City has determined that knowledge of the occurrence of the Listed Event would be material under applicable federal securities laws), the Dissemination Agent shall file a notice of such occurrence with the National Repositories or the Municipal Securities Rulemaking Board, and the State Repositories, if any. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (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 2010 Bonds pursuant to the Indenture.

SECTION 6. Termination of Reporting Obligation. The obligations of the City and the Trustee under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the 2010 Bonds. In addition, in the event that the Rule shall be amended, modified or repealed such that compliance by the City with Sections 3, 4 and/or 5 hereof shall no longer be required in any or all respects, then the City’s obligations hereunder shall terminate to a like extent.

SECTION 7. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be the City.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Trustee may amend this Disclosure Agreement (and the Trustee shall agree to any amendment so requested by the City which does not impose any greater duties nor any greater risk of liability on the Trustee), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a) or 4, 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 2010 Bonds, or the type of business conducted;

90165268.7 D-74 (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 2010 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 either (i) is approved by the Holders of the 2010 Bonds in the same manner as provided in the Indenture with respect to amendments to the Indenture which require the consent of Holders, or (ii) does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the 2010 Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the City shall describe such amendment in its 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 City. 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 manner as provided under Section 5, 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 City 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, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in any Annual Report in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report.

SECTION 10. Default. In the event of a failure of the City or the Dissemination Agent (if the Dissemination Agent is other than the City) 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% aggregate principal amount of outstanding 2010 Bonds, shall, but only to the extent funds in an amount satisfactory to the Trustee have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges of the Trustee whatsoever, including, without limitation, fees and expenses of its attorneys), or any Holder or Beneficial Owner of the 2010 Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City or the Dissemination Agent (if the Dissemination Agent is other than the City), as the case may be, to comply with its obligations under this Disclosure Agreement. The sole remedy under this Disclosure Agreement in the event of any failure of the City or the Dissemination Agent (if the Dissemination Agent is other than the City) to comply with this Disclosure Agreement shall be an action to compel performance. The Trustee shall not owe any fiduciary duty to the Participating Underwriters nor shall its failure to comply with the request of any Participating Underwriter result in a breach of any of its fiduciary duties owed to the Holders.

SECTION 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the City agrees to indemnify and save the Dissemination Agent and Trustee, their officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the

90165268.7 D-75 Dissemination Agent or Trustee’s negligence or willful misconduct. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the 2010 Bonds. If the Trustee performs the duties assigned to it hereunder, the Trustee shall not be responsible to any person for any failure by the City or the Dissemination Agent (if other than the Trustee) to perform duties or obligations imposed hereby.

SECTION 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Trustee, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the 2010 Bonds, and shall create no rights in any other person or entity. No person shall have any right to commence any action against the Trustee or the Dissemination Agent seeking any remedy other than to compel specific performance of this Disclosure Agreement. Neither the Trustee nor the Dissemination Agent shall be liable under any circumstances for monetary damages to any person for any breach of this Disclosure Agreement.

SECTION 13. Notices. All written notices to be given hereunder shall be given in person or by mail to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time, namely:

To the City: City of Anaheim 200 South Anaheim Boulevard Anaheim, California 92805 Attention: City Clerk

and: City of Anaheim Public Utilities Department 201 South Anaheim Boulevard Anaheim, California 92805 Attention: Public Utilities General Manager

To the Trustee: U.S. Bank National Association Corporate Trust Services 633 West Fifth Street 24th Floor Los Angeles, California 90071 Attention: Corporate Trust

The Trustee and the City may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Unless specifically otherwise required by the context of this Disclosure Agreement, any notices required to be given hereunder to the Trustee or the City may be given by any form of electronic transmission capable of producing a written record. Each such party shall file with the Trustee information appropriate to receiving such form of electronic transmission.

90165268.7 D-76 SECTION 14. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

Dated: October __, 2010 CITY OF ANAHEIM

By Public Utilities Assistant General Manager— Finance and Administration

ATTEST:

______City Clerk

U.S. BANK NATIONAL ASSOCIATION, as Trustee

By Authorized Officer

90165268.7 D-77 EXHIBIT A

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: ANAHEIM PUBLIC FINANCING AUTHORITY

Name of Issue: ANAHEIM PUBLIC FINANCING AUTHORITY REVENUE BONDS, SERIES 2010-A (WATER SYSTEM PROJECT) (TAX-EXEMPT), and ANAHEIM PUBLIC FINANCING AUTHORITY REVENUE BONDS, SERIES 2010-B (WATER SYSTEM PROJECT) (FEDERALLY TAXABLE BUILD AMERICA BONDS)

Date of Issuance: October __, 2010

NOTICE IS HEREBY GIVEN that the City of Anaheim, California (the “City”) has not provided an Annual Report with respect to the above-named 2010 Bonds as required by the Continuing Disclosure Agreement, dated October __, 2010 between the City and U.S. Bank National Association, as trustee. The City anticipates that the Annual Report will be filed by ______.

Dated: ______CITY OF ANAHEIM

By:

Title:

90165268.7 D-A-78 APPENDIX E

BOOK-ENTRY SYSTEM

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority and the City believe to be reliable, but the Authority and the City take no responsibility for the accuracy thereof.

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 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 Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration

90165268.7 E-79 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 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being prepaid, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 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 Authority (or the Trustee on behalf thereof) 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 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 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 Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of such principal, premium and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or 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.

90165268.7 E-80 APPENDIX F

FORM OF OPINION OF BOND COUNSEL

Board of Directors Anaheim Public Financing Authority 200 South Anaheim Boulevard Anaheim, California 92805

City Council City of Anaheim 200 South Anaheim Boulevard Anaheim, California 92805

$______$______Anaheim Public Financing Authority Anaheim Public Financing Authority Revenue Bonds, Series 2010-A Revenue Bonds, Series 2010-B (Water System Project) (Water System Project) (Tax-Exempt) (Federally Taxable Build America Bonds)

Ladies and Gentlemen:

We have acted as bond counsel to the Anaheim Public Financing Authority, a joint exercise of powers entity established under the Constitution and laws of the State of California (the “Authority”), in connection with the issuance by the Authority of its $______Anaheim Public Financing Authority Revenue Bonds, Series 2010-A (Water System Project) (Tax-Exempt) (the “2010-A Bonds”) and its $______Anaheim Public Financing Authority Revenue Bonds, Series 2010-B (Water System Project) (Federally Taxable Build America Bonds) (the “2010-B Bonds,” and together with the 2010-A Bonds, the “2010 Bonds”).

The 2010 Bonds are being issued pursuant to Article 4 of Chapter 5 of Division 7 of Title 1 of the California Government Code and an Indenture of Trust, dated as of October 1, 2010 (the “Indenture”), by and between the Authority and U.S. Bank National Association, as trustee (the “Trustee”). The 2010 Bonds are payable from Project Revenues, as defined in the Indenture, consisting primarily of 2010 Purchase Payments to be made by the City of Anaheim, California (the “City”) pursuant to an Installment Purchase Agreement, dated as of October 1, 2010 (the “Installment Purchase Agreement”), by and between the Authority and the City. Proceeds of the 2010 Bonds will be used to finance the acquisition and construction of additional capital assets of the City’s Water System and to pay related costs of issuance. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Indenture or the Installment Purchase Agreement, as applicable.

As bond counsel, we have examined copies certified to us as being true and complete copies of the proceedings of the Authority and the City in connection with the issuance of the 2010 Bonds. We have also examined such certificates of officers of the Authority and the City and others as we have considered necessary for the purposes of this opinion.

90165268.7 F-81 Based upon the foregoing, we are of the opinion that:

1. The 2010 Bonds constitute valid and binding limited obligations of the Authority as provided in the Indenture, and are entitled to the benefits of the Indenture. The 2010 Bonds are payable from Project Revenues (as such term is defined in the Indenture), which Project Revenues include 2010 Purchase Payments under the Installment Purchase Agreement.

2. The Indenture has been duly and validly authorized, executed and delivered by the Authority and, assuming the enforceability thereof against the Trustee, constitutes the legally valid and binding obligation of the Authority, enforceable against the Authority in accordance with its terms. The Indenture creates a valid pledge, to secure the payment of principal of and interest on the 2010 Bonds, of the Project Revenues and other amounts held by the Trustee in the funds and accounts established pursuant to the Indenture, subject to the provisions of the Indenture permitting the application thereof for other purposes and on the terms and conditions set forth therein.

3. The Installment Purchase Agreement has been duly and validly authorized, executed and delivered by the Authority and the City, and constitutes the legally valid and binding obligation of the Authority and the City, enforceable against the Authority and the City in accordance with its terms. The Installment Purchase Agreement creates a valid pledge, to secure the payment of 2010 Purchase Payments by the City, of Surplus Revenues of the Water System, on the terms and conditions set forth therein.

4. The Internal Revenue Code of 1986 (the “Code”) imposes certain requirements that must be met subsequent to the issuance and delivery of the 2010-A Bonds for interest thereon to be and remain excluded from the gross income of the owners thereof for federal income tax purposes. Noncompliance with such requirements could cause the interest on the 2010-A Bonds to be included in gross income retroactive to the date of issue of the 2010-A Bonds. The Authority and the City have covenanted in the Indenture and the Installment Purchase Agreement to maintain the exclusion of interest on the 2010-A Bonds from the gross income of the owners thereof for federal income tax purposes.

In our opinion, under existing law interest on the 2010 Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenant, interest on the 2010-A Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes.

We are further of the opinion that under existing statutes, regulations, rulings and court decisions, the 2010-A Bonds are not “specified private activity bonds” within the meaning of section 57(a)(5) of the Code and, therefore, interest on the 2010-A Bonds 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. Receipt or accrual of interest on 2010-A Bonds owned by a corporation may affect the computation of the alternative minimum taxable income, upon which the alternative minimum tax is imposed, to the extent that such interest is taken into account in determining the adjusted current earnings of that corporation (75% of the excess, if any, of such adjusted current earnings over the alternative minimum taxable income being an adjustment to alternative minimum taxable income (determined without regard to such adjustment or to the alternative tax net operating loss deduction)).

Except as stated in the preceding three paragraphs, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the 2010 Bonds.

90165268.7 F-82 Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the 2010 Bonds, or the interest thereon, if any action is taken with respect to the 2010 Bonds or the proceeds thereof predicated or permitted upon the advice or approval of other bond counsel.

The opinions expressed in paragraphs 1 through 3 above are qualified to the extent the enforceability of the 2010 Bonds, the Indenture and the Installment Purchase Agreement may be limited by applicable bankruptcy, insolvency, debt adjustment, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors’ rights generally or as to the availability of any particular remedy. The enforceability of the 2010 Bonds, the Indenture and the Installment Purchase Agreement is subject to the effect of general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, to the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and to the limitations on legal remedies against governmental entities in California.

No opinion is expressed herein on the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the 2010 Bonds.

Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

Very truly yours,

90165268.7 F-83