$19,975,000 CHINO HILLS FINANCING AUTHORITY WATER …

NEW ISSUE RATINGS

BOOK-ENTRY-ONLY S&P: “AA”

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

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “LEGAL MATTERS - Tax Matters.”

SAN BERNARDINO COUNTY STATE OF CALIFORNIA

$19,975,000 CHINO HILLS FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2012

Dated: Date of Delivery Due: June 1, as Shown on the Inside Front Cover Page.

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

The Chino Hills Financing Authority Water Revenue Bonds, Series 2012 (the “Bonds”) are being issued to (i) refund the City of Chino Hills Certificates of Participation (2002 Water System Project), (ii) refund the City of Chino Hills Refunding Certificates of Participation (2003 Water System Project), (iii) fund capital improvements, (iv) fund a reserve fund for the Bonds, and (v) pay the costs of issuing the Bonds. See “THE FINANCING PLAN - Estimated Sources and Uses of Funds” herein.

The Bonds will be issued pursuant to an Indenture, dated as of December 1, 2012 (the “Indenture”), by and between the Chino Hills Financing Authority (the “Authority”) and U.S. Bank National Association, as trustee (the “Trustee”). The Bonds are payable from Authority Revenues consisting of Installment Payments to be made by the City of Chino Hills (the “City”) to the Authority as payment for certain real property and improvements (the “Project”) pursuant to an Installment Purchase Agreement dated as of December 1, 2012, as described herein (the “Installment Purchase Agreement”). The City is required under the Installment Purchase Agreement to make installment payments in each Fiscal Year from Net Revenues of the City’s water system (the “Enterprise”) in an amount sufficient to pay the annual principal and interest due on the Bonds, as described herein. See “SOURCES OF PAYMENT FOR THE BONDS” and “RISK FACTORS” herein.

Interest on the Bonds is payable semiannually on June 1 and December 1 of each year, commencing on June 1, 2013, until maturity or earlier redemption. See “THE BONDS - General Provisions” and “THE BONDS - Redemption” herein. The Bonds will be issued in denominations of $5,000 or integral multiples thereof. The Bonds, when delivered, will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository for the Bonds as described herein under “APPENDIX F - DTC AND THE BOOK-ENTRY-ONLY SYSTEM.”

The Bonds are special obligations of the Authority and are payable solely from the Authority Revenues and the other assets pledged therefor under the Indenture. The Bonds do not constitute a debt or liability of the City or of the State and neither the faith and credit of the City nor of the State are pledged to the payment of the Bonds. The City’s obligation to pay the Installment Payments and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the City payable solely from Net Revenues and other funds provided for in the Installment Purchase Agreement, and does not constitute a debt of the City or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the City or the State, or any political subdivision thereof, is pledged to the payment of the Installment Payments or other payments required to be made under the Installment Purchase Agreement.

The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Bond Counsel. Certain legal matters will be passed on for the City and the Authority by Jenkins & Hogin, LLP, and by Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about December 18, 2012 through the facilities of DTC.

The date of the Official Statement is November 29, 2012.

Raymond James & Associates, Inc.

$19,975,000 CHINO HILLS FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2012

MATURITY SCHEDULE

(Base CUSIP®† 16957T)

$18,545,000 Serial Bonds

Maturity Date Principal Interest Reoffering

June 1 Amount Rate Yield CUSIP®†

2013 $1,230,000 2.00% 0.20% AA3

2014 1,645,000 2.00 0.30 AB1

2015 1,670,000 4.00 0.43 AC9

2016 1,735,000 2.00 0.53 AD7

2017 1,790,000 4.00 0.65 AE5

2018 1,860,000 4.00 0.78 AF2

2019 905,000 1.50 0.87 AG0

2020 915,000 1.50 1.04 AH8

2021 940,000 4.00 1.33 AJ4

2022 970,000 4.00 1.60 AK1

2023 555,000 4.00 1.80* AL9

2024 570,000 3.00 2.05* AM7

2025 575,000 2.00 2.20 AN5

2026 590,000 5.00 2.00* AP0

2027 620,000 3.00 2.30* AQ8

2028 640,000 3.00 2.36* AR6

2029 655,000 3.00 2.45* AS4

2030 680,000 3.00 2.50* AT2

$1,430,000 3.00% Term Bond due June 1, 2032 Yield 2.65%* CUSIP®† AU9

_____________________________________

* Priced to the June 1, 2022 optional call date.

† CUSIP® A registered trademark of the American Bankers Association. Copyright © 1999-2012 Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc. CUSIP® data herein is provided by Standard & Poor’s CUSIP® Service Bureau. This data in not intended to create a database and does not serve in any way as a substitute for the CUSIP® Service Bureau. CUSIP® numbers are provided for convenience of reference only. Neither the City, the Authority nor the Purchaser takes any responsibility for the accuracy of such numbers.

CHINO HILLS FINANCING AUTHORITY CHINO HILLS, CALIFORNIA

CITY COUNCIL/AUTHORITY BOARD MEMBERS

Art Bennett, Mayor Peter Rogers, Vice Mayor

Ed Graham, Council Member Gwenn Norton-Perry, Council Member

One Council Member seat is currently vacant ________________________________________

CITY STAFF

Michael S. Fleager, City Manager Mary M. McDuffee, City Clerk Mark D. Hensley, City Attorney

Kathleen Gotch, Assistant City Manager Judy R. Lancaster, Finance Director/City Treasurer Joann Lombardo, Community Development Director

Jonathan Marshall, Community Services Director Nadeem Majaj, Public Works Director

Steve Nix, City Engineer ________________________________________

PROFESSIONAL SERVICES

Bond Counsel Orrick, Herrington & Sutcliffe LLP

Los Angeles, California

Disclosure Counsel Fulbright & Jaworski L.L.P.


Financial Advisor Harrell & Company Advisors, LLC

Orange, California

Trustee and Escrow Bank U.S. Bank National Association


Verification Agent Grant Thornton LLP

Minneapolis, Minnesota

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

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

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

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the Authority or the City to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the Authority, the City, the Financial Advisor or the Purchaser. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

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

Information Subject to Change. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority or the City or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions.

Stabilization of Prices. In connection with this offering, the Purchaser may overallot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Purchaser may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside front cover page hereof and said public offering prices may be changed from time to time by the Purchaser.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

TABLE OF CONTENTS

INTRODUCTION ...................................................... 1 The Authority ............................................................. 1 The City ..................................................................... 1 Security and Sources of Repayment .......................... 2 Professional Services ................................................. 2 Offering of the Bonds ................................................ 3 Information Concerning this Official Statement ........ 3

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

THE FINANCING PLAN .......................................... 8 The Refunding Program............................................. 8 Estimated Sources and Uses of Funds ....................... 8

SOURCES OF PAYMENT FOR THE BONDS ....... 9 General ....................................................................... 9 Pledge of Net Revenues ............................................. 9 Allocation of Revenues and Net Revenues .............. 11 Rate Covenant .......................................................... 12 Additional Indebtedness .......................................... 13 Reserve Fund ........................................................... 16

THE ENTERPRISE ................................................. 17 History and Service Area ......................................... 17 Water Supply ........................................................... 17 The Water Purchase Agreement ............................... 20 Existing Facilities .................................................... 21 Capital Improvements .............................................. 22 Water Consumption ................................................. 23 Water Users .............................................................. 24 Water Rates and Charges ......................................... 25

FINANCIAL INFORMATION ............................... 29 Personnel ................................................................. 29 Insurance .................................................................. 29 Retirement Plan ....................................................... 29 Other Post-Employment Retirement Benefits .......... 33 Outstanding Indebtedness of the Enterprise ............. 35 Historic Operating Results and Debt Service

Coverage ............................................................... 36 Projected Operating Results and Debt Service

Coverage ............................................................... 38 Financial Statements ................................................ 40

RISK FACTORS ....................................................... 45 Certain Factors Affecting the Authority and the

City Generally ....................................................... 45 Accuracy of Assumptions ........................................ 45 Limited Obligations with Respect to the Bonds ...... 45 System Operation and Expenses; Net Revenues ...... 46 Risks Relating to Water Supplies ............................. 46

Costs of Capital Improvement Program ................... 47 California State Water Legislation ........................... 47 Rate-Setting Process under Proposition 218 ............ 48 Environmental Regulations ...................................... 48 Statutory and Regulatory Compliance ..................... 48 Natural Calamities; Earthquakes; Fire Hazard ......... 48 Limited Recourse on Default ................................... 49 Limitations on Remedies ......................................... 49 Future Initiative and Legislation .............................. 50 Loss of Tax Exemption ............................................ 50 Secondary Market .................................................... 50 IRS Audit of Tax-Exempt Bond Issues .................... 50

CONSTITUTIONAL PROVISIONS AFFECTING ENTERPRISE REVENUES AND EXPENDITURES ......................................... 51 Article XIIIA and Article XIIIB ............................... 51 Proposition 218: Article XIIIC and Article XIIID ... 51 Future Initiatives ...................................................... 52

LEGAL MATTERS .................................................. 53 Enforceability of Remedies ...................................... 53 Approval of Legal Proceedings ................................ 53 Tax Matters .............................................................. 53 Absence of Litigation ............................................... 55

CONCLUDING INFORMATION .......................... 56 Rating on the Bonds ................................................. 56 Underwriting ............................................................ 56 Verifications of Mathematical Computations ........... 56 The Financial Advisor .............................................. 56 Continuing Disclosure ............................................. 56 Additional Information ............................................ 57 References ................................................................ 57 Execution ................................................................. 57

APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

APPENDIX B - CITY AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2012

APPENDIX C - GENERAL INFORMATION ABOUT THE CITY OF CHINO HILLS

APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT

APPENDIX E - PROPOSED FORM OF OPINION OF BOND COUNSEL

APPENDIX F - DTC AND THE BOOK-ENTRY-ONLY SYSTEM

[THIS PAGE INTENTIONALLY LEFT BLANK]

OFFICIAL STATEMENT $19,975,000

CHINO HILLS FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2012

This Official Statement which includes the cover page, the inside front cover page, and appendices (the “Official Statement”), is provided to furnish certain information concerning the sale of the Chino Hills Financing Authority (the “Authority”) Water Revenue Bonds, Series 2012 (the “Bonds”), in the aggregate principal amount of $19,975,000.

INTRODUCTION This Introduction contains only a brief description of this issue and does not purport to be complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Bonds to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” herein).

The Authority

The Authority is a joint exercise of powers authority organized and existing under and by virtue of the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California (the “Joint Powers Act”). The City of Chino Hills (the “City”) pursuant to Resolution No. 04R-16 adopted on January 13, 2004, and the Chino Hills Redevelopment Agency (the “Agency”) pursuant to Resolution No. CHRA 04-05 adopted on January 13, 2004, formed the Authority by the execution of a joint exercise of powers agreement (the “Joint Powers Agreement”). Pursuant to the Marks-Roos Local Bond Pooling Act of 1985, as amended, constituting Article 4 (commencing with Section 6584), of Chapter 5, Division 7, Title 1 of the Government Code of the State (the “Bond Law”), the Authority is authorized, among other things, to issue revenue bonds to provide funds to finance public capital facilities.

The Authority is governed by a five-member Board which consists of all members of the City Council. The Mayor of the City is appointed the Chairperson of the Authority. The City Manager acts as the Executive Director of the Authority.

The State Legislature approved a bill, AB X1 26, pursuant to which all California redevelopment agencies, including the Agency, were dissolved as of February 1, 2012, and, certain of the Agency’s rights and obligations were transferred to the City acting as the successor agency to the Agency on that date. The dissolution of the Agency, and the assignment of the JPA Agreement to the City acting as successor agency to the Agency, will not affect the validity of the JPA Agreement.

The City

The City was incorporated in 1991. There are 46 square miles within its boundaries, including 3,000 acres of open space. The City is located in southwestern San Bernardino County (the “County”). Neighboring communities include Chino and Diamond Bar. See “APPENDIX C - GENERAL INFORMATION ABOUT THE CITY OF CHINO HILLS” herein.

2

Security and Sources of Repayment

The Bonds are secured under an Indenture, dated as of December 1, 2012, (the “Indenture”), by and between the Authority and U.S. Bank National Association, as trustee (the “Trustee”).

The Bonds are secured by (1) Authority Revenues, which consist of Installment Payments (the “Installment Payments”) to be paid by the City to the Authority as the payment for the Project, as described herein, pursuant to an Installment Purchase Agreement, dated as of December 1, 2012, by and between the Authority and the City (the “Installment Purchase Agreement”) and (2) any other amounts held in certain funds under the Indenture. The Installment Payments will be sufficient to pay, when due, the annual principal (including mandatory sinking fund redemption) and interest due on the Bonds. Pursuant to the Indenture, the Authority will assign to the Trustee, for the benefit of the Owners of the Bonds, all of its rights, title and interest under the Installment Purchase Agreement (except its rights to indemnification thereunder). For a summary of the Indenture and the Installment Purchase Agreement see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS” herein. Certain capitalized terms used in this Official Statement and not otherwise defined have the meaning given them in “APPENDIX A.”


Professional Services

U.S. Bank National Association will serve as the Trustee for the Bonds and perform the functions required of it under the Indenture for the payment of the principal of and interest on the Bonds. Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, will act as Bond Counsel and Fulbright & Jaworski L.L.P., Los Angeles, California will act as Disclosure Counsel. Harrell & Company Advisors, LLC, Orange, California, Financial Advisor, advised the City and Authority as to the financial structure and certain other financial matters relating to the Bonds. Certain matters will be passed upon for the City and the Authority by Jenkins & Hogin, LLP.

The City’s audited general purpose financial statements for the Fiscal Year ended June 30, 2012, attached hereto as “APPENDIX B” have been audited by Lance, Soll & Lunghard, LLP, Certified Public Accountants, Brea, California (the “Auditor”). As stated in their report appearing in Appendix B, the Auditors were not requested to consent to the inclusion of their report in Appendix B, nor have they undertaken to update their report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by the Auditors with respect to any event subsequent to the date of their report.

Grant Thornton LLP, Minneapolis, Minnesota will verify the mathematical accuracy of certain computations with respect to the refunding of the Prior Certificates (as defined herein).

3

Offering of the Bonds

Authority for Issuance and Delivery. The Bonds are to be issued pursuant to the Bond Law, the Indenture and by Resolution No. CHFA 12R-04 of the Authority adopted on October 23, 2012.

Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery in New York, New York on December 18, 2012 through the facilities of DTC. See “APPENDIX F - DTC AND THE BOOK-ENTRY-ONLY SYSTEM.”

Information Concerning this Official Statement

This Official Statement speaks only as of its date. The information set forth herein has been obtained by the Authority and the City with the assistance of the Financial Advisor from sources which are believed to be reliable and such information is believed to be accurate and complete, but such information is not guaranteed as to accuracy or completeness, nor has it been independently verified and is not to be construed as a representation by the Financial Advisor or the Disclosure Counsel. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended as such and are not to be construed as representations of fact. The information and expressions of opinion herein are subject to change without notice and the delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the information or opinions set forth herein or in the affairs of the City or the Authority since the date hereof.

Availability of Legal Documents. The summaries and references contained herein with respect to the Indenture, the Installment Purchase Agreement, the Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the documents described herein are available for inspection during the period of initial offering of the Bonds at the offices of the Financial Advisor. Copies of these documents may be obtained after delivery of the Bonds at the trust office of the Trustee, U.S. Bank National Association, Los Angeles, California 90071 or from the City of Chino Hills, 14000 City Center Drive, Chino Hills, California 91709.

4

THE BONDS

General Provisions

Payment of the Bonds. The Bonds will be issued in the form of fully registered Bonds in the principal amount of $5,000 each or any integral multiple thereof (“Authorized Denominations”). Interest on the Bonds is payable at the rates per annum set forth on the inside front cover page hereof, on June 1, 2013 and each December 1 and June 1 thereafter (each, an “Interest Payment Date”) until maturity. Interest on the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months. Principal on the Bonds is payable on June 1 in each of the years and in the amounts set forth on the inside front cover page hereof.

The principal of the Bonds will be payable in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the Office of the Trustee, except as provided in “APPENDIX F - DTC AND THE BOOK-ENTRY-ONLY SYSTEM.” Interest on the Bonds shall be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Bond is authenticated on or before an Interest Payment Date and after the close of business on the 15th calendar day of the month preceding such Interest Payment Date (each, a “Record Date”), in which event interest thereon shall be payable from such Interest Payment Date, (ii) a Bond is authenticated on or before the first Record Date, in which event interest thereon shall be payable from the Closing Date, or (iii) interest on any Bond is in default as of the date of authentication thereof, in which event interest thereon shall be payable from the date to which interest has previously been paid or duly provided for. Interest shall be paid in lawful money of the United States on each Interest Payment Date. Interest shall be paid by check of the Trustee mailed by first-class mail, postage prepaid, on each Interest Payment Date to the Owners of the Bonds at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date. Notwithstanding the foregoing, interest on any Bond which is not punctually paid or duly provided for on any Interest Payment Date shall, if and to the extent that amounts subsequently become available therefor, be paid on a payment date established by the Trustee to the Person in whose name the ownership of such Bond is registered on the Registration Books at the close of business on a special record date to be established by the Trustee for the payment of such defaulted interest, notice of which shall be given to such Owner not less than ten days prior to such special record date.

Book-Entry-Only System. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. Interest on and principal of the Bonds will be payable when due by wire of the Trustee to DTC which will in turn remit such interest and principal to DTC Participants (as defined herein), which will in turn remit such interest and principal to Beneficial Owners (as defined herein) of the Bonds (see “APPENDIX F - DTC AND THE BOOK-ENTRY-ONLY SYSTEM” herein). As long as DTC is the registered owner of the Bonds and DTC’s book-entry method is used for the Bonds, the Trustee will send any notices to Bond Owners only to DTC.

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

5

Redemption

Optional Redemption. The Bonds maturing on or before June 1, 2022, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing after June 1, 2022 shall be subject to optional redemption, in whole on any date, or in part in Authorized Denominations, on any Interest Payment Date on or after June 1, 2022, upon the exercise by the City of its right to cause the redemption of Bonds in accordance with the Installment Purchase Agreement, from any source of available funds, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption.

Mandatory Sinking Fund Redemption. The Bonds maturing June 1, 2032 (the “Term Bonds”) are also subject to mandatory sinking fund redemption in part, on June 1 in each of the years as set forth in the following table, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the redemption date, without premium. If some but not all of the Term Bonds have been redeemed pursuant to the optional redemption provisions of the Indenture, the principal amount of all subsequent mandatory sinking fund payments with respect to such Term Bonds will be reduced by the aggregate principal amount of such Term Bonds so optionally redeemed, such reduction to be allocated among such subsequent mandatory sinking fund payments in integral multiples of $5,000 on a basis designated by the City in a Written Certificate of the City filed with the Trustee.

SINKING FUND PAYMENT SCHEDULE FOR TERM BONDS MATURING JUNE 1, 2032

Year (June 1)

PrincipalAmount

2031 $705,000 2032 (maturity) 725,000

Notice of Redemption. When redemption is authorized or required, the Trustee on behalf and at the expense of the Authority shall mail (by first class mail) notice of any redemption to the respective Owners of any Bonds designated for redemption at their respective addresses appearing on the Registration Books at least 30 but not more than 60 days prior to the date fixed for redemption. Such notice shall state the date of the notice, the redemption date, the redemption place and the redemption price and shall designate the CUSIP numbers, if any, the Bond numbers and the maturity or maturities of the Bonds to be redeemed (except in the event of redemption of all of the Bonds of such maturity or maturities in whole), and shall require that such Bonds be then surrendered at the Office of the Trustee for redemption at the redemption price, giving notice also that further interest on such Bonds will not accrue from and after the date fixed for redemption. Neither the failure to receive any notice so mailed, nor any defect in such notice, shall affect the validity of the proceedings for the redemption of the Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption.

With respect to any notice of any optional redemption of Bonds, unless at the time such notice is given the Bonds to be redeemed shall be deemed to have been paid within the meaning of the Indenture, such notice shall state that such redemption is conditional upon receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys that, together with other available amounts held by the Trustee, are sufficient to pay the redemption price of, and accrued interest on, the Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the Authority shall not be required to redeem such Bonds. In the event a notice of redemption of Bonds contains such a condition and such moneys are not so received, the redemption of Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given, that such moneys were not so received and that there shall be no redemption of Bonds pursuant to such notice of redemption.

6

Selection of Bonds for Redemption. Whenever provision is made for the optional redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds not previously called for redemption among maturities of Bonds as directed in a Written Request of the City, and by lot among Bonds with the same maturity in any manner which the Trustee in its sole discretion shall deem appropriate. Whenever provision is made for the sinking fund redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds not previously called for redemption by lot among Bonds with the same maturity in any manner which the Trustee in its sole discretion shall deem appropriate. For purposes of such selection, all Bonds shall be deemed to be comprised of separate $5,000 denominations and such separate denominations shall be treated as separate Bonds which may be separately redeemed.

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

Effect of Notice of Redemption. Notice of redemption having been duly given, and moneys for the redemption price, and the interest to the applicable date fixed for redemption, having been set aside with the Trustee, the Bonds shall become due and payable on said date, and, upon presentation and surrender thereof at the Office of the Trustee, said Bonds shall be paid at the redemption price thereof, together with interest accrued and unpaid to said date. If, on said date fixed for redemption, moneys for the redemption price of all the Bonds to be redeemed, together with interest to said date, shall be held by the Trustee so as to be available therefor on such date, and, if notice of redemption thereof shall have been duly given and not canceled, then, from and after said date, interest on said Bonds shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the redemption of Bonds shall be held in trust for the account of the Owners of the Bonds so to be redeemed without liability to such Owners for interest thereon.

7

Scheduled Debt Service on the Bonds The following is an annualized schedule of Installment Payments, and therefore the annual scheduled debt service on the Bonds.

Bond

Year Ending

June 1 Principal Interest Annual Total

2013 $ 1,230,000.00 $ 276,081.25 $ 1,506,081.25

2014 1,645,000.00 585,150.00 2,230,150.00

2015 1,670,000.00 552,250.00 2,222,250.00

2016 1,735,000.00 485,450.00 2,220,450.00

2017 1,790,000.00 450,750.00 2,240,750.00

2018 1,860,000.00 379,150.00 2,239,150.00

2019 905,000.00 304,750.00 1,209,750.00

2020 915,000.00 291,175.00 1,206,175.00

2021 940,000.00 277,450.00 1,217,450.00

2022 970,000.00 239,850.00 1,209,850.00

2023 555,000.00 201,050.00 756,050.00

2024 570,000.00 178,850.00 748,850.00

2025 575,000.00 161,750.00 736,750.00

2026 590,000.00 150,250.00 740,250.00

2027 620,000.00 120,750.00 740,750.00

2028 640,000.00 102,150.00 742,150.00

2029 655,000.00 82,950.00 737,950.00

2030 680,000.00 63,300.00 743,300.00

2031 705,000.00 42,900.00 747,900.00

2032 725,000.00 21,750.00 746,750.00

Total $19,975,000.00 $4,967,756.25 $24,942,756.25

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THE FINANCING PLAN

The Refunding Program The City has previously caused to be executed and delivered its $9,545,000 Certificates of Participation (2002 Water System Project) (“2002 Certificates”) and its $18,210,000 Refunding Certificates of Participation (2003 Water System Project) (“2003 Certificates”) (collectively, the “Prior Certificates”), pursuant to separate trust agreements (the “Prior Agreements”) and separate installment purchase agreements between the City and the Chino Hills Capital Improvement Corporation (the “Corporation”) (the “Prior Installment Purchase Agreements”). The City pledged the Net Revenues of the Enterprise to repay amounts due under the Prior Installment Purchase Agreements and evidenced by the Prior Certificates.

On the Closing Date, a portion of the proceeds of the Bonds, together with certain other funds, will be deposited in trust with U.S. Bank National Association, as prior trustee and escrow bank (the “Escrow Bank”) pursuant to two escrow agreements relating to the Prior Certificates, each dated as of December 1, 2012, between the City, the Authority and the Escrow Bank (the “Escrow Agreements”). The deposit will be in an amount sufficient to prepay principal and interest evidenced by Prior Certificates through and including January 1, 2013 and to pay the prepayment price of the Prior Certificates upon early call and prepayment of the Prior Certificates on January 1, 2013. The lien of the Prior Certificates created by the Prior Agreements and the lien of the Prior Installment Purchase Agreements including, without limitation, the pledge of the Net Revenues, will be discharged, terminated and of no further force and effect upon the deposit with the Escrow Bank of the amounts required pursuant to the Escrow Agreements. See “CONCLUDING INFORMATION - Verifications of Mathematical Computations.”

Estimated Sources and Uses of Funds

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

Sources of Funds Par Amount of Bonds $19,975,000.00 Net Original Issue Premium 1,796,818.15 Funds on Deposit with Prior Certificates’ Trustee 897,817.50 Available Funds $22,669,635.65 Uses of Funds Transfer to Escrow Bank for 2002 Certificates $ 9,336,317.40 Transfer to Escrow Bank for 2003 Certificates 8,298,828.33 Acquisition Fund 3,550,000.00 Reserve Fund 1,120,375.00 Purchaser’s Discount 150,152.26 Costs of Issuance Fund (1) 213,962.66 Total Uses $22,669,635.65 ____________________________________

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

Deposit to Acquisition Fund. The City expects to use the funds deposited in the Acquisition Fund to replace certain water mains in its Sleepy Hollow and Los Serranos neighborhoods and to replace an existing pressure reducing valve regulating water into the Sleepy Hollow neighborhood. See “THE ENTERPRISE - Capital Improvements.”

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SOURCES OF PAYMENT FOR THE BONDS

General

The Bonds are special obligations of the Authority and are payable solely from Authority Revenues, which consist of all Installment Payments, and the other assets pledged therefor under the Indenture. In order to secure the payment of the principal of, premium, if any, and interest on the Bonds in accordance with their terms and the provisions of the Indenture, the Authority has pledged to the Owners of the Bonds, and grant thereto a lien on and a security interest in, all of the Authority Revenues and any other amounts held in the Bond Fund and the Reserve Fund. Said pledge constitutes a first lien on and security interest in such assets.

The Authority has transferred, conveyed and assigned to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of its right, title and interest in and to the Installment Purchase Agreement (excepting its right to indemnification) including the right to receive Installment Payments from the City.

Nothing in the Indenture or in the Bonds affects or impairs the obligation of the Authority, which is absolute and unconditional, to pay the principal of and interest on the Bonds to the respective Owners of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, but only out of the Authority Revenues and other assets pledged therefor in the Indenture, or affects or impairs the right of such Owners, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds.

THE BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM AND SECURED BY A PLEDGE OF AUTHORITY REVENUES AND THE OTHER ASSETS PLEDGED THEREFOR UNDER THE INDENTURE. THE AUTHORITY HAS NO TAXING POWER. THE BONDS DO NOT CONSTITUTE A DEBT OR LIABILITY OF THE CITY OR OF THE STATE AND NEITHER THE FAITH AND CREDIT OF THE CITY NOR OF THE STATE ARE PLEDGED TO THE PAYMENT OF THE BONDS.

Pledge of Net Revenues

Pursuant to the Installment Purchase Agreement, the City is obligated to pay Installment Payments to the Authority from Net Revenues. The amount of the Installment Payment payable by the City on each Installment Payment Date will be equal to the interest on, or the principal of (including mandatory sinking fund redemptions) and interest on, as applicable, the Bonds due on the following Interest Payment Date. In order to secure the payment of the Senior Obligations (defined below), the City has pledged to the owners of Senior Obligations, and grants thereto a lien on and a security interest in, all of the Net Revenues and any other amounts held in the Senior Obligation Payment Account established and maintained by the City. Said pledge constitutes a first lien on and security interest in such assets.

Certain defined terms used for the purpose of calculating Net Revenues are listed below.

“Enterprise” means properties and assets, real and personal, tangible and intangible, of the City, now or hereafter existing, used or pertaining to the generation, transmission, distribution and sale of water, including all additions, extensions, expansions, improvements and betterments thereto and equippings thereof; provided, however, that to the extent the City is not the sole owner of an asset or property, only the City’s ownership interest in such asset or property shall be considered to be part of the Enterprise.

“Revenues” means, for any period, all income and revenue received by the City from the operation or ownership of the Enterprise, determined in accordance with Generally Accepted Accounting Principles, including, without limiting the generality of the foregoing (a) all income, rents, rates, fees, charges or other moneys derived from the services, facilities and commodities sold, furnished or supplied through the facilities of the Enterprise, but excluding amounts representing development fees received by the City

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in accordance with §66000 et seq. of the California Government Code, (b) the earnings on and income derived from the investment of such income, rents, rates, fees, charges or other moneys to the extent that the use of such earnings and income is limited by or pursuant to the law to the Enterprise, (c) Subsidy Payments, and (d) the proceeds derived by the City directly or indirectly from the sale, lease or other disposition of a part of the Enterprise; provided, however, that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the City.

“Operation and Maintenance Expenses” means, for any period, the reasonable and necessary costs spent or incurred by the City for maintaining and operating the Enterprise, calculated in accordance with Generally Accepted Accounting Principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Enterprise in good repair and working order, and including Administrative Costs, salaries and wages of employees, payments to its employee retirement systems (to the extent paid from Revenues), overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers, insurance premiums, and payments due under the Water Purchase Agreement, but excluding in all cases (a) depreciation, replacement and obsolescence charges or reserves therefor, (b) amortization of intangibles or other bookkeeping entries of a similar nature, (c) costs of capital additions, replacements, betterments, extensions or improvements to the Enterprise, which under Generally Accepted Accounting Principles are chargeable to a capital account or to a reserve for depreciation, and (d) charges for the payment of Debt Service on Obligations. See “THE ENTERPRISE - The Water Purchase Agreement” for a discussion and definition of the Water Purchase Agreement.

“Net Revenues,” for any period, are defined in the Installment Purchase Agreement as the “Revenues” for such period, less the “Operation and Maintenance Expenses” for such period.

“Debt Service” means, for any period, for any Obligation, that portion of the Obligation Payments for such Obligation required to be made in such period; provided, however, that (a) if amounts constituting accrued interest or capitalized interest have been deposited with an Obligation Trustee for Obligations, then the interest paid with respect to such Obligations from such amounts shall be disregarded and not included in calculating Debt Service, (b) if moneys or Defeasance Securities have been deposited by the City into a separate fund or account or are otherwise held by the City or by a fiduciary to be used to pay Debt Service on specified Obligations, and such Obligations are discharged, or no longer outstanding, pursuant to the terms of the instrument under which they are issued or arise, then the Debt Service paid from such moneys or Defeasance Securities, or from the earnings thereon, shall be disregarded and not included in calculating Debt Service, (c) the amount on deposit in an Obligation Reserve Fund on any date of calculation of Debt Service shall be deducted from the amount of principal due at the final maturity of the Obligations for which such Obligation Reserve Fund was established and in each preceding year until such amount is exhausted, and (d) with respect to Obligation Payments, including the Installment Payments, that are not comprised of separate payments of interest and principal but that, rather, are required pursuant to the instrument under which they arise to be paid in amounts sufficient to pay principal and interest on bonds, notes or other obligations of an entity other than the City, for purposes of calculating Debt Service, interest payments and principal payments (whether at maturity or by redemption or prepayment) with respect to such bonds, notes or other obligations shall be deemed to be interest payments and principal payments with respect to such Obligation Payments.

“Obligations” means Senior Obligations and Subordinate Obligations.

“Senior Obligations” means the Installment Purchase Agreement and all agreements contracts or leases of the City authorized and executed by the City under and pursuant to applicable law, the installment, lease or other similar payments under which are, in accordance with the terms of the Installment Purchase Agreement, payable from the Net Revenues on a parity with the Installment Payments.

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“Subordinate Obligations” means all agreements contracts or leases of the City authorized and executed by the City under and pursuant to applicable law, the installment, lease or other similar payments under which are, in accordance with the terms of the Installment Purchase Agreement, payable from the Net Revenues on a basis subordinate to the Senior Obligation Payments.

“Subsidy Payments” means payments with respect to the interest due on an Obligation made by the United States Treasury to the Obligation Trustee therefor pursuant to Section 54AA of the Code, Section 6431 of the Code or Section 1400U-2 of the Code or any successor to or extension or replacement of any of such provisions of the Code, or any provisions of the Code that create substantially similar direct-pay subsidy programs to such programs created pursuant to Sections 54AA, Section 6431 or Section 1400U-2 of the Code.

Allocation of Revenues and Net Revenues

The City will establish and maintain within its treasury, so long as any Bonds and other Senior Obligations remain outstanding, a separate fund designated the “City of Chino Hills Water Enterprise Fund” (the “Enterprise Fund”). The City will establish and maintain within the Enterprise Fund, the “Senior Obligation Payment Account” and, if and when it issues or incurs Subordinate Obligations, the “Subordinate Obligation Payment Account.”

All Revenues received by the City shall be deposited in the Enterprise Fund when and as received. The City shall pay from the Enterprise Fund all Operation and Maintenance Expenses (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Expenses, the payment of which is not immediately required) as and when the same shall be due and payable. After having paid, or having made provision for the payment of, Operation and Maintenance Expenses, the City shall set aside and deposit or transfer, as the case may be, from the Enterprise Fund the amounts set forth below at the following times and in the following order of priority:

(i) Senior Obligation Payment Account. On or before each date on which Senior Obligation Payments are due and payable, the City shall transfer legally available Net Revenues to the Senior Obligation Payment Account in an amount which, together with other amounts on deposit therein, is at least equal to such Senior Obligation Payments; provided, however, that no such deposit need be made if amounts on deposit in the Senior Obligation Payment Account are at least equal to the amount of such Senior Obligation Payments.

(ii) Senior Obligation Reserve Funds. The City shall transfer to each Senior Obligation Trustee with which a Senior Obligation Reserve Fund is established and held, for deposit in such Senior Obligation Reserve Fund or for payment of Reserve Facility Costs (as defined below) with respect to a Reserve Facility held in such Reserve Fund in lieu of cash, as applicable, legally available Net Revenues in an amount equal to the amount, if any, required to be deposited therein to build up or replenish such Senior Obligation Reserve Fund as and to the extent required by the instrument pursuant to which such Senior Obligation is issued or incurred or to pay such Reserve Facility Costs as provided in such Reserve Facility or in the contract or agreement entered into by the City and the issuer of such Reserve Facility in connection with the issuance of such Reserve Facility, as applicable. In the event that there are insufficient Net Revenues to make all of the transfers contemplated by this paragraph, then said transfers shall be made, as nearly as practicable, pro rata, based on the respective principal amounts of the Senior Obligations, deposits to the Senior Obligation Reserve Funds for which, or payments of Reserve Facility Costs with respect to which, are required to be made.

(iii) Subordinate Obligation Payment Account. On or before each date on which Subordinate Obligation Payments are due and payable, the City shall transfer legally available Net Revenues to the Subordinate Obligation Payment Account in an amount which, together with other amounts on deposit therein, is at least sufficient to such Subordinate Obligation Payments; provided,

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however, that no such deposit need be made if amounts on deposit in the Subordinate Obligation Payment Account are at least equal to the amount of such Subordinate Obligation Payments.

(iv) Subordinate Obligation Reserve Funds. The City shall transfer to each Subordinate Obligation Trustee with which a Subordinate Obligation Reserve Fund is established and held, for deposit in the such Subordinate Obligation Reserve Fund or for payment of Reserve Facility Costs with respect to a Reserve Facility held in such Reserve Fund in lieu of cash, as applicable, legally available Net Revenues in an amount equal to the amount, if any, required to be deposited therein to build up or replenish such Subordinate Obligation Reserve Fund as and to the extent required by the instrument pursuant to which such Subordinate Obligation is issued or incurred or to pay such Reserve Facility Costs as provided in such Reserve Facility or in the contract or agreement entered into by the City and the issuer of such Reserve Facility in connection with the issuance of such Reserve Facility, as applicable. In the event that there are insufficient Net Revenues to make all of the transfers contemplated by this paragraph, then said transfers shall be made, as nearly as practicable, pro rata, based on the respective principal amounts of the Subordinate Obligations, deposits to the Subordinate Obligation Reserve Funds for which, or payments of Reserve Facility Costs with respect to which, are required to be made.

“Reserve Facility Costs” means, with respect to a Reserve Facility, the principal amount of any draws under such Reserve Facility and related reasonable expenses incurred by the issuer of such Reserve Facility and interest thereon as provided therein or in the contract or agreement entered into by the City and such issuer in connection with the issuance of such Reserve Facility.

Amounts required or permitted to be deposited or transferred pursuant to paragraph (ii), (iii), or (iv) above, shall not be so deposited or transferred unless the City shall have determined that there will be sufficient Net Revenues available to make the required deposits or transfers pursuant to all paragraphs prior to said paragraph on the dates on which such deposits or transfers are required to be made. So long as the City has determined that Net Revenues will be sufficient to make all of the deposits or transfers required to be made pursuant to all paragraphs above, on the dates on which such deposits or transfers are required to be made, Net Revenues on deposit in the Enterprise Fund may from time to time be used for any purpose for which such funds may be legally applied.

Rate Covenant

Pursuant to the Installment Purchase Agreement, the City covenants that it will prescribe, revise and collect rates, fees and charges for the services of the Enterprise that, after allowances for contingencies and errors in estimates, shall produce Revenues sufficient in each Fiscal Year to provide Net Revenues at least equal to (i) 1.15 times the Debt Service on the Senior Obligations payable during such Fiscal Year, and (ii) and 1.00 times the sum of (A) the Debt Service on the Senior Obligations payable during such Fiscal Year, plus (B) the Debt Service on the Subordinate Obligations payable during such Fiscal Year, plus (C) the amount of Reserve Facility Costs payable during such Fiscal Year.

If, in any Fiscal Year, rates, fees and charges for the services of the Enterprise, after allowances for contingencies and errors in the estimates, will produce Revenues insufficient in such Fiscal Year to provide Net Revenues at least equal to (i) 1.15 times the Debt Service on the Senior Obligations payable during such Fiscal Year, and (ii) and 1.00 times the sum of (A) the Debt Service on the Senior Obligations payable during such Fiscal Year, plus (B) the Debt Service on the Subordinate Obligations payable during such Fiscal Year, plus (C) the amount of Reserve Facility Costs payable during such Fiscal Year, unless the City certifies that, in its best judgment, such insufficiency is unlikely to occur in the next succeeding Fiscal Year, the City shall employ an Independent Consultant to make recommendations as to a revision of the rates, fees and charges for the services of the Enterprise or the methods of operation of the Enterprise that will result in producing Net Revenues in the amount specified above.

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The City shall, promptly upon its receipt of such recommendations from such Independent Consultant, subject to applicable requirements or restrictions imposed by law, and subject to a good faith determination of the City Council that such recommendations, in whole or in part, are in the best interests of the City, revise the rates, fees and charges for the services of the Enterprise or its methods of operation or collections and shall take such other action as shall be in conformity with such recommendations. In the event that the City fails to comply with such recommendations, subject to the applicable requirements or restrictions imposed by law and to the determination of the City Council of the City that such recommendations are in the best interests of the City, any Senior Obligation Trustee, may, in addition to the rights and remedies elsewhere set forth herein, and shall, upon the written request of the owners of a majority in principal amount of such Senior Obligations, institute and prosecute an action or proceeding in a court of competent jurisdiction to compel the City to comply with such recommendations and requirements. If the City complies in all material respects with the reasonable recommendations of the Independent Consultant in respect to said rates, fees and charges for the services of the Enterprise and methods of operation or collection, the City shall be deemed to have complied with the covenants related thereto contained in the Installment Purchase Agreement, notwithstanding that Net Revenues shall be less than the amount required under the Installment Purchase Agreement for such Fiscal Year; provided, however, that such rates, fees and charges for the services of the Enterprise and methods of operation or collection shall produce Net Revenues equal to at least 1.00 times the sum of (i) the Debt Service on the Senior Obligations payable during such Fiscal Year, plus (ii) the Debt Service on the Subordinate Obligations payable during such Fiscal Year, plus (iii) the amount of Reserve Facility Costs payable during such Fiscal Year; provided, further, however, that the provisions described in this sentence will not be construed as in any way excusing the City from taking any action or performing any duty required under this Installment Purchase Agreement or be construed as constituting a waiver of any other Event of Default.

Additional Indebtedness

No Superior Obligations. In order to protect the availability of the Net Revenues and the security for the Installment Payments and additional Senior Obligations, the City shall not, so long as any Senior Obligation remains unpaid, issue or incur any obligations payable from Revenues or Net Revenues on a basis senior to the Installment Payments or additional Senior Obligations.

Parity Senior Obligations. The City may at any time issue or incur additional Senior Obligations payable from Net Revenues on a parity with the Installment Payments and all other Senior Obligations theretofore issued or incurred, but only subject to the following conditions:

(i) upon the issuance or incurrence of such Senior Obligations, no Event of Default shall have occurred and be continuing;

(ii) Net Revenues, calculated in accordance with Generally Accepted Accounting Principles, for the latest Fiscal Year or any more recent 12 month period selected by the City ending not more than 60 days prior to the issuance or incurrence of such Senior Obligations, as shown by the books of the City, plus, at the option of the City, the additional allowance described in the following sentence, shall have amounted to (i) at least 1.25 times the Assumed Maximum Annual Debt Service on all Senior Obligations to be outstanding or unpaid upon the issuance or incurrence of such Senior Obligations, and (ii) at least 1.00 times the sum of (A) Assumed Maximum Annual Debt Service on all Senior Obligations and all Subordinate Obligations to be outstanding or unpaid upon the issuance or incurrence of such Senior Obligations, plus (B) the amount of Reserve Facility Costs that became due and payable during such Fiscal Year or other 12 month period. The calculation of Net Revenues set forth in the preceding sentence may be adjusted to reflect (I) rates that have been adopted but that were not in effect during the period of calculation, (II) existing dwelling units or structures that were not connected during the period of calculation, (III) wholesale contracts to provide service to other entities that were signed but were not in effect during the period of calculation, and (IV) the full year impact of rate increases and contracts that

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were in effect for a portion of the period of calculation. Notwithstanding the foregoing, if such Senior Obligations are being issued or incurred for the purpose of refunding outstanding Senior Obligations, the provisions of the first sentence of this paragraph need not be complied with if Assumed Debt Service on Senior Obligations in each Fiscal Year, calculated for all Senior Obligations to be outstanding or unpaid after the issuance or incurrence of such Senior Obligations, shall be less than or equal to Assumed Debt Service on Senior Obligations in such Fiscal Year, calculated for all Senior Obligations outstanding or unpaid immediately prior to the issuance or incurrence of such Senior Obligations;

(iii) a Senior Obligation Reserve Fund shall be funded for such Senior Obligations, with cash or a Reserve Facility that is at least equal to the lesser of (i) Assumed Maximum Annual Debt Service on such Senior Obligations, (ii) 125% of the average annual Assumed Debt Service for such Senior Obligations, (iii) 10% of the principal amount of such Senior Obligations or (iv) such lesser amount determined by the City and such as will result in a confirmation by each rating agency then maintaining a rating on the Senior Obligations of its then-current rating on such Senior Obligations, and if the instrument pursuant to which such Senior Obligations are issued or incurred provides that a line of credit, letter of credit, insurance policy, surety bond or other credit source may be provided in substitution of the cash in such Senior Obligation Reserve Fund, such line of credit, letter of credit, insurance policy, surety bond or other credit source shall be a Reserve Facility;

(iv) the interest payments dates for such Senior Obligations shall be on June 1 and December 1 and the principal payment dates for such Senior Obligations shall be on June 1; and

(v) the Senior Obligation Trustee for such Senior Obligations shall be the Trustee.

The following defined terms are used for the purposes of calculating the ratios required for the issuance of Additional Obligations:

“Assumed Debt Service” means, for any period, for any Obligation, that portion of the Obligation Payments for such Obligation required to be made in such period; provided, however, that (a) in determining the principal amount due in each period, payment shall be assumed to be made in accordance with any amortization schedule established for such Obligation, including any scheduled payment at maturity or mandatory redemption or prepayment of such Obligation on the basis of accreted value and, for such purpose, the scheduled payment at maturity or redemption payment or prepayment shall be deemed a principal payment, (b) in determining the interest due in each period, interest payable at a fixed rate shall be assumed to be made at such fixed rate and on the required payment dates, (c) if any outstanding Obligations constitute Variable Rate Indebtedness, the interest rate on such Obligations shall be assumed to be 110% of the rate of interest on such Obligations on the date of calculation, (d) if Additional Obligations proposed to be incurred will be Variable Rate Obligations, then such Additional Obligations shall be assumed to bear interest at (i) if interest on such Variable Rate Obligations is excludable from gross income under applicable provisions of the Code, the rate quoted in the “25 Revenue Bond Index” for the last week of the month preceding the date of sale of such Additional Obligations, as published in The Bond Buyer, or if that index is no longer published, another similar index selected by the City, and (ii) if such interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities, plus 50 basis points, (e) if any outstanding Obligations constitute Credit Enhanced Obligations or if Additional Obligations proposed to be incurred would constitute Credit Enhanced Obligations, then (i) Assumed Debt Service on such Obligations shall be deemed to include any periodic payment payable to the Credit Enhancer as a condition of the Credit Enhancer’s standing ready to provide moneys necessary for payment to the holders of such Credit Enhanced Obligations, and (ii) Assumed Debt Service on such Obligations shall not be based upon the terms of any reimbursement obligations to the Credit Enhancer except to the extent and for periods during which payments have been required to be made pursuant to such reimbursement obligations due to the Credit Enhancer’s advancing funds and not being reimbursed, (f) if amounts constituting accrued interest or capitalized interest have

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been deposited with an Obligation Trustee for Obligations, then the interest payable with respect to such Obligations from such amounts shall be disregarded and not included in calculating Assumed Debt Service, (g) if moneys or Defeasance Securities have been deposited by the City into a separate fund or account or are otherwise held by the City or by a fiduciary to be used to pay Debt Service on specified Obligations, and such Obligations are discharged, or no longer outstanding, pursuant to the terms of the instrument under which they are issued or arise, then the Debt Service to be paid from such moneys or Defeasance Securities, or from the earnings thereon, shall be disregarded and not included in calculating Assumed Debt Service, (h) the amount on deposit in an Obligation Reserve Fund on any date of calculation of Assumed Debt Service shall be deducted from the amount of principal due at the final maturity of the Obligations for which such Obligation Reserve Fund was established and in each preceding year until such amount is exhausted, and (i) with respect to Obligation Payments, including the Installment Payments, that are not comprised of separate payments of interest and principal but that, rather, are required pursuant to the instrument under which they arise to be paid in amounts sufficient to pay principal and interest on bonds, notes or other obligations of an entity other than the City, for purposes of calculating Assumed Debt Service, interest payments and principal payments (whether at maturity or by redemption or prepayment) with respect to such bonds, notes or other obligations shall be deemed to be interest payments and principal payments with respect to such Obligation Payments.

“Assumed Maximum Annual Debt Service” means, at any point in time, with respect to Obligations to be outstanding immediately after the incurring of the Obligations in connection with the incurrence of which Assumed Maximum Annual Debt Service is being calculated, the maximum amount of Assumed Debt Service on such Obligations in the then current or any future Fiscal Year.

Subordinate Obligations. The City may at any time issue or incur Subordinate Obligations payable from Net Revenues on a basis subordinate to the Senior Obligations and on a parity with all other Subordinate Obligations theretofore issued or incurred, but only subject to the following conditions: Net Revenues, calculated in accordance with Generally Accepted Accounting Principles, for the latest Fiscal Year or any more recent 12 month period selected by the City ending not more than 60 days prior to the issuance or incurrence of such Subordinate Obligations, as shown by the books of the City, plus, at the option of the City, the additional allowance described in the following sentence, shall, after deducting all amounts required for the payment of Senior Obligations, have amounted to at least 1.00 times the sum of (a) Assumed Maximum Annual Debt Service on all Subordinate Obligations to be outstanding or unpaid upon the issuance or incurrence of such Senior Obligations, plus (b) the amount of Reserve Facility Costs that became due and payable during such Fiscal Year or other 12 month period. The calculation of Net Revenues set forth in the preceding sentence may be adjusted to reflect (i) rates that have been adopted but that were not in effect during the period of calculation, (ii) existing dwelling units or structures that were not connected during the period of calculation, (iii) wholesale contracts to provide service to other entities that were signed but were not in effect during the period of calculation, and (iv) the full year impact of rate increases and contracts that were in effect for a portion of the period of calculation. Notwithstanding the foregoing, if such Subordinate Obligations are being issued or incurred for the purpose of refunding outstanding Subordinate Obligations, the provisions of the first sentence of this paragraph need not be complied with if Assumed Debt Service on Subordinate Obligations in each Fiscal Year, calculated for all Subordinate Obligations to be outstanding or unpaid after the issuance or incurrence of such Subordinate Obligations, shall be less than or equal to Assumed Debt Service on Subordinate Obligations in such Fiscal Year, calculated for all Subordinate Obligations outstanding or unpaid immediately prior to the issuance or incurrence of such Subordinate Obligations.

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Reserve Fund

Pursuant to the Indenture, the Trustee will establish and maintain a Reserve Fund. The Trustee shall apply amounts in the Reserve Fund solely for the purpose of (i) paying principal of or interest on the Bonds when due and payable to the extent that moneys deposited in the Interest Account or Principal Account are not sufficient for such purpose, and (ii) redeeming Bonds in accordance with the provisions of the Indenture. On or before each Interest Payment Date, after the required deposits to the Interest Account and the Principal Account have been made, the Trustee will deposit Authority Revenues in the Reserve Fund; provided, that no such deposit need to be made so long as the balance therein is equal to the Reserve Requirement. The Reserve Requirement, as defined in the Indenture, means as of the date of any calculation, an amount equal to lesser of (a) the maximum amount of annual debt service coming due and payable on the Bonds in the current or any future Bond Year, or (b) $1,120,375. The Reserve Requirement as of the Closing Date is $1,120,375.

Earnings on the investment of the amount in the Reserve Fund shall be retained therein to the extent required to maintain the Reserve Requirement, and otherwise shall be transferred to the Interest Account to be applied as a credit against the next succeeding Installment Payments.

Whenever Bonds are to be optionally redeemed in part, a proportionate share of the amount on deposit in the Reserve Fund shall be transferred by the Trustee from the Reserve Fund to the Redemption Fund or to such deposit held by the Trustee and shall be applied to the redemption of said Bonds; provided, however, that such amount shall be so transferred only if and to the extent that the amount remaining on deposit in the Reserve Fund will be at least equal to the Reserve Requirement (excluding from the calculation thereof said Bonds to be redeemed).

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THE ENTERPRISE

History and Service Area

The predecessor to the City’s water system was the San Bernardino County Waterworks District No. 8, (the “District”). The District was originally formed in the early 1920s to service an area in western San Bernardino County (the “County”) commonly known as Sleepy Hollow, with approximately 100 service connections. In August, 1983, the territory served by the District was expanded to a size including the present service area with the acquisition and consolidation of five separate water companies. On October 15, 1989 the District sold approximately 25% of the District’s service area (including the related distribution pipelines) to the Monte Vista Water District (“Monte Vista”) and the City of Chino. The service area sold is located east of Highway 71, outside of what is now the city limits of the City.

Nearly all of the District’s retained service area was incorporated as the City on December 1, 1991. At the same time, the County Board of Supervisors dissolved the District and the District’s water system was transferred to the City. The water system is owned, operated and accounted for by the City as a department of the City on an enterprise basis.

The City’s water system currently serves a population of approximately 75,000.

Water Supply

The City has five different sources of water supply, providing a maximum of 41.1 million gallons per day (“mgd”) capacity of potable water and 1.79 mgd capacity of recycled water. The City’s average daily demand in Fiscal Year 2011/12 was 15 mgd and maximum daily demand was 25.7 mgd, including recycled water.

Chino Basin

The City’s water rights to pump from the Chino Basin have primarily been established by a court decision, the Chino Basin Municipal Water District vs. the City of Chino et al, San Bernardino Superior Court Number 164327 (the “Chino Basin Judgment”), dated January 27, 1978. This decision adjudicated all groundwater rights in Chino Basin and contains a physical solution to meet the requirements of water users having rights in or dependent upon the Chino Basin. The Chino Basin Judgment declared that the safe yield of the Chino Basin is 140,000 acre-feet per year, which is allocated among three classes of water users (or “pools”): (i) overlying agricultural - 82,800 acre-feet per year, (ii) overlying nonagricultural (industries) - 7,366 acre-feet per year, and (iii) appropriative (municipal) - 49,834 acre-feet per year. A fundamental premise of the physical solution is that all Chino Basin water users, including the City, will be allowed to pump sufficient water from the Chino Basin to meet such users’ requirements. To the extent that pumping by such users exceeds the share of the safe yield assigned to the overlying pools (or the operating safe yield in the case of the appropriative pool) each pool will provide funds to the Chino Basin Watermaster to replace the overproduction with supplemental water which is primarily water imported into the Chino Basin.

Pursuant to the Chino Basin Adjudication, the City was initially allocated a safe yield of 2,111 acre-feet per year. The City was allowed to augment its safe yield by transfers of 1,945 acre-feet of unused safe yield allocations from the agricultural pool to the appropriative pool due to a permanent reallocation of a portion of the agricultural pool as well as an allocation resulting from conversion of agricultural property to urban property. In total, the City’s operating safe yield is currently 4,056 acre-feet per year. The City is also allowed to pump unused carryover from prior years. If the City pumps groundwater from the Chino Basin in excess of the operating safe yield assigned the City under the Chino Basin Judgment, as adjusted, the City pays a replenishment assessment to the Chino Basin Watermaster for purchase of

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imported water for replenishment. However, the City does get a credit for any recharge to the Chino Basin provided by the Inland Empire Utilities Agency (“IEUA”) from certain recycled water.

The City also provides water to three users that have rights to groundwater in the Chino Basin -- Los Serranos Golf Club, Boys Republic, and Higgins Brick. The City is allowed to pump groundwater from the Chino Basin on their behalf and such amounts are not applied to the City’s operating safe yield.

The City’s groundwater facilities include 9 active wells. However, only 1 deep well and 3 shallow wells are currently used in operations, with a 5th well expected to come on-line during 2012/13. The City does not generally pump from the remaining wells due to the ground subsidence dispute described below, as well as potential contamination at deeper wells from naturally occurring arsenic and at shallow wells from nitrates. Instead, the City has entered into an agreement with Monte Vista under which Monte Vista will pump groundwater from the Chino Basin on behalf of the City from wells located outside the subsidence area and deliver such water to the City.

In Fiscal Year 2011/12, the City pumped approximately 2.88 mgd from the Chino Basin groundwater basin, or 3,229 acre-feet.

The Chino Basin serves as a storage site for 100,000 acre-feet of Metropolitan Water District of Southern California (“MWD”) water to be used in connection with the dry-year yield program, a program used during drought conditions. Under the program, under a dry year condition, members in the Chino Basin are required to pump some of this water each year in-lieu of purchasing a like amount of MWD water from the Water Facilities Authority (the “Water Facilities Authority”). During the last drought, the City did pump more groundwater from the Chino Basin and purchase less water from the Water Facilities Authority.

Ground Subsidence Dispute. The City of Chino (“Chino”) has alleged that certain deep aquifer pumping by the City has caused ground subsidence within the city limits of Chino. This claim was raised by motion in connection with the Chino Basin Judgment, in which all groundwater rights in the Chino Basin were adjudicated and where the court has retained continuing jurisdiction. In connection with this claim, the City and Chino entered into an agreement (the “Forbearance Agreement”) under which each agreed to reduce pumping in the subsidence area by 1,500 acre-feet per year for a period of three successive one year terms. The Forbearance Agreement was extended for an additional one year period that ended in August 2005. During the forbearance period, the Watermaster monitored ground water levels and conducted studies to determine the cause of the subsidence. As of January 31, 2006, the Watermaster asserted that it had concluded the necessary subsidence studies and distributed a draft Guidance Criteria for MZ-1 Producers calling for the voluntary reduction of pumping from the deep aquifer to certain levels based upon the Watermaster’s studies. The City disputed the conclusions of the studies and believes additional studies are necessary to determine the amount of water that can be safely drawn from the subsidence area.

In the fall of 2007, the City and the Watermaster stipulated to a Long Term Plan (“Stipulation”) that provides in essence for (i) continued testing in the subsidence area to determine how much water can be safely pumped from the deep aquifer, and (ii) to the extent that it is determined it would be prudent for the City to relocate some of its pumping activities, that the parties would work together to review other areas of the Basin from which the City can pump to replace the amount it had been pumping from the deep aquifer. If it is finally established that pumping from the deep aquifer by the City is contributing to the subsidence, the City along with other pumping entities may be required to permanently reduce its pumping activities in the subsidence area. The City believes the Watermaster is required to provide the City with an alternative source, at no cost to the City, or otherwise provide remuneration to the City if the City relocates its pumping facilities, should it be determined that it would be prudent for the City to reduce its pumping in the subsidence area. The Watermaster believes that it has no such obligation. However, as part of the Stipulation, the parties agreed that this issue would be resolved, if necessary, in the future.

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The City expects, but cannot guarantee, that the resolution of this issue will not significantly impact the operation of the Enterprise.

Monte Vista Water District

In July 1998, the City entered into an agreement with Monte Vista (the ‘‘Monte Vista Agreement”) to purchase water from Monte Vista, a member of the Water Facilities Authority described below. Under the terms of the Monte Vista Agreement, Monte Vista will provide the City up to 20.22 mgd of water. The Monte Vista Agreement renews automatically each year. Approximately 42% of the Monte Vista Water District’s water supply is purchased from MWD and is treated at the Agua de Lejos Facility described below.

In Fiscal Year 2011/12, the City purchased an average 4.57 mgd from Monte Vista under the Monte Vista Agreement, or 5,114 acre-feet.

As described above, the City entered into an agreement with Monte Vista under which Monte Vista will pump groundwater from the Chino Basin on behalf of the City from wells located outside the subsidence area and deliver such water to the City. Such water is not taken into account in the amount that can be purchased directly from Monte Vista.

The City has also entered into a separate agreement with Monte Vista pursuant to which the City provided certain funds toward the construction of a new well to be operated by Monte Vista, and the City has the right to utilize up to 0.7 mgd of the production of such well, up to 65.5 acre-feet per month. In Fiscal Year 2011/12, the City purchased an average 0.43 mgd from water produced by this well, or 481 acre-feet. Such water is not taken into account in the amount that can be purchased under the Monte Vista Agreement nor is it counted against the City’s safe yield from the Chino Basin.

Water Facilities Authority

The City receives an allocation of 12.72 mgd of water through the City’s participation in the Water Facilities Authority. In 1983, to accommodate future water quality and volume needs, the City joined the Water Facilities Authority, a joint powers authority, to facilitate financing and construction of a regional water treatment facility for State Water Project water purchased from MWD (the “Agua de Lejos Facility”). The Agua de Lejos Facility was completed and operational by October 1989, and was designed to meet the requirements of the Federal Safe Drinking Water Act and State water quality standards. The Agua de Lejos Facility treats MWD water purchased from IEUA.

In Fiscal Year 2011/12, the City purchased an average 1.96 mgd from the Water Facilities Authority, or 2,198 acre-feet.

Chino Basin Desalter Authority

The City and the Chino Basin Desalter Authority (the “Desalter Authority”) are parties to a Water Purchase Agreement under which the City has agreed to purchase at least 4,200 acre-feet of desalter water each Fiscal Year. See “The Water Purchase Agreement” below. The City’s actual purchases are approximately 17% of the total acre-feet produced by the Desalter Authority, which are currently slightly higher than 4,200 acre-feet per year, or 3.75 mgd.

IEUA Recycled Water

The City has the ability to purchase up to 2,000 acre-feet per year of recycled water from IEUA. Purchases in recent years have averaged 1,600 to 1,700 acre-feet, or 1.42 mgd. IEUA is currently beginning an expansion of their storage and delivery facilities which would allow the City to serve additional recycled water within the central area of the City. This expansion is scheduled for completion in summer 2014 and will capture additional users such as City’s Community Park, Ruben S. Ayala High

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School, McCoy Equestrian Center, the City’s new Community Center and Government Center and the Shoppes at Chino Hills retail center. The City estimates this would result in an additional 100 acre-feet of use per year of recycled water.

A five year history of water purchases and pumping for the Enterprise is shown below.

CHINO HILLS WATER SYSTEM HISTORICAL WATER PRODUCTION BY SOURCE

(IN ACRE-FEET)

Fiscal Year Ending June 30

Chino Basin

Monte Vista

Monte Vista Well

Water Facilities Authority

Desalter

Authority IEUA Total 2008 2,489.9 4,524.1 - 8,089.4 2,721.6 1,478.9 19,303.9 2009 1,748.1 5,368.7 - 5,417.0 4,274.8 1,284.8 18,093.4 2010 1,446.4 6,132.4 - 4,016.0 4,394.6 1,494.6 17,484.0 2011 1,985.5 6,696.8 - 1,511.6 4,266.4 1,614.4 16,074.7 2012 3,228.5 5,113.9 480.7 2,197.6 4,236.3 1,533.5 16,790.5

______________________________ Source: Chino Hills Water Department.

The Water Purchase Agreement

The City and the Desalter Authority, a joint powers authority of which the City is a member, are parties to a Water Purchase Agreement (the “Water Purchase Agreement”). Pursuant to the Water Purchase Agreement, the Desalter Authority agrees to provide the City, and the City agrees to purchase, its pro rata share of desalter water each Fiscal Year (the “Project Allotment”). The City’s Project Allotment of 4,200 acre-feet is 17.07% of the total desalter water available each year. The Desalter Authority charges the City under the Water Purchase Agreement related costs including an amount sufficient to cover the City’s share of the costs of certain projects financed by the Desalter Authority through the issuance of revenue bonds (“Desalter Authority Bonds”). These costs include fixed Desalter Authority Bonds costs and fixed and variable operating and maintenance costs. See also “FINANCIAL INFORMATION - Outstanding Indebtedness of the Enterprise - Desalter Authority Debt” herein. The City treats payments under the Water Purchase Agreement as Operation and Maintenance Expenses.

The City may amend the Water Purchase Agreement in the future to pay additional fixed costs, which in turn may result in increased Operation and Maintenance Expenses to the Enterprise. However, the City has covenanted to fix rates and charges to generate sufficient Net Revenues to comply with the rate covenant contained in the Installment Purchase Agreement. See “SOURCES OF PAYMENT FOR THE BONDS – Rate Covenant” herein.

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The City’s share of desalter water for the last 5 fiscal years is shown below.

Total City’s Fiscal Acre-Feet Project Year Produced Allotment

2007/08 26,578.0 4,430.0 2008/09 25,678.5 4,508.1 2009/10 25.685.4 4,394.5 2010/11 25,009.0 4,265.7 2011/12 24,662.8 4,208.7

______________________________ Source: Chino Basin Desalter Authority.

Existing Facilities

The Enterprise has two major transmissions lines that provide water from the north, a 30-inch pipeline, the “Ramona Feeder,” from the Agua de Lejos Facility and a 42-inch pipeline, the “Interconnect” from Monte Vista. Other major facilities contained in the Enterprise include 9 active supply wells, of which 4 are currently in operation, each with a chlorination station, transmission mains, supply connections, distribution pipeline, 18 storage reservoirs, 10 active pumping facilities and 5 hydro-pneumatic stations. The storage reservoirs range in capacity from 0.25 million gallons to 5.0 million gallons, with the total storage capacity of 39 million gallons. The water system includes water lines and mains varying in size from two to forty-two inches. The water system is operated over four major water pressure zones.

A Water, Recycled Water and Sewer Master Plan (the “Plan”) was prepared for the Enterprise in 2005 and adopted by the City Council in 2008. The Plan included an analysis of the pipelines, reservoirs and pump stations. The Plan was modeled with maximum daily demand and required fire flow and no current deficiencies were found. However, additional reservoir storage was identified as being needed in future build-out years ending 2020. These improvements have been or will be programmed into the Capital Improvement Program as updates of the Plan model show need.

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Capital Improvements

As residential and commercial development continue within the City, additions to the City’s Enterprise will be made, which are expected to be principally financed through fees paid by developers and deposited in the Water Facilities Fee Fund. Further, as the water system ages, replacements of facilities will occur, which will be financed from available funds generated by the Enterprise. The City plans approximately $20.1 million in additions, upgrades and replacements to the existing Enterprise over the next 4 years, to be funded from proceeds of the Bonds, on a pay-as-you-go basis from user rates or from reserves in the Enterprise Fund or Water Facilities Fee Fund.

CHINO HILLS WATER SYSTEM CAPITAL IMPROVEMENT PROGRAM

Estimated Expenditures

Project Estimated

Cost To Date as of June 30, 2012

FY 2012/13

FY 2013/14

FY 2014/15

FY 2015/16

Water Projects

Supervisory Control and Data Acquisition System (SCADA) $ 832,300 $ 467,100 $ 181,600 $ 183,600 $ - $ -

Arsenic Remediation in Well 15B 1,200,000 415,200 784,800 - - -

Upgrade Pressure Reducing Stations 755,000 55,100 269,900 430,000 - -

Well 16R ASR 795,100 8,500 786,600 - - -

Well No. 5 Upgrades 1,707,900 7,900 1,700,000 - - -

Pump to Waste Lines 207,500 41,900 165,600 - - -

Reservoir No. 18 4,554,700 24,200 175,500 - 4,355,000 -

Pave Access Roads 450,000 - 250,000 200,000 - -

Abandon Well 13 100,000 - 100,000 - - -

Butterfield Ranch Service Replacements 300,000 - 300,000 - - -

Chlorination Station 100,000 - 100,000 - - -

Rolling Ridge Mainline Replacement - Phase 3 975,000 - 75,000 900,000 - -

Hydro Pneumatic Tank at R-12 100,800 - 100,800 - - -

R-19 Electrical 50,000 - 50,000 - - -

Los Serranos Water Main - Phase VII 1,402,400 2,400 1,400,000 - - -

Sleepy Hollow Pressure Reducing Valve 150,000 - 150,000 - - -

Sleepy Hollow Water Main Replacement 2,000,000 - 2,000,000 - - -

Well 16 Connection 100,000 - - - - 100,000

Ion Exchange at Well 7A/7B 1,500,000 - - - - 1,500,000

Recycled Water Projects

Intermediate Zone Recycled Water Reservoir 2,588,400 244,400 2,344,000 - - -

R-20 Rehabilitation 150,000 - 150,000 - - -

Reservoir R-4 Conversion 134,500 - - - 134,500 -

Butterfield Ranch Road Recycled Water Line 1,200,000 - - 100,000 1,100,000 -

$21,353,600 $1,266,700 $11,083,800 $1,813,600 $5,589,500 $1,600,000

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Funding sources for the Capital Improvement Program are shown below.

Funding Sources FY 2012/13 FY 2013/14 FY 2014/15 FY 2015/16 Total

Bond Proceeds $ 3,550,000 $ - $ - $ - $ 3,550,000

Water Facilities Fee Fund 2,701,100 183,600 4,355,000 - 7,239,700

Grants 473,500 - - - 473,500

Fund Balance 4,359,200 1,630,000 1,234,500 1,600,000 8,823,700

$11,083,800 $1,813,600 $5,589,500 $1,600,000 $20,086,900

Water Consumption

As of June 30, 2012 the City had 21,265 water service connections. The average water demand between July 2011 and June 2012 was 14.98 mgd and maximum demand was 25.69 mgd.

The following table sets forth water consumption by acre-feet during the five Fiscal Years ended June 30, 2012.

TABLE NO. 1 CHINO HILLS WATER SYSTEM

WATER CONSUMPTION Fiscal Years Ending June 30

2008 2009 2010 2011 2012

Number of Water

Connections (1) 21,179 21,185 21,224 21,242 21,265

Total Water

Consumption (2) 18,962 17,607 16,228 15,318 15,741

Billings (3) $16,213,968 $16,826,684 $17,337,561 $18,193,489 $20,535,164

Source: City of Chino Hills. ____________________________________

(1) Includes the City’s owned landscaping water meters. (2) In acre-feet. (3) Billings amount is for water sales only; amount excludes other operating and non-operating revenues collections

from application and reconnections fees and revenues such as meter connection fee, interest income and rebates.

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Water Users

As shown in the following table, the ten largest water users accounted for 19.8% of the annual water consumption in the Fiscal Year ending June 30, 2012. The two largest private users, Vellano Golf Course and Los Serranos Golf Course, accounted for a combined 5% of the total usage in Fiscal Year ending June 30, 2012.

TABLE NO. 2 CHINO HILLS WATER SYSTEM TEN LARGEST WATER USERS Fiscal Year Ending June 30, 2012

12 Month Consumption Percentage

Customers (CCF) of Total

City of Chino Hills 573,432 8.36%

Vellano Golf Course 202,673 2.96

Los Serranos Golf Course 136,509 1.99

Chino Valley Unified School District 130,784 1.91

Western Hills Golf Association 108,896 1.59

Vellano Homeowners Association 57,107 0.83

Pinehurst Hills Community Association 41,159 0.60

Rancho Monte Vista M.H.P. 36,305 0.53

Boys Republic 35,821 0.52

BRE Properties 33,314 0.49

Total 1,356,000 19.78%

Total Fiscal Year 2011/12 Consumption 6,856,618

Source: City of Chino Hills.

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Water Rates and Charges

Water rates are determined by the City Council of the City. Water rates are not subject to regulation by the California Public Utilities Commission or by any other state agency. Monthly water rates within the City’s boundaries are two-tiered, composed of both a monthly service charge and a commodity rate. The former is a flat rate assessed according to a meter size; the commodity rate is assessed per hundred cubic feet (“ccf”). In addition, the City has set installation charges for water capital connection, meter installation, and inspection fees.

In 2010, the City commissioned a water cost of service and rate design study (the “Water Rate Study”) to update its last study of October 2007. The Study was completed in March 2011. The Water Rate Study takes into account reduced building activity, higher wholesale water costs, and mandated reduced urban water usage.

In May 2011, the City Council of the City adopted an ordinance (“Ordinance”) to approve water rates effective each July 1 for July 1, 2011 through July 1, 2015 as shown below. The Ordinance was later amended to reduce certain reclaimed water rates. In accordance with the Ordinance, the rates are subject to adjustment from time to time to reflect changes, increases and decreases, in costs and charges imposed by the MWD, Monte Vista, the Water Facilities Authority, the Desalter Authority, IEUA and the Chino Basin Watermaster. The City purchases water from all of these agencies and will pass through the actual costs based on fees and charges imposed by these agencies. The City will also adjust the charges to reflect changes, increases or decreases, in electricity costs based upon charges and fees imposed by Southern California Edison. The City purchases electricity from Southern California Edison for purposes of transporting water from the various sources to the customers of the Enterprise.

Monthly Service Charge. The City has a monthly service charge based on meter size. The five-year schedule of monthly service charges approved by the adoption of the Ordinance is as follows:

TABLE NO. 3 CHINO HILLS WATER SYSTEM MONTHLY SERVICE CHARGES

Effective Date

Meter Size July 1, 2011 July 1, 2012 July 1, 2013 July 1, 2014 July 1, 2015

⅝” 14.89 16.37 18.00 19.79 21.76

¾” 22.23 24.44 26.87 29.54 32.47

1” 37.05 40.73 44.78 49.23 54.12

1 ½” 74.10 81.46 89.56 98.46 108.25

2” 118.56 130.34 143.30 157.54 173.20

3” 259.34 285.12 313.46 344.62 378.87

4” 435.69 479.00 526.61 578.96 636.51

6” 900.83 990.37 1,088.82 1,197.05 1,316.03

8” 1,187.04 1,305.03 1,434.76 1,577.37 1,734.16

10” 1,933.95 2,126.18 2,337.52 2,569.87 2,825.32


In addition, the City has established a separate monthly service charge for fire meters.

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Commodity Charge. The City charges a commodity charge based on usage and pumping zones. The five-year schedule of commodity charges approved by the adoption of the Ordinance is as follows:


COMMODITY CHARGES

Effective Date Usage July 1, 2011 July 1, 2012 July 1, 2013 July 1, 2014 July 1, 2015

Residential SFR MFR $/ccf $/ccf $/ccf $/ccf $/ccf Low Zone 0-12 ccf 0-7 ccf 1.56 1.72 1.89 2.08 2.28 13-30 ccf 8-20 ccf 1.78 1.96 2.15 2.37 2.60 31+ ccf 21+ ccf 2.49 2.74 3.01 3.31 3.64

Intermediate Zone 0-12 ccf 0-7 ccf 1.69 1.86 2.04 2.25 2.47 13-30 ccf 8-20 ccf 1.91 2.10 2.31 2.54 2.79 31+ ccf 21+ ccf 2.62 2.88 3.17 3.48 3.83

High Zone 0-12 ccf 0-7 ccf 1.89 2.08 2.29 2.51 2.76 13-30 ccf 8-20 ccf 2.11 2.32 2.55 2.81 3.09 31+ ccf 21+ ccf 2.82 3.10 3.41 3.75 4.12

Non-Residential Low Zone 1.87 2.05 2.26 2.48 2.73 Intermediate Zone 2.00 2.20 2.42 2.66 2.92 High Zone 2.20 2.42 2.66 2.92 3.21 Temporary (Construction Meter) 2.26 2.48 2.73 3.00 3.30 Agricultural 1.49 1.75 2.03 2.36 2.73

Institutional Low Zone 1.87 2.05 2.26 2.48 2.73 Intermediate Zone 2.00 2.20 2.42 2.66 2.92 High Zone 2.20 2.42 2.66 2.92 3.21

Reclaimed Water Low Zone 1.31 1.44 1.58 1.74 1.91 Intermediate Zone 1.40 1.54 1.69 1.86 2.04 High Zone 1.54 1.69 1.86 2.04 2.25 Temporary (Construction Meter) 1.58 1.73 1.91 2.10 2.31

Private Fire Protection Private Fire Protection 2.82 3.10 3.41 3.75 4.12


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Table No. 5 compares average residential water rates charged by the City with surrounding cities and other water agencies in the area.

TABLE NO. 5 COMPARISON OF RESIDENTIAL WATER RATES

FISCAL YEAR 2011/12

Fixed Charge Commodity Charge Total

City of Upland $ 8.00 $27.06 $35.06

City of Norco 14.23 29.26 43.49

Cucamonga Valley Water District 11.67 33.20 44.87

City of Chino 19.47 25.74 45.21

City of Pomona 30.23 24.62 54.85

Walnut Valley Water District 16.03 42.90 58.93

City of Chino Hills - Intermediate Zone 22.23 39.42 61.65

Yorba Linda Water District 11.73 55.44 67.17

Fontana Water Company 25.04 53.61 78.65

City of Ontario 21.10 62.36 83.46

Golden State Water Company (Claremont) 22.35 61.50 83.85

Source: Water Cost of Service and Rate Design Study, Glenn M. Reiter & Associates.

Collection Procedures. The City is on a monthly billing cycle. Payment is due by 21 days after the billing date. If payment is not received, a delinquency notice is sent on the 28th day after the billing date. A 10% or $10 (whichever is greater) late payment penalty is charged after a bill is delinquent for 42 days. Currently 9.6% of the accounts were delinquent after 21 days, which accounts for approximately 10.5% of the City’s monthly water system revenues. The number of accounts which are delinquent after 42 days, when penalties are assessed and service is about to be interrupted, drops to below 4%. All accounts not paid in full within 49 days of the delinquent billing date will be disconnected until full payment is made, including late payment penalties and a $50.00 reconnection fee. There were a total 750 accounts that had service disconnected and reconnected in Fiscal Year 2011/12.

Meter Installation Charge. The current schedule of regular service meter installation charges is as follows:


METER INSTALLATION CHARGES

Meter and Service Line and Curb No Service

Service Size Cock Already Installed Line Installed

1 inch $330 $ 875

1 ½ inch 400 1,000

2 inch 500 1,300


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All meter installation charges for meter sizes 3 inches or larger are made at cost plus 10%. Only duly authorized employees or agents of the City are authorized to install service connections.

Water Capital Connection Charge. The current schedule of water capital connection charges are shown below. Water capital connection charges are development impact fees and recorded in the City’s Water Facilities Fee Fund.


CONNECTION FEES

Meter Size Capital Connection Fee

1 inch $ 5,358

1 ½ inch 17,842

2 inch 28,558

3 inch 53,580

4 inch 89,318

6 inch 178,582

8 inch 285,742

10 inch 430,408


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FINANCIAL INFORMATION

Personnel

Management. The key personnel responsible for management of the Enterprise include the City Manager, City Engineer, Director of Public Works and Finance Director.

Employees and Employee Benefits. As of July 1, 2012, the City has assigned 28.3 full-time equivalent (FTE) positions to the operation of the Enterprise. This is comprised of 24.3 FTE positions relating to operations, and 4 FTE positions relating to utility billing and customer service. The Enterprise is overseen by the Public Works Director, the Water and Sewer Manger and 3 supervisors in charge of customer service, production and distribution. All of the staff who work with the Enterprise are City employees with the rights and benefits described herein with respect to all City employees.

City employees are represented by the San Bernardino Public Employees’ Association or by the Chino Hills Supervisors’ Association. The current memorandum of understanding between the City and both employee groups expires on August 31, 2013. The City has never experienced a work stoppage or other employee action.

Insurance

The City of Chino Hills is a member of the California Joint Powers Insurance Authority (“JPIA”). The JPIA is composed of 123 California public entities and is organized under a joint powers agreement pursuant to California Government Code. The purpose of the JPIA is to arrange and administer programs for the pooling of self-insured losses, to purchase excess insurance or reinsurance, and to arrange for group purchased insurance for property and other lines of coverage.

The City participates in the all-risk property protection program of the JPIA. This insurance protection is underwritten by several insurance companies. City property, including the Enterprise, currently has all-risk property insurance protection in the amount of $97,759,439. There is a $5,000 deductible per occurrence except for non-emergency vehicle insurance which has a $1,000 deductible.

The City participates in the JPIA self-insurance pools for general liability and workers’ compensation liability. Excess insurance is purchased to insure losses above $750,000 for general liability and from $2 million to $4 million for workers’ compensation.

Retirement Plan

The following information on the City’s Retirement Plan applies to City employees as a whole, including the employees assigned to the Enterprise. No separate information is presented solely for Enterprise employees.

Plan Description. The City of Chino Hills contributes to the San Bernardino County Employees’ Retirement Association (SBCERA), a cost-sharing multiple-employer defined benefit pension plan operating under the California County Employee’s Retirement Act of 1937 and covering substantially all employees of the County of San Bernardino, the City of Chino Hills, the City of Big Bear Lake, the California State Association of Counties, the South Coast Air Quality Management District, the San Bernardino County Law Library, the Crest Forest Fire District, Mojave Desert Air Quality Management District, and the Superior Courts collectively referred to as the “Participating Members.” SBCERA provides retirement, disability benefits, annual cost of living adjustments and death benefits to plan members and beneficiaries. SBCERA acts as a common investment and administrative agent for the Participating Members. SBCERA publishes its own Comprehensive Annual Financial Report and

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receives its own independent audit. This report may be obtained from their executive office: 348 West Hospitality Lane, Third Floor, San Bernardino, California 92415-0014.

California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (the “Reform Act”), which makes changes to public employees retirement systems, including SBCERA, most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For non-safety participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. Among the other changes, the Reform Act also: (i) requires all new participants enrolled after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (ii) requires SBCERA to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. Ultimately, the Reform Act will reduce the City’s long-term pension obligation as existing employees retire and new employees are hired to replace them.

Funding Policy. Participating Members are required to contribute a percentage of covered salary based on certain actuarial assumptions and their age at entry into the Plan. The City pays a portion of the employees’ required contribution to the Plan at a rate of 8% of the employees covered payroll. The City pays the entire employee required contribution for Executive Management and Division Managers.

Contribution Rates. The 2012/13 employer’s rate for the City is 25.77% of annual covered payroll. The contribution requirements of the plan members and the City are established and may be amended by SBCERA. The City contracts with the San Bernardino County Sheriff for police services, and therefore the City does not maintain a separate retirement plan for safety members.

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SBCERA sets contribution rates in part based on investment returns. A history of the SBCERA portfolio rate of return is shown below.

TABLE NO. 8 SBCERA HISTORICAL INVESTMENT RETURNS

Year Ending June 30

Rate of Return

2002 (4.33%)

2003 0.80

2004 17.16

2005 9.43

2006 11.45

2007 19.70

2008 (2.52)

2009 (24.00)

2010 7.91

2011 22.59

2012 1.00 __________________________________________

Source: San Bernardino County Employees’ Retirement Association.

The City’s percentage of payroll for SBCERA payments for 2007/08 through 2012/13 are shown in the table below.

TABLE NO. 9 CITY OF CHINO HILLS

HISTORICAL SBCERA RATES

Fiscal Year Rate

2007/08 20.13%

2008/09 19.97

2009/10 19.42

2010/11 20.39

2011/12 22.38

2012/13 25.77

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Required Contributions. For fiscal year 2011/12, the City’s annual pension cost of $3,800,656 for SBCERA was equal to the City’s required and actual contributions. The required contribution was determined as part of the June 30, 2010, actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 8.00% investment rate of return (net of administrative expenses), (b) projected annual salary increase that vary by duration of service and (c) cost-of-living adjustments are contingent upon CPI increases with a 2% maximum. Both (a) and (b) included an inflation component of 3.75% and a payroll growth of 4.25%. The Asset Valuation Method of SBCERA employs market value of assets less unrecognized market value gains and losses from each of the last five years. Market value gains and losses are equal to the difference between the actual market return and the expected return on the market value, and are recognized over a five-year period. The actuarial value of assets is reduced by the value of the non-valuation reserves.


TREND INFORMATION FOR EMPLOYER CONTRIBUTIONS (in $ Thousands)

Fiscal Year

Annual Required Contribution

Percentage of APC Contributed

2003/04 $1,454 100%

2004/05 1,793 100%

2005/06 2,093 100%

2006/07 2,703 100%

2007/08 3,087 100%

2008/09 3,269 100%

2009/10 3,461 100%

2010/11 3,599 100%

2011/12 3,800 100%

SBCERA unfunded actuarial accrued liability (UAAL) is being amortized as a level percentage of future active member payroll (including payroll for new members) assuming a constant number of active members. The June 30, 2002, UAAL is being recognized over a 20-year declining period effective June 30, 2002. Any new UAAL after June 30, 2002, that arises at each valuation is amortized over its own 20-year declining period.

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SBCERA does not report separately to the City its share of the SBCERA pooled actuarial value of assets or of unfunded liability. The City’s share of such assets and liabilities is grouped together with other Participating Members. The City currently has 168 employees in the SBCERA Plan, representing 0.87% of the total 19,258 employees in the SBCERA Plan as of June 30, 2011.

Set forth below is a ten-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30 of each year indicated for all Participating Members of SBCERA. The schedule presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

TABLE NO. 11 SAN BERNARDINO COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION

ALL PARTICIPATING MEMBERS HISTORICAL FUNDING PROGRESS (ACTUARIAL VALUE)

(in $ Thousands)

Actuarial Valuation

June 30 Date

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued Liability

Unfunded Actuarial Accrued Liability

Funded Ratio

Annual Covered Payroll

Unfunded Liability as a

Percent of Covered Payroll

2002 $3,874,474 $3,911,039 $ 36,565 99.07% $ 865,300 4.23%

2003 3,815,573 4,368,411 552,838 87.34% 933,898 59.20%

2004 4,418,152 4,719,865 301,713 93.61% 943,545 31.98%

2005 4,750,229 5,215,719 465,490 91.08% 968,674 48.05%

2006 5,175,767 5,624,646 448,879 92.02% 1,028,731 43.63%

2007 5,797,400 6,227,013 429,613 93.10% 1,102,151 38.98%

2008 6,341,531 6,773,629 432,098 93.62% 1,219,562 35.43%

2009 6,383,388 7,013,534 630,146 91.02% 1,226,431 51.38%

2010 6,367,232 7,444,986 1,077,754 85.52% 1,250,193 86.21%

2011 6,484,507 8,189,646 1,705,139 79.18% 1,244,555 137.01% ____________________________________

Source: San Bernardino County Employees’ Retirement Association.

The market value of assets as of June 30, 2011 was $6,136,573,589, or 94.7% of actuarial value and 74.9% of the accrued actuarial liability.

Other Post-Employment Retirement Benefits

Plan Description. The City has established the City of Chino Hills Retiree Healthcare Plan, a single-employer defined benefit healthcare plan. The plan provides post-retirement health care benefits to eligible employees who retire from the City under the San Bernardino County Employee’s Retirement Association (SBCERA) and who elect a CalPERS Health Plan (PEMHCA). The City pays the PEMHCA minimum employer contribution using the unequal method $75.60 per month for 2011. The retiree pays the remainder of the PEMHCA premium. The City does not provide contributions for retiree dental, vision, or life insurance benefits.

Funding Policy. Currently, the City funds retiree healthcare benefits on a pay-as-you-go basis, paying for retiree benefits from the City's General Fund as they are due with no pre-funding for future years. For Fiscal Year 2010/2011, the City paid $1,241 for benefits of two retired employees.

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Annual OPEB Cost and Net OPEB Obligation. The City's annual other postemployment benefit (OPEB) cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed thirty years. The following table shows the components of the City’s annual OPEB cost for Fiscal Years 2008/09 through 2011/12, the amount actually contributed to the plan, and changes in the City’s net OPEB obligation for these benefits:


ANNUAL OPEB COST AND NET OPEB OBLIGATION

2008/09 2009/10 2010/11 2011/12

Annual required contribution $133,000 $140,000 $146,000 $114,034

Interest on net OPEB obligation - 5,637 11,453 6,301

Adjustment to annual required contribution - (7,905) (16,341) (18,012)

Annual OPEB cost (expense) 133,000 137,732 141,112 102,323

Contributions made (including premiums paid) (634) (876) (1,241) (2,352)

Increase in net OPEB obligation 132,636 136,856 139,871 99,971

Net OPEB obligation-beginning of year - 132,636 269,492 409,363

Net OPEB obligation-end of year $132,636 $269,492 $409,363 $509,334

The City’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the 2011/12 Fiscal Year and the three preceding years were as follows:


OPEB COSTS AND NET OPEB OBLIGATION

Fiscal Year

Annual

OPEB Cost

Percentage of OPEB Cost Contributed

Net Pension Obligation

2008/09 $133,000 100.27% $132,636

2009/10 137,732 52.27% 269,492

2010/11 141,112 34.47% 409,363

2011/12 102,323 20.09% 509,334

The City’s annual contribution to OPEB costs were $2,352 in Fiscal Year 2011/12 and are estimated to be $5,092 for Fiscal Year 2012/13.

Funded Status and Funding Progress. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trends. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. A schedule of funding progress presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Only two years are presented below since the City implemented the reporting provisions for OPEB in Fiscal Year 2009/10 and performs its actuarial valuation every three years.

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SCHEDULE OF FUNDING PROGRESS

Actuarial Valuation

Date

Entry Age Actuarial Accrued Liability

Actuarial Value of Assets

Unfunded

AAL (UAAL)

Funded Ratio

Covered Payroll

UAAL as a Percentage of

Covered Payroll

1/1/2009 $ 919,000 $- $ 919,000 0.0% $ 9,175,000 10.0%

6/15/2012 1,160,000 - 1,160,000 0.0% 10,595,000 10.9%

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

The actuarial valuation dated May 1, 2012, used the Entry Age Normal actuarial cost method, a discount rate of 4.5% which is the long-term expected rate of return on the City's investment fund, an annual general inflation rate of 3.0%, and an annual aggregate payroll increase of 3.5%. The unfunded accrued actuarial liability (UAAL) is being amortized over a fixed 30-year period as a level percentage of payroll beginning with the 2008/09 Fiscal Year. The initial UAAL was amortized over a closed 30 years and the residual UAAL is amortized over an open 30 years. The PEMHCA medical plans are considered community rated plans for the City. Therefore, no implied subsidy was determined for this valuation. The Plan is assumed to be on going for cost purposes. This does not imply that an obligation to continue the Plan exists. As of the actuarial valuation date, the City had 154 active participants and three retirees receiving benefits.

Outstanding Indebtedness of the Enterprise

The Prior Agreements. The City previously caused to be delivered its Chino Hills Certificates of Participation (2002 Water System Project) in the original aggregate principal amount of $9,545,000 and Refunding Certificates of Participation (2003 Water System Project) in the original principal amount of $18,210,000 (collectively, the “Prior Certificates”). The Prior Certificates will be refunded with certain of the proceeds of the Bonds.

Desalter Authority Debt. On June 11, 2008, the Desalter Authority sold its Desalter Revenue Refunding Bonds, Series 2008A (“2008 Bonds”) to refund its Adjustable Rate Desalter Revenue Bonds, Series 2004A-1 and Series 2004A-2 and fix the interest rate on the 2008 Bonds. These revenue bonds are due in 2035.

The members of the Desalter Authority, including the City, entered into Water Purchase Agreements in 2002 with the Desalter Authority. The Water Purchase Agreements were amended in 2008 by a Letter Agreement. Under each Water Purchase Agreement, as amended, the members are required to pay quarterly their share of budgeted Fixed Project Costs (which includes debt service on the 2008 Bonds and capital expenditures) and Fixed O&M Costs. The members are also billed for Variable O&M Costs based on water delivered to each member. The City’s share of debt service on the 2008 Bonds is 21.43%, and for all other computations required under the Water Purchase Agreement, the City’s share of costs is 17.07%, based on its Project Allotment.

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The Water Purchase Agreement is a “take-or-pay” contract, and accordingly, the payments due under it are to be paid by the City whether or not water is furnished to the City or whether or not the Desalter Authority facilities financed are operational.

Under the Water Purchase Agreement, the City is required to fix, prescribe and collect rates and charges for the Enterprise which will be at least sufficient to yield Net Water System Revenues, as defined in the Water Purchase Agreement, equal to 125% of Fixed Project Costs (including debt service on the 2008 Bonds and any additional bonds), plus Fixed O&M Costs plus Variable O&M Costs. The City is in compliance with the Water Purchase Agreement.

The City treats the payments under the Water Purchase Agreement as Operation and Maintenance Expenses. Accordingly, payments on the 2008 Bonds and any additional bonds of the Desalter Authority are senior to payments on the Bonds.

Historic Operating Results and Debt Service Coverage

The following Table No. 15 is a summary of historic operating results and debt service coverage of the City’s Enterprise for the five Fiscal Years ended June 30, 2012. These results have been derived from the City’s financial statements, but exclude certain non-cash items and include certain other adjustments. These exclusions include the annual adjustment in net book value of the City’s investment in the Water Facility Authority and the Desalter Authority, depreciation and amortization and development impact fees or other capital-related income. The table has not been audited by the City’s auditor.

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HISTORIC OPERATING RESULTS AND DEBT SERVICE COVERAGE For Fiscal Years Ended June 30

2008 2009 2010 2011 2012

Revenues:

Charges for Service $17,781,444 $ 16,901,021 $17,650,091 $18,068,632 $20,922,011

Meter and Installation Fees 81,603 29,399 15,930 12,320 9,934

Interest Earnings 808,084 472,763 309,105 149,240 128,636

Water Rebates* 2,287,314 844,405 2,765,951 658,174 1,610,422 (1)

Other 303,073 283,364 189,534 159,606 207,054

Total Revenues $21,261,518 $18,530,952 $20,930,611 $19,047,972 $22,878,057

Expenses:

Purchased water $ 6,072,267 $ 5,539,822 $ 6,380,020 $ 5,695,980 $ 6,003,898

Water Purchase Agreement 2,677,570 3,567,829 3,637,862 3,740,374 3,921,116

Subtotal Water Supply Costs $ 8,749,837 $ 9,107,651 $10,017,882 $ 9,436,354 $ 9,925,014

Utilities 749,308 988,289 733,862 738,416 768,735

Salaries and benefits 1,861,303 2,134,426 2,228,263 2,220,078 2,445,110

Contractual services 728,999 546,555 544,347 560,201 497,969

Repairs and maintenance 550,780 1,220,956 687,465 493,495 879,979

Services and supplies 257,098 309,995 226,544 216,703 217,339

Other general and administrative 1,547,594 1,673,520 1,768,703 1,698,578 1,853,638

Total Expenses $14,444,919 $15,981,392 $16,207,066 $15,363,825 $16,587,784

Net Revenues $ 6,816,599 $ 2,549,560 $ 4,723,545 $ 3,684,147 $ 6,290,273

Installment Payments $ 2,117,554 $ 2,121,424 $ 2,115,574 $ 2,119,304 $ 2,119,344

Debt Service Coverage 3.22x 1.20x 2.23x 1.74x 2.97x ____________________________________


* Beginning with the Enterprise’s June 30, 2010 financial statements, the City accounts for any rebates on water purchases from the Desalter Authority, Water Facilities Authority and Monte Vista as revenue, rather than an offset to the cost of purchased water. Prior years’ audited information has been restated to be consistent with the City’s current accounting treatment of the rebates.

(1) The City received a one-time rebate from the Desalter Authority in 2012 of approximately $1.5 million as a result of new members buy-in to the facilities.

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Projected Operating Results and Debt Service Coverage

The City’s actual operating results for Fiscal Year 2011/12 and estimated projected operating results for the Enterprise for Fiscal Years 2012/13 through 2015/16 are set forth in Table No. 16.

The projected operating results reflect certain significant assumptions concerning future events and circumstances. The financial forecast represents the City’s estimate of the projected financial results of the Enterprise based upon the City’s judgment of the most probable occurrence of certain important future events. The assumptions set forth below are material in the development of financial projections for the Enterprise, and variations in the assumptions may produce substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material.

Revenue Assumptions

Total water consumption held constant at 15,712 acre-feet per year.

Charges for service increase based on water rates approved by the Ordinance.

Expenditure Assumptions for Fiscal Year 2012/13

A general 5% inflation factor was applied to most of the operating expenses based on the Fiscal Year 2011/12 budget, with the following significant exceptions:

Purchased water costs are lower due to more expected pumping of groundwater and less purchased water than projected in future years.

Utility costs are increased to be consistent with original Water Rate Study estimates. Actual utility costs in Fiscal Year 2011/12 were lower than budgeted in the Water Rate Study by 27%.

Personnel costs increase due to increase in the City’s flexible benefits cost together with an increase in the City’s retirement contribution rate.

Contractual services reflects contracting for a Fixed Asset Assessment Study.

Maintenance costs reflect increase in well repair/rehabilitation expenses.

Other general and administrative costs increase for additional chemicals required as a result of additional groundwater pumping.

Expenditure Assumptions for Fiscal Year 2013/14 through 2015/16

A general 5% inflation factor was applied to most of the operating expenses based on the previous year’s budget, with the following significant exceptions:

Purchased water costs are increased beginning in Fiscal Year 2013/14 to be consistent with original Water Rate Study estimates based on less groundwater pumping.

Utility costs are increased 2% in Fiscal Year 2013/14 and 7% annually thereafter.

Addition of one Maintenance Worker and one Control Analyst position in Fiscal Year 2013/14.

Contractual services in Fiscal Year 2014/15 reflects contracting for the update of the Residential Watering Guide and Urban Water Management Plan.

Maintenance costs reflect rental of additional vehicle starting in Fiscal Year 2013/14.

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ACTUAL AND PROJECTED OPERATING RESULTS AND DEBT SERVICE COVERAGE For Fiscal Years Ended June 30

Actual Projected

2012 2013 2014 2015 2016

Number of Meters 21,265 21,379 21,539 21,701 21,864

Number of New Meters 13 114 160 162 163

Acre-Feet of Water Sales 15,741 15,712 15,712 15,712 15,712

Revenues:

Charges for Service $20,922,011 $22,501,000 $24,805,000 $27,351,000 $30,157,000

Meter and Installation Fees 9,934 5,000 5,000 5,000 5,000

Interest Earnings 128,636 102,700 102,700 102,700 102,700

Water Rebates 1,610,422 143,000 395,000 395,000 395,000

Other 207,054 322,600 327,900 332,200 336,600

Total Revenue $22,878,057 $23,074,300 $25,635,600 $28,185,900 $30,996,300

Expenses:

Water Supply Costs $ 9,925,014 $ 8,557,800 $11,793,700 $12,076,300 $12,641,000

Utilities 768,735 1,168,100 1,188,000 1,270,700 1,359,300


Contractual services 497,969 745,100 697,600 885,900 735,100

Repairs and maintenance 879,979 1,050,000 1,135,800 1,193,300 1,256,700

Services and supplies 217,339 220,500 242,700 277,300 265,500

Other general and administrative 1,853,638 2,063,000 2,190,600 2,322,200 2,425,500

Total Expenses $16,587,784 $16,622,800 $20,354,200 $21,287,400 $22,107,100

Overall % Change in Expenses 0.2% 22.4% 4.6% 3.9%

Net Revenues $ 6,290,273 $ 6,451,500 $ 5,281,400 $ 6,898,500 $ 8,889,200

Installment Payments $ 2,119,344 $ 1,903,256 $ 2,230,150 $ 2,222,250 $ 2,220,450

Debt Service Coverage 2.97x 3.39x 2.36x 3.10x 4.00x

____________________________________


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Financial Statements

The City’s accounting policies conform to generally accepted accounting principles and reporting standards set forth by the State Controller. The audited financial statements also conform to the principles and standards for public financial reporting established by the National Council of Government Accounting and the Governmental Accounting Standards Board.

Basis of Accounting and Financial Statement Presentation. The government-wide financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund financial statements are reported using the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due.

The City retained the firm of Lance, Soll & Lunghard, LLP, Certified Public Accountants, Brea, California, (the “Auditor”) to examine the general purpose financial statements of the City as of and for the year ended June 30, 2012. The following tables summarize the audited Statement of Net Assets and audited Statement of Revenues, Expenditures and Changes in Fund Balance of the City’s Water Enterprise Fund for the last five Fiscal Years.

See “APPENDIX B” hereto for the audited financial statements for the Fiscal Year ended June 30, 2012. The City has not requested, and the auditor has not provided, any review or update of such statements in connection with the inclusion in this Official Statement.

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WATER ENTERPRISE FUND STATEMENT OF NET ASSETS

As of June 30

2008 2009 2010 2011 2012

Assets:

Current:

Cash and Investments $ 28,663,115 $ 28,500,045 $ 29,886,671 $ 20,173,180 $ 22,897,637

Receivables:

Accounts 3,473,674 2,148,894 2,242,816 2,170,221 2,444,784

Accrued interest 201,217 99,588 60,465 34,889 8,115

Due from other governments - - - 8,789 -

Due from other agencies - - - 136,169 -

Due from developers 1,009,736 940,128 940,128 901,584 901,584

Due from other funds 88,282 75,272 39,042 13,358 29,936

Inventories 257,452 - - - -

Restricted:

Cash with fiscal agent 895,629 891,908 891,788 891,788 891,788

Total Current Assets 34,589,105 32,655,835 34,060,910 24,329,978 27,173,844

Noncurrent:

Advances to other funds 3,633,256 3,560,977 3,560,977 - -

Deferred charges 481,946 447,573 413,200 378,827 344,454

Investment in joint venture 15,950,632 15,562,321 13,649,420 13,209,749 14,294,623

Capital assets - net of accumulated

depreciation 109,150,260 108,296,603 105,254,049 105,090,978 103,160,328

Total Noncurrent Assets 129,216,094 127,867,474 122,877,646 118,679,554 117,799,405

Total Assets $163,805,199 $160,523,309 $156,938,556 $143,009,532 $144,973,249

____________________________________

Continued on next page

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WATER ENTERPRISE FUND STATEMENT OF NET ASSETS

As of June 30

Continued from previous page

2008 2009 2010 2011 2012

Liabilities and Net Assets:

Current:

Accounts payable $ 1,326,231 $ 1,220,926 $ 890,390 $ 649,660 $ 898,372

Accrued liabilities 118,331 140,361 70,079 74,323 94,383

Accrued interest 78,869 80,856 75,785 69,945 66,196

Deposits payable 1,150,252 1,140,018 1,175,832 1,197,187 1,266,969

Due to other governments - - - 8,789 -

Due to other funds - - - - -

Due to developers 8,160 8,160 - - -

Compensated absences 3,000 5,000 5,000 5,000 5,000

Certificates of Participation 1,175,000 1,200,000 1,240,000 1,280,000 1,325,000

Total Current Liabilities 3,859,843 3,795,321 3,457,086 3,284,904 3,655,920

Noncurrent:

Due to developers - - - - 3,099

Advanced from other funds 3,303,000 2,972,700 2,642,400 - -

Advances from constructions 19,273 - - - -

Due to developers 3,237,533 3,099 3,099 3,099 -

Compensated absences 129,463 162,135 174,150 164,047 173,711

Certificates of Participation 19,933,007 18,848,164 17,723,321 16,558,477 15,348,633

Total Noncurrent Liabilities 26,622,276 21,986,098 20,542,970 16,725,623 15,525,443

Total Liabilities 30,482,119 25,781,419 24,000,056 20,010,527 19,181,363

Net Assets:

Invested in capital assets,

net of related debt 84,777,287 88,245,340 86,279,469 87,252,501 86,486,695

Restricted for debt service 895,629 891,908 891,788 891,788 891,788

Unrestricted 47,650,164 45,604,642 45,767,243 34,854,716 38,413,403

Total Net Assets 133,323,080 134,741,890 132,938,500 122,999,005 125,791,886

Total Liabilities and

Net Assets $163,805,199 $160,523,309 $156,938,556 $143,009,532 $144,973,249

____________________________________

Source: City of Chino Hills Comprehensive Annual Financial Report.

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WATER ENTERPRISE FUND STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS

For the year ended June 30

2008 2009 2010 2011 2012

Operating Revenues:

Charges for services $ 17,785,777 $ 16,905,221 $ 17,655,790 $ 18,068,634 $ 20,922,012

Meter installation and fees 81,603 29,399 15,930 12,320 9,934

Other 286,210 1,922,510 3,248,665 4,364,099 3,779,917

Total Operating Revenues 18,153,590 18,857,130 20,920,385 22,445,053 24,711,863

Operating Expenses:


Professional and contractual services 736,037 546,555 544,406 560,202 497,970

Purchased water 6,462,523 8,263,246 10,017,882 9,436,354 9,925,014

Repair and maintenance 550,782 1,220,955 687,466 493,497 879,979

Services and supplies 1,250,756 698,306 2,139,447 656,374 253,469

Administration and general expenses 1,601,294 1,728,820 1,833,847 1,698,579 1,853,637

Utilities 749,308 988,288 733,863 738,416 768,737

Depreciation and amortization 3,569,602 3,731,917 3,829,930 3,858,438 3,932,471

Total Operating Expenses 16,781,605 19,312,513 22,015,103 19,661,939 20,556,388

Operating Income (Loss) 1,371,985 (455,383) (1,094,718) 2,783,114 4,155,475

____________________________________

Continued on next page

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WATER ENTERPRISE FUND STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS

For the year ended June 30

Continued from previous page

2008 2009 2010 2011 2012

Nonoperating Revenues

(Expenses):

Interest revenue $ 1,315,835 $ 768,496 $ 482,644 $ 149,250 $ 128,640

Interest expense (1,245,767) (1,190,725) (1,063,532) (991,130) (950,751)

Gain (loss) on disposal

of capital assets 16,861 8,728 21,056 - 24,025

Contributions - - - 10,896 -

Total Nonoperating

Revenues (Expenses): 86,929 (413,501) (559,832) (830,984) (798,086)

Income (Loss) Before Transfers 1,458,914 (868,884) (1,654,550) 1,952,130 3,357,389

Contributions - - - - 300,955

Contributions from developers 1,360,554 492,406 267,792 - -

Contributions from property owners 7,158,722 3,443,163 - - -

Contributions from

governmental funds - - - - -

Transfers in - - 6,601 1,523 -

Transfers out - (1,647,875) (423,233) (429,614) (865,463)

Changes in Net Assets 9,978,190 1,418,810 (1,803,390) 1,524,039 2,792,881

Net Assets:

Beginning of Year,

as previously reported 115,006,379 133,323,080 134,741,890 132,938,500 122,999,005

Restatements 8,338,511 - - (11,463,534) -

Beginning of Fiscal Year, as restated 123,344,890 133,323,080 134,741,890 121,474,966 122,999,005

End of Fiscal Year $133,323,080 $134,741,890 $132,938,500 $122,999,005 $125,791,886

____________________________________

Source: City of Chino Hills Comprehensive Annual Financial Report.

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RISK FACTORS Investment in the Bonds involves risks which may not be appropriate for certain investors. The following is a discussion of certain risk factors which should be considered, in addition to other matters set forth herein, in evaluating the Bonds for investment. The information set forth below does not purport to be an exhaustive listing of the risks and other considerations which may be relevant to an investment in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks.

Certain Factors Affecting the Authority and the City Generally

The Authority’s ability to make payments of principal of and interest on the Bonds is dependent upon the collection of Installment Payments from the City and the City’s ability to make payments of Installment Payments is dependent upon the collection of water service charges. Those charges are collected with relatively consistent and predictable service demands. A number of factors could adversely affect the City’s water service charge structure including, but not limited to, capital improvement needs, federal and State requirements, drought conditions and general economic conditions. The City has been, and expects to be, able to adjust its rates from time to time to meet such conditions.

Accuracy of Assumptions

To estimate the revenues available to pay debt service on the Bonds, the City has made certain assumptions with regard to the rates and charges to be imposed in future years, the expenses associated with operating the Enterprise and the interest rate at which funds will be invested. The City believes these assumptions to be reasonable, but to the extent that any of these assumptions fail to materialize, the Net Revenues available to pay Installment Payments will, in all likelihood, be less than those projected herein. See “FINANCIAL INFORMATION - Projected Operating Results and Debt Service Coverage.” The City may choose, however, to maintain compliance with the rate covenant set forth in the Installment Purchase Agreement in part by means of contributions from available reserves or resources. In such event, Net Revenues may generate amounts which are less than 1.15 times amounts required to pay Installment Payment in any given fiscal year. See “SOURCES OF PAYMENT FOR THE BONDS - Rate Covenant.”

Limited Obligations with Respect to the Bonds


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System Operation and Expenses; Net Revenues

Projected revenues, operational expenses and demands of the Enterprise described in this Official Statement are based on certain assumptions which the City believes are reasonable. However, no assurance can be given that actual operating results will be consistent with these projections. Operation and Maintenance Expenses of the Enterprise may vary with groundwater conditions and the quality and amount of local supplies as well as treatment costs, regulatory compliance costs and other factors. Increases in expenses could require an increase in rates or charges in order to comply with the rate covenant. The Net Revenues may be affected by the disruption in service from system failures, a lack of development, the relocation out of the service area, or the discontinued use of the City’s water service, by one or more major customers, an increase in water treatment costs or other operating costs of the Enterprise, or a number of other risk factors, whether or not described herein. The occurrence of any of these events, or changes in technology or regulatory standards, could impact the Net Revenues. Receipt of the Net Revenues in amounts sufficient to make Installment Payments is dependent on the continual use of utilities at forecasted levels.

Risks Relating to Water Supplies

The City’s water supply and the cost thereof are affected by many factors, including but not limited to annual snowpack and rainfall, population growth, water use, groundwater basin quality and recharge trends, federal and State environmental rules and regulations, environmental restoration commitments, water quality, climate change, and area of origin issues. Sustained drought conditions or continued low water levels could adversely affect the City’s water supply, impact operational expenses of the Enterprise and demand for water services from the Enterprise. Additionally, any natural disaster or other physical calamity, including acts of terrorism, earthquake, earth movements, floods. extreme weather or gradual climate change, may have the effect of reducing water availability, quality and/or distribution capabilities of the City, impair the financial stability of the City affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements thus affecting revenues of the water system through damage to the Enterprise and to the economy of the surrounding area.

Drought Risks. The ability of the Enterprise to operate effectively is affected by the water supply available to the City, which is situated in a semi-arid environment. If the water supply decreases significantly, whether by drought, operation of mandatory supply restrictions, prohibitively high water costs or otherwise, water sales will diminish and revenues available to pay the Installment Payments, may be adversely affected. See “THE ENTERPRISE - Water Supply.”

While the City has plans and manages reserve supplies to account for normal occurrences of drought conditions, between 2007 and 2009 decreased runoff from the northern California snowpack, environmental issues in the Bay-Delta, and a severe drought in the Colorado River Basin restricted the ability to transport water supplies to Southern California. As a result of the severe drought in the State between 2007 and 2009, the State and the City took numerous actions to mitigate the effects of the drought, including, among others, implementing conservation programs.

Future droughts could again result in reduced deliveries of water to the City and mandatorily enforced conservation measures and other mitigations, that could have a material adverse impact on the revenues of the Enterprise available to pay the Installment Payments.

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Reliance on Water Purchased from MWD. Approximately 50% of the City’s available water supply comes from water purchased from third parties who purchase all or a portion of their water supply from MWD. Recent federal and State court decisions and environmental regulations have severely restricted the amount of water that may be delivered by MWD from the Bay-Delta. Operational constraints in the Bay-Delta likely will continue until a long-term solution to the problems in the Bay-Delta is identified and implemented.

Climate Change. One of the factors that may pose a risk to the future availability of water in the City is climate change. Rising temperatures could result in earlier runoff and cause California’s rivers to carry a heavier flow of water. This could possibly trigger floods which would place pressure on California levees. Rising sea levels may further impact hydrology including, without limitation, the salinity levels in estuaries such as the Bay-Delta. Such conditions, particularly in northern California’s Bay-Delta region, may lead to the failure of levees and consequently the disruption of water flow throughout California’s various water systems. Rising temperatures may also result in decreased precipitation levels that could amplify the effects of drought conditions on water supply. Finally, rising temperatures may cause a reduction in the Sierra Nevada snowmelt, a major source of water in California, and may result in reduced water deliveries. The City is unable to predict whether or when any such conditions may occur or their impact on the City. While the City seeks to better understand the potential impact that climate change may have on its water supply, efforts are underway to develop water resources and implement efficient water management strategies that will create a sustainable source of future water supply for the City.

Above-Normal Precipitation. Just as too little water can negatively affect the revenues of the Enterprise, above-normal precipitation also can negatively affect the revenues of the Enterprise. In years where the City receives above-normal levels of precipitation, the residents of the City do not need to purchase as much water which can lead to reduced Revenues.

Seismic Activity. Certain of the third parties from which the City purchases water receive water supplies from MWD via the California Aqueduct and the Colorado River Aqueduct. Major portions of the California Aqueduct, the Colorado River Aqueduct and MWD’s internal supply system are located near major earthquake faults, including the San Andreas Fault. A significant seismic event on any of these faults could damage aqueducts and supply lines sufficiently to disrupt water delivery to the City, potentially resulting in lower revenues. See also “Natural Calamities; Earthquakes; Fire Hazard” below.

Costs of Capital Improvement Program

As described herein, the City’s capital improvement program with respect to the Enterprise includes water and recycled water projects expecting to cost approximately $20.1 million between fiscal year 2012/13 and 2015/16. The actual cost of constructing the various components of the capital improvements to the Enterprise will depend on a variety of factors, including but not limited to potential rising costs or shortages of labor or materials, the discovery of unforeseen subsurface conditions, earthquake, flood or other natural disasters, severe weather conditions, access to the financial markets or other events outside of the control of the City. There can be no assurance that costs for construction of the capital improvements to the Enterprise will not significantly exceed the amounts projected by the City.

California State Water Legislation

In November 2009, the State Legislature passed and the Governor approved a comprehensive package of water legislation (the “2009 State Water Legislation”) that included a mandate to reduce per capita urban water usage by 20% by 2020 (which the City expects to accomplish by 2020), new regulations to monitor groundwater levels, and an $11.1 billion general obligation bond measure that will require the approval of the voters of the State (the “State Water Bonds”). The State Water Bonds would fund improvements to the State’s aging water infrastructure and projects and programs to address ecosystem and water supply issues, such as water and groundwater storage, groundwater cleanup, water recycling, water conservation

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and restoration of the Bay-Delta. In August 2010, the State Legislature passed and the Governor signed a bill postponing the vote on the State Water Bonds until November 2012. Implementation of the other components of the 2009 State Water Legislation is on-going. At this time, the City cannot predict what effect, if any, the 2009 State Water Legislation will have on the operations and finances of the City; although, the City continues to track these and other related activities and to work with other agencies to ensure that proposed or pending legislation does not adversely impact the operations and finances of the City. See “THE ENTERPRISE - Water Supply” herein for a discussions of the City’s sources of water.

Rate-Setting Process under Proposition 218

Proposition 218, which added Articles XIIIC and XIIID to the California Constitution, affects the City’s ability to maintain existing rates and impose rate increases, and no assurance can be given that future rate increases will not encounter majority protest opposition or be challenged by initiative action authorized under Proposition 218. In the event that future proposed rate increases cannot be imposed as a result of majority protest or initiative, the City might thereafter be unable to generate Net Revenues in the amounts required to pay Installment Payments. The City believes the current water rates through July 1, 2015 approved by the City Council were effected under the public hearing and majority protest provisions of Proposition 218. See “CONSTITUTIONAL PROVISIONS AFFECTING ENTERPRISE REVENUES AND EXPENDITURES.”

Environmental Regulations

The operation of the Enterprise is subject to state and federal environmental laws and regulations. The City believes that it is in material compliance with such standards. The adoption of more stringent laws and regulations may cause the City to incur greater expenses for the operation of the Enterprise, particularly, for example, if such change requires the use of new or costly technology. It is not possible to predict the timing or nature of more stringent operation standards that may be imposed on the City over the terms of the Bonds.

Statutory and Regulatory Compliance

Laws and regulations governing treatment and delivery of water and wastewater are enacted and promulgated by federal, state and local government agencies. Compliance with these laws and regulations is and will continue to be costly, and, as more stringent standards are developed, such costs will likely increase. Claims against the Enterprise for failure to comply with applicable laws and regulations could be significant. Such claims may be payable from assets of the Enterprise comprising Operation and Maintenance Expenses or from other legally available sources. In addition to claims by private parties, changes in the scope and standards for public agency water and wastewater systems such as that operated by the City may also lead to administrative orders issued by federal or State regulators. Future compliance with such orders can also impose substantial additional costs on the City. No assurance can be given that the cost of compliance with such laws, regulations and orders would not adversely affect the ability of the City to generate Net Revenues sufficient to pay Installment Payments.

Natural Calamities; Earthquakes; Fire Hazard

The occurrence of any natural calamity, including but not limited to an earthquake, uncontrolled fire or a major flood, may result in the substantial interference with the use of the Enterprise, which could adversely affect the ability of the City to generate Net Revenues sufficient to pay Installment Payments. The Installment Purchase Agreement obligates the City to procure and maintain throughout the term of the Installment Sale Agreement, various forms of insurance, to assure repair or replacement of the Enterprise in the event of damage or destruction to the Enterprise. The City makes no representation as to the ability of any insurer to fulfill its obligations under any insurance policy required to be procured and maintained by the Installment Purchase Agreement. Certain risks, such as damage from earthquakes, may

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not be covered by such property insurance. Under such circumstances, no assurance can be given that the City would have insurance or other resources available to make repairs to the Enterprise or to make Installment Payments under the Installment Purchase Agreement.

Seismic Activity. According to the seismic safety element of the City’s General Plan, the City is located in a seismically active region and could be impacted by a major earthquake originating from the numerous faults in the area. Of primary concern are the Chino Fault, the Whittier Fault and the Central Avenue Fault, although other faults exist in the area. A 5.4 magnitude earthquake occurred in July 2008 located between the Chino Fault and the Whittier Fault, approximately 2 miles southwest of the City.

Seismic hazards encompass both potential ground displacement and ground shaking. The City also contains a number of hillsides in excess of a 25% slope, and such steep topography makes landslides and other slope instabilities possible.

Wildfire. Portions of the City are in areas where there is high or extreme danger of wildfires during dry months and during periods of prolonged drought. In 2002, a 500-acre brush fire occurred in the Chino Hills State Park. In 2008, the Freeway Complex Fire, which ultimately burned over 30,000 acres throughout 3 counties, destroyed 2 structures in the southwestern section of the City. Within the City boundaries, this fire was limited primarily to the Chino Hills State Park and surrounding area.

The City has adopted a Natural Hazards Mitigation Plan. This plan includes a hazard analysis for earthquake, flood, landslide and fire risk and is required to comply with FEMA requirements for disaster relief funding. The plan was last updated in January 2011.

Limited Recourse on Default

If the City defaults on its obligation to pay the Installment Payments when due, the Trustee, subject to certain provisions of the Installment Purchase Agreement, has the right to accelerate the total unpaid principal amount of the Installment Payments. However, in the event of a default and such acceleration there can be no assurance that the City will have sufficient Net Revenues to pay the accelerated principal. Default by the City will not result in loss of the Enterprise or any other assets of the City.

Limitations on Remedies

The ability of the City to comply with its covenants under the Installment Purchase Agreement and to generate Net Revenues sufficient to pay principal of and interest with respect to the Bonds may be adversely affected by actions and events outside of the control of the City and may be adversely affected by actions taken (or not taken) by voters, property owners, taxpayers or persons obligated to pay assessments, fees and charges. See “CONSTITUTIONAL PROVISIONS AFFECTING ENTERPRISE REVENUES AND EXPENDITURES.” Furthermore, the remedies available to the owners of the 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. Remedies available to the Owners may be further limited by a variety of factors and may be inadequate to assure the timely payment of principal of and interest and premium, if any, on the Bonds or to preserve the tax-exempt status of interest on the Bonds.

Bond Counsel has limited its opinion as to the enforceability of the Bonds and the Indenture to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium, or other similar laws affecting generally the enforcement of creditor’s rights, by equitable principles and by the exercise of judicial discretion. The lack of availability of certain remedies or the limitation of remedies may entail risks of delay in the exercise of, or limitations on or modifications to, the rights of the Owners.

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Enforceability of the rights and remedies of the owners of the Bonds may become subject to the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditor’s rights generally, now or hereafter in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the United States of America of the powers delegated to it by the Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose and the limitations on remedies against governmental entities in the State.

Future Initiative and Legislation

California’s constitutional initiative process has resulted in the adoption of measures which pose certain limits on the ability of cities and local agencies to generate revenues, through property taxes or otherwise. From time to time, other initiative measures could be adopted, affecting the City’s ability to generate revenues and to increase appropriations. No assurances can be given as to the potential impact of any future initiative or legislation on the finances and operations of the City.

Loss of Tax Exemption

In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, the Authority and the City have covenanted to not take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the Bonds under Section 103 of the Internal Revenue Code of 1986, as amended. Failure to comply with such covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. See “LEGAL MATTERS - Tax Matters.”

Secondary Market

There can be no assurance that there will be a secondary market for the Bonds, or if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, pricing of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could substantially differ from the original purchase price.

IRS Audit of Tax-Exempt Bond Issues

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

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CONSTITUTIONAL PROVISIONS AFFECTING ENTERPRISE REVENUES AND EXPENDITURES

Article XIIIA and Article XIIIB

Pursuant to California law, any fee that exceeds the reasonable cost of providing the service for which the fee is charged is a “special tax,” which under Article XIIIA of the California Constitution must be authorized by a two-thirds vote of the electorate. This requirement may be applicable to rates for water service and capacity charges, to the extent that such rates and charges exceed the reasonable costs of providing service. In addition, the California courts have determined that fees imposed as a condition of approval of a development project, such as impact fees for water service, will not be special taxes if the fees approximate the reasonable cost of constructing the related improvements contemplated by the local agency imposing the fee. Such court determinations have been codified in California Government Code Section 66005.

On November 6, 1979, California voters approved Proposition 4, the “Gann Initiative,” which added Article XIIIB to the California Constitution. Under Article XIIIB, state and local governmental entities have an annual “appropriations limit” and are not permitted to spend certain moneys that are called “appropriations subject to limitation” (consisting of tax revenues, state subventions, and certain other funds) in an amount higher than the “appropriations limit.”

Article XIIIB does not affect the appropriations of moneys that are excluded from the definition of “appropriations subject to limitation,” including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the “appropriations limit” is to be based on certain 1978-79 expenditures and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities’ revenues in any tax year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Certain expenditures are excluded from the appropriation limit, including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by voters and payments required to comply with court or federal mandates which without discretion required an expenditure for additional services or which unavoidably make the providing of existing services more costly.

The City believes that its rates and charges for water service do not exceed the costs the City reasonably bears in providing existing such services, and are presently in compliance with Article XIIIA and Article XIIIB.

Proposition 218: Article XIIIC and Article XIIID

General. On November 5, 1996, California voters approved Proposition 218, “the Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the California Constitution, providing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments, and property-related fees and charges. The City believes that it has complied with the requirements of Proposition 218 in all material respects with respect to the adoption of the City’s current charges for Enterprise services.

Article XIIIC. Article XIIIC provides that a local government may not impose, extend, or increase local taxes until such taxes are submitted to the electorate for approval. General taxes, imposed, extended, or increased for general governmental purposes of the city, require a majority vote and special taxes, imposed, extended, or increased for specific purposes, require a two thirds vote. In addition, Article XIIIC provides that the constitutional initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local taxes, assessments, fees, and charges. This provision with

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respect to the initiative power is not limited to taxes, assessments, fees, and charges imposed on or after November 6, 1996, the effective date of Proposition 218. However, on July 1, 1997, a bill was signed into law by the Governor of the State enacting Government Code Section 5854, which states: “Section 3 of Article XIIIC of the California Constitution, as adopted at the November 5, 1996 general election, shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after that date, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protection by Section 10 of Article I of the United States Constitution.” Government Code Section 5854 appears to limit the voters’ power to repeal or reduce Enterprise fees and charges if such reduction would interfere with the City’s payment of Installment Payments. If Government Code Section 5854 becomes the subject of a challenge, however, no guarantee can be made that the courts will agree with such interpretation.

Article XIIID. Article XIIID imposes various procedural and substantive requirements on local governments that levy an “assessment,” “fee,” or “charge.” Article XIIID defines “fees” or “charges” as “any levy other than an ad valorem tax, a special tax, or an assessment imposed by a [local government] upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service.” “Property related service” means a public service having a direct relationship to property ownership (property ownership includes tenancies where tenants are directly liable to pay the fee or charge). In particular, a fee or charge (i) may not exceed the funds required to provide the property related service, (ii) may not be used for any purpose other than that for which the fee or charge was imposed, (iii) may not exceed the proportional cost of the service attributable to the parcel, (iv) may not be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question, and (v) may not be imposed for general governmental services.

In addition, before any property related fee or charge may be imposed or increased, the local government agency must provide mailed notice 45 days in advance of a hearing regarding the proposed imposition or increase, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the local government agency may not impose or increase the fee or charge. Moreover, except for fees or charges for water, wastewater, and refuse collection services (or fees for electrical and gas service, which are expressly exempted from Proposition 218), no property related fee or charge may be imposed or increased without a majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds approval by those residing in the affected area and voting at the election. Article XIIID states that, beginning July 1, 1997, all fees or charges must comply with its provisions.

The ability of the City to comply with the covenants in the Installment Purchase Agreement, including the rate covenants described under “SOURCES OF PAYMENTS FOR THE BONDS - Rate Covenant,” in connection with the levy and collection of Enterprise service charges could be adversely affected by actions taken or not taken by voters, property owners or other persons obligated to pay Enterprise service charges.

Future Initiatives

Articles XIIIA, XIIIB, XIIIC and XIIID of the California Constitution were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time, other initiative measures could be adopted, further affecting the Enterprise revenues or the City’s ability to expend such revenues.

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LEGAL MATTERS

Enforceability of Remedies

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

Approval of Legal Proceedings

The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority. A complete copy of the proposed form of Bond Counsel opinion is contained in “APPENDIX E” hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

The Authority and the City have no knowledge of any fact or other information which would indicate that the Indenture, the Installment Purchase Agreement, or the Bonds are not so enforceable against the Authority and the City, as applicable, except to the extent such enforcement is limited by principles of equity, by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors’ rights generally and by limitations on legal remedies against municipalities in the State.

Certain legal matters will be passed on by Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel and by Jenkins & Hogin, LLP. Fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds.

Tax Matters

In the opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel to the Authority (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in “APPENDIX E” hereto.

To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The

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original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public.

Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The Authority has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.

Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. As one example, the Obama Administration recently announced a legislative proposal which, for tax years beginning on or after January 1, 2013, generally would limit the exclusion from gross income of interest on obligations like the Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. Other proposals have been made that could significantly reduce the benefit of, or otherwise affect, the exclusion from gross income of interest on obligations like the Bonds. The introduction or enactment of any such legislative proposals, clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and regarding the impact of future legislation, regulations or litigation, as to which Bond Counsel expresses no opinion.

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The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service (“IRS”) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority has covenanted, however, to comply with the requirements of the Code.

Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority or the Beneficial Owners to incur significant expense.

Absence of Litigation

The Authority will furnish a certificate dated the date of delivery of the Bonds to the effect that there is no litigation pending or, to the knowledge of the duly authorized officer of the Authority executing the certificate, threatened, seeking to restrain or enjoin the execution, sale or delivery of the Bonds, in any way contesting or affecting the authority for the execution, sale or delivery of the Bonds, or the execution and delivery of the Indenture, the Installment Purchase Agreement or the Continuing Disclosure Agreement, or in any way contesting the existence or powers of the Authority.

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CONCLUDING INFORMATION

Rating on the Bonds

Standard & Poor’s has assigned their rating of “AA” to the Bonds. Such rating reflects only the views of the rating agency and any desired explanation of the significance of such rating should be obtained from the rating agency. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds.

Underwriting

The Bonds were sold to Raymond James & Associates, Inc. (the “Purchaser”). The Purchaser is offering the Bonds at the prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Purchaser has purchased the Bonds at a price equal to $21,621,665.89, which amount represents the principal amount of the Bonds, plus a net original issue premium of $1,796,818.15, and less a Purchaser’s discount of $150,152.26. The Purchaser will pay certain of its expenses relating to the offering.

Verifications of Mathematical Computations

Grant Thornton LLP will verify from the information provided to them the mathematical accuracy as of the date of the closing on the Bonds of (1) the computations contained in the provided schedules to determine that the cash deposits listed in the schedules prepared by the Financial Advisor, to be held in escrow, will be sufficient to pay, when due, the principal, prepayment premium and interest requirements of the 2002 Certificates and 2003 Certificates, and (2) the computation of yield on the Bonds contained in the provided schedules used by Bond Counsel in its determination that the interest with respect to the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code. Grant Thornton LLP will express no opinion on the assumptions provided to them, nor as to the exemption from taxation of the interest with respect to the Bonds.

The Financial Advisor

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

Continuing Disclosure

The City has covenanted to provide certain financial information and operating data by not later than April 1 each year commencing April 1, 2013 and to provide the audited General Purpose Financial Statements of the City for the Fiscal Year ending June 30, 2012 and for each subsequent Fiscal Year when they are available (together, the “Annual Report”), and to provide notices of the occurrence of certain enumerated events. The Annual Report and such notices will be filed by the City on the Electronic Municipal Market Access Website (“EMMA”) operated by the Municipal Securities Rulemaking Board.

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The specific nature of the information to be contained in the Annual Report or the notices of material events and certain other terms of the continuing disclosure obligation are set forth in “APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT.” These covenants have been made in order to assist the Purchaser in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The City has never failed to comply, in all material respects, with its undertaking, to provide continuing disclosure under the Federal Securities laws.

Additional Information

The summaries and references contained herein with respect to the Indenture, the Installment Purchase Agreement, the Bonds, statutes and other documents, do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the Indenture, and the Installment Purchase Agreement may be obtained after delivery of the Bonds from the City of Chino Hills, 14000 City Center Drive, Chino Hills, California 91709.

References

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

Execution

The execution of this Official Statement has been duly authorized by the Board of Directors of the Chino Hills Financing Authority and by the City Council of the City of Chino Hills, respectively.

CHINO HILLS FINANCING AUTHORITY

By: /s/ Judy R. Lancaster

Treasurer

CITY OF CHINO HILLS

By: /s/ Judy R. Lancaster

Finance Director


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APPENDIX A

SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

The following is a summary of certain provisions of the Installment Purchase Agreement and theIndenture which are not described elsewhere in this Official Statement. These summaries do not purportto be comprehensive and reference should be made to the Installment Purchase Agreement and theIndenture for a full and complete statement of their provisions. All capitalized terms not defined in thisOfficial Statement or defined below have the meaning set forth in the Installment Purchase Agreementand the Indenture.

DEFINITIONS OF CERTAIN TERMS

“Acquisition Costs” means, with respect to the Acquisition Project, all costs of acquiring,constructing and installing the Acquisition Project, including but not limited to:

(a) all costs which the Authority or the City shall be required to pay to amanufacturer, vendor or contractor or any other Person under the terms of any contract orcontracts for the acquisition, construction or installation of the Acquisition Project;

(b) obligations of the Authority or the City incurred for labor and materials(including obligations payable to the Authority or the City for actual out-of-pocket expenses ofthe Authority or the City) in connection with the acquisition, construction or installation of theAcquisition Project;

(c) the costs of performance or other bonds and any and all types of insurance thatmay be necessary or appropriate to have in effect during the course of acquisition, constructionand installation of the Acquisition Project;

(d) all costs of design, planning, engineering and architectural services, including theactual out-of-pocket costs of the Authority or the City for test borings, surveys, estimates, plansand specifications, environmental documentation, permitting and preliminary investigationstherefor, development fees, sales commissions, and for supervising the acquisition, constructionand installation, as well as for the performance of all other duties required by or consequent to theproper acquisition, construction and installation of the Acquisition Project;

(e) Costs of Issuance; and

(f) any sums required to reimburse the Authority or the City for advances made bythe Authority or the City for any of the above items or for any other costs incurred and for workdone by the Authority or the City which are properly chargeable to the acquisition, constructionor installation of the Acquisition Project.

“Acquisition Fund” means the fund by that name established and held by the Trustee pursuant tothe Indenture.

“Acquisition Project” means the improvements to the Enterprise described under the caption“Acquisition Project” on Exhibit A to the Installment Purchase Agreement, as the same may be modifiedin accordance with the Installment Purchase Agreement.

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“Additional Obligations” means Obligations other than the Installment Purchase Agreement.

“Administrative Costs” means the ordinary and necessary administrative costs and incidentalexpenses related to the Authority Bonds, the Authority Indenture and the Installment PurchaseAgreement, including, but not limited to Trustee fees (including any fees and expenses of its counsel) andindemnification payable by the Authority pursuant to the Authority Indenture and fees incurred inconnection with the calculation of arbitrage rebate due to the federal government with respect to theAuthority Bonds.

“Affiliate” of another Person means any Person directly or indirectly controlling, controlled by,or under common control with, such other Person; for purposes of the Installment Purchase Agreement,control means the power to exercise a controlling influence over the management or policies of a Person,unless such power is solely the result of an official position with such Person.

“Annual Debt Service” means, for each Bond Year, the sum of (a) the interest due on theOutstanding Bonds in such Bond Year, assuming that the Outstanding Bonds are retired as scheduled(including by reason of mandatory sinking fund redemptions), and (b) the principal of the OutstandingBonds due in such Bond Year (including by reason of mandatory sinking fund redemptions).

“Authority” means the Chino Hills Financing Authority, a joint exercise of powers authorityorganized and existing under the laws of the State, and any successor thereto.

“Authority Revenues” means all Installment Payments.

“Authorized Denominations” means $5,000 and any integral multiple thereof.

“Authorized Representative” means (a) with respect to the Authority, the Executive Director ofthe Authority, the Treasurer of the Authority and the Secretary of the Authority, and any other Persondesignated as an Authorized Representative of the Authority in a Written Certificate of the Authority filedwith the Trustee, and (b) with respect to the City, the City Manager of the City and the Finance Directorof the City, and any other Person designated as an Authorized Representative of the City in a WrittenCertificate of the City filed with the Trustee.

“Beneficial Owners” means those Persons for which the Participants have caused the Depositoryto hold Book-Entry Bonds.

“Bond Counsel” means a firm of nationally recognized bond counsel selected by the Authority.

“Bond Fund” means the fund by that name established and held by the Trustee pursuant to theIndenture.

“Bond Law” means the Marks-Roos Local Bond Pooling Act of 1985, constituting Sections6584 et seq. of the California Government Code.

“Bond Year” means each twelve-month period beginning on June 2 in each year and extendingto the next succeeding June 1, both dates inclusive, except that the first Bond Year shall begin on theClosing Date and end on June 1, 2013.

“Bonds” or “Authority Bonds” means the Chino Hills Financing Authority Water RevenueBonds, Series 2012, issued under the Indenture.

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“Book-Entry Bonds” means the Bonds registered in the name of the Depository, or the Nomineethereof, as the registered owner thereof pursuant to the terms and provisions of the Indenture.

“Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday in the State, (b)a day on which banking institutions in the State, or in any state in which the Office of the Trustee islocated, are required or authorized by law (including executive order) to close, or (c) a day on which theNew York Stock Exchange is closed.

“Cede & Co.” means Cede & Co., the nominee of DTC, and any successor nominee of DTCwith respect to Book-Entry Bonds.

“City” means the City of Chino Hills, a municipal corporation and general law city organizedand existing under the laws of the State, and its successors.

“Closing Date” means the date on which the Bonds are delivered to the Original Purchaser.

“Code” means the Internal Revenue Code of 1986.

“Continuing Disclosure Agreement” means the Continuing Disclosure Agreement, dated as ofDecember 1, 2012, by and between the City and U.S. Bank National Association, as Trustee, as originallyexecuted and as it may be amended from time to time in accordance with the terms thereof.

“Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursableto the Authority or the City relating to the authorization, issuance, sale and delivery of the Bonds,including but not limited to printing expenses, rating agency fees, filing and recording fees, initial fees,expenses and charges of the Trustee and its counsel, including the Trustee’s first annual administrativefee, fees, charges and disbursements of attorneys, financial advisors, accounting firms, consultants andother professionals, fees and charges for preparation, execution and safekeeping of the Bonds, anypremium for bond insurance for the Bonds and any other cost, charge or fee in connection with theoriginal issuance of the Bonds.

“Costs of Issuance Fund” means the fund by that name established and held by the Trusteepursuant to the Indenture.

“Credit Enhanced Obligations” means Obligations, the payments with respect to which aresecured by an irrevocable letter of credit, surety bond, insurance policy or other credit facility orarrangement with an entity that the City is obligated to reimburse for advances made for amounts due onsuch Credit Enhanced Obligations.

“Credit Enhancer” means the entity issuing or providing the irrevocable letter of credit, suretybond, insurance policy or other credit facility or arrangement securing payments with respect to CreditEnhanced Obligations.

“Defeasance Securities” means (a) direct general obligations of the United States of America(including obligations issued or held in book entry form on the books of the Department of the Treasuryof the United States of America), or (b) obligations guaranteed as to principal and interest by, the UnitedStates of America or any agency or instrumentality thereof, when such obligations are backed by the fullfaith and credit of the United States of America; provided, however, that such obligations shall not becallable or prepayable prior to maturity.

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“Depository” means DTC, and its successors as securities depository for Book-Entry Bonds,including any such successor appointed pursuant to the Indenture.

“DTC” means The Depository Trust Company, a limited-purpose trust company organized underthe laws of the State of New York.

“Event of Default” means, with respect to the Installment Purchase Agreement, any event orcircumstance described under the caption “INSTALLMENT PURCHASE AGREEMENT – Events ofDefault and Remedies – Events of Default” and, with respect to the Indenture, any event or circumstancesdescribed under the caption “INDENTURE – Events of Default and Remedies – Events of Default.”

“Fiscal Year” means the period beginning on July 1 of each year and ending on the nextsucceeding June 30, or any other twelve-month designated as the official Fiscal Year of the City.

“Generally Accepted Accounting Principles” means the uniform accounting and reportingprocedures set forth in publications of the American Institute of Certified Public Accountants or itssuccessor, or by any other generally accepted authority on such procedures, and includes, as applicable,the standards set forth by the Governmental Accounting Standards Board or its successor.

“Indenture” or “Authority Indenture” means the Indenture, dated as of December 1, 2012, byand between the Authority and U.S. Bank National Association, as Trustee, as originally executed and asit may from time to time be amended or supplemented from time to time by any Supplemental Indenture.

“Independent Consultant” means a financial consultant, engineer or accountant, or firm of suchfinancial consultants, engineers or accountants, which is generally recognized within its profession forwork of the character required and that (a) is in fact independent and not under the domination of the City,the Authority or any Affiliate of the City or the Authority, (b) does not have any substantial interest,direct or indirect, with the City, the Authority or any Affiliate of the City or the Authority, and (c) is notconnected with the City, the Authority or any Affiliate of the City or the Authority as a member, officeror employee thereof, but who may be regularly retained to make annual or other reports thereto.

“Installment Payments” means the Installment Payments required to be made by the Citypursuant to the Installment Purchase Agreement.

“Installment Payment Date” means May 15 and November 15 of each year, commencing May15, 2013.

“Installment Purchase Agreement” means the Installment Purchase Agreement, dated as ofDecember 1, 2012, by and between the City and the Authority, as originally executed and as it may fromtime to time be amended in accordance with the terms thereof.

“Interest Account” means the account by that name within the Bond Fund established and heldby the Trustee pursuant to the Indenture.

“Interest Payment Date” means June 1 and December 1 of each year, commencing June 1,2013.

“Letter of Representations” means the Letter of Representations from the Authority to theDepository, in which the Authority makes certain representations with respect to issues of its securitiesfor deposit by the Depository.

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“Maximum Annual Debt Service” means the largest Annual Debt Service for any Bond Year,including the Bond Year the calculation is made.

“Moody’s” means Moody’s Investors Service, Inc., a corporation duly organized and existingunder the laws of the State of Delaware, and its successors and assigns, except that if such entity shall bedissolved 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 selectedby the Authority.

“Net Proceeds” means, when used with respect to any insurance, self insurance or condemnationaward, the proceeds from such insurance or condemnation award remaining after payment of all expenses(including attorneys’ fees) incurred in the collection of such proceeds.

“Nominee” means the nominee of the Depository, which may be the Depository, as determinedfrom time to time pursuant to the Indenture.

“Obligation Payments” means Senior Obligation Payments and Subordinate ObligationPayments.

“Obligation Trustees” means the Senior Obligation Trustees and the Subordinate ObligationTrustees.

“Office of the Trustee” means the principal corporate trust office of the Trustee in Los Angeles,California or such other office as may be specified to the Authority by the Trustee in writing; provided,however, that with respect to presentation of Bonds for payment or for registration of transfer andexchange, such term shall mean the office or agency of the Trustee at which, at any particular time, itscorporate trust agency business shall be conducted, which other office or agency shall be specified to theAuthority by the Trustee in writing.

“Opinion of Counsel” means a written opinion of Bond Counsel.

“Original Purchaser” means the original purchaser of the Bonds from the Authority.

“Outstanding” means, when used as of any particular time with reference to Bonds, subject tothe provisions for disqualified bonds under the Indenture, all Bonds theretofore, or thereupon being,authenticated and delivered by the Trustee under the Indenture except (a) Bonds theretofore canceled bythe Trustee or surrendered to the Trustee for cancellation, (b) Bonds with respect to which all liability ofthe Authority shall have been discharged in accordance with the provisions of the Indenture describedunder the caption “INDENTURE – Defeasance – Discharge of Indenture,” and (c) Bonds in lieu of whichother Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

“Owner” means, with respect to a Bond, the Person in whose name such Bond is registered onthe Registration Books.

“Participant” means any entity which is recognized as a participant by DTC in the book-entrysystem of maintaining records with respect to Book-Entry Bonds.

“Participating Underwriter” has the meaning ascribed to such term in the ContinuingDisclosure Agreement.

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“Permitted Encumbrances” means, with respect to the Enterprise or any part thereof (a) liensfor taxes or other governmental charges or levies not delinquent or that are being contested in good faithby the City, (b) defects, irregularities, encumbrances, easements, including easements for roads and publicutilities and similar easements, rights of way, mineral conveyances, mineral reservations and clouds ontitle that do not materially impair the use of the property affected thereby for its intended purposes, (c)mechanics’, workers’, repairmen’s, architects’, engineers’, surveyors’, or carriers’ liens or other similarliens provided that the same shall be discharged in the ordinary course of business and without unduedelay or the validity of the same shall be contested in good faith with any pending execution thereofappropriately stayed, (d) other liens, charges and encumbrances that, in the written opinion of counsel tothe City, a copy of which is filed with the Trustee, do not materially impair the use of the Enterprise (forpurposes of the Installment Purchase Agreement, counsel to the City may rely upon a certificate of anyengineer or any architect as to whether such liens, charges and encumbrances prevent or materially impairthe use of the Enterprise), and (e) encumbrances on property, plant and equipment comprising a part ofthe Enterprise to the extent permitted by the Installment Purchase Agreement as summarized under thecaption “INSTALLMENT PURCHASE AGREEMENT – Covenants – Against Encumbrances.”

“Permitted Investments” means the following, to the extent that such securities are otherwiseeligible legal investments of the Authority:

(1) Direct general obligations of the United States of America (including obligations issuedor held in book-entry form on the books of the Department of the Treasury of the United States ofAmerica);

(2) Obligations of any of the following federal agencies which obligations represent the fullfaith and credit of the United States of America, including:

- Export-Import Bank- Rural Economic Community Development Administration- U.S. Maritime Administration- Small Business Administration- U.S. Department of Housing & Urban Development (PHAs)- Federal Housing Administration- Federal Financing Bank;

(3) Direct obligations of any of the following federal agencies which obligations are not fullyguaranteed by the full faith and credit of the United States of America:

- Senior debt obligations issued by the Federal National Mortgage Association (FNMA) orFederal Home Loan Mortgage Corporation (FHLMC)

- Obligations of the Resolution Funding Corporation (REFCORP)- Senior debt obligations of the Federal Home Loan Bank System;

(4) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances withdomestic commercial banks which have a rating on their short term certificates of deposit on the date ofpurchase of “P-1” by Moody’s and “A-1” or “A-1+” by S&P and maturing not more than 360 calendardays after the date of purchase (ratings on holding companies are not considered as the rating of thebank);

(5) Commercial paper which is rated at the time of purchase in the single highestclassification, “P-1” by Moody’s and “A-1+” by S&P and which matures not more than 270 calendardays after the date of purchase;

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(6) Investments in a money market fund rated “AAAm” or “AAAm-G” or better by S&P,including a fund for which the Trustee, its parent holding company, if any, or any affiliates or subsidiariesof the Trustee provide investment advisory or other management services;

(7) Pre-refunded Municipal Obligations defined as follows: any bonds or other obligations ofany state of the United States of America or of any agency, instrumentality or local governmental unit ofany such state which are not callable at the option of the obligor prior to maturity or as to whichirrevocable instructions have been given by the obligor to call on the date specified in the notice; and

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

(b) (i) which are fully secured as to principal and interest and redemption premium, ifany, by an escrow consisting only of cash or obligations described in paragraph (1) or (2) above,which escrow may be applied only to the payment of such principal of and interest andredemption premium, if any, on such bonds or other obligations on the maturity date or datesthereof or the specified redemption date or dates pursuant to such irrevocable instructions, asappropriate, and (ii) which escrow is sufficient, as verified by a nationally recognizedindependent certified public accountant, to pay principal of and interest and redemption premium,if any, on the bonds or other obligations described in this paragraph on the maturity date or datesspecified in the irrevocable instructions referred to above, as appropriate;

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

(9) Investment agreements with a domestic or foreign bank or corporation (other than a lifeor property casualty insurance company) the long-term debt of which, or, in the case of a guaranteedcorporation the long-term debt, or, in the case of a monoline financial guaranty insurance company,claims paying ability, of the guarantor is rated at least “Aa1” by Moody’s and “AA+” by S&P; provided,that, by the terms of the investment agreement:

(a) the invested funds are available for withdrawal without penalty or premium, atany time upon not more than seven days’ prior notice;

(b) the investment agreement shall state that it is the unconditional and generalobligation of, and is not subordinated to any other obligation of, the provider thereof or, if theprovider is a bank, the agreement or the opinion of counsel shall state that the obligation of theprovider to make payments thereunder ranks pari passu with the obligations of the provider to itsother depositors and its other unsecured and unsubordinated creditors;

(c) the Trustee or the Authority receive the opinion of domestic counsel that suchinvestment agreement is legal, valid and binding and enforceable against the provider inaccordance with its terms and of foreign counsel (if applicable);

(d) the investment agreement shall provide that if during its term (i) the provider’srating by either Moody’s or S&P falls below “Aa2” or “AA,” respectively, the provider shall, atits option, within 10 days of receipt of publication of such downgrade, either (A) collateralize theinvestment agreement by delivering or transferring in accordance with applicable state andfederal laws (other than by means of entries on the provider’s books) to the Trustee or a holder ofthe collateral, collateral free and clear of any third-party liens or claims the market value of whichcollateral is maintained at levels and upon such conditions as would be acceptable to Moody’s

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and S&P to maintain an “AA” rating in an “AA” rated structured financing (with a market valueapproach); or (B) repay the principal of and accrued but unpaid interest, on the investment, and(ii) the provider’s rating by either Moody’s or S&P is withdrawn or suspended or falls below“A1” or “A+,” respectively, the provider must, at the direction of the Authority or the Trustee,within 10 days of receipt of such direction, repay the principal of and accrued but unpaid intereston the investment, in either case with no penalty or premium to the Trustee;

(e) the investment agreement shall state, and an opinion of counsel shall be rendered,in the event collateral is required to be pledged by the provider under the terms of the investmentagreement, at the time such collateral is delivered, that the holder of collateral has a perfected firstpriority security interest in the collateral, any substituted collateral and all proceeds thereof (in thecase of bearer securities, this means the holder of collateral is in possession);

(f) the investment agreement must provide that if during its term (i) the providershall default in its payment obligations, the provider’s obligations under the investmentagreement shall, at the direction of the Authority or the Trustee, be accelerated and amountsinvested and accrued but unpaid interest thereon shall be repaid to the Trustee, and (ii) theprovider shall become insolvent, not pay its debts as they become due, be declared or petition tobe declared bankrupt, etc., the provider’s obligations shall automatically be accelerated andamounts invested and accrued but unpaid interest thereon shall be repaid to the Trustee; and

(f) the Local Agency Investment Fund maintained by the Treasurer of the State.

(10) The investment pool maintained by the Treasurer of the County of San Bernardino.

“Person” means an individual, corporation, limited liability company, firm, association,partnership, trust, or other legal entity or group of entities, including a governmental entity or any agencyor political subdivision thereof.

“Principal Account” means the account by that name within the Bond Fund established and heldby the Trustee pursuant to the Indenture.

“Project” means, collectively, the Acquisition Project and the Saleback Project.

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

“Rebate Requirement” has the meaning ascribed to such term in the Tax Certificate.

“Record Date” means, with respect to interest payable on any Interest Payment Date, the 15th

calendar day of the month preceding such Interest Payment Date, whether or not such day is a BusinessDay.

“Redemption Price” means the aggregate amount of principal of and premium, if any, on theBonds upon the redemption thereof pursuant to the Indenture.

“Redemption Fund” means the fund by that name established and held by the Trustee pursuantto the Indenture.

“Registration Books” means the records maintained by the Trustee for the registration ofownership and registration of transfer of the Bonds pursuant to the Indenture.

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“Reserve Facility” means a line of credit, letter of credit, insurance policy, surety bond or othercredit source, the long-term unsecured obligations of the issuer of which are rated at the time of issuanceof such Reserve Facility at least “A” by Moody’s or S&P, deposited in lieu of cash in a Senior ObligationReserve Fund.

“Reserve Fund” means the fund by that name established and held by the Trustee pursuant to theIndenture.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies,Inc., a corporation duly organized and existing under the laws of the State of New York, and itssuccessors and assigns, except that if such entity shall be dissolved or liquidated or shall no longerperform the functions of a securities rating agency, then the term “S&P” shall be deemed to refer to anyother nationally recognized securities rating agency selected by the Authority.

“Saleback Project” means the improvements to the Enterprise described under the caption“Saleback Project” on Exhibit A to the Installment Sale Agreement.

“Senior Obligation Payments” means the installment, lease or other similar payments payableby the City under and pursuant to Senior Obligations.

“Senior Obligation Reserve Fund” means, with respect to a Senior Obligation, any debt servicereserve fund or account established to secure the payment of Senior Obligation Payments with respect tosuch Senior Obligation.

“Senior Obligation Trustee” means, with respect to a Senior Obligation, the trustee, fiscal agentor other fiduciary authorized to act for the benefit and on behalf of the owners of such Senior Obligationor the owners of interests in such Obligation, as the case may be.

“State” means the State of California.

“Subordinate Obligation Payments” means the installment, lease or other similar paymentspayable by the City under and pursuant to Subordinate Obligations.

“Subordinate Obligation Reserve Fund” means, with respect to a Subordinate Obligation, anydebt service reserve fund or account established to secure the payment of Subordinate ObligationPayments with respect to such Subordinate Obligation.

“Subordinate Obligation Trustee” means, with respect to a Subordinate Obligation, the trustee,fiscal agent or other fiduciary authorized to act for the benefit and on behalf of the owners of suchSubordinate Obligation or the owners of interests in such Obligation, as the case may be.

“Supplemental Indenture” means any supplemental indenture amendatory of or supplemental tothe Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorizedunder the Indenture.

“Tax Certificate” means the Tax Certificate executed by the Authority at the time of issuance ofthe Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may beamended from time to time in accordance with the terms thereof.

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“Trustee” means U.S. Bank National Association, a national banking association organized andexisting under the laws of the United States of America, or any successor thereto as Trustee under theIndenture, substituted in its place as provided therein.

“Variable Rate Obligation” means an Obligation, the interest on or payable with respect to is, atthe time such Obligation is issued or incurred, payable at a rate that is subject to fluctuation or subsequentadjustment, which rate and not, at some subsequent date, been established at a rate which is not subject tofluctuation or subsequent adjustment.

“Verification Report” means, with respect to the deemed payment of Bonds pursuant to theIndenture described under the caption “INDENTURE – Defeasance – Bonds Deemed to Have BeenPaid,” a report of a nationally recognized certified public accountant, or firm of such accountants,verifying that the Defeasance Securities and cash, if any, deposited in connection with such deemedpayment satisfy the requirements of the Indenture.

“Water Purchase Agreement” means the Water Purchase Agreement, dated as of January 15,2002, by and between the Authority and the City, as amended by the Letter Agreement, dated April 30,2008, by and among the Authority, the City and the other participants, as the same may be furthermodified or amended in accordance with the terms thereof.

“Written Certificate” and “Written Request” mean (a) with respect to the Authority, a writtencertificate or written request, respectively, signed in the name of the Authority by an AuthorizedRepresentative of the Authority, and (b) with respect to the City, a written certificate or written request,respectively, signed in the name of the City by an Authorized Representative of the City. Any suchcertificate or request may, but need not, be combined in a single instrument with any other instrument,opinion or representation, and the two or more so combined shall be read and construed as a singleinstrument.

INSTALLMENT PURCHASE AGREEMENT

Purchase of Saleback Project by, and Sale Thereof to, the Authority; Payment

Purchase and Sale of Saleback Project. The City represents and warrants that it is the sole andexclusive owner of the Saleback Project. The Authority purchases from the City, and the City sells to theAuthority, the Saleback Project in accordance with the provisions of the Installment Purchase Agreement.All right, title and interest in the Saleback Project shall immediately vest in the Authority on the ClosingDate without further action on the part of the Authority or the City.

Payment. On the Closing Date, the Authority shall pay to the City, as and for the purchase priceof the Saleback Project, the amount specified in the Installment Purchase Agreement, which amount shallbe paid from the proceeds of the Authority Bonds.

Acquisition, Construction and Installation of the Acquisition Project

Acquisition, Construction and Installation of the Acquisition Project. The Authority agrees tocause the Acquisition Project to be acquired, constructed and installed by the City, as agent of theAuthority. The City shall enter into contracts and provide for, as agent of the Authority, the completeacquisition, construction and installation of the Acquisition Project. The City agrees that it will cause theacquisition, construction and installation of the Acquisition Project to be diligently performed. It isexpressly understood and agreed that, except to the extent of proceeds of the Authority Bonds madeavailable to the City on the Closing Date, the Authority shall be under no liability of any kind or character

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whatsoever for the payment of any cost of the Acquisition Project. In the event the proceeds of theAuthority Bonds so made available are insufficient to complete the acquisition, construction andinstallation of the Acquisition Project, the City shall cause to be applied from and to the extent of otheravailable City funds, an amount equal to that necessary to complete the acquisition, construction andinstallation of the Acquisition Project.

Changes to the Acquisition Project. The City may make any changes in the composition anddescription of the Acquisition Project or any component thereof whenever the City deems such changes tobe necessary and appropriate; provided, however, that no such change shall (a) impair the ability of theCity to make the Installment Payments, (b) cause to be included in the Acquisition Project any propertynot constituting property useful in the performance of the City’s powers, projects and purposes, or (c)cause the Acquisition Project or any such component thereof to have an estimated useful life materiallyshorter than the estimated useful life of the Acquisition Project or such component prior to such change.Any such change shall be implemented by the City’s filing with the Authority and the Trustee adescription of such change and, upon such filing, the description of the Acquisition Project contained inExhibit A to the Installment Purchase Agreement shall be deemed to have been modified in accordancetherewith. No such change shall constitute a modification or amendment of the Installment PurchaseAgreement for purposes of the provisions of the Installment Purchase Agreement described under thecaption “INSTALLMENT PURCHASE AGREEMENT – Amendments – Amendment of InstallmentPurchase Agreement.”

Purchase and Sale of Project; Payments; Discharge of Obligations

Purchase and Sale of Project. The City purchases from the Authority, and the Authority sells tothe City, for the Installment Payments, the Project in accordance with the provisions of the InstallmentPurchase Agreement. All right, title and interest in the Project shall immediately vest in the City on theClosing Date without further action on the part of the City or the Authority.

Installment Payments. The City shall pay to the Authority, from Net Revenues, the InstallmentPayments at the times and in the amounts provided in the Installment Purchase Agreement. The amountof the Installment Payment payable by the City on each Installment Payment Date shall be equal to theinterest on, or the principal of (including mandatory sinking fund redemptions) and interest on, asapplicable, the Authority Bonds due on the following Interest Payment Date. Pursuant to the AuthorityIndenture, the Installment Payments are to be applied to the payment of the principal of and interest onthe Authority Bonds, and the Installment Payments shall be made in amounts that are sufficient, but nomore than sufficient, to pay the scheduled payments of principal of (including mandatory sinking fundredemptions) and interest on the Outstanding Authority Bonds. If and to the extent that, on anyInstallment Payment Date, there are amounts on deposit in the Bond Fund established under the AuthorityIndenture, said amounts shall be credited against the Installment Payment due on such InstallmentPayment Date. Each Installment Payment shall be paid to the Trustee, as assignee of the Authority, nolater than the applicable Installment Payment Date, in lawful money of the United States of America, infunds which will be available not later than the Business Day following such payment.

The Installment Purchase Agreement constitutes a Senior Obligation and the InstallmentPayments constitute Senior Obligation Payments.

Reserve Fund Payments. The City shall maintain or cause to be maintained in the Reserve Fundestablished under the Authority Indenture an amount equal to the Reserve Requirement; provided,however, that any replenishment thereof shall be payable solely from Net Revenues after the payment orsetting aside therefrom of amounts required for the payment of Debt Service on Senior Obligations. If anevent occurs that causes the amount on deposit in the Reserve Fund to be reduced below, or further

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below, the Reserve Requirement, then on or before the last Business Day of each month, commencing onor before the last Business Day of the month in which such event occurs, the City shall transfer, from NetRevenues after the payment or setting aside therefrom of amounts required for the payment of DebtService on Senior Obligations, to the Trustee for deposit in the Reserve Fund, 1/12 of the amount of suchreduction, except that no such transfer to the Trustee and deposit in the Reserve Fund need be made if theamount available and contained therein is at least equal to the Reserve Requirement.

Late Payments. In the event the City fails to make any of the payments required to be made by itunder the Installment Purchase Agreement, such payment shall continue as an obligation of the City untilsuch amount shall have been fully paid and, to the extent permitted by law, the City shall pay the samewith interest accruing thereon at the rate equal to the highest interest rate borne by any of the OutstandingAuthority Bonds.

Nature of Installment Purchase Agreement; Liability of City Limited. The Installment PurchaseAgreement constitutes a Senior Obligation and the Installment Payments constitute Senior ObligationPayments.

The obligation of the City to pay the Installment Payments and other payments required to bemade by it under the Installment Purchase Agreement is a special obligation of the City payable, in themanner provided in the Installment Purchase Agreement, solely from Net Revenues and other fundsprovided for therein, and does not constitute a debt of the City or of the State, or of any politicalsubdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction.Neither the faith and credit nor the taxing power of the City or the State, or any political subdivisionthereof, is pledged to the payment of the Installment Payments or other payments required to be madeunder the Installment Purchase Agreement.

Notwithstanding anything contained in the Installment Purchase Agreement, the City shall not berequired to advance any moneys derived from any source of income other than Net Revenues and theother funds provided in the Installment Purchase Agreement for the payment of the Installment Paymentsand other payments required to be made by it under the Installment Purchase Agreement, or for theperformance of any agreements or covenants required to be performed by it contained in the InstallmentPurchase Agreement. The City may, however, but in no event shall be obligated to, advance moneys forany such purpose so long as such moneys are derived from a source legally available for such purpose andmay be legally used by the City for such purpose.

Obligation Absolute. The obligation of the City to make the Installment Payments and otherpayments required to be made by it under provisions of the Installment Purchase Agreement solely fromNet Revenues, is absolute and unconditional, and until such time as the Installment Payments and suchother payments shall have been paid in full (or such obligations shall have been discharged and satisfiedpursuant to the Installment Purchase Agreement), the City shall not discontinue or suspend anyInstallment Payments or other payments required to be made by it under the Installment PurchaseAgreement when due, whether or not the Project or any part thereof is operating or operable or has beencompleted, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part,and such Installment Payments and other payments shall not be subject to reduction whether by offset orotherwise and shall not be conditional upon the performance or nonperformance by any party of anyagreement for any cause whatsoever.

Discharge of Obligations. If the Authority shall pay or cause to be paid or there shall otherwisebe paid to the Owners of all Outstanding Authority Bonds the interest thereon and the principal thereofand the premiums, if any, thereon or if all Outstanding Authority Bonds shall be deemed to have beenpaid at the times and in the manner stipulated in the Authority Indenture, and if all amounts then due and

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payable under the Installment Purchase Agreement shall have been paid or provided for, then allagreements, covenants and other obligations of the City under the Installment Purchase Agreement shallthereupon cease, terminate and become void and be discharged and satisfied.

Pledges; Funds and Accounts

Pledge of Net Revenues. Subject only to the provisions of the Installment Purchase Agreementpermitting the application thereof for the purposes and on the terms and conditions set forth in theInstallment Purchase Agreement, in order to secure the payment of the Senior Obligations in accordancewith their terms and the provisions of the Installment Purchase Agreement, the City pledges to the ownersof Senior Obligations, and grants thereto a lien on and a security interest in, all of the Net Revenues andany other amounts held in the Senior Obligation Payment Account. Said pledge shall constitute a first lienon and security interest in such assets, which shall immediately attach to such assets and be effective,binding and enforceable against the City, its successors, purchasers of any of such assets, creditors and allothers asserting rights therein, to the extent set forth in, and in accordance with, the Installment PurchaseAgreement, irrespective of whether those parties have notice of the pledge of, lien on and security interestin such assets and without the need for any physical delivery, recordation, filing or further act.

Establishment of Funds and Accounts. The City agrees to establish and maintain within itstreasury, so long as any Senior Obligations remains outstanding, a separate fund designated the “City ofChino Hills Water Enterprise Fund” (the “Enterprise Fund”). Subject to the provisions summarized in thefollowing paragraph, the City agrees to establish and maintain within the Enterprise Fund the followingaccounts:

(a) Senior Obligation Payment Account; and

(b) Subordinate Obligation Payment Account.

Notwithstanding the foregoing, the City need only establish a Subordinate Obligation PaymentAccount if and when it issues or incurs Subordinate Obligations.

The City may establish such other accounts within the Enterprise Fund as it determines may benecessary or appropriate for the management of the financial affairs of the Enterprise.

Allocation of Revenues. All Revenues received by the City shall be deposited in the EnterpriseFund when and as received. The City shall pay from the Enterprise Fund all Operation and MaintenanceExpenses (including amounts reasonably required to be set aside in contingency reserves for Operationand Maintenance Expenses, the payment of which is not immediately required) as and when the sameshall be due and payable.

After having paid, or having made provision for the payment of, Operation and MaintenanceExpenses, the City shall set aside and deposit or transfer, as the case may be, from the Enterprise Fund theamounts set forth below at the following times and in the following order of priority:

(a) Senior Obligation Payment Account. On or before each date on which SeniorObligation Payments are due and payable, the City shall transfer legally available Net Revenuesto the Senior Obligation Payment Account in an amount which, together with other amounts ondeposit therein, is at least equal to such Senior Obligation Payments; provided, however, that nosuch deposit need be made if amounts on deposit in the Senior Obligation Payment Account areat least equal to the amount of such Senior Obligation Payments.

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(b) Senior Obligation Reserve Funds. The City shall transfer to each SeniorObligation Trustee with which a Senior Obligation Reserve Fund is established and held, fordeposit in the such Senior Obligation Reserve Fund or for payment of Reserve Facility Costs withrespect to a Reserve Facility held in such Reserve Fund in lieu of cash, as applicable, legallyavailable Net Revenues in an amount equal to the amount, if any, required to be deposited thereinto build up or replenish such Senior Obligation Reserve Fund as and to the extent required by theinstrument pursuant to which such Senior Obligation is issued or incurred or to pay such ReserveFacility Costs as provided in such Reserve Facility or in the contract or agreement entered into bythe City and the issuer of such Reserve Facility in connection with the issuance of such ReserveFacility, as applicable. In the event that there are insufficient Net Revenues to make all of thetransfers contemplated by this paragraph (b), then said transfers shall be made, as nearly aspracticable, pro rata, based on the respective principal amounts of the Senior Obligations,deposits to the Senior Obligation Reserve Funds for which, or payments of Reserve Facility Costswith respect to which, are required to be made.

(c) Subordinate Obligation Payment Account. On or before each date on whichSubordinate Obligation Payments are due and payable, the City shall transfer legally availableNet Revenues to the Subordinate Obligation Payment Account in an amount which, together withother amounts on deposit therein, is at least sufficient to such Subordinate Obligation Payments;provided, however, that no such deposit need be made if amounts on deposit in the SubordinateObligation Payment Account are at least equal to the amount of such Subordinate ObligationPayments.

(d) Subordinate Obligation Reserve Funds. The City shall transfer to eachSubordinate Obligation Trustee with which a Subordinate Obligation Reserve Fund is establishedand held, for deposit in the such Subordinate Obligation Reserve Fund or for payment of ReserveFacility Costs with respect to a Reserve Facility held in such Reserve Fund in lieu of cash, asapplicable, legally available Net Revenues in an amount equal to the amount, if any, required tobe deposited therein to build up or replenish such Subordinate Obligation Reserve Fund as and tothe extent required by the instrument pursuant to which such Subordinate Obligation is issued orincurred or to pay such Reserve Facility Costs as provided in such Reserve Facility or in thecontract or agreement entered into by the City and the issuer of such Reserve Facility inconnection with the issuance of such Reserve Facility, as applicable. In the event that there areinsufficient Net Revenues to make all of the transfers contemplated by this paragraph (d), thensaid transfers shall be made, as nearly as practicable, pro rata, based on the respective principalamounts of the Subordinate Obligations, deposits to the Subordinate Obligation Reserve Fundsfor which, or payments of Reserve Facility Costs with respect to which, are required to be made.

Amounts required or permitted to be deposited or transferred pursuant to paragraph (b), (c), or(d), above, shall not be so deposited or transferred unless the City shall have determined that there will besufficient Net Revenues available to make the required deposits or transfers pursuant to all paragraphsprior to said paragraph on the dates on which such deposits or transfers are required to be made. So longas the City has determined that Net Revenues will be sufficient to make all of the deposits or transfersrequired to be made pursuant to paragraphs (a), (b), (c) and (d), above, on the dates on which suchdeposits or transfers are required to be made, Net Revenues on deposit in the Enterprise Fund may fromtime to time be used for any purpose, including capital improvements, for which such funds may belegally applied.

Senior Obligation Payment Account. The City shall transfer from the Senior Obligation PaymentAccount to the appropriate Person the Senior Obligation Payments as and when due and payable. In theevent there are insufficient amounts on deposit in the Senior Obligation Payment Account to make all of

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such Senior Obligation Payments, then said payments shall be made, as nearly as practicable, pro rata,based on the respective principal amounts of the Senior Obligation payments due and payable.

Subordinate Obligation Payment Account. The City shall transfer from the SubordinateObligation Payment Account to the appropriate Person the Subordinate Obligation Payments as and whendue and payable. In the event there are insufficient amounts on deposit in the Subordinate ObligationPayment Account to make all of such Subordinate Obligations Payments, then said payments shall bemade, as nearly as practicable, pro rata, based on the respective principal amounts of the SubordinateObligation Payments due and payable.

Covenants

Compliance with Installment Purchase Agreement. The City shall punctually pay the InstallmentPayments and other payments required to be made by it under the Installment Purchase Agreement instrict conformity with the terms thereof, and shall faithfully observe and perform all the agreements,conditions, covenants and terms contained in the Installment Purchase Agreement required to be observedand performed by it, shall not suffer or permit any default to occur under the Installment PurchaseAgreement and shall not terminate the Installment Purchase Agreement for any cause, including, withoutlimiting the generality of the foregoing, any acts or circumstances that may constitute failure ofconsideration, destruction of or damage to the Project, commercial frustration of purpose, any change inthe tax or other laws of the United States of America or of the State or any political subdivision of eitheror any failure of the Authority to observe or perform any agreement, condition, covenant or termcontained in the Installment Purchase Agreement required to be observed and performed by it, whetherexpress or implied, or any duty, liability or obligation arising out of or connected with the InstallmentPurchase Agreement or the insolvency, or deemed insolvency, or bankruptcy or liquidation of theAuthority or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot,civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack oftransportation facilities, fire, explosion, or acts or regulations of governmental authorities.

Rate Covenant. (a) The City shall, subject to applicable requirements or restrictions imposed bylaw, prescribe, revise and collect rates, fees and charges for the services of the Enterprise that, afterallowances for contingencies and errors in estimates, shall produce Revenues sufficient in each FiscalYear to provide Net Revenues at least equal to (i) 1.15 times the Debt Service on Senior Obligationspayable during such Fiscal Year, and (ii) and 1.00 times the sum of (A) the Debt Service on SeniorObligations payable during such Fiscal Year, plus (B) the Debt Service on Subordinate Obligationspayable during such Fiscal Year, plus (C) the amount of Reserve Facility Costs payable during suchFiscal Year.

(b) If, in any Fiscal Year, rates, fees and charges for the services of the Enterprise, afterallowances for contingencies and errors in the estimates, shall produce Revenues insufficient in suchFiscal Year to provide Net Revenues at least equal to (i) 1.15 times the Debt Service on SeniorObligations payable during such Fiscal Year, and (ii) and 1.00 times the sum of (A) the Debt Service onSenior Obligations payable during such Fiscal Year, plus (B) the Debt Service on SubordinateObligations payable during such Fiscal Year, plus (C) the amount of Reserve Facility Costs payableduring such Fiscal Year, unless the City certifies that, in its best judgment, such insufficiency is unlikelyto occur in the next succeeding Fiscal Year, the City shall employ an Independent Consultant to makerecommendations as to a revision of the rates, fees and charges for the services of the Enterprise or themethods of operation of the Enterprise that will result in producing Net Revenues in the amount specifiedin paragraph (a) above.

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(c) The City shall, promptly upon its receipt of such recommendations from suchIndependent Consultant, subject to applicable requirements or restrictions imposed by law, and subject toa good faith determination of the City Council that such recommendations, in whole or in part, are in thebest interests of the City, revise the rates, fees and charges for the services of the Enterprise or its methodsof operation or collections and shall take such other action as shall be in conformity with suchrecommendations. In the event that the City fails to comply with such recommendations, subject to theapplicable requirements or restrictions imposed by law and to the determination of the City Council of theCity that such recommendations are in the best interests of the City, any Senior Obligation Trustee, may,in addition to the rights and remedies elsewhere set forth in the Installment Purchase Agreement, andshall, upon the written request of the owners of a majority in principal amount of such Senior Obligations,institute and prosecute an action or proceeding in a court of competent jurisdiction to compel the City tocomply with such recommendations and requirements. If the City complies in all material respects withthe reasonable recommendations of the Independent Consultant in respect to said rates, fees and chargesfor the services of the Enterprise and methods of operation or collection, the City shall be deemed to havecomplied with the covenants summarized under this caption (“– Rate Covenant”), notwithstanding thatNet Revenues shall be less than the amount required under the provisions summarized under this captionfor such Fiscal Year; provided, however, that such rates, fees and charges for the services of theEnterprise and methods of operation or collection shall produce Net Revenues equal to at least 1.00 timesthe sum of (i) the Debt Service on Senior Obligations payable during such Fiscal Year, plus (ii) the DebtService on Subordinate Obligations payable during such Fiscal Year, plus (iii) the amount of ReserveFacility Costs payable during such Fiscal Year; provided, further, however, that this sentence shall not beconstrued as in any way excusing the City from taking any action or performing any duty required underthe Installment Purchase Agreement or be construed as constituting a waiver of any other Event ofDefault under the Installment Purchase Agreement.

Tax Covenants. The City shall not take any action, or fail to take any action, if such action orfailure to take such action would adversely affect the exclusion from gross income of interest on theAuthority Bonds under Section 103 of the Code. Without limiting the generality of the foregoing, the Cityshall comply with the requirements of the Tax Certificate, which is incorporated in the InstallmentPurchase Agreement as if fully set forth therein. This covenant shall survive payment in full or defeasanceof the Authority Bonds.

Continuing Disclosure. The City shall comply with and carry out all of the provisions of theContinuing Disclosure Agreement applicable to it; provided, however, that failure of the City to complywith the Continuing Disclosure Agreement shall not be considered an Event of Default under theInstallment Purchase Agreement.

Protection of Security and Rights. The City shall preserve and protect the security of theInstallment Purchase Agreement and the rights of the Trustee, as assignee of the Authority, to theInstallment Payments and other payments required to be made by the City under the Installment PurchaseAgreement and shall warrant and defend such rights against all claims and demands of all Persons.

Punctual Payment. The City shall punctually pay or cause to be paid the Installment Payments instrict conformity with the terms of the Installment Purchase Agreement, according to the true intent andmeaning of the Installment Purchase Agreement, but only out of Net Revenues as provided in theInstallment Purchase Agreement.

Prompt Acquisition and Construction. The City shall take all necessary and appropriate steps toconstruct, acquire and install the Acquisition Project, as agent of the Authority, with all practicabledispatch and in an expeditious manner and in conformity with law so as to complete the same as soon aspossible.

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Against Encumbrances. Except as otherwise provided in the Installment Purchase Agreement,the City shall not mortgage or otherwise encumber, pledge or place any charge upon the Enterprise or anypart thereof, except for Permitted Encumbrances. The City shall discharge or cause to be discharged, orshall make adequate provision to satisfy and discharge, within 60 days after the same become due andpayable, all lawful costs, expenses, liabilities and charges relating to the maintenance, repair, replacementor improvement of the properties constituting the Enterprise or the operation of the Enterprise and lawfulclaims and demands for labor, materials, supplies or other objects that might by law become a lien uponthe Enterprise or Net Revenues if unpaid. Nothing summarized under this caption (“– AgainstEncumbrances”) shall require the City to pay or cause to be discharged, or make provision for thepayment, satisfaction and discharge of, any lien, charge, cost, liability, claim or demand so long as thevalidity thereof is contested in good faith and by appropriate legal proceedings.

The City may incur obligations secured by a lien on (i) rolling stock comprising a part of theEnterprise without limitation, and (ii) other property, plant and equipment comprising a part of theEnterprise; provided, however, that the principal amount of such obligations outstanding at any one timeshall not exceed 5% of the net property, plant and equipment of the Enterprise (not taking into accountany outstanding obligations with respect to rolling stock that is a part of the Enterprise) as shown on theaudited financial statements of the City for the most recent Fiscal Year for which audited financialstatements are available.

Against Sale or Other Disposition of Property. The City shall not sell, lease or otherwise disposeof the Enterprise or any part thereof essential to the proper operation of the Enterprise or to themaintenance of Revenues; provided, however, that any real or personal property which has become non-operative or which is not needed for the efficient and proper operation of the Enterprise, or any materialor equipment which has become worn out, may be sold if such sale will not materially reduce NetRevenues and if the proceeds of such sale are used for the purposes of the Enterprise. The City shall notenter into any agreement or lease which impairs the operation of the Enterprise or any part thereofnecessary to secure adequate Net Revenues for the payment of Installment Payments.

Maintenance and Operations of the Enterprise; Budgets. The City shall maintain and preserve theEnterprise in good repair and working order at all times and shall operate the Enterprise in an efficientand economical manner and shall pay all Operation and Maintenance Expenses as they become due andpayable; provided, however, that the City shall not be required to pay such Operation and MaintenanceExpenses if the validity thereof shall be contested in good faith (so long as such nonpayment will notmaterially adversely affect the City’s ability to perform its obligations under the Installment PurchaseAgreement)

The City shall prepare and adopt an annual budget for the Enterprise for each Fiscal Year. Suchbudget shall set forth in reasonable detail the Revenues anticipated to be derived in such Fiscal Year andthe expenditures anticipated to be paid or provided for therefrom in such Fiscal Year, including, withoutlimitation, the amounts required to pay or provide for the payment of the Senior Obligation Paymentsduring such Fiscal Year, the amounts required to pay or provide for the payment of Operation andMaintenance Expenses during such Fiscal Year and the amounts required to pay or provide for thepayment of all other claims or obligations required to be paid from Revenues in such Fiscal Year, andshall show that Revenues and Net Revenues shall be at least sufficient to satisfy the requirements of theInstallment Purchase Agreement. Any budget may be amended at any time by the City during the FiscalYear; provided, however, that any such amended budget shall show that Revenues and Net Revenuesshall be at least sufficient to satisfy the requirements of the Installment Purchase Agreement.

Payment of Claims. The City shall pay and discharge any and all lawful claims for labor,materials or supplies that, if unpaid, might become a lien on Revenues or any part thereof or on any funds

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in the hands of the City or any Senior Obligation Trustee that might impair the security of the SeniorObligations; provided, however, that the City shall not be required to pay such claims if the validitythereof shall be contested in good faith (so long as such nonpayment will not materially adversely affectthe City’s ability to perform its obligations under the Installment Purchase Agreement).

Compliance with Contracts. The City shall comply with, keep, observe and perform all materialagreements, conditions, covenants and terms, express or implied, required to be performed by it containedin all contracts for the use of the Enterprise and all other contracts affecting or involving the Enterprise.

Insurance. The City shall procure and maintain or cause to be procured and maintained casualtyinsurance on the Enterprise with responsible insurers, or provide self insurance (which may be providedin the form of risk-sharing pools), in such amounts and against such risks (including accident to ordestruction of the Enterprise) as are usually covered in connection with facilities similar to the Enterprise.In the event of any damage to or destruction of the Enterprise caused by the perils covered by suchinsurance or self insurance, the Net Proceeds thereof shall be applied to the reconstruction, repair orreplacement of the damaged or destroyed portion of the Enterprise. The City shall begin suchreconstruction, repair or replacement promptly after such damage or destruction shall occur, and shallcontinue and properly complete such reconstruction, repair or replacement as expeditiously as possible,and shall pay out of such Net Proceeds all costs and expenses in connection with such reconstruction,repair or replacement so that the same shall be completed and the Enterprise shall be free and clear of allclaims and liens unless the City determines that such property or facility is not necessary to the efficientor proper operation of the Enterprise and therefore determines not to reconstruct, repair or replace suchproject or facility. If such Net Proceeds exceed the costs of such reconstruction, repair or replacement,then the excess Net Proceeds shall be used for the purposes of the Enterprise.

The City shall procure and maintain such other insurance as it shall deem advisable or necessaryto protect its interests, which insurance shall afford protection in such amounts and against such risks asare usually covered in connection with facilities similar to the Enterprise; provided, however, that anysuch insurance may be maintained under a self-insurance program so long as such self-insurance ismaintained in the amounts and manner usually maintained in connection with facilities similar to theEnterprise and is, in the opinion of an accredited actuary, actuarially sound.

Eminent Domain Proceeds. If all or any part of the Enterprise shall be taken by eminent domainproceedings, the Net Proceeds thereof shall be applied to the replacement of the property or facilities sotaken, unless the City determines that such property or facilities are not necessary to the efficient orproper operation of the Enterprise and therefore determines not to replace such property or facilities. AnyNet Proceeds of such award not applied to replacement, or remaining after such work has been completed,shall be used for the purposes of the Enterprise.

Accounting Records. The City shall keep appropriate accounting records in which complete andcorrect entries shall be made of all transactions relating to the Enterprise, which records shall be availablefor inspection by the Authority and the Trustee at reasonable hours and under reasonable conditions.

Payment of Taxes and Compliance with Governmental Regulations. The City shall pay anddischarge all taxes, assessments and other governmental charges, if any, that may hereafter be lawfullyimposed upon the Enterprise or any part thereof or upon the Revenues, when the same shall become due;provided, however, that the City shall not be required to pay such taxes, assessments or governmentalcharges if the validity thereof shall be contested in good faith (so long as such nonpayment will notmaterially adversely affect the City’s ability to perform its obligations under the Installment PurchaseAgreement).

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The City shall duly observe and comply with all valid regulations and requirements of anygovernmental authority relative to the operation of the Enterprise or any part thereof; provided, however,that the City shall not be required to comply with any such regulations or requirements so long as thevalidity or application thereof shall be contested in good faith.

Collection of Charges, Fees and Rates; No Free Service. The City shall have in effect at all timesrules and regulations for the payment of bills for the services of the Enterprise, which rules andregulations shall provide for a due date and a delinquency date for each bill. The City shall not permit anypart of the Enterprise to be used or taken advantage of free of charge by any Person (other than the City),except to the extent required by federal or State law.

Administrative Costs. The City shall pay all Administrative Costs. Administrative Costs shall bepaid by the City directly to the Person or Persons to whom such amounts shall be payable. The City shallpay all such amounts when due or at such later time as such amounts may be paid without penalty or, inany other case, within 30 days after notice in writing from the Trustee to the City stating the amount ofAdministrative Costs then due and payable and the purpose thereof.

Indemnification of Authority. To the extent permitted by law, the City agrees to indemnify andhold the Authority and its members and officers harmless against any and all liabilities which might ariseout of or are related to the Project, the Installment Purchase Agreement or the Authority Bonds, and theCity further agrees to defend the Authority and its members and officers in any action arising out of orrelated to the Project, the Installment Purchase Agreement or the Authority Bonds.

Further Assurances. The City shall adopt, deliver, execute and make any and all furtherassurances, instruments and resolutions as may be reasonably necessary or proper to carry out theintention or to facilitate the performance of the Installment Purchase Agreement and for the betterassuring and confirming unto the Authority, or unto the Trustee, as assignee of the Authority, the rightsand benefits provided in the Installment Purchase Agreement to the Authority, or to the Trustee, asassignee of the Authority.

Events of Default and Remedies

Events of Default. The occurrence, from time to time, of any one or more of the following eventsshall constitute an Event of Default under the Installment Purchase Agreement:

(a) failure of the City to pay any Senior Obligation Payment when and as the sameshall become due and payable;

(b) failure of the City to observe and perform any of the other agreements orcovenants required in the Installment Purchase Agreement or in any other Senior Obligation to beperformed by it if such failure shall have continued for a period of 30 days after written noticethereof, specifying such failure and requiring the same to be remedied, shall have been given tothe City by the Trustee, or to the City and the Trustee by the Owners of not less than 5% inaggregate principal amount of the Authority Bonds at the time Outstanding; provided, however,that, if in the reasonable opinion of the City, the failure stated in the notice can be corrected, butnot within such 30 day period, such failure shall not constitute an Event of Default under theInstallment Purchase Agreement if corrective action is instituted by the City within such 30 dayperiod and the City shall thereafter diligently and in good faith cure such failure in a reasonableperiod of time; or

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(c) the commencement by the City of a voluntary case under Title 11 of the UnitedStates Code or any substitute or successor statute.

Acceleration of Installment Payments. If an Event of Default under the Installment PurchaseAgreement shall have occurred and be continuing, the Trustee, as assignee of the Authority, may, bywritten notice to the City, declare the unpaid principal amount of the Installment Payments immediatelydue and payable, whereupon, anything contained in the Installment Purchase Agreement to the contrarynotwithstanding, said amounts shall, without further action, become and be immediately due and payablewith, to the extent permitted by law, interest on such accelerated amounts at a rate per annum equal to thehighest rate applicable to any Outstanding Authority Bond. If at any time after the principal amount ofsuch unpaid Installment Payments shall have so accelerated and before any judgment or decree of thepayment of the moneys due shall have been obtained or entered, the City shall pay the unpaid amount ofall such Installment Payments due prior to such declaration, with interest on such overdue InstallmentPayments as provided in the Installment Purchase Agreement , and the reasonable expenses of the Trusteeand the Authority, if any, and any and all other defaults (other than in the payment of the unpaidInstallment Payments due and payable solely by reason of such declaration) shall have been made good orcured to the satisfaction of the Trustee, as assignee of the Authority, or provision deemed by the Trustee,as assignee of the Authority, to be adequate shall have been made therefor, then and in every such casethe Trustee, as assignee of the Authority, by written notice to the City, may rescind and annul suchdeclaration and its consequences; but no such rescission and annulment shall extend to or shall affect anysubsequent Event of Default under the Installment Purchase Agreement or shall impair or exhaust anyright or power consequent thereon.

Remedies on Default. Upon the occurrence of an Event of Default under the InstallmentPurchase Agreement, the Trustee, as assignee of the Authority, shall have the right:

(a) by mandamus or other action or proceeding or suit at law or in equity to enforceits rights against the City or any City Council member, officer or employee thereof, and tocompel the City or any such City Council member, officer or employee to perform and carry outhis or her duties under applicable law and the agreements and covenants required to be performedby him or her contained in the Installment Purchase Agreement;

(b) by suit in equity to enjoin any acts or things which are unlawful or violate therights of the Trustee, as assignee of the Authority;

(c) by suit in equity require the City and its officers and employees, and themembers of the City Council, to account as the trustee of an express trust; and

(d) to have a receiver or receivers appointed for the Enterprise and of the issues,earnings, income, products and profits thereof, pending such proceedings, with such powers asthe court making such appointment shall confer.

Application of Net Revenues After Default. If an Event of Default under the InstallmentPurchase Agreement shall occur and be continuing, all Net Revenues and any other funds thereafterreceived by the Trustee, as assignee of the Authority, under any of the provisions of the InstallmentPurchase Agreement shall be applied as follows and in the following order:

(a) to the payment of the costs and expenses of the Trustee, as assignee of theAuthority, if any, in carrying out the provisions of the Installment Purchase Agreement describedunder the caption “– Events of Default and Remedies”;

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(b) to the payment of the entire unpaid Senior Obligations, with interest on theoverdue installments at the rate or rates of interest applicable thereto, in accordance with theirrespective terms, provided, however, that if such Net Revenues are not sufficient to pay suchamounts in full, then said Net Revenues shall be applied, as nearly as practicable, pro rata, basedon the respective principal amounts of unpaid Senior Obligations; and

(c) to such other obligations payable from Net Revenues as are then payable.

Non-Waiver. Nothing in the Installment Purchase Agreement or in any other provision thereofshall affect or impair the obligation of the City, which is absolute and unconditional, to pay theInstallment Payments to the Trustee, as assignee of the Authority, at the respective due dates from the NetRevenues and the other funds in the Installment Purchase Agreement committed for such payment, orshall affect or impair the right of the Trustee, as assignee of the Authority, which is also absolute andunconditional, to institute suit to enforce such payment by virtue of the contract embodied in theInstallment Purchase Agreement.

A waiver by the Trustee, as assignee of the Authority, of any default or breach of duty or contractby the City shall not affect any subsequent default or breach of duty or contract or impair any rights orremedies on any such subsequent default or breach of duty or contract. No delay or omission by theTrustee, as assignee of the Authority, to exercise any right or remedy accruing upon any default or breachof duty or contract by the City shall impair any such right or remedy or shall be construed to be a waiverof any such default or breach of duty or contract or an acquiescence therein, and every right or remedyconferred upon the Trustee, as assignee of the Authority, by applicable law or by the provisions of theInstallment Purchase Agreement under the caption “– Events of Default and Remedies” may be enforcedand exercised from time to time and as often as shall be deemed expedient by the Trustee, as assignee ofthe Authority.

If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned ordetermined adversely to the Trustee, as assignee of the Authority, the City and the Trustee, as assignee ofthe Authority, shall be restored to their former positions, rights and remedies as if such action, proceedingor suit had not been brought or taken.

Remedies Not Exclusive. No remedy in the Installment Purchase Agreement conferred upon orreserved to the Trustee, as assignee of the Authority, is intended to be exclusive of any other remedy, andeach such remedy shall be cumulative and shall be in addition to every other remedy given under theInstallment Purchase Agreement or now or hereafter existing in law or in equity or by statute or otherwiseand may be exercised without exhausting and without regard to any other remedy conferred by law.

Amendments

Amendment of Installment Purchase Agreement. (a) The Installment Purchase Agreement andthe rights and obligations of the City, the Authority and the Trustee, as assignee of the Authority, may bemodified or amended from time to time and at any time by a written amendment to the InstallmentPurchase Agreement executed by the City and the Trustee, as assignee of the Authority, with the writtenconsent of the Owners of a majority of the aggregate principal amount of the Authority Bonds thenOutstanding. No such modification or amendment shall (i) extend the payment date of any InstallmentPayment or reduce the amount of any Installment Payment, without the prior written consent of theOwner of each affected Authority Bond, (ii) reduce the percentage of Owners of the Authority Bondswhose consent is required to effect any such amendment or modification, without the prior writtenconsent of the Owners of all Authority Bonds then Outstanding, or (iii) affect the rights of the Authoritywithout its prior written consent.

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(b) The Installment Purchase Agreement and the rights and obligations of the City and theTrustee, as assignee of the Authority, may be modified or amended from time to time and at any time by awritten amendment to the Installment Purchase Agreement executed by the City and the Trustee, asassignee of the Authority, without the written consents of any Owners of the Authority Bonds, but only tothe extent permitted by law and only for any one or more of the following purposes; provided, however,that no such modification or amendment shall affect the rights of the Authority without its prior writtenconsent:

(i) to add to the agreements and covenants of the City in the Installment PurchaseAgreement contained other agreements and covenants thereafter to be observed, to pledge orassign additional security for the Installment Payments, or to surrender any right or power in theInstallment Purchase Agreement reserved to or conferred upon the City;

(ii) to make such provisions for the purpose of curing any ambiguity, inconsistencyor omission, or of curing or correcting any defective provision contained in the InstallmentPurchase Agreement;

(iii) to make such additions, deletions or modifications as may be necessary orappropriate to assure the exclusion from gross income for federal income tax purposes of intereston the Authority Bonds; and

(iv) in any other respect whatsoever as the City may deem necessary or desirable,provided that such modification or amendment does not materially adversely affect the rights orinterests of the Owners of the Authority Bonds.

Miscellaneous

Assignment. The City and the Authority acknowledge the transfer, conveyance and assignmentby the Authority to the Trustee, pursuant to the Authority Indenture, of all of the Authority’s right, titleand interest in and to the Installment Purchase Agreement (excepting the Authority’s right toindemnification under the Installment Purchase Agreement), including the right to receive InstallmentPayments from the City.

Successor Is Deemed Included in all References to Predecessor. Whenever the City, theAuthority or the Trustee, as assignee of the Authority, is named or referred to in the Installment PurchaseAgreement, such reference shall be deemed to include the successors or assigns thereof, and allagreements and covenants required to be performed by or on behalf of the City, the Authority or theTrustee, as assignee of the Authority, shall bind and inure to the benefit of the respective successors andassigns thereof whether so expressed or not.

Limitation of Rights. Nothing in the Installment Purchase Agreement expressed or implied isintended or shall be construed to give to any Person other than the City, the Authority, and the Trustee, asassignee of the Authority, any legal or equitable right, remedy or claim under or in respect of theInstallment Purchase Agreement or any covenant, condition or provision contained in the InstallmentPurchase Agreement, and all such covenants, conditions and provisions are and shall be held to be for thesole and exclusive benefit of the City, the Authority and the Trustee, as assignee of the Authority.

Waiver of Personal Liability. No member, officer, agent or employee of the City shall beindividually or personally liable for the payment of the Installment Payments or other payments requiredto be made by the City under the Installment Purchase Agreement or be subject to any personal liability oraccountability by reason of the execution and delivery of the Installment Purchase Agreement, but

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nothing contained in the Installment Purchase Agreement shall relieve any such member, officer, agent oremployee of the City from the performance of any official duty provided by any applicable provisions oflaw or by the Installment Purchase Agreement.

Governing Laws. The Installment Purchase Agreement shall be governed by and construed inaccordance with the laws of the State.

INDENTURE

The Bonds

Transfer and Exchange of Bonds. Any Bond may be transferred upon the Registration Books bythe Person in whose name it is registered, in person or by such Person’s duly authorized attorney, uponsurrender of such Bond to the Trustee for cancellation, accompanied by delivery of a written instrumentof transfer, duly executed in a form acceptable to the Trustee. Whenever any Bond or Bonds shall be sosurrendered for transfer, the Authority shall execute and the Trustee shall authenticate and shall deliver anew Bond or Bonds of the same maturity in a like aggregate principal amount, in any AuthorizedDenomination. The Trustee shall require the Owner requesting such transfer to pay any tax or othergovernmental charge required to be paid with respect to such transfer.

The Bonds may be exchanged at the Office of the Trustee for a like aggregate principal amount ofBonds of the same maturity of other Authorized Denominations. The Trustee shall require the payment bythe Owner requesting such exchange of any tax or other governmental charge required to be paid withrespect to such exchange.

The Trustee shall not be obligated to make any transfer or exchange of Bonds pursuant to theIndenture during the period established by the Trustee for the selection of Bonds for redemption, or withrespect to any Bonds selected for redemption.

Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond shall become mutilated, the Authority,at the expense of the Owner of said Bond, shall execute, and the Trustee shall thereupon authenticate anddeliver, a new Bond of the same maturity in a like principal amount in exchange and substitution for theBond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilatedBond so surrendered to the Trustee shall be canceled by it and delivered to, or upon the order of, theAuthority.

If any Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may besubmitted to the Trustee and, if such evidence and indemnity satisfactory to the Trustee shall be given, theAuthority, at the expense of the Owner, shall execute, and the Trustee shall thereupon authenticate anddeliver, a new Bond of the same maturity in a like aggregate principal amount in lieu of and inreplacement for the Bond so lost, destroyed or stolen (or if any such Bond shall have matured or shallhave been selected for redemption, instead of issuing a replacement Bond, the Trustee may pay the samewithout surrender thereof). The Authority may require payment by the Owner of a sum not exceeding theactual cost of preparing each replacement Bond issued under the Indenture and of the expenses whichmay be incurred by the Authority and the Trustee. Any Bond issued under the provisions of the Indenturesummarized under this caption (“– Bonds Mutilated, Lost, Destroyed or Stolen”) in lieu of any Bondalleged to be lost, destroyed or stolen shall constitute an original additional contractual obligation on thepart of the Authority whether or not the Bond so alleged to be lost, destroyed or stolen be at any timeenforceable by anyone, and shall be entitled to the benefits of the Indenture with all other Bonds securedby the Indenture.

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Temporary Bonds. The Bonds may be issued in temporary form exchangeable for definitiveBonds when ready for delivery. Any temporary Bonds may be printed, lithographed or typewritten, shallbe of such Authorized Denominations as may be determined by the Authority, shall be in fully-registeredform without coupons and may contain such reference to any of the provisions of the Indenture as may beappropriate. Every temporary Bond shall be executed by the Authority and authenticated by the Trusteeupon the same conditions and in substantially the same manner as the definitive Bonds. If the Authorityissues temporary Bonds it shall execute and deliver definitive Bonds as promptly thereafter as practicable,and thereupon the temporary Bonds may be surrendered, for cancellation, at the Office of the Trustee andthe Trustee shall authenticate and deliver, in exchange for such temporary Bonds, an equal aggregateprincipal amount of definitive Bonds of such maturities in Authorized Denominations. Until soexchanged, the temporary Bonds shall be entitled to the same benefits under the Indenture as definitiveBonds authenticated and delivered under the Indenture.

Security for Bonds; Flow of Funds; Investments

Pledge and Assignment. Subject only to the provisions of the Indenture permitting theapplication thereof for the purposes and on the terms and conditions set forth in the Indenture, in order tosecure the payment of the principal of, premium, if any, and interest on the Bonds in accordance withtheir terms and the provisions of the Indenture, the Authority pledges to the Owners, and grants thereto alien on and a security interest in, all of the Authority Revenues and any other amounts held in the BondFund and the Reserve Fund. Said pledge shall constitute a first lien on and security interest in such assets,which shall immediately attach to such assets and be effective, binding and enforceable against theAuthority, its successors, purchasers of any of such assets, creditors and all others asserting rights therein,to the extent set forth in, and in accordance with, the Indenture, irrespective of whether those parties havenotice of the pledge of, lien on and security interest in such assets and without the need for any physicaldelivery, recordation, filing or further act.

The Authority transfers, conveys and assigns to the Trustee, for the benefit of the Owners, all ofthe Authority’s right, title and interest in and to the Installment Purchase Agreement (excepting its right toindemnification thereunder), including the right to receive Installment Payments from the City. TheTrustee accepts said assignment for the benefit of the Owners, subject to the provisions of the Indenture.

The Trustee shall be entitled to and shall receive all of the Authority Revenues, and any AuthorityRevenues collected or received by the Authority shall be deemed to be held, and to have been collected orreceived, by the Authority as agent of the Trustee and shall forthwith be paid by the Authority to theTrustee.

Bond Fund. (a) The Trustee shall establish and maintain a separate fund designated the “BondFund.” Within the Bond Fund, the Trustee shall establish and maintain a separate account designated the“Principal Account” and a separate account designated the “Interest Account.” Upon receipt by theTrustee of any Authority Revenues, the Trustee shall deposit such Authority Revenues in the Bond Fund.

(b) No later than the second Business Day immediately preceding each Interest PaymentDate, the Trustee shall withdraw from the Bond Fund and transfer to the Interest Account the amount, ifany, necessary to cause the amount on deposit in the Interest Account to be equal to the interest due onthe Bonds on such Interest Payment Date. In the event that, on the Business Day immediately precedingan Interest Payment Date, amounts in the Interest Account are insufficient to pay the interest on the Bondsdue and payable on such Interest Payment Date, the Trustee shall withdraw from the Reserve Fund, to theextent of any funds therein, the amount of such insufficiency, and shall transfer any amounts sowithdrawn to the Interest Account. On each Interest Payment Date, the Trustee shall withdraw from theInterest Account for payment to the Owners of the Bonds the interest on the Bonds then due and payable.

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(c) No later than second Business Day immediately preceding each June 1 on whichprincipal of the Bonds is due and payable, including principal due and payable by reason of mandatorysinking fund redemption of the Bonds, after having made the transfer required to be made pursuant to theprovisions summarized in paragraph (b) above, the Trustee shall withdraw from the Bond Fund andtransfer to the Principal Account the amount, if any, necessary to cause the amount on deposit in thePrincipal Account to be equal to the principal due on the Bonds on such June 1, including principal dueand payable by reason of mandatory sinking fund redemption of such Bonds. In the event that, on theBusiness Day immediately preceding a June 1 on which principal of the Bonds is due and payable,including principal due and payable by reason of mandatory sinking fund redemption of the Bonds,amounts in the Principal Account are insufficient to pay such principal, the Trustee shall withdraw fromthe Reserve Fund, to the extent of any funds therein, the amount of such insufficiency, and shall transferany amounts so withdrawn to the Principal Account. On each June 1 on which principal of the Bonds isdue and payable, including principal due and payable by reason of mandatory sinking fund redemption ofthe Bonds, the Trustee shall withdraw from the Principal Account for payment to the Owners of theBonds such principal then due and payable.

Reserve Fund. (a) The Trustee shall establish and maintain a special fund designated the“Reserve Fund.” On the Closing Date, the Trustee shall deposit in the Reserve Fund the amount requiredto be deposited therein pursuant to the Indenture. The Trustee shall deposit in the Reserve Fund fromtime to time payments made by the City pursuant to the Installment Purchase Agreement. No depositneed be made to the Reserve Fund so long as the amount on deposit therein is at least equal to the ReserveRequirement. The Trustee shall promptly notify the City if the amount on deposit in the Reserve Fund isless than the Reserve Requirement.

(b) Except as otherwise summarized under this caption (“– Reserve Fund”), amounts in theReserve Fund shall be used and withdrawn by the Trustee solely for the purpose of (i) making transfers tothe Interest Account in accordance with the Indenture in the event of any deficiency at any time in theInterest Account of the amount then required for payment of the interest on the Bonds, (ii) makingtransfers to the Principal Account in accordance with the Indenture in the event of any deficiency at anytime in the Principal Account of the amount then required for payment of the principal of the Bonds, and(iii) redeeming Bonds in accordance with the provisions summarized under this caption.

(c) Whenever Bonds are to be optionally redeemed in part, a proportionate share, determinedas provided below, of the amount on deposit in the Reserve Fund shall, on the date on which amounts toredeem such Bonds are deposited in the Redemption Fund or otherwise deposited with the Trusteepursuant to the provisions summarized under the caption “INDENTURE – Defeasance – Bonds DeemedTo Have Been Paid,” be transferred by the Trustee from the Reserve Fund to the Redemption Fund or tosuch deposit held by the Trustee and shall be applied to the redemption of said Bonds; provided, however,that such amount shall be so transferred only if and to the extent that the amount remaining on deposit inthe Reserve Fund will be at least equal to the Reserve Requirement (excluding from the calculationthereof said Bonds to be redeemed). Such proportionate share shall be equal to the remainder of (i) theReserve Requirement on the day immediately preceding the date on which amounts to redeem suchBonds are deposited in the Redemption Fund or otherwise deposited with the Trustee pursuant to Section10.02 hereof, minus (ii) the Reserve Requirement on the day immediately following the date on whichamounts to redeem such Bonds are deposited in the Redemption Fund or otherwise deposited with theTrustee pursuant to Section 10.02 hereof.

(d) Whenever the balance in the Reserve Fund exceeds the amount required to redeem or paythe Outstanding Bonds, including interest accrued to the date of payment or redemption and premium, ifany, due upon redemption, the Trustee shall, upon receipt of a Written Request of the Authority, transferthe amount in the Reserve Fund to the Interest Account, Principal Account and/or Redemption Fund, as

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applicable, to be applied, on the next succeeding Interest Payment Date or redemption date, as applicableto the payment and/or redemption of all of the Outstanding Bonds.

(e) If, as a result of the scheduled payment of principal of or interest on the Bonds, theReserve Requirement is reduced, the Trustee shall transfer an amount equal to the amount of suchreduction to the Interest Account.

Redemption Fund. The Trustee shall establish and maintain a special fund designated the“Redemption Fund.” The Trustee shall deposit in the Redemption Fund (a) any moneys received from oron behalf of the City upon the exercise by the City of its right, pursuant to the Installment PurchaseAgreement to cause Bonds to be redeemed pursuant to the Indenture, and (b) amounts required to betransferred to the Redemption Fund from the Acquisition Fund pursuant to the Indenture. Amounts in theRedemption Fund shall be disbursed therefrom for the payment of the Redemption Price of Bondsredeemed pursuant to the Indenture.

Rebate Fund. The Trustee shall establish and maintain a special fund designated the “RebateFund.” There shall be deposited in the Rebate Fund such amounts as are required to be deposited thereinpursuant to the Tax Certificate, as specified in a Written Request of the Authority. All money at any timedeposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy theRebate Requirement, for payment to the United States of America. Notwithstanding defeasance of theBonds pursuant to the Indenture or anything to the contrary contained in the Indenture, all amountsrequired to be deposited into or on deposit in the Rebate Fund shall be governed exclusively by theprovisions summarized in this paragraph and by the Tax Certificate (which is incorporated in theIndenture by reference). The Trustee shall be deemed conclusively to have complied with suchprovisions if it follows the written directions of the Authority, and shall have no liability or responsibilityto enforce compliance by the Authority with the terms of the Tax Certificate. The Trustee mayconclusively rely upon the Authority’s determinations, calculations and certifications required by the TaxCertificate. The Trustee shall have no responsibility to independently make any calculation ordetermination or to review the Authority’s calculations. Any funds remaining in the Rebate Fund afterpayment in full of all of the Bonds and after payment of any amounts described in this paragraph, shall bewithdrawn by the Trustee and remitted to the Authority.

Costs of Issuance Fund. The Trustee shall establish and maintain a separate fund designated the“Costs of Issuance Fund.” On the Closing Date, the Trustee shall deposit in the Costs of Issuance Fundthe amount required to be deposited therein pursuant to the Indenture. The moneys in the Costs ofIssuance Fund shall be used and withdrawn by the Trustee from time to time to pay the Costs of Issuanceupon submission of a Written Request of the City stating (i) the Person to whom payment is to be made,(ii) the amount to be paid, (iii) the purpose for which the obligation was incurred, (iv) that such paymentis a proper charge against the Costs of Issuance Fund, and (v) that such amounts have not been the subjectof a prior disbursement from the Costs of Issuance Fund, in each case together with a statement or invoicefor each amount requested thereunder. On the last Business Day that is no later than six months after theClosing Date, the Trustee shall transfer any amount remaining in the Costs of Issuance Fund to theAcquisition Fund and, upon making such transfer, the Costs of Issuance Fund shall be closed.

Acquisition Fund. The Trustee shall establish and maintain a separate fund designated the“Acquisition Fund.” On the Closing Date, the Trustee shall deposit in the Acquisition Fund the amountrequired to be deposited therein pursuant to the Indenture. The moneys in the Acquisition Fund shall beused and withdrawn by the Trustee from time to time to pay the costs of the Acquisition Project uponsubmission to the Trustee of a Written Request of the City stating (i) the Person to whom payment is to bemade, (ii) the amount to be paid, (iii) the purpose for which the obligation was incurred, (iv) that such

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payment constitutes a cost of the Acquisition Project and is a proper charge against the Acquisition Fund,and (v) that such amounts have not been the subject of a prior disbursement from the Acquisition Fund.

Upon the filing of a Written Certificate of the City stating (i) that the portion of the AcquisitionProject to be financed from the Acquisition Fund has been completed and that all costs of suchAcquisition Project have been paid, or (ii) that such portion of the Acquisition Project has beensubstantially completed and that all remaining costs of such portion of the Acquisition Project have beendetermined and specifying the amount to be retained therefor, the Trustee shall (A) if the amountremaining in the Acquisition Fund (less any such retention) is equal to or greater than $25,000, transferthe portion of such amount equal to the largest integral multiple of $5,000 that is not greater than suchamount to the Redemption Fund, to be applied to the redemption of Bonds, and (B) after making thetransfer, if any, required to be made pursuant to the preceding clause (A), transfer all of the amountremaining in the Acquisition Fund (less any such retention) to the Interest Account, to be applied to thepayment of interest on the Bonds.

Investment of Moneys. (a) Except as otherwise provided in the Indenture, all moneys in any ofthe funds or accounts established pursuant to the Indenture held by the Trustee shall be invested by theTrustee solely in Permitted Investments, as directed in a Written Request of the City received by theTrustee no later than two Business Days prior to the making of such investment. Moneys in all suchfunds and accounts shall be invested in Permitted Investments maturing not later than the date on which itis estimated that such moneys will be required for the purposes specified in the Indenture; provided,however, that Permitted Investments in which moneys in the Reserve Fund are so invested shall matureno later than the earlier of five years from the date of investment or the final maturity date of the Bondsand, provided, further, that if such Permitted Investments may be redeemed at par so as to be available oneach Interest Payment Date, any amount in the Reserve Fund may be invested in such redeemablePermitted Investments maturing on any date on or prior to the final maturity date of the Bonds. Absent atimely Written Request of the City with respect to the investment of moneys in any of the funds oraccounts established pursuant to the Indenture held by the Trustee, the Trustee shall invest such moneysin Permitted Investments described in paragraph (6) of the definition thereof.

(b) Subject to the provisions of the Indenture described under the caption “INDENTURE –Security for Bonds; Flow of Funds; Investments – Rebate Fund,” all interest, profits and other incomereceived from the investment of moneys in any fund or account established pursuant to the Indenture(other than the Reserve Fund) shall be retained therein. Subject to the provisions of the Indenturedescribed under the caption “– Security for Bonds; Flow of Funds; Investments – Rebate Fund,” allinterest, profits and other income received from the investment of moneys in the Reserve Fund shall betransferred to the Interest Account; provided, however, that, notwithstanding the foregoing, any suchtransfer shall be made only if and to the extent that, after such transfer, the amount on deposit in theReserve Fund is at least equal to the Reserve Requirement.

(c) Permitted Investments acquired as an investment of moneys in any fund or accountestablished under the Indenture shall be credited to such fund or account. For the purpose of determiningthe amount in any fund or account, all Permitted Investments credited to such fund or account shall bevalued by the Trustee at the market value thereof (without regard to costs incurred in the acquisition ordisposition thereof, including breakage, unwind or other similar fees), such valuation to be performed notless frequently than semiannually on or before each May 15 and November 15. To the extent of anyvaluations to be made by the Trustee under the Indenture, the Trustee may utilize computerized securitiespricing services that may be available to it, including those available through its regular accountingsystem. Any Permitted Investment that is a registrable security shall be registered in the name of theTrustee.

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(d) The Trustee may act as principal or agent in the making or disposing of any investment.Upon the Written Request of the City, the Trustee shall sell or present for redemption any PermittedInvestments so purchased whenever it shall be necessary to provide moneys to meet any requiredpayment, transfer, withdrawal or disbursement from the fund to which such Permitted Investments arecredited, and the Trustee shall not be liable or responsible for any loss resulting from any investmentmade or sold pursuant to the Indenture. For purposes of investment, the Trustee may commingle moneysin any of the funds and accounts established under the Indenture. The Trustee, in making or disposing ofany investment permitted by the Indenture, may deal with itself (in its individual capacity) or with anyone or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any thirdperson or dealing as a principal for its own account.

The Authority acknowledges that to the extent regulations of the Comptroller of the Currency orother applicable regulatory entity grant the Authority the right to receive brokerage confirmations ofsecurity transactions as they occur, the Authority specifically waives receipt of such confirmations to theextent permitted by law. The Trustee shall furnish the Authority periodic cash transaction statements,which shall include detail for all investment transactions made by the Trustee under the Indenture.

Covenants

Installment Purchase Agreement. The Authority shall not do or permit anything to be done, oromit or refrain from doing anything, in any case where any such act done or permitted to be done, or anysuch omission of or refraining from action, would or might be a ground for cancellation or termination ofthe Installment Purchase Agreement by the City.

Punctual Payment. The Authority shall punctually pay or cause to be paid the principal,premium, if any, and interest to become due in respect of all the Bonds, in strict conformity with the termsof the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out ofAuthority Revenues and other assets pledged for such payment as provided in the Indenture and receivedby the Authority or the Trustee.

Extension of Payment of Bonds. The Authority shall not directly or indirectly extend or assent tothe extension of the maturity of any of the Bonds or the time of payment of any claims for interest by thepurchase of such Bonds or by any other arrangement, and in case the maturity of any of the Bonds or thetime of payment of any such claims for interest shall be extended, such Bonds or claims for interest shallnot be entitled, in case of any default under the Indenture, to the benefits of the Indenture, except subjectto the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims forinterest thereon which shall not have been so extended. Nothing in this paragraph shall be deemed to limitthe right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and suchissuance shall not be deemed to constitute an extension of maturity of the Bonds.

Against Encumbrances; Defense of Pledge. The Authority shall not create, or permit the creationof, any pledge of, lien on, security interest in or charge or other encumbrance upon the assets pledgedunder the Indenture, except as permitted thereby. The Authority shall at all times, to the extent permittedby law, defend, preserve and protect said pledge of such assets, and the lien thereon and security interesttherein created by the Indenture, against all claims and demands of all Persons whomsoever.

Tax Covenants. The Authority shall not take any action, or fail to take any action, if such actionor failure to take such action would adversely affect the exclusion from gross income of interest on theBonds under Section 103 of the Code. Without limiting the generality of the foregoing, the Authorityshall comply with the requirements of the Tax Certificate, which is incorporated in the Indenture as iffully set forth therein. This covenant shall survive payment in full or defeasance of the Bonds.

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In the event that at any time the Authority is of the opinion that for purposes of the provisionssummarized under this caption (“– Tax Covenants”) it is necessary or helpful to restrict or limit the yieldon the investment of any moneys held by the Trustee in any of the funds or accounts established under theIndenture, the Authority shall so instruct the Trustee in writing, and the Trustee shall take such action asmay be necessary in accordance with such instructions.

Notwithstanding any provisions of the Indenture summarized under this caption, if the Authorityshall provide to the Trustee an opinion of Bond Counsel to the effect that any specified action requiredunder such provisions is no longer required or that some further or different action is required to maintainthe exclusion from federal income tax of interest on the Bonds, the Trustee may conclusively rely on suchopinion in complying with the requirements of the provisions of the Indenture summarized under thiscaption and of the Tax Certificate, and the covenants under the Indenture shall be deemed to be modifiedto that extent.

Continuing Disclosure. The Trustee shall comply with and carry out all of the provisions of theContinuing Disclosure Agreement applicable to it. Notwithstanding any other provision of the Indenture,failure of the City or the Trustee to comply with the Continuing Disclosure Agreement shall not beconsidered an Event of Default under the Indenture; provided, however, that the Trustee may (and, at thewritten direction of any Participating Underwriter or the Owners of at least 25% aggregate principalamount of Outstanding Bonds, and upon receipt of indemnification reasonably satisfactory to the Trustee,shall) or any Owner or Beneficial Owner of the Bonds may, take such actions as may be necessary andappropriate to compel performance, including seeking mandate or specific performance by court order.

Further Assurances. The Authority shall make, execute and deliver any and all such furtheragreements, instruments and assurances as may be reasonably necessary or proper to carry out theintention or to facilitate the performance of the Indenture and for the better assuring and confirming untothe Owners of the rights and benefits provided in the Indenture.

Events of Default and Remedies

Events of Default. The following events shall be Events of Default:

(a) the failure of the Authority to pay any installment of principal of any Bondswhen and as the same shall become due and payable, whether at maturity as therein expressed, byproceedings for redemption or otherwise;

(b) the failure of the Authority to pay any installment of interest on any Bonds whenand as the same shall become due and payable;

(c) the failure of the Authority to observe and perform any of the other covenants,agreements or conditions on its part in the Indenture or in the Bonds contained, if such failureshall have continued for a period of 30 days after written notice thereof, specifying such failureand requiring the same to be remedied, shall have been given to the Authority by the Trustee, orto the Authority and the Trustee by the Owners of not less than 5% in aggregate principal amountof the Bonds at the time Outstanding; provided, however, that, if in the reasonable opinion of theAuthority the failure stated in the notice can be corrected, but not within such 30 day period, suchfailure shall not constitute an Event of Default under the Indenture if corrective action isinstituted by the Authority within such 30 day period and the Authority shall thereafter diligentlyand in good faith cure such failure in a reasonable period of time;

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(d) the occurrence and continuance of an Event of Default under the InstallmentPurchase Agreement; or

(e) the commencement by the Authority of a voluntary case under Title 11 of theUnited States Code or any substitute or successor statute.

Acceleration. If the Installment Payments are accelerated pursuant to provisions of theInstallment Purchase Agreement described under the caption “INSTALLMENT PURCHASEAGREEMENT – Events of Default and Remedies – Acceleration of Installment Payments,” then theprincipal amount of the Bonds then Outstanding, and the interest accrued thereon, shall immediatelybecome due and payable, anything contained in the Indenture or in the Bonds to the contrarynotwithstanding, with, to the extent permitted by law, interest on such accelerated amounts at a rate perannum equal to the highest rate applicable to any Bond. If at any time after the Bonds have been sodeclared due and payable and before any judgment or decree for the payment of the moneys due shallhave been obtained or entered, all accelerations of payments with respect to the Installment Paymentsshall have been rescinded, then and in every such case the Trustee, by written notice to the Authority andthe Owners of the Bonds, shall rescind and annul the acceleration of the Bonds and its consequences; butno such rescission and annulment shall extend to or shall affect any subsequent default or shall impair orexhaust any right or power consequent thereon.

Other Remedies. If an Event of Default under the Indenture shall have occurred and becontinuing, the Trustee shall have the right:

(a) by mandamus, suit, action or proceeding, to compel the Authority and itsofficers, agents or employees to perform each and every term, provision and covenant containedin the Indenture and in the Bonds, and to require the carrying out of any or all such covenants andagreements of the Authority and the fulfillment of all duties imposed upon it by the Indenture andthe Bond Law;

(b) by suit, action or proceeding in equity, to enjoin any acts or things which areunlawful, or the violation of any of the rights of the Trustee or the Owners; or

(c) by suit, action or proceeding in any court of competent jurisdiction, to require theAuthority and its officers and employees to account as if it and they were the trustees of anexpress trust.

Remedies Not Exclusive. No remedy in the Indenture conferred upon or reserved to the Trusteeor to the Owners is intended to be exclusive of any other remedy or remedies, and each and every suchremedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy givenunder the Indenture or now or hereafter existing at law or in equity or otherwise.

Application of Authority Revenues After Default. If an Event of Default under the Indentureshall occur and be continuing, all Authority Revenues and any other funds thereafter received by theTrustee under any of the provisions of the Indenture shall be applied by the Trustee as follows and in thefollowing order:

(a) to the payment of any expenses necessary in the opinion of the Trustee to protectthe interests of the Owners and payment of reasonable fees, charges and expenses of the Trustee(including reasonable fees and disbursements of its counsel) incurred in and about theperformance of its powers and duties under the Indenture;

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(b) to the payment of the principal and interest then due with respect to the Bonds(upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partiallypaid, or surrender thereof if fully paid) subject to the provisions of the Indenture, as follows:

First: to the payment to the Persons entitled thereto of all installments of interestthen due in the order of the maturity of such installments and, if the amount availableshall not be sufficient to pay in full any installment or installments maturing on the samedate, then to the payment thereof ratably, according to the amounts due thereon, to thePersons entitled thereto, without any discrimination or preference; and

Second: to the payment to the Persons entitled thereto of the unpaid principal ofany Bonds which shall have become due, whether at maturity or by call for redemption,with interest on the overdue principal at the rate borne by the respective Bonds on thedate of maturity or redemption, and, if the amount available shall not be sufficient to payin full all the Bonds, together with such interest, then to the payment thereof ratably,according to the amounts of principal due on such date to the Persons entitled thereto,without any discrimination or preference; and

(c) any remaining funds shall be transferred by the Trustee to the Bond Fund.

Power of Trustee to Enforce. All rights of action under the Indenture or the Bonds or otherwisemay be prosecuted and enforced by the Trustee without the possession of any of the Bonds or theproduction thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted bythe Trustee shall be brought in the name of the Trustee for the benefit and protection of the Owners ofsuch Bonds, subject to the provisions of the Indenture.

Owners' Direction of Proceedings. Anything in the Indenture to the contrary notwithstanding, theOwners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right,by an instrument or concurrent instruments in writing executed and delivered to the Trustee, and uponindemnification of the Trustee to its reasonable satisfaction, to direct the method of conducting allremedial proceedings taken by the Trustee under the Indenture; provided, however, that such directionshall not be otherwise than in accordance the provisions of the Indenture and applicable law and,provided, further, that the Trustee shall have the right to decline to follow any such direction which in theopinion of the Trustee would be unjustly prejudicial to Owners not parties to such direction.

Limitation on Owners’ Right to Sue. No Owner of any Bond shall have the right to institute anysuit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedyunder the Indenture, the Bond Law or any other applicable law with respect to such Bond, unless (a) suchOwner shall have given to the Trustee written notice of the occurrence of an Event of Default under theIndenture, (b) the Owners of a majority in aggregate principal amount of the Bonds then Outstandingshall have made written request upon the Trustee to exercise the powers granted before in the Indenture orto institute such suit, action or proceeding in its own name, (c) such Owner or said Owners shall havetendered to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses andliabilities to be incurred in compliance with such request, and (d) the Trustee shall have refused oromitted to comply with such request for a period of 60 days after such written request shall have beenreceived by, and said tender of indemnity shall have been made to, the Trustee.

Such notification, request, tender of indemnity and refusal or omission are declared, in everycase, to be conditions precedent to the exercise by any Owner of any remedy under the Indenture or underlaw; it being understood and intended that no one or more Owners shall have any right in any mannerwhatever by such Owner’s or Owners’ action to affect, disturb or prejudice the security of the Indenture

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or the rights of any other Owners, or to enforce any right under the Bonds, the Indenture, the Bond Lawor any other applicable law with respect to the Bonds, except in the manner provided in the Indenture, andthat all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained inthe manner provided in the Indenture and for the benefit and protection of all Owners, subject to theprovisions of the Indenture.

Absolute Obligation. Nothing in the Indenture or the Bonds contained shall affect or impair theobligation of the Authority, which is absolute and unconditional, to pay the principal of and interest onthe Bonds to the respective Owners at their respective dates of maturity, or upon call for redemption, asprovided in the Indenture, but only out of the Authority Revenues and other assets pledged in theIndenture therefor, or affect or impair the right of such Owners, which is also absolute and unconditional,to enforce such payment by virtue of the contract embodied in the Bonds.

Termination of Proceedings. In case any proceedings taken by the Trustee or any one or moreOwners on account of any Event of Default under the Indenture shall have been discontinued orabandoned for any reason or shall have been determined adversely to the Trustee or the Owners, then inevery such case the Authority, the Trustee and the Owners, subject to any determination in suchproceedings, shall be restored to their former positions and rights under the Indenture, severally andrespectively, and all rights, remedies, powers and duties of the Authority, the Trustee and the Ownersshall continue as though no such proceedings had been taken.

No Waiver of Default. No delay or omission of the Trustee or of any Owner to exercise any rightor power arising upon the occurrence of any default or Event of Default under the Indenture shall impairany such right or power or shall be construed to be a waiver of any such default or Event of Default underthe Indenture or an acquiescence therein, and every power and remedy given by the Indenture to theTrustee or to the Owners may be exercised from time to time and as often as may be deemed expedient.

Trustee

Duties and Liabilities of Trustee. The Trustee shall, prior to an Event of Default under theIndenture, and after the curing or waiver of all Events of Default which may have occurred, perform suchduties and only such duties as are expressly and specifically set forth in the Indenture. The Trustee shall,during the existence of any Event of Default under the Indenture which has not been cured or waived,exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care andskill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct ofsuch person’s own affairs.

Qualifications; Removal and Resignation; Successors. (a) The Trustee initially a party to theIndenture and any successor thereto shall at all times be a trust company, national banking association orbank having trust powers in good standing in or incorporated under the laws of the United States or anystate thereof, having (or if such trust company, national banking association or bank is a member of abank holding company system, its parent bank holding company shall have) a combined capital andsurplus of at least $75,000,000, and subject to supervision or examination by a federal or state agency. Ifsuch trust company, national banking association or bank publishes a report of condition at least annually,pursuant to law or to the requirements of any supervising or examining agency above referred to, then forthe purpose of the provisions described in this paragraph the combined capital and surplus of such trustcompany, national banking association or bank shall be deemed to be its combined capital and surplus asset forth in its most recent report of condition so published.

(b) The Authority may, by an instrument in writing, upon at least 30 days’ notice to theTrustee, remove the Trustee initially a party to the Indenture and any successor thereto unless an Event of

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Default under the Indenture shall have occurred and then be continuing, and shall remove the Trusteeinitially a party to the Indenture and any successor thereto if (i) at any time requested to do so by aninstrument or concurrent instruments in writing signed by the Owners of not less than a majority inaggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing),or (ii) the Trustee shall cease to be eligible in accordance with paragraph (a) above, or shall becomeincapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or itsproperty shall be appointed, or any public officer shall take control or charge of the Trustee or of itsproperty or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by givingwritten notice of such removal to the Trustee.

(c) The Trustee may at any time resign by giving written notice of such resignation by firstclass mail, postage prepaid, to the Authority and to the Owners at the respective addresses shown on theRegistration Books. In case at any time the Trustee shall cease to be eligible in accordance with theprovisions of paragraph (a) above the Trustee shall resign immediately in the manner and with the effectspecified in the Indenture.

(d) Upon removal or resignation of the Trustee, the Authority shall promptly appoint asuccessor Trustee by an instrument in writing. Any removal or resignation of the Trustee andappointment of a successor Trustee shall become effective upon acceptance of appointment by thesuccessor Trustee; provided, however, that any successor Trustee shall be qualified as provided inparagraph (a) above. If no qualified successor Trustee shall have been appointed and have acceptedappointment within 45 days following notice of removal or notice of resignation as aforesaid, theremoved or resigning Trustee or any Owner (on behalf of such Owner and all other Owners) may petitionany court of competent jurisdiction for the appointment of a successor Trustee, and such court maythereupon, after such notice, if any, as it may deem proper, appoint such successor Trustee. Anysuccessor Trustee appointed under the Indenture shall signify its acceptance of such appointment byexecuting and delivering to the Authority and to its predecessor Trustee a written acceptance thereof, andthereupon such successor Trustee, without any further act, deed or conveyance, shall become vested withall the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessorTrustee, with like effect as if originally named Trustee in the Indenture; but, nevertheless at the WrittenRequest of the Authority or the request of the successor Trustee, such predecessor Trustee shall executeand deliver any and all instruments of conveyance or further assurance and do such other things as mayreasonably be required for more fully and certainly vesting in and confirming to such successor Trusteeall the right, title and interest of such predecessor Trustee in and to any property held by it under theIndenture and shall pay over, transfer, assign and deliver to the successor Trustee any money or otherproperty subject to the trusts and conditions as set forth in the Indenture. Upon acceptance ofappointment by a successor Trustee as summarized in this paragraph (d), the successor Trustee shall,within 15 days after such acceptance, mail, by first class mail postage prepaid, a notice of the successionof such Trustee to the trusts under the Indenture to the Owners at the addresses shown on the RegistrationBooks.

(e) Any trust company, national banking association or bank into which the Trustee may bemerged or converted or with which it may be consolidated or any trust company, national bankingassociation or bank resulting from any merger, conversion or consolidation to which it shall be a party orany trust company, national banking association or bank to which the Trustee may sell or transfer all orsubstantially all of its corporate trust business, provided such trust company, national banking associationor bank shall be eligible under paragraph (a) above, shall be the successor to such Trustee, without theexecution or filing of any paper or any further act, anything contained in the Indenture to the contrarynotwithstanding.

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Liability of Trustee. (a) The recitals of facts in the Indenture and in the Bonds contained shall betaken as statements of the Authority, and the Trustee shall not assume responsibility for the correctness ofthe same or incur any responsibility in respect thereof, other than as expressly stated in the Indenture inconnection with the respective duties or obligations in the Indenture or in the Bonds assigned to orimposed upon it. The Trustee shall, however, be responsible for its representations contained in itscertificate of authentication on the Bonds.

(b) The Trustee makes no representations as to the validity or sufficiency of the Indenture orof any Bonds, or in respect of the security afforded by the Indenture and the Trustee shall incur noresponsibility in respect thereof. The Trustee shall be under no responsibility or duty with respect to theissuance of the Bonds for value, the application of the proceeds thereof except to the extent that suchproceeds are received by it in its capacity as Trustee, or the application of any moneys paid to theAuthority or others in accordance with the Indenture.

(c) The Trustee shall not be liable in connection with the performance of its duties under theIndenture, except for its own negligence or willful misconduct.

(d) No provision of the Indenture or any other document related thereto shall require theTrustee to risk or advance its own funds.

(e) The Trustee may execute any of its powers or duties under the Indenture throughattorneys, agents or receivers and shall not be answerable for the actions of such attorneys, agents orreceivers if selected by it with reasonable care.

(f) The Trustee shall not be liable for any error of judgment made in good faith by aresponsible officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinentfacts.

(g) The immunities and protections extended to the Trustee also extend to its directors,officers, employees and agents.

(h) Before taking action under the provisions of the Indenture under the caption“INDENTURE – Trustee” or under “INDENTURE – Events of Default and Remedies” or upon thedirection of the Owners, the Trustee may require indemnity satisfactory to the Trustee be furnished to it toprotect it against all fees and expenses, including those of its attorneys and advisors, and protect it againstall liability it may incur.

(i) The Trustee shall not be liable with respect to any action taken or omitted to be taken byit in good faith in accordance with the direction of the Owners of not less than a majority in aggregateprincipal amount of the Bonds at the time Outstanding relating to the time, method and place ofconducting any proceeding for any remedy available to the Trustee, or exercising any trust or powerconferred upon the Trustee under the Indenture.

(j) The Trustee may become the Owner of Bonds with the same rights it would have if itwere not Trustee and, to the extent permitted by law, may act as depository for and permit any of itsofficers or directors to act as a member of, or in any other capacity with respect to, any committee formedto protect the rights of Owners, whether or not such committee shall represent the Owners of a majority inaggregate principal amount of the Bonds then Outstanding.

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(k) The Trustee shall have no responsibility with respect to any information, statement, orrecital in any official statement, offering memorandum or any other disclosure material prepared ordistributed with respect to the Bonds.

(l) The Trustee shall not be deemed to have knowledge of an Event of Default under theIndenture unless it has actual knowledge thereof.

Right to Rely on Documents and Opinions. The Trustee shall be protected in acting upon anynotice, resolution, request, consent, order, certificate, report, opinion, bonds or other paper or documentbelieved by it to be genuine and to have been signed or presented by the proper party or parties.

Whenever in the administration of the duties imposed upon it by the Indenture the Trustee shalldeem it necessary or desirable that a matter be proved or established prior to taking or suffering anyaction under the Indenture, such matter (unless other evidence in respect thereof is specifically prescribedin the Indenture) may be deemed to be conclusively proved and established by a Written Certificate of theAuthority, and such Written Certificate shall be full warrant to the Trustee for any action taken or sufferedin good faith under the provisions of the Indenture in reliance upon such Written Certificate, but in itsdiscretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require suchadditional evidence as it may deem reasonable.

The Trustee may consult with counsel, who may be counsel to the Authority, with regard to legalquestions, and the opinion of such counsel shall be full and complete authorization and protection inrespect of any action taken or suffered by it under the Indenture in good faith and in accordancetherewith.

Accounting Records and Financial Statements. The Trustee shall at all times keep, or cause to bekept, proper books of record and account, prepared in accordance with prudent corporate trust industrystandards, in which accurate entries shall be made of all transactions made by it relating to the proceeds ofthe Bonds, the Authority Revenues received by it and all funds and accounts established by it pursuant tothe Indenture. Such books of record and account shall be available for inspection by the Authority and theCity during regular business hours and upon reasonable notice and under reasonable circumstances asagreed to by the Trustee. The Trustee shall deliver to the Authority and the City a monthly accounting ofthe funds and accounts it holds under the Indenture; provided, however, that the Trustee shall not beobligated to deliver an accounting for any fund or account that (a) has a balance of zero, and (b) has nothad any activity since the last reporting date.

Preservation and Inspection of Documents. All documents received by the Trustee under theprovisions of the Indenture shall be retained in its possession and shall be subject during business hoursand upon reasonable notice to the inspection of the Authority, the Owners and their agents andrepresentatives duly authorized in writing.

Compensation and Indemnification. The Authority shall pay to the Trustee, or cause the Trusteeto be paid, all reasonable compensation pursuant to a pre-approved fee letter for all services renderedunder the Indenture, and also all reasonable expenses, charges, legal and consulting fees pursuant to a pre-approved fee letter and other disbursements pursuant to a pre-approved fee letter and those of itsattorneys, agents and employees, incurred in and about the performance of their powers and duties underthe Indenture. The Authority shall, to the extent permitted by law, indemnify and save the Trusteeharmless from and against any costs, claims, expenses and liabilities which it may incur in the exerciseand performance of its powers and duties under the Indenture and under the Installment PurchaseAgreement, including the enforcement of any remedies and the defense of any suit, and which are not due

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to its negligence or its willful misconduct. The duty of the Authority to indemnify the Trustee shallsurvive the resignation or removal of the Trustee and the termination and discharge of the Indenture.

Supplemental Indentures

Supplemental Indentures. (a) The Indenture and the rights and obligations of the Authority, theTrustee and the Owners under the Indenture may be modified or amended from time to time and at anytime by a Supplemental Indenture, which the Authority and the Trustee may enter into when there arefiled with the Trustee the written consents of the Owners of a majority of the aggregate principal amountof the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Indenture under thecaption “– Miscellaneous – Disqualified Bonds.” No such modification or amendment shall (i) extend thefixed maturity of any Bond, reduce the amount of principal thereof or the rate of interest thereon, extendthe time of payment thereof or alter the redemption provisions thereof, without the consent of the Ownerof each Bond so affected, (ii) permit any pledge of, or the creation of any lien on, security interest in orcharge or other encumbrance upon the assets pledged under the Indenture prior to or on a parity with thepledge contained in, and the lien and security interest created by, the Indenture or deprive the Owners ofthe pledge contained in, and the lien and security interest created by, the Indenture, except as expresslyprovided in the Indenture, without the consent of the Owners of all of the Bonds then Outstanding, or (iii)modify or amend the provisions summarized under this caption (“– Supplemental Indentures”) withoutthe prior written consent of the Owners of all Bonds then Outstanding.

(b) The Indenture and the rights and obligations of the Authority, the Trustee and the Ownersunder the Indenture may also be modified or amended from time to time and at any time by aSupplemental Indenture, which the Authority and the Trustee may enter into without the consent of anyOwners for any one or more of the following purposes:

(i) to add to the covenants and agreements of the Authority in the Indenturecontained other covenants and agreements thereafter to be observed, to pledge or assignadditional security for the Bonds (or any portion thereof), or to surrender any right or powerreserved to or conferred upon the Authority, provided that such modification or amendment doesnot materially adversely affect the rights or interests of the Owners under the Indenture;

(ii) to make such provisions for the purpose of curing any ambiguity, inconsistencyor omission, or of curing or correcting any defective provision contained in the Indenture;

(iii) to permit the qualification of the Indenture under the Trust Indenture Act of1939, as amended, or any similar federal statute hereafter in effect;

(iv) to cause interest on the Bonds to be excludable from gross income for purposesof federal income taxation by the United States of America; and

(v) in any other respect whatsoever as the Authority may deem necessary ordesirable, provided that such modification or amendment does not materially adversely affect therights or interests of the Owners under the Indenture.

(c) Promptly after the execution by the Authority and the Trustee of any SupplementalIndenture, the Trustee shall mail a notice (the form of which shall be furnished to the Trustee by theAuthority), by first-class mail, postage prepaid, setting forth in general terms the substance of suchSupplemental Indenture, to the Owners at the respective addresses shown on the Registration Books. Anyfailure to give such notice, or any defect therein, shall not, however, in any way impair or affect thevalidity of any such Supplemental Indenture.

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Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture pursuant tothe Indenture, the Indenture shall be deemed to be modified and amended in accordance therewith, andthe respective rights, duties and obligations under the Indenture of the Authority, the Trustee and theOwners shall thereafter be determined, exercised and enforced under the Indenture subject in all respectsto such modification and amendment, and all the terms and conditions of any such SupplementalIndenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes.

Endorsement of Bonds; Preparation of New Bonds. Bonds delivered after the effective date ofany Supplemental Indenture pursuant to the Indenture may and, if the Authority so determines, shall beara notation by endorsement or otherwise in form approved by the Authority and the Trustee as to anymodification or amendment provided for in such Supplemental Indenture, and, in that case, upon demandof the Owner of any Bond Outstanding at the time of such effective date and presentation of such Bondfor such purpose at the Office of the Trustee a suitable notation shall be made on such Bonds. If theSupplemental Indenture shall so provide, new Bonds so modified as to conform, in the opinion of theAuthority and the Trustee, to any modification or amendment contained in such Supplemental Indenture,shall be prepared and executed by the Authority and authenticated by the Trustee and, in that case, upondemand of the Owner of any Bond Outstanding at the time of such effective date, and presentation ofsuch Bond for such purpose at the Office of the Trustee, such a new Bond in equal principal amount ofthe same maturity shall be exchanged for such Owner’s Bond so surrendered.

Amendment of Particular Bonds. The provisions of the Indenture shall not prevent any Ownerfrom accepting any amendment or modification as to any particular Bond owned by it, provided that duenotation thereof is made on such Bond.

Defeasance

Discharge of Indenture. (a) If the Authority shall pay or cause to be paid or there shall otherwisebe paid to the Owners of all Outstanding Bonds the principal thereof and the interest and premium, if any,thereon at the times and in the manner stipulated in the Indenture and therein, then the Owners shall ceaseto be entitled to the pledge of the Authority Revenues and the other assets as provided in the Indenture,and all agreements, covenants and other obligations of the Authority under the Indenture shall thereuponcease, terminate and become void and the Indenture shall be discharged and satisfied. In such event, theTrustee shall execute and deliver to the Authority all such instruments as may be necessary or desirable toevidence such discharge and satisfaction, and the Trustee shall pay over or deliver to the Authority allmoney or securities held by it pursuant to the Indenture which are not required for the payment of theprincipal of and interest and premium, if any, on the Bonds.

Subject to the provisions of the immediately preceding paragraph, when any Bond shall havebeen paid and if, at the time of such payment, the Authority shall have kept, performed and observed allof the covenants and promises in such Bonds and in the Indenture required or contemplated to be kept,performed and observed by it or on its part on or prior to that time, then the Indenture shall be consideredto have been discharged in respect of such Bond and such Bond shall cease to be entitled to the pledge ofthe Authority Revenues and the other assets as provided in the Indenture, and all agreements, covenantsand other obligations of the Authority under the Indenture shall cease, terminate, become void and becompletely discharged and satisfied as to such Bond.

Notwithstanding the discharge and satisfaction of the Indenture or the discharge and satisfactionof the Indenture in respect of any Bond, those provisions of the Indenture relating to the maturity of theBonds, interest payments and dates thereof, exchange and transfer of Bonds, replacement of mutilated,destroyed, lost or stolen Bonds, the safekeeping and cancellation of Bonds, non-presentment of Bonds,and the duties of the Trustee in connection with all of the foregoing, shall remain in effect and shall be

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binding upon the Trustee and the Owners of such Bond, and the Trustee shall continue to be obligated tohold in trust any moneys or investments then held by the Trustee for the payment of the principal of andinterest and premium, if any, on such Bond, and to pay to the Owner of such Bond the funds so held bythe Trustee as and when such payment becomes due.

Bonds Deemed To Have Been Paid. (a) If moneys shall have been set aside and held by theTrustee for the payment or redemption of any Bond and the payment of the interest thereon to thematurity or redemption date thereof, such Bond shall be deemed to have been paid within the meaningand with the effect provided in the provisions of the Indenture summarized under the caption “–Discharge of Indenture” above. Any Outstanding Bond shall prior to the maturity date or redemption datethereof be deemed to have been paid within the meaning of and with the effect expressed in suchprovisions if (i) in case any of such Bonds are to be redeemed on any date prior to their maturity date, theAuthority shall have given to the Trustee in form satisfactory to it irrevocable instructions to mail, on adate in accordance with the provisions of the Indenture, notice of redemption of such Bond on saidredemption date, said notice to be given in accordance with the Indenture, (ii) there shall have beendeposited with the Trustee either (A) money in an amount which shall be sufficient, or (B) DefeasanceSecurities, the principal of and the interest on which when due, and without any reinvestment thereof,together with the money, if any, deposited therewith, will provide moneys which shall be sufficient to paywhen due the interest to become due on such Bond on and prior to the maturity date or redemption datethereof, as the case may be, and the principal of and premium, if any, on such Bond, and (iii) in the eventsuch Bond is not by its terms subject to redemption within the next succeeding 60 days, the Authorityshall have given the Trustee, in form satisfactory to it, irrevocable instructions to mail as soon aspracticable, a notice to the Owner of such Bond that the deposit required by clause (ii) above has beenmade with the Trustee and that such Bond is deemed to have been paid in accordance with the provisionsof the Indenture summarized under this caption (“– Bonds Deemed To Have Been Paid”) and stating thematurity date or redemption date upon which money is to be available for the payment of the principal ofand premium, if any, on such Bond.

(b) No Bond shall be deemed to have been paid pursuant to clause (ii) of paragraph (a) aboveunless the Authority shall have caused to be delivered to the Authority and the Trustee (i) an executedcopy of a Verification Report with respect to such deemed payment, addressed to the Authority and theTrustee, in form and in substance acceptable to the Authority and the Trustee, (ii) a copy of the escrowagreement entered into in connection with the deposit pursuant to clause (ii) of paragraph (a) aboveresulting in such deemed payment, which escrow agreement shall be in form and in substance acceptableto the Authority and the Trustee and which escrow agreement shall provide that no substitution ofDefeasance Securities shall be permitted except with other Defeasance Securities and upon delivery of anew Verification Report, and no reinvestment of Defeasance Securities shall be permitted except ascontemplated by the original Verification Report or upon delivery of a new Verification Report, and (iii) acopy of an opinion of Bond Counsel, dated the date of such deemed payment and addressed to theAuthority and the Trustee, in form and in substance acceptable to the Authority and the Trustee, to theeffect that such Bond has been paid within the meaning and with the effect expressed in the Indenture, theIndenture has been discharged in respect of such Bond and all agreements, covenants and otherobligations of the Authority under the Indenture as to such Bond have ceased, terminated, become voidand been completely discharged and satisfied.

Unclaimed Moneys. Any moneys held by the Trustee in trust for the payment and discharge ofthe principal of, or premium or interest on, any Bond which remain unclaimed for two years after the datewhen such principal, premium or interest has become payable, if such moneys were held by the Trustee atsuch date, or for two years after the date of deposit of such moneys if deposited with the Trustee after thedate when such principal, premium or interest become payable, shall be repaid by the Trustee to theAuthority as its absolute property free from trust, and the Trustee shall thereupon be released and

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discharged with respect thereto and the Owner of such Bond shall look only to the Authority for thepayment of such principal, premium or interest.

Miscellaneous

Successor Is Deemed Included in All References to Predecessor. Whenever in the Indentureeither the Authority or the Trustee is named or referred to, such reference shall be deemed to include thesuccessors or assigns thereof, and all the covenants and agreements in the Indenture contained requiredthereby to be performed by or on behalf of the Authority or the Trustee shall bind and inure to the benefitof the respective successors and assigns thereof whether so expressed or not.

Limitation of Rights. Nothing in the Indenture or in the Bonds expressed or implied is intendedor shall be construed to give to any Person other than the Trustee, the Authority and the Owners any legalor equitable right, remedy or claim under or in respect of the Indenture or any covenant, condition orprovision therein contained, and all such covenants, conditions and provisions are and shall be held to befor the sole and exclusive benefit of the Trustee, the Authority and the Owners.

Evidence of Rights of Owners. Any request, consent or other instrument required or permitted bythe Indenture to be signed and executed by Owners may be in any number of concurrent instruments ofsubstantially similar tenor and shall be signed or executed by such Owners in Person or by an agent oragents duly appointed in writing. Proof of the execution of any such request, consent or other instrumentor of a writing appointing any such agent, or of the holding by any Person of Bonds transferable bydelivery, shall be sufficient for any purpose of the Indenture and shall be conclusive in favor of theTrustee and the Authority if made in the manner provided in the provisions of the Indenture summarizedunder this caption (“– Evidence of Rights of Owners”).

The fact and date of the execution by any Person of any such request, consent or other instrumentor writing may be proved by the certificate of any notary public or other officer of any jurisdiction,authorized by the laws thereof to take acknowledgments of deeds, certifying that the Person signing suchrequest, consent or other instrument acknowledged to him the execution thereof, or by an affidavit of awitness of such execution duly sworn to before such notary public or other officer.

The ownership of Bonds shall be proved by the Registration Books.

Any request, consent, or other instrument or writing of the Owner of any Bond shall bind everyfuture Owner of the same Bond and the Owner of every Bond issued in exchange therefor or in lieuthereof, in respect of anything done or suffered to be done by the Trustee or the Authority in accordancetherewith or reliance thereon.

Disqualified Bonds. In determining whether the Owners of the requisite aggregate principalamount of Bonds have concurred in any demand, request, direction, consent or waiver under theIndenture, Bonds which are known by the Trustee to be owned or held by or for the account of theAuthority, or by any other obligor on the Bonds, or by any Person directly or indirectly controlling orcontrolled by, or under direct or indirect common control with, the Authority or any other obligor on theBonds, shall be disregarded and deemed not to be Outstanding for the purpose of any such determination.Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposesof the provisions of the Indenture summarized in this paragraph if the pledgee shall establish to thesatisfaction of the Trustee the pledgee’s right to vote such Bonds and that the pledgee is not a Persondirectly or indirectly controlling or controlled by, or under direct or indirect common control with, theAuthority or any other obligor on the Bonds. In case of a dispute as to such right, any decision by theTrustee taken upon the advice of counsel shall be full protection to the Trustee.

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Money Held for Particular Bonds. The money held by the Trustee for the payment of the interest,principal or premium due on any date with respect to particular Bonds (or portions of Bonds in the case ofBonds redeemed in part only) shall, on and after such date and pending such payment, be set aside on itsbooks and held in trust by it for the Owners entitled thereto, subject, however, to the provisions of theIndenture relating to unclaimed moneys but without any liability for interest thereon.

Funds and Accounts. Any fund or account required by the Indenture to be established andmaintained by the Trustee may be established and maintained in the accounting records of the Trustee,either as a fund or an account, and may, for the purposes of such records, any audits thereof and anyreports or statements with respect thereto, be treated either as a fund or as an account; but all such recordswith respect to all such funds and accounts shall at all times be maintained in accordance with prudentcorporate trust industry standards to the extent practicable, and with due regard for the requirements ofthe Indenture and for the protection of the security of the Bonds and the rights of every Owner thereof.The Trustee may establish any such additional funds or accounts as it deems necessary to perform itsobligations under the Indenture.

Business Days. If the date for making any payment or the last date for performance of any act orthe exercising of any right, as provided in the Indenture shall not be a Business Day, such payment maybe made or act performed or right exercised on the next succeeding Business Day, with the same forceand effect as if done on the nominal date provided in the Indenture and, unless otherwise specificallyprovided in the Indenture, no interest shall accrue for the period from and after such nominal date.

Waiver of Personal Liability. No member, officer, agent or employee of the Authority shall beindividually or personally liable for the payment of the principal of or premium or interest on the Bondsor be subject to any personal liability or accountability by reason of the issuance thereof; but nothingcontained in the Indenture shall relieve any such member, officer, agent or employee from theperformance of any official duty provided by any applicable provision of law or by the Indenture.

Governing Laws. The Indenture shall be governed by and construed in accordance with the lawsof the State.

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APPENDIX B

CITY AUDITED FINANCIAL STATEMENTS

FOR THE FISCAL YEAR ENDED JUNE 30, 2012


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APPENDIX C

GENERAL INFORMATION ABOUT THE CITY OF CHINO HILLS

The following information concerning the City of Chino Hills is presented as general background data. The Bonds are payable solely from Net Revenues as described in the Official Statement. The Bonds are not an obligation of the City, and the taxing power of the City is not pledged to the payment of the Bonds.

General Information

The City was incorporated on December 1, 1991 as a general law city. Prior to incorporation, the area comprising the City was managed first by the County of San Bernardino, and later by the Chino Hills Manager’s Office, a special district of the County. In mid-1979, when faced with increasing demand for development, the County initiated the drafting of the Chino Hills Specific Plan (the “Specific Plan”). The Specific Plan was adopted on August 2, 1982 and set the character of Chino Hills through zoning and land use policies. It represented one of the largest master-planned developments in California at the time. The Specific Plan sought to guide development into the most suitable locations, preserve environmentally sensitive areas, reduce pressures on a nearby dairy preserve and design an effective implementation system that would result in the efficient provision of services and facilities. The Specific Plan primarily addressed the northern portion of the City and covered 26 of the City’s 46 square miles and sought to cluster development around several “village” commercial cores, with residential density decreasing away from the core. The Specific Plan included a financial plan that identified a variety of funding sources to construct infrastructure in coordination with residential and commercial development.

After incorporation, the City developed its first General Plan (the “General Plan”), based upon the precepts of the Specific Plan, but on a broader scale that incorporated the City’s entire 46 square miles. The City’s General Plan was adopted on September 13, 1994. The General Plan continued earlier efforts to preserve the City’s rural character through protection of ridgelines, the use of sensitive grading techniques, and abundant landscaping. The community currently has 3,000 acres (4.7 square miles) of City-owned open space, 40 parks, and 38 miles of scenic trails. The development cycle in Chino Hills is maturing. As of January 2012, nearly 23,000 residential units had been built and the population had reached over 75,000.

Government Organization

The City operates under the council/manager form of government. The City is governed by a five-member council, each elected at large for four-year alternating terms. Positions of City Manager and City Attorney are filled by appointments of the City Council. The City currently employs 146 full-time staff members. An additional 10 full-time positions are authorized but currently vacant.

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Governmental Services

Chino Hills is a full service City. The Community Development Department serves Chino Hills’ residents and businesses by assisting, regulating, and preserving residential and commercial development within the City. The Community Services Department provides a wide range of programs, services, and educational and recreational opportunities, as well as a variety of human services programs that assist individuals, youth, and families. The Public Works Department has responsibility for the operation and maintenance of water and sewer service; water quality; and maintenance of vehicles, streets, facilities, 40 parks and 3,000 acres of publicly-owned open space. The City has contracted with the San Bernardino County Sheriff’s Department for law enforcement services since incorporation in 1991. The Chino Valley Independent Fire District (CVIFD) is headquartered in Chino Hills and serves the Chino Valley, which includes the Cities of Chino Hills and Chino. CVIFD provides high-quality emergency services including emergency medical and paramedic, hazardous materials response and urban search and rescue services.

Community Information

There are eleven elementary schools, two middle schools, and two high schools in the City of Chino Hills.

Recreation is a priority in Chino Hills. Big League Dreams Chino Hills Sports Park is a 33-acre multi-use sports facility that attracts tournaments, visitors, and new commercial ventures to the City. The City is also home to the McCoy Equestrian & Recreation Center. This beautiful 20-acre facility includes two lighted arenas, covered bleachers, a gazebo, a community building, and trail connections. In addition to the Chino Hills State Park, the City also has 40 parks and 38 miles of scenic trails.

Transportation

Regional access to the City from the Greater Los Angeles, Orange and San Bernardino Metropolitan Areas is provided by the Pomona Freeway (State Route 60), Chino Valley Freeway (State Highway 71), Carbon Canyon Road (State Route 142) and Grand Avenue.

Carbon Canyon Road bisects the City in an easterly-westerly direction, linking the Chino Valley Freeway with Imperial Highway and the Orange Freeway (State Highway 57) in Orange County. Grand Avenue connects with the Chino Valley Freeway with the Pomona Freeway, the Orange Freeway and Interstate 210. This network of roads provides very direct freeway access to San Bernardino, Los Angeles, Riverside, and Orange Counties. Under the General Plan, a substantial backbone network of streets and highways has been constructed within the City. The system is designed to provide safe, efficient circulation within each village.

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Population

The following table provides a comparison of population growth for Chino Hills, surrounding cities and San Bernardino County between 2008 and 2012.

TABLE NO. C-1 CHANGE IN POPULATION

CHINO HILLS, SURROUNDING CITIES AND SAN BERNARDINO COUNTY 2008 - 2012

CHINO HILLS SURROUNDING CITIES SAN BERNARDINO COUNTY

Percentage Percentage Percentage

Year Population Change Population Change Population Change

2008 74,964 132,650 2,009,594

2009 74,725 (0.3%) 133,361 0.5% 2,019,432 0.5%

2010 74,738 0.0% 133,716 0.3% 2,033,141 0.7%

2011 75,345 0.8% 134,303 0.4% 2,052,397 0.9%

2012 75,655 0.4% 134,990 0.5% 2,063,919 0.6%

% Increase Between

2008 - 2012 0.9% 1.8% 2.7%

Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, August 2011, “E-5 Population and Housing Estimates for Cities, Counties, and the State, 2011 and 2012, with 2010 Benchmark” Sacramento, California, May 2012.

____________________________________

Surrounding cities include Chino and Diamond Bar.

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Per Capita Personal Income

Per capita personal income information for San Bernardino County, the State of California and the United States are summarized in the following table.

TABLE NO. C-2 PER CAPITA PERSONAL INCOME

SAN BERNARDINO COUNTY, STATE OF CALIFORNIA AND UNITED STATES (1) 2006 - 2010

Year San Bernardino County (2) State of California (2) United States (2)

2006 $28,607 $41,518 $37,725

2007 29,765 43,211 39,506

2008 30,220 44,003 40,947

2009 29,072 41,034 38,846

2010 29,609 41,893 39,937

Source: U.S. Department of Commerce, Bureau of Economic Analysis. ____________________________________

(1) Per capita personal income for the City is not available. (2) Per capita personal income was computed using Census Bureau midyear population estimates. Estimates for

2000-2010 reflect county population estimates available as of April 2012. All state and local area dollar estimates are in current dollars (not adjusted for inflation). Last updated: April 25, 2012 - new estimates for 2010; revised estimates for 2000-2009.

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Employment

As of June 2012 the civilian labor force for the City was approximately 39,600 of whom 37,100 were employed. The unadjusted unemployment rate as of June 2012 was 6.4% for the City as compared to 12.6% for the County. Civilian labor force, employment and unemployment statistics for the City, County, the State and the nation, for the years 2007 through 2011 are shown in the following table:

TABLE NO. C-3 CITY OF CHINO HILLS

CIVILIAN LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT ANNUAL AVERAGES

Year

Civilian Labor Force

Employment

Unemployment

Unemployment Rate

2007

City of Chino Hills 41,100 40,000 1,100 2.7%

San Bernardino County 863,500 815,100 48,400 5.6%

California 17,921,000 16,960,700 960,300 5.4%

United States 153,124,000 146,047,000 7,078,000 4.6%

2008



California 18,203,100 16,890,000 1,313,100 7.2%

United States 154,287,000 145,362,000 8,924,000 5.8%

2009



California 18,208,300 16,144,500 2,063,900 11.3%

United States 154,142,000 139,877,000 14,265,000 9.3%

2010



California 18,316,400 16,051,500 2,264,900 12.4%

United States 153,889,000 139,064,000 14,825,000 9.6%

2011



California 18,384,900 16,226,600 2,158,300 11.7%

United States 153,617,000 139,869,000 13,747,000 8.9%

Source: California State Employment Development Department and United States Bureau of Labor Statistics.

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Industry

Chino Hills is located in the Riverside-San Bernardino-Ontario Metropolitan Statistical Area (MSA). As of June 2012 six major job categories constitute 79.2% of the work force. They are government (19.2%), service producing (17.9%), educational and health services (12.0%), professional and business services (11.9%), leisure and hospitality (10.8%), and manufacturing (7.4%). The distribution of employment in the Riverside San Bernardino Ontario MSA is presented in the following table.

TABLE NO. C-4 RIVERSIDE-SAN BERNARDINO-ONTARIO MSA

WAGE AND SALARY WORKERS BY INDUSTRY (1) (in $ thousands)

Industry 2008 2009 2010 2011 2012

Government 233.3 232.8 241.6 230.8 224.5

Other Services 42.2 37.5 39.2 39.4 39.3

Leisure and Hospitality 131.3 124.1 122.9 123.5 125.8

Educational and Health Services 131.1 133.5 132.5 136.7 140.4

Professional and Business Services 138.2 123.7 123.0 123.3 139.4

Financial Activities 46.5 42.2 40.9 39.8 38.8

Information 14.9 15.3 16.1 14.9 14.8

Transportation, Warehousing and Utilities 70.2 67.1 66.2 68.5 69.6

Service Producing

Retail Trade 168.1 154.1 153.9 155.0 154.7

Wholesale Trade 55.0 48.9 48.9 48.8 54.0

Manufacturing

Nondurable Goods 34.8 30.7 30.0 29.4 30.5

Durable Goods 73.7 58.2 55.5 56.6 55.5

Goods Producing

Construction 93.8 69.8 61.3 59.1 59.1

Mining and Logging 1.2 1.2 1.0 1.0 1.1

Total Nonfarm 1,234.3 1,139.1 1,133.0 1,126.8 1,147.5

Farm 21.9 20.9 21.1 19.0 19.1

Total (all industries) 1,256.2 1,160.0 1,154.1 1,145.8 1,166.6

Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month, March 2011 Benchmark.”

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(1) Annually, as of June.

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Principal Employers

The principal employers operating within the City as of June 30, 2012 are as follows:


PRINCIPAL EMPLOYERS

Number

Name of Company of Employees Product/Service

Chino Valley Unified School District 1,350 Education

City of Chino Hills 271 Government

Costco 270 Membership Warehouse

Boys Republic 210 Private Education

Lowe’s 206 Home Improvement Store

99 Ranch Market 126 Asian Supermarket

Chino Valley Independent Fire District 125 Emergency Services

Harkins Theatre 120 Movie Theater

BJ’s Brewery 117 Restaurant

Best Buy 91 Retail


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Commercial Activity

The following table summarizes the volume of retail sales and taxable transactions for the City of Chino Hills for 2006 through 2010 (the most recent year for which statistics are available).


TOTAL TAXABLE TRANSACTIONS (in $ thousands)

2006 - 2010

Retail and Retail and Total Taxable

Food Services Food Services Transactions Issued Sales

Year ($000’s) % Change Permits ($000’s) % Change Permits

2006 $422,293 559 $469,660 1,108

2007 427,531 1.2% 546 494,924 5.4% 1,086

2008 473,470 10.8% 661 531,788 7.5% 1,182

2009 468,060 (1.1%) 789 527,458 (0.8%) 1,110

2010 491,419 5.0% 783 550,838 4.4% 1,083

Source: California State Board of Equalization, “Taxable Sales in California.”

The following table compares taxable transactions for the City of Chino Hills and surrounding cities for 2006 through 2010 (the most recent year for which statistics are available).

TABLE NO. C-7 CHANGE IN TOTAL TAXABLE TRANSACTIONS

CHINO HILLS AND SURROUNDING CITIES (in $ thousands)

2006 - 2010

% Change from

City 2006 2007 2008 2009 2010 2006 - 2010

CHINO HILLS $ 469,660 $ 494,924 $ 531,789 $ 527,458 $ 550,838 17.3%

Chino 1,525,481 1,479,950 1,471,397 1,291,272 1,336,520 (12.4%)

Diamond Bar 346,890 351,953 311,256 272,020 286,359 (17.4%)

Source: California State Board of Equalization, “Taxable Sales in California.”

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Taxable transactions by type of business for the City of Chino Hills are summarized below for 2006 through 2010 (the most recent year for which statistics are available).


TAXABLE TRANSACTIONS BY TYPE OF BUSINESS (in $ thousands)

2006 - 2010

2006 2007 2008 2009 2010

Retail and Food Services

Clothing and Clothing

Accessories Stores $ 3,693 $ 4,164 $ 21,674 $ 35,343 $ 34,406

General Merchandise Stores 131,254 130,263 124,395 # #

Food and Beverage Stores 44,021 43,116 43,057 46,709 46,864

Food Services and Drinking Places 48,216 52,820 76,056 90,930 90,851

Home Furnishings and

Appliance Stores 10,680 10,003 25,184 38,404 38,006

Building Materials and Garden

Equipment and Supplies # # # # #

Motor Vehicles and Parts Dealers 9,424 8,662 11,663 11,481 13,441

Gasoline Stations 66,206 71,502 84,395 69,323 82,270

Other Retail Group 108,799# 107,001# 87,047# 175,869# 185,581#

Total Retail and Food Services 422,293 427,531 473,470 468,060 491,419

All Other Outlets 47,367 67,393 58,318 59,398 59,419

Totals All Outlets $469,660 $494,924 $531,788 $527,458 $550,838

Source: California State Board of Equalization, “Taxable Sales in California.” ____________________________________

# Sales omitted because their publication would result in the disclosure of confidential information. These are included with “Other Retail Group” when possible.

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Building Activity

The following table summarizes building activity valuations for the City of Chino Hills for the five-year period from 2007 through 2011.


BUILDING ACTIVITY AND VALUATION (in $ thousands)

2007 - 2011

2007 2008 2009 2010 2011

Total Valuation Residential &

Non-Residential $139,517,968 $107,435,539 $ 27,847,116 $ 31,725,720 $ 24,257,981

No. of New Dwelling Units:

Single-Family 109 63 29 34 21

Multi-Family 0 0 0 0 0

Total New Units 109 63 29 34 21


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APPENDIX D

FORM OF CONTINUING DISCLOSURE AGREEMENT

Upon delivery of the Bonds, the City of Chino Hills expects to enter into a Continuing DisclosureAgreement with respect to the Bonds in substantially the following form:

THIS CONTINUING DISCLOSURE AGREEMENT (this “Disclosure Agreement”), dated asof December 1, 2012, is by and between the CITY OF CHINO HILLS, a municipal corporation andgeneral law city organized and existing under the laws of the State of California (the “City”), and U.S.BANK NATIONAL ASSOCIATION, a national banking association organized and existing under thelaws of the United States of America, as Trustee (the “Trustee”).

W I T N E S S E T H :

WHEREAS, pursuant to the Indenture, dated as of December 1, 2012 (the “Indenture”), by andbetween the Chino Hills Financing Authority (the “Authority”) and the Trustee, the Authority has causedto be issued the Chino Hills Financing Authority Water Revenue Bonds, Series 2012 (the “Series 2012Bonds”), in the aggregate principal amount of $19,975,000, to assist the City in refinancing the PriorProject and financing the Additional Project; and

WHEREAS, this Disclosure Agreement is being executed and delivered by the City and theTrustee for the benefit of the holders and beneficial owners of the Series 2012 Bonds and in order to assistthe underwriters of the Series 2012 Bonds in complying with Securities and Exchange Commission Rule15c2-12(b)(5);

NOW, THEREFORE, for and in consideration of the mutual promises and covenants hereincontained, the parties hereto agree as follows:

Section 1. Definitions. Unless the context otherwise requires, the terms defined in this Sectionshall for all purposes of this Disclosure Agreement have the meanings herein specified. Capitalizedundefined terms used herein shall have the meanings ascribed thereto in the Indenture.

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

“Annual Report Date” means the date in each year that is the first day of the month followingthe ninth month after the end of the City’s fiscal year, which date, as of the date of this DisclosureAgreement, is April 1.

“Authority” means the Chino Hills Financing Authority, a joint exercise of powers authorityorganized and existing under the laws of the State of California.

“City” means the City of Chino Hills, California, a municipal corporation and general law cityorganized and existing under the laws of the State of California.

“Disclosure Representative” means the Finance Director of the City, or such other officer oremployee of the City as the City shall designate in writing to the Trustee from time to time.

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“Dissemination Agent” means the Trustee, acting in its capacity as Dissemination Agenthereunder, or any successor Dissemination Agent designated in writing by the City and which has filedwith the Trustee a written acceptance of such designation.

“Indenture” means the Indenture, dated as of December 1, 2012, by and between the Authorityand U.S. Bank National Association, as originally executed and as it may be amended or supplementedfrom time to time in accordance with its terms.

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

“MSRB” means the Municipal Securities Rulemaking Board or any other entity designated orauthorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Untilotherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRBare to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB,currently located at http://emma.msrb.org.

“Official Statement” means the Official Statement, dated November 29, 2012, relating to theSeries 2012 Bonds.

“Participating Underwriter” means any of the original underwriters of the Series 2012 Bondsrequired to comply with the Rule in connection with the offering of the Series 2012 Bonds.

“Rule” means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission underthe Securities Exchange Act of 1934, as the same may be amended from time to time.

“Trustee” means U.S. Bank National Association, as Trustee under the Indenture, or anysuccessor thereto as Trustee thereunder, substituted in its place as provided therein.

Section 2. Provision of Annual Reports. (a) The City shall, or shall cause the DisseminationAgent to, provide to the MSRB an Annual Report which is consistent with the requirements of Section 3hereof, not later than the Annual Report Date, commencing with the report for the 2012-13 Fiscal Year.The Annual Report may include by reference other information as provided in Section 3 hereof; provided,however, that the audited financial statements of the City, if any, may be submitted separately from thebalance of the Annual Report, and later than the date required above for the filing of the Annual Report ifthey are not available by that date. If the City’s fiscal year changes, it shall, or it shall instruct theDissemination Agent to, give notice of such change in a filing with the MSRB.

(b) Not later than 15 business days prior to the date specified in subsection (a) of this Sectionfor the providing of the Annual Report to the MSRB, the City shall provide the Annual Report to theDissemination Agent and the Trustee (if the Trustee is not the Dissemination Agent). If by such date, theTrustee has not received a copy of the Annual Report, the Trustee shall contact the City and theDissemination Agent to determine if the City is in compliance with the first sentence of this subsection(b).

(c) If the Trustee is unable to verify that an Annual Report has been provided to the MSRBby the date required in subsection (a) of this Section, the Trustee shall, in a timely manner, send a noticeto the MSRB in substantially the form attached as Exhibit A.

(d) The Dissemination Agent shall:

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(i) provide any Annual Report received by it to the MSRB, as provided herein; and

(ii) file a report with the City and (if the Dissemination Agent is not the Trustee) theTrustee certifying that the Annual Report has been provided pursuant to this DisclosureAgreement and stating the date it was provided to the MSRB.

Section 3. Content of Annual Reports. The City’s Annual Report shall contain or incorporateby reference the following:

(a) The City’s audited financial statements, if any, prepared in accordance with generallyaccepted accounting principles as promulgated to apply to governmental entities from time to time by theGovernmental Accounting Standards Board. If the City’s audited financial statements, if any, are notavailable by the time the Annual Report is required to be filed pursuant to subsection (a) of Section 2hereof, the Annual Report shall contain unaudited financial statements, in a format similar to that used forthe City’s audited financial statements, and the audited financial statements, if any, shall be filed in thesame manner as the Annual Report when they become available.

(b) The following information with respect to the Series 2012 Bonds:

(i) The principal amount of Series 2012 Bonds Outstanding and the principalamount of any Senior Obligations outstanding as of the January 1 next preceding the AnnualReport Date.

(ii) The balance in the Reserve Fund, and a statement of the Reserve Requirement asof the January 1 next preceding the Annual Report Date.

(c) Water rates and water services charge changes approved by the City Council of the Cityduring the current fiscal year.

(d) An update of the information contained in the following tables of the Official Statement,for the then current fiscal year, as described below:

(i) Chino Hills Water System – Water Consumption;

(ii) Chino Hills Water System – Ten Largest Water Users; and

(iii) Chino Hills Water System – Historic Operating Results and Debt ServiceCoverage.

(e) In addition to any of the information expressly required to be provided under thepreceding paragraphs (a), (b), (c) and (d), the City shall provide such further information, if any, as maybe necessary to make the specifically required statements, in the light of the circumstances under whichthey are made, not misleading.

Any or all of the items listed above may be included by specific reference to other documents,including official statements of debt issues of the City or related public entities, which have been madeavailable to the public on the MSRB’s website. The City shall clearly identify each such other documentso included by reference.

Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, theCity shall give, or cause to be given, notice of the occurrence of any of the following events with respect

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to the Series 2012 Bonds in a timely manner not later than ten business days after the occurrence of theevent:

(i) Principal and interest payment delinquencies.

(ii) Unscheduled draws on debt service reserves reflecting financial difficulties.

(iii) Unscheduled draws on credit enhancements reflecting financial difficulties.

(iv) Substitution of credit or liquidity providers, or their failure to perform.

(v) Adverse tax opinions or issuance by the Internal Revenue Service of proposed orfinal determination of taxability or of a Notice of Proposed Issue (IRS Form 5701TEB).

(vi) Tender offers.

(vii) Defeasances.

(viii) Rating changes.

(ix) Bankruptcy, insolvency, receivership or similar event of the City.

For purposes of the event identified in paragraph (ix), the event is considered to occur when anyof the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligatedperson in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federallaw in which a court or governmental authority has assumed jurisdiction over substantially all of theassets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existinggovernmental body and officials or officers in possession but subject to the supervision and orders of acourt or governmental authority, or the entry of an order confirming a plan of reorganization, arrangementor liquidation by a court or governmental authority having supervision or jurisdiction over substantiallyall of the assets or business of the obligated person.

(b) Pursuant to the provisions of this Section, the City shall give, or cause to be given, noticeof the occurrence of any of the following events with respect to the Series 2012 Bonds, if material, in atimely manner not later than ten business days after the occurrence of the event:

(i) Unless described in paragraph (v) of subsection (a) of this Section, other materialnotices or determinations by the Internal Revenue Service with respect to the taxstatus of the Series 2012 Bonds or other material events affecting the tax status ofthe Series 2012 Bonds.

(ii) Modifications to rights of holders of the Series 2012 Bonds.

(iii) Optional, unscheduled or contingent Series 2012 Bond calls.

(iv) Release, substitution, or sale of property securing repayment of the Series 2012Bonds.

(v) Non-payment related defaults.

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(vi) The consummation of a merger, consolidation, or acquisition involving anobligated person or the sale of all or substantially all of the assets of the obligatedperson, other than in the ordinary course of business, the entry into a definitiveagreement to undertake such an action or the termination of a definitiveagreement relating to any such actions, other than pursuant to its terms.

(vii) Appointment of a successor or additional Trustee or the change of name of aTrustee.

(c) The Trustee shall, as soon as reasonably practicable after obtaining actual knowledge ofthe occurrence of any of the Listed Events, contact the Disclosure Representative and inform such personof the event.

(d) If a Listed Event described in subsection (b) of this Section occurs, the City shalldetermine if such event would be material under applicable Federal securities law.

(e) If a Listed Event described in subsection (a) of this Section occurs, or if the Citydetermines that the occurrence of a Listed Event described in subsection (b) of this Section would bematerial under applicable Federal securities law, the City shall, or shall cause the Dissemination Agent to,file a notice of the occurrence of such Listed Event with the MSRB, within ten business days of suchoccurrence.

(f) Notwithstanding the foregoing, notices of Listed Events described in paragraph (vii) ofsubsection (a) of this Section and paragraph (iii) of subsection (b) of this Section need not be given anyearlier than the notice (if any) of the underlying event is given to holders of affected Series 2012 Bondspursuant to the Indenture.

Section 5. Format for Filings with MSRB. Any report or filing with the MSRB pursuant tothis Disclosure Agreement must be submitted in electronic format, accompanied by such identifyinginformation as is prescribed by the MSRB.

Section 6. Termination of Reporting Obligation. The City’s obligations under thisDisclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full ofall of the Series 2012 Bonds. If such termination occurs prior to the final maturity of the Series 2012Bonds, the City shall give notice of such termination in a filing with the MSRB.

Section 7. Dissemination Agent. The City may, from time to time, appoint or engage aDissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and maydischarge any such Dissemination Agent, with or without appointing a successor Dissemination Agent.The Dissemination Agent may resign by providing 30 days’ written notice to the City and the Trustee.The Dissemination Agent shall have no duty to prepare the Annual Report nor shall the DisseminationAgent be responsible for filing any Annual Report not provided to it by the City in a timely manner and ina form suitable for filing. If at any time there is not any other designated Dissemination Agent, theTrustee shall be the Dissemination Agent.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this DisclosureAgreement, the City and the Trustee may amend this Disclosure Agreement (and the Trustee shall agreeto any amendment so requested by the City; provided, however, that the Trustee shall not be obligated toenter into any amendment increasing or affecting its duties or obligations), and any provision of thisDisclosure Agreement may be waived, provided that the following conditions are satisfied:

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(a) if the amendment or waiver relates to the provisions of subsection (a) of Section 2 hereof,Section 3 hereof or subsection (a) or (b) of Section 4 hereof, it may only be made in connection with achange in circumstances that arises from a change in legal requirements, change in law, or change in theidentity, nature or status of an obligated person with respect to the Series 2012 Bonds, or the type ofbusiness conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion ofnationally recognized bond counsel, have complied with the requirements of the Rule at the time of theprimary offering of the Series 2012 Bonds, after taking into account any amendments or interpretations ofthe Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver (i) is approved by Owners of the Series 2012 Bondsin the manner provided in the Indenture for amendments to the Indenture with the consent of Owners, or(ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests ofOwners or Beneficial Owners of the Series 2012 Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Cityshall describe such amendment or waiver in the next Annual Report, and shall include, as applicable, anarrative explanation of the reason for the amendment or waiver and its impact on the type (or in the caseof a change of accounting principles, on the presentation) of financial information or operating data beingpresented by the City. In addition, if the amendment relates to the accounting principles to be followed inpreparing financial statements (i) notice of such change shall be given in a filing with the MSRB, and (ii)the Annual Report for the year in which the change is made shall present a comparison (in narrative formand also, if feasible, in quantitative form) between the financial statements as prepared on the basis of thenew accounting principles and those prepared on the basis of the former accounting principles.

Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed toprevent the City from disseminating any other information, using the means of dissemination set forth inthis Disclosure Agreement or any other means of communication, or including any other information inany Annual Report or notice required to be filed pursuant to this Disclosure Agreement, in addition to thatwhich is required by this Disclosure Agreement. If the City chooses to include any information in anyAnnual Report or notice in addition to that which is specifically required by this Disclosure Agreement,the City shall have no obligation under this Disclosure Agreement to update such information or includeit in any future Annual Report or notice of occurrence of a Listed Event or any other event required to bereported.

Section 10. Default. In the event of a failure of the City, the Trustee or the DisseminationAgent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the writtendirection of any Participating Underwriter or the Owners of at least 25% of the aggregate principalamount of Outstanding Series 2012 Bonds, shall, upon receipt of indemnification reasonably satisfactoryto the Trustee), or any Owner or Beneficial Owner of the Series 2012 Bonds may, take such actions asmay be necessary and appropriate, including seeking mandate or specific performance by court order, tocause the City, the Trustee or the Dissemination Agent, as the case may be, to comply with its obligationsunder this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed anEvent of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the eventof any failure of the City, the Trustee or the Dissemination Agent to comply with this DisclosureAgreement shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. ArticleVIII of the Indenture is hereby made applicable to this Disclosure Agreement as if this DisclosureAgreement were (solely for this purpose) contained in the Indenture. The Dissemination Agent shall be

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entitled to the protections and limitations from liability afforded to the Trustee thereunder. Neither theTrustee nor the Dissemination Agent shall be responsible for the form or content of any Annual Report ornotice of Listed Event. The Dissemination Agent shall receive reasonable compensation for its servicesprovided under this Disclosure Agreement. The Dissemination Agent (if other than the Trustee or theTrustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth inthis Disclosure Agreement. To the extent permitted by law, the City agrees to indemnify and save theDissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense andliabilities which it may incur in the exercise or performance of its powers and duties hereunder, includingthe costs and expenses (including attorneys’ fees) of defending against any claim of liability, and whichare not due to its negligence or its willful misconduct. The obligations of the City under this Section shallsurvive resignation or removal of the Dissemination Agent and payment of the Series 2012 Bonds.

Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of theCity, the Trustee, the Dissemination Agent, the Participating Underwriter and the Owners and BeneficialOwners from time to time of the Series 2012 Bonds, and shall create no rights in any other person orentity.

Section 13. Counterparts. This Disclosure Agreement may be executed in severalcounterparts, each of which shall be an original and all of which shall constitute but one and the sameinstrument.

IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of thedate first above written.

CITY OF CHINO HILLS

By:

U.S. BANK NATIONAL ASSOCIATION, ASTRUSTEE

By:

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EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Chino Hills Financing Authority

Name of Bond Issue: Chino Hills Financing Authority Water Revenue Bonds, Series 2012

Date of Issuance: December 18, 2012

NOTICE IS HEREBY GIVEN that the City of Chino Hills (the “City”) has not provided anAnnual Report with respect to the above-named Bonds as required by the Continuing DisclosureAgreement, dated as of December 1, 2012, by and between the City and U.S. Bank National Association,as Trustee. [The City anticipates that the Annual Report will be filed by _________, 20__.]

Dated:

U.S. Bank National Association, as Trustee,on behalf of the City of Chino Hills

cc: City of Chino Hills

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APPENDIX E

PROPOSED FORM OF OPINION OF BOND COUNSEL

Upon delivery of the Bonds, Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, BondCounsel to the Authority, proposes to render its final approving opinion with respect to the Bonds insubstantially the following form:

[Date of Delivery]

Chino Hills Financing AuthorityChino Hills, California

Chino Hills Financing AuthorityWater Revenue Bonds, Series 2012

(Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel to the Chino Hills Financing Authority (the “Authority”) inconnection with the issuance by the Authority of the Chino Hills Financing Authority Water RevenueBonds, Series 2012 (the “Bonds”), in the aggregate principal amount of $19,975,000, issued pursuant tothe Indenture, dated as of December 1, 2012 (the “Indenture”), by and between the Authority and U.S.Bank National Association, as trustee (the “Trustee”).

In such connection, we have reviewed the Indenture, the Installment Purchase Agreement, datedas of December 1, 2012 (the “Installment Purchase Agreement”), by and between City of Chino Hills (the“City”) and the Authority, the Tax Certificate, opinions of counsel to the Authority, the City and theTrustee, certificates of the Authority, the City, the Trustee and others and such other documents, opinionsand matters to the extent we deemed necessary to render the opinions set forth herein. Capitalizedundefined terms used herein have the meanings ascribed thereto in the Indenture or, if not defined therein,in the Installment Purchase Agreement.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings andcourt decisions and cover certain matters not directly addressed by such authorities. Such opinions maybe affected by actions taken or omitted or events occurring after the date hereof. We have not undertakento determine, or to inform any person, whether any such actions are taken or omitted or events do occur orany other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of itsdate and is not intended to, and may not, be relied upon or otherwise used in connection with any suchactions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance,and we disclaim any obligation to update this letter. We have assumed the genuineness of all documentsand signatures presented to us (whether as originals or as copies) and the due and legal execution anddelivery thereof by, and validity against, any parties other than the Authority and the City. We haveassumed, without undertaking to verify, the accuracy of the factual matters represented, warranted orcertified in the documents referred to in the second paragraph hereof. Furthermore, we have assumedcompliance with all covenants and agreements contained in the Indenture, the Installment PurchaseAgreement and the Tax Certificate, including, without limitation, covenants and agreements compliancewith which is necessary to assure that future actions, omissions or events will not cause the interest on theBonds to be included in gross income for federal income tax purposes.

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In addition, we call attention to the fact that the rights and obligations under the Bonds, theIndenture, the Installment Purchase Agreement and the Tax Certificate and their enforceability may besubject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium andother laws relating to or affecting creditors’ rights, to the application of equitable principles, to theexercise of judicial discretion in appropriate cases, and to the limitations on legal remedies againstgovernmental entities such as the Authority and the City in the State of California. We express noopinion with respect to any indemnification, contribution, penalty, arbitration, judicial reference, choiceof law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoingdocuments, nor do we express any opinion with respect to the state or quality of title to or interest in anyof the real or personal property described in the Installment Purchase Agreement or the accuracy orsufficiency of the description of any such property. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of theOfficial Statement or other offering material relating to the Bonds and express no opinion with respectthereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of thefollowing opinions:

1. The Bonds constitute valid and binding special obligations of the Authority, payable, asprovided in the Indenture, solely from the Authority Revenues and the other assets pledged therefor underthe Indenture.

2. The Indenture has been duly executed and delivered by, and constitutes a valid andbinding obligation of, the Authority.

3. The Installment Purchase Agreement has been duly executed and delivered by, andconstitutes a valid and binding obligation of, the Authority and the City. The obligation of the City tomake Installment Payments and other payments required to be made by it under the Installment PurchaseAgreement is a special obligation of the City payable, in the manner provided in the Installment PurchaseAgreement, solely from Net Revenues and other funds provided for in the Installment PurchaseAgreement.

4. Interest on the Bonds is excluded from gross income for federal income tax purposesunder Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personalincome taxes. Interest on the Bonds is not a specific preference item for purposes of the federalindividual or corporate alternative minimum taxes, although we observe that it is included in adjustedcurrent earnings when calculating corporate alternative minimum taxable income. We express no opinionregarding other tax consequences related to the ownership or disposition of, or the accrual or receipt ofinterest on, the Bonds.

Faithfully yours,

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APPENDIX F

DTC AND THE BOOK-ENTRY-ONLY SYSTEM

The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

Neither the issuer of the Bonds (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Bonds (the “Agent”) take any responsibility for the information contained in this Appendix.

No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.

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

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Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information contained on these Internet sites is not incorporated herein by reference.

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

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

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

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds and distributions on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or

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registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

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