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Ord. 1268 2006-05-16ORDINANCE NO. 1268 APPROVED MAY 15, 2006 CITY OF PEARLAND, TEXAS X13,845,000 WATER AND SEWER REVENUE AND REFUNDING BONDS SERIES 2006 TRANSCRIPT OF PROCEEDINGS PLEASE SEE FILE FOR SIGNED COPY Andrews Kurth LLP 600 Travis, Suite 4200 Houston, Texas 77002 (713)220-4200 HOU:2586943.1 OFFICIAL STATEMENT DATED MAY 15,2006 In the opinion of Bond Counsel,interest on the Bonds is excludable from gross income for federal income tax purposes under existing law,subject to the matters described under"TAX EXEMPTION"herein,and is not includable in the alternative minimum taxable income of individuals. See"TAX EXEMPTION"for a discussion of the opinion of Bond Counsel,including the alternative minimum tax on corporations. NEW ISSUE: BOOK-ENTRY-ONLY Ratings: Moody's Investors Service,Inc.(FSA) "Aaa" Standard&Poor's Ratings Services(FSA) "AAA" $13,845,000 CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria and Harris Counties) WATER AND SEWER SYSTEM REVENUE AND REFUNDING BONDS, SERIES 2006 Dated: June 1,2006 Due: September 1,as shown below Principal of and interest on the $13,845,000 City of Pear land, Texas, Water and Sewer System Revenue and Refunding Bonds, Series 2006 (the "Bonds")are payable by Wells Fargo Bank,N.A., Houston,Texas,the paying agent/registrar(the"Paying Agent/Registrar"). Interest on the Bonds is payable on March 1 and September 1 of each year,commencing September 1, 2006 and thereafter until maturity or prior redemption. The definitive Bonds will be initially registered and delivered only to Cede& Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book- Entry-Only System described herein. The Bonds will be issued in denominations of$5,000 of principal amount or any integral multiple thereof. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of the Bonds will he payable by the Paying Agent/Registrar to Cede& Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See"THE BONDS — Book-Entry-Only System" herein. The Bonds maturing on September 1, 2017 and thereafter are subject to redemption prior to their scheduled maturities on September 1, 2016 or any date thereafter, at the option of the City. Upon redemption the Bonds will be payable at a price equal to the principal amount thereof plus accrued interest to the date of redemption. See "THE BONDS - Description" and "THE BONDS - Redemption Provisions." The Bonds are special obligations of the City of Pear land,Texas(the"City")and are payable solely from a first lien on and pledge of the Net Revenues (hereinafter defined)of the City's waterworks and sanitary sewer system. See"THE BONDS—Source of Payment." The Bonds are authorized by an ordinance(the"Ordinance")approved by the City Council. Proceeds of the Bonds will be used(i)to finance certain water and sewer improvements for the City, (ii) to refund certain of the City's outstanding bonds as indicated in Schedule I attached hereto and (iii) to pay the costs of issuance of the Bonds. See`THE BONDS—Use of Proceeds." The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under an insurance "P FSA' policy to be issued concurrently with the delivery of the Bonds by FINANCIAL SECURITY ASSURANCE INC. �r PRINCIPAL AMOUNTS,MATURITIES,INTEREST RATES,PRICES AND CUSIP NUMBERS $7,180,000 Serial Bonds Initial Initial Maturity Principal Interest Reoffering CUSIP(b' Maturity Principal Interest Reoffering CUSIP(b' (September 1) Amount Rate Yield(a) 704883 (September 1) Amount Rate Yieldta' 704883 2009 $ 550,000 4.000% 3.740% FQ5 2018t`r $ 100,000 4.375% 4.510% FZ5 2010 570,000 4.250 3.770 FR3 2019(`) 100,000 4.500 4.610 GA9 2011 600,000 4.250 3.820 FS1 2020m 100,000 4.625 4.680 GB7 2012 625,000 4.250 3.920 FT9 2021(') 100,000 4.625 4.710 GC5 2013 650,000 4.500 4.030 FU6 2022(`) 100,000 4.625 4.740 GD3 2014 680,000 4.500 4.130 FV4 2023(`) 100,000 4.625 4.760 GE l 2015 710,000 4.500 4.230 FW2 2024`) 100,000 4.625 4.780 GF8 2016 745,000 4.500 4.300 FXO 2025(`) 100,000 4.625 4.800 GG6 2017(`) 100,000 4.300 4.430 FY8 2026(`) 1,1 50,000 4.750 4.820 GH4 $6,665,000 Term Bonds $2,470,000 Term Bonds Due September 1,2028(a)(b)(c)(d)Interest Rate 5.000%(Yield 4.670%)CUSIP 704883GJ0 $4,195,000 Term Bonds Due September 1,2031 (a)(b)(c)(d)Interest Rate 5.125%(Yield 4.600%)CUSIP 704883GK7 (a) The initial yields will be established by and are the sole responsibility of the Underwriters,and may subsequently be changed. (b) CUSIP numbers have been assigned to the Bonds by Standard&Poor's CUSIP Service Bureau,A Division of the McGraw Hill Companies,Inc., and are included solely for the convenience of the registered owners of the Bonds. Neither the City, the Financial Advisor nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Bonds maturing on September 1, 2017 and thereafter, are subject to redemption, at the option of the City on September 1, 2016, at the par value thereof plus accrued interest to the date of redemption. See`THE BONDS—Redemption Provisions." (d) Subject to mandatory redemption by lot or other customary random selection on September 1 in the years and in the amounts set forth herein under the caption`THE BONDS—Redemption Provisions." The Bonds are offered when, as and if issued, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Andrews Kurth LLP,Houston,Texas,Bond Counsel to the City,as to the validity of the issuance of the Bonds under the Constitution and the laws of the State of Texas. Certain legal matters will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Houston, Texas as Underwriters' Counsel. See"LEGAL MATTERS." Delivery of the Bonds is expected to be on or about June 15,2006. UBS INVESTMENT BANK FIRST SOUTHWEST COMPANY COASTAL SECURITIES EDWARD D. JONES & CO., L.P. CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS § COUNTIES OF BRAZORIA AND HARRIS § CITY OF PEARLAND § We, the undersigned officers of the City of Pearland, Texas (the"City"), hereby certify as follows: 1. The City Council of the City convened in a regular meeting on May 15, 2006, at the regular meeting place thereof, within the City, and the roll was called of the duly constituted officers and members of the City Council, to wit: Tom Reid Mayor Kevin Cole Mayor Pro Tem Richard F. Tetens Council Member Woodrow "Woody"Owens Council Member Steve Saboe Council Member Larry R. Marcott Council Member Young Lorfing Secretary and all of such persons were present, thus constituting a quorum. Whereupon, among other business, the following was transacted at said meeting: a written ORDINANCE AUTHORIZING ISSUANCE OF CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE AND REFUNDING BONDS, SERIES 2006; PRESCRIBING THE TERMS AND CONDITIONS THEREOF; PROVIDING FOR THE PAYMENT 'THEREOF; AWARDING THE SALE THEREOF; AUTHORIZING THE PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE BONDS; AUTHORIZING THE REFUNDING OF CERTAIN OUTSTANDING BONDS; AUTHORIZING THE PURCHASE OF BOND INSURANCE; MAKING OTHER PROVISIONS REGARDING SUCH BONDS AND MATTERS INCIDENT THERETO; AUTHORIZING EXECUTION AND DELIVERY OF A PAYING AGENT/REGISTRAR AGREEMENT; CONTAINING OTHER MATTERS RELATED THERETO; AND DECLARING AN EMERGENCY (the "Ordinance") was duly introduced for the consideration of the City Council and read in full. It was then duly moved and seconded that the Ordinance be adopted on first reading; and, after due discussion, such motion, carrying with it the adoption of the Ordinance, prevailed and carried by the following vote: AYES: 5 NAYS: 0 ABSTENTIONS: 0 2. That a true, full and correct copy of the Ordinance adopted at the meeting described in the above and foregoing paragraph is attached to and follows this certificate; that the 1 11OU:2572701.3 Ordinance has been duly recorded in the City Council's minutes of such meeting; that the above and foregoing paragraph is a true, full and correct excerpt from the City Council's minutes of such meeting pertaining to the adoption of the Ordinance; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of the City Council as indicated therein; that each of the officers and members of the City Council was duly and sufficiently notified officially and personally, in advance, of the date, hour, place and subject of the aforesaid meeting, and that the Ordinance would be introduced and considered for adoption at such meeting, and each of such officers and members consented, in advance, to the holding of such meeting for such purpose; that such meeting was open to the public as required by law; and that public notice of the date, hour, place and subject of such meeting was given as required by the Open Meetings Law, Chapter 551, Texas Government Code. m A7 SIGNED AND SEALED this /..5v , 2006. Sec) , Mayor Y o' PEARL ND, TEXAS CITY OF PEARLAND, TEXAS ``fluff11Hffl oil_ . t)4 ..e..% isti ...,ptt ,eases , .,.. 1, \‘,....!% j I Of 4'04 suo0":01 2 HOU:2572701.1 CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE AND REFUNDING BONDS SERIES 2006 ORDINANCE NO. 1268 HOU:2572701.3 TABLE OF CONTENTS Pare ARTICLE I. FINDINGS AND DETERMINATIONS Section 1.1. Findings and Determinations 1 ARTICLE IL DEFINITIONS AND INTERPRETATIONS Section 2.1. Definitions 2 Section 2.2. Interpretations 5 ARTICLE III. TERMS OF THE SERIES 2006 BONDS Section 3.1. Name, Amount, Purpose, Authorization 6 Section 3.2. Numbers, Date and Denomination 6 Section 3.3. Interest Payment Dates, Interest Rates and Maturities 6 Section 3.4. Redemption Prior to Maturity 7 Section 3.5. Manner of Payment, Characteristics, Execution and Authentication 9 Section 3.6. Approval by Attorney General; Registration by Comptroller 9 Section 3.7. Authentication 9 Section 3.8. Special Record Date 9 Section 3.9. Ownership 10 Section 3.10. Book-Entry Only System 10 Section 3.11. Payments and Notices to Cede& Co. 11 Section 3.12. Successor Securities Depository;Transfer Outside Book-Entry Only System 1 1 Section 3.13. Registration, Transfer, and Exchange 11 Section 3.14. Cancellation of Series 2006 Bonds 12 Section 3.15. Mutilated, Lost, or Stolen Series 2006 Bonds 12 ARTICLE IV. FORM OF SERIES 2006 BONDS AND CERTIFICATES Section 4.1. Forms 13 Section 4.2. Legal Opinion; CUSIP Numbers 19 ARTICLE V. SECURITY AND SOURCE OF PAYMENT FOR THE BONDS Section 5.1. Pledge and Source of Payment 20 Section 5.2. Rates and Charges 20 Section 5.3. Special Funds 20 Section 5.4. Flow of Funds 21 Section 5.5. Interest and Sinking Fund 21 Section 5.6. Reserve Fund 22 Section 5.7. Deficiencies in Funds 23 Section 5.8. Investment of Funds; Transfer of Investment Income 23 Section 5.9. Security for Uninvested Funds 24 HOU:2572701.3 ARTICLE VI. ADDITIONAL BONDS Section 6.1. Additional Bonds Section 6.2. Subordinate Lien Obligations 25 Section 6.3. Special Project Bonds 26 ARTICLE VII. COVENANTS AND PROVISIONS RELATING TO BONDS Section 7.1. Punctual Payment of Bonds 26 Section 7.2. Power to Own and Operate System; Ratemaking Power 26 Section 7.3. Maintenance of System 26 Section 7.4. Sale or Encumbrance of System Section 7.5. Insurance 26 Section 7.6. Accounts, Records and Audits 27 Section 7.7. Competition 27 Section 7.8. Pledge and Encumbrance of Net Revenues Section 7.9. Covenants with Respect to Certain Assumed Water District Bonds 27 Section 7.10. Bondholders Rights and Remedies 28 Section 7.11. Defeasance 28 Section 7.12. Legal Holidays 29 Section 7.13. Unavailability of Authorized Publication 29 Section 7.14. No Recourse Against City Officials 29 Section 7.15. Amendment to Ordinance 29 ARTICLE VIII. CONCERNING THE PAYING AGENT/REGISTRAR Section 8.1. Acceptance 30 Section 8.2. Fiduciary Account 30 Section 8.3. Bonds Presented 30 Section 8.4. Series 2006 Bonds Not Timely Presented 30 Section 8.5. Paying Agent/Registrar May Own Series 2006 Bonds 31 Section 8.6. Successor Paying Agents/Registrars 31 ARTICLE IX. PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF SERIES 2006 BONDS Section 9.1. Sale of Series 2006 Bonds; Insurance 31 Section 9.2. Approval, Registration and Delivery 32 Section 9.3. Offering Documents; Ratings 32 Section 9.4. Application of Proceeds of Series 2006 Bonds 33 Section 9.5. Tax Exemption 33 Section 9.6. Redemption Prior to Maturity of Refunded Bonds 36 ARTICLE X. CONTINUING DISCLOSURE UNDERTAKING Section 10.1. Annual Reports 36 Section 10.2. Material Event Notices 37 Section 10.3. Limitations, Disclaimers, and Amendments 37 HOU 2572701.3 Section 10.4. Definitions 39 ARTICLE XI. MISCELLANEOUS Section 11.1. Related Matters 39 Section 11.2. Severability 39 Section 11.3. Open Meeting 39 Section 11.4. Governing Law 40 Section 11.5. Repealer 40 Section 11.6. Emergency 40 Section 11.7. Effective Date 40 HOU:2572701.3 CITY OF PEARLAND ORDINANCE NO. 1268 ORDINANCE AUTHORIZING ISSUANCE OF CITY OF PEARLAND, TEXAS, WATER AND SEWER SYSTEM REVENUE AND REFUNDING BONDS, SERIES 2006; PRESCRIBING THE TERMS AND CONDITIONS THEREOF; PROVIDING FOR THE PAYMENT THEREOF; AWARDING THE SALE THEREOF; AUTHORIZING THE PREPARATION AND DISTRIBUTION OF AN OFFICIAL STATEMENT TO BE USED IN CONNECTION WITH THE SALE OF THE BONDS; AUTHORIZING THE REFUNDING OF CERTAIN OUTSTANDING BONDS; AUTHORIZING THE PURCHASE OF BOND INSURANCE; MAKING OTHER PROVISIONS REGARDING SUCH BONDS AND MATTERS INCIDENT THERETO; AUTHORIZING EXECUTION AND DELIVERY OF A PAYING AGENT/REGISTRAR AGREEMENT; CONTAINING OTHER MATTERS RELATED THERETO; AND DECLARING AN EMERGENCY BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: ARTICLE I. FINDINGS AND DETERMINATIONS Section 1.1. Findings and Determinations. It is hereby officially found and determined that: (a) The City is authorized by Chapter 1502, Texas Government Code, as amended, to issue revenue bonds payable from the revenues of its water and sewer system for the purpose of constructing repairs, improvements, additions and extensions to the City's waterworks and sanitary sewer system. (b) The conditions precedent to the issuance of additional bonds which are contained in the ordinances authorizing the issuance of the City's Series 1996A Bonds, Series 1996B Bonds, Series 1999 Bonds, Series 2001 Bonds and Series 2003 Bonds (each hereinafter defined) have been met, and the City is authorized to issue the revenue bonds and make the pledges and covenants set forth herein. (c) The City is authorized by Chapter 1207, Texas Government Code, as amended, to issue refunding bonds for the purpose of refunding the Refunded Bonds (as defined herein) and to accomplish such refunding by depositing directly with any place of payment for the Refunded Bonds proceeds from the sale of such refunding bonds, together with any other available funds, in an amount sufficient to provide for the payment or redemption of the Refunded Bonds, and pursuant to such chapter such deposit shall constitute the making of firm banking and financial arrangements for the discharge and final payment or redemption of the Refunded Bonds; (d) The City desires, as authorized in Chapter 1207, Texas Government Code, as amended, to directly deposit the proceeds of the refunding bonds herein authorized, HOU:2572701.3 together with any other available funds, with the paying agent/registrar for the Refunded Bonds in a manner sufficient to provide for the full and timely payment of all principal of,premium, if any, and interest on the Refunded Bonds; (e) The City hereby finds and determines that the refunding of the Refunded Bonds will result in a gross savings of$85,157.91 and a net present value savings of$ $75,828.51 to the City; and (f) The City Council now deems it to be in the best interest of the City to issue, sell and deliver the Series 2006 Bonds (hereinafter defined) as hereinafter authorized. ARTICLE IL DEFINITIONS AND INTERPRETATIONS Section 2.1. Definitions. In this Ordinance, the following terms shall have the following meanings,unless the context clearly indicates otherwise: "Act" shall mean, collectively, Chapter 1502, Texas Government Code, as amended and Chapter 1207,Texas Government Code, as amended. "Additional Bonds" shall mean the additional revenue bonds permitted to be issued by the City pursuant to Section 6.1 hereof. "Average Annual Principal and Interest Requirements" shall mean the average annual principal and interest requirements for all Bonds. Upon the issuance of the Series 2006 Bonds, the Average Annual Principal and Interest Requirements are hereby determined to be $2,593,063 and shall be recomputed upon the issuance of each series of Additional Bonds and set forth in each ordinance authorizing the issuance of Additional Bonds. For purposes of calculating the Average Annual Principal and Interest Requirements with respect to any variable rate Additional Bonds, interest on such bonds shall be calculated in accordance with Section 6.1 of this Ordinance. "Bond Insurer"shall mean Financial Security Assurance Inc. "Bonds" shall mean any or all of the Series 1996A Bonds, the Series 1996B Bonds, the Series 1999 Bonds, the Series 2001 Bonds, the Series 2003 Bonds, the Series 2006 Bonds and any Additional Bonds from time to time hereafter issued, but only to the extent such Bonds remain Outstanding within the meaning of this Ordinance. "Business Day" shall mean any day other than (1) a Saturday or a Sunday, (2) a legal holiday or the equivalent on which banking institutions generally are authorized or required to close in New York, New York or Houston, Texas or any other city in which is located the principal corporate trust office of the Paying Agent/Registrar or (3) a day on which the New York Stock Exchange is closed in whole or in part. "City" shall mean the City of Pearland, Texas, and, where appropriate, the City Council thereof and any successor to the City as owner of the System. 2 HOU:2572701.3 "Code"shall mean the Internal Revenue Code of 1986, as amended. "DTC" shall mean The Depository Trust Company of New York, New York, or any successor securities depository. "DTC Participant" shall mean brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC Participants. "Fiscal Year" shall mean the City's fiscal year, which currently runs from October 1 to September 30, but which may be changed from time to time by the City. "Gross Revenues" shall mean all revenues, income and receipts of every nature derived or received by the City from the operation and ownership of the System; the interest income from the investment or deposit of money in the Revenue Fund and the Reserve Fund (each hereinafter defined in Article V hereof); and any other revenues hereafter pledged to the payment of all Bonds. Gross Revenues shall not include any of(i) grants from, or payments by, any federal, state or local governmental agency or authority or any other entity or person, the use of which is restricted by law or by the terms of the grant or payment to capital expenditures of the System, (ii) capital assets, debt service funds or debt service reserve funds of water districts or other public or private sewer systems annexed, acquired or otherwise assumed by the City or(iii) any interest earned on items(i)or(ii) above. "Interest Payment Date, " when used in connection with any Series 2006 Bond, shall mean March 1 or September 1 of each year as applicable commencing September 1, 2006. "Maintenance and Operation Expenses" shall mean the reasonable and necessary expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs and extensions necessary to render efficient service (but only such repairs and extensions as, in the judgment of the governing body of the City, are necessary to keep the System in operation and render adequate service to the City and the inhabitants thereof, or such as might be necessary to meet some physical accident or conditions which would otherwise impair the Bonds), and all payments (including payments of amounts equal to all or a part of the debt service on bonds issued by other political subdivisions and authorities of the State of Texas) under contracts which are now or hereafter defined as operating expenses by the Legislature of Texas. Depreciation shall never be considered as a Maintenance and Operation Expense. Maintenance and Operation Expenses shall include, without limitation, all payments under contracts for the impoundment, conveyance or treatment of water or otherwise which are now or hereafter defined as operating expenses by the Legislature of Texas and the treatment of such payments as Maintenance and Operation Expenses shall not be affected in any way if, subsequent to entering into such contracts, the City acquires as a part of the System title to any properties or facilities used to impound, convey or treat water under such contracts, or if the City contracts to acquire title to such properties or facilities as a part of the System upon the final payment of debt service on the bonds issued to finance such properties or facilities. "Net Revenues" shall mean all Gross Revenues remaining after deducting the Maintenance and Operation Expenses. 3 HOU.2572701.3 "Ordinance" shall mean this Bond Ordinance and all amendments hereof and supplements hereto. "Outstanding"when used with reference to the Bonds shall mean, as of a particular date, all such bonds theretofore delivered except: (a) any such bond canceled by or on behalf of the City at or before said date; (b) any such bond defeased pursuant to the defeasance provisions of the ordinance authorizing its issuance, or otherwise defeased as permitted by applicable law; and (c) any such bond in lieu of or in substitution for which another bond shall have been delivered pursuant to the ordinance authorizing the issuance of such bond. "Owner" or Registered Owner" when used with respect to any Bond, shall mean the person or entity in whose name such Bond is registered in the Register. Any reference to a particular percentage or proportion of the Owners of the Bonds of a particular class or series of Bonds shall mean the Owners at a particular time of the specified percentage or proportion in aggregate principal amount of all Bonds or the Bonds of such class or series then Outstanding. "Paying Agent/Registrar" shall mean Wells Fargo Bank, N.A., Houston, Texas, and its successors in that capacity. "Purchaser" shall mean the underwriting syndicate comprised of UBS Securities LLC, First Southwest Company, Coastal Securities and Edward D. Jones & Co., Inc. "Record Date" shall mean, with respect to any Interest Payment Date, the fifteenth day of the month, whether or not a Business Day, next preceding each Interest Payment Date. "Refunded Bonds" shall mean the City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 1996B, dated June 1, 1996, currently outstanding in the aggregate principal amount of$5,080,000 and maturing on September 1 in each of the years 2009 through 2016, inclusive. "Register" shall mean the books of registration kept by the Paying Agent/Registrar in which are maintained the names and addresses of and the principal amounts registered to each Owner of Series 2006 Bonds. "Series 1996A Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue Refunding Bonds, Series I 996A. "Series 1996E Bonds" shall mean the City of Pearland, Texas Water and Sewer System Revenue Bonds, Series 1996B. "Series 1999 Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 1999. "Series 2001 Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2001. "Series 2003 Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue Bonds, Series 2003. 4 HOU:2572701.3 "Series 2006 Bonds" shall mean the City of Pearland, Texas, Water and Sewer System Revenue and Refunding Bonds, Series 2006, authorized by this Ordinance. "Special Project" shall mean, to the extent permitted by law, any water or sewer system property, improvement or facility declared by the City not to be part of the System, for which the costs of acquisition, construction, and installation are paid from proceeds of a financing transaction other than the issuance of bonds payable from ad valorem taxes or revenues of the System and for which all maintenance and operation expenses are payable from sources other than ad valorem taxes or revenues of the System, but only to the extent that and for so long as all or any part of the revenues or proceeds of which are or will be pledged to secure the payment or repayment of such costs of acquisition, construction, and installation under such financing transaction. "Subordinate Lien Obligations" shall mean the obligations permitted to be issued by the City pursuant to Section 6.2 hereof. "Surety Policy" shall mean and include a surety bond, bond insurance policy or other credit agreement, as authorized by Section 1502.064, Texas Government Code, provided that the issuer of any Surety Policy shall be rated in the highest rating category at the time of issuance of such Surety Policy by A.M. Best Company, Standard & Poor's Ratings Group, or Moody's Investors Service. A Surety Policy shall insure all Bonds and Additional Bonds on a pro rata basis. A Surety Policy may include a letter of credit or other agreement or instrument, including any related reimbursement or financial guaranty agreement, whereby the issuer is obligated to provide funds up to and including the maximum amount and under the conditions specified in such agreement or instrument. "System" shall mean all properties, facilities, improvements, equipment, interests, rights and powers constituting the water and sewer system of the City, and all future extensions, replacements, betterments, additions, improvements, enlargements, acquisitions, purchases and repairs to the System, including without limitation, all those heretofore or hereafter acquired as a result of the annexation and dissolution of water districts or the acquisition of the properties or assets of any other public, private or non-profit entities. The System shall not include any Special Project. Section 2.2. Interpretations. All terms defined herein and all pronouns used in this Ordinance shall be deemed to apply equally to singular and plural and to all genders. The titles and headings of the articles and sections of this Ordinance and the Table of Contents of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Bonds and the validity of the lien on and pledge of the Net Revenues to secure the payment of the Bonds. 5 HOU:2572701.3 ARTICLE III. TERMS OF THE SERIES 2006 BONDS Section 3.1. Name, Amount, Purpose, Authorization. The City of Pearland, Texas Water and Sewer System Revenue and Refunding Bonds, Series 2006 Bonds shall be issued in fully registered form, without coupons, in the aggregate principal amount of THIRTEEN MILLION EIGHT HUNDRED FORTY FIVE THOUSAND DOLLARS ($13,845,000) for the purposes of (i) constructing certain repairs, improvements, additions and extensions to the System, including particularly the construction of water transmission and distribution mains, sanitary sewer collection mains and water storage facilities and certain improvements and facilities related thereto, (ii) refunding the Refunded Bonds, and (iii) payment of expenses of issuance of the Series 2006 Bonds and of refunding the Refunded Bonds, all under and pursuant to the authority of the Act and all other applicable law. Section 3.2. Numbers, Date and Denomination. The Series 2006 Bonds shall be numbered separately from R-1 upward, shall be dated as of June 1, 2006, and shall be in the denomination of$5,000 principal amount or any integral multiple thereof. Section 3.3. Interest Payment Dates, Interest Rates and Maturities. The Series 2006 Bonds shall bear interest from the later of the June 1, 2006, or the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate or rates per annum set forth below, calculated on the basis of a 360-day year composed of twelve 30-day months and payable semiannually on March 1 and September 1 of each year, commencing September 1, 2006, until maturity or prior redemption. The Series 2006 Bonds shall mature and become payable on the dates and in the respective principal amounts set forth below, subject to prior redemption as set forth in the FORM OF SERIES 2006 BONDS in Article IV hereof: Bond Maturity Principal Interest Number (09/01) Amount Rate R-1 2009 $550,000 4.000% R-2 2010 570,000 4.250 R-3 2011 600,000 4.250 R-4 2012 625,000 4.250 R-5 2013 650,000 4.500 R-6 2014 680,000 4.500 R-7 2015 710,000 4.500 R-8 2016 745,000 4.500 R-9 2017 100,000 4.300 R-10 2018 100,000 4.375 R-11 2019 100,000 4.500 R-12 2020 100,000 4.625 R-13 2021 100,000 4.625 R-14 2022 100,000 4.625 R-15 2023 100,000 4.625 R-16 2024 100,000 4.625 6 HOU:2572701.3 Bond Maturity Principal Interest Number (09/01) Amount Rate R-17 2025 100,000 4.625 R-18 2026 1,150,000 4.750 *** *** *** *** R-19 2028 2,470,000 5.000 *** *** *** *** R-20 2031 4,195,000 5.125 The principal amount of the Series 2006 Bonds shall be allocated between and designated as being applied for the purposes of refunding the Refunded Bonds and for constructing the repairs, improvements, additions and extensions to the System as described in Section 3.1 of this Ordinance as follows: System Year Improvements Refunding Total 2009 -- $ 550,000 $ 550,000 2010 -- 570,000 570,000 2011 -- 600,000 600,000 2012 -- 625,000 ' 625,000 2013 -- 650,000 650,000 2014 -- 680,000 680,000 2015 -- 710,000 710,000 2016 -- 745,000 745,000 2017 $ 100,000 -- 100,000 2018 100,000 -- 100,000 2019 100,000 -- 100,000 2020 100,000 -- 100,000 2021 100,000 -- 100,000 2022 100,000 -- 100,000 2023 100,000 -- 100,000 2024 100,000 -- 100,000 2025 100,000 -- 100,000 2026 1,150,000 -- 1,150,000 2027 1,205,000 -- 1,205,000 2028 1,265,000 -- 1,265,000 2029 1,330,000 -- 1,330,000 2030 1,395,000 -- 1,395,000 2031 1,470,000 -- 1,470,000 $8,715,000 $5,130,000 $13,845,000 Section 3.4. Redemption Prior to Maturity. (a) The City reserves the right, at its option, to redeem prior to maturity, the Series 2006 Bonds maturing on or after September 1, 2017, in whole or in part, in principal amounts of$5,000 or any integral multiple thereof, on September 1, 2016, or 7 HOU:2572701.3 any date thereafter, at a price equal to the principal amount of the Series 2006 Bonds or the portions thereof called for redemption plus accrued interest to the date of redemption. (b) The Bonds maturing on March 1, 2028 and on March 1, 2031 (the "Term Bonds") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Bonds or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Bonds Maturing September 1,2028 September I,2027 $ 1,205,000 September 1,2028(maturity) 1,265,000 Term Bonds Maturing September 1,2031 September 1,2029 $ 1,330,000 September 1,2030 1,395,000 September 1,2031 (maturity) 1,470,000 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 1 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have been optionally redeemed on or before January 1 of such year and which have not been made the basis for a previous reduction. (c) Series 2006 Bonds may be redeemed in part only in integral multiples of $5,000. If a Series 2006 Bond subject to redemption is in a denomination larger than $5,000, a portion of such Series 2006 Bond may be redeemed, but only in integral multiples of $5,000. In selecting portions of Series.2006 Bonds for redemption, each Series 2006 Bond shall be treated as representing that number of Series 2006 Bonds of $5,000 denomination which is obtained by dividing the principal amount of such Series 2006 Bond by $5,000. Upon presentation and surrender of any Series 2006 Bond for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of this Ordinance, shall authenticate and deliver in exchange therefor a Series 2006 Bond or Series 2006 Bonds of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Series 2006 Bond so surrendered. (d) Notice of any redemption, identifying the Series 2006 Bonds or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the Register, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Series 2006 Bonds called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Series 2006 Bonds which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being 8 HOU:2572701.3 Outstanding except for the purpose of being paid with the funds so provided for such payment. Section 3.5. Manner of Payment, Characteristics, Execution and Authentication. The Paying Agent/Registrar shall be the paying agent for the Series 2006 Bonds. The Series 2006 Bonds shall be payable, shall have the characteristics, shall be signed and executed, shall be sealed, and shall be authenticated, all as provided and in the manner indicated in the FORM OF SERIES 2006 BONDS set forth in Article IV of this Ordinance. The Series 2006 Bonds initially delivered shall also have attached or affixed to each such Series 2006 Bond the registration certificate of the Comptroller of Public Accounts of the State of Texas. If any officer of the City whose manual or facsimile signature shall appear on the Series 2006 Bonds, as provided in the FORM OF SERIES 2006 BONDS, shall cease to be such officer before the authentication of the Series 2006 Bonds or before the delivery of the Series 2006 Bonds, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. The approving legal opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel, may be printed on the Series 2006 Bonds over the certification of the City Secretary, which may be executed in facsimile. CUSIP numbers also may be printed on the Series 2006 Bonds, but errors or omissions in the printing of either the opinion or the numbers shall have no effect on the validity of the Bonds. Section 3.6. Approval by Attorney General: Registration by Comptroller. The Initial Series 2006 Bonds shall be delivered to the Attorney General of the State of Texas for examination and approval and shall be registered by the Comptroller of Public Accounts of the State of Texas. The manually executed registration certificate of such Comptroller substantially in the form provided in Article IV of this Ordinance shall be affixed or attached to the Initial Series 2006 Bonds. Section 3.7. Authentication. Except for the Series 2006 Bonds to be initially issued, which need not be authenticated, only such Series 2006 Bonds as shall bear thereon a certificate of authentication substantially in the form provided in Article IV of this Ordinance, manually executed by an authorized representative of the Paying Agent/Registrar, shall be entitled to the benefits of this Ordinance or shall be valid or obligatory for any purpose. Such duly executed certificate of authentication shall be conclusive evidence that the Series 2006 Bond so authenticated was delivered by the Paying Agent/Registrar hereunder. Section 3.8. Special Record Date. If interest on any Series 2006 Bond is not paid on any Interest Payment Date and continues unpaid for 30 days thereafter, the Paying Agent/Registrar shall establish a new record date for the payment of such interest, to be known as a "Special Record Date." The Paying Agent/Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the City. Such Special Record Date shall be fifteen (15) days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first class, postage prepaid, not later than five (5) days prior to the Special Record Date, to each Registered Owner of an affected Series 2006 Bond as of the close of business on the day prior to the mailing of such notice. 9 HOU:2572701.3 Section 3.9. Ownership. Subject to the further provisions of this Section, the City, the Paying Agent/Registrar, and any other person may treat the person in whose name any Series 2006 Bond is registered on the Register as the absolute Owner of such Series 2006 Bond for the purpose of making and receiving payment of the principal of or interest on such Series 2006 Bond, and for all other purposes, whether or not such Series 2006 Bond is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Owner of any Series 2006 Bond in accordance with this Section 3.9 shall be valid and effectual and shall discharge the liability of the City and the Paying Agent/Registrar upon such Series 2006 Bond to the extent of the sums paid. Section 3.10. Book-Entry Only System. The definitive Series 2006 Bonds shall be initially issued in the form of a separate single fully registered Series 2006 Bond for each of the maturities thereof. Upon initial issuance, the ownership of each such Series 2006 Bond shall be registered in the name of Cede & Co., as nominee of DTC, and except as provided in Section 3.12 hereof, all of the Outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in this Ordinance with respect to interest checks being mailed to the Owner at the close of business on the Record Date, the word "Cede & Co." in this Ordinance shall refer to such new nominee of DTC. With respect to Series 2006 Bonds registered in the name of Cede & Co., as nominee of DTC, the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Series 2006 Bonds. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (a) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Series 2006 Bonds, (b) the delivery to any DTC Participant or any other person, other than a Series 2006 Bondholder, as shown on the Register, of any notice with respect to the Series 2006 Bonds, including any notice of redemption or (c) the payment to any DTC Participant or any other person, other than a Series 2006 Bondholder as shown in the Register, of any amount with respect to principal of Series 2006 Bonds, premium, if any, or interest on the Series 2006 Bonds. Except as provided in Section 3.11 of this Ordinance, the City and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Series 2006 Bond is registered in the Register as the absolute owner of such Series 2006 Bond for the purpose of payment of principal of, premium, if any, and interest on Series 2006 Bonds, for the purpose of giving notices of redemption and other matters with respect to such Series 2006 Bond, for the purpose of registering transfer with respect to such Series 2006 Bond, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of Series 2006 Bonds, premium, if any, and interest on the Series 2006 Bonds only to or upon the order of the respective owners, as shown in the Register as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of principal of, premium, if any, and interest on the Series 2006 Bonds to the extent of the sum or sums so paid. No person 10 HOU:2572701.3 other than an owner shall receive a Series 2006 Bond evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. Section 3.11. Payments and Notices to Cede & Co. Notwithstanding any other provision of this Ordinance to the contrary, as long as any Series 2006 Bonds are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, premium, if any, and interest on the Series 2006 Bonds, and all notices with respect to such Series 2006 Bonds shall be made and given, respectively, in the manner provided in the representation letter of the City to DTC. Section 3.12. Successor Securities Depository: Transfer Outside Book-Entry Only System. In the event that the City or the Paying Agent/Registrar determines that DTC is incapable of discharging its responsibilities described herein and in the representation letter of the City to DTC, and that it is in the best interest of the beneficial owners of the Series 2006 Bonds that they be able to obtain certificated Series 2006 Bonds, the City or the Paying Agent/Registrar shall (a) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC of the appointment of such successor securities depository and transfer one or more separate Series 2006 Bonds to such successor securities depository or (b) notify DTC of the availability through DTC of Series 2006 Bonds and transfer one or more separate Series 2006 Bonds to DTC Participants having Series 2006 Bonds credited to their DTC accounts. In such event, the Series 2006 Bonds shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Series 2006 Bondholders transferring or exchanging Series 2006 Bonds shall designate, in accordance with the provisions of this Ordinance. Section 3.13. Registration, Transfer, and Exchange: The Paying Agent/Registrar is hereby appointed the registrar for the Series 2006 Bonds. So long as any Series 2006 Bond remains Outstanding, the Paying Agent/Registrar shall keep the Register at its office in Houston, Texas in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of the Series 2006 Bonds in accordance with the terms of this Ordinance. Each Series 2006 Bond shall be transferable only upon the presentation and surrender thereof at the office of the Paying Agent/Registrar, accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Paying Agent/Registrar. Upon due presentation of any Series 2006 Bond for transfer, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor, within seventy-two (72) hours after such presentation, a new Series 2006 Bond or Series 2006 Bonds, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and bearing interest at the same rate as the Series 2006 Bond or Series 2006 Bonds so presented and surrendered. All Series 2006 Bonds shall be exchangeable upon the presentation and surrender thereof at the office of the Paying Agent/Registrar for a Series 2006 Bond or Series 2006 Bonds, maturity and interest rate and in any authorized denomination, in an aggregate principal 11 HOt1:2572701.3 amount equal to the unpaid principal amount of the Series 2006 Bond or Series 2006 Bonds presented for exchange. The Paying Agent/Registrar shall be and is hereby authorized to authenticate and deliver exchange Series 2006 Bonds in accordance with the provisions of this Section. Each Series 2006 Bond delivered by the Paying Agent/Registrar in accordance with this Section shall be entitled to the benefits and security of this Ordinance to the same extent as the Series 2006 Bond or Series 2006 Bonds in lieu of which such Series 2006 Bond is delivered. All Series 2006 Bonds issued in transfer or exchange shall be delivered to the Registered Owners thereof at the office of the Paying Agent/Registrar or sent by United States mail, first class, postage prepaid. The City or the Paying Agent/Registrar may require the Registered Owner of any Series 2006 Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Series 2006 Bond. Any fee or charge of the Paying Agent/Registrar for such transfer or exchange shall be paid by the City. The Paying Agent/Registrar shall not be required to transfer or exchange any Series 2006 Bond called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Series 2006 Bond called for redemption in part. Section 3.14. Cancellation of Series 2006 Bonds. All Series 2006 Bonds paid or redeemed in accordance with this Ordinance, and all Series 2006 Bonds in lieu of which exchange Series 2006 Bonds or replacement Series 2006 Bonds are authenticated and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment or redemption. The Paying Agent/Registrar shall furnish the City with appropriate certificates of destruction of such Series 2006 Bonds. Section 3.15. Mutilated, Lost. or Stolen Series 2006 Bonds. Upon the presentation and surrender to the Paying Agent/Registrar of a mutilated Series 2006 Bond, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Bond of like maturity, interest rate, and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Owner of such Series 2006 Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Paying Agent/Registrar. If any Series 2006 Bond is lost, apparently destroyed, or wrongfully taken, the City, pursuant to the applicable laws of the State of Texas, and in the absence of notice or knowledge that such Series 2006 Bond has been acquired by a bona fide purchaser, shall execute and the Paying Agent/Registrar shall authenticate and deliver, a replacement Series 2006 Bond of like maturity, interest rate, and principal amount, bearing a number not contemporaneously outstanding,provided that the Owner thereof shall have: 12 HOU:2572701.3 (1) furnished to the City and the Paying Agent/Registrar satisfactory evidence of the ownership of and the circumstances of the loss, destruction or theft of such Series 2006 Bond; (2) furnished such security or indemnity as may be required by the Paying Agent/Registrar and the City to save them harmless; (3) paid all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar, and any tax or other governmental charge that may be imposed; and (4) met any other reasonable requirements of the City and the Paying Agent/Registrar. If, after the delivery of such replacement Series 2006 Bond, a bona fide purchaser of the original Bond in lieu of which such replacement Bond was issued presents for payment such original Series 2006 Bond, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Series 2006 Bond from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost, or expense incurred by the City or the Paying Agent/Registrar in connection therewith. If any such mutilated, lost, apparently destroyed, or wrongfully taken Series 2006 Bond has become or is about to become due and payable, the City in its discretion may, instead of issuing a replacement Series 2006 Bond, authorize the Paying Agent/Registrar to pay such Series 2006 Bond. Each replacement Series 2006 Bond delivered in accordance with this Section 3.14 shall be entitled to the benefits and security of this Ordinance to the same extent as the Series 2006 Bond or Series 2006 Bonds in lieu of which such replacement Series 2006 Bond is delivered. ARTICLE IV. FORM OF SERIES 2006 BONDS AND CERTIFICATES Section 4.1. Forms. The form of the Series 2006 Bonds, including the form of the Paying Agent/Registrar's Authentication Certificate, the form of Assignment and the form of the Comptroller's Registration Certificate which shall be attached or affixed to the Initial Series 2006 Bonds, shall be, respectively, substantially as follows, with such additions, deletions, and variations as may be necessary or desirable and not prohibited by this Ordinance: **** 13 HOU:25727013 FORM OF SERIES 2006 BONDS United States of America State of Texas NUMBER DENOMINATION R- $ REGISTERED REGISTERED CITY OF PEARLAND, TEXAS WATER AND SEWER SYSTEM REVENUE AND REFUNDING BONDS SERIES 2006 INTEREST RATE: DATED DATE: MATURITY DATE: CUSIP: June 1, 2006 September 1, REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS THE CITY OF PEARLAND, TEXAS (the "City"), a municipal corporation duly incorporated under the laws of the State of Texas, for value received hereby promises to pay, but solely from certain Net Revenues as hereinafter provided, to the Registered Owner identified above or registered assigns, on the Maturity Date specified above, upon presentation and surrender of this Series 2006 Bond at the designated payment office of Wells Fargo Bank, N.A. in Houston, Texas (the "Paying Agent/Registrar"), the principal amount identified above, in any coin or currency of the United States of America which on the date of payment of such principal is legal tender for the payment of debts due the United States of America, and to pay, solely from such Net Revenues, interest thereon at the rate described below, calculated on the basis of a 360- day year, composed of twelve 30-day months, from the later of the Dated Date identified above or the most recent interest payment date to which interest has been paid or duly provided for. Interest on this Series 2006 Bond is payable by check sent by United States mail, first class, postage prepaid, payable on March 1 and September 1, beginning on September 1, 2006, mailed to the Registered Owner as shown on the books of registration kept by the Paying Agent/Registrar as of the fifteenth calendar day of the month next preceding each interest payment date. Any accrued interest payable at maturity or earlier redemption shall be paid upon presentation and surrender of this Series 2006 Bond at the principal corporate trust office of the Paying Agent/Registrar. THIS SERIES 2006 BOND IS ONE OF A DULY AUTHORIZED SERIES OF BONDS (the "Series 2006 Bonds") aggregating $13,845,000, issued for the purposes of(i) constructing certain repairs, improvements, additions and extensions to the City's waterworks and sanitary sewer system, including particularly the construction of water transmission and distribution mains, sanitary sewer collection mains and water storage facilities and certain improvements and facilities related thereto, (ii) refunding the Refunded Bonds, and (iii) payment of expenses of issuance of the Series 2006 Bonds, all under and pursuant to Chapters 1207 and 1502, Texas Government Code, as amended, and an ordinance adopted by the City on May 15, 2006 (the 14 HOU:25727013 "Ordinance"), and other applicable law. Capitalized terms used herein without definition are defined in the Ordinance. THIS SERIES 2006 BOND AND THE SERIES OF WHICH IT IS A PART are special obligations of the City that are payable from and are equally and ratably secured by a first lien on and pledge of the Net Revenues collected and received by the City from the operation and ownership of the City's water and sewer system as defined and provided in the Ordinance, which Net Revenues are required to be set aside and pledged to the payment of the Outstanding Bonds, as described in the Ordinance, the Series 2006 Bonds, and all Additional Bonds issued on a parity therewith, in the Interest and Sinking Fund and the Reserve Fund maintained for the payment of all such Bonds, all as more fully described and provided for in the Ordinance. THIS SERIES 2006 BOND AND THE SERIES OF WHICH IT IS A PART ARE PAYABLE SOLELY FROM SUCH NET REVENUES AND NEITHER THE STATE, NOR ANY POLITICAL SUBDIVISION OR AGENCY OF THE STATE, SHALL BE OBLIGATED TO PAY THE SAME OR THE INTEREST THEREON AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE, THE CITY, OR ANY OTHER POLITICAL CORPORATION, SUBDIVISION OR AGENCY THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE SERIES 2006 BONDS. THE OWNER HEREOF SHALL NEVER HAVE THE RIGHT TO DEMAND PAYMENT OF THIS SERIES 2006 BOND OUT OF ANY FUNDS RAISED OR TO BE RAISED BY AD VALOREM TAXATION. THE CITY RESERVES THE RIGHT, at its option, to redeem prior to maturity, the Series 2006 Bonds maturing on or after September 1, 2017, in whole or in part, in principal amounts of$5,000 or any integral multiple thereof, on September 1, 2016, or any date thereafter, at a price equal to the principal amount of the Series 2006 Bonds or the portions thereof called for redemption plus accrued interest to the date of redemption: THE BONDS MATURING ON MARCH 1, 2028 and on March 1, 2031 (the "Term Bonds") are subject to mandatory sinking fund redemption in the following amounts (subject to reduction as hereinafter provided), on the following dates, in each case at a redemption price equal to the principal amount of the Bonds or the portions thereof so called for redemption plus accrued interest to the date fixed for redemption: Mandatory Redemption Dates Principal Amounts Term Bonds Maturing September 1,2028 September 1,2027 $ 1,205,000 September 1,2028(maturity) 1,265,000 Term Bonds Maturing September 1,2031 September 1,2029 $ 1,330,000 September 1,2030 1,395,000 September 1,2031 (maturity) 1,470,000 The particular Term Bonds to be redeemed shall be selected by the Registrar by lot or other customary random selection method, on or before January 1 of each year in which Term Bonds are to be mandatorily redeemed. The principal amount of Term Bonds to be mandatorily redeemed in each year shall be reduced by the principal amount of such Term Bonds that have 15 HOU:2572701.3 been optionally redeemed on or before January 1 of such year and which have not been made the basis for a previous reduction. SERIES 2006 BONDS MAY BE REDEEMED IN PART only in integral multiples of $5,000. If a Series 2006 Bond subject to redemption is in a denomination larger than $5,000, a portion of such Series 2006 Bond may be redeemed, but only in integral multiples of$5,000. In selecting portions of Series 2006 Bonds for redemption, each Series 2006 Bond shall be treated as representing that number of Series 2006 Bonds of$5,000 denomination which is obtained by dividing the principal amount of such Series 2006 Bond by $5,000. Upon presentation and surrender of any Series 2006 Bond for redemption in part, the Paying Agent/Registrar, in accordance with the provisions of the Ordinance, shall authenticate and deliver in exchange therefor a Series 2006 Bond or Series 2006 Bonds of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Series 2006 Bond so surrendered. NOTICE OF ANY REDEMPTION, identifying the Series 2006 Bonds or portions thereof to be redeemed, shall be sent by United States mail, first class, postage prepaid, to the Registered Owners thereof at their addresses as shown on the Register, not less than thirty (30) days before the date fixed for such redemption. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the redemption price of the Series 2006 Bonds called for redemption. If such notice of redemption is given, and if due provision for such payment is made, all as provided above, the Series 2006 Bonds which are to be so redeemed thereby automatically shall be redeemed prior to their scheduled maturities, they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being Outstanding except for the purpose of being paid with the funds so provided for such payment. THE PAYING AGENT/REGISTRAR SHALL NOT BE REQUIRED to transfer or exchange any Series 2006 Bond called for redemption in whole or in part during the forty-five (45) day period immediately prior to the date fixed for redemption; provided, however, that this restriction shall not apply to the transfer or exchange by the Registered Owner of the unredeemed portion of a Series 2006 Bond called for redemption in part. REFERENCE IS HEREBY MADE TO THE ORDINANCE, a copy of which is on file in the office of the Paying Agent/Registrar, and to all of the provisions of which the Registered Owner of this bond by the acceptance hereof hereby assents, for definitions of terms; the description of and the nature and extent of the security for the Series 2006 Bonds; the priority for the application and use of the income and revenues of the System; the Net Revenues pledged to the payment of the principal of and interest on the Series 2006 Bonds: the nature and extent and manner of enforcement of the lien and pledge securing the payment of the Series 2006 Bonds; the terms and conditions for the issuance of additional revenue obligations, including Additional Bonds; the terms and conditions for amending the Ordinance; the terms and conditions relating to the transfer or exchange of this bond; the rights, duties, and obligations of the City and the Paying Agent/Registrar; the terms and provisions upon which the liens, pledges, charges and covenants made therein may be discharged at or prior to the maturity of this bond, and deemed to be no longer Outstanding thereunder; and for the other terms and provisions thereof. Capitalized terms used herein, unless otherwise defined, have the same meanings assigned in the Ordinance. 16 HOU.2572701.3 THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Ordinance unless this bond either (i) is registered by the Comptroller of Public Accounts of the State of Texas or (ii) is authenticated by the Paying Agent/Registrar by due execution of the authentication certificate manually endorsed hereon. Such duly executed certificate of authentication shall be conclusive evidence that this bond was delivered by the Paying Agent/Registrar under the provisions of the Ordinance. THIS SERIES 2006 BOND IS TRANSFERABLE only upon presentation and surrender at the designated payment office of the Paying Agent/Registrar, duly endorsed for transfer or accompanied by an assignment duly executed by the Registered Owner or his authorized representative, subject to the terms and conditions of the Ordinance. THE REGISTERED OWNER of this Series 2006 Bond, by acceptance hereof, acknowledges and agrees to be bound by all the terms and conditions of the Ordinance. THE CITY has covenanted in the Ordinance that it will at all times provide a legally qualified Paying Agent and Registrar for the Series 2006 Bonds and will cause notice of any change of Registrar to be mailed to each Registered Owner. THE CITY HAS RESERVED THE RIGHT TO ISSUE ADDITIONAL PARITY BONDS, subject to the restrictions contained in the Ordinance, which may be equally and ratably payable from, and secured by a first lien on and pledge of, the Net Revenues in the same manner and to the same extent as the Outstanding Bonds, which includes this Series 2006 Bond and the series of which it is a part. IT IS HEREBY DECLARED AND REPRESENTED that this Series 2006 Bond has been duly and validly issued and delivered; that all acts, conditions, and things required or proper to be performed, to exist, and to be done precedent to or in the issuance and delivery of this Series 2006 Bond have been performed, have existed, and have been done in accordance with law; that the Series 2006 Bonds do not exceed any statutory limitation; and that provision has been made for the payment of the principal of and interest on this Series 2006 Bond and all of the Series 2006 Bonds by the creation of the aforesaid lien on and pledge of the Net Revenues. IN WITNESS WHEREOF, the City has caused its corporate seal to be impressed or placed in facsimile hereon and has caused this Series 2006 Bond to be executed by the Mayor and countersigned by the City Secretary by manual, lithographed, or printed facsimile signatures. CITY OF PEARLAND, TEXAS (SEAL) Mayor COUNTERSIGNED 17 HOU:2572701.3 City Secretary **** [FORM OF COMPTROLLER'S REGISTRATION CERTIFICATE] The following form of Comptroller's Registration Certificate shall be attached or affixed to each of the Series 2006 Bonds initially delivered: OFFICE OF THE COMPTROLLER § OF PUBLIC ACCOUNTS § REGISTER NO. THE STATE OF TEXAS § I hereby certify that this bond has been examined, certified as to validity and approved by the Attorney General of the State of Texas, and that this bond has been registered by the Comptroller of Public Accounts of the State of Texas. WITNESS MY SIGNATURE AND SEAL OF OFFICE this , 2006. Comptroller of Public Accounts (SEAL) of the State of Texas **** (FORM OF AUTHENTICATION CERTIFICATE] The following form of Authentication Certificate shall appear on each of the Series 2006 Bonds. AUTHENTICATION CERTIFICATE This Series 2006 Bond is one of the Series 2006 Bonds described in and delivered pursuant to the within-mentioned Ordinance; and, except for the Series 2006 Bonds initially delivered, this Series 2006Bond has been issued in exchange for or replacement of a Series 2006 Bond, Series 2006 Bonds, or a portion of a Series 2006 Bond or Series 2006 Bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. WELLS FARGO BANK,N.A., Houston, Texas as Paying Agent/Registrar By Authorized Signature Date of Authentication: 18 HOU:25 7270 f.3 **** [FORM OF ASSIGNMENT] The following form of assignment shall be printed on the back of each of the Bonds: ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto (Please print or type name, address, and zip code of Transferee) (Please insert Social Security or Taxpayer Identification Number of Transferee) the within bond and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer such bond on the books kept for registration thereof, with full power of substitution in the premises. DATED: Signature Guaranteed: Registered Owner NOTICE: The signature above must correspond to the name of the Registered Owner as shown on the face of this bond in NOTICE: Signature must be guaranteed by a every particular, without any alteration, member firm of the New York Stock enlargement or change whatsoever. Exchange or a commercial bank or trust company. **** STATEMENT OF INSURANCE Financial Security Assurance Inc. ("Financial Security"), New York, New York, has delivered its municipal bond insurance policy with respect to the scheduled payments due of principal of and interest on this Bond to Wells Fargo Bank, N.A., Houston, Texas, or its successor, as paying agent for the Bonds (the "Paying Agent"). Said Policy is on file and available for inspection at the principal office of the Paying Agent and a copy thereof may be obtained from Financial Security or the Paying Agent. **** Section 4.2. Legal Opinion; CUSIP Numbers. The opinion of Andrews Kurth LLP, Houston, Texas, and CUSIP Numbers may be printed on the Series 2006 Bonds, but errors or 19 HOU:2572701.3 omissions in the printing of such opinion or such numbers shall have no effect on the validity of the Series 2006 Bonds. ARTICLE V. SECURITY AND SOURCE OF PAYMENT FOR THE BONDS Section 5.1. Pledge and Source of Payment. The City hereby covenants and agrees that Gross Revenues of the System shall, as collected and received by the City, be deposited and paid into the special funds hereinafter established, and shall be applied in the manner hereinafter set forth, in order to provide for the payment of all Maintenance and Operation Expenses and to provide for the payment of principal of, interest on and any redemption premiums on the Bonds and all expenses of paying same; and to provide for the disposition of the remaining Net Revenues. The Bonds shall constitute special obligations of the City that shall be payable solely from and shall be equally and ratably secured by a first lien on and pledge of the Net Revenues as collected and received by the City from the operation and ownership of the System, which Net Revenues shall, in the manner herein provided, be set aside for and are hereby pledged to the payment of the Bonds in the Interest and Sinking Fund and the Reserve Fund as hereinafter provided, and the Bonds shall be, in all respects, on a parity with and of equal dignity with one another. The Owners of the Bonds shall never have the right to demand payment of either the principal of, interest on or any redemption premium on the Bonds out of any funds raised or to be raised by taxation. Section 5.2. Rates and Charges. So long as any Bonds remain Outstanding, the City shall fix, charge and collect rates and charges for the use and services of the System which are calculated to be fully sufficient to produce Net Revenues in each Fiscal Year at least equal to 115% of the principal and interest requirements scheduled to occur in such Fiscal Year on all Bonds then Outstanding, plus an amount equal to the sum of'all deposits required to be made to the Reserve Fund in such Fiscal Year (but in no event shall Net Revenues ever be less than the amount required to establish and maintain the Interest and Sinking Fund and the Reserve Fund as hereinafter provided) and, to the extent that funds for such purpose are not otherwise available, to pay all other outstanding obligations payable from the Net Revenues of the System, including all amounts owed by the City to a provider of a Surety Policy, if any, as and when the same become due. For the purpose of complying with its obligation to fix, charge and collect rates and charges, as herein provided, the City shall be entitled to rely on the certificate described in Section 6.1 of this Ordinance, as therein provided, in determining the amount of interest anticipated to be paid in respect of Bonds bearing interest at a variable rate. The City will not grant or peiinit any free service from the System, except for public buildings and institutions operated by the City. In addition, the City will not grant or permit any free service from the System permitted by the previous sentence if to do so would violate any condition or covenant to which the City is bound in connection with any federal grant agreement or otherwise. Section 5.3. Special Funds. The following "Special Funds" shall be established, maintained and accounted for as hereinafter provided so long as any of the Bonds remain Outstanding: 20 HOU:2572701.3 (a) Revenue Fund; (b) Interest and Sinking Fund; and (c) Reserve Fund. All of such Funds shall be maintained as separate accounts on the books of the City. The Interest and Sinking Fund and the Reserve Fund shall constitute trust funds which shall be held in trust for the Owners of the Bonds and the proceeds of which shall be pledged to the payment of the Bonds. All of the Funds named above shall be used solely as herein provided so long as any Bonds remain Outstanding. Section 5.4. Flow of Funds. Gross Revenues of the System shall be deposited as collected into the Revenue Fund. Moneys from time to time on deposit to the credit of the Revenue Fund shall be applied in the following manner and in the following order of priority: (a) First, to pay Maintenance and Operation Expenses and to provide by encumbrance for the payment of all obligations incurred by the City for Maintenance and Operation Expenses and to establish and maintain an operating reserve equal to one month's estimated Maintenance and Operation Expenses; (b) Second, to make all deposits into the Interest and Sinking Fund required by any ordinance authorizing the issuance of Bonds; (c) Third, to reimburse the provider of a Surety Bond any amounts advanced under such Surety Bond; (d) Fourth, to pay interest to any provider of a Surety Bond any amounts advanced under such Surety Bond; (e) Fifth, to make all deposits into the Reserve Fund required by this Ordinance, and any resolution authorizing the issuance of Additional Bonds; (f) Sixth, to make all deposits, as may be required by any ordinance of the City authorizing the issuance of certain Subordinate Lien Obligations described in Section 6.2 hereof, in order to provide for the payment of and security for such Subordinate Lien Obligations; and (g) Seventh, for any lawful purpose. Section 5.5. Interest and Sinking Fund. On or before the last Business Day of each month so long as any Bonds remain Outstanding, after making all required payments and provision for payment of Maintenance and Operation Expenses, there shall be transferred into the Interest and Sinking Fund from the Revenue Fund the following amounts: (a) Such amounts, in approximately equal monthly installments, as will be sufficient to accumulate the amount required to pay the interest scheduled to become due on the Bonds on the next Interest Payment Date; and (b) Such amounts, in approximately equal monthly installments, as will be sufficient to accumulate the amount required to pay the next maturing principal of the Bonds (i.e., the principal amount payable on the next September 1), including the principal amounts of, and any redemption premiums on, any Bonds payable as a result of 21 HOU:2572701.3 the operation or exercise of any mandatory or optional redemption provision contained in any ordinance authorizing the issuance of Bonds. Whenever the total amounts on deposit to the credit of the Interest and Sinking Fund and the Reserve Fund shall be equivalent to the sum of the aggregate principal amount of all Outstanding Bonds plus the aggregate amount of all interest accrued and to accrue thereon, no further payments need be made into the Interest and Sinking Fund or the Reserve Fund, and such Bonds shall not be regarded as being Outstanding except for the purpose of being paid with the moneys on deposit in such Funds. Moneys deposited to the credit of the Interest and Sinking Fund shall be used solely for the purpose of paying principal (at maturity, prior redemption or tender, or to purchase Bonds in the open market to be credited against mandatory redemption requirements), interest and redemption premiums on the Bonds, plus all bank charges and other costs and expenses relating to such payment. On or before each date principal becomes due and/or each Interest Payment Date on the Bonds, the City shall transfer from the Interest and Sinking Fund to the Paying Agent for the Bonds an amount equal to the principal of,interest on and any redemption premiums payable on the Bonds on such date, together with an amount equal to all bank charges and other costs and expenses relating to such payment. The Paying Agent shall destroy all paid Bonds and shall provide the City with an appropriate certificate of destruction. Section 5.6. Reserve Fund. On or before the last Business Day of each month so long as any Bonds remain Outstanding, after making all required payments and provision for payment of Maintenance and Operation Expenses and after making all required transfers into the Interest and Sinking Fund, there shall be transferred into the Reserve Fund from the Revenue Fund amounts equal to one-sixtieth (1/60th) of the Average Annual Principal and Interest Requirements on the Bonds unless or until there has been accumulated in the Reserve Fund money and investments in an aggregate amount at least equal to the Average Annual Principal and Interest Requirements on the Bonds; provided that additional deposits into the Reserve Fund sufficient to provide for the increased reserve requirements resulting from the issuance of any Additional Bonds shall be made by not later than 60 months from the date of issuance of such Additional Bonds as required by Section 6.1(d)hereof. Such additional deposits into the Reserve Fund in connection with the issuance of any Additional Bonds shall be made each month in amounts equal to one-sixtieth (1/60th) of the Average Annual Principal and Interest Requirements on the Bonds and such Additional Bonds. After such amount has accumulated in the Reserve Fund and so long thereafter as such fund contains such amount, no further deposits shall be required to be made into the Reserve Fund, and any excess amounts in the Fund may be transferred to the Revenue Fund; but if and whenever the balance in the Reserve Fund is reduced below such amount, monthly deposits into such Fund shall be resumed and continued in amounts at least equal to one-twelfth (1/12th) of the Average Annual Principal and Interest Requirements on the Bonds until the Reserve Fund has been restored to such amount. The Reserve Fund shall be used to pay the principal of and interest on the Bonds at any time when there is not sufficient money available in the Interest and Sinking Fund for such purpose and it may be used finally to pay and retire the last Bonds to mature or be redeemed. 22 HOU:2572701.3 The requirements of the immediately preceding paragraph of this Section notwithstanding, the City may provide a Surety Policy or Policies issued in amounts equal to all or part of the Average Annual Principal and Interest Requirements on the Bonds in lieu of depositing cash into the Reserve Fund; provided, however, that no such Surety Policy may be so substituted unless (i) the ordinance authorizing the substitution of the Surety Policy for all or part of the Average Annual Principal and Interest Requirements on the Bonds contains a finding that such substitution is cost effective and (ii) the City obtains an opinion of nationally recognized bond counsel that such substitution is permitted by applicable Texas law then in effect. Such Surety Policy may be drawn upon only after all cash or investments held in the Reserve Fund have been used or applied. If a Surety Policy or Policies are issued in accordance with the preceding sentence, such Surety Policy or Policies shall be drawn upon and reimbursed on a pro rata basis. In the event a Surety Policy issued to satisfy all or a part of the City's obligation with respect to the Reserve Fund causes the amount then on deposit in the Reserve Fund to exceed the Average Annual Principal and Interest Requirements on all Bonds, the City may transfer such excess amount to any fund or funds established for the payment of or security for Bonds or any Subordinate Lien Obligations (including any escrow established for the final payment of any such obligations pursuant to Chapter 1207, Texas Government Code); provided, however, that no funds constituting bond proceeds shall be transferred for the benefit of the Subordinate Lien Obligations. Section 5.7. Deficiencies in Funds. If in any month there shall not be deposited into any fund maintained pursuant to this Article the full amounts required hereinabove, amounts equivalent to such deficiency shall be set apart and paid into such Special Fund or Funds from the first available and unallocated moneys in the Revenue Fund, and such payment shall be in addition to the amounts otherwise required to be paid into such Funds during any succeeding month or months. To the extent necessary, the rates and charges for the System shall be increased to make up for any such deficiencies. Section 5.8. Investment of Funds; Transfer of Investment Income. (a) Money in the Revenue Fund, the Interest and Sinking Fund and the Reserve Fund may, at the option of the City, be invested in time deposits or certificates of deposit secured in the manner required by law for public funds, or be invested in direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America, in obligations of any agencies or instrumentalities of the United States of America or as otherwise permitted by state law; provided that all such deposits and investments shall be made in such manner(which may include repurchase agreements for such investments with any national bank) that the money required to be expended from any Special Fund will be available at the proper time or times, and provided further that in no event shall such deposits or investments of moneys in the Reserve Fund mature later than the final maturity date of the Bonds. All such investments shall be valued in terms of current market value no less frequently than the last Business Day of the City's Fiscal Year, except that any direct obligations of the United States of America - State and Local Government Series shall be continuously valued at their par value or principal face amount. Any obligation in which money is so invested shall be kept and held in an official depository of the City, except as hereinafter provided. For purposes of maximizing investment returns, money in such funds may be invested, together with money in other funds or with other money of the City, in common 23 HoU2572701.3 investments of the kind described above, or in a common pool of such investments which shall be kept and held at an official depository of the City, which shall not be deemed to be or constitute a commingling of such money or funds provided that safekeeping receipts or certificates of participation clearly evidencing the investment or investment pool in which such money is invested and the share thereof purchased with such money or owned by such fund are held by or on behalf of each such fund. If necessary, such investments shall be promptly sold to prevent any default. (b) All interest and income derived from such deposits and investments shall be credited monthly to the Special Fund from which such investment was made. Section 5.9. Security for Uninvested Funds. So long as any Bonds remain Outstanding, all uninvested moneys on deposit in, or credited to, the Revenue Fund, the Interest and Sinking Fund and the Reserve Fund shall be secured by the pledge of security as provided by law for cities in the State of Texas. ARTICLE VI. ADDITIONAL BONDS Section 6.1. Additional Bonds. The City reserves the right to issue, for any lawful purpose, including the refunding of any previously issued Bonds or any other bonds or obligations of the City issued in connection with the System or payable from Net Revenues, one or more series of Additional Bonds on a parity with the Outstanding Bonds and any Additional Bonds then Outstanding, payable from, and secured by a first lien on, the Net Revenues of the System; provided, however, that no Additional Bonds may be issued unless: (a) All Additional Bonds shall mature only on September 1 and interest thereon shall be payable only on March 1 and September I; (b) The Interest and Sinking Fund and the Reserve Fund each contains the amount of money then required to be on deposit therein; (c) For either the preceding Fiscal Year or any consecutive 12-month period out of the 15-month period immediately preceding the month in which the bond ordinance authorizing such Additional Bonds is adopted (the"Base Period") either: (1) Net Revenues are certified by the Director of Finance of the City to have been equal to at least one hundred and forty percent (140%) of the Average Annual Principal and Interest Requirements on all Bonds, after giving effect to the issuance of the Additional Bonds to be issued; or (2) Net Revenues, adjusted to give effect to any rate increase or annexation of territory placed into effect or consummated prior to the adoption of the ordinance authorizing the Additional Bonds to the same extent as if such rate increase or annexation had been placed into effect or consummated prior to the commencement of the Base Period, would have been equal to at least the amount required in paragraph (1) above, as certified by an independent consulting engineer or independent firm of consulting engineers; 24 HOU:257270I 3 Provided, however, that this requirement shall not apply to the issuance of any series of Additional Bonds for refunding purposes that will not have the result of increasing the average annual principal and interest requirements on the Bonds; and (d) Provision is made in the bond ordinance authorizing the Additional Bonds then proposed to be issued for (1) additional payments into the Interest and Sinking Fund sufficient to provide for the payment of the increased principal of and interest on the Bonds resulting from the issuance of such Additional Bonds, and (2) additional payments into the Reserve Fund sufficient to provide for the accumulation therein of the increased reserve requirement resulting from the issuance of such Additional Bonds, by not later than sixty(60) months from the date of issuance of such Additional Bonds. The provisions of this Section 6.1(a) notwithstanding, the City may issue Additional Bonds that bear interest at a variable rate. Such variable rate bonds may mature on dates other than September 1 and interest thereon may be payable on dates other than March 1 or September 1; provided that the issuance of Additional Bonds as variable rate bonds may not cause the total amount of Outstanding Bonds that are variable rate bonds to exceed 50%(20% as long as the Series 1999 Bonds shall remain outstanding) of the aggregate principal amount of all Outstanding Bonds and Subordinate Lien Obligations at the time of such issuance. For purposes of calculating the funding requirements for the Reserve Fund and for the purposes of calculating compliance with the conditions precedent to the issuance of Additional Bonds pursuant to Section 6.1(c) and the rate covenant set forth in Section 5.2, any Bonds that are variable rate bonds shall be assumed to bear interest at a rate which shall be estimated and certified by the financial advisor to the City as the rate that would be borne by such variable rate bonds if they were at the date of such certification issued as Bonds bearing a fixed rate of interest to their scheduled maturity or maturities. Section 6.2. Subordinate Lien Obligations. The City reserves the right to issue, for any lawful purpose, bonds, notes or other obligations secured in Whole or in part by liens on the Net Revenues that are junior and subordinate to the lien on Net Revenues securing payment of the Bonds. Such Subordinate Lien Obligations may be further secured by any other source of payment lawfully available for such purposes. In the event that the City should decide to issue such Subordinate Lien Obligations as variable rate bonds, for purposes of calculating the funding requirements for the reserve fund for such Subordinate Lien Obligations, the variable rate bonds shall be assumed to bear interest at the rate of 10% per annum, and for purposes of calculating compliance with any conditions precedent to the issuance of additional Subordinate Lien Obligations and any rate covenants relating to such Subordinate Lien Obligations, the variable rate bonds shall be assumed to bear interest at the higher of 9%per annum or the highest variable rate over the preceding twenty-four(24)months. Deposits may be made pursuant to Section 5.4(d) of this Ordinance into such funds as may be created and maintained for the payment of and security for Subordinate Lien Obligations described in this Section (including a reserve fund not to exceed the Average Annual Principal and Interest Requirements on such Subordinate Lien Obligations and any provisions for curing deficiencies in such funds), but only to the extent that the aggregate Outstanding principal amount of such Subordinate Lien Obligations does not exceed 50% of the aggregate principal amount of Bonds and Subordinate Lien Obligations Outstanding on the date of such calculation. 25 HOU:2572701.3 Section 6.3. Special Project Bonds. The City reserves the right to issue revenue bonds secured by liens on and pledges of revenues and proceeds derived from Special Projects. ARTICLE VII. COVENANTS AND PROVISIONS RELATING TO BONDS Section 7.1. Punctual Payment of Bonds. The City covenants that it will punctually pay or cause to be paid the interest on and principal of all Bonds according to the terms thereof and will faithfully do and perform, and at all times fully observe, any and all covenants, undertakings, stipulations and provisions contained in this Ordinance and in any other ordinance authorizing the issuance of such Bonds. Section 7.2. Power to Own and Operate System; Ratemaking Power. The City covenants that it has all necessary power and authority to own and operate the System as herein described and provided and that it possesses, and shall exercise, all necessary power and authority to establish, fix, increase, impose and collect rates and charges for the use and services of the System in the amounts required to comply with the covenants and provisions contained herein. Section 7.3. Maintenance of System. So Iong as any Bonds remain Outstanding, the City covenants that it will at all times maintain the System, or within the limits of its authority cause the same to be maintained, in good condition and working order and will operate the same, or cause the same to be operated, in an efficient and economical manner at a reasonable cost and in accordance with sound business principles. In operating and maintaining the System, the City will comply with all contractual provisions and agreements entered into by it and with all valid rules, regulations, directions or orders of any governmental, administrative or judicial body promulgating same, noncompliance with which would materially and adversely affect the operation of the System. Section 7.4. Sale or Encumbrance of System. So long as any Bonds remain Outstanding, the City covenants that it will not sell, dispose of or, except as permitted in Article VI, further encumber the System; provided, however, that this provision shall not prevent the City from disposing of any portion of the System which is being replaced or is deemed by the City to be obsolete, worn out, surplus or no longer needed for the proper operation of the System. Net proceeds from any such disposition may be deposited in the Revenue Fund and, notwithstanding any other provision contained herein, shall be used only for System purposes. Any agreement pursuant to which the City contracts with a person, corporation, municipal corporation or political subdivision to operate the System or to lease and/or operate all or part of the System shall not be considered as an encumbrance of the System. Section 7.5. Insurance. The City covenants that it will keep the System insured. with insurers of good standing, against risks, accidents or casualties against which and to the extent customarily insured against by political subdivisions of the State of Texas operating similar properties, to the extent that such insurance is available. All net proceeds of such insurance shall be applied to repair or replace any insured property that is damaged or destroyed, or shall be deposited in the Revenue Fund, or shall be used to redeem Outstanding Bonds. The cost of all 26 HOU:2572701.3 such insurance, together with any additional insurance. shall be a part of the Maintenance and Operation Expenses. Section 7.6. Accounts, Records and Audits. So long as any Bonds remain Outstanding, the City covenants that it will maintain a proper and complete system of records and accounts pertaining to the operation of the System in which full, true and proper entries will be made of all dealings, transactions, business and affairs which in any way affect or pertain to the System or the Gross Revenues or the Net Revenues thereof. The City shall, after the close of each Fiscal Year, prepare financial statements of the System, and have those financial statements audited by an independent certified public accountant or independent firm of certified public accountants. After the audit, the City shall furnish a copy of these audited financial statements, together with the independent certified public accountant's report thereon, without cost, to the Municipal Advisory Council of Texas, the major municipal rating agencies, and any Owners of Bonds who shall request the same. All expenses incurred in preparing such audits shall be Maintenance and Operation Expenses. Section 7.7. Competition. To the extent it legally may, the City covenants that it will not grant any franchise or permit for the acquisition, construction or operation of any competing facilities which might be used as a substitute for the System and will prohibit the operation of any such competing facilities to the extent that such competing facilities would impair the City's ability to pay principal of or interest on the Bonds. Section 7.8. Pledge and Encumbrance of Net Revenues. The City covenants that it has the lawful power to create a lien on and to pledge the Net Revenues to secure the payment of the Bonds, and has lawfully exercised such power under the Constitution and laws of the State of Texas. The City further covenants that, other than to the payment of the Bonds, the Net Revenues are not and will not be made subject to any other lien, pledge or encumbrance to secure the payment of any debt or obligation of the City, unless such lien, pledge or encumbrance is junior and subordinate to the lien and pledge securing payment of the Bonds. Section 7.9. Covenants with Respect to Certain Assumed Water District Bonds. So long as any Bonds remain Outstanding, the City covenants as follows: (a) To the extent it legally may, the City will impose, and strictly enforce, the requirement upon all water districts located within the City's extraterritorial jurisdiction that any bonds issued by such water districts which are secured in whole or in part by pledges of or liens on water or sewer system revenues shall provide that all such pledges of and liens on water or sewer system revenues shall automatically terminate upon the annexation and dissolution of the district by the City; (b) The City shall use its best efforts to redeem, refund or defease all annexed water district bonds assumed by the City which by their own terms are secured in whole or in part by pledges of or liens on water or sewer system revenues which do not terminate upon annexation and dissolution by the City of such water district, or otherwise to provide for the discharge of such pledges or liens on water or sewer system revenues; and 27 HOU:2572701.3 (c) Pursuant to Section 43.075, Texas Local Government Code (successor to Article 1182c-1, Vernon's Texas Civil Statutes, as amended), the City shall, unless it has theretofore made adequate provision for the payment thereof, annually levy and cause to be collected taxes upon all taxable property of the City sufficient to pay principal of and interest, as they respectively become due and payable, on all assumed bonds, warrants and other obligations that were issued by water districts that have been annexed to, and dissolved by, the City, and which are by their own terms secured in whole or in part by a lien on or pledge of water or sewer system revenues which did not terminate upon the annexation and dissolution by the City of such water district. Section 7.10. Bondholders Rights and Remedies. This Ordinance shall constitute a contract between the City and the Owners of the Series 2006 Bonds from time to time Outstanding and this Ordinance shall be and remain irrepealable until the Series 2006 Bonds and the interest thereon shall be fully paid or discharged or provision therefor shall have been made as provided herein. In the event of a default in the payment of the principal of or interest on any of the Series 2006 Bonds or a default in the performance of any duty or covenant provided by law or in this Ordinance, the Owner or Owners of any of the Series 2006 Bonds may pursue all legal remedies afforded by the Constitution and laws of the State of Texas to compel the City to remedy such default and to prevent further default or defaults. Without in any way limiting the generality of the foregoing, it is expressly provided that any Owner of any of the Series 2006 Bonds may at law or in equity, by suit, action, mandamus, or other proceedings, enforce and compel performance of all duties required to be performed by the City under this Ordinance, including the making and collection of reasonable and sufficient rates and charges for the use and services of the System, the deposit of the revenues thereof into the Special Funds herein provided, and the application of such revenues in the manner required in this Ordinance. Section 7.11. Defeasance. The City may defease the provisions of this Ordinance and discharge its obligations to the Registered Owners of any or all of the Series 2006 Bonds to pay the principal of and interest thereon in any manner permitted by law, including by depositing with the Paying Agent/Registrar or with the State Treasurer of the State of Texas either: (a) cash in an amount equal to the principal amount of such Series 2006 Bonds plus interest thereon to the date of maturity or redemption; or (b) pursuant to an escrow or trust agreement, cash and/or(i) direct noncallable obligations of United States of America, including obligations that are unconditionally guaranteed by the United States of America; (ii) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; or (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, which, in the case of (i), (ii) or (iii), may be in book-entry form, and the 28 HOU:2572701.3 principal of and interest on which will, when due or redeemable at the option of the holder, without further investment or reinvestment of either the principal amount thereof or the interest earnings thereon, provide money in an amount which, together with other moneys, if any, held in such escrow at the same time and available for such purpose, shall be sufficient to provide for the timely payment of the principal of and interest thereon to the date of maturity or earlier redemption; provided,however,that if any of the Series 2006 Bonds are to be redeemed prior to their respective dates of maturity, provision shall have been made for giving notice of redemption as provided in this Ordinance. Upon such deposit, such Series 2006 Bonds shall no longer be regarded to be Outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the City. Section 7.12. Legal Holidays. In any case where the date of maturity of interest on or principal of the Series 2006 Bonds or the date fixed for redemption of any Series 2006 Bonds shall be in the City a legal holiday or a day on which the Paying Agent/Registrar for the Series 2006 Bonds is authorized by law to close, then payment of interest or principal need not be made on such date but may be made on the next succeeding day not in the City a legal holiday or a day on which such Paying Agent Registrar is authorized by law to close with the same force and effect as if made on the date of maturity or the date fixed for redemption and no interest shall accrue for the period from the date of maturity or redemption to the date of actual payment. Section 7.13. Unavailability of Authorized Publication. If, because of the temporary or permanent suspension of any newspaper, journal or other publication, or, for any reason, publication of notice cannot be made meeting any requirements herein established, any notice required to be published by the provisions of this Ordinance shall be given in such other manner and at such time or times as in the judgment of the City or of the Paying Agent/Registrar (or paying agent) for the Series 2006 Bonds shall most effectively approximate such required publication and the giving of such notice in such manner shall for all purposes of this Ordinance be deemed to be in compliance with the requirements for publication thereof. Section 7.14. No Recourse Against City Officials. No recourse shall be had for the payment of principal of or interest on any Series 2006 Bonds or for any claim based thereon or on this Ordinance against any official of the City or any person executing any Series 2006 Bonds. Section 7.15. Amendment to Ordinance. The City may, with the consent of Owners holding a majority in aggregate principal amount of the Bonds then Outstanding affected thereby, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Owners of Outstanding Bonds, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of, premium, if any, and interest on the Bonds, reduce the principal amount thereof, the redemption price therefor, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of,premium,if any, or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3)reduce the aggregate principal amount of Bonds required to be held by Owners for consent to any such amendment, addition, or rescission. 29 HOU2572 701.3 ARTICLE VIII. CONCERNING THE PAYING AGENT/REGISTRAR Section 8.1. Acceptance. Wells Fargo Bank, N.A., Houston, Texas, is hereby appointed as the initial Paying Agent/Registrar for the Series 2006 Bonds. Such initial Paying Agent/Registrar and any successor Paying Agent/Registrar, by undertaking the performance of the duties of the Paying Agent/Registrar hereunder, and in consideration of the payment of fees and/or deposits of money pursuant to this Ordinance, shall be deemed to accept and agree to abide by the terms of this Ordinance. The registration of and payment of the principal of, premium, if any, and interest on the Series 2006 Bonds when due shall be effectuated pursuant to the terms of a Paying Agent/Registrar Agreement to be entered into by and between the City and the Paying Agent/Registrar, which shall be substantially in the form attached hereto as Exhibit A, the terms and provisions of which are hereby approved, and the Mayor and/or the Mayor Pro Tem are hereby authorized to execute and deliver such Paying Agent/Registrar Agreement on behalf of the City in multiple counterparts and the City Secretary is hereby authorized to attest and affix the City's seal thereto. Section 8.2. Fiduciary Account. All money transferred to the Paying Agent/Registrar under this Ordinance (except sums representing Paying Agent/Registrar's fees) shall be held in a fiduciary account for the benefit of the City, shall be the property of the City, and shall be disbursed in accordance with this Ordinance. Section 8.3. Bonds Presented. Subject to the provisions of Section 8.4, all matured Series 2006 Bonds properly and timely presented to the Paying Agent/Registrar for payment shall be paid without the necessity of further instructions from the City. Such Series 2006 Bonds shall be canceled as provided herein. Section 8.4. Series 2006 Bonds Not Timely Presented. The Paying Agent/Registrar shall remit to the City, upon receipt of the certificate provided for herein, a sum equal to the aggregate face amount of all Series 2006 Bonds which have not been presented for payment prior to the date specified in such certificate. Such certificate shall: (a) Specify the Series 2006 Bonds or portions thereof to which it applies and the amount of each; (b) Specify the date on which the City believes itself to be no longer obligated to pay such Series 2006 Bonds or portions thereof by virtue of the expiration of the applicable statute of limitations under the laws of the State of Texas; and (c) Be signed by the Mayor and attested by the City Secretary. Funds held by the Paying Agent/Registrar that represent principal of and interest on the Series 2006 Bonds remaining unclaimed by any Registered Owner after the expiration of three years from the date such funds have become due and payable(a) shall be reported and disposed of by the Paying Agent/Registrar in accordance with the provisions of Title 6 of the Texas Property Code, as amended, to the extent such provisions are applicable to such funds, or (b) to the extent such provisions do not apply to the funds, such funds shall be paid by the Paying Agent/Registrar to the City upon receipt by the Paying Agent/Registrar of a written request therefor from the City. 30 HOU:2572701.3 The Paying Agent/Registrar shall have no liability to the Owners of the Series 2006 Bonds by virtue of actions taken in compliance with this Section. Section 8.5. Paying Agent/Registrar May Own Series 2006 Bonds. The Paying Agent/Registrar in its individual or any other capacity, may become the Owner or pledgee of Series 2006 Bonds with the same rights it would have if it were not the Paying Agent/Registrar. Section 8.6. Successor Paying Agents/Registrars. The City covenants that at all times while any Series 2006 Bonds are Outstanding it will provide a legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar for the Series 2006 Bonds. If the Paying Agent/Registrar or its successor for any reason no longer acts as Paying Agent/Registrar hereunder, the City covenants that it will appoint a bank in the same city as the Paying Agent/Registrar initially appointed to perform the duties of Paying Agent/Registrar hereunder. Any successor Paying Agent/Registrar shall be either a national or state banking institution, and a corporation organized and doing business under the laws of the United States of America or any state, which is authorized under such laws to exercise trust powers and is subject to supervision or examination by federal or state authority. The City reserves the right to change the Paying Agent/Registrar for the Series 2006 Bonds on not less than sixty (60) days written notice to the Paying Agent/Registrar, as long as any such notice is effective not less than sixty (60) days prior to the next succeeding principal or interest payment date on the Series 2006 Bonds. Promptly upon the appointment of any successor Paying Agent/Registrar, the previous Paying Agent/Registrar shall deliver the Register or a copy thereof to the new Paying Agent/Registrar and the new Paying Agent/Registrar shall notify each Registered Owner, by first-class mail, postage prepaid, of such change and of the address of the new Paying Agent/Registrar. Each Paying Agent/Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Ordinance. ARTICLE IX. PROVISIONS CONCERNING SALE AND APPLICATION OF PROCEEDS OF SERIES 2006 BONDS Section 9.1. Sale of Series 2006 Bonds Insurance. The sale of the Series 2006 Bonds to the Purchaser at a price of $14,062,709.45 (representing the principal amount of the Series 2006 Bonds, plus a net premium on the Series 2006 Bonds of $321,546.95 and less an underwriting discount of$103,837.50), plus accrued interest to the date of delivery of the Series 2006 Bonds, in accordance with the terms of the Bond Purchase Agreement presented to and hereby approved by the City Council, in substantially the form attached hereto as Exhibit B which price and terms are hereby found and determined to be the most advantageous reasonably obtainable by the City. The Mayor, Mayor Pro-Tem and all other officials, agents and representatives of the City are hereby authorized to do any and all things necessary or desirable to provide for the issuance and delivery of the Bonds. The District hereby acknowledges that the sale of the Bonds is contingent upon the issuance of a policy of municipal bond insurance from the Bond Insurer insuring the timely payment of principal of and interest on the Bonds. The terms and conditions of the Bond Insurance Policy and the surety policy, as set out in Exhibit C hereto, are incorporated herein for all purposes for so long 31 HOU:2572701.3 as such policies remain in effect. The appropriate officials and representatives of the City are hereby authorized and directed to execute such documents and certificates and to do any and all things necessary or desirable to obtain such insurance and surety policy, and the printing on the Bonds of an appropriate legend or statement regarding such insurance, as provided by the Bond Insurer,is hereby approved. Section 9.2. Approval, Registration and Delivery. The Mayor and the City Secretary are hereby authorized to have control and custody of the Series 2006 Bonds and all necessary records and proceedings pertaining thereto pending their delivery, and the Mayor of the City, the City Secretary of the City, the City Manager of the City and other officers and employees of the City are hereby authorized, directed and instructed to make such certifications and to execute such instruments (including by printed facsimile signature, the Series 2006 Bonds) as may be necessary to accomplish the delivery of the Series 2006 Bonds and to assure the investigation, examination, and approval thereof by the Attorney General of Texas and the registration of the initial Series 2006 Bonds by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Series 2006 Bonds, the Comptroller of Public Accounts of the State of Texas (or a deputy designated in writing to act for him) shall be requested to sign manually the registration certificate prescribed herein to be attached or affixed to each Series 2006 Bond initially delivered and the seal of the Comptroller of Public Accounts of the State of Texas shall be impressed or printed or lithographed thereon. Delivery of the Series 2006 Bonds is subject to the unqualified approving opinion as to the legality of the Series 2006 Bonds of the Attorney General of Texas and of Andrews Kurth LLP, Houston, Texas, Bond Counsel. Section 9.3. Offering Documents; Ratings. The City hereby approves the form and contents of the Preliminary Official Statement and the final Official Statement, dated as of the date hereof, relating to the Series 2006 Bonds, and any addenda, supplement or amendment thereto, and ratifies and approves the distribution of such Preliminary Official Statement and Official Statement in the offer and sale of the Series 2006 Bonds and in the reoffering of the Series 2006 Bonds by the Purchaser, with such changes therein or additions thereto as the officials executing same may deem advisable, such determination to be conclusively evidenced by their execution thereof. The Mayor is hereby authorized and directed to execute, and the City Secretary is hereby authorized and directed to attest, the final Official Statement. It is further hereby officially found, determined and declared that the statements and representations contained in the Preliminary Official Statement and final Official Statement are true and correct in all material respects, to the best knowledge and belief of the City Council, and that, as of the date thereof, the Preliminary Official Statement was an official statement of the City with respect to the Series 2006 Bonds that was deemed "final"by an authorized official of the City except for the omission of no more than the information permitted by subsection (b)(1) of Rule 15c2-12 of the Securities and Exchange Commission. Copies of the Preliminary Official Statement and the Official Statement are attached hereto as Exhibits D and E, respectively. Further, the City Council hereby ratifies, authorizes and approves the actions of the Mayor, the City's financial advisor and other consultants in seeking a rating on the Series 2006 Bonds from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and such actions are hereby ratified and confirmed. 32 HOU:2572701.3 Section 9.4. Application of Proceeds of Series 2006 Bonds. (a) Proceeds from the sale of the Series 2006 Bonds shall, promptly upon receipt by the City, be applied as follows: (1) First, accrued interest and premium, if any, shall be deposited into the Interest and Sinking Fund; (2) Second, $8,700,000 of the proceeds from the sale of the Series 2006 Bonds, together with any investment earnings on such proceeds, shall be deposited to a separate construction fund of the City and used for the purposes set forth in Section 3.1 of this Ordinance; (3) Third, $5,096,603 of the proceeds from the sale of the Series 2006 Bonds (together with funds provided by the City in the amount of$53,000) shall be deposited with the paying agent/registrar for the Refunded Bonds for the redemption of the Refunded Bonds. (4) Fourth, an amount equal to the costs of issuance of the Series 2006 Bonds, as approved by the City, shall be applied to pay such costs as the City may arrange. (5) Finally, any proceeds of the Series 2006 Bonds remaining after making all such deposits and payments shall be deposited into the Interest and Sinking Fund. (b) From the existing interest and sinking fund for the Refunded Bonds there shall be transferred to the Interest and Sinking Fund created by Section 5.5 of this Ordinance the amount of$0.00. Section 9.5. Tax Exemption. The City intends that the interest on the Series 2006 Bonds shall be excludable from gross income of the owners thereof for federal income tax purposes pursuant to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended, (the "Code") and all applicable temporary, proposed and final regulations (the "Regulations") and procedures promulgated thereunder and applicable to the Series 2006 Bonds. For this purpose, the City covenants that it will monitor and control the receipt, investment, expenditure and use of all gross proceeds of the Series 2006 Bonds (including all property, the acquisition, construction or improvement of which is to be financed directly or indirectly with the proceeds of the Series 2006 Bonds) and take or omit to take such other and further actions as may be required by Sections 103 and 141 through 150 of the Code and the Regulations to cause the interest on the Series 2006 Bonds to be and remain excludable from the gross income, as defined in Section 61 of the Code, of the owners of the Series 2006 Bonds for federal income tax purposes. Without limiting the generality of the foregoing, the City shall comply with each of the following covenants: (a) The City will use all of the proceeds of the Series 2006 Bonds to: (i) make an initial cash deposit sufficient to pay the principal of, premium, if any, and interest on the Refunded Bonds, (ii) provide funds for the purposes described in Section 3.1; and (iii) 33 HOU:2572701.3 pay the costs of issuing the Bonds and of refunding the Refunded Bonds. All of the proceeds of the Series 2006 Bonds will be used for the purposes set forth above; (b) The City will not directly or indirectly take any action or omit to take any action, which action or omission would cause the Series 2006 Bonds or the Refunded Bonds to constitute "private activity bonds" within the meaning of Section 141(a) of the Code. (c) Principal of and interest on the Series 2006 Bonds will be paid solely from ad valorem taxes collected by the City, investment earnings on such collections, and as available, proceeds of the Series 2006 Bonds. (d) Based upon all facts and estimates now known or reasonably expected to be in existence on the date the Series 2006 Bonds are delivered, the City reasonably expects that the proceeds of the Series 2006 Bonds and the Refunded Bonds(to the extent any of such proceeds remain unexpended) will not be used in a manner that would cause the Series 2006 Bonds or the Refunded Bonds or any portion thereof to be "arbitrage bonds"within the meaning of Section 148 of the Code. (e) At all times while the Series 2006 Bonds are outstanding, the City will identify and properly account for all amounts constituting gross proceeds of the Series 2006 Bonds in accordance with the Regulations. The City will monitor the yield on the investments of the proceeds of the Series 2006 Bonds and, to the extent required by the Code and the Regulations, will restrict the yield on such investments to a yield which is not materially higher than the yield on the Series 2006 Bonds. To the extent necessary to prevent the Series 2006 Bonds from constituting "arbitrage bonds," the City will make such payments as are necessary to cause the yield on all yield restricted nonpurpose investments allocable to the Series 2006 Bonds to be less than the yield that is materially higher than the yield on the Series 2006 Bonds. (f) The City will not take any action or knowingly omit to take any action, if taken or omitted, would cause the Series 2006 Bonds to be treated as "federally guaranteed"obligations for purposes of Section 149(b) of the Code. (g) The City represents that not more than fifty percent (50%) of the proceeds of any new money portion of the Series 2006 Bonds or any new money issue refunded by, the Refunded Bonds was invested in nonpurpose investments (as defined in Section 148(f)(b)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of Section 1 49(g)(3)(A)(ii) of the Code, and the City reasonably expected at the time each issue of the Refunded Bonds was issued that at least eighty-five percent (85%) of the spendable proceeds of the Series 2006 Bonds or the Refunded Bonds would be used to carry out the governmental purpose of such Series 2006 Bonds within the corresponding three-year period beginning on the respective dates of the Series 2006 Bonds or the Refunded Bonds. (h) The City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the gross proceeds of the Series 34 HOU:2572701.3 2006 Bonds, if any, be rebated to the federal government. Specifically, the City will (i) maintain records regarding the receipt, investment and expenditure of the gross proceeds of the Series 2006 Bonds as may be required to calculate such excess arbitrage profits separately from records of amounts on deposit in the funds and accounts of the City allocable to other obligations of the City or moneys which do not represent gross proceeds of any obligations of the City and retain such records for at least six years after the day on which the last outstanding Series 2006 Bond is discharged, (ii) account for all gross proceeds under a reasonable, consistently applied method of accounting, not employed as an artifice or device to avoid, in whole or in part, the requirements of Section 148 of the Code, including any specified method of accounting required by applicable Regulations to be used for all or a portion of the gross proceeds, (iii) calculate, at such times as are required by applicable Regulations, the amount of excess arbitrage profits, if any, earned from the investment of the gross proceeds of the Series 2006 Bonds and (iv) timely pay, as required by applicable Regulations, all amounts required to be rebated to the federal government. In addition, the City will exercise reasonable diligence to assure that no errors are made in the calculations required by the preceding sentence and, if such an error is made, to discover and promptly correct such error within a reasonable amount of time thereafter, including payment to the federal government of any delinquent amounts owed to it, including interest thereon and penalty. (i) The City will not indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Series 2006 Bonds that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in smaller profit or a larger loss than would have resulted if such arrangement had been at arm's length and had the yield on the issue not been relevant to either party. (j) The City will timely file or cause to be filed with the Secretary of the Treasury of the United States the information required by Section 149(e) of the Code with respect to the Series 2006 Bonds on such form and in such place as the Secretary may prescribe. (k) The City will not issue or use the Series 2006 Bonds as part of an "abusive arbitrage device" (as defined in Section 1.148 10(a) of the Regulations). Without limiting the foregoing, the Series 2006 Bonds are not and will not be a part of a transaction or series of transactions that attempts to circumvent the provisions of Section 148 of the Code and the Regulations, by (i) enabling the City to exploit the difference between tax exempt and taxable interest rates to gain a material financial advantage, or(ii) increasing the burden on the market for tax-exempt obligations. (1) Proper officers of the City charged with the responsibility for issuing the Series 2006 Bonds are hereby directed to make, execute and deliver certifications as to facts, estimates or circumstances in existence as of the Issue Date and stating whether there are facts, estimates or circumstances that would materially change the City's expectations. On or after the Issue Date, the City will take such actions as are necessary 35 HOU:2572701.3 and appropriate to assure the continuous accuracy of the representations contained in such certificates. (m) The covenants and representations made or required by this Section are for the benefit of the Series 2006 Bond holders and any subsequent Series 2006 Bond holder, and may be relied upon by the Series 2006 Bondholder and any subsequent Series 2006 Bondholder and bond counsel to the City. In complying with the foregoing covenants, the City may rely upon an unqualified opinion issued to the City by nationally recognized bond counsel that any action by the City or reliance upon any interpretation of the Code or Regulations contained in such opinion will not cause interest on the Series 2006 Bonds to be includable in gross income for federal income tax purposes under existing law. Notwithstanding any other provision of this Ordinance, the City's representations and obligations under the covenants and provisions of this Section 7.5 shall survive the defeasance and discharge of the Series 2006 Bonds for as long as such matters are relevant to the exclusion of interest on the Series 2006 Bonds from the gross income of the owners for federal income tax purposes. Section 9.6. Redemption Prior to Maturity of Refunded Bonds. To maximize the City's present value savings and to minimize the City's costs of refunding, the City hereby authorizes and directs that certain of the Refunded Bonds shall be called for redemption prior to maturity in the amounts, at the dates and at the redemption prices set forth in Exhibit F attached hereto, and the Mayor or Mayor Pro-Tern is hereby authorized and directed to take all necessary and appropriate action to give or cause to be given a notice of redemption and/or a notice of defeasance to the holders or paying agent/registrars, as appropriate, of such Refunded Bonds, and, if required, to publish such notices, all in the manner required by the documents authorizing the issuance of such Refunded Bonds. ARTICLE X. CONTINUING DISCLOSURE UNDERTAKING Section 10.1. Annual Reports. The City shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year ending in or after 2006, financial information and operating data with respect to the City of the general type described in Exhibit G hereto. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit G hereto and (2) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If audited financial statements are not so provided, then the City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID, when and if audited financial statements become available, but if such audited financial statements are unavailable the City will provide such financial statements on an unaudited basis within the above-described six-month period. 36 HOU:2572701.3 If the City changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC, or may be provided in any other manner consistent with the Rule. Section 10.2. Material Event Notices. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Series 2006 Bonds, if such event is material within the meaning of the federal securities laws: (a) Principal and interest payment delinquencies; (b) Non-payment related defaults; (c) Unscheduled draws on debt service reserves reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers, or their failure to perform; (f) Adverse tax opinions or events affecting the tax-exempt status of the Series 2006 Bonds; (g) Modifications to rights of holders of the Series 2006 Bonds; (h) Series 2006 Bond calls; (i) Defeasances; (j) Release, substitution, or sale of property securing repayment of the Series 2006 Bonds; and (k) Rating changes. The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 10.1 of this Ordinance by the time required by such Section. Section 10.3. Limitations, Disclaimers, and Amendments. The City shall be obligated to observe and perform the covenants specified in this Article for so long as, but only for so long as, the City remains an "obligated person" with respect to the Series 2006 Bonds within the meaning of the Rule, except that the City in any event will give the notice required by Section 37 HOU:2572701.3 10.2 of any Series 2006 Bond calls and defeasance that cause the City to be no longer such an "obligated person." The provisions of this Article are for the sole benefit of the Owners and beneficial owners of the Series 2006 Bonds, and nothing in this Article, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Article or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Series 2006 Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE OWNER OR BENEFICIAL OWNER OF ANY SERIES 2006 BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY,WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART,OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the City in observing or performing its obligations under this Article shall constitute a breach of or default under this Ordinance for purposes of any other provision of this Ordinance. Nothing in this Article is intended or shall act to disclaim, waive or otherwise limit the duties of the City under federal and state securities laws. The provisions of this Article may be amended by the City from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status or type of operations of the City, but only if(1) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell Series 2006 Bonds in the primary offering of the Series 2006 Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (a) the Owners of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the Outstanding Series 2006 Bonds consent to such amendment or (b) a person or entity that is unaffiliated with the City(such as nationally recognized bond counsel)determines that such amendment will not materially impair the interests of the Owners and beneficial owners of the Series 2006 Bonds. If the City so amends the provisions of this Article, it shall include with any amended financial information or operating data next provided in accordance with Section 10.1 an explanation, in narrative form,of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided. The City may also amend or repeal the provisions of this Article if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the City 38 HOU.2572701.3 also may amend the provisions of this Article in its discretion in any other manner or circumstance, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Series 2006 Bonds in the primary offering of the Series 2006 Bonds. Section 10.4. Definitions. As used in this Article, the following terms have the meanings ascribed to such terms below: "MSRB"means the Municipal Securities Rulemaking Board. "NRMSIR"means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rule"means SEC Rule 15c2-12,as amended from time to time. "SEC"means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. ARTICLE XL MISCELLANEOUS Section 11.1. Related Matters. In order that the City shall satisfy, in a timely manner, all of its obligations under the Ordinance, the Mayor, the City Secretary and other appropriate officers and agents of the City are hereby authorized and directed to take all other actions that are reasonably necessary to provide for issuance and delivery of the Series 2006 Bonds, including executing by manual or facsimile signature and delivering on behalf of the City all certificates, consents, receipts, requests, notices, investment agreements and other documents as may be reasonably necessary to satisfy the City's obligations under the Ordinance and to direct the transfer and application of funds of the City consistent with the provisions of such Ordinance. If requested by the Attorney General of Texas or his representatives, the Mayor may authorize such ministerial changes in the written text of this Ordinance as are necessary to obtain the Attorney General's approval and as he determines are consistent with the intent and purposes of this Ordinance, which determination shall be final. Section 11.2. Severability. If any Section, paragraph, clause or provision of this Ordinance shall for any reason be held to be invalid or unenforceable, the invalidity or unenforceability of such Section, paragraph, clause or provision shall not affect any of the remaining provisions of this Ordinance. Section 11.3. Open Meeting. It is hereby found, determined and declared that a sufficient written notice of the date, hour, place and subject of the meeting of the City Council at which this Ordinance was adopted was posted at a place convenient and readily accessible at all times to the general public at the City Hall of the City for the time required by law preceding this meeting, as required by the Open Meetings Act, Chapter 551, Texas Government Code, as 39 HOU:2572701.3 amended, and that this meeting has been open to the public as required by law at all times during which this Ordinance and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof Section 11.4. Governing Law. This Ordinance shall be construed in accordance with and governed by the laws of the State of Texas. Section 11.5. Repealer. All ordinances, or parts thereof inconsistent herewith, are hereby repealed to the extent of such inconsistency. Section 11.6. Emergency. It is hereby officially found and deteiinined that this Ordinance relates to an immediate public emergency affecting life, health, property and public peace, and that such emergency exists, the specific emergency being that the proceeds from the sale of the Series 2006 Bonds are required as soon as possible for necessary and urgently needed improvements, and that this Ordinance be passed and approved on the date of its introduction. Section 11.7. Effective Date. This Ordinance shall be in force and effect from and after its passage on the date shown below. 40 HOU:2572701.3 PASSED AND APPROVED on first reading pursuant to Section 3.10 of the City Charter this/72.7 /3.--- , 2006. C - 7Q72?t)i r.-..P Mayor, City of Pearland, Texas ATTEST: ' v Seci • ' y 0/ ear'9 d, Texas (SEA a011fft o ft E 0 I-A, tent/Registrar Agreement I ft i it�''�` �o base Agreement 4hi (�' n ra Provisions E'%.-'bit reli r; ary Official Statement Exh • .';la] Statement Exhibit Description of Refunded Bonds Exhibit G Description of Annual Financial Information • 40 HOU:2572701.1 EXHIBIT A PAYING AGENT/REGISTRAR AGREEMENT See Tab 4 HOU:2572701.3 EXHIBIT B BOND PURCHASE AGREEMENT See Tab 3 HOU:2572701.3 EXHIBIT C INSURANCE PROVISIONS lull ')V71701 srr' FSA .1 Orrin Company June 14,2006 VIA E-MAIL Mr.Bill Eisen City of Pearland,Texas City Hall-3519 Liberty Drive Pearland,Texas 77581 Re: Not to Exceed$13,845,000 aggregate principal amount of City of Pearland,Texas Waterworks and Sewer System Revenue and Refunding Bonds,Series 2006 Dear Mr.Eisen: Please find attached our amended municipal bond insurance commitment letter in respect of the above-referenced issue. Please return one fully executed copy to Ms.Vanessa Edwards-El,of our office, prior to any reference to Financial Security as insurer of the issue being made in marketing efforts in respect of the issue. Please note that a blacklined copy of each draft of each financing document and opinion,each draft of the preliminary and final official statements and the bond proof should be delivered to us for review and comment. Attached as a link to this e-mail is Financial Security's website, where the logo, statement of insurance, disclosure language, specimen policy, procedures for premium payment, form of opinion and form of disclosure, no default and tax certificate may be accessed and downloaded as needed. Financial Security will require, prior to closing,six hard copies of the final official statement. We will deliver to Bond Counsel,at the preliminary closing,assuming the requirements of the commitment letter have been met, an opinion of counsel as to the enforceability of the policy, a disclosure, no default and tax certificate and the executed policy. Prior to the closing, Financial Security will obtain rating letters from the rating agencies indicated in the official statement. Note that any questions with regard to rating agency fees should be directed to the respective rating agency. Please ensure the following people are added to the Distribution List for this Financing: Michael Cooper,Associate General Counsel Telephone: (212)893-7389 Telecopier: (212)857-0337 E-Mail: MCooper @FSA.com Michael Caldiero,Assistant Vice President Telephone: (212)339-3468 Telecopier: (212)857-0313 E-Mail: Mcaldiero @FSA.com Vanessa Edwards-El, Paralegal Telephone: (212)339-0864 Documentation and Closing Coordinator Telecopier: (212)339-0872 or(212)339-3588 E-Mail: VEdwards-EI @fsa.corn Financial Security requires one original and two copies of the final closing transcript of proceedings and it may be in the form of either hard copies or three CD-ROMs. I look forward to working with you. Yours truly, Michael Cooper Associate General Counsel ec: Rick Witte,Andrews&Kurth L.L.P. Mr.Craig Brest, UBS Investment Bank Mr. Ryan O'Hara, RBC Capital Markets I I i ii ial +v�•uril� 1 -ur:uu r %•-1,-,.:11,t,u■•■•■•A,." 1,,oiu.1,•1; t,,. \,•„ 1�,t1,•11e11,o-•..,n I r::ri,,-r„.I .,1„I„n• AI:uIrl,i 1':ui-.”u::.'p,n, •,,Ir;,•� 1 ,;,,,, wit 1' A MUNICIPAL BOND INSURANCE COMMITMENT FINANCIAL SECURITY ASSURANCE INC. ("Financial Security" or "FSA") hereby commits to issue its Municipal Bond Insurance Policy(the"Policy")relating to whole maturities of the debt obligations described in Exhibit A attached hereto(the "Bonds"), subject to the terms and conditions set forth in this Commitment, of which Commitment Exhibit A is an integrated part, or added hereto(the"Commitment"). To keep this Commitment in effect after the Expiration Date set forth in Exhibit A attached hereto, a request for renewal must be submitted to Financial Security prior to such Expiration Date. Financial Security reserves the right to refuse wholly or in part to grant a renewal. THE MUNICIPAL BOND INSURANCE POLICY SHALL BE ISSUED IF THE FOLLOWING CONDITIONS ARE SATISFIED: 1. The documents to be executed and delivered in connection with the issuance and sale of the Bonds shall not contain any untrue or misleading statement of a material fact and shall not fail to state a material fact necessary in order to make the information contained therein not misleading. 2. No event shall occur which would permit any underwriter or purchaser of the Bonds, otherwise required, not to be required to underwrite or purchase the Bonds on the date scheduled for the issuance and delivery thereof("Closing Date"). 3. There shall be no material change in or affecting the Bonds(including,without limitation,the security for the Bonds) or the financing documents or the Official Statement(or any similar disclosure documents)to be executed and delivered in connection with the issuance and sale of the Bonds from the descriptions or forms thereof approved by Financial Security. 4. The Bonds shall contain no reference to Financial Security,the Policy or the insurance evidenced thereby except as may be approved by Financial Security. BOND PROOFS SHALL HAVE BEEN APPROVED BY FINANCIAL SECURITY PRIOR TO PRINTING. The Bonds shall bear a Statement of Insurance in the form provided by Financial Security. 5. Financial Security shall be provided with: (a) Executed copies of all financing documents, any disclosure document (the "Official Statement") and the various legal opinions delivered in connection with the issuance and sale of the Bonds(which shall be dated the Closing Date and which, except for the opinions of counsel relating to the adequacy of disclosure,shall be addressed to Financial Security or accompanied by a letter of such counsel permitting Financial Security to rely on such opinion as if such opinion were addressed to Financial Security), including, without limitation,the approving opinion of bond counsel. Each of the foregoing shall be in form and substance acceptable to Financial Security. Copies of all drafts of such documents prepared subsequent to the date of the Commitment (blacklined to reflect all revisions from previously reviewed drafts) shall be furnished to Financial Security for review and approval. Final drafts of such documents shall be provided to Financial Security at least three(3) business days prior to the issuance of the Policy, unless Financial Security shall agree to some shorter period. (b) Evidence of wire transfer in federal funds of an amount equal to the insurance premium, unless alternative arrangements for the payment of such amount acceptable to Financial Security have been made prior to the delivery date of the Bonds. (c) Standard & Poor's Credit Market Services, Moody's Investors Service Inc. and Fitch IBCA, Inc. will separately present bills for their respective fees relating to the Bonds. Payment of such bills should be made directly to such rating agency. Payment of the rating fee is not a condition to release of the Policy by Financial Security. 6. Promptly after the closing of the Bonds, Financial Security shall receive three completed sets of executed documents (one original and either(i)two photocopies(each unbound)or(ii)three compact discs). 7. The Official Statement shall contain the language provided by Financial Security and only such other references to Financial Security or otherwise as Financial Security shall supply or approve. FINANCIAL SECURITY SHALL BE PROVIDED WITH SIX PRINTED COPIES OF THE OFFICIAL STATEMENT. EXHIBIT A AMENDED MUNICIPAL BOND INSURANCE COMMITMENT TERM SHEET Issuer: City of Pearland,Texas Name of Insured Bonds: Waterworks and Sewer System Revenue and Refunding Bonds.Series 2006 Principal Amount of Insured Bonds: Not to Exceed$13,845,000 Date of Commitment: June 14, 2006 Expiration Date: Friday,July 21,2006* Premium: .30%of total debt service on the Insured Bonds. Additional Conditions: 1. The amortization schedule for, and final maturity date of, the Bonds shall be acceptable to Financial Security. The Bonds shall be issued with a fixed rate to maturity. 2. The Issuer shall have purchased from Financial Security a Municipal Bond Debt Service Reserve Insurance Policy in the amount of the required deposit to the Reserve Fund upon the issuance of the Insured Bonds pursuant to Financial Security's commitment of even date herewith. 3. See attached Exhibits B-D. Terms used in this Commitment and not otherwise defined shall have the meanings ascribed to them in the document authorizing the issuance of and setting forth the terms for the Bonds described above(the"Ordinance"). FINANCIAL SECURITY ASSURANCE INC. • Authorized Officer To keep the Commitment in effect to the Expiration Date set forth above, Financial Security must receive a duplicate of this Exhibit A executed by an authorized officer by the earlier of the date on which the Official Statement containing disclosure language about Financial Security is circulated and ten days from the date of this Commitment. The undersigned agrees that if the Bonds are insured by a policy of municipal bond insurance, such insurance shall be provided by Financial Security in accordance with the terms of the Commitment. CITY OF PEARLAND,TEXAS,TEXAS Authorized Officer L:\LEGAL\MUNISISTATES\7X191643 G.doc EXHIBIT B Page 1 of 1 OPINION REQUIREMENTS 1. Each of the Ordinance,the Bonds and other transaction documents(the"Related Documents")is a legal, valid and binding obligation of the parties thereto, has been duly authorized, executed and delivered and is enforceable in accordance with its terms. 2. There does not exist any action, suit, proceeding or investigation pending, or to the best of counsel's knowledge, threatened which if adversely determined, could (i) materially adversely affect (a) the financial condition of the Issuer,(b)the ability of the Issuer to perform its obligations under the Related Documents,(c) the security for the Bonds, or(d) the transactions contemplated by the Related Documents or(ii) impair the ability of the Issuer to maintain and operate the System(as defined in the Ordinance). 3. Nothing has come to the attention of counsel which would cause it to believe that the final Official Statement (excluding information provided by Financial Security), as of its date and the date of issuance of the Policy, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made,not misleading. 4. The Bonds are secured by a valid first lien on and security interest in the Net Revenues on a parity with all Outstanding Bonds and Additional Bonds issued pursuant to the Ordinance. 5. Upon the issuance of the Bonds (and the making of the required deposit to the escrow, if any), the legal defeasance of the bonds to be refunded with the proceeds of the Bonds shall have occurred. 6. The Escrow Deposit Agreement, if any, providing for the custody and application of funds to effect the defeasance of the bonds to be refunded with the proceeds of the Bonds is a valid and binding obligation of the parties thereto enforceable in accordance with its terms. • L:\LEGAL\MU NIS\STATES\TX\91643_G.doc EXHIBIT C Page 1 of 5 ORDINANCE REQUIREMENTS The Ordinance shall incorporate the following requirements either in one section or article entitled"Provisions Relating to Bond Insurance"(or the like),the provisions of which section or article shall be stated in the Ordinance to govern, notwithstanding anything to the contrary set forth in the Ordinance,or individually in the appropriate sections: (a) "Insurance Policy" shall be defined as follows: "the insurance policy issued by the Insurer guaranteeing the scheduled payment of principal of and interest on the Bonds when due". "Insurer" shall be defined as follows: "Financial Security Assurance Inc., a New York stock insurance company, or any successor thereto or assignee thereof". (b) The prior written consent of the Insurer shall be a condition precedent to the deposit of any credit instrument provided in lieu of a cash deposit into the Reserve Fund, if any. Notwithstanding anything to the contrary set forth in the Ordinance, amounts on deposit in the Reserve Fund shall be applied solely to the payment of debt service due on the Bonds. (c) The Insurer shall be deemed to be the sole holder of the Insured Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Insured Bonds are entitled to take pursuant to Section 7.10 of the Ordinance. (d) If acceleration is permitted under the Ordinance, the maturity of Insured Bonds shall not be accelerated without the consent of the Insurer. In the event the maturity of the Bonds is accelerated,the Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued on such principal to the date of acceleration (to the extent unpaid by the Issuer) and the Paying Agent shall be required to accept such amounts. Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Insurer's obligations under the Insurance Policy with respect to such Bonds shall be fully discharged. (e) The Insurer shall be included as a third party beneficiary to the Ordinance. (f) Upon the occurrence of an extraordinary optional, special or extraordinary mandatory redemption in part, the selection of Bonds to be redeemed shall be subject to the approval of the Insurer. The exercise of any provision of the Ordinance which permits the purchase of Bonds in lieu of redemption shall require the prior written approval of the Insurer if any Bond so purchased is not cancelled upon purchase. (g) Any amendment, supplement, modification to, or waiver of, the Ordinance that requires the consent of Bondowners or adversely affects the rights and interests of the Insurer shall be subject to the prior written consent of the Insurer. (h) Unless the Insurer otherwise directs, upon the occurrence and continuance of a default in payment or performance of the provisions of the Ordinance, amounts on deposit in the any construction fund or project fund representing proceeds of the Bonds shall not be disbursed, but shall instead be applied to the payment of debt service or redemption price of the Bonds. (I) The Issuer acknowledges that the rights granted to the Insurer under the Ordinance or any other or any other transaction document(each a"Related Document")to request, consent to or direct any action are rights granted to the Insurer in consideration of its issuance of the Insurance Policy. Any exercise by the Insurer of such rights is merely an exercise of the Insurer's contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the Bondholders and such action does not evidence any position of the insurer, affirmative or negative,as to whether the consent of the Bondowners or any other person is required in addition to the consent of the Insurer. (j) Only(1)cash,(2)non-callable direct obligations of the United States of America("Treasuries"),(3)evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the L:\LEGAL\MUNIS\STATES1TX191643 G.doc EXHIBIT C Page 2 of 5 right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (4) subject to the prior written consent of the Insurer, pre-refunded municipal obligations rated"AAA"and "Aaa" by S&P and Moody's, respectively, or (5) subject to the prior written consent of the Insurer, securities eligible for "AAA" defeasance under then existing criteria of S&P or any combination thereof,shall be used to effect defeasance of the Bonds unless the Insurer otherwise approves. To accomplish defeasance,the Issuer shall cause to be delivered(i)a report of an independent firm of nationally recognized certified public accountants or such other accountant as shall be acceptable to the Insurer ("Accountant") verifying the sufficiency of the escrow established to pay the Bonds in full on the maturity or redemption date ("Verification"), (ii) an Escrow Deposit Agreement (which shall be acceptable in form and substance to the Insurer), (iii)an opinion of nationally recognized bond counsel to the effect that the Bonds are no longer"Outstanding" under the Ordinance and(iv)a certificate of discharge of the Paying Agent with respect to the Bonds; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the Issuer, Paying Agent and Insurer. The Insurer shall be provided with final drafts of the above-referenced documentation not less than five business days prior to the funding of the escrow. Bonds shall be deemed "Outstanding" under the Ordinance unless and until they are in fact paid and retired or the above criteria are met. (k) Amounts paid by the Insurer under the Insurance Policy shall not be deemed paid for purposes of the Ordinance and the Bonds relating to such payments shall remain Outstanding and continue to be due and owing until paid by the Issuer in accordance with the Ordinance. The Ordinance shall not be discharged unless all amounts due or to become due to the Insurer have been paid in full or duly provided for. (I) The Issuer covenants and agrees to take such action (including, as applicable, filing of UCC financing statements and continuations thereof)as is necessary from time to time to preserve the priority of the pledge of the Trust Estate under applicable law. (m) Claims Upon the Insurance Policy and Payments by and to the Insurer. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date ("Payment Date")there is not on deposit with the Paying Agent, after making all transfers and deposits required under the Ordinance, moneys sufficient to pay the principal of and interest on the Bonds due on such Payment Date, the Paying Agent shall give notice to the Bond Insurer and to its designated agent(if any)(the"Insurer's Fiscal Agent")by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time,on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Bonds due on such Payment Date, the Paying Agent shall make a claim under the Insurance Policy and give notice to the Insurer and the Insurer's Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Bonds and the amount required to pay principal of the Bonds, confirmed in writing to the Insurer and the Insurer's Fiscal Agent by 12:00 noon, New York City time,on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Insurance Policy. The Paying Agent shall designate any portion of payment of principal on Bonds paid by the Insurer, whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Bonds registered to the then current Bondholder, whether DTC or its nominee or otherwise, and shall issue a replacement Bond to the Insurer, registered in the name of Financial Security Assurance Inc., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided that the Paying Agent's failure to so designate any payment or issue any replacement Bond shall have no effect on the amount of principal or interest payable by the Issuer on any Bond or the subrogation rights of the Insurer. L SLEGAL\MUNIS\STATES\TX191643_G doc EXHIBIT C Page 3 of 5 The Paying Agent shall keep a complete and accurate record of all funds deposited by the Insurer into the Policy Payments Account (defined below)and the allocation of such funds to payment of interest on and principal of any Bond. The Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Paying Agent. Upon payment of a claim under the Insurance Policy, the Paying Agent shall establish a separate special purpose trust account for the benefit of Bondholders referred to herein as the"Policy Payments Account" and over which the Paying Agent shall have exclusive control and sole right of withdrawal. The Paying Agent shall receive any amount paid under the Insurance Policy in trust on behalf of Bondholders and shall deposit any such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Paying Agent to Bondholders in the same manner as principal and interest payments are to be made with respect to the Bonds under the sections hereof regarding payment of Bonds. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything herein to the contrary and to the extent permitted by law, the Issuer agrees to pay to the Insurer(i)a sum equal to the total of all amounts paid by the Insurer under the Insurance Policy(the"Insurer Advances");and(ii)interest on such Insurer Advances from the date paid by the Insurer until payment thereof in full, payable to the Insurer at the Late Payment Rate per annum (collectively, the "Insurer Reimbursement Amounts"). "Late Payment Rate" means the lesser of(a)the greater of(I)the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in The City of New York,as its prime or base lending rate(any change in such rate of interest to be effective on the date such change is announced by JPMorgan Chase Bank)plus 3%,and(II)the then applicable highest rate of interest on the Bonds and (b)the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The Issuer hereby covenants and agrees that the Insurer Reimbursement Amounts are secured by a lien on and pledge of the Net Revenues and payable from such Net Revenues on a parity with debt service due on the Bonds. The Issuer's obligation to make payments in excess of Insurer Advances under this paragraph is subject in all respects to annual appropriation therefor by the Issuer. Funds held in the Policy Payments Account shall not be invested by the Paying Agent and may not be applied to satisfy any costs, expenses or liabilities of the Paying Agent. Any funds remaining in the Policy Payments Account following a Bond payment date shall promptly be remitted to the Insurer. (n) The Insurer shall, to the extent it makes any payment of principal of or interest on the Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Insurance Policy. Each obligation of the Issuer to the Insurer under the Related Documents shall survive discharge or termination of such Related Documents. (o) The Issuer shall pay or reimburse the Insurer any and all charges, fees, costs and expenses that the Insurer may reasonably pay or incur in connection with (i)the administration, enforcement, defense or preservation of any rights or security in any Related Document;(ii)the pursuit of any remedies under the Ordinance or any other Related Document or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, the Ordinance or any other Related Document whether or not executed or completed, or(iv) any litigation or other dispute in connection with the Ordinance or any other Related Document or the transactions contemplated thereby, other than costs resulting from the failure of the Insurer to honor its obligations under the Insurance Policy.The Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Ordinance or any other Related Document. (p) After payment of reasonable expenses of the Paying Agent, the application of funds realized upon default shall be applied to the payment of expenses of the Issuer or rebate only after the payment of past due and current debt service on the Bonds and amounts required to restore the Reserve Fund to the amount required to be maintained on deposit therein. L:\LEGALIMUNIS\STATES\TX191643 G doc EXHIBIT C Page 4 of 5 (q) The Insurer shall be entitled to pay principal or interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer(as such terms are defined in the Insurance Policy)and any amounts due on the Bonds as a result of acceleration of the maturity thereof in accordance with the Ordinance,whether or not the Insurer has received a Notice of Nonpayment (as such terms are defined in the Insurance Policy)or a claim upon the Insurance Policy. (r) The notice address of the Insurer is: Financial Security Assurance Inc., 31 West 52nd Street, New York, New York 10019,Attention:Managing Director—Surveillance, Re:Policy No. , Telephone: (212) 826-0100; Telecopier:(212)339-3556. In each case in which notice or other communication refers to an Event of Default, then a copy of such notice or other communication shall also be sent to the attention of the General Counsel and shall be marked to indicate"URGENT MATERIAL ENCLOSED." (s) The Insurer shall be provided with the following information by the Issuer or Paying Agent,as the case may be: (i) Annual audited financial statements within 150 days after the end of the Issuer's fiscal year(together with a certification of the Issuer that it is not aware of any default under the Ordinance), and the Issuer's annual budget within 30 days after the approval thereof together with such other information, data or reports as the Insurer shall reasonably request from time to time; (ii) Notice of any draw upon the Reserve Fund within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the amount required to be maintained on deposit therein and (ii) withdrawals in connection with a refunding of Bonds; (iii) Notice of any default known to the Paying Agent or Issuer within five Business Days after knowledge thereof; (iv) Prior notice of the advance refunding or redemption of any of the Bonds, including the principal amount, maturities and CUSIP numbers thereof; (v) Notice of the resignation or removal of the Paying Agent and Bond Registrar and the appointment of,and acceptance of duties by,any successor thereto; (vi) Notice of the commencement of any proceeding by or against the Issuer commenced under the United States Bankruptcy Code or any other applicable bankruptcy,insolvency, receivership, rehabilitation or similar law(an"Insolvency Proceeding"); (vii) Notice of the making of any claim in connection with any Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on, the Bonds; (viii) A full original transcript of all proceedings relating to the execution of any amendment, supplement,or waiver to the Related Documents;and (ix) All reports, notices and correspondence to be delivered to Bondholders under the terms of the Related Documents. (t) Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Ordinance, no such issuance may occur(1) if a default under the Ordinance has occurred and then continues unless such default shall be cured upon such issuance and (2) unless the Reserve Fund is fully funded at the amount required to be maintained on deposit therein(giving effect to the proposed issue)upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Insurer. L.\LEGAL\MUNIS\STATES\7X\91643 G doc EXHIBIT C Page 5 of 5 (u) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the Ordinance would adversely affect the security for the Bonds or the rights of the Bondholders, the Issuer shall consider the effect of any such amendment, consent,waiver,action or inaction as if there were no Insurance Policy. (v) No contract shall be entered into or any action taken by which the rights of the Insurer or security for or sources of payment of the Bonds may be impaired or prejudiced in any material respect except upon obtaining the prior written consent of the Insurer. • L:\LEGAL\MUNIS\STATES\TX\91643 G.doc EXHIBIT D Page 1 of 1 REFUNDING REQUIREMENTS If the bonds to be refunded with the proceeds of the Bonds(the"Refunded Bonds")will not be called for redemption with ninety days of the issuance of the Bonds,the following shall be required: (i) the defeasance of the Refunded Bonds shall be accomplished by the deposit solely of cash or direct non- callable obligations of the United States of America unless otherwise approved by Financial Security. (ii) The document providing for the establishment and maintenance of the escrow to provide such defeasance (the "Escrow Deposit Agreement") shall be in form and substance acceptable to Financial Security and shall provide that amendment or modification of the Escrow Deposit Agreement shall not be permitted unless Financial Security shall consent to such amendment or modification. (iii) In the event a forward purchase agreement will be employed in the refunding, such agreement shall be subject to the approval of Financial Security and shall be accompanied by opinions of counsel as required by Financial Security. Financial Security shall provide its requirements for forward purchase agreements upon request. (iv) Financial Security shall be an addressee of a Verification Report by an independent firm of certified public accountants which is either nationally recognized or otherwise acceptable to Financial Security, in form and substance satisfactory to Financial Security, as to the adequacy of the escrow established to provide for the payment of the Refunded Bonds in accordance with the terms and provisions of the Escrow Deposit Agreement. L\LEGAL\MUNIS\STATES\TX\91643_G.doc PROCEDURES FOR PREMIUM PAYMENT TO FINANCIAL SECURITY ASSURANCE INC. Financial Security's issuance of its municipal bond insurance policy at bond closing is contingent upon payment and receipt of the premium. NO POLICY MAY BE RELEASED UNTIL PAYMENT OF SUCH AMOUNT HAS BEEN CONFIRMED. Set forth below are the procedures to be followed for confirming the amount of the premium to be paid and for paying such amount: Confirmation of Upon determination of the final debt service Amount to be Paid: schedule, fax such schedule to Financial Security Attention: Michael Caldiero, Assistant Vice President Phone No.: (212) 339-3468 Fax No.: (212)857-0313 Confirm with the individual in our underwriting department that you are in agreement with respect to par and premium on the transaction prior to the closing date. Payment Date: Date of Delivery of the insured bonds. Method of Payment: Wire transfer of Federal Funds. Wire Transfer Instructions: Bank: The Bank of New York ABA#: 021 000 018 Acct. Name: Financial Security Assurance Inc. Account No.: 8900297263 Transaction Nos. 91643 [INSERT DSR TRAN. NO.] Policy Nos.: 206919(To Be Assigned) 206919 CONFIRMATION OF PREMIUM WIRE NUMBER AT CLOSING Financial Security will accept as confirmation of the premium payment a wire transfer number and the name of the sending bank, to be communicated on the closing date to Vanessa Edwards-El, Paralegal Documentation and Closing Coordinator,(212)339-0864. ::r' FSA i I)r.ria Company June 14,2006 VIA E-MAIL Mr.Bill Eisen City of Pearland City Hall-3519 Liberty Drive Pearland,Texas 77581 Re: City of Pearland,Texas Water and Sewer System Revenue and Refunding Bonds, Series 2006 Dear Mr. Eisen: Please find attached our amended municipal bond debt service reserve commitment letter in respect of the above- referenced issue. Please return one fully executed copy to Ms. Vanessa Edwards-El, of our office, prior to any reference to Financial Security as insurer of the issue being made in marketing efforts in respect of the issue. Please note that a blacklined copy of each draft of each financing document and opinion,each draft of the preliminary and final official statements and the bond proof should be delivered to us for review and comment. Attached as a link to this e-mail is Financial Security's website, where the logo, statement of insurance, disclosure language, specimen policy, procedures for premium payment,form of opinion and form of disclosure, no default and tax certificate may be accessed and downloaded as needed. Financial Security will require, prior to closing,four hard copies of the final official statement. We will deliver to Bond Counsel, at the pre-closing, assuming the requirements of the commitment letter have been met,an opinion of counsel as to the validity of the policy,a disclosure, no default and tax certificate and the executed original policy. Prior to the closing, Financial Security will obtain rating letters from the rating agencies indicated in the official statement. Note that any questions with regard to rating agency fees should be directed to the respective rating agency. Please ensure the following people are added to the Distribution List for this Financing: Michael Cooper,Associate General Counsel Telephone: (212)893-7389 Telecopier: (212)857-0337 E-Mail: MCooper©FSA.com Michael Caldiero,Assistant Vice President Telephone: (212)339-3468 Telecopier: (212)857-0313 E-Mail: Mcaldiero @FSA.com Vanessa Edwards-El, Paralegal Telephone: (212)339-0864 Documentation and Closing Coordinator Telecopier: (212)339-0872 or(212)339-3588 E-Mail: VEdwards-El @fsa.com Financial Security requires one original and two copies of the final closing transcript of proceedings and it may be in the form of either hard copies or three CD-ROMs. I look forward to working with you. Yours truly, Michael Cooper Associate General Counsel ec: Rick Witte,Andrews&Kurth L.L.P. Mr.Craig Brest;UBS Investment Bank Mr. Ryan O'Hara; RBC Capital Markets I�inan ial" +urii� .\>-u rans'.- .0 A\"-+"i=lt,1 tr',t•A'' 'i n,.t,-.+\"1 a.,:_1 2.t'I''8•;1.,. \,•al,,rk•tiall:--.'^:u,lr;au '„-I.,,u,1,n-ALuirnl-l',,rr-• .' slI s -inl. „ EXHIBIT A FSA AMENDED MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE COMMITMENT Issuer: City of Pearland,Texas Date of Commitment: June 14,2006 Insured Bonds: Water and Sewer System Revenue and Refunding Bonds, Series 2006, and all other Bonds issued and Outstanding as defined in the Ordinance Premium: 2.50%of Policy Limit Expiration Date: Friday,July 21,2006 Policy Limit: A dollar amount equal to the required deposit to the Reserve Fund,as specified under the Ordinance, up to a maximum of$965,000 FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), a stock insurance company, hereby commits to issue its Municipal Bond Debt Service Reserve Insurance Policy (the "Reserve Policy"), in the form transmitted herewith, relating to the above-described debt obligations (the "Bonds"), subject to the terms and conditions contained herein or added hereto. All terms used herein and not otherwise defined shall have the meanings ascribed to them in the document setting forth the security for and authorizing the issuance of the Bonds(the"Ordinance"). To keep this Commitment in effect after the Expiration Date set forth above, a request for renewal must be submitted to Financial Security prior to such expiration date. Financial Security reserves the right to refuse wholly or in part to grant a renewal. To keep the Commitment in effect to the Expiration Date set forth above, Financial Security must receive a duplicate of this Commitment executed by an authorized officer of the Issuer by the date which is ten days from the date of this Commitment. THE RESERVE POLICY SHALL BE ISSUED UPON SATISFACTION OF THE FOLLOWING CONDITIONS: 1. The Water and Sewer System Revenue and Refunding Bonds, Series 2006, shall be issued and insured by Financial Security in accordance with Financial Security's commitment of even date herewith. 2. Financial Security shall be provided with: (a) An opinion of Bond Counsel, addressed to and in form and substance satisfactory to Financial Security, as to the Policy constituting a"Surety Policy"under the applicable provisions of the Ordinance. (b) Satisfactory evidence that the Issuer has obtained all consents required in connection with the deposit of the Reserve Policy to the Reserve Fund. (c) Evidence of wire transfer in federal funds in an amount equal to the Premium. 3. The Ordinance for the Insured Bonds,shall include the following terms and conditions and shall be in form and substance acceptable to Financial Security: (a) The Issuer shall repay any draws under the Reserve Policy and pay all related reasonable expenses incurred by Financial Security. Interest shall accrue and be payable on such draws and expenses from the date of payment by Financial Security at the Late Payment Rate. "Late Payment Rate"means the lesser of(a) the greater of(i)the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ("Prime Rate") (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan L:\LEGAL\MUNIS\STATES\TX\92498 D.doc Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as Financial Security shall specify. The Issuer's obligation to make payments in excess of the amount drawn under the Reserve Policy under this paragraph is applicable only to the extent permitted by law and is subject in all respects to annual appropriation therefor by the Issuer. Repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, "Policy Costs") shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Policy Costs related to such draw. Amounts in respect of Policy Costs paid to Financial Security shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to Financial Security on account of principal due, the coverage under the Reserve Policy will be increased by a like amount,subject to the terms of the Reserve Policy. All cash and investments in the Reserve Fund shall be transferred to the Interest and Sinking Fund for payment of debt service on Bonds before any drawing may be made on the Reserve Policy or any other credit facility credited to the Reserve Fund in lieu of cash(each, a "Surety Policy"). Payment of any Policy Costs shall be made prior to replenishment of any such cash amounts. Draws on all Surety Policies (including the Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Reserve Fund. Payment of Policy Costs and reimbursement of amounts with respect to other Surety Policies shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Fund. (b) If the Issuer shall fail to pay any Policy Costs in accordance with the requirements of Paragraph 3(a) hereof, Financial Security shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Ordinance other than (i) acceleration of the maturity of the Bonds or (ii) remedies which would adversely affect owners of the Bonds. (c) The Ordinance shall not be discharged until all Policy Costs owing to Financial Security shall have been paid in full. The Issuers obligation to pay such amounts shall expressly survive payment in full of the Bonds. (d) Additional Bonds may only be issued pursuant to Section 6.1 of the Ordinance if the certificate delivered pursuant to Section 6.1(c)of the Ordinance demonstrates Net Revenues shall be sufficient to pay Policy Costs in accordance with the provisions of paragraph(a)above. (e) The paying agent for the Bonds shall ascertain the necessity for a claim upon the Reserve Policy and to provide notice to Financial Security in accordance with the terms of the Reserve Policy at least five business days prior to each date upon which interest or principal is due on the Bonds. Where deposits are required to be made by the Issuer with the paying agent to the Interest and Sinking Fund for the Bonds more often than semi-annually, the Paying Agent shall be instructed to give notice to Financial Security of any failure of the Issuer to make timely payment in full of such deposits within two business days of the date due. (f) In order to secure the Issuers payment obligations with respect to the Policy Costs,there is hereby granted and perfected in favor of the Insurer a security interest(subordinate only to that of the owners of the Bonds) in all Net Revenues and other collateral pledged under this Ordinance as security for the Bonds. 4. The Reserve Policy shall expire on the earlier of the date the Water and Sewer System Revenue and Refunding Bonds, Series 2006, are no longer outstanding and the final maturity date of the Water and Sewer System Revenue and Refunding Bonds, Series 2006. Page 2 of 3 5. Any official statement or similar disclosure document relating to the Water and Sewer System Revenue and Refunding Bonds, Series 2006, shall contain only such references to the Reserve Policy and Financial Security as supplied or approved by Financial Security. FINANCIAL SECURITY ASSURANCE INC. Authorized Officer To keep this commitment in effect to the Expiration Date set forth on the first page,Financial Security must receive by the date which is ten days from the date of this Commitment a duplicate of this Commitment executed by an appropriate officer of the Issuer. The undersigned agrees that if the reserve fund requirement for the Bonds is met in whole or in part by credit instrument, such credit instrument shall be a Reserve Policy provided by Financial Security in accordance with the terms of this Commitment. CITY OF PEARLAND,TEXAS Authorized Officer Page 3 of 3 PROCEDURES FOR PREMIUM PAYMENT TO FINANCIAL SECURITY ASSURANCE INC. Financial Security's issuance of its municipal bond insurance policy at bond closing is contingent upon payment and receipt of the premium. NO POLICY MAY BE RELEASED UNTIL PAYMENT OF SUCH AMOUNT HAS BEEN CONFIRMED. Set forth below are the procedures to be followed for confirming the amount of the premium to be paid and for paying such amount: Confirmation of Upon determination of the final debt service Amount to be Paid: schedule, fax such schedule to Financial Security Attention: Michael Caldiero, Assistant Vice President Phone No. (212) 339-3468 Fax No. (212)857-0313 Confirm with the individual in our underwriting department that you are in agreement with respect to par and premium on the transaction prior to the closing date. Payment Date: Date of Delivery of the insured bonds. Method of Payment: Wire transfer of Federal Funds. Wire Transfer Instructions: • Bank: The Bank of New York ABA#: 021 000 018 Acct. Name: Financial Security Assurance Inc. Account No.: 8900297263 Transaction No. 92498 CONFIRMATION OF PREMIUM WIRE NUMBER AT CLOSING Financial Security will accept as confirmation of the premium payment a wire transfer number and the name of the sending bank, to be communicated on the closing date to Vanessa Edwards-El, Paralegal Documentation and Closing Coordinator,(212)339-0864. EXHIBIT D PRELIMINARY OFFICIAL STATEMENT See Tab 5 HOU:2572701.3 EXHIBIT E OFFICIAL STATEMENT See Tab 6 HOU:2572701.3 EXHIBIT F DESCRIPTION OF REFUNDED BONDS Redemption Redemption Name Maturities Amount Price Date Water and Sewer System Revenue Bonds 09/01/2009 $540,000 100% 06/15/2006 Series 1996B 09/01/2010 560,000 100% 06/15/2006 09/01/2011 590,000 100% 06/15/2006 09/01/2012 615,000 100% 06115/2006 09/01/2013 645,000 100% 06/15/2006 09/01/2014 675,000 100% 06/1512006 09/01/2015 710,000 100% 06/1512006 09/01/2016 745,000 100% 06/15/2006 • • HOU:2572701 3 EXHIBIT G DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Article X of this Ordinance: Annual Financial Statements and Operating Data The financial information and operating data with respect to the City to be provided annually in accordance with such Article are as specified below: 1. The financial statements of the District for the most recently concluded fiscal year. Accounting Principles The accounting principles referred to in Article X are the accounting principles described in the notes to the financial statements referred to in paragraph 1 above. HOU:2572701.3 PRELIMINARY OFFICIAL STATEMENT DATED DECEMBER 4, 2007 This Preliminary Official Statement is subject to completion and amendment. Upon sale of the Bonds,the Official Statement will be completed and delivered to the Underwriters. Prospective purchasers must read the entire Official Statement to make an informed investment decision. In the opinion of Bond Counsel,interest on the Bonds is excludable from gross income for federal income tax purposes under existing law,subject to the matters described under"TAX EXEMPTION"herein,and is not includable in the alternative minimum taxable income of individuals. See`TAX EXEMPTION"for a discussion of the opinion of Bond Counsel,including the alternative minimum tax on corporations. NEW ISSUE: BOOK-ENTRY-ONLY RATINGS: Moody's Investors Service,Inc. " Standard&Poor's Ratings Services "_" $22,835,000 CITY OF PEARLAND, TEXAS (A political subdivision of the State of Texas located within Brazoria.Fort Bend and Hams Counties) PERMANENT IMPROVEMENT BONDS, SERIES 2008 Dated: January 1,2008 Due: March I,as shown below Principal of and interest on the$22,835,000 City of Pearland,Texas,Permanent Improvement Bonds,Series 2008(the"Bonds")is payable by Wells Fargo Bank,N.A., Houston,Texas,the initial paying agent/registrar(the"Paying Agent/Registrar"). The Bonds are initially registered and delivered only to Cede&Co.,the nominee of The Depository Trust Company("DTC")pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede&Co., which will make distribution of the amounts so paid to the beneficial owners of the Bonds. See"THE BONDS- Book-Entry-Only System"herein. Interest on the Bonds will accrue from January 1, 2008 and is payable on March 1, and September 1 of each year, commencing September 1, 2008, to the registered owners(initially Cede &Co.)appearing on the registration books of the Paying Agent/Registrar on the 15th day of the month preceding each interest payment date(the"Record Date"). See"THE BONDS-Description." The Bonds are payable from the proceeds of a continuing,direct annual ad valorem tax levied,within the limits prescribed by law,against all taxable property within the City of Pearland,Texas(the"City"). See"THE BONDS-Source of Payment." The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapter 1331,Texas Government Code, as amended,an election held within the City on May 12,2007 and an ordinance(the"Ordinance")to be approved by the City Council on December 17, 2007. See"THE BONDS—Authorization of the Bonds." Proceeds of the sale of the Bonds will be used for (i) construction and improvements to City streets; (ii) construction and improvements to City drainage system;(iii)construction of a new fire station;and(iv)to pay the costs of issuance of the Bonds. See"THE BONDS-Use of Proceeds." The City has applied for and intends to obtain a municipal bond insurance policy to guarantee the scheduled payment of principal of and interest on the Bonds. The premium for such insurance, if any, will be paid by the Underwriters (hereinafter defined). See"SALE AND DISTRIBUTION OF THE BONDS-Bond Insurance." PRINCIPAL AMOUNTS,MATURITIES,INTEREST RATES AND PRICES (Due March 1) Initial CUSIP Initial CUSIP Principal Interest Reoffering Nos. Principal Interest Reoffering Nos. Maturity Amount Rate Yield(a) (b) Maturity Amount Rate Yield(a) (b) 2009 $ 170,000 % % 2021(c) $ 445,000 % % 2010 240,000 2022(c) 470,000 2011 205,000 2023(c) 490,000 2012 290,000 2024(c) 515,000 2013 235,000 2025(c) 545,000 2014 335,000 2026(c) 625.000 2015 310,000 2027(c) 660.000 2016 325,000 2028(c) 695,000 2017 340,000 2029(c) 730,000 2018 360,000 2030(c) 4,530,000 2019(c) 405.000 2031(c) 4,705,000 2020(c) 425,000 2032(c) 4,785,000 (a) The initial yields will be established by and are the sole responsibility of the Underwriters,and may subsequently be changed. (b) CUSIP numbers have been assigned to the Bonds by Standard and Poor's CUSIP Service Bureau, A Division of The McGraw-Hill Companies, Inc., and are included solely for the convenience of the registered owners of the Bonds. Neither the City, the Financial Advisor, nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) The Bonds maturing on March 1, 2019 and thereafter, are subject to redemption, at the option of the City, at par value thereof plus accrued interest on March I,2018,or any date thereafter. See"THE BONDS-Redemption Provisions." The Bonds are offered when, as and if issued, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Andrews Kurth LLP, Houston.Texas, Bond Counsel for the City. as to the validity of the issuance of the Bonds under the Constitution and laws of the State of Texas. See"LEGAL MATTERS." Delivery of the Bonds through DTC is expected to be on or about January 17,2008. SELLING: MONDAY,DECEMBER 17,2007 UNTIL 1:00 P.M.,HOUSTON TIME.