NEW ISSUE - BOOK ENTRY ONLY

$300,000,000 EAST BAY MUNICIPAL UTILITY DISTRICT (Alameda and Contra Costa Counties, California) WATER SYSTEM SUBORDINATED REVENUE BONDS, SERIES 2005A Dated: Date of Delivery Due: June 1, as shown below This cover page contains certain information for general reference only. It is not intended to be a summary of the security or tenns of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Interest on the Series 2005A Bonds is payable on December l, 2005, and semiannually thereafter on June l and December l of each year. Principal is payable on June l of the years set forth below. The Series 2005A Bonds will be issued in fully-registered form, without coupons, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York. DTC will act as securities depository for the Series 2005A Bonds. Purchasers of the Series 2005A Bonds will not receive certificates representing their interests in the Series 2005A Bonds purchased. The principal or redemption price of and interest due with respect to the Series 2005A Bonds are payable by The Bank of New York Trust Company, N.A., as trustee, to DTC, which is obligated in turn to remit such principal or redemption price and interest to the DTC participants for subsequent disbursement to the beneficial owners of the Series 2005A Bonds, as described herein. The Series 2005A Bonds are subject to optional and mandatory redemption prior to maturity as more fully described herein. The scheduled payment of principal of and interest on the Series 2005A Bonds when due will be guaranteed under an insurance policy to be issued, concurrently with the delivery of the Series 2005A Bonds, by MBIA Insurance Corporation. MBIA The Series 2005A Bond proceeds will be used to (i) provide additional moneys to finance improvements to the Water System, (ii) fund a reserve fund for the Series 2005A Bonds, and (iii) pay costs of issuance incidental to the issuance of the Series 2005A Bonds, as described herein. The Series 2005A Bonds are special obligations of the District, payable solely from and secured by a pledge of Subordinated Water Revenues, and are subordinate to any of the District's Senior Water Bonds hereafter issued, as more fully described herein. There are no Senior Water Bonds currently outstanding. The Series 2005A Bonds are issued on a parity with the District's Subordinated Water Bonds and Parity Debt heretofore or hereafter issued, as more fully described herein including certain payment obligations of the District under interest rate swap agreements entered into by the District in connection therewith. The general fund of the District is not liable, and the credit or taxing power of the District is not pledged, for the payment of the Series 2005A Bonds or the interest thereon.

In the opinion of Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel, based on existing statutes, regulations, rulings and judicial decisions and assuming compliance with certain covenants in the documents perlaining to the Series 2005A Bonds and requirements of the Internal Revenue Code of 1986, as amended, as described herein, interest on the Series 2005A Bonds is not includable in the gross income of the owners of the Series 2005A Bonds for federal income tax purposes. In the further opinion of Co-Bond Counsel, interest on the Series 2005A Bonds is not treated as an item of tax preference in calculating the federal alternative minimum taxable income ofindividuals and corporations. Interest on the Series 2005A Bonds, however, is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation's alternative minimum tax liability. In the further opinion of Co-Bond Counsel, interest on the Series 2005A Bonds is exempt from personal income taxes imposed by the State of California. See the caption "TAX MATTERS" herein.

MATURITY SCHEDULE $117,265,000 Serial Series 2005A Bonds Maturity Date (June 1) Principal Amount Interest Rate Yield 2027 $27 ,205,000 5.00% 4.33%(c) 2028 28,570,000 5.00 4.35(c) 2029 29,995,000 5.00 4.37 ( c) 2030 31,495,000 5.00 4.38(c)

$182,735,000 5.00% Tenn Series 2005A Bonds due June 1, 2035 Yield: 4.40%(c)

(c) Yield to the optional redemption date of June 1, 2015 at par. The Series 2005A Bonds will be offered when, as and if issued, subject to the approval of validity by Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the District by its General Counsel and for the Underwriters by Stradling Yocca Carlson & Rauth, A Professional Corporation. Cerlain legal matters will be passed on for MBIA Insurance Corporation by its General Counsel. It is anticipated that the Series 2005A Bonds will be available for delivery in New York, New York through the DTC book-ent,y system on or about June 2, 2005. OTIGROUP Bear, Stearns & Co. Inc. E. J. De La Rosa & Co., Inc. Lehman Brothers Merrill Lynch & Co. Siebert Brandford Shank & Co., LLC Dated: May 5, 2005 No dealer, broker, salesperson or other person has been anthorized by the District or the Underwriters to give any information or to make any representation other than as set forth herein and, if given or made, snch other information or representation mnst not be relied npon as having been anthorized by the District or the Underwriters. This Official Statement does not constitnte an offer to sell or the solicitation of an offer to bny nor shall there be any sale of the Series 2005A Bonds by a person in any jnrisdiction in which it is nnlawful for snch person to make snch an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the pnrchasers of the Series 2005A 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 snch and are not to be construed as representations of facts.

The Underwriters have provided the following sentence for inclusion in this Official Statement:

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

The information set forth in this Official Statement has been obtained from official sources and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Underwriters. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2005A BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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

The issnance and sale of the Series 2005A Bonds have not been registered nnder the Secnrities Act of 1933 or the Secnrities Exchange Act of 1934, both as amended, in reliance npon exemptions provided therennder by Sections 3(a)(2) and 3(a)(l2), respectively, for the issnance and sale of mnnicipal securities.

The District maintains a website. However, the information presented there is not part of this Official Statement and shonld not be relied npon in making an investment decision with respect to the Series 2005A Bonds. EAST BAY MUNICIPAL UTILITY DISTRICT Alameda and Contra Costa Counties, California 375 - I Ith Street Oakland, California 94607 (510) 835-3000

Board of Directors

William B. Patterson, President Lesa R. Mcintosh, Vice President John A. Coleman Katy Foulkes Doug Linney Frank Mellon David Richardson

Management

Dennis M. Diemer, General Manager Robert C. Helwick, General Counsel W. Robert Alcott, Director of Water and Natural Resources Gary Breaux, Director of Finance Artis L. Dawson, Director of Administration Marilyn L. Miller, Director of Engineering and Construction Michael J. Wallis, Director of Operations and Maintenance David R. Williams, Director of Wastewater Lynelle M. Lewis, Secretary of the District Lloyd J. Sawchuk, Treasury Manager

Co-Bond Counsel

Sidley Austin Brown & Wood LLP Lofton & Jennings San Francisco, California San Francisco, California

Co-Financial Advisors

Public Financial Management, Inc. San Francisco, California

P.G. Corbin & Co., Inc. San Francisco, California

Trustee The Bank of New York Trust Company, N.A. San Francisco, California (This page intentionally left blank) TABLE OF CONTENTS Page

INTRODUCTION ...... 1 Purpose ...... 1 The District ...... 1 Security for the Series 2005A Bonds ...... 1 Series 2005A Bond Reserve Fund ...... 2 Bond Insurance ...... 2 Rate Covenant ...... 2 Continuing Disclosure ...... 3 Professionals Involved in the Issue ...... 3 Summaries Not Definitive ...... 3 Additional Information ...... 4 Changes Since the Preliminary Official Statement...... 4 THE SERIES 2005A BONDS ...... 4 General Description ...... 4 Redemption ...... 4 ESTIMATED SOURCES AND USES OF FUNDS ...... 6 SECURITY FOR THE SERIES 2005A BONDS ...... 6 General...... 6 Series 2005A Bond Reserve Fund ...... 7 Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt ...... 9 Issuance of Additional Senior Water Bonds ...... 9 Allocation of Net Revenues Under the Senior Water Bond Resolution; Rate Stabilization Fund ...... 10 Allocation of Subordinated Water Revenues Under the Indenture ...... 11 Investment of Monies in Funds and Accounts Under the Indenture ...... 12 Issuance of Additional Subordinated Water Bonds and Parity Debt; Junior and Subordinate Obligations ...... 12 Commercial Paper ...... 13 State Loans and Federal Loan ...... 13 Interest Rate Swap Agreements ...... 14 BOND INSURANCE ...... 14 The MBIA Insurance Corporation Insurance Policy ...... 14 MBIA ...... 15 MBIA Information ...... 16 Financial Strength Ratings ofMBIA ...... 16 THE DISTRICT ...... 17 Organization ...... 17 District Board ...... 17 District Management ...... 19 Service Area...... 20 Annexations, Ultimate Service Area and Spheres of Influence ...... 20 Employee Relations ...... 21 Contract Equity Program ...... 21 Insurance ...... 21 THE WATER SYSTEM ...... 22 General...... 22 Water Supply ...... 22 Water Facilities ...... 24

1 TABLE OF CONTENTS (continued) Page

Water Rights and Related Proceedings ...... 25 Water Treatment ...... 28 Water Consumption ...... 28 Current Water Conditions Update ...... 29 Water Supply Management Plan ...... 29 Water Conservation ...... 32 Wastewater Recycling ...... 32 Capital Improvement Program ...... 33 Seismic Matters ...... 3 7 Seismic Improvement Program ...... 3 7 WATER SYSTEM FINANCES ...... 39 Basis of Accounting ...... 39 Sources of Funds ...... 39 Rates and Charges ...... 41 Comparison of Annual Water Service Charges ...... 42 Annexations ...... 43 Billing and Collection Procedures ...... 44 Tax Revenues ...... 44 System Capacity Charge ...... 46 Power Sales ...... 46 Developer Contributions ...... 46 Grants ...... 47 Taxation of the District ...... 47 Employees' Retirement Systern ...... 47 District Investment Policy ...... 49 Outstanding Debt ...... 49 Debt Management Policies ...... 52 Historic Operating Results ...... 52 District Management's Discussion of Operating Results ...... 53 Projected Operating Results ...... 53 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ...... 55 Tax Limitations - Proposition 13 ...... 55 Spending Limitations ...... 56 Proposition 62 ...... 56 Proposition 218 ...... 57 Future Initiatives ...... 59 Effect of Proposition 218 and of Possible General Limitations on Enforcement Remedies ...... 59 CONTINUING DISCLOSURE ...... 60 LITIGATION ...... 60 RATINGS ...... 60 TAX MATTERS ...... 60 UNDERWRITING ...... 62 APPROVAL OF LEGAL PROCEEDINGS ...... 62 FINANCIAL ADVISOR ...... 62 INDEPENDENT ACCOUNTANTS ...... 62 MISCELLANEOUS ...... 63

11 TABLE OF CONTENTS (continued) Page

APPENDIX A EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004 ...... A-1 APPENDIX B SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ...... B-1 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION ...... C-1 APPENDIX D FORM OF CO-BOND COUNSEL OPINION ...... D-1 APPENDIX E DTC AND THE BOOK-ENTRY ONLY SYSTEM ...... E-1 APPENDIX F SUMMARY OF CERTAIN PROVISIONS OF THE STATE LOANS ...... F-1 APPENDIX G SPECIMEN BOND INSURANCE POLICY ...... G-1 APPENDIX H FORM OF CONTINUING DISCLOSURE AGREEMENT FOR SERIES 2005A BONDS ...... H-1

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

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SAN FRANCISCO i \ \ '\ \

\ \ \\ \ \ '\ \ HAYWARD . / + \\/ ~ OFFICIAL STATEMENT

$300,000,000 East Bay Municipal Utility District (Alameda and Contra Costa Counties, California) Water System Subordinated Revenue Bonds, Series 2005A

INTRODUCTION

This Introduction is subject in all respects to the more complete information contained and referenced elsewhere in this Official Statement. The offering of the Series 2005A Bonds to potential investors is made only by means of the entire Official Statement.

Purpose

The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth certain information concerning the East Bay Municipal Utility District (the "District''), the water supply, treatment and distribution system owned by the District (the "Water System" or the "System"), and System finances, in connection with the sale of the District's $300,000,000 Water System Subordinated Revenue Bonds, Series 2005A (the "Series 2005A Bonds'').

The Series 2005A Bonds are being issued for the purposes of (i) providing additional moneys to finance improvements to the Water System (ii) funding a reserve fund for the Series 2005A Bonds, and (iii) paying the costs of issuance incidental to the issuance of the Series 2005A Bonds, as more fully described under the captions "ESTIMATED SOURCES AND USES OF FUNDS" and "WATER SYSTEM-Capital Improvement Program" herein. Unless otherwise noted, all information in tables has been provided by the District.

The District

The District is a municipal utility district, created in 1923 by vote of the electorate in portions of Alameda and Contra Costa Counties in the State of California (the "State"). The District is formed under the authority of the Municipal Utility District Act, constituting Division 6 of the Public Utilities Code of the State, commencing with Section 11501 (the 'Municipal Utility District Act''). Pursuant to the Municipal Utility District Act, the District is empowered to own and operate the Water System See the caption "THE DISTRICT" herein. The Water System treats and disposes of sewage from a portion of the area within the District, which is designated as Special District No. I.

Security for the Series 2005A Bonds

The Series 2005A Bonds are special obligations of the District, payable solely from and secured by a pledge of the Subordinated Water Revenues of the District, as defined in the Water System Subordinated Revenue Bond Indenture, dated as of April I, 1990, by and between the District and First Interstate Bank of California, which has been succeeded by The Bank of New York Trust Company, N.A., as trustee (the "Trustee"), as amended and supplemented, including as amended and supplemented by a Eleventh Supplemental Indenture dated as of June I, 2005, providing for the issuance of the Series 2005A Bonds (collectively, the "Indenture"). THE GENERAL FUND OF THE DISTRICT IS NOT LIABLE FOR, AND THE CREDIT OR TAXING POWER OF THE DISTRICT IS NOT PLEDGED TO, THE PAYMENT OF THE SERIES 2005A BONDS OR THE INTEREST THEREON.

I The Series 2005A Bonds are not payable from or secured by the revenues of the wastewater system of the District. See the caption "SECURITY FOR THE SERIES 2005A BONDS - General - Pledge of Subordinated Water Revenues" herein.

The Series 2005A Bonds are junior and subordinate to any senior water revenue bonds hereafter issued pursuant to the Senior Water Bond Resolution (collectively, the "Senior Water Bonds''). There are no Senior Water Bonds currently outstanding.

The Series 2005A Bonds will be secured on a parity with the $1,181,150,000 aggregate principal amount of the District's Water System subordinated revenue bonds Outstanding as of May I, 2005, together with any additional Water System subordinated revenue bonds hereafter issued (collectively, the "Subordinated Water Bonds"), with certain amounts which are payable by the District with respect to certain interest rate swap agreements, and any Parity Debt ( as hereinafter defined) that may hereafter be incurred in accordance with the Indenture. See the captions "SECURITY FOR THE SERIES 2005A BONDS - Senior Water Bonds and Outstanding Subordinated Water Bonds", "- Issuance of Additional Senior Water Bonds," "- Interest Rate Swap Agreements" and "- Issuance of Additional Subordinated Water Bonds and Parity Debt" herein.

On May 4, 2005, the District also entered into variable to fixed rate interest rate swap agreements in an aggregate notional amount of $325,000,000 in connection with the issuance of the Series 2005B Bonds (the "Series 2005B Swap Agreements). The District has entered into a Purchase Contract dated May 5, 2005 (the "Series 2005B Purchase Contract'') pursuant to which the District has agreed to sell to Citigroup Global Markets Inc., as representative of the underwriters identified therein, $325,000,000 variable rate Water System Subordinated Revenue Refunding Bonds, Series 2005B ( the "Series 2005B Bonds"). Additionally, the District has authorized the issuance of additional variable rate Subordinated Water Bonds in an aggregate principal amount not to exceed $100,000,000 (the "Series 2005C Bonds" and, together with the Series 2005A Bonds and the Series 2005B Bonds, the "Series 2005 Bonds''). See caption "SECURITY FOR THE BONDS-Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt" herein.

Series 2005A Bond Reserve Fund

On the date of issuance of the Series 2005A Bonds, the Trustee shall deposit into the Series 2005A Bond Reserve Fund from the proceeds of the Series 2005A Bonds an amount of $12,000,000, which is equal to the Series 2005A Bond Reserve Requirement. See "SECURITY FOR THE SERIES 2005A BONDS-Series 2005A Bond Reserve Fund.

Bond Insurance

Payment of the principal of and interest on the Series 2005A Bonds when due will be insured by a municipal bond insurance policy to be issued by MBIA Insurance Corporation (the "Bond Insurer") simultaneously with the delivery of the Series 2005A Bonds. See the caption "BOND INSURANCE" herein.

Rate Covenant

The District covenants under the Indenture that it will at all times, while any of the Subordinated Water Bonds (including the Series 2005A Bonds) remain Outstanding, fix, prescribe and collect rates, fees and charges in connection with the services and facilities furnished by the Water System so as to yield Water Revenues ( as hereinafter defined) in each Fiscal Year sufficient so that the sum of the Subordinated Water Revenues (as hereinafter defined) for such year plus all amounts required to be paid

2 under the Senior Water Bond Resolution for the Senior Water Bonds for such year for principal, interest, reserve fund and any other debt service requirements on the Senior Water Bonds shall be at least equal to I. I times the amount of Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt for such Fiscal Year. See "APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Covenants" hereto.

Continuing Disclosure

The District has covenanted for the benefit of the holders and beneficial owners of the Series 2005A Bonds to provide certain financial information and operating data relating to the District by not later than 270 days following the end of the District's fiscal year (which currently begins on July I and ends on June 30 of each year (a "Fiscal Year'') (the "Annual Report"), commencing with the Annual Report for Fiscal Year 2004-05, and to provide notices of the occurrence of certain enumerated events, if material. See "CONTINUING DISCLOSURE" herein. These covenants have been made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b )(5). The District has not failed to comply in any material respect with the terms of any prior continuing disclosure undertaking. See "APPENDIX H - FORM OF CONTINUING DISCLOSURE AGREEMENT FOR THE SERIES 2005A BONDS."

Professionals Involved in the Issue

The Bank of New York Trust Company, N.A. acts as Trustee under the Indenture. Certain legal matters incident to the authorization, issuance and sale of the Series 2005A Bonds are subject to the approval of Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel. Certain legal matters will be passed upon for the District by its General Counsel, for the Underwriters by Stradling Yocca Carlson & Rauth, A Professional Corporation, and the Insurer by its General Counsel. Public Financial Management, Inc., San Francisco, California, and P.G. Corbin & Co., Inc., San Francisco, California, are serving as Co-Financial Advisors to the District.

Summaries Not Definitive

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

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

3 Additional Information

The District regularly prepares a variety of publicly available reports, including audits, budgets and related documents. Any Bondholder may obtain a copy of any such report, as available, from the Trustee or the District. Additional information regarding this Official Statement may be obtained by contacting the Trustee or: Director of Finance, East Bay Municipal Utility District, 375-Eleventh Street, Oakland, California 94607, (510) 287-0310

Changes Since the Preliminary Official Statement

This Official Statement includes certain changes since the date of the Preliminary Official Statement under the captions "INTRODUCTION-Security for the Series 2005A Bonds," "SECURITY FOR THE SERIES 2005A BONDS-Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt" and "-Interest Rate Swap Agreements" to reflect that the District has entered into the Series 2005B Purchase Contract pursuant to which it has agreed to sell the Series 2005B Bonds in the aggregate principal amount of $325,000,000 and has entered into the Series 2005B Swap Agreements in the aggregate notional amount of $325,000,000 in connection with the issuance of Series 2005B Bonds.

THE SERIES 2005A BONDS

General Description

The Series 2005A Bonds will be issued in the aggregate principal amounts, will bear interest at the rates and will mature in the years and amounts all as set forth on the inside cover page of this Official Statement. The Series 2005A Bonds will be issued in denominations of $5,000 or any integral multiple thereof. The Series 2005A Bonds will be dated and shall bear interest from the Closing Date. Interest on the Series 2005A Bonds is payable on each June I and December I, commencing December I, 2005. The Series 2005A Bonds will be issued as fully registered bonds in book-entry form only and when delivered will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC''), which will act as securities depository for the Series 2005A Bonds. See "APPENDIX E - DTC AND THE BOOK-ENTRY ONLY SYSTEM."

Redemption

Optional Redemption. The Series 2005A Bonds are subject to redemption prior to their respective stated maturities, at the option of the District, from any source of available funds, as a whole or in part on any date (by such maturities as may be specified by the District and by lot within a maturity) on or after June I, 2015, at a redemption price equal to the principal amount of Series 2005A Bonds called for redemption plus accrued interest to the date fixed for redemption, without premium.

4 Mandatory Redemption. The Series 2005A Bonds maturing on June 1. 2035 are subject to redemption prior to their stated maturities. in part. by lot. from Mandatory Sinking Account Payments as specified below. commencing on June 1. 2031. at the principal amount of the Series 2005A Bonds so redeemed plus accrued interest thereon to but not including the date fixed for redemption. without pre nuum.

Term Series 2005A Bonds Due June 1, 2035

Mandatory Sinking Account Payment Dates Mandatory Sinking (June 1) Account Payments 2031 $ 33,070,000 2032 34,725,000 2033 36,460,000 2034 38,285,000 2035t 40,195,000 t Final Maturity.

Notice of Redemption. Notice of redemption of the Series 2005A Bonds shall be mailed by the Trustee. not less than thirty (30) nor more than sixty (60) days prior to the redemption date. to DTC or. if the book-entry system as described in Appendix E has been discontinued. by first-class mail. to the respective Owners of any Series 2005A Bonds designated for redemption and the Bond Insurer in the manner and under the terms and conditions provided in the Indenture.

Selection of Bonds for Redemption. Whenever provision is made in the Indenture for the redemption of less than all of the Series 2005A Bonds to be redeemed. from all Series 2005A Bonds of the respective maturity (and interest rate) not previously called for redemption. in authorized denomination. by lot in any manner which the Trustee in its sole discretion shall deem appropriate and fair.

Effect of Redemption. If notice of redemption is given as provided in the Indenture. and moneys for payment of the Redemption Price. together with accrued interest to the redemption date on the Series 2005A Bonds ( or portions thereof ) called for redemption is held by the Trustee. then the Series 2005A Bonds ( or portions thereof) designated for redemption shall become due and payable at the Redemption Price in the notice of redemption. together with accrued interest thereon to the date fixed for redemption. and interest on such Series 2005A Bonds so called for redemption shall cease to accrue and shall cease to be entitled to any benefit or security under the Indenture.

5 ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds with respect to the Series 2005A Bonds are as follows:

Sources Principal Amount of Series 2005A Bonds $ 300,000,000.00 Original Issue Premium 14 832 423.15 Total $ 314,832,423.15

Uses Series 2005A Water System Fund $ 299,743,306.15 Series 2005A Bond Reserve Fund 12,000,000.00 Underwriter's Discount 1,735,117.00 Costs of Issuance(!) I 354 000.00 Total $ 314,832,423.15

Cl) Includes legal, financing and consulting fees, rating agency fees, bond insurance premium, printing costs and other miscellaneous expenses.

SECURITY FOR THE SERIES 2005A BONDS

General

Authority for Issuance. The Series 2005A Bonds are authorized for issuance pursuant to the Municipal Utility District Act and all laws of the State amendatory thereof or supplemental thereto, including the Revenue Bond Law of 1941, as made applicable by Article 6a of Chapter 6 of Division 6 of the Municipal Utility District Act, and Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State (collectively, the "Act"), resolutions adopted by the District and the Indenture. By Resolution No. 32967-96, adopted by the Board of Directors of the District on February 13, 1996, the Board declared its intention to issue up to $700,000,000 of Water System revenue bonds. Following the issuance of the Series 2005A Bonds, all $700,000,000 of bonds authorized under Resolution No. 32967-96 will have been issued. Additionally, by Resolution No. 33272-01 adopted by the Board November 13, 2001, the Board declared its intention to issue up to $700,000,000 of Water System revenue bonds. Following the issuance of the Series 2005A Bonds, $550,000,000 of bonds will remain authorized but unissued under Resolution No. 33272-01. The District has heretofore and may from time to time hereafter adopt other resolutions authorizing the issuance of Senior Water Bonds and additional Subordinated Water Bonds or other Parity Debt, subject to the satisfaction of the conditions set forth in the Senior Water Bond Resolution or the Indenture. The issuance of revenue bonds by the District is not subject to prior voter approval, although such bond resolutions are subject to referendum. See caption "--Senior Water Bonds, and Outstanding Subordinated Water Bonds and Parity Debt" below.

Pledge of Subordinated Water Revenues. Pursuant to the Indenture, the District has irrevocably pledged to the payment of the principal or redemption price of and interest on the Subordinated Water Bonds, including the Series 2005A Bonds and any Parity Debt, all Subordinated Water Revenues (as hereinafter defined) and all amounts held by the Trustee under the Indenture ( except for amounts held in the Rebate Fund) subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein.

"Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the District for borrowed money or interest rate swap agreements having an equal lien and

6 charge upon the Subordinated Water Revenues and therefore payable on a parity with the Subordinated Water Bonds (whether or not any Subordinated Water Bonds are Outstanding).

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

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

The Series 2005A Bonds are special obligations of the District, payable solely from and secured by a pledge of Subordinated Water Revenues. The general fund of the District is not liable, and the credit or taxing power of the District is not pledged, for the payment of the Series 2005A Bonds or the interest thereon.

The Series 2005A Bonds are not payable from or secured by the revenues of the Wastewater System of the District.

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

Series 2005A Bond Reserve Fund

On the date of issuance of the Series 2005A Bonds, the Trustee shall deposit to the Series 2005A Bond Reserve Fund the amount of $12,000,000, which equals the Series 2005A Bond Reserve Requirement. In addition, the Trustee shall deposit in the Series 2005A Bond Reserve Fund, from any amount remaining in the Revenue Fund, on any interest payment date following the transfer to the Interest Fund and the Principal Fund as required by the Indenture, that amount of money which shall be required either (i) to maintain the Series 2005A Bond Reserve Fund in the full amount of the Series 2005A Bond Reserve Requirement or (ii) to repay any and all obligations due and payable under the terms and conditions of any letter of credit or insurance policy or surety bond. No deposit need be made in the

7 Series 2005A Bond Reserve Fund so long as there shall be on deposit therein a sum equal to at least the amount required to maintain the Series 2005A Bond Reserve Requirement. Whenever the amount on deposit in the Series 2005A Bond Reserve Fund is less than the Series 2005A Bond Reserve Requirement, such amount shall be increased to the Series 2005A Bond Reserve Requirement as provided for in the Indenture not later than twelve months thereafter. All amounts in the Series 2005A Bond Reserve Fund shall be used and withdrawn by the Trustee solely for the purposes of making up any deficiency in the Interest Fund or the Principal Fund for the payment of principal and interest on the Series 2005A Bonds, or (together with any other moneys available therefor) for the payment or redemption of all Series 2005A Bonds then Outstanding, or for the payment of the final principal and interest payments of the Series 2005A Bonds. Any amounts in the Series 2005A Bond Reserve Fund in excess of the Series 2005A Bond Reserve Requirement, shall be transferred by the Trustee to the District on June 1 and December 1 of each year. Moneys in the Series 2005A Bond Reserve Fund shall be invested, as directed by the District, in (i) Investment Securities, (ii) investment agreements with a domestic or foreign bank or corporation ( other than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor, is rated not lower than their respective long-term ratings on any of the District's Outstanding Subordinated Water Bonds (without giving effect to any credit enhancement) by Moody's (if Moody's is then rating any of the District's Outstanding Subordinated Water Bonds) and Standard & Poor's (if Standard & Poor's is then rating any of the District's Outstanding Subordinated Water Bonds), or (iii) any other forms of investments (including investment agreements) approved in writing by the Series 2005A Bond Insurer, with a maturity date no later than the final maturity of the Series 2005A Bonds. All Investment Securities credited to the Series 2005A Bond Reserve Fund shall be valued at the cost thereof.

All amounts in the Series 2005A Bond Reserve Fund (including all amounts which may be obtained from letters of credit and surety bonds and insurance policies on deposit in the Series 2005A Bond Reserve Fund) may be used and withdrawn by the Trustee, as provided in the Indenture, solely for the purpose of making up any deficiency in the Interest Fund or the Principal Fund or the payment of the Series 2005A Bonds. In the event of any deficiency in the Interest Fund or Principal Fund for the payment of principal and interest payments for the Bonds, Subordinated Water Revenues shall be applied in accordance with the Indenture without regard to the existence of any reserve fund for any Series of Bonds. After first applying all cash and Investment Securities held in the Series 2005A Bond Reserve Fund to pay the Bond Obligation (as defined in the Indenture) of, Mandatory Sinking Account Payments with respect to, and interest on, Bonds when due, the Trustee shall, on a pro rata basis with respect to the portion of the Series 2005A Bond Reserve Fund held in the form of letters of credit and amounts held in the form of surety bonds and insurance policies ( calculated by reference to the maximum amounts of such letters of credit and surety bonds and insurance policies), draw under each letter of credit or surety bond or insurance policy issued with respect to the Series 2005A Bond Reserve Fund, in a timely manner and pursuant to the terms of such letter of credit or surety bond or insurance policy to the extent necessary in order to obtain sufficient funds on or prior to the date such funds are needed to pay the Bond Obligation of, Mandatory Sinking Account Payments with respect to, and interest on, the Series 2005A Bonds when due. In the event that the Trustee has written notice from the District or any Bondholder that any payment of principal of, or interest on, a Series 2005A Bond has been recovered from a Series 2005A Bondholder pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with the final, nonappealable order of a court having competent jurisdiction, the Trustee, pursuant to and provided that the terms of the letter of credit or surety bond or insurance policy, if any, credited to the Series 2005A Bond Reserve Fund so provide, shall so notify the issuer thereof and draw on such letter of credit or surety bond or insurance policy to the lesser of the extent required or the maximum amount of such letter of credit or surety bond or insurance policy in order to pay to such Series 2005A Bondholders the principal of and interest so recovered. All amounts in the Series 2005A Bond Reserve Fund ( other than amounts which may be obtained from letters of credit and surety bonds and insurance policies on deposit

8 in the Series 2005A Bond Reserve Fund) may be used and withdrawn by the Trustee, if so directed by the District, for the payment or redemption of all Series 2005A Bonds then Outstanding, or for the payment of the final principal and interest payments of the Series 2005A Bonds.

The Series 2005A Bond Reserve Fund secures only the Series 2005A Bonds and is not available for the payment of any other Series of Subordinated Water Bonds. Amounts held in any other Bond Reserve Fund under the Indenture for any other Series of Subordinated Water Bonds are not available for the payment of the Series 2005A Bonds.

Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt

Senior Water Bonds. Currently, there are no Senior Water Bonds outstanding under the District's Senior Water Bond Resolution. Any Senior Water Bonds hereafter issued in accordance with the Senior Water Bond Resolution, would be payable from Water Revenues prior to the payment of the District's Subordinated Water Bonds, including the Series 2005A Bonds hereby offered.

Outstanding Subordinated Water Bonds and Parity Debt. As of May I, 2005, the District had outstanding $1,181,150,000 aggregate principal amount of Subordinated Water Bonds (collectively, the "Outstanding Subordinated Water Bonds''), issued under and pursuant to the Indenture. See caption "WATER SYSTEM FINANCES-Outstanding Debt" herein.

Pursuant to Resolution No. 33472-05 adopted by the Board on April 26, 2005, the Board authorized the issuance of not to exceed $725,000,000 aggregate principal amount of Subordinated Water Bonds, including the $300,000,0000 aggregate principal amount of the Series 2005A Bonds. The District has entered into the Series 2005B Purchase Contract pursuant to which it has agreed to sell $325,000,000 aggregate principal amount of Series 2005B Bonds to effect a partial refunding of the District's Water System Subordinated Revenue/Refunding Bonds, Series 1996 (the "Series 1996 Bonds'') and Water System Subordinated Revenue Bonds, Series 1998 (the "Series 1998 Bonds"). The District also anticipates issuing the Series 2005C Bonds as additional variable rate Subordinated Water Bonds in the approximate aggregate principal amount of $100,000,000 to retire a portion of the District's outstanding Commercial Paper Notes (Water Series). The District makes no assurance as to whether or not the Series 2005C Bonds will be issued, the principal amount of the Series 2005C Bonds or the timing of the issuance of the Series 2005C Bonds.

Pursuant to Resolution No. 33472-05, the District has entered into $325,000,000 aggregate notional amount of Series 2005B Swap Agreements with an effective date of June 2, 2005, the expected delivery date of the Series 2005B Bonds. See caption"- Interest Rate Swap Agreements" herein.

Additionally, the District has outstanding loans with the State of California's State Water Resources Control Board and certain interest rate swap agreements, including the Series 2005B Swap Agreements, the scheduled payments under which are payable from Water Revenues on a parity to the Subordinated Water Bonds. See caption "- State Loans and Federal Loan," "- Interest Rate Swap Agreements" and "WATER SYSTEM FINANCES - Outstanding Debt" herein. The Outstanding Subordinated Water Bonds, together with any additional Subordinated Water Bonds issued under the Indenture, and any Parity Debt hereafter issued or incurred in accordance with the Indenture, will be on a parity with the Series 2005A Bonds as to the pledge of and lien on Subordinated Water Revenues.

Issuance of Additional Senior Water Bonds

The District covenants under the Indenture that it will not create any pledge, lien or charge upon any of the Subordinated Water Revenues having priority over or having parity with the lien of the

9 Subordinated Water Bonds except for Senior Water Bonds issued pursuant to the Senior Water Bond Resolution and such other indebtedness as permitted in the Indenture. The District also covenants that it will not amend or change the Senior Water Bond Resolution in any manner which would permit the issuance of additional Senior Water Bonds in a greater principal amount than would have been permitted thereunder prior to such amendment or change or reduce the percentage or coverage requirements contained therein. The Indenture otherwise does not limit the issuance of additional Senior Water Bonds or the amendment of the Senior Water Bond Resolution. The Indenture provides that the District may not issue any Senior Water Bonds in such amount as would cause the District to be in violation of the rate covenant contained in the Indenture.

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

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

The District may issue refunding Senior Water Bonds pursuant to the Senior Water Bond Resolution without compliance with the foregoing provisions subject to certain conditions specified in the Senior Water Bond Resolution. See "APPENDIX C - SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION - Refunding Bonds" herein.

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

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

The District may withdraw amounts from time to time held in the Rate Stabilization Fund within 120 days after the end of the applicable Fiscal Year. Amounts so withdrawn shall be included in Water Revenues for such Fiscal Year and may be applied for any purposes for which Water Revenues generally are available. All interest and earnings upon deposits in the Rate Stabilization Fund will not be held therein, but will be treated and accounted for as Water Revenues. The amount on deposit in the Rate

10 Stabilization Fund as of May 1, 2005 was $50,000,000. All Net Revenues remaining after such application constitute Subordinated Water Revenues. See "APPENDIX C - SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION -Allocation of Revenues" herein.

Allocation of Subordinated Water Revenues Under the Indenture

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

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

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

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

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

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

11 Investment of Monies in Funds and Accounts Under the Indenture

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

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

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

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

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

Refunding Subordinated Water Bonds may be authorized and issued by the District without compliance with the provisions described above, subject to the terms and conditions of the Indenture, including the condition that Maximum Annual Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt outstanding following the issuance of such refunding Subordinated Water

12 Bonds is less than or equal to Maximum Annual Debt Service on all Senior Water Bonds, Subordinated Water Bonds and Parity Debt outstanding prior to the issuance of such refunding Subordinated Water Bonds. See "APPENDIX B - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Refunding Bonds" herein.

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

Commercial Paper

As of May I, 2005, the District had authorized $330,000,000 aggregate principal amount of Commercial Paper Notes (Water Series), of which $330,000,000 was outstanding, payable from available water revenues junior and subordinate to the payment of the principal, redemption price, interest and reserve fund requirements for the Subordinated Water Bonds and all Parity Debt. See "WATER SYSTEM FINANCES - Outstanding Debt" for a description of the District's commercial paper program.

State Loans and Federal Loan

The District participates in the State of California's State Water Resources Control Board (the "State Board'') low interest rate loan program, which was established to provide below-market rate financing for qualified water resource projects in the State. Under this program, the District has entered into four loan contracts with the State Board (the "State Loans") in the aggregate principal amount of $27,073,629 payable from Water Revenues, of which $17,031,078 aggregate principal amount was outstanding as of May I, 2005. State Loans entered into prior to January 1993 were silent as to the payment thereof in relation to outstanding debt of the District, and the lien priority, if any, of such State Loans is unclear. State Loans entered into since such date provide that such State Loans shall be either senior to or on a parity with all future debt of the District. For purposes of calculating debt service coverage ratios, the District has assumed that all State Loans entered into prior to 1993 are payable from Water Revenues subordinate to payments of principal of and interest on the Subordinated Water Bonds and that all State Loans entered into after January 1993 are Parity Debt. To date, the District has entered into a State Loan payable from Water Revenues (relating to the Upper San Leandro Reservoir) which is subject to the new January 1993 parity requirement of the State Board, with an aggregate principal amount of $2,188,000 (the "Parity State Loan") of which $2,102,595 aggregate principal amount was outstanding of May I, 2005. See "APPENDIX F - SUMMARY OF CERTAIN PROVISIONS OF THE STATE WATER LOANS" for a summary of certain provisions of the State Loans.

In June 2002, the District received a loan from the California Energy Commission to fund energy conservation efforts (the "Energy Commission Loan''). The Energy Commission Loan is payable from Water Revenues subordinate to the payments of principal and interest on the Subordinated Water Bonds. As of December 31, 2004, the unpaid principal amount of the Energy Commission Loan was $1,738,207.

In 1978 and 1979, the District received a drought loan from the United States Department of Commerce to fund drought-related projects (the "Federal Loan"). The Federal Loan is payable from

13 Water Revenues subordinate to the payments of principal and interest on the Subordinated Water Bonds. As of December 31. 2004. the unpaid principal amount of the Federal Loan was $1.993.415.

Interest Rate Swap Agreements

The District has entered into Interest Rate Swap Agreements (the "Series 2002 Swap Agreements") with Citigroup Financial Products Inc. ("Citigroup") and with Bear Steams Capital Markets Inc. ("Bear Steams" and, together with Citigroup, the "2002 Swap Providers") whereby the District has effectively fixed the interest rate on the $241,850,000 principal amount of the Series 2002 Bonds. In connection with the issuance of the Series 2005B Bonds, the District has entered into the Series 2005B Interest Rate Swap Agreements (together with the Series 2002 Swap Agreements, the "Swap Agreements") with Lehman Brothers Special Financing Inc., Merrill Lynch Capital Services Inc., SBS Financial Products Company, LLC and Bear Stearns Capital Markets Inc. (together with the 2002 Swap Providers, collectively, the "Swap Providers") whereby the District has effectively fixed the interest rate of the Series 2005B Bonds in the principal amount of $325,000,000. The obligation of the District to make regularly scheduled payments to the Swap Providers under the Swap Agreements is on a parity with the District's obligation to make payments on the Series 2005A Bonds. Under certain circumstances, the Swap Agreements may be terminated and the District may be required to make a substantial termination payment to the respective Swap Providers. Pursuant to the Swap Agreements, any such termination payment owed by the District would be payable on a basis that is subordinate to the Series 2005A Bonds but prior to the District's Commercial Paper Notes (Water Series). In the event of early termination of any of the Swap Agreements, there can be no assurance that (i) the District will receive any termination payment payable to the District by the respective Swap Providers, (ii) the District will have sufficient amounts to pay termination payment payable by it to the respective Swap Providers, or (iii) the District will be able to obtain a replacement Swap Agreement with comparable terms.

There is no guarantee that the floating rate payable to the District pursuant to each of the Swap Agreements will match the variable interest rate on the Series 2002 Bonds or the Series 2005B Bonds to which the respective Swap Agreement relates at all times or at any time. Under certain circumstances, the Swap Providers may be obligated to make a payment to the District under their respective Swap Agreement that is less than the interest due on the Series 2002 Bonds or the Series 2005B Bonds to which such Swap Agreement relates. In such event, the District would be obligated to pay such insufficiency from Subordinated Water Revenues.

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

BOND INSURANCE

Set forth below is a brief summary of certain information concerning the Bond Insurer and the terms of the municipal bond insurance policy. Information with respect to the Bond Insurer has been supplied to the District by the Bond Insurer. The following discussion does not purport to be complete and is qualified in its entirety by reference to the municipal bond insurance policy.

The MBIA Insurance Corporation Insurance Policy

The policy of MBIA Insurance Corporation (the "Bond Insurer") unconditionally and irrevocably guarantees the full and complete payment required to be made by the District to the Trustee or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest due the Series 2005A Bonds as such

14 payments shall become due but shall not be so paid ( except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by the Bond Insurer's policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any Owner of the Series 2005A Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitntes an avoidable preference to such owner within the meaning of any applicable bankruptcy law (a ''Preference").

The Bond Insurer's policy does not insure against loss of any redemption premium which may at any time be payable with respect to any Series 2005A Bond. The Bond Insurer's policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemption (other than mandatory sinking fund redemption); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Series 2005A Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Bond Insurer's policy also does not insure against nonpayment of principal of or interest due on the Series 2005A Bonds resulting from the insolvency, negligence or any other act or omission of the Trustee or any other paying agent for the Series 2005A Bonds.

Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Trustee or any owner of a Series 2005A Bonds the payment of an insured amount for which is then due, that such required payment has not been made, the Bond Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Series 2005A Bonds or presentment of such other proof of ownership of the Series 2005A Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Series 2005A Bonds as are paid by the Bond Insurer, and appropriate instruments to effect the appointment of the Bond Insurer as agent for such owners of the Series 2005A Bonds in any legal proceeding related to payment of insured amounts on the Series 2005A Bonds, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners or the Trustee payment of the insured amounts due on such Series 2005A Bonds, less any amount held by the Trustee for the payment of such insured amounts and legally available therefor.

MBIA

MBIA Insurance Corporation ("MBIA'') is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. MBIA has three branches, one in the Republic of France, one in the Republic of Singapore and one in the Kingdom of Spain. New York has laws prescribing minimum capital requirements, limiting classes and concentrations of investments and requiring the approval of policy rates and forms. State laws also regulate the amount of both the aggregate and individual risks that may be insured, the payment of dividends by MBIA, changes in control and transactions among affiliates. Additionally, MBIA is required to maintain contingency reserves on its liabilities in certain amounts and for certain periods of time.

15 MBIA does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the policy and MBIA set forth under the heading "BOND INSURANCE." Additionally, MBIA makes no representation regarding the Certificates or the advisability of investing in the Series 2005A Bonds.

MBIA Information

The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated herein by reference:

(I) The Company's Annual Report on Form 10-K for the year ended December 31, 2004; and

Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended, after the date of this Official Statement and prior to the termination of the offering of the Series 2005A Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the SEC filings (including (I) the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004) are available (i) over the Internet at the SEC's website at http://www.sec.gov; (ii) at the SEC's public reference room in Washington D.C.; (iii) over the Internet at the Company's website at http://www.mbia.com; and (iv) at no cost, upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York 10504. The telephone number of MBIA is (914) 273-4545.

As of December 31, 2003, MBIA had admitted assets of $9.9 billion (audited), total liabilities of $6.2 billion (audited), and total capital and surplus of $3.7 billion (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of December 31, 2004 MBIA had admitted assets of $10.3 billion (unaudited), total liabilities of $6.9 billion (unaudited), and total capital and surplus of $3.3 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

Financial Strength Ratings of MBIA

Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."

Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the financial strength of MBIA "AAA."

Fitch Ratings rates the financial strength of MBIA "AAA."

Each rating of MBIA should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of MBIA and its ability to pay claims on its policies

16 of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.

The above ratings are not recommendations to buy. sell or hold the Certificates. and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Series 2005A Bonds. MBIA does not guaranty the market price of the Series 2005A Bonds nor does it guaranty that the ratings on the Series 2005A Bonds will not be revised or withdrawn.

In the event the Insurer were to become insolvent. any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association. established pursuant to Article 14.2 (commencing with Section 1063) of Chapter I of Part 2 of Division I of the California Insurance Code.

THE DISTRICT

Organization

Formation of the District was approved at an election held in portions of Alameda and Contra Costa Counties (known throughout the San Francisco Bay Area as the "East Bay") in May 1923, under the provisions of the Municipal Utility District Act. Under the Municipal Utility District Act, municipal utility districts are empowered to acquire, construct, own, operate or control works for supplying the District and public agencies in the District with light, water, power, heat, transportation, telephone service or other means of communications, or means for the collection, treatment or disposition of garbage, sewage or refuse matter, and public recreation facilities appurtenant to its reservoirs and may do all things necessary and convenient to the full exercise of powers granted in the Municipal Utility District Act. The District presently exercises only those functions relating to water supply, power generation and recreational facilities through its Water System, and sewerage and wastewater interception, treatment and disposal, within an area known as Special District No. 1, through its Wastewater System. Special District No. 1 covers only a portion of the service area of the District. The District presently does not intend to exercise other functions. Such functions and the related facilities would not constitute part of the Water System or the Wastewater System.

District Board

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

The following persons currently serve on the District Board:

1. William B. Patterson is a retired Manager of Oakland Parks and Recreation and long active in the community. He served as President of the Oakland Branch of the NAACP from 1991 to 1996. He was appointed by the Board on September 12, 1997 to fill the unexpired term of Kenneth H. Simmons, who resigned from the Board in July 1997. Mr. Patterson was subsequently elected to the Board of Directors in 2000 and re-elected in 2004. He is currently President of the Board.

17 2. Lesa R. Mcintosh is a sole practitioner of law in Richmond, California, specializing in business, land use and estate planning. She served as a member of the Richmond City Council from 1996 to 1999. She has long been active in community service, serving in the past as Commissioner of the Port of Richmond, Chair of the Richmond Public Safety Committee of the Richmond City Council, Board member of the Contra Costa County Legal Services Foundation, an instructor at Contra Costa College, and a Police Commissioner. Ms. Mcintosh was appointed by the Board of Directors in February 1999 to fill the unexpired term of Director John Gioia. She was subsequently elected to the Board of Directors in 2000 and re­ elected in 2004 and is currently Vice President of the Board.

3. John A. Coleman is the Director of Local Government Affairs for KB Hornes and has long been active in the community. He is the past president and member of the Board of Directors of the Lafayette Chamber of Commerce, as well as serving as chair of the Upper Mokelurnne River Watershed Authority, a Board Member of DSRSD/EBMUD Recycled Water Authority ("DERWA") (a joint powers authority for recycled water service provided by the District and the Dublin San Ramon Services District) and President of the Board of Directors of the California Association of Sanitation Agencies. He is a past board member of the National Association of Service and Conservation Corps and the California Biodiversity Council. Mr. Coleman also served Governors Wilson and Davis as the Deputy Director of External Affairs for the California Conservation Corps. He is Scoutmaster for Troop 243 in Lafayette. He was first elected in 1990. His current term expires on December 31, 2006.

4. Katy Foulkes is a former mayor and council member of the City of Piedmont, is currently serving on Alameda County's Local Agency Formation Commission, and also represents the District on joint powers agencies within the Sacramento area and the Counties of Amador, Calavera and Alpine. She is also active in the Association of California Water Agencies and the Association's Local Government Committee. She was first elected in 1994. Her current term expires on December 31, 2006.

5. Doug Linney is president of The Next Generation, a public relations firm providing services to individuals, organizations and businesses in achieving environmental protection. He is active in a number of community and environmental organizations including the California League of Conservation Voters. Mr. Linney was elected in 2004. His term expires on December 31, 2008.

6. Frank Mellon is employed by Associated Contractors of California and has been a management representative and employee relations/labor relations consultant in the public and private sectors. He is Scoutmaster for Troop 708 in Castro Valley and was District Chair for the Tres Randios District of the San Francisco Bay Area Council. He also teaches Labor Law in the California State University of Hayward's Human Resources Certificate Program. He was first elected in 1994. His current term expires on December 31, 2006.

7. David Richardson was a long-time storekeeper with the District and served as President of the American Federation of State, County and Municipal Employees (AFSCME), Local 444 and Executive Board Member of AFSCME District Council 57. He retired from the District in 1996. He is also a member of the Board of Directors of the South County Ecology Center Public Officials for Water and Environment Reform (POWER), which is an organization of California water agencies and officials dedicated to promoting public accountability and environmentally sustainable water policies and practices. He was elected in 1998 and re­ elected in 2002. His current term expires on December 31, 2006.

18 District Management

District management is comprised of:

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

Robert C. Helwick was appointed General Counsel in 1995. Prior to that appointment he served as the District's Acting General Counsel and as Chief of Resources Law. He has been an attorney with the District's Office of General Counsel since 1976.

W. Robert Alcott was appointed Director of Water and Natural Resources in November 2004. Prior to that appointment, he served as Manager of Water Supply for five years and as Senior Community Affairs Representative for two years. Prior to joining the District in 1996, he was General Manager of the El Dorado Irrigation District and County Administrator for Martin County, Florida.

Gary Breaux was appointed Director of Finance in 1994. Prior to that appointment, he was Director of Finance!Treasurer for the City of Oakland, California and the Oakland Redevelopment Agency for three years. Prior to his appointment at the City of Oakland, he was Director of Finance for the City of Richmond, Virginia for seven years.

Artis L. Dawson was appointed Director of Public Affairs in 1988, and is now Director of Administration. She was Manager of Personnel from 1982 until 1988. Prior to that appointment she was an Executive Assistant, appointed in late 1981 to work on special administrative projects for the District.

Marilyn L. Miller was appointed Director of Engineering and Construction in 1996. Prior to that appointment she was Acting Director of Engineering and Construction and Manager of Design from 1992 to 1995. Prior to that, she was Senior Engineer in the Wastewater Department from 1987 to 1992. She joined the District in 1987.

Michael J. Wallis was appointed as Director of Operations and Maintenance in 1996 after serving as Director of the Wastewater Department since 1992. Prior to that he held the positions of Manager of Support Services and Senior Civil Engineer since 1985.

David R. Williams was appointed Director of Wastewater in 1997 after holding the position of Manager of Support Services. Prior to joining the District in 1993, he was Planning Division Manager at the Central Contra Costa Sanitary District.

Lynelle M. Lewis was appointed as Secretary of the District in February 1995. She has been with the District since August 1993.

Lloyd J. Sawchuk was appointed Treasury Manager in 1992. He has been with the District since 1972 and held the position of Assistant Treasurer of the District since 1979.

19 Service Area

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

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

The Municipal Utility District Act was amended in 1941 to enable formation of special districts for the provision of wastewater services. In 1944, voters in six East Bay cities elected to form the District's Special District No. I to treat wastewater released into the Bay. The District began wastewater treatment in 1951. In 1971, the District annexed Kensington, El Cerrito and a part of Richmond to Special District No. 1. The Wastewater System presently serves approximately 600,000 people in an 83- square-mile area of the two counties along the Bay's east shore, extending from Richmond on the north, southward to San Leandro.

Annexations, Ultimate Service Area and Spheres of Influence

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

There have been more than 450 separate annexations, both of unincorporated territory and by cities within the District. As required by State law, the Local Agency Formation Commissions ("LAFCO") in Alameda County and Contra Costa County have established the "spheres of influence" for the District, which define the area which may be annexed to the District. The spheres of influence are consistent with the urban spheres established for the cities and other special districts in the area and include the District's present service area and adjacent lands which the LAFCOs anticipate will need water service from the District in the foreseeable future. The LAFCOs are required to periodically review and update the sphere of influence. Territory annexed to the District is currently required either to contribute a local distribution system or to pay the charges to finance one, and to pay an annexation fee of $600 per acre and certain other fees.

The District established and has revised from time to time an ultimate service area boundary. The land area between the present service area boundary and the ultimate service area boundary, or approximately 7 5 square miles, includes some areas of potential development. However, a large part of it is parklands and other undeveloped lands which are not anticipated to be developed in the foreseeable future. Another 81 square miles within the ultimate service area outside the District's present service area boundary is under the waters of the San Francisco and San Pablo Bays. The ultimate service area boundary is limited on the west and north by the shorelines of the San Francisco and San Pablo Bays. The ultimate service area boundary is limited on the south and northeast by adjoining water agencies which have sources of supply independent of the District. On the west and east sides of the City of San Ramon, potential new development, now in the early stages of land use planning and environmental documentation, is located just outside the ultimate service area boundary.

20 Employee Relations

The District has approximately 1,669 regular employees in the Water System and approximately 262 regular employees in the Wastewater System.

The District has four unions representing approximately 1,729 workers out of a total full-time workforce of 1,931 employees: Local 2019 of the American Federation of State, County and Municipal Employees (AFSCME) represents white collar workers including professionals; Local 444 of AFSCME represents blue collar workers; Local 21, International Federation of Professional and Technical Engineers (IFPTE) represents supervisory employees; and Local 39, International Union of Operating Engineers (IUOE) represents water treatment/distribution workers.

Locals 2019, 444, 21 and 39 are operating under a Memoranda of Understanding ("MOUs") which expires on April 29, 2007. The MOUs are comprehensive in scope and provide for binding arbitration for the resolution of grievances.

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

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

Contract Equity Program

The District adopted Policy I 7 in 1998 to "Prevent the District from participating in or perpetuating ongoing discrimination in the marketplace while avoiding the granting of preferences on the basis of race, gender and other protected categories as prohibited by Article I, Section 31, of the California Constitution."

The District also encourages Local Business Enterprise participation and has a goal of awarding 50% of all contracts under $50,000 to small businesses certified by the State of California.

Insurance

The District uses a combination of self-funding and insurance coverage in the District's risk management program. The program provides protection for the District's buildings and facilities, including their contents and equipment, from fire, explosion and related perils including earthquake and flood, and provides protection to the District from liability for bodily injury and property damage which may arise from the District's operations, including but not limited to use of its property, facilities, or vehicles. The District also maintains fidelity protection against fraudulent acts of employees. The District self-funds workers' compensation risks up to $5,000,000 per occurrence and carries excess insurance coverage up to $100,000,000.

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

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

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

• $25 million in coverage for flood perils, subject to a deductible of $1 million per occurrence;

• $25 million in coverage for earthquake perils, subject to a deductible of 5 percent per unit of coverage per location subject to a minimum of $250,000, except $1,500,000 for all water and wastewater transmission lines (including but not limited to pipelines and aqueducts) per occurrence as respects earthquake;

• $10 million in coverage for boiler and machinery insurance subject to a $25,000 self-insured retention; and

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

THE WATER SYSTEM

General

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

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

Water Supply

The District's water supply currently is obtained from two sources: the 577-square mile Mokeluurne River watershed in the Sierra Nevada mountains, and the runoff from streams within the District. Approximately 89% of the District's current water supply is derived from the Mokelumne River watershed.

Mokelumne River Watershed. The average runoff of the Mokeluurne River is 640 million gallons per day or 235 billion gallons per year. As described below under the caption "Water Rights and Related Proceedings," the District has water rights permitting the total diversion of 325 million gallons per day or 119 billion gallons (365,000 acre-feet) per year from the Mokeluurne River, subject to prior

22 water rights. Average annual water consumption in the District has not exceeded 220 million gallons per day.

The annual Mokelurnne River runoff during the ten-year period from 1995 to 2004 has ranged from a daily average low of 339 million gallons per day in 2001 to a daily average high of 1.385 million gallons per day in 1995. with a ten-year average of 118% of normal runoff. In 1977. the lowest year of record since records have been kept. the annual runoff from the Mokelurnne River was 129.000 acre-feet (an average of 115 million gallons per day). Faced with the possibility of future drought conditions. the District has developed a conservation program ( described below under the caption "Water Consumption"), and has developed its Water Supply Management Plan ("WSMP") to maximize use of existing resources, improve delivery of water, provide security of supply and meet long-term water needs. The plan is discussed below under the caption "Water Supply Management Plan."

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

Entities with water rights in the Mokelurnne River watershed senior to those of the District include Pacific Gas and Electric Company ("PG&E"), Amador Water Agency and Jackson Valley Irrigation District (for a total potential consumptive diversion of 20,000 acre-feet per year in Amador County); Calaveras County Water District and Calaveras Public Utility District (for a total of 27 ,000 acre­ feet per year in Calaveras County); and Woodbridge Irrigation District and the City of Lodi (for a total of 63,600 acre-feet in normal and wet years and 42,600 acre-feet in dry years in San Joaquin County). In addition, the District's water rights permit from the State for the Camanche Reservoir presently requires that minimum releases be made from Camanche Reservoir for the protection of downstream fisheries.

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

United States Bureau of Reclamation Central Valley Project Contract. In December 1970, the District entered into the Central Valley Project Contract (the "CVP Contract") with the United States Bureau of Reclamation (the "Bureau") entitling the District annually to take up to 150,000 acre-feet (134 million gallons per day) of American River water from the Folsom-South Canal Unit of the Bureau's Central Valley Project (the "CVP"). The District does not currently receive water deliveries pursuant to the CVP Contract except in dry years. The CVP Contract is intended to supplement the District's Mokelurnne River water supply. The CVP Contract was amended on July 20, 2001 (the "Arnendatory Contract") to include additional points of delivery of CVP water under the contract. Added as authorized points of delivery are (I) a location on the Sacramento River near the community of Freeport, and (2) a location on the lower American River near the I-5 highway bridge. See caption "- Water Supply Management Plan - Freeport Regional Water Project" below. In addition, the Amendatory Contract provides that the District will be provided up to 133,000 acre-feet (119 million gallons per day) of CVP water in a single dry year, but no more than 165,000 acre-feet in any 3 consecutive dry year period. The Bureau is currently in the process of negotiating contract terms for a long-term renewal of all CVP Contracts. The District has completed negotiations with the Bureau regarding terms for the 40 year long term renewal of the CVP Contract. The CVP Contract may also subsequently be renewed for periods up to an additional 40 years. The resulting draft renewal long term CVP Contract contains essentially the same terms as the Amendatory Contract in providing CVP water to help meet the District's dry year

23 needs. The Bureau's final approval of the renewal long term CVP Contract is pending completion of Environmental Documentation which is scheduled to be completed during the summer of 2005.

Water Facilities

Pardee Reservoir. The District's Mokelunrne River water is collected and stored at Pardee Reservoir, located in the Sierra Nevada foothills 90 miles east of the District and 3 8 miles northeast of Stockton. Pardee Reservoir was completed in 1929 and has a storage capacity of 197,950 acre-feet.

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

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

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

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

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

Portions of the Mokelunrne Aqueducts were submerged in the flood-waters from the break causing damage and corrosion to all three main pipes. State Emergency Services took approximately six months to pump out the flood waters. The damage to the Mokelunrne Aqueducts is currently estimated at approximately $10 million although District staff and outside experts continue to assess the damage and cost of repairing the pipes. The structure of the pipelines has been inspected and there is no instability or

24 concern that the damage would cause the pipes to fail. The nature of the repairs is limited to repairing and replacing the aqueduct coatings to protect them from further corrosion.

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

Pumping Plants. Walnut Creek No. I and No. 2 Pumping Plants. built in 1958. and Walnut Creek No. 3 Pumping Plant. built in 1972. increase the capacities of the Mokelurnne Aqueducts. When operating. these three pumping plants increase the combined capacity of the aqueducts to over 328 MGD. The Moraga Pumping Plant and Aqueduct. placed in service in 1975. supply water from the Lafayette Aqueducts to Upper San Leandro Reservoir. The plant's four pumps have a combined delivery capacity of 105 MGD; however. the configuration of the existing outlet works limits delivery to a maximum rate of 58 MGD. The Moraga aqueduct is six miles of 5.5-foot. 5-foot and 4-foot steel and concrete pipe between Lafayette and the Upper San Leandro Reservoir near Moraga. The Briones Pumping Plant and Aqueduct were placed in service in 1965 following completion of Briones Reservoir. These facilities supply Briones Reservoir with Mokelurnne River water. Briones No. 2 Pumping Plant was constructed in 1980. Briones No. I Pumping Plant was retired in June. 1997. The four pumps in the Briones No. 2 Pumping Plant can deliver up to a total of 60 MGD.

Treatment Plants. Water delivered to the District's customers is first treated at one of six treatment plants. which have a combined capacity to treat approximately 500 million gallons a day. The water treatment plants are Upper San Leandro (83 MGD) in Oakland. San Pablo (60 MGD) in Kensington. Sobrante (60 MGD) in El Sobrante. and plants located in Orinda (175 MGD). Lafayette (42 MGD) and Walnut Creek (80 MGD). The Orinda Water Treatment Plant serves all or parts of Alameda. Albany. Berkeley. El Cerrito. Emeryville. Moraga. Oakland. Orinda. Piedmont. Richmond and San Leandro. The other plants supply water in varying amounts to the balance of the District's service area. The highest recorded water use for a single day was 377 million gallons on July 14, 1972.

Distribution Facilities. From the Orinda Water Treatment Plant treated water is carried 3.41 miles through the Claremont Tunnel, a 9-foot-diarneter horseshoe bore to three distribution aqueducts. The water distribution network includes 4,000 miles of pipe, 131 pumping plants and 175 neighborhood reservoirs (including approximately 130 above-ground concrete or steel reservoirs), having an operating capacity of 870 million gallons. The District's service area is divided into 125 pressure zones, ranging in elevation from sea level to 1.450 feet. About 60 percent of treated water is distributed to customers by gravity flow.

Pardee and Camanche Power Plants. Since 1930 the District has generated hydroelectric power with two turbines at Pardee Darn (the "Pardee Power Plant"). In 1983, the District added a third generating unit to the Pardee Power Plant and constrncted a power plant at Camanche Reservoir to double total generating capacity to 39 megawatts, and generate about 145,000 megawatt hours in a normal year, enough to serve a community of 30,000. The power is currently being sold on the open market. See caption "WATER SYSTEM FINANCES - Sources of Funds."

Water Rights and Related Proceedings

Mokelumne River Rights. The District holds permits and licenses issued by the State Board which enable the District to utilize waters of the Mokelurnne River as the primary source of the water supply for the District's service area. These appropriative Mokelurnne River rights include a license,

25 which has a priority date of 1924, entitling the District to divert up to 200 million gallons per day to its service area from the Mokelurnne River, and a permit, which has a 1949 priority, entitling the District to divert up to an additional 125 million gallons per day to the service area. The District has completed construction of the water diversion and storage facilities authorized by the permit and has petitioned the State Board to extend the permit beyond year 2000, allowing additional time to put the entitlement to full beneficial use. The extension petition is currently pending before the State Board. In addition to the water rights described above, the District also has a series of rights for the production of hydroelectric power at Pardee and Camanche Darns.

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

The State Board conducted a water rights hearing in the fall of 1992 (the "1992 Lower Mokelurnne River Hearing") related to Mokelurnne fisheries issues and minimum flows required for the protection of fisheries resources. Similar issues were reviewed by the Federal Energy Regulatory Commission ("FERC"), which granted a hydroelectric power generation license for the District's Mokelurnne River facilities in 1981. Following the completion of Endangered Species Act consultation, the District, U.S. Fish and Wildlife Service ("USF&WS") and California Department of Fish and Game ("CDF&G") executed a Joint Settlement Agreement ("JSA") to resolve the fisheries protection issues in FERC's Mokelurnne River proceeding, and filed it with the FERC on March 30, 1998. FERC approved the JSA with minor modifications in its Order issued November 27, 1998 (the "1998 FERC Order").

On October 16, 2000, the State Board sent a letter to all parties to the 1992 Lower Mokelurnne River Hearing, stating its belief that the issues considered during the 1992 hearing had been fully resolved by the 1998 FERC Order and D-1641. The parties were invited to respond, and, on April 26, 2001, the Chief of the State Board's Division of Water Rights notified the parties that the complaints that had initiated the 1992 hearing had been dismissed because all issues raised in those complaints had been remedied through other means. The decision to dismiss said complaints successfully concluded the Lower Mokelurnne River water rights proceeding conducted by the State Board in 1992.

On May 22, 1995, the State Board adopted a Bay-Delta Water Quality Control Plan establishing water quality standards necessary for the protection of fisheries and of the beneficial uses in the San Francisco Bay and Sacramento-San Joaquin Delta Estnary. The State Board released environmental documentation for implementation of the Bay-Delta Water Quality Control Plan in December 1997, and commenced hearings to assign responsibilities to water rights-holders for meeting the Bay-Delta Water Quality Control Plan's standards on July 1, 1998. The State Board's Bay-Delta Water Rights Decision ("D-1641") was adopted on March 15, 2000. In D-1641 the State Board determined, among other matters, that the minimum flow releases required by the JSA and by the 1998 FERC Order constitnted the District's fair-share contribution toward implementing the 1995 Bay-Delta Water Quality Control Plan's standards. Several lawsuits were subsequently filed in California Superior Court, Sacramento County, challenging various aspects of D-1641. The District has been named as a real party in interest in five of these lawsuits. On May 5, 2003, the Sacramento County Superior Court issued a Statement of Decision sustaining D-1641 with regard to the JSA. That decision was subsequently appealed in eight separate appeals concerning a number of issues, including the JSA. Those appeals are now pending before the California Court of Appeal. Briefing is almost complete, following which the court will hear the case.

26 The District cannot predict the outcome of any decision or what effect any decision may have on the District's water rights.

Supplemental Water Supply Project. The District prepared and on June 26, 2001 certified the Supplemental Water Supply Project ("SWSP") Environmental Impact Report/Environmental Impact Statement ("EIR/EIS") for utilization of the District's CVP supplemental water supply contract (see the caption "- Water Supply- United States Bureau of Reclamation Central Valley Project Contract" above). Concurrently with certification of the EIR/EIS, the District executed the Amendatory Contract that provides for alternative points of delivery for the contract supply, including a point of delivery on the Sacramento River near Freeport. The District and Sacramento County are pursuing a plan to construct and operate a joint project at Freeport (the "Freeport Regional Water Project") that would allow the District to use the District's CVP Contract supply in dry years to augment its Mokelurnne River water rights supply in order to meet District customer demands. See caption"- Water Supply Management Plan -Freeport Regional Water Project" herein.

In July 2001 petitions for writ of mandate were filed by certain CVP contractors and by certain contractors for water from California's State Water Project, challenging the District's approval and execution of the Amendatory Contract. The petitioners alleged that the EIR/EIS prepared in conjunction with approval of the Amendatory Contract does not meet the requirements of the California Environmental Quality Act. State Water Contractors et al. v. East Bay Municipal Utility District (Sacramento County Superior Court Consolidated Action No. 01C501076). On August 15, 2002, the Sacramento County Superior Court ruled that the EIR complied with CEQA requirements. The petitioners subsequently appealed that ruling. In addition, the petitioners filed a second lawsuit against the Bureau challenging the Bureau's approval of the Arnendatory Contract. Kem County Water Agency et al. v. U.S. Department of the Interior et al. (U.S. District Court, Eastern District of California, Case No. CIV-F-03-5175 OWW/DLB). Both cases were subsequently settled and dismissed and there is currently no litigation pending challenging the District's CVP Contract.

Central Valley Project Improvement Act. In 1992, Congress enacted the Central Valley Project Improvement Act ("CVPIA") which provides envirornnental protections for fish and wildlife in the operation of the CVP. In 2000, the Bureau issued a Record of Decision on the CVPIA Programmatic Environmental Impact Statement ("PEIS"). The PEIS identified the impacts to CVP Contract water supplies as a result of implementing the new fish and wildlife protection provisions of CVPIA. All CVP contractors will be subject to shortages in CVP supply during dry years. The CVPIA requires that all CVP contracts contain provisions consistent with the CVPIA, including provisions for conservation and tiered prices. The District has completed negotiations with the Bureau regarding terms for a long term renewal of the CVP Contract. The CVP Contract may also subsequently be renewed for periods up to 40 years. The resulting draft renewal long term CVP Contract contains essentially the same terms as the Amendatory Contract in providing CVP water to help meet the District's dry year needs. The Bureau's final approval of the renewal long term CVP Contract is pending completion of Environmental Documentation which is scheduled to be completed during the summer of 2005.

CALFED Bay-Delta Program. The CALFED Bay-Delta program was established in 1994 by a commitment of 10 (now 23) State and federal agencies to jointly develop a consensus-based long-term solution to problems in the Bay-Delta Estuary. The primary areas of concern are fish and wildlife, water supply reliability, delta levees and water quality. The program's intent is to implement a comprehensive and balanced plan that addresses all of the resource issues. In August 2000, CALFED issued its Record of Decision for its environmental documentation, culminating a nearly six-year planning effort. CALFED is now engaged in "Stage 1", or the first seven years, of its 30-year implementation plan. CALFED is now renewing its formal public participation process with a newly constituted Bay-Delta Public Advisory Committee. The District is engaged in numerous CALFED and CVPIA implementation forums intended

27 to achieve consensus among participants on issues related to the District's interests. Foremost among these are water rights and contractual entitlements, ecosystem rehabilitation, drinking water quality protection, supply and reliability, and financing the Bay-Delta Program over the next ten years.

Water Treatment

Water supplies are subject to increasingly stringent State and federal water quality standards. Currently, the State and the federal government regulate 111 potential contaminants. Because the District's water supply comes primarily from a remote, protected watershed, it requires only minimal treatment to meet these health standards. The District's drinking water is sampled and tested continually from all parts of the Water System to ensure that it meets or exceeds all primary (health related) and secondary (aesthetic) regulatory standards established by the USEPA and the California Department of Health Services. Test results on the District's water consistently show that regulated constituents of drinking water either are not detected at all, or they are present in amounts far below limits permitted by State and federal drinking water standards.

Water Consumption

The current number of accounts and consumption by customer type are shown in Table I below. Approximately 92% of the District's accounts are residential, but because residential consumption per account is lower than for other customer types, they account for only 66% of consumption and provide 68% of revenues. Industrial accounts consume approximately 10% of the District's water and provide 18% of its revenues, while making up less than I% of its accounts. The District has five large customers: Chevron U.S.A. Inc. and its subsidiaries; Tosco Petroleum; the University of California; the C&H Sugar Company; and Golden Rain Foundation (Rossmoor). In Fiscal Year 2004, the five largest customers consumed 11 % of the District's water; Chevron U.S.A. Inc. alone consumed 6%. The next six largest customers combined consume less than 5% of the District's water.

Table 1 NUMBER OF ACCOUNTS AND METERED ANNUAL CONSUMPTION By Customer Type As of June 30, 2004

Type of Number of Percent of Annual Consumption(') Percent of Customer Connection.C'l Connections (Thousands of Cc!) Consumption Residential 350,739 92% 63,576 66% CommerciaJ(3l 23,761 6 18,318 19 4 IndustriaJ( l 1,352 I 9,624 10 Irrigation 2 399 I 4 920 5 Total 378 251 100% 96 438 100%

(1) Connections include inactive services and individual meters grouped and billed as single accounts. (2) Metered water consumption shown here is water delivered and billed to customers. Gross water consumption shown in Table 2 includes water lost through leaks in the transmission system, used in the treatment process, evaporation, fighting fires and other miscellaneous causes, which approximates 9 .5o/o of gross consumption. "Ccf' is the abbreviation for hundred cubic feet. (3) Includes the University of California. (4) Includes Chevron U.S.A., Inc. and C&H Sugar Company.

28 Gross water consumption in the District since Fiscal Year 1995 is shown in Table 2 below.

Table 2 GROSS WATER CONSUMPTION('l (inMGD)

Average Annual Consumption Per Fiscal Year Consumption Day 1995 67.738 186 1996 71.727 197 1997 75.064 206 1998 73.270 201 1999 76.856 211 2000 78.850 215 2001 78.877 216 2002 77.173 211 2003 77.760 213 2004 82.088 225

(1) Gross water consumption includes water lost through leaks in the transmission system, used in the treatment process, evaporation, fighting fires and other miscellaneous causes, which approximates 9 .5o/o of gross consumption.

Current Water Conditions Update

Mokelurnne runoff for Water Year 2004 which ended September 30. 2004. was only 502.000 acre-feet or 67% of the long-term average amount of 745.000 acre-feet. Water Year 2005 began with Pardee. Camanche. Briones. and San Pablo Reservoirs at normal levels. and the Upper San Leandro Reservoirs below its operating range. San Pablo Reservoir was drawn down throughout the summer and fall. and will continue to be operated at a maximum restricted level of 294 feet of elevation or about 20 feet below spillway crest elevation due to the San Pablo Darn Modification Project.

At March 30. 2005. the total annual average rainfall of 48.84" has already been exceeded with 51. 87" with three months remaining in Water Year 2005. The Department of Water Resources' April 1, 2005 water year runoff forecast for the Mokelurnne River was 915,000 acre-feet. Accordingly, the required flows from Camanche Reservoir and required flows below Woodbridge during the period April I through September 30, 2005 will be in accordance with the JSA "Normal and Above" year-type flow schedule. The District started flood control releases from the Camanche Reservoir on January 28, 2005. By March 18, 2005 the release from Camanche Reservoir was increased to the rate of 1,350 cfs. The District anticipates regulating flood control releases from the Camanche Reservoir through September 2005, and as part of a pulse gravel cleansing flow in September. The District expects to enter Water Year 2006 with maximum allowable carryover storage.

Water Supply Management Plan

In October 1993, the District adopted a Water Supply Management Plan (WSMP) to guide the provision of water to the District's service area through the year 2020. The District forecasts a demand of 277 MGD by 2020, adjusted to 229 MGD when savings from conservation and recycled water programs are taken into account. Over the same period, projected increased use by senior water rights holders and in-stream flow requirements to protect and enhance fishery resources on the Mokelurnne River will decrease the water supply available to satisfy this projected increase in customer demand. The WSMP

29 and the District's 2000 Urban Water Management Plan demonstrated that the District's existing water supplies are insufficient to meet current and future customer demand during droughts, despite implementation of conservation and water recycling programs and an aggressive dry-year water rationing policy. Without additional near-term water supplies, the District's customers will experience potentially severe water shortages during prolonged droughts. The conservation component of the WSMP relies on voluntary measures and incentives focusing on efficient residential appliances and landscaping changes, including rebates to customers who purchase and install water-saving ultra-low-flow toilets and clothes washing machines and upgrade their existing landscape irrigation systems. The reclamation component of the WSMP will recycle treated wastewater for non-potable use on irrigated spaces such as golf courses, cemeteries, and highway medians. Total savings in year 2020 from the conservation and reclamation components of the WSMP is projected to be about 48 MGD.

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

Freeport Regional Water Project. The Freeport Regional Water Project ("FRWP") is a regional water supply project undertaken in partnership with the Sacramento County Water Agency ("SCWA"). The City of Sacramento is an associate partner in the project. In February 2002, with the support of the U.S. Bureau of Reclamation ("USBR"), the District and SCWA formed the Freeport Regional Water Authority ("FRWA") under a joint powers agreement to develop the FRWP. The FRWP will provide up to 100 MGD of supplemental water supplies to the District in dry years which will help meet projected drought year needs through 2020. It will also provide up to 85 MGD to SCWA during most years.

The FRWP will divert water from the Sacramento River near the community of Freeport and will convey this water through new pipelines and the existing Folsom South Canal (FSC) to the Mokelurnne Aqueduct near Camanche Reservoir. A turnout in the pipe within central Sacramento County will deliver water to SCWA. Water will be delivered to the District pursuant to the District's Arnendatory Contract with the USBR, executed in 200 I.

The Final Environmental Impact Report for the project was certified in April 2004. Necessary regulatory agency approvals have been received including biological opinions from the U.S. Fish and Wildlife Service ("USFWS") and National Oceanic and Atmospheric Administration and a Record of Decision from USBR. The project is now under design with all necessary consultant contracts issued. Design, permit acquisition, public outreach, and easement acquisition is anticipated to be completed in 2007 and construction is anticipated to be completed in late 2009.

Mokelumne Aqueduct Seismic and Fisheries Protection Elements. The approved WSMP also includes strengthening a portion of the Mokelumne Aqueduct against earthquake or flood-caused breaks that pass through unstable soils in the Sacramento-San Joaquin Delta, and adoption of the Lower Mokelurnne River Management Plan ("LMRMP"). The LMRMP balances the long-term plan for protection and enhancement of the lower Mokelurnne fishery with meeting the public's needs for a reliable water supply. Both of these components are well into implementation. The LMRMP provided the basis for the JSA with USFWS and the CDF&G in the 1998 FERC described under the caption "­ Water Rights and Related Proceedings -Mokelumne River Rights."

Amador Canal Improvement Project. The District, PG&E, and the Amador Water Agency ("AWA") have agreed to jointly contribute to the replacement of the Amador Canal with a pipeline that is anticipated to eliminate between 3,000-6,000 acre-feet per year in seepage losses from the existing earthen ditch canal. Until the AWA needs its full 15,000 acre-feet of entitlement, which is currently estimated to be approximately 2020, the conserved water will be available to PG&E and the District for additional hydropower generation and as additional inflow to Pardee Reservoir. The water conserved by

30 this project will be available to the District in most years for diversion into the Mokelurnne Aqueduct or through the Pardee and Camanche power plants. The Board of Directors approved an "Amended and Restated" agreement in August 2000 which obliges the District to provide $4.339.000 to AWA upon its issuance of a Notice of Award for construction of the project.

The project EIR was certified in 200 I and was challenged in court. AWA successfully defended the initial CEQA lawsuit. but the Court of Appeal overturned the judgment in January 2004. AWA has prepared a supplement to the EIR to address the court-determined deficiency. The design has been completed and AWA is scheduled to award a construction contract in the summer of 2005.

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

East Contra Costa County. The District is exploring a potential conjunctive use project on District owned property in Bixler near Brentwood in east Contra Costa County. A technical report summarizing the results of groundwater exploration and aquifer tests in the Bixler area indicates that a conjunctive use project is feasible if potential impacts to local users and the Bay-Delta river system can be addressed. The District is seeking partners to develop a full-scale. locally supported project with regional benefits. A specific project has yet to be identified.

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

Bayside Groundwater Project. A draft EIR for this project was published on March 14, 2005. The project is designed to put drinking water into the Deep Aquifer of the South East Bay Plain Basin during wet years for storage so it will be available later in the event of drought. Implementation of the project is planned in two phases. Phase I is a I MGD annual capacity project using a single existing demonstration well in the San Lorenzo area. Phase 2 is the potential future expansion of groundwater facilities to an annual capacity of 2 to 10 MGD. The draft EIR addresses a variety of significant environmental issues related to the project. These issues include groundwater hydrology, water quality, surface water quality, biological resources, geology, air quality, hazards, noise and cultural resources. All potentially significant impacts identified in the EIR will be mitigated. Phase I is proposed for immediate implementation. At this time, the District does not know whether it will pursue Phase 2, or if it does pursue Phase 2, exactly what Phase 2 facilities will be necessary, other than somewhere in the range of 2- 10 MGD average annual capacity or the location of such facilities. The District intends to use the information gathered from Phase I operations to determine the feasibility of Phase 2 and inform its future determinations on whether and how to proceed with Phase 2. If the District determines to pursue Phase 2, the District will, at that time, complete a subsequent EIR.

The District-SFPUC-Hayward Intertie. The CALFED August 28, 2000 Record of Decision encourages exploration of Bay Area intertie opportunities. See caption "- Water Rights and Related Proceedings - CALFED Bay-Delta Program" above. To this end, in April 2003, the City of Hayward completed CEQA documentation necessary to approve a project allowing for 30 MGD of water to be conveyed between the District and the San Francisco Public Utilities Commission (SFPUC) water system

31 via the City of Hayward's distribution system. The participating agencies have approved initial project funding, a project design and construction agreement, and an operation and maintenance agreement. This project will give the District and neighboring agencies increased flexibility to provide water throughout the region during an emergency. The intertie will allow sharing of water among the parties during emergencies or planned critical work on facilities that would be difficult to remove from service without an alternative water source. The project consists primarily of improvements within the City of Hayward. There are also minor improvements needed to the District and SFPUC systems. The design for this project has been completed and the construction began in early 2005. The project is anticipated to be in service in 2007.

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

In October 2003, a preliminary study identified three venues in the Bay Area where a regional desalination facility could be located. The agencies have submitted a joint grant application to the State Department of Water Resources in early 2005 to fund a detailed feasibility and environmental study. If funded, the feasibility study could be completed in 2007 with final design and construction by 2010. The partner agencies are actively working on additional studies to identify project sites and capacity.

Water Conservation

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

Wastewater Recycling

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

On April 9, 1996, the District's Board of Directors adopted the Nonpotable Water Policy which requires customers of the District to use nonpotable water (recycled water and other nonpotable water sources) for nondomestic purposes when it is of adequate quality and quantity, available at reasonable cost, not detrimental to public health, and not injurious to plant life, fish and wildlife. The District is

32 currently in the planning, design and construction phases of several water recycling projects which are scheduled for implementation by 2020.

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

Capital Improvement Program

The District's annual planning process includes a review and update of facilities needs for the ensuing five Fiscal Years. The District's Fiscal Year 2006 to Fiscal Year 2010 five-year capital plan identifies a total of approximately $672.5 million of new appropriations for capital projects and a cash expenditure amount of approximately $1.0 billion on capital projects.

Fiscal Years 2006-2010 Capital Improvement Program Forecast -Appropriations and Cash Expenditures

Fiscal Year Appropriations Cash Expenditurei'! Ended June 30 $ (Millions) $ (Millions) 2006 146.1 170.3 2007 185.2 159.8 2008 104.4 252.4 2009 97.9 251.1 2010 $ 121.5 $ 168.2 Total $ 672.5(2) $ 1,001.8

(1) Cash expenditures include spending for projects appropriated in earlier Fiscal Years. CZ) Does not add due to rounding.

33 The current five-year capital plan is sunuuarized in the tables below:

Fiscal Years 2006-2010 Capital Improvement Program Forecast -Appropriations (Millions)

Fiscal Year ended June 30 2006 2007 2008 2009 2010 TOTAL Emergency Preparedness $ 0.5 $ 0.5 $ 0.1 $ 0.1 $ 0.1 $ 1.3 Extensions/Improvements 11.6 41.8 3.7 11.7 3.0 71.8 Facilities, Services & Equipment 18.3 3.3 4.4 8.1 5.6 39.8 Maintaining Infrastructure 36.1 45.8 38.0 38.6 34.8 193.3 Regulatory Compliance 9.2 50.4 .7 2.3 .2 62.7 Resource Management 2.7 1.0 .8 .7 .3 5.5 Water Quality 1.8 5.9 1.3 1.8 1.5 12.2 Water Supply 38.9 9.5 28.4 25.l 49.0 150.9 Non-Program Specific 2.0 2.0 2.0 2.0 2.0 10.0 Ad.min. & General Expense ----2,iQ ----2,iQ ----2,iQ 25.0 ----2,iQ 125.0 TOTAL $146.1 $185.2 $104.4 $115.4 $121.5 $672.5

Fiscal Years 2006-2010 Sources of Funds for Capital Improvement Program Expenditures

Funding Sources (Millions) Bond Proceeds $ 640 Commercial Paper Proceeds 0 Advances and Contributions 62 Grants 12 Revenues 287 Total $1,001

Five-year financial projections related to the Capital Improvement Program are discussed under the caption "WATER SYSTEM FINANCES - Projected Operating Results" herein.

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

Future Water Supply (Water Supply Management Plan). As discussed above under the caption "- Water System Management Program." the WSMP projects within the five-year capital plan include: East Contra Costa - Bixler Exploration Project. the San Joaquin County Conjunctive Use Alternative Project. the Bayside Groundwater Project. the District-SFPUC-Hayward Intertie Project. the Freeport Regional Water Project. and the Amador Canal Improvement Project.

The Water Recycling Program implements projects that will provide an additional 8.0 MGD of recycled water by 2020 and includes appropriations to fund the design and construction of a water reclamation facility for the San Ramon Valley and facilities for the East Bayshore Recycled Water Project. Expenditures will also be made to upgrade existing reclamation facilities at the North Richmond Water Reclamation Project to provide 3 to 4 MGD of boiler feed water to the Chevron Richmond refinery. The District is also collaborating with the University of California at Berkeley to implement a denitrification project that will utilize new innovative technology to treat and produce recycled water at

34 the point of use, thereby avoiding the cost of a lengthy distribution system. The denitrification project will irrigate two sports fields on the University of California at Berkeley campus.

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

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

System Extensions and Improvements. The OP/NET program will continue to improve the District's control systems for water operations and the operations of the District's power plants. The benefits of the program include maintaining efficient and reliable operation of the water system, optimizing energy cost savings for pumping plants and improved response to disasters and outage planning.

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

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

The Lamorinda Water System Improvement Program (the "LWSIP") is currently in environmental review process and is anticipated to include all major pressure zone projects that are scheduled to be constructed in the Lafayette, Moraga and Orinda area during the next ten to fifteen years. One of the first projects anticipated to be constructed is the Moraga Road Pipeline which will provide additional capacity to serve the City of Moraga. Other projects include improvements to Lafayette Water Treatment Plant filters, upgrades to Orinda Water Treatment Plant, refurbishment of Leland No. 1 Pumping Plant and a new Leland No. 2 Pumping Plant, and improvements to the Walnut Creek Water Treatment Plant to provide necessary operational capacity.

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

The Water Quality Improvement Program continues to address the issues of the reduction of contaminants in drinking water, with specific focus on Disinfection By-Products and Cryptosporidiurn. The program includes water quality improvements, oxygenation systems upgrades, system monitoring installations, and continued replacement of selected redwood reservoirs.

The Water Treatment Upgrade Program consists of many tasks needed to comply with water quality regulations and to improve the operation, reliability and safety of the water treatment plants ("WTPs"). In Fiscal Year 2006 and 2007 work is anticipated to include improvements to Upper San Leandro WTP waste stream handling, constrnction of a chemical containment basin at San Pablo WTP,

35 chemical storage improvements at all WTPs except Walnut Creek, installation of motorized ozone contactor valves at Upper San Leandro and Sobrante WTP and the Lafayette Aqueduct Disinfection Facility.

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

San Pablo Dam Seismic Upgrade Project. Seismic evaluation of the San Pablo Darn reservoir embankment indicates that the slopes may become unstable and the crest settlements may be excessive during the maximum credible earthquake (MCE) on the Hayward Fault. The water levels were lowered 20 feet in the summer of 2004 when this risk was identified. Retrofit measures are required to keep the darn stable and to prevent an uncontrolled release of reservoir water at normal operating levels. This project provides for modifications to the downstream slope of the darn embankment to prevent slope instability and crest settlement during the MCE, and may involve draining of the reservoir during construction. The planning and pre-design phases of the project have started. The EIR is anticipated to be prepared in Fiscal Year 2006. Construction of the modification is expected to start in Fiscal Year 2008.

Berryman Reservoir Replacement Project. The Berryman Reservoir needs to be replaced due to its location on the Hayward Fault. Elements of the project include a rate control station (regulator) accessing storage from the Summit Pressure Zone; Berryman Pressure Zone Pipeline improvements; and construction of a new combined Berryman/Summit East Pumping Plant. These facilities have been completed and the reservoir was drained in April 2005. The remaining work includes geotechnical evaluation of the reservoir floor and constrnction of a small storage facility within the reservoir bowl. The remaining work is expected to be completed in Fiscal Year 2006.

Reservoir Outlet Modifications. The District has also embarked on two design modification projects to analyze, design and modify reservoir outlet towers to withstand earthquakes on nearby faults. Preliminary analysis of the Briones Reservoir Outlet Tower found it to be unstable under earthquake loading. More detailed analysis is expected to be completed in Fiscal Year 2006 and upgrades to the tower will be undertaken as necessary upon conclusion of the Briones Darn safety evaluation which is currently underway.

The District also plans to make modifications to the Lafayette Reservoir Tower which are anticipated to include seismic upgrades, modifications of the tower to act as a spillway capable of handling a probable maximum flood, and upgrades to the tower gate mechanical controls. Environmental documentation for Lafayette Tower is expected to be completed in Fiscal Year 2006, with design expected to be completed in Fiscal Year 2007 and constrnction in Fiscal Year 2008. This schedule is dependent upon Division of Safety of Darns acceptance of the District's proposed concrete infilling of the existing tower.

Recent analyses of the San Pablo and Chabot Reservoir Towers also indicate that these structures should be retrofitted to continue to function safely after a major earthquake. These modifications will be included as part of the San Pablo Darn seismic upgrades.

36 Seismic Matters

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

A seismic evaluation stndy prepared for the District and completed in 1994 examined the likely effects on the District's existing local water system of earthquakes on the Hayward Fault, the Calaveras Fault and the Concord Fault. The study concluded that, in the event of a 7.0 earthquake on the Hayward Fault, the District would likely experience major damage to the Claremont, San Pablo and Upper San Leandro Tunnels, substantial damage to buried pipes, damage to potable water reservoirs and a disruption in the operation of the District's pumping plants, rate control stations and water treatment plants. The District also would likely experience significant damage in connection with a lesser magnitude earthquake on the Hayward Fault or an earthquake on the Calaveras or Concord Faults. If the Claremont Tunnel were closed, severe water rationing would be required in the western portion of the District during the estimated 26-week repair period. A major earthquake may also have a severe adverse impact on the economy of the District's service area.

In the event of severe earthquake damage to the District's Mokelurnne Aqueducts, which carry water from Pardee Reservoir to the District's service area, repair efforts could take up to one year before water could be transported again to the District's terminal reservoirs. This would necessitate a stringent conservation program to reduce consumption, as the District's terminal reservoirs currently store only a four to six months' supply under normal consumption patterns.

Stndies prepared for the District on the safety of Pardee and Camanche Darns during seismic and extreme flood events also have been completed. The results of the studies indicate that both darns would perform satisfactorily in the event of the maximum credible earthquake of magnitude 6.5.

In the event of significant earthquake damage to the Water System and/or the District's service area, there can be no assurance that Subordinated Water Revenues would be sufficient to pay principal and interest on the Series 2005A Bonds.

The District is addressing seismic risks through its Seismic Improvement Program. See the caption "Seismic Improvement Program," below.

Seismic Improvement Program

The District has taken a number of actions to minimize damage to the Water System in the event of an earthquake. The intent is to permit rapid recovery of the ability to provide fire protection and minimum water service following a major seismic event. Principal among these actions have been programs to provide a strong repair capability and ongoing improvements to ensure that District facilities meet the latest seismic design standards. In 1995, the District initiated a ten-year water system seismic improvement program to identify those facilities that are most susceptible to earthquake damage and to address, to the extent deemed cost-effective by the District, identified needs.

37 The Seismic Improvement Program is a program to strengthen, reinforce and upgrade the District's water distribution and transmission systems to better enable the District to provide post­ earthquake water service. Fiscal Year 2005 marks the tenth year of this program. Accomplishments to date include upgrades to 67 reservoirs, 75 pipelines 22 pumping plants, six water treatment plants, three maintenance yards, the Administration Building and various electrical equipment anchorages throughout the District. Key project accomplishments include the completion of Southern Loop Pipeline in June 2002, the first year of a two-year construction of the Claremont Tunnel by-pass, which is expected to be completed in 2006 and seismic upgrades of the Mokelumne Aqueduct No. 3 across the Sacramento-San Joaquin Delta. Other seismic projects include continuation of upgrades to pipelines at fault and landslide areas and construction of the portable pump tie-ins on the transmission pipelines. These and future planned improvements will allow the District to meet its service restoration goal of providing water service to 70% of its customers within ten days after a major seismic event.

Future planned improvements include:

Claremont Corridor Seismic Improvement Project. The Claremont Tunnel is a vital transmission facility providing service to 800,000 customers west of the Oakland-Berkeley Hills. This tunnel crosses the Hayward Fault and current seismic analysis suggests that in a magnitude 7.0 earthquake the tunnel would be damaged and most likely be out of service for up to six months for tunnel repairs. Loss of this transmission facility would result in severe water rationing and reduced supplies for fire fighting, so upgrading this facility was identified as a critical effort. The tunnel upgrade consists of a new 1570-foot bypass tunnel to replace the vulnerable portion of the tunnel at the Hayward Fault zone, and repair and reinforcement of the liner in the remainder of the tunnel.

The tunnel was removed from service in February 2002 for a physical inspection to assess its current condition and determine the extent of seismic upgrades necessary. An Environmental Impact Report (EIR) was completed in October 2003, and final design was completed in 2004. Construction began in June 2004 and a new tunnel portal, a 480-foot access tunnel, and over 350 feet of the bypass tunnel is expected to be completed in Fiscal Year 2006. From December 2004 to March 2005 the existing Claremont Tunnel was dewatered for repairs and reinforcement of the liner. All the repairs and 50 percent of the work have been completed. The remaining liner reinforcement and the bypass mining are scheduled for completion in the next tunnel outage during the winter of Fiscal Year 2006.

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

Reservoir Seismic Upgrades Project. The Reservoir Upgrades Project addresses seismic risks to seventy-four distribution tanks to assure continued water storage following an earthquake, and mitigate the risks to life safety that would result from tank failure. By the end of Fiscal Year 2005, the District expects that sixty-seven tanks will have been completed. The remaining tanks have been delayed due to the Claremont Tunnel outages. Three tanks are expected to be completed in Fiscal Year 2006 and two more in future years. The last two tanks are at the Lafayette Water Treatment Plant and will be either replaced or upgraded as part of the Lamorinda Water System Improvements Project. Other accomplishments include the completion of landslide mitigations and the installation of seismic isolation valves at reservoirs, and valve pit roof anchorages.

Additionally, the Seismic Mitigation Planning Program will establish an ongoing process to ensure earthquake readiness of District infrastructure. This program will identify potential seismic performance problems to ensure the Water System will remain in a constant state of readiness to perform

38 following a major earthquake. Work includes monitoring the physical condition of District facilities on a scheduled basis. and keeping District earthquake standards current and providing a performance evaluation of the transmission and distribution system improvements made during the Seismic Improvement Program.

WATER SYSTEM FINANCES

Basis of Accounting

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

Sources of Funds

The District's principal source of revenues is water sales. In Fiscal Year 2004. 84% of the Water System's $288.8 million in total revenues was provided from water sales. Property taxes contributed 6.0%, or $17.4 million of revenues.

Sources of cash other than water sales and taxes include income from the sale of energy from the District's hydroelectric power plants, investment income, System Capacity Charges ("SCC") and grants and contributions in aid of construction. In Fiscal Year 2004, the Water System's hydroelectric power plants produced power revenues of $2.8 million. The District's income on investments was $6.2 million. Total contributions were $2.8 million in Fiscal Year 2004 as shown on Table 3.

The following Table 3 sets forth the District's Water System revenue sources for the five most recent Fiscal Years ended June 30, 2004. Comparative summaries of Water System revenues appear in Table 9. See the caption "Selected Financial Information" herein. See the caption "SECURITY FOR THE SERIES 2005A BONDS - General Pledge of Subordinated Water Revenues" herein.

39 Table 3 WATER SYSTEM REVENUE Summary of Revenues and Contributions By Sources Five Years Ended June 30, 2004 (Millions)

Fiscal Year Ending June 30 2000 2001 2002 2003 2004 Revenue: Water Sales $ 197.8 $ 206.8 $ 214.0 $ 223.l $ 241.9 SCC Revenues(ll 12.0 11.9 11.6 12.3 12.9 Power Sales 5.6 7.3 3.1 4.0 2.8 InteresiC21 15.2 24.1 24.9 13.8 6.2 Taxes 13.4 14.3 15.5 16.5 17.4 Othe/31 7.8 4.3 5.8 12.4 7.6

Total Revenues $ 251.8 $ 268.7 $ 274.9 $ 282.1 $ 288.8

Contributions: Developers $ 34.9 $ 28.8 $ 12.6 $ 17.9 $ 25.2 Seismic Surcharge 13.5 13.7 13.7 13.9 14.1 Grants 0.4 0.0 0.0 0.0 0.0

Total Contributions $ 48.8 $ 42.5 $ 26.3 31.8 39.3

Total Revenues and Contributions $ 300.6 $ 311.2 $ 301.2 $ 313.9 $ 328. l

(1) SCC Revenues include the interest payment portion of debt service attributable to SCC-related capital facilities. SCC Revenues do not include recovery of the principal repayment portion of debt service or the preliminary engineering and design costs of future water supply projects, both of which are funded from SCC charges. SCC receipts are designated as developer contributions under the Uniform System of Accounts for Water Utilities. SCC Revenues are described in greater detail under the caption "System Capacity Charge." (2) Includes interest earnings and net change in fair value of investments. (3) Excludes reimbursements and other receipts applied directly to operating expenses.

The following Table 4 sets forth revenues by customer type.

Table 4 WATER REVENUES BY CUSTOMER TYPE Fiscal Year Ended June 30, 2004 (Thousands)

Type of Customer Revenues (JJ Percent Residential $ 158.093 68% Conuuercial 43.210 19 Industrial 19.872 8 Other 10 839 ---2 Total $ 232,014 100%

(1) Water revenues exclude proceeds from the seismic surcharge, but include revenues from the sale of nonpotable water.

40 Rates and Charges

The District's rates and rate structure are established by its Board of Directors after a public hearing process, and are not subject to regulation by any other agency. The District has not modified its rate setting process as a result of Proposition 218. See the caption "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS -Proposition 218."

Since Fiscal Year 2001, rates have increased by 17.9%, an average of 3.5% per Fiscal Year. The average rate increases enacted by the District during the current Fiscal Year, for Fiscal Year 2004 and the past three Fiscal Years are as follows:

Fiscal Average Rate Year Increase 2001 3.6% 2002 3.7 2003 3.4 2004 3.5 2005(!) 3.7

Cl) Effective July 1, 2004.

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

Table 5 shows the rate schedule effective July I, 2004, and represents an average increase of 3. 7% from Fiscal Year 2004 rates. The monthly water bill for a typical residential account consuming 11 hundred cubic feet (8,228 gallons) per month is $27.99.

41 Table 5 WATER SYSTEM RA TES AND CHARGES Effective July 1, 2004(')

Service Charge

Meter Size Per Month 5/8-inch and 3/4-inch $ 8.04 I-inch 12.46 1 Yi-inch 19.63 2-inch 28.32 Over 2-inch Various

Charge for Water Delivered

Per Hundred Rate Class Cubic Feet Basic Rate - Single Famill21 $ 1.53 Basic Rate - Multi Family 1.99 Basic Rate - Other 2.12 Elevation surcharges - Zones 2 through 5 0.29 Zones 6 and higher 0.62

(1) A Seismic Improvement Surcharge is added to each customer's water bill. The surcharge consists of a meter charge component that varies by meter size and a volume surcharge. (2) Applies to first 172 gallons per day for single family residential customers. Additional consumption by residential customers is billed at $1.91 per hundred cubic feet for consumption between 173 and 393 gallons per day and $2.33 for all water used in excess of 393 gallons per day.

Comparison of Annual Water Service Charges

Table 6 shows average annual water service charges by various State water agencies for a typical residential account with a 5/8-inch meter using eleven hundred cubic feet of water per month. Charges are for the minimum cost zone or area served by the agency as of January 1, 2005.

42 Table 6 COMPARATIVE ANNUAL RESIDENTIAL WATER CHARGES For 11 Ccf/Month and 5/8" Meter As of January 1, 2005

Average Annual Household Water Supplier Water Service Charge

Contra Costa Water District $ 507 City of Palo Alto 504 Marin Municipal Water District 421 City of San Jose 405 City of Livermore 398 City of Los Altos 392 Alameda County Water District 338 Dublin San Ramon Services District 336 East Bay Municipal Utility District(!) 336 City of Hayward 301 City of Pleasanton 299 North Main Watch District 276 City and County of San Francisco 245

Cl) Based on Fiscal Year 2004 Rates effective July 1, 2004.

Annexations

The District charges $800 for an annexation proceeding plus $600 per acre to be developed, to be paid at the time of application for water service.

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

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

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

43 Billing and Collection Procedures

All water service customers are billed directly by the District bimonthly, with the exception of approximately 1,000 accounts consisting of the largest users in the District, which are billed monthly. Service may be discontinued if an overdue account is not paid after appropriate customer notification. The District considers its rates of payment delinquency, service discontinuance for non-payment, and write-offs for uncollectible accounts to be low by water industry standards for urban areas. The write-offs for uncollectible accounts by Fiscal Year have been:

Fiscal Year Uncollectible Percent of Gross Ended June 30 Revenues Billings 2000 $ 663,317 0.34 2001 609,185 0.29 2002 636,243 0.30 2003 671,538 0.30 2004 764,220 0.32

Tax Revenues

The levy and collection of ad valorem property taxes and subventions have provided approximately 5% to 6% of total operating revenues in each of the past five Fiscal Years for the District. In addition, the District retains the authority to impose an additional ad valorem levy to pay debt service on its outstanding general obligation bonds. It should be noted that tax revenues and subventions are not pledged as a source of payment for the Series 2005A Bonds, although such revenues are routinely applied to pay operation and maintenance expenses (to the extent not applied to pay debt service with respect to the District's general obligation bonds). See the caption "THE WATER SYSTEM- Seismic Matters" for a discussion of the seismic surcharge, the caption "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" for a discussion of certain constitutional and statutory limitations on taxes and appropriations.

From time to time legislation has been considered as part of the State budget to shift the share of the one percent ad valorem property tax collected by counties from special districts to school districts or other governmental entities. While legislation enacted in connection with the 1992-93 State budget shifted approximately 35% of many special districts' shares of the countywide one percent ad valorem tax, the share of the countywide one percent ad valorem tax pledged to debt service by special districts was exempted. The 2004-05 State budget has reallocated additional portions of special districts' shares of the countywide one percent ad valorem tax shifting a portion of the property tax revenues collected by the counties from special districts to school districts. The District has historically, since the 1970's, applied its share of property tax revenues to fund the maintenance fire protection capacity. As a result of legislation providing for an exemption from the property tax shift for funding fire protection services and facilities, the District does not expect to lose any property tax revenues allocable to the Water System in Fiscal Years 2006 and 2007.

Taxes are levied by each County for each fiscal year on taxable real and personal property which 1s situated within the District as of the preceding January I. 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 property secured by a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll".

44 Property taxes on the secured roll are due in two installments, on November 1 and March 1 of the fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared to be in default on or about June 30 of each year. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is declared to be subject to the county tax collector's power of sale and may be subsequently sold by the county tax collector.

Property taxes on the unsecured roll are due as of the March 1 lien date and become delinquent, if unpaid, on August 31 of each year. A 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November 1 of each fiscal year. The taxing authority has four ways of collecting unsecured personal property taxes: (1) filing a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation in the county recorder's office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging to the taxpayer.

Two exemptions from ad valorem taxation are currently in effect. Legislation enacted in 1972 provides that $7,000 of the full cash value of owner-occupied dwellings is exempt from taxation. State subventions currently compensate local agencies for tax revenues lost from this exemption. Additionally, the Statutes of 1979 exempted all business inventories from ad valorem taxation.

Pursuant to California Revenue and Taxation Code Sections 4701 et seq., Contra Costa County and Alameda County each maintain a reserve fund for the purpose of guaranteeing 100% of the secured levies of the electing governmental jurisdictions for which such county collects taxes. The District has elected to participate in Contra Costa County's reserve fund guaranty program. Consequently, the District is exposed to the effect of delinquencies in collections only for property located in Alameda County.

Table 7 shows a five-year record of assessed valuations, secured roll levies and delinquencies for the taxable property included within the District. Assessed valuations are expressed by County Assessors as "full cash value" as defined by Article XIIIA of the State Constitution. The tax levy shown is the District's allocated share of the maximum ad valorem tax levy by each county of 1 % of full cash value. See the caption "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" herein.

There can be no assurances that future legislation will not reduce or eliminate the District's share of the 1% county-wide ad valorem property tax revenues.

45 Table 7 TAXABLE PROPERTY WITHIN THE DISTRICT Assessed Valuation and Tax Collection Record

Fiscal Year Ending June 30 2000 2001 2002 2003 2004 Assessed Valuation for Taxation Purposes(tl Alameda County $46, 919,231,000 $ 49,437,360,000 $ 51,865,936,000 $ 55,507,656,000 $ 58,190,331,000 Contra Costa County 43 848 600 000 48 478 445 000 51 915 734 000 55 475 414 000 60 592 042 000 Total $90,767,831,000 $ 97,915,805,000 $103,781,670,000 $110,983,070,000 $118,782,373,000 Secured Roll Tax Levy(2l Alameda County $ 7,133,654 $ 7,468,707 $ 7,851,142 $ 8,445,000 $ 8,982,000 Contra Costa County 5 920 156 6311105 7 698 856 8 023 000 8 456 000 Total $ 12,627,916 $ 13,444,759 $ 15,549, 998 $ 16,468,000 $ 17,438,000 3 Delinquent June 3Q( l Amount $ 145,908 $ 145,672 $ 198,420 $ 207,747 $ 174,250 Percent 1.15% 1.08% 1.28% 1.26% 1.00%

(tl Net assessed valuations, plus homeowner's exemptions, the taxes on which are paid by the State. All valuations are stated on a 100% of full cash value basis. For revenue purposes, net assessed valuations require deductions of redevelopment project area incremental valuations. 2 ( l Net basis excluding all exemptions. Levies reflect the tax reductions effected by the adoption of Article XIIIA of the State Constitution in 1978, the "Jarvis-Gann Initiative." 3 ( l Amounts apply to Alameda County only, since Contra Costa County guarantees 100% payment of the District's secured roll levy. The delinquency percentages are based on the two counties' secured roll levies. Sources: Auditor-Controller's Office, Alameda and Contra Costa Counties, as compiled by the District.

System Capacity Charge

The District's System Capacity Charge ("SCC") is designed to recover from new accounts the costs of facilities that have been constructed since 1983, or will be constructed in the future to provide distribution service to future customers based on land use plans, Under the existing SCC policy, water treatment facilities, distribution reservoirs, pumping plants, and large transmission mains built to meet demands of new development are financed by bonds, The portion of SCC receipts used to fund interest expense on debt used to finance construction of the SCC-related capital facilities is included in operating revenues, The portion of the SCC receipts used to fund principal repayment on that debt is reported as contributions, The debt service on the portion of the Subordinated Water Bonds used to finance improvements for new customers is paid by SCC receipts, SCC funds applied to the interest expense portion of debt service in Fiscal Year 2004 amounted to $12,9 million,

Power Sales

The District operates hydropower plants at Pardee and Camanche Reservoirs, These plants generate 150 million kilowatt hours of electricity in normal rainfall years, The power is sold on the open market Annual revenues from power sales net of royalty payments have ranged from approximately $2,8 million to $7,3 million over the last five Fiscal Years, Revenues from power sales vary depending on power prices and the volume of water available for release from the reservoirs,

Developer Contributions

Cash contributions for main extension and other facilities to serve new customers depend on the level of development District policy requires new applicants for service to pay the cost of providing capacity necessary to serve them through a combination of direct charges for mains, hydrants, and services and regional SCC to cover the cost of transmission mains, pumping plants and reservoirs, In

46 Fiscal Year 2004 advances for mains, hydrants and services were $9.8 million, and include facilities relocation reimbursements of $39 ,000.

Grants

Grants are received for specific recreation projects. In Fiscal Year 2004, no grant money was collected. An amount of $12.0 million is budgeted for Fiscal Years 2006-2010 based on projected grant commitments and applications.

Taxation of the District

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

Employees' Retirement System

Regular and full-time employees are members of the District Employees' Retirement System, which was established in 1937 to provide retirement, disability, and survivorship benefits. As of June 30, 2004, for both the Water and Wastewater Systems, there were 1,805 active plan members, 213 terminated plan members entitled to but not yet receiving benefits and 993 retirees and beneficiaries receiving benefits.

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

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

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

Allowances Fiscal Year Active (Net) District Paid From Ended June 30 Members(]! Total Plan Assets Contribution Retirement Plan 2000 2,017 584,392,743 20,055,005 22,577,239 2001 2,018 576,304, 112 18,603,542 25,303,815 2002 2,018 536,448,666 19,540,402 27,775,288 2003 2,028 545,526,993 21,467,253 30,923,567 2004 2,018 640,640,512 27,831,130 32,853,312

Cl) Includes active plan members and terminated plan members entitled to but not yet receiving benefits. Source: The District.

47 Under the ordinance governing the Retirement System, the District is required to have an actuarial study performed at least every two years. The actuarial report provides a basis for the Board's decision regarding the rate of contributions by the District to the Retirement System. The unfunded actuarial liability is currently being funded over an approximate 30-year period from the date of the last actuarial study. The District is making contributions within the contribution range determined by its outside actuaries.

The Employees Retirement System current asset allocation targeted was adopted by the Retirement Board in March 1999. The fixed income allocation target of 30% of plan assets is managed by a combination of active and passive asset strategies. Western Asset Management Co. of Pasadena, California provided active management with the passive strategy reflecting the Lehman Aggregate index managed by Northern Trust Global Investments of Chicago.

The equity allocation target of 70%, consisting of 33% large cap domestic equities, 17% of international equities, 10% mid cap domestic equities, and 10% small cap domestic equities was managed in a combination of active and passive strategies. Large cap domestic equities (growth) was managed by Fidelity Management Company of Boston, complimented by Institutional Capital Corporation of Chicago managing the "value" portion of the allocation and Northern Trust Global Investments managing a passive allocation in a S & P 500 Index account. The 17% international equity allocation was managed by Franklin/Templeton Funds of Fort Lauderdale and Fisher Investments, Inc. of Woodside, California. The 10% mid cap domestic equity allocation was managed by Northern Trust Global Investments reflecting the S&P 400 Index. The 10% small cap equity allocation was managed by Mazama Capital Management of Portland, Oregon, TCW Company of Los Angeles, California.

Mellon Human Resources & Investment Solutions has completed an actuarial study of the retirement system including the pension and health insurance benefit trusts as of June 30, 2004. The market value of the plan's assets was $640,640,512 and the pension benefit obligation ("PBO") was $928,434,335, resulting in a funding ratio of the plan under the PBO valuation of 69.0%. Under plan provisions, cost of living increases of up to 5% are granted when the plan is 85% funded under the PBO basis.

The Actuarial Accrued Liability at June 30, 2004 was $949,019,537. The Actuarial Value of Assets was $665,101,648 resulting in an Unfunded Actuarial Accrued Liability of $283,917,889 and a funded ratio of 70. l % calculated in compliance with Statement No. 25 and Statement No. 27 of the Governmental Accounting Standards Board entitled, respectively, "Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans" and "Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans." The valuation study has used the entry age normal actuarial method applied in the aggregate to determine recommended District contributions. The retirement system assets were valued at market for accounting purposes, the investment rate assumption was 8.25% per annum and salaries were assumed to increase based on age with a range of 9.42% for age 20 to 4.01 % for age 70 and over. The Actuarial Accrued Liability of June 30, 2004 of $949,019,537 includes the Actuarial Accrued Liability of the District's health insurance benefit obligations to the Retirement System (the "HIB") of $62,356,809, which is based on vestable plan health insurance benefits in effect at June 30, 2004. At June 30, 2004, $59,641,703 of the Unfunded Actuarial Accrued Liability was attributable to HIB. Additional information concerning the retirement system may be found in "APPENDIX A - AUDITED FINANCIAL STATEMENTS OF THE DISTRICT".

48 District Investment Policy

Funds of the District are invested in accordance with the Government Code of the State, the Municipal Utility District Act and the District's investment policy. The four primary investment criteria set forth in the District's written investment policy are (in order of priority) (I) preservation of principal, (2) maintenance of liquidity, (3) yield and (4) diversity. In order to keep funds available to meet commitments, the District's investment policy provides that the maturity date of individual investments shall not exceed five years and that the average maturity of the portfolio shall not exceed 720 days. Investments permitted by the District's current investment policy include U.S. Treasury notes, bonds and bills, the State of California Local Agency Investment Fund, obligations issued by federal agencies, bankers' acceptances and commercial paper rated in the highest short-term rating category, as well as collateralized repurchase agreements, certificates of time deposit with maturities not to exceed five years and negotiable certificates of deposit, with maturities not to exceed two years and medium term corporate notes with maturities not to exceed five years. Monies in the funds and accounts held by the Trustee under the Indenture may be invested only in Investment Securities, as defined therein. See the caption "SECURITY FOR THE SERIES 2005A BONDS - Investment of Monies in Funds and Accounts Under the Indenture" above. The District does not enter into reverse repurchase agreements or otherwise borrow for purposes of investing, and the District does not invest in highly volatile derivatives and other such securities. See Note 2 in "APPENDIX A - AUDITED FINANCIAL STATEMENTS OF THE DISTRICT" for a description of the District's investment portfolio as of June 30, 2004.

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

Outstanding Debt

Table 8 shows Water System debt outstanding as of May I, 2005. By Resolution No. 32967-96 adopted February 13, 1996, the Board declared its intention to issue up to $700,000,000 of Water System revenue bonds all of which will have been issued following the issuance of the Series 2005A Bonds. By Resolution No. 33272-01 adopted November 13, 2001, the Board declared its intention to issue up to $700,000,000 of Water System revenue bonds of which $550,000,000 will remain unissued following the issuance of the Series 2005A Bonds. The District may from time to time in the future adopt other resolutions authorizing the issuance of Senior Water Bonds, or additional Subordinated Water Bonds and Parity Debt, subject to the satisfaction of the conditions set forth in the Senior Water Bond Resolution and the Indenture. See the captions "SECURITY FOR THE SERIES 2005A BONDS - Issuance of Additional Senior Water Bonds" and "- Issuance of Additional Subordinated Water Bonds and Parity Debt" herein.

Low-interest loans were made by the State Board to the District to finance certain water reclamation and reuse facilities within the District to conserve fresh water supplies. A federal drought loan was made by the U.S. Department of Commerce to the District in 1978 and 1979 to finance drought­ related projects. See the caption "SECURITY FOR THE SERIES 2005A BONDS - State Loans and Federal Loan."

Commercial Paper Notes (Water Series) are issued from time to time pursuant to Resolution No. 32048, as amended, which authorizes a maximum outstanding principal amount not exceeding the lesser of (I) the annual average of the District's total revenue for the three preceding years or (2) 25% of

49 the District's total outstanding bonds issued pursuant to Chapters 6, 7 and 8 of the Municipal Utility District Act. Resolution No. 32048, as amended, provides that the District will maintain a liquidity facility in an aggregate principal amount of Commercial Paper Notes to be issued. The current facility is in an aggregate principal amount not to exceed $330,000,000 outstanding at any time. A total of $225,000,000 is provided by WestLB AG, acting through its New York Branch and the banks from time to time a party thereto, under an agreement which expires August 1, 2008, with provisions for annual one­ year extensions. Also, J.P. Morgan Chase Bank provides additional liquidity under the agreement in an aggregate principal amount of not to exceed $105,000,000 outstanding at one time, which expires on August 1, 2008. The District may use capacity under the liquidity facilities for either the Commercial Paper Notes (Water Series) or the Commercial Paper Notes (Wastewater Series). The Commercial Paper Notes (Water Series) are payable from and secured by a pledge of Water Revenues on a basis subordinate to the Senior Water Bonds, if issued, and Subordinated Water Bonds.

Table 8 OUTSTANDING WATER SYSTEM DEBT As of May 1, 2005

Date of Last Amount Outstanding Issue Issue Maturity Issued May 1,2005

Subordinated Water Revenue Bonds: Subordinated Revenue Refunding Bonds, 7/01/93 6/01/21 $ 222,530,000 $ 37,360,000 Series 1993 Subordinated Revenue Bonds, Series 1994 10/01/94 6/01/05 80,000,000 1,795,000 Subordinated Revenue Refunding Bonds, 2/15/96 6/01/26 290,475,000 244,775,000 Series 1996 Subordinated Revenue Bonds, Series 1998 8/01/98 6/01/38 300,000,000 298,180,000 Subordinated Revenue Bonds, Series 2001 6/01/01 6/01/21 250,000,000 250,000,000 Subordinated Revenue Refunding Bonds, 3/05/02 6/01/25 241,850,000 234,160,000 Series 2002 Subordinated Revenue Refunding Bonds, 6/19/03 6/01/21 115,730,000 114,880,000 Series 2003 Parity Debt: State Water Resources Control Board Loan 1/01/03(1) 1/01/23 2,188,000 2,102,595 Subordinate Debt: State Water Resources Control Board Loan 3/01/88(1) 2/28/09 121,875 33,550 State Water Resources Control Board Loan 6/06/91 (!) 4/30/11 1,359,000 541,941 State Water Resources Control Board Loan 2/01/93(1) 7/31/14 23,404,754 14,352,992 Federal Drought Loan 9/01/78 9/01/17 5,870,862 1,993,415 California Energy Commission Conservation Loan 6/22/02 6/22/13 1,991,945 1,738,207 Commercial Paper Notes (Water Series) Various Various 330 000 000 330 000 000 Total Debt $ 1,865,521,436 $ 1,531,912,700

(1) Date of loan contract.

Table 9 shows future payments on outstanding debt. As discussed above under the caption "SECURITY FOR THE SERIES 2005A BONDS-Senior Water Bonds, Outstanding Subordinated Water Bonds and Parity Debt," pursuant to Resolution No. 33472-05 adopted on April 26, 2005, the District has authorized the issuance of not to exceed $725,000,000 aggregate principal amount of Subordinated Water Bonds, portions of which are anticipated to be issued to refund certain Outstanding

50 Series 1996 Bonds and Series 1998 Bonds and a portion of the District's outstanding Commercial Paper Notes (Water Series). Table 9 assumes the refunding of portions of the Series 1996 Bonds, Series 1998 Bonds and Commercial Paper Notes (Water Series). Table 9 WATER SYSTEM DEBT SERVICE('l

Subordinated Bonds Total Series 2005A Series 2005B and Subordinated Series 1993 Bonds Series2005A Senes2005C State Parity Water Bond and Commerc,al State and Federal 2 3 F,scal Year through 200} ! Prmc,pal Bonds Interest Bondsi ! L=, Parity Debt Paper''! LoanJ5! Total Debt Serv,ce 2006 66,860,4% 0 14,958,333 13,813,779 139,860 95,772,469 5,750,(XX) 2,123,275 103,645,744

2007 66,873,681 0 15,000,000 14,327,372 139,860 %,340,913 6,900,(XX) 2,116,155 105,357,068

2008 66,841,914 0 15,000,000 14,311,391 139,860 %,293,165 6,900,(XX) 2,109,036 105,302,201 2009 68,016,450 0 15,000,000 14,317,588 139,860 97,473,897 6,900,(XX) 2,101,917 106,475,814 2010 68,105,341 0 15,000,000 14,332,445 139,860 97,577,646 6,900,(XX) 2,087,507 106,565,153 2011 68,191,574 0 15,000,000 14,339,614 139,860 97,671,048 6,900,(XX) 2,078,804 106,649,852

2012 68,327,698 0 15,000,000 14,400,558 139,860 97,868,116 6,900,(XX) 2,014,086 106,782,202

2013 68,464,532 0 15,000,000 14,343,148 139,860 97,947,539 6,900,(XX) 1,%9,542 106,817,081

2014 68,471,526 0 15,000,000 14,351,775 139,860 97,%3,161 6,900,(XX) 1,729,217 106,592,378

2015 68,474,816 0 15,000,000 14,352,714 139,860 97,%7,389 6,900,(XX) 1,722,098 106,589,487

2016 64,713,310 0 15,000,000 18,300,051 139,860 98,153,221 6,900,(XX) 1,714,978 106,768,199

2017 61,946,210 0 15,000,000 22,603,279 139,860 99,689,349 6,900,(XX) 156,625 106,745,974

2018 61,973,830 0 15,000,000 22,563,819 139,860 99,677,508 6,900,(XX) 149,506 106,727,014 2019 62,151,245 0 15,000,000 22,615,637 139,860 99,906,742 6,900,(XX) 0 106,806,742

2020 54,759,669 0 15,000,000 30,053,731 139,860 99,953,260 6,900,(XX) 0 106,853,260

2021 54,782,683 0 15,000,000 30,122,590 139,860 100,045,133 6,900,(XX) 0 106,945,133 2022 58,041,380 0 15,000,000 27,931,420 139,860 101,112,659 6,900,(XX) 0 108,012,659

2023 58,010,534 0 15,000,000 28,166,493 139,860 101,316,886 6,900,(XX) 0 108,216,886

2024 57,984,425 0 15,000,000 28,261,713 139,860 101,385,998 6,900,(XX) 0 108,285,998

2025 61,418,520 0 15,000,000 24,%5,154 0 101,383,674 6,900,(XX) 0 108,283,674 2026 29,106,(XX) 0 15,000,000 25,137,761 0 69,243,761 6,900,(XX) 0 76,143,761

2027 0 27,205,000 15,000,000 27,562,218 0 69,767,218 6,900,(XX) 0 76,667,218

2028 0 28,570,000 13,639,750 27,623,721 0 69,833,471 6,900,(XX) 0 76,733,471 2029 0 29,995,000 12,211,250 27,691,286 0 69,897,536 6,900,(XX) 0 76,797,536 2030 0 31,495,000 10,711,500 27,720,528 0 69,927,028 6,900,(XX) 0 76,827,028 2031 0 33,070,000 9,136,750 27,799,411 0 70,006,161 6,900,(XX) 0 76,906,161

2032 0 34,725,000 7,483,250 27,880,375 0 70,088,625 6,900,(XX) 0 76,988,625

2033 0 36,460,000 5,747,000 27,911,546 0 70,118,546 6,900,(XX) 0 77,018,546 2034 0 38,285,000 3,924,000 27,980,597 0 70,189,597 6,900,(XX) 0 77 ,089,597

2035 0 40,195,000 2,009,750 28,051,294 0 70,256,044 6,900,(XX) 0 77,156,044

2036 0 0 0 30,611,793 0 30,611,793 6,900,(XX) 0 37,511,793

2037 0 0 0 30,680,115 0 30,680,115 6,900,(XX) 0 37,580,115

2038 0 0 0 30 768 370 ____o 30 768 370 6900 CXXl O 37 668 370

1303 515 831 $ 300 CXXl 000 394 821583 765 893 284 $ 2657340 $2 766 888 038 226 550 CXXl 22 072 746 $ 3 015 510 784

(1) Debt serV1ce ls calculated on a cash basis. (2) Assumes defeasance of $90,165,CXXl principal amount of Series 1996 Bonds and $221,100,000 principal amount of the Series 1998 Bonds result mg from the issuance of the Series 2005B Bonds. Debt service on Series 2003 Bonds has been fixed pursuant to the Series 2002 Swap Agreements. See caption "SECURITY FOR THE SERJES 2005A BONDS-Interest Rate Swap Agreements." (3) Assumes issuance of $300,CXXl,OOO aggregate pnnc1pal amount of Series 2005A Bonds, $325,CXXl,OOO aggregate pnnc1pal amount of Series 2005B Bonds and $100,000,000 aggregate prme1pal amount of the Series 2005C Bonds and that mt ere st with respect to the $325,000,000 pnnc1pal amount of the Series 2005B Bonds has been swapped to a fixed interest rate of 3.34%. See capllon "SECURITY FOR THE SERIES 2005ABONDS-Interest Rate Swap Agreements." (4) Assumes issuance of $100,000,CXXl aggregate pnnc1pal amount of Series 2005C Bonds to refund outstanding Commercial Paper Notes (Water Series'') Assumes $230 rrulhon outstanding. \Vhtle the commercial paper program ls ]muted by statute to seven years, 11 ls the District's mtention to reestablish the corrnnercial paper program after each seven-year period. Assumes interest rate of 2.50% m Fiscal Year 2006 and 3.00% thereafter, on Out st and mg Senes 2005C Bonds and Commere1al Paper Notes CW at er Senes). (5) Includes 20-year State Water Resources Control Board loans, federal drought loan and Cahforrua Energy Comnussion Conservallon loan. (6) May not add due to round mg.

51 Debt Management Policies

It is the current policy of the District to seek to maintain a debt service coverage ratio of 1.6 on the sum of the outstanding Senior Water Revenue Bonds and Subordinate Water Revenue Bonds and to fund 35% of its capital program over each five-year planning period from revenues and sources other than debt.

Historic Operating Results

The District's financial statements for Fiscal Year 2004, and the Report of KPMG LLP, independent accountants, are included as Appendix A, and should be read in their entirety. The summary operating results for Fiscal Years 2000 through 2004 contained in Table 10 is derived from the audited financial statements for prior Fiscal Years and are qualified in their entirety by reference to such statements, including the notes thereto.

Table 10 sets forth the historic operating results and the calculation of the Debt Service coverage ratio for the Wastewater System in accordance with the Indenture for each of the last five Fiscal Years.

Table 10 WATER SYSTEM DEBT SERVICE COVERAGE(11

2000 2001 2002 2003 2004 WATER REVENUES(2l: Water Revenue $ 197,771,972 $ 206,791,485 $ 213,999,674 $ 223,125,945 $ 241,926,963 Power Revenue 5,622,100 7,285,232 3,126,485 4,049,748 2,832,851 Interest and Net Change in Fair Value of Investments 15,249,228 24,060,304 24,906,080 13,822,054 6,220,244 SCC Revenue 11,980,105 11,851,061 11,623,298 12,273,145 12,865,529 Seismic Rate Surcharge 13,489,725 13,700,000 13,706,453 13,870,000 14,098,436 Other Revenue 7817141 4267419 5 783 200 12 353 951 7 613 176 TOTAL WATER REVENUES $ 251930271 $ 267 955 194 $ 273 125 188 279494 843 285 557 199

WATER OPERATION & MAINTENANCE COSTS: Operating Expense $ 131,664,081 $ 128,523,372 $ 124,866,350 $ 135,616,805 150,197 ,106 (Less Tax Receipts)(3l {13,444, 780) {14,285,601) {15,549,998) {16,468,941) {17,438,319) TOTAL WATER OPERATION & MAINTENANCE COSTS $ 118,219,301 $ 114,237,771 $ 109,316,352 $ 119,147,864 $ 132,758,787

NET WATER REVENUES $ 133 710 970 $ 153 717 423 $ 163 808 836 160 346 979 152 798 412

DEBT SERVICE: Senior Revenue Bonds 0 0 0 0 0 Subordinated Revenue Bonds 65,939,301 68,453,574 75,109,514 79,029,364 81,366,576 Parity State Loans 0 0 0 0 0(4) TOTAL DEBT SERVICE $ 65,939,301 $ 68,453,574 $ 75,109,514 $ 79,029,364 $ 81,366,576

DEBT SERVICE COVERAGE RATIO 2.03 2.25 2.18 2.03 1.88

(') Calculated in accordance with the Indenture. Revenues excludes grant receipts, taxes, and developer contributions. Developer contributions are defined as contributions (not Water Revenue) "' under the Indenture. Operation and Maintenance Costs excludes those expenses paid from District's share of colllltywide 1%property tax revenues. Under current "' District policy, District's share of countywide 1%property tax revenues are used to pay for operations allocable to maintenance of fire protection capacity. (') Initial debt service payment was due on July 1, 2004.

52 District Management's Discussion of Operating Results

Water System Net Revenue was $152.7 million in Fiscal Year 2004 compared to $160.3 million in Fiscal Year 2003. Revenues from water sales increased $18 million, primarily due to a 3.75 percent increase in rates which became effective July 1, 2003. The additional revenues will be used to fund operating expenses and the capital program. Water Operation and Maintenance Costs increased by $13.0 million due to higher pumping costs, laboratory service charges and increased costs of fire and property insurance. See also "Management's Discussion and Analysis" contained in Appendix A - "EAST BAY MUNICIPAL UTILITY DISTRICT AUDITED FINANCIAL STATEMENTS, JUNE 30, 2004.

Projected Operating Results

In the preparation of the projections in this section, the District has made certain assumptions with respect to conditions that may occur in the future. While the District believes these assumptions are reasonable for the purpose of the projections, they are dependent on future events, and actual conditions may differ from those assumed. To the extent actual future factors differ from those assumed by the District or provided to the District by others, the actual results will vary from those forecast. This projected information has not been compiled, reviewed or examined by the District's independent accountants.

53 Table 11 sets forth the prqjected operating results and calculation of the Debt Service cc:werage ratios for the Water System in accordance with the Indenture for the current and next five Fiscal Years. The prqjections set forth in Table 11 are based upon the District's Biennial Budget for Fiscal Years 2004 and 2005 with respect to Fiscal Year 2005 results and the District's proposed Biennial Budget for Fiscal Years 2006 and 2007 and the proposed Five Year Plan forthe Water andWastavater System; anticipated to be subnitted to the Board of Directors on May 10, 2005 for Fiscal Years 2006 through 2010.

Table 11 WATER SYSTEM Debt Service Cc:werage Prqjection (M ii lions) Fiscal Year EndingJ une 30

2005(1) 2CXXi 2007 2008 2009 2010 WATER REVENUES121 Water Revenue( 3l $ 24&4 $ 25&8 $ 270.0 $ 279.6 $ 28&7 $ 29& l Power Revenue 2.5 4.5 4.5 4.5 5.4 5.7 Interest and Net Change in FaJ r Value of I ,westm,nts 6.6 4.1 5.3 6.4 6.4 5.7 sec Revenue 23.9 26.7 29.5 34.6 41.7 46.5 Seismic Rate Surcharge 13.7 13.8 13.9 14.0 14.l 14.2 Other Revenue _____Th§ _____Th§ _____Th§ _____Th§ ____ru ____ru TOTAL WATER REVENUES $ 310.7 $ 323.5 $ 33&8 $ 354.7 $ 372.0 $ 385.9

WATER OPERATION & MAINTENANCE COSTS Operating Expense( 4l $ 17&6 $ 182.6 $ 18&2 $ 194.2 $ 200.7 $ 207.8 151 (Less Tax Receipt,0 ___Dfil) ___lli'2) ~ ___illl,§) ___Dfil) ___@J) TOTAL WATER OPERATION & MAINTENANCE COSTS $ 162. l $ 165.4 $ 170.3 $ 175.6 $ 181.4 $ 187.7

NET WATER REVENUES $ 14&6 $ 15& l $ 16&5 $ 179.l $ 190.6 $ 19&2

DEBT SERVICE Senior Revenue Bonds $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 Subordinated Ra,enue Bond~ 61 81.9 95.6 96.2 102.2 114.6 120.7 Parity State Loars ____cu 0.1 0.1 0.1 0.1 0.1 TOTAL DEBT SERVICE 82.0 95.8 96.3 102.3 114.8 120.9

DEBT SERVICE COVERAGE RATIO l.81 l.65 l.75 l.75 l.66 l.64

(I) Based cri acbr:ted Fiscal Year 2005 B udJe:. Re.;Enues exclu:les grant re:::eir:ts, taxes, and developer ccritributicris. Developer contril::uticris are defined as contril::utions (net WatEf Re.;Enue) "' urdEr the IrdEnture. Assurres 3.75% rate increase effective in Fiscal Year 20'.Xi, a 3.75% rate increase effectivefcr Fiscal Year XXJ7 ard 2.70Yo rate increases effe:::tive in each cf Fi sc:aJ Y ears 2008, 2009 ard 20 l 0. Fiscal Year 20'.Xi ard XXJ7 Operatirg Expenses based cri prq::osed BiEnnial BudJe: for Fiscal Years 20'.Xi and XXJ7. SubsequEnt Fiscal Year Projections assurre 3.0Yo increase in Operating Expenses. ISi Op::raticri ard MaintEnance Costs excludes those exp::nses paid fran ad valorem taxes. Under currEnt District r:olicy, taxes are used to pay for q::eraticris allocable to rmintenarx:::e cf fire p-cte:::tion cap3eity. (Cl Assurres issuance of $325,CX::0,0'.)'.) SEries 2CX)5B Bcrids to redeem $9'.), 165,CX::O aooregate principal arrount cf Series 19_:X:i Bcrids and $221, 100,CX::O aooregate p-incipal arrcunt of SEries 1998 Bords. Assurres that interest with resp::ct totheSEries 20058 Bords has been swapped toa fixed interest rate of 3.34Yo. See car:tim "SECURITY FOR THE SERIES 2CX)5A BONDS - lntErest Rate Swap Agreerrents." Assurres issuance cf $100,CX::0,0'.)'.) SEries 2005C Bcrids to refund outstardirg Comn::rcial Paper Notes (W atEf SEries). Assurres intErest rate cri SEries 2CX)5C Bords of 2.50Yo in Fiscal Year 20'.Xi ard 3.0Yo thEreaftEf. Assurres the issuarx:::e of SEries 2CX)5A Bcrids at the intErest rates listed cri the front COJEf cf this Official Staterrent and $95 nillicri, $100 nillion and $95 nillicri in aggregate p-irx:::ipal arrount of Sul::ordinated W atEf Bcrids in Fiscal Years 2008, 2009 ard 2010, respYtively, at an average i ntErest rate cf 5.0'.JYo.

54 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS

Tax Limitations - Proposition 13

Article XIIIA of the State Constitution, known as Proposition 13, was approved by the voters in June 1978. Section l(a) of Article XIIIA limits the maximum ad valorem tax on real property to 1% of "full cash value," and provides that such tax shall be collected by the counties and apportioned according to State statutes. Section l(b) of Article XIIIA provides that the 1% limitation does not apply to ad valor em taxes levied to pay interest or redemption charges on ( 1) indebtedness approved by the voters prior to July 1, 1978, and (2) any bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast by the voters voting on the proposition.

Section 2 of Article XIIIA defines "full cash value" to mean the county assessor's valuation of real property as shown on the 1975-76 Fiscal Year tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. Such legislation further provides that each county will levy the maximum tax permitted by Article XIIIA, which is $1.00 per $100 of assessed market value. The legislation further establishes the method for allocating the taxes collected by each county among the taxing agencies in the county. Special districts, such as the District, receive an allocation that is based primarily upon their tax levies in certain years prior to the amendment's effective date relative to the tax levies of other congruent agencies. The District receives approximately 1.25% of the non-debt service property taxes collected within its jurisdiction from Alameda and Contra Costa counties.

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

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

The effect of Article XIIIA on the District's finances has been to restrict ad valorem tax revenues for general purposes to the statutory allocation of the 1% levy while leaving intact the power to levy ad valorem taxes in whatever rate or amount may be required to pay debt service on its outstanding general obligation bonds and unissued bonds authorized prior to July 1, 1978. Under current District policy, principal and interest on general obligation bonds issued for the District's water system are paid from non-tax revenues. Consequently, since Fiscal Year 1978/79 tax revenues have consisted exclusively of the District's allocated share of the 1% county levy.

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

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

Spending Limitations

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

Proposition 62

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

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

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

56 Proposition 218

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

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

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

The District believes that because such charges are payable only if a property owner or tenant receives service from the District, the District's water charges are not charged "as an incident of the ownership or tenancy of real property" and are consequently not "fees" or "charges" subject to Article XIIID. See "WATER SYSTEM FINANCES - Rates and Charges."

In Opinion No. 97-302, dated July 14, 1997, the California Attorney General concluded that Article XIIID is inapplicable to the District's tiered water rate structure. The opinion makes a distinction between a water rate structure based upon the amount of water used, which is not subject to Article XIIID, and fees or assessments that are levied against a parcel of land on a per-parcel or per-acre basis, which are subject to Article XIIID. The Attorney General concluded that fees for water that are based upon metered amounts used are not imposed as an incident of property ownership and do not have a direct relationship to property ownership and, consequently, such fees would not be governed by Article XIIID. On December 1, 2000, the Court of Appeal for the Second Appellate District of the State of California published an opinion regarding Proposition 218 's definition of property-related fees that is consistent with Opinion No. 97-302. In Howard Jarvis Taxpayers Association v. City of Los Angeles, the Court of Appeal held that fees for water that are based upon metered amounts used are charges for a commodity and not related to property ownership and, consequently, Article XIIID does not apply to such fees. However, in a decision rendered in February, 2004, the California Supreme Court in Richmond et al. v. Shasta Community Services District, 32 Cal. 4th 409, upheld a Court of Appeals decision that water connection fees were not property related fees or charges subject to Article XIIID, while at the same time stating in dicta that fees for ongoing water service through an existing connection were property related fees and charges. In October 2004, the California Supreme Court granted review of the Fourth Appellate Court's decision in Bighorn-Desert View Water Agency v. Beringson, 120 Cal. App. 4th 890 (2004), in

57 which the appellate court had relied on Howard Jarvis Taxpayers Association v. City of Los Angeles and rejected the Supreme Court's dicta from Richmond et al. v. Shasta Community Services District.

On March 23, 2005, the California Fifth District Court of Appeal published Howard Jarvis Taxpayers Association v. City of Fresno, 2005 Daily Journal DAR 3402, 2005 West Law 665253, concluding that in lieu fees charged as a component of utility service charges are subject to the requirements of Proposition 218. The ruling in City of Fresno relies in part on the Richmond decision's dicta and appears to conflict with Apartment Association of Los Angeles County, Inc. v. City of Los Angeles, 24 Cal.4th 830 (2001), in which the California Supreme Court ruled that the property-related fee provisions of Proposition 218 apply only to fees triggered by property ownership alone and not by voluntary conduct of the property owner, such as consuming utility services. The City of Fresno decision is not yet final and may be appealed to the California Supreme Court, which is considering similar issues in the pending Bighorn-Desert View case. Accordingly, the City of Fresno decision is not yet controlling law in California. The outcome of these appeals may be determinative if charges for ordinary utility services are subject to the procedural requirements of Proposition 218.

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

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

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

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

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

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

Without conceding that its water charges are subject to Article XIIID, the District believes that its rates comply with the foregoing standards.

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

Article XIIIC. Article XIIIC provides that the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge and that the

58 power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. Article XIIIC does not define the terms "local tax," "assessment," ''fee" or "charge." However, the California Court of Appeal for the Fourth Appellate District in the case of Bighorn-Desert View Water Agency v. Beringson, 114 Cal.App.4th 1213 (2004), held that the initiative power described in Article XIIIC applies only to the local taxes, assessments, fees and charges governed by Article XIIID. In an opinion rendered in April 2004, the California Supreme Court in Bighorn-Desert View Water Agency v. Beringson granted review and transferred the matter to the California Court of Appeal for the Fourth Appellate District with directions to vacate its decision and to reconsider the cause in light of the decision in Richmond et al. v. Shasta Community Services District. On reconsideration of the matter, the California Court of Appeal for the Fourth Appellate District reaffirmed its prior holding (Bighorn-Desert View Water Agency v. Beringson, 120 Cal. App. 4th 890 (2004)). As noted above, the California Supreme Court has again granted review of the case. In any event, the District and its general counsel do not believe that Article XIIIC grants to the voters within the District the power to repeal or reduce rates and charges in a manner that would be inconsistent with the contractual obligations of the District. No assurance can be given that the voters of the District will not, in the future, approve initiatives which seek to repeal, reduce or prohibit the future imposition or increase of assessments, fees or charges, including the District's water service fees and charges, which are the source of Water Revenues pledged to the payment of debt service on the Series 2005A Bonds.

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

Future Initiatives

Articles XIIIA, XIIIB, XIIIC and XIIID and Proposition 62 were adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiatives could be proposed and adopted affecting the District's revenues or ability to increase revenues.

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

The ability of the District to comply with its covenants under the Indenture and to generate Water Revenues sufficient to pay the principal of and interest on the Series 2005A Bonds may be adversely affected by actions and events outside of the control of the District and may be adversely affected by actions taken ( or not taken) under Article XIIIC or Article XIIID by voters, property owners, taxpayers or payers of assessments, fees and charges. Furthermore, any remedies available to the owners of the Series 2005A Bonds upon the occurrence of an event of default under the Indenture are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain. In addition to the possible limitations on the ability of the District to comply with its covenants under the Indenture, the rights and obligations under the Series 2005A Bonds and the Indenture may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against municipal utility districts in the State of California.

Based on the foregoing, in the event the District fails to comply with its covenants under the Indenture, including its covenants to generate sufficient Water Revenues, as a consequence of the application of Article XIIIC and Article XIIID, or to pay principal of or interest on the Series 2005A Bonds, there can be no assurance that available remedies will be adequate to fully protect the interests of the holders of the Series 2005A Bonds.

59 CONTINUING DISCLOSURE

The District has covenanted for the benefit of the holders and beneficial owners of the Series 2005A Bonds to provide certain financial information and operating data relating to the District by not later than 270 days following the end of the District's fiscal year (which currently is June 30 of each year) (the "Annual Report"), commencing with the Annual Report for Fiscal Year 2005, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the District with each Nationally Recognized Municipal Securities Information Repository and with the state information repository, if any. The notices of material events will be filed by the District with the Municipal Securities Rulemaking Board and with the state information repository, if any. The specific nature of the information to be contained in the Annual Report or the notices of material events is set forth below in "APPENDIX H - FORM OF CONTINUING DISCLOSURE AGREEMENT FOR SERIES 2005A BONDS." These covenants have been made in order to assist the Underwriter, in complying with Securities and Exchange Commission Rule 15c2-12(b )(5). The District has not failed to comply in any material respect with any of the District's prior continuing disclosure undertakings.

LITIGATION

There is no action, suit or proceeding known to be pending or threatened, restraining or enjoining the District in the execution or delivery of, or in any way contesting or affecting the validity of, the Series 2005A Bonds. There is no litigation known to be pending, or to the knowledge of the District, threatened, questioning the existence of the District or the title of the officers of the District to their respective offices.

There exist lawsuits and claims against the District, which are incidental to the ordinary course of operations of the Water System. In the view of the District's management and General Counsel, there is no litigation, present or pending, which will individually or in the aggregate materially impair the District's ability to service its indebtedness or to expend the proceeds for the purposes for which the Series 2005A Bonds are authorized or which will have a material adverse effect on the business operations of the District.

RATINGS

It is expected that Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and Moody's Investors Service, Inc. ("Moody's") will assign the Bonds the ratings of "AAA" and "Aaa," respectively, based on the issuance of the Policy. No application has been made to any other rating agency for the purpose of obtaining any additional rating on the Series 2005A Bonds. Any desired explanation of such ratings should be obtained from the rating agency furnishing the same. Generally, rating agencies base their ratings on information and materials furnished to them and on investigations, studies and assumptions by the rating agencies. There is no assurance that any rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating agency if, in the judgment of such rating agency, circumstances so warrant. Any such change in or withdrawal of such ratings may have an adverse effect on the market price of the Series 2005A Bonds.

TAX MATTERS

In the opinion of Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel, based on existing statutes, regulations, rulings and judicial decisions and assuming compliance with certain covenants in the Indenture and requirements of the Internal Revenue Code of 1986, as amended (the "Code"), regarding the use, expenditure and

60 investment of proceeds of the Series 2005A Bonds and the timely payment of certain investment earnings to the United States, interest on the Series 2005A Bonds is not includable in the gross income of the owners of the Series 2005A Bonds for federal income tax purposes. Failure to comply with such covenants and requirements may cause interest on the Series 2005A Bonds to be included in gross income retroactively to the date of issuance of the Series 2005A Bonds.

In the further opinion of Co-Bond Counsel, interest on the Series 2005A Bonds is not treated as an item of tax preference in calculating the federal alternative minimum taxable income of individuals and corporations. Interest on the Series 2005A Bonds, however, is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation's alternative minimum tax liability.

Ownership of, or the receipt of interest on, tax-exempt obligations may result in collateral tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with excess passive income, individual recipients of Social Security or Railroad Retirement benefits, taxpayers that may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and taxpayers who may be eligible for the earned income tax credit. Co-Bond Counsel express no opinion with respect to any collateral tax consequences and, accordingly, prospective purchasers of the Series 2005A Bonds should consult their tax advisors as to the applicability of any collateral tax consequences.

Certain requirements and procedures contained or referred to in the Indenture may be changed, and certain actions may be taken, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. Co-Bond Counsel express no opinion as to the exclusion of interest on the Series 2005A Bonds from gross income for federal income tax purposes on and after the date on which any such change occurs or action is taken upon the advice or approval of counsel other than Co­ Bond Counsel.

Legislation affecting municipal obligations is continually being considered by the United States Congress. There can be no assurance that legislation enacted after the date of issuance of the Series 2005A Bonds will not have an adverse effect on the tax-exempt status of the Series 2005A Bonds. Legislation or regulatory actions and proposals may also affect the economic value of tax exemption or the market price of the Series 2005A Bonds.

The difference between the amount payable at maturity of a Series 2005A Bond with a yield less than its interest rate (as set forth on the cover page of this Official Statement) (each a "Premium Bond") and the tax basis of an owner of a Premium Bond (other than a purchaser who holds a Premium Bond as inventory, stock in trade or for sale to customers in the ordinary course of business) over the principal amount of such Premium Bond is "bond premium." Bond premium is amortized for federal income tax purposes over the term of a Premium Bond based on the purchaser's yield to maturity in the Premium Bond, except that in the case of a Premium Bond callable prior to its stated maturity, the amortization period and the yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such Premium Bond. A purchaser of a Premium Bond is required to decrease his or her adjusted basis in such Premium Bond by the amount of bond premium attributable to each taxable year in which such purchaser holds such Premium Bond. The amount of bond premium attributable to a taxable year is not deductible for federal income tax purposes. Purchasers of Premium Bonds should consult their tax advisors with respect to the precise determination for federal income tax purposes of the amount of bond premium attributable to each taxable year and the effect of bond premium on the sale or other

61 disposition of a Premium Bond, and with respect to the state and local tax consequences of owning and disposing of a Premium Bond.

In the further opinion of Co-Bond Counsel, interest on the Series 2005A Bonds is exempt from personal income taxes imposed by the State of California.

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

UNDERWRITING

The Series 2005A Bonds are being purchased pursuant to a purchase contract between the District and Citigroup Global Markets Inc., as representative of the Underwriters (the "Underwriters"). The Underwriters have agreed to purchase the Series 2005A Bonds at an aggregate purchase price of $313,097,306.15 (equal to the $300,000,000.00 aggregate principal amount of the Series 2005A Bonds, less an Underwriters discount of $1,735,117.00, plus original issue premium of $14,832,423.15). The purchase contract provides that the Underwriter will purchase all of the Series 2005A Bonds if any are purchased. The obligation of the Underwriters to make such purchase is subject to certain terms and conditions set forth in the purchase contract.

The Underwriters may offer and sell the Series 2005A Bonds to certain dealers and others at prices or yields below those stated on the cover page of this Official Statement. The offering prices or yields may be changed from time to time by the Underwriters.

APPROVAL OF LEGAL PROCEEDINGS

All legal matters incident to the authorization, issuance and sale of the Series 2005A Bonds are subject to the approval of Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel. The form of approving opinion of Co-Bond Counsel is included as Appendix D to this Official Statement and the approving opinion will be delivered with the Series 2005A Bonds. Certain legal matters will be passed upon for the District by its General Counsel and for the Underwriters by Stradling Yocca Carlson & Rauth, A Professional Corporation. Certain legal matters will be passed on for the Insurer by its General Counsel.

FINANCIAL ADVISOR

The Financial Advisors are not obligated to undertake, and have not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. Public Financial Management, Inc. and P.G. Corbin & Co., Inc. are independent financial advisory firms and are not engaged in the business of underwriting, trading or distributing municipal securities or other public securities.

INDEPENDENT ACCOUNTANTS

The financial statements of the District's Water System at June 30, 2004 included in Appendix A to this Official Statement, have been audited by KPMG LLP, independent accountants, as set forth in their report dated September 3, 2004, which also appears in Appendix A. It is District policy to competitively select and retain independent accountants for a five-year period. KPMG LLP began serving as the District's independent accountants in Fiscal Year 2000.

62 MISCELLANEOUS

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

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or registered owners of any of the Series 2005A Bonds. The delivery and distribution of this Official Statement have been duly authorized by the District.

EAST BAY MUNICIPAL UTILITY DIS TRI CT

By: /s/ Dennis M. Diemer General Manager

63 (This page intentionally left blank) APPENDIX A

AUDITED FINANCIAL STATEMENTS

A-1 (This page intentionally left blank) EAST BAY MUNICIPAL UTILITY DISTRICT

Financial Statements

June 30, 2004

(With Independent Auditors' Report Thereon) (This page intentionally left blank) EAST BAY MUNICIPAL UTILITY DISTRICT

Table of Contents

Page

Independent Auditors' Report I

Management's Discussion and Analysis 2

Basic Financial Statements:

Balance Sheets - Proprietary Funds - Enterprise IO

Statements of Revenues, Expenses, and Changes in Net Assets - Proprietary Funds - Enterprise 12

Statements of Cash Flows - Proprietary Funds - Enterprise 13

Statements of Fiduciary Net Assets - Fiduciary Fund- Pension and Other Employee Benefit Trust (Component Unit) 15

Statements of Changes in Fiduciary Net Assets - Fiduciary Fund-Pension and Other Employee Benefit Trust (Component Unit) 16

Notes to Basic Financial Statements 17

Required Supplementary Information - Historical Pension Data (Unaudited) 39 (This page intentionally left blank) KPMG LLP Three Embarcadero Center San Francisco, CA 94111

Independent Auditors' Report

The Board of Directors East Bay Municipal Utility District:

We have audited the accompanying financial statements of each major fund and the discretely presented component unit of the East Bay Municipal Utility District (the District) as of and for the year ended June 30, 2004, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. The prior year summarized comparative information has been derived from the District's 2003 financial statements, and in our report dated September 5, 2003, we expressed an unqualified opinion on those financial statements.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of each major fund and the discretely presented component unit of the East Bay Municipal Utility District as of June 30, 2004 and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The management's discussion and analysis on pages 2 through 9 and the schedules of funding progress on page 39 are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

September 3, 2004 EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

This section presents management's analysis of the East Bay Municipal Utility District's (the District) financial condition and activities as of and for the year ended June 30, 2004. Management's Discussion and Analysis (MDA) is intended to serve as an introduction to the District's basic financial statements.

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

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

• Organization and Business • Overview of the Basic Financial Statements • Financial Analysis • Capital Assets and Debt Administration • Factors Impacting Future Periods • Request for Information

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

OVERVIEW OF THE BASIC FINANCIAL STATEMENTS The District's basic financial statements are comprised of two components: (I) Fund Financial Statements and (2) Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements.

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

2 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

Proprietary Funds. The District's proprietary funds consist of two enterprise funds, the Water System and the Wastewater System. Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.

The District's proprietary fund statements include:

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

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

The statement of cash flows presents changes in cash and cash equivalents resulting from operational, capital, noncapital, and investing activities. This statement summarizes the annual flow of cash receipts and cash payments, without consideration of tl1e timing of the event giving rise to the obligation or receipt and excludes noncash accounting measures of depreciation or amortization of assets.

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

Notes to Basic Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to basic financial statements can be found on pages 17 to 38 of this report.

Other Information. In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning ilie District's progress in funding its obligation to provide pension and other postemployment healthcare benefits to its employees. Such required supplementary information can be found on page 39 of this report.

FINANCIAL ANALYSIS Financial Highlights • The total assets of the District exceeded the total liabilities by $1.4 billion (net assets). • Net assets increased by $40 million or 3% during the fiscal year.

3 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

• Capital assets increased by $135 million or 5% to $2.9 billion. • During the year, operating revenue increased by $19 million or 7% to $314 million. • Operating expense increased by $15 million or 6% to $264 million. • Capital contributions, consisting of capital facility fees, decreased by $6 million or 17% from the prior fiscal year.

Financial Position The District's net assets increased by $40 million or 3% during the year (see Table I below). Current and other assets, primarily bond proceeds, were used to fund construction of capital projects during the year, resulting in a decrease of $37 million in the level of current and other assets. By far the largest portion of the District's net assets (77%) or $1 billion represents its investment in capital assets necessary to provide services. The increase of 3% in Total Net Assets is consistent with tbe District's implementation of a five-year capital improvement program.

Table 1 Net Assets Water and Wastewater June 30, 2004 and 2003 (In thousands)

2004 2003 Variance Current and other assets $ 461,531 498,956 (37,425) Capital assets 2,890,307 2,755,527 134,780 Total assets 3,351,838 3,254,483 97,355 Current and other liabilities 148,774 137,305 11,469 Long-term liabilities 1,782,298 1,736,644 45,654 Total liabilities 1,931,072 1,873,949 57,123 Net assets: Invested in capital assets, net of related debt 1,090,005 1,006,470 83,535 Restricted 67,359 68,711 (1,352) Unrestricted 263,402 305,353 (41,951)

Total net assets $ =====''=42=0=, 7=6=6 = 1,380,534 40,232

4 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

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

Table 2 Changes in Net assets Water and Wastewater June 30, 2004 and 2003 (ln thousands)

2004 2003 Variance % Revenues: Water service revenues $ 241,927 223,126 18,801 8% Wastewater service revenues 42,822 41,590 l,232 3 Other revenues 29,559 30,247 (688) (2) Total operating revenues 314,308 294,963 19,345 7 Expenses: Water operations 156,418 145,311 11,107 8 Wastewater operations 36,801 35,545 1,256 4 Depreciation (excluding amounts reported within the Waler and Wastewater operations) 70,438 67,714 2,724 4 Total operating expenses 263,657 248,570 15,087 6 Net operating income 50,651 46,393 4,258 9 Nonoperating expenses, net (38,998) (29,309) (9,689) 33 Income before contributions 11,653 17,084 (5,431) (32) Capital contributions 28,579 34,344 (5,765) (17) Change in net assets 40,232 51,428 (11,196) (22) Total net assets - beginning 1,380,534 1,329,106 51,428 4 Total net assets - ending $ 1,420,766 1,380,534 40,232 3

5 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

The District's total operating revenue of $314 million for the year increased by $19 million and total operating expense increased by $15 million, providing a 9% increase in net operating income. The District's change in net assets for the year, including capital contributions, decreased by $1 l million or 22%. The major components of this decrease were:

• Water and wastewater revenue increased by $19 million and $1 million, respectively, mainly reflecting rate increases effective July I, 2003. • Other revenue decreased by $1 million, primarily reflecting a $1 million decrease in power revenue. • Operating expense increased by $15 million, primarily reflecting increases in depreciation and amortization expense across both water and wastewater systems. • Nonoperating expense (net of nonoperating revenue) increased by $10 million, primarily reflecting a decrease of $5 million in the fair value of investments and a decrease of $5 million in other income compared to the prior year. • Capital contributions decreased by $6 million, primarily reflecting a decrease of $6 million m system capacity charges and contributions from residential and commercial developers.

CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets The District had $2.9 billion (net of accumulated depreciation) invested in a broad range of utility capital assets as of June 30, 2004. The investment in capital assets includes land, buildings, improvements, water treatment plants, filter plants, aqueducts, water transmission, and distribution mains, water storage facilities, pump stations, water reclamation facilities, wastewater, and wet weather treatment facilities, machinery, and equipment (see Table 3 below). This amount represents an increase of $135 million or 4.9% over the prior fiscal year, consistent with the District's implementation of a five-year (FY 02 to FY 06) capital improvement program. The District's net revenue, long-term debt, and contributions from customers are used to finance capital investments. More detailed information about the District's capital assets is presented in note 3 to the basic financial statements.

Table 3 Capital Assets, Net of Depreciation Water and Wastewater June 30. 2004 and 2003 (In thousands)

Water System Wastewater System Districtwide Increase (dcerease) 2004 2003 2004 2003 2004 2003 Amount 0/o

Structures, buildings, and equipment $ 2,023.012 1.789,032 470,271 476.896 2,493,283 2,265,928 227,355 10.0% Land and rights"'()f:..way 48,924 48,924 5,587 5,586 54,511 54,510 I 0.0 Construction 'WOrk in progress 322,172 420,938 20,341 14,151 342,513 435,089 (92,576) (21.3) Totals $ 2,394,108 2,258,894 496,199 496,633 2,890,307 2.755,527 134,780 4.9

6 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

This year's major capital additions included: Water Walnut Creek- San Ramon Valley transmission improvements $ 27,759,000 Walnut Creek Water Treatment Plant long-term capacity upgrade 24,868,000 Pipeline Infrastructure Renewals 13,212,000 Service Lateral Replacement Polybutylene 12,030,000 New Service Installations 9,131,000 Pipeline System Extensions 7,606,000 Mokelumne Aqueduct Seismic Upgrade 6,569,000 Vehicle Replacements 6,245,000 Claremont Corridor SIP 5,574,000 Reservoir Upgrades SIP 5,390,000

Wastewater Resource Recovery Project 5,796,000 Digester Upgrade 3,655,000 Routine Capital Equipment Replacement 1,734,000

Additional information on the District's capital assets can be found in note 3 of the financial statements.

Long-Term Debt As of June 30, 2004, the District had total long-term debt outstanding of $1.8 billion (net of unamortized costs), increasing by $49 million, or 2.7%, as shown in Table 4:

Table 4 Outstanding Debt (Net of Unrunorlized Cos bi) Waler and Wastewater June 30, 2004 and 2003 (In thousands)

Water System Wastewater System Districtwide Increase (decrease) 2004 2003 2004 2003 2004 2003 Amount o/o

General obligation bonds $ 3,922 4,757 40,031 41,380 43,953 46,137 (2,184) (4.7)% Revenue bonds 1,141,045 1,163,796 238,373 241,614 1,379,418 1,405,410 (25,992) ( 1.8) Com1nercial paper 330,000 250,000 330,000 250,000 80,000 32.0 Loans 22.054 21,363 46,668 50,542 68,722 71,905 (3,183) (4.4) $ 1,497,021 1,439,916 325,072 333,536 1,822,093 1,773,452 48,641 2.7

The District issued $115.73 million in Water System Subordinated Revenue Refunding Bonds, Series 2003. Proceeds were used to refund $123.27 million of the District's Water System Subordinated Revenue Refunding Bonds, Series 1993, which represent a portion of the $177.865 million outstandiog aggregate principal amount of the Series 1993 Bonds as of June 1, 2003.

7 (Contioued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

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

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

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

Commercial Paper: Limit to 25% of outstanding long-term debt.

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

Revenue-supported debt authorization for the District can be approved by the District's board of directors, subject to a referendum process. At June 30, 2004, the District had $1 billion in authorized but unissued revenue bonds ($850 million Water and $150 million Wastewater).

Table 5 Debt Ratings Water and Wastewater June 30, 2004

Rating by Moody's Investors Standard & District debt by type Service Poor's Water system: Commercial Paper P-1 A-1+ Subordinated Revenue Bonds Aa2 AA General Obligation Bonds Aaa AA Wastewater system: Commercial Paper P-1 A-1+ Subordinated Revenue Bonds Aa3 AA General Obligation Bonds Aa3 AA

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

FACTORS IMPACTING FUTURE PERIODS The District's contribution rate to the Employees' Retirement System is scheduled to increase from an aggregate of20.8% in FY04 to 23.53% in FY05. Using the covered payroll of$138.6 million from FY04, this will translate to an increase of$3.3 million in additional District contributions.

8 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Management's Discussion and Analysis June 30, 2004

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

9 EAST BAY l\llJ::'IJlCJPAL lJTJI.lTY DISTRICT Balance Sheets - Proprietary Funds - Enterprise June 30, 2004 (With comparative financial infonnation as of June 30, 2003) (Dollars in thousands)

Water Svstem Fund Wastewater System Fund Asseh: 2004 2003 2004 2003 Current assets: Cash and investmentc; s 198,349 248,649 64.002 69,677 262,351 318,326 Receivables: Customer 19,599 16,142 3,104 3,036 22,703 19,178 Interest and other 9,521 4,730 2,163 4,679 11,684 9,409 Materials and supplies 9,521 9,916 - 9,521 9,916 Prepaid insurance 3,036 1,781 3,227 1,781 Total current assets 240,026 281,218 69,460 ~6!0 Noncurrcnt assets: Restricted cash and investn1ents: 13ond construction fund - 2,593 2,603 2,593 2,603 Bond interest and redemption fund 78 78 - Debt service reserve fund 21,793 21,793 - 21,793 Funds received for construction 77,375 77,426 - 77,426 fERC partnership fund 2,294 2,281 ·- 2,281 tvfonetary reserve 619 619 - 619 Total restricted cash and investments 102,081 !02,119 2,671 104,722 Unrestricted investments: Reserve funded CTP -- - 11,480 11,135 11,480 11,135 Seismic fund 13,254 1,119 - 13,254 1,119 Vehicle/equipment replacement fund 3,634 6,041 6,954 8,772 Total unrestricted cash and investments 16,888 7,160 14,800 13,866 ~688 21,026 Other a\isets: Deferred bond issuance costs 9,174 9,164 2,899 3,048 12,073 Other 2,673 1,628 859 758 3,532 Total other assets 11,847 10,792 3,758 3,806 15,605 14,598 Capital assets: Structures, buildings, and equipment 2,824,348 2,533,916 662,697 653,437 3,487,045 3,187,353 Less accumulated depreciation (801,336) (744,884) (192,426) (176,541) (993,762) (921,425) Subtotal 2,023,012 1,789,032 470,271 476,896 2,493,283 2,265,928 Land and rights~of-way 48,924 48,924 5,587 5,586 54,511 54,5!0 Construction in progress 322,172 420,938 20,341 14,151 342,513 435,089 Total capital assets, net 2,394,108 2,258,894 496,199 496,633 2,890,307 2,755,527 Total noncurrcnt assets 2,524,924 2,378,965 517,428 516,908 3,042,352 2,895,873 Total assets $ 2,764,950 2,660,183 586,888 594,300 3,351,838 3,254,483

10 (Continued) EAST BAY ~1UN"ICIPAL lJTILJTY DISTRlCT Balance Sheets - Proprietary Funds·- Enterprise June 30, 2004 (With comparative financi,1.l infomiation as of Jw1e 30, 2003) (Dollars in thousands)

Water Svstem Fund Wastewater System Fund Total Liabilities and !\et Assets 2004 2003 2004 2003 2004 __2003 Current liabilities: Current maturities of long~term debt $ 29,315 27,682 10,480 9,125 39,795 36,807 Accounts payable and accrued expenses 64,870 57,889 9,919 7,723 74,789 65,612 Accrued interest 5,946 6,037 2,269 3,336 8,215 9,373 Total current liabilities 100e!l!.._ 91,608 22,668 20,184 122,799 111,792 Noncurrent liabilities: Other liabilities: Advances for construction 13,008 11,615 - - 13,008 11,615 Other liabilities ~ 6,819 6,750 7,079 12,967 13,898 Total other liabilities 19,225 I 8,434 6.750 7,079 25,975 25,513 Long~term liabilities, net of current maturities 1,467,706 1,412,233 314,592 324,411 1,782,298 1,736,644 Total noncurrent liabilities 1,486,931 1,430,667 321,342 331,490 1,808,273 1,762,157 Total liabilities 1,587,062 1,522,275 344,010 351,674 1,931,072 1,873,949 Net assets: Invested in capital assets, net of related debi 918,879 840.771 171,126 165,699 1,090,005 1,006,470 Restricted for constructim1 64,367 65,811 - 64,367 65,811 Restricted for debt service 78 78 Restricted - other 2,914 2,900 -· - 2,914 2,900 Unrestricted 191,728 228,426 71,674 76,927 263,402 305,353 Total net assets 1,177,888 242,878 242,626 1,420,766 1,380,534 Total liabilities and net assets $ 2,764,950 2,660,183 586,888 594,300 3,351,838 3,254,483

Sec accompanying notes to basic financial statements. EAST BAY l\1UNICIPAL UTILITY DISTRICT Statements of Revenues, Expenses, and Changes in Net Assets­ Proprietary Funds- Enterprise Year ended June 30. 2004 (With comparative financial infonnation for the year ended June 30, 2003) (Dollars in thousands)

Water S;rstem Fund Wastewater System Fund Total 2004 2003 2004 2003 2004 2003 Operating revenue: Water $ 241,927 223.126 241,927 223,126 Sewer 42,822 41.590 42,822 41,590 Power 2,833 4,050 2,833 4,050 System capacity charges 12,865 12,273 12.865 12,273 Wet weather facilities charges 13,861 1\924 13,861 13,924 Total operating revenue 257,625 239,449 56,683 55,514 314,308 294,963 Operating expense: Raw water 22,805 22.891 22,805 22,891 Water treat1ncnt and distribution 72,448 62,274 72,448 62,274 Rccreation areas, net 7,783 6,977 7,783 6,977 Sewer lines and pumping 10,911 9,355 10,911 9,355 Sewer treatment plant operations 19,827 19,291 19,827 19,291 Customer accounting and collecting II .029 10,031 1,601 1,705 12,630 11,736 Financial and risk managemen1 14,799 12,335 706 799 15,505 13,134 Facilities management 10,171 9.038 - 10,171 9,038 General administration 17,383 21. 765 3,756 4,395 21,139 26,160 Depreciation on utility plant 54,552 51,853 15,886 15,861 70,438 67,714 Total operating expense 197,164 52,687 51,406 263,657 248,570 Net operating income 46,655 42,285 4.108 50,651 46,393 Other income (expense): Investment income 11,117 13,299 2,621 2,954 13,738 16,253 Taxes and subventions 17,438 16,469 6,253 5,777 23,691 22,246 interest :md amortization of bond expenses_, net of capitalized interest of $6,588 and $8,565 for the Water System and $691 and $1,085 for the Wastewater System in 2004 and 2003, respectively (59, 138) (59,175) (13,087) (15,764) (72,225) (74,939) Other income (expense) (2,561! 7,205 (l,641) (74) (4,202) 7,131 Total other expense, net (33,1441 !22,202) (5,854) i7,107l (38,998) (29,309) Income (loss) before capital contributions 13,5ll 20,083 (l,858) (2,999) 11,653 17,084 Capital contributions 26,469 31,848 2,.!_!Q___ 2,496 28,579 34,344 Change in net assets 39,980 51,931 252 (503) 40,232 51,428 Total net assets - beginning 1,137,908 1,085,977 242,626 243,129 1,380,534 1,329,106 Total net assets - ending $ 1,177,888 1,137,908 2421878 242,626 1,420,766 1,380,534

See accompanying notes to basic financial statements.

12 EAST BAY :\IUNICIPAL UTILITY DISTRICT Statements of Cash flows - Proprietary Funds- Enterprise Year ended June 30, 2004 (With compamtive financial information for the year ended June 30, 2003) (Dollars in thousands)

Water System Fund Wastewater Svstcrn Fund Total 2004 2003 2004 2003 2004 2003 Cash flows from operating activities: Cash received from customers s 255,921 241,106 56,616 55,497 312,537 296,603 Reimbursements from other agencies for: Hilling and collection service~ 2,386 2,519 2,386 2,519 Administrative services 1,973 8,092 - 1,973 8,092 La.boratory services - 5,805 2,973 5,805 2,973 Cash paymen!s for judgments and claim~ (8,633) (4,652) (185) (245) (8,818) (4,897) Cash paymen!s to suppliers for goods and services (15,052) (20,414) ( 16,525) (35,466) (36,973) Cash payments to employees for service~ 1122,920) (23,550) (21,920) (146,470) (138,016) Net cash provided by operating activities 113,675 1102!_ 18,272 19,780 131,947 130,301 Cash flows from nonca.pita..l financing activities: Tax receipts 17,438 16.469 6,253 6,028 23,691 22,497 Other noncapital financing increases L428 10,523 315 52 1,743 10,575 Other noncapital financing decrease.~ (4,247) (5,369) (871) (45) (5,118) (5,414) Net cash provided by noncapital financing activities 14,619 21,623 5,697 20,316 27,658 Capital and related financing activities: Capital contributions 26,469 31,848 2,110 2,496 28,579 34,344 Proceeds from advances for construction 6,644 6,593 - 6,644 6,593 Reductions in advances for construction (5,251) (4,967) (5,251) (4,967) Interest received on construction funds 862 1,890 4 862 1,894 Proceeds from sale of capital assets 104 190 37 104 227 Net proceeds from sale of bonds 12.936 12,936 Proceeds from the issuance of commercial paper 80,000 38,000 80,000 38,000 Federal/state loans received 2,188 1,992 2,188 1,992 Acquisition and construction of capital assets (200,457) (209,525) (9,807) (13,352) (210,264) (222,877) Principal paid on long-term debl (28,586) (24,060) (9,124) (9,434) (37,710) (33,494) Interest paid on long~term debt (55,736) (57,145) (13,345) (14,524) (69,081) (71,669) Net cash used in capital and related financing activities (l73,763) (21,837) (203,929) (237,021) Cash flows from investing activities: Purchase of investment securities (372,925) (363,134) (75,707) (108.497) (448,632) (471,631) Proceeds from sale of investment securitic~ 315,394 385,282 77,157 89,877 392,551 475,159 lnterest received on investments 9,753 13.483 2,846 3,202 12,599 16,685 Net cash provided by (used in) investing activities (47,778) 35,631 (15,418) (43,482) 20,213 Net decrease in cash and cash equivalents (93,247) (47,409) (1,901) (11,440) (95,148) (58,849) Cash and cash equivalents: Beginning of year 197,903 9,033 20,473 159,527 218,376 End of year $ ",,.,;; ">47 150,494 _____7~ 64,379 159,527

13 (Continued) EAST BAY MUI',JCIPAL UTILITY DISTRICT Statements of Cash Flows - Proprietary Funds - Enterprise Year ended June 30, 2004 (With comparative financial information for the year ended June 30, 2003) (Dollars in thousands)

Water System Fund Wastewater System Fund Total 2004 2003 2004 2003 2004 2003 Reconciliation of net operating income to net cash provided by operating activities: Net operating income $ 46,655 42,285 3,996 4,108 50,651 46,393 Adjustments to reconcile net operating income to net cash provided b) operating activities: Depreciation 59,210 56,751 15,886 15,861 75,096 72,612 Amortization 7,683 6,118 (263) 718 7,420 6,836 Changes in assets/liabilities: Materials and supplies 395 (1,052) - 395 ( 1,052) Prepaid insurance (1,255) (180) (191) - (1,446) (180) Customer receivables (3,457) 1,144 (67) (104) (3,524) 1,040 Other receivables (1,687) 2,862 86 (1,687) 2,948 Accotnlts payable and accrued expenses 2,933 1,284 (1,362) (929) 1,571 355 Other liabilities -1.12.L 1,309 273 40 3,471 1,349 Net cash provided by operating activities $ •111 .,,, ,:.75 110,521 19,780 131,947 130,301

See accompanying notes to basic financial statements.

14 EAST BAY MUNICIPAL UTILITY DISTRICT Statements of Fiduciary Net Assets - Fiduciary Fund- Pension and Other Employee Benefit Trust (Component Unit) June 30, 2004 (With comparative financial information as of June 30, 2003) (Do liars in thousands)

2004 2003 Assets: Cash and investments $ 8,474 7,668 Invested securities lending collateral 67,384 34,555 Receivables: Contributions 2,046 1,159 Interest and other 23,999 17,001 Prepaid insurance 218 178 Retirement system investments, at fair value 643,523 554,612 Total assets 745,644 615,173 Liabilities: Accounts payable and accrued expenses 831 502 Retirement system liabilities 36,788 34,589 Securities lending collateral 67,384 34,555 Total liabilities 105,003 69,646 Net assets: Held in trust for pension benefits 638,026 543,730 Held in trust for postemployment healthcare benefits 2,615 1,797 Total net assets 640,641 545,527 $ ======

See accompanying notes to basic financial statements.

15 EAST BAY MUNICIPAL UTILITY DISTRICT Statements of Changes in Fiduciary Net Assets - Fiduciary Fund- Pension and Other Employee Benefit Trust (Component Unit) Year ended June 30, 2004 (With comparative financial information for the year ended June 30, 2003) (Dollars in thousands)

2004 2003 Additions: Contributions: Employer $ 27,831 21,467 Plan members 7,084 5,651 34,915 27,118 Investment income (loss): Net appreciation (depreciation) in fair value of investments: Traded securities 87,911 8,239 Real estate (8) Interest 3,727 4,514 Dividends 5,401 3,180 Real estate operating income, net 4 31 97,043 15,956 Less investment expense 2,252 1,676 Borrowers' rebates and other agent fees on securities lending transactions 468 499 Net investment income 94,323 13,781 Total additions, net 129,238 40,899 Deductions: Benefits paid 32,853 30,923 Refund of contributions 476 160 Administrative expenses 795 737 Total deductions 34,124 31,820 Change in net assets (postemployment healthcare benefits of$819 and $725, respectively) 95,114 9,079 Net assets: Beginning of year 545,527 536,448

End of year $ ==64=0==,6==4=1 = 545,527

See accompanying notes to basic financial statements.

16 EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

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

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

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

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

The basic financial statements include partial prior year comparative information. A complete presentation of the prior year information can be found in the District's financial statements for the year ended June 30, 2003.

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

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

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

Additionally, the District reports the following fiduciary fund:

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

17 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The Pension and Other Employee Benefit Trust fund is maintained to account for assets held by the Employees' Retirement System in a trustee capacity. (d) Basis ofAccounting Proprietary funds and the Pension and Other Employee Benefit Trust fund are accounted for on a flow of economic resources measurement focus, using the accrual basis of accounting. Under this method, all assets and liabilities associated with operations are included on the balance sheet, and revenues are recorded when earned and expenses are recorded at the time liabilities are incurred.

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the District are charges to customers for sales and services. The District also recognizes system capacity and wet weather facilities charges as operating revenue. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

When both restricted and umestricted resources are available for use, it is the District's policy to use restricted resources first, then umestricted resources as they are needed.

For its proprietary activities, the District does not apply Financial Accounting Standards Board (F ASB) statements and interpretations issued after November 30, 1989. The proprietary funds apply all applicable Governmental Accounting Standards Board (GASB) pronouncements as well as statements and interpretations of the FASB, the Accounting Principles Board Opinions, and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.

In addition, the accounting policies of the District conform to accounting principles generally accepted in the United States of America for water utilities. The accounts are maintained substantially in accordance with the Uniform System of Accounts for Water Utilities followed by investor-owned and major municipally owned water utilities.

18 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Balance Sheet - The balance sheet is designed to display the financial position of the District. The District's fund equity is no longer reported as retained earnings and contributed capital, but rather as net assets which is broken down into three categories defined as follows:

• Invested in capital assets, net of related debt This component of net assets consists of capital assets including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. • Restricted This component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or law or regulations of other governments. It also pertains to constraints imposed by law or constitutional provisions or enabling legislation. • Unrestricted - This component of net assets consists of net assets that do not meet the definition of"restricted" or "invested in capital assets, net of related debt."

Statement of Revenues, Expenses, and Changes in Net Assets - The statement of revenues, expenses, and changes in net assets is the operating statement for proprietary funds. Revenues are reported by major source. This statement distinguishes between operating and nonoperating revenues and expenses and presents a separate subtotal for operating revenues, operating expenses, and operating income.

(e) Use ofEstimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(j) Capital Assetv Utility Plant at Original Cost The cost of additions to utility plant and replacement of retired units of property are capitalized. Cost includes material, direct labor and fringe benefits, transportation, and such indirect items as engineering, supervision, and interest on borrowed funds during construction. Repairs, maintenance, and minor purchases of equipment are charged to expenses as incurred.

The depreciated cost of other property units, plus removal costs, less salvage, is charged to expense upon retirement.

19 (Continued} EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Water Supply Management Program Costs incurred in this program are debt funded and capitalized within construction in progress. These costs are transferred to utility plant upon completion of the project and depreciated over the period of useful life. Debt service costs on the debt used to finance the program are recovered in future periods through rates and charges for service benefiting from the program.

Preliminary Survey and Investigation Costs The District capitalizes initial costs incurred to study and evaluate certain potential long-term capital projects. These costs are transferred to property, plant, and equipment upon completion of the project and are depreciated over the life of the asset. In the event the project is abandoned, these costs are expensed.

(g) Depreciation Depreciation of capital assets is computed on a straight-line basis using the estimated service lives of the related assets (5 to 75 years). The aggregate provision for depreciation was 2.11% and 2.20% of the average plant balance for the years ended June 30, 2004 and 2003, respectively.

(h) Re.,tricted Assets The District segregates certain cash and investments which have legal or other external restrictions.

The Bond Construction Fund is used to report proceeds of bond issuances that are restricted for use in the capital program. The Bond Interest and Redemption Fund is used to segregate resources accumulated for debt service payments. Funds received for construction represent operating revenues restricted to fund specific construction projects or amounts received by the District from applicants and developers to cover the cost of extending water and wastewater service to new customers or to fund large wastewater treatment equipment replacements.

(i) Deferred Amount on Bond Refundings Gains and losses incurred in connection with debt refunding transactions are deferred and amortized over the shorter of the life of the refunded debt or the new debt.

(j) Cash and Cash Equivalents For purposes of the statement of cash flows, the District considers all highly liquid investments (including restricted assets) with original maturities of three months or less at the date of purchase to be cash equivalents.

(k) Investments Investments are stated at fair value. Included in investment income (loss) is the net change in the fair value of investments which consists of the realized gains or losses and the unrealized appreciation (depreciation) of those investments.

20 ( Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Measurement of the fair value of investments is based upon quoted market prices, if available. The estimated fair value of investments that have no quoted market price is determined based on equivalent yields for such securities or for securities of comparable maturity, quality, and type as obtained from market makers.

The District and the Employees' Retirement System participate in the State Treasurer's Investment Pool along with certain external participants. Oversight of the pool is provided by the Pooled Money Investment Board consisting of the Treasurer, Controller, and Director of Finance for the State of California. The District's position in the pool is equal to the value of the pool shares. The income from the pooled investments is allocated between the individual funds and external participants based on the daily cash balance maintained by each individual fund and external participant in relation to the total pooled investments of those funds and external participants. Measurement of the fair value of real estate investments is estimated by the investment managers and reflects both internal and independent appraisals ofreal estate properties.

Each of the financial instruments invested in by the District represents a potential concentration of credit risk. However, as the portfolio and the components of the various instruments are diversified, and issuers of securities are dispersed throughout many industries and geographic locations, the concentrations of credit risk are limited.

The market value of investments in any one organization exceeding 5% of the Employees' Retirement System's net assets as of June 30, 2004 and 2003 was as follows: Nature of investment 2004 2003 Northern Trust Collective Daily Aggregate Bond Index Fund $ 77,393 77,198 Northern Trust Collective Daily Standard & Poor's Midcap 400 Equity Index Fund 64,656 50,484 Templeton Institutional Funds, Inc. Foreign Equity Series 66,379 49,552 Putnam International Trust 46,720

The Retirement Board policies permit the Employees' Retirement System to use investments of the pension plan to enter into securities lending transactions which are loans of securities to broker-dealers and other entities for collateral with a simultaneous agreement to return collateral for the same securities in the future. The Employees' Retirement System's securities custodian is an agent in lending the Plan's securities for cash collateral, U.S. government securities, and irrevocable letters of credit of 102% for domestic securities lent and 105% for international securities lent. Investments held by broker-dealers under securities loans with cash collateral at year-end are presented as "noncategorized" in the schedule of custodial risk (note 2). As of June 30, 2004, the Employees' Retirement System had no credit risk exposure to borrowers because the amounts the Employees' Retirement System owes the borrowers exceed the amounts the borrowers owe the Employees' Retirement System. Contracts with the lending agent require them to indemnify the Employees' Retirement System under certain circumstances if the borrowers fail to return the securities (and if the collateral were inadequate to replace the securities lent) or fail to pay the

21 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Employees' Retirement System for income distributions by the securities issuers while the securities are on loan. The risk of any loss of collateral or investment of cash collateral (including a loss of income or principal, or loss of market value thereon) lies with the Employees' Retirement System, except for losses resulting from negligence or intentional misconduct of the agent in performing the duties allocated under the securities lending agreement with respect to collateral. During the year ended June 30, 2004, there were no violations of legal or contractual provisions, and no borrower or lending agent default losses known to the securities lending agent. In lending securities, cash collateral is invested in the lending agent's short-term investment pool, which as of June 30, 2004 had a weighted average maturity of 30 days. The relationship between the maturities of the investment pool and the Employees' Retirement System's loans is affected by the maturities of the securities loans made by other entities that use the agent's pool which the Employees' Retirement System cannot determine. Cash collateral may also be invested separately in term loans, in which case the maturity of the collateral investment generally matches the term of the loan. Noncash collateral cannot be pledged or sold unless the borrower defaults. All securities loans can be terminated on demand by either the lender or the borrower, although the average term of overall loans for the Employees' Retirement System was approximately 70 days. There are no dividends or coupon payments owing on the securities lent. Cash received as collateral on securities lending transactions is reported as an asset of the Employees' Retirement System with a corresponding liability.

As of June 30, 2004, the fair value of securities on loan was $67.4 million. The total cash and noncash collateral held by the Employees' Retirement System's custodian was valued at $70.5 million, consisting of $65.6 million cash collateral and $4.9 million noncash collateral.

(l) Mate rial and Supplies Material and supplies inventories are valued at cost, which approximates market, using the average-cost method.

(m) Compensated Absences Compensated absences are accrued and reported as a liability in the period earned. Amounts payable as of June 30 are included on the balance sheet in accounts payable and accrued expenses.

(n) Revenue Customer water meters are read on a cyclical basis throughout a monthly or bimonthly period. Bills are rendered and revenue is recognized in the period that meters are read.

Wastewater treatment billings are a combination of flow, strength charges, and a monthly service charge. Customer bills are rendered on a cyclical basis throughout a monthly or bimonthly period, and revenue is recognized in the period in which bills are rendered.

Wet weather facilities charges are designed to finance the operating costs related to wet weather sewage flows.

22 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

(o) Interest Rate Swap The District enters into interest rate swap agreements to modify interest rates on some outstanding debt. Other than the net interest expense resulting from these agreements, no amounts are recorded in the financial statements.

(2) Cash and Investments State statutes authorize the District to invest in obligations of the U.S. Treasury and other U.S. agencies, bankers' acceptances, commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Commercial Paper Record, money market funds, repurchase agreements, corporate notes, and the State Treasurer's investment pool.

In addition to the above-noted financial instruments, the Employees' Retirement System's investment policy authorizes the Employees' Retirement System to invest in other instruments, including, but not limited to, corporate bonds, common and preferred stocks, real estate investment trusts, and mutual funds.

Total cash and investments at fair value as of June 30, 2004 and 2003 consisted of the following:

2004 2003 Primary Retirement Primary Retirement Government System Total Government System Total

Cash and investments $ 262,351 8,474 270,825 318,326 7,668 325,994 Invested securities lending collateral 67.384 67,384 34,555 34,555 Restricted cash and investments 104,752 104,752 104,722 104,722 Noncurrent unrestricted cash and investments 31,688 31,688 21.026 21,026 Employees' Retiren1ent System investments 643.523 643,523 554.612 554,612

Total cash and investments s 398,791 719,381 1,118,172 444,074 596,835 1,040,909

The District's investments are categorized to give an indication of the level of risk assumed at year-end. Category I includes investments that are held by the District's custodian bank in the District's name. Category 2 includes investments that are held by the counterparty bank in a segregated account. Category 3 includes investments which are uninsured and unregistered, with securities held by the counterparty, but not in the District's name. The District has no Category 2 or 3 investments. The Employees' Retirement System has no Category 2 investments.

23 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

The District's cash and investments as of June 30, 2004 are as follows:

Carrying Type of investment Category 1 value Primary Government: U.S. agency securities $ 216,800 216,800 Corporate securities 86,476 86,476 Guaranteed investment contracts 21,793 21,793 Commercial paper 49,358 49,358 $ 374,427 374,427 Investment in State Treasurer's investment pool 15,824 Demand deposits and certificates of deposit 8,540 Total cash and investments $ 398,791

24 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

The Employees' Retirement System's cash and investments as of June 30, 2004 are as follows:

Category Carrying Type of investment 1 3 value Component unit - employees' retirement system: Categorized investments: U.S. government securities $ 40,675 950 41,625 Domestic corporate bonds 27,903 27,903 International bonds 4,633 4,633 Domestic stocks 198,110 198,110 International stocks 52,521 52,521 Real estate 19 19 $ 323,861 324,811 ======950 Noncategorized investments: Investment in State Treasurer's investment pool 1,300 Demand deposits 215 U.S. government securities 77,393 Domestic corporate bonds 13,004 Domestic stocks 96,313 International stocks 66,379 Mutual funds (money market) 6,959 Investments held by broker-dealers under securities loans with cash collateral: U.S. government bonds and agency securities 13,402 Domestic corporate bonds 6,249 Domestic stocks 30,434 International stocks 15,538 Securities lending short-term collateral investment pool 67,384 Total cash and investments $ 719,381

The bank balances of the District and Employees' Retirement System's demand deposits and certificates of deposit as of June 30, 2004 totaled $8,540 and $215, respectively. Of the total bank balances, $595 was covered by federal depository insurance and the remainder was collateralized by collateral pools established by the financial institutions which hold these deposits as required by state statutes for all public deposits. There were no situations that occurred during the year which posed greater credit risk than as of June 30, 2004.

25 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

A reconciliation of the Enterprise fund cash and investments reported on the balance sheet to cash and cash equivalents reported on the statement of cash flows as of June 30, 2004 and 2003 is as follows: 2004 2003 Cash and investments included in current assets $ 262,351 318,326 Cash and investments included in restricted assets 104,752 104,722 Cash and investments included in unrestricted assets 31,688 21,026 398,791 444,074 Less investments with original maturities in excess of three months (334,412) (284,547} Cash and cash equivalents $ 64,379 159,527

(3) Capital Assets Capital assets as of June 30, 2004 and 2003 consisted of the following: 2004 2003 Utility plant: Source of supply $ 105,752 97,998 Raw water transmission and storage 412,978 320,192 Interception and outfall 129,256 129,017 Pumping 123,114 123,114 Treatment 610,181 590,839 Distribution 1,516,274 1,388,371 Power generation 76,545 74,136 Equipment 149,688 142,786 Plant structures 221,910 214,074 Other 141,347 106,826 3,487,045 3,187,353 Less accumulated depreciation (993,762} (921,425} Utility plant, net 2,493,283 2,265,928 Land and rights-of-way 54,511 54,510 Construction in progress 342,513 435,089 $ 2,890,307 2,755,527

26 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Capital asset activity for the year ended June 30, 2004 was as follows:

Beginning Ending balance, balance, July 1, June 30, 2003 lncreases Decreases 2004 Business-type activities: Water System: Capita} assets~ not being depreciated: Land and rights-of-v.ray $ 48,924 48,924 Construction in progress 420 938 202,356 (301,122) 322,172 Total capital assets, not being depreciated 469,862 202 356 (301,122) 371,096 Capital assets, being depreciated: Buildings and improvements 147,531 7,248 154,779 System and improvements 2,305,120 288,981 (8,644) 2,585,457 Machinery and equipment 81,265 4,893 (2,046) 84,112 2,533,916 301 122 ( I0,690) 2,824,348 Less accumulated depreciation for: Buildings and improvements (41,287) (4,052) (45,339) System and improvements (645,454) (51,094) 1,079 (695,469) Machinery and equipment [58,143) (4,064) 1,679 (60,528) !744,884) (59,210) 2,758 [801,336) Total capital assets, being depreciated, net 1,789,032 241,912 [7.932) 2,023,012 Water System capital assets, net 2,258,894 444,268 [309,054) 2,394,108 Wastewater System: Capital assets, not being depreciated: Land and rights-of-way 5,586 5,587 Construction in progress 14,151 16.468 (10,278) 20,341 Total capital assets, not being depreciated 19,737 16,469 ( 10,278l 25,928 Capital assets, being depreciated: Buildings and improvements 66,542 589 67,131 System and improvements 579,906 9,361 (1,018) 588,249 Machinery and equipment 6,989 328 7,317 653,437 10,278 ( 1.018) 662,697 Less accumulated depreciation for: Buildings and improvements (15,014) (1,731) (16,745) System and improvements (155,543) (13.873) (169,416) Machinery and equipment (5,984) (281) [6,265) (176,541) (I 5,885J (192,426) Total capital assets, being depreciated, net 476,896 (5,607) (1,018) 470,271 Wastewater System capital assets, net 496,633 10,862 (11,296) 496,199 Business-type activities capital assets, net s 2,755,527 455.130 (320,350) 2,890,307

27 ( Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Depreciation expense was charged to the following activities of the District as follows: 2004 2003 Business-type activities: Water System $ 59,210 56,751 Wastewater System 15,886 15,861 Total business-type activities depreciation expense $ 75,096 72,612 ======

Depreciation expense is included in recreation areas (net), facilities management, and depreciation on utility plant.

( 4) Accounts Payable and Accrued Expense Accounts payable and accrued expense at June 30, 2004 and 2003 consist of:

Water Svstem \Vastewater System Total 2004 2003 2004 2003 2004 2003

Accounts payable s 17,687 17,253 3,330 2,002 21,017 19.255 Accrued salaries 21,861 20,636 3,380 3,156 25,241 23,792 Workers' compensation reserves 13,971 10,026 1,904 l,632 15,875 11,658 Other 11,351 9,974 l,305 933 12,656 10,907 Total $======64,870 57,889 9,919 7,723 74,789 65,612

(5) Commercial Paper Notes The District's board of directors has authorized a short-term commercial paper borrowing program of up to the lesser of either ( 1) the average of the total annual revenue for the three preceding years or (2) 25% of the District's total outstanding bonds. The proceeds from the issuance of commercial paper are restricted as to use, Under this program, which must be authorized by the board of directors every seven years and is subject to the right of referendum, the Water System or the Wastewater System may issue commercial paper and bank notes at prevailing interest rates for periods not more than 270 days from the date of issuance. The program was last authorized on October 24, 2000.

As of June 30, 2004 and 2003, $330,000 and $250,000 in commercial paper notes were outstanding under this program, with terms of 8 to 50 days and interest rates ranging from .92% to 1.12% as of June 30, 2004 and terms of 1 to 78 days and interest rates ranging from 0.90% to 1.10% as of June 30, 2003. There were no unused proceeds as of June 30, 2004. It is the District's policy to refinance its commercial paper notes with long-term bonds.

To provide liquidity for the program, the District maintains a liquidity support agreement with a commercial bank. Combined borrowings by the Water System and the Wastewater System with the commercial paper and bank notes cannot exceed the amount of this agreement. Drawings under the

28 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

agreement are restricted to pay maturing commercial paper. There were no borrowings under tbe line of credit agreement during the years ended June 30, 2004 and 2003. Effective August I, 2003, the agreement was extended to August 1, 2008 in the amount of$330,000.

(6) Long-Term Obligations The Jong-term debt outstanding as of June 30, 2004, excluding commercial paper notes, bears interest and matures as follows:

Fiscal year Year of final Carrying amount June 30 Descriftion issued Interest rates maturity 2004 2003 Water System: General Obligation Bonds: Series M 1993 3.00o/t) - 7 .50o/t) 2008 s 3,940 4,785 Revenue Bonds: Subordinated Series 1993 1994 s.00°1o 2006 37,360 177,865 Subordinated Series 1994 1995 5.50°/o - 8.50°;0 2005 1,795 3,495 Subordinated Revenue Bonds 1996 1997 3.75%-6.00% 2026 244,775 245,275 Subordinated Revenue Bonds 1998 1999 4.00% - 5.25o/o 2038 298,180 300,000 Subordinated Revenue Bonds 2001 2001 3.601Yo-5.25o/o 2026 250,000 250,000 Subordinated Revenue Bonds 2002 2002 3.835o/t)/swap rate 2025 234,160 238,300 Subordinated Revenue Bonds 2003 2003 2.001x, -s.00% 2021 114,880 Bonds outstanding 1,185,090 1,219,720 Less unamortized discount, premium, and refunding loss (40,123) (51,167) 1,144,967 1, 168,553 Federal Drought Loans 1979 5.00°A'J 2018 1,993 2,136 State Water Resources Control Board Loans 1989 3.39~) 2011 41 48 1992 3.20~) 2011 617 690 1993 3.00~j 2016 15,429 16,497 California Energy Commission Loan 2003 3.00~j 2013 1,828 1,991 Upper San Leandro Reservoir Loan 2004 2.51% 2023 2,146 22,054 21,362 Water System long-tenn debt (excluding commercial paper) 1,167,021 1,189,915

29 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Fiscal year Year of final Carrying amount June 30 Description issued Interest rates maturitv 2004 2003 Wastewater System: General Obligation Bonds: Series F 2003 2.50(Yo 5.00% 2018 $ 40,320 41,730 Revenue Bonds: Subordinated Revenue Bonds 1996 1997 3.75% - 5.00% 2026 75,800 77,260 Subordinated Revenue Bonds 1998 1999 4.00% - 5.25% 2038 49,710 50,000 Subordinated Revenue Bonds 2003 2003 Auction Rates 2033 122,960 125,050 Bonds outstanding 288,790 294,040 Less unamortized discount, premium, and refunding loss ( 10,386) (l 1,046) 278,404 282,994 State Water Resources Control Board Loans 1989 4.01% 2009 1,012 1,144 1991 3.50% 2011 9,539 10,724 1992 3.10% 2014 12,805 13,883 1994 2.90% 2015 6,373 6,859 1995 3.40% 2017 11,406 12,095 1997 2.80% 2018 2,957 3,128 2000 2.20°/o 2020 2,576 2,709 46,668 50,542 Wastewater System long-term debt (excluding commercial paper) 325,072 333,536 Business-type activity long-term debt (excluding comn1ercial paper) $ 1,492,093 1,523,451

30 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Long-term liability activity for the year ended June 30, 2004 was as follows:

Beginning Ending balance, balance, July I, June 30, Due within Business~!Ipe activities 2004 Additions Reductions 2004 one iear

Water System: Bonds payable: General obligation bonds $ 4,785 (845) 3,940 890 Revenue bonds 1,214,935 115,730 (149,515) 1,181,150 26,845 Less deferred amounts: For issuance discounts/premiums (23,665) 13,875 (9,790) On refunding (27,502) (8,237) 5,406 (30,333)

Total bonds payable 1,168,553 107,493 (131,079) 1,144,967 27,735

Commercial paper 250,000 80,000 330,000 Loans 21,362 2,188 (1,496) 22,054 1,580 Advances for construction 11,615 1,393 13,008 Liability reserves 5,104 887 (1,634) 4,357 Other 1,715 145 1,860

Water System long-tenn liabilities 1,458,349 192,106 (134,209) 1,516,246 29,315

Wastewater System: Bonds payable: General obligation bonds 41,730 ( 1,410) 40,320 1,845 Revenue bonds 252,310 (3,840) 248,470 4,635 Less deferred amounts: For issuance discounts/premiums (1,671) (31) (1,702) On refunding (9,375) 691 (8,684)

Total bonds payable 282,994 (4,590) 278,404 6,480

Loans 50,542 (3,874) 46,668 4,000 Other 7,079 (329) 6,750

Wastewater System long-term liabilities 340,615 (8,793) 331,822 10,480

Business-type activity long-term debt and other liabilities $ 1,798,964 192,106 (143,002) 1,848,068 39,795

31 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

General obligation and revenue bonds are generally callable at future dates. The general obligation bonds are backed by the assessed values of real property within the District.

Revenue-supported debt can be authorized by the District's board of directors, subject to a referendum process.

The net revenues of the Water System are pledged toward the repayment of the water revenue bonds and the State Water Resources Control Board Parity Loans to the Water System. The net revenues of the Wastewater System are pledged toward the repayment of the wastewater revenue bonds and the State Water Resources Control Board Parity Loans to the Wastewater System.

The District is subject to certain revenue bond covenants on outstanding debt, the most restrictive of which requires the setting of rates and charges to yield net revenue, as defined, equal to at least 110% of the current annual debt service requirements of the combined senior and subordinated Water System and Wastewater System Revenue Bonds, respectively. The District has designated $65,000 ($50,000 for the Water System and $15,000 for the Wastewater System) net revenues as a rate stabilization fund, which is available to satisfy the coverage requirements for debt service in future years. There have never been any draws for this purpose. There is currently no senior Water System or Wastewater System debt outstanding.

On January 31, 2002, the District, in anticipation of the issuance of Series 2002 Water System Refunding Bonds, entered into a matched interest rate swap contract with two providers, in which the District contracted to pay a fixed rate of 3.835% on the nominal amount of outstanding Series 2002 Bonds, in exchange for a floating rate payment, set monthly, two business days prior to the end of each month, at a contract rate reflecting 65% of 30-day LIBOR on that date. The effect of these transactions is structured to result in the approximate equivalent of the District paying a fixed rate of 3.835% on the Series 2002 Refunding Bonds, since the inflow of payments from the LIBOR-based swap is anticipated to approximate the outflow of payments on the variable rate bonds. Only the net difference in interest payments to the swap providers is made under the swap contracts. The District will be exposed to variable rates if the providers to the swap contracts default or if the swap contracts are terminated. A termination of the swap contracts may also result in the District's making or receiving a termination payment based on market interest rates at the time of the termination. As of June 30, 2004, the District has an unrealized and unrecorded loss of approximately $9. 7 million and a net accrued interest payable of $603 related to the Water System interest rate swap contracts based on the market interest rates in effect at June 30, 2004.

On October 17, 2002, the District, in anticipation of the issuance of Series 2003 Wastewater System Refunding Bonds, entered into a matched interest rate swap contract with two providers, in which the District contracted to pay a fixed rate of 3.468% on the nominal amount of outstanding Wastewater Series 20038 Bonds, in exchange for a floating rate payment, set monthly, two business days prior to the end of each month, at a contract rate reflecting 65% of 30-day LIBOR on that date. The effect of these transactions is structured to result in the approximate equivalent of the District paying a fixed rate of 3.468% on the Series 2003 refunding bonds, since the inflow of payments from the LIBOR-based swap is anticipated to approximate the outflow of payments on the variable rate bonds. Only the net difference in interest payments to the swap providers is made under the swap contracts. The District will be exposed to variable rates if the providers to the swap contracts default or if the swap contracts are terminated. A termination of the swap contracts may also result in the District's making or receiving a termination

32 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

payment based on market interest rates at the time of the termination. As of June 30, 2004, the District has an unrealized and unrecorded loss of approximately $461 and a net accrued interest payable of $165 related to the Wastewater System interest rate swap contracts based on the market interest rates in effect at June 30, 2004.

At June 30, 2004, the District had $1.0 billion in authorized but unissued revenue bonds ($850 million Water and $150 million Wastewater).

The annual requirements to amortize the General Obligation Bonds, Revenue Bonds, and other long-term debt outstanding, excluding commercial paper notes, as of June 30, 2004 are shown in the schedules below:

General Obligation Bonds:

Water Srstem Wastewater System Business-tree activity Princi~al Interest PrincieaI Interest PrincieaI Interest

Year ending June 30: 2005 $ 890 221 1,845 1,693 2,735 1,914 2006 950 172 1.970 1,638 2,920 1,810 2007 1,005 119 2,100 1,579 3,105 1,698 2008 1,095 62 2,240 1,516 3,335 1,578 2009 2.380 1,448 2,380 1.448 2010-2014 14,530 5,799 14,530 5,799 2015-2018 15,255 1,932 15.255 1,932

Total $ 3,940 574 40.320 15,605 44,260 16,179

Revenue Bonds:

Water System Wastewater System Busincss~typc activity Princieat Interest Principal Interest Princi~al Interest

Year ending June 30: 2005 5 26,845 48,531 4,635 7,478 31,480 56,009 2006 28,130 47,311 4,840 7.334 32,970 54,645 2007 29,505 45,959 5,055 7,181 34,560 53,140 2008 30,675 44,769 5,265 7,043 35,940 51,812 2009 33,l !O 43,522 5,490 6,896 38,600 50,418 2010-2014 189,080 203,458 31,310 31,429 220,390 234,887 2015-2019 245,830 157,301 38,970 25,464 284.800 182,765 2020-2024 318,800 98,741 48,305 18,343 367,105 117,084 2025-2029 150,245 44.418 49,595 10,273 199,840 54,691 2030 - 2034 64,835 25,549 44,210 5,271 109,045 30,820 2035 - 2039 64,095 8,207 10,795 1,382 74,890 9,589

Total $ 1,181.150 767,766 248.470 128,094 1,429,620 895,860

33 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Loans:

Water Sistem Waste-water Srstem Business-type activity Principal Interest Princifal Interest Princi(?al Interest

Year ending June 30: 2005 $ 1,578 691 4,000 1,477 5,578 2,168 2006 1,621 641 4,128 1,349 5,749 1,990 2007 1,665 589 4,261 1,216 5,926 1,805 2008 1,711 537 4,399 1,078 6,110 1,615 2009 1,758 483 4,540 937 6,298 1,420 2010-2014 9,009 1,564 19,549 2,582 28,558 4,146 2015-2019 4,120 321 5,602 380 9,722 701 2020- 2023 592 38 189 4 781

Total s 22,054 4,864 46,668 9,023 68,722 13,887

(7) Employees' Retirement System (a) Description The Employees' Retirement System is a single-employer, contributory, defined benefit pension plan (the Plan) which provides retirement, disability, survivorship, and postemployment healthcare benefits for eligible directors, officers, and employees of the District. The Plan is administered by a Retirement Board composed of three members appointed by the District's board of directors and two members elected by and from the active membership of the Plan, and a nonvoting member elected by the retirees of the Plan. Retirement Ordinance No. 40 assigns the authority to establish Plan benefit provisions to the District's board of directors.

All regular full-time employees of the District are members of the Plan. In accordance with the ordinance governing the Plan, eligible employees become members on the first day they are physically on the job. District-defined benefits vest in part with members after completion of five years of continuous, full-time employment.

The Plan is funded by contributions from its members and from the District. District contribution percentages are recommended by the Retirement Board, employee contribution rates are established by the board of directors pursuant to the Ordinance, giving consideration to actuarial recommendations and prospective changes in factors which affect funding. Each member contributes to the Plan based upon a percentage of his or her covered compensation, which was 4.24% effective June 16, 2003 through September 7, 2003, increasing to 4.61 % effective September 8, 2003 through December 14, 2003, increasing again to 5.27% on December 15, 2003 through April 18, 2004, increasing again to 5.93% effective April 19, 2004. The District's contribution is based upon the aggregate amount of members' covered compensation, at an actuarially determined rate.

(b) Postemployment Healthcare Cost In addition to retirement benefits, the District provides postemployment health benefits assistance (administered by the Employees' Retirement System) for employees who retire from the District or

34 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

their surviving spouses. Effective July I, 1996, a 20-year vesting schedule for full benefits was implemented for all new participants. Effective January 1, 1999, retired members who had separated from the District prior to their retirement and who had at least 10 years of service also became eligible for the postemployment health benefits based on the same sliding scale. The scale provides for 50% of healthcare benefits for service from 10 through 15 years, 75% of healthcare benefits for service from 15 through 20 years, and 100% of healthcare benefits for service of 20 years or more. Effective July 1, 2003, the District reimbursed up to $450 per month ($550 per month effective July 1, 2004 for membership of a spouse or registered domestic partner) for any health, dental, or long-term care insurance premiums paid by the retiree for themselves, current spouse, or domestic partner, or any health, dental, or long-term care insurance premiums paid by the eligible surviving spouse of a retiree. These benefits are paid from a separate postemployment healthcare benefits fund which up until June 17, 2002 was advance funded entirely by the District on an actuarially determined basis. Cash reimbursement of these benefits totaled $3.674 million in the year ended June 30, 2004. Effective June 18, 2002, a portion of the postemployment healthcare benefit costs is recovered through employee contributions.

Through June 30, 1999, the medical premium subsidy was not a vested benefit and the District reserved the right to modify or terminate the benefit at any time. If the medical subsidy were terminated, assets accumulated from contributions made for the subsidy would be used to provide other pension benefits. Effective July 1, 1999, the medical premium subsidy became a vested benefit to a maximum of $200 per month, was changed effective October 1, 2000 to a maximum of $250 per month, and was changed effective July I, 2002 to a maximum of $400 per month, and was changed effective July I, 2003 to a maximum of $450 per month, and was changed again effective July 1, 2004 to a maximum of $450 per month and $550 per month for membership of a spouse or registered domestic partner.

(c) Contributions Required and Contributions Made The Plan's funding policy provides for periodic District contributions at actuarially determined amounts sufficient to accumulate the necessary assets to pay benefits when due as specified by ordinance. The individual-entry-age-normal method is used to determine the normal cost, and the unfunded actuarial accrued liability (past service liability) is amortized as a level percentage of future covered payroll over 17 years for the pension plan, and 27 years for the postemployment healthcare benefit plan. District contributions for the year to cover normal cost and to amortize the unfunded actuarial liability approximated a total of20.80% of covered payroll, increasing to 23.53% effective July 1, 2004, inclusive ofpostemployment health care benefits.

Significant assumptions used to compute contribution requirements are as follows:

• 8.25% investment rate ofretum • 5.54% projected average salary increases • 4.00% inflation rate • 3.50% cost-of-living adjustments

35 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

Contributions for the year ended June 30, 2004, based on the actuarial valuation (including amounts for postemployment healthcare benefits), were as follows: Water System Wastewater Fund Srstem Fund Total Regular contributions: District contributions $ 23,753 4,078 27,831 Member contributions 5,947 1,019 6,966 29,700 5,097 34,797 Other contributions; Member buybacks 101 17 118 $ 29,801 5,114 34,915

Regular District and member contributions in fiscal 2004 represent an aggregate of 20.80% and 5.03% of covered payroll, respectively. The District's contributions include amounts for postemployment healthcare benefits at a rate of 3.31% of covered payroll through December 14, 2003, increasing to 3.34% of covered payroll beginning December 15, 2003 through June 13, 2004, and 3.69% of covered payroll beginning June 14, 2004. The payroll for the District employees covered by the Plan for the year ended June 30, 2004 was $138,585, which was 90.4% of the total District payroll of $153,283. The total District contribution of $27,831 consisted of $13,341 for normal cost and $12,490 for amortization of the unfunded actuarial accrued liability.

Member buyback contributions relate to prior years' service credits for Plan participants. The Plan was amended in 1998 for limited temporary construction workers and in 2003 for intermittent employees to allow current members, who previously worked for the District in a status that did not qualify for membership in the Employees' Retirement System, to establish retirement service credit for prior service with payments over a period of two to eight years.

(d) Schedule ofEmployer Contributions The schedule of employer contributions is shown below:

Annual required Percentage contribution contributed Fiscal year ended June 30: 2004 $ 27,831 100% 2003 21,467 100 2002 19,540 100

36 (Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

The annual required contributions for fiscal years ended June 30, 2004 and 2003 include amounts for the pay-as-you-go amounts for postemployment healthcare benefits.

(8) Risk Management The District's liability, property, and workers' compensation risks are insured by commercial insurance carriers, all of which are subject to the District's self-insurance retentions, which vary by type of coverage.

Selected other coverages are:

Self-insured Coverage Potier limit retention Workers' compensation $ 100,000 $ 5,000 All risk property ( except earthquake and t1ood) 125,000 100 Flood 25,000 1,000 Earthquake 25,000 5% of replacement Liability 90,000 10,000 Water/10,000 Wastewater Crime 10,000 25

Settled claims have not exceeded the District's policy limits in any of the past four fiscal years.

Claim expenses and liabilities are recorded when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated.

As of June 30, 2004, the amount of these liabilities was $20,233 and is included in accounts payable and accrued expenses and other noncurrent liabilities in the accompanying balance sheet. This amount (which has not been discounted) has been actuarially determined and includes an estimate of incurred but not reported losses. Changes in the reported liability are as follows:

2004 2003 Liability at beginning of year $ 15,760 15,413 Current year claims and changes in estimates 13,291 4,999 Payments of claims (8,818) (4,652)

Liability at end of year $ ===2=0=,2=3=3= 15,760

37 ( Continued) EAST BAY MUNICIPAL UTILITY DISTRICT Notes to Basic Financial Statements June 30, 2004 (Dollars in thousands)

(9) Commitments and Contingencies Litigation The District is a defendant in various lawsuits. Although the outcome of these lawsuits is not presently determinable, it is the opinion of the District's counsel that resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the District.

38 EAST BAY MUNICIPAL UTILITY DISTRICT Required Supplementary Information - Historical Pension Data (Unaudited- See accompanying independent auditors' report) (Dollars in thousands)

Analysis of Funding Progress - Pension Plan Schedule of funding progress for the District's pension plan administered by the Employees' Retirement System:

Actuarial accrued UAAL as a Actuarial liability percentage of value of (AAL)- Unfunded Funded Covered covered assets entry age AAL(UAAL) ratio payroll payroll Actuarial valuation date (a) (b) (b- a) (a/b) (c) ((b - a)/c)

June 30, 2001 $ 606,896 663,763 56,867 91.4% 125,313 45.4°/o June 30, 2002 631,700 719,660 87,960 87.8 129,791 67.8 June 30, 2003 639,382 838,385 199,003 76.3 133,678 148.9

Analysis of Funding Progress - Postemployment Healthcare Plan Schedule of funding progress for the District's postemployment healthcare plan administered by the Employees' Retirement System:

Actuarial accrued UAALasa Actuarial liability percentage of value of (AAL)- Unfunded Funded Covered covered assets entry age AAL(UAAL) ratio payroll payroll Actuarial valuation date <•l (b) (b-aJ (a!bJ (c) ((b- a)/c)

June 30, 2001 $ 841 30,971 30,130 2.7% 125,313 24.0%1 June 30, 2002 1,265 50,358 49,093 2.5 129,191 37.8 June 30, 2003 2,113 58,752 56,639 3.6 133,678 42.4

39 (This page intentionally left blank) APPENDIX B

SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

Definitions

"Accreted Vaine" means, with respect to any Capital Appreciation Indebtedness, the principal amount thereof plus the interest accrued thereon, compounded at the interest rate thereon on each date as specified herein.

"Act" means the Municipal Utility District Act, constituting Division 6 of the Public Utilities Code of the State of California, and all laws of the State of California amendatory thereof or supplemental thereto, including the Revenue Bond Law of 1941, as made applicable by Article 6a of Chapter 6 of said Division 6, and Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California.

"Annual Debt Service" means for any Fiscal Year the aggregate amount of principal and interest on all Water Bonds, Bonds and Parity Debt becoming due and payable during such Fiscal Year calculated using the principles and assumptions set forth under the defmition of Maximum Annual Debt Service.

"Assumed Debt Service" means for any Fiscal Year the aggregate amount of principal and interest which would be payable on all Water Bonds, Bonds and Parity Debt if each Excluded Principal Payment were amortized for a period specified by the District (but no longer than thirty (30) years from the date of the issuance of the Water Bonds, Bonds or Parity Debt to which such Excluded Principal Payment relates) on a substantially level debt service basis, calculated based on a fixed interest rate equal to the rate at which the District could borrow for such period, as certified by a certificate of a financial advisor or investment banker delivered to the Trustee, who may rely conclusively on such certificate, within thirty (30) days of the date of calculation.

"Bond Obligation" means, as of any given date of calculation, (1) with respect to any Outstanding Bond or Water Bond which is Current Interest Indebtedness, the principal amount thereof, and (2) with respect to any Outstanding Bond or Water Bond which is Capital Appreciation Indebtedness, the Accreted Value thereof.

"Bonds" means the East Bay Municipal Utility District Water System Subordinated Revenue Bonds authorized by, and at any time Outstanding pursuant to, the Indenture.

"Business Day" means any day other than (1) a Saturday, Sunday, or a day on which banking institutions in the State of California or the State of New York are authorized or obligated by law or executive order to be closed, and (2) for purposes of payments and other actions related to Bonds secured by a letter of credit, a day upon which commercial banks in the city in which is located the office of the issuing bank at which demands for payment under the letter of credit are to be presented are authorized or obligated by law or executive order to be closed.

"Capital Appreciation Indebtedness" means Water Bonds, Bonds and Parity Debt on which interest is compounded and paid less frequently than annually.

"Code" means the Internal Revenue Code of 1986, and the regulations applicable thereto or issued thereunder, as amended from time to time.

B-1 "Costs of Issuauce" means all items of expense directly or indirectly payable by or reimbursable to the District and related to the authorization, execution, sale and delivery of the Bonds, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, filing and recording fees, travel expenses and costs relating to rating agency meetings and other meetings concerning the Bonds, initial fees and charges of the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, financial advisor fees and expenses, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Bonds, surety, insurance and credit enhancement costs, and any other cost, charge or fee in connection with the delivery of Bonds.

"Curreut Iuterest Iudebteduess" means the Water Bonds, Bonds and Parity Debt on which interest is paid at least annually.

"Debt Service" means the amount of principal and interest becoming due and payable on all Water Bonds, Bonds and Parity Debt provided, however, that for the purposes of computing Debt Service:

(a) Excluded Principal Payments shall be excluded from such calculation and Assumed Debt Service shall be included in such calculation;

(b) if the Water Bonds, Bonds or Parity Debt are Variable Rate Indebtedness, the interest rate thereon for periods when the actual interest rate cannot yet be determined shall be assumed to be twelve percent (12%) per annum;

( c) principal and interest payments on Water Bonds, Bonds and Parity Debt shall be excluded to the extent such payments are to be paid from amounts on deposit with the Trustee or another fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Water Bonds, Bonds or Parity Debt held by the Trustee or another fiduciary as capitalized interest;

( d) in determining the principal amount, payment shall ( unless a different subsection of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Water Bonds, Bonds or Parity Debt on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Indebtedness;

( e) if any interest rate swap agreement is in effect with respect to, and is payable on a parity with, the Water Bonds, Bonds or Parity Debt to which it relates, no amounts payable under such interest rate swap agreement shall be included in the calculation of Debt Service unless the sum of (i) interest payable on such Water Bonds, Bonds or Parity Debt, plus (ii) amounts payable by the District under such interest rate swap agreement, less (iii) amounts receivable by the District under such interest rate swap agreement are greater than the interest payable on the Water Bonds, Bonds or Parity Debt to which it relates, then, in such instance, the amount of such payments to be made that exceed the interest to be paid on the Water Bonds, Bonds or Parity Debt shall be included in such calculation. For such purposes, the variable amount under any such interest rate swap agreement shall be assumed to be equal to twelve percent (12%) per annum; and

B-2 (f) if any Water Bonds, Bonds or Parity Debt include an option or an obligation to tender all or a portion of such Water Bonds, Bonds or Parity Debt to the District, the Trustee or another fiduciary or agent and require that such Water Bonds, Bonds or Parity Debt or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due, the options or obligations to tender shall be treated as a principal maturity occurring on the first date on which holders or owners thereof may or are required to tender, except that any such option or obligation to tender shall be ignored and not treated as a principal maturity, if (I) such Water Bonds, Bonds or Parity Debt are in one of the two highest Rating Categories by Moody's and by Standard & Poor's or such Water Bonds, Bonds or Parity Debt are rated in the highest short-term, note or commercial paper Rating Categories by Moody's and by Standard & Poor's and (2) funds for the purchase price are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Water Bonds, Bonds or Parity Debt, shall be subordinated to the obligation of the District on the Bonds and Parity Debt or, if not subordinate, shall be incurred ( assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture.

"Excluded Principal Payments" shall mean each payment of principal (or the principal component of lease or instalhnent purchase payments) of Water Bonds, Bonds or Parity Debt which the District determines on a date not later than the date of issuance thereof that the District intends to pay with monies which are not Water Revenues or Subordinated Water Revenues but from the proceeds of future debt obligations of the District and the Trustee may rely conclusively on such determination of the District.

"Fiscal Year" means the period beginning on July I of each year and ending on the next succeeding June 30, or any other twelve-month period hereafter selected and designated as the official fiscal year period of the District, which designation shall be provided to the Trustee in a certificate of the District.

"Indenture" means the Water System Subordinated Revenue Bond Indenture, dated as of April 1, 1990, by and between the Trustee and the District, as originally executed or as it may from time to time be supplemented or amended by any Supplemental Indenture delivered pursuant to the provisions thereof.

"Investment Securities" means the following:

(i) any bonds or other obligations which as to principal and interest constitute direct obligations of, or are unconditionally guaranteed by, the United States of America, including obligations of any of the Federal agencies and Federally sponsored entities set forth in clause (iii) below to the extent unconditionally guaranteed by the United States of America;

(ii) any certificates, receipts, secunbes or other obligations evidencing ownership of, or the right to receive, a specified portion of one or more interest payments or principal payments, or any combination thereof, to be made on any bond, note, or other obligation described above in clause (i);

(iii) obligations of the Federal National Mortgage Association, the Goverrunent National Mortgage Association, Federal Home Loan Banks and Federal Home Loan Mortgage Corporation;

B-3 (iv) obligations of any state, territory or commonwealth of the United States of America or any political subdivision thereof or any agency or department of the foregoing; provided that at the time of their purchase such obligations are rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(v) any bonds or other obligations of any state of the United States of America or any political subdivision thereof (a) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee of such bonds or their obligations by the obligor to give due notice of redemption and to call such bonds for redemption on the date or dates specified in such instructions, (b) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described above in clause (i), (ii) or (iii) which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the interest payment dates and the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, ( c) as to which the principal of and interest on the bonds and obligations of the character described above in clause (i), (ii) or (iii) which have been deposited in such fund along with any cash on deposit in such fund are sufficient to pay the principal of and interest and redemption premium, if any, on the bonds or other obligations described in this clause (v) on the interest payment dates and the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (a) of this clause (v), as appropriate, and ( d) which have been rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vi) bonds, notes, debentures or other evidences of indebtedness issued or guaranteed by any corporation which are, at the time of purchase, rated by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) in their respective highest short-term Rating Categories, or, if the term of such indebtedness is longer than three (3) years, rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vii) demand or time deposits or certificates of deposit, whether negotiable or nonnegotiable, issued by any bank or trust company organized under the laws of any state of the United States of America or any national banking association (including the Trustee), provided that such certificates of deposit shall be purchased directly from such a bank, trust company or national banking association and shall be either ( 1) continuously and fully insured by the Federal Deposit Insurance Corporation, or (2) continuously and fully secured by such securities and obligations as are described above in clauses (i) through (iv), inclusive, which shall have a market value ( exclusive of accrued interest) at all times at least equal to the principal amount of such certificates of deposit and shall be lodged with the Trustee, as custodian, by the bank, trust company or national banking association issuing such certificates of deposit, and the bank, trust company or national banking association issuing each such certificate of deposit required to be so secured shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such certificate of deposit will at all times be an amount equal to the principal amount of each such certificate of deposit and the Trustee shall be entitled to rely on each such undertaking;

B-4 (viii) taxable commercial paper or tax-exempt commercial paper rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(ix) variable rate obligations required to be redeemed or purchased by the obligor or its agent or designee upon demand of the holder thereof secured as to such redemption or purchase requirement by a liquidity agreement with a corporation and as to the payment of interest and principal either upon maturity or redemption ( other than upon demand by the holder thereof) thereof by an unconditional credit facility of a corporation, provided that the variable rate obligations themselves are rated in their respective highest Rating Categories for its short-term rating, if any, and not lower than their respective ratings on the Bonds for its long-term rating, if any, by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds), and that the corporations providing the liquidity agreement and credit facility have, at the date of acquisition of the variable rate obligation by the Trustee, an outstanding issue of unsecured, uninsured and unguaranteed debt obligations rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(x) any repurchase agreement with any bank or trust company organized under the laws of any state of the United States or any national banking association (including the Trustee) having a minimum permanent capital of one hundred million dollars ($100,000,000) and with short-term debt rated by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) in their respective four highest short-term rating categories or govermnent bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, which agreement is secured by any one or more of the securities and obligations described in clauses (i), (ii) or (iii) above, which shall have a market value ( exclusive of accrued interest and valued at least monthly) at least equal to the principal amount of such investment and shall be lodged with the Trustee or other fiduciary, as custodian for the Trustee, by the bank, trust company, national banking association or bond dealer executing such repurchase agreement, and the entity executing each such repurchase agreement required to be so secured shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such repurchase agreement (as valued at least monthly) will be an amount equal to the principal amount of each such repurchase agreement and the Trustee shall be entitled to rely on each such undertaking;

(xi) any cash sweep or similar account arrangement of or available to the Trustee, the investments of which are limited to investments described in clauses (i), (ii), (iii), (iv) and (x) of this definition of Investment Securities and any money market fund, the entire investments of which are limited to investments described in clauses (i), (ii), (iii), (iv) and (x) of this definition oflnvestment Securities and which money market fund is rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds); provided that as used in this clause (xi) and clause (xii) investments will be deemed to satisfy the requirements of clause (x) if they meet the requirements set forth in clause (x) ending with the words "clauses (i), (ii) or (iii) above" and without regard to the remainder of such clause (x);

B-5 (xii) a guaranteed investment contract with a financial institution or insurance company which has at the date of execution thereof an outstanding issue of unsecured, uninsured and unguaranteed debt obligations or a claims paying ability rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(xiii) shares of beneficial interest in diversified management companies investing exclusively in securities and obligations described in clauses (i) through (xii) of this definition of Investment Securities and which companies are rated in their respective highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) or have an investment advisor registered with the Securities and Exchange Commission with not less than five years experience investing in such securities and obligations and with assets under management in excess of $500,000,000; and

(xiv) any investment approved by the Board for which confirmation is received from each rating agency then rating any of the Bonds that such investment will not adversely affect such agency's rating on such Bonds.

"Mandatory Sinking Account Payment" means the amount required to be deposited by the District in a sinking account for the payment of Term Bonds.

"Maximum Annual Debt Service" shall mean the greatest amount of principal and interest becoming due and payable on all Water Bonds, Bonds and Parity Debt in the Fiscal Year in which the calculation is made or any subsequent Fiscal Year; provided, however, that for the purposes of computing Maximum Annual Debt Service:

(a) Excluded Principal Payments shall be excluded from such calculation and Assumed Debt Service shall be included in such calculation;

(b) if the Water Bonds, Bonds or Parity Debt are Variable Rate Indebtedness, the interest rate thereon for periods when the actual interest rate cannot yet be determined shall be assumed to be twelve percent (12%) per annum;

( c) principal and interest payments on Water Bonds, Bonds and Parity Debt shall be excluded to the extent such payments are to be paid from amounts on deposit with the Trustee or another fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Water Bonds, Bonds or Parity Debt held by the Trustee or another fiduciary as capitalized interest;

(d) in determining the principal amount due in each Fiscal Year, payment shall (unless a different subsection of this defmition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Water Bonds, Bonds or Parity Debt on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Indebtedness;

( e) if any interest rate swap agreement is in effect with respect to, and is payable on a parity with, the Water Bonds, Bonds or Parity Debt to which it relates, no amounts payable

B-6 under such interest rate swap agreement shall be included in the calculation of Maximum Annual Debt Service unless the sum of (i) interest payable on such Water Bonds, Bonds or Parity Debt, plus (ii) amounts payable by the District under such interest rate swap agreement, less (iii) amounts receivable by the District under such interest swap agreement are greater than the interest payable on the Water Bonds, Bonds or Parity Debt to which it relates, then, in such instance, the amount of such payments to be made that exceed the interest to be paid on the Water Bonds, Bonds or Parity Debt shall be included in such calculation. For such purposes, the variable amount under any such interest rate swap agreement shall be assumed to be equal to twelve percent ( 12%) per annum; and

(f) if any Water Bonds, Bonds or Parity Debt include an option or an obligation to tender all or a portion of such Water Bonds, Bonds or Parity Debt to the District, the Trustee or another fiduciary or agent and require that such Water Bonds, Bonds or Parity Debt or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due in any Fiscal Year, the options or obligations to tender shall be treated as a principal maturity occurring on the first date on which holders or owners thereof may or are required to tender, except that any such option or obligation to tender shall be ignored and not treated as a principal maturity, if (I) such Water Bonds, Bonds or Parity Debt are rated not lower than their respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) and by Standard & Poor's (if Standard and Poor's is then rating the Bonds) or such Water Bonds, Bonds or Parity Debt are rated in the highest short-term note or commercial paper Rating Categories by Moody's (if Moody's is then rating the Bonds) and by Standard & Poor's (if Standard and Poor's is then rating the Bonds) and (2) funds for the purchase price are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Water Bonds, Bonds or Parity Debt, shall be subordinated to the obligation of the District on the Bonds and Parity Debt or, if not subordinate, shall be incurred (assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture.

"Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"Opinion of Bond Counsel" means a written opinion of a law finn of national standing in the field of public finance selected by the District and not objected to by the Trustee.

"Outstanding," when used at any particular time with reference to Bonds, means (subject to the provisions relating to disqualified bonds) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except (I) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the District shall have been discharged under the Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

"Owner" or "Bondholder" or "Bondowner," whenever used with respect to a Bond, means the person in whose name such Bond is registered.

B-7 "Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the District for borrowed money or interest rate swap agreement having an equal lien and charge upon the Subordinated Water Revenues and therefore payable on a parity with the Bonds (whether or not any Bonds are Outstanding).

"Person" means a corporation, finn, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

"Rating Category" means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier.

"Revenue Fund" means the fund held in trust by the District to which the Subordinated Water Revenues are required to be deposited.

"Standard & Poor's" means Standard & Poor's Corporation, a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Standard & Poor's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"Subordinated Water Revenues" for any fiscal period means the sum of (a) the Water Revenues for such fiscal period plus (b) the amounts, if any, withdrawn by the District from the Rate Stabilization Fund created in the Water Bond Resolution for treatment as Water Revenues for such fiscal period, less the sum of ( c) all Water Operation and Maintenance Costs for such fiscal period, ( d) the amounts, if any, withdrawn by the District from Water Revenues for such fiscal period for deposit in such Rate Stabilization Fund, and ( e) all amounts required to be paid under the Water Bond Resolution for principal, interest, reserve fund and any other debt service requirements on the Water Bonds as the same become due and payable.

"Variable Rate Indebtedness" means any indebtedness the interest rate on which is not fixed at the time of incurrence of such indebtedness, and has not at some subsequent date been fixed, at a single numerical rate for the entire term of the indebtedness.

"Water Bond Resolution" means Resolution No. 30050 of the District, adopted on January 26, 1982, as amended and supplemented from time to time.

"Water Bonds" means all bonds and other obligations of the District issued pursuant to the Water Bond Resolution.

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

B-8 "Water Revennes" means all charges received for, and all other income and receipts derived by the District from, the operation of the Water System, or arising from the Water System, together with income from the investment of any monies in any fund or account established under the Water Bond Resolution or the Indenture.

"Water System" means the entire water system of the District and all of the facilities thereof, including all facilities for the storage, transmission or distribution of water or the generation or transmission of hydroelectric power, together with all additions, betterments, extensions and improvements to said system or any part thereof. The term "Water System" does not include the sewage disposal system or facilities of Special District No. 1 of the District (including any power generation facilities constituting a part of said system).

Pledge of Revenues

The Bonds are revenue obligations of the District and are payable as to both principal and interest, and any premium upon redemption thereof, exclusively from the Subordinated Water Revenues and other amounts held by the Trustee ( except for amounts held in the Rebate Fund). The Subordinated Water Revenues are pledged to the payment of Bonds and Parity Debt without priority or distinction of one over the other. Said pledge constitutes a first lien on the Subordinated Water Revenues and such other amounts referred to in this paragraph.

Allocation of Subordinated Water Revenues

The District is to transfer the monies in the Revenue Fund, into the following respective funds, in the following amounts, in the following order of priority, the requirements of each such fund (including the making up of any deficiencies in any such fund resulting from lack of Subordinated Water Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any deposit is made to any fund subsequent in priority.

(1) Interest Fund. The District shall transfer to the Trustee and the Trustee shall set aside in the Interest Fund on or before the Business Day prior to each interest payment date therefor an amount equal to the interest becoming due and payable on the Outstanding Bonds which are Current Interest Indebtedness ( excluding any interest for which there are monies on deposit in the Interest Fund from the proceeds of any Series of Bonds or other source to pay such interest).

(2) Principal Fund; Sinking Accounts. The District shall transfer to the Trustee and the Trustee shall set aside in the Principal Fund on or before the Business Day prior to each principal or Sinking Account payment date therefor an amount equal to (a) the amount of Bond Obligation becoming due and payable on the Outstanding Serial Bonds, plus (b) the Mandatory Sinking Account Payments to be paid into the respective Sinking Accounts for the Term Bonds; provided that if the District certifies to the Trustee that any principal payments are expected to be refunded on or prior to their respective due dates or paid from excess amounts on deposit in a bond reserve fund upon such payment, no amounts need be set aside towards such principal to be so refunded or paid. All of the aforesaid Mandatory Sinking Account Payments shall be made without priority of any payment into any one such Sinking Account over any other such payment.

(3) Bond Reserve Funds. Upon the occurrence of any deficiency in any Bond Reserve Fund established under the Indenture for any Series of Bonds, the District shall transfer to the Trustee and the Trustee shall set aside in such Bond Reserve Fund an amount equal to the aggregate amount of each unreplenished prior withdrawal from the Bond Reserve Fund until

B-9 there is on deposit m such Bond Reserve Fund an amount equal to the respective reserve requirement.

Any Subordinated Water Revenues remaining after the foregoing transfers shall be held free and clear of the Indenture by the District and it may use and apply such Subordinated Water Revenues for any lawful purpose of the District, including the redemption and purchase of Bonds.

If on any principal payment date, interest payment date or mandatory redemption date the amounts on deposit in the Interest Fund and Principal Fund, including the Sinking Accounts therein are insufficient to make such payments, the Trustee shall immediately notify the District of such deficiency and direct that the District transfer the amount of such deficiency to the Trustee on such payment date. The District covenants and agrees to transfer to the Trustee from any Subordinated Water Revenues in its possession the amount of such deficiency on the principal, interest or mandatory redemption date referenced in such notice.

Investments

All monies in any of the funds and accounts held by the Trustee shall be invested, as directed by the District, solely in Investment Securities.

The District may and the Trustee shall, upon the Request of the District, enter into a fmancial futures or financial option contract with an entity the debt securities of which are rated in their respective highest short-term Rating Categories by Moody's and Standard & Poor's.

The District may and the Trustee shall, upon the Request of the District, and provided that the Trustee is supplied with an Opinion of Bond Counsel to the effect that such action is permitted under the laws of the State of California, enter into an interest rate swap agreement corresponding to the interest rate or rates payable on a Series of Bonds or any portion thereof and the amounts received by the District or the Trustee, if any, pursuant to such a swap agreement may be applied to the deposits required hereunder; in which case, the entity with which the District or the Trustee may contract for an interest rate swap is limited to entities the debt securities of which are rated in their respective highest short-term debt Rating Categories by Moody's and Standard & Poor's. If the District so designates, amounts payable under the interest rate swap agreement shall be secured by Subordinated Water Revenues and other assets pledged hereunder to the Bonds on a parity basis therewith and, in such event, the District shall pay to the Trustee for deposit in the Interest Fund, at the times and in the manner provided in the Indenture, the amounts to be paid under such interest rate swap agreement, as if such amounts were additional interest due on the Bonds to which such interest rate swap agreement relates, and the Trustee shall pay to the other party to the interest rate swap agreement, to the extent required thereunder, amounts deposited in the Interest Fund for the payment of interest on the Bonds with respect to which such agreement was entered into.

Additional Bonds; Parity Debt

The issuance of additional Water Bonds is not limited by the Indenture. The District may issue Bonds and Parity Debt payable from Subordinated Water Revenues and secured equally and ratably with Bonds previously issued, subject to the following specific conditions precedent to the issuance of any such additional Bonds or Parity Debt:

(a) No Event of Default shall have occurred and then be continuing.

B-10 (b) The aggregate principal amount of Bonds or Parity Debt shall not exceed any limitation imposed by law or by any Supplemental Indenture.

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

Refunding Bonds

Refunding Bonds may be authorized and issued by the District without compliance with the provisions described above under "Additional Bonds; Parity Debt", provided that Maximum Annual Debt Service on all Water Bonds, Bonds and Parity Debt Outstanding following the issuance of such refunding Bonds is less than or equal to Maximum Annual Debt Service on all Water Bonds, Bonds and Parity Debt Outstanding prior to the issuance of such refunding Bonds.

Covenants

Among other covenants the District has agreed as follows:

The District will not create any pledge, lien or charge upon any of the Subordinated Water Revenues having priority over or having parity with the lien of the Bonds except only as described above. The District will not amend or change the Water Bond Resolution in any manner which would permit the issuance of additional Water Bonds in a greater principal amount than would have been permitted thereunder prior to such amendment or change or reduce the debt service percentage or coverage requirements contained therein. The District will not issue Water Bonds pursuant to the Water Bond Resolution in such amount as would cause the District to fail to be in compliance with the rate covenant described in the second succeeding paragraph hereof.

The District will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest on the Bonds under Section 103 of the Code. The District will not directly or indirectly use or permit the use of any proceeds of the Bonds or any other funds of the District, or take or omit to take any action that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148(a) of the Code. To that end, the District will comply with all requirements of Section 148 of the Code to the extent applicable to the Bonds.

The District will, at all times while any of the Bonds remain Outstanding, fix, prescribe and collect rates, fees and charges in connection with the services and facilities furnished by the Water System so as to yield Water Revenues in each Fiscal Year sufficient so that the sum of the Subordinated Water Revenues for such year plus all amounts required to be paid under the Water Bond Resolution for

B-11 such year for principal, interest, reserve fund and any other debt service requirements on the Water Bonds shall be at least equal to 1.1 times the amount of Debt Service on all Water Bonds, Bonds and Parity Debt Outstanding for such Fiscal Year.

The District will maintain and preserve the Water System in good repair and working order at all times, and will operate the Water System in an efficient and economical manner. Subject in each case to the condition that insurance is obtainable at rates deemed reasonable by the District and upon terms and conditions deemed reasonable by the District, the District will procure and maintain at all times: (a) insurance on the Water System against such risks as and in such amounts as the District deems prudent taking into account insurance coverage for similar utilities, and (b) public liability insurance in such amounts as the District deems prudent taking into account insurance coverage for similar utilities.

Events of Default; Remedies

The following events are Events of Default:

(a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise, or default in the redemption from any Sinking Account of any Bonds in the amounts and at the times provided therefor;

(b) default in the due and punctual payment of any instalhnent of interest on any Bond when and as such interest installment shall become due and payable;

( c) if the District shall fail to observe or perform any covenant, condition, agreement or provision in this Indenture on its part to be observed or performed, other than as referred to in subsection (a) or (b), for a period of sixty (60) days after written notice, specifying such failure and requesting that it be remedied, has been given to the District by the Trustee; except that, if such failure can be remedied but not within such sixty (60) day period and if the District has taken all action reasonably possible to remedy such failure within such sixty (60) day period, such failure shall not become an Event of Default for so long as the District shall diligently proceed to remedy the same in accordance with and subject to any directions or limitations of time established by the Trustee;

( d) if any default shall exist under any agreement governing any Parity Debt and such default shall continue beyond the therein stated grace period, if any, with respect to such default;

( e) if any default shall exist under the Water Bond Resolution and such default shall continue beyond the therein stated grace period, if any, with respect to such default;

(f) if the District files a petition in voluntary bankruptcy, for the composition of its affairs or for its corporate reorganization under any state or Federal bankruptcy or insolvency law, or makes an assignment for the benefit of creditors, or admits in writing to its insolvency or inability to pay debts as they mature, or consents in writing to the appointment of a trustee or receiver for itself;

(g) if a court of competent jurisdiction shall enter an order, judgment or decree declaring the District insolvent, or adjudging it bankrupt, or appointing a trustee or receiver of the District, or approving a petition filed against the District seeking reorganization of the District

B-12 under any applicable law or statute of the United States of America or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within 60 days from the date of the entry thereof; and

(h) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the District or of the Subordinated Water Revenues, and such custody or control shall not be terminated within 60 days from the date of assumption of such custody or control.

If an Event of Default shall occur and be continuing, the District is to immediately transfer to the Trustee all Subordinated Water Revenues held by it and received thereafter and the Trustee shall apply all Subordinated Water Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (except as otherwise provided in the Indenture) as follows and in the following order:

(1) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and Parity Debt, including the costs and expenses of the Trustee and the Bondholders in declaring such Event of Default, and payment of reasonable fees and expenses of the Trustee (including reasonable fees and disbursements of its counsel and other agents) incurred in and about the performance of its powers and duties under the Indenture;

(2) To the payment of the whole amount of Bond Obligation then due on the Bonds and Parity Debt (upon presentation of the Bonds and Parity Debt to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Indenture, with interest on such Bond Obligation, at the rate or rates of interest borne by the respective Bonds and Parity Debt, to the payment to the persons entitled thereto of all instalhnents of interest then due and the unpaid principal or Redemption Price of any Bonds and Parity Debt which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue Bond Obligation and Parity Debt at the rate borne by the respective Bonds and Parity Debt, and, if the amount available shall not be sufficient to pay in full all the Bonds and Parity Debt due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or interest or Accreted Value (plus accrued interest) due on such date to the persons entitled thereto, without any discrimination or preference.

In each and every such case during the continuance of such Event of Default, the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding shall be entitled, upon notice in writing to the District, to declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable.

This provision, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, the District shall pay to or shall deposit with the Trustee a sum sufficient to pay all principal on such Bonds matured prior to such declaration and all matured instalhnents of interest (if any) upon all the Bonds, and the reasonable expenses of the Trustee, and any and all other defaults known to the Trustee ( other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee, or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding, by written notice to the District and to the Trustee, may, on behalf of the Owners of all the Bonds, rescind and annul such declaration and its consequences; but no

B-13 such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

The Trustee is appointed (and the successive respective Owners of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) to represent the Owners in the matter of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds, the Indenture, the Act and applicable provisions of any other law. Upon any default or other occasion, giving rise to a right in the Trustee to represent the Bondholders, the Trustee may take such action as may seem appropriate and, upon the request in writing of Owners of not less than 25% in aggregate principal amount of Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, shall proceed to protect or enforce its rights or the rights of such Owners by such appropriate actions as it shall deem most effectual to protect and enforce any such right.

No remedy conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or otherwise.

Special Insurance Provisions

So long as the payment of principal of and interest on any Series 2005A Bonds is insured by a municipal bond insurance policy issued simultaneously with the delivery of the Series 2005A Bonds, anything in the Indenture to the contrary notwithstanding, the bond insurer shall be deemed to be the sole Owner of the Series 2005 A Bonds it insures for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Owners of the Series 2005A Bonds are entitled to take pursuant to the Indenture.

Amendments

The Indenture and the rights and obligations of the District, the Owners of the Bonds and the Trustee may be modified or amended at any time by a Supplemental Indenture, with the written consent of the Owners of a majority in the aggregate amount of Bonds then Outstanding. No such modification or amendment shall (a) extend the fixed maturity of any Bond or reduce the amount of principal thereof, or extend the time of payment or reduce the amount of any Mandatory Sinking Account Payment provided for the payment of any Bonds, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Owner of each Bond so affected, or (b) reduce the aforesaid percentage of Bond Obligation the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Indenture, or deprive the Owners of the Bonds of the lien created by the Indenture on such Subordinated Water Revenues and other assets, without the consent of the Owners of all of the Bonds then Outstanding.

The Indenture may also be modified or amended at any time with the written consents of each provider of a letter of credit or a policy of bond insurance for the Bonds, provided that at such time the payment of all the principal of and interest on all Outstanding Bonds shall be insured by a policy or policies of municipal bond insurance or payable under a letter of credit the provider of which shall be a fmancial institution or association having unsecured debt obligations rated, or insuring or securing other debt obligations rated on the basis of such insurance or letters of credit, rated not lower than the respective ratings on the Bonds by Moody's (if Moody's is then rating the Bonds) or Standard & Poor's (if Standard & Poor's is then rating the Bonds).

B-14 The Indenture and the rights and obligations of the District, of the Trustee and the Owners of the Bonds may also be modified or amended at any time by a Supplemental Indenture, without the consent of any Bondholders but only to the extent permitted by law and only for any one or more of the following purposes:

(I) to add to the covenants and agreements of the District or to surrender any right or power reserved to or conferred upon the District;

(2) to make such provisions for the purpose of curing any omission or ambiguity, or of curing or correcting any defective provision contained in the Indenture, or in regard to questions arising under the Indenture, as the District may deem necessary or desirable, and which shall not materially and adversely affect the interests of the Owners of the Bonds;

(3) to modify the Indenture in such manner as to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statutes and which shall not materially and adversely affect the interests of the Owners of the Bonds;

( 4) to make modifications or adjustments necessary or desirable to provide for the issuance of Variable Rate Indebtedness, Capital Appreciation Indebtedness or Parity Debt, with such interest rate, payment, maturity and other terms as the District may deem desirable, subject to the provisions of the Indenture;

(5) to provide for the issuance of Bonds in book-entry form or bearer form, provided that such provisions shall not materially and adversely affect the interest of the Owners of the Bonds;

(6) if the District agrees in a Supplemental Indenture to maintain the exclusion of interest on a Series of Bonds from gross income for purposes of federal income taxation, to make such provisions as are necessary or appropriate to ensure such exclusion;

(7) to provide for the issuance of an additional Series of Bonds pursuant to provisions of the Indenture; and

(8) for any other purpose that does not materially and adversely affect the interests of the Owners of the Bonds.

Defeasance

Bonds may be paid by the District in any of the following ways:

(a) by paying or causing to be paid the Bond Obligations of and interest on such Outstanding Bonds, as and when the same become due and payable;

(b) by depositing with the Trustee, an escrow agent or other fiduciary, in trust, at or before maturity, money or securities in the necessary amount to pay or redeem such Outstanding Bonds; or

(c) by delivering to the Trustee, for cancellation by it, such Outstanding Bonds.

B-15 Upon the deposit with the Trustee, escrow agent or other fiduciary, in trust, at or before maturity, of money or securities in the necessary amount to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the District in respect of such Bond shall cease, terminate and be completely discharged, provided that the Owner thereof shall thereafter be entitled to the payment of the principal of and premium, if any, and interest on the Bonds, and the District shall remain liable for such payment, but only out of such money or securities deposited with the Trustee as aforesaid for their payments.

The District may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the District may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.

Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be:

(a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date; or

(b) Investment Securities described in clauses (i), (ii) or (v) of the definition thereof the principal of and interest on which when due will, in the opinion of an independent certified public accountant delivered to the Trustee (upon which opinion the Trustee may conclusively rely), provide money sufficient to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or Redemption Price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as required by the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Request of the District) to apply such money to the payment of such principal or Redemption Price and interest with respect to such Bonds.

B-16 APPENDIXC

SUMMARY OF CERTAIN PROVISIONS OF THE SENIOR WATER BOND RESOLUTION

Outstanding Water Bonds

There are currently no Water Bonds outstanding pursuant to the Water Bond Resolution. Additional Water Bonds may be issued under the Water Bond Resolution upon the terms and conditions set forth in the Water Bond Resolution. All Water Bonds from time to time outstanding under the Water Bond Resolution are referred to herein as the "Water Bonds".

Security

The Water Bonds are secured by a pledge of and first lien on Net Revenues of the Water System. Net Revenues are (i) Revenues of the Water System plus (ii) the amounts. if any. withdrawn from the Rate Stabilization Fund (see "Allocation of Revenues-Rate Stabilization Fund" herein) for treatment as Revenues less (i) operation and maintenance costs and (ii) the amount. if any. withdrawn from Revenues for deposit in the Rate Stabilization Fund. Revenues are defined as charges and other income and receipts derived from the operation of the Water System together with investment earnings on funds associated with the Water System. Revenues do not include taxes. Operation and maintenance expenses are net of such expenses paid from taxes. The Water Bonds are further secured by a pledge of funds held in the Bond Reserve Fund. Interest Fund. Retirement Fund and Sinking Fund when established.

The Bond Reserve Fund

The Bond Reserve Fund. maintained by the Trustee. is maintained in an amount equal to the sum of the principal due and interest accruing. whether or not payable in that period. in the 12 months immediately following the date of the Water Bonds. on the outstanding Water Bonds ("Initial Annual Debt Service"). If the balance in the Bond Reserve Fund exceeds this requirement the Treasurer may request the Trustee to withdraw such excess and pay it to the District. Otherwise. monies held in the Bond Reserve Fund may be used solely for the purpose of paying principal of and interest on Water Bonds then outstanding in the event that no other funds are available therefor. or for the retirement of all of the Water Bonds then outstanding.

Allocation of Revenues

The Water Bond Resolution provides that the District shall account for all the Revenues. shall make transfers to the Trustee as described below. shall pay operation and maintenance costs. and shall use and apply remaining funds for any lawful purpose including redemption of the Water Bonds.

Interest Fund - At least one business day before each payment date the District shall deposit with the Trustee an amount sufficient. together with any balance in the Interest Fund. to pay the interest next becoming due on the Water Bonds.

Retirement Fund - At least one business day before each principal payment date. the District shall deposit with the Trustee an amount sufficient. together with any balance in the Retirement Fund. to pay the principal next becoming due on the Water Bonds.

C-1 Bond Reserve Fund - The Bond Reserve Fund was initially funded from proceeds of bond issues. Upon the occurrence of any deficiency in the Bond Reserve Fund. the District shall immediately deposit with the Trustee an amount sufficient to restore the balance therein to an amount equal to Initial Annual Debt Service on each Series of Water Bonds then outstanding.

Rate Stabilization Fund - After making the required deposits as set forth above to the various funds established under the Water Bond Resolution. remaining Revenues may be deposited from time to time in the Rate Stabilization Fund. Such deposits from Revenues may be in any amount determined by the District. subject to the following limitations:

(i) deposits from such Revenues for fiscal years of the District ending on or before June 30. 1985 shall be limited to an aggregate amount of $10 million.

(ii) deposits from such Revenues for each fiscal year of the District ending after June 30. 1985 may only be made if. after such deposits. the debt service coverage ratio described under the caption "Summary of Certain Provisions of the Water Bond Resolution-Covenants­ Charges" is at least 1.25 times, and such deposits must be made within 120 days after the end of the applicable fiscal year; and

(iii) no deposit from Revenues may be made in respect of any Fiscal Year to the extent such Revenues were relied upon by the District in certifying that it had satisfied the debt service coverage test for issuing additional Water Bonds during the applicable Fiscal Year (see "Additional Bonds" below) to the extent such withdrawal would cause the District to fail to satisfy such coverage test.

The District may withdraw amounts from time to time held in the Rate Stabilization Fund within 120 days after the end of the applicable Fiscal Year. Amounts so withdrawn shall be included in Revenues for such Fiscal Year and may be applied for any purposes for which Revenues generally are available. All interest and earnings upon deposits in the Rate Stabilization Fund will not be held therein. but will be treated and accounted for as Revenues.

To date. the District has deposited $50.000.000 in the Rate Stabilization Fund.

Additional Bonds

The Water Bond Resolution specifies conditions under which the District may issue additional Series of Water Bonds on a parity with the Water Bonds. which conditions include:

(I) the District shall be in compliance with all covenants of the Water Bond Resolution.

(2) an amount from the proceeds shall be deposited in the Bond Reserve Fund sufficient. together with the balance in the fund. to make the amount in the fund then equal to the aggregate of Initial Annual Debt Service on all Series of Water Bonds then outstanding.

(3) the Net Revenues of any 12 consecutive months during the 18 months immediately preceding the issuance of the additional Water Bonds plus (a) 75% of the amount by which the Net Revenues would have increased had any increase in rates and charges. adopted prior to the issuance of such additional Water Bonds but in effect for less than a year. been in effect for a full year; and (b) 75% of the projected increase in annual Net Revenues to be provided by facilities under construction or to be constructed with the proceeds of the additional

C-2 bonds shall have been equal to 1.25 times the maximum debt service on the additional Water Bonds and all outstanding Series of Water Bonds.

Refunding Bonds

The District is also authorized to issue refunding Water Bonds under the Water Bond Resolution upon satisfaction of conditions specified therein which conditions include:

(I) if less than all Water Bonds outstanding under the Water Bond Resolution to be refunded. the District shall be in compliance with all covenants under the Water Bond Resolution.

(2) the District shall deposit with the Trustee funds in the necessary amount to provide for the payment of the refunded Water Bonds together with irrevocable instructions to publish notice of the redemption of the refunded Water Bonds to be redeemed.

Covenants

The Resolution sets forth covenants of the District. Certain of these covenants are summarized below.

I. Charges. The District covenants that so long as any Water Bonds are outstanding it will fix rates and charges in each Fiscal Year so as to provide Revenues that shall be at least sufficient to make all payments required by the Water Bond Resolution. including the necessary expenses of maintaining and operating the Water System and to yield Net Revenues in each Fiscal Year equal to at least 125 % of the annual debt service due on the Water Bonds in that Fiscal Year.

2. Punctual Payment. The District will punctually pay or cause to be paid the principal and interest to become due on the Water Bonds.

3. Against Encumbrances. The District will not mortgage or otherwise encumber. pledge or place any charge upon the System or any part thereof. and the District will not create any pledge. lien or charge upon any of the Revenues except a pledge. lien or charge inferior and subordinate to the lien of the Water Bond Resolution.

4. Against Sale or Other Disposition of Property. The District will not sell. lease or otherwise dispose of the Water System or any part thereof essential to the proper operation of the Water System or to the maintenance of the Revenues. The District will not enter into any lease or agreement which impairs the operation of the Water System or any part thereof necessary to secure adequate Revenues for the payment of the principal of and interest on the Water Bonds. or which would otherwise impair the rights of the Bondholders with respect to the Revenues or the operation of the Water System.

5. Maintenance and Operation of Water System. The District will maintain and preserve the Water System in good repair and working order at all times. and will operate the Water System in an efficient and economical manner.

6. Payment of Claims. The District will pay and discharge. or cause to be paid and discharged. any and all lawful claims for labor. materials or supplies which. if unpaid. might become a lien or charge upon the Revenues prior to or superior to the lien of the Water Bonds. or which might impair the security of the Water Bonds.

C-3 7. Use of Proceeds. The District will make no use of the proceeds of the Water Bonds which will cause the Water Bonds to be "arbitrage bonds" subject to Federal income taxation by reason of Section 103(c) of the Internal Revenue Code of 1954. The District will not make any use of the proceeds of the Water Bonds which would impair the tax­ exempt status of the Water Bonds under Section 103(a) of the Internal Revenue Code.

8. Books and Accounts; Financial Statements. The District will keep proper books of record and accounts of all transactions relating to the Water System. Such books will at all times be subject to inspection by the Trustee or holders of not less than 10% of the principal amount of the Water Bonds then outstanding. The District will prepare and file with the Trustee within 120 days after the close of each Fiscal Year a detailed statement of revenues. expenditures and fund balances. and will furnish a copy of a summary of such statement to any Bondholder on request.

9. Protection of Security. The District will preserve and protect the security of the Water Bonds and the rights of the Bondholders. and will warrant and defend their rights against all claims and demands of all persons.

10. Payment of Taxes, Etc. The District will pay and discharge, or cause to be paid and discharged, all taxes, assessments and other governmental charges, if any, which may hereafter be lawfully imposed upon the Water System or upon any Revenues. The District will conform with all valid requirements of any governmental authority relative to the Water System.

11. Eminent Domain Proceedings. The proceeds realized by the District from eminent domain proceedings shall be applied as provided in the Water Bond Resolution.

Events of Default

The Water Bond Resolution defines events of default as failure to (I) make a payment of principal when due; (2) make a payment of interest within 30 days of its due date; (3) observe any covenants, agreements or conditions for a period of 30 days, or (4) the filing of a petition or answer seeking reorganization under federal bankruptcy laws or court control of the District under laws for relief or aid of debtors.

Remedies

In the event of default and during its continuance, the holders of not less than a majority in aggregate principal amount of the Water Bonds at the time outstanding shall be entitled, upon written notice to the District, to declare the principal outstanding and accrued interest immediately due and payable. At any time after such declaration if the District shall deposit with the Trustee a sum sufficient to pay all overdue principal and interest and any reasonable expenses of the Trustee and shall have cured any other default, then the holders of not less than a majority of the Water Bonds then outstanding may rescind such declaration. All funds received by the trustee under such declaration shall be applied by the Trustee to the expenses of the Bondholders in declaring the defaults, to the payment of interest in default in order of matnrity, and to the payment of principal made ratably to persons entitled thereto without discrimination or preference.

C-4 In addition, the Trustee or any Bondholder shall have the right, in addition to certain other equitable remedies set forth in the Water Bond Resolution, for the equal benefit of all Bondholders similarly situated, to bring suit to compel the District to perform its duties under the Act and its agreements under the Water Bond Resolution.

Requirements for Amendment of the Water Bond Resolution

The Water Bond Resolution may be modified or amended with the written consent of holders of 66-2/3% of all Water Bonds then outstanding (exclusive of issuer-owned Bonds) provided that no modification or amendment will extend the maturity, reduce the interest rate or principal amount payable or reduce the percentage of consent required for amendment without the express consent of all Bondholders.

The Water Bond Resolution may also be amended by a supplemental water bond resolution, without the consent of the Bondholders, but only for the purposes of adding covenants and agreements of the District, curing ambiguities or in regard to questions arising under the Resolution, as the Board deems desirable and not inconsistent with the Resolution or adversely affecting the interests of the holders of the Water Bonds, and issuing an additional Series of Water Bonds under the Water Bond Resolution.

C-5 (This page intentionally left blank) APPENDIXD

FORM OF CO-BOND COUNSEL OPINION

Upon the delivery of the Series 2005A Bonds, Sidley Austin Brown & Wood LLP, San Francisco, California, and Lofton & Jennings, San Francisco, California, Co-Bond Counsel, propose to render their final approving opinion with respect to the Series 2005A Bonds in substantially the following form:

[Closing Date]

East Bay Municipal Utility District Oakland, California

$300,000,000 EAST BAY MUNICIPAL UTILITY DISTRICT (Alameda and Contra Costa Connties, California) WATER SYSTEM SUBORDINATED REVENUE BONDS, SERIES 2005A

Ladies and Gentlemen:

We have acted as co-bond counsel to the East Bay Municipal Utility District (the "District") in connection with the issuance of its Water System Subordinated Revenue Bonds, Series 2005A in the aggregate principal amount of $300,000,000 (the "Bonds"). The Bonds are being issued pursuant to the Municipal Utility District Act ( constituting Division 6 of the Public Utilities Code of the State of California, as amended), the Revenue Bond Law of 1941 as made applicable by Article 6a of Chapter 6 of Division 6 of the Municipal Utility District Act, and Article 11 of Chapter 3 of Part I of Division 2 of Title 5 of the Government Code of the State of California ( collectively, the "Act") and a Water System Subordinated Revenue Bond Indenture, dated as of April I, 1990, by and between the District and First Interstate Bank of California (which has been succeeded by The Bank of New York Trust Company, N.A.), as trustee (the "Trustee"), as amended and supplemented by a First Supplemental Indenture, dated as of May 15, 1990, a Second Supplemental Indenture, dated as of October I, 1991, a Third Supplemental Indenture, dated as of July I, 1992, a Fourth Supplemental Indenture, dated as of July I, 1993, a Fifth Supplemental Indenture, dated as of October I, 1994, a Sixth Supplemental Indenture, dated as of February I, 1996, a Seventh Supplemental Indenture, dated as of June I, 1998, an Eighth Supplemental Indenture, dated as of June I, 2001, a Ninth Supplemental Indenture, dated as of March I, 2002, a Tenth Supplemental Indenture, dated as of July I, 2003, and an Eleventh Supplemental Indenture, dated June I, 2005, providing for the issuance of the Bonds ( collectively, the "Indenture").

In our capacity as co-bond counsel, we have reviewed the Act, the Indenture, certifications of the District, the Trustee, and others, opinions of counsel to the District and the Trustee, and such other documents, opinions and instruments as we deemed necessary to render

D-1 the opm10ns set forth herein. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

We have assumed the genuineness of all documents and signatures presented to us. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. In addition, we call attention to the fact that the rights and obligations under the Bonds and the Indenture are subject to bankruptcy, insolvency, reorganization, arrangement, moratorium and other similar laws affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against public agencies in the State of California. Furthermore, the imposition of fees and charges by the District relating to the Water System may be subject to the provisions of Articles XIII C and XIII D of the California Constitution.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Bonds constitute the valid and binding special limited obligations of the District.

2. The Indenture has been duly authorized, executed and delivered by, and constitutes the valid and binding obligation of, the District. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Subordinated Water Revenues of the District, and certain other amounts held by the Trustee under the Indenture (including amounts held in the Series 2005A Bond Reserve Fund), as and to the extent set forth in the Indenture and subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein.

3. The Bonds are special limited obligations of the District and are payable exclusively from and are secured by a pledge of Subordinated Water Revenues and certain amounts held under the Indenture. The general fund of the District is not liable, and the credit or taxing power of the District is not pledged, for the payment of the Bonds or the interest thereon.

4. Bonds and other parity debt of the District have been and may from time to time hereafter be issued under the Indenture which are payable from Subordinated Water Revenues on a parity basis with the Bonds.

5. Based on existing statutes, regulations, rulings and judicial decisions and assuming continuing compliance by the District with certain covenants in the Indenture and requirements of the Internal Revenue Code of 1986, as amended, regarding the use, expenditure and investment of bond proceeds and the timely payment of certain investment earnings to the United States, interest on the Bonds is not includable in the gross income of the owners of the Bonds for purposes of federal income taxation. Interest on the Bonds is not treated as an item of tax preference in calculating the federal alternative minimum taxable income of individuals or corporations; however, such interest is included as an adjustment in the calculation of federal

D-2 corporate alternative minimum taxable income and may therefore affect a corporation's federal alternative minimum tax liability. We express no opinion as to any other federal income tax consequences caused by ownership of or receipt of interest on the Bonds. Certain requirements and procedures contained or referred to in the Indenture and other relevant documents may be changed and certain actions may be taken or omitted under various circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of nationally recognized bond counsel. No opinion is expressed herein as to the tax status of any Bond if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves.

6. Interest on the Bonds is exempt from personal income tax imposed by the State of California.

The opm10ns expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions. Such opinions may be adversely affected by actions taken or events occurring, including a change in law, regulation or ruling ( or in the application or official interpretation of any law, regulation or ruling) after the date hereof. We have not undertaken to determine, or to inform any person, whether such actions are taken or such events occur, and we have no obligation to update this opinion in light of any such actions or events.

Other than as described herein, we have neither addressed nor are we opining on the tax consequences to any person of the investment in, or the receipt of interest on, the Bonds.

Respectfully submitted, Respectfully submitted,

D-3 (This page intentionally left blank) APPENDIXE

DTC AND THE BOOK-ENTRY ONLY SYSTEM

General

DTC will act as securities depository for the Series 2005A Bonds. The Series 2005A Bonds will be issued as fully-registered bonds. registered in the name of Cede & Co. (DTC's partnership nominee). One fully-registered Series 2005A Bond will be delivered for each maturity of the Series 2005A Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds securities that its participants (the "Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants (the "Direct Participants") include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The Rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission.

Purchases of the Series 2005A Bonds under the DTC system must be made by or through Direct Participants, which will receive credit for the Series 2005A Bonds on DTC's records. The ownership interest of each actual purchaser of each Series 2005A Bond ("Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2005A Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2005A Bonds, except in the event that use of the book-entry system for the Series 2005A Bonds is discontinued.

To facilitate subsequent transfers, all Series 2005A Bonds deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of Series 2005A Bonds with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2005A Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such securities are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers.

E-1 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 Cede & Co. If less than all of the bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. will consent or vote with respect to the Series 2005A Bonds. Under its usual procedures, DTC mails an Omnibus Proxy to an issuer as soon as possible after the record date. The Onrnibus Proxy assigns Cede & Co. 's consenting or voting rights to those Direct Participants to whose accounts the Series 2005A Bonds are credited on the record date (identified in a listing attached to the Onrnibus Proxy).

Principal, premium, if any, and interest payments with respect to the Series 2005A Bonds will be made to DTC. DTC's practice is to credit Direct Participants' accounts on payment dates in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on the date payable. 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 District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Series 2005A Bonds at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, security certificates are required to be printed and delivered as described in the Indenture.

The District may decide to discontinue use of the system of book-entry transfers through DTC ( or a successor securities depository). In that event, Series 2005A Bond certificates will be printed and delivered as described in the Indenture.

The District cannot and does not give any assurances that DTC will distribute to Participants, or that Participants will distribute to the Beneficial Owners, payments of principal of, interest and premium, if any, on the Series 2005A Bonds paid, or any redemption or other notices, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The District is not responsible or liable for the failure of DTC or any Direct Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Series 2005A Bonds or any error or delay relating thereto.

The foregoing description of the procedures and record keeping with respect to beneficial ownership interests in the Series 2005A Bonds, payment of principal, interest and other payments on the Series 2005A Bonds to Direct Participants, Indirect Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in such Series 2005A Bonds and other related transactions by and between DTC, the Direct Participants, the Indirect Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the Direct Participants, the Indirect Participants nor the Beneficial Owners should rely on the

E-2 foregoing information with respect to such matters but should instead confirm the same with DTC or the Participants, as the case may be.

Discontinuance of Book-Entry System

DTC may discontinue providing its services as securities depository with respect to the Series 2005A Bonds at any time by giving notice to the Trustee and the District and discharging its responsibilities with respect thereto under applicable law, or the District may discontinue use of the system of book-entry transfers for the Series 2005A Bonds through DTC (or a successor securities depository). If the system of book-entry transfers for the Series 2005A Bonds is discontinued, the District will execute, and the Trustee will authenticate and make available for delivery, replacement Series 2005A Bonds in the form of registered certificates as provided in the Indenture. In addition, the following provisions would apply: the principal or redemption price of the Series 2005A Bonds will be payable upon presentation thereof, at the principal corporate trust office of the Trustee, in San Francisco, California; interest on the Series 2005A Bonds will be payable by check mailed on each interest payment date to the registered owners thereof as shown on the registration books of the Trustee as of the close of business on the applicable record date of the calendar month immediately preceding the applicable interest payment date; and the Series 2005A Bonds will be transferable and exchangeable on the terms and conditions provided in the Indenture.

E-3 (This page intentionally left blank) APPENDIXF

SUMMARY OF CERTAIN PROVISIONS OF THE STATE LOANS

The following is a summary of certain provisions of the State Loans between the State Water Resources Control Board (the "State Board") and the District. The following summary is qualified in its entirety by reference to the State Loans. Each State Loan is for the purpose of financing a specific project identified to such State Loan ( each. the "Project"). Pnrsuant to the State Loans, the District is required to maintain a dedicated source of revenue sufficient to provide reasonable assurance of repayment of the State Loans. The dedicated source of revenue must comply with the requirements of the Federal Clean Water Act and any applicable Federal and State regulations.

Certain Definitions

"Completion of construction" means the date, as determined by the State Board after consultation with the District, that the work of building and erection of the Project is substantially complete.

"Initiation of construction" means the date that the notice to proceed with work is issued for the Project, or, if notice to proceed is not required, the date of commencement of building and erection of the Project.

"Project completion" means the date, as determined by the State Board after consultation with the District, that operation of the Project is initiated or is capable of being initiated, whichever comes first.

"Revenue Program" means a system of charges, fees, or other means of income production adopted by the District which provides for recovery of appropriate capital costs of the Project, generates adequate income to reasonably assure repayment of loan funds under each State Loan, generates adequate income to provide for reasonable operation and maintenance of the Project, and provides adequate income for reasonable futnre expansion and improvement of the Project.

Revenue Program

The District agrees to prepare and provide an acceptable final Revenue Program to the State Board at the time of ninety percent (90%) pay-out of loan funds available pursuant to each State Loan. Further loan disbursements may be withheld until an acceptable final Revenue Program is submitted. The District further agrees to periodically review and modify the Revenue Program as necessary to assure reasonable adequacy of the Revenue Program. The final Revenue Program and all modifications thereof shall be consistent with the applicable guidelines and shall be to the reasonable satisfaction of the State Board. The State Board may review the District's records to assure compliance with the approved Revenue Program at any time during the useful life of the Project.

The District agrees to expeditiously provide, during construction of the Project and thereafter during the useful life of the Project, such reports, data, and information as may be reasonably required by the State Board. The District agrees to, among other things, establish certain accounts and maintain certain records in accordance with certain standards. The District agrees to require Project contractors and sub-contractors to maintain books, records, and other material relative to the Project in accordance with generally accepted accounting standards.

F-1 Loan Disbursements; Availability of Funds; Withholding

Amounts available under each State Loan will be disbursed, subject to certain conditions, upon submission of a disbursement request form, duly completed and executed. The District agrees that it will not request disbursement for any Project cost until such cost has been incurred and is due and payable to Project contractors, although it is agreed that actual disbursement of such cost by the District is not required as a condition of disbursement request.

The State Board's obligation to disburse any sum to the District under any State Loan is contingent upon the availability of sufficient funds to permit the disbursements provided for therein. In the event that sufficient funds do not become available for reasons beyond the reasonable control of the State Board, such as failure of the Federal or state government to appropriate funds necessary for disbursement of loan amounts, the State Board shall not be obligated to make any disbursements to the District under such State Loan.

The State Board may withhold all or any portion of the funds available under any State Loan in the event that: (a) the District has materially violated, or threatens to materially violate, any term, provision, condition, or commitment of any State Loan; (b) the District fails to maintain reasonable progress toward completion of the Project; or (c) an acceptable Revenue Program is not submitted at the time of 90 percent pay-out of funds available under any State Loan.

Repayment; Penalties; District Obligation

The loan amount, together with all interest accruing thereon, shall be repaid in full not later than 20 years after the financed facility becomes operational. Repayment generally shall be made in 20 equal annual installments (including interest), with the first repayment due one year after the first disbursement, with annual repayment installments due thereafter until the loan amount and all accrued interest has been paid in full. The actual repayments will be based on actual disbursements.

Upon completion of construction of the Project and submission of necessary reports, the State Board will prepare an appropriate loan repayment schedule and supply the same to the District. The loan repayment schedule may be amended as necessary to accurately reflect amounts due under the State Loans.

The District agrees to make each loan payment on or before the due date therefor. A ten-day grace period will be allowed. A penalty in the amount of one-tenth of one percent (0.1 % ) of the amount due will be due for each day of nonpayment. For purposes of penalty assessment, payment will be deemed to have been made if payment is deposited in the U.S. mail within the grace period with postage prepaid and properly addressed.

The District is obligated to make all payments required by the State Loans to the State Board, notwithstanding any individual default by its constituents or others in the payment to the District of taxes, assessments, tolls, or other charges levied by the District. The District shall provide for the punctual payment to the State Board of all amounts which become due under the State Loans. In the event of failure, neglect or refusal of any officer of the District to levy or cause to be levied any tax or assessment necessary to provide payment by the District under the State Loans, to enforce or to collect such tax or assessment, or to pay over to the State Board any money collected necessary to satisfy any amount due under the State Loans, the State Board may take such action in a court of competent jurisdiction as it deems necessary to compel the performance of all duties relating to the levying and collection of the taxes or assessments and the payment of the money collected therefrom to the State Board.

F-2 Default; Termination; Immediate Repayment

Each State Loan may be terminated by written notice during construction of the Project, or thereafter at any time prior to complete repayment of the District, at the option of the State Board, upon violation by the District of any material provision of the related State Loan after such violation has been called to the attention of the District and after failure of the District to bring itself into compliance with the provisions of the related State Loan within a reasonable time as established by the State Board.

In the event of such termination, the District agrees, upon demand, to immediately repay to the State Board an amount equal to the current balance due on such State Loan, including accrued interest, and all penalty assessments due. In the event of termination, interest shall accrue on all amounts due at the highest legal rate of interest from the date that notice of termination is mailed to the District to the date of full repayment by the District.

Disputes

Any dispute arising under the State Loans which is not otherwise disposed of by agreement shall be decided by the Chief of the Division of Clean Water Program of the State Water Resources Control Board, or his authorized representative. The decision shall be final and conclusive unless the District furnishes a written appeal within thirty (30) calendar days after mailing of the decision to the District, to the State Board's Executive Director. The decision of the State Board's Executive Director shall be final and conclusive unless determined by a court of competent jurisdiction to have been fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence. In connection with such appeal the District shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute, the District shall continue to fulfill and comply with all the terms, provisions, commitments, and requirements of the State Loans. In the event of litigation between the District and the State Board, it is agreed that the prevailing party shall be entitled to such reasonable costs and/or attorney fees as may be ordered by the court entertaining such litigation.

Certain Covenants of the District

Compliance with Law. The District agrees that it will, at all times, comply with and require its contractors and subcontractors to comply with all applicable federal and state laws, rules, guidelines, regulations, and requirements.

Construction Activities; Notifications; Protection of Archeological and Historical Resources. The District agrees to promptly notify the State Board in writing of:

(a) Any substantial change in scope of the Project; and the District agrees that no substantial change in the scope of the Project will be undertaken until written notice of the proposed change has been provided to and approved by the State Board;

(b) Cessation of all major construction work on the Project where such cessation of work is expected to or does extend for a period of 30 days or more;

( c) Any circumstance, combination of circumstances, or condition, which is expected to or does delay completion of construction for a period of 90 days or more beyond the estimated date of completion of construction previously provided to the State Board;

( d) Discovery of any potential archeological or historical resource; and

F-3 (e) Completion of construction of the Project.

Project Access. The Agency agrees to insure that the State Board will have suitable access to the Project site at all reasonable times during Project construction and thereafter for the useful life of the Project.

Project Completion: Initiation of Operations. Upon completion of construction of the Project, the District agrees to expeditiously initiate Project operations. At the time of completion of construction, the State Board, after consultation with the District, will establish a reasonable estimated Project completion date, and the District agrees to make all reasonable efforts to meet the date so established. Extension of the Project completion date by the State Board shall not be unreasonably withheld.

Reports and Records. The District agrees to expeditiously provide, during construction of the Project and thereafter during the useful life of the Project, such reports, data, and information as may be reasonably required by the State Board.

Damages for Breach Affecting Tax Exempt Stains. In the event that any breach of any of the provisions of the State Loans by the District shall result in the loss of tax-exempt status for any State bonds related to the State Loan program of the State Board, or if such breach shall result in an obligation on the part of the State to reimburse the Federal government by reason of any arbitrage profits, the District shall immediately reimburse the State in an amount equal to any damages paid by or loss incurred by the State due to such breach.

Amendment

Each State Loan may be amended at any time by mutual written agreement of the parties.

F-4 APPENDIXG

SPECIMEN BOND INSURANCE POLICY

G-1 (This page intentionally left blank) FINANCIAL GUARANTY INSURANCE POLICY MB IA Insurance Corporation Arrronk, NwYork 10504 Pd icy No. lNUMBER]

MBIA lnsuance Corporation (the "Insurer"), in consideration cf the JI!YITT'rt cf the prenium ard sul:Jject to the term; cf this pdicy, hereby uncondifionally ard i1IB1cxably g.arantEes to any cwner, as hereiraft:erdEfined, cf thefdlcwing described obligations, theful ard corrplete JI!YITT'rt reQ.Jiredtobe trade 0y eron l:ehalf cf the lssuerto[PAYING AGENT,lrRUSTEE] er itssu::cesscr(the "PayingAgert") cf anarrourtEqual to(i) the pinciJBI cf (either at the slatEd rraturity er 0y any adJancerrent cf rraturity pursuant to a rrardatD!y sinking fund JIIYITT't11) ard irterest on, the Obligations (as tmt1Eml is Mined belcw) as such JI!Yrrenls shall becorre dJe bu: shall rot be so JRid (excepttmt in the e;ertcf any acceleration cf the due d!te cf such pinciJBI 0y rEES011 cf rrardatD!y er qitional rederrption er acceleration re;ulfing fran defaut er othetwise, cther than any ad!ancemrt cf rraturity JJU5lB111: to a rrardatD!y sinking fund JI!Yrrenl; the JI!Yrrenls guararteed hereby sral I be trade in su::h arrounts ard at such fims as su::h JI!Yrrenls cf pinciJRI would rave l:een due had there rot l:een any such acceleration); ard (ii) the reirrb.Jrsemrt cf a such JI!Yrrenl: which is subsequertly recO/ered fran any o.vner pursuant to a final j udgmrt 0y a court cf corrpetEf1tj urisdicfion tmt su::h JIIYITT'rt constitu:es an avoidable inference to su::h cwner within the nmning cf any appicable larknfJll:Y l

[PAR] [LEGAL NAME OF ISSUE]

Upon recei p: cf teleploti c er telegrapli c ncti ce, su::h nctice subsequertly confi rrred in wrifi ng 0y reg stered er certified rrai I, er lµll1 recei p: cf writ:1Et1 nctice 0y regstered er certified trail, 0y the InsITT'f"franthe PayingAgert er any cwner cf an Obligation the JI!Yrrenl:cf an InsuredAnrurtferwhich is then due, tmt such req.Jired JI!Yrrenl: ms rot l:een trade, the Insurer on the due d!te cf su::h JIIYrrenl: er within one b.Jsiness day after recei p: cf nctice cf such nonJIIYrrent; whiche;er is later, will rrake a deposit cf funds in an accourtwith U.S. Bank Trust Nafional Associafion, in NEW Yor1<, NEW Yor1<, er its successcr, sufficiert fer the JI!Yrrenl: cf any su::h Insured Anrunts wnch are then dJe. Upon presentrrent ard sunerder cf such Obligations er pesertm'f11:cf su::h cther procf cf cwnership cf the Obligations, together with any appopriate instrurents cf assignrrentto e;iden::e the assignrrent cf the InsuredAmounts due on the Obligations as are JRid 0y the InsITT'f", ard appopriate instrumrts to effect the app:iintrrent cf the lnsITT'f" asagentfersu::h o.vners cf the Obligations in any legal proceedng related to JI!Yrrenl:cf InsuredAmounts on the Obligations, su::h instrurrents l:eing ina fcrmsatisfadD!ytoUS. BankTrustNafional Associafion, U.S. BankTrustNafional Associafionsrall dsbursetosucho.vners, er the Paying AgentJI1Ymrtcf the Insured Amounts due on su::hObligations, less any am:rnt held 0y the PayingAgertferthe JI!Yrrenl:cf su::h lnsuredAnrunts ard legally availabletherefer. Tns pd icy does rot insure against loss cf any preJI!Yrrent preniumwnch rray at any firre be JI!Yabiewith re;i;ectto any Obligation As used herein, the 1Em1 "o.vner" srall nmn the regstered o.vner cf any Obligation as indicated in the bmks rrairtained 0y the PayingAgert, the Issuer, er any designee cf the Issuer fer su::h pupa;e. The 1Em1 cwner shall rot include the Issuer er any JI111Y wmse agwrertwith the Issuer constitute; the underlying security fertheObligations. Any seivicecf process on the Insurer rray be trade to the Insurer at its offices located at 113 King Street, Ammk, NEWY erk 10504ard such seivice cf process shall bevalidard l:inding

This pdicy is non-cancellablefer any rEES011. The preniumonthis pd icy is rot refITTB.blefer any rEES011 includng the JI!YITT'rt pier to rraturity cf the Obligations. In thee;ertthe lnsurerwereto becorre insolvent; any claim; arising under a pdicy cf firancial guararty insurance are excludedfrancO/erage 0y the California Insurance Guaranty Associafion, eslablished pursuant to Article 14.2 (comrrencingwithSecfion 1C63) cf Chap:er 1 cf Part2 cf Division 1 cf the California InsuanceCode IN WITNESS WHEREOF, the Insurer ms causedtns pdicy to beexecutEd infacsinileon its l:ehalf 0y itsduy authori2!"dcfficers, this [DAY] day cf [MONTH, YEAR].

At:tESt Assi start SecretaJy STD-R-CA-6 4f.)5 (This page intentionally left blank) APPENDIXH

CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the "Disclosure Agreement") is executed and delivered by the East Bay Municipal Utility District (the "Issuer") and The Bank of New York Trust Company, N.A., as successor trustee, as successor in interest to BNY Western Trust Company (the "Trustee") in connection with the issuance of $300,000,000 aggregate principal amount of Water System Subordinated Revenue Bonds, Series 2005A (the "Series 2005A Bonds"). The Series 2005A Bonds are being issued pursuant to an Indenture dated as of April 1, 1990 between the Issuer and the Trustee, as previously supplemented and amended, including as supplemented and amended by the Eleventh Supplemental Indenture, dated as of June 1, 2005 ( collectively, the Indenture"). In connection therewith the Issuer and the Trustee covenant and agree as follows:

SECTION 1. Purpose of this Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Issuer and the Trustee for the benefit of the Bondholders and Beneficial Owners of the Series 2005A Bonds and in order to assist the Participating Underwriters (as defined herein) in complying with Securities and Exchange Commission Rule 15c2-12(b )(5).

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

"Annual Report" shall mean any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

"Beneficial Owner" shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Series 2005A Bonds (including persons holding Bonds through nominees, depositories or other intermediaries); or (b) is treated as the owner of any Series 2005A Bonds for federal income tax purposes.

"Central Post Office" shall mean the Disclosure USA website maintained by the Municipal Advisory Council of Texas or any successor thereto, or any other organization or method approved by the staff or members of the Securities and Exchange Commission as an intermediary through which issuers may, in compliance with the Rule, make filings required by this Continuing Disclosure Agreement.

"Disclosure Representative" shall mean the Director of Finance of the Issuer or his or her designee, or such other officer or employee as the Issuer shall designate in writing to the Trustee from time to time.

"Dissemination Agent" shall mean the Trustee, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Trustee a written acceptance of such designation.

"Holder" shall mean either the registered owners of the Series 2005 A Bonds or, if the Series 2005A Bonds are registered in the name of The Depository Trust Company or another recognized depository, any available participant in such depository system.

"Listed Event" shall mean any of the events listed in Section 5( a) of this Disclosure Agreement.

H-1 "National Repository" shall mean, at any time, a then-existing Nationally Recognized Municipal Securities Information Repository as recognized from time to time by the SEC for the purposes referred to in the Rule (hereinafter defined). The National Repositories are identified on the SEC website at http://www.sec.gov/info/municipal/nrmsir.htm.

"Participating Underwriter" shall mean any of the original underwriters of the Series 2005A Bonds listed on the cover page of the Official Statement required to comply with the Rule in connection with offering of the Series 2005A Bonds.

"Repository" shall mean each National Repository and each State Repository.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"SEC" shall mean the United States Securities and Exchange Commission.

"State" shall mean the State of California.

"State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rule and recognized as such by the SEC. As of the date of this Disclosure Agreement, there is no State Repository.

SECTION 3. Provision of Annual Reports.

(a) The Issuer shall, or shall cause the Dissemination Agent to, not later than 270 days after the end of the Issuer's Fiscal Year (presently June 30), commencing with the report for the 2004-05 Fiscal Year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited fmancial statements of the Issuer are not available by the date required above for the filing of the Annual Report, the Issuer shall submit the audited financial statements as soon as available. If the Issuer's Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f).

(b) If the Issuer is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the Issuer shall send to the Municipal Securities Rulemaking Board and to each Repository a notice in substantially the form attached hereto as Exhibit A.

(c) The Dissemination Agent shall:

(i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and the State Repository, if any; and

(ii) file a report with the Issuer and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided to each Repository pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided.

( d) Notwithstanding any other provision of this Continuing Disclosure Agreement, the Issuer and the Dissemination Agent reserve the right to make any of the aforementioned filings through the Central Post Office.

05014\cdc-water-fin H-2 SECTION 4. Content of Annual Reports. The Issuer's Annual Report shall contain or include by reference the following categories or similar categories of information updated to incorporate information for the most recent fiscal or calendar year, as applicable (the tables referred to below are those appearing in the Official Statement, dated May 5, 2005, relating to the Series 2005A Bonds (the "Official Statement")):

(a) The audited fmancial statements of the Issuer for the prior Fiscal Year, prepared in accordance with Generally Accepted Accounting Principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer's audited fmancial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3( a), the Annual Report shall contain unaudited fmancial statements in a format similar to the fmancial statements contained in the final Official Statement, and the audited fmancial statements shall be filed in the same manner as the Annual Report when they become available;

(b) A table showing the Number of Accounts and Metered Annual Consumption (by customer type) for the preceding calendar year;

(c) A table showing Gross Water Consumption (including annual consumption and average consumption per day) for the preceding Fiscal Year;

(d) A table showing the Summary of Revenues and Contributions by Source;

(e) A table showing Water System Rates and Charges for the preceding Fiscal Year; ( as well as average rate increases)

(f) A table showing Outstanding Water System Debt as of the preceding Fiscal Year;

(g) A table showing revenues, operating and maintenance expense, debt service on water revenue bonds and debt service coverage for the Water System for the most recent Fiscal Year calculated in accordance with the terms of the Indenture; and

(h) Any material changes in the water supply.

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Issuer or related public entities, which have been submitted to each of the Repositories or the SEC. If any document included by reference is a fmal official statement, it must be available from the Municipal Securities Rulemaking Board. The Issuer shall clearly identify each such other document so included by reference.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this section, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2005A Bonds, if material:

I. Principal or interest payment delinquencies.

2. Non-payment related defaults.

3. Modifications to the rights of the Bondholders.

4. Optional, contingent or unscheduled calls.

H-3 5. Defeasances.

6. Rating changes.

7. Adverse tax opinions or events adversely affecting the tax-exempt status of the Series 2005A Bonds.

8. Unscheduled draws on the debt service reserves reflecting fmancial difficulties.

9. Unscheduled draws on the credit enhancements reflecting fmancial difficulties.

10. Substitution of the credit or liquidity providers or their failure to perform.

11. Release, substitution or sale of property securing repayment of the Series 2005 A Bonds.

(b) The Dissemination Agent shall, as soon as is reasonably practicable after obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the Issuer promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to Section 5(f). For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of such Listed Event shall mean actual knowledge by the Dissemination Agent, if other than the Trustee, and if the Dissemination Agent is the Trustee, then by the officer at the corporate trust office of the Trustee with regular responsibility for the administration of matters related to the Indenture. The Dissemination Agent shall have no responsibility to determine the materiality of any of the Listed Events.

(c) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Dissemination Agent pursuant tot Section 5(b) or otherwise, the Issuer shall as soon as possible determine if knowledge of such event would be material under applicable federal securities laws.

(d) If the Issuer determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the Issuer shall promptly notify the Dissemination Agent in writing and instruct the Dissemination Agent to report the occurrence pursuant to Section 5(f).

( e) If in response to a request under Section 5(b ), the Issuer determines that the Listed Event is not material under applicable federal securities laws, the Issuer shall so notify the Dissemination Agent in writing and instruction the Dissemination Agent not to report the occurrence pursuant to Section 5(f).

(f) If the Dissemination Agent has been instructed by the Issuer to report the occurrence of a Listed Event, the Dissemination Agent shall as soon as possible file a notice of such occurrence with the Municipal Securities Rulemaking Board and the Central Post Office or each National Repository, and each State Repository, if any. Notwithstanding the foregoing, notice of Listed Events described in Section (a)(4) and Section (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Series 2005A Bonds pursuant to the Indenture.

H-4 SECTION 6. Termination of Reporting Obligation. The Issuer's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2005 A Bonds. If such termination occurs prior to the fmal maturity of the Series 2005A Bonds, the Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5(f).

SECTION 7. Dissemination Agent. The Issuer may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. If at any time there is not any other designated Dissemination Agent, the Trustee, upon notice from the Issuer, shall be the Dissemination Agent. The initial Dissemination Agent shall be the Trustee. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Issuer pursuant to this Disclosure Agreement.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Issuer and the Dissemination Agent may amend this Disclosure Agreement, ( and, to the extent that any such amendment does not materially change or increase its obligations hereunder, the Dissemination Agent shall agree to any amendment so requested by the Issuer), and any provision of this Disclosure Agreement may be waived; provided, that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Section 3(a),Section 4 or Section 5( a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Series 2005 A Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Series 2005A Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Series 2005A Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Issuer shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type ( or in the case of a change of accounting principles, on the presentation) of fmancial information or operating data being presented by the Issuer. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(f), 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 fmancial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

H-5 SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Issuer chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Issuer shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 10. Default. In the event of a failure of the Issuer or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the request of any Participating Underwriter or the Holders of at least 25% of the aggregate principal amount of Outstanding Series 2005A Bonds, shall), or any Holder or Beneficial Owner of the Series 2005A Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Issuer or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Issuer or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance hereunder.

SECTION 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. The Dissemination Agent (if other than the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Issuer agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding any loss, expense and liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the Issuer under this Section 11 shall survive resignation or removal of the Dissemination Agent and payment of the Series 2005A Bonds

SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

To the Issuer: To the Dissemination Agent:

East Bay Municipal Utility District The Bank of New York Trust Company, N.A. 375 Eleventh Street 550 Kearny Street, Suite 600 Oakland, California 94607-4240 San Francisco, California 94108 Attention: Treasury Manager Telephone: 415-263-2416 Telephone: 510-287-0205 Fax: 415-399-1647 Fax: 510-287-0293

SECTION 13. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Trustee, the Dissemination Agent, the Participating Underwriters and the Holders and Beneficial Owners from time to time of the Series 2005A Bonds, and shall create no rights in any other person or entity.

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.

H-6 IN WITNESS WHEREOF, this Disclosure Agreement has been executed on behalf of the Issuer and the Trustee by their duly authorized representatives as of June I, 2005.

EAST BAY MUNICIPAL UTILITY DISTRICT

By: ______Gary Breaux Director of Finance

THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee

By: ______Authorized Officer

H-7 EXHIBIT A

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Name oflssuer: EAST BAY MUNICIPAL UTILITY DISTRICT

Name of Bond Issue: $300,000,000 East Bay Municipal Utility District Water System Subordinated Revenue Bonds, Series 2005A

Date oflssuance: June 2, 2005

NOTICE IS HEREBY GIVEN that tlie East Bay Municipal Utility District (tlie "Issuer") has not provided an Annual Report with respect to tlie above-named Bonds as required by Section 3( a) of the Continuing Disclosure Agreement, dated as of June I, 2005, by and between tlie Issuer and The Bank of New York Trust Company, N.A., as trustee (the "Trustee") and in accordance with Section 27.35 of the Indenture of Trust dated April I, 1990, as supplemented and amended, including as supplemented and amended by tlie Eleventh Supplemental Indenture, dated as of June I, 2005 by and between tlie Issuer and tlie Trustee. The Issuer anticipates that tlie Annual Report will be filed by , 20

Dated: ------, 20

THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee on behalf of the Issuer

By: ______Authorized Officer

cc: East Bay Municipal Utility District

H-8